Tax Law Review, Vol. 48, No. 4 (Summer 1993), pp. 739-879


If the field of state taxation has become somewhat of an academic backwater, it is not for want of issues warranting sustained scholarly attention. The Supreme Court alone has provided ample grist for the academic mill by handing down an extraordinary number of significant decisions delineating the federal constitutional restraints on state tax power. Among the state tax questions considered by the Court in recent years, none has figured so prominently and persistently in its deliberations as the states' power to tax the income of multijurisdictional corporations. In Allied-Signal, Inc. v. Director, Division of Taxation, the Court revisited the most perplexing aspect of this question: the constitutional restraints on a state's power to tax corporate income from intangibles. The Court held that a state lacked the power to tax the income that a nondomiciliary corporation derived from the sale of its minority interest in another corporation because the interest served an “investment” function rather than an “operational” function. Allied-Signal is but one piece of the complex and often confusing mosaic of federal constitutional and state statutory rules governing state taxation of corporate income from intangibles. This Article analyzes these rules, and the problems to which they are directed, with two goals in mind: first, to untangle some of the thornier issues that state corporate taxation of intangible income has raised in the past, and second, to provide a sensible framework for resolving these issues in the future. Section II of this Article considers the general principles governing state taxation of corporate income. It delineates both the federal constitutional restraints that confine the states' power to tax corporate income and the state statutory framework within which such power is exercised. Section III undertakes the same task with respect to the specific principles governing state taxation of corporate income from intangibles. State tax aficionados, and others familiar with these principles, may wish to proceed directly to Section IV, but should do so with the understanding that the balance of the Article rests on the foundation laid in Sections II and III. Section IV addresses the major contemporary controversies involving state taxation of corporate income from intangibles. It analyzes the limits on the states' power to include intangible income within a nondomiciliary taxpayer's apportionable tax base, and it examines the largely unexplored question of fair apportionment of income from intangibles. Section V charts a roadmap for the future treatment of corporate income from intangibles in light of the lessons that emerge from the preceding inquiry.