ASARCO INC. v. IDAHO STATE TAX COMM’N(1982)

No. 80-2015

Argued: April 19, 1982Decided: June 29, 1982

The State of Idaho may not constitutionally include within the taxable income of appellant nondomiciliary parent corporation doing some business (primarily silver mining) in the State a portion of intangible income (dividends, interest payments, and capital gains from the sale of stock) that appellant received from subsidiary corporations having no other connection with the State. Pp. 315-330.

(a) As a general principle, a State may not tax value earned outside its borders. “[T]he linchpin of apportionability in the filed of state income taxation is the unitary-business principle.” Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425, 439 ; Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207, 223 . Pp. 315-320.

(b) Here, based on the findings in the state trial court and the undisputed facts, appellant succeeded in proving that no unitary business relationship existed between appellant and its subsidiaries. Pp. 320-324.

(c) To have, as Idaho proposes, corporate purpose define unitary business – i. e., to consider intangible income as part of a unitary business if the intangible property (shares of stock) is “acquired, managed or disposed of for purposes relating or contributing to the taxpayer’s business” – would destroy the concept of unitary business. Such a definition, which would permit nondomiciliary States to apportion and tax dividends “[w]here the business activities of the dividend payor have nothing to do with the activities of the recipient in the taxing State,” Mobil Oil Corp., supra, at 442, cannot be accepted consistently with recognized due process standards. While the dividend-paying subsidiaries in this case “ad[d] to the riches” of appellant, Wallace v. Hines, 253 U.S. 66, 70 (1920), they are “discrete business enterprise[s]” that in “any business or economic sense” have “nothing to do with the activities” of appellant in Idaho. Mobil Oil Corp., supra, at 439-442. Therefore, there is no “rational relationship between [appellant’s dividend] income attributed to the State and the intrastate values of the enterprise.” Mobil Oil Corp., supra, at 437. The Due Process Clause bars Idaho’s effort to levy upon income that is not properly within the reach of its taxing power. Pp. 325-329.

[458 U.S. 307, 308]

income derived from its subsidiaries also violates the Due Process Clause. Pp. 329-330.

102 Idaho 38, 624 P.2d 946, reversed.

POWELL, J., delivered the opinion of the Court, in which BURGER, C. J., and BRENNAN, WHITE, MARSHALL, and STEVENS, JJ., joined. BURGER, C. J., filed a concurring opinion, post, p. 331. O’CONNOR, J., filed a dissenting opinion, in which BLACKMUN and REHNQUIST, JJ., joined, post, p. 331.

George W. Beatty argued the cause for appellant. With him on the briefs were C. Rudolf Peterson, William L. Goldman, James A. Riedy, Philip E. Peterson, and Alexander J. Gillespie, Jr.

Theodore V. Spangler, Jr., Deputy Attorney General of Idaho, argued the cause for appellee. With him on the brief was David H. Leroy, Attorney General. *

[ Footnote * ] Briefs of amici curiae urging affirmance were filed for the State of Illinois by Tyrone Fahner, Attorney General, Fred H. Montgomery, Special Assistant Attorney General, and Lloyd B. Foster; and for the Multistate Tax Commission et al. by William D. Dexter; Wilson L. Condon, Attorney General of Alaska; J. D. MacFarlane, Attorney General of Colorado; Carl R. Ajello, Attorney General of Connecticut; Richard S. Gebelein, Attorney General of Delaware; David H. Leroy, Attorney General of Idaho, and Theodore V. Spangler, Jr., Deputy Attorney General; Linley E. Pearson, Attorney General of Indiana; Robert T. Stephan, Attorney General of Kansas; Stephen H. Sachs, Attorney General of Maryland; Francis X. Bellotti, Attorney General of Massachusetts; Frank K. Kelley, Attorney General of Michigan; Warren R. Spannaus, Attorney General of Minnesota; John Ashcroft, Attorney General of Missouri; Paul L. Douglas, Attorney General of Nebraska; Gregory H. Smith, Attorney General of New Hampshire; Jeff Bingaman, Attorney General of New Mexico; Rufus L. Edmisten, Attorney General of North Carolina, and M. C. Banks, Deputy Attorney General; Robert O. Welfald, Attorney General of North Dakota, and Albert R. Hausauer, Assistant Attorney General; Dave Frohnmayer, Attorney General of Oregon; and David L. Wilkinson, Attorney General of Utah. John J. Easton, Attorney General of Vermont, and Paul P. Hanlon filed a brief for the State of Vermont as amicus curiae.

