us supreme court: 06-1413

8/14/2019 US Supreme Court: 06-1413

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Official - Subject to Final Review

IN THE SUPREME COURT OF THE UNITED STATES

- - - - - - - - - - - - - - - - - x

MEADWESTVACO CORPORTATION, :

SUCCESSOR IN INTEREST TO :

THE MEAD CORPORATION, :

Petitioner :

v. : No. 06-1413

ILLINOIS DEPARTMENT OF :

REVENUE, ET AL. :

- - - - - - - - - - - - - - - - - x

Washington, D.C.

Wednesday, January 16, 2008

The above-entitled matter came on for oral

argument before the Supreme Court of the United States

at 11:17 a.m.

APPEARANCES:

BETH S. BRINKMANN, ESQ., Washington, D.C.; on behalf

of the Petitioner.

BRIAN F. BAROV, ESQ., Assistant Attorney General,

Chicago, Ill.; on behalf of the Respondents.

1Alderson Reporting Company



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C O N T E N T S

ORAL ARGUMENT OF PAGE

BETH S. BRINKMANN, ESQ.

On behalf of the Petitioner 3BRIAN F. BAROV, ESQ.

On behalf of the Respondents 27REBUTTAL ARGUMENT OFBETH S. BRINKMANN, ESQ.

On behalf of the Petitioner 53




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P R O C E E D I N G S

(11:17 a.m.)

CHIEF JUSTICE ROBERTS: We will hear

argument next in Case 06-1413, MeadWestvaco v. The

Illinois Department of Revenue.

Ms. Brinkmann.

ORAL ARGUMENT OF BETH S. BRINKMANN

ON BEHALF OF THE PETITIONER

MS. BRINKMANN: Mr. Chief Justice, and may

it please the Court:

The ruling of the Illinois Appellate Court

in this case radically expanded the Court's

operational-function tax. The State tax at issue

violates the principles of constitutional limitations on

state taxing authority for at least two reasons.

First, the factors relied on by the appellate court here

for functional -- for operational function would mean

that ownership and investment would meet that standard.

But that's what this Court rejected in Allied-Signal.

A State does not have the authority to reach

out to tax all investments owned by a company that does

business in the State. The operational function demands

more. It applies --

JUSTICE GINSBURG: You are saying to me, Ms.

Brinkmann -- we talk about an asset, an investment.




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This was one company. This -- it's strange to talk

about unitary basis or investment. This is a division

of one company. And we are talking about a sale of

assets. Not the sale of stock of a subsidiary.

So what more is there than this is one

company, it sells some of its assets?

MS. BRINKMANN: Well, Your Honor, the fact

that it's a division does not mean that it meets either

the operational-function test or the unitary-business

test. A long line of cases from this Court tell us

that. It --

JUSTICE GINSBURG: Do we have any cases --

do we have any decisions that go against the state

taxing authority that involve divisions as opposed to

subsidiaries?

MS. BRINKMANN: No, but the Exxon case

involved divisions, and it went in favor of the state

taxing authority. But the Court applied a

straightforward, unitary business analysis to that.

And, Your Honor, this dates back to the Adams Express

case of 1897.

The Court in that case said it's not

ownership. It's about the use, the unitariness of use,

not of ownership. Mobile followed on that. Mobile

talked about the fact that it's not the corporate form

4

Alderson Reporting Company



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that mattered. It pointed out that that could have

little to do with the underlying determination of

apportionment, which depends upon whether it's a

discrete business enterprise.

And then following on the heels of that

analysis in Mobil, the Court applied it to the Exxon

case that involved divisions. That was a vertically

integrated corporation. It's very different from the

facts of this case, and it reached a different result.

Moreover, the Woolworth case involved

subsidiaries. Three out of the four of them were 100

percent wholly owned.

JUSTICE STEVENS: Can I go back to sort of a

fundamental question I'm not quite sure I know the

answer to. Supposing we don't have corporations here,

but an individual resident of New York owned this whole

business and a big bunch of it was activities in

Illinois, and he sold the business. Would Illinois have

the authority to impose any tax on that transaction?

MS. BRINKMANN: If it was a capital gain,

Your Honor, on the sale of investment, the Court's

longstanding cases teach that it is the domicile that

taxes that commercial gain.

JUSTICE STEVENS: I'm assuming it's not the

domicile. The owner lives in New York. The business is




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all over the country, but does millions of dollars of

business in Illinois. And they sell the whole business.

Would the owner be subject to any tax of any kind in

Illinois on that transaction? Could he constitutionally

be subjected to any tax?

BRINKMANN: If there was -- the domiciliary

State generally is the State which has the authority to

tax an income on a capital gain --

JUSTICE STEVENS: Assume it's not the

domiciliary State.

MS. BRINKMANN: But what the Court explained

in Mobil, for example, if it is under the unitary

business principle, then the State in which --

JUSTICE STEVENS: Could we get an answer

without reference to cases? Do you think Illinois would

have the authority to impose a tax on that transaction?

MS. BRINKMANN: If the -- there was

sufficient nexus to the company doing business --

JUSTICE STEVENS: Millions of dollars of

business in Illinois, that's my assumption.

MS. BRINKMANN: Yes, they would be able to

tax the ongoing business activity in that State.

JUSTICE KENNEDY: No.

JUSTICE STEVENS: Could they tax the sale of

the business?




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JUSTICE KENNEDY: I have the same --

MS. BRINKMANN: The sale of the business

would be to the domicile of the seller. They would be

able to --

JUSTICE STEVENS: You're saying only the

domicile could impose a tax?

MS. BRINKMANN: Yes, unless, as the Court

recognized in Mobil, there is this unitary business

exception, because the State's ability to tax begins at

the starting point at the territorial limitations of the

State. And the Court has --

JUSTICE STEVENS: But if they owned a truck

instead of a business, they could tax that transaction,

I suppose?

JUSTICE SCALIA: You can't have a unitary

business -- a person who is a unitary business. I mean,

a person can't be unitary with Exxon. I mean, when you

speak of a unitary business you're talking about a

corporation which, you know, is unitary with another

corporation.

MS. BRINKMANN: That's the area --

JUSTICE SCALIA: Once you put it into a

personal taxation scheme, it seems to me the whole

unitary business notion has no application at all.

MS. BRINKMANN: Well, I agree with you, Your




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Honor. But it does come back to the taxing, the right

of the domicile State to tax on a sale --

JUSTICE GINSBURG: What is -- what does the

domicile State -- we have Ohio. But you say as a matter

of constitutional law, not State tax policy, as a matter

of constitutional law, the only State that has authority

to tax the capital gain is Ohio?

MS. BRINKMANN: That's right, Your Honor,

unless --

JUSTICE GINSBURG: Does Ohio -- would Ohio

give credit for the tax that its sister State thinks is

due? What is, in fact, Ohio's tax law in this respect?

Does Ohio give credit to taxes paid by other States --

to other States?

MS. BRINKMANN: Ohio would allocate the

entire gain as a capital gain on an intangible that was

sold in the State of Ohio. That would be allocated in

its entirety to Illinois.

Now, what the Court has recognized is that

default principle sometimes gives way when that gain has

had enough connection to business activity in another

jurisdiction. That's where these issues arise, because

there are States taxing multi- state activities. And

that's --

JUSTICE GINSBURG: Can I have an answer to a




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very simple question? If Illinois claimed the tax,

would Ohio give credit for the tax paid in Illinois?

MS. BRINKMANN: Not if Ohio had the

constitutional right to allocate that tax to Ohio, as it

does.

JUSTICE GINSBURG: Do we know what -- what

Ohio does in these situations?

MS. BRINKMANN: Yes. It allocates it to the

State of Ohio. The only exception for that would be in

a situation, not the facts here, but if that capital

gain either served an operational function to the

business activities that were conducted in another

State, then that State would have a right to apportion

it and tax its portion of that or if the operational

function applied. And that is because the activity now

has transformed from just a capital gain that's

connected to the domiciliary State of the seller to a

business income because it is part of this unitary

business. That's why the other State has a right to

apportion.

JUSTICE ALITO: What has Ohio done --

MS. BRINKMANN: That's not the situation

here.

JUSTICE ALITO: What has Ohio done up to

this point with respect to this transaction?




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MS. BRINKMANN: Under Ohio's laws this would

be allocated to that State.

CHIEF JUSTICE ROBERTS: To Ohio?

MS. BRINKMANN: Yes, because it's a capital

gain on a sale of an investment.

CHIEF JUSTICE ROBERTS: Ms. Brinkmann, you

begin your brief by saying this, a paper company, that

happens to own a data processing company. Why couldn't

you equally say this is a data processing company that

happens to own a paper company?

