Amicus Curiae Brief — EMI Ltd. v. Bennett

mS Office -Supreme Court, U.S,

4 EBIiLED «

No. 84-613 NG’ oy 1964

ALEXANDER L. STEVAS,

IN THE CLERK

Supreme Court of the Anited States

OCTOBER TERM, 1984

EMI LIMITED,

Petitioner,

Vv.

WILLIAM BENNETT, AND ERNEST J.

DRONENBURG, JR., SUCCESSOR; KENNETH Cory;

RICHARD SILBERMAN, AND MARY ANN GRAVES,

SUCCESSOR; AND MARTIN HUFF AND

GERALD H. GOLDBERG, SUCCESSOR,

Respondents.

Petition For A Writ Of Certiorari To The

United States Cou:t Of Appeals For The Ninth Circuit

BRIEF OF

ORGANIZATION FOR FAIR TAXATION

OF INTERNATIONAL INVESTMENTS, INC.

AS AMICUS CURIAE SUPPORTING CERTIORARI

JAMES M. CARTER

(Counsel of Record)

ICI Americas INc.

Wilmington, DE 19897

(302) 575-3738

LAWRENCE A. SALIBRA

ALCAN ALUMINUM Corp.

100 Erieview Plaza

P.O. Box 6977

Cleveland, OH 44101

Counsel for Amicus Curiae

A CET EE A TT REIT TN

PRESS OF RAM PRINTING, HYATTSVILLE, MD 20781 (301) 864-6662

i

TABLE OF CONTENTS

Page

EWUREEET OF BUCUR CUMIAR .cccciccccsccccvercceses 1

SUMMARY OF ARGUMENT ..c0ccccccccccccccvocccccces 2

ARGUMENT:

PETITIONER, A FOREIGN CORPORATION THAT DOES

Not Do BusInEss IN THE UNITED STATES, ALLEGES

AN INDEPENDENT INJURY To ITSELF AND To UNITED

STATES FOREIGN COMMERCE By REASON OF CALIFOR-

NIA’S UNITARY TAX SCHEME. THIS STATES A CASE

ARISING UNDER THE CONSTITUTION AND SHOULD

CONFER STANDING To SUE IN UNITED STATES

GA ilo Nick adieeic RGA SPER SRES bab 4b 0056080 4

A. Petitioner And Others Similarly Situated Suf-

fer Independent Injuries To Themselves Under

California’s Unitary Tax Scheme ........... 4

B. Petitioner’s Claims State A Case Or Con-

troversy Arising Under The United States

Constitution That Should Confer Standing To

Sue In United States Courts .............. 8

C. This Court Already Held That State Taxation

Of Instrumentalities Of Foreign Commerce

Creates Impermissible Burdens And Interfers

With Federal Constitutional Powers. Those

Decisions At Least Confer Standing Upon Peti-

tioner To Sue In United States Courts To

Vindicate Its Constitutional Claims ........ 12

D. Proof Of Impermissible Burden On Foreign

Commerce Forbidden In Japan Line Is Most

Appropriately Presented by Foreign Parents 13

eS daa cenea sees 15

ee 15

CNG ore Ul Se aa el eh Kb uvkdwe sae’ 16

APPENDIX A: List Of OFTII Members ............... la

ii

TABLE OF AUTHORITIES

CASEs: Page

Alcan Aluminium v. Department of Rev. of State of Or.,

ye oes Fe ye tt | eee 5, 6

Capitol Industries-E MI, Inc. v. Bennett, 681 F.2d 1107 (9th

Cir. 1982), cert. denied, 459 U.S. 1087 (1982) ...... 7

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

Illinois Dept. of Rev. et al, __- U.S. ___, No. 81-349 9, 10

Container Corp. v. Franchise Tax Bd., 463 U.S. 159, 77

L.Ed.2d CEENG kbnsnckveccueceniees 8, 9, 10, 11, 12

Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434

(SEO cdvcnecsnvdeweneuaneesaneseuaen 8, 12, 13, 14, 15

Mobil Oil Corp. v. Commissioner, 445 U.S. 425 (1980) . 11

CONSTITUTION:

Foreign Commerce Clause,

Be 5, Oe BS seers 2, 5, 7, 8, 14, 17

STATUTES:

INTERNAL REVENUE, CODE, § 482 ...........2ceeeee- 11

INTERNAL REVENUE, CODE, § 861 ...............00-. 11

CALIFORNIA REv. & Tax CopbE, § 25101 .............. 7

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1984

No. 84-613

EMI LIMITED,

Petitioner,

i

WILLIAM BENNETT, AND ERNEST J.

