author: Justice Thomas

text:
    BARAL v. UNITED STATES
    No. 98-1667.
    Argued January 18, 2000
    Decided February 22, 2000

      Thomas, J., delivered the opinion for a unanimous Court.

      Walter J. Rockier argued the cause for petitioner. With him on the briefs were Julius Greisman and Thomas Klein.

      Kent L. Jones argued the cause for the United States. With him on the brief were Solicitor General Waxman, Assistant Attorney General Argrett, Deputy Solicitor General Wallace, Gilbert S. Rothenberg, and Charles Bricken.

   Justice Thomas

delivered the opinion of the Court.

Internal Revenue Code § 6511(b)(2)(A) imposes a ceiling on the amount of credit or refund to which a taxpayer is entitled as compensation for an overpayment of tax: “[T]he amount of the credit or refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return.” 26 U. S. C. § 6511(b)(2)(A). We are called upon in this case to decide when two types of remittance are “paid” for purposes of this section: a remittance by a taxpayer of estimated income tax, and a remittance by a taxpayer’s employer of withholding tax. The plain language of a nearby Code section, § 6513(b), provides the answer: These remittances are “paid” on the due date of the taxpayer’s income tax return.

I

The relevant facts are not disputed. Two remittances were made to the Internal Revenue Service toward petitioner David H. Baral’s income tax liability for the 1988 tax year. The first, a withholding of $4,104 from Baral’s wages throughout 1988, was a garden-variety collection of income tax by the employer, see §3402. The second, an estimated income tax of $1,100 remitted in January 1989, was sent by Baral himself out of concern that his employer’s withholding might be inadequate to meet his tax obligation for the year, see §6654. In the ordinary course, Baral’s income tax return for 1988 was due to be filed on April 15,1989. Though he applied for and received an extension of time until August 15, Baral missed this deadline; he did not file the return until nearly four years later, on June 1, 1993. The Service, on July 19,1993, assessed the tax liability reported on this belated return.

On the return, Baral claimed that he (and his employer on his behalf) had remitted $1,175 more with respect to the 1988 taxable year than he actually owed. Baral requested that the Service apply this excess as a credit toward his outstanding tax obligations for the 1989 taxable year. The Service denied the requested credit. It did not dispute that Baral had timely filed the request under the relevant filing deadline — “within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.” § 6511(a); see § 6511(b)(1). But the Service concluded that the claim exceeded the ceiling imposed by § 6511(b)(2)(A). That provision states that “the amount of the credit or refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return.” Ibid.; see generally Commissioner v. Lundy, 516 U. S. 235, 240 (1996) (explaining that §6511 contains two separate timeliness provisions: (1) § 6511(b)(l)’s filing deadline and (2) § 6511(b)(2)’s ceilings, which are defined by reference to that provision’s “look-back period[s]”). Since Baral had filed his return on June 1,1993, and had earlier received a 4-month extension from the initial due date, the relevant look-back period under § 6511(b)(2)(A) extended from June 1, 1993, back to February 1, 1990 (i. e., three years plus four months). According to the Service, Baral had paid no portion of the overpaid tax during that period, and so faced a ceiling of zero on any allowable refund or credit.

Baral then commenced the instant suit for refund in Federal District Court. That court sustained the Service’s position and granted summary judgment in its favor. The Court of Appeals affirmed. App. to Pet. for Cert. A-1, judgt. order reported at 172 F. 3d 918 (CADC 1999). The Court of Appeals looked to § 6513(b)(1), which states that amounts of tax withheld from wages “shall... be deemed to have been paid by [the taxpayer] on the 15th day of the fourth month following the close of his taxable year,” and to § 6513(b)(2), which makes similar provision for amounts submitted as estimated income tax, and concluded that, under these subsections, both of the remittances at issue were “paid” on April 15, 1989. Accord, e. g., Dantzler v. United States, 183 F. 3d 1247, 1250-1251 (CA11 1999) (estimated income tax); Ertman v. United States, 165 F. 3d 204, 207 (CA2 1999) (same); Ehle v. United States, 720 F. 2d 1096, 1096-1097 (CA9 1983) (withholding from wages). In view of apparent tension between this approach and a decision of the Court of Appeals for the Fifth Circuit, Ford v. United States, 618 F. 2d 357, 360-361, and n. 4 (1980) (suggesting that a remittance respecting any sort of tax is “paid” under § 6511 only when the Service assesses the tax liability), we granted certiorari, 527 U. S. 1067 (1999).

II

The parties renew before us the contentions advanced below. The Government submits that §§ 6513(b)(1) and (2) unequivocally provide that the two remittances at issue were “paid” on April 15, 1989, for purposes of § 6511(b)(2)(A), so that they precede the look-back period, which, as noted, commenced on February 1, 1990. Baral, on the other hand, urges that a tax cannot be “paid” within the meaning of § 6511(b)(2)(A) until the tax liability is assessed (i. e., the value of the liability is definitively fixed). According to Baral, the requisite assessment might be made either when the taxpayer files his return (here June 1, 1993) or when the Service, under §6201, formally assesses the liability (here July 19, 1993), though he seems to prefer the latter date. See Brief for Petitioner 9 (“Payment of the income tax . . . occurred at the earliest on June 1,1993, when the amount of that tax first became known, and more precisely on July 19, 1993, when the income tax was assessed”).

We agree with the Government that §§ 6513(b)(1) and (2) settle the matter. We set out these provisions in full:

“(b) Prepaid income tax
“For purposes of section 6511 or 6512—
“(1) Any tax actually deducted and withheld at the source during any calendar year under chapter 24 shall, in respect of the recipient of the income, be deemed to have been paid by him on the 15th day of the fourth month following the close of his taxable year with respect to which such tax is allowable as a credit under section 31.
“(2) Any amount paid as estimated income tax for any taxable year shall be deemed to have been paid on the last day prescribed for filing the return under section 6012 for such taxable year (determined without regard to any extension of time for filing such return).”

Subsection (1) resolves when the remittance of withholding tax by Baraks employer was “paid”: Since Baral is a calendar year taxpayer, the $4,104 withheld from his wages during the 1988 calendar year was “paid” on April 15, 1989. Subsection (2) determines when Baraks remittance of estimated income tax was “paid”: Since the referenced § 6012 together with § 6072(a) requires that a calendar year taxpayer like Baral file his income tax return on the April 15th following the close of the calendar year, the $1,100 remitted as an estimated income tax in respect of Baraks 1988 tax liability was likewise “paid” on April 15,1989. And both of these statutorily defined payment dates apply “[f]or purposes of section 6511,” the provision directly at issue in this case. This means that, under § 6511(b)(2)(A), both remittances at issue (the withholding and the estimated income tax) fall before, and hence outside, the look-back period, which commenced on February 1,1990. Because neither these remittances nor any others were “paid” within the look-baek period (February 1, 1990, to June 1, 1998), the ceiling on Baral’s requested credit of $1,175 is zero, and the Service was correct to deny the requested credit.

