Petition — EMI Ltd. v. Bennett

82-903 DEG 2 1962

ALEXANDER L. STEVAS,

No. 82- CLERK

In the Supreme Court

OF THE

United States

Octoser TERM, 1982

EMI Limirep,

Petitioner,

VS.

WituiaM Bennett, Kenneto Cory, Mary Ann Graves,

and GreraLp H. GoLpBERG.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT PRIOR TO ENTRY

OF DECISION IN THAT COURT AND WHILE

CASE IS PENDING THEREIN

VALENTINE BROOKES

Counsel of Record

BROOKES AND BRooKES

601 California St., #1902

San Francisco, CA 94108

(415) 981-7630

Attorney for Petitioner

BOWNE OF SAN FRANCISCO, INC. © ISO NINTH ST. © &.F.,CA 94103 © (415) 664-2300

QUESTIONS PRESENTED

la. Whether a United Kingdom corporation which has no

place of business in the United States, which has no

access to the State courts, and which owns an Amer-

ican subsidiary, has standing to sue in the Federal

courts for the following relief:

(1)

(2)

To restrain defendant state tax officials from

making further demands on plaintiff, either

directly or through pressure on its American

subsidiary, for financial information about its

operations in other countries which it cannot

provide either because the law of the home

country prohibits it or because local records of

foreign subsidiaries do not segregate it and make

it available to plaintiff; and

To restrain defendant state tax officials from

assessing a tax on plaintiff's American sub-

sidiary based on the disregard of plaintiff’s

separate entity, and on the apportionment of

plaintiff’s income entirely earned abroad to

California to tax to that subsidiary, where the

economic effect of defendant’s conduct is to

diminish the value of plaintiff’s property in the

United States, all contrary to a treaty, to

international law, and to the United States

Constitution.

b. Whether the relief sought can be granted by a Fed-

eral court, where plaintiff has no access to State

courts, and the rights plaintiff is suing to enforce

are created entirely by. Federal sources of law;

viz.,

a treaty, the United States Constitution makes

obligatory on the states.

ii

c. Whether the Federal courts can refuse to entertain

a case or controversy under International Law and

under the Due Process Clause of the Fifth Amend-

ment where the State courts provide no remedy and

the rights sought to be enforced are created by the

United States Constitution, a treaty to which the

United States is a party, and International Law.

d. Whether the Federal courts have subject matter

jurisdiction over a case involving asserted violations

of a United States treaty, the United States Con-

stitution, and International Law.

It is not contended that this issue is the one which

justifies intervention of this Court prior to deci-

sion in the Court of Appeals under the standards

explained in Rule 18 of the Rules of this Court.

Does international custom recognized as such by the

Executive and observed by the Federal Government

in its own tax system bind the States of the Union

or only the Federal Government?

May the State of California burden foreign com-

merce by extending its combined unitary income

formula (hereinafter “combined formula”) to a

United Kingdom corporation which has foreign com-

merce with the United States but which does no

business in any state of the United States, which

does not have a permanent establishment in the

United States, which is not subject to taxation by

the United States Government under either the Inter-

nal Revenue Code or the United States-United

Kingdom Income Tax Convention, and where the

c.

ili

effect of the State’s application of its formula is to

apportion income of the non-resident United Kingdom

corporation and its non-United States subsidiaries

to the American subsidiary for taxation by California

where:

The entire income of the United Kingdom corpora-

tion and of its non-U.8. subsidiaries has already been

taxed in full 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

The income of the American subsidiary is swollen

by that apportionment far beyond any conceivable

earning capacity of its own business; and

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 non-U.S. 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 Cali-

fornia 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

California made its demand and cannot now be

assembled; and

There is no uniformity between the economic envir-

onment in which the American subsidiary operates

e.

£

iv

- and those in which the non-U.S. corporations operate,

most notably because the wage rates in the United

States for the years before the Court were higher

than those prevailing in any other country in which

the corporations which California would consolidate

operate, with the result that each factor in the

formula is weighted to apportion more net income

to California than could be earned in that state by

the business conducted in it, such income being there-

fore derived from that properly taxable by the United

Kingdom and the other foreign countries where the

businesses are conducted; and

Where the businesses of the United Kingdom parent,

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

sidiary which are being combined consist primarily

of making records and tapes in each country of music

popular in that country, 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 the American subsidiary to custom-

ers of their choice, and under a reciprocal matrix

exchange agreement both the U.K. parent and the

American subsidiary make records of music initially

recorded by the other; and

Where the effect of the California formula is to tax

to the American subsidiary income earned and

received exclusively abroad by other corporations

from business conducted locally in other countries

or in foreign commerce whick income California

would not have jurisdiction over directly because of

the Due Process Clause, of International Law, and

Vv

of the United States-United Kingdom Income Tax

Convention.

