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

jie Nee Court, US

FILED

oct 19

No. 81-523 wee

REARS. STEVAS:

CLBLRK

IN THE

Supreme Court of the United States

October Term, 1982

CONTAINER CORPORATION OF AMERICA,

Appellant,

Vv

FRANCHISE TAX ARD,

Appellee.

ON APPEAL FROM THE COURT OF APPEAL

OF THE STATE OF CALIFORNIA

FOR THE FIRST APPELLATE DISTRICT

BRIEF OF AMICUS CURIAE

MULTISTATE TAX COMMISSION

AND PARTICIPATING STATES

WILLIAM D. DEXTER

General Counsei

Office and Post Office Address:

204 Custer Way

Tumwater, WA 98501

Telephone: (206) 357-8000

—

——

ABCD AT CRAFTSMAN PRESS SEATTLE

PARTICIPATING AMICUS CURIAE

State of Alabama

RALPH P. EAGERTON, JR.

Commissioner of Revenue

Alabama Department of Revenue

201 Administrative Bldg.

Montgomery, AL 36130

State of Alaska

WILSON L. CONDON

Attorney General

Department of Law

Pouch K

State Capitol

Juneau, AK 99811

State of Arkansas

FARRIS W. WOMACK

Director

Department of Finance and

Administration

JAMES R. EADS, JR.

Chief Counsel

Department of Finance and

Administration

P.O. Box 1272

Little Rock, AR 72203

State of Colorado

J. D. MacFARLANE

Attorney General

1525 Sherman St. 3rd Floor

Denver, CO 80203

State of Connecticut

CARL R. AJELLO

Attorney General

30 Trinity Street

Hartford, CT 06115

District of Columbia

CAROLYN L. SMITH

Director of Finance and Revenue

Room 4136, Municipal Center

300 Indiana Avenue N.W.

Washington, D.C. 20001

State of Delaware

RICHARD S. GEBELEIN

Attorney General

Department of Justice

State Office Bldg.

Wilmington, DE 19801

State of Florida

RANDY MILLER

Executive Director

Department of Revenue

102 Carlton Bidg.

Tallahassee, FL 32304

State of Hawaii

GEORGE FREITAS

Director of Taxation

425 Queen Street

Honolulu, HI 96813

State of Idaho

DAVID H. LEROY

Attorney General

THEODORE V. SPANGLER, JR.

Deputy Attorney General

Office of the Attorney General

State House

Boise, ID 83720

State of Indiana

LINLEY E. PEARSON

Attorney General

219 State House

Indianapolis, IN 46204

State of Kansas

ROBERT T. STEPHAN

Attorney General

Kansas Judicial Center, 2nd Floor

Topeka, KS 66612

continued on inside back cover

IN THE

Supreme Court of the United States

October Term, 1982

CONTAINER CORPORATION OF AMERICA,

Appellant, |

V

FRANCHISE TAX BOARD,

Appellee.

ON APPEAL FROM THE COURT OF APPEAL

OF THE STATE OF CALIFORNIA

FOR THE FIRST APPELLATE DISTRICT

BRIEF OF AMICUS CURIAE

MULTISTATE TAX COMMISSION

AND PARTICIPATING STATES'

1. This brief is submitted by the Multistate Tax Commission and

participating states in support of the Appellee. The parties have consented

to the filing of this brief and originals of the consent letters have been

filed with the Clerk of the Court.

i

TABLE OF CONTENTS

Page

Statement of Interest .....................0..5.. 1

D adwae tus seenuuatdes sas 9

I. General Introductory and

Constitutional Considerations .............. 9

II. The Worldwide Combination Method Is Not

Facially Invalid Under the Due Process Clause 15

III. Container’s Due Process Arguments Lack Merit

Because Container Has Not Borne Its Burden of

Proving by Clear and Cogent Evidence that

California’s Application of Worldwide Combined

Reporting Taxed Any of Container’s

Extraterritorial Net Income ............... 16

IV. Contrary To Its Argument, Container Has Not

Shown That California’s Use of the Combination

Method Results in the Taxation of Income That

Was Also Taxed By Foreign Countries 20

V. Substantial Evidence in the Record Supports the

Lower Court’s Holding That Container and Its

Subsidiaries Conducted a Unitary Business

Sufficient to Meet the Rational Relationship Test

of the Due Process Clause ................. 22

D ̃ ... 30

TABLES OF AUTHORITY

Table of Cases

Page

Adams Express Co. v. Ohio State Auditor,

165 U.S. 194 (1896), aff'd on rehearing,

, ðᷣ 10.12

American Cement Corp. v. Graves, 299 U.S. 517 (1936) 17

ASARCO Inc. v. Idaho State Tax Comm'n,

— =| , 102 S. Ct. 3013 (1982) 10-11,22,23

Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm'n,

266 U.S. 271 (1924) ........... 5,11,12,15,21,passim

Butler Bros.v. McColgan, 315 U.S. 501 (1942) 6,11,12,14,16

Caterpillar Tractor Co. v. Lenckos, 84 Ill. 2d 102, 417 N.E.

2d 1343 (1981), aff’g 77 Ill. App. 3d 90, 395 N. E. 2d

1167 (1979), appeal filed sub nom Chicago Bridge &

Iron Co. v. Caterpillar Tractor Co., No. 81-349 (argued

Apr. 19, 1982, reh g granted

rr ss knoe de oud 2,9,14,15,passim

Chase Brass & Copper Co. v. Franchise Tax Bd., 10 Cal.

App. 3d 496, 95 Cal. Rptr. 805 (1970) ........... 14

Coca Cola Co. v. Dep t of Revenue, 271 Or. 517, 533 P.2d

788 (1975), aff'g 5 Or. T.R. 405 (1974) ........... 14

Crawford Mfg. v. State Commissioner of Revenue, 180

Kan. 352, 304 P.2d 504 (1956) ................. 14

Crew Levick Co. v. Pennsylvania, 245 U.S. 292 (1917) 11

Edison Cal. Stores Inc. v. McColgan, 30 Cal. 2d 472,

, Sos Cie idee esieaet 64 14

Page

Exxon Corp. v. Department of Revenue,

447 U.S. 207 (1980) ù0) 6.10, 14.16.22

First Fed. Sav. & Loan v. Tax Comm'n Ass n.

r chad detestesseeneuuts 13

Ford Motor Co. v. Beauchamp, 308 U.S. 331 (1939) ... 12

Forthingham v. Mellon, 262 U.S. 447 (1923) ....... 10

Fry Roofing v. Wood, 344 U.S. 157 (1952) ......... 29

F. W. Woolworth, Inc. v. Taxation & Revenue Dep't

of New Mexico, US. , 102 S. Ct.

D Neh becdaares bund ee CES 10,11,22,23

Grayson v. Harris, 267 U.S. 352 (1925) ............ 29

GTE Automatic Elec., Inc. u. Aliphin,

68 Ill. 2d 326, 369 N.E.2d 841 (1977) ........... 1

Hans Rees’ Sons, Inc. v. North Carolina,

F ce acaceees 12,20,23

International Harvester Co. uv. Dep't of Treasury,

D nc cceu Gees deaKu neat weed 13

International Harvester v. Evatt, 329 U.S. 416 (1947) . 12

In re Morton Salt Co., 150 Kan. 650, 95 P.2d 335 (1939) 14

Japan Line Ltd. v. County of Los Angeles,

, co ukh eens and pacaes 13,22

John Deere Plow Co. v. Franchise Tax Bd., 38 Cal. 2d

214, 238 P.2d 569 (19511 14

iv

Joslin Dry Goods Co. v. Dolan.⁊ĩJ Colo

r 6 be bh e006 06nd b0ceba we 14

Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976) .. 13

Mobil Oil Corp. v. Commissioner of Taxes,

445 U.S. 425 (1980) ............ 5,6,11,12,13,passim

Montana Dep’t of Revenue v. American Smelting & Ref.