MS. BRINKMANN: No, Your Honor. This has

been a paper company since 1846.

CHIEF JUSTICE ROBERTS: Well, and

Lexis/Nexis has been a data processing company since

whenever.

MS. BRINKMANN: But under the Court's

unitary --

CHIEF JUSTICE ROBERTS: It's not the

oldest -- whichever is oldest isn't the one that gets to

be regarded as the dominant partner, is it?

MS. BRINKMANN: No. But when you do the

analysis, you're looking at the taxpayer, which is Mead

Corporation. And it clearly has a --

CHIEF JUSTICE ROBERTS: Is General Electric

a light bulb company or, since it owns NBC, a media

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company.

MS. BRINKMANN: I would have to know many

more facts in order to answer that questions, Your

Honor. But I -- and I don't mean to be evasive --

JUSTICE GINSBURG: Why isn't the answer

both? Why isn't the answer both, just as here it is

both a paper or office supply company and a Lexis/Nexis,

electronic data company?

MS. BRINKMANN: It's an analytical construct

that we're doing here. We're looking at the taxpayer

who is being taxed, the Mead Corporation. So you look

at its business that's being conducted in Illinois.

They have a unitary paper company that's vertically

integrated that's doing business activities in Illinois.

CHIEF JUSTICE ROBERTS: Well, that's because

they sell paper in Illinois?

MS. BRINKMANN: Yes.

CHIEF JUSTICE ROBERTS: Well, Lexis sells

data services in Illinois, too.

MS. BRINKMANN: Yes. But when you're

looking -- and for both purposes, Your Honor, for State

tax on the operating income of both of those businesses,

Illinois does have a right to apportion those taxes.

And those taxes were paid without objection by both of

those businesses.

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We're talking about a tax on a different

event, on a capital gain on a sale of the business in

Ohio.

CHIEF JUSTICE ROBERTS: Well, why doesn't --

I mean, you just said, as I understand it, Illinois has

the right to tax Lexis under business activities in

Illinois. Illinois would argue the reason it has a

capital gain is partly because they were doing business

in Illinois and so we should be entitled to part of that

capital gain. Almost -- I mean, it seems to me it would

be pretty easy if they get to tax 2 percent of Lexis's

business, well then maybe they should get 2 percent of

the capital gain when it's sold or tax 2 percent.

MS. BRINKMANN: Your Honor, that is a

belated argument that the State of Illinois has raised

in this Court. It did not present an argument to the

Illinois appellate court based on Lexis/Nexis's

connection to Illinois. It raises a host of

jurisdictional, procedural and substantive bars.

Under the rules of Illinois, as we point out

in our reply brief, that argument is waived. This comes

to the Court from a State court, not a Federal court of

appeals. Because of that waiver, it's an independent

and adequate state ground.

Moreover, that argument wasn't raised in the

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brief in opposition, either.

JUSTICE GINSBURG: They're raising it in --

in support of the judgment. So if it's novel, but it

supports the judgment, then at least shouldn't the

Illinois courts have a chance to look at it and say, oh,

that's what we really meant, we just got -- explained it

the wrong way?

MS. BRINKMANN: Well, that would certainly

be a matter for the Illinois court rather than for this

Court, Your Honor. But in addition, I think any

disposition on the merits of that issue would be a

ruling by this Court that would be trumping that

independent and adequate State ground waiver.

Moreover, this argument wasn't raised in the

brief in opposition, either. And the Court's precedent,

of course, and practice would not be to address that.

Particularly in this case, it denied notice to the amici

who would be affected by this argument.

But turning to the substance of it --

JUSTICE KENNEDY: I think this is part of

the substance. I thought that as part of one of your

answers you said that Ohio is free to allocate part of

this capital gains tax to Illinois? Did I hear you say

that, because I don't understand that?

MS. BRINKMANN: No, Your Honor, I'm sorry.

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I apologize if I misspoke. Ohio would allocate, I mean,

take the entire gain for itself as the domicile State of

the seller --

JUSTICE KENNEDY: I see.

MS. BRINKMANN: -- of the investment. In

other factual scenarios, if it turns out that that asset

actually was not an investment and in fact had enough

connection to the business activities in Illinois

because it was really the supplier of the raw materials,

or the two examples that this Court has given as

operational functions is the interest on the bank

account, which is the working capital, or the -- the

futures hedging against the raw material of corn.

CHIEF JUSTICE ROBERTS: Well, isn't it kind

of like futures hedging? I mean, you've got a paper

company and then you've got something that is sort of

the paperless aspect, and they can look at it and say,

well, we're kind of hedging our paper business by

investing heavily in something that's supposedly going

to take away the need for paper.

MS. BRINKMANN: No, Your Honor. Under the

operational function test, it has to be a much closer

nexus to the operating, the operations of the paper

company; and short of that operational function -- or if

it were part of the unitary business, the domiciliary

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State would allocate. And if I could turn --

JUSTICE KENNEDY: Are you saying this is a

passive investment?

MS. BRINKMANN: Yes, Your Honor.

JUSTICE SOUTER: How can you call it a

passive investment, not only when there was -- I think

undisputedly -- as -- as much interest and activity in

Nexis's business planning by the Mead people? But to my

mind even more importantly, when in fact Mead, I think a

couple of times, merged with -- with Nexis -- with Lexis

-- when that provided a tax advantage, by -- by giving

them loss carryforwards that reduced their taxes. Why

isn't it fair to -- to say under the operational

function test that if -- if the company is -- if Nexis

is -- is mergeable with Mead when it produces a tax

advantage and is certainly in a very operational sense

functional then, because it's saving them a lot of

money -- and that's, that has nothing to do with passive

investment. If it's usable in a merger scenario there,

it ought when the -- when the tide turns be -- be

regarded as close enough in operational function to be

taxable when the gain comes in.

MS. BRINKMANN: Your Honor, that's contrary

to the Court's long-standing recognition that something

that enriches the taxpayer is not necessarily part of

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the unitary business's operational function.

JUSTICE SOUTER: That's -- that's right.

But weren't the enrichment cases in which income was

being generated by an investment? The investor, of

course, was the -- was the taxpayer company, and it

simply reaped the benefits of a profitable investment.

That's something very different from merging

corporations, then unmerging them, and then merging them

again to provide not merely enrichment, but great tax

savings; and if they are operationally close enough to

produce great tax savings, why shouldn't they be treated

as operationally close enough when in fact they -- they

produce a capital gain?

MS. BRINKMANN: Because that isn't the

operational connection that justifies a State --

JUSTICE SOUTER: The gain alone certainly is

not. If they had absolutely done nothing but make their

investment and wait to see whether the ship came in, I

would understand your argument. But between the

investment and the return of the ship, they were merging

these corporations back and forth for -- for their --

for Mead's tax advantage. And that seems to me to take

it out -- take the facts of this case out of the sort of

the paradigm of the -- the operational or the

nonoperational function cases.

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MS. BRINKMANN: Your Honor, I think not, if

we look at Allied-Signal, we look at Woolworth, and we

look at ASARCO. Allied-Signal was a sales and

investment -- and getting back to the point about the

argument really was waived about the connection with

Lexis/Nexis in Illinois, those were the same facts in

Allied-Signal. The investment there was --

JUSTICE GINSBURG: It was a sale of stock in

that case, wasn't it?

MS. BRINKMANN: Yes.

JUSTICE GINSBURG: It was the sale of a

subsidiary. And here we have a sale of assets of one

company, and that's why it's so hard for me to see this,

as, why are we talking about unitary or not? There is

only one company; it's Mead.

MS. BRINKMANN: In Allied-Signal, the

investment there was also doing business within the

State. In the Exxon case, there were divisions to which

this Court applied the entire unitary business

principle, because what the Court has said repeatedly in

Mobil, in Exxon, in all these cases, it's not the

corporate form; it is whether there is a discrete

business enterprise; and ASARCO speaks to this.

JUSTICE GINSBURG: You told me that there

was no case that the tax -- taxing authority lost that

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involved divisions of a single company and sale of

assets, rather than the sale of stock.

MS. BRINKMANN: That's correct. We have

four or five cases here. One of them does involve

divisions, Exxon, but in that case it was a vertically

integrated corporation, and the State prevailed in that

case, but it did not change the analysis that applied.

JUSTICE GINSBURG: Well, we're talking about

what Due Process permits States to do, and you're asking

us to declare a restriction that, as far as I know, has

never been declared in any case.

MS. BRINKMANN: It has, Your Honor. It goes

back to principles that ownership do -- does not

determine; simply because there is a business operating

in the State, the State does not have the right to tax

every investment that's owned by that. That dates back

to 1897.

