us supreme court: 06-1413
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Official - Subject to Final Review
IN THE SUPREME COURT OF THE UNITED STATES
- - - - - - - - - - - - - - - - - x
MEADWESTVACO CORPORTATION, :
SUCCESSOR IN INTEREST TO :
THE MEAD CORPORATION, :
Petitioner :
v. : No. 06-1413
ILLINOIS DEPARTMENT OF :
REVENUE, ET AL. :
- - - - - - - - - - - - - - - - - x
Washington, D.C.
Wednesday, January 16, 2008
The above-entitled matter came on for oral
argument before the Supreme Court of the United States
at 11:17 a.m.
APPEARANCES:
BETH S. BRINKMANN, ESQ., Washington, D.C.; on behalf
of the Petitioner.
BRIAN F. BAROV, ESQ., Assistant Attorney General,
Chicago, Ill.; on behalf of the Respondents.
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C O N T E N T S
ORAL ARGUMENT OF PAGE
BETH S. BRINKMANN, ESQ.
On behalf of the Petitioner 3BRIAN F. BAROV, ESQ.
On behalf of the Respondents 27REBUTTAL ARGUMENT OFBETH S. BRINKMANN, ESQ.
On behalf of the Petitioner 53
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P R O C E E D I N G S
(11:17 a.m.)
CHIEF JUSTICE ROBERTS: We will hear
argument next in Case 06-1413, MeadWestvaco v. The
Illinois Department of Revenue.
Ms. Brinkmann.
ORAL ARGUMENT OF BETH S. BRINKMANN
ON BEHALF OF THE PETITIONER
MS. BRINKMANN: Mr. Chief Justice, and may
it please the Court:
The ruling of the Illinois Appellate Court
in this case radically expanded the Court's
operational-function tax. The State tax at issue
violates the principles of constitutional limitations on
state taxing authority for at least two reasons.
First, the factors relied on by the appellate court here
for functional -- for operational function would mean
that ownership and investment would meet that standard.
But that's what this Court rejected in Allied-Signal.
A State does not have the authority to reach
out to tax all investments owned by a company that does
business in the State. The operational function demands
more. It applies --
JUSTICE GINSBURG: You are saying to me, Ms.
Brinkmann -- we talk about an asset, an investment.
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This was one company. This -- it's strange to talk
about unitary basis or investment. This is a division
of one company. And we are talking about a sale of
assets. Not the sale of stock of a subsidiary.
So what more is there than this is one
company, it sells some of its assets?
MS. BRINKMANN: Well, Your Honor, the fact
that it's a division does not mean that it meets either
the operational-function test or the unitary-business
test. A long line of cases from this Court tell us
that. It --
JUSTICE GINSBURG: Do we have any cases --
do we have any decisions that go against the state
taxing authority that involve divisions as opposed to
subsidiaries?
MS. BRINKMANN: No, but the Exxon case
involved divisions, and it went in favor of the state
taxing authority. But the Court applied a
straightforward, unitary business analysis to that.
And, Your Honor, this dates back to the Adams Express
case of 1897.
The Court in that case said it's not
ownership. It's about the use, the unitariness of use,
not of ownership. Mobile followed on that. Mobile
talked about the fact that it's not the corporate form
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that mattered. It pointed out that that could have
little to do with the underlying determination of
apportionment, which depends upon whether it's a
discrete business enterprise.
And then following on the heels of that
analysis in Mobil, the Court applied it to the Exxon
case that involved divisions. That was a vertically
integrated corporation. It's very different from the
facts of this case, and it reached a different result.
Moreover, the Woolworth case involved
subsidiaries. Three out of the four of them were 100
percent wholly owned.
JUSTICE STEVENS: Can I go back to sort of a
fundamental question I'm not quite sure I know the
answer to. Supposing we don't have corporations here,
but an individual resident of New York owned this whole
business and a big bunch of it was activities in
Illinois, and he sold the business. Would Illinois have
the authority to impose any tax on that transaction?
MS. BRINKMANN: If it was a capital gain,
Your Honor, on the sale of investment, the Court's
longstanding cases teach that it is the domicile that
taxes that commercial gain.
JUSTICE STEVENS: I'm assuming it's not the
domicile. The owner lives in New York. The business is
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all over the country, but does millions of dollars of
business in Illinois. And they sell the whole business.
Would the owner be subject to any tax of any kind in
Illinois on that transaction? Could he constitutionally
be subjected to any tax?
BRINKMANN: If there was -- the domiciliary
State generally is the State which has the authority to
tax an income on a capital gain --
JUSTICE STEVENS: Assume it's not the
domiciliary State.
MS. BRINKMANN: But what the Court explained
in Mobil, for example, if it is under the unitary
business principle, then the State in which --
JUSTICE STEVENS: Could we get an answer
without reference to cases? Do you think Illinois would
have the authority to impose a tax on that transaction?
MS. BRINKMANN: If the -- there was
sufficient nexus to the company doing business --
JUSTICE STEVENS: Millions of dollars of
business in Illinois, that's my assumption.
MS. BRINKMANN: Yes, they would be able to
tax the ongoing business activity in that State.
JUSTICE KENNEDY: No.
JUSTICE STEVENS: Could they tax the sale of
the business?
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JUSTICE KENNEDY: I have the same --
MS. BRINKMANN: The sale of the business
would be to the domicile of the seller. They would be
able to --
JUSTICE STEVENS: You're saying only the
domicile could impose a tax?
MS. BRINKMANN: Yes, unless, as the Court
recognized in Mobil, there is this unitary business
exception, because the State's ability to tax begins at
the starting point at the territorial limitations of the
State. And the Court has --
JUSTICE STEVENS: But if they owned a truck
instead of a business, they could tax that transaction,
I suppose?
JUSTICE SCALIA: You can't have a unitary
business -- a person who is a unitary business. I mean,
a person can't be unitary with Exxon. I mean, when you
speak of a unitary business you're talking about a
corporation which, you know, is unitary with another
corporation.
MS. BRINKMANN: That's the area --
JUSTICE SCALIA: Once you put it into a
personal taxation scheme, it seems to me the whole
unitary business notion has no application at all.
MS. BRINKMANN: Well, I agree with you, Your
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Honor. But it does come back to the taxing, the right
of the domicile State to tax on a sale --
JUSTICE GINSBURG: What is -- what does the
domicile State -- we have Ohio. But you say as a matter
of constitutional law, not State tax policy, as a matter
of constitutional law, the only State that has authority
to tax the capital gain is Ohio?
MS. BRINKMANN: That's right, Your Honor,
unless --
JUSTICE GINSBURG: Does Ohio -- would Ohio
give credit for the tax that its sister State thinks is
due? What is, in fact, Ohio's tax law in this respect?
Does Ohio give credit to taxes paid by other States --
to other States?
MS. BRINKMANN: Ohio would allocate the
entire gain as a capital gain on an intangible that was
sold in the State of Ohio. That would be allocated in
its entirety to Illinois.
