In the taxation of corporations, the State of California employs an income tax method that utilizes the "unitary-business" doctrine and three-factor formula apportionment. On appeal to the United States Supreme Court, Container Corporation of America contested the application of California's taxation method on three grounds. First, it disputed the finding of a unitary-business consisting of itself and its foreign subsidiaries; second, it claimed that even if a unitary-business did exist, differences in international economic conditions caused a distortion of income when the apportionment method was applied, which warranted rejection of the worldwide income apportionment; and third, it claimed that states' use of the unitary-business concept across national boundaries and the apportionment of worldwide income violated the foreign commerce clause because the method resulted in double taxation and violated federal uniformity in the international sphere. This article examines the Supreme Court's holding on each of these three contested issues. First is an examination of the fundamental principles of the unitary-business determination, including a discussion of the constitutional restraints placed upon states using the unitary-business method and the discretion allowed by the Supreme Court in unitary-business determinations made by state courts. Second is an examination of the distortion of income produced when the unitary-business/formula apportionment method is applied despite differences in international economic conditions and the amount of income distortion the Court appears willing to accept. Finally is an examination of the foreign commerce clause considerations of double taxation and federal uniformity in the international sphere. The analysis of the double taxation issue includes a discussion of the level of scrutiny applied by the Court in cases of international double taxation. The federal uniformity analysis includes an examination of the Court's tests for determining state violation of federal uniformity and will apply those tests to the facts presented by the Container case.
John C. Vitek,
State Taxation of Multinational Corporations and the Apportionment of Worldwide Income: Container Corporation of America v. Franchise Tax Board, 103 S.Ct. 2933 (1983),
63 Neb. L. Rev.
Available at: http://digitalcommons.unl.edu/nlr/vol63/iss3/7