Cite as: 512 U. S. 298 (1994)
Opinion of the Court
(West 1992). Thus, if a unitary business had 8% of its payroll, 3% of its property, and 4% of its sales in California, the State took the average—5%—and imposed its tax on that percentage of the business' total income.2
B
The corporate income tax imposed by the United States employs a "separate accounting" method, a means of apportioning income among taxing sovereigns used by all major developed nations. In contrast to combined reporting, separate accounting treats each corporate entity discretely for the purpose of determining income tax liability.3
Separate accounting poses the risk that a conglomerate will manipulate transfers of value among its components to minimize its total tax liability. To guard against such manipulation, transactions between affiliated corporations must be scrutinized to ensure that they are reported on an "arm's-length" basis, i. e., at a price reflecting their true market value. See 26 U. S. C. § 482; Treas. Reg. § 1.482-1T(b), 26 CFR § 1.482-1T(b) (1993).4 Assuming that all transactions are assigned their arm's-length values in the corporate accounts, a jurisdiction using separate accounting taxes corporations that operate within its borders only on the income
2 In 1993, California modified the formula to double the weight of the sales factor. Cal. Rev. & Tax. Code Ann. § 25128 (West Supp. 1994); 1993 Cal. Stats., ch. 946, § 1.
3 An affiliated group of domestic corporations may, however, elect to file a consolidated federal tax return in lieu of separate returns. 26 U. S. C. § 1501.
4 Effective enforcement of arm's-length standards requires exacting scrutiny by the taxing jurisdiction, and some commentators maintain that the results are arbitrary in any event. See 1 Hellerstein & Hellerstein, supra, ¶ 8.03 (describing "three inherent defects" of separate accounting: compliance expense, impracticability, and the difficulty of arriving at "arm's-length" prices).
305
Page: Index Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 NextLast modified: October 4, 2007