Co., 173 Mont. 316, 567 P.2d 901 (1977), appeal

dismissed, 434 U.S. 1042 (1978) ................ 14

Moorman Mfg. Co. v. Bair,

e 10.12. 13.17

Multistate Tax Comm'n v. United States Steel Corp.,

659 F.2d 931 (9th Cir. 1981 24

Multistate Tax Comm'n v. United States Steel Corp.,

No.1-76-182 (D.Idaho) o 24

Multistate Tax Comm'n v. United States Steel Corp.,

No. 82-3181 (9th Cir. Briefs submitted) .......... 24

New York ex rel. Cohn v. Graves, 300 U.S. 308 (1936) 11

Norfolk & Western Ry. v. Missouri State Tax Comm'n,

Dr 12,23

Norfolk & Western Ry. v. North Carolina,

F occ butbnebenth ae cee aves 17

Northwestern Airlines, Inc. v. Minnesota,

e d 13

Northwest States Portland Cement Co. v. Minnesota, 358

r d eee ae 13

Norton Co. v. Dep’t of Revenue, 340 U.S. 534 (1951) .. 13

Page

Peck & Co. v. Lowe, 247 U.S. 165 (1918) .......... 11

Portland Ry., Light & Power Co. v. Railroad Comm'n,

r a ducal wae bun econ ean 29

Standard Pressed Steel Co. v. Dep't of Revenue,

, ee Ne a re 13

Underwood Typewriter Co. v. Chamberlain,

,,, Ce eee Te 3,11,12,17,22

United States v. New Mexico, |)

r A cig o'e.56.80'4 13

United States Steel Corp. v. Multistate Comm'n,

434 U.S. 452 (1978), aff'g 417 F. Supp. 795

D <6 cc's 5 n'y 00.400 oeeme alee 08% 1,11,24

Webb Resources Inc. v. McCoy, 194 Kan. 758,

r wc oh ataeekse eu ae sy seve 14

Western Auto Supply Co. v. Commissioner of Taxation,

245 Minn. 346, 71 N.W.2d 797 (1955) ........... 14

Wisconsin v. J.C. Penney Co., 311 U.S. 435 (1940) .. 10,23

Zale-Salem, Inc. v. State Tax Comm'n,

237 Or. 261, 391 P.2d 601 (1964) ............... 14

Statutes

Uniform Division of Income for Tax Purposes Act (UDITPA)

ITIL, ²ð A eos bh cewebs 1

r dds he dues ibaa ceiee bad pes 1

UDITPA 55 1-22, 7A U.L.A. 91092 (1978) ....... 1

Page

r ³ hewn ds ae eect 1

UDITPA § 18, Cal. Rev. & Tax Code § 25137 .... 20

Rules and Regulations

ie dec cae d cere rank ones eo 00s 88's 4

Other Authority

Dexter, Post Oral Argument Comments on

ASARCO and Woolworth, 15 Tax Notes No. 11 at

,, ⁰⁰ʒʒ rede ceetetes 10

Dexter, The Attribution of the Net Income of

Multistate-Multinational Corporations for State

Income Taxes on or Measured by Net Income,

1 Multistate Tax Comm’n Rev. No. 1 at 5 (1981) 11

Dexter, The Unitary Concept in State Income

Taxation of Multistate Multinational Businesses,

r 14

P. Hartman, Federal Limitations on State and

D ek cae bwenek needs 9

House Comm. on the Judiciary, State Taxation of

Interstate Commerce, H.R. Rep. No. 1480,

88th Cong., 2d Sess. Vol. 4 at 1154-55

, ̃ rr. 14

Lathrop, Due Process Considerations and the

Apportionment of Dividend Income: A Dissent

From the ASARCO and Woolworth Decisions,

16 Tax Notes 1 at 3, 30 (July 5, 1982) .......... 23

L. Solomon, Multinational Corporations and The

Emerging World Order (1978) ................ 25,26

Multinational Corporations and Income Allocations

Under Section 482 of the Internal Revenue Code,

Fee MU 26

7 Multistate Tax Commissions Ann. Rep. 64

hc / / / 24

M. Wilkins, The Maturing Multinational Enterprise -

American Business Abroad From 1914 to

r ee in Ee ae as og oe at 25

Pierce, The Uniform Division of Income for State

Tax Purposes, 35 Taxes 747 (1957) ............. 1

R. Vernon, Economic Sovereignty At Bay, 47

Foreign Affiars 110 (1968) ..................... 25

R. Vernon, Sovereignty At Bay - The Multinational

Spread of U. S. Enterprises (197177 25

R. Vernon, Storm Over The Multinationals - The Real

r . eg 25

Vagts, The Multinational Enterprise: A New

Challenge for Transnational Law, 83 Harv. L.

, A eee e hee bw ae 25

1

STATEMENT OF INTEREST

The Multistate Tax Commission (hereinafter referred to as the

Commission) is the official administrative agency of the

Multistate Tax Compact (hereinafter referred to as the Compact)

entered into currently by 19 states and the District of Columbia

as full members and by 11 states as associate members.’

In the area of state income taxation of a multijurisdictional

business, Article IV of the Compact sets forth the provisions

of the Uniform Division of Income for Tax Purposes Act

(UDITPA).* UDITPA apportions business income’”’ of a

unitary trade or business, irrespective of the corporate form

in which it is conducted, in accordance with the well-

recognized three-factor apportionment formula of tangible

property, payroll and sales. Nonbusiness income is

specifically allocated by UDITPA 55 4-8.‘ UDITPA should

be interpreted to carry out its purpose which is to provide

for uniformity and full accountability (without duplication)

in the division of income for state income tax purposes by

workable and rational division of income rules.“

2. The constitutionality of the Compact was upheld by the United States

Supreme Court in United States Steel Corp. v. Multistate Tax Comm'n,

434 U.S. 452 (1978), fg 417 F. Supp. 795 (. D. N. v. 1976). The Court

there noted that the Compact “symbolized the recognition that, as applied

to multistate businesses, traditional state tax administration was

inefficient and costly to both state and taxpayer. Jd. at 456.

3. Uniform Division of Income for Tax Purposes Act (UDITPA §§ 1-22,

reprinted in 7A U.L.A. 91 (1978). UDITPA was promulgated in 1957 by

the National Conference of Commissioners on Uniform State Laws.

4. UDITPA § l(a) defines business income as:

income arising from transactions and activity in the regular course

of the taxpayer’s trade or business and includes income from

tangible and intangible property if the acquisition, management,

and disposition of the property constitute integral parts of the

taxpayer's regular trade or business operations.

Section Ie) defines ‘‘nonbusiness income,” which is subject to specific

allocation, as all income other than business.

5. See prefatory note to UDITPA, 7A U.L.A. 91-92 (1978); GTE Automatic

Elec, Inc. u. Aliphin, 68 Tl. 2d 326, 369 N.E.2d 841 (1977); Pierce, The Uniform

Division of Income for State Tax Purposes, 35 Taxes 747, 749 (1957).

2

In the instant matter, and in the pending appeal of Chicago

Bridge & Iron Co. v. Caterpillar Tractor Co., No. 81-349

(argued Apr. 19, 1982, ren g granted May 3, 1982) (hereinafter

referred to as CBJ), the Commission and participating states

are concerned with the unsubstantiated argument that an

established international tax policy“ exists for the

ascertainment of the United States income of United States

parent corporations and their controlled foreign subsidiaries

and affiliates. We are further concerned with the argument

that this alleged policy precludes the constitutional

employment of worldwide combined reporting (the unitary

method applied to a group of corporations or other legal

entities which conduct an integrated unitary business in part

through foreign affiliates, hereinafter referred to as the

combination method, combined reporting, or combination).

This Court should not permit the policies of the United States

Treasury Department (hereinafter referred to as Treasury)

to indiscriminately spill over and dictate state tax policies.

We believe that this matter should be resolved by Congress,

not by Treasury or this Court. Acceptance of Container’s

argument would open the floodgates to state income tax

avoidance by large multinational corporations by permitting

them to use their own internal accounting devices and the

corporate form in which they conduct their business to shift

their profits anywhere in the world.’

6. While there may be international agreements between the United

States and certain other nations pertaining to taxation of the domestic

operations of foreign parent corporations, including their foreign affiliated

and subsidiary corporations, no such agreements exist as to how nations

will tax their own domestic corporations, including their foreign subsidiary

and affiliated corporations. Absolutely nothing in the record in this cause

substantiates Container’s argument that any international standards,

agreements or norms exist or that the unitary method here involved

conflicts with these alleged standards, agreements or norms.

7. The need for combined reporting. on the international level, can

be illustrated by an actual example of a multinational corporation

conducting unitary operations in Canada and Idaho through two

subsidiary corporations. The Canadian subsidiary processes pulp used

for the manufacture of paper by the American subsidiary. The pulp is

transported from the Canadian subsidiary to the American subsidiary

by a pipeline crossing international boundaries. Under these

3

We are further concerned with Container’s use of abstract

theoretical due process arguments to invalidate reasonable

apportionment results and with its position that its

relationship with its foreign subsidiaries was insufficient to

permit combination without violating due process.

SUMMARY OF ARGUMENT

Container and its amici contend that the judgment below

is unconstitutional because: (1) it conflicts with international

tax policy, contrary to the limitations of the commerce clause;

(2) worldwide combination misapportions income to the

United States members of the group, resulting in

extraterritorial taxation in violation of the due process clause

(Appellants Br. at 9); (3) the income missapportioned to the

United States members of the group is fully taxed in the

foreign country where it was earned. (id.) and therefore the

income is subject to double taxation, in violation of the

commerce clause (id.); and (4) Container did not conduct a

unitary business with its subsidiaries for the years in question.

The question of whether an established international tax

policy exists, and whether this alleged policy conflicts with

worldwide combined reporting, is thoroughly analyzed in the

brief amicus curiae of the Multistate Tax Commission and

participating states in the CBI case at III pp. 17-24. No

international policy for the attribution of net income exists.

