Amicus Curiae Brief — Shell Oil Co. v. Iowa Dept. of Revenue

Supreme Court, US,

»,) FILED

JUN 3 1988

No. 87-984 JOSEPH F. SPANIOL, JR,

—OL ERK

In The

Supreme Court of the United States

October Term, 1987

—— —O——————__ — —

SHELL OIL COMPANY,

Appellant,

v.

THE IOWA DEPARTMENT OF REVENUE,

Appellee.

O- —

ON APPEAL FROM THE SUPREME COURT OF IOWA

—()————__——____

BRIEF OF AMICI CURIAE

IN SUPPORT OF THE APPELLEE BY THE STATE

OF NEW JERSEY AND THE STATES OF ARIZONA,

ARKANSAS, COLORADO, IDAHO, MARYLAND,

MINNESOTA, MISSOURI, MONTANA, NEW YORK,

NORTH DAKOTA, OREGON AND SOUTH CAROLINA

ray

Vv

Cary Epwarps

Attorney General of New Jers sey

Richard J. Hughes Justice Complex

CN 112

Trenton, New Jersey 08625

(609) 292-1537

JAMES J. CIANcrIA,

Assistant Attorney General

Of Counsel

*Mary R. Hamiy

Jonn P. Miscione

Deputy Attorneys General

On the Brief

*(Counsel of Record)

(Continued on inside cover)

COCKLE LAW BRIEF PRINTING CO.. (800) 225-6964

or call collect (402, 342-2831

Ropert K. Corse

Attorne yu General

0] Arizona

JOHN STEVEN CLARK

Attorney General

of Arkansas

DuaxeE Wooparp

Attorney General

oT Colorado

JAMES 7. JONES

Attorne if (+ ve ral

of Idaho

J. JOSEPH CURRAN, JR.

Attorney General

of Maryland

Hvusert H. Humpnrey III

Attorney General

of Minne sota

Wirtim L. Wesster

Attorney General

of Misse ira

Mike GREELY)

A frorney (re ne ral

oT Montana

RoBerT ABRAMS

Attorneu General

of Ne uM York

NIcHOLAS J. SPAETH

Attorney General

oO; North Dakota

Dave FROHNMAYER

Attorney General

at (jre Ton

i¢ TRAVIS \l eEpLoe

Attorney General

Of SO ith (‘arolina

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES Minissha . an

INTEREST OF AMICI CURTAB .W = 1

ARGUMENT

THE OUTER CONTINENTAL SHELF LANDS

ACT DOES NOT PREEMPT THE STATE OF

IOWA FROM IMPOSING ITS CORPORATE

NET INCOME TAX ON THE APPORTIONED

NET INCOME OF A UNITARY BUSINESS.

INCLUDING INCOME ALLEGEDLY EARNED

ON THE OUTER CONTINENTAL SHELF... 2

5 15

ii

TABLE OF AUTHORITIES

Page

Cases:

Aloha Air Lines, Inc. v. Director of Taxation, 464

U.S. T (1983) nn ccccceneee scehalibiastepspibaeheeiiidbalpieannisiichidadteuninmnaneni 3

Amerada Hess Corp. v. Director, Division of Tax-

ation, No. 87-453, probable jurisdiction noted 56

U.S.L.W. 3781 (May 16, 1988) 0 1,2

Chicago & North Western Transportation Co. v.

Kalo Brick & Tile Co., 450 U.S. 311 |) 3

Container Corp. v. Franchise Tax Bad. 463 U.S.

ne tee ee inhaslasilegipaleiinputemumatumiiioa nue 1,6

Exxon Corp. v. Hunt, 475 US. 355 (1986) 3, 6

Exron Corp. v. Wisconsin Dept. of Revenue, 447

ve sf is 1,6

Fidelity Federal Sav. d& Loan Ass'n v. De La Cuesta,

Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S.

473 (1981) iplinsiibieasteetneateattame mates 9, 10, 14

Jones v. Rath Packing Co., 430 U.S. 519 (A977) 3

Maryland v. Louisiana, 451 U.S. 725 , eee 3

Maxwell v. Bugbee 250 U.S. 525 (1919) 5)

Metropolitan Life Ins. Co. v. Massachusetts, 471

Te COP CD orintccaniciee 3

Mobil Oi] Corp. v. Commissioner of Taxes, 445 U.S.