JUSTICE POWELL delivered the opinion of the Court.

The question is whether the State of Idaho constitutionally may include within the taxable income of a nondomiciliary [458 U.S. 307, 309] parent corporation doing some business in Idaho a portion of intangible income – such as dividend and interest payments, as well as capital gains from the sale of stock – that the parent receives from subsidiary corporations having no other connection with the State.

I

This case involves corporate income taxes that appellee Idaho State Tax Commission sought to levy on appellant ASARCO Inc. for the years 1968, 1969, and 1970. ASARCO is a corporation that mines, smelts, and refines in various States nonferrous metals such as copper, gold, silver, lead, and zinc. It is incorporated in New Jersey and maintains its headquarters and commercial domicile in New York. ASARCO’s primary Idaho business is the operation of a silver mine. It also mines and sells other metals and operates the administrative office of its northwest mining division in Idaho. According to the appellee’s tax calculations, approximately 2.5% of ASARCO’s total business activities take place in Idaho. App. 59a, 67a, and 75a.

During the years in question, ASARCO received three types of intangible income of relevance to this suit. 1 First, it collected dividends from five corporations in which it owned major interests: M. I. M. Holdings, Ltd.; General Cable Corp.; Reverse Copper and Brass, Inc.; ASARCO Mexicana, S. A.; and Southern Peru Copper Corp. 2 Second, [458 U.S. 307, 310] ASARCO received interest income from three sources: from Revere’s convertible debentures; from a note received in connection with a prior sale of Mexicana stock; and from a note received in connection with a sale of General Cable Stock. Third, ASARCO realized capital gains from the sale of General Cable and M. I. M. stock.

In 1965, Idaho adopted its version of the Uniform Division of Income for Tax Purposes Act (UDITPA). 3 See Idaho Code 63-3027 (1976 and Supp. 1981); 7A U. L. A. 91 (1978). Under this statute, Idaho classifies corporate income from intangible property as either “business” or “nonbusiness” income. “Business” income is defined to include income from intangible property when “acquisition, management, or disposition [of the property] constitute[s] integral or necessary parts of the taxpayers’ trade or business operations.” 4 Idaho apportions such “business” income according [458 U.S. 307, 311] to a three-factor formula and includes this apportioned share of “business” income in the taxpayer’s taxable Idaho income. 5 “Nonbusiness” income, on the other hand, is defined as “all income other than business income.” Idaho Code 63-3027 (a)(4) (Supp. 1981). Idaho allocates intangible “nonbusiness” income entirely to the State of the corporation’s commercial domicile instead of apportioning it among the States in which a corporate taxpayer owns property or carries on business. 6

Idaho is a member of the Multistate Tax Compact, an interstate taxation agreement concerning state taxation of multistate businesses. The Compact established the Multistate Tax Commission, which is composed of the tax administrators [458 U.S. 307, 312] from the member States. 7 Article VIII of the Compact provides that any member State may request that the Commission perform an audit on its behalf. See United States Steel Corp. v. Multistate Tax Comm’n, 434 U.S. 452, 457 (1978) (upholding the Compact against a facial attack on Compact and Commerce Clauses and Fourteenth Amendment grounds).