If this policy did exist, it would not prohibit or restrict the

states’ authority to employ combined reporting, or any other

method, to ascertain the apportionable net income

Footnote 7 (con't)

circumstances, it is impossible to separate the profits of the Canadian

subsidiary from that of the American subsidiary because the profits of

the two corporations from the manufacture of pulp and paper products

were earned by a series of transactions beginning in Canada and ending

in sales in the United States. Underwood Typewriter Co. v. Chamberlain.

254 U.S. 113 (1920). Thus, logic dictates that combination be utilized

to determine the profits of either of these two subsidiaries.

4

(hereinafter referred to as apportionable income“) of

Container, or any other U. S. domestic corporation. Jd. at

16 n.32. Container and its amici are simply asking the Court

to require the states to use the intercorporate separate

accounting of a multinational corporation (hereinafter

referred to as a MNC) which conducts a part of its unitary

business in foreign countries through subsidiary

corporations, to determine apportionable net income.’ In this

case, Container relies solely on the separate accounting of

its book net profits and that of its subsidiaries to support

its facial,“ as applied. distortion, and double taxation

arguments. Exhibit A at 1-6.

In regard to these arguments, Container does not separate

its facial attack from its as applied attack on worldwide

combination; Container does not separate the facts it relies

on to support its distortion argument from the facts it

relies on to support its double taxation argument.

However, these distinct issues must be separately considered

since these issues are not addressed to either common legal

or factual questions.

In regard to Container’s double taxation argument, the

record does not show that combination has attributed any

net income to the United States which has in fact been taxed

by the foreign countries in which Container’s subsidiaries

conducted business for the years in question. Neither does

the record establish that California has attributed to U. S.

8. The phrase apportionable income refers to a multijurisdictional

taxpayer's tax base which is divided by an apportionment formula among

those states in which the taxpayer does business. See infra note 15.

9. To support its double taxation and distortion arguments, Container

erroneously uses the terms separate accounting and arm's-length

synonymously. Further, Container improperly relies on its separate

accounting of net profits, not net taxable income. Because IRS § 482

audits are unusual and special procedures, the IRS audit of Container

for the years in question was not an arm's- length adjustment audit.

This is demonstrated by the fact that the tax comparisons between

combination results and the results Container asserts are here controlling

are based on its own “separate accounting and not on any so called

“arm’s-length” analysis by any country.

5

sources any net taxable income which is not attributable to

U. S. sources for federal income tax purposes if any reasonable

allowance is made for the admitted understatement of U. S.

source net income by Container s separate accounting. (See

infra notes 10-11.) Thus. Container s double taxation argument

is not supported by any proof of either extraterritorial or double

taxation by California.

In regard to Containers distortion argument, it has not

attempted to prove that the combination method, as applied

by California, has attributed any net income to California which

is disproportionate to its extensive California operations. A

difference between an apportionment result and separate

accounting does not invalidate an apportionment result.

Notwithstanding the foregoing, Container and its amici

facially attack worldwide combination on the premise that

worldwide combination attributes too much income to U. S.

sources because of: (1) the distortion in the payroll factor;

(2) the higher expected rate of return of U. S. based MNCs

on their foreign operations as compared to their expected

rate of return on their domestic operations; and (3) double

taxation of income which has been earned in and taxed by

foreign countries.

Worldwide combination per se has nothing to do with these

issues. Combination simply requires a unitary business, which

is conducted by a group of corporations, to be treated as a single

business for income attribution purposes in the same manner

as though the business was conducted as branches or divisions

of a single corporation. The arguments of Container and its

amici to facially attack worldwide combination are equally

relevant if the foreign operations of a United States MNC are

conducted by overseas divisions. Since the states clearly have

the authority to combine the income of overseas branches to

determine the boundaries of a unitary business for

apportionment purposes (see Bass, Ratcliff & Gretton, Ltd. v.

State Tax Comm'n, 266 U.S. 271 (1924) which was cited with

approval in Mobil and other decisions of this Court), a facial

attack against combined reporting cannot be sustained (see also

Mobil, 425 U.S. at 440-41).

6

Neither has Container advanced any valid reasons to

support its argument that worldwide combination as applied

to its business affairs results in either distortion or

international double taxation. In support of its as applied

argument, in addition to the reasons advanced by Container

to support its facial attack, Container contends: (1) that it has

proved that California’s use of worldwide combined reporting

actually results in the misapportionment of its net income to

California and subjects the combined net income of Container

and its subsidiaries to double taxation; and (2) that it did not

conduct a unitary business with its foreign affiliates. Container

has not proved its case because it bases its as applied

argument (as well as its facial argument) on the following

erroneous assumptions and erroneous factual conclusions:

First, that its separate accounting for its net profits and

that of its subsidiaries appropriately determines its net

taxable income from U.S. sources, and the foreign source

net taxable income of its subsidiaries. However, book net

profit is not taxable income. The record conspicuously fails

to indicate actual net taxable income of Container’s

subsidiaries as reported to foreign countries for foreign

income tax purposes. In addition, Container admits that this

“separate accounting is inaccurate. In any event, separate

accounting does not invalidate an apportionment result. See

Exxon; Mobil; Butler Bros.

Second, Container’s argument is based on the erroneous

assumption that one-third of net taxable income under

UDITPA is attributable to payroll costs (Appellant's Br. at

10. The net book profits of Container and affiliated corporations, which

is set forth on Exhibit A, do not constitute the net taxable income for

U. S. federal tax purposes or for the tax purposes of foreign countries

in which its affiliated corporations conduct business. As to Container,

this is demonstrated by comparing federal taxable income in Exhibit A

at 7 with the net profit figures of Container set forth in Exhibit A at 2, 4, 6.

11. Container was not compensated for some services which it provided

its subsidiaries (JA { 144 at 74); it sold used equipment to them at book

rather than fair market value (id., J 144 at 76); it brokered equipment to

them at a fee less than would be charged a third party (id. J 148 at 77);

it received no fees for loans it guaranteed for its subsidiaries and it charged

minimal interest on loans made to them.

7

14) and that the unitary apportionment method is based on

the premise that each dollar of payroll expense produces an

equal amount o net income (id. at 11). On the contrary, the

UDITPA three factor fe. nula is based on the premise that

the location of a taxpayer's tangible property, payroll and

sales taken together roughly approximates the geographical

locations of the net income of a unitary business. Further,

no particular portion of net income is attributable to any one

factor or to any geographical location to which that factor

assigns net income.

Third, Container’s argument is based on the unproven

assumption that profits in foreign countries are higher per

dollar of investment than in the United States because MNCs

anticipate this result. Appellant’s Br. at 14. Three of

Container’s affiliates incurred net losses based on their

separate accounting in 1963, four operated at a net loss in

1964 and one in 1965. Exhibit A at 1, 3, 5. These facts destroy

Cortainer’s argument that its foreign subsidiaries operated

at higher profit rates.

Fourth, Container’s reliance upon the table at page 17 of

its brief, which is constructed from separate accounting of

net profits as reported on its federal IRS 2952 information

schedules, further demonstrates the erroneous foundation

of Container’s argument. By definition, the information on

these schedules is not accurate and contains estimates and

approximations that are determined by separate accounting

— they do not represent the net taxable income which was

subject to tat by any foreign country or by the United

States. For example, Container’s IRS form 2952 shows that

the Italian subsidiaries had an average income of $34,000

for the tax years at issue. Appellant’s Br. at 17. But

Container’s 2952 form also shows that the Italian

subsidiaries had an average tax liability of $121,044 for these

same years (JA J 159 at 84), which represents 356% of their

average pre-tax income. The inherent inaccuracy of

Container’s 2952 form is further demonstrated in Exhibit

A where Container’s net profits are listed as $25,361,936 for

1963; $28,975,400 for 1964; and $30,026,749 for 1965 (Exhibit

A at 2, 4, 6) even though Container’s federal taxable income

substantially exceeded these amounts (id. at 7). Thus,

8

Container’s distortion and double taxation arguments are

not based on amounts actually attributable to either the IRS

or to the foreign subsidiaries for income tax purposes.

Fifth, Container’s reliance upon the differences between

payrolls and rates of return are not substantiated by the

claimed misapportionment of income as set forth in the table

at page 17 of its brief. Container’s allegation that the

California wage rate is two hundred fifty percent that of the

wage rate paid to workers in Cali, Colombia, if appropriate

at all, hardly demonstrates the invalidity of the mere 9.5%

difference’? between net income attributable to the United

States by worldwide combined reporting and by Container’s

net profits assigned to different countries by Container’s

separate accounting.“

In sum, Container simply relies on its internal separate

accounting to attack the combination method on its face and

as applied by California. Since Container has not attempted

to prove California actually taxed extraterritorial income,

Container has failed to carry its burden of proving that

California’s use of the combination method took its property

without due process of law. Neither has Container proved

any actual double taxation.

Neither is there merit in Container’s argument that the

court below denied it due process of law in concluding that

it conducted a unitary business with its foreign subsidiaries.