JUSTICE GINSBURG: It's not just that it's

an investment, it's not just that it's holding on to the

shares in another company. It's both of these are

ongoing businesses, Lexis/Nexis and Mead, and they are

both generating income, and all along Illinois has been

taxing the income of both of them, right?

MS. BRINKMANN: Yes, the operating income

within the State's apportioned. But if you look to the

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business activity of the taxpayer Mead, operating in

Illinois, it is that nexus on which Illinois is claiming

that they have a right to tax here. And if we look at

the Woolworth case, for example, I think that is also

instructive. Those were four subsidiaries. Three of

them were 100 percent wholly owned, and the Court

expressly said we recognize they are wholly owned

subsidiaries. These could be integrated divisions, and

they said, that is not significant, if they are

independent, different business enterprises.

JUSTICE GINSBURG: Weren't those foreign

corporations?

MS. BRINKMANN: Yes, Your Honor.

JUSTICE GINSBURG: So running them as -- as

a single company would have been a little harder.

MS. BRINKMANN: Well, no, in fact there were

also some foreign subsidiaries, I believe, involved in

the ASARCO case, for example, Your Honor, and the same

analysis applied -- you know, whether it was vertically

integrated and whether or not it met -- the unitary

business test goes back to three core principles, and

this Court has said at least four if not five times that

the unitary business principle is the linchpin of

apportionment. That is whether or not there is

functional integration.

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JUSTICE SOUTER: Don't we start -- I don't

mean to cut off your argument, but don't we start with

the assumption that this is not a unitary business?

Wasn't that the finding of the trial court which was not

disturbed on appeal?

MS. BRINKMANN: That's right, Your Honor.

That's right.

JUSTICE SOUTER: You can say it if you want,

but I wanted to make sure --

MS. BRINKMANN: There is no virtual

integration; there is no sharing of centralized

management; there's no economies of scale. We think

this is unassailable in the stipular record --

JUSTICE BREYER: Am I thinking about that

part correctly? I -- I found this difficult. I go back

to the railroad; that seems the easiest case. You have

a railroad in 50 States, and Illinois finds it very hard

to evaluate its -- evaluate its value, its railroad

property in Illinois, because the value of that depends

on service everywhere. So the court says that's the

unitary principle; and really what you're supposed to

look at is whether when you look at the supposedly

separate part of the business, does that separate part

of the business contribute to the whole thing? So that

if you were in fact trying to say what is Illinois doing

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without considering that separate part, it would be

tough to do.

I mean, that's the underlying theme.

MS. BRINKMANN: We would --

JUSTICE BREYER: And if that's so, there is

no second test. I mean, I grant you there is language,

but really what people have done is they've said, we are

here in a special situation because we have an interest

in another company, and that's a special part of our

business, and has nothing to do with the rest of the

business. And then the argument is no, it does have

something to do with the rest of the business. And if

it does, like it provides you with working capital, it's

just like the railroad track in California vis-a-vis

Illinois.

MS. BRINKMANN: It's contributing to the

business.

JUSTICE BREYER: And if it doesn't, it

doesn't. So now, if that's right, then it's the form of

analysis rather than the result that's wrong in the

court below. Because they start talking about two

separate tests and then people argue whether the second

should swallow up the first, and at that point I get

totally lost. It's fairly long, but I'd appreciate your

evaluating what I've just said.

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MS. BRINKMANN: Well, Your Honor, there --

on this record, there's no question that the Lexis/Nexis

cannot meet the unitary business test.

JUSTICE GINSBURG: Yes, there is, Ms.

Brinkmann. The Illinois appellate court never got to

that question. Illinois argued all along this is a

unitary business. The only one who said it wasn't was

this trial court, and the Illinois intermediate

appellate court says, well, we don't have to deal with

that because if you use the other label, operational

function, that comes out all right, too.

But this argument was certainly the number

one argument that Illinois was making. It lost only in

the trial court on -- on it. And the appellate court

said we don't have to get to it. So I think your answer

to Justice Souter really wasn't accurate because it

isn't --

MS. BRINKMANN: Well, our position is on the

record here, Your Honor, the stipulated record, that

it's unassailable. But we do --

JUSTICE GINSBURG: All we know is that a

trial judge said that was so.

MS. BRINKMANN: And then that's our

position, obviously, on the record, Your Honor; but we

agreed this was properly raised in the appellate court,

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as opposed to the other argument which was not. And

this also was mentioned in the brief in opposition, as

opposed to their other argument, which was not.

So we do think the Court could reach this

argument, and we maintain that on this record the

linchpin of apportionment giving the right of a State --

and this is a right to extend beyond its territory.

The Court has already let it go beyond its

territory to get to something outside the State if it's

part of the unitary business -- the railroad case, the

express case.

And in that situation there are three

factors, none of which can be met on this record. There

was no shared, centralized management, none. There was

no integrated functions, none. And there were no

economies of scale. Lexis/Nexis did not even get a

discount on any paper they bought from Mead. They were,

you know, minor customers of each other.

JUSTICE GINSBURG: Maybe when we're talking

about Due Process and Commerce Clause limitations on

what States can tax, we ought to ask ourselves if those

three -- is that it? If we're trying to measure, is

there a sufficient relationship between Lexis/Nexis,

Mead, and the State of Illinois to make it fair for them

to tax?

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And you say, oh, yes. Each year when

they're making income, when they are a going concern,

Illinois can get a piece of it. But when the assets are

sold, assets that would have generated income for

Illinois year after year, but when those assets are

sold, Illinois can get nothing to represent -- to

substitute for that stream of income that it would have

gotten.

MS. BRINKMANN: No. It will continue to get

income tax on an apportioned basis before and after.

JUSTICE GINSBURG: But Lexis/Nexis is gone.

MS. BRINKMANN: Well, Lexis/Nexis continues

to operate. It's now owned by Reed Elsevier. So it

would continue to pay an apportioned income tax.

It's a different event here, Your Honor. It

is the sale of an investment that occurred in Ohio. And

as the domicile State, Ohio has provided benefits to the

corporate headquarters, to management --

JUSTICE GINSBURG: Suppose it had been

Delaware, and there was nothing there in Delaware except

it was a Delaware corporation.

MS. BRINKMANN: That's not the commercial

domicile, Your Honor. There is a distinction in all of

these cases between the State of incorporation and the

commercial domicile. The commercial domicile --

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CHIEF JUSTICE ROBERTS: Ms. Brinkmann, one

thing that concerns me is how this will complicate the

process. I think, with respect to ordinary income, the

States work this out, and they figure we get 5 percent

because we have 5 percent of the presence or business,

whatever.

Now, they're going to have that, and they're

going to have an overlay on that. They're going to say,

well, it's 5 percent; but, you know, we sold this asset

that doesn't have any connection to Illinois; and that's

part of the income we've got. So you don't get quite 5

percent of all.

And another -- Illinois is going to come

back and say, well, yes, but you sold this other one;

and, as to that one, you've got sufficient connection

with Illinois. It seems to me it's going to be

impossible to sort this out.

MS. BRINKMANN: Your Honor, this has been

going on since at least 1992 in the Allied-Signal case.

The lower courts, the State courts, except for the court

in this case, have been able to apply that easily.

In order to take the expansive view of

Illinois here, you would be undermining Allied-Signal,

which had the same facts as in this case, not to mention

ASARCO, Woolworth.

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And I would just say, before I could reserve

the remainder of my time, Allied-Signal was the case in

which this Court was faced with new arguments raised by

the States, at argument. You went back and had

resupplemental briefing and reargument, and questioned

in your questions to those parties whether or not ASARCO

and Woolworth should be revisited and overruled.

So the Allied-Signal case took into account

all of these concerns and came back with a ringing

affirmation of the linchpin of an apportionability for

state taxation being the unitary-business test with the

operational-function aspect.

JUSTICE KENNEDY: I don't like to intrude on

the white light, but if I could just ask one question.

If the unitary-tax argument has been

preserved and is met and if there's a finding that they

are unitary, does Illinois have the right to tax the

sale, or to -- to a portion of it?

MS. BRINKMANN: We think that the finding is

that it is not unitary.

JUSTICE KENNEDY: No, no. Assume -- assume

it is unitary. Can Illinois then, in your view, have a

part of -- tax part of the gain on the sale?

MS. BRINKMANN: Yes, if it were unitary, but

we think there's no way this record could meet the

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standards compared to Woolworth, ASARCO. In all those

cases, they were much closer. Thank you.

CHIEF JUSTICE ROBERTS: Thank you, Ms.

Brinkmann.

Mr. Barov.