In 1971, the Multistate Tax Commission audited ASARCO’s tax returns for the years in question on behalf of six States, including Idaho. The auditor recommended adjusting ASARCO’s tax computations in several respects. As accepted by the Idaho State Tax Commission and as relevant to the present dispute, the auditor first “unitized” – or treated as one single corporation – ASARCO and six of its wholly owned subsidiaries. 8 As a consequence of unitization, the auditor combined ASARCO’s income with that of these six subsidiaries and disregarded (as intracompany accounting transfers) the subsidiaries’ dividend payments to ASARCO. Cf. United States Steel Corp. v. Multistate Tax Comm’n, supra, at 473, n. 25. The auditor listed five factors thought to justify unitizing treatment. First, ASARCO [458 U.S. 307, 313] owned a majority (in fact, all) of the stock of each subsidiary. Second, “ASARCO, with its subsidiaries, conducts a vertically integrated non-ferrous metals operation. This is evidenced by the flow from the mines to the smelters to the refineries and ultimately to the sales made by the New York office.” App. 88a. Third, “ASARCO and its subsidiaries have interlocking officers and directors, which enables ASARCO to control the major management decisions of each subsidiary.” Ibid. Fourth, sales between the companies were numerous, making it “apparent . . . that the companies supplied markets to each other . . . .” Id., at 89a. And finally, various services were provided to the ASARCO group either by ASARCO or by subsidiaries specifically set up for such a purpose. 9 The propriety of this treatment of the six wholly owned subsidiaries is not an issue before us.

The auditor found the situation to differ with respect to ASARCO’s interest in M. I. M., General Cable, Revere, Mexicana, and Southern Peru. This judgment planted the seed of the current dispute. As to these five companies, the auditor determined that the links with ASARCO were not sufficient to justify unitary treatment. Nonetheless, he found that ASARCO’s receipt of dividends from each of these did constitute “business” income to ASARCO. See n. 4, supra. The auditor similarly classified the interest and capital gains income at issue in this case. These categories of income also were added in ASARCO’s total income to be apportioned among the various States in which ASARCO was subjected to an income tax.

The Idaho State Tax Commission adopted the auditor’s adjustments [458 U.S. 307, 314] in an unreported decision. App. to Juris. Statement 46a. In rejecting ASARCO’s challenge to the auditor’s unitized treatment of the six wholly owned corporations, see n. 8, supra, the Commission stated that it was “quite clear from the evidence produced at the hearing that [ASARCO’s] business activities are so inter-related as to defy measurement by separate accounting . . . .” App. to Juris. Statement 49a-50a. The Commission likewise upheld the auditor’s conclusion that the dividends presently at issue were properly treated as apportionable “business” income. It consequently assessed tax deficiencies against ASARCO of $92,471.88 for 1968, $111,292.44 for 1969, and $121,750.76 for 1970, plus interest.

On ASARCO’s petition for review, the State District Court upheld the Commission’s unitized treatment of the six subsidiaries in an unpublished opinion. The court, however, overruled the Commission’s determination that the disputed dividends, interest, and capital gains constituted “business” income, on the reasoning that this income did not come from property or activities that were “an integral part of [ASARCO’s] trade or business.” Idaho Code 63-3027(a)(1) (Supp. 1981). In the court’s view, “if the dividend income from other corporations is an integral part of the business of [ASARCO] . . . they should be unitized and all matters considered and[,] if they are not[,] . . . the income is not business income but is [nonapportionable] non business income.” App. to Juris. Statement 37a.

The Commission, but not ASARCO, appealed to the Idaho Supreme Court. That court held that the trial court had erred by excluding from “business” income ASARCO’s receipt of dividends, interest, and capital gains as a result of its owning stock in the five corporations. 10 American Smelting [458 U.S. 307, 315] & Refining Co. v. Idaho State Tax Comm’n, 99 Idaho 924, 935-937, 592 P.2d 39, 50-52 (1979). In response to ASARCO’s constitutional arguments, the court decided that this tax treatment withstood attack under the Commerce and Due Process Clauses. We vacated and remanded the case for reconsideration in light of our decision in Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425 (1980). ASARCO Inc. v. Idaho State Tax Comm’n, 445 U.S. 939 (1980). The Idaho Supreme Court reinstated its previous opinion in a brief per curiam order on March 4, 1981. 102 Idaho 38, 624 P.2d 946. We noted probable jurisdiction, 454 U.S. 812 (1981), and we now reverse.

II

As a general principle, a State may not tax value earned outside its borders. See, e. g., Connecticut General Life Ins. Co. v. Johnson, 303 U.S. 77, 80 -81 (1938). 11 The broad inquiry in a case such as this, therefore, is “whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state. The simple but controlling question is whether the state has given anything for which it can ask return.” Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444 (1940).