Now, what the Court has recognized is that
default principle sometimes gives way when that gain has
had enough connection to business activity in another
jurisdiction. That's where these issues arise, because
there are States taxing multi- state activities. And
that's --
JUSTICE GINSBURG: Can I have an answer to a
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very simple question? If Illinois claimed the tax,
would Ohio give credit for the tax paid in Illinois?
MS. BRINKMANN: Not if Ohio had the
constitutional right to allocate that tax to Ohio, as it
does.
JUSTICE GINSBURG: Do we know what -- what
Ohio does in these situations?
MS. BRINKMANN: Yes. It allocates it to the
State of Ohio. The only exception for that would be in
a situation, not the facts here, but if that capital
gain either served an operational function to the
business activities that were conducted in another
State, then that State would have a right to apportion
it and tax its portion of that or if the operational
function applied. And that is because the activity now
has transformed from just a capital gain that's
connected to the domiciliary State of the seller to a
business income because it is part of this unitary
business. That's why the other State has a right to
apportion.
JUSTICE ALITO: What has Ohio done --
MS. BRINKMANN: That's not the situation
here.
JUSTICE ALITO: What has Ohio done up to
this point with respect to this transaction?
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MS. BRINKMANN: Under Ohio's laws this would
be allocated to that State.
CHIEF JUSTICE ROBERTS: To Ohio?
MS. BRINKMANN: Yes, because it's a capital
gain on a sale of an investment.
CHIEF JUSTICE ROBERTS: Ms. Brinkmann, you
begin your brief by saying this, a paper company, that
happens to own a data processing company. Why couldn't
you equally say this is a data processing company that
happens to own a paper company?
MS. BRINKMANN: No, Your Honor. This has
been a paper company since 1846.
CHIEF JUSTICE ROBERTS: Well, and
Lexis/Nexis has been a data processing company since
whenever.
MS. BRINKMANN: But under the Court's
unitary --
CHIEF JUSTICE ROBERTS: It's not the
oldest -- whichever is oldest isn't the one that gets to
be regarded as the dominant partner, is it?
MS. BRINKMANN: No. But when you do the
analysis, you're looking at the taxpayer, which is Mead
Corporation. And it clearly has a --
CHIEF JUSTICE ROBERTS: Is General Electric
a light bulb company or, since it owns NBC, a media
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company.
MS. BRINKMANN: I would have to know many
more facts in order to answer that questions, Your
Honor. But I -- and I don't mean to be evasive --
JUSTICE GINSBURG: Why isn't the answer
both? Why isn't the answer both, just as here it is
both a paper or office supply company and a Lexis/Nexis,
electronic data company?
MS. BRINKMANN: It's an analytical construct
that we're doing here. We're looking at the taxpayer
who is being taxed, the Mead Corporation. So you look
at its business that's being conducted in Illinois.
They have a unitary paper company that's vertically
integrated that's doing business activities in Illinois.
CHIEF JUSTICE ROBERTS: Well, that's because
they sell paper in Illinois?
MS. BRINKMANN: Yes.
CHIEF JUSTICE ROBERTS: Well, Lexis sells
data services in Illinois, too.
MS. BRINKMANN: Yes. But when you're
looking -- and for both purposes, Your Honor, for State
tax on the operating income of both of those businesses,
Illinois does have a right to apportion those taxes.
And those taxes were paid without objection by both of
those businesses.
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We're talking about a tax on a different
event, on a capital gain on a sale of the business in
Ohio.
CHIEF JUSTICE ROBERTS: Well, why doesn't --
I mean, you just said, as I understand it, Illinois has
the right to tax Lexis under business activities in
Illinois. Illinois would argue the reason it has a
capital gain is partly because they were doing business
in Illinois and so we should be entitled to part of that
capital gain. Almost -- I mean, it seems to me it would
be pretty easy if they get to tax 2 percent of Lexis's
business, well then maybe they should get 2 percent of
the capital gain when it's sold or tax 2 percent.
MS. BRINKMANN: Your Honor, that is a
belated argument that the State of Illinois has raised
in this Court. It did not present an argument to the
Illinois appellate court based on Lexis/Nexis's
connection to Illinois. It raises a host of
jurisdictional, procedural and substantive bars.
Under the rules of Illinois, as we point out
in our reply brief, that argument is waived. This comes
to the Court from a State court, not a Federal court of
appeals. Because of that waiver, it's an independent
and adequate state ground.
Moreover, that argument wasn't raised in the
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brief in opposition, either.
JUSTICE GINSBURG: They're raising it in --
in support of the judgment. So if it's novel, but it
supports the judgment, then at least shouldn't the
Illinois courts have a chance to look at it and say, oh,
that's what we really meant, we just got -- explained it
the wrong way?
MS. BRINKMANN: Well, that would certainly
be a matter for the Illinois court rather than for this
Court, Your Honor. But in addition, I think any
disposition on the merits of that issue would be a
ruling by this Court that would be trumping that
independent and adequate State ground waiver.
Moreover, this argument wasn't raised in the
brief in opposition, either. And the Court's precedent,
of course, and practice would not be to address that.
Particularly in this case, it denied notice to the amici
who would be affected by this argument.
But turning to the substance of it --
JUSTICE KENNEDY: I think this is part of
the substance. I thought that as part of one of your
answers you said that Ohio is free to allocate part of
this capital gains tax to Illinois? Did I hear you say
that, because I don't understand that?
MS. BRINKMANN: No, Your Honor, I'm sorry.
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I apologize if I misspoke. Ohio would allocate, I mean,
take the entire gain for itself as the domicile State of
the seller --
JUSTICE KENNEDY: I see.
MS. BRINKMANN: -- of the investment. In
other factual scenarios, if it turns out that that asset
actually was not an investment and in fact had enough
connection to the business activities in Illinois
because it was really the supplier of the raw materials,
or the two examples that this Court has given as
operational functions is the interest on the bank
account, which is the working capital, or the -- the
futures hedging against the raw material of corn.
CHIEF JUSTICE ROBERTS: Well, isn't it kind
of like futures hedging? I mean, you've got a paper
company and then you've got something that is sort of
the paperless aspect, and they can look at it and say,
well, we're kind of hedging our paper business by
investing heavily in something that's supposedly going
to take away the need for paper.
MS. BRINKMANN: No, Your Honor. Under the
operational function test, it has to be a much closer
nexus to the operating, the operations of the paper
company; and short of that operational function -- or if
it were part of the unitary business, the domiciliary
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State would allocate. And if I could turn --
JUSTICE KENNEDY: Are you saying this is a
passive investment?
MS. BRINKMANN: Yes, Your Honor.
JUSTICE SOUTER: How can you call it a
passive investment, not only when there was -- I think
undisputedly -- as -- as much interest and activity in
Nexis's business planning by the Mead people? But to my
mind even more importantly, when in fact Mead, I think a
couple of times, merged with -- with Nexis -- with Lexis
-- when that provided a tax advantage, by -- by giving
them loss carryforwards that reduced their taxes. Why
isn't it fair to -- to say under the operational
function test that if -- if the company is -- if Nexis
is -- is mergeable with Mead when it produces a tax
advantage and is certainly in a very operational sense
functional then, because it's saving them a lot of
money -- and that's, that has nothing to do with passive
investment. If it's usable in a merger scenario there,
it ought when the -- when the tide turns be -- be
regarded as close enough in operational function to be
taxable when the gain comes in.