ORAL ARGUMENT OF BRIAN F. BAROV

ON BEHALF OF THE RESPONDENTS

MR. BAROV: Mr. Chief Justice, and may it

please the Court:

Illinois is not attempting to tax income

earned outside its borders. To the contrary, the income

it seeks to tax here is income earned by Mead on its

electronic publishing business, Lexis, which conducted

substantial business in Illinois.

Mead paid taxes on the income that the

electronic publishing business earned. Yet, it now

contends that the Constitution bars it from taxing any

of the gains it realized on the sale of Lexis, even

though Illinois undeniably contributed --

JUSTICE KENNEDY: Well, if you did not

proceed on the unitary business there, let's take that

off the table. It seems to me that Lexis's presence in

Illinois is quite irrelevant.

MR. BAROV: No, Your Honor. It's --

JUSTICE KENNEDY: It seems to me that, under

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your theory, you could tax the sale, even if Lexis were

not in Illinois at all, just because Mead is.

MR. BAROV: If this - if they were unitary,

yes, then Lexis's presence in Illinois would be

irrelevant to this case, if they met the

unitary-business doctrine.

JUSTICE BREYER: That's not the question. I

thought that the -- I agree with the same question

Justice Kennedy had. Suppose that I'm a Massachusetts

company that sells tables, and I sell some tables in

Illinois. And one day I take some of the money, and I

buy an iron mine in New Mexico. And then I sell the

iron mine. And Illinois, not Massachusetts, wants to

impose a tax. And suppose there is no connection

whatsoever between the iron mine and anything else but

for four, which are the four listed on page 13a:

One, that I have contributed capital support

to the iron mine.

Two, I approve the major capital

expenditures of the iron mine, sitting in my office in

Massachusetts.

Three, sometimes -- and this is a tougher

one -- I call the iron mine a division of my table

company.

And, four, I sometimes retain tax benefits

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and control over the extra cash of the iron mine, but

I'm not using it in my day-to-day work.

Now, are those four things alone sufficient

for Illinois to tax the sale of my iron mine? That, it

seems to me, is the way they presented it. Maybe it is

a unitary business really, but I guess we have to send

it back for that.

MR. BAROV: Under -- under those bare facts,

probably there would be not a sufficient connection.

JUSTICE BREYER: All right. Then why isn't

that the end of this case? That's what they said it

was. That's what they said, perhaps wrongly, that this

isn't a unitary business. And, therefore, we are left

with those four facts, and why not send it back and say

you haven't reached the unitary-business question; go

reach it?

MR. BAROV: Because, Your Honor --

JUSTICE KENNEDY: And if I can just add on

to that same question: If you're going to have the

unitary-tax theory, that's -- that's very helpful. But

if we take the unitary-tax theory off the table, it

seems to me that you are confusing the law by having

some midway test. I don't know what your theory is,

that -- in relation to this part of Justice Breyer's

question.

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MR. BAROV: There's a two-part answer to

that question -- those questions, Your Honor.

First, there's a second avenue of State

taxation that's been well recognized by this Court for

at least 80 years, which is that if a business conducts

business in a State, a State has a tax -- has the right

to tax a share of that business. And that's all

Illinois did here. When it apportioned the income in

this case, it apportioned the income only based on

Lexis's in-State Illinois presence. So under that

avenue alone, the tax is constitutional.

The second --

JUSTICE KENNEDY: But Mead didn't receive --

pardon me -- Lexis didn't receive the money for the

sale, Mead did.

MR. BAROV: Right.

JUSTICE KENNEDY: Unless, again, if Mead's

presence or nonpresence is simply irrelevant to what

happened here, absent a unitary theory.

MR. BAROV: No, Your Honor. Mead received

the tax -- the gain for the sale because Lexis was a

division of Mead, and the only tax-paying -- the only --

there is no -- there was no legal entity known as

"Lexis" at the time that Lexis was sold. It was assets

-- it was assets owned by the Mead Corporation.

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Now, Mead received the benefit -- the gain

on the sale because Mead was the only tax-paying entity

in this case. So Mead was conducting a business in

Illinois called "Lexis," and, therefore, Illinois could

tax at least --

JUSTICE KENNEDY: Do you think that if there

had been a separate corporation and that Lexis was a

subsidiary corporation and the subsidiary was -- it was

sold, that, again, absent a finding of unitary, Illinois

then could have had a tax?

MR. BAROV: Yes. Illinois could have taxed

based on the --

JUSTICE KENNEDY: All right. So, then, the

asset stock doesn't make any difference?

MR. BAROV: But the -- but the point, Your

Honor, is that Lexis had a presence in Illinois. It was

conducting business in Illinois. That, alone, gave

Illinois the power to tax a share of the income --

JUSTICE KENNEDY: That gets back to Justice

Stevens's initial hypothetical. If you live in New York

and you have an investment in a company that does a lot

of business in Illinois and you in New York, a resident

individual, sell that stock, under your theory Illinois

could tax it.

MR. BAROV: No. Illinois can't tax that

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State because there is no relationship -- there has to

be some relationship, you know, between Illinois and the

tax-paying activity and the taxpayer.

In Justice Breyer's hypothetical there was

none. But there is a -- but let me, if I can, address

that prong of the analysis, also.

Here there was a much closer connection

between Lexis and Mead than simply that of a passive

investment. It wasn't just that Mead helped Lexis buy,

make, handle acquisitions. They were involved in the

actual acquisitions themselves, in purchasing and

contracting to make those acquisitions.

Mead was involved in many of the -- in

controlling lots of their capital investment, its -- and

its -- it was also involved in manipulating excess -- in

their excess cash. And there is a whole -- there was a

host of facts that supported a closer relationship

between Mead and Lexis than simply that, that passive

investment.

So whether -- even if you are looking at it

from the operational-function point of view, there was

-- there was a -- a sufficient connection between Lexis

and Mead beyond that of Justice Breyer's hypothetical.

JUSTICE ALITO: If you traded places with

Ohio, how would you have treated this transaction under

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your tax laws?

MR. BAROV: Under our tax laws --

JUSTICE ALITO: Say that Mead was domiciled

in Illinois but Lexis/Nexis operated in Ohio, would you

have just taken -- would you have allocated or would you

have claimed that -- the right to tax the entire capital

gain?

MR. BAROV: This would have probably, I

think, Your Honor -- I believe this would have been

apportioned as business income under Illinois law.

JUSTICE GINSBURG: Do you know what -- or

did you know what Ohio did in the --

MR. BAROV: I don't know what Ohio did.

They -- Mead has never cited anything in the record to

support the contention that it has been -- that it was

allocated all to Ohio. My understanding of Ohio law at

the time was they -- they have the same business-income

test, basically, that Illinois does.

JUSTICE GINSBURG: Well, what would you say

-- I mean, we talk about apportioning income and

allocating income, allocating to the commercial

headquarters.

What in an enterprise like this would you

say is allocated to the commercial headquarters as

opposed to being apportioned among all the States?

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MR. BAROV: Different States have different

rules, Your Honor, and these are State-law rules, not

constitutional rules, about allocation and

apportionment. Some States will allocate an intangible

capital gain like this to their own domicile State.

Other States will apportion it based on the

share of income that is done in the State.

Again, I don't know what Ohio did. But the

point is that's a rule -- that's a State-law rule of

choice, not a rule of -- a constitutional rule. I think

this Court has been pretty clear in the Mobil Oil case

that these -- those -- that doesn't have a

constitutional significance.

That when a State, a domicile State, and a

State where a source -- which is the source of income,

when those conflict, in fact, this Court has signaled

that apportionment is the default rule. And that the

source State actually would have -- the source State

would win that confrontation.

JUSTICE SOUTER: Mr. Barov, I just want to

go back to an earlier answer to see how far you would go

with the position that you took.

Assume that, exclusive of Nexis, Mead is the

same kind of unitary corporation as under -- under

everybody's understanding now. Assume, also, as you

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suggested in a hypo, that Lexis was doing business in

Illinois. So that at least a -- a portion of its own

activity could be taxed in Illinois. And assume, third,

that the relationship between Mead and Lexis is simply

one of passive investment. Mead simply bought a lot of

stock, maybe 100 percent of the stock at the right time;

and, otherwise, it kept hands off. And at this point

Mead now -- now sells.

On -- on your theory, would -- would the

State of Illinois be able to tax a portion of the

capital gain?

MR. BAROV: Yes, they would, Your Honor.

But they would be limited in how much of that capital

gain they could apportion. They would apportion it

limited to the amount of income that arose in Illinois.

And that's what the auditor did in this case.

JUSTICE SOUTER: Well, but that would be, in

effect, the portion of the Nexis business, total

business that took place in Illinois, total sales, total

payroll, however you do it.

