74
Opinion of the Court
In following the federal scheme for the calculation of taxable income, Iowa allows a deduction for dividends received from domestic subsidiaries, but not for those received from foreign subsidiaries. Iowa does not directly tax the income of a subsidiary unless the subsidiary, itself, does business in Iowa.9 Thus, if a domestic subsidiary transacts business in Iowa, its income is taxed, but if it does not do business in Iowa, neither its income nor the dividends paid to its parent are taxed. In the case of the foreign subsidiary doing business abroad, Iowa does not tax the corporate income, but does tax the dividends paid to the parent.10 Unlike the Federal Government, Iowa does not allow a credit for taxes paid to foreign countries. See 465 N. W. 2d 664, 665 (Iowa 1991).11
In computing its taxable income on its 1981 Iowa return, Kraft deducted foreign subsidiary dividends, notwithstanding contrary provisions of Iowa law.12 Respondent Iowa Department of Revenue and Finance (Iowa) assessed a defi-9 Iowa is not a State that taxes an apportioned share of the entire income of a unitary business, without regard for formal corporate lines. See Tr. of Oral Arg. 37; cf. Container Corp. of America v. Franchise Tax Bd., 463 U. S. 159, 164-169 (1983).
10 At oral argument, counsel for Kraft offered the following illustration: "If an Iowa parent company had a Kentucky subsidiary, [that] did all its business in Kentucky, and another subsidiary that did all its business in Germany, Iowa would not tax the income of either of those subsidiaries. If each paid a dividend to the Iowa parent, Iowa would tax the German dividends and would not tax the Kentucky dividends." Tr. of Oral Arg. 47-48.
11 If in calculating its federal tax liability, a taxpayer elects to deduct foreign tax withheld on foreign subsidiary dividends, a taxpayer may also deduct these tax payments in calculating its Iowa taxes. Electing the deduction, then, allows the taxpayer to reduce, but not eliminate, the Iowa tax on foreign subsidiary dividends. In the relevant year, Kraft elected to take the foreign tax credit, see 465 N. W. 2d, at 666, and thus could not deduct the foreign taxes in computing its federal or Iowa taxable income, see n. 7, supra.
12 See 465 N. W. 2d, at 666.
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