Petition — Capitol Industries-EMI, Inc. v. Bennett

- Supreme Court, U.S.

FILED

82-688

No. 82-

OCT 20 1982

ALEXANDER L STEVag,

In the Supreme Court _

OF THE

United States

Octosen Trem, 1982

Carrrou Inpusraies-EM1I, Iwc.,

Petitioner,

vs.

Wu Benvett, and Eanest J. Dronensvune, Jun.,

Successor; Kennetu Cory; RIAA Sr.sermay,

and Mary Ann Graves, Successor; and Martin

Hurr and Geratp H. Goipsere, Successor.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

VALENTINE Brookes

Counsel of Record

Lawrence V. Brookes

Brookes aND Brookes

601 California St., # 1902

San Francisco, CA 94108

(415) 981-7630

Attorneys for Petitioner

QUESTIONS PRESENTED

1. Whether Section 1341, Title 28, United States Code,

removes from the federal court’s jurisdiction a suit to en-

join and restrain the assessment and collection of a Cali-

fornia Franchise tax, where it is not “plain” that the com-

plainant has any judicial remedies available to it in the

California courts to contest the amount of the tax or even

to raise constitutional issues.

2. May the State of California burden foreign com-

merce by extending the combined unitary income formula

(hereinafter “combined formula”) which it applies to an

American corporation to include the income, property and

wages of its United Kingdom parent corporation and the

latter’s 71 non-U.S. subsidiaries operating worldwide,

which have foreign commerce with the United States but

which do no business in any state of the United States,

which do not have a permanent establishment in the United

States, which are not subject to taxation by the United

States Government under either the Internal Revenue Code

or the United States-United Kingdom Income Tax Con-

vention, and where the effect of the State’s application

of its formula is to apportion some of the income of the

nonresident United Kingdom corporation and its non-

United States subsidiaries to the American subsidiary for

taxation by California where:

(a) The income of the United Kingdom corporation

and of its non-U.S. subsidiaries which is included in

the combined unit California would apportion, has al-

ready been taxed by the United Kingdom and the other

host countries, and California allows neither a deduc-

tion for those taxes nor a credit for them against its

own tax, thus producing multiple taxation of income

earned in foreign commerce; and

ii

(b) The income of petitioner, the American subsidi-

ary, is swollen by the apportionment to it of some of

the income of the United Kingdom parent and its non-

U.S. subsidiaries, far beyond any conceivable earning

capacity of the American subsidiary from the conduct

of its own business; and

(e) The apportionment of the combined net income

by the three-factor formula of the ratio of California

property, payroll and sales to the combined world-

wide property, payroll and sales of the United King-

dom parent and its seventy-six subsidiaries, is made

on the basis of estimates, first because the Official

Secrets Act of the United Kingdom prohibits the

United Kingdom corporations from revealing some of

the information essential to the application of the

California formula, and second because the wages paid

by the non-U.K. subsidiaries are not reported to the

United Kingdom parent and are for years before Cali-

fornia made its demand and cannot now be assembled;

and

(d) There is no uniformity between the economic

environment in which the American subsidiary oper-

ates and those in which the non-U.S. corporations oper-

ate, most notably because the wage rates in the United

States for the years before the Court are higher than

those which prevail in the countries in which the cor-

porations which California would consolidate operate,

with the result that each factor in tue formula is

weighted to apportion more net income to California

than could be earned in that state by the business con-

ducted in it, such income being therefore derived from

that properly taxable by the United Kingdom and the

5

iii

other foreign countries where the businesses are con-

ducted ; and

(e) where the businesses of the United Kingdom

parent, its non-U. S. subsidiaries, and the American

subsidiary which are being combined consiat primarily

of the recording in each country of music popular in

and often peculiar to that country, the making of

records and tapes in the country in which the record-

ing was made, and the sale of those records and tapes

to the residents of that country, but sales of records

in foreign commerce are made by both the U.K. parent

and petitioner, the American subsidiary, to customers

of their choice, and under a reciprocal matrix exchange

agreement both the U.K. parent and the American sub-

sidiary make records of music initially recorded by the

other; and

(f) where the effect of the California formula is to

tax to petitioner, the American subsidiary, income

earned and received exclusively abroad by other cor-

porations from business conducted locally in other

countries or in foreign commerce, which income Cali-

fornia would not have jurisdiction over directly be-

cause of the Due Process Clause, o“ International Law,

of the United States-United Kingdom Income Tax Con-

vention, and of Section 381, Title 15, United States

Code.

3. Is California’s use of the combined formula in the

circumstances contrary to the Due Process clause, the

United States-United Kingdom Income Tax Convention

then in effect, and International Law?

iv

PARTIES TO THE PROCEEDINGS BELOW

There is no other party to this proceeding. EMI Limited

is a party to a companion but unconsolidated case which

the Court of Appeals remanded to the District Court for

further proceedings. On October 8, 1982, the District Court

dismissed the EMI case. An appeal will be but has not yet

been filed, and a petition for certiorari will be but has not

yet been filed.