4. Does the United States-United Kingdom Income Tax

Convention in effect in the years 1968-1974 prohibit a

state’s apportioning by formula to an American sub-

sidiary some of the income of its United Kingdom

parent corporation where under the treaty the United

States cannot tax any of the income of the United

Kingdom parent because it does not have a permanent

establishment in the United States?

PARTIES TO THE PROCEEDING BELOW

There is no other party to this proceeding. Capitol

Industries-EMI, Inc., plaintiff’s subsidiary, is a party to

a companion but unconsolidated case which was joined in

the Court of Appeals for argument and decision, and which

is pending before this Court on petition for certiorari in

Docket No. 82-688. It will be affected by the outcome of this

case.

vi

TABLE OF CONTENTS

Questions presented

Parties to the proceeding below

Opinions below

Statutes, constitutional provisions and treaties in-

volved

Statement of the case

Reasons for granting the writ

Conclusion

z

iii

S wo wn

vii

TABLE OF AUTHORITIES CITED

Cases

Page

Baker v. Carr, 369 U.S. 186 (1962) AY:

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

(1964) 12

Bryant v. Yellen, 447 U.S. 352 (1980) 17

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

349 7, 8,9, 12

Container Corp. of America v. Franchise Tax Board,

No. 81-523 7, 8, 9, 11, 19

Duke Power Co. v. Carolina Env. Study Grp., 438 U.S.

60, 72 ....... 17

Japan Line Ltd. v. County of Los Angeles, 41 U.S. 434,

(1979) 10, 12, 14

Russian Volunteer Fleet v. United States, 282 U.S. 481

(1931) 18

Sears v. The Scotia, 14 Wall (81 U.S.) 170 (1872) ........ 12

The Paquete Habana, 175 U.S. 677, 686, 708 (1900)........ 12

United States Steel Corp. v. Multi-State Tax Commis-

sion, 367 F.Supp. 107 (S.D.N.Y. 1973, affirmed on

other grounds 434 U.S. 452) 17

Wong Wing et al. v. United States, 163 U.S. 228

(1896) 18

Constitution

United States Constitution, Fifth Amendment .............. ii, 18

Rules

Supreme Court Rules, Rule 18 ii, 1

eee

Taste or Autsorities CITeD

Statutes

Page

Internal Revenue Code, Section 482 8

United States Code:

Title 28, Section 1254(1) 2

Title 28, Section 1331 2

Title 28, Section 1341 2,6

Title 28, Section 2101(e) 2

Title 28, Section 2201 2

Statute of the International Court of Justice, Sec. 38

(1) 12

Statute of the World Court, Sec. 36 12

Constitutional Provisions

Commerce Clause (Art. I, See. 8, el. 3) 220... 2

Due Process Clause (amendment 14, See. 1) -................. 2

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

I, See. 8, el. 1 and 10, and Art. I, See. 10, el. 1 and 3;

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

el. 1 and 2, and Art. VI, cl. 2 and 17 2

Other Authorities

Draft Restatement of Foreign Relations Law (Re-

vised) American Law Institute, See. 132(3) —............ 12

Hearings Before the Senate Foreign Relations Com-

mittee, July 19, and 20, 1977, 95th Cong. Ist. Sess.

pp. 20-21, 412, 489-490 13

Restatement of the Foreign Relations Law of the

United States, Second, Sec. 1, Comment C -....0.0000...... 12

(Draft Revision), Sec. 711, comment a, Sec. 713 -........... 18

No. 82-

In the Supreme Court

OF THE

United States

Octoser TERM, 1982

EMI Limirep,

Petitioner,

vs.

Witt Bennett, Kennets Cory, Mary Ann Graves,

and Geratp H. Go.psera.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT PRIOR TO ENTRY

OF DECISION IN THAT COURT AND WHILE

CASE IS PENDING THEREIN

EMI Limited, a corporation of the United Kingdom,

plaintiff in the United States District Court and appellant

in the United States Court of Appeals for the Ninth Cir-

cuit, petitions for a Writ of Certiorari under Rule 18 of

this Court to review the case now pending in and not yet

decided by the United States Court of Appeals for the

Ninth Circuit.