425 (1980) - 1,6

Moorman Manufacturing Co. v. Bair, 487 U.S.

267 (1978) plied 7

Rice v. Santa Fe Elevator ¢ orp., 331 US, 218 (1947)... 83

Richards v. United States, 369 U.S. ] (1962) 8

Rodrique v. Aetna Casualty & Sure ty Co., 395 US.

{

do2 (1969)

iii

TABLE OF AUTHORITIES—Continued

Page

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983)............... 2

Shell Oil Co. v. Florida, No. 86-1593 itaiaticiataiicaeinis 14

Texaco Inc. and Tenneco Oil Co. v. Director, Di-

vision of Taxation, No. 87-464, probable juris-

diction noted 56 U.S.L.W. 3781 (May 16, 1988) 2

Texas Company v. Cooper, 236 La. 380, 107 So2d

POTN whic tncisiou te gt wees se 12, 13

United States v. Wells Fargo Bank, 56 U.S.LW.

GUID SiniiseassasiriehomsstaiiainiSibbia trad iateted tactics dee tik os 12

OTHER:

B31 U.S.C. section 3124 (8) i nnmennnseeeeeeeccc 4

43 U.S.C. section 1331 et seq. 00 2

43 U.S.C. section 1383 (a) oe 4

43 U.S.C. section 1333(a)(3) a

43 U.S.C. section 1333(a)(2)(A) 3, 8,9

S. Rep. No. 411, 83d Cong., 1st Sess. (1953) 10, 11, 13, 14

INTEREST OF AMICI CURIAE

Two concerns prompt this brief on behalf of amici

curiae, the States of Arizona, Arkansas, Colorado, Idaho,

Maryland, Minnesota, Missouri, Montana, New Jersey, New

York, North Dakota, Oregon and South Carolina. All im-

pose either a corporate franchise tax measured by net in-

come or a corporate net income tax, and all use formulary

apportionment to determine the portion of entire net in-

come derived from sources within the taxing state.* Ae-

ceptance of Shell’s position would seriously erode the

unitary business principle, which underlies and justifies

formulary apportionment. The keystone of Shell’s argu-

ment is that the net income of a unitary business ean be

sourced to specific sites, e.g., the Outer Continental Shelf

(““OCS’’). The idea that the net income of a unitary busi-

ness can be sourced to particular geographic locales was

rejected by this Court in Mobil Oil Corp. v. Commissioner

of Taxes, 445 U.S. 425 (1980), and in Exxon Corp. v. Wis-

consin Dept. of Revenue, 447 U.S. 207 (1980), and, having

reappeared chameleon fashion here, should be rejected

again.**

* Amici other than Arizona, Idaho, Minnesota, New York

and North Dakota determine apportioned net income using

the net income and apportionment factors of the single corpo-

rate taxpayer doing business within the taxing state. Arizona,

Idaho, Minnesota, New York and North Dakota use combined

reporting which measures apportioned net income by taking

into account the income and apportionment factors of a uni-

tary group of corporations. See Container Corp. v. Franchise

Tax Bd., 463 U.S. 159 (1983). This distinction is not material here

because the income in question is includable in the income

base under both measurements.

** New Jersey has a particular interest in the case because

it is the respondent in Amerada Hess Corp. v. Director, Divi-

(Continued on following page)

|

9

—

The other concern prompting amici to file this brief

is that all of them, like lowa, include in their respective

net income bases income which Shell claiins is earned on

the OCS. All amici are thus concerned with the precise

legal issue presented, the potential revenue loss, and the

difficult questions of proof and computation inherent in

Shell’s position.

ARGUMENT

THE OUTER CONTINENTAL SHELF LANDS

ACT DOES NOT PREEMPT THE STATE OF

IOWA FROM IMPOSING ITS CORPORATE

NET INCOME TAX ON THE APPORTIONED

NET INCOME OF A UNITARY BUSINESS,

INCLUDING INCOME ALLEGEDLY EARNED

ON THE OUTER CONTINENTAL SHELF.

This is a preemption case. Thus the primary ques-

tion is whether Congress, in enacting the Outer Contin-

ental Shelf Lands Act, (48 U.S.C. sections 1331 et seq.