The thirty-seven facts taken from the stipulated facts, infra

pp. 27-29, illustrate that the subsidiaries were not conducted

as discrete businesses so unrelated to Container’s own

business that combination denied Container due process of

law. Any reasonable inference from these and other facts

support the proposition that Container formed and utilized

12. This is the difference between the total worldwide net profits

attributable to the United States by Container’s separate accounting as

compared to worldwide combinec reporting. It is obtained from the figures

set forth on page 17 of Appellant's Brief.

13. The tax liabilities sl. on on the 2952s as having been paid to foreign

countries are not accurate (JA ¢¢ 159-61 at 83-85) and otherwise do not

prove double taxation of net income.

9

its foreign subsidiaries to further its container business

throughout the world and that it used its total resources as

needed in furtherance of this purpose. From the record in this

case, we discern little difference between the type of centralized

management and control that Container exercised over its

foreign operations than it exercised over its domestic operations.

If the unitary business principle is going to have any continued

vitality in the field of state net income taxes, consideration must

be given to the modern methods of how integrated businesses

are conducted. Top management of large multinational

corporations realistically cannot control any of their far flung

Operations except through advanced planning, approval of major

of reports, the placing of persons in key positions, and the

promolgation of basic corporate policies, etc. throughout the total

enterprise. If the states cannot rely on reasonable presumptions

that can be drawn from the general character and mode of

operations of particular MNCs to determine whether they are

conduciing a unitary business sufficient to satisfy the “minimal

connection and rational relationship’’ due process standard,

the states will be completely unable to uniformly and fairly

administer the unitary business principle.

THE ARGUMENT

I. General Introductory and Constitutional Considerations

The broad issue before this Court is what constitutes the

extent and nature of the fundamental constitutional

restrictions on the sovereign taxing powers of the states

within our federal system. The narrow issue here is to what

extent California can use the combination method" to

determine Container’s net income attributable to its business

activities in California.

14. See generally P. Hartman, Federal Limitations on State and Local

Taxation (1981).

15. The term “unitary business principle is used in two separate and

distinct contexts. The first context, the combination method at issue here

and in Chicago Bridge & Iron Co. v. Caterpillar Tractor Co., No. 81-349

(ren g granted May 3, 1982), is used to determine which of two or more

10

Inasmuch as Container is not a champion of any

constitutional rights except its own, Forthingham v. Mellon,

262 U.S. 447, 487-88 (1923), these issues must be resolved

in regard to the specific facts and circumstances pertaining

to Container, not by abstract hypothetical considerations.

In resolving these issues, this Court’s function is not to

determine whether the combination method or any other

method employed by the states is the most fair and equitable

method. The study and potential promulgation of uniform

state tax laws involves complex questions which require

political, not judicial, resolution. Moorman Mfg. Co. v. Bair,

437 U.S. 267, 278-80 (1978). This Court has repeatedly held

that a state is free to design any tax system it wishes so long

as that tax system does not impinge on a taxpayer’s

fundamental constitutional rights. Moorman; Wisconsin v.

J.C. Penney Co., 311 U.S. 435, 444 (1940).

An understanding of the basic principles upo which the

“unitary business principle is constructed will aid

resolution of the complex issues in this case. Beginning with

the early property tax case of Adams Express Co. v. Ohio

State Auditor, 165 U.S. 194 (1896), aff'd on rehearing, 166

U.S. 185 (1897) through Exxon Corp. v. Department of

Revenue, 447 U.S. 207 (1980 this Court has uniformly

Footnote 15 (con't)

corporate entities should be regarded as being engaged in one “unitary

business and should therefore be combined or treated as a single

corporation for state tax reporting purposes. The second context, the

unitary apportionment method at issue in ASARCO Inc. v. Idaho State

Tax Comm'n, No. 80-2015 and F.W. Woolworth, Inc. v. Taxation &

Revenue Dep't of New Mexico, No. 80-1745 (Petition for Rehearing

pending), is used to determine what income is tributed to the unitary

business and is thus subject to apportionment among the states in which

to describe this income. See supra text accompanying note 8. See generally

Dexter, Post Oral Argument Comments on ASARCO and Woolworth, 15

Tax Notes No. 11 at 867 (June 14, 1982).

16. See supra note 15.

17. Because a Petition for Rehearing is pending and this Court’s mandates

have not issued in either ASARCO, Inc. v. Idaho State Tax Comm n

11

sustained reasonably apportioned state imposed property.

franchise, or net income taxes. This Court has consistently

held that the states are free to use the unitary business

technique even if some components of the unitary business

are located outside the taxing jurisdiction, including foreign

countries. United States Steel Corp. v. Multistate Tax

Comm'n, 434 U.S. 452 (1978), aff'g 417 F. Supp. 795

(S. D. N. V. 1976); Butler Bros. v. McColgan, 315 U.S. 501

(1942); Bass, Ratcliff & Gretion, Ltd. v. State Tax Comm'n,

266 U.S. 271, 282 (1924); Underwood Typewriter Co. v.

Chamberlain, 254 U.S. 113 (1920).

This Court has recognized that net income taxes, unlike

gross receipt taxes, are not imposed on any transactions from

which net income may be derived. Peck & Co. v. Lowe, 247

U.S. 165 (1918). Thus, Inſeither the privilege nor the burden

is affected by the character of the source from which the

income is derived.’’ New York ex rel. Cohn v. Graves, 300

U.S. 308, 313 (1936). For purposes of state corporate taxes

net taxable income is a highly abstract concept.“

representing only a relatively small part of the taxpayer's

business receipts. Taxation of net income is not the taxation

of any specific item, activity, or property of the business.

Separate accounting”’ results do not impeach the validity

of assignment of net taxable income by the formulary

apportionment method.” This Court has upheld unitary

apportionment, even though applied to income from foreign

activities of a foreign corporation which earned no taxable

income in the United States for federal income tax purposes.

Footnote 17 (con't)

U.S. 102 S. Ct. 3013 (1982) and F.W. Woolworth, Inc. v. Taxation

& Revenue Dept. U.S. 102 S. Ct. 3128 (1982), we believe it

inappropriate to refer to these cases as established authority.

18. Dexter, The Attribution of the Net Income of Multistate-

Multinational Corporations for State Income Taxes on or Measured by

Net Income, 1 Multistate Tax Comm'n Rev. No. 1 at 5 (Nov. 1981).

19. Compare Crew Levick Co. v. Pennsylvania, 245 U.S. 292 (1917) with

Peck & Co. v. Lowe, 247 U.S. 165 (1918).

20. See Exxon; Mobil; Butler Bros.

12

Bass, Ratcliff & Gretton. It has also held that all aspects

of a business presumptively contribute to the operations of

the business as a whole. Adams Express, 165 U.S. at 227.

Apportionment formulas are based on the premise that

geographical sourcing is impossible where the instate and

out-of-state activities are interdependent” and that it is

necessary and constitutionally permissible to assign net

income under these circumstances to where the instate and

outstate business is conducted, as reflected by the rough

approximation of an apportionment formula. Moorman Mfg.

Co. v. Bair, 437 U.S. 267, 278-80 (1978); International

Harvester v. Evatt, 329 U.S. 416 (1947).

This Court has invalidated an apportionment formula only

when the taxpayer has proved by clear and cogent evidence

that the formula taxed extraterritorial income or values.

Moorman Mfg. Co.; Butler Bros.; Norfolk & Western Ry. v.

Missouri State Tax Comm n, 390 U.S. 317 (1968); Hans Rees’

Sons, Inc. v. North Carolina, 283 U.S. 123 (1931). It has thus

upheld a single property factor apportionment formula (Bass,

Ratcliff & Gretton; Underwood Typewriter Co.) and a single

sales factor apportionment formula (Moorman Mfg. Co.; Ford

Motor Co. v. Beauchamp, 308 U.S. 331 (1939)).

In applying the foregoing constitutional standards, the

Court has held that the taxpayer’s corporate business form

is not controlling in determining the apportionable net

income. Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S.

425, 440-41 (1980). Rather, it has held that the unitary

business principle is controlling for this purpose.” Id. at 439.

However, the apportionment of the income or property of

a unitary business may be invalidated if the apportionment

results in extraterritorial taxation. Norfolk & Western Ry.;

Hans Rees’ Sons, Inc.. Thus, the fundamental due process

question is whether a state, regardless of the method used,

taxes extraterritorial values or income.

21. Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 121 (1920).

22. The linchpin of apportionability should be whether the

apportionment result is constitutionally reasonable, not the unitary

business method per se. See infra pp. 23-25.

13

While this Court has held that the purpose of the commerce

clause is to prevent any undue multiple burdens on interstate

commerce, it has also held that any prohibited risk of

multiple taxation is satisfied by reasonable apportionment

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

434 (1979); Northwestern States Portland Cement Co. v.

Minnesota, 358 U.S. 450, 448-49 (1959). It has also refused

to engage in hypothetical reasoning or speculation in

resolving any alleged multiple taxation question. Moorman,

437 U.S. at 276; First Fed. Sav. & Loan v. Tax Comm'n

Ass n, 437 U.S. 255, 262 n.9 (1978); Standard Pressed Steel

Co. u. Dep't of Revenue, 419 U.S. 560 (1975); Northwestern

States Portland Cement Co.; Northwest Airlines, Inc. v.