EMI Limited stock is owned in the United Kingdom.

Petitioner has no partially owned subsidiaries.

*

Page

Questions presented i

Parties to the proceedings below . iv

Opinions below 1

Jurisdietion 2

Statutes, constitutional provisions and treaties involved 2

Statement of the case 3

Reasons for granting the writ 8

Conelusion 2¹

J a cul a 2 8

*

“a

vi

TABLE OF AUTHORITIES CITED

Cases

f

ASARCO Inc. v. Idaho State Tax Commission, No.

80-215, October term, 1981, decided June 29, 1982,

„ ee Rg i SE ae 20

Atlantic Coast Line R. Co. v. Daughton, 262 U.S. 413

(1923)

Bass, Ratcliff & Gretton v. State Tax Commission, 266

U.S. 271 (1924) 20

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

(1964) 17

Barnes v. State Board of Equalization, 118 Cal.App.3d

904, 173 Cal. Rptr. 742 (198177 10, 12

Chicago Bridge & Iron Co. v. Caterpillar Tractor Co.,

Illinois Department of Revenue, No. 81-349, Oet.

Term 1982 12, 13, 18

Container Corporation of America v. Calif. Franchise

Tax Board, No. 81-523, Oct. Term 1982 12, 18, 21

EMI Limited v. Bennett et al., No. 81-1088 13

F. W. Woolworth Co. v. Taxation & Rev. Dept., No.

80-175, October term, 1981 decided—June 29, 1982,

— U.S. , 73 L.Ed. 2d 819 20

Hillsborough Township v. Cromwell, 326 U.S. 620

(1946) 8

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

434 (1979) 14, 15, 17, 19

MeCulloch v. Marineros de Honduras, 372 U.S. 10

(1963) 17

Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976) ..... 16

.

> # i

be 1 =? £4 ~~ a, * - 2 ~. „5 81 ren 1 8 89

a

vii .

Tant or Aurnonrris Crrep

Cases

Page

Sears v. The Scotia 14 Wall (81 U.S.) 170 (1872) —.... 17

The Paquete Habana, 175 U.S. 677 (1900) 17

West Publishing Co. v. MeColgan, 27 Cal.2d 705, 166

P.2d 861 (1946) affirmed on other grounds, 328 U.S.

823 9, 10

Constitutional Provisions

Commerce Clause (Art. I, See. 8, el. 3) gtd

Due Process Clause (Amendment 14, See. 122 2

Import-Export Clause (Art. I, See. 10, el. 2) and Art.

I, Sec. 8, el. 1, and 10, and Art. I, Sec. 10, cl. 1 and 3;

and Art. II, See 2, cl. 1 and 2, Art. III, See. 2, el.

1 and 2, and Sec. 3, cl. 1 and 2, and Art. VI, el. 2

and 17 2

Statutes

Internal Revenue Code, Section 482. 6

Statute of the International Court of Justice, Article

38 (1) 17

Statute of the World Court, Article 36 17

United States Code:

Title 15, Section 381 iii, 3, 6, 20

Title 28, Section 1254011) 2

Title 28, Section 1331 2,8

Title 28, Section 1341 i, 2, 8, 12, 13, 22

Title 28, Section 2201 2,8

viii

Page

Other Authorities

Draft Restatement of Foreign Relations Law (Re-

vised), American Law Institute, Sec. 132 (3) —— 18

The Federalist XI (James Madison) 16

The Federalist XII (Alexander Hamilton) — 16

The Federalist XLIV (John Jay) 16

1 Curtis, History of the Constitution of the United

States:

Page 148 15

Pages 179-180, 202-213, 276-277 16

2 Curtis, History of the Constitution of the United

States:

Pages 11-12, 13-14 16

Pages 20-22 site

Pages 289-298 16

3 Farrand, The Records of the Federal Convention of

1787 (1911), 539, 547-548 15, 16

2 ‘nals 2 3 4 x

ee ~* are an” le ited * — r a oe

No. 82-

In the Supreme Court

United States

Ocroser Term, 1982

Carrrol Iypusrais-EMI, Ixc.,

Petitioner,

vs.

Wu Bennett, and Ernest J. Dronensvune, Jun.,

Successor; Kenweru Cory; RICA SANA,

and Man’ Ann Graves, Successor; and Martin

Hurr and Geratp H. Goipsere, Successor.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Capitol Industries-EMI, Inc., a Delaware corporation,

petitions for a Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit, to review its deci-

sion rendered February 16, 1982, petition for rehearing

denied and opinion amended July 22, 1982. A second peti-

tion for rehearing was filed on July 27, 1982 and denied

on September 7, 1982.

N

A Fu i

The opinion of the Court of Appeals was released for

publication on July 22, 1982, and is reported at 681 F.2d

1107. It is reproduced in Appendix A, attached hereto. The

District Court filed an opinion, which is unpublished. It is

set forth in Appendix B.

JURISDICTION

The jurisdiction of this Court is invoked under Section

1254(1) of Title 28, United States Code.