MS. BRINKMANN: Your Honor, that's contrary
to the Court's long-standing recognition that something
that enriches the taxpayer is not necessarily part of
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the unitary business's operational function.
JUSTICE SOUTER: That's -- that's right.
But weren't the enrichment cases in which income was
being generated by an investment? The investor, of
course, was the -- was the taxpayer company, and it
simply reaped the benefits of a profitable investment.
That's something very different from merging
corporations, then unmerging them, and then merging them
again to provide not merely enrichment, but great tax
savings; and if they are operationally close enough to
produce great tax savings, why shouldn't they be treated
as operationally close enough when in fact they -- they
produce a capital gain?
MS. BRINKMANN: Because that isn't the
operational connection that justifies a State --
JUSTICE SOUTER: The gain alone certainly is
not. If they had absolutely done nothing but make their
investment and wait to see whether the ship came in, I
would understand your argument. But between the
investment and the return of the ship, they were merging
these corporations back and forth for -- for their --
for Mead's tax advantage. And that seems to me to take
it out -- take the facts of this case out of the sort of
the paradigm of the -- the operational or the
nonoperational function cases.
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MS. BRINKMANN: Your Honor, I think not, if
we look at Allied-Signal, we look at Woolworth, and we
look at ASARCO. Allied-Signal was a sales and
investment -- and getting back to the point about the
argument really was waived about the connection with
Lexis/Nexis in Illinois, those were the same facts in
Allied-Signal. The investment there was --
JUSTICE GINSBURG: It was a sale of stock in
that case, wasn't it?
MS. BRINKMANN: Yes.
JUSTICE GINSBURG: It was the sale of a
subsidiary. And here we have a sale of assets of one
company, and that's why it's so hard for me to see this,
as, why are we talking about unitary or not? There is
only one company; it's Mead.
MS. BRINKMANN: In Allied-Signal, the
investment there was also doing business within the
State. In the Exxon case, there were divisions to which
this Court applied the entire unitary business
principle, because what the Court has said repeatedly in
Mobil, in Exxon, in all these cases, it's not the
corporate form; it is whether there is a discrete
business enterprise; and ASARCO speaks to this.
JUSTICE GINSBURG: You told me that there
was no case that the tax -- taxing authority lost that
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involved divisions of a single company and sale of
assets, rather than the sale of stock.
MS. BRINKMANN: That's correct. We have
four or five cases here. One of them does involve
divisions, Exxon, but in that case it was a vertically
integrated corporation, and the State prevailed in that
case, but it did not change the analysis that applied.
JUSTICE GINSBURG: Well, we're talking about
what Due Process permits States to do, and you're asking
us to declare a restriction that, as far as I know, has
never been declared in any case.
MS. BRINKMANN: It has, Your Honor. It goes
back to principles that ownership do -- does not
determine; simply because there is a business operating
in the State, the State does not have the right to tax
every investment that's owned by that. That dates back
to 1897.
JUSTICE GINSBURG: It's not just that it's
an investment, it's not just that it's holding on to the
shares in another company. It's both of these are
ongoing businesses, Lexis/Nexis and Mead, and they are
both generating income, and all along Illinois has been
taxing the income of both of them, right?
MS. BRINKMANN: Yes, the operating income
within the State's apportioned. But if you look to the
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business activity of the taxpayer Mead, operating in
Illinois, it is that nexus on which Illinois is claiming
that they have a right to tax here. And if we look at
the Woolworth case, for example, I think that is also
instructive. Those were four subsidiaries. Three of
them were 100 percent wholly owned, and the Court
expressly said we recognize they are wholly owned
subsidiaries. These could be integrated divisions, and
they said, that is not significant, if they are
independent, different business enterprises.
JUSTICE GINSBURG: Weren't those foreign
corporations?
MS. BRINKMANN: Yes, Your Honor.
JUSTICE GINSBURG: So running them as -- as
a single company would have been a little harder.
MS. BRINKMANN: Well, no, in fact there were
also some foreign subsidiaries, I believe, involved in
the ASARCO case, for example, Your Honor, and the same
analysis applied -- you know, whether it was vertically
integrated and whether or not it met -- the unitary
business test goes back to three core principles, and
this Court has said at least four if not five times that
the unitary business principle is the linchpin of
apportionment. That is whether or not there is
functional integration.
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JUSTICE SOUTER: Don't we start -- I don't
mean to cut off your argument, but don't we start with
the assumption that this is not a unitary business?
Wasn't that the finding of the trial court which was not
disturbed on appeal?
MS. BRINKMANN: That's right, Your Honor.
That's right.
JUSTICE SOUTER: You can say it if you want,
but I wanted to make sure --
MS. BRINKMANN: There is no virtual
integration; there is no sharing of centralized
management; there's no economies of scale. We think
this is unassailable in the stipular record --
JUSTICE BREYER: Am I thinking about that
part correctly? I -- I found this difficult. I go back
to the railroad; that seems the easiest case. You have
a railroad in 50 States, and Illinois finds it very hard
to evaluate its -- evaluate its value, its railroad
property in Illinois, because the value of that depends
on service everywhere. So the court says that's the
unitary principle; and really what you're supposed to
look at is whether when you look at the supposedly
separate part of the business, does that separate part
of the business contribute to the whole thing? So that
if you were in fact trying to say what is Illinois doing
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without considering that separate part, it would be
tough to do.
I mean, that's the underlying theme.
MS. BRINKMANN: We would --
JUSTICE BREYER: And if that's so, there is
no second test. I mean, I grant you there is language,
but really what people have done is they've said, we are
here in a special situation because we have an interest
in another company, and that's a special part of our
business, and has nothing to do with the rest of the
business. And then the argument is no, it does have
something to do with the rest of the business. And if
it does, like it provides you with working capital, it's
just like the railroad track in California vis-a-vis
Illinois.
MS. BRINKMANN: It's contributing to the
business.
JUSTICE BREYER: And if it doesn't, it
doesn't. So now, if that's right, then it's the form of
analysis rather than the result that's wrong in the
court below. Because they start talking about two
separate tests and then people argue whether the second
should swallow up the first, and at that point I get
totally lost. It's fairly long, but I'd appreciate your
evaluating what I've just said.
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MS. BRINKMANN: Well, Your Honor, there --
on this record, there's no question that the Lexis/Nexis
cannot meet the unitary business test.
JUSTICE GINSBURG: Yes, there is, Ms.
Brinkmann. The Illinois appellate court never got to
that question. Illinois argued all along this is a
unitary business. The only one who said it wasn't was
this trial court, and the Illinois intermediate
appellate court says, well, we don't have to deal with
that because if you use the other label, operational
function, that comes out all right, too.