MR. BAROV: Right, and then that would be

put -- that would be put into --

JUSTICE SOUTER: Okay. But the only point I

wanted to be clear on to understand your position is

that purely passive investment would be enough to

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trigger your theory?

MR. BAROV: Yes, it would be.

JUSTICE SOUTER: Okay.

MR. BAROV: It is, Your Honor.

CHIEF JUSTICE ROBERTS: Counsel, why isn't

your friend correct that you have waived any argument

based on the presence of Lexis in Illinois?

MR. BAROV: Your Honor, two reasons:

First, under the -- they have cited

basically two basis grounds for waiver, one under

Illinois law and under this Court's rules. But they

misstate Illinois law in the -- on the waiver regard.

The cases and rules they cite to stand for a

simple proposition that a point not raised in a brief

before a particular court can't be raised on oral

argument. But what the Illinois Supreme Court has been

clear on "otherwise" is that an argument, even if it's

not raised in the appellate court, as long as it's

raised in the trial court in support of a judgment, may

be raised in a reviewing court on further review.

I can provide a couple of cites, Your Honor.

JUSTICE GINSBURG: And -- and I'm not

following your argument, because I thought that the

argument that this was a unitary enterprise was made in

the Illinois appellate court, and the appellate court

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recognizes that it was made, and said we are not going

to reach it because we have this operational-function

test?

MR. BAROV: Yes, Your Honor. That's --

that's correct.

CHIEF JUSTICE ROBERTS: Well, but that's --

they are very different from your current argument,

which you emphasize that whether they are unitary or

not, Lexis/Nexis was in Illinois.

MR. BAROV: That's correct, Your Honor.

CHIEF JUSTICE ROBERTS: Okay. Now, as to

that argument, at least I am very reluctant to overturn

a State court on an argument that they didn't have an

opportunity to consider. And whether it's technically

waived because you raised it in the trial court or not,

it certainly was not an argument you made to the

Illinois appellate courts.

MR. BAROV: That's correct, Your Honor. And

-- but I think, as this Court set forth in Caterpillar

v. Lewis, it is a predicate to the intelligent

resolution of this case.

CHIEF JUSTICE ROBERTS: Well, it wasn't in

Allied-Signal. In Allied-Signal the asset that was sold

was in New Jersey, and that was totally irrelevant to

how we treated the issue in that case.

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MR. BAROV: Certainly, Your Honor. But New

Jersey was taking a very different position in that

case. They were making a much broader argument than we

are making here. They were trying to overturn the

entire unitary doctrine.

And so they may have -- they may have chosen

not to make that argument. It may very well have been

in that case that ASARCO's apportionment factors in that

case were so minimal that it wasn't worth their making

that argument.

But, for whatever reason, they weren't

interested in taxing based on the source alone.

But here, as the facts show, Illinois did

tax. We taxed Lexis, or the gain on Lexis, pursuant to

Lexis' in-state apportionment factors.

JUSTICE STEVENS: May I ask this question

just -- it shows my ignorance, but if the

unitary-business approach to taxation was not applied in

this case, how did you compute the amount of the tax?

MR. BAROV: It was computed -- what the

department did in this case is it -- it took the entire

gain that put -- that went into Mead's apportionable tax

base. But, then, in order to find the Illinois-Lexis

share of the gain, he looked at the -- he looked at

Lexis's Illinois sales and Illinois's -- Lexis's

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Illinois payroll and pulled that amount out, which was

about four percent of the gain, and put that into Mead's

JUSTICE STEVENS: So you use a different

formula from the normal three-factor formula to compute

the tax?

MR. BAROV: Right. You use a different

formula. You use a two-factor formula, but it was just

related to Mead's sales, not to --

JUSTICE KENNEDY: But it seems to me that

those factors are wholly irrelevant to the fact of sale.

It's just whimsical. It has nothing to do with the

sale.

The reason we use apportionment in other

cases is, just as in Justice Breyer's railroad example,

there is no other way to tell, and so forth.

But here the presence of Lexis in Illinois

is wholly accidental with reference to what went on in

the sale.

MR. BAROV: No, Your Honor, it wasn't. I

mean Lexis did considerable business in Illinois, and

the auditor was isolating Illinois's business in

attempting to accurately value the amount of gain that

should be attributable to Mead based on Lexis's Illinois

presence.

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CHIEF JUSTICE ROBERTS: Well, that's why

it's even more dramatic to me that you didn't raise the

argument based on the Lexis connection to Illinois.

That's the basis on which your auditor is claiming these

taxes; and, yet, you don't even raise it before the

Illinois appellate court as a ground for being able to

reach the Lexis/Nexis income.

MR. BAROV: -- the trial court -- actually

the appellate court ruled on whether the State law tests

had been met at the time. And when it went up on appeal

we -- we prevailed in the appellate court based on

operational -- I'm sorry, in the trial court, based on

the court's finding the operational function had been

met. That's how the appellant framed the issue, and the

case sort of turned on really Illinois State law's

interpretation of Allied-Signal. But, you know, at this

point the -- the facts and the law are clear and a

decision --

JUSTICE STEVENS: In the Illinois courts,

they did argue that as a matter of Federal

constitutional law the tax is impermissible, didn't

they?

MR. BAROV: Correct, yes. Yes, they did.

At this point, Your Honor, I mean, to render a decision

that doesn't take into account the facts of the case,

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the economic reality, accordingly would be artificial.

CHIEF JUSTICE ROBERTS: We couldn't do

anything more if we said you haven't waived it, we

couldn't do anything more than send it back. You're

telling us Lexis has this presence in Illinois, but we

have nothing in the record about that.

MR. BAROV: Yes, it is in the record. The

auditor's -- I mean, the stipulation itself shows that

Lexis was in Illinois. And the Illinois appellate court

made a finding that the presence of Lexis -- Mead to tax

Nexis with Illinois was undisputed. So the Illinois

appellate court recognized that Lexis had a taxing --

adequate taxing connection with Illinois.

CHIEF JUSTICE ROBERTS: Where is that?

MR. BAROV: That is -- I don't have the page

cite handy, Your Honor, but the appellate court did make

a finding that it was undisputed that the --

CHIEF JUSTICE ROBERTS: I just -- usually

appellate courts don't make findings. That's why I'm

curious --

MR. BAROV: I'm sorry. Made a statement.

JUSTICE GINSBURG: Was there any sort of

stipulation between the parties to say what each, what

Lexis/Nexis was doing in Illinois, what Mead was doing

in Illinois?

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MR. BAROV: There was, there was a long

stipulation, yes, Your Honor, and plus there was

exhibits attached to the stipulation, which are

reflected in our briefs, that discuss in detail what

Mead and Lexis were both doing, at least their

relationship to each other.

JUSTICE GINSBURG: Let me ask you about the

theory that both the trial court and the intermediate

appellate court went on, this operational function test,

which has been brought up in a few of our cases, but I

don't know any that was decided. Did we ever have any

case that turned on the operational function test to

hold for the State taxing authority?

MR. BAROV: No, Your Honor. But in

Allied-Signal there was -- examples were given of

certain --

JUSTICE GINSBURG: Yes. But one of the

problems with applying it as you urge here is that that

would just override -- why would anyone go to the

trouble of making a case under the so-called unitary

business test, because the operational function test

would be much easier to meet? So --

MR. BAROV: I guess on that point I would

disagree with you a bit, Your Honor. I think there are

very -- they're different types that look at different

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relationships. So one doesn't -- while the same facts

can support them in instances, you can have situations

where a business is unitary but not operational or --

I'm sorry, an asset is operational, but isn't

necessarily --

JUSTICE BREYER: What? What? What could it

be? That is -- as I read this, I thought, well, there

is no separate test. It's just there's a certain

situation that comes up fairly commonly where someone

claims that an asset of a company was really quite

separate, and therefore when they get income from it or

they sell it it has nothing to do with my business. And

the answer is: It did have something to do with your

business, you used the working capital and so forth, in

which case it's part of the business. So how -- how is

it -- how is it different from that?

MR. BAROV: I agree, Your Honor.

JUSTICE BREYER: Well, if you agree with

that, do you really agree, because if you agree with

that there's no such separate test, this court was wrong

to consider it separately, the lower court, and they

should have reached the question they didn't reach,

which was is this whole thing one single business, which

is normally called the unitary business test?

MR. BAROV: Your Honor, on that point I

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disagree.

JUSTICE BREYER: Good. All right.

