## Facts

- Butler Brothers, an Illinois wholesale merchandise corporation headquartered in Chicago, operated warehouse-stores in multiple states, including California.
- The enterprise was operated as a single integrated business with centralized functions (including a central buying division serving all stores).
- For the relevant year, Butler’s overall operations generated substantial profit, but its internal branch accounting reported a loss at the California store.
- California imposed a corporate franchise tax measured by net income, with special rules for corporations doing business both inside and outside the state.
- The California Franchise Tax Commissioner treated Butler as a unitary business and applied a three-factor apportionment formula based on California’s share of (1) property, (2) payroll, and (3) sales.
- The formula produced positive income allocable to California and an additional tax assessment, which Butler paid under protest and sought to recover.
- The California Supreme Court upheld the assessment and rejected Butler’s Fourteenth Amendment due process challenge; Butler sought review in the U.S. Supreme Court.

## Issues

1. Whether California’s formula apportionment of a unitary multistate business’s net income, despite a branch loss under separate accounting, violated the Fourteenth Amendment by taxing extraterritorial values.
2. Whether Butler proved by clear and cogent evidence that the apportionment formula was not fairly calculated to attribute only income reasonably connected to California.
3. Whether the state court’s handling of stipulated facts denied due process on the theory that the case was decided on an unforeseen ground.

## Decision

- The U.S. Supreme Court affirmed the judgment sustaining the additional franchise tax.
- The Court held that a state may use a formulary apportionment method for a unitary business if the formula is fairly calculated to assign to the state the portion of net income reasonably attributable to in-state business.
- The Court found Butler did not meet its burden to show, by clear and cogent evidence, that the formula taxed extraterritorial values.
- The Court ruled that a separate-accounting loss at the California branch did not, by itself, establish unconstitutional taxation of out-of-state income.
- The Court rejected the procedural due process claim, finding no denial of an opportunity to be heard based on any new or unexpected ground.

## Legal Principles

- A state franchise tax measured by apportioned net income satisfies due process when the apportionment method is fairly calculated to allocate to the state the portion of net income reasonably attributable to business done there.
- For a unitary multistate business, a state may apportion total corporate income using a reasonable formula rather than accept branch-by-branch separate accounting as controlling.
- The taxpayer challenging an apportionment formula bears the burden of proving by clear and cogent evidence that the method results in taxation of extraterritorial values.
- A branch loss shown under the taxpayer’s accounting practices does not alone demonstrate that an apportionment formula reaches income unrelated to the taxing state.
- No due process violation occurs where the state court resolves the dispute within the scope of the issues presented and stipulated facts.

## Conclusion

The Court upheld California’s use of a three-factor formula to apportion income of a unitary multistate corporation, emphasizing that due process is satisfied by a reasonable, fairly calculated allocation method and that the taxpayer must provide clear and cogent proof of extraterritorial taxation to prevail.


Butler Bros. v. McColgan, 315 U.S. 501 (1942)