Baral disputes this reading of § 6513(b). He claims that §§ 6513(b)(1) and (2) establish a “deemed paid” date for payment of estimated tax and withholding tax, but in no sense prescribe when the income tax is “paid,” which is the crucial inquiry under § 6511(b)(2)(A). According to Baral, withholding tax and estimated tax are taxes in their own right (separate from the income tax), and are converted into income tax only on the income tax return. (On this view, payment of the income tax occurred no earlier than June 1, 1993, when Baral filed the return.) This reading is evident, he says, from the significance that the Treasury Regulations place on the filing of the return, see 26 CFR §301.6315-1 (1999) (“The aggregate amount of the payments of estimated tax should be entered upon the income tax return for such taxable year as payments to be applied against the tax shown on such return”); § 301.6402-3(a)(1) (providing that “in the case of an overpayment of income taxes, a claim for credit or refund of such overpayment shall be made on the appropriate income tax return”), and from the fact that the Code’s provisions regarding withholding and estimated tax are found in different subtitles (C and F, respectively) from the provisions governing income tax (A).

We disagree. Withholding and estimated tax remittances are not taxes in their own right, but methods for collecting the income tax. Thus, § 31(a)(1) of the Code provides that amounts withheld from wages “shall be allowed to the recipient of the income as a credit against the [income] tax,” and § 6315 states that “[pjayment of the estimated income tax, or any installment thereof, shall be considered payment on account of the income taxes imposed by subtitle A for the taxable year.” Similarly, one of the regulations cited by Baral explains that a remittance of estimated income tax “shall be considered payment on account of the income tax for the taxable year for which the estimate is made.” 26 CFR §301.6315-1 (1999) (emphasis added). Baral’s reading fails, moreover, to give any meaning to 26 U. S. C. § 6513. That section exists “[f]or purposes of section 6511,” and §6511 concerns credits and refunds, which result only when the aggregate of remittances (such as withholding tax and estimated income tax) exceed the tax liability, see §6401. Thus, the concepts of credit or refund have no meaning as applied to Baral’s notion of withholding taxes and estimated taxes as freestanding taxes. Not surprisingly, the caption to § 6513(b) describes withholding and estimated income tax remittances as “[p]repaid income tax.”

Taking a more metaphysical tack, Baral contends that income tax is “paid” under § 6511(b)(2)(A) only when the income tax is assessed — here, June 1 or July 19, 1993, see supra, at 434-435 — because the concept of payment makes sense only when the liability is “defined, known, and fixed by assessment,” Brief for Petitioner 9. But the Code directly contradicts the notion that payment may not occur before assessment. See § 6151(a) (“[T]he person required to make [a return of tax] shall, without assessment or notice and demand from the Secretary, pay such tax ... at the time and place fixed for filing the return” (emphasis added)); § 6213(b)(4) (“Any amount paid as a tax or in respect of a tax may be assessed upon the receipt of such payment’ (emphasis added)). Nor does Baral’s argument find support in our decision in Rosenman v. United States, 323 U. S. 658 (1945), where we applied § 6511’s predecessor to a remittance of estimated estate tax. To be sure, a part of our opinion seems to endorse petitioner’s view that payment only occurs at assessment:

"It is [the] erroneous assessment that gave rise to a claim for refund. Not until then was there such a claim as could start the time running for presenting the claim. In any responsible sense payment was then made by the application of the balance credited to the petitioners in the suspense account....” Id., at 661.

But the remittance in Rosenman, unlike the ones here, was not governed by a “deemed paid” provision akin to §6513, and we therefore had no occasion to consider the implications of such a provision for determining when a tax is “paid” under the predecessor to §6511. See ibid, (noting that “no extraneous relevant aids to construction have been called to our attention”). Moreover, if the quoted passage had represented our holding, we would have broadly rejected the Government’s argument that payment occurred when the remittance of estimated estate tax was made, instead of rejecting the argument, as we did, only because it was not in accord with the “tenor” of the “business transaction,” id., at 663.

We observe, finally, that Baral’s position — to the extent he submits that payment occurs only at the Service’s assessment — would work to the detriment of taxpayers who timely file their returns and claim a refund or credit as compensation for an overpayment. The Service 'will not always assess the taxpayer’s liability immediately upon receiving the return; the Service generally has three years in which to do so, see 26 U. S. C. § 6501(a) (1994 ed., Supp. III). The Code does allow for payment of interest to the taxpayer on over-payments once the return has been filed and the tax paid, 26 U. S. C. § 6611 (1994 ed. and Supp. III), but under Baral’s view no interest could accrue during the time between the filing of the return and the Service’s assessment. Fortunately for the timely taxpayer, the Code definitively rejects Baral’s position in this setting. Section 6611(d) of 26 U. S. C. explains that the date of payment is determined according to the provisions of § 6513, which, as noted, supra, at 435-436, plainly set a deemed date of payment for remittances of withholding and estimated income tax on the April 15 following the relevant taxable year.

* * *

For the foregoing reasons, we affirm the judgment below.

It is so ordered.

       Central to our analysis in this regard was a concern that the Service should not be able to treat the same remittance as a payment for statute of limitations purposes — disadvantaging the taxpayer by decreasing the time in which a refund claim could be filed — and as a deposit for purposes of accrual of interest on overpayments — disadvantaging the taxpayer by starting the accrual of interest only at assessment. Rosenman, 328 U. S., at 662-663. Indeed, we suggested that an amendment to the Code disapproving of the Service's treatment of remittances as deposits for interest purposes might change the analysis. Id., at 663 (citing Current Tax Payment Act of 1943, § 4(d), 57 Stat. 140) (presently codified at 26 U. S. C. § 6401(c)).

       We need not address the proper treatment under §6511 of remittances that, unlike withholding and estimated income tax, are not governed by a “deemed paid” provision akin to § 6513(b). Such remittances might include remittances of estimated estate tax, as in Rosenman, or remittances of any sort of tax by a taxpayer under audit in order to stop the running of interest and penalties, see, e. g., Moran v. United States, 63 F. 3d 663 (CA7 1995). In the latter situation, the taxpayer will often desire treatment of the remittance as a deposit — even if this means forfeiting the right to interest on an overpayment — in order to preserve jurisdiction in the Tax Court, which depends on the existence of a deficiency, 26 U. S. C. §6213 (1994 ed. and Supp. III), a deficiency that would be wiped out by treatment of the remittance as a payment. We note that the Service has promulgated procedures to govern classification of a remittance as a deposit or payment in this context. See Rev. Proc. 84-58, 1984-2 Cum. Bull. 501.


source: Caselaw Access Project

author: Justice Ginsburg

license: Public Domain

text:
    WEISGRAM et al. v. MARLEY CO. et al.
    No. 99-161.
    Argued January 18, 2000
    Decided February 22, 2000

      Ginsburg, J., delivered the opinion for a unanimous Court.

      Paul A. Strandness argued the cause for petitioners. With him on the briefs were Stephen S. Eckman and Daniel J. Dunn.

      Christine A. Hogan argued the cause for respondents. With her on the brief was James S. Hill.

        Jeffrey Robert Wkite filed a brief for the Association of Trial Lawyers of America as amicus curiae urging reversal.
      Briefs of amici curiae urging affirmance were filed for Brunswick Corp. by Stephen M. Shapiro, Timothy S. Bishop, and Jeffrey W. Sarles; and for the Product Liability Advisory Council, Inc., by Michael T. Wharton.

   Justice Ginsburg

delivered the opinion of the Court.

