Businesses avoid major new taxes Supreme Court rejects bid to change states' authority

June 16, 1992|By Lyle Denniston | Lyle Denniston,Washington Bureau

WASHINGTON -- Corporate America escaped a major new tax bite yesterday as the Supreme Court unanimously turned down a plea to allow states to levy a tax on a portion of total income earned by companies that operate inside their borders.

By a separate 5-4 vote, the court gave the benefit of that ruling specifically to Allied-Signal Inc., the company that took over the former Bendix Corp.

The case had been watched closely by American business, since the court had hinted that it might use the decision to make a fresh start on the constitutional rules governing state taxes on firms that operate in more than one state.

Maryland was one of the states with a keen interest in the outcome, because it is a state in which many multistate businesses operate. Maryland, like most states, could have gained added revenue if the court had changed direction significantly.

But, after holding two hearings to explore the impact of casting aside decades of law and giving states wider taxing authority over multistate companies, the court chose to leave the law largely as it has been for decades.

In the unanimous part of its ruling, the court reaffirmed the long-standing notion that states may tax a portion of a company's total income only when the company is operated as a unitary business with its activities integrated under a common management.

The court rebuffed a plea by New Jersey to shift to a new approach, under which each state where a company did business could tax a portion of a firm's total income, regardless of whether some operations of that company were conducted outside the state and were entirely unrelated to the taxing states.

New Jersey had argued that the realities of modern corporations made it unrealistic to try to separate income produced within a state from that coming from operations elsewhere.

In particular, the state had contended that when Bendix was under the leadership of acquisition-minded William Agee, it used corporate funds to buy and sell other companies as a regular business strategy.

Thus, New Jersey contended, Bendix should have to pay tax to New Jersey when it made money by selling off one of its acquired firms.

In the test case before the court, Mr. Agee decided to sell off a one-fifth stake that Bendix had in a metals company, ASARCO Inc. ASARCO was unrelated to New Jersey.

Bendix made more than $211 million in selling its ASARCO stock, and New Jersey demanded taxes on a portion of that gain.

Bendix paid the tax bill to New Jersey and sued for a refund. Ultimately, as the case moved to the Supreme Court, Bendix became part of Allied-Signal, which pressed the tax claim before the justices.

The ruling clarifies, in particular, that multistate businesses will not have to pay taxes to a wide variety of states when they put XTC funds into longer-term investments in unrelated businesses.

If a firm invests in other companies for operational reasons, that makes its investments subject to multistate taxation, the court made clear. But if the company does so only for investment purposes, states with no connection to the acquired firm may not tax a gain when that stock is sold, the court indicated.

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