Our application of this general principle in this case is guided by two of our recent decisions. In Mobil Oil Corp. v. Commissioner of Taxes of Vermont, supra, the taxpayer conducted “an integrated petroleum business,” 445 U.S., at [458 U.S. 307, 316] 428, that included international petroleum exploration, production, refining, transportation, distribution, and sale of petroleum, as well as related chemical and mining enterprises. Much of its business abroad was conducted through wholly or partly owned subsidiaries. The State of Vermont imposed a corporate income tax on that portion of Mobil’s total income that the State attributed to Mobil’s Vermont activity, which was confined to the wholesale and retail marketing of petroleum. The State sought to include within Mobil’s apportionable Vermont income its receipt of dividends from its subsidiaries and affiliates that operated abroad. Mobil protested that the State could not properly apportion and tax this “foreign source” dividend income.

For present purposes, our analysis in Mobil began with the observation that Mobil’s principal dividend payors were part of Mobil’s integrated petroleum business. Although Mobil was “unwilling to concede the legal conclusion” that activities by these dividend payors formed part of Mobil’s “`unitary business,'” it “offered no evidence that would undermine the conclusion that most, if not all, of its subsidiaries and affiliates contribute[d] to [Mobil’s] worldwide petroleum enterprise.” Id., at 435.

The Court next stated that due process limitations on Vermont’s attempted tax would be satisfied if there were “a `minimal connection’ between the interstate activities and the taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise.” Id., at 436-437, citing Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272 -273 (1978); National Bellas Hess, Inc. v. Illinois Dept. of Revenue, 386 U.S. 753, 756 (1967); Norfolk & Western R. Co. v. Missouri Tax Comm’n, 390 U.S. 317, 325 (1968). And we said that these limitations would not be contravened by state apportionment and taxation of income that were determined by geographic accounting to have arisen from a different State “so long as the intrastate and extrastate activities formed part of a single unitary business.” 445 U.S., at 438 (emphasis added). [458 U.S. 307, 317]

The Mobil Court explicated the limiting “unitary business” principle by observing that geographic accounting, in purporting to isolate income received in various States, “may fail to account for contributions to income resulting from functional integration, centralization of management, and economies of scale.” Ibid. The fact that “these factors of profitability arise from the operation of the business as a whole,” ibid., therefore could justify a State’s otherwise impermissible inclusion of corporate income derived from corporate activities beyond the State’s borders. The Court thus stated:

“[T]he linchpin of apportionability in the field of state income taxation is the unitary-business principle. In accord with this principle, what appellant must show, in order to establish that its dividend income is not subject to an apportioned tax in Vermont, is that the income was earned in the course of activities unrelated to the sale of petroleum products in that State. [Mobil] has made no effort to demonstrate that the foreign operations of its subsidiaries and affiliates are distinct in any business or economic sense from its petroleum sales activities in Vermont. Indeed, all indications in the record are to the contrary, since it appears that these foreign activities are part of [Mobil’s] integrated petroleum enterprise. In the absence of any proof of discrete business enterprise, Vermont was entitled to conclude that the dividend income’s foreign source did not destroy the requisite nexus with in-state activities.” Id., at 439-440 (emphasis added and footnote omitted).

We consequently rejected Mobil’s constitutional challenge to Vermont’s tax. In so doing, however, we cautioned that we did

[458 U.S. 307, 318]

recipient in the taxing State, due process considerations might well preclude apportionability, because there would be no underlying unitary business.” Id., at 441-442 (emphasis added).

We soon had occasion to reiterate these principles. Three months after Mobil, we decided Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207 (1980). In Exxon, “a vertically integrated petroleum company,” id., at 210, explored for, produced, refined, and marketed petroleum and related products. Although Exxon’s activities in Wisconsin were confined to marketing, the State sought to apportion and tax Exxon’s income from nonmarketing activities in the United States.