DRONENBURG, JR., SUCCESSOR; KENNETH Cory;

RICHARD SILBERMAN, AND MARY ANN GRAVES,

SUCCESSOR; AND MARTIN HUFF AND

GERALD H. GOLDBERG, SUCCESSOR,

Respondents.

Petition For A Writ Of Certiorari To The

United States Court Of Appeals For The Ninth Circuit

BRIEF OF

ORGANIZATION FOR FAIR TAXATION

OF INTERNATIONAL INVESTMENTS, INC.

AS AMICUS CURIAE SUPPORTING CERTIORARI’

INTEREST OF AMICUS CURIAE

The Organization for Fair Taxation of International

Investments, Inc. (“OFTII”), is a Delaware nonprofit

corporation with membership comprised of domestic sub-

sidiaries of foreign corporations that do not. do business

directly and do not maintain permanent establishments in

1 Petitioner and respondent have filed letters with the Clerk of this

Court consenting to the filing of this amicus curiae brief.

2

the United States. The purpose for which OFTII was

organized is to represent its members’ interests in mat-

ters of State taxation and to seek legislative and judicial

solutions to problems of double taxation and tax burdens

on foreign commerce. OFTII members include the

corporations listed in Appendix 1, infra. These corpora-

tions are treated as unitary businesses with their foreign

parents and have their foreign parents’ foreign incomes

included in the domestic corporations’ apportionable Cali-

fornia income tax bases.

The fundamentally important issue before the Court on

this petition is whether a foreign parent whose foreign

income is combined with that of its domestic subsidiary to

-create a base upon which a State apportions income tax

has, itself, standing to challenge the constitutionality

under the Foreign Commerce Clause of the inclusion of

such foreign parent’s income in the State’s apportionment

formula.

OFTII, on behalf of its members, has a direct interest

in having this Court address the issue of the standing of a

foreign parent with respect to foreign commerce because,

in the event a foreign parent has no standing, the entire

burden of demonstrating that the unitary tax unconstitu-

tionally burdens foreign commerce will fall on the mem-

bers of OF TII: domestic subsidiaries that conduct little or

no business in foreign commerce and that have no direct

knowledge as to the income of the foreign parent beyond

what they themselves generate.

SUMMARY OF ARGUMENT

Petitioner (EMI), a foreign corporation that does not

do business in the United States, has alleged three

grounds of injury: (1) Burden and expense of compliance;

(2) risk of violating English law in making disclosure of

3

information required in computing California’s world-

wide income tax; and (8) loss in value of petitioner’s

investment in its United States subsidiary against which

the worldwide assessment is exigible. OF TII, as amicus,

takes no position with respect to the alleged violation of

English law (British Official Secrets Act) or the merits of

petitioner’s case, but does urge this Court to direct the

lower United States court to hear petitioner’s claims on

their merits and decide the constitutional issues that

clearly exist should petitioner prove its allegations. The

issue now before this Court is not whether petitioner’s

claims are true but whether, taking those claims as true,

petitioner states a case arising under the Constitution of

the United States and has standing to vindicate its claims

in United States courts.

The foreign parent corporation of a domestic subsidiary

should have standing to sue in the United States courts

for injuries to its commerce caused by California’s unitary

tax scheme for the following reasons:

1. A foreign corporation that does not do business in

the United States is denied entry to the courts of Califor-

nia to adjudicate its claims of injury to foreign commerce

caused by California’s tax scheme.

2. A foreign corporation’s claim that, on its face, dem-

onstrates injury to itself and to foreign commerce as a

result of State action, presents a case arising under the

Constitution of the United States that can be heard in

United States courts.

3. Petitioner’s claim, on its face, demonstrates bur-

dens on itself and on the foreign commerce of the United

States. The intervention of a foreign government in the

case as amicus reinforces petitioner’s claims of injury to

the foreign relations of the United States.

4

4. This Court have already held that the State of

California has no authority to impose burdens on the

instrumentalities of the foreign commerce of the United

States or to interfere with the Federal Government’s

“one voice” in foreign affairs. Petitioner should be permit-

ted to offer its case to show violation by the State of this

Court’s prior decisions and the Constitution.