The jurisdiction of the federal court was invoked under

Sections 1331 and 2201, Title 28, United States Code. Peti-

tioner contends that it does not have a plain, speedy and

efficient judicial remedy available to it in the California

courts, and for that reason the provisions of Section 1341,

Title 28, United States Code, do not remove this case from

the jurisdiction of the federal courts.

STATUTES, CONSTITUTIONAL PROVISIONS

AND TREATIES INVOLVED

1. The sections of the Judicial Code involved are Sec-

tions 1331, 1341 and 2201, Title 28, United States Code.

They are set forth verbatim in Appendix C.

2. The sections of the United States Constitution in-

volved are the Commerce Clause (Art. I, Sec. 8, cl. 3), the

Due Process Clause (Amendment 14, Sec. 1), the Import-

Export Clause (Art. I, Sec. 10, el. 2), and Art. I, See. 8,

el. 1 and 10, and Art. I, Sec. 10, el. 1 and 3; and Art. II,

See. 2, cl. 1 and 2, Art. III, Sec. 2, el. 1 and 2, and See. 3,

el. 1 and 2, and Art. VI, el. 2 and 17. All are set forth in

Appendix D.

ii

12

3. The United States-United Kingdom Income Tax

Convention in effect in the years involved in this case.

The text of the relevant provisions is set forth in full in

Appendix E.

4. Section 381 of Title 15, United States Code, is also

involved. Its text is set forth in Appendix F.

STATEMENT OF THE CASE

This case is one to restrain defendant tax officials of

the State of California from assessing a tax against plain-

tiff, Capitol Industries-EMI, Inc., on a portion of the

income of its parent, EMI Limited, and the latter’s 71

non-US subsidiaries from their business not done in the

United States but done exclusively in foreign and local

commerce from and in the United Kingdom and other

foreign countries, in violation of the United States Con-

stitution, and a federal statute, of a United States treaty,

and of International Law.

Petitioner Capitol Industries-EMI, Inc., is a Delaware

corporation, and is a subsidiary of EMI Limited, a cor-

poration of the United Kingdom. That corporation owns

all or substantially all of the stock of 76 subsidiary cor-

porations, some of which are formed under the laws of the

United Kingdom, and others of which are formed under

the laws of the various countries in which they operate.

They operate in and are formed under the laws of more

than 30 countries in Western Europe, North America, the

Near East and the Far East of Asia, South America,

Africa, and Australasia. Capitol Industries-EMI, Ine.

(hereinafter “Capitol”), is one such subsidiary, and has

been since EMI Limited acquired a majority of its stock in

1956. Capitol has its principal office and plant in Holly-

4

wood, California, and has other plants in Illinois, Virginia

and Connecticut.

Capitol makes and sells phonograph records and pre-

recorded tapes of music recorded in its studios and in

independent studios by artists under contract to it. These

artists are selected by Capitol, and the music recorded is

selected by Capitol, or by Capitol and the artists. EMI

has no role in Capitol’s selections of artist or music.

Capitol sells its records nationally and internationally,

‘through outlets with whom it establishes contractual rela-

tionship. Its sales are to the trade. It also has its own

licensees in foreign countries who make and sell records

in their countries from Capitol matrices. EMi Limited

does not direct or participate in any of these activities

and arrangements.

EMI Limited does not do business in the United States

and does not have a permanent establishment in this

country. It is therefore not subject to United States tax

by treaty and international custom. In its corporate self it

does no business outside of the United Kingdom. EMI’s

worldwide subsidiaries make approximately 20% of all of

the phonograph records made in the Western world and

own pressing plants located in 13 countries. Capitol in the

United States owns three of these plants. In addition to

that type of music business, through subsidiaries operating

in several countries, but not in the United States, the EMI

group is in the business of retailing phonograph records

and pre-recorded tapes, and sheet music.

Subsidiaries of EMI also operate a variety of other

businesses: the manufacture of television cameras, anten-

nae and transmission equipment, and of security devices;

the operation of a movie studio at which both television

5

films and films for the theater are made; the operation

of movie theaters, bingo parlors, hotels, restaurants, and

places of amusement; the manufacture for the government

of the United Kingdom and certain governments of NATO

of military equipment, much of which employs radar prin-

ciples pioneered and in some instances invented by EMI,

and the development and production of equipment in the

field of medical electronics, the most notable of which is

the invention and patenting of the brain scanner and body

scanner. Capitol conducts no business other than the mak-

ing of phonograph records and pre-recorded tapes, and at

times the manufacture and sale of raw tape for use by

other recording companies.

EMI does operate in foreign commerce between the

United Kingdom and the United States. Its subsidiaries

sell completed phonograph records to an unrelated United

States outlet, but not to Capitol. It and its subsidiaries

have a matrix exchange agreement with Capitol, modeled

closely after the one which EMI Limited had with RCA

before MI acquired controlling interest in Capitol, under

which each party has an option to license a duplicate

matrix of recordings made by the other, to make record-

ings of the music embedded on that matrix and to sell

them in their marketing areas. This agreement is entirely

reciprocal, giving EMI precisely the same rights in re-

spect to matrices of music recorded by Capitol as it gives

Capitol for matrices made by EMI. The agreement confers

an option right on each party, and does not bind either

party to take any of the matrix offerings of the other.

