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CERTIORARI TO THE SUPREME COURT OF IOWA No. 90-1918. Argued April 22, 1992-Decided June 18, 1992

The Iowa statute that imposes a business tax on corporations uses the federal tax code's definition of "net income" with certain adjustments. Like the federal scheme, Iowa allows corporations to take a deduction for dividends received from domestic, but not foreign, subsidiaries. However, unlike the federal scheme, Iowa does not allow a credit for taxes paid to foreign countries. Petitioner Kraft General Foods, Inc., a unitary business with operations in the United States and several foreign countries, deducted its foreign subsidiary dividends from its taxable income on its 1981 Iowa return, notwithstanding the contrary provisions of Iowa law. Respondent Iowa Department of Revenue and Finance (Iowa) assessed a deficiency, which Kraft challenged in administrative proceedings and subsequently in Iowa courts. The Iowa Supreme Court rejected Kraft's argument that the disparate treatment of domestic and foreign subsidiary dividends violated the Commerce Clause of the Federal Constitution, holding that Kraft failed to demonstrate that the taxing scheme gave Iowa businesses a commercial advantage over foreign commerce.

Held: The Iowa statute facially discriminates against foreign commerce in violation of the Foreign Commerce Clause. It is indisputable that the statute treats dividends received from foreign subsidiaries less favorably than those received from domestic subsidiaries by including the former, but not the latter, in taxable income. None of the several arguments made by Iowa and its amici-that, since a corporation's domicile does not necessarily establish that it is engaged in either foreign or domestic commerce, the disparate treatment is not discrimination based on the business activity's location or nature; that a taxpayer can avoid the discrimination by changing a subsidiary's domicile from a foreign to a domestic location; that the statute does not treat Iowa subsidiaries more favorably than those located elsewhere; that the benefit to domestic subsidiaries might be offset by the taxes imposed on them by other States and the Federal Government; and that the statute is intended to promote administrative convenience rather than economic protectionism-justifies Iowa's differential treatment of foreign commerce. Pp.75-82.

465 N. W. 2d 664, reversed and remanded.


STEVENS, J., delivered the opinion of the Court, in which WHITE, O'CONNOR, SCALIA, KENNEDY, SOUTER, and THOMAS, JJ., joined. REHNQUIST, C. J., filed a dissenting opinion, in which BLACKMUN, J., joined, post, p.82.

Jerome B. Libin argued the cause for petitioner. With him on the briefs were Kathryn L. Moore and John v:


Marcia Mason, Assistant Attorney General of Iowa, argued the cause for respondent. With her on the brief were Bonnie J. Campbell, Attorney General, and Harry M. Griger, Special Assistant Attorney General.

Kent L. Jones argued the cause for the United States as amicus curiae urging affirmance. With him on the brief were Solicitor General Starr, Acting Assistant Attorney General Bruton, Deputy Solicitor General Wallace, Gary R. Allen, and Ernest J. Brown. *

JUSTICE STEVENS delivered the opinion of the Court.

In 1981 petitioner Kraft General Foods, Inc. (Kraft), operated a unitary business throughout the United States and in several foreign countries. Because part of its business was conducted in Iowa, Kraft was subject to the Iowa Business Tax on Corporations.1 At issue in this case is Iowa's inclusion in the tax base of the dividends that Kraft received from six subsidiaries, each of which was incorporated and conducted its business in a foreign country.2 While Iowa taxes

*Briefs of amici curiae urging reversal were filed for Avon Products, Inc., et al. by Timothy B. Dyk, Edward K. Bilich, and Maryann B. Gall; for Chevron Corp. et al. by Mark L. Evans, Alan I. Horowitz, and Anthony F. Shelley; and for the Washington Legal Foundation by Stephan

Richard Ruda, Michael G. Dzialo, Martin Lobel, and James F. Flug filed a brief for the National Conference of State Legislatures et al. as amici curiae urging affirmance.

1 Iowa Code § 422.32 et seq. (1981).

2 See App. to Pet. for Cert. 29a. Kraft owned capital stock representing more than 80% of the voting power and of the total value of the subsidiaries. Ibid.

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