Brief of Tax Executives Institute, Inc. as amicus curiae in support of petitioner.

In The Supreme Court of the United States Pennzoil Company And Subsidiaries, Petitioner, V. Department Of Revenue, State Of Oregon, Respondent. On Petition for a Writ of Certiorari to the Supreme Court of Oregon

On February 6, 2002, Tax Executives Institute filed the following brief amicus curiae with the Supreme Court of the United States concerning the constitutionality of Oregon's determination that a $3.1 billion settlement payment Pennzoil received from Texaco (stemming from Texaco's tortious interference with a deal Pennzoil had with Getty Oil) was business income and therefore subject to apportionment. The brief was filed under the aegis of the Institute's State and Local Tax Committee, whose chair is Bruce J. Reid of Microsoft Corporation. The Supreme Court denied certiorari on March 18, 2002.

Pursuant to Rule 37 of the Rules of the Supreme Court, Tax Executives Institute, Inc. respectfully submits this brief as amicus curiae in support of Petitioner. (1) Tax Executives Institute (hereinafter "TEI" or "the Institute") is a voluntary, nonprofit association of corporate and other business executives, managers, and administrators who are responsible for the tax affairs of their employers. The Institute was organized in 1944 and currently has approximately 5,300 members who represent more than 2,700 of the leading businesses in the United States, Canada, and Europe, nearly all of which are engaged in interstate commerce. TEI is dedicated to promoting the uniform and equitable enforcement of the tax laws and to reducing the costs and burdens of administration and compliance to the benefit of both the government and taxpayers, and to vindicating the due process and Commerce Clause rights of business taxpayers.

The members of the Institute represent a cross-section of the business community in North America, and the multi-jurisdictional companies represented by the Institute's membership are significantly affected by the rules governing the allocation and apportionment of income among the various States. As a result, nearly all the Institute's members will be affected by the final result in this case. If the Oregon Supreme Court's decision stands, business taxpayers throughout the Nation will suffer from increased uncertainty, the enhanced potential for duplicative taxation, and the unavoidable cost and burden of compliance.

The issue in this case is simply this: Whether respondent violated the Due Process and Commerce Clauses of the U.S. Constitution when proceeds received by Pennzoil Company in settlement of a tort case having no connection to the State of Oregon were determined to be business income subject to apportionment for purposes of determining Pennzoil Company's Oregon tax liability. The constitutional rights of many if not most companies represented by TEI members are implicated and, indeed, threatened by Oregon's determination. The absence of guidance on the States' ability to tax extraterritorial income by categorizing extraordinary gains as apportionable business income--compounded by the Court's declining to review three recent cases, Deluxe Corp. v. Franchise Tax Bd., No. A088142 (Cal. Ct. App. 2001), cert. denied, 534 U.S. -- (Jan. 7, 2002) (No. 01-603); Hoechst Celanese Corp. v. Franchise Tax Bd., 106 Cal. Rptr. 2d 548 (2001), cert. denied, 534 U.S. -- (Nov. 11, 2001) (No. 01-265); and Kroger Co. v. Kansas Dep't of Revenue, 270 Kan. 148 (2000), cert. denied, 532 U.S. --, 121 S. Ct. 1736 (2001)--imperils all taxpayers. At stake in this case is no less than whether any real constitutional limit exists to the taxing power of the States. If a payment received in settlement of the then-largest jury award for tort damages stemming from interference in a failed capital transaction stands as apportionable business income, then what transaction is not subject to apportionment? History teaches that other States will follow suit, pouring their interpretative new wine into the old wineskins of seemingly constitutional statutes until any protections afforded by the Constitution have burst apart at the seams.

As the individuals who must contend daily with the interpretation and administration of tax laws across the country and globally, TEI members and the businesses by which they are employed will be materially affected by the Court's decision whether to review this case. Therefore, the Institute's interest in the outcome of this case is vital.

SUMMARY OF ARGUMENT

1. This case involves the limitations on the States' power to apportion income of a nondomiciliary taxpayer where that income bears no, or only a nominal, connection with the taxpayer's activities in the State. Under the Commerce Clause and Due Process Clause of the Constitution, a State may not tax value earned outside its borders. ASARCO Inc. v. Idaho State Tax Comm'n, 458 U.S. 307,315 (1982). The State of Oregon's attempt in this case to tax income received from a transaction that had absolutely no connection to activities within its borders should fail and, accordingly, the decision below should be reversed.

2. This is the latest in a series of cases to come to the Court on the question of what connection, or nexus, must exist between a State and a nondomiciliary taxpayer's income from out-of-state sources or activities before that income can be apportioned to, and therefore taxed by, the State. The general permissibility of formulary apportionment, however, should not obscure the Constitution's limitation on States' ability to tax out-of-state income. Although having discretion, no State has carte blanche in devising or applying its apportionment scheme.

   The key to the Court's constitutional analysis has been the application of the unitary business principle, which focuses on whether the out-of-state item that the State is seeking to tax is "unitary" with, or functionally related to, that taxpayer's in-state activities. Hence, unless the unitary business principle is correctly applied, the apportionment formula employed by the State will most likely render a constitutionally impermissible result. If a State errs or overreaches in defining a taxpayer's unitary business -- for example, by including nonapportionable items of income in or excluding apportionable items of expense from the tax base -- its formula will violate constitutional norms. Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 772-73 (1992) (striking down New Jersey's attempt to tax gain realized from a stock sale).

3. The overarching constitutional issue in this case is whether the State of Oregon's determination that proceeds received by Pennzoil Company in settlement of the then-largest jury award for tort damages is business income subject to apportionment does violence to the unitary business principle and hence contravenes the Commerce and Due Process Clauses by effectively taxing income beyond the State's constitutional reach.

4. Like many States, Oregon imposes a corporate excise tax for the privilege of doing business in the State, which starts with the corporation's federal taxable income and is modified to reflect the net income derived from or attributable to sources within the State. To promote uniform taxation of interstate businesses and effect the proper apportionment of income to the State, Oregon generally uses the Uniform Distribution of Income...