OPINIONS BELOW

There is no opinion of the Court of Appeals. The opinion

of the District Court is not officially reported, but is ap-

pended hereto in Appendix A. The opinion of the Court

of Appeals at a prior stage of these proceedings is reported

at 681 F.2d 1107. The portion of it relevant to this peti-

tioner is reproduced in Appendix B hereto.

2

JURISDICTION

The jurisdiction of this Court is invoked under Sections

1254(1) and 2101(e) of Title 28, United States Code. No

decision has yet been rendered by the United States Court

of Appeals, in this appeal, which was docketed Novem-

ber 2, 1982. The decision of the District Court, Northern

District of California, dismissing the case, was entered on

October 8, 1982, and Notice of Appeal was filed by peti-

tioner on October 21, 1982.

The jurisdiction of the federal court was invoked under

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

tiff has no judicial remedies available to it in the California

courts under California statutes and constitution, and for

that reason the Court of Appeals held that the provisions

of Section 1341, Title 28, United States Code, do not re-

move this case from the jurisdiction of the federal courts.

The dismissal on remand was based on the assertions that

petitioner lacks standing to sue, and the federal courts lack

jurisdiction of the subject matter. Appendix A.

STATUTES, CONSTITUTIONAL PROVISIONS

AND TREATIES INVOLVED

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

tions 1331 and 220), 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, el. 3),

the Due Process Clause (amendment 14, Sec. 1), the Im-

port-Export Clause (Art. I, See. 10, cl. 2), and Art. I,

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

Art. IT, See. 2, el. 1 and 2, Art. TTI, See. 2, cl. 1 and 2, and

Art. VI, cl. 2 and 17. All are set forth in Appendix C.

3

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 Appen-

dix D.

STATEMENT OF THE CASE

This case is one to restrain defendant California State

tax officials from assessing a tax against petitioner’s sub-

sidiary, Capitol Industries-EMI, Inc., on a portion of peti-

tioner’s income from its business done exclusively in for-

eign and local commerce from and in the United Kingdom,

in violation of International Law, a federal treaty, and the

United States Constitution.

Petitioner, EMI Limited, is a corporation formed in the

United Kingdom, which owns all or substantially all of the

stock of 76 subsidiary corporations, some of which are

formed under the laws of the United Kingdom, and others

of which are formed under the laws of the various coun-

tries in which they operate. They operate in and are

formed under the laws of more than 30 countries in West-

ern Europe, North America, the Near East and the Far

East of Asia, South America, South Africa, and Austral-

asia. Capitol Industries-EMI, Ine. is one such subsidiary,

and has been since plaintiff acquired a majority of its stock

in 1956. Capitol Industries-EMI, Inc. (hereinafter “Capi-

tol”) is formed under the laws of the United States, has

its principal office and plant in Hollywood, California, and

has other plants in Illinois, Virginia and Connecticut.

EMI Limited does not do business in the United States

and does not have a permanent establishment in this coun-

try. By treaty it is exempt from United States tax. In its

corporate self it does no business outside of the United

Kingdom. EMi’s worldwide subsidiaries make approxi-

4

mately 20% of all of the phonograph records made in the

Wesiern world, and own pressing plants located in 13 coun-

tries. Three of these plants are in the United States, owned

by Capitol. 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 busi-

nesses: the manufacture of television cameras, antennae

and transmission equipment, and of security devices; the

operation of a movie studio at which both television 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 tapes for use by

other recording companies.

Defendants demanded 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, and Capitol informed defendants that

it could not supply information about EMI which it could

not get from EMI, Defendant’s staff 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 total net

income of EMI and all of its worldwide subsidiaries, 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.S. property and payroll figures were

unknown and defendants substituted their estimates. Cap-

itol protested this action, conferences were held by Capitol

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 defendants had sought from EMI.

Petitioner EMI Limited and Capitol both then filed cases

in the United States District Court for the Northern Dis-

trict of California against the defendants, to restrain such

an assessment against Capitol, and in EMI’s case to re-

strain defendants from demanding of EMI, either directly

or through Capitol, information it was prohibited by Brit-

ish law from revealing, from lessening the value of EMI’s

property in the United States through the assertion of un-

constitutional taxes from Capitol, and from burdening

EMI’s foreign commerce with the United States.