But this argument was certainly the number
one argument that Illinois was making. It lost only in
the trial court on -- on it. And the appellate court
said we don't have to get to it. So I think your answer
to Justice Souter really wasn't accurate because it
isn't --
MS. BRINKMANN: Well, our position is on the
record here, Your Honor, the stipulated record, that
it's unassailable. But we do --
JUSTICE GINSBURG: All we know is that a
trial judge said that was so.
MS. BRINKMANN: And then that's our
position, obviously, on the record, Your Honor; but we
agreed this was properly raised in the appellate court,
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as opposed to the other argument which was not. And
this also was mentioned in the brief in opposition, as
opposed to their other argument, which was not.
So we do think the Court could reach this
argument, and we maintain that on this record the
linchpin of apportionment giving the right of a State --
and this is a right to extend beyond its territory.
The Court has already let it go beyond its
territory to get to something outside the State if it's
part of the unitary business -- the railroad case, the
express case.
And in that situation there are three
factors, none of which can be met on this record. There
was no shared, centralized management, none. There was
no integrated functions, none. And there were no
economies of scale. Lexis/Nexis did not even get a
discount on any paper they bought from Mead. They were,
you know, minor customers of each other.
JUSTICE GINSBURG: Maybe when we're talking
about Due Process and Commerce Clause limitations on
what States can tax, we ought to ask ourselves if those
three -- is that it? If we're trying to measure, is
there a sufficient relationship between Lexis/Nexis,
Mead, and the State of Illinois to make it fair for them
to tax?
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And you say, oh, yes. Each year when
they're making income, when they are a going concern,
Illinois can get a piece of it. But when the assets are
sold, assets that would have generated income for
Illinois year after year, but when those assets are
sold, Illinois can get nothing to represent -- to
substitute for that stream of income that it would have
gotten.
MS. BRINKMANN: No. It will continue to get
income tax on an apportioned basis before and after.
JUSTICE GINSBURG: But Lexis/Nexis is gone.
MS. BRINKMANN: Well, Lexis/Nexis continues
to operate. It's now owned by Reed Elsevier. So it
would continue to pay an apportioned income tax.
It's a different event here, Your Honor. It
is the sale of an investment that occurred in Ohio. And
as the domicile State, Ohio has provided benefits to the
corporate headquarters, to management --
JUSTICE GINSBURG: Suppose it had been
Delaware, and there was nothing there in Delaware except
it was a Delaware corporation.
MS. BRINKMANN: That's not the commercial
domicile, Your Honor. There is a distinction in all of
these cases between the State of incorporation and the
commercial domicile. The commercial domicile --
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CHIEF JUSTICE ROBERTS: Ms. Brinkmann, one
thing that concerns me is how this will complicate the
process. I think, with respect to ordinary income, the
States work this out, and they figure we get 5 percent
because we have 5 percent of the presence or business,
whatever.
Now, they're going to have that, and they're
going to have an overlay on that. They're going to say,
well, it's 5 percent; but, you know, we sold this asset
that doesn't have any connection to Illinois; and that's
part of the income we've got. So you don't get quite 5
percent of all.
And another -- Illinois is going to come
back and say, well, yes, but you sold this other one;
and, as to that one, you've got sufficient connection
with Illinois. It seems to me it's going to be
impossible to sort this out.
MS. BRINKMANN: Your Honor, this has been
going on since at least 1992 in the Allied-Signal case.
The lower courts, the State courts, except for the court
in this case, have been able to apply that easily.
In order to take the expansive view of
Illinois here, you would be undermining Allied-Signal,
which had the same facts as in this case, not to mention
ASARCO, Woolworth.
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And I would just say, before I could reserve
the remainder of my time, Allied-Signal was the case in
which this Court was faced with new arguments raised by
the States, at argument. You went back and had
resupplemental briefing and reargument, and questioned
in your questions to those parties whether or not ASARCO
and Woolworth should be revisited and overruled.
So the Allied-Signal case took into account
all of these concerns and came back with a ringing
affirmation of the linchpin of an apportionability for
state taxation being the unitary-business test with the
operational-function aspect.
JUSTICE KENNEDY: I don't like to intrude on
the white light, but if I could just ask one question.
If the unitary-tax argument has been
preserved and is met and if there's a finding that they
are unitary, does Illinois have the right to tax the
sale, or to -- to a portion of it?
MS. BRINKMANN: We think that the finding is
that it is not unitary.
JUSTICE KENNEDY: No, no. Assume -- assume
it is unitary. Can Illinois then, in your view, have a
part of -- tax part of the gain on the sale?
MS. BRINKMANN: Yes, if it were unitary, but
we think there's no way this record could meet the
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standards compared to Woolworth, ASARCO. In all those
cases, they were much closer. Thank you.
CHIEF JUSTICE ROBERTS: Thank you, Ms.
Brinkmann.
Mr. Barov.
ORAL ARGUMENT OF BRIAN F. BAROV
ON BEHALF OF THE RESPONDENTS
MR. BAROV: Mr. Chief Justice, and may it
please the Court:
Illinois is not attempting to tax income
earned outside its borders. To the contrary, the income
it seeks to tax here is income earned by Mead on its
electronic publishing business, Lexis, which conducted
substantial business in Illinois.
Mead paid taxes on the income that the
electronic publishing business earned. Yet, it now
contends that the Constitution bars it from taxing any
of the gains it realized on the sale of Lexis, even
though Illinois undeniably contributed --
JUSTICE KENNEDY: Well, if you did not
proceed on the unitary business there, let's take that
off the table. It seems to me that Lexis's presence in
Illinois is quite irrelevant.
MR. BAROV: No, Your Honor. It's --
JUSTICE KENNEDY: It seems to me that, under
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your theory, you could tax the sale, even if Lexis were
not in Illinois at all, just because Mead is.
MR. BAROV: If this - if they were unitary,
yes, then Lexis's presence in Illinois would be
irrelevant to this case, if they met the
unitary-business doctrine.
JUSTICE BREYER: That's not the question. I
thought that the -- I agree with the same question
Justice Kennedy had. Suppose that I'm a Massachusetts
company that sells tables, and I sell some tables in
Illinois. And one day I take some of the money, and I
buy an iron mine in New Mexico. And then I sell the
iron mine. And Illinois, not Massachusetts, wants to
impose a tax. And suppose there is no connection
whatsoever between the iron mine and anything else but
for four, which are the four listed on page 13a:
One, that I have contributed capital support
to the iron mine.
Two, I approve the major capital
expenditures of the iron mine, sitting in my office in
Massachusetts.
Three, sometimes -- and this is a tougher
one -- I call the iron mine a division of my table
company.
And, four, I sometimes retain tax benefits
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and control over the extra cash of the iron mine, but
I'm not using it in my day-to-day work.
Now, are those four things alone sufficient
for Illinois to tax the sale of my iron mine? That, it
seems to me, is the way they presented it. Maybe it is
a unitary business really, but I guess we have to send
it back for that.
MR. BAROV: Under -- under those bare facts,
probably there would be not a sufficient connection.
JUSTICE BREYER: All right. Then why isn't
that the end of this case? That's what they said it
was. That's what they said, perhaps wrongly, that this
isn't a unitary business. And, therefore, we are left
with those four facts, and why not send it back and say
you haven't reached the unitary-business question; go
reach it?