MR. BAROV: I think there is -- I mean,

they're both ways of reaching the overall unitary

principle, whether you can show the intangible flow of

assets -- of value between a company -- I can give you

an example, say, of a company that would be unitary but

where the operational function analysis wouldn't apply

is the Container Corp. Type fact pattern, where you have

a domestic -- a domestic parent providing value out to

the foreign subsidiaries, but there is nothing sort of

flowing back to the domestic parent. They're not really

using those subsidiaries in the domestic business. But

nevertheless, there is enough value being thrown out

that it passed the unitary threshold.

The unitary -- the unitary -- I'm sorry.

The operational function analysis or test or principle,

whatever you want to call it, arises in the examples

given in Allied-Signal. As you said, you've got

something which isn't really part of the rest of your

business, but you're using it in that business to

support it way beyond just a passive investment.

And this -- in this case, that's how Mead

was using Lexis. They were using it to support their,

the value of their multiple, their multi-state business,

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by manipulating -- by making capital contributions,

manipulating corporate structures, and bringing back

that tax and net loss carryforwards, which increased the

value, which increased their business activities.

So this case actually is that -- is that --

falls within that paradigm also. It's not unlike any --

like either of those hypotheticals in Allied-Signal, not

unlike the use of working -- investment of working

capital.

So, yes, both -- the test, while there are

facts that overlap them, they can show that there are

different relationships.

JUSTICE GINSBURG: So say you -- but you

would be asking us, if you were going to go on that

operational function, to take two examples that were

given in Allied-Signal that are quite different from

what's involved here, and to make that a doctrine when

you recognize that we have never used that theory to

hold for a State taxing authority in the context of a

multi-state enterprise?

MR. BAROV: Your Honor, I don't think you

have to create a separate doctrine again. I think these

are both considered different ways of showing the

intangible flow of value, the significant links between

a business that give rise to constitutional

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apportionment. And whether they're considered separate

analyses -- they have been described by some academics

as corollaries of each other. It's certainly, given

this Court's signals in Allied-Signal, I think it's

certainly appropriate where the facts arise to make the

constitutional finding based on the operational function

that an asset serves in a business.

JUSTICE STEVENS: May I ask this question.

Does the record tell us whether other States have sought

to tax the capital gain on this transaction?

MR. BAROV: No, it does not, Your Honor.

JUSTICE STEVENS: As far as we know,

Illinois is out on its own here?

MR. BAROV: I don't know, Your -- I don't

know the answer to that, Your Honor. I hope not.

In any event, Your Honor --

JUSTICE SCALIA: You'd not wager, however,

right?

MR. BAROV: In any case, Your Honor, as you

said, as I've said, there are two possible ways that --

two different constitutional paths or theories that we

can go down in this case to meet the -- that allows

Illinois to apportion.

Independent of the operational links, Mead

can tax the gain on Lexis simply because Lexis conducted

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business in Illinois. A state may tax a nonresident's

investment income based on its investment in a separate

business, and that's exactly what Illinois -- that's

another way to uphold the Illinois appellate court's

decision.

JUSTICE GINSBURG: If Illinois -- if Ohio

is, in fact, taxing the whole gain at its full rate on

the theory that this entire income should be allocated

to Ohio, then you do have an element of double taxation,

right?

MR. BAROV: That's possible, Your Honor, but

it's -- first, there is no -- there's no evidence that

Ohio in fact did that. But I think the Mobil Oil case

should have disposed of that, that contention, because

this Court rejected a similar argument that the mere

possibility of taxation by a domiciliary State

foreclosed taxation by a State where the business was

present.

And under Mobil Oil, when a resident State's

claim and a source State's claim conflict, this Court

indicated that the resident State's claim must yield to

that of the source State. So there should be no issue

of multiple taxation in this case.

Just -- Chief Justice Roberts, just to go

back to your question, it's page 11A of the pet. app.

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where the appellate court said: "Mead does not dispute

that Lexis/Nexis had the requisite connection or nexus

with Illinois."

CHIEF JUSTICE ROBERTS: I thought -- I've

been looking, too. I thought 18A does say that they had

$46 million of sales attributable to Lexis/Nexis.

MR. BAROV: Right. Certainly. There was

hundreds of millions of dollars of sales in Illinois.

So that's really not an issue in this case.

CHIEF JUSTICE ROBERTS: No, only 46 million.

MR. BAROV: I'm sorry.

CHIEF JUSTICE ROBERTS: It said 46, not

hundreds of millions.

MR. BAROV: I'm sorry. In 1994, yes, that's

correct.

The -- and again there's -- both Mead and

Lexis -- as both Mead and Lexis had adequate

constitutional connection here, there is no basis not to

sustain --

JUSTICE SCALIA: You're taxing Mead, not

Nexis/Lexis?

MR. BAROV: Correct. That's correct.

JUSTICE SCALIA: So what relevance is it

that Nexis/Lexis has business in Illinois?

MR. BAROV: It's --

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JUSTICE SCALIA: I mean that's fine if

that's who you're taxing.

MR. BAROV: Well, it's relevant if, only if,

this Court finds that there was no operational

relationship between Lexis and Mead. Then Lexis's

presence in Illinois becomes relevant because in that

case, whether you look at this as a separate business

conducted by Mead or whether it was even a passive

investment of Mead's, Illinois can still tax it in the

manner that it did by -- by isolating the values of

Lexis's -- that Lexis earned in Illinois.

JUSTICE KENNEDY: And that is different --

JUSTICE SCALIA: I might say that I don't

follow that. It seems to me what you can establish from

the fact that it did a lot of business in Illinois is

that can you tax it and -- but I don't see how.

JUSTICE GINSBURG: There was no "it" to tax,

right?

MR. BAROV: That 's correct. There was no

"it" to tax and under this court's well-established case

law, International Harvester, J.C. Penney, a State can

tax a nonresident on an investment in that State as well

as the tax is properly prorated to the amount of income

that rose within that State.

JUSTICE GINSBURG: At the time of this sale

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of Lexis/Nexis assets, there was only one taxpayer; it

was Mead.

MR. BAROV: That's correct, Your Honor.

There was one taxpayer and it was Mead. That was the

only party that could have been taxed. That's correct.

So here, in this case, Mead is taking an

all-or-nothing approach to taxation but this could --

this disregards the connections between Mead's

electronic publishing business in Illinois. And the

Court should decline to rule in their favor. In fact --

JUSTICE SCALIA: Do you have any case like

that where your ability to tax a surviving corporation

has to do with, not whether the surviving corporation

itself has sufficient contacts with the State, but

whether some other corporation that has disappeared now

but that merged into it had sufficient -- it seems to me

you have to establish connection with the taxpayer. Not

-- not with somebody from whom the taxpayer made some

money.

MR. BAROV: You have to establish a

connection with the taxpayer's activities in the taxing

State. That's the constitutional touchstone. So if

Mead -- whether Mead was running a business in Illinois

or investing in Illinois or had a unitary business that

operated in Illinois, those -- that's the -- that

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provides a sufficient link.

JUSTICE SCALIA: That's fine.

MR. BAROV: So that provides the taxing --

the ability --

JUSTICE SCALIA: But that isn't established

by the mere fact that Lexis/Nexis did business there.

Ultimately you have to come down to connecting it to

Mead, either by your unitary business doctrine or by

this functional doctrine that you're relying on.

MR. BAROV: No, Your Honor. Under

International Harvester, I think that the Court made it

very clear that even a passive investment can be taxed

by a State. If Mead -- Mead can be taxed -- even if

LEXIS was a passive investor and Mead was only investing

in Illinois, Illinois could still tax Mead on the value

of its investment that arose in Illinois. And so Mead

realized the gain. Mead is the taxpayer. Mead can be

taxed as long as the tax is properly prorated to the

Illinois presence, which it was in this case.

JUSTICE KENNEDY: But the proration, it

seems to me -- that should have nothing to do with the

extent of Lexis in Illinois --

MR. BAROV: Exactly.

JUSTICE KENNEDY: -- nor does it have to do

with the extent of Mead in Illinois.

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MR. BAROV: Well, no, Your Honor. It's --

under this -- then under this Court's precedent, that

you're looking for the source State, the activity of the

business was conducted in the source State. Now, in

this case it happened that the amounts are fairly close

to each other. So if there is any question about it,

there's no -- you know, there is no constitutional

problem that arises out of that. But clearly this -- I

mean it's settled precedent that a State can tax based

on income -- the income that arose in that State and

that's what happened here.

Indeed, to accept Mead's contention which

also would create a constitutional loophole that for

income in ae State's marketplace helped create but which

a State cannot recover, the Illinois court's decision

permitting Illinois to tax a fraction of the gain should

be affirmed.

And if the Court has no other questions --

JUSTICE SCALIA: Can you tax me on stock --

on stock that I own on companies that do business in

Illinois?