Exxon disputed the propriety of this treatment. The Wisconsin Tax Appeals Commission agreed with the objection on the basis of its conclusion that Exxon’s “three main functional operating departments – Exploration and Production, Refining, and Marketing – were separate unitary businesses.” Id., at 215 (emphasis added). The Commission found that the tax as applied “`had the effect of imposing a tax on [Exxon’s] exploration and on its refining net income, all of which was derived solely from operations outside the State of Wisconsin and which had no integral relationship to [Exxon’s] marketing operations within Wisconsin.'” Ibid. On appeal, however, the Circuit Court for Dane County held that Exxon’s three main functional operating departments were all part of a single unitary business. The Wisconsin Supreme Court agreed. 12 [458 U.S. 307, 319]

In reviewing the case, this Court unanimously agreed with the State Commission and the two state courts that the decisive concept in the case was that of a unitary business. Significantly, we repeated Mobil’s teaching that “[t]he `linchpin of apportionability’ for state income taxation of an interstate enterprise is the `unitary-business principle.'” Id., at 223, quoting Mobil, 445 U.S., at 439 . We also repeated:

“In order to exclude certain income from the apportionment formula, the company must prove that `the income was earned in the course of activities unrelated to the sale of petroleum products in that State.’ . . . The court looks to the `underlying economic realities of a unitary business,’ and the income must derive from `unrelated business activity’ which constitutes a `discrete business enterprise,’ 445 U.S., at 441 , 442, 439.” 447 U.S., at 223 -224.

Examining the facts, the Court found that Exxon was “a highly integrated business which benefits from an umbrella of centralized management and controlled interaction.” Id., at 224. 13 We rejected the company’s protest because “[w]e agree[d] with the Wisconsin Supreme Court that Exxon [was] such a unitary business and that Exxon has not carried [458 U.S. 307, 320] its burden of showing that its functional departments are `discrete business enterprises’. . . .” Ibid. 14

III

In this case, ASARCO claims that it has succeeded, where the taxpayers in Mobil and Exxon failed, in proving that the dividend payors at issue are not part of its unitary business, but rather are “discrete business enterprises.” 447 U.S., at 224 . We must test this contention on the record before us.

A

The closest question is posed by ASARCO’s receipt of dividends from Southern Peru. ASARCO is one of Southern Peru’s four shareholders, holding 51.5% of its stock. 15 [458 U.S. 307, 321] Southern Peru produces smelted but unrefined “blister copper” in Peru, and sells 20-30% of its output to the Southern Peru Copper Sales Corp. 16 The remainder of Southern Peru’s output is sold under contracts to its shareholders in proportion to their ownership interests. Southern Peru sold about 35% of its output to ASARCO, App. 89a, at prices determined by reference to average representative trade prices quoted in a trade publication and over which the parties had no control. 17 Id., at 125a-126a; 99 Idaho, at 928, 592 P.2d, at 43.

ASARCO’s majority interest, if asserted, could enable it to control the management of Southern Peru. The Idaho State [458 U.S. 307, 322] Tax Commission, however, found that Southern Peru’s “remaining three shareholders, owning the remainder of the stock, refuse[d] to participate in [Southern Peru] unless assured that they would have a way to assure that management would not be completely dominated by ASARCO.” App. to Juris. Statement 55. Consequently ASARCO entered a management agreement giving it the right to appoint 6 of Southern Peru’s 13 directors. The other three shareholders also appointed six directors. Ibid.; The thirteenth and final director is appointed by the joint action of either the shareholders or the first 12 directors. Ibid.; App. 121a. Southern Peru’s bylaws provide that eight votes are required to pass any resolution, ibid. and its articles and bylaws can be changed only by unanimous consent of the four stockholders.

In its unreported opinion, the state trial court concluded that this management contract “insures that [ASARCO] will not be able to control [Southern Peru].” App. to Juris. Statement 43a. It likewise found that Southern Peru “operates independently of [ASARCO].” Id., at 42a. The court reached this conclusion after hearing testimony that ASARCO did not “control Southern Peru in any sense of that term,” App. 121a, and that Southern Peru did not “seek direction or approval from ASARCO on major decisions.” Id., at 124a. Idaho does not dispute any of these facts. In view of the findings and the undisputed facts, we conclude that ASARCO’s Idaho silver mining and Southern Peru’s autonomous business are insufficiently connected to permit the two companies to be classified as a unitary business.