This case concerns the respective authority of federal trial and appellate courts to decide whether, as a matter of law, judgment should be entered in favor of a verdict loser. The pattern we confront is this. Plaintiff in a product liability action gains a jury verdict. Defendant urges, unsuccessfully before the federal district court but successfully on appeal, that expert testimony plaintiff introduced was unreliable, and therefore inadmissible, under the analysis required by Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U. S. 579 (1993). Shorn of the erroneously admitted expert testimony, the record evidence is insufficient to justify a plaintiff’s verdict. May the court of appeals then instruct the entry of judgment as a matter of law for defendant, or must that tribunal remand the ease, leaving to the district court’s discretion the choice between final judgment for defendant or a new trial of plaintiff’s case?

Our decision is guided by Federal Rule of Civil Procedure 50, which governs the entry of judgment as a matter of law, and by the Court’s pathmarking opinion in Neely v. Martin K. Eby Constr. Co., 386 U. S. 317 (1967). As Neely teaches, courts of appeals should “be constantly alert” to “the trial judge’s first-hand knowledge of witnesses, testimony, and issues”; in other words, appellate courts should give due consideration to the first-instance decisionmaker’s “ Teel’ for the overall case.” Id., at 325. But the court of appeals has authority to render the final decision. If, in the particular ease, the appellate tribunal determines that the district court is better positioned to decide whether a new trial, rather than judgment for defendant, should be ordered, the court of appeals should return the case to the trial court for such an assessment. But if, as in the instant ease, the court of appeals concludes that further proceedings are unwarranted because the loser on appeal has had a full and fair opportunity to present the case, including arguments for a new trial, the appellate court may appropriately instruct the district court to enter judgment against the jury-verdict winner. Appellate authority to make this determination is no less when the evidence is rendered insufficient by the removal of erroneously admitted testimony than it is when the evidence, without any deletion, is insufficient.

I

Firefighters arrived at the home of Bonnie Weisgram on December 30, 1993, to discover flames around the front entrance. Upon entering the home, they found Weisgram in an upstairs bathroom, dead of carbon monoxide poisoning. Her son, petitioner Chad Weisgram, individually and on behalf of Bonnie Weisgram’s heirs, brought a diversity action in the United States District Court for the District of North Dakota seeking wrongful death damages. He alleged that a defect in an electric baseboard heater, manufactured by defendant (now respondent) Marley Company and located inside the door to Bonnie Weisgram’s home, caused both the fire and his mother’s death.

At trial, Weisgram introduced the testimony of three witnesses, proffered as experts, in an endeavor to prove the alleged defect in the heater and its causal connection to the fire. The District Court overruled defendant Marley’s objections, lodged both before and during the trial, that this testimony was unreliable and therefore inadmissible under Federal Rule of Evidence 702 as elucidated by Daubert. At the close of Weisgram’s evidence, and again at the close of all the evidence, Marley unsuccessfully moved under Federal Rule of Civil Procedure 50(a) for judgment as a matter of law on the ground that plaintiffs had failed to meet their burden of proof on the issues of defect and causation. The jury returned a verdict for Weisgram. Marley again requested judgment as a matter of law, and additionally requested, in the alternative, a new trial, pursuant to Rules 50 and 59; among arguments in support of its post-trial motions, Marley reasserted that the expert testimony essential to prove Weisgram’s case was unreliable and therefore inadmissible. App. 123-125. The District Court denied the motions and entered judgment for Weisgram. App. to Pet. for Cert. A28-A40. Marley appealed.

The Court of Appeals for the Eighth Circuit held that Marley’s motion for judgment as a matter of law should have been granted. 169 F. 3d 514, 517 (1999). Writing for the panel majority, Chief Judge Bowman first examined the testimony of Weisgram’s expert witnesses, the sole evidence supporting plaintiffs’ produet defect charge. Id., at 518-522. Concluding that the testimony was speculative and not shown to be scientifically sound, the majority held the expert evidence incompetent to prove Weisgram’s ease. Ibid. The court then considered the remaining evidence in the light most favorable to Weisgram, found it insufficient to support the jury verdict, and directed judgment as a matter of law for Marley. Id., at 516-517, 521-522. In a footnote, the majority “reject[ed] any contention that [it was] required to remand for a new trial.” Id., at 517, n. 2. It recognized its discretion to do so under Rule 50(d), but stated: “[W]e can discern no reason to give the plaintiffs a second chance to make out a case of strict liability .... This is not a close case. The plaintiffs had a fair opportunity to prove their claim and they failed to do so.” Ibid, (citations omitted). The dissenting judge disagreed on both points, concluding that the expert evidence was properly admitted and that the appropriate remedy for improper admission of expert testimony is the award of a new trial, not judgment as a matter of law. Id., at 522, 525 (citing Midcontinent Broadcasting Co. v. North Central Airlines, Inc., 471 F. 2d 357 (CA8 1973)).

Courts of Appeals have divided on the question whether Federal Rule of Civil Procedure 50 permits an appellate court to direct the entry of judgment as a matter of law when it determines that evidence was erroneously admitted at trial and that the remaining, properly admitted evidence is insufficient to constitute a submissible ease. We granted certiorari to resolve the conflict, 527 U. S. 1069 (1999), and we now affirm the Eighth Circuit’s judgment.

h-4

Federal Rule of Civil Procedure 50, reproduced below, governs motions for judgment as a matter of law in jury trials. It allows the trial court to remove cases or issues from the jury’s consideration "when the facts are sufficiently clear that the law requires a particular result.” 9A C. Wright & A. Miller, Federal Practice and Procedure § 2521, p. 240 (2d ed. 1995) (hereinafter Wright & Miller). Subdivision (d) controls when, as here, the verdict loser appeals from the trial court’s denial of a motion for judgment as a matter of law:

“[T]he party who prevailed on that motion may, as ap-pellee, assert grounds entitling the party to a new trial in the event the appellate court concludes that the trial court erred in denying the motion for judgment. If the appellate court reverses the judgment, nothing in this rule precludes it from determining that the appellee is entitled to a new trial, or from directing the trial court to determine whether a new trial shall be granted.”

Under this Rule, Weisgram urges, when a court of appeals determines that a jury verdict cannot be sustained due to an error in the admission of evidence, the appellate court may not order the entry of judgment for the verdict loser, but must instead remand the case to the trial court for a new trial determination. Brief for Petitioner 20, 22; Reply Brief 1, 17. Nothing in Rule 50 expressly addresses this question.

In a series of pre-1967 decisions, this Court refrained from deciding the question, while emphasizing the importance of giving the party deprived of a verdict the opportunity to invoke the discretion of the trial judge to grant a new trial. See Cone v. West Virginia Pulp & Paper Co., 330 U. S. 212, 216-218 (1947); Globe Liquor Co. v. San Roman, 332 U. S. 571, 573-574 (1948); Johnson v. New York, N. H. & H. R. Co., 344 U. S. 48, 54, n. 3 (1952); see also 9A Wright & Miller § 2540, at 370. Then, in Neely, the Court reviewed its prior jurisprudence and ruled definitively that if a motion for judgment as a matter of law is erroneously denied by the district court, the appellate court does have the power to order the entry of judgment for the moving party. 386 U. S., at 326; see also Louis, Post-Verdict Rulings on the Sufficiency of the Evidence: Neely v. Martin K. Eby Construction Co. Revisited, 1975 Wis. L. Rev. 503 (surveying chronologically Court’s decisions bearing on appellate direction of judgment as a matter of law).

