Amicus Brief — Container Corp. of America v. Franchise Tax Bd.

Office. Supreme Court, U.S.

FILED

No. 81-523

=H 41962

In the Supreme Coprt=on L. STEvas,

CLERK

OF THE

United States

Octoser TERM, 1982

ConTAINER CoRPORATION OF AMERICA,

Appellant,

vs.

Francuise Tax Boanrp,

Appellee.

On Appeal From The Court of Appeal

of the State of California

for the First Appellate District

Brief of EMI Limited and Capitol Industrics-EMI, Inc.

as Amici Curiae in Support of

Appellant Container Corporation of America

On Merits of the Case

VALENTINE Brookes

Lawrence V. Brookes

601 California Street,

Suite 1902

San Francisco, CA 94108

(415) 981-7630

Attorneys for Amici Curiae

EMI Limited

Capitol Industries-EMI, Inc.

BOWNE-PERNAU WALSH © 190 NINTH GT. © &.F., CA 94103 © (4158) 864-2300

TABLE OF CONTENTS

Page

Interest of Amici Curiae —.-...2....2....2......-sceccesesceeeeeeeeeeeeees 1

Summary of argument ................. 2

CS EPR ee NR See oeiuadia 4

aes 4

I. The use of the arm’s length method of determir.-

ing the income which a Nation has authority to

permit its subdivisions to tax, and the avoidance

of double taxation through credits, have both be-

come principles of international law, precluding

the use by the states of combined apportionment

formulae against those corporations entitled to

rely on international law 5

II. The history of the failure of the cubis and

the substitution of the Constitution shows that the

tolerance of some state burdens on interstate com-

merce does not extend to burdens on foreign com-

merce .......... sie siitiiilameaiiatitpiniibianiaitin 21

III. State taxation of domestic multinational groups

by a method more onerous than the method inter-

national law requires be used in taxing foreign

multinational groups is a burden on foreign com-

merce ........ sesbninanentaninigiiiiiemician

23

Conclusion 30

PIII IIS. ‘iniasrsiicersninesiinininmmnccatscheaitaianiniatiagiislinmisimisinciansiis Al

SIIE OD stcenscpnpsstrinnigessciniaticosenascinctnistsiammippeincagenmmianitin A2

ii

TABLE OF AUTHORITIES CITED

Cases

Page

Asarco, Inc. v. Idaho Tax Commission, No. 89-2015,

I SS 28, 29

Baker v. Carr, 369 U.S. 186 (1972) -...022-0.2.2...-:ecceeeeeee 11

Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398

EEE sectstncananiaiiapnamigueitiescniotiaidi 3,14

Chicago & S. Airlines v. Waterman SS ou. "333 US.

SE Bee GOED ccncccencteneniniiiesmetiiniianinl 3, 16,18

Chicago Bridge and Iron Co. v. Caterpillar (No. 81-

a i SD TED cenccicsnnecsishiineiiicrimntinrsncenteninntsnitnntmnctiiintien 29

Chy Lung v. Freeman, 92 U.S. 275 (1876) ...............:...... 10

Dames & Moore v. Regan, ........ = , 69 L.Ed 2nd

Ee GED crnssecscscasiomenernsneniiinningecaninegeniniicnasiiiaaiegl 11, 16

Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S.

Be GED ccceesseccaninesttiinncsndinttinnidtininienanimniaiigiaianes 29

Fong Yue Ting v. United States, 149 U.S. 698 (1893) ... 16

F. W. Woolworth Co. v. Taxation and Revenue Depart-

ment, No. 80-1745, Oct. Term, 1982 _....00202... 28

Haig v. Agee, ........ a , 69 L.Ed. 2d 640 (1981)

pe Line, Ltd. v. County of Los Angeles, 441 U.S.

Se 2, 3, 4, 5, 10, 13, 21, 23, 25, 27

Kolovrat v. Oregon, 366 U.S. 187 (1961) 000... 14

McCulloch v. Marineros de Honduras, 372 U.S. 10, 21

i a ee 8, 26

Maryland v. Louisiana, 451 U.S. 725 (1981) 7

Matson Navigation Co. v. State Board, 297 U.S. 441

EIDE ciinsssinconstndeinnciacselabetasienenaiibniainntiges 27

Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976) ....10, 22

Mobil Oil Corp. v. Comm. of Taxes, 445 U.S. 425 (1980)

ili

Tas_e or AutHorities CITED

Cases

Page

Nielsen v. Johnson, 279 U.S. 47 (1929) ............--..2-..-.-.. 3,14

Schechter v. United States, 295 U.S. 495 (1935) —.......... 16

Sears v. The Scotia, 81 U.S. (14 Wall) 170 (1872) ...2,7,8

Sumitomo Shoji America, Inc. v. Avagliano, No. 80-

2070 and 81-24, October Term, 1981, decided June 15,

SII sicbisioeshdiatiesiasubeeninenpemneatsenieninite ...4, 6, 20

The Paquete Habana, 175 U.S. 677 (1900) ocdieteniianineians 2,7

United States v. Belmont, 301 U.S. 324 (1937) ..3, 10, 14, 17

United States v. Curtiss Wright Export Corp., 299 U.S.

IIE cis. ancnanarniciicaietshadenhiaageninnniil 3, 10, 16, 17, 19, 24

United States v. Pink, 315 U.S. 203 (1942) 00... 17

United States v. Shaughnessy, 338 U.S. 537 (1950) ...11, 16

Zschernig v. Miller, 389 U.S. 429, 440 (1968) —..0...... 26

Constitution

United States Constitution, Article I, Sec. 8, el. 3 .......

Sincabinstabiniidmentiiteniems a 2, 4, 5, 21, 23, 26, 27, 28

Article I, Section 8, cl. 10 ....................-cccscceceeseeesees . 14

I I I SO cia nel aeitelidellenatinlaideaeaitiaain 14

ES Ee 3

Statutes

Internal Revenue Code, Sec. 482 14

Internal Revenue Code, Sec. 901 ..... . 2

Statute of the International Court of Justice, Section

EARS SL ES SE eee ce 2, 7, 8, 12

iv

TaB_e or AutTnorities CITED

Texts and Other Authorities

Page

Restatement of Foreign Relations Law, Second:

i acerca leeenanninicenemmabnl 2,7,8

SRST Canes ere ee ee ea OT ENE TE 6

Ee ae eT Eee ann ee 6

EERIE SOREN ESee enna ET aE ERE CO NOT 6

Restatement of Foreign Relations Law (Revised;

Tentative Draft):

alr a i iesiadatenenntaniinell 2,7,8

TS ane ree en erro ener 6

I elie cenitieliel 7, 8,12

BINT ois hciclada i dieeniniamnnstnnicisaiditniamaediil Sh scrisienidaniineheoniannel 3,12

SIN TIITIIIIITE "sts cssianins nea pieecanendnisiliniinntetiicistenaiambadainnibanininl 14

iat aa leliislacanntienenadinaatsaniiaiiiilia 6,8

SS ee en een eee 9, 12,13

IIIT ccuiciiscthldbaihideindiabdudeiogiiiiiiiambiedianes ‘ 13

I ei atin cc tidentemabaicianacatill 5, 9,12

BID GD cnncccnsentinaccnnssscsacenensnnanscieninentenvionmiissinnssiil 9, 12, 13, 20

I each etinatneianesibiatabiabinlesnslinaphins 6

a ll 6

James Madison, Preface to Debates in the Convention

of 1787, set forth in 3 Farrand, op. cit., Appendix

es Me SCIEN shisistsesbisenninienetsineteiiaushdiichieienitninaamieenisesaiten 22

The Federalist XI (Madison) ........................:c.:cccscsseseseeeee 22

The Federalist XLIV (Jay) ....................--.-c-ccccsseeeeesseeses 22

Model Income Tax Conventions -.0..0.2...00.00..00ccccccceeeeeeee 20, 21

Curtis, History of the Constitution of the United States

(1854, Harper and Brothers, N.Y.) 148, 179-180, 276 22

II Curtis, op. cit., pp. 11-14, 289-298 2. 22

Be Gs I, Cig TI TE cctctecncitehccsiinctsieictnninnetcnintntioctnnion 22

3 Farrand, The Records of the Federal Convention of

1787 (1911), Appendix A, CCCCI, 539, 547-548 ....... 22

No. 81-523

In the Supreme Court

United States

Ocroser Term, 1982

ConTAINER CORPORATION OF AMERICA,

Appellant,

vs.