MR. BAROV: In the abstract, yes, you could,

Your Honor.

JUSTICE SCALIA: Do you know any State that

tries to do it.

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MR. BAROV: No, Your Honor, but again, Your

Honor --

JUSTICE SCALIA: That's extraordinary. I

don't know of any tax that a State could possibly

impose, that no State has imposed.

(Laughter.)

MR. BAROV: Your Honor, this is -- but Your

Honor, International Harvester is the perfectly precise

fact pattern where this Court upheld a tax on a -- on

investors, on the shareholder's investment in a State in

which they were not present, so -- but in this case Mead

had an independent tax presence also in Illinois. So

that issue just doesn't arise in this case.

CHIEF JUSTICE ROBERTS: Thank you, Counsel.

Ms. Brinkmann, you have three minutes.

REBUTTAL ARGUMENT OF BETH S. BRINKMANN

ON BEHALF OF THE PETITIONER

MS. BRINKMANN: I have four very quick

points, Your Honor. Two go into this new, very

breathtaking argument that the State is making based on

Lexis/Nexis's presence to the State. Concerning

Illinois law, if you look Repondents' brief in

opposition, on page 12 at note 4, they cite the same

Illinois law we do, trying to argue that we had waived

arguments in the brief in op, so we are on pretty solid

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ground there. I think it's their cert page, they were

agreeing with us on what the Illinois law meant.

On the substance of it, I think Justice

Scalia and Justice Kennedy brought out the weaknesses.

Their position would lead to taxes on all stock sales.

Any State where an investment was doing business could

then reach out and apportion the gain on that. And as

far as International Harvester and J.C. Penney, those

were tax on the investment, not the investor. And the

dissent -- that was the dispute -- the majority. It was

the incident of the tax fell on the invest -- the

investment that was doing business in the State.

The State concedes, Your Honor, on Justice

Ginsburg's, the distinction between -- the sale of

assets and the sale of stocks that you were concerned

about. On page 43, they concede and I think it's very

well recognized through Mobil and Exxon and Woolworth

that "apportionment has nothing to do with the form a

business organization takes."

CHIEF JUSTICE ROBERTS: Ms. Brinkmann, your

final point.

MS. BRINKMANN: Finally I would point out,

on the question you asked -- I think it was Justice

Ginsburg -- what Illinois would do in this.

Interestingly --

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JUSTICE GINSBURG: Ohio.

MS. BRINKMANN: -- the record in this case

at -- it's not in the joint appendix, but it's at C-851.

It's Exhibit 1, to the stipulation of facts. It

indicates that interest and dividends allocable are

allocable to Illinois if the commercial domicile is in

Illinois.

JUSTICE SCALIA: Illinois or Ohio, were you

talking about?

MS. BRINKMANN: This is the Illinois return,

and the question was what Illinois would do? And they

say commercial domicile, we get your interest and

dividends.

CHIEF JUSTICE ROBERTS: Ms. Brinkmann, on

the waiver point -- I'm looking at page 18a -- it not

only says that Lexis/Nexis contributed $46 million from

its presence in Illinois; it begins the sentence by

saying "as the Department notes, $46 million of Mead's

income came from Lexis/Nexis activities in Illinois."

So that doesn't sound like a waiver of that point to me.

MS. BRINKMANN: At one point, after they got

through the unitary business and operational functional

analysis, there was an argument about whether it was

grossly disproportionate, and that's where some of that

information came. It was never in the context of this

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legal --

CHIEF JUSTICE ROBERTS: Initially, it's

about the context in which -- what I regard as an

important fact -- was raised, whether it was raised in

the context of an argument on unitary business or

whether or not they went too far, but the stubborn fact

is still there.

MS. BRINKMANN: There are facts, Your Honor,

but the Illinois law is very clear; it's rule 341(h)(7)

and (i) which applies to applee. If you don't raise a

point in the appellate court, it is waived. That's an

independent and adequate State ground. And it's a very

breathtaking argument, as Justice Scalia pointed out,

that also wasn't brought forth in the brief in

opposition. Thank you, Your Honor.

CHIEF JUSTICE ROBERTS: Thank you. The case

is submitted.

(Whereupon, at 12:18 p.m., the case in the

above-entitled matter was submitted.)

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27:13,16 50:9pulled 39:1purchasing

32:11purely 35:25purposes 11:21pursuant 38:14put 7:22 35:22

35:22 38:22

39:2p.m 56:18

Q question 5:14

9:1 22:2,626:14 28:7,829:15,19,25

30:2 38:1643:22 46:847:25 52:654:23 55:11

questioned 26:5

questions 11:326:6 30:252:18

quick 53:18quite 5:14 25:11

27:23 43:1045:16

R R 3:1radically 3:12

railroad 20:1620:17,18 21:14

23:10 39:15raise 40:2,5

56:10raised 12:15,25

13:14 22:2526:3 36:14,1536:18,19,2037:15 56:4,4

raises 12:18raising 13:2

rate 47:7raw 14:9,13reach 3:20 23:4

29:16 37:240:7 43:2254:7

reached 5:929:15 43:22

reaching 44:4read 43:7reality 41:1

realized 27:1851:17

really 13:6 14:917:5 20:2121:7 22:1629:6 40:1543:10,19 44:1244:20 48:9

reaped 16:6reargument

26:5reason 12:7

38:11 39:14

reasons 3:1536:8

REBUTTAL 2:7 53:16

receive 30:13,14received 30:20

31:1recognition

15:24recognize 19:7

45:18

recognized 7:88:19 30:441:12 54:17

recognizes 37:1record 20:13

22:2,19,19,2423:5,13 26:2533:14 41:6,746:9 55:2

recover 52:15reduced 15:12Reed 24:13reference 6:15

39:18reflected 42:4regard 36:12

56:3regarded 10:20

15:21rejected 3:19

47:15related 39:9relation 29:24

relationship 23:23 32:1,232:17 35:442:6 49:5

relationships 43:1 45:12

relevance 48:23relevant 49:3,6





relied 3:16reluctant 37:12relying 51:9remainder 26:2render 40:24

repeatedly 17:20

reply 12:21Repondents

53:22represent 24:6requisite 48:2reserve 26:1resident 5:16

31:22 47:19,21resolution 37:21

respect 8:129:25 25:3

Respondents 1:21 2:6 27:7

rest 21:10,1244:20

restriction 18:10

result 5:9 21:20resupplemental

26:5retain 28:25return 16:20

55:10Revenue 1:9 3:5review 36:20reviewing 36:20revisited 26:7right 8:1,8 9:4

9:13,19 11:2312:6 16:218:15,23 19:320:6,7 21:19

22:11 23:6,726:17 29:1030:6,16 31:1333:6 35:6,2139:7 44:246:18 47:1048:7 49:18

ringing 26:9

rise 45:25Roberts 3:3 10:3

10:6,13,18,2411:15,18 12:414:14 25:1

27:3 36:5 37:637:11,22 40:141:2,14,1847:24 48:4,1048:12 53:1454:20 55:1456:2,16

rose 49:24rule 34:9,9,10

34:10,17 50:1056:9

ruled 40:9rules 12:20 34:2

34:2,3 36:1136:13

ruling 3:1113:12

running 19:1450:23

S s 1:18 2:1,3,8

3:1,7 49:1953:16

sale 4:3,4 5:216:24 7:2 8:210:5 12:2 17:817:11,12 18:118:2 24:1626:18,23 27:1828:1 29:430:15,21 31:239:11,13,1949:25 54:14,15

sales 17:3 35:1938:25 39:948:6,8 54:5

saving 15:17savings 16:10,11saying 3:24 7:5

10:7 15:255:18

says 20:20 22:955:16

scale 20:1223:16

Scalia 7:15,22

46:17 48:20,2349:1,13 50:1151:2,5 52:1952:24 53:354:4 55:856:13

scenario 15:19scenarios 14:6scheme 7:23second 21:6,22

30:3,12

see 14:4 16:1817:13 34:2149:16

seeks 27:12sell 6:2 11:16

28:10,12 31:2343:12

seller 7:3 9:1714:3

sells 4:6 11:1828:10 35:8

send 29:6,1441:4

sense 15:16sentence 55:17separate 20:23

20:23 21:1,2231:7 43:8,1143:20 45:2246:1 47:2 49:7

separately 43:21served 9:11serves 46:7

service 20:20services 11:19set 37:19settled 52:9share 30:7 31:18

34:7 38:24shared 23:14shareholder's

53:10shares 18:20sharing 20:11ship 16:18,20short 14:24

show 38:13 44:545:11

showing 45:23shows 38:17

41:8signaled 34:16signals 46:4significance

34:13significant 19:9

45:24

similar 47:15simple 9:1 36:14simply 16:6

18:14 30:1832:8,18 35:4,546:25

single 18:119:15 43:23

sister 8:11sitting 28:20situation 9:10

9:22 21:823:12 43:9

situations 9:743:2

sold 5:18 8:1712:13 24:4,625:9,14 30:2431:9 37:23

solid 53:25somebody 50:18sorry 13:25

40:12 41:21

43:4 44:1648:11,14

sort 5:13 14:1616:23 25:1740:15 41:2244:11

sought 46:9sound 55:20

source 34:15,1534:18,18 38:1247:20,22 52:352:4

Souter 15:5 16:2

16:16 20:1,822:16 34:2035:17,23 36:3

so-called 42:20speak 7:18speaks 17:23special 21:8,9stand 36:13standard 3:18standards 27:1start 20:1,2

