Reply Brief — Getty Oil Co. v. Tax Commission

SEP 17 1977

RODAK, JR, CLERK

Yuthe Supreme Gourtof the Wiited States

OcTOBER TERM, 1977

No. 77-125

GETTY OIL COMPANY,

Appellant,

VERSUS

OKLAHOMA TAX COMMISSION,

Appellee.

ON APPEAL FROM THE SUPREME COURT OF

THE STATE OF OKLAHOMA

REPLY BRIEF

Bruce H. JOHNSON

*L. E. STRINGER

RANDALL D. Mock

STEVEN L. BARGHOLS

1700 Liberty Tower—100 Broadway

Oklahoma City, Oklahoma 73102

Counsel for Appellant

September, 1977

* Counsel upon whom service is to be made.

——_ OL OL

UTTERBACK TYPESETTING Co... S19 W. CALIF... OKLAHOMA CiTY. PH. 235-0030

TABLE OF CONTENTS

PAGE

ARGUMENTS:

A. A substantial federal question was both timely

and properly raised in the Supreme Court of

Oklahoma

B. The Supreme Court of Oklahoma recognized

the substantial federal question raised and de-

two

cided it adversely to Getty | ae 3

C. The federal question is substantial . 6

CONCLUSION ; RAE ae

TABLE OF AUTHORITIES

-_----- -—

CASES:

Avien, Inc., In re, 390 F.Supp. 1335 (E.D. New York

1975), aff'd, 532 F.2d 273 (2d Cir. 1976) 7,8

Charleston Federal Savings & Loan Ass’n v. Alder-

son, 324 U.S. 182 (1945) a 4

F. S. Royster Guano Co. v. Virginia, 253 U.S. 412

(1920) ia oy iaiiate 11

Getty Oil Company v. Oklahoma Tax Commission,

563 P.2d 627 (Okla. 1977) 4

Graham v. State Tax Commission, 369 N.Y.S.2d 863,

aff'd, 389 N.Y.S.2d 362, 357 N.E.2d 1017 (1975) - 4-5

Grossman v. Baumgartner, 17 N.Y.2d 345, 271 N.Y.S.

2d 195 (N.Y. App. 1966)

Raley v. Ohio, 360 U.S. 423 (1959)

5

4

Saltonstall v. Saltonstall, 276 U.S. 260 (1928) 4

Stanley v. Illinois, 405 U.S. 645 (1972) 8

2

Wilson v. Cook, 327 U.S. 474 (1946)

AUTHORITIES CONTINUED ot PAGE

UNITED STATES CONSTITUTION:

Equal Protection Clause, Fourteenth Amend-

ment aoe aera S|

STATE STATUTES:

63 O.S. 1971, § 2358(A) (3)

68 O.S. 1971, § 2358(A) (3) (d)

I

In the

Supreme Court of the United States

OcToBEeR TERM, 1977

No. 77-125

GETTY OIL COMPANY,

Appellant,

VERSUS

OKLAHOMA TAX COMMISSION,

Appellee.

ON APPEAL FROM THE SUPREME COURT OF

THE STATE OF OKLAHOMA

REPLY BRIEF

Appellant, referred to in its Jurisdictional Statement

and hereinafter as “Getty,” asks the Court to grant its

appeal and overrule the Motion to Dismiss or Affirm filed

by Appellee, hereinafter referred to as Tax Commission,

for the reason that the Jurisdictional Statement filed by

Getty as well as the record below clearly manifest the fact

that Getty timely and properly raised and presented a sub-

stantial federal question to the Supreme Court of Oklahoma

upon which federal question that court rendered a decision

adverse to Getty by sustaining the validity of a state taxa-

tion statute attacked on the ground of its being repugnant

to the Fourteenth Amendment to the United States Con-

stitution.

a

A. A SUBSTANTIAL FEDERAL QUESTION WAS

BOTH TIMELY AND PROPERLY RAISED IN

THE SUPREME COURT OF OKLAHOMA.

Getty’s Jurisdictional Statement outlines and develops

at length the fact that the record of the proceedings below

is replete with instances in which the validity of the state

statute in question was attacked on the ground of its being

repugnant to the Fourteenth Amendment. That the validity

of the state taxation statute itself rather than simply the

assessment of the additional tax liability was challenged

by Getty renders inapposite to the instant facts Tax Com-

mission’s reliance on Wilson v. Cook, 327 U.S. 474, 66 S.Ct.

663, 90 L.Ed. 794 (1946). The record below demonstrates on

its face that Getty raised and argued the substantial federal

question at every procedural opportunity available to it

during the course of those proceedings.

It is not denied by Getty that other issues in addition

to that federal question were raised and arguments pre-

sented by Getty during the course of those proceedings.