The license fees and other amounts paid for the privilege

are entirely reciprocal, so that the amounts paid by Capi-

tel. 6p FEMI: anp ho sense. On. the eenpeinte: pale ey, EIT. to

Capitol, per unit manufactured.

Both EMI and Capitol contend that they are not en-

gaged together in a single unitary business, and that the

income of each can be readily ascertained by the arm’s

length method used by the United States Government

under Section 482 of the Internal Revenue Code, and by

all foreign governments. They also contend that taxing

Capitol on an apportioned amount of EMI’s income rep-

resents a forbidden burden on foreign commerce and denial

of due process, contrary to the Constitution of the United

States, and contrary to Inter: .tional law, to the United

Stat’ United Kingdom Income Tax Convention, and to

Secti..1 381, Title 15, United States Code.

Defendants initiated their audit of Capitol’s returns by

demanding information of EMI Limited, threatening it

with monetary penalties if it did not reply.“ EMI informed

them that it was not within the jurisdiction of California,

could not supply some of the information sought because

of restrictions of the Official Secrets Act of the United

Kingdom, and did not possess other of the information

sought because it was not supplied to EMI by EMI’s

non-U.K. subsidiaries. Defendants then made the same

request for information of Capitol, with the same threat

of a penalty, an Capitol informed defendants that it

could not supply information about EMI which it could

not get from EMI. Defendants’ employees then compiled

figures about EMI available from public sources in the

United States, and assessed a proposed additional tax

against Capitol based upon what they believed to be the

The Court of Appeals stated in a footnote that the demand was

made only on Capitol. The court's remark is contrary to three affi-

davits in the record and is not supported by any affidavit or other

7

total net income of EMI and all of its worldwide sub-

sidiaries, and an apportionment of it to California based

upon the ratio which the California property, payroll and

sales of Capitol bore to what defendants estimated was

the total worldwide property, payroll and sales of EMI

and its subsidiaries. The non-U.K., non-U.8. property and

payroll figures were unknown and defendants substituted

their estimates. Capitol protested this action, conferences

were held by Cs pitol representatives with defendants and

their representatives, and those representatives informed

Capitol that defendants would adhere to their position,

until such time as Capitol provided the information de-

fendants had sought from EMI. EMI Limited, and Capitol

Industries-EMI, Inc., both then filed cases in the United

States District Court for the Northern District of Cali-

fornia against the defendants, to restrain such an assess-

ment against Capitol, and in EMI’s case to restrain defen-

dants from lessening the value of EMI’s investment in the

United States, through the assertion of unconstitutional

taxes from Capitol, from burdening EMI’s foreign com-

merce with the United States, aad for other relief.

Cross-motions for summary judgment were filed, in pe-

titioner’s motion supported by extensive affidavits of officers

of EMI and Capitol, and documentary exhibits. While these

cases were pending, defendants’ representatives proposed

to Capitol’s representatives that defendants would change

the basis of assessment, to combine Capitol only with EMI's

music business. Capitol’s representatives informed defen-

dants’ representatives that the information they needed

for such a modified combination and apportionment was

not available, so the representatives of defendants devised

rn a” fe

5

ployed those in the apportionment formula in substitution

for the figures that they had previously used, which had

been their estimate of the entire worldwide business of

EMI Limited. The effect was to reduce the deficiency, but

a deficiency in excess of $400,000 still remains in issue for

the years determined by defencants, and an unknown but

certain amount for later years. On December 7, 1981, while

this case was submitted and awaiting decision in the Court

of Appeals, defendants mailed notices of final assessment

so computed. Petitioner has obtained a stay of collection

by filing an appeai with the State Board of Equalization.

The District Court rendered summary judgment for de-

fendants, holding that petitioner had an adequate remedy

in the California courts. Appeal was taken, and the Court

of Appeals also held that petitioner had a “plain, speedy

and efficient” remedy in the state courts, and remanded the

case for dismissal. The merits were not considered.

1. This Court should grant the writ in order to declare

that it has not held that 6 1341, Title 28, U.S. Code, renders

§1331 and § 2201 of the same title dead letters in state

tax cases. The court below seems to think otherwise, be-

cause it has construed this Court’s prior decisions as dis-

pensing with the statutory requirement that the state court

remedy, to be a disqualifying one for federal jurisdiction,

must be “plain”. This Court has held that the efficiency of

the state remedy must be “plain”, in two decisions it has

not overruled, Atlantic Coast Line R. Co. v. Daughton;

262 U.S. 413, 426 (1923) ; Hillsborough Township v. Crom-

well, 326 U.S. 620, 625 (1946). The decision below is in

conflict with them. It is “plain” that the California state

court remedy is questionable, at best. The precise limits of

judicially created doctrines are always difficult to predict

and the California doctrine of exhaustion of administrative

remedies as a condition precedent to relief in the courts

is a judicially established doctrine, without statutory foun-

dation indicating what its limits are. The California courts

have been steadily expanding the doctrine, and it has been

applied in two tax cases in the California courts in a man-

ner which raises the most serious question about whether

petitioner would have an “efficient” remedy in those courts.