Minnesota, 322 U.S. 292-95 (1944); International Harvester

Co. v. Dep’t of Treasury, 322 U.S. 340, 348 (1944).

This Court has properly noted that ſcloncurrent federal

and state taxation of income, of course, is a well-established

norm (Mobil, 445 U.S. at 448) and that “‘[a]bsent some

explicit directive from Congress, we [the Court] cannot infer

that treatment of foreign income at the federal level

mandates identical treatment by the States.”’ (id.; bracketed

material added). It has thus emphasized that “absent

congressional action . . the States’ power to tax can be

deprived only under ‘the clearest constitutional mandate’

Michelin Tire Corp. v. Wages, 423 U.S. 276, 293 (1976).“

United States v. New Mexico, __ U.S. , 102 S. Ct. 1373,

1384 (1982).

In sum, this Court has concluded that if a state tax is fairly

apportioned and non-discriminatory, if it is applied to an

activity with substantial nexus in the state, and if it is

designed to reasonably compensate the state for services

provided, then a state tax does not contravene either the due

process clause (Moorman, 437 U.S. at 272) or the commerce

clause (Japan Line, 441 U.S. at 444-45) limitations on state

taxing power. Further, the taxpayer carries the burden of

proving that a state tax is unconstitutional by showing a

lack of connection between its instate activities and that

which the state has sought to tax. Mobil, 445 U.S. at 442;

Norton Co. v. Dep't of Revenue, 340 U.S. 534, 537 (1951).

14

In the application of the foregoing general constitutional

principles, the state courts were faced with a question of what

criteria to use to determine when a taxpayer conducted a

unitary business and what should be the result when a

unitary business is conducted by the taxpayer in conjunction

with commonly owned and controlled affiliated corporations.

The cases hold that a unitary business is being conducted

if the business is owned and controlled by the same interests

and the component parts of the business are so interrelated

and interdependent that they form one business unit rather

than separate discrete business enterprises.” In determining

whether a business is unitary, no case holds and no study

concludes that the corporate form in which the business

is conducted is controlling.“

23. The basic tests utilized by the state courts to determine what

constitutes a unitary business are set forth in Dexter, The Unitary Concept

in State Income Taxation of Multistate Multinational Businesses, 10 Urb.

Law. 181 (1978).

See also Exxon; Mobil; Butler Bros. v. McColgan; Chase Brass & Copper

Co. v. Franchise Tax Bd., 10 Cal. App. 3d 496, 95 Cal. Rptr. 805 (1970);

John Deere Plow Co. v. Franchise Tax Bd., 38 Cal. 2d 214, 238 P.2d 569

(1951); Zale-Salem, Inc. v. State Tax Comm'n, 237 Or. 261, 391 P.2d 601

(1964); Webb Resources Inc. v. McCoy, 194 Kan. 758, 401 P.2d 870 (1965);

Crawford Mfg. v. State Commissioner of Revenue, 180 Kan. 352, 304 P.2d

504 (1956); Western Auto Supply Co. v. Commissioner of Taxation, 245

Minn. 346, 71 N.W.2d 797 (1955).

24. See House Comm. on the Judiciary, State Taxation of Interstate

Commerce, H.R. Rep. No. 1480, 88th Cong., 2d Sess. Vol. 4 at 1154-55

(Willis Report).

25. See Mobil; Edison Cal. Stores Inc. v. McColgan, 30 Cal. 2d 472, 183

P.2d 16 (1947); Joslin Dry Goods Co. v. Dolan, __ Colo. . 615 P.2d 16

(1980); In re Morton Salt Co., 150 Kan. 650, 95 P.2d 335 (1939); Caterpillar

Tractor Co. v. Lenckos, 84 Ill. 2d 102, 417 N.E. 2d 1343 (1981), fg 77

Ill. App. 3d 90, 395 N.E. 2d 1167 (1979), appeal filed sub nom. Chicago

Bridge & Iron Co. v. Caterpillar Tractor Co., No. 81-349 (argued Apr. 19,

1982; reh g granted May 3, 1982); Montana Dep't of Revenue v. American

Smelting & Ref. Co., 173 Mont. 316, 567 P.2d 901 (1977), appeal dismissed,

434 U.S. 1042 (1978); Coca Cola Co. v. Dep't of Revenue, 271 Or. 517,

533 P.2d 788 (1975), aff'g 5 Or. T.R. 405 (1974).

15

II. The Worldwide Combination Method Is Not Facially

Invalid Under the Due Process Clause

The worldwide combination method is not facially

unconstitutional* because of the following: (1) Container’s

distortion and double taxation arguments are equally

relevant regardless if Container conducts business through

separate foreign subsidiaries or through foreign divisions of

a single corporation; (2) Bass, Ratcliff & Gretton holds that

a state may apply its apportionment formula to a taxpayer’s

tax base that includes income from foreign divisions of the

taxpayer’s single business; and (3) Mobil holds that corporate

form has no effect on resolving the issue of whether a state

has denied due process to a taxpayer by taxing the

taxpayer’s extraterritorial income. Container’s distortion and

double taxation arguments, if they have any relevance at all,

should only be addressed to the result when the method is

applied to Container.

The purpose of the combination method is to treat two or

more separate corporations as a single business unit for net

income apportionment purposes when they would be treated

as a unit if their combined businesses were conducted as

divisions of a single corporation.” A ruling in favor of

Container and its amici that worldwide combination is

facially invalid would dictate a ruling against Caterpillar

Tractor Co. in CBI, where both the state and the taxpayer

(Caterpillar) agree that application of worldwide combined

reporting is necessary to prevent unreasonable and

unconstitutional attribution of Caterpillar’s income to

Illinois. There is thus no substance to a facial attack against

the constitutionality of worldwide combined reporting.

26. See Brief of Caterpillar Tractor Co. as Amicus Curiae in support

of Appellee at 7-9.

27. Container relies upon hypothetical considerations and attacks the

facial validity of worldwide combined reporting because it cannot carry

its burden of proving that California's application of worldwide combined

reporting taxed income that was not rationally related to California.

28. See Supra p. 5; supra notes 15, 23 & 25.

16

III. Container’s Due Process ents Lack Merit

Because Container Has Not e Its Burden of

Proving by Clear and t Evidence that California’s

Application of Worl e Combined Reporting Taxed

Any of Container’s Extraterritorial Net Income

Container has offered no proof to establish that if it had not

conducted any activities in California for the years in question

what its net income would have been for those years. Neither

has it otherwise proved any extraterritorial taxation by

California. Rather, it erroneously assumes that its separate

accounting analysis proves extraterritorial taxation by

California’s uso of the combination method. While relying on

its internal separate accounting to prove its case, Container

admits that this separate accounting is not accurate.” This

argument based on separate accounting”’ begs the reasonable

attribution question at issue. For, if Container and its foreign

subsidiaries in fact conducted a unitary business for the years

in question, separate accounting does not establish the

invalidity of an apportionment result. Exxon Corp. v. Dep't

of Revenue, 447 U.S. 207 (1980); Mobil Oil Corp. v.

Commissioner of Taxes, 445 U.S. 425 (1980); Butler Bros. v.

McColgan, 315 U.S. 501 (1942).

Notwithstanding the foregoing, in order to prove the

validity of its separate accounting”’ for its net profits and

those of its foreign affiliates, Container argues that ſblecause

coinbined apportionment on a worldwide basis fails to account

for the lower wage rates and greater profitability of foreign

operations worldwide combined apportionment is invalid on

its face and as applied to Container. Appellant’s Br. at 15,

29. See supra note 11.

30. The distortion ia the attribution of income by the apportionment

method as compared to separate accounting was far greater in Exxon and

Butler Bros.’ than any distortion claimed by Container to exist in this

case. In Butler Bros., the taxpayer contended that its California operations

were operated at a loss of $82,851 and apportionment assigned a profit

of $93,500 to California based on an apportionment of 8.1321 percent of

the entire unitary income to California. This represents a difference of

$175,000 or a shift of 15% of Butler Bros. net income between net income

assigned to California by separate accounting and worldwide combination.

In contrast, the average shift here is 2.28 percent.

17

11-18. It bases its wage rates argument (hereinafter

referred to as Containers payroll' argument) on its

erroneous assumptions that: (1) ‘‘[clombined apportionment

under the unitary method assumes that a dollar of property,

payroll or sales of the parent (Container) produces

approximately the same amount of income as a dollar of

property, payroll or sales of a subsidiary (id. at 11); and (2)

under UDITPA, one-third of net income is attributable ‘upon

the basis of payroll costs“ (id. at 14). However,

apportionment under the unitary method is based on the

assumptions that: (1) the net income of a unitary business

cannot be realistically divided by separate accounting”’ to

any particular costs, properties or activities; and (2) it is

reasonable to attribute net income to where the business of

the taxpayer is conducted as reflected by a composite result

of all the factors of an apportionment formula. Thus,

UDITPA assumes that the attribution of net income of a

business in reference to the location of a taxpayer's sales,

payroli and tangible properties as an average is a reasonable

rough approximation for the geographical distribution of this

net income. The fact that the factors are equally weighted

for this purpose does not mean that one-third of net income

is attributable to each factor.