It is axiomatic that any court should carefully avoid basing

a decision on constitutional grounds when there exist any

other reasonable bases upon which its decision may rest.

Getty urged the Supreme Court of Oklahoma to decide the

case below as a matter of statutory construction. In its Brief

to the Supreme Court of Oklahome, Getty suggested the

proper manner of construing the various provisions of the

state statute in question so as to arrive at a fair and equi-

table result treating uniformly all Oklahoma taxpayers

similarly situated. Such a statutory construction would

have avoided the constitutional issue here involved. How-

ever, Getty’s arguments were rejected.

ee ree oe

oo

Getty further argued before the Supreme Court of

Oklahoma that the state statute in question, if applied as

Tax Commission sought, discriminated in an invidious man-

ner against taxpayers engaging in multi-state business

operations which have incurred net operating losses in

Oklahoma business activities but which have realized suffi-

cient income from operations in other states to absorb those

Oklahoma losses. Getty was persistent in raising the federal

question and in asserting that denial of the deduction under

the facts presented was unreasonable, arbitrary and dis-

criminatory, and constituted a denial of equal protection of

the Jaws under the Fourteenth Amendment.

B. THE SUPREME COURT OF OKLAHOMA

RECOGNIZED THE SUBSTANTIAL FEDERAL

QUESTION RAISED AND DECIDED IT AD-

VERSELY TO GETTY.

In its Motion to Dismiss or Affirm, Tax Commission

concedes the point raised by Getty in its Jurisdictional

Statement that an appeal lies from a state court of last resort

of a decision sustaining the validity of a state statute drawn

in question on the ground of its being repugnant to the Fed-

eral Constitution if that question is either presented to that

state court or decided by it. Thus, as Tax Commission must

necessarily further concede, demonstration that the Su-

preme Court of Oklahoma did in fact base its decision on

its interpretation of the Fourteenth Amendment renders

moot Tax Commission’s first argument raised in its Motion

to Dismiss or Affirm that the federal question herein as-

serted by Getty was neither timely nor properly raised.

per eal

This Court has consistently held that when it appears

from the opinion of the state court of last resort that a state

statute was drawn in question on the ground of its being

repugnant to the Federal Constitution, and ihe decision of

that court sustains the validity of that state statute, this

Court has jurisdiction on appeal and need not inquire as to

the manner in which such question was raised below. See

Raley v. Ohio, 360 U.S. 423, 436, 79 S.Ct. 1257, 3 L.Ed.2d

1344 (1959); Charleston Federal Savings & Loan Ass’n v.

Alderson, 324 U.S. 182, 185, 186, 65 S.Ct. 624, 89 L.Ed. 857

(1945). Stated differently, any alleged deficiency in the

manner in which a federal question is presented is effec-

tively cured if the highest state court assumes that such

question is properly before it and proceeds to consider and

determine that issue. In such an event, this Court has here-

tofore refused to make inquiry into the precise manner of

presentation of the federal question in the court below.

Saltonstall v. Saltonstall, 276 U.S. 260, 267, 268, 48 S.Ct. 225,

72 L.Ed. 565 (1928).

The Supreme Court of Oklahoma decided the federal

question raised and asserted by Getty. In its opinion, that

court expressly denied that the state statute attacked by

Getty “creates unconstitutionally arbitrary discrimination

against non-resident taxpayers in the position of Getty... .”

Getty Oil Company v. Oklahoma Tax Commission, 563 P.2d

627, 631 (Okla. 1977). In so ruling, the Supreme Court of

Oklahoma, as does Tax Commission in its Motion to Dismiss

or Affirm, ignored the multi-state /single-state classification

challenged by Getty, and purported to distinguish on factual

grounds the decision of the Supreme Court of New York

(Appellate Division, Third Judicial District) in Graham v.

a

State Tax Commission, 369 N.Y.S.2d 863, aff'd, 389 N.Y-S.

362, 357 N.E.2d 1017 (1975), cited by Getty as highly per-

suasive authority. In distinguishing the Graham decision,

the Supreme Court of Oklahoma created a “strawman”

resident/non-resident distinction upon which to support its

reasoning. However, in so doing, the Supreme Court of

Oklahoma necessarily recognized and rejected Getty’s con-

tention that its claim for relief from inception has been

grounded on the Equal Protection Clause of the Fourteenth

Amendment. The New York Graham decision deals with

a factual situation remarkably similar to that at issue,

wherein the New York court struck down the validity of

a state taxation statute closely resembling the Oklahoma

taxation statute in question and granted relief under the

Fourteenth Amendment to an aggrieved taxpayer for the

reason that the state taxation statute was “unreasonable,

arbitrary or capricious and, therefore, invalid,” citing the

earlier decision of that court in Grossman v. Bat mgartner,

17 N.Y.2d 345, 271 N.Y.S.2d 195 (N.Y. App. 1966). The

Grossmon decision carefully analyzes and expressly rests

on a long line of United States Supreme Court decisions

construing the Equal Protection Clause of the Fourteenth

Amendment. Thus, the fact that the Supreme Court of

Oklahoma expressly passed on the federal question raised

by Getty cannot be controverted.