MR. BAROV: Because, Your Honor --
JUSTICE KENNEDY: And if I can just add on
to that same question: If you're going to have the
unitary-tax theory, that's -- that's very helpful. But
if we take the unitary-tax theory off the table, it
seems to me that you are confusing the law by having
some midway test. I don't know what your theory is,
that -- in relation to this part of Justice Breyer's
question.
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MR. BAROV: There's a two-part answer to
that question -- those questions, Your Honor.
First, there's a second avenue of State
taxation that's been well recognized by this Court for
at least 80 years, which is that if a business conducts
business in a State, a State has a tax -- has the right
to tax a share of that business. And that's all
Illinois did here. When it apportioned the income in
this case, it apportioned the income only based on
Lexis's in-State Illinois presence. So under that
avenue alone, the tax is constitutional.
The second --
JUSTICE KENNEDY: But Mead didn't receive --
pardon me -- Lexis didn't receive the money for the
sale, Mead did.
MR. BAROV: Right.
JUSTICE KENNEDY: Unless, again, if Mead's
presence or nonpresence is simply irrelevant to what
happened here, absent a unitary theory.
MR. BAROV: No, Your Honor. Mead received
the tax -- the gain for the sale because Lexis was a
division of Mead, and the only tax-paying -- the only --
there is no -- there was no legal entity known as
"Lexis" at the time that Lexis was sold. It was assets
-- it was assets owned by the Mead Corporation.
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Now, Mead received the benefit -- the gain
on the sale because Mead was the only tax-paying entity
in this case. So Mead was conducting a business in
Illinois called "Lexis," and, therefore, Illinois could
tax at least --
JUSTICE KENNEDY: Do you think that if there
had been a separate corporation and that Lexis was a
subsidiary corporation and the subsidiary was -- it was
sold, that, again, absent a finding of unitary, Illinois
then could have had a tax?
MR. BAROV: Yes. Illinois could have taxed
based on the --
JUSTICE KENNEDY: All right. So, then, the
asset stock doesn't make any difference?
MR. BAROV: But the -- but the point, Your
Honor, is that Lexis had a presence in Illinois. It was
conducting business in Illinois. That, alone, gave
Illinois the power to tax a share of the income --
JUSTICE KENNEDY: That gets back to Justice
Stevens's initial hypothetical. If you live in New York
and you have an investment in a company that does a lot
of business in Illinois and you in New York, a resident
individual, sell that stock, under your theory Illinois
could tax it.
MR. BAROV: No. Illinois can't tax that
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State because there is no relationship -- there has to
be some relationship, you know, between Illinois and the
tax-paying activity and the taxpayer.
In Justice Breyer's hypothetical there was
none. But there is a -- but let me, if I can, address
that prong of the analysis, also.
Here there was a much closer connection
between Lexis and Mead than simply that of a passive
investment. It wasn't just that Mead helped Lexis buy,
make, handle acquisitions. They were involved in the
actual acquisitions themselves, in purchasing and
contracting to make those acquisitions.
Mead was involved in many of the -- in
controlling lots of their capital investment, its -- and
its -- it was also involved in manipulating excess -- in
their excess cash. And there is a whole -- there was a
host of facts that supported a closer relationship
between Mead and Lexis than simply that, that passive
investment.
So whether -- even if you are looking at it
from the operational-function point of view, there was
-- there was a -- a sufficient connection between Lexis
and Mead beyond that of Justice Breyer's hypothetical.
JUSTICE ALITO: If you traded places with
Ohio, how would you have treated this transaction under
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your tax laws?
MR. BAROV: Under our tax laws --
JUSTICE ALITO: Say that Mead was domiciled
in Illinois but Lexis/Nexis operated in Ohio, would you
have just taken -- would you have allocated or would you
have claimed that -- the right to tax the entire capital
gain?
MR. BAROV: This would have probably, I
think, Your Honor -- I believe this would have been
apportioned as business income under Illinois law.
JUSTICE GINSBURG: Do you know what -- or
did you know what Ohio did in the --
MR. BAROV: I don't know what Ohio did.
They -- Mead has never cited anything in the record to
support the contention that it has been -- that it was
allocated all to Ohio. My understanding of Ohio law at
the time was they -- they have the same business-income
test, basically, that Illinois does.
JUSTICE GINSBURG: Well, what would you say
-- I mean, we talk about apportioning income and
allocating income, allocating to the commercial
headquarters.
What in an enterprise like this would you
say is allocated to the commercial headquarters as
opposed to being apportioned among all the States?
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MR. BAROV: Different States have different
rules, Your Honor, and these are State-law rules, not
constitutional rules, about allocation and
apportionment. Some States will allocate an intangible
capital gain like this to their own domicile State.
Other States will apportion it based on the
share of income that is done in the State.
Again, I don't know what Ohio did. But the
point is that's a rule -- that's a State-law rule of
choice, not a rule of -- a constitutional rule. I think
this Court has been pretty clear in the Mobil Oil case
that these -- those -- that doesn't have a
constitutional significance.
That when a State, a domicile State, and a
State where a source -- which is the source of income,
when those conflict, in fact, this Court has signaled
that apportionment is the default rule. And that the
source State actually would have -- the source State
would win that confrontation.
JUSTICE SOUTER: Mr. Barov, I just want to
go back to an earlier answer to see how far you would go
with the position that you took.
Assume that, exclusive of Nexis, Mead is the
same kind of unitary corporation as under -- under
everybody's understanding now. Assume, also, as you
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suggested in a hypo, that Lexis was doing business in
Illinois. So that at least a -- a portion of its own
activity could be taxed in Illinois. And assume, third,
that the relationship between Mead and Lexis is simply
one of passive investment. Mead simply bought a lot of
stock, maybe 100 percent of the stock at the right time;
and, otherwise, it kept hands off. And at this point
Mead now -- now sells.
On -- on your theory, would -- would the
State of Illinois be able to tax a portion of the
capital gain?
MR. BAROV: Yes, they would, Your Honor.
But they would be limited in how much of that capital
gain they could apportion. They would apportion it
limited to the amount of income that arose in Illinois.
And that's what the auditor did in this case.
JUSTICE SOUTER: Well, but that would be, in
effect, the portion of the Nexis business, total
business that took place in Illinois, total sales, total
payroll, however you do it.
MR. BAROV: Right, and then that would be
put -- that would be put into --
JUSTICE SOUTER: Okay. But the only point I
wanted to be clear on to understand your position is
that purely passive investment would be enough to
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trigger your theory?
MR. BAROV: Yes, it would be.
JUSTICE SOUTER: Okay.
MR. BAROV: It is, Your Honor.
CHIEF JUSTICE ROBERTS: Counsel, why isn't
your friend correct that you have waived any argument
based on the presence of Lexis in Illinois?
MR. BAROV: Your Honor, two reasons:
First, under the -- they have cited
basically two basis grounds for waiver, one under
Illinois law and under this Court's rules. But they
misstate Illinois law in the -- on the waiver regard.