B

Under the principles of our decisions, the relationship of each of the other four subsidiaries to ASARCO falls far short of bringing any of them within its unitary business. M. I. M. Holdings engages in the mining, milling, smelting, and refining of copper, lead, zinc, and silver in Australia. The company also operates a lead and zinc refinery in England. During the years in question M. I. M. sold only about 1% [458 U.S. 307, 323] of its output to ASARCO, for sums in the range of $0.2 to $2.2 million. Id., at 43a-47a. It appears that these sales were on the open market at prevailing market rates. ASARCO owns 52.7% of M. I. M.’s stock, and the rest is widely held. Although ASARCO has the control potential to manage M. I. M., no claim is made that it has done so. 18 As an ASARCO executive explained, it never even elected a member of M. I. M.’s board:

“This company has been very successful in staffing the corporation with Australian people and [they have] been able to run this company by themselves and, therefore, in consequence of the nationalistic feeling which develops in most of such developing countries we have not exercised any right we might have to elect a director to the board of the company.” Id., at 132a.

In addition to forgoing its right to elect directors, ASARCO similarly has taken no part in the selection of M. I. M.’s officers – a function of the board of directors. Nor do the two companies have any common directors or officers. Id., at 34a, 40a. The state trial court found that M. I. M. “operates entirely independently of and has minimal contact with” ASARCO. App. to Juris. Statement 43a. As the business relation also is nominal, it is clear that M. I. M. is merely an investment. See, e. g., Keesling & Warren, The Unitary Concept in the Allocation of Income, 12 Hastings L. J. 42, 52-53 (1960).

General Cable and Revere Copper, large publicly owned companies, fabricate metal products. Both are ASARCO customers. 19 But ASARCO held only minority interests, owning [458 U.S. 307, 324] approximately 34% of the outstanding common shares of each. The remaining shares – listed on the New York Stock Exchange – are widely held. App. 135a. The two companies occupy parallel positions with respect to ASARCO as a result of a 1961 Department of Justice antitrust suit against ASARCO. The suit was based on ASARCO’s interests in each. In 1967, ASARCO consented to a decree that prohibited it from maintaining common officers in these companies, voting its stock in them, selling the companies copper at prices below those quoted to their competition, and from acquiring stock in any other copper fabricator. Id., at 96a. Neither Revere’s nor General Cable’s management seeks direction or approval from ASARCO on operational or other management decisions. 20 Id., at 137a.

Mexicana mines and smelts lead and copper in Mexico. Originally it was a wholly owned subsidiary of ASARCO, but a change in Mexican law required ASARCO to divest itself of 51% of Mexicana’s stock in 1965. This stock is now publicly held by Mexican nationals. The record does not reveal whether ASARCO and Mexicana have any common directors. The state trial court found, however, that Mexicana “operates independently of [ASARCO],” App. to Juris. Statement 43a, and the Idaho Supreme Court stated that “Mexicana does not seek approval from ASARCO concerning major policy decisions . . . .” 99 Idaho, at 929, 592 P.2d, at 44. 21 [458 U.S. 307, 325]

C

Idaho does not dispute the foregoing facts. Neither does it question that a unitary business relationship between ASARCO and these subsidiaries is a necessary prerequisite to its taxation of the dividends at issue. E. g., Brief for Appellee 10 (“When income is earned from activities which are part of a unitary business conducted in several states, then the requirement that the income bear relation to the benefits and privileges conferred by the several states has been met”). See also Tr. of Oral Arg. 25 (“[W]hen intangible assets such as, for example, shares of stock, are found to be a part of a taxpayer’s own unitary business, . . . there is no logical or constitutional reason why the income from those same intangibles should be treated any differently than any other business income that that taxpayer might earn”). Rather the State urges that we expand the concept of a “unitary business” to cover the facts of this case. [458 U.S. 307, 326]

Idaho’s proposal is that corporate purpose should define unitary business. It argues that intangible income should be considered a part of a unitary business if the intangible property (the shares of stock) is “acquired, managed or disposed of for purposes relating or contributing to the taxpayer’s business.” Brief for Appellee 4. See also Tr. of Oral Arg. 25 (urging that income from intangible property be considered part of a unitary business when the intangibles “contribute to or relate to or are some way in furtherance of the taxpayer’s own trade or business”). Idaho asserts that “[i]t is this integration – i. e., between the business use of the intangible asset (the shares of stock) and ASARCO’s mining, smelting, and refining business – which makes the income part of the unitary business.” Brief for Appellee 4.