Petitioner’s claims clearly state a case or controversy

arising under the Constitution; petitioner, a foreign

corporation, has no other plain, speedy and efficient rem-

edy to adjudicate its claims; the case is ripe for adjudica-

tion since the tax has already been assessed by California

and paid by petitioner’s subsidiary; the conclusion is in-

escapable, therefore, that petitioner or any other foreign

corporation similarly situated should have standing to sue

for redress in the courts of the United States.

ARGUMENT

PETITIONER, A FOREIGN CORPORATION THAT DOES

NOT DO BUSINESS IN THE UNITED STATES, ALLEGES

AN INDEPENDENT INJURY TO ITSELF AND TO UNITED

STATES FOREIGN COMMERCE BY REASON OF

CALIFORNIA’S UNITARY TAX SCHEME. THIS STATES A

CASE ARISING UNDER THE CONSTITUTION AND

SHOULD CONFER STANDING TO SUE IN UNITED

STATES COURTS.

A. Petitioner And Others Similarly Situated Suffer Indepen-

dent Injuries To Themselves Under California’s Unitary

Tax Scheme.

Petitioner alleges an injury that, for the purposes of

this petition, must be taken as demonstrated. The court

below, nevertheless, dismissed petitioner’s claims on the

grounds that petitioner’s injury was that of a shareholder

and purely derivative. In the words of the Court of

Appeals, “EMI’s only possible injury is the diminution in

5

value of its holding in Capitol.” Petitioner’s Appendix

A-6. If this view stands, there is no forum in which a claim

of injury to foreign commerce can be adjudicated. A U.S.

subsidiary assessed with a tax based on its foreign par-

ent’s foreign source income cannot allege a violation of the

Foreign Commerce Clause in either State or Federal

courts since the subsidiary is not in foreign commerce

and, therefore, clearly has no standing to complain of a

foreign commerce injury. If the foreign parent also has no

standing, then the Foreign Commerce Clause is terra

infirma for private parties. Petitioner does, indeed,

allege a direct injury based not solely on its position as a

shareholder and should be permitted to offer evidence to

prove that allegation.

Petitioner has alleged that it is directly burdened by

California’s unitary method of taxation. Central to those

burdens is the requirement that Petitioner supply de-

tailed financial information concerning its worldwide op-

erations. In Alcan Aluminium v. Department of Rev. of

State of Or., 724 F.2d 1294 (7th Cir. 1984), the court

recognized the foreign parent’s “independent injury” as a

basis for standing. Key among those injuries is the obliga-

tion to supply detailed financial information. /d. at 1296.

Petitioner (EMI) here has made the same allegation: that

it is forced to produce detailed financial information con-

cerning its worldwide activities.

States utilizing unitary taxation engage in the ploy of

directing requests for information to the domestic sub-

sidiary. Those requests, however, involve detailed in-

quiries with respect to the operations of the foreign par-

ent and its foreign subsidiaries. Subsidiaries do not in the

normal course collect detailed financial information on

their parents and their parents’ foreign holdings. Sub-

sidiaries simply cannot respond to such demands and, if

6

the requests are to be honored, they are a burden which

falls squarely on the foreign parent.

More often than not, even the foreign parent cannot

honor the requests because the requests presume that

the rest of the world operates according to the State’s tax

accounting principles. This presumption is palpably un-

true. Were unitary tax apportionment to be universally

adopted, it would also require uniform standards of tax

accounting be adopted. If the latter is not done, multina-

tionals would be required to maintain as many separate

and parallel accounting systems for each unitary nation

in which they operate as there are unitary nations in

total. No company could afford such accounting systems.

The Seventh Circuit Court of Appeals, in a factually

similar case, Alcan Aluminium, supra., reached the

opposite conclusion from the court below (Ninth Circuit)

on the issue of standing of the foreign parent. In the

words of the [Seventh Circuit] Court of Appeals:

a [Alcan] has alleged an independent injury

as basis for standing. It claims an unconstitutional

burden on its foreign commerce. If appellant’s alivga-

tions are accepted as true, its interests and those of

. . . [Alean’s U.S. subsidiary] are not identical [cita-

tion omitted]. Thus. . . [the U.S. subsidiary’s] state

remedy does not — appellant aa As soon as

the tax is assessed against. . . [the U.S. subsidiary]

the threat of injury to appellant will be immediate.