Neely first addressed the compatibility of appellate direction of judgment as a matter of law (then styled “judgment n.o.v.”) with the Seventh Amendment’s jury trial guarantee. It was settled, the Court pointed out, that a trial court, pursuant to Rule 50(b), could enter judgment for the verdict loser without offense to the Seventh Amendment. 386 U. S., at 321 (citing Montgomery Ward & Co. v. Duncan, 311 U. S. 243 (1940)). “As far as the Seventh Amendment’s right to jury trial is concerned,” the Court reasoned, “there is no greater restriction on the province of the jury when an appellate court enters judgment n.o.v. than when a trial court does”; accordingly, the Court concluded, “there is no constitutional bar to an appellate court granting judgment n.o.v.” 386 U. S., at 322 (citing Baltimore & Carolina Line, Inc. v. Redman, 295 U. S. 654 (1935)). The Court next turned to “the statutory grant of appellate jurisdiction to the courts of appeals [in 28 U. S. C. §2106],” which it found “certainly broad enough to include the power to direct entry of judgment n.o.v. on appeal” 386 U. S., at 322. The remainder of the Neely opinion effectively complements Rules 50(c) and 50(d), providing guidance on the appropriate exercise of the appellate court’s discretion when it reverses the trial court’s denial of a defendant’s Rule 50(b) motion for judgment as a matter of law. Id., at 322-330; cf. supra, at 449, n. 5 (1963 observation of Advisory Committee that, as of that year, “problems [concerning motions for judgment coupled with new trial motions] ha[d] not been fully canvassed”).

Neely represents no volte-face in the Court’s understanding of the respective competences of trial and appellate forums. Immediately after declaring that appellate courts have the power to order the entry of judgment for a verdict loser, the Court cautioned:

“Part of the Court’s concern has been to protect the rights of the party whose jury verdict has been set aside on appeal and who may have valid grounds for a new trial, some or all of which should be passed upon by the district court, rather than the court of appeals, because of the trial judge’s first-hand knowledge of witnesses, testimony, and issues — because of his ‘feel’ for the overall case. These are very valid concerns to which the court of appeals should be constantly alert.” 386 U. S., at 325.

Nevertheless, the Court in Neely continued, due consideration of the rights of the verdict winner and the closeness of the trial court to the case “do[es] not justify an ironclad rule that the court of appeals should never order dismissal or judgment for the defendant when the plaintiff’s verdict has been set aside on appeal.” Id., at 326. “Such a rule,” the Court concluded, “would not serve the purpose of Rule 50 to speed litigation and to avoid unnecessary retrials.” Ibid. Neely ultimately clarified that if a court of appeals determines that the district court erroneously denied a motion for judgment as a matter of law, the appellate court may (1) order a new trial at the verdict winner’s request or on its own motion, (2) remand the ease for the trial court to decide whether a new trial or entry of judgment for the defendant is warranted, or (3) direct the entry of judgment as a matter of law for the defendant. Id., at 327-330; see also 9A Wright & Miller § 2540, at 371-372.

III

The parties before us — and Court of Appeals opinions— diverge regarding Neely’s scope. Weisgram, in line with some appellate decisions, posits a distinction between cases in which judgment as a matter of law is requested based on plaintiffs failure to produce enough evidence to warrant a jury verdict, as in Neely, and eases in which the proof introduced becomes insufficient because the court of appeals determines that certain evidence should not have been admitted, as in the instant ease. Insufficiency caused by deletion of evidence, Weisgram contends, requires an “automatic remand” to the district court for consideration whether a new trial is warranted. Brief for Petitioner 20, 22; Reply Brief 1, 3-6; Tr. of Oral Arg. 6, 18, 23.

Weisgram relies on cases holding that, in fairness to a verdict winner who may have relied on erroneously admitted evidence, courts confronting questions of judgment as a matter of law should rule on the record as it went to the jury, without excising evidence inadmissible under Federal Rule of Evidence 702. See, e. g., Kinser v. Gehl Co., 184 F. 3d 1259, 1267, 1269 (CA10 1999); Schudel v. General Electric Co., 120 F. 3d 991, 995-996 (CA9 1997); Jackson v. Pleasant Grove Health Care Center, 980 F. 2d 692, 695-696 (CA11 1993); Midcontinent Broadcasting, 471 F. 2d, at 358. But see Lightning Lube, Inc. v. Witco Corp., 4 F. 3d 1153, 1198-1200 (CA3 1993). These decisions are of questionable consistency with Rule 50(a)(1), which states that in ruling on a motion for judgment as a matter of law, the court is to inquire whether there is any “legally sufficient evidentiary basis for a reasonable jury to find for [the opponent of the motion].” Inadmissible evidence contributes nothing to a “legally sufficient evidentiary basis.” See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U. S. 209, 242 (1993) (“When an expert opinion is not supported by sufficient facts to validate it in the eyes of the law, or when indisputable record facts contradict or otherwise render the opinion unreasonable, it cannot support a jury’s verdict.”).

As Neely recognized, appellate rulings on post-trial pleas for judgment as a matter of law call for the exercise of “informed discretion,” 386 U. S., at 329, and fairness to the parties is surely key to the exercise of that discretion. But fairness concerns should loom as large when the verdict winner, in the appellate court’s judgment, failed to present sufficient evidence as when the appellate court declares inadmissible record evidence essential to the verdict winner’s case. In both situations, the party whose verdict is set aside on appeal will have had notice, before the close of evidence, of the alleged evidentiary deficiency. See Fed. Rule Civ. Proc. 50(a)(2) (motion for judgment as a matter of law “shall specify .. . the law and facts on which the moving party is entitled to the judgment”). On appeal, both will have the opportunity to argue in support of the jury’s verdict or, alternatively, for a new trial. And if judgment is instructed for the verdict loser, both will have a further chance to urge a new trial in a rehearing petition.

Since Daubert, moreover, parties relying on expert evidence have had notice of the exacting standards of reliability such evidence must meet. 509 U. S. 579; see also Kumho Tire Co. v. Carmichael, 526 U. S. 137 (1999) (rendered shortly after the Eighth Circuit’s decision in Weisgram’s case); General Electric Co. v. Joiner, 522 U. S. 136 (1997). It is implausible to suggest, post-Daubert, that parties will initially present less than their best expert evidence in the expectation of a second chance should their first try fail. We therefore find unconvincing Weisgram’s fears that allowing courts of appeals to direct the entry of judgment for defendants will punish plaintiffs who could have shored up their cases by other means had they known their expert testimony would be found inadmissible. See Brief for Petitioner 18, 25. In this case, for example, although Weisgram was on notice every step of the way that Marley was challenging his experts, he made no attempt to add or substitute other evidence. See Lujan v. National Wildlife Federation, 497 U. S. 871, 897 (1990) (“[A] litigant’s failure to buttress its position because of confidence in the strength of that position is always indulged in at the litigant's own risk.”).