Francuise Tax Boarp,

Appellee.

On Appeal From The Court of Appeal

of the State of California

for the First Appellate District

Brief of EMI Limited and Capitoi Industries-EMI, Inc.

as Amici Curiae in Support of

Appellant Container Corporation of America

On Merits of the Case

A letter from counsel for each party, consenting to the

filing of this brief, is on file in the Office of the Clerk.

EMI Limited, one of the amici curiae, was granted

leave to file and did file an amicus brief in support of juris-

diction as sought by Container Corporation of America.

The instant brief addresses the merits, and presents argu-

ments not offered in the prior brief.

INTEREST OF AMICI CURIAE

EMI Limited (hereinafter EMI), is a United Kingdom

corporation, which does not have a permanent establish-

ment in the United States, under the United States-United

Kingdom Tax Convention, and which does not do business

in the United States. EMI has subsidiaries which operate

in the United Kingdom and more than 40 other countries,

including the United States. Most of the corporations which

operate in countries foreign to the United Kingdom are

exclusively in the business of recording music or manufac-

turing and selling recorded music, principally on record

dise, but also on tape or cassette. In the United Kingdom

EMI subsidiaries conduct a wide range of manufacturing,

retail and service businesses, including defense contract

work.

EMI has a United States subsidiary, Capitol Industries-

EMI, Inc., which in turn has a subsidiary domiciled in Los

Angeles, California, which records music, manufactures

records, and sell records at wholesale under the name Capi-

tol Records, Ine. Capitol Industries-E MI, Ine., has filed

California Franchise Tax returns of income, reporting its

income on the Unitary basis, combining its operation inside

of California with those outside of it, including those of its

subsidiaries. It has not filed its California Franchise Tax

return income combining itself with its parent corpora-

tion, EMI, or EMI’s other subsidiaries. The California

Franchise Tax Board has administratively combined Capi-

tol Industries-EMI with EMI and its other subsidiaries, on

a “music only” basis, and assessed it accordingly.

2

EMI has brought an action for an injunction and decla-

ratory relief in the federal district court which that court

dismissed on jurisdictional grounds. On appeal, the Ninth

Cireuit Court of Appeals in EMI, Limited v. Bennett, et al.,

No. 80-4114, reversed and remanded to the district court

for consideration of the merits. Capitol Industries-EMI,

Ine. has also brought suit in the federal court, and in the

companion case its appeal is before the Ninth Circuit Court

of Appeals under the style Capitol Industries-EMI, Ine. v.

Bennett, et al., No. 80-4113, on petition for rehearing of

the jurisdictional point.

A principal contention of both EMT and Capitol In-

dustries-EMT, Ine., is that the unitary combination which

California seeks to impose on the two companies is an

imposition on and attempted regulation of foreign com-

merce, and is barred by the United States Constitution,

Article I, See. 8, el. 3, as interpreted in this Court in Japan

Line, Lid. v. County of Los Angeles, 441 U.S. 434 (1979).

While there may be constitutional limitations against

state taxation of the income of a United Kingdom corpo-

ration not having a permanent establishment in the United

States not presented in the case at bar, the Court’s review

of this case and reversal of the California decision may

well dispose of EMI's case as well as the case at bar.

SUMMARY OF ARGUMENT

1. Internationally accepted custom is one source of

international law. Sec. 38(1), Statute of the International

Court of Justice; Sec. 36, Statute of the World Court;

Sears v. The Scotia, 14 Wall. (81 U.S.) 170 (1872); The

Paquete Habana, 175 U.S. 677 (1900); Restatement of the

Foreign Relations Law of the United States, Second, See.

1, Comment C, Every treaty on the subject in force, every

model treaty both of this Government and of the United

Nations and of other international agencies, provides for

use of the arms length method in allocating income to

source. International practice is to use it between coun-

tries without bi-lateral tax treaties. The Solicitor General,

3

who represents the government in this court, responding

to the requests from the Secretaries of State, Treasury and

Commerce, and the United States Trade Representative,

has informed the Court in his amicus brief in the Chicago

Bridge & Iron case, no. 81-349, October Term, 1981, that

the United States Government recognizes that the use of

the arms length method is international custom. It is, there-

fore, international law.

The Executive speaks for the United States in our for-

eign relations, the conduct of which is not entrusted to

this court [Chicago & S. Airlines v. Waterman SS Corp.,

333 U.S. 103, 111 (1948)] or to Congress [United States v.

Curtiss Wright Export Corp., 299 U.S. 319 (1936) ]. His

statement that the United States accepts the universality

between nations of the arms length custom is a statement

of the international law this nation accepts, and respects.

(Restatement of Foreign Relations Law, Draft Revision,

See. 132, Comment C.)

The states are, of course, bound by international law as

fully as is the Nation. Banco Nacional de Cuba v. Sabba-

tino, 376 U.S. 398 (1964); Article VI, cl. 2; Nielson v.

Johnson, 279 U.S. 47 (1929) ; United States v. Belmont, 301

U.S. 324, 331 (1937).

EMI Limited, as a foreign juridical national, is en-

titled to the benefits of international law, and the restric-

tions international law imposes on governments that would

tax it.

2. The Confederation could not govern effectively be-

cause the Articles left the states free to tax and impede

foreign commerce, to have foreign relations and even to

make treaties. The Constitution was intended to remove all

of these powers from the states. There was less concern

with burdens on interstate commerce. The Constitution

should be construed to forbid all state burdens on foreign

commerce and not merely those similar to prohibited bur-

dens on interstate commerce. Japan Line Ltd. v. County

of Los Angeles, 441 U.S. 434 (1979) correctly perceived

the distinction.

4

3. While international law does not restrict California’s

right to tax the Container Corporation on its income de-

rived from business done within the United States, it may

restrict California's right to tax Container Corporation on

its income realized from business done in Colombia, Vene-

zuela and other foreign countries. Compare Sumitomo Shoji

America, Inc. v. Avagliano, No. 80-2070 and 81-24, October

Term, 1981, decided June 15, 1982.

However, the Court need not reach consideration of that

possibility. International law condemns use of the combined

unitary formula because it burdens the commerce their

juridical nationals conduct with the United States. This is

foreign commerce. The unitary tax is just as burdensome

when it is applied to domestic multinational groups. What

the states may not burden is the foreign commerce of the

United States, regardless of who conducts it.

Furthermore, to permit a tax on one group of multi-

nationals which international law prohibits on another is

a burden on the foreign commerce of one which the other

escapes, a classic discrimination. Discrimination between

competitors in foreign commerce is itself a burden, and is

impermissible.

ARGUMENT

INTRODUCTORY

There are two aspects to the problem the court is faced

with in the Container Corporation case: International

Law; and the foreign commerce clause (Article I, Section

8, cl. 3). Both, under the United States Constitution, are

limitations on the powers of the states to tax. They are not

necessarily synonymous limitations, however.

Restrictions may be found on the powers of the states

to tax because of the compulsion of the Commerce Clause,

and not because any restriction is found in established in-

ternational law. The decision of this Court in Japan Line

Ltd. v. County of Los Angeles, 441 U.S. 434 (1978), is an

5

example. However, in this case there are considerations of

international law which the Court should take into account.’