(724 F.2d at 1299]

The court’s ultimate dismissal of the case was based, not

on lack of standing, but on ripeness—Oregon refused to

issue a final assessment of the tax while the case was

pending. The tax will, apparently, never be assessed

since Oregon has now repealed its unitary tax statute.

There is no issue of ripeness in the instant (EMI) case.

PES Cini ha, nl tel AC A IN A Nt: at lr

7

Petitioner should, therefore, have standing to sue in

United States courts under the standard announced by

the Seventh Circuit Court of Appeals.

It is not an answer to sav that the imposition of a tax on

a domestic subsidiary of a foreign parent is a matter

affecting only the subsidiary directly. Under California

law, the worldwide combined unitary group is defined as

“the taxpayer,” but only the domestic unit of that group is

allowed access to the State’s courts, and then only as to

matters affecting the computation of the tax. CALIFORNIA

REV. & TAX CODE, § 25101 provides:

When the income of a taxpayer subject to the tax

imposed under this part is derived from or attribut-

able to sources both within and without the state, the .

tax shall be measured by the net income derived from

or attributable to sources within the state in accord-

ance with the provision of Article 2. . . [the three

factor apportionment provisions].

As applied by California, this provision includes the for-

eign parent since its income becomes the base upon which

the worldwide combined income tax is apportioned. For

purposes of legal action, however, the “taxpayer” is ap-

parently limited to the entity that actually pays the tax,

i.e., the domestic subsidiary. The parent cannot “pay” the

tax since it neither does business nor files tax returns in

California. There is, therefore, no forum provided by

California in which petitioner or any other foreign parent

can raise the claims petitioner seeks to adjudicate in

Federal court. Capitol Industries-EMI, Inc. v. Bennett,

681 F.2d 1107, 1118-1119 (9th Cir. 1982), cert. denied, 459

U.S. 1087, (1982); cf., Petitioner’s App. A-4 (9th Cir.

Opinion). The State courts are not, in any event, appro-

priate fora in which a claim of injury to the foreign com-

merce of the United States or a violation of the Foreign

Commerce Clause should be adjudged. In the State court

8

opinion reversed by this Court in Japan Line, Ltd. v.

County of Los Angeles, 441 U.S. 434 (1979), the philoso-

phy expressed by the California Supreme Court made it

clear why a state court shouid not be allowed to decide a

Foreign Commerce Clause case:

[T]he threat of double taxation from foreign taxing

authorities has no role in commerce clause considera-

tions of multiple burdens, since burdens in interna-

tional commerce are not attributable to discrimina-

tion by the taxing state and are matters for interna-

tional agreement.

[441 U.S. at 439, quoting Cal. Sup. Court]

B. Petitioner’s Claims State A Case Or Controversy Arising

Under The United States Constitution That Should Con-

fer Standing To Sue In United States Courts.

In Container Corp. v. Franchise Tax Board, 463 U.S.

159, 77 L.Ed.2d 545 (1983), this Court expressly declined

(n.26) to address the question whether California’s unita-

ry income tax scheme, when applied to a foreign parent

corporation of a domestic subsidiary, violated the For-

eign Commerce Clause of the Constitution. This Court

went further (n.32) and recognized that there might be

more foreign policy significance to the incidence of a tax

that falls on a foreign interest than one that falls on a

domestic interest. The petitioner now presents the exact

question left open by this Court in Container. This case,

based on the allegations of petitioner, properly falls with-

in the rubric of Japan Line, supra. The two principal

distinctions that indicated a result in Container (enumer-

ated by this Court, 77 L.Ed 2d at 567-568) opposite from

Japan Line, do not exist in this (EMI’s) case:

1. The division of the tax base “pie” between formula-

ry apportionment and “arm’s length” allocation may re-

sult in a fairly apportioned or even a lower tax in the case

lees etreeern Andi SR ee ah elie ond

9

of a domestic parent, e.g., Chicago Bridge & Iron Co. v.