C. THE FEDERAL QUESTION IS SUBSTANTIAL.

Tax Commission argues that the state taxation statute

in question does not discriminate against Getty and other

Oklahoma taxpayers similarly situated on the basis of citi-

zenship or residence. That such an argument is asserted by

Tax Commission at this late stage in the proceedings is

manifest evidence of Tax Commission’s resolute refusal to

confront the very issue central to Getty’s appeal. Getty

further notes that the Supreme Court of Oxlahoma based

its decision on an express finding that the challenged statute

treats residents and non-residents in a like manner. Getty

has never argued that the discriminatory effect of that stat-

ute rests on the basis of a citizenship or residency classifica-

tion. The “Question Presented” in Getty’s Jurisdictional

Statement accurately reflects the federal question raised.

Neither Tax Commission nor the Supreme Court of

Oklahoma has denied that a distinction has been drawn in

the class of taxpayers doing business within Oklahoma

which have ‘Incurred net operating losses between those

taxpayers which do business exclusively in Oklahoma and

those taxpayers which also do business outside the State.

No explanation for the resulting disparity in treatment for

taxation purposes has been adduced during the course of

these proceedings to date. Both Tax Commission ard the

Supreme Court of Oklahoma have failed and refused to

respond to the contention of Getty that the multi-state ’

single-state classification drawn by the construction of the

taxation statute in question is arbitrary and discriminatory

in violation of the Fourteenth Amendment.

dias

Apparently in an attempt to respond to Getty’s argu-

ment raised in its Jurisdictional Statement that Tax Com-

mission has failed to justify the discriminatory distinction

drawn between taxpayers engaged in multi-state business

operations and those engaged in business operations in

Oklahoma only, Tax Commission now suggests for the first

time that the challenged Oklahoma taxation statute permits

the Oklahoma Tax Commission to dispense with the need

for auditing state income tax returns filed by Oklahoma

taxpayers. Tax Commission speculates that some perceived

notion of “administrative convenience” was the avowed

purpose underlying enactment by the Oklahoma Legisla-

ture of that statute. As discussed at length by Getty in its

Petition for Rehearing (Appendix “F”, Jurisdictional State-

ment) filed with the Supreme Court of Oklahoma, it is

highly significant that the only other courts which have

considered the “administrative convenience” justification

raised in defense of the validity of another very similar

state taxation statute have flatly rejected that argument

as being an unreasonable basis for a discriminatory classifi-

cation between two taxpayers similarly situated. See In re

Avien, Inc., 390 F.Supp. 1335 (E.D. New York 1975), aff'd,

532 F.2d 273 (2d Cir. 1976).

In defense of the sustention of validity of the Oklahoma

taxation statute by the Supreme Court of Oklahoma, Tax

Commission would argue that in order to achieve such “ad-

ministrative convenience,” numerical conformity between a

taxpayer’s federal and Oklahoma income tax returns is

required by the statute in question. However, when Section

2358(A)(3)(d) of the Oklahoma Income Tax Act is rele-

gated to serving only the purpose of administrative

=

convenience and numerical conformity, the arbitrary and

unreasonable nature of the distinction drawn between

multi-state taxpayers and taxpayers engaged in business

operations only in Oklahoma becomes blatant. First, strict

numerical conformity between state and federal income tax

returns filed by the two classes of taxpayers is simply im-

possible because the multi-state business taxpayer’s federal

income tax return will reflect Oklahoma as well as outside-

Oklahoma income while both returns filed by the taxpayer

engaged in business operations only in Oklahoma will of

course reflect only Oklahoma income. Moreover, as sug-

gested by the United States Court of Appeals for the Second

Circuit in its decision in In re Avien, Inc., 532 F.2d 273 (2d

Cir. 1976), a test involving “procedural conformity” in

arriving at permissible computation procedures used to

calculate deductions is reasonable as opposed to a strict

“numerical-figure conformity” test such as that applied

by the Supreme Court of Oklahoma in the case below.