Also, an attack on one factor of an apportionment formula

does not prove the invalidity of the apportionment result.“

For example, if property values are higher in a foreign area

like Hong Kong or Western Europe, based on Container’s

theoretical ‘‘payroll’’ argument, the property factor would

misapportion net income overseas. The same is true with the

sales factor. In fact, California is not constitutionally required

to use a payroll factor to apportion net income and could have

used a single sales factor formula (Moorman) or a single

property factor formula (Underwood Typewriter).

Container’s argument in regard to higher expected (not

actual) rates of returns of U.S. MNCs on investments in

foreign countries, Appellant’s Br. at 14, is also defective. As

31. See Norfolk & Western Ry. v. North Carolina, 297 U.S. 682, 688

(1936); American Cement Corp. v. Graves, 299 U.S. 517 (1936).

18

applied to Container, this argument is specifically refuted

by the fact that three of its foreign subsidiaries operated at

a loss in 1963, four in 1964 and one in 1965. Exhibit A at

1, 3, 5. Expected profits and profits received are separate

and distinct factual issues.

Further, Container’s distortion argument is not internally

consistent. For, if the enormous claimed payroll and

profitability distortions were actually reliable predictors of

alleged misapportionment (Appellant’s Br. at 12-14), the

resulting alleged extraterritorial taxation would be many

times greater than that claimed by Container on pages 16-18

of its brief. For example, while Container asserts that its

payroll costs in foreign countries are many times less than

its payroll costs in the United States (id. at 12-13) and its

operations in foreign countries are many times more

profitable than in the United States, it claims an actual

distortion of $4,000,000 (Appellant’s Br. at 17). Using

Container’s numbers (id.), this figure represents only a 14%

difference between its separate accounting ‘‘net profits’’ and

worldwide combination. This $4,000,000 difference is simply

based on the difference of its separate accounting for its

net profits and that of its subsidiaries for federal tax

information purposes as set forth on Container’s IRS forms

2952s for the years in question. These net profit figures do

not represent the net profits on which any income taxes are

computed by any country of the world.“ Thus, the table on

32. Form 2952 is an information form filed with the Internal Revenue

Service as part of the federal tax return of U.S. MNCs. This form is not

used to compute any tax liabilities for any taxing jurisdiction and does

not purport to accurately reflect any figures appearing thereon either in

regard to the net profits or income tax liabilities of the taxpayer or its

foreign affiliated corporations. See supra p. 7. (JA at 83-85). However,

information on Container’s 2952s for the tax years 1963, 1964 and 1965

was used to prepare Exhibit A (JAE at 1-6). The net profits disclosed

in the 2952s were presumably determined by reference to generally

accepted accounting principles which vary from country to country (JA

at 83-85) and which differ from net taxable income as determined by

various countries in which Container’s subsidiaries operate. Hd.). Thus,

these net profit figures must be treated as guesses or rough estimates.

These net income figures hardly validate the de minimis

misapportionment of net income upon which Container relies in this case.

19

table on page 17 of Container’s brief does not prove distortion

or double taxation.

Furthermore, these figures and those on page 16 of

Container’s brief do not correctly compare Container’s U.S.

source net income for federal income tax purposes with its

U.S. source net taxable income for worldwide combination

purposes. This comparison can only be made by comparing

Container’s U.S. source federal net taxable income in Exhibit

A at 7, with Container’s worldwide combined net taxable net

income which was apportioned to U.S. sources by California's

use of combination (factor information is derived from

Exhibit A at 1-6 and net taxable income figure from Id. at

7). This comparison reveals that Container’s average U.S.

source net taxable income (including Subpart F income and

California additions, such as state income taxes and interest

on government obligations, which are clearly U.S. source

income) for the years in question is $32,803,794. Net income

attributable to the U.S. under the California worldwide

apportionment method is $34,244,889. This represents a

difference of $1,441,109 or an attribution of approximately

3.23% more to U.S. sources than attributable to U.S. sources

for federal income tax purposes. Since Container asserts that

its separate accounting profit is 9.43% of its U.S. receipts

(Appellant’s Br. at 14), this represents an increase of only

three tenths of one percent of Container’s U.S. source receipts

based on its admittedly inaccurate separate accounting.

Since only approximately 8% of worldwide income was

apportioned to California, increased net income attributable

to California is only $115,289. When this is multiplied by

California’s tax rate, the tax result is de minimus,

particularly when California’s net income tax is deductible

for federal income tax purposes. Furthermore, if the

foregoing adjustments take into account foreign source

income which is included in federal taxable income and the

difference between federal depreciation and California

depreciation deductions, this slight difference disappears.

In sum, the record does not support Container’s argument

that worldwide combined reporting is unconstitutional on

20

its face or as applied. If Container is entitled to anything,

it is apportionment relief“ which it has not requested.

IV. Contrary To Its ent, Container Has Not Shown

That California’s Use of the Combination Method

Results in the Taxation of Income That Was Also

Taxed By Foreign Countries

Container asserts that California is not only taxing

income which has been earned in foreign countries under the

system of allocation applied in those countries, California

is taxing income which is, in fact, also taxed by the foreign

countries in which Container’s subsidiaries operate.

Appellant’s Br. at 21. This statement is not correct.

Regarding the foreign countries in which Container’s

subsidiaries operated, the record fails to indicate (1) the

allocation methods employed by the foreign countries; (2) the

subsidiaries’ actual net taxable income reported to those

countries; and (3) taxes actually paid to those countries.

Container has conspicuously failed to produce the actual tax

returns filed by its foreign subsidiaries with foreign countries

in which they operated for the years in question. One can

only surmise that Container has failed to do this because this

information would not have supported either its distortion

or double taxation arguments. Rather, as discussed above,

Container relies upon the net profit figures in Exhibit A at

1-6 which are taken from its IRS form 2952 which it filed

for informational purposes with its federal tax returns. These

net profit figures are not the net taxable income figures

reported to foreign countries (JA ¢ 21 at 11-12) and they are

not accurate (JA at 83-85). Furthermore, the taxes paid by

the foreign subsidiaries to foreign countries as contained in

Container’s 2952s (reproduced in Exhibit A at 1-6) are not

33. See Hans Rees Sons; Norfolk & Western Ry. See also UDITPA §

18, Cal. Rev. & Tax Code § 25137, which provides for apportionment relief

if a taxpayer can establish that the apportionment provisions do not fairly

represent the extent of the taxpayer's business activities in the state. As

demonstrated herein, Container has simply not carried its burden of

proving that it is entitled to UDITPA § 18 apportionment relief.

34. Appellant’s Br. at 21-26.

21

complete or accurate figures, neither are they based on the

net profit figures contained in the 29528.“

In any event, California has taxed only approximately 8%

of the combined net income of Container and its subsidiaries

and Container has not shown that more than 92% of this

combined income has been taxed either by other states or

by foreign countries.

Assuming arguendo that Container has demonstrated that

there is some overlap in taxation between the method

employed by California in determining Container’s income

apportionable to California and the methods used by foreign

governments to tax Container’s subsidiary corporations, this

does not raise a foreign commerce clause issue. California

only asserts tax liability against Container for its California

activities. California tax is not imposed on and is no more

associated with foreign commerce than the New York income

tax in Bass, Ratcliff & Gretton. In Bass the taxpayer’s

apportioned income was derived in part from foreign

activities. In Container’s case, its income is derived solely

from its domestic U. S. operations. When Container conducts

a unitary business with its foreign subsidiaries, worldwide

combination is simply a method used to determine its true

net income which it derives from its U.S. business which it

conducts in the taxing state. Container’s argument that the

35. As discussed above, the inaccuracy of the net profit and tax figures

in Exhibit A is demonstrated by the fact that they disclose an average

of $34,000 in pre-tax income to Italy and tax liability on the average of

over $121,000 to Italy based on this profit or 356% of the $34,000 pre-

tax net profit figure. See supra p. 7.

In spite of the foregoing, Container asserts that the tax figures

reproduced on page 84 of the Joint Appendix and the net profits of its

foreign subsidiaries, as set forth in Exhibit A at 1-6, establish that

California taxes net income which has been taxed by Colombia and

Venezuela according to the arm’s-length principle actually applied in those

countries. Appellant's Br. at 22-23. This statement is not supported by

the record. Assuming arguendo that tax treaties were relevant, no tax

treaties exist between the United States and these countries. Neither does

the fact that Container filed returns with these countries (as set forth

in JA ¢ 140 at 72) support this statement. Furthermore, the long footnote

No. 11 on pp. 25-26 of Container’s brief is not a source of proof.