Petitioner has been unable to supply some of the infor-

mation demanded by defendants’ staff, and defendants ac-

cordingly made estimates and assessed tax based on them.

The information sought was about sales, property and pay-

roll of EMI and its non-United Kingdom subsidiaries from

the music business and EMI could not supply petitioner

with that information, party because some of that informa-

tion was about its foreign subsidiaries, who did not classify

it, and party because the British Official Secrets Act for-

bade it. At least the latter bar may be removed with time,

but under California doctrine information subsequently

available could not be used at the trial. Effectively this

would prevent petitioner’s challenging the computation and

under a recent state decision the earlier failure to supply

is a fatal jurisdictional bar to any relief, even on consti-

tutional grounds.

In West Publishing Co. v. McColgan, 27 Cal.2d 705, 166

P.2d 861, 865 (1946) affirmed on other grounds, 328 U.S.

823, the California Supreme Court held that evidence which

the taxpayer had not presented to the administrative agen-

cies could not be introduced in court in a refund action

challenging the administrative onduet. The result was to

10

prevent the taxpayer from questioning the amount of the

assessed tax, though the court did proceed to consider

the taxpayer’s constitutional arguments. More recently,

however, in Barnes v. State Board of Equalization, 118 Cal.

App.3d 904, 173 Cal. Rptr. 742 (1981), hearing denied, the

California Court of Appeal even refused to permit the

taxpayer to present its constitutional points. The reason

was the same as in West, that the taxpayer had neglected

to supply information requested by the State Board of

Equalization while the case was in the administrative

process.

The Court of Appeals below has construed both cases

in its opinion in a manner which limits them severely, and

the court was apparently under the impression that it had

the power to instruct the California courts how to inter-

pret their own precedents. Unfortunately for this petitioner,

however, the California courts are at liberty to define the

doctrine of exhaustion of administrative remedies accord-

ing to their own concepts, and are not bound by the inter-

pretation of a federal court. The Court of Appeals erred

in believing that it could define the state doctrine in a way

which would govern the state courts in a later proceeding

involving this petitioner.

The Court of Appeals could not deny that the two Cali-

fornia cases did hold that evidence not presented to the

administrative agency could not be presented later in court,

or that the Barnes case held that the requirement was juris-

dictional and prevented the court from considering any of

the taxpayer’s arguments on the merits, even constitutional

arguments which were unrelated to the facts not presented.

The Court of Appeals stated that those decisions would

not apply to a taxpayer such as Capitol which failed

1¹

to introduce evidence for the administrative agencies

which it had no power to obtain and offer, and speculated

that if Capitol succeeded in obtaining further information

from EMI, at a subsequent date, it could then successfully

offer that information or evidence in a state court action.

There is, unfortunately, not a whit of suggestion in the

Barnes opinion that that view is correct. Furthermore, it

would have to depend upon whether the California courts

agreed that EMI had properly construed the Official Secrets

Act of Great Britain. The administrative agency denied

that it had. This is a subject which should not properly

be presented for consideration by state courts, yet under

the view taken by the Court of Appeals of what the

California courts meant to hold, it would be of the essence

that they decide that Capitol was indeed unable because

of British law to introduce or offer the evidence the Fran-

chise Tax Board had requested, and which Capitol sought

to introduce at a later date in the state court proceedings.

The record in this case contains several pamphlets in

which EMI describes in some detail the role it plays as a

defense contractor for the United Kingdom Government,

and in a general way the products which it supplies to that

government. That revelation was first made by the British

Government, and EMI could not have made it until per-

mitted to do so. The future may also bring a relaxation of

certain specific prohibitions in the same regard, as the

years in question fall further into history and the materials

supplied in those years become more obsolete. It might well

come to pass that Capitol would be able to supply all the

information the Franchise Tax Board requested for its

“music-only” formula by the time the cage comes to trial in

the California courts, but it seems anything but “plain”

-

. —

—— — —

12

that the California courts would permit Capitol to argue

its constitutional points or to introduce the newly obtained

evidence. That evidence would relate only to amount of

tax, of course, but the same is true of the evidence the

taxpayer tardily sought to offer in the Barnes case, and

yet it was held precluded from having its unrelated con-

stitutional arguments considered.

Section 1341 is being stretched in the decision below

beyond the limit of permissible interpretation, and this

Court should review the decision for the purpose of inform-

ing the lower courts that § 1341 is not a restriction absolute

in all cases, but only when the state courts do provide a

“plain, speedy and efficient” remedy.

A decision from this Court that state courts so restrict-

ing their remedy do not remove federal jurisdiction is

needed to show the federal courts that § 1341 is not a dead

letter, and at the same time it will not open the floodgates

because the unusual facts here presented should not find

many parallels. Indeed, it would probably serve as a warn-

ing to the state courts that they should not create bars to

state relief which prevent the remedies they offer from

being “efficient.”