The cases and rules they cite to stand for a
simple proposition that a point not raised in a brief
before a particular court can't be raised on oral
argument. But what the Illinois Supreme Court has been
clear on "otherwise" is that an argument, even if it's
not raised in the appellate court, as long as it's
raised in the trial court in support of a judgment, may
be raised in a reviewing court on further review.
I can provide a couple of cites, Your Honor.
JUSTICE GINSBURG: And -- and I'm not
following your argument, because I thought that the
argument that this was a unitary enterprise was made in
the Illinois appellate court, and the appellate court
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recognizes that it was made, and said we are not going
to reach it because we have this operational-function
test?
MR. BAROV: Yes, Your Honor. That's --
that's correct.
CHIEF JUSTICE ROBERTS: Well, but that's --
they are very different from your current argument,
which you emphasize that whether they are unitary or
not, Lexis/Nexis was in Illinois.
MR. BAROV: That's correct, Your Honor.
CHIEF JUSTICE ROBERTS: Okay. Now, as to
that argument, at least I am very reluctant to overturn
a State court on an argument that they didn't have an
opportunity to consider. And whether it's technically
waived because you raised it in the trial court or not,
it certainly was not an argument you made to the
Illinois appellate courts.
MR. BAROV: That's correct, Your Honor. And
-- but I think, as this Court set forth in Caterpillar
v. Lewis, it is a predicate to the intelligent
resolution of this case.
CHIEF JUSTICE ROBERTS: Well, it wasn't in
Allied-Signal. In Allied-Signal the asset that was sold
was in New Jersey, and that was totally irrelevant to
how we treated the issue in that case.
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MR. BAROV: Certainly, Your Honor. But New
Jersey was taking a very different position in that
case. They were making a much broader argument than we
are making here. They were trying to overturn the
entire unitary doctrine.
And so they may have -- they may have chosen
not to make that argument. It may very well have been
in that case that ASARCO's apportionment factors in that
case were so minimal that it wasn't worth their making
that argument.
But, for whatever reason, they weren't
interested in taxing based on the source alone.
But here, as the facts show, Illinois did
tax. We taxed Lexis, or the gain on Lexis, pursuant to
Lexis' in-state apportionment factors.
JUSTICE STEVENS: May I ask this question
just -- it shows my ignorance, but if the
unitary-business approach to taxation was not applied in
this case, how did you compute the amount of the tax?
MR. BAROV: It was computed -- what the
department did in this case is it -- it took the entire
gain that put -- that went into Mead's apportionable tax
base. But, then, in order to find the Illinois-Lexis
share of the gain, he looked at the -- he looked at
Lexis's Illinois sales and Illinois's -- Lexis's
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Illinois payroll and pulled that amount out, which was
about four percent of the gain, and put that into Mead's
JUSTICE STEVENS: So you use a different
formula from the normal three-factor formula to compute
the tax?
MR. BAROV: Right. You use a different
formula. You use a two-factor formula, but it was just
related to Mead's sales, not to --
JUSTICE KENNEDY: But it seems to me that
those factors are wholly irrelevant to the fact of sale.
It's just whimsical. It has nothing to do with the
sale.
The reason we use apportionment in other
cases is, just as in Justice Breyer's railroad example,
there is no other way to tell, and so forth.
But here the presence of Lexis in Illinois
is wholly accidental with reference to what went on in
the sale.
MR. BAROV: No, Your Honor, it wasn't. I
mean Lexis did considerable business in Illinois, and
the auditor was isolating Illinois's business in
attempting to accurately value the amount of gain that
should be attributable to Mead based on Lexis's Illinois
presence.
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CHIEF JUSTICE ROBERTS: Well, that's why
it's even more dramatic to me that you didn't raise the
argument based on the Lexis connection to Illinois.
That's the basis on which your auditor is claiming these
taxes; and, yet, you don't even raise it before the
Illinois appellate court as a ground for being able to
reach the Lexis/Nexis income.
MR. BAROV: -- the trial court -- actually
the appellate court ruled on whether the State law tests
had been met at the time. And when it went up on appeal
we -- we prevailed in the appellate court based on
operational -- I'm sorry, in the trial court, based on
the court's finding the operational function had been
met. That's how the appellant framed the issue, and the
case sort of turned on really Illinois State law's
interpretation of Allied-Signal. But, you know, at this
point the -- the facts and the law are clear and a
decision --
JUSTICE STEVENS: In the Illinois courts,
they did argue that as a matter of Federal
constitutional law the tax is impermissible, didn't
they?
MR. BAROV: Correct, yes. Yes, they did.
At this point, Your Honor, I mean, to render a decision
that doesn't take into account the facts of the case,
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the economic reality, accordingly would be artificial.
CHIEF JUSTICE ROBERTS: We couldn't do
anything more if we said you haven't waived it, we
couldn't do anything more than send it back. You're
telling us Lexis has this presence in Illinois, but we
have nothing in the record about that.
MR. BAROV: Yes, it is in the record. The
auditor's -- I mean, the stipulation itself shows that
Lexis was in Illinois. And the Illinois appellate court
made a finding that the presence of Lexis -- Mead to tax
Nexis with Illinois was undisputed. So the Illinois
appellate court recognized that Lexis had a taxing --
adequate taxing connection with Illinois.
CHIEF JUSTICE ROBERTS: Where is that?
MR. BAROV: That is -- I don't have the page
cite handy, Your Honor, but the appellate court did make
a finding that it was undisputed that the --
CHIEF JUSTICE ROBERTS: I just -- usually
appellate courts don't make findings. That's why I'm
curious --
MR. BAROV: I'm sorry. Made a statement.
JUSTICE GINSBURG: Was there any sort of
stipulation between the parties to say what each, what
Lexis/Nexis was doing in Illinois, what Mead was doing
in Illinois?
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MR. BAROV: There was, there was a long
stipulation, yes, Your Honor, and plus there was
exhibits attached to the stipulation, which are
reflected in our briefs, that discuss in detail what
Mead and Lexis were both doing, at least their
relationship to each other.
JUSTICE GINSBURG: Let me ask you about the
theory that both the trial court and the intermediate
appellate court went on, this operational function test,
which has been brought up in a few of our cases, but I
don't know any that was decided. Did we ever have any
case that turned on the operational function test to
hold for the State taxing authority?
MR. BAROV: No, Your Honor. But in
Allied-Signal there was -- examples were given of
certain --
JUSTICE GINSBURG: Yes. But one of the
problems with applying it as you urge here is that that
would just override -- why would anyone go to the
trouble of making a case under the so-called unitary
business test, because the operational function test
would be much easier to meet? So --
MR. BAROV: I guess on that point I would
disagree with you a bit, Your Honor. I think there are
very -- they're different types that look at different
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relationships. So one doesn't -- while the same facts
can support them in instances, you can have situations
where a business is unitary but not operational or --
I'm sorry, an asset is operational, but isn't
necessarily --
JUSTICE BREYER: What? What? What could it
be? That is -- as I read this, I thought, well, there
is no separate test. It's just there's a certain
situation that comes up fairly commonly where someone
claims that an asset of a company was really quite
separate, and therefore when they get income from it or
they sell it it has nothing to do with my business. And
the answer is: It did have something to do with your
business, you used the working capital and so forth, in
which case it's part of the business. So how -- how is
it -- how is it different from that?
