Deighan, Baime and D'Annunzio. The opinion of the court was delivered by D'Annunzio, J.A.D.
Bendix Corporation (Bendix) appeals a Tax Court judgment affirming a Division of Taxation decision to add three income items to Bendix's income for its fiscal year which ended September 30, 1981. Bendix Corp. v. Taxation Div. Director, 10 N.J. Tax. 46 (1988). The three items are:
(1) a $211.5 million capital gain from Bendix's sale of 20.6% of the outstanding stock of Asarco, Inc. (Asarco);
(2) a $41.9 million capital gain from Bendix's sale of 100% of the outstanding stock of United Geophysical Corporation (UGC); and
(3) $3.4 million interest Bendix earned on the proceeds of the Asarco and UGC stock sales.
The addition of these items increased Bendix's tax base under New Jersey's Corporation Business Tax Act (1945), N.J.S.A. 54:10A-1 et seq., and, therefore, increased Bendix's tax.
The facts are not in dispute as the case was tried on stipulated facts and exhibits and a deposition of W.M. Agee, a former Bendix chief executive.
During the tax year in question, Bendix was a Delaware corporation, incorporated in 1929, with its principal office in Michigan. Bendix commenced business as a manufacturer of aviation and automotive parts. By 1981 Bendix was a multinational corporation operating directly or through subsidiaries in all 50 states and 22 other countries, and its business had expanded beyond basic aviation and automotive business to include four major operating groups: (a) automotive; (b) aerospace/electronics; (c) industrial energy; (d) forest products.
In 1981, Bendix operated several units of its aerospace group in Teterboro, New Jersey, and manufactured electric generating systems in Eatontown, New Jersey. In addition, a wholly-owned subsidiary, Bendix's Field Engineering Corporation, provided ocean current, weather and other information worldwide to the trans-oceanic shipping industry through its Marine Science Services Division in Teterboro and provided facilities management and support services to an Environmental Protection Agency facility in Edison, New Jersey. Bendix sold its full range of products and services to New Jersey customers and stored inventory in New Jersey.
Bendix acquired 20.6% of Asarco's outstanding stock between December 1977 and November 1978. Asarco mined and produced copper, lead, zinc, silver and other non-ferrous metals, as well as asbestos and coal, in Latin America and other countries. See ASARCO Inc. v. Idaho State Tax Comm'n., 458 U.S. 307, 102 S. Ct. 3103, 73 L. Ed. 2d 787 (1982) for a more detailed description of Asarco's activities. As a result of its equity position in Asarco, two Bendix executives became members of Asarco's 14-member board of directors. Asarco contributed $.82 a share to Bendix's 1979 earnings of $7.10 a share, and $2.22 a share to Bendix's 1980 earnings of $7.68 a share.
In late 1980, Bendix decided to sell its Asarco stock because it had appreciated considerably and Bendix had decided to reduce its position in the natural resource business. The sale yielded three times Bendix's initial investment.
In 1965, Bendix purchased all of the stock of United Geophysical Corporation (UGC). UGC performed seismic surveys for the oil and gas industry. UGC transacted no business in New Jersey. Bendix employees managed UGC through service on UGC's board or as UGC corporate officers. Bendix approved UGC's annual financial plans, its major capital expenditures and financed the construction of two ships to be used by UGC in marine seismic exploration.
In 1980, Bendix took advantage of an opportunity "to divest UGC at a very favorable price" and sold all of the UGC stock for $80 million, yielding a $41.9 million capital gain.
In 1981, Bendix placed the proceeds of the Asarco and UGC sales in an interest bearing investment account outside New Jersey. The investments generally carried maturities of less than 90 days and generated $3.4 million interest during fiscal 1981.
Bendix contends that New Jersey's inclusion of the Asarco and UGC capital gains in the corporate business tax base was an unconstitutional taxing of extra-territorial values.
A state may look beyond its borders in taxing the property of foreign corporations to allow it to
get the true value of the things within it, when they are part of an organic system of wide extent, that gives them a value above what they otherwise would possess. [ Wallace v. Hines, 253 U.S. 66, 69, 40 S. Ct. 435, 436, 64 L. Ed. 782 (1920)].
This principle was applied in Bass, Ratcliff & Gretton v. State Tax Commission, 266 U.S. 271, 45 S. Ct. 82, 69 L. Ed. 282 (1924), to uphold a New York franchise tax imposed on an English brewer.
So in the present case we are of the opinion that, as the Company carried on the unitary business of manufacturing and selling ale, in which its profits were earned by a series of transactions, beginning with the manufacture in England and ending in the sales in New York and other places . . . the state was justified in attributing to New York a just proportion of the profits earned by the Company from such unitary business. [ Id. at 282, 45 S. Ct. at 84].
Because the taxpayer's New York activities were part of the "unitary business" of brewing and marketing ale, New York taxing authorities were permitted to measure the tax base by all of the taxpayer's worldwide income. This base was then apportioned to New York by the proportion the value of the taxpayer's New York property bore to the total value of all the taxpayer's property ($44,117/$3,501,483).
The unitary business principle was considered recently by the United States Supreme Court in a series of cases beginning in 1980. In Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 100 S. Ct. 1223, 63 L. Ed. 2d 510 (1980), the Court upheld Vermont's inclusion in Mobil's tax base of dividends Mobil received from its subsidiaries and affiliates doing business abroad. Mobil was a New York corporation which marketed petroleum products in Vermont. Mobil had no production or refining facilities in Vermont.
The Court stated the general principle that to tax income generated in interstate commerce Due Process requires 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. The Court ruled that Mobil failed to establish that the income was earned in the course of activities unrelated to the sale of petroleum products in Vermont. It was satisfied that the foreign activities were part of Mobil's integrated petroleum enterprise.
So long as dividends from subsidiaries and affiliates reflect profits derived from a functionally integrated enterprise, those dividends are income to the parent earned in a unitary business. One must look principally at the underlying activity, not at the form of investment, to determine the propriety of apportionability. [ Id. at 440, 100 S. Ct. at 1233.]
In Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207, 100 S. Ct. 2109, 65 L. Ed. 2d 66 (1980), the Court rejected Exxon's argument that its maintenance of three discrete departments for Exploration/Production, Refining and Marketing, each with separate financial accounts, required the exclusion of non-marketing income from its Wisconsin tax base.
Mobil and Exxon involved vertically integrated economic units. ASARCO Inc. v. Idaho State Tax Commission, supra, involved dividend and interest income from corporations in which Asarco owned major interests but which engaged in the same business as Asarco, the mining and production of non-ferrous metals. Although there was some movement of product between Asarco and the subsidiaries, the corporate relationships more closely resembled ...