After holding Weisgram’s expert testimony inadmissible, the Court of Appeals evaluated the evidence presented at trial, viewing it in the light most favorable to Weisgram, and found the properly admitted evidence insufficient to support the verdict. 169 F. 3d, at 516-517. Weisgram offered no specific grounds for a new trial to the Eighth Circuit. Even in the petition for rehearing, Weisgram argued only that the appellate court had misapplied state law, did not have the authority to direct judgment, and had failed to give adequate deference to the trial court’s evidentiary rulings. App. 131-151. The Eighth Circuit concluded that this was “not a close case.” 169 F. 3d, at 517, n. 2. In these circumstances, the Eighth Circuit did not abuse its discretion by directing entry of judgment for Marley, instead of returning the case to the District Court for further proceedings.

* * *

Neely recognized that there are myriad situations in which the determination whether a new trial is in order is best made by the trial judge. 386 U. S., at 325-326. Neely held, however, that there are also cases in which a court of appeals may appropriately instruct the district court to enter judgment as a matter of law against the jury-verdict winner. Id., at 326. We adhere to Neely’s holding and rationale, and today hold that the authority of courts of appeals to direct the entry of judgment as a matter of law extends to cases in which, on excision of testimony erroneously admitted, there remains insufficient evidence to support the jury’s verdict.

For the reasons stated, the judgment of the Court of Appeals for the Eighth Circuit is

Affirmed.

       At trial and on appeal, the suit of the Weisgram heirs was consolidated with an action brought against Marley Company by State Farm Fire and Casually Company, insurer of the Weisgram home, to recover benefits State Farm paid for the damage to the Weisgram townhouse and an adjoining townhouse. State Farm was dismissed from the appeal after certio-rari was granted. For purposes of this opinion, we generally refer to the plaintiffs below, and to the petitioners before us, simply as “Weisgram.”

       The Tenth Circuit has held it inappropriate for an appellate court to direct the entry of judgment as a matter of law based on the trial court’s erroneous admission of evidence, because to do so would be unfair to a party who relied on the trial court’s evidentiary rulings. See Kinser v. Gehl Co., 184 F. 3d 1259, 1267, 1269 (1999). The Fourth, Sixth, and Eighth Circuits recently have issued decisions, in accord with the position earlier advanced by the Third Circuit, directing the entry of judgment as a matter of law based on proof rendered insufficient by the deletion of improperly admitted evidence. See Redman v. John D. Brush & Co., 111 F. 3d 1174, 1178-1179 (CA4 1997); Smelser v. Norfolk Southern R. Co., 105 F. 3d 299, 301, 306 (CA6 1997); Wright v. Willamette Industries, Inc., 91 F. 3d 1105, 1108 (CA8 1996); accord, Aloe Coal Co. v. Clark Equipment Co., 816 F. 2d 110, 115-116 (CA3 1987).

       We agreed to decide only the issue of the authority of a court of appeals to direct the entry of judgment as a matter of law, and accordingly accept as final the decision of the Eighth Circuit holding the testimony of Weis-gram’s experts unreliable, and therefore inadmissible under Federal Rule of Evidence 702, as explicated in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U. S. 579 (1993). We also accept as final the Eighth Circuit’s determination that the remaining, properly admitted, evidence was insufficient to make a submissible case under state law.

         “Rule 50. Judgment as a Matter of Law in Jury Trials; Alternative Motion for New Trial; Conditional Rulings.
      “(a) Judgment as a Matter of Law.
      “(1) If during a trial by jury a party has been fully heard on an issue and there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue, the court may determine the issue against that party and may grant a motion for judgment as a matter of law against that party with respect to a claim or defense that cannot under the controlling law be maintained or defeated without a favorable finding on that issue.
      “(2) Motions for judgment as a matter of law may be made at any time before submission of the case to the jury. Such a motion shall specify the judgment sought and the law and the facts on which the moving party is entitled to the judgment.
      “(b) Renewing Motion for Judgment after Trial; Alternative Motion for New Trial. If, for any reason, the court does not grant a motion for judgment as a matter of law made at the close of all the evidence, the court is considered to have submitted the action to the jury subject to the court’s later deciding the legal questions raised by the motion. The movant may renew its request for judgment as a matter of law by filing a motion no later than 10 days after entry of judgment — and may alternatively request a new trial or join a motion for a new trial under Rule 59. In ruling on a renewed motion, the court may:
      “(1) if a verdict was returned:
      “(A) allow the judgment to stand,
      “(B) order a new trial, or
      “(C) direct entry of judgment as a matter of law; or
      “(2) if no verdict was returned:
      “(A) order a new trial, or
      “(B) direct entry of judgment as a matter of law.
      “(c) Granting Renewed Motion for Judgment as a Matter of Law; Conditional Rulings; New Trial Motion.
      “(1) If the renewed motion for judgment as a matter of law is granted, the court shall also rule on the motion for a new trial, if any, by determining whether it should be granted if the judgment is thereafter vacated or reversed, and shall specify the grounds for granting or denying the motion for the new trial. If the motion for a new trial is thus conditionally granted, the order thereon does not affect the finality of the judgment. In case the motion for a new trial has been conditionally granted and the judgment is reversed on appeal, the new trial shall proceed unless the appellate court has otherwise ordered. In case the motion for a new trial has been conditionally denied, the appellee on appeal may assert error in that denial; and if the judgment is reversed on appeal, subsequent proceedings shall be in accordance with the order of the appellate court.
      "(2) Any motion for a new trial under Rule 59 by a party against whom judgment as a matter of law is rendered shall be filed no later than 10 days after entry of the judgment.

        “(d) Same: Denial of Motion for Judgment as a MatteR op Law. If the motion for judgment as a matter of law is denied, the party who prevailed on that motion may, as appellee, assert grounds entitling the party to a new trial in the event the appellate court concludes that the trial court erred in denying the motion for judgment. If the appellate court reverses the judgment, nothing in this rule precludes it from determining that the appellee is entitled to a new trial, or from directing the trial court to determine whether a new trial shall be granted.”

       According to the Advisory Committee Notes to the 1963 Rule 50 amendments, this "omission” was not inadvertent:
      “Subdivision (d) does not attempt a regulation of all aspects of the procedure where the motion for judgment n.o.v. and any accompanying motion for a new trial are denied, since the problems have not been fully canvassed in the decisions and the procedure is in some respects still in a formative stage. It is, however, designed to give guidance on certain important features of the practice.” Advisory Committee’s Notes on Fed. Rule Civ. Proc. 50(d), 28 U. S. C. App., p. 769.

       Section 2106 reads:
      “The Supreme Court or any other court of appellate jurisdiction may affirm, modify, vacate, set aside or reverse any judgment, decree, or order of a court lawfully brought before it for review, and may remand the cause and direct the entry of such appropriate judgment, decree, or order, or require such further proceedings to be had as may be just under the circumstances.”

         Iacurci v. Lummus Co., 387 U.S. 86 (1967) (per curiam), decided shortly after Neely, is illustrative. There, the Court reversed the appellate court’s direction of the entry of judgment as a matter of law for the defendant and instructed the appeals court to remand the case to the trial court for a new trial determination; the Court pointed to the jury’s failure to respond to four out of five special interrogatories, which left issues of negligence unresolved, and concluded that in the particular circumstances, the trial judge “was in the best position to pass upon the question of a new trial in light of the evidence, his charge to the jury, and the jury’s verdict and interrogatory answers.” 387 U. S., at 88.