22

attribution of any net taxable income to California which is

not reflected in its own separate accounting is the taxacion of

extraterritorial income earned in foreign commerce is analogous

to the taxpayer’s argument in Bass that New York imposed

a tax on extraterritorial foreign income by use of the

apportionment method and to the taxpayers’ arguments in

Exxon and Underwood Typewriter Co. that extraterritorial

domestic income was taxed under the apportionment method.

However, in these cases the Court held that the apportionment

of the net income of a unitary business was a valid means to

determine instate net income. Thus, the instant case is clearly

distinguishabie from Japan Line where the property tax was

imposed directly on foreign corporations’ property used

exclusively in foreign commerce.“

Thus, for the reasons set ferth above and supra pp. 18-20

in reference to Container’s distortion argument, Container

has clearly not proved any double taxation. And, as

indicated at suprs p. 13, this Court has refused to resolve

double taxation claims based on theoretical and

hypothetical considerations.

V. 1414 2 — 7 41 —

Court's Holding That Container and Its Subsidiaries

Conducted a Unitary Business Sufficient to Meet the

Rational Relationship Test of the Due Process Clause

The narrow constitutional issue before this Court is

whether the lower court’s holding that Container and its

foreign subsidiaries conducted a worldwide unitary business

36. For further consideration of the foreign commerce clause argument

of Container and its amici see the amicus brief of the Multistate Tax

Commission in the pending CBI case.

37. As discussed above, this brief will not consider the relevancy of the

due process tests as discussed in ASARCO and Woolworth. See supra

note 17. In addition, those decisions erroneously resolved a combination

method issue (the issue here in Container) when the actual issue before

the court was a unitary apportionment issue — whether dividend income

received by an existing unitary business could be included in the business’

apportionable income. See supra note 15. In the alternative, as

demonstrated in Appellee s brief, this case is factually distinguishable

from ASARCO and Woolworth.

23

is consistent with the due process clause. The due process

clause provides a minimal protection to taxpayers, insuring

that the taxing power exerted by the state bears fiscal

relation to protection, opportunities and benefits given by

the state.

As stated by Professor Lathrop:

The uni business concept . . is not the linchpin of

apportionability. The linchpin of apportionability in the

due process sense is whether the amount of net income

attributed to the state has a rational relationship to the

business activities carried on in that state for which the

state has given benefits and can ask compensation in

return.

The reasonableness of the apportionment result, not the

unitary business principle, is the ultimate due process test.

See Norfolk & Western Ry. u. Missouri State Tax Comm'n,

390 U.S. 317 (1968) (state property tax); Hans Rees’ Sons,

Inc. v. North Carolina, 283 U.S. 123 (1931) (state corporate

income tax). In both of these cases the apportionment

formula result was invalidated on due process grounds even

though the formula only apportioned the unitary income or

the unitary property values. To our knowledge, this Court

has never invalidated a state income tax apportionment case

based on the unitary business principle, except in ASARCO

and Woolworth where a Petition for Rehearing isp ng.

It cannot be overemphasized that due process is a ._ sult

oriented test, not a method oriented test: regardless of the

method employed, the crucial issue is whether the taxing

resuit represents a taking of the taxpayer's property without

due process of law.

Although the resulting income attributed to California does

not violate the due process clause because it is well within

38. Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444 (1940).

39. Lathrop, Due Process Considerations and the Apportionment of

Dividend Income: A Dissent From the ASARCO and Woolworth

Decisions, 16 Tax Notes 1 at 3, 20 (July 5, 1982). See the amicus brief

of Idaho and Utah, filed as a supplement to this brief.

24

rough approximation apportionment standards,” if required,

the record supports California's factual decision to combine

Container and its foreign subsidiaries into one unitary

business.“ From the states’ perspective, the complex factual

inquiries necessary to prove that a parent and its subsidiaries

are subtly interwoven can present an administrative

nightmare.“ The needed facts are entirely in the possession

and control of multinational corporate taxpayers at various

locations around the world.“ As illustrated by the record in

40. See our response to Container’s distortion argument in III. above

at pp. 16-20.

41. In an effort to address the problem of what facts are necessary to

determine which entities are engaged in a single trade or business, see

Reg. IV.1(b), to the Multistate Tax Commission’s UDITPA Allocation

and Apportionment Regulations, which is reprinted in 7 Multistate Tax

Comm'n Ann. Rep. 64, 65, App. J (1973-74).

42. In order to resolve these complex factual issues, Container suggests

that this Court should adopt a due process standard of substantial flow

of goods. Appellant’s Br. at 47. We submit that this is a simplistic

oversimplification of the problem.

43. When a taxpayer needs to prove that it engaged in a single worldwide

unitary business, the taxpayer can easily produce the necessary facts to

prove their business is a worldwide unitary business. For example, consider

the thorough record established by Caterpillar Tractor Co. in the CBI case.

On the other hand, the difficulties faced by a state that needs to obtain

the necessary facts from an uncooperative taxpayer cannot be

overemphasized: the limited and overworked resources of the states are

virtually no match for a large multinational corporation that decides to

pursue a course of delay and judicial obstructionism. For example,

consider the Multistate Tax Commission’s protracted dispute with United

States Steel Corp. The first round of this controversy lasted six years,

required two district court opinions, and concluded with this Court's

holding that the Multistate ‘i'ax Compact is Constitutional in United

States Steel Corp. v. Multistate Tax Comm'n, 434 U.S. 452 (1978), aff'g

417 F. Supp. 795 (S.D.N.Y. 1976).

The second round of this controversy with U.S. Steel began in 1976

and is currently on appeal for the second time to the Ninth Circuit. In

spite of three district court orders requiring U.S. Steel to produce the

necessary relevant information, the matter remains stalled in the courts,

and U.S. Steel continues to refuse to provide this information. See

generally Multistate Tax Comm'n v. United States Steel Corp., No.

1-76-182 (D. Idaho); Multistate Tax Comm'n v. United States Steel Corp.,

659 F.2d 931 (9th Cir. 1981); Multistate Tax Comm'n v. United States

Steel Corp., No. 82-3181 (9th Cir. Briefs submitted).

25

this case, the states are forced to rely upon stipulated records

and cross examination of the taxpayer’s witnesses to prove

the necessary factual ties to support a combined report.

Judicial presumptions should favor the states while also

permitting corporate taxpayers to rebut the presumptions

to establish that the states are taxing extraterritorial income.

Resolution of these presumptions revolves around how one

views a Multinational Corporation (MNC). If a MNC is

presumptively viewed as a single economic unit, a cluster

of corporations of diverse nationality joined together by ties

of common ownership and responsive to a common

management strategy. then the taxpayer must shoulder

the burden of proving that the result of a state’s taxing

method violates the taxpayer’s due process rights.

Much has been written in regard to the fundamental nature

of MNCs.“ The following general description accords with

common sense and business reality:

Although MNC subsidiary corporations are legally

separate, in fact MNC ts tend to view them as

parts of the si global system whose overall success,

rather than that of any individual component, is

considered critical. From a business viewpoint, then, the

44. Vagts, The Multinational Enterprise: A New Challenge For

Transnational Law, 83 Harv. L. Rev. 739, 740 n.4 (1970) (quoting from

Vernon, Economic Sovereignty At Bay, 47 Foreign Affairs 110, 114 (1968).

45. See L. Solomon, Multinational Corporations and The Emerging

World Order (1978); R. Vernon, Storm Over The Multinationals - The Real

Issues (1977); R. Vernon, Sovereignty At Bay - The Multinational Spread

of U. S. Enterprises (1971); M. Wilkins, The Maturing Multinational

Enterprise - American Business Abroad From 1914 to 1970 (1974); Vagts,

supra note 44.

Professor Solomon states that la] decentralization ideology masks the

reality of centralization, in which one corporate nerve center devised a

common corporate strategy and made fundamental decisions regarding

production, marketing, finance and research. Discipline and continuity

Multinational Corporations and the Emerging World Order 20 (1978).

26

operations of the MNC largely transcend the geographic

boundaries of the various nations of incorporation.“

In specifically analyzing the crucial issue of parental control,

one author illustrates the broad spectrum of factual

relationships that exist between MNC parents and their

subsidiaries:

A survey of the European subsidiaries and other units

of 127 American corporations indicated that

approximately 40% imposed single strict control,

40% evi loose control and 20% had control that

was intermediate, flexible, undeterminable or in the

process of being changed. A trend for stricter control

was noted, stemming from three factors: the ease of

communication and trans tion; the development of

the European Common Market, which resulted in the

reorganization of distribution and marketing functions;

and the growth and importance of the European

subsidiaries as corporate profit centers. Other expert

observers view control by American firms as declining

over time as foreign iates gained experience.“

Unless this Court presumes (subject to clear and convincing

proof to the contrary) that a single business exists when a

MNC parent and its subsidiaries engage in the same line of

business, this Court will be encouraging a multiplicity of suits

to review innumerable degrees of factual MNC control

relationships. Logic dictates that this Court should presume

that MNCs in the same line of business are conducting a

unitary worldwide business. Absent this presumption, the

states will be faced with the insurmountable burden of

making detailed complex factual inquiries of MNC taxpayers.