(“OCSLA’’)), intended to preclude lowa from imposing

its corporate net income tax on an apportioned share of

Shell’s net income when there has been no exelusion of in-

come allegedly derived from the OCS. See Shaw v. Delta

Air Lines, Inc., 463 U.S, 85, 95 (1983); Fidelity Federal

(Continued from previous page)

sion of Taxation, No. 87-453 and Texaco Inc. and Tenneco Oil

Co. v. Director, Division of Taxation, No. 87-464, probable juris-

diction noted 56 U.S.L.W. 3781 (May 16, 1988), which, like this

case, involve the compuiation of the net income base of a uni-

tary business. In joining in this brief, the other amici do not

necessarily subscribe to New Jersey's position in Nos. 87-453

and 87-464.

3

Sav. & Loan Ass’n v. De La Cuesta, 458 U.S. 141, 152

(1982). In a review of a preemption challenge, state

legislation is presumed valid; preemption is disfavored

and is to be found only in the clearest cases of con-

flict. Chicago & North Western Transportation Co. v.

Kalo Brick & Tile Co., 450 U.S. 311, 317 (1981) ; Maryland

v. Loutstana, 451 U.S. 725, 746-47 (1981). This presump-

tion in favor of state iegislation is particularly strong

where a State is exercising a traditional function of its

sovereignty, e.g., taxation. Metropolitan Life Ins. Co. v.

Massachusetts, 471 U.S. 724, 740 (1985): Jones v. Rath

Packing Co., 430 U.S. 519, 525 (1977).

Congressional intent to displace state law can be

either express (see e.g. Aloha Air Lines, Inc. v. Director

of Taxation, 464 U.S. 7 (1983); Exxon Corp. v. Hunt, 475

U.S. 355 (1986)) or implied. Metropolitan Life Ins. Co.

v. Massachusetts, supra at 738. Implied preemption can

be inferred from the pervasiveness of federal legislation

which leaves no room for state intrusion, by the predomi-

nance of the federal interest in a particular field, by the

objective of federal legislation, or the inconsistency of

state legislation with a federal objective. Rice v. Santa Fe

Elevator Corp., 331 U.S. 218, 230 (1947): Maryland v.

Louistana, supra, at 746-47.

Since Shell asserts that the plain language of OCSLA

prohibits imposition of the lowa tax, i.e. that this is a case

of express preemption, the starting point for the pre-

emption analysis is the language of the federal statute.

See Exxon Corp. v. Hunt, supra at 362. The language of

OCSLA does not support Shell’s argument.

Shell points to two provisions—section 1333(a)(2)(A),

which provides in part that ‘‘State taxation laws shall

4

not apply to the outer Continental Shelf’’ and section

1353(a)(5), which provides in part that OCSLA ‘‘shall

never be interpreted as a basis’’ for a State to claim ‘‘any

interest in or jurisdiction ... over the seabed and subsoil

of the outer Continental Shelf... or the revenues there-

b

from.’’ Even when this language is considered in a

vacuum Without reference to its context or legislative his-

*

tory, it does not have the meaning Shell advances." lowa

is neither applying its corporate income tax to the OCS

nor laying claim to an ‘‘inierest in... revenues’’ from the

OCS. Shell’s argument to the contrary (cf. Shell b26)

reflects a basic misunderstanding of what OCSLA_ in-

iended and of the operation of the lowa income tax.

Iowa is not, and could not under the Due Process Clause,

extend its income tax law to the OCS because the OCS

is plainly not within the geographical boundaries and thus

the political jurisdiction of Lowa. lowa is confined to

* Shell attempts to set the stage for its argument by review-

ing a multitude of unrelated federal statutes containing various

state tax preclusions (Shell b18). One need not quarrel with

Shell’s statement that Congress has the power to limit state

taxation to nevertheless conclude that none of the cited stat-

utes, with their varying preemption language, suggests the

proper construction of OCSLA. To take 31 U.S.C. sec. 3124(a)

as an example, it is clear that (1) Congress intended in section

3124 to create a tax exemption for stocks and obligations of the

United States, (2) Congress specified the precise scope of the

exemption, extending it to “each form of taxation that would

require the obligation, the interest on the obligation, or both,

to be considered in computing a tax,” and (3) having been spe-

cific in creating the exemption, Congress was explicit in vali-

dating two types of state taxation-nondiscriminatory franchise

taxes, and estate or inheritance taxes. Section 1333(a) of OCSLA

does not state that it is creating a tax exemption but rather that

state taxation laws shall not apply to the OCS, and, being di-

rected at state tax laws, not pe li exempt from state taxes,

neither details particular types of preempted state taxes nor

validates certain others.

