Westinghouse Electric Corporation v. Tully

PETITIONER: Westinghouse Electric Corporation
RESPONDENT: Tully
LOCATION: Environmental Protection Agency

DOCKET NO.: 81-2394
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: New York Court of Appeals

CITATION: 466 US 388 (1984)
ARGUED: Nov 01, 1983
DECIDED: Apr 24, 1984

ADVOCATES:
Paul M. Dodyk - on behalf of the Appellant
Peter H. Schiff - on behalf of the Appellees

Facts of the case

Question

Media for Westinghouse Electric Corporation v. Tully

Audio Transcription for Oral Argument - November 01, 1983 in Westinghouse Electric Corporation v. Tully

Warren E. Burger:

We'll hear arguments next in Westinghouse Electric against Tully.

Mr. Dodyk, I think you may proceed whenever you're ready.

Paul M. Dodyk:

Mr. Chief Justice, and may it please the Court:

in this appeal, Westinghouse Electric Corporation challenges the constitutionality of the way in which the State of New York taxes the income of a domestic international sales corporation or DISC.

A DISC is not a typical business corporation.

It is a vehicle established under the Internal Revenue Code to permit the deferral of income taxes with respect to certain income from exports.

The income which may be attributed to a DISC and on which tax may be deferred is determined by a formula set forth in the Internal Revenue Code such as 50 percent of net income or 4 percent of gross receipts derived from exports.

DISCs typically perform no functions, own no property, have no employees.

A DISC is essentially an accounting segregation of a portion of a taxpayer's export-related income for purposes of tax deferral.

The export-related income so segregated is essentially pure income separated from the costs which generate that income.

Those costs remain on the books of the business entities whose exports are in question.

Under the Internal Revenue Code as it was in effect during the relevant period, a taxpayer was essentially permitted to defer federal taxes on 50 percent of income allocated to the DISC until that income is distributed to the parent.

Turning to Westinghouse, Westinghouse and its affiliates are engaged in a variety of businesses, some of which exports products, a portion of the income from which during the relevant period was allocated by Westinghouse to the DISC.

During the years here in question, 1972 and 1973, approximately 75 to 80 percent of the Westinghouse DISC income was derived from Westinghouse exports, approximately 20 to 25 percent from affiliates of Westinghouse.

The record in this case establishes that the affiliates of Westinghouse did no business in New York.

It further establishes that the affiliates are autonomous, independently managed, and deal with Westinghouse on an arm's length basis.

The State of New York does not treat these affiliates as unitary with Westinghouse and has not attempted to tax their income in recognition of the fact that they do not do business in the State of New York.

The tax practices here at issue arise from New York's taxation of accumulated DISC income.

The particular tax involved is the New York corporate income tax.

The New York corporate income tax is a formula apportioned tax.

In determining the amount of income which the State of New York taxes, it first attempts to determine the taxpayer's total income.

It then multiplies it by a fraction which is determined by the relationship of the taxpayer's New York property, payroll and revenue to the total payroll, property and revenue of the taxpayer.

In determining the amount of a taxpayer's income to be apportioned to New York, the state in this case added to the income of Westinghouse the total income of its DISC, including the amount on which federal taxes were deferred, and including the amount derived by reason of exports by Westinghouse non-New York affiliates.

Having determined the income apportioned to New York, the state then applied a tax rate of 9 percent to that income as allocated to the State of New York.

In computing the tax actually due, however, the court took another step, and that is, it permitted a credit with respect to 70 percent of the tax due on accumulated DISC income.

And it is that credit which is at issue in this case, because the State of New York, although it permits that credit, it permits it only with respect to exports which are shipped from a regular place of business in the State of New York.

More specifically, in calculating the credit, the New York statute requires the taxpayer to multiply its accumulated DISC income by a fraction of which the numerator is gross receipts shipped from New York, and the denominator gross receipts from exports shipped from all sources.

In this case the result was to limit the credit permitted Westinghouse to approximately 5 percent of the accumulated DISC income which New York taxed.

Of course, with respect to other corporations which have their base of operations in New York, such as General Electric, the credit is much greater.

The basic result of New York's limitation on the availability of the credit is that if a firm ships exports from New York, it will pay a tax of 2.7 percent on accumulated DISC income attributed to that shipment, but if it ships that export from New Jersey or any state other than New York, it will pay a tax of 9 percent.