I. The use of the arm’s length method of determining the

income which a Nation has authority to permit its sub-

divisions to tax, and the avoidance of double taxation

through credits, have both become principles of inter-

national law, precluding the use by the states of com-

bined apportionment formulae against those corpora-

tiors entitled to rely on international law

A. EMI Limited, a corporation of the United Kingdom,

and its American subsidiary, Capitol Industries-EMI Inc.,

both have standing to complain of a violation of interna-

tional law by the state of California and any other states

of the union. International law generally deals with the

power of a state to enact tax legislation and other legisla-

tion exemplifying its power on nationals, whether individ-

ual or juridical, of other states.* Thus it is a recognized

principle of international law that the United States could

not tax IMI Limited on any portion of its income, because

EMI Limited does not do any business in the United States,

and has neither office nor permanent establishment here. Re-

statement (Revised), Sec. 412(1)(c) and comment (a). Its

ownership of a subsidiary is, under international law, the

recognized form for it to operate in the United States,

and the law of the United States applies fully to that sub-

In Japan Line, supra, this Court relied on international custom

to establish a standard by which the states are bound, not as a mat-

ter of international law, but under the commerce clause. As we will

show, international custom becomes the law of Nations, by which

the states are also bound.

?The custom in international law and communications between

governments is to refer to Nations as states. In discussing interna-

tional law within the United States, the political subdivisions of

the United States comprising the United States are referred to as

States of the Union. To avoid the use of the same word with dif-

ferent meanings in different sections of this brief, we shall here-

inafter refer to the Nations of the world as Nations, and to States

of the Union as states.

6

sidiary, but without disregard of corporate entity. Sumi-

tomo Shoji America, Inc. v. Avagliano, decided June 15,

1982, Nos. 80-2070 and 81-24, Oct. Term, 1981. Restatement

of Foreign Relations Law, Second, See. 27, Sec. 172; Re-

statement (Revised) (1982) Sec. 216, See. 418, comment

(b).* However, the United States is not so limited in taxing

Container Corporation, since that corporation is a national

of the United States. Restatement (Second), See. 27;

Restatement (Revised) Sec. 418. Nevertheless, in taxing

Container Corporation, the United States is bound to give

effect to Venezuelan law where it places limitations on the

Venezuelan subsidiary, since the Venezuelan subsidiary is

a national of another nation. Cf. Sumitomo Shoji America,

Inc. v. Avagliano, supra. Restatement (Second), See. 30,

comment (b); Restatement (Revised) See. 418(4). Vene-

zuela is but one example, typical, perhaps, of each of the

nations in which Container Corporation has subsidiaries

operating which are incorporated under the laws of that

host country. It is not our purpose to demonstrate that

there are such foreign restrictions, but to suggest that they

may exist, and that possibility is a consideration always

to be kept visible in the background in analysis of the in-

ternational law aspects of this entire issue. It is obviously

most clearly evident, and is a foreground consideration, in

analyzing the tax status of foreign parent corporaticns,

such as EMI Limited, operating in the United States only

through a separately incorporated subsidiary, and bound

by the Official Secrets Act of the United Kingdom not to

reveal to any foreign government any financial or other

information about its activities as a defense contractor

for the United Kingdom forces.

*Hereafter the Restatement of the Foreign Relations Law of

the United States, Second (1965) will be cited simply as Restate-

ment (Second). The Draft Restatement of the Foreign Relations

Law of the United States (Revised), still in process with three

volumes published but not finally approved, will be cited as Re-

statement (Revised).

“

International law is found in treaties, but not exclusively

there. It is also found in enactments of the United Nations,

in the statutes creating and the decisions of numerous in-

ternstional courts, such as the International Court of Jus-

tice and the “.vrld Court, and, most importantly, in eus-

tom. Restatement (Second), Sec. 1, Comment C; Restate-

ment (Revised) See. 102; Article 38(1), Statute of the In-

ternational Court of Justice ;* Statute of the World Court,

Art. 36, to which the United States acceded in 1926.

This Court has recognized that internationally accepted

custom is international law. As such, it has been given

effect by this Court, binding nationals of the United States,

and governing this Court in its decisions. The Paquete

Habana, 175 U.S. 677 (1900), Sears v. The Scotia, 81 U.S.

(14 Wall) 170 (1872). The first cited case dealt with the

principle recognized by international custom that fishing

vessels were not subject to capture as prizes of war. No

treaties to which the United States was a party so pro-

vided, or dealt with the subject. The Court said, however, :

“By an ancient usage among civilized nations, begin-

ning centuries ago, and gradually ripening into a

rule of international law, coast fishing vessels, pur-

suing their vocation of catching and bringing in fresh

fish, have been recognized as exempt, with their car-

gos and crews, from capture as prize of war.” (175

U.S. at 686).

The Paquete Habana was therefore held not subject to

capture as a prize of war, because of the restrictions of

international law.

*Article 38(1) reads as follows: The Court, whose function is to

decide in accordance with international law such disputes as are

submitted to it, shall apply: (a) international conventions, whether

general or particular, establishing rules expressly recognized by the

contesting states; (b) international custom, as evidence of a general

practice accepted as law; (c) the general principles of law recog-

nized by civilized nations; and (d) . . . judicial decisions and the

teachings of the most highly qualified publicists of the various na-

tions, as subsidiary means for the determination of rules of law.

8

The Scotia, supra, was also an example of custom gov-

erning the rules of the sea, not found in any treaties, but

which had evolved into a principle of international law.

The case arose in the 19th century, when steamships were

plying the same seas as sailing vessels but had not sup-

planted them. Because of the superior maneuverability of

steamships, the custom had evolved that they must give

way to sailing vessels to avoid collision. After surveying

the regulations which had been evolved by thirty coun-

tries, but without treaties governing the subject, this Court

concluded that that was sufficient custom to become a basis

of international law. The Court held, accordingly, that the

decision in the case was governed by that custom, as one

of international law which the courts of the United States

must apply. To borrow language this Court later used:

“International law ... has at times, like the common

law ..., a twilight existence (while) the gradual con-

solidation of opinion and habits . . . has been doing its

quiet work.” (New Jersey v. Delaware, 291 U.S. 361,

383-384 (1934) ).

The recognition of custom as international law, while an

old principle, is still respected, and still represents inter-

nationally recognized international law. Restatement (Sec-

ond), Sec. 1, comment c; Restatement (Revised) See. 102;

Statute of the International Court of Justice, See. 38(1)

(supra footnote 4 p 7); McCulloch v. Marineros de Hon-

duras, 372 U.S. 10, 21 (1963).

In the present case, we have an evolved international

custom, respected by nations of the world, and particu-

larly the treaty nations since they have bound themselves

by bilateral treaties to enforce common standards about

the source of taxable net income and the prevention of

double taxation. This Court has been informed by the

official representative before it of the Executive of the

United States government that it is the view of that gov-

ernment that there is an international custom, embodied

in many treaties but also in international practice where

9

treaties are not in force, limiting jurisdiction to tax to

the income earned within its borders, and to the deter-

mination of that income by the armslength fair price

method, to avoid double taxation. See alse Restatement

(Revised), Sections 411, 412(1)(c) and 413. The Reporter’s

Comment, set forth in Appendix A hereto, discusses the

subject in a manner which we believe has not before been

called to the Court’s attention. It is to the same effect as

what the Court has learned from other sources, however.

In addition, as this Court has been informed repeatedly,

the government of the United Kingdom for itself, and also

both it and the government of Italy, in each instance acting

as president of the Commission of the European Economic

Community, for that community of ten nations, have filed

diplomatic representations with the Department of State

stating that there is an internationally recognized stan-

dard and protesting the departure from it by California

and other states which have been most prominent in ig-

noring that international standard.

