RESPONDENT: Department of Rev. of Wisconsin
LOCATION: Police Car
DOCKET NO.: 79-509
DECIDED BY: Burger Court (1975-1981)
LOWER COURT: Wisconsin Supreme Court
CITATION: 447 US 207 (1980)
ARGUED: Mar 18, 1980
DECIDED: Jun 10, 1980
Gerald S. Wilcox - on behalf of the Appellee
Thomas G. Ragatz - on behalf of the Appellant
Facts of the case
Media for Exxon Corporation v. Department of Rev. of Wisconsin
Audio Transcription for Oral Argument - March 18, 1980 in Exxon Corporation v. Department of Rev. of Wisconsin
Warren E. Burger:
We will hear arguments first this morning in Exxon Corporation v. Wisconsin Department of Revenue.
Mr. Ragatz, you may proceed whenever you are ready.
Thomas G. Ragatz:
Thank you, Mr. Chief Justice, and may it please the Court.
This is an appeal from a decision of the Wisconsin Supreme Court that reversed a lower court decision that had excluded from Wisconsin taxation the income of appellant's expiration and production department earned outside the State of Wisconsin.
The basic issue here, as asserted by the appellee, is whether a vertically integrated multistate corporation can be automatically characterized as unitary and automatically required thereby to subject its total corporate income to apportionment even though the taxpayer can conclusively identify and accurately measure its exploration and production income at its situs origin outside the state.
Now, contrary to the position of the appellant, the appellee asserts that once a taxpayer is determined to be unitary and engages in any activities in the state of Wisconsin, then virtually all its corporate income is subject to apportionment by Wisconsin and the taxpayer is not permitted to prove extraterritorial taxation by establishing either that the income was derived from sources outside the state of Wisconsin or that the quantity of income attributable to Wisconsin is out of all appropriate proportion to the activities of the taxpayer in Wisconsin.
Now, whether or not appellant is found to be unitary is not the basic issue.
Appellant does not concede that it is a single unitary business, but even assuming arguendo that it is unitary, that does not answer the question of whether the due process and commerce clauses of the United States Constitution permit imposition of the unitary per se approach with full apportionment, regardless of unrefuted proof that the result is to tax situs income derived and accurately measured outside the state of Wisconsin.
Appellant's position here involves a two-step analysis.
First, as to what are the constitutional principles previously defined by this Court to limit state taxation of extraterritorial income and, second, as to whether the appellant's proof in the record here satisfies the burden of proof as defined by this Court to establish a constitutional violation.
The leading decisions of this Court on apportionment are the Hans Rees case decided in 1931, Bass, Ratcliff decided in 1924, Butler Brothers in 1942, and more recently Moorman Manufacturing company decided in 1978.
All of these cases are consistent with the proposition that a taxpayer does have and in fact must have the right -- must have the opportunity to prove the unconstitutionality of an apportionment assessment by establishing a taxation of extraterritorial income.
In Hans Rees, the issue was not whether the taxpayer was unitary, which was assumed by this Court.
The real issue was whether or not the assessment there taxed income which was earned outside the state of North Carolina.
This Court found a due process violation based upon the taxpayer's proof that the income attributable to North Carolina was out of all appropriate proportion to the activities of the taxpayer in that state thus Hans Rees met its burden of proving extraterritorial taxation.
This decision was consistent with the prior Bass, Ratcliff case, only there the taxpayer's proof did not establish that New York was taxing income not earned in that state.
Now, despite the fact that the taxpayer was found to be a so-called unitary business, this Court nevertheless examined the record for proof of extraterritorial taxation, but found such proof to be lacking.
Butler Brothers involved a similar analysis as to a unitary business.
This Court decision notes that the taxpayer failed to prove that the apportionment formula there attributed to California for taxation income which was earned elsewhere by not showing that the factors responsible for the income were present in other states but were not present in California thus, Butler Brothers failed to sustain its burden of proof.
Finally, in Moorman, this Court only commented on the so-called unitary concept in a footnote but did analyze the record and found that the taxpayer did not show that a significant portion of its income being taxed by Iowa was in fact generated outside the state.
The majority opinion by Mr. Justice Stevens notes the lack of "any separate accounting analysis" showing what portion of Moorman's profits were attributable to sales, to manufacturing, or to other portions of the taxpayer's operations, and the opinion expressly suggests that it should not be impossible for a unitary corporation to prove its actual income from activities in a particular state.
Now, we should note parenthetically here that neither Bass, Ratcliff, Butler Brothers nor Moorman involved situs income which was geographically located and accurately measured outside the taxing state, but that the fact situation here presents such a record for perhaps the first time for the Court to deal with tangible situs income derived from natural resources.
Thus, the law as previously decided by this Court expressly recognizes that a taxpayer contesting an assessment under an apportionment cormula must have the opportunity to prove extraterritorial taxation even though deemed to be a unitary business.
As a consequence, it is clear that this Court has consistently treated unitary as a possible condition precedent to the application of an apportionment formula, but has simultaneously made clear that the factual issue of unitary is totally irrelevant to the issue of extraterritorial taxation and to the proof thereof.
Moreover, until the decision of the Wisconsin Supreme Court, which is here before you --
Byron R. White:
Except if it weren't unitary, it would be rather relevant, wouldn't it?
Thomas G. Ragatz:
If the taxpayer wasn't unitary, you wouldn't meet the condition precedent and you wouldn't even get to the analysis of extraterritorial taxation.
Byron R. White:
Why wouldn't you if the state tried to tax it, why, they would tell them it couldn't.
Thomas G. Ragatz:
Well, we would be here as we are now, Mr. Justice White --
Byron R. White:
Saying they were taxing out of state income?