## Facts

- Bendix Corporation (later succeeded by Allied-Signal) was a Delaware corporation headquartered in Michigan, doing business nationwide, including in New Jersey.
- Bendix acquired 20.6% of ASARCO Inc. stock (Dec. 1977–Nov. 1978); ASARCO was a New Jersey corporation with principal offices in New York.
- Bendix resold the ASARCO shares to ASARCO in 1981, realizing a $211.5 million capital gain.
- The parties stipulated that, throughout Bendix’s ownership:
  - Bendix and ASARCO were unrelated business enterprises.
  - Their activities had nothing to do with each other.
  - Bendix had two board seats but exerted no control over ASARCO.
- New Jersey included the ASARCO gain in Bendix’s apportionable corporate tax base and assessed tax on an apportioned share.
- The New Jersey Supreme Court upheld apportionment, reasoning that Bendix’s acquisition and divestiture activity was an integral operational activity.

## Issues

1. Whether, consistent with the Due Process and Commerce Clauses, New Jersey could include in the apportionable tax base Bendix’s gain from selling stock in a corporation stipulated to be an unrelated business enterprise.
2. Whether the unitary business principle or an “operational function” theory permitted apportionment of the gain absent functional integration, centralized management, or economies of scale between Bendix and ASARCO.

## Decision

- The Supreme Court reversed and remanded.
- New Jersey could not apportion and tax the ASARCO stock gain because the investment was not part of a unitary business and did not serve an operational function in Bendix’s business.
- The Court rejected the view that a state may apportion all corporate income simply because the corporation does business in the state.
- Dissent (O’Connor, joined by Rehnquist, Blackmun, and Thomas) would have upheld the tax, stressing the taxpayer’s burden to show nonapportionability by clear and cogent evidence.

## Legal Principles

- Due Process and Commerce Clause limits require (1) a minimal connection (nexus) between the taxed activity and the taxing state and (2) a rational relation between income attributed to the state and in-state value.
- A state may apportion multistate income when the taxpayer’s activities form a unitary business; it may not tax income from unrelated activity constituting a discrete business enterprise.
- Unitary business analysis commonly focuses on functional integration, centralized management, and economies of scale.
- Income from an asset may be apportionable if the asset serves an operational function in the taxpayer’s business; income from a passive investment in an unrelated enterprise is nonapportionable.
- The intended or actual use of sale proceeds within the taxpayer’s broader business does not, by itself, establish that the underlying asset was operationally connected to a unitary business.

## Conclusion

Because Bendix’s ASARCO stockholding was stipulated to be an unrelated investment lacking unitary or operational ties to Bendix’s in-state business, New Jersey’s apportionment and taxation of the resulting capital gain violated constitutional limits on state taxation of multistate corporate income.


Allied-Signal, Inc. v. Dir., Div. of Tax'n, 504 U.S. 768 (1992)