Caterpillar Tractor Co., Illinois Dept. of Rev. et al., _—

U.S. —_, No. 81-349 (1983, dismissed) depending upon

the facts of the case. Thus, double taxation may not

actually occur. In the case of a foreign parent with sub-

stantial foreign (to the U.S.) source income and a domes-

tic (U.S.) subsidiary with relatively smaller U.S. source

income, California’s formulary apportionment will gener-

ally increase greatly the amount of California’s assess-

ment for which no relief at all can be obtained in the

foreign parent’s domiciliary jurisdiction or any other for-

eign jurisdiction.’

2. The incidence of California’s tax based on petition-

er’s foreign source income falls, contrary to the facts in

Container, on the foreign owners of an instrumentality of

foreign commerce. For example, a foreign parent

corporation with income twelve times greater than its

domestic (U.S.) subsidiary (a ratio achieved or exceeded

by several OFTII members) may have a California

formulary income tax assessed against the domestic sub-

sidiary that exceeds the taxable income of the subsidiary.

Any contribution toward payment of the California tax by

the foreign parent would be a nondeductible capital con-

tribution to the domestic subsidiary. Hence, the income

tax that is levied by California on income that is also taxed

by the foreign domiciliary jurisdiction cannot even be

apportioned ratably among the multinational group mem-

bers by a tax-sharing agreement such as is commonly

2 Several OFTII members have experienced decreases in appor-

tioned taxes due to inclusion of foreign parents’ losses in the tax base.

They, nevertheless, oppose the unitary method because the com-

pliance burden is out of all proportion to any possible benefit and

because a decrease is an aberrant in the normal result.

10

used by domestic corporate groups filing consolidated

returns. Double taxation is almost inevitable.

There are other factors present in California’s unitary

income taxation scheme that clearly demonstrate the bur-

den on foreign commerce when the scheme is applied to

include a foreign parent corporation. These are:

(a) In order to compute the correct apportionment

of California tax, the foreign parent must conform its

accounting practices to California tax accounting princi-

ples. This may be very difficult to accomplish and, given

the wide divergence in accounting principles between

foreign countries and the U.S., very expensive as well.

(b) The necessity to convert foreign currency

transactions to U.S. dollars for California tax purposes is

an additional and direct burden on a foreign parent. A

domestic corporation with foreign subsidiaries must

calculate currency conversions to U.S. dollars for many

purposes, including financial disclosure and State and

Federal tax returns. A foreign based multinational must

calculate currency conversions for its domiciliary

jurisdiction and, under California’s rules, also prepare

conversions to U.S. dollars. This is a direct and burden-

some chore imposed by California on the foreign parent.

(c) The “more searching inquiry” addressed to tax

apportionment in foreign commerce by Container (77

_ L.Ed.2d at 555) mandates an opposite result from Con-

tainer in the case of a foreign parent. The theory of

California’s unitary taxation scheme upheld by Container

is that services, know-how, and guidance are provided by

a parent to its subsidiaries. Cf., Chicago Bridge & Iron

Co., supra. These services, it was found by the California

courts, create income that would escape taxation

domestically, except, perhaps indirectly, through in-

clusion of foreign source dividends in the domestic tax

Ne ee ee

11

base. Cf., Mobil Oil Corp. v. Commissioner, 445 U.S. 425

(1980). This principle cannot, on its face, apply to a for-

eign parent of a domestic subsidiary. Any benefit the

subsidiary dervies from management expertise and serv-

ices provided by a foreign parent increases domestic in-

come subject to tax. The jurisdiction that may suffer loss

of tax revenue under such circumstances is the foreign

jurisdiction in which the parent providing services is

domiciled. Prevention of shifting of income, deductions

and credits among inembers of a controlled group is, to be

sure, the function of INTERNAL REVENUE CODE, § 482

embodying the “arm’s length” trading standard adopted

by the United States and virtually every one of its inter-

national trading partners. The “arm’s length” standard

is, of course, rejected by California’s “unitary” tax

scheme.