The Executive has informed both this Court and the Con-

gress that the consolidated unitary formula applied by

those states conflicts with internationally recognized prac-

tice established by treaty and custom. Judicial recognition

should be given to that fact, and the necessary corollary

that it is prohibited by international law, where the eco-

nomic effect of the tax would fall on a national, individual

or juridical, of another nation. Thus Secretary Blumenthal,

Assistant Secretary Laurence Woodworth, Assistant See-

retary Donald Lubick, and now the Solicitor General have

stated that the [Executive recognizes that international

practice, and have stated that the states should be bound by

it in their own taxing policies. Moreover, testimony before

the Senate I’oreign Relations Committee in 1977 was to the

effect that the previous administration (before the Carter

administration) had also recognized that principle and in

deference to it had acceded to the British request that an

explicit prohibition of violation of the principle by a state

10

should be placed in the United States-United Kingdom

Income Tax Convention then being negotiated. (See Ap-

pendix B for statement of former Assistant Secretary of the

Treasury, Charles Walker.)

This Court has held repeatedly that in foreign relations

the United States must speak with a single voice and has

stated also that ordinarily that voice is that of the Execu-

tive. (Baker v. Carr, 369 U.S. 186, 211 (1972); Japan Line

Ltd. v. Los Angeles County, 441 U.S. at 449; Michelin Tire

Corp. v. Wages, 423 U.S. 276, 285 (1976) ; United States v.

Belmont, 301 U.S. 324 (1937); Chy Lung v. Freeman, 92

U.S. 275, 279 (1876)). The governing principle has perhaps

never been stated more eloquently then by this Court in

United States v. Curtiss-Wright Export Corp., 299 US.

304, 319 (1937) :

“Not only, as we have shown, is the Federal power

over external affairs in origin and essential character

different from that over interna: affairs, but participa-

tion in the exercise of the power is significantly

limited. In this vast external realm, with its important,

complicated, delicate and manifold problems, the Presi-

dent alone has the power to speak or listen as a

representative of the nation. He makes treaties with

the advice and consent of the Senate; but he alone

negotiates. Into the field of negotiation the Senate can

not intrude; and Congress itself is powerless to invade

it. As Marshal said in his great argument of March 7,

1800, in the House of Representatives, ‘The President

is the sole organ of the nation in its external affairs,

and its sole representative with foreign nations.’ ”

Thereafter the Court chars ‘terized the Presidential power

in the following terms: (<0 U.S. at 320):

“ .. the very delicate, plenary and exclusive power of

the President as the sole organ of the Federal govern-

ment in the field of international relations—a power

that does not require as a basis for its exercise an act

of Congress. ...”

11

Later, in United States v. Shaughnessy, 338 U.S. 537,

542-543 (1950), this Court stated that the admission of

aliens into the United States was solely within the preroga-

tive of the President to govern, and he could do it with or

without specifie act of Congress. The language this Court

used was:

“The exclusion of aliens is a fundamental act of

sovereignty. The right to do so stems not alone from

legislative power but is inherer.t in the executive power

to control the foreign affairs of the nation. United

States v. Curliss-Wright Export Corp., 299 U.S. 304;

Fong Yue Ting v. United States, 149 U.S. 698. When

Congress prescribes a procedure concerning the admis-

sibility of aliens, it is not dealing alone with the legis-

lative power. It is implementing an inherent executive

power.”

In an ensuing paragraph the court again said that “the ~

power of exclusion of aliens is also inherent in the execu-

tive department of the sovereign, .. .”

Later cases recognize this principle. Thus in Baker v.

Carr, 369 U.S. 186 (1972), this Court analyzed the effect of

determinations by the other branches of government in the

field of foreign affairs, and stated that (369 U.S. 186, at

212) “the judiciary ordinarily follows the executive ...” in

such matters.

Finally, and most recently, in Dames € Moore v. Regan,

ne US. ......, 69 L.Ed 2nd 918 (1981) this Court upheld the

validity of the provision in the Executive Agreement by

which the American hostages were returned by Iran, which

removed settlement of American claims against Iranian

assets from the courts, where litigation to enforce them

was pending, and vested it exclusively in an agency created

by the joint agreement of the executives of the two affected

countries. The Court examined legislation Congress had

adopted and concluded that it neither authorized nor for-

bade what the Executive Agreement had done, and hence

the authority for the agreement must be found in the

12

Executive’s power. The Court upheld the Executive Agree-

ment, even though the effect was to remove jurisdiction

from the courts in litigation already pending.

The principle is so well established that it is stated in

the Restatement (Revised) Section 132, and comment ec. to

that section. The words of the comment are these:

“Courts give particular weight to the position taken

by the United States government because it is desir-

able that so far as possible the United States speak

with one voice on such matters. Compare Baker v.

Carr, 369 U.S. 186, 217 (1972), quoted in Introductory

Note to Scope, P4. The views of the United States

government, moreover, are also state practice, creating

or modifying international law. See Section 102 and

Comment b. Even views expressed by the Executive

Branch as a party before the court or as amicus curiae

will be given substantial respect since the Executive

Branch will have to answer to a foreign state for any

alleged violation of international law resulting from

the action of a court.”

As we have shown, international law arises from interna-

tionally accepted custom, and this need not be in writing.

Section 102, Restatement (Revised) states that interna-

tional law is that which has been accepted as such by the

international political system (a) in the form of customary

laws; (b) by international agreements; or (c) by derivation

from general priuciples of law common to the major legal

systems of the world. The Statute of the International

Court of Justice, Sec. 38(1), expressly states that interna-

tional custom becomes international law. (Footnote 4,

supra p. 7)

Customary international law results from a general and

consistent practice of Nations followed by them from a

sense of legal obligation. Even between the United States

and non-treaty nations such as Venezuela and Colombia the

tax principles found in the treaties are applied. See Re-

statement (Revised) Sections 411, 412(1)(c) and 413. This

13

adherence by non-treaty nations to the tax principles in

treaties is an example of this growth of international law.

We have seen that the treaty nations and the United

States have agreed that double taxation will be avoided,

and that the method by which it will be avoided is to use

the armslength fair price method in testing whether inter-

national commercial transactions between commonly owned

corporations are at unrealistic prices having the effect of

distorting the source of taxable income, and providing for

the reconstruction of the proper taxable income by the fair

price method. As this Court recognized in Japan Line,

neither by treaty nor custom have nations agreed to avoid

double taxation by using a common apportionment formula,

and they have not agreed to either a method or tribunal for

settling disagreements about the operation of the formula.

They have agreed instead, by treaty where such treaties

exist and by custom where they do not, to tax only the

income earned within their borders and to ascertain it by

the fair price armslength method. This is recognized as

international law. Restatement (Revised), Section 411 and

412 and Reporters’ Notes, comment 3. The Restatement

(Revised) also declares that the United States’ view of

international law is that it requires either the exemption

of income a nation could tax or a credit for taxes paid

elsewhere to avoid double taxation. Section 413. Every state

using the combined formula violates this rule, because not

one of them allows a credit for foreign taxes, or even a

deduction.

The formula has no interest in the armslength method.

Instead it makes a conclusive assumption that all world

business is conducted in the same manner, at the same

mark-ups, at the same labor costs, and the products are

sold at the same prices to customers, wherever manufac-

tured, and wherever sold. The Court has been told repeat-

edly in briefs of the parties and of other amici curiae that

statistics and other sources of judicial notice demonstrate

that those assumptions are contrary to the fact, and indeed

14

we suspect that the Court has sufficient economic sophisti-

cation to know without prompting that those assumptions

are economic nonsense. So we see the American states at-

tempting to use a standard which international practice

disavows, between both treaty nations and non-treaty na-

tions. The fair price method is respected in tax practice

between the United States government and the government

of such nations as Venezuela, Colombia, Peru, Chile, and

other countries with whom the United States does not have

bilateral income tax treaties. Section 482 of the Internal

Revenue Code of the United States does not distinguish be-

tween treaty nations and non-treaty nations, and Treasury

practice as well as international practice is to make no such

distinction, either. The fair price method is used between

all nations, including those in which Container Corporation

has foreign subsidiaries.