Cross-motions for summary judgment were “ied, in peti-

tioner’s motion supported by extensive affidavits of officers

6

of EMI and Capitol, and documentary exhibits. While these

cases were pending in the United States District Court, de-

fendants’ representatives proposed to Capitol’s represen-

tatives that defendants would change the basis of assess-

ment, to combine Capitol only with EMI’s music business.

Capitol’s representatives informed defendants’ representa-

tives that the information they needed for such a modified

combination and apportionment was not available under

British law, so the representatives of defendants devised

figures based upon assumptions and estimates and em-

ployed those in the apportionment formula in substitution

for the figures that they had previously used which had

represented the entire worldwide business of petitioner.

The effect was to reduce the deficiency, but a substantial

deficiency in excess of $800,000 still remains in issue for the

years determined by defendants, and an unknown but cer-

tain amount for later years.

The District Court rendered summary judgment for de-

fendants, holding that for purpose of Section 1341, peti-

tioner, although not having any judicial remedy in the

California courts, must be deemed to have the remedy Cali-

fornia law afforded to Capitol. Appeal was taken, and the

Court of Appeals held that petitioner had no remedy in the

California courts and Section 1341 did not bar it from the

federal courts. It remanded the case to the District Court,

which refused to rule on the merits and dismissed the case,

this time on the grounds that petitioner lacked standing to

sue, and that the federal courts lacked jurisdiction of the

subject matter. This appeal followed,

This petition before judgment below is filed to enable

this Court, if it so desires, to add a case involving a for-

eign parent in a multi-national group of corporations with

7

American subsidiaries to those cases which it will consider,

Container Corp. of America v. Franchise Tax Board, No.

_ 81-523, and Chicago Bridge and Iron Co. v. Caterpillar,

No. 81-349. Those cases invoive the Constitutional validity

of combining domestic parents with their foreign subsidi-

aries and the apportionment of the income of the latter to

the domestic parents. The instant case presents the con-

verse, where the parent is a foreign corporation and the

effect of the combination is to *ttribute its foreign source

income downstream to the domestic subsidiary. As the

amicus brief of the Solicitor General in No. 81-349 states,

at p. 18, this type of case presents the violation of inter-

national custom and the burden on foreign commerce in

the clearest focus.

Petitioner does operate in foreign commerce between the

United Kingdom and the United States. Its subsidiaries

sell completed phonograph records to a United States out-

let, 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 EMI 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 recordings 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 respect of 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 Capitol to EMI are the same as the amounts paid

by EMI to Capitol, per unit manufactured.

Petitioner contends that taxing Capitol on an appor-

tioned amount of EMI’s income represents a forbidden

burden on foreign commerce, contrary to the Constitution

of the United States, and contrary to international law,

and to the United States-United Kingdom Income Tax

Convention.

Petitioner contends that it is not engaged in a single uni-

tary business with Capitol, 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.

REASONS FOR GRANTING THE WRIT

1. This Court has accepted jurisdiction of two cases'

presenting the constitutional issues raised by the applica-

tion of their combined apportionment formulae by states

to foreign source income of foreign subsidiaries of domes-

tic parent corporations. The urgency of this case is that it

presents another, and vitally important, aspect of the same

problem: viz, the application of such combined apportion-

ment formulae to the foreign source income of foreign

parent corporations with an American subsidiary. This

aspect of the problem should be considered while the Court

is considering the other cases. Considerations unique to the

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

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

Department of Revenue, No. 81-349; and Container Corporation of

America v. Franchise Tax Board, no. 81-523.

9

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. The amicus

brief filed by the Solicitor General in No. 81-349 presents

some of these arguments and acknowledges (p. 18) that

they are involved with full force in a case such as this one,

in which a state is attempting to force the foreign source

income of a foreign parent downstream to its American

subsidiary, and tax the latter on it.

2. The Court has been made aware by the Solicitor

General’s brief and the other amicus briefs in Nos. 81-349

and 81-523 that there is no more serious international con-

troversy involving the United States in the area of taxa-

tion than that which has been engendered by the insistence

of certain states on applying their combined unitary

apportiorment formulae to foreign-based multinational

corporations and their foreign subsidiaries, and then com-

bining them with their American subsidiaries. The Court

has been informed repeatedly that three Presidents of the

European Economic Community have filed protests with

the Department of State against this practice. The Govern-

ments of the United Kingdom, Canada and the Netherlands

have filed letters of protest with the Department of State.

