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Supreme Court affirms unitary business principle.

In Allied Signal, Inc. v. Director, Division of Taxation (6/15/92), the U.S. Supreme Court adhered to precedent in ruling that, under the due process and commerce clauses of the U.S. Constitution, a state may not tax value earned outside its borders. Instead, the Court ruled, in accordance with the "unitary business principle," a state may tax a multistate business on the apportioned share that takes place within its borders.

The case involved New Jersey's attempt to tax gains realized by Allied SiguaFs Bendix division with respect to Bendix's 1981 sale of stock in Asarco Inc. New Jersey claimed there was no logical distinction between a short-term investment of working capital within its borders (which is clearly apportionable) and any other type of investment (including the acquisition of intangible assets.

The Court disagreed and confirmed a second basis for taxation: It is not essential to apportionment that the payor and payee engage in the same unitary business. It is sufficient that the capital transaction serve an operation, rather than an investment, function.

Nevertheless, it appears the Court adopted a restrictive rule for determining when an intangible asset serves an operation function. Although a short-term investment of working capital fills the bill, Bendix's stake in Asarco did not-even though it was acquired under a long-term corporate strategy of acquisition and disposition and the proceeds from the sale were intended to be used to acquire Martin Marietta Corp., which would have been operated as part of Bendix's unitary business.

Observation: In substance, the unitary business principle is still the key to interstate taxation, and it will be rare indeed for the fruits of an investment to be subject to tax on a finding that the investment served an operation function.
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Title Annotation:New Jersey; Allied Signal, Inc. v. Director, Division of Taxation
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Sep 1, 1992
Words:291
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