MR. BAROV: I agree, Your Honor.
JUSTICE BREYER: Well, if you agree with
that, do you really agree, because if you agree with
that there's no such separate test, this court was wrong
to consider it separately, the lower court, and they
should have reached the question they didn't reach,
which was is this whole thing one single business, which
is normally called the unitary business test?
MR. BAROV: Your Honor, on that point I
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disagree.
JUSTICE BREYER: Good. All right.
MR. BAROV: I think there is -- I mean,
they're both ways of reaching the overall unitary
principle, whether you can show the intangible flow of
assets -- of value between a company -- I can give you
an example, say, of a company that would be unitary but
where the operational function analysis wouldn't apply
is the Container Corp. Type fact pattern, where you have
a domestic -- a domestic parent providing value out to
the foreign subsidiaries, but there is nothing sort of
flowing back to the domestic parent. They're not really
using those subsidiaries in the domestic business. But
nevertheless, there is enough value being thrown out
that it passed the unitary threshold.
The unitary -- the unitary -- I'm sorry.
The operational function analysis or test or principle,
whatever you want to call it, arises in the examples
given in Allied-Signal. As you said, you've got
something which isn't really part of the rest of your
business, but you're using it in that business to
support it way beyond just a passive investment.
And this -- in this case, that's how Mead
was using Lexis. They were using it to support their,
the value of their multiple, their multi-state business,
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by manipulating -- by making capital contributions,
manipulating corporate structures, and bringing back
that tax and net loss carryforwards, which increased the
value, which increased their business activities.
So this case actually is that -- is that --
falls within that paradigm also. It's not unlike any --
like either of those hypotheticals in Allied-Signal, not
unlike the use of working -- investment of working
capital.
So, yes, both -- the test, while there are
facts that overlap them, they can show that there are
different relationships.
JUSTICE GINSBURG: So say you -- but you
would be asking us, if you were going to go on that
operational function, to take two examples that were
given in Allied-Signal that are quite different from
what's involved here, and to make that a doctrine when
you recognize that we have never used that theory to
hold for a State taxing authority in the context of a
multi-state enterprise?
MR. BAROV: Your Honor, I don't think you
have to create a separate doctrine again. I think these
are both considered different ways of showing the
intangible flow of value, the significant links between
a business that give rise to constitutional
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apportionment. And whether they're considered separate
analyses -- they have been described by some academics
as corollaries of each other. It's certainly, given
this Court's signals in Allied-Signal, I think it's
certainly appropriate where the facts arise to make the
constitutional finding based on the operational function
that an asset serves in a business.
JUSTICE STEVENS: May I ask this question.
Does the record tell us whether other States have sought
to tax the capital gain on this transaction?
MR. BAROV: No, it does not, Your Honor.
JUSTICE STEVENS: As far as we know,
Illinois is out on its own here?
MR. BAROV: I don't know, Your -- I don't
know the answer to that, Your Honor. I hope not.
In any event, Your Honor --
JUSTICE SCALIA: You'd not wager, however,
right?
MR. BAROV: In any case, Your Honor, as you
said, as I've said, there are two possible ways that --
two different constitutional paths or theories that we
can go down in this case to meet the -- that allows
Illinois to apportion.
Independent of the operational links, Mead
can tax the gain on Lexis simply because Lexis conducted
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business in Illinois. A state may tax a nonresident's
investment income based on its investment in a separate
business, and that's exactly what Illinois -- that's
another way to uphold the Illinois appellate court's
decision.
JUSTICE GINSBURG: If Illinois -- if Ohio
is, in fact, taxing the whole gain at its full rate on
the theory that this entire income should be allocated
to Ohio, then you do have an element of double taxation,
right?
MR. BAROV: That's possible, Your Honor, but
it's -- first, there is no -- there's no evidence that
Ohio in fact did that. But I think the Mobil Oil case
should have disposed of that, that contention, because
this Court rejected a similar argument that the mere
possibility of taxation by a domiciliary State
foreclosed taxation by a State where the business was
present.
And under Mobil Oil, when a resident State's
claim and a source State's claim conflict, this Court
indicated that the resident State's claim must yield to
that of the source State. So there should be no issue
of multiple taxation in this case.
Just -- Chief Justice Roberts, just to go
back to your question, it's page 11A of the pet. app.
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where the appellate court said: "Mead does not dispute
that Lexis/Nexis had the requisite connection or nexus
with Illinois."
CHIEF JUSTICE ROBERTS: I thought -- I've
been looking, too. I thought 18A does say that they had
$46 million of sales attributable to Lexis/Nexis.
MR. BAROV: Right. Certainly. There was
hundreds of millions of dollars of sales in Illinois.
So that's really not an issue in this case.
CHIEF JUSTICE ROBERTS: No, only 46 million.
MR. BAROV: I'm sorry.
CHIEF JUSTICE ROBERTS: It said 46, not
hundreds of millions.
MR. BAROV: I'm sorry. In 1994, yes, that's
correct.
The -- and again there's -- both Mead and
Lexis -- as both Mead and Lexis had adequate
constitutional connection here, there is no basis not to
sustain --
JUSTICE SCALIA: You're taxing Mead, not
Nexis/Lexis?
MR. BAROV: Correct. That's correct.
JUSTICE SCALIA: So what relevance is it
that Nexis/Lexis has business in Illinois?
MR. BAROV: It's --
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JUSTICE SCALIA: I mean that's fine if
that's who you're taxing.
MR. BAROV: Well, it's relevant if, only if,
this Court finds that there was no operational
relationship between Lexis and Mead. Then Lexis's
presence in Illinois becomes relevant because in that
case, whether you look at this as a separate business
conducted by Mead or whether it was even a passive
investment of Mead's, Illinois can still tax it in the
manner that it did by -- by isolating the values of
Lexis's -- that Lexis earned in Illinois.
JUSTICE KENNEDY: And that is different --
JUSTICE SCALIA: I might say that I don't
follow that. It seems to me what you can establish from
the fact that it did a lot of business in Illinois is
that can you tax it and -- but I don't see how.
JUSTICE GINSBURG: There was no "it" to tax,
right?
MR. BAROV: That 's correct. There was no
"it" to tax and under this court's well-established case
law, International Harvester, J.C. Penney, a State can
tax a nonresident on an investment in that State as well
as the tax is properly prorated to the amount of income
that rose within that State.
JUSTICE GINSBURG: At the time of this sale
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of Lexis/Nexis assets, there was only one taxpayer; it
was Mead.
MR. BAROV: That's correct, Your Honor.
There was one taxpayer and it was Mead. That was the
only party that could have been taxed. That's correct.