Members of Parliament of the United Kingdom have gone

so far as to testify before a Congressional Committee in

Washington in support of bills which would prohibit

states’ including foreign source income of multinational

corporate groups owned by foreign corporations within

their unitary apportionment formulae. All of these letters

were written to the Department of State after the United

State Senate refused, by two votes less than the two-thirds

10

required for approval, to approve the explicit prohibition

of such practice in the new United States-United Kingdom

Income Tax Convention.

3. The International community has shown much more

concern with the avoidance of dnplication 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 nations or signed and in the

process of ratification. There are many more than that in

effect bilaterally between other nations. International

organizations have model tax treaties all containing proce-

dures for avoiding duplication of income taxes. The con-

cern this Court expressed in Japan Line, Ltd. v. County of

Los Angeles, 41 U.S. 434 (1979), about duplication of taxa-

tion 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 im-

posed by the home nation, should be even greater here.

The duplication of income taxation in the international

sphere is an issue of much bigger international importance

than was the duplication of property taxes this Court dis-

approved in Japan Line. 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. The EMI Limited case

and its companion case, Capitol Industries-EMI, Ine. v.

Bennett, et al., No. 82-688, October Term 1982, are excellent

vehicles 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

11

under the laws and operating in a treaty nation, and hav-

ing no permanent establishment in the United States. The

impact of any decision in this area involving domestically-

owned multinational corporate groups cannot be fully

assessed by this Court without consideration of the pos-

sible impact of such a decision on foreign parents of multi-

national groups which have one or more subsidiaries

operating in the United States.

The State of California has argued in its brief filed

in No. 81-523, at pp. 116-118, that the international pro-

hibition of duplication of taxes cannot apply to state taxes

because it is accepted custom within the United States

for both the federal government and the states’ govern-

ments to tax the same income. That argument misses the

entire point of the international custom. By bilateral

treaties where they are in effect and international custom

where they are not, the foreign countries have pledged

themselves to abstain or do in fact abstain from demanding

tax contributions to run their own governments from

income which has paid a tax in another country. The

United States cannot escape the same obligation by resort

to the division of governmental expenditures between fed-

eral and state governments. The United States is respon-

sible internationally for the conduct of its states, and is

the government which is regarded internationally as the

responsible government for providing governmental ser-

vices in the United States. If it chooses to delegate some of

them to political subdivisions it may, but it cannot thereby

avoid restrictions against the double taxation of income

by expecting foreign governments to tolerate doubly tax-

ing income to support the political subdivisions of the

United States of America,

12

4, International law prohibits what defendants seek to

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

so. Unlike the situation in the Japan Line case, here there

is an entire absence of nexus. Petitioner has no property

of its own or office in California. Under International law

ownership of the stock of Capitol does not establish the

presence of petitioner in every State in which Capitol

operates. International law is based on custom and settled

practice as much as on multilateral treaties and agree-

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

The Paquete Habana, 175 U.S. 677, 686, 708 (1900);

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

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

Foreign Relations Law of the United States, Second,

Sec. 1, Comment C. Every state is subordinate to Inter-

national law. Banco National 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

each of the forty income tax treaties the United States has

signed and in addition is universally respected between

nations where there is no treaty. Thus, for example, Mexico

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

Chile and Spain, and the United States, all recognize the

custom in the absence of treaty. Thus under International

Law California’s jurisdiction over Capitol does not confer

jurisdiction over petitioner.

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’s amicus brief in No. 81-39 is an expression of the

13.

Executive’s position. Before that, in 1977, both Secretary

of the Treasury Blumenthal and Assistant Secretary

Woodworth testified before the Senate Foreign Relations

Committee that the California combined unitary apportion-

ment method was contrary to “the internationally accepted

approach” and “is inconsistent with accepted tax treaty

policy.” (Hearings Before the Senate Foreign Relations

Committee, July 19, and 20, 1977, 95th Cong. Ist. Sess.

pp. 20-21, 412, 489-490.)

Notes from the Governments of the United Kingdom,

Canada and The Netherlands, and from three Presidents

of the European Economic Community to the United

States Department of State, have spoken of the competing

allocation method required by all treaties in force, known

as the arms-length basis, as the internationally accepted

basis, and have protested California’s departure from it.

