In the Supreme Court of United States: Unisys Corporation, Petitioner, v. Pennsylvania Board of Finance and Revenue, Respondent. On Petition for a Writ of Certiorari to the Supreme Court of Pennsylvania: Brief of Tax Executives Institute, Inc. as amicus curiae in support of petitioner.

On June 23, 2003, Tax Executives Institute filed the following brief amicus curiae in support of the petitioners with the Supreme Court of the United States in Unisys Corporation v. Pennsylvania Board of Finance and Revenue. The ease provides the Supreme Court with an opportunity to address the issue of factor representation. The brief was prepared under the aegis of the Institute's State and Local Tax Committee, whose chair is Barbara Barton of Electronic Data Systems Corp.

Interest Of Amicus Curiae

Pursuant to Rule 37 of the Rules of this Court, Tax Executives Institute, Inc. respectfully submits this brief as amicus curiae in support of Petitioner, Unisys Corporation. (1) Tax Executives Institute, Inc., (hereinafter "TEI" or "the Institute") is a voluntary, non-profit 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 has approximately 5,300 members who represent more than 2,800 of the leading corporations in the United States, Canada, and Europe. The Institute is dedicated to promoting the uniform and equitable enforcement of the tax laws, reducing the costs and burdens of administration and compliance to the benefit of both the government and taxpayers, and to vindicating the Commerce Clause and other constitutional rights of all business taxpayers. The members of the Institute represent a cross-section of the business community in North America and are, almost without exception, engaged in interstate commerce.

The multijurisdictional companies represented by the Institute's membership are significantly affected by the allocation and apportionment of income and net worth among the various states. As a result, TEI's members will be directly affected by the Supreme Court's decision whether to grant a writ of certiorari in this case. The specific issue involved in this case is whether the franchise tax scheme employed by Pennsylvania, which includes both the net worth and dividends received from subsidiaries of a taxpayer in the tax base, but uses only the taxpayer's property, payroll, and sales in the apportionment formula, results in fair, rational, and constitutional apportionment. The case raises fundamental issues about the legitimacy of a state's apportionment mechanism under the Commerce and Due Process Clauses. A writ of certiorari should be issued here to enable the Court to confirm that the Constitution does not permit apportionment of a consolidated or unitary multistate tax base without taking into account the corresponding apportionment factors of the businesses in the consolidated or unitary group generating the income or value constituting the tax base.

This case has significant ramifications for taxpayers other than Unisys. Its resolution will directly affect the tax liabilities of other businesses subject to Pennsylvania's tax system, and indirectly affect the tax systems of other states that apply similar principles. Indeed, approximately 1,000 cases on appeal in Pennsylvania are awaiting the outcome of this case. As individuals who must contend daily with the interpretation and administration of the nation's tax laws, the Institute's members--and the companies by whom they are employed--have a vital interest in the proper disposition of this case.

Summary of Argument

1. The issue in this case is whether Pennsylvania can include worldwide income and net worth in the tax base while employing an apportionment formula that includes the apportionment factors of only the parent corporation, i.e., whether "factor representation" is required by the Constitution. This case presents the Court with an opportunity to address an issue that was left open in Mobil Oil Corp. v. Comm'r of Taxes, 445 U.S. 425 (1980).

2. In computing Pennsylvania's franchise tax for the tax years at issue, Unisys Corporation calculated its tax base with regard to its own net worth and average income, and elected to use a three-factor apportionment formula, taking into account its own payroll, tangible property, and sales for those years. On review, the Pennsylvania Department of Revenue adjusted Unisys Corporation's franchise tax upward substantially by including the aggregate net worth of its hundred-pins subsidiaries worldwide and capitalized dividends received from these subsidiaries into the tax base, but not making corresponding adjustments to reflect the property, payroll, and sales of the subsidiaries in the apportionment factors.

3. 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); see U.S. Const. art. I, [subsection] 8, cl. 3 (Commerce Clause); U.S. Const. amend. XIV, [subsection] 1 (Due Process Clause).

   Dividing income among the several states resembles "slicing a shadow." Container Corp. v. Franchise Tax Bd., 463 U.S. 159, 192 (1983). Absolute consistency, even among taxing authorities using the same apportionment formula, "may just be too much to ask," id., but there are constitutional limits on a state's use of an apportionment formula, especially in respect of income derived beyond a state's borders. No state has carte blanche in devising or applying its apportionment scheme. The shadow must be sliced, and it must be sliced fairly in accordance with constitutional principles.

4. One means of taxing in-state income is the use of the unitary business principle which calculates the local tax base by first defining the scope of the unitary business, of which the taxed enterprise's activities in the taxing state form one part, and then apportioning the total income of the unitary business between the taxing state and other jurisdictions based on a formula taking into account objective measures of the corporation's activities within and without the jurisdiction. Container Corp., 463 U.S. at 165.

   To pass constitutional muster, the apportionment formula must, first and foremost, be fair. Container Corp., 463 U.S. at 169. Here, the issue is whether the apportionment formula used by Pennsylvania is properly designed to ensure against the proscribed taxation of extraterritorial income and value. In this case, Pennsylvania included all of Unisys Corporation's dividends from its subsidiaries, as well as their capitalized net worth, in its apportionable tax base. The state, however, did not include in the denominator of the three-factor apportionment formula the property, payroll, and sales of the subsidiaries that produced that income and value. Thus, Pennsylvania's taxing scheme did not provide for "factor representation" in respect of the net worth of, and dividends received from, Unisys Corporation's subsidiaries.

5. An apportionment formula that fails by design to take into account the factors generating the apportioned income is constitutionally flawed because there can never be a "rational relationship between the income attributed to the State and the intrastate values of the enterprise." Mobil, 445 U.S. at 436. The failure to provide factor representation is "inherently arbitrary," Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 121 (1920), and cannot help but produce a result that reflects neither "a reasonable sense of how [the] income [was] generated" (as required by Container Corp., 463 U.S. at 169) nor "the relative contribution of the activities in the various States to the production of total unitary in come" (Butler Bros. v. McColgan, 315 U.S. 501, 509 (1942)). This Court's prior holdings teach this conclusion and common sense confirms it.

   In Mobil, the Court acknowledged that the factor representation issue could be one of constitutional import, but declined to resolve it on the ground that the issue had not been properly raised. 445 U.S. at 434. The Court reserved the question, stating, "we need not, and do not, decide whether combined apportionment of this type [inclusion of the Mobil subsidiaries' and affiliates' sales, payroll, and property in the...