The facts in the case at bar affirm that a MNC parent,

operating in the same line of business as its many foreign

subsidiaries, is so inexorably intertwined with the

subsidiaries’ business affairs that the corporate cluster

should be presumed to be acting like a single worldwide

46. Note, Multinational Corporations and Income Allocations Under

Section 482 of the Internal Revenue Code, 89 Harv. L. Rev. 1202 (1976).

47. L. Solomon. Multinational Corporations and the Emerging World

Order 21 (1978).

27

business. Container’s numerous admissions in the stipulated

record support this presumption by clearly indicating that

Container: (1) represented itself as a worldwide company,

referred to its foreign operations as divisions, and referred

to its foreign employees as its own employees in its 1963

annual report (Exhibit I); (2) engaged in the same line of

business with all of its foreign subsidiaries except one (a

holding company without tangible property or employees)

(JA { 25 at 14); (3) owned a controlling interest in all twenty

of its foreign subsidiaries (JA 1 25 at 14-15, J 10 at 7); (4)

created and founded eleven of their foreign subsidiaries (JA

1 25 at 14); (5) studied and made recommendations on

whether to create a new subsidiary or enter a new market

(JA 1 28 at 16-17); (6) admitted that a majority of the

positions on the boards of directors on over half of the foreign

subsidiaries were held by non-local representatives.

(Appellant’s Br. at 3); (7) reviewed most of the subsidiaries’

“major policy matters” (JA J 74 at 39); (8) entered into

detailed written contracts when permitted by local law, to

provide an astounding range of technical services,

information and personnel to its foreign subsidiaries,“

including con/idential information (JA ¢ 144 at 74, Exhibit

F); (9) loaned money to its foreign subsidiaries (JA 1 133 at

69); (10) guaranteed loans made to its foreign subsidiaries

48. These technical service agreements demonstrate that Container was

inexorably intertwined in the business affairs of its subsidiaries. For

example, consider Container’s contract with its German subsidairy:

II. BREMER PAPIER is engaged in the same industries as

CONTAINER. In order to develop its business on the German

market, BREMER PAPIER wishes to partake of the experiences

accumulated by CONTAINER in the industries as referred to in

Recital I hereof by requiring assistance of CONTAINER.

FIRST: CONTAINER binds itself to perform services and to

provide advice and consultation to BREMER PAPIER concerning

manufacturing techniques, engineering, design, architecture,

insurance and cost accounting in accordance with CONTAINER’s

progress in these areas, and to render any other assistance which

BREMER PAPIER may require in connection with any aspect of

its industrial or commercial operations. (Exhibit F at 9-10).

Another example of broad spectrum of services that Container provided

is the Contract with one of its Mexican subsidiaries:

28

(JA € 133 at 70); (11) helped subsidiaries in their acquisition

of equipment and machinery (JA € 147 at 76); (12) assisted

the foreign subsidiaries’ purchase of equipment from

independent suppliers (JA J 148 at 77); (13) sold

linerboard. paperboard and raw materials to its

foreign subsidiaries (JA ¢ 141 at 73); (14) purchased paper

for its foreign subsidiaries (J A J 143 at 74); (15) entered into

a joint venture with one Colombian subsidiary (JA € 158 at

81); (16) assisted a foreign subsidiary’s contract negotiations

(JA € 65 at 33); (17) made its design laboratories and design

information (JA / 66, 67 at 34-35) and its product

information (JA € 86 at 46, J 92 at 49) available to its

subsidiaries; (18) assisted the foreign subsidiaries to find

qualified personnel (JA 1 89 at 48, J 95 at 51); (19) trained

key subsidiary personnel (JA J 79 at 42); (20) demonstrated

a specific machine or process, and discussed specific topics,

with key subsidiary personnel (JA J 108 at 55); (21)

established approximately 10-12 visits per year for 2-6 week

periods by foreign employees to the United States to

familiarize themselves with the methods of operation of

CCA” (JA J 131 at 69); (22) transferred employees to

subsidiaries (JA J 120 at 62); (23) paid the salaries of some

employees of foreign subsidiaries (JA J 124 at 64-65); (24)

maintained a foreign operations staff (JA € 126 at 65);

(25) had three members of this foreign operations staff make

decisions regarding its foreign subsidiaries and present

Footnote 48 (con't)

FIRST: Container binds itself to render Carton y Papel technical

assistance for the efficient operation of the industrial plants referred

to in Recital II hereof, for the efficient production of board and

cardboard and corrugated shipping containers, as well as for any

other similar activity that Carton y Papel may carry out in the future

in Mexico. As a consequence of Container's obligation, Carton y

Papel shall have the right to receive technical assistance as far as

concerns the purchase of machinery and raw material, the

supervision of pr duction methods and the improvement of same

in accordance with Container's technical progress, the information

of such raw materia! or finished products markets as may be of

interest to it, as well as any other assistance which it may require

in connection with any aspect of its industrial or commercial

operations. (Exhibit F at 20).

29

studies and made recommendations to CCA’s Management

Committee and Board of Directors (JA 1 129 at 67); (26)

stipulated that its Director of Taxes and Insurance was

thoroughly experienced with the subsidiaries’ tax and

financial affairs (JA at 83); (27) had 26 former employees

working for the foreign subsidiaries (J A ¢ 120 at 62), at least

ten of whom functioned at the corporate or division level

(Exhibit D); (28) paid 38 employees who were employed by

the foreign subsidiaries (JA € 119 at 60); (29) had officers

or employees serving on every subsidiary Board of Directors

except one inactive subsidiary (Exhibit E); (30) had nine

officers who also served on the Board of Directors of the

foreign subsidiaries (JA € 131 at 68); (31) had its accountant,

Arthur Anderson & Co., audit all but two of its subsidiaries

(JA ¢ 138 at 72); (32) had its insurance agent insure many

of its foreign subsidiaries (J A ¢ 149 at 78); (33) had its general

counsel devote 40% of his time to insure that the foreign

subsidiaries conformed to ‘‘CCA’s standards for

professionalism, profitability and ethical practices” (JA “

128 at 66); (34) developed accounting procedures to facilitate

receipt of financial information (JA J 136 at 71); (35) received

monthly and yearly profit reports from the foreign

subsidiaries (JA J 135 at 71) because Container worked

toward achieving the most efficient systems and procedures

possible (JA J 139 at 72); (36) reviewed the subsidiaries’

budgets at its annual meeting (JA J 134 at 70); and (37) had

a special Management Committee that made quarterly

reviews of the subsidiaries’ capital projects (id.).

Because these numerous factual admissions support the

lower court’s holding that Container and its subsidiaries

conducted a de facto single business, this Court should accept

and affirm the trial court’s findings of fact. See Fry Roofing

v. Wood, 344 U.S. 157, 160 (1952): (Frayson u. Harris, 267

U.S. 352, 358 (1925); Portland Ry., Light & Power Co. v.

Railroad Comm'n, 229 U.S. 397, 412 (1913). These facts

amply demonstrate that Container has thorough knowledge

of, and was inexorably intertwined in the business affairs

of all of its subsidiaries for the years in question. Although

Container’s brief characterizes its involvement with its

30

subsidiaries as occurring in limited instances. nothing

in the record indicates Containers above involvements were

not absolutely essential to the business success of the plarent

or its subsidiaries. In resolving the question of whether

Container’s subsidiaries conducted independent discrete

business enterprises, the decisive determination requires

examination of the quality and character of Container’s

involvement in the affairs of its foreign subsidiaries, not

examination of the mere frequency or quantity of their

interactions. In any event, this involvement is sufficient to

overcome Container’s claimed violation of its due process

rights, where, as in this case, the difference between

Container’s separate accounting and worldwide combination

results are well within reasonable apportionment limits.

CONCLUSION

The record does not support Container’s due process clause

or commerce clause arguments that worldwide combined

reporting is unconstitutional on its face, or as applied by

California. Container is champion of no legal rights except

its own. As an abstract theoretical proposition, Container

cannot be denied due process of law or be subject to double

taxation. Worldwide combined reporting is not

unconstitutional on its face. Worldwide combined reporting

is constitutional as applied by California because Container

failed to prove actual taxation of extraterritorial income. The

controlling principle should be the reasonableness of the

apportionment result, not the unitary business principle per

se. Container has further failed to carry its burden of proof

because ample evidence in the record supports the trial

court’s factual finding that Container conducted a unitary

business with its foreign subsidiaries for the years in

question. We therefore respectfully submit that this Court

should affirm the judgment of the court below.

Respectfully submitted,

WILLIAM D. DEXTER

Counsel for Amicus Curiae

49. Appellant's Br. at 5.

50. Taxpayers often argue that they provide services (such as those

listed above) to protect their investments, not to control the operations

of their subsidiaries. We submit that this distinction is illusory and

incapable oi definition.

continued from inside front cover

Commonwealth ef Kentucky

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