on

taxing the in-state attributes of a unitary business. Those

in-state values are determined by applying an apportion-

ment factor to the net income of a unitary business. As-

suming for the sake of argument that it could be demon-

strated with certainty that Shell’s net income included net

income earned on the OCS,* the effect of the lowa appor-

tionment formula is to eliminate such income from the

base. The lowa apportionment factor is the ratio of lowa

sales to total sales, and in most other States the factor is

the ratio-of in-state sales, wages, and property to total

stiles, wages, and property. Included in the denominator

of the sales fraction are those sales made by Shell on the

OCS. Since there are no OCS sales in the numerator of

the sales fraction nor any demonstrable OCS value in the

numerator,** the effect of including those sales in the de-

nominator is to remove OCS sales from the tax base or

ore precisely to remove a corresponding portion of net

income from the tax base. Far from applying its tax law

to the OCS, by means of its apportionment formula lowa

has eliminated any such extraterritorial extension of its

income tax.***

Nor is Iowa asserting an interest in ‘‘revenues’’ from

the OCS. Again, consistent with the Due Process Clause,

Towa could not, at least on an unapportioned basis, tax

* As discussed below, it cannot be demonstrated what, if

any, portion of Shell’s net income was earned on the OCS.

** Shell has conceded that there is no way of determinin

“with any degree of certainty” whether its lowa sales include

crude oil having its ultimate source on the OCS JJ.A.19).

*** The inclusion of OCS sales in the denominator of the

apportionment factor is plainly not an extension of lowa’s tax-

ing power to the Shelf: See Maxwell v. Bugbee, 250 U.S. 525,

539 (1919).

revenues from sales of natural gas and oil made on the

OCS because the OCS is not within the territorial juris-

diction of lowa. But Iowa is not taxing revenues; it is

taxing net income apportioned to lowa. The stumbling

block of separate accounting and the rationale for the

unitary business principle is that in the case of a unitary

business it is impossible to determine the precise geogra-

phiecal sources of a company’s net income. Mobil Oil

Corp. v. Commissioner of Taxes, supra at 488. Since a

company’s net income derives ‘‘from the operation of the

business as a whole, it becomes misleading to characterize

the income of the business as having a single identifiable

‘souree.’’’ Ibid; and see Exxon Corp. v. Wisconsin

Dept. of Revenue, supra at 226, (rejecting Exxon’s argu-

ment that income allegedly earned outside Wisconsin from

the production of crude oil and natural gas should be de-

ducted from the Wisconsin net income base).* Shell’s at-

tempt to isolate net income attributable to the OCS (J.A.

36 to 43) is to no avail because ‘‘the profit figures relied

on by [Shell] are based on precisely the sort of formal

geographic accounting whose basic theoretical weaknesses

justify resort to formula apportionment in the first

place.”’ Container Corp. v. Franchise Tax Board, 463

U.S. 159, 181 (1983). To take a single example, the ex-

penses listed at J.A. 40 for exploration, land expense, re-

* In Exxon, as here, there were two types of purported

“situs” income—income attributable to the wellhead value of

crude oil transferred downstream from Exxon’s Exploration and

Production Department to its Refining Department and income

attributable to third party sales at the wellhead. 447 US. at

217. The Court did not reach the issue of wellhead sales be-

cause Wisconsin took the position that under its statute the

income from such sales was excludable. 447 U.S. at 226 and

n.10.

search, and head office are prorated by Shel! to the OCS.

There is no assurance that such proration takes into ac-

count the true transfers of value between Shell’s two oper-

ating segments—its Products Organization and its E & P

Organization. These difficulties in isolating net income

actually atributable to the OCS exist whether revenue is

generated by a sale on the OCS or by a sale elsewhere. In

either case it is impossible to determine what, if any, por-

tion of OCS revenue or value ends up in net income. The

contributions to net income from refining, manufacturing,

and selling in the continental United States may far exceed

the contribution to net income from sales or value on the

OCS. See Moorman Manufacturing Co. v. Bair, 437 U.S.

267, 276 (1978).