2.A. This Court has accepted jurisdiction of two cases*

presenting constitutional issues raised by the application

of their combined apportionment formulae by American

states to foreign source income of foreign subsidiaries of

domestic parent corporations. This case presents another,

and vitally important aspect of the same problem: viz, the

application of such combined apportionment formulae to

"Chicago Bridge & Iron Co. o. Caterpillar Tractor Co., Illinois

Department of Revenue, No. 81-349, Oct. Term 1982; Container

Corporation of America v. Calif. Franchise Tax Board, No. 81-523,

Oct. Term 1962.

13

the foreign source income of a foreign parent corporation

with an American subsidiary. This aspect of the problem

should, if possible, be considered while the Court is con-

sidering the other cases.* Considerations unique where

there is a foreign parent, such as treaties, double taxation

of the before-tax income, and the fact the foreign source

income of foreign parents will never be paid into the United

States, and will never be within the reach of the United

States, are considerations the Court should have presented

to it on plenary argument, and will not have before it in

cases involving American parent corporations. As the

Solicitor General pointed out in his amicus brief in Chicago

Bridge d Iron Co. v. Caterpillar, supra footnote 3, it is the

instance of the taxation of the American subsidiary so as

to reach the income of the foreign parent which has the

international community up in arms. This case is that case,

and presents this Court with its only present vehicle for

ruling on it directly.

B. The Court has learned from the briefs of the parties

and amici curiac in both Chicago Bridge d Iron and Con-

tainer Corporation that there is no more serious interna-

tional controversy involving the United States in the area

of taxation than that which has been engendered by the

14

them with their American subsidiaries. The protest letters

of the President of the European Economic Community,

The Netherlands, Canada and others have been presented

to the Court, as have the voices of various foreign trade

‘ati

C. The international community has shown much more

concern with the avoidance of duplication of income taxes

than it has with the duplication of property taxes. There

are presently 40 such treaties, either in effect between the

United States and foreign countries c. guned and in the

process of ratification. The concern this Court expressed in

Japan Line, Ltd. v. County of Los Angeles, 44) U.S. 434

(1979), about duplication of taxation in foreign commerce

and the retaliatory effect that could be expected from

permitting a state to impose taxes on foreign commerce

which duplicate the tax burden imposed by the home nation,

should be even greater here. The duplication of income

taxation in the international sphere is an issue repeatedly

dealt with in treaties, and international custom of avoiding

it has developed even where there are not bilateral treaties.

As we will show hereafter, the retaliation which this Court

foresaw would follow from the duplication of tax involved

in Japan Line, if this Court had permitted it to occur, has

already occurred in the international income tax sphere.

This case is an excellent vehicle for the consideration of the

impact of this type of combined formula because the feared

duplication of tax exists in fact, and the ultimate equity

owner of the income which has been taxed twice is a foreign

corporation, formed under the laws of and operating in a

treaty nation, and having no permanent establishment in

the United States. The impact of any decision in this

area involving domestically-owned multinational corporate

15

groups cannot be fully assessed by this Court without con-

sideration of the possible impact of such a decision on

foreign parents of multinational groups which have one or

more subsidiaries operating in the United States.

D. In Japan Line, Lid. v. County of Los Angeles,

441 U.S. 434 (1979), this Court held that the constitutional

tests of validity of taxes in foreign commerce differed from

those in interstate commerce. Our Nation’s formative

history explains the necessity of that conclusion, and of

the corollary the Court also adopted, that schemes of

taxation which do not impermissibly burden interstate

commerce may impermissibly burden foreign commerce.

Hence apportionment methods valid in taxation of inter-

state commerce may be invalid when applied to foreign

commerce, and this Court's decision in Japan Line held

that the apportionment of property values there involved,

though valid in interstate commerce, was invalid in foreign

commerce.

The history we referred to suggests strongly that the

prohibition against states’ burdening foreign commerce is

absolute. Two eminent historians state that the two prin-

cipal causes of the American Revolution were dissatis-

faction with Parliament’s control over taxes and over

foreign commerce. The first governing law over the United

States, the Articles of Confederat gu, did not substitute

another central control over these subjects for the one

the Continental Congress was fighting to terminate. 3

Farrand, The Records of the Federal Convention of 1787

(1911), pp. 547-548; 2 Curtis, History of the Constitution

of the United States (Harper and Brothers, 1854), pp. 20-

22; 1 Curtis, History etc., p. 148. Experience with operat-

ing under the Articles soon demonstrated that the Union

would not survive long in peacetime if each state remained

free to contribute to the national treasury only whatever

it chose, to regulate and to tax foreign commerce, and to

make its own treaties of irade with foreign nations.