So here, in this case, Mead is taking an
all-or-nothing approach to taxation but this could --
this disregards the connections between Mead's
electronic publishing business in Illinois. And the
Court should decline to rule in their favor. In fact --
JUSTICE SCALIA: Do you have any case like
that where your ability to tax a surviving corporation
has to do with, not whether the surviving corporation
itself has sufficient contacts with the State, but
whether some other corporation that has disappeared now
but that merged into it had sufficient -- it seems to me
you have to establish connection with the taxpayer. Not
-- not with somebody from whom the taxpayer made some
money.
MR. BAROV: You have to establish a
connection with the taxpayer's activities in the taxing
State. That's the constitutional touchstone. So if
Mead -- whether Mead was running a business in Illinois
or investing in Illinois or had a unitary business that
operated in Illinois, those -- that's the -- that
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provides a sufficient link.
JUSTICE SCALIA: That's fine.
MR. BAROV: So that provides the taxing --
the ability --
JUSTICE SCALIA: But that isn't established
by the mere fact that Lexis/Nexis did business there.
Ultimately you have to come down to connecting it to
Mead, either by your unitary business doctrine or by
this functional doctrine that you're relying on.
MR. BAROV: No, Your Honor. Under
International Harvester, I think that the Court made it
very clear that even a passive investment can be taxed
by a State. If Mead -- Mead can be taxed -- even if
LEXIS was a passive investor and Mead was only investing
in Illinois, Illinois could still tax Mead on the value
of its investment that arose in Illinois. And so Mead
realized the gain. Mead is the taxpayer. Mead can be
taxed as long as the tax is properly prorated to the
Illinois presence, which it was in this case.
JUSTICE KENNEDY: But the proration, it
seems to me -- that should have nothing to do with the
extent of Lexis in Illinois --
MR. BAROV: Exactly.
JUSTICE KENNEDY: -- nor does it have to do
with the extent of Mead in Illinois.
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MR. BAROV: Well, no, Your Honor. It's --
under this -- then under this Court's precedent, that
you're looking for the source State, the activity of the
business was conducted in the source State. Now, in
this case it happened that the amounts are fairly close
to each other. So if there is any question about it,
there's no -- you know, there is no constitutional
problem that arises out of that. But clearly this -- I
mean it's settled precedent that a State can tax based
on income -- the income that arose in that State and
that's what happened here.
Indeed, to accept Mead's contention which
also would create a constitutional loophole that for
income in ae State's marketplace helped create but which
a State cannot recover, the Illinois court's decision
permitting Illinois to tax a fraction of the gain should
be affirmed.
And if the Court has no other questions --
JUSTICE SCALIA: Can you tax me on stock --
on stock that I own on companies that do business in
Illinois?
MR. BAROV: In the abstract, yes, you could,
Your Honor.
JUSTICE SCALIA: Do you know any State that
tries to do it.
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MR. BAROV: No, Your Honor, but again, Your
Honor --
JUSTICE SCALIA: That's extraordinary. I
don't know of any tax that a State could possibly
impose, that no State has imposed.
(Laughter.)
MR. BAROV: Your Honor, this is -- but Your
Honor, International Harvester is the perfectly precise
fact pattern where this Court upheld a tax on a -- on
investors, on the shareholder's investment in a State in
which they were not present, so -- but in this case Mead
had an independent tax presence also in Illinois. So
that issue just doesn't arise in this case.
CHIEF JUSTICE ROBERTS: Thank you, Counsel.
Ms. Brinkmann, you have three minutes.
REBUTTAL ARGUMENT OF BETH S. BRINKMANN
ON BEHALF OF THE PETITIONER
MS. BRINKMANN: I have four very quick
points, Your Honor. Two go into this new, very
breathtaking argument that the State is making based on
Lexis/Nexis's presence to the State. Concerning
Illinois law, if you look Repondents' brief in
opposition, on page 12 at note 4, they cite the same
Illinois law we do, trying to argue that we had waived
arguments in the brief in op, so we are on pretty solid
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ground there. I think it's their cert page, they were
agreeing with us on what the Illinois law meant.
On the substance of it, I think Justice
Scalia and Justice Kennedy brought out the weaknesses.
Their position would lead to taxes on all stock sales.
Any State where an investment was doing business could
then reach out and apportion the gain on that. And as
far as International Harvester and J.C. Penney, those
were tax on the investment, not the investor. And the
dissent -- that was the dispute -- the majority. It was
the incident of the tax fell on the invest -- the
investment that was doing business in the State.
The State concedes, Your Honor, on Justice
Ginsburg's, the distinction between -- the sale of
assets and the sale of stocks that you were concerned
about. On page 43, they concede and I think it's very
well recognized through Mobil and Exxon and Woolworth
that "apportionment has nothing to do with the form a
business organization takes."
CHIEF JUSTICE ROBERTS: Ms. Brinkmann, your
final point.
MS. BRINKMANN: Finally I would point out,
on the question you asked -- I think it was Justice
Ginsburg -- what Illinois would do in this.
Interestingly --
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JUSTICE GINSBURG: Ohio.
MS. BRINKMANN: -- the record in this case
at -- it's not in the joint appendix, but it's at C-851.
It's Exhibit 1, to the stipulation of facts. It
indicates that interest and dividends allocable are
allocable to Illinois if the commercial domicile is in
Illinois.
JUSTICE SCALIA: Illinois or Ohio, were you
talking about?
MS. BRINKMANN: This is the Illinois return,
and the question was what Illinois would do? And they
say commercial domicile, we get your interest and
dividends.
CHIEF JUSTICE ROBERTS: Ms. Brinkmann, on
the waiver point -- I'm looking at page 18a -- it not
only says that Lexis/Nexis contributed $46 million from
its presence in Illinois; it begins the sentence by
saying "as the Department notes, $46 million of Mead's
income came from Lexis/Nexis activities in Illinois."
So that doesn't sound like a waiver of that point to me.
MS. BRINKMANN: At one point, after they got
through the unitary business and operational functional
analysis, there was an argument about whether it was
grossly disproportionate, and that's where some of that
information came. It was never in the context of this
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legal --
CHIEF JUSTICE ROBERTS: Initially, it's
about the context in which -- what I regard as an
important fact -- was raised, whether it was raised in
the context of an argument on unitary business or
whether or not they went too far, but the stubborn fact
is still there.
MS. BRINKMANN: There are facts, Your Honor,
but the Illinois law is very clear; it's rule 341(h)(7)
and (i) which applies to applee. If you don't raise a
point in the appellate court, it is waived. That's an
independent and adequate State ground. And it's a very
breathtaking argument, as Justice Scalia pointed out,
that also wasn't brought forth in the brief in
opposition. Thank you, Your Honor.
CHIEF JUSTICE ROBERTS: Thank you. The case
is submitted.
(Whereupon, at 12:18 p.m., the case in the
above-entitled matter was submitted.)
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$ $46 48:6 55:16
55:18
0 06-1413 1:7 3:4
1 1 55:4
100 5:11 19:635:6
18a 48:5 55:151846 10:121897 4:21 18:171992 25:191994 48:14
2 2 12:11,12,132008 1:1227 2:6
3 3 2:4341(h)(7) 56:9
4 4 53:23
43 54:1646 48:10,12
5 5 25:4,5,9,1150 20:1753 2:9
8 80 30:5