Shell argues (Shell b21) that there is no difference in

‘‘economic substance’’ between a single state tax on 100%

of Shell’s apportioned OCS income and state taxes levied

directly on OCS production. To the contrary, if as Shell

hypothesizes, it did business only in Iowa and on the OCS,

the economic sources of Shell’s net income would be en-

tirely within lowa except for its crude oil production on

the Shelf. Under those circumstances, absent a showing

of an egregiously excessive tax burden, Iowa could prop-

erly tax 100% of Shell’s net income because it would be

imposing its net income tax on the lowa ineidents of a uni-

tary business. See Moorman Manufacturing Co. v. Bair,

supra. That would not be the case, assuming again that

Shell did business only in lowa and on the OCS, were Lowa

to impose its net income tax on a separate accounting basis

on the entire value of Shell’s crude oil production on the

Shelf. The tax would not be related to the economic

sources in Iowa of Shell’s income but rather to Shell’s

economic activities on the Shelf. Thus, in economic terms,

the two impositions would be quite different, both in con-

cept and amount.

When the language Shell points to is considered in its

statutory context, as indeed it must be (Richards v. United

Slates, 369 U.S. 1, 11 (1962)), Shell’s argument collapses

altogether. The language as to non-applicability of state

taxation laws is the last sentence of seetion 1333(a)(2)(A).

The preceding sentences of that section declare the civil

and criminal law of each adjacent State to be the law of

the United States for the portion of the OCS which would

be within such State if its boundaries were extended sea-

ward. This declaration capsulizes a significant congres-

sional compromise between senators, including Senator

Long, who advocated that the laws of the adjacent States

should govern the administration of the OCS (see Rod-

rique v. Aetna Casualty & Surety Co., 395 U.S. 352, 358-

59 (1969)), and those who maintained that federal mari-

time or admiralty law should apply (/d. at 361-65). The

compromise set forth in section 1333(a)(2)(A) is that fed-

eral law applies to the OCS, but the law of the adjacent

States is adopted as federal law. Behind the decision to

use state law as federal law were the competing concerns

that workers on OCS platforms were closely tied to the

adjacent States but that state law and state political juris-

diction could not or should not be extended to those strue-

ures. Id. at 365-64.

The final sentence in section 1333(a)(2)(A)_ that

‘‘State taxation laws shall not apply to the outer Contin

ental Shelf,’’ viewed in context, is a natural sequel to the

ideas expressed in the first part of the section. The in-

corporation of adjacent state law as federal law raised the

question of the applicability of the tavat'on laws of the

adjacent States, and, making explicit the views of the

Justice Department that state law and political jurisdic-

tion could not and should not be extended to the OCS (/d.

at 564), Congress included the quoted language. Thus,

viewed in context, the obvious meaning of the sentence

‘*State taxation laws shall not apply to the outer Contin-

ental Shelf’’ is to exclude the tax laws of both the adja-

cent and inland States from those state laws adopted as

surrogate federal law.

Viewed in context, the language in section 1333(a) (3)

(the other provision on which Shell relies) that OCSLA

‘*shall never be interpreted as a basis’’ for a State to

claim ‘‘any interest in or jurisdiction ... over the seabed

and subsoil of the outer Continental Shelf... or the rev-

enues therefrom,’’ is equally contrary to Shell’s position.

In Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473

(1981), this Court held that despite OCSLA’s declaring

the OCS to be an area of exclusive federal jurisdiction,

state courts are not deprived of concurrent jurisdiction

in those cases where state law has been declared surro-

gate federal law by section 1333(a)(2)(A). Relying, as

does Shell, on section 1333(a)(3), the petitioner in Gulf

argued that state court jurisdiction over a personal in-

jury case would contravene the mandate that OCSLA

‘*shall never be interpreted as a basis for claiming any

. . . jurisdiction on behalf of any state for any purpose

over the... outer Continental Shelf... .’’ (emphasis

added). This Court replied:

This argument again confuses the political jurisdic-

tion of a State with its judicial jurisdiction. Section

1333(a)(3) speaks to the geographic boundaries of

- 10

state sovereignty, because Congress primarily was

concerned in enacting OCSLA to assure federal con-

trol over the Shelf and its resources. [453 U.S. at

482}.