1 Curtis, History etc., 179-180, 202-213, 276-277; The

Federalist XII (Alexander Hamilton). The necessity of

removing from the states all control over foreign com-

merce in order to preserve the Union was perceived, and

was a major factor in framing the Constitution, and in

gaining adherents to it. The Federalist XLIV (John Jay) ;

The Federalist XI (James Madison); 2 Curtis, History

etc., pp. 11-12, 13-14 (footnotes), 23-24. 3 Farrand, The

Records of the Federal Convention of 1787 (1911), Appen-

dix A, CCCCI, 539, 547-548; Michelin Tire Corp. v. Wages,

423 U.S. 276, 283 (1976). There was not equal perception

that the Congress should also have the power to regulate

interstate commerce, but that subject was vigorously

debated and the power was conferred only after the per-

suasion of debate. 2 Curtis, History ete., pp. 289-298. Thus

history shows that the Constitutional Convention was abso-

lutely disinclined to tolerate state interference with foreign

commerce, and was less concerned wih state interference

with interstate commerce.

It follows that the absence of Congressional legislation

specifically laying down standards may imply some toler-

ance of state interference with interstate commerce, but

none with foreign commerce.

For this reason, this Court should review the application

of State formulae taxing the foreign source income of

foreign parent corporations and their subsidiaries to

domestic subsidiaries of the foreign parents. This case,

where the cleavage between income earned in this country

and that earned abroad is unusually distinct, is an appro-

priate vehicle.

17

E. The action defendants would take is in violation of

the treaty then in effect. The treaty treated laws of the

states as laws of the United States and restricted their

application to foreign corporations not having a perma-

nent establishment in the United States. Although Capitol

is not a direct beneficiary of the treaty, Capitol is the direct

victim of its disregard. In view of the obvious reluctance

of the federal courts to permit EMI to enforce its own

rights, and the unavailability to EMI of any access to the

state courts, the treaty rights can apparentiy be effectively

enforced only by Capitol.

F. International law prohibits what defendants seek

to do, this Court should so declare, and in this case can do

so. In Japan Line, the property subjected to multiple tax-

ation had nexus with California through actual physical

presence. Here there is an entire absence of nexus. EMI

Limited has not property of its owr or office in California.

Use of the arm's length standard is international custom,

and the combined unitary formula is not. Under Interna-

tional law ownership of the stock of Capitol does not estab-

lish the presence of EMI in every State in which Capitol

operates. International law is based on custom and settled

practice as much as on treaties and agreements. The Pa-

quete Habana, 175 U.S. 677, 686, 708 (1900); Sears v. The

Scotia 14 Wall (81 U.S.) 170 (1872); McCulloch v. Marin-

eros de Honduras, 372 U.S. 10, 21 (1963); Statute of the

International Court of Justice, Article 38 (1) ; Statute of the

World Court, Article 36. Every state is subordinate to In-

ternational law. Banco Nacional de Cuba v. Sabbatino, 376

U.S. 398, 425 (1964). The international custom to respect

the distinction between foreign parent and domestically

formed subsidiary is so thoroughly accepted that it is in

18

each of the forty income tax treaties the United States has

signed and in addition is universally respected between na-

tions wheie there is no treaty. Thus, for example, Mexico

and the United States, and Colombia, Venezuela, Peru,

Chile and Spain and the United States all bilaterally rec-

ognize the custom in the absence of treaty.

The official position of the Executive about what is pre-

vailing international custom binds the American courts

(Draft Restatement of Foreign Relations Law (Revised),

American Law Institute, Sec. 132 (3)). The Solicitor Gen-

eral, in response to requests from the Secretaries of State,

Treasury and Commerce, and the United States Trade Rep-

resentative, has informed this Court that the Executive rec-

ognizes that international custom mandates the use of the

arm’s-length method and not the combined unitary formula.

He has asked this Court to rule that the international cus-

tom should be enforced by this Court. Memorandum for the

United States as Amicus Curiae, filed in Chicago Bridge d

Iron Company v. Caterpillar Tractor Co., et al., No. 81-349,

October Term 1981.

Petitioner has fully discussed the existence of this inter-

national custom and its status as international law in the

Amicus Brief it filed in concert with its parent, EMI Lim-

ited, in the pending case of Container Corporation of Amer-

ica v. Franchise Tax Board, No. 81-523, October Term,

1982, pp. 5-21. Reference to that brief can be made for a

full development of the status of this custom as interna-

tional law.

The importance of this Court’s early review of Califor-

nia’s departure from International law, in conjunction with

the cases it is reviewing, justifies the Court’s review of this

case.

19

G. In Japan Line, Ltd. v. County of Los Angeles, supra,

this Court predicted that foreign governments would be

driven to retaliate against the United States if American

states were permitted to impose a duplicating tax on prop-

erty already, and properly, taxed in the home country.

California’s tax practices typified by what defendants are

seeking to do here have already produced retaliation by

the United Kingdom. The new U.S.-U.K. Income Tax Con-

vention as signed, and approved by the British Parliament,

contained an express prohibition of California’s combined

formula as applied to United Kingdom parents and their

American subsidiaries. The United States Senate approved

the treaty except for that provision, which narrowly failed

to obtain two-thirds approval. This required that the Brit-

ish Parliament ratify the treaty without that provision,

which for two years it refused to do. It insisted on another

revision, the Third Protocol, which had the effect of per-

mitting increases in the taxation of American corporations

operating in the British North Sea. This was an “addi-

tional concession to the British” for “loss of the benefits

of Article 9(4)” (the prohibition of State unitary taxa-

tion) according to Assistant Secretary Donald Lubick.