This definition of unitary business would destroy the concept. The business of a corporation requires that it earn money to continue operations and to provide a return on its invested capital. Consequently all of its operations, including any investment made, in some sense can be said to be “for purposes related to or contributing to the [corporation’s] business.” When pressed to its logical limit, this conception of the “unitary business” limitation becomes no limitation at all. When less ambitious interpretations are employed, the result is simply arbitrary. 22 [458 U.S. 307, 327]

We cannot accept, consistently with recognized due process standards, a definition of “unitary business” that would permit nondomiciliary States to apportion and tax dividends “[w]here the business activities of the dividend payor have nothing to do with the activities of the recipient in the taxing State . . . .” 23 Mobil Oil Corp. v. Commissioner of Taxes of [458 U.S. 307, 328] Vermont, 445 U.S., at 442 . In such a situation, it is not true that “the state has given anything for which it can ask return.” Wisconsin v. J. C. Penney Co., 311 U.S., at 444 .

Justice Holmes stated long ago that “the possession of bonds secured by mortgages of lands in other States, or of a land-grant in another State or of other property that adds to the riches of the corporation but does not affect the [taxing State’s] part of the [business] is no sufficient ground for the increase of the tax – whatever it may be . . . .” Wallace v. Hines, 253 U.S. 66, 69 -70 (1920). In this case, it is plain that the five dividend-paying subsidiaries “add to the riches” of ASARCO. But it is also true that they are “discrete business enterprise[s]” that – in “any business or economic sense” – have “nothing to do with the activities” of ASARCO in Idaho. Mobil, supra, at 439-442. Therefore there is no “rational relationship between the [ASARCO dividend] income attributed to the State and the intrastate values of the enterprise. Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272 -273 (1978).” Mobil, supra, at 437. Idaho’s attempt to tax a portion of these dividends can be viewed as “a mere effort to reach profits earned elsewhere under the guise of legitimate taxation.” Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm’n, 266 U.S. 271, 283 (1924). The Due Process Clause bars such an effort to levy upon income that is [458 U.S. 307, 329] not properly “within the reach of [Idaho’s] taxing power.” Connecticut General Life Ins. Co. v. Johnson, 303 U.S., at 80 . 24

IV

In addition to the disputed dividend income, Idaho also has sought to tax certain ASARCO interest and capital gains income. [458 U.S. 307, 330] The interest income arose from a note ASARCO received from its sale of Mexicana stock and from a Revere convertible debenture, as well as in connection with ASARCO’s 1970 disposition of its General Cable stock. See n. 21, supra. The General Cable stock sale also generated capital gains for ASARCO, as did ASARCO’s sale of a portion of its stock in M. I. M.

Idaho and ASARCO agree that interest and capital gains income derived from these companies should be treated in the same manner as the dividend income. 25 Brief for Appellant 27; Brief for Appellee 21. Cf. 99 Idaho, at 937, 592 P.2d, at 52 (“In our view the same standard applies to the question whether gains from the sale of stock are business income as applies to the question whether dividends from the stock are business income”). We also agree. “One must look principally at the underlying activity, not at the form of investment, to determine the propriety of apportionability.” Mobil, 445 U.S., at 440 . Changing the form of the income “works no change in the underlying economic realities of [whether] a unitary business [exists], and accordingly it ought not to affect the apportionability of income the parent receives.” Id., at 441. We therefore hold that Idaho’s attempt to tax this income also violated the Due Process Clause.

V

For the reasons stated, the judgment of the Supreme Court of Idaho is

Reversed.

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