Gulf thus stands for the general proposition that de-

pite the comprehensive prohibition of state jurisdiction

over the OCS in section 1333(a)(3) certain kinds of non-

political state jurisdiction remain unaffected. The thrust

of section 1333(a)(3) is simply to set ‘‘the geographical

boundaries of state sovereignty.’’ State action which

does not extend state boundaries into the OCS is not fore-

closed. The additional phrase in section 1333(a)(3) that

no State may claim ‘‘any interest in... the revenues”’

from the OCS is similarly directed at the territorial limi-

tations on state sovereignty. As made clear in the Senate

Report, the purpose of section 1333(a)(3) is to establish

that the adoption of state law does not permit a State to

participate ‘‘in the administration of or revenues from

the areas outside of State boundartes.’’ S. Rep. No. 411,

83d Cong., Ist Sess. (1953), at 23 (hereinafter ‘‘Senate

Report,’’ emphasis added). Iowa’s imposition of its cor-

porate net income tax on the portion of Shell’s net in-

come derived from Iowa sources does not extend lowa’s

boundaries or its political jurisdiction into the OCS. (If

it were otherwise, no State could, consistent with the Due

Process and Commerce Clause, impose its corporate net

income tax on the apportioned entire net income of a uni-

tary business.)

Gulf stands as well for the proposition that if a sub-

ject is not specifically mentioned in section 1333(a)(3)

it is not beyond state jurisdiction.

11

The language of [section 1333(a)(3)] refers to ‘any

interest in or jurisdiction over’ real property, min-

erals and revenues, not over causes of action... .

We do not think the legislative history of OCSLA

can be read to rebut the presumption of concurrent

state-court jurisdiction, given Congress’ silence on

the subject in the statute itself. [453 U.S. at 482-3

emphasis added}.

Similarly here, OCSLA’s silence regarding the imposition

of an apportioned net income tax on net income derived

from the Shelf should not rebut the presumption against

preemption of state law.

OCSLA’s legislative history, which Shell refers to

-at length (Shell b28 to 41), offers no more support to Shell

than does the statute as enacted. The legislative history

contains no direct reference to the adjustment Shell urges.

Moreover, with the one exception discussed below, the

numerous references in the legislative history to state

taxation refer to the exercise of taxing jurisdiction by

States adjacent to the OCS and to forms of taxation other

than the corporate income tax. The single exception is

the contention of Senator Long, an opponent of the legis-

lation, that adjacent States would have costs as a result

of the development of the OCS but no sources of revenue

directly related to that development.. In enumerating the

revenue sources which OCSLA foreclosed to Louisiana

and the other adjacent States, Senator Long, in his Minor-

ity Report, included ‘‘the State’s severance tax, property

tax, [and] tax on corporate profits.’’ Senate Report at

67. This single statement appears to be the only refer-

ence in the entire legislative history of OCSLA to corpo-

rate net income taxes. As such, it is no basis for in-

12

ferring the intent of Congress. As this Court recently

stated in determining the effect of a single Senator’s state-

ment concerning the scope of the tax exemption found in

section 5(e) of the National Housing Act of 1937:

The relevant passage comes in the middle of a long

speech, and no similar expression is to be found in

any other legislative debate or document. This short

isolated comment simply cannot overcome the under-

stood meaning of section 5(e) and the presumption

against implied tax exemptions. [United States v.

Wells Fargo Bank, 56 U.S.L.W. 4265, 4267 (1988) }.

Similarly here, Senator Long’s isolated comment referring

to Louisiana’s tax on corporate profits cannot overcome

the settled doctrine that the imposition of an apportioned

net income tax does not extend a State’s taxing jurisdic-

tion bevond its borders.

Moreover, it is far from clear that Senator Long was

thinking in terms of OCSLA’s foreclosing the imposition

of Louisiana’s net income tax on an apportioned share of

an integrated oil company’s net income (cf. Shell b32).