(Appendix G.) This retaliation is not confined to Cali-

fornia’s corporations.

There is no assurance other countries will not also retal-

iate against the California combined formula. There are

nine members of the EEC who joined in repeated denuncia-

tion of the California practice. Since one has already retal-

iated, it is reasonable to expect others to do so. Certainly

the danger this Court foresaw if the States are free to im-

pose multiple tax burdens on foreign commerce is present

here, and this Court should review the permissibility of the

California method as soon as possible. |

This case provides a suitable vehicle.

H. Independent of Constitutional limitations on the

state’s power to tax, Defendants are seeking to do by

indirection what Congress has forbidden them to do

directly. Title 15 United States Code, Section 381. Sub-

sections (a) and (c) of that Code section prescribe the

nexus necessary for a state to tax income derived from

interstate commerce, and should be applied to prevent a

state from importing income from a related foreign entity

and subjecting it to tax, where the corporation prope ‘y

subject to its tax is a self-sufficient and independently

operating business entity from the foreign concern.

I. The issue is not precluded by Bass, Ratch# d Gret-

ton v. State Tax Commission, 266 U.S. 271, (1924), which

involved a single British corporation doing business in two

American states. It could not have claimed protection under

the treaty or 15 U.S. Code See. 381, neither of which was

yet in effect, nor under International custom, which had not

yet evolved. Its business was clearly unitary, consisting of

making a product in Great Britain and selling it through

offices in Illinois and New York, but it offered no evidence

of a loss in New York yet claimed one because it showed

a loss from its New York and Illinois business combined

in its federal tax return. It had clearly submitted itself to

the state’s jurisdiction, unlike EMI. No subterfuge to reach

an exempt corporation was involved.

J. The action of defendants is in conflict with the Due

Process Clause, under the recent decisions of this Court in

ASARCO Ince. v. Idaho State Tax Commission, No. 80-215,

October term, 1981, decided June 29, 1982. U.S.

73 L.Ed. 2d 787, and in F. W. Woolworth Co. v. Taxa-

tion & Rev. Dept., No. 80-175, October term, 1981 decided

21

June 29, 1982, U.S. , 73 L.Ed. 2d 819. Under the

tests enunciated in those two decisions, the business of

petitioner is not unitary with that of its parent corpora-

tion, EMI Limited, and particularly not with that of the

non-United Kingdom subsidiaries of EMI, which defen-

dants would consolidate with Capitol. We recognize that

the Court is unlikely to believe that it should review this

case in order to determine the proper application of its

two recent decisions where they have not been considered

below, or by the California tax authorities for that matter,

but we believe that if the Court does grant certiorari it

may wish to preserve this issue as one possibly to consider.

This case represents the ideal vehicle for this Court’s

consideration of the constitutional status, under the United

States Constitution and International Law, of the com-

bined unitary formula used by California and certain other

states, in the application where a domestic subsidiary is

combined with a group of foreign corporations, including

the parent corporation, who do not have permanent estab-

lishments in the United States, and a mathematically deter-

mined percentage of the total income of the group is as-

signed to the domestic subsidiary for taxation. This is done

here without regard to the absence of any over-reaching

or other conduct which could have the effect of improperly

shifting income from the subsidiary to the foreign sources,

and the fact any irregularities could be adequately dealt

with by the internationally accepted arm’s-length method.

This case would expand the scope of this Court’s considera-

tion of the Container Corporation of America v. Franchise

Tax Board, No. 81-523, to include a domestic subsidiary of a

foreign parent, and thus provide the Court with a vehicle

suitable for considering fully the objections of the foreign

nations to California’s departure from established interna-

tional custom, and California’s double taxation of income

already fully taxed in the host or parent country.

We believe the procedural objection the Court of Appeals

found should not deter the Court, because it is plainly based

on a serious fallacy, which fallacy is that the Federal

Courts can tell the California courts how to interpret

to their own judicially created doctrines of exhaustion

of administrative remedies. The evidence provided by the

State courts is what must be considered, and that evidence

shows that those courts are expanding the doctrine and

would probably prevent petitioner from having a full trial,

with all issues considered, including both those of constitu-

tional law and of fact, in a manner to satisfy the require-

ments of due process for a trial de novo. There is, there-

fore, not a plain, . . efficient” remedy in the State courts,

and the Federal courts have not been ousted of jurisdiction

by Section 1341. Since the facts of this case are unusual,

agreement with our position on this point will not open

the floodgates in California cases. Moreover, it might well

cause the California courts to rethink their judicially

erected barriers to “efficient remedy”.

Accordingly, the Writ of Certiorari should be granted.

Respectfully submitted,

VaLentine Brookes

Counsel of Record

Lawrence V. Brookes

Brookes Ax D Brookes

Attorneys for Petitioner

(Appendices follow)