The states of the union are, of course, bound by interna-

tional law. The Constitution explicitly provides so (Article

VI, Section 2; Article I, Section 8, cl. 10), and this Court

has often so held. Nielsen v. Johnson, 279 U.S. 47, (1929);

Kolovrat v. Oregon, 366 U.S. 187 (1961) ; United States v.

Belmont, 301 U.S. 324 (1937). The first case involved the

binding effect of a treaty on state taxation. The court has

not distinguished between treaties and other sources of in-

ternational law and has held the states bound by interna-

tional law from whatever source derived. Banco Nacional

De Cuba v. Sabbatino, 376 U.S. 398, 425 (1964); and see

also Restatement (Revised) Section 135(1).

We believe the foregoing discussion demonstrates that

the question of the application by the states of the United

States of a combined unitary formula to reach the income

of foreign parent corporations which operate in the United

States only through American subsidiaries is a question of

international law, not of state law or even exclusively of

United States constitutional law, and that international law

has evolved from the settled international practice of using

the armslength method between nations. When the official

15

representative of the Executive in this Court, the Solicitor

General, at the request of the Secretaries of State, Treas-

ury and Commerce, and the United States Trade Repre-

sentative, acting in response to the urging of a majority

of our leading foreign trading partners through their offi-

cial channels, appears in this Court and informs this Court

that the Executive Branch recognizes the existence of a

settled practice of nations, this Court will, under its settled

precedents, recognize that the Solicitor General has spoken

as the Executive, and that his statement of views is that

of the single voice by which the United States speaks in

foreign affairs. It is a declaration to this Court that the

United States Government recognizes this “settled” prac-

tice as international custom. International custom is inter-

national law.

In the conduct of relations between nations, the Execu-

tive’s recognition of a certain rule as international law is

not subject to reconsideration by the other branches of gov-

ernment, or by the states. The states must conform their

taxing principles to the fair price armslength method.

When the Executive informs this Court that is the sole

standard permitted by the international law this Govern-

ment recognizes, then it follows that any other method, in-

cluding the combined unitary formula, is unconstitutional

because it is contrary to international law.

The foregoing analysis of the views of the Executive

communicated through the Solicitor General is a proper

distillation of what this Court has held in the past. The

“sole voice,” “sole organ” statements found repeatedly in

this Court’s opinions necessarily represent a recognition

that some one branch of government possesses that voice.

Also, the doctrine means that that voice cannot be drowned

out by another governmental voice, state or federal.

This Court’s decisions, not only its words, recognize the

point. Thus the delegation of powers rule is not offended

by an indistinct statute delegating to the President the

power to restrict immigration of aliens, for he has the

16

power without the legislation. United States v. Shaugh-

nessy, 338 U.S. 537; Fong Yue Ting v. United States, 149

U.S. 698 (1893). Similarly, the breadth of the delegation

to the President of authority to grant or deny licenses to

operate commercial airplanes in foreign commerce did not

present a delegation problem because of the President's

inherent powers. Chicago & Air Lines v. Waterman S.S.

Corp., 333 U.S. 103 (1948). Also, the same case held that

the President need give no reason for his exercise of that

power because it is not subject to judicial review. Id. Per-

haps of even greater significance is the fact that the land-

mark case United States v. Curtiss-Wright Export Corp.,

299 U.S. 311 (1936), aiso involved an issue of overbroad

delegation of power to the President in the field of foreign

affairs, and the Court held that the President’s power to

act alone in that field was so great that there could be

little room in that area for the unlawful delegation concept.

The force of the emphasis on the vast scope of Presidential

power to act alone if need be in foreign affairs is greatly

increased by the fact that in the previous year the Court

had invalidated a delegation of authority to the President

as overly broad where it dealt with domestic affairs.

Schechter v. United States, 295 U.S. 495 (1935). Hence the

Court had to be very serious when it said (299 U.S. at 319):

“In this vast external realm, with its important, com.

plicated, delicate and manifold problems, the Presi-

dent alone has the power to speak or listen as a repre-

sentative of the nation.”

Quite recently this Court has had two occasions to con-

sider she Executive power in foreign relations, first in Haig

v. Agee, ...... US. ....., 69 L.Ed. 2d 640 (1981), and three

days later in Dames & Moore v. Regan, ........ ae , 69

L.Ed. 2d 918 (1981). We have already analyzed Dames &

Moore, supra p. 11. Haig v. Agee upheld the power of the

Executive to cancel the passport of a United States citizen

residing abroad, although the statute in question did not

explicitly confer the power. The Court noted that neither

17

did the statute deny the power, and pointed out that the

President had issued and denied passports under his pre-

rogative before 1856, when the first statute on the subject

was passed. The Court observed that that confirmation of

presidential power occurred in order to vest it in him

solely and deny it to the states (69 L.Ed. 2d at 654, foot-

note 27). The Court also spoke of the weight of adminis-

trative construction (69 L.Ed. 2d at 652) :

“This is especially so in the areas of foreign policy and

national security, where congressional silence is not to

be equated with congressional disapproval.”

So here, the absence of enabling legislation does not im-

ply either Congressional disapproval or an absence of Pres-

idential power. Quite the contrary, for if there is not Pres-

idential power then there is a vacuum in which the United

States has no voice in its own foreign affairs, a situation

not to be countenanced. United States v. Curtiss-Wright

Export Corp., supra, 299 U.S. at pp. 317-318.

Previous Executive agreements were reviewed in the

opinion. Among the most famous is the Litvinov Agree-

ment ancillary to the Executive’s decision to recognize the

Soviet regime as a legitimate government. In United States

v. Pink, 315 U.S. 203 (1942), the Court upheld the power of

the Executive to enter into the Agreement even though

one aspect of it was to overrule a property decision of the

New York Court of Appeals. Previously it had held that

agreement superior to the public policy of New York,

which did not recognize the validity of uncompensated

expropriations. United States v. Belmont, 301 U.S. 324

(1937).

Since the power of the Executive to act alone in repre-

senting the interests of this nation in foreign affairs is so

firmly established, there remains only the question whether

the power to determine that an international usage or prac-

tice has become so firmly and generally recognized by Na-

tions as to have become international law rests in the

Executive. We submit that to be effective it can repose in

18

no other branch. It cannot repose in the judiciary, for the

judiciary cannot give advisory opinions, and the main

thrust of any recognition of a commonly accepted inter-

national usage as international law is present and pros-

pective. It means our nation does and will respect it in

votes at the United Nations and its agencies, on the high

seas, and in the countless forces agreements this nation

has with the nations where we have bases. There are, ob-

viously, other examples as well. The Supreme Court fully

stated its own views of the reasons the judiciary cannot

share in the power to conduct foreign relations in these

words (Chicago & S. Air Lines v. Waterman SS Corp.,

supra, 333 U.S. at 111):

“The President, both as Commander-in-Chief and as

the Nation’s organ for foreign affairs, has available

intelligence services whose reports are not and ought

not to be published to the world. It would be intoler-

able that courts, without the relevant information,

should review and perhaps nullify actions of the Ex-

ecutive taken on information properly held secret.

Nor can courts sit in camera in order to be taken into

executive confidences. But even if courts could require

full disclosure, the very nature of executive decisions

as to foreign policy is political, not judicial. Such de-

cisions are wholly confided by our Constitution to the

political departments of the government, Executive and

Legislative. They are delicate, complex, and involve

large elements of prophecy. They are and should be

undertaken only by those directly responsible to the

people whose welfare they advance or imperil. They

are decisions of a kind for which the Judiciary has

neither aptitude, facilities nor responsibility and which

has long been held to beleng in the domain of political

power not subject to judicial intrusion or inquiry.”

(Kmphasis ours.)

The “political power” the Court referred to was that of

the Executive. Neither can the power to recognize inter-

19

national law require congressional approval in order to

exist, although it surely can be regulated by Congress to

some extent, because the proper exercise of the power re-

quires facilities Congress does not possess. Our embassies

and consulates abroad are of the Executive Branch and are,

as this Court has said, the President’s eyes and ears

abroad. It is to the Department of State that representa-

tions are made by other nations that certain conduct has

been so universally rejected as proper conduct by nations

that its prohibition is a mandate of international law.