To require strict conformity of numbers between a

taxpayer’s federal and Oklahoma income tax returns, rather

than conformity of procedures used to calculate those num-

bers, not only produces an unreasonable and impossible

result in the instant case, but also is squarely inconsistent

with the mandate of the Oklahoma Income Tax Act which

compels a taxpayer tu employ 4he separate allocation ac-

counting method of reporting income and losses by allocat-

ing all income and losses produced to the individual states

in which the multi-state taxpayer has operated during the

taxable year. 68 O.S. 1971, § 2358(A)(3). As this Court

stated in Stanley v. Illinois, 405 U.S. 645, 656, 92 S.Ct. 1208,

31 L.Ed.2d 551 (1972), “. . . the Constitution recognizes

higher values than speed and efficiency.” The “administra-

tive convenience” argument presented by Tax Commissior

is so attenuated as to be unworthy of recognition by this

Court.

Tax Commission makes no attempt to distinguish the

cases cited by Getty substantiating the contention that the

federal question involved is substantial other than to ob-

serve, as Getty said in its Jurisdictional Statement, that

those cases deal with statutory tax exemptions, and not

deductions. Such a purported distinction is entirely un-

respc ‘tive and devoid of merit. It is noteworthy that Tax

Commission does not deny that, while the nature of the tax

benefits withheld from the various litigant-taxpayers in the

cases cited are somewhat different from that denied Getty,

the adverse and arbitrary result to Getty and other tax-

payers similarly situated is no less burdensome or inequi-

table, nor is the underlying rationale any more defensible.

Again in this vein, the reluctance, unwillingness or inability

of Tax Commission to discuss or suggest reasons supporting

the challenged multi-state/single-state classification con-

firms the weakness of its Motion to Dismiss or Affirm.

Tax Commission asserts that it was the intent of the

Oklahoma Legislature to deny the tax deduction in question

to taxpayers in the position of Getty. If this Court concludes

that the statute challenged by Getty is in fact arbitrary,

discriminatory and in violation of the Fourteenth Amend-

ment, and, hence, void, then even if the Oklahoma Legisla-

ture intended that result, this certainly cannot be considered

redemptive.

Tax Commission also suggests that the Oklahoma

Legislature “could” have based the challenged multi-state /

_

single-state classification on the “ability of a class [of tax-

payers] to pay.” Tax Commission argues that simply be-

cause Getty was able to absorb its net operating losses in

Oklahoma from its operations conducted outside Oklahoma

and reflect net operating income for federal income tax

purposes that the deduction in question should be withheld

from Getty, but allowed to an Oklahoma taxpayer reflecting

net operating losses on both its federal and Oklahoma in-

come tax returns. Because it was that income generated

from its operations conducted outside Oklahoma which

absorbed the Oklahoma net operating losses so as to pre-

clude Getty from claiming a net operating loss carry-over

deduction on its federal income tax return, it is blatantly

contradictory for Tax Commission to simultaneously main-

tain that denial of that deduction to Getty is not “an indirect

tax on income from sources outside of Oklahoma.” Further-

more, Tax Commission disregards the fact that an Okla-

homa taxpayer’s ability to pay income tax is taken into

account in determining, first, whether that taxpayer did

in fact realize income from its operations in Oklahoma, and,

second, in determining how much income was realized

therefrom. Obviously, the more income an Oklahoma tax-

payer realizes from its operations in Oklahoma, the more

dollars in taxes it will pay to the State of Oklahoma. In

this manner, every Oklahoma taxpayer bears its eq:itable

share of the tax burden. Such a taxation scheme is emi-

nently more reasonable than penalizing a taxpayer engaged

in multi-state operations by denying the claimed deduction

for the sole and invidious reason that its operations outside

Oklahoma proved to be more profitable than its operations

within the State.

ee

=

To permit a single-state taxpayer to offset its operating

losses against its operating income while requiring a multi-

state taxpayer to report only its income within the taxing

state, in that instance in which income from its operations

outside Oklahoma absorbed a loss which might otherwise

have been claimed as a net operating loss carry-over deduc-

tion on its federal income tax return, denies the multi-state

taxpayer equal protection of the laws in violation of the

Fourteenth Amendment. The discriminatory classification

resulting from that difference in treatment does not “rest

upon some ground or difference having a fair and substan-

tial relation to the object of the legislation.” F. S. Royster

Guano Co. v. Virginia, 253 U.S. 412, 415, 40 S.Ct. 560, 64

L.Ed. 989 (1920).

CONCLUSION

For the foregoing reasons Tax Commission’s Motion to

Dismiss or Affirm should be refused, and Getty’s appeal

from the opinion and judgment below should be granted.

Respectfully submitted,

Bruce H. JOHNSON

*L,. E. STRINGER

RANDALL D. Mock

STEVEN L. BARGHOLS

1700 Liberty Tower—100 Broadway

Oklahoma City, Oklahoma 73102

Counsel for Appellant

September, 1977

* Counsel upon whom service is to be made.