## Facts

- California imposed a corporate franchise tax measured by income and, for multijurisdictional enterprises, used the unitary business principle with formula apportionment rather than separate accounting.
- California applied an equal-weight three-factor apportionment formula based on the proportion of worldwide payroll, property, and sales located in California.
- Container Corporation of America, a Delaware corporation headquartered in Illinois, did business in California and owned multiple foreign subsidiaries incorporated and operating abroad.
- Container reported dividend income received from foreign subsidiaries but excluded the subsidiaries’ payroll, property, and sales from the apportionment formula, treating the subsidiaries as separate investments.
- The California Franchise Tax Board assessed additional tax, concluding Container and its foreign subsidiaries were a single unitary business and requiring worldwide combined reporting.
- Container paid under protest and sued for a refund; California courts upheld the assessments.

## Issues

1. Whether California’s inclusion of foreign subsidiaries in a worldwide combined report, and inclusion of their factors in the apportionment formula, violated the Due Process Clause or the Commerce Clause by taxing extraterritorial values.
2. Whether worldwide combined reporting, as applied to foreign subsidiaries, violated the Foreign Commerce Clause by burdening foreign commerce or impairing the federal government’s ability to speak with one voice in foreign commercial relations.
3. Whether practical double-taxation risks and asserted conflicts with federal arm’s-length practice and tax treaties rendered California’s method unconstitutional.

## Decision

- The Supreme Court affirmed, holding California could treat Container and its foreign subsidiaries as a unitary business and apply worldwide combined reporting with the three-factor formula.
- The Court held Container failed to prove, by clear and convincing evidence, that the apportionment taxed extraterritorial values or produced a constitutionally significant distortion.
- The Court held the tax did not violate the Due Process Clause or the Commerce Clause because there was sufficient connection to California and a rational relationship between income attributed to California and in-state business activity.
- The Court rejected the Foreign Commerce Clause challenge, finding no clear conflict with federal policy and no showing that the tax prevented the federal government from speaking with one voice.

## Legal Principles

- A state may apportion the income of a unitary business using formula apportionment, including a parent and subsidiaries (including foreign subsidiaries) where operations reflect functional integration, centralized management, and economies of scale.
- The taxpayer bears the burden to show by clear and convincing evidence that an apportionment method reaches extraterritorial values or yields a grossly distorted result.
- Under Due Process and the Commerce Clause, a state tax on corporate income is valid when there is a minimal connection (nexus) to the state and a rational relationship between the income attributed to the state and the value of in-state activity.
- Separate accounting is not constitutionally required for multijurisdictional enterprises; formula apportionment is permissible absent proof of unfair apportionment.
- A state tax affecting foreign commerce is not invalid absent a showing that it conflicts with explicit federal policy or impairs the federal government’s ability to speak with one voice in foreign commercial relations.

## Conclusion

The Court upheld California’s worldwide combined reporting and three-factor apportionment as applied to a multinational corporate group found to be unitary, concluding the taxpayer did not establish unconstitutional extraterritorial taxation or an impermissible burden on foreign commerce.


Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983)