Those nations must negotiate that recognition with the

President, not the Congress.

Approached differently, Congress does not conduct the

foreign affairs of the United States. The President does

that, for he “alone has the power to speak or listen as a

representative of the nation.” United States v. Curtiss-

Wright Export Corp., supra, 299 U.S. at 319. As an aspect

of foreign affairs, the determination of what international

customs and practices are to be recognized by this Nation

as binding on it under international law is in the Presi-

dent.

These views, we believe, will govern this Court when

it considers the status of a foreign corporation such as

EMI Limited. We recognize that the power of the United

States and hence presumably of its political subdivisions

to tax American corporations is not governed by interna-

tional law, but derives exclusively from the Constitution,

and the domestic legislative powers it recognizes. Yet in-

ternational law may govern the extent to which the United

States and its political subdivisions may reach out to for-

eign countries and assert the power to inquire into trans-

actions conducted in those foreign countries by subsidi-

aries formed in those countries but owned by American

parent corporations, and also to tax income derived from

those transactions. Thus a foreign nation, such as Colom-

bia, might find that the economic effect of the use by the

States of the combined unitary formula could be to com-

20

pel the American parent corporation to withdraw more

income from Colombia’s subsidiary than Colombia felt

compatible with its foreign exchange laws, because of the

impact of such payments on Colombia’s balance of pay-

ments in respect of the United States, and such incom-

patibility would be a matter of concern under international

law, and could prohibit the state’s formula being applied.

See Sumitomo Shoji America, Inc. v. Avagliano, supra.

Certainly, it could be anticipated that any foreign country

would both resent and resist any effort by a state to send

a tax auditor into that foreign country for the purposes

of verification of information supplied by the parent cor-

poration to the taxing state.

B. Another aspect of international law which the states’

combined unitary formulae violate is the recognition in in-

ternational law that deductions or credits for foreign taxes

‘on the same income should be allowed, since there should

not be double taxation of the same income. See Section

413, Restatement (Revised).

Since 1919, the United States revenue laws have per-

mitted the foreign income taxes to be a credit against the

United States income tax, where a credit is not allowed

in reverse, to avoid double taxation. This provision ap-

peared in the 1919 act as Sections 222 and 238, and

will now be found in Section 901 of the Internal Revenue

Code. The United States is a party to 40 bilateral income

tax conventions, a few of which have not yet been ratified,

and all of them provide for the allowance of credits, either

by the United States or by the foreign government, de-

pending upon which is the country of domicile and which

is the country where the income has been earned. The

model draft of the Income Tax Convention published by

the League of Nations and by the Organization for Eco-

nomic Cooperation and Development so provide also, as

do the London and the Mexico Model Tax Conventions.

The Organization for Economie Development taxation con-

vention, in Articles 23(a) and 23(b), prohibits double tax-

21

ation and provides for credits. Finally, The United Na-

tions Model Double Taxation Convention between Devel-

oped and Developing Countries, United Nations Doeument

ST./ESA/102, likewise contains provision for such credits.

It is apparent that the avoidance of double taxation has

become an internationally recognized objective, found in

all bilateral income tax treaties to which the United States

is a party, in such treaties between other countries, and in

the model conventions of the United Nations and other in-

ternational organizations. In such circumstances, with such

virtual unanimity between Nations, the practice of the

United States in these treaties is a recognition of the exis-

tence of an international standard which has become inter-

national law. It is custom which has become universal, and

as such is international law. The states should be held

bound by this international law, and their uniform failure

to allow either a deduction or a credit for the foreign in-

come which they reach out to tax by the formula is uncon-

stitutional as in violation of international law.

C. These views are essentially similar to those this

Court expressed in Japan Line, Ltd. v. County of Los An-

geles, 441 U.S. 424 (1979), except that there the invali-

dated apportionment did not involve a type of tax which

had produced a network of bilateral treaties and a series

of model treaties proposed by the United States, the

United Nations and others. The evidence of custom ripen-

ing into international law was less compelling there than

here, but the result the Court reached was precisely the

same as it would have reached had it treated the custom

as international law instead of an international policy the

foreign commerce clause respected.

II. The history of the failure of the Confederacy and the

substitution of the Constitution shows that the toler-

ance of some state burdens on interstate commerce does

not extend to burdens on foreign commerce

The failure of the Articles of Confederation to provide

a workable Union, and the impetus behind the substitution

22

of the Constitution for the Articles, were primarily be-

cause the Articles left each State free to tax and impede

foreign commerce, and to have its own foreign policy.’ The

Framers of the Constitution were determined to correct

those weaknesses and deprive the states of all jurisdiction

over foreign commerce and foreign policy.’ The last hold-

outs in the ratification process realized this and their re-

luctance to surrender the commercial advantage of their

seaboard location was because of their knowledge.’ Unless

the lessons of history are lost on us today, the states must

be denied their effort in this case to reclaim some of that

surrendered power.

By applying its apportionment formula to foreign

source income regardless of whether derived from discrete

foreign businesses, and regardless of whether foreign in-

come from foreign commerce can be determined by the

arms length methods Nations wee to determine what they

cam tax, California is dotg what the Framers of the Con-

stitution resolved mo state could ever again do; have in-

dependent foreign relations and burden the Nati .’s for-

eign commerce by repressive taxation.°

The failure of the Confederation so soon after the Treaty

of Independence, due to the emergence o7 commercial rival-

ries between the states, each of which was free to have and

pursue its own foreign policy, make treaties, and burden

the foreign commerce of its neighbors, led the Framers of

‘Michelin Tire Corp. v. Wages, 423 U.S. 276, 283 (1976); I

Curtis, History of the Constitution of the United States (1854,

Harper and Brothers, N.Y.) 148, 179-180, 276; II Curtis, op. cit.,

pp. 11-14, 289-298; 3 Farrand, The Records of the Federal Conven-

tion of 1787 (1911), Appendix A, CCCCI, 539, 547-548.

‘II Curtis, op. cit., pp. 11-12, 13-14, footnotes; The Federalist

XLIV (Jay); The Federalist XI (Madison).

"II Curtis, op. cit., pp. 23-24.

*II Curtis, op. cit., pp. 289-298; James Madison, Preface to De-

bates in the Convention of 1787, set forth in 3 Farrand, op. cit.,

Appendix CCCCI, 539, 547-548.

23

the Constitution to agree that those practices must be

prohibited. There was debate over whether the states

should remain free to regulate trade between themselves

but none over the termination of their freedom over for-

eign commerce. Therefore the Constitution removes from

the states any power over foreign relations and over for-

eign commerce. Any state regulation of foreign commerce

is a burden the Framers meant to prohibit.

Against this historical background, the distinction this

Court drew between foreign commerce and interstate com-

merce in Japan Line, Ltd. v. County of Los Angeles, 441

U.S. 434 (1979), is not only sound, but an inevitable lesson

of history. Some state burdens on interstate commerce may

be tolerated by the silence of Congress to prohibit them,

but not on foreign commerce. Only the Federal government

can regulate that.

III. State taxation of domestic multinational groups by a

method more onerous than the method international

law requires be used in taxing foreign multinational

groups is a burden on foreign commerce

The practices which are violations of international law

when applied against corporations which are nationals of

foreign countries are unconstitutional burdens on foreign

commerce when applied to corporations whic! — re nationals

of the United States. Because they are bur. ome is why

international law prohibits them. The Executive, through

his representative before this Court, the Solicitor General,

has informed the Court that the operation of the states’

combined unitary apportionment formula has become a

burden on foreign commerce. In his brief he has stated that

the clearest and most obvious burden is felt when the

states attempt to impose that taxing method on a multina-

tional group with a foreign parent, but he has also stated

that the burden also exists when they attempt to apply it to

domestic corporations with foreign subsidiaries conducting

their business in other countries, which are themselves

sovereign countries.

