Allied-Signal, Inc. Ex Rel. Bendix Corp. v. Director, Division of Taxation

1992-06-15

Headline: Court limits states’ power to tax distant investment gains, blocks New Jersey from apportioning a $211.5 million stock-sale gain, and reaffirms unitary-business limits on state corporate income taxation.

Holding: The Court ruled that New Jersey may not include Bendix’s $211.5 million gain from selling ASARCO stock in its apportionable tax base because the stipulated record shows the investment was not part of Bendix’s unitary business.

Real World Impact:

Prevents states from taxing gains on unrelated out-of-state investments.
Protects multistate companies from apportionment of discrete investment income.
Affirms objective tests for when states may apportion corporate income.

Topics: corporate income tax, investment gains, interstate taxation, unitary business

Summary

Background

A manufacturing and aerospace company (Bendix, now Allied-Signal) with operations in New Jersey bought a 20.6% stake in a mining company (ASARCO) and later sold that stake for a $211.5 million gain. New Jersey included part of that gain in Bendix’s state tax base. The New Jersey tax courts upheld the tax on stipulated facts that the two businesses were unrelated in operations, and the matter reached the Supreme Court.

Reasoning

The Court addressed whether the longstanding “unitary business” test should control state taxing power and whether New Jersey could apportion this particular gain. The Justices reaffirmed the unitary-business approach and refused to overturn earlier cases. They explained that a State may tax apportioned income only when there is functional integration, centralized management, or shared economies of scale, or when a capital transaction serves an operational (not merely investment) function. Given the parties’ stipulation that Bendix and ASARCO ran separate, unrelated businesses and the absence of integration, the Court held New Jersey could not include the ASARCO gain in its apportionable tax base.

Real world impact

The decision protects companies from having discrete, out-of-state investment returns taxed by States where the firms simply do business, unless objective ties show the investment served the in-state operational business. The Court also stressed stability and reliance interests in preserving the existing test for allocating multistate corporate income.

Dissents or concurrances

A dissenting Justice argued Bendix had not met the heavy burden to show the gain was unrelated, noting long-term investment used to fund an intended aerospace acquisition could be operationally related and taxable by New Jersey.