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

nia’s departure from International law, in conjunction with

the two cases it is reviewing, and presenting the situation

the Solicitor General has stated presents the international

issue in its clearest form, justifies the Court’s review of

this case at this time.

5. The action defendants would take is in violation of

the treaty then in effect. While it seems not to be a model

of clarity to eyes accustomed to distinguishing between

state and federal governments, it must be read as an inter-

national document speaking for two nations indivisible.

The treaty contains clear indications that the treaty bind-

ing “the United States” was intended to bind all 50 of

them. The treaty language was intended to be understood

on both sides of the Atlantic, and in diplomatic usage

“State” means “nation”. The treaty refers repeatedly to

14

corporations “created or organized in or under the laws of

the United States”. All American private business corpo-

rations are organized under the jaws of some State, so the

term “United States” is clearly used to include the states,

and if that meaning is applied throughout defendants are

in violation of the treaty. Petitioner does not have a per-

manent establishment in the United States and is exempted

by the treaty from taxes imposed by “the United States

of America.”

6. 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 Parlia-

ment, contained an express prohibition of states’ combined

formulae 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 (see Appendix EF), which had

the effect of permitting increases in the taxation of

American corporations operating in the British North

Sea. This retaliatory effect is not confined to California’s

corporations.

There is no assurance other countries will not also retal-

iate against the California combined formula. There are

Bt

nine members of the EI2C who joined in the denunciation

of the California practice. Since one has already retaliated,

it is reasonable to expect others to do so, Certainly the

danger this Court foresaw if the States are free to impose

multiple tax burdens on foreign commerce is present here,

and this Court should review the permissibility of the Cali-

fornia method of measuring its tax on domestic -subsidi-

aries by the foreign source income of their foreign parents

as soon as possible.

This case provides a suitable vehicle.

7. The decision of the District Court concerning juris-

diction does not present an issue which would cause this

Court to review that decision before consideration in the

Court of Appeals, but this Court cannot well grant certior-

ari on the merits of our petition unless it believes that it

has jurisdiction to do so. Hence we argue the jurisdictional

point.

The District Court apparently understood the opinion of

the Court of Appeals as instructing it to dismiss, although

the Court of Appeals had not considered the point on the

merits, said so, and even refused to permit petitioner to

file a post-argument brief on the point, which had not been

discussed in the previous briefs. The standing to sue objec-

tion is wholly without merit.

First, the District Court relied on a number of prior de-

cisions by the Court of Appeals for the Ninth Circuit which

that court had referred to in remanding the case for con-

sideration of the issue, to the effect that ordinarily a parent

corporation does not have standing to sue to object to what

is being done to its subsidiary, There is neither logic nor

justice in permitting that analysis to prevail in a case such

16

as this one, where the complainant is suing to prevent the

defendants from disregarding the complainant's corporate

entity. The state tax officials are disregarding petitioner's

corporate entity in allocating some of its net income to

Capitol for taxation to that corporation. The income of

petitioner is not the income of Capitol, unless the corporate

entity of petitioner is disregarded, or unless Capitol’s cor-

porate entity be disregarded and its operations deemed to

be those of petitioner. The latter contention has never been

made, but if it were it would make EMI the principal and

end the standing to sue debate. Where the merits of the

case present the propriety of the disregard of petitioner’s

corporate entity, it cannot be said that petitioner is without

standing to sue to prevent it. A cynical disregard of justice

would be carried to the extreme if the doctrine of corporate

entity prevents a parent corporation from suing to prevert

defendants from disregarding the parent’s corporate entity.

Secondly, petitioner has standing to sue based upon its

own claim for relief. The first claim for relief is that peti-

tioner’s property in the United States would be diminished

in value if defendants are permitted unimpeded to do what

they are attempting to do, Petitioner thus suffers directly

an economic detriment which it seeks to prevent. The fact

that petitioner’s property is stock in a corporation instead

of tangible personal property, or a bank account, or land,

should not alter the fact that the stock it owns in Capitol

is petitioner’s property, and defendants are seeking to di-

minish its value by asserting an unconstitutional tax

against it, The complainant's capacity to assert a case or

controversy does not depend on the type of property which

defendants would burden. Threatened injury to any prop-

erty gives its owner the “personal stake in the outcome,”

thus providing “that concrete adverseness which sharp-

17

ens the presentation of issues .. .” Baker v. Carr, 369 U.S.