24

This Court stated its recognition of the ability of the

kxecutive to sense the effeci of intrusions by other forces

into the conduct of our external affairs, in a case previously

cited, United States v. Curtiss-Wright Export Corp., supra.

We quoted above some of the Court’s language in that

opinion, and we again quote the most essential and sig-

nificant statement of awareness of the subtlety of manifes-

tations of foreign impact:

“In this vast external realm, with its important, com-

plicated, delicate and manifold problems, the President

alone has the power to speak or listen as a representa-

tive of the Nation.” 299 U.S. at 319.

From what this Court has recognized is a superior listen-

ing post, the Executive has discerned a burden on the

foreign commerce of this nation, which is one manifesta-

tion of its external affairs, and that it burdens the foreign

commerce of this nation whether it is conducted by foreign

corporations or by domestic corporations, through foreign

subsidiaries.

The use by American parent corporations of subsidiaries

incorporated under the laws of the foreign countries is

mandatory as a practical matter. These foreign countries

are themselves sovereign, and hence they have the sover-

eign’s authority to pass laws, create conditions for opera-

tion of businesses, and conditions for shipment of profits

done from business within their borders to the American

parent. To avoid a conflict between requirements of United

States and those of the host country, therefore, it is essen-

tial that a foreign subsidiary, fully amenable to the laws

of the host country, be established. This is particularly

vital in those countries, such as Mexico, which require some

equity participation by their own nationals in foreign con-

trolled cperations in their country. Not only are these

foreign subsidiaries convenient, but it is apparent that they

are in most instances practical necessities. For the states

to disregard their existence and treat the operations

abroad as being conducted by the American parent, and as

25

being conducted, contrary to notorious fact, in an economic

climate parallel to that in the United States as to price

levels, wage levels, margins of profit, and other essentials

of economic success in commercial transactions, impresses

us as being a burden on foreign commerce by definition.

But the Executive, who has commercial attaches in em-

bassies, consular offices whose function in part is to assist

American business abroad, and an entire department de-

voted to foreign commerce, whose head (the Secretary of

Commerce) has protested to the Solicitor General that

what the states are doing is a burden on foreign commerce

which should be stopped, has declared that it is. The evi-

dence which this Court spoke of in Japan Lines is even

more abundantly present here.

Finally, in this aspect of the discussion, the Court spoke

in Japan Lines of the danger of retaliation if a formula

suitable for taxation in internal commerce were applied to

foreign commerce, since the foreign countries could not be

compelled to surrender taxing jurisdiction to the American

states. That retaliation has occurred and is present for this

Court to consider, in viewing the available evidence of the

effect on foreign commerce of the states’ combined unitary

formula. The Court has been told of the British retaliation

for the action of a Senate minority in blocking approval of

the explicit prohibition in the new treaty of what the states

are doing here, insofar as British parent corporations and

their domestic subsidiaries are concerned. The treaty had to

be returned to the United Kingdom for reenactment by the

Parliament. The testimony of Assistant Secretary of the

Treasury Lubick, and particularly the letter which he wrote

to the Senate Foreign Relations Committee members when

the new provision the British insisted be added to the

treaty was before the Senate for ratification, show that the

new provision was placed in the treaty by the British in

retaliation for the removal of Article 9(4). Secretary

Lubick explained the adverse impact of the new provision

on American business, and its benefits to the United King-

dom. A price was exacted for the blocking of approval of

Article 9(4) by a minority of the Senate. This is the first

retaliation, apparently, but more is to be expected if this

state taxing method is approved by this Court, in view of

the volume of protests which have been voiced to this gov-

ernment by the members of the Common Market, by the

Canadian government and now also by Japan. We urge

that this irritant be removed by this Court before its

adverse impact on our relations with other foreign coun-

tries becomes similarly evident and outspoken.

While international law, which prohibits the states’

applying their combined unitary formula to a corporate

group headed by a foreign parent corporation and thereby

to reach for taxation some of the income of that foreign

parent, does not restrict the states in the same way when

attempting to tax a United States parent corporation with

foreign subsidiaries by the same combined unitary method,

a related principle may do so. Regulations within the states’

traditional areas of jurisdiction will fall, absent a treaty or

the compulsion of international law, “if they impair the

effective exercise of the Nation’s foreign policy.” Zschernig

v. Miller, 389 U.S. 429, 440 (1968). This Nation’s foreign

policy is to refrain from double taxation of international

income. Compare McCulloch v. Marineros de Honduras,

supra, 372 U.S. 10, where a neutral federal statute was

construed not to apply to foreign merchant seaman in order

to avoid embarrassment to our foreign relations.

However, we submit that there is a direct constitutional

bar here, because the states’ formula is a burden on foreign

commerce, prohibited by the United States Constitution.

if international law prohibits the states’ applying their

combined unitary formulae to multinational groups headed

by a foreign parent corporacion, as we contend, and if there

is not a corresponding prohibition against the states apply-

ing that formula to multinational groups headed by Amer-

ican corporations, a discrimination between foreign groups

and domestic groups is established. If this results in a

27

heavier state tax burden for the domestically-owned multi-

national groups than for the foreign-owned groups, that

discrimination impairs their competitive position and itself

becomes a burden on foreign commerce. We do not believe

it reasonable to consider that the foreign commerce clause

can permit the states to discriminate against American

owned multinational groups. If they are not permitted to

compete on equal terms with their foreign opposite num-

bers, then they are burdened in the conduct of their foreign

commerce. Inequality of treatment when translated into

economic consequences is itself a burden on foreign com-

merce and as such is unconstitutional.

This Court has long and consistently held that a state

tax system which discriminates against commerce is a pro-

hibited burden on it. Maryland v. Louisiana, 451 U.S. 725

(1981). A tax system which burdens some foreign com-

merce but not all discriminates against some foreign com-

merce and burdens it. This the states cannot do.’ The dis-

crimination cannot be overcome by extending the scope of

the unitary formula to tax the foreign-earned income of

foreign multinational groups, so it must be overcome in

the only way in which it can be: by restricting the power

of the states to burden the foreign source income of do-

mestic multinationals. Essentially that technique was used

in Japan Line Ltd, v. Los Angeles County, supra, 441 U.S.

434, where the property was physically within the taxing

county but jurisdiction to tax was denied because the home

country had jurisdiction to tax which the United States

could not control.

Furthermore, consideration of the reason behind the

international custom which has evolved into international

law shows that it evolved in order to avoid unacceptable

burdens on the commerce the nations of the world conduct

°Matson Navigation Co. v. State Board, 297 U.S. 441, (1936),

construed the Equal Protection Clause, not the Foreign Commerce

Clause and did not involve income earned and taxed abroad.

28

with each other. The rules evolved to remove burdensome

taxation of income earned in another country, and to pre-

vent double taxation, and they accomplish this in part by

acknowledging the prior claims to taxation in the country

where the business is done over the claims of the home

country, producing a custom in which the latter defers to

the former in allowing credits for taxes paid. The states

offend the foreign commerce clause in two ways: they im-

pose the burdensome double tax, and they make no effort

to ameliorate it through a credit, or even a deduction. The

burden they impose on the foreign commerce of domestic

internationals, accordingly, is greater than that which the

international community finds acceptable when dealing

with the juridical nationals of other countries.

The dimensions of this burden on foreign commerce are

seen from the record in the Container Corporation case.

According to the computations found in Container Cor-

poration’s amicus brief filed in the Chicago Bridge & Iron

case (No. 81-349, Oct. Term 1981), Container’s California

income is more than doubled by the combined unitary for-

mula, and the cause is not business done between Califor-

nia and Venezuela, for example, for there is none, but is

the minutiae the state courts have declared represent uni-

tary characteristics. Such an increase in income cannot

possibly come from that minutiae, as this Court held on

June 29, 1982 in Asarco, Inc. v. Idaho Tax Commission, No.