       See Tr. of Oral Arg. 6, 8, 17-18, 23, 26-28, 31; Reply Brief 3-6; Brief for Respondents 24-29. Compare, e. g., Redman, 111 F. 3d, at 1178-1179 (treating judgment as a matter of law based on insufficiency caused by admission error identically to initial insufficiency); Smelser, 105 F. 3d, at 301, 306 (same); Wright, 91 F. 3d, at 1108 (same); Lightning Lube, Inc. v. Witco Corp., 4 F. 3d 1153, 1198-1200 (CA3 1993) (rejecting distinction), with Kinser, 184 F. 3d, at 1267, 1269 (insufficiency caused by admission error inappropriate basis for judgment as a matter of law); Jackson v. Pleasant Grove Health Care Center, 980 F. 2d 692, 695-696 (CA11 1993) (same); Douglass v. Eaton Corp., 956 F. 2d 1339, 1343-1344 (GA6 1992) (same); Midcontinent Broadcasting Co. v. North Central Airlines, Inc., 471 F. 2d 357, 358-359 (CA8 1973) (same).

       Weisgram misreads the Court’s decision in Montgomery Ward & Co. v. Duncan, 311 U. S. 243 (1940), to support his position. Reply Brief 3-4; Tr. of Oral Arg. 19. The Court in Montgomery Ward directed that a trial judge who grants the verdict loser’s motion for judgment n.o.v. should also rule conditionally on that party’s alternative motion for a new trial. 311 U. S., at 253-254. The conditional ruling would be reviewed by the court of appeals only if it reversed the entry of judgment n.o.v. Proceeding in this manner would avoid protracting the proceedings by obviating the need for multiple appeals. See id. at 253. Rule 50 was amended in 1963 to codify Montgomery Ward’s instruction. See Fed. Rule Civ. Proc. 50(c)(1).
      In the course of its elaboration, the Montgomery Ward Court observed that a “motion for judgment cannot be granted unless, as a matter of law, the opponent of the movant Mled to make a case.” 311 U. S., at 251. In contrast, the Court stated, a new trial motion may invoke the court’s discretion, bottomed on such standard new trial grounds as “the verdict is against the weight of the evidence,” or “the damages are excessive,” or substantial errors were made “in admission or rejection of evidence.” Ibid; see also id, at 249.
      Many rulings on evidence, of course, do not bear dispositively on the adequacy of the proof to support a verdict. For example, the evidence erroneously admitted or excluded may strengthen or weaken one side’s case without being conclusive as to the litigation’s outcome. Or, the evidence may abundantly support a jury’s verdict, but one or another item may have been unduly prejudicial to the verdict loser and excludable on that account. See Fed. Rule Evid. 403 (relevant evidence “may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice”). Such run-of-the-mine, ordinarily nondispositive, evidentiary rulings, we take it, were the sort contemplated in Montgomery Ward. Cf. 311 U. S., at 245-246 (indicating that sufficiency-of-the-evidence challenges are properly raised by motion for judgment, while other rulings on evidence may be assigned as grounds for a new trial).

       Weisgram additionally urges that the Seventh Amendment prohibits a court of appeals from directing judgment as a matter of law on a record different from the one considered by the jury. Brief for Petitioner 20-22; Reply Brief 6-8. Neely made dear that a court of appeals may order entry of judgment as a matter of law on suffidency-of-the-evidence grounds without violating the Seventh Amendment. 386 U. S., at 321-322. Entering judgment for the verdict loser when all of the evidence was properly before the jury is scarcely less destructive of the jury’s verdict than is entry of such a judgment based on a record made insufficient by the removal of evidence the jury should not have had before it.

       We recognize that it is awkward for an appellee, who is wholeheartedly urging the correctness of the verdict, to point out, in the alternative, grounds for a new trial. See Kaplan, Amendments of the Federal Rules of Civil Procedure, 1961-1963 (II), 77 Harv. L. Rev. 801, 819 (1964) (“A verdict winner may suffer forensic embarrassment in arguing for a new trial on his own behalf, faute de mieux, while seeking to defend his verdict against all attacks by his opponent.”). A petition for rehearing in the court of appeals, however, involves no conflicting tugs. We are not persuaded by Weisgram’s objection that the 14 days allowed for the filing of a petition for rehearing is insufficient time to formulate compelling grounds for a new trial. Reply Brief 15-16. This time period is longer than the ten days allowed a verdict winner to move for a new trial after a trial court grants judgment as a matter of law. See Fed. Rule Civ. Proc. 50(c)(2). Nor do we foreclose the possibility that a court of appeals might properly deny a petition for rehearing because it pressed an argument that plainly could have been formulated in a party’s brief See Louis, Post-Verdict Rulings on the Sufficiency of the Evidence: Neely v. Martin K. Eby Construction Co. Revisited, 1975 Wis. L. Rev. 503, 519-520, n. 90 (“[IJt is often difficult to argue that a gap in one’s proof can be filled before a court has held that the gap exists ....” On the other hand, “the brief or oral argument will suffice ... when the area of the alleged evidentiary insufficiency has previously been clearly identified.” (citation omitted)).

       We note that the decision in Kwmho is consistent with Eighth Circuit precedent existing at the time of trial in Weisgram’s case. See, e.g., Peitzmeier v. Hennessy Industries, Inc., 97 F. 3d 293, 297 (CA8 1996).

       Cf. Neely v. Martin K. Eby Constr. Co., 386 U. S. 317, 327 (1967) (observing that it would not be dear that litigation should be terminated for evidentiary insuffidency when, for example, the trial court exduded evidence that would have strengthened the verdict winner’s case or “itself caused the insuffidency ... by erroneously [imposing] too high a burden of proof”).


author: Justice Breyer

text:
    HUNT-WESSON, INC. v. FRANCHISE TAX BOARD OF CALIFORNIA
    No. 98-2043.
    Argued January 12, 2000
    Decided February 22, 2000

      BKEYER, J., delivered the opinion for a unanimous Court.

      Walter Hellerstein argued the cause for petitioner. With him on the briefs were Charles J. Moll III, Edwin P. An-tolin, Fred O. Marcus, and Drew S. Days III.

      David Lew, Deputy Attorney General of California, argued the cause for respondent. With him on the brief were Bill Lockyer, Attorney General, and Timothy G. Laddish, Senior Assistant Attorney General.

      Briefs of amici curiae urging reversal were filed for General Electric Co. by Carter G. Phillips, Scott J. Heyman, Nathan C. Sheers, John Amato, Amy Eisenstadt, and Frank A Yanover; and for Tax Executives Institute, Inc., by Timothy J. McCormally and Mary L. Fahey.

      Briefs of amici curiae urging affirmance were filed for the State of Idaho et al. by Alan G. Lance, Attorney General of Idaho, and Geoffrey L.

        Thorpe, Deputy Attorney General, Bruce M. Botelho, Attorney General of Alaska, Joseph P. Mazurek, Attorney General of Montana, and Heidi Heitkamp, Attorney General of North Dakota; and for the Multistate Tax Commission by Pauli Mines.

   Justice Breyer

delivered the opinion of the Court.