The application of unitary apportionment “upstream”

(from subsidiary to foreign parent) violates the basic

principles upon which the unitary income tax scheme

rests, namely, “downstream” apportionment to include in

the tax base foreign source income produced as the result

of domestic expenditures and activities. “Downstream”

apportionment, 7.e., including the subsidiaries of a parent

corporation that controls and directs the activities of

those subsidiaries, has a much less chilling effect on for-

eign commerce and foreign relations where the parent is

domiciled or does business in the taxing jurisdiction. A

downstream apportionment theory is applied by IN-

TERNAL REVENUE CODE, § 861 and the regulations there-

under, but limited to United States domiciliary parents of

foreign corporations. The power of the States to apply a

somewhat similar “downstream” apportionment for

domestic parent taxpayers was upheld in Container. The

basic premise of that application is missing entirely in the

case of the foreign parent of a domestic subsidiary. “Up-

12

stream” apportionment, i.e., including foreign income of

a foreign parent based on the domestic subsidiary’s activi-

ties, not only rests on questionable economic principles,

but has a direct and chilling effect on foreign commerce

and the foreign relations of the United States. This is

made clear in the amicus brief filed by Her Britannic

Majesty’s Government in support of the petitioner in this

case. The difficulties of trying to negotiate a tax treaty

with the United States where the Federal Government

does not speak for the States are amply illustrated by the

history of the 1975 U.S.-U.K. Tax Convention and the

current suspension of negotiations with the German

Federal Republic (West) and the Netherlands.

C. This Court Already Held That State Taxation Of In-

strumentalities Of Foreign Commerce Creates Imper-

missible Burdens And Interferes With Federal Con-

stitutional Powers. Those Decisions At Least Confer

Standing Upon Petitioner To Sue In United States Courts

To Vindicate Its Constitutional Claims.

Petitioner, a foreign corporation that does not do busi-

ness in the United States, alleges that inclusion of its

(wholly foreign source) income in California’s pre-

apportionment tax base has resulted in an unconstitution-

al burden on foreign commerce. Japan Line, supra.,

stands as this Court’s most recent statement of con-

stitutional standards by which burdens on foreign com-

merce are to be measured. Although this Court reached

the issue of the burden on foreign commerce in their

recent decision in Container, supra., it is clear that they

limited application of Container to the situation of a

domestic parent:

We have no need to address in this opinion the con-

stitutionality of combined apportionment with re-

spect to state taxation of domestic corporations with

foreign parents or foreign corporations with either

foreign parents or foreign subsidiaries.

(Jd. at 568, n. 26]

13

This Court further pointed out the analogy articulated

in Japan Line:

We specifically left open in J oan Line the applica-

tion of that case to “domestically owned instrumen-

talities engaged in foreign commerce,” . . . [citation

omitted] and—to the extent that corporations can be

° re mp to cargo containers in the first place—this

case falls clearly within that reservation.

(Id. at 568]

By means of the same analogy, it is clear that a foreign

parent is the equivalent of foreign “owned in-

strumentalities engaged in foreign commerce” and falls

squarely within the doctrine articulated in Japan Line,

supra.

D. Proof Of Impermissible Burden On Foreign Commerce

Forbidden In Japan Line Is Most Appropriately Presented

By Foreign Parents.

In Japan Line this Court encountered a similar method

of local taxation and held that it placed impermissible

burdens on foreign commerce. Japan Line involved an

action by six Japanese shipping companies incorporated

under the laws of Japan and that had their principal places

of business and commercial domiciles in that country.

Plaintiffs in Japan Line challenged the constitutionality

of the imposition of California’s ad valorem property tax

to shipping containers owned by the plaintiffs, used ex-

clusively for transportation of cargo in foreign commerce,

and subject to property tax in Japan. California imposed

the ad valorem property tax on plaintiffs’ containers

which “passed through” the State during the course of

their international journeys.

In Japan Line, this Court found that California’s ad

valorem property tax, as applied to the foreign plaintiffs’

14

shipping containers, which were temporarily located in

California, but which were also based, registered and

subjected to property tax in Japan, was unconstitutional

because it resulted in multiple taxation of the instrumen-

talities of foreign commerce. This Court noted that when

a State seeks to tax foreign instrumentalities, the princi-

ples of the Foreign Commerce Clause bring two distinct

considerations into play. The first is the enhanced risk of

multiple taxation. This Court observed:

Due to the absence of an authoritative tribunal cap-

able of ensuring that the aggregation of taxes is

computed on no more than one full value, a state tax,

even though “fairly apportioned” to reflect an in-

strumentality’s presence within the State may subjct

“ foreign commerce to the risk of a double tax bur-

den to which [domestic] commerce is not exposed,

and which the commerce clause forbids.’ ”

Id. at 447-448]

The second consideration identified by this Court is the

fact that “a state tax on instrumentalities of foreign com-

merce may impair federal uniformity in an area where

federal uniformity is essential.” Jd. at 448. This Court

unequivocally declared that “foreign commerce is preemi-

nently a matter of national concern.” Jbid. This Court

identified two critical ways in which a State tax on in-

strumentalities of foreign commerce may frustrate the

achievement of federal uniformity:

[1] Ifthe State imposes an apportioned tax, inter-

national disputes over reconciling apportionment

formulae may arise.