As made clear in Texas Company v. Cooper, 236 La. 380,

107 So.2d 676 (1958), while Louisiana had a corporate net

income tax in the early 1950’s which used formulary ap-

portionment, the tax collector had tLe right to require sep-

arate accounting in cases where the apportionment method

produced an unfair result:

When the collector finds that use of the apportion-

ment method by a taxpayer produces a manifestly un-

fair result and that the separate accounting method

would more equitably determine the amount of net

income derived from sources in Louisiana, he may re-

quire that the separate accounting method be used in

such ease. [236 La. at 390]

13

A regulation made clear that separate accounting could be

required of oil companies engaged in the production of

crude oil in Louisiana. See 236 La. at 409. In the Tezas

Company case, the Louisiana Supreme Court upheld the

tax collecior’s determination that the oil company had to

use separate accounting because formulary apportion-

ment produced a manifestly unfair result. The Texas

Company, although an integrated oil company, engaged

on'y in the production, sale, and transportation of erude

oil in Louisiana and had no refinery there. Separate ac-

counting was appropriate, according to the court, because

the production of erude oil in Louisiana was a discrete and

easily quantifiable step. 236 La. at 399. In light of its

statutory authority, its regulation, and the Texas Com-

pany case, had OCSLA permitted Louisiana to extend its

taxation laws to the OCS, it is quite likely that Louisiana

would have required separate accounting for production

on the Shelf. Given Senator Long’s views that Louisiana’s

severance and property taxes should have been applicable

to the OCS (Senate Report at 67), it is entirely plausible

that in referring to the State’s tax on corporate profits,

the Senator had in mind the application of separate ac-

counting to production on the OCS. That, of course, is not

what lowa has done in taxing Shell.

Finally, the imposition of lowa’s apportioned net in-

come tax with respect to Shell’s activities in lowa does not

thwart the federal policies fostered by OCSLA, whether

the original 1953 version or the 1978 amendments. Shell’s

suggestion to the contrary notwithstanding (Shell b35),

“The legislative record suggests that maximization of

economic returns was not the driving force behind the

legislation.’’ (Brief for the United States as amicus curiae

14

in Shell Oil Co. v. Florida, No. 86-1593). Rather, the fed-

eral policies sought to be accomplished by OCSLA were

the establishment of ‘‘exclusive jurisdiction and control of

the Federal Government of the United States over the sea-

bed and subsoil of the outer Continental Shelf and the de-

velopment of its vast mineral resourees.’’ Senate Report

at 2, quoted in Gulf Offshore Co. v. Mobil Oil Corp., supra

at 479, n.7. Lowa’s imposition of its corporate net income

tax on an apportioned share of Shell’s net income, some of

which may derive from the OCS does not M any way frus-

trate the exercise of federal jurisdiction and control over

the OCS nor the development of the Shelf’s resources.

lowa’s tax in no way extends into the OCS nor reaches

OCS development per se. The burden of the tax is simply

too remote from the OCS to thwart OCSLA’s policies.

In summary, neither OCSLA itself, nor its legislative

history, nor the policies it promotes suggests that Congress

intended to preempt the imposition of lowa’s apportioned

net income tax with respect to Shell’s activities in lowa.

Iowa is not extending its tax laws to the OCS nor is it

claiming an interest in OCS revenues. Rather, it is sub-

jecting to tax the lowa incidents of Shell’s unitary busi-

ness. ‘The tax base is net income apportioned to lowa, and

whether that net income base contains income earned on

the OCS eannot be determined on this record. Even if

that fact could be determined, lowa’s tax would still not

violate OCSLA because it would remain a tax on the Iowa

portion of Shell’s net income, and there would still be no

extraterritorial extension of lowa’s tax laws into the OCS.

1d .

CONCLUSION

lor the reasons stated above, the judgment of the Snu-

preme Court of lowa should be affirmed.

Respectfully submitted,

Cary Epwarps

Attorney General of New Jersey

James J. Crancra

Assistant Attorney General

Of Counsel

*Mary R. Hamine

Joun P. Miscione

Deputy Attorneys General

On the Brief

*(Counsel of Record)

Roserr K. Corsin

Attorney General

of Arizona

JoHN STEVEN CLARK

Attorney General

of Arkansas

Duane Wooparp

Attorney General

of Colorado

JAMES T. JonES

Attorney General

of Idaho

J. Josepu Curran, Jr.

Attorney General

of Maryland

Hveert H. Humpnrey IIT

Attorney General

of Minnesota

Wituiam L. Wesster

Attorney General

of Missouri

Mike Greery

Attorney General

of Montana

Roserr Aprams

Attorney General

of New York

Nicno.as J. Sparri

Attorney General

of North Dakota

Dave FRoHNMAYER

Attorney General

of Oregon

T. Travis Mepiock

Attorney General

of South Carolina

16