A State may tax a proportionate share of the income of a nondomiciliary corporation that carries out a particular business both inside and outside that State. Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U. S. 768, 772 (1992). The State, however, may not tax income received by a corporation from an “ ‘ “unrelated business activity” ’ which constitutes a ‘“discrete business enterprise.”’” Id., at 773 (quoting Exxon Corp. v. Department of Revenue of Wis., 447 U. S. 207, 224 (1980), in turn quoting Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U. S. 425, 442, 439 (1980)). California’s rules for taxing its share of a multistate corporation’s income authorize a deduction for interest expense. But they permit (with one adjustment) use of that deduction only to the extent that the amount exceeds certain out-of-state income arising from the unrelated business activity of a discrete business enterprise, i. e., income that the State could not otherwise tax. We must decide whether those rules violate the Constitution’s Due Process and Commerce Clauses. We conclude that they do.

I

The legal issue is less complicated than may first appear, as examples will help to show. California, like many other States, uses what is called a “unitary business” income-calculation system for determining its taxable share of a multistate corporation’s business income. In effect, that system first determines the corporation’s total income from its nationwide business. During the years at issue, it then averaged three ratios — those of the firm’s California property, payroll, and sales to total property, payroll, and sales— to make a combined ratio. Cal. Rev. & Tax Code Ann. §§ 25128, 25129, 25132, 25134 (West 1979). Finally, it multiplies total income by the combined ratio. The result is “California’s share,” to which California then applies its corporate income tax. If, for example, an Illinois tin can manufacturer, doing business in California and elsewhere, earns $10 million from its total nationwide tin can sales, and if California’s formula determines that the manufacturer does 10% of its business in California, then California will impose its income tax upon 10% of the corporation’s tin can income, $1 million.

The income of which California taxes a percentage is constitutionally limited to a corporation’s “unitary” income. Unitary income normally includes all income from a corporation’s business activities, but excludes income that “derive[s] from unrelated business activity which constitutes a discrete business enterprise,” Allied-Signal, 504 U. S., at 773 (internal quotation marks omitted). As we have said, this latter “nonunitary” income normally is not taxable by any State except the corporation’s State of domicile (and the States in which the “discrete enterprise” carries out its business). Ibid.

Any income tax system must have rules for determining the amount of net income to be taxed. California’s system, like others, basically does so by asking the corporation to add up its gross income and then deduct costs. One of the costs that California permits the corporation to deduct is interest expense. The statutory language that authorizes that deduction — the language here at issue — contains an important limitation. It says that the amount of “interest deductible” shall be the amount by which “interest expense exceeds interest and dividend income ... not subject to allocation by formula,” i. e., the amount by which the interest expense exceeds the interest and dividends that the non-domiciliary corporation has received from nonunitary busi-nessor investment. Cal. Rev. & Tax Code Ann. § 24344 (West 1979) (emphasis added); Appendix, infra. Suppose the Illinois tin can manufacturer has interest expense of $150,000; and suppose it receives $100,000 in dividend income from a nonunitary New Zealand sheep-farming subsidiary. California’s rule authorizes an interest deduction, not of $150,000, but of $50,000, for the deduction is allowed only insofar as the interest expense “exceeds” this other unrelated income.

Other language in the statute makes the matter a little more complex. One part makes clear that, irrespective of nonunitary income, the corporation may use the deduction against unitary interest income that it earns. §24844. This means that if the Illinois tin can manufacturer has earned $100,000 from tin can related interest, say, interest paid on its tin can receipt bank accounts, the manufacturer can use $100,000 of its interest expense deduction to offset that interest income (though it would still lose the remaining $50,000 of deduction because of income from the New Zealand sheep farm). Another part provides an exception to the extent that the subsidiary paying the dividend has paid taxes to California. §§ 24344,24402. If the sheep farm were in California, not New Zealand (or at least to the extent it were taxable in California), the tin can manufacturer would not lose the deduction. We need not consider either of these complications here.

One final complication involves a dispute between the parties over the amount of interest expense that the California statute at issue covers. Hunt-Wesson, Inc., claims that California (at least during the years at issue here) required interstate corporations first to determine what part of their interest expense was for interest related to the unitary business and what part was for interest related to other, nonunitary matters. It says that the statute then required it to put the latter to the side, so that only interest related to the unitary business was at issue. California agrees that the form it provided to corporations during the years at issue did work this way, but states that the form did not interpret the statute correctly. In its view, the statute takes all interest expense into account. Apparently California now believes that, if the tin can manufacturer had $100,000 interest expense related to its tin can business, and another $50,000 interest expense related to the New Zealand sheep farm (say, money borrowed to buy shares in the farm), then California’s statute would count a total interest expense of $150,000, all of which California would permit it to deduct from its unitary tin can business income if, for example, it had no non-unitary New Zealand sheep farm income in that particular year. This matter, arguably irrelevant to the tax years here in question (Hunt-Wesson reported no nonunitary interest expense), is also irrelevant to our legal result. Therefore, we need not consider this particular dispute further.

The question before us then is reasonably straightforward: Does the Constitution permit California to carve out an exception to its interest expense deduction, which it measures by the amount of nonunitary dividend and interest income that the nondomiciliary corporation has received? Petitioner, Hunt-Wesson, Inc., is successor in interest to a non-domiciliary corporation. That corporation incurred interest expense during the years at issue. California disallowed the deduction for that expense insofar as the corporation had received relevant nonunitary dividend and interest income. Hunt-Wesson challenged the constitutional validity of the disallowance. The California Court of Appeal found it constitutional, No. A079969 (Dec. 11, 1998), App. 54; see also Pacific Tel. & Tel. Co. v. Franchise Tax Bd., 7 Cal. 3d 544, 498 P. 2d 1030 (1972) (upholding statute), and the California Supreme Court denied review, App. 67. We granted certio-rari to consider the question.

II

Relevant precedent makes clear that California’s rule violates the Due Process and Commerce Clauses of the Federal Constitution. In Container Corp. of America v. Franchise Tax Bd., 463 U. S. 159 (1983), this Court wrote that the “Due Process and Commerce Clauses ... do not allow a State to tax income arising out of interstate activities — even on a proportional basis — unless there is a ‘“minimal connection” or “nexus” between the interstate activities and the taxing State, and “a rational relationship between the income attributed to the State and the intrastate values of the enterprise.”’” Id., at 165-166 (quoting Exxon Corp., 447 U. S., at 219-220, in turn quoting Mobil Oil Corp., 445 U. S., at 436, 437). Cf. International Harvester Co. v. Department of Treasury, 322 U. S. 340, 358 (1944) (Rutledge, J., concurring in part and dissenting in part) (“If there is a want of due process to sustain” a tax, “by that fact alone any burden the tax imposes on the commerce among the states becomes ‘undue’”). The parties concede that the relevant income here — that which falls within the scope of the statutory phrase “not allocable by formula” — is income that, like the New Zealand sheep farm in our example, by itself bears no “rational relationship” or “nexus” to California. Under our precedent, this “nonunitary” income may not constitutionally be taxed by a State other than the corporation’s domicile, unless there is some other connection between the taxing State and the income. Allied-Signal, 504 U. S., at 772-773.