186, 204 (1962). The added requirement of causal connec-

tion between the threatening conduct and the injury (Duke

Power Co. v. Carolina Env, Study Grp., 438 U.S. 59, 72) is

abundantly present, and is significantly clearer than it was

in Duke Power. Petitioner’s standing is based on a present

ownership of threatened property, not one contingent on

future events, yet even such a contingent economic stake

can confer standing to sue. Bryant v. Yellen, 447 U.S. 352

(1980).

Furthermore, petitioner seeks relief to prevent defen-

dants from continuing to make demands on it and its sub-

sidiary that it violate British law in order to supply them

with information beyond their jurisdiction to obtain di-

rectly. The Court of Appeals stated in a footnote in its re-

manding opinion that only one demand was made against

petitioner and the rest of the demands were made against

Capitol. We do not see why that should effect the result

adversely to petitioner, since clearly defendants were seek-

ing to use economic pressure on petitioner’s property to

force petitioner to supply information to them it could not

supply under penalty of violation of British law.

Freedom from demands for information was held to con-

fer standing to sue in United States Steel Corp. v. Multi-

State Tax Commission, 367 F.Supp. 107 (S.D.N.Y. 1973,

affirmed on other grounds 434 U.S. 452). This is the land-

mark case which upheld the constitutional validity of the

Multi-State Tax Commission, If this court had disagreed

with the views of the District Court that United States

Steel had standing to sue to object to the demands on it for

information it is unlikely this Court would have used such

a case for the establishment of such a landmark principle.

18

In any event, the standing to sue to make that objection

seems self-evident.

Finally, only petitioner has the certain and clear right

to sue to enforce the United States-United Kingdom In-

come Tax Convention, The damage to it through violation

of that treaty is a reduction in the value of its property in

the United States attributable to the defendants refusing

to comply with the treaty. Their conduct in taxing Capitol

on EMI’s income is a violation of the treaty, in petitioner’s

eyes, and is part of petitioner’s case in the Federal courts.

Finally, the spectacle we would be presented with if the

District Court should be affirmed would be that a foreign

corporation, aggrieved by conduct of American officials, has

no judicial remedy available to it in the United States. The

State courts provide no relief because they provide no rem-

edy for this petitioner, as the Court of Appeals held on the

first appeal, and the District Court has held that the Fed-

eral Courts provide no remedy either, Yet international

law obligates the United States to provide a forum for the

protection and enforcement of treaty rights and other

rights which international law recognizes. See Restatement

of the Foreign Relations Law of the United States (Draft

Revision), Sec. 711, comment a; Sec. 713, comment a. This

rule was pointed out to the District Court in the brief filed

there but was ignored.

Moreover, aliens are entitled to procedural due process

under the Fifth Amendment (Wong Wing et al. v. United

States, 163 U.S. 228 (1896), and a federal statute should

not be interpreted to challenge that rule (Russian Volunteer

Fleet v. United States, 282 U.S. 481 (1931)). By parallel

reasoning, a judicial interpretation of the case or contro-

19

versy requirement should not lead to a denial of any Amer-

ican forum, since that result would deny procedural due

process.

The further ruling of the District Court that it lacked

subject matter jurisdiction of an action arising under a

United States treaty, the United States Constitution and

international law is incomprehensible, is erroneous, and

should be disapproved.

CONCLUSION

This case represents the vehicle for this Court’s con-

sideration of the constitutional status, under the United

States Constitution and International Law, of the combined

unitary formula used by California and certain other

states, where the parent corporation and most of the in-

cluded corporations are foreign corporations, and a domes-

tic subsidiary is combined with them, providing the state

with the opportunity to assert the right to apportion some

of their income to itself to tax. None of the foreign curpora-

tions has a permanent establishment in the United States,

and a mathematically determined percentage of the total

income of the group is assigned to the domestic subsidiary

for taxation, 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 to 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 consideration 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

20

objections of the foreign nations to California’s departure

from established international custom, and California’s

double taxation of income already fully taxed in the host

or parent country.

We believe the procedural objections the District Court

found should not deter the Court, because standing to sue

is plainly present on the facts and under this Court’s prior

decisions, and subject matter jurisdiction is clearly present,

Accordingly, the Writ of Certiorari should be granted.

Respectfully submitted,

Valentine Brookes,

Counsel of Record

Brookes and Brookes

Attorney for Petitioner

(Appendices follow)