Mead Corporation is a domestic corporation of Ohio and has its headquarters there. Throughout its…

Mead Corporation is a domestic corporation of Ohio and has its headquarters there. Throughout its long history, Mead's business has revolved around paper, packaging, and office and school supplies. During the 1970s and 1980s , Mead developed an information retrieval system that became known as Lexis Nexis (Lexis). The headquarters of Lexis is in Illinois. In 1994, Mead sold Lexis for $1.5 billion realizing a capital gain of a little more than $1 billion. Mead considered this gain as nonbusiness income and reported all of it on its Ohio tax return. The State of Illinois assessed Mead with $4 million in taxes and penalties for not reporting an apportioned share of the Lexis sale and gain. Mead paid Illinois under protest and filed a lawsuit seeking a refund. Although it found Lexis and Mead were not a unitary business, the trial judge ruled in favor of Illinois concluding that Lexis served an “operational purpose in Mead's business.” The Illinois Appellate Court affirmed, and the Illinois Supreme Court denied review. Mead's petition for a writ of certiorari was granted. AUTO, ].: The Due Process and Commerce Clauses forbid the States to tax extraterritorial values. A State may, however, tax an apportioned share of the value generated by the intrastate and extra state activities of a multistate enterprise if those activities form part of a “unitary business.” We have been asked in this case to decide whether the State of Illinois constitutionally taxed an apportioned share of the capital gain realized by an out-of-state corporation on the sale of one of its business divisions. The Appellate Court of Illinois upheld the tax and affirmed a judgment in the State's favor. Because we conclude that the state courts misapprehended the principles that we have developed for determining whether a multistate business is unitary, we vacate the decision of the Appellate Court of Illinois… Petitioner contends that the trial court properly found that Lexis and Mead were not unitary and that the Appellate Court of Illinois erred in concluding that Lexis served an operational function in Mead's business. According to petitioner, the exception for apportionment of income from nonunitary businesses serving an operational function is a narrow one that does not reach a purely passive investment such as Lexis. We perceive a more fundamental error in the state courts' reasoning. In our view, the state courts erred in considering whether Lexis served an “operational purpose” in Mead's business after determining that Lexis and Mead were not unitary. The Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State's power to tax out-of-state activities. The Due Process Clause demands that there exist “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax,” as well as a rational relationship between the tax and the “values connected with the taxing State.” The Commerce Clause forbids the States to levy taxes that discriminate against interstate commerce or that burden it by subjecting activities to multiple or unfairly apportioned taxation. The broad inquiry subsumed in both constitutional requirements is whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state-that is, whether the state has given anything for which it can ask return. Where, as here, there is no dispute that the taxpayer has done some business in the taxing State, the inquiry shifts from whether the State may tax to what it may tax. To answer that question, we have developed the unitary business principle. Under that principle, a State need not “isolate the intrastate income-producing activities from the rest of the business ” but “may tax an apportioned sum of the corporation's multistate business if the business is unitary.” The court must determine whether instrastate and extrastate activities formed part of a single unitary business, or whether the out-of-state values that the State seeks to tax derived from “unrelated business activity ” which constitutes a “discrete business enterprise.” … With the coming of the Industrial Revolution in the 19th century, the United States witnessed the emergence of its first truly multistate business enterprises. These railroad, telegraph, and express companies presented state taxing authorities with a novel problem: A State often cannot tax its fair share of the value of a multistate business by simply taxing the capital within its borders. The whole of the enterprise is generally more valuable than the sum of its parts; were it not, its owners would simply liquidate it and sell it off in pieces …. The unitary business principle addressed this problem by shifting the constitutional inquiry from the niceties of geographic accounting to the  of the taxpayer's business unit. If the value the State  to tax derived from a “unitary business ” operated within and without the State, the State could tax an apportioned share of the value of that business  stead of isolating the value attributable to the operation of the business within the State. Conversely, 1f the  . e the State wished to tax derived from a “discrete  enterprise,” then the State could not tax even an apportioned share of that value. We recognized as early as 1876 that the Due Process Clause did not require the States t . o assess  in each county where it lies accordt?.g . to tts value there. We went so far as to opine that [t]t may . well be doubted whether any better mode of do  the value of that portion of the track any one county has been devised than to ascertain the value of the whole road, and apportion the value within the county by it? relative length to the whole.” We … held that  permissibly be applied to a. state the physical unity of wires or a1ls but  the same unity in the use of the enttre property for the specific purpose, with the same elements of value arising from such use. We extended he reach of the unitary business principle further still m later cases, when we relied on it to justify the taxa­ tion b . y apportionment of net income, dividends, capital gam, and other intangibles. As the unitary business principle has evolved in step with American enterprise, courts have sometimes found it difficult to identify exactly when a business is unitary …. We concluded that the unitary business principle is not so inflexible that as new methods of finance and new forms of business evolve it cannot be modified and supplemented where appropriate. We explained that situations could occur in which apportionment might be constitutional even though the payee and the  were not engaged in the same unitary business. It was in that context that we observed that an asset could form part of a taxpayer's unitary business if it served an “operational rather than an investment function” in that business. Hence, for example, a State may include within the  income of a nondomiciliary corporation the interest earned on short-term deposits in a bank located in another State if that income forms part of the working capital of the corporation's unitary business, notwithstanding the absence of a unitary relationship between the corporation and the bank … . Our references to “operational function” … were not intended to modify the unitary business principle by adding a new ground for apportionment. The concept of operational function simply  that an asset can be a part of a taxpayer's unitary busmess even if what we may term a “unitary relationship” does not exist between the “ and payee.” Where as here the asset in question is another business, V:e have  the hallmarks of . a unitary relationship as functional integration, management and economies of scale. The court found each of ' these hallmarks lacking and concluded that Lexis was not a unitary part of Mead's. !he appellate court, however, made no . such. Relying on its operational function test, lt reserved judgment on whether Mead and Lexis formed a business. The appellate court may . take up t . hat question on remand, and we express no It now .. : . The State . .. argues that  IS not    of the Appellate Court of The may be affirmed on an alternative   that the record amply demonstrates that lexis did substantial business in Illinois and that Lexis' own contacts with the State suffice to justify the apportionment of Mead's capital gain. The State … invites us to recognize a new ground for the   of intangibles based on the taxmg State s contacts with the capital asset rather than the taxpayer. We decline this invitation because the question that the State … calls upon us to answer was neither raised nor passed upon in the state courts. It also was not addressed in the State's brief in opposition to the petition. We typically will not address a question under these circumstances even if the answer would afford an alternative ground for affirmance …. The judgment of the Appellate Court of Illinois is vacated, and this case is remanded for further proceedings not inconsistent with this opinion.

Case Question

1. What is the history of Mead's development and operation of Lexis?

2. After Mead successfully sold Lexis, what claim was made by the State of Illinois?

3. What was the ruling of the Illinois Appellate Court and the decision of the Illinois Supreme Court?

4. What does the U. S. Supreme Court find regarding the phrases “unitary business” and “discrete business enterprise”?

5. Why does the Supreme Court refuse to find for Illinois even through Lexis operates within that state?

 

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