California’s statute does not directly impose a tax on non-unitary income. Rather, it simply denies the taxpayer use of a portion of a deduction from unitary income (income like that from tin can manufacture in our example), income which does bear a “rational relationship” or “nexus” to California. But, as this Court once put the matter, a “ ‘tax on sleeping measured by the number of pairs of shoes you have in your closet is a tax on shoes.’ ” Trinova Corp. v. Michigan Dept. of Treasury, 498 U. S. 358, 374 (1991) (quoting Jenkins, State Taxation of Interstate Commerce, 27 Tenn. L. Rev. 239, 242 (1960)). California’s rule measures the amount of additional unitary income that becomes subject to its taxation (through reducing the deduction) by precisely the amount of nonuni-tary income that the taxpayer has received. And for that reason, that which California calls a deduction limitation would seem, in fact, to amount to an impermissible tax. National Life Ins. Co. v. United States, 277 U. S. 508 (1928) (finding that a federal statute that reduced an insurance company’s tax deduction for reserves by the amount of tax-exempt interest the company received from a holding of “tax-free” municipal bonds constituted unlawful taxation of tax-exempt income).

However, this principle does not end the matter. California offers a justification for its rule that seeks to relate the deduction limit to collection of California’s tax on unitary income. If California could show that its deduction limit actually reflected the portion of the expense properly related to nonunitary income, the limit would not, in fact, be a tax on nonunitary income. Rather, it would merely be a proper allocation of the deduction. See Denman v. Slayton, 282 U. S. 514 (1931) (upholding Federal Tax Code’s denial of interest expense deduction where borrowing is incurred to “purchase or carry” tax-exempt obligations).

California points out that money is fungible, and that consequently it is often difficult to say whether a particular borrowing is “really” for the purpose of generating unitary income or for the purpose of generating nonunitary income. California’s rule prevents a firm from claiming that it paid interest on borrowing for the first purpose (say, to build a tin can plant) when the borrowing is “really” for the second (say, to buy shares in the New Zealand sheep farm). Without some such rule, firms might borrow up to the hilt to support their (more highly taxed) unitary business needs, and use the freed unitary business resources to purchase (less highly taxed) nonunitary business assets. This “tax arbitrage” problem, California argues, is why this Court upheld the precursor of 26 U. S. C. § 265(a)(2), which denies the taxpayer an interest deduction insofar as the interest expense was “incurred or continued to purchase or carry” tax-exempt obligations or securities. Denman v. Slayton, supra, at 519. This Court has consistently upheld deduction denials that represent reasonable efforts properly to allocate a deduction between taxable and tax-exempt income, even though such denials mean that the taxpayer owes more than he would without the denial. E. g., First Nat. Bank of Atlanta v. Bartow County Bd. of Tax Assessors, 470 U. S. 583 (1985).

The California statute, however, pushes this concept past reasonable bounds. In effect, it assumes that a corporation that borrows any money at all has really borrowed that money to “purchase or carry,” ef. 26 U. S. C. §265(a)(2), its nonunitary investments (as long as the corporation has such investments), even if the corporation has put no money at all into nonunitary business that year. Presumably California believes that, in such a case, the unitary borrowing supports the nonunitary business to the extent that the corporation has any nonunitary investment because the corporation might have, for example, sold the sheep farm and used the proceeds to help its tin can operation instead of borrowing.

At the very least, this last assumption is unrealistic. And that lack of practical realism helps explain why California’s rule goes too far. A state tax code that unrealistically assumes that every tin can borrowing first helps the sheep farm (or the contrary view that every sheep farm borrowing first helps the tin can business) simply because of the theoretical possibility of a hypothetical sale of either business is a code that fails to “actually reflect a reasonable sense of how income is generated,” Container Corp., 463 U. S., at 169, and in doing so assesses a tax upon constitutionally protected nonunitary income. That is so even if, as California claims, its rule attributes all interest expense both to unitary and to nonunitary income. And it is even more obviously so if, as Hunt-Wesson claims, California attributes all sheep-farm-related borrowing to the sheep farm while attributing all tin-can-related borrowing first to the sheep farm as well.

No other taxing jurisdiction, whether federal or state, has taken so absolute an approach to the tax arbitrage problem that California presents. Federal law in comparable circumstances (allocating interest expense between domestic and foreign source income) uses a ratio of assets and gross income to allocate a corporation’s total interest expense. See 26 CFR §§ 1.861-9T(f), (g) (1999). In a similar, but much more limited, set of circumstances, the federal rules use a kind of modified tracing approach — requiring that a certain amount of interest expense be allocated to foreign income in situations where a United States business group’s loans to foreign subsidiaries and the group’s total borrowing have increased relative to recent years (subject to a number of adjustments), and both loans and borrowing exceed certain amounts relative to total assets. See §1.861-10. Some States other than California follow a tracing approach. See, e. g., D. C. Mun. Regs., Tit. 9, § 123.4 (1998); Ga. Rules and Regs. § 560-7-7.03(3) (1999). Some use a set of ratio-based formulas to allocate borrowing between the generation of unitary and nonunitary income. See, e. g., Ala. Code § 40-18-35(a)(2) (1998); La. Reg. § 1130(B)(1) (1988). And some use a combination of the two approaches. See, e. g., N. M. Admin. Code, Tit. 3, § 5.5.8 (1999); Utah Code Ann. § 59-7-101 (19) (1999). No other jurisdiction uses a rule like California’s.

Ratio-based rules like the one used by the Federal Government and those used by many States recognize that borrowing, even if supposedly undertaken for the unitary business, may also (as California argues) support the generation of nonunitary income. However, unlike the California rule, ratio-based rules do not assume that all borrowing first supports nonunitary investment. Rather, they allocate each borrowing between the two types of income. Although they may not reflect every firm’s specific actions in any given year, it is reasonable to expect that, over some period of time, the ratios used will reflect approximately the amount of borrowing that firms have actually devoted to generating each type of income. Conversely, it is simply not reasonable to expect that a rule that attributes all borrowing first to nonunitary investment will accurately reflect the amount of borrowing that has actually been devoted to generating each type of income.

Because California's offset provision is not a reasonable allocation of expense deductions to the income that the expense generates, it constitutes impermissible taxation of income outside its jurisdictional reach. The provision therefore violates the Due Process and Commerce Clauses of the Constitution.

The judgment of the California Court of Appeal is reversed, and the case is remanded for proceedings not inconsistent with this opinion.

It is so ordered.

APPENDIX TO OPINION OF THE COURT

Cal. Rev. & Tax Code Ann. §24344 (West 1979).

“Interest; restrictions
“(a) Except as limited by subsection (b), there shall be allowed as a deduction all interest paid or accrued during the income year on indebtedness of the taxpayer.
“(b) [T]he interest deductible shall be an amount equal to interest income subject to allocation by formula, plus the amount, if any, by which the balance of interest expense exceeds interest and dividend income (except dividends deductible under the provisions of Section 24402) not subject to allocation by formula. Interest expense not included in the preceding sentence shall be directly offset against interest and dividend income (except dividends deductible under the provisions of Section 24402) not subject to allocation by formula.”
“§24402. Dividends
“Dividends received during the income year declared from income which has been included in the measure of the taxes imposed under Chapter 2 or Chapter 3 of this part upon the taxpayer declaring the dividends.”