80-2015, and F. W. Woolworth Co. v. Taxation and Reve-

nue Department, No. 80-17745. The Court may readily con-

clude that Container Corporation is not unitary with its

foreign subsidiaries under the standards stated in those

cases, but we hope the Court will also deal with the broader

aspects of the case, and state its agreement that interna-

tional lew, the single voice doctrine, and the foreign com-

merce clause all prohibit the extension of the combined

unitary formula system to income earned from operations

in other countries.

We conclude our argument by acknowledging that there

is language in the opinion in Mobil Oil Corp. v. Comm. of

29

Taxes, 445 U.S. 425 (1980) which, when removed from the

context of the issue framed in that case, could suggest that

the Court has already prejudged the suitability of a for-

mula to allocate foreign source income. We believe the

Court does not decide issues which the parties before it

concede, and that it was merely acknowledging Mobil’s con-

cession that in its case the formula used could be applied

to its business income (445 U.S. at 434). The Court said

(445 U.S. at 437) “Indeed, in its Vermont tax returns,

Mobil included all its operating income in apportionable

net income, without regard to the locality in which it was

earned.” As the Caterpillar case (No. 81-349, Oct. Term,

1981) demonstrates, a formula sometimes operates to a

taxpayer’s advantage. Moreover, the Court said that Mobil

had failed to introduce any evidence that its foreign opera-

tions were “distinct in any business or economic sense from

its petroleum sales activities in Vermont.” 445 U.S. at 439.

Finally, in both Exxon Corp. v. Wisconsin Dept. of Reve-

nue, 447 U.S. 207, 223 (1980), and in Asarco, Inc. v. Idaho

State Tax Commission, supra, slip opinion, p. 11, this Court

referred to the now famous “linchpin” statement in Mobil

as referring to “state income taxation of an interstate en-

terprise” (Emphasis ours). We conclude the foreign com-

merce issues remain open issues.

The Court may ponder why a United Kingdom parent

corporation and its American subsidiary should be con-

cerned by the plight of their American owned competitors.

The answer is that the combined unitary formula is a fes-

tering sore in the international commercial world, which

breeds distrust and antagonism which are of no benefit to

anyone in foreign commerce, and undoubtedly will produce

further international reaction. Immunity in some but not

in all would simply increase antagonisms. International

commercial relationships are conducted most effectively

when the competition between those manufacturing and

selling goods in international commerce is on the basis

of quality, price, service, and other commercial considera-

30

tions, and not when one group of competitors is burdened

by an aberrant tax burden from which the other competi-

tors are free.

Furthermore, although EMI Limited and its American

subsidiary, Capitol Industries-E MI, Ine. are convinced

that they are immune from this burden under International

law, they have had to proceed to the federal courts to

vindicate their position, and those courts have not yet

finally rendered judgment. The State of California does

not agree that a distinction exists between foreign-based

multinationals and domestically-based multinationals and

wants to tax them all, in the same way. EMI Limited and

Capitol Industries-!. MI, Inc. therefore have that interest

also in a decision from this Court which would eliminate

the problem for all corporations engaged in foreign com-

merce.

CONCLUSION

The decision below is erroneous and should be reversed.

Respectfully submitted,

VALENTINE BRooKES

Lawrence V. Brookes

Attorneys for Amici Curiae

EMI Limited

Capitol Industries-EMI1, Inc.

Appendix A

Restatement of the Law, Foreign Relations Law

(Revised; Tentative Draft)

§ 412. The Basic Rule Applied

(1) A state has jurisdiction to tax the income of:

(a) persons (whether natural or juridical) who

are nationals, residents, or domiciliaries of the state,

whether the source of the income is within or with-

out the state;

(b) natural persons present in the state, and na-

tural or juridical persons doing business in the state

(although not nationals, residents or domiciliaries of

the state), but only with respect to income derived

from or associated with presence or doing business

within the state; and

() natural or juridical persons not nationals, resi-

dents or domiciliaries of the state and not present

therein, only with respect to income derived from

property located in the territory of the state.

(2) A state has jurisdiction to tax property located

within its territory, without regard to the nationality,

domicil, residence, or presence of the owner of the

property.

(3) A state has jurisdiction to tax transfer of wealth

(a) if the wealth consists of property located in its ter-

ritory, or (b) as regards property not located in its

territory, if the transfer is made by or to nationals,

domiciliaries, or residents of the state.

(4) A state has jurisdiction to tax transactions

which occur, originate or terminate in its territory or

which have a substantial relation to the state, without

regard to the nationality, domicil, residence or pres-

ence of the parties to such transactions.

A-2

Comment:

a. Implied limitations on jurisdiction to tax. The rules

in this section affirming a state’s jurisdiction to tax clearly

imply some limitations on that jurisdiction: a state may tax

a foreign company not having its headquarters in the state

but doing business in the state on the income derived from

that business, but not on its world-wide income (Subsection

1(b)); a state may tax persons not nationals, residents or

domiciliaries of the state with respect to income derived

from property in the state (Subsection 1(c)), but the exist-

ence of such property and income does not justify taxation

of other property or income outside the state. These limita-

tions are implied in the bases of jurisdiction required by

§ 402 and the principle of reasonableness in § 403.

The jurisdiction to tax nationals, residents or domicili-

aries (Subsection (1)(a)) applies as well to complex com-

mercial enterprises, permitting a state to tax a parent cor-

poration on its world-wide income, including that of its

branches and subsidiaries. (Emphasis ours.)

B-2

necessarily (assuming California is the only state in which

U.S. operations are conducted) California will be taxing

foreign source income as that term has been defined and

recognized internationally for federal and foreign income

tax purposes. In the context of harmonizing international

tax systems among tax treaty partners, this is an unaccept-

able development.

Given the increasing valucs and geographic dispension

of multinational business activities, and given the aware-

ness by the Treasury of the accelerating foree with which

California reputedly has been applying the unitary tax

method to worldwide operations, it is to the Treasury’s

credit that it has, by including Article 9(4) in the UK

Treaty, asserted the federal prerogative over international

tax relationships. Those relationships have a direct bearing

on the conduct of foreign trade, on the balance of payments,

and, indeed, on international relations.

CONCLUSION

It clearly is in the national interest to ratify the UK

treaty, including Article 9(4), and I urge this committee to

recommend that it be so ratified. The concerns of the state

of California and other states are by no means serious

enough to warrant a reservation of Article 9(4) from the

treaty, and thus deprive the nation as a whole from the

benefits of that article.

I thank the Committee for its attention.

Appendix B

PREPARED STATEMENT OF

CHARLES M. WALKER,

FORMER ASSISTANT SECRETARY OCF

THE TREASURY FOR TAX POLICY

Mr. Chairman and members of this distinguished com-

mittee: Iam pleased to appear here today to testify in sup-

port of the new income tax convention with the United

Kingdom.

First, let me introduce myself. I am a lawyer residing

and practicing in Los Angeles, California. I had the privi-

lege of serving as Assistant Secretary of the Treasury for

Tax Policy from early September, 1975, to January 20,

1977. One of the functions of my office was the negotiation

of tax treaties and the preparation of treaty documents,

protocols thereto, and notes exchanged thereon for signa-

ture by appropriate officials of our government. As a mat-

ter of fact, I had the privilege of appearing before this

Committee on November 7, 1975, to present testimony in

support of new tax treaties with Ieeland, Romania, Poland,

and the Union of Soviet Socialists Republics.

The income tax convention with the United Kingdom

(which I will refer to as the United Kingdom Tax Treaty)

had been negotiated before I assumed my duties with the

Treasury Department. However, signature of the Treaty

occurred thereafter, as did the exchange of notes thereon

dated April 13, 1976.

The unitary method employed by California is not used

for federal or foreign tax purposes. Thus, if California’s

use of the unitary method produces an amount of taxable

income for the subsidiary which exceeds the amount deter-

mined on a separate corporate and arm’s length basis, then