[2] Ifanovel state tax creates an asymmetry in the

international tax structure, foreign nations dis-

advantaged by the levy may retaliate against

American-owned instrumentalities present in their

jurisdictions. Such retaliation of necessity would be

15

directed at American transportation equipment in

peng not just that of the taxing State, so that the

ation as a whole would suffer. If other States fol-

lowed the taxing State’s example, various in-

strumentalities of commerce could be subjected to

varying degrees of multiple taxation, a result that

would plainly prevent this Nation from “speaking

with one voice” in regulating foreign commerce.

(Id. at 450-451]

It is these principles, identified by this Court in Japan

Line, that directly control petitioner’s cause.

Domestic subsidiaries are not equipped to present toa

court the type of evidence necessary to demonstrate

whether double taxation has been avoided and federal

uniformity achieved, as required by Japan Line:

1. Double Taxation.

In the context of a foreign parent-domestic subsidiary

combination, the risk of double taxation occurs when the

income of the foreign parent or one of its foreign sub-

sidiaries is included in the unitary tax base. If this income

has been taxed as though wholly attributable to the host

country of the foreign parent or its foreign subsidiary,

then the use of it again to assess California’s tax results

not simply in the risk of double taxation, but in double

taxation in fact.

It is clearly the foreign parent, not its domestic sub-

sidiary, that sees and pays this double tax. It is the

foreign parent that has the knowledge of how it and its

foreign subsidiaries are taxed by their host countries. It

is the foreign parent whose income is reduced by multiple

taxes on the same income. To suggest that a domestic

subsidiary does or should have information concerning

16

these double taxes simply ignores the reality of corporate

organization.

2. Federal Uniformity.

It is quite unreasonable to require a domestic subsidia-

ry to become involved directly in international disputes

over reconciliation of apportionment. It is the foreign

parent that must negotiate competing claims to tax in-

come from its worldwide operations, and it will be the

foreign parent, not the domestic subsidiary, that controls

the worldwide investment decisions based on different

taxing schemes. It is also the foreign parents that monitor

the world’s financial and tax structures in order to make

sound investment decisions. Many members of OF TII do

not do business outside the United States at all and,

therefore, are totally indifferent in their normal course of

operations to any asymmetry in the international tax

structure which could result in retaliation. To assert it

must be the domestic subsidiary that bears the burden of

proof in a foreign commerce case ignores the realities of

both the burden and of normal corporate organization.

CONCLUSION

For the reasons stated, the petition should be granted

and the case remanded to be heard on the merits of

17

petitioner’s claims of injury under the Foreign Commerce

Clause.

Respectfully submitted,

JAMES M. CARTER

(Counsel of Record)

ICI AMERICAS INC.

Wilmington, DE 19897

(302) 575-3738

LAWRENCE A. SALIBRA

ALCAN ALUMINUM CORP.

100 Erieview Plaza

P.O. Box 6977

Cleveland, OH 44101

Counsel for Amicus Curiae

November 20, 1984

APPENDIX

la

APPENDIX 1

The Organization for Fair Taxation of International Invest-

ments, Inc. (“OFTII”), a Delaware nonprofit corporation, in-

cludes the following corporations organized and doing business

in the United States:

Alcan Aluminum INCO United States, Inc.

Corporation Lever Brothers Company

Allied-Lyons North America Moet-Hennessy U.S. Corp.

Corp. Nestle Enterprises, Inc.

BASF America Corp. Shell Oil Company

BATUS, Inc. Siemens Capital Corporation

Beecham, Inc. Silor Optical, Inc.

The BOC Group Sony Corporation of

Elf Aquitaine, Inc. . America

Foseco Minsep 4 Thorn EMI (USA) Inc.

Gold Fields American Corp. Volkswagen of America,

Harrison & Crosfield Ine.

(America) Inc. Whatman, Inc.

ICI Amerieas Inc. and others