21:21starting 7:10state 3:13,15,20

3:22 4:13,176:7,7,10,13,227:11 8:2,4,5,68:11,17,23 9:99:13,13,17,1910:2 11:2112:15,22,2413:13 14:215:1 16:1517:18 18:6,1518:15 23:6,923:24 24:17,2425:20 26:1130:3,6,6 32:134:5,7,14,1434:15,18,1835:10 37:1340:9,15 42:1345:19 47:1,1647:17,22 49:21

49:22,24 50:1450:22 51:1352:3,4,9,10,1552:24 53:4,553:10,20,2154:6,12,1356:12

statement 41:21





States 1:1,158:13,14,2318:9 20:1723:21 25:426:4 33:25

34:1,4,6 46:9State's 7:9 18:25

47:19,20,2152:14

State-law 34:2,9STEVENS 5:13

5:24 6:9,14,196:24 7:5,1238:16 39:440:19 46:8,12

Stevens's 31:20

stipular 20:13stipulated 22:19stipulation 41:8

41:23 42:2,355:4

stock 4:4 17:818:2 31:14,2335:6,6 52:1952:20 54:5

stocks 54:15straightforward

4:19strange 4:1stream 24:7structures 45:2stubborn 56:6subject 6:3subjected 6:5submitted 56:17

56:19subsidiaries

4:15 5:11 19:519:8,17 44:11

44:13subsidiary 4:4

17:12 31:8,8substance 13:19

13:21 54:3substantial

27:14substantive

12:19substitute 24:7SUCCESSOR

1:4sufficient 6:18

23:23 25:1529:3,9 32:2250:14,16 51:1

suggested 35:1supplier 14:9supply 11:7support 13:3

28:17 33:1536:19 43:244:22,24

supported 32:17

supports 13:4suppose 7:14

24:19 28:9,14supposed 20:21supposedly

14:19 20:22Supposing 5:15Supreme 1:1,15

36:16sure 5:14 20:9surviving 50:12

50:13sustain 48:19swallow 21:23

T T 2:1,1table 27:22

28:23 29:21tables 28:10,10take 14:2,20

16:22,23 25:2227:21 28:11

29:21 40:2545:15

taken 33:5takes 54:19talk 3:25 4:1

33:20talked 4:25talking 4:3 7:18

12:1 17:1418:8 21:2123:19 55:9

tax 3:13,13,215:19 6:3,5,8,16

6:22,24 7:6,97:13 8:2,5,7,118:12 9:1,2,4,1411:22 12:1,612:11,13 13:2315:11,15 16:916:11,22 17:2518:15 19:323:21,25 24:1024:14 26:17,2327:10,12 28:1

28:14,25 29:430:6,7,11,2131:5,10,18,2431:25 33:1,2,635:10 38:14,1938:22 39:640:21 41:1045:3 46:10,2547:1 49:9,1649:17,20,22,2350:12 51:15,1852:9,16,1953:4,9,12 54:954:11

taxable 15:22taxation 7:23

26:11 30:438:18 47:9,1647:17,23 50:7

taxed 11:1131:11 35:338:14 50:551:12,13,18

taxes 5:23 8:1311:23,24 15:1227:15 40:554:5

taxing 3:15 4:144:18 8:1,2317:25 18:2327:17 38:12

41:12,13 42:1345:19 47:748:20 49:250:21 51:3

taxpayer 10:22

11:10 15:2516:5 19:1 32:350:1,4,17,1851:17

taxpayer's 50:21

tax-paying 30:22 31:232:3

teach 5:22technically

37:14tell 4:10 39:16

46:9telling 41:5territorial 7:10territory 23:7,9test 4:9,10 14:22

15:14 19:2121:6 22:326:11 29:2333:18 37:342:9,12,21,2143:8,20,2444:17 45:10

tests 21:22 40:9Thank 27:2,3

53:14 56:15,16theme 21:3theories 46:21theory 28:1

29:20,21,2330:19 31:2335:9 36:1 42:8

45:18 47:8thing 20:24 25:2

43:23things 29:3think 6:15 13:10

13:20 15:6,917:1 19:420:12 22:15

23:4 25:326:19,25 31:633:9 34:1037:19 42:2444:3 45:21,22

46:4 47:1351:11 54:1,354:16,23

thinking 20:14thinks 8:11third 35:3thought 13:21

28:8 36:2343:7 48:4,5

three 5:11 19:519:21 23:12,22

28:22 53:15three-factor

39:5threshold 44:15thrown 44:14tide 15:20time 26:2 30:24

33:17 35:640:10 49:25

times 15:1019:22

told 17:24total 35:18,19

35:19totally 21:24

37:24touchstone

50:22tough 21:2tougher 28:22track 21:14traded 32:24transaction 5:19

6:4,16 7:139:25 32:2546:10

transformed 9:16

treated 16:1132:25 37:25

trial 20:4 22:8





22:14,22 36:1937:15 40:8,1242:8

tries 52:25trigger 36:1

trouble 42:20truck 7:12trumping 13:12trying 20:25

23:22 38:453:24

turn 15:1turned 40:15

42:12turning 13:19turns 14:6 15:20

two 3:15 14:1021:21 28:1936:8,10 45:1546:20,21 53:19

two-factor 39:8two-part 30:1Type 44:9types 42:25

U Ultimately 51:7unassailable

20:13 22:20undeniably

27:19underlying 5:2

21:3undermining

25:23understand 12:5

13:24 16:1935:24

understanding 33:16 34:25

undisputed

7:17,18,19,249:18 10:1711:13 14:2516:1 17:14,1919:20,23 20:3

20:21 22:3,723:10 26:17,2026:22,24 27:2128:3 29:6,1330:19 31:934:24 36:2437:8 38:542:20 43:3,2444:4,7,15,1644:16 50:2451:8 55:22

56:5unitary-busin...

4:9 26:11 28:629:15 38:18

unitary-tax 26:15 29:20,21

United 1:1,15unmerging 16:8upheld 53:9uphold 47:4urge 42:18usable 15:19use 4:23,23

22:10 39:4,7,839:14 45:8

usually 41:18

V v 1:7 3:4 37:20value 20:18,19

39:23 44:6,1044:14,25 45:445:24 51:15

values 49:10vertically 5:7

vis-a-vis 21:14

W wager 46:17wait 16:18

waived 12:2117:5 36:637:15 41:353:24 56:11

waiver 12:2313:13 36:10,1255:15,20

want 20:8 34:2044:18

wanted 20:935:24

wants 28:13Washington

1:11,18wasn't 12:25

13:14 17:920:4 22:7,1632:9 37:2238:9 39:2056:14

way 8:20 13:726:25 29:539:16 44:2247:4

ways 44:4 45:2346:20

weaknesses 54:4Wednesday

1:12well-established

49:20went 4:17 26:4

38:22 39:1840:10 42:9

56:6weren't 16:3

28:15whichever 10:19whimsical 39:12white 26:14wholly 5:12 19:6

19:7 39:11,18win 34:19Woolworth 5:10

17:2 19:425:25 26:727:1 54:17

work 25:4 29:2working 14:12

21:13 43:1445:8,8

worth 38:9

wouldn't 44:8wrong 13:7

21:20 43:20wrongly 29:12

X x 1:2,10

Y year 24:1,5,5years 30:5yield 47:21

York 5:16,2531:20,22

$ $46 48:6 55:16

55:18

0 06-1413 1:7 3:4

1 1 55:4

100 5:11 19:635:6

18a 48:5 55:151846 10:121897 4:21 18:171992 25:191994 48:14

2 2 12:11,12,132008 1:1227 2:6

3 3 2:4341(h)(7) 56:9

4 4 53:23

43 54:1646 48:10,12

5 5 25:4,5,9,1150 20:1753 2:9

8 80 30:5

us supreme court: 06-1413

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