Amicus Curiae Brief — Barclays Bank PLC v. Franchise Tax Bd. of Cal.

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BARCLAYS BANK, PLC, PETITIONER

ve

FRANCHISE TAX BOARD OF CALIFORNIA

COLGATE-PALMOLIVE COMPANY, PETITIONER

v.

FRANCHISE TAX BOARD OF CALIFORNIA

ON WRITS OF CERTIORARI TO THE COURT OF APPEAL

OF THE STATE OF CALIFORNIA, IN AND

FOR THE THIRD APPELLATE DISTRICT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

SUPPORTING RESPONDENT

Drew S. Days, III

Solicitor General

LorETTA C. ARGRETT

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

MALCOLM L. STEWART

Assistant to the Solicitor General

Department of Justice

Washington, D.C, 20530

(208) 514-8217

*%,

ee

QUESTIONS PRESENTED

The United States will address the following questions:

1. Whether California’s application of worldwide com-

bined reporting (WWCR) to a foreign-controlled multi-

national corporation during tax year 1977 impaired the

federal government’s conduct of international commercial

policy and therefore violated the Foreign Commerce

Clause of the Constitution.

2. Whether California’s application of WWCR to a

domestic multinational corporation during tax years 1970-

1973 violated the Foreign Commerce Clause.

3. Whether the Fourteenth Amendment to the Con-

stitution requires California to provide a refund remedy

in the event that the taxes at issue are determined to

have been unlawfully imposed.

(1)

TABLE OF CONTENTS

Page

Interest of the United States noone ceeeeeceeeeeeeeeee 1

ES DE ce 2

I asennNNONS 14

i 16

ES ae 30

TABLE OF AUTHORITIES

Cases:

Alcan Aluminium Vv. Franchise Tax Board, No. 84-

C-6932 (N.D. Ill. March 7, 1986) ..........00000..... 12

Boyle v. United Technologies Corp., 487 U.S. 500

ESTE Oe a pe 17, 19, 23

Chicago Bridge & Iron Company V. Caterpillar

Tractor Co., 463 U.S. 1220 (1983) .... er 9

Complete Auto Transit, Inc. Vv. Brady, 430 US.

ELLEN 16

Container Corp. V. Franchise Tax Board, 463 U.S.

a 2, 3, 9, 14, 16, 18, 19, 20, 24, 26, 27

Franchise Tax Board v. Alcan Aluminium, 493

I ees 12, 21

Haig Vv. Agee, 453 U.S. 280 (1981) —.....000 19

Harisiades v. Shaughnessy, 342 U.S. 580 (1952)... 19

Harper V. Virginia Dep’t of Taxation, 113 S. Ct.

EE eT 22, 23, 28, 29

Itel Containers Int’l Corp. v. Huddleston, 113

S. Ct. 1095 (1993) ....... EOI Bet es eRe 17, 20

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

LO ee _...8-9, 16, 18, 24-25

Japan Whaling Ass’n Vv. American Cetacean Soci-

I es 19

McKesson Corp. V. Division of Alcoholic Bever-

ages & Tobacco, 496 U.S. 18 (1990) 000... 22, 28, 29

Mobil Oil Corp. v. Commissioner of Taxes, 445

a Sec 18

United States v. Curtiss-Wright Export Corp., 299

TSN 16

(111)

IV Vv

Constitution, treaty and statutes: Page Miscellaneous—Continued: Page

Wardair Canada Inc. v. Florida Department of Chairman’s Report on the Worldwide Unitary

Revenue, 477 U.S. 1 (1986) oo ---coccecccceceeceeeeeeeeseee 16 Taxation Working Group (1984) ............. 9,10

Convention for Avoidance of Double Taxation, De- 122 Cong. Rec. 20,348 (1976) ~..........---.---.--seeeeenseeees 4

cember 31, 1975, United States-United King- 124 Cong. Rec. (1978):

dom, 31 U.S.T. 5670, T.I.A.S. No. 9682... 3 8 RIES TN 4

Art. 9(4), 31 U.S.T. 5677 0. 3, 4, 6, 7, 16, 23 P. pee sevoessvescnesennscenseeaseencensecaneensesancnaneennssoneenass ;

. EEE aR EES Renee aoe ae eee aE

_ ry ee a caclaleais 4

» $8, Cl. 3: i Peat 4

Commerce Clause covcceoccoocose 1, 14, 16, 17, 22, 23, 27 pp. 18,652-18,653 eo ee re eT 7

Foreign Commerce Clause _................. 3, 12, 17, 20 he 7

23, 26, 27 ALLELES 7

BO, Tis hE Gi erccnterrntncniomascssccinicnmntansscnenianitiin 1 _ “re 7

Cal. Rev. & Tax. Code § 25110 (West 1992) ........... 2 a 7

Internal Revenue Code (26 U.S.C.): H.R. 3980, 99th Cong., Ist Sess. (1985) 0... 10

ENB SacI so SNRs cL eae R = 2 H.R. 5076, 96th Cong., 2d Sess. (1980) 0... 7

Tax Injunction Act, 28 U.S.C. 1341.00.00. 12, 21 Letter from the Secretary of the Treasury Blu-

Alaska Stat. (1990 & Supp. 1992): menthal to the head of the California Franchise

' —_= re nr aoe 28 Tax Board (Feb. 15, 1977) -...................-.-..-.-----.--. 5, 6

a Letter from the Secretary of the Treasury to the

I . :

“ pagan Soup. ae ” President of the Senate (Dec. 18, 1985) 11, 12, 26-27

ee ee ee eee Letter from the Secretary of the Treasury to State

Mont. Code Ann. (1993): Governor (Apr. 28, 1978) 0-0 e---ee-ceeceeeneeee 6

§§ 15-31-322 to 15-31-326 _.... ee. 28 125 Cong. Rec. 17,433 (1979) —........... lial ceehcaathlinit 7

N.D. Cent. Code (1993): S. Hrg. 1066, 99th Cong., 2d Sess. (1986) ........... 13

ne 2g S. 1974, 99th Cong., Ist Sess. (1985) ....... 10

Tenn. Code Ann. (1989 4 Statement of Assistant Secretary of the Treasury

er 67 ‘onan (1) ~ge a 98 Laurence N. Woodworth (July 19, 1977) ............ 5-6

dowdy dae Tax Treaties With the United Kingdom, the Re-

Utah Code Ann. (1992 & Supp. 1993) : public of Korea and the Republic of Philippines:

SOR IIUED sovevcncessctstensiensesinssoceeuntaninicenseiieeteseniinisi 28 Hearings Before the Senate Comm. on Foreign

§ 59-7-403 sesieuiiaittaitdlisasiibincaairia ini niainsiiiaaias 28 Relations, 95th Cong., Ist Sess. (1977) ............... 4, 5,6

Miscellaneous:

Cal. S.B. 671 (Oct. 6, 1993) :

SRE ERE ene enc ene ee Se ON ie CL PORT 3

i er eae aes 3

REE reemileeent oad ek rc nan SATE tReet Pier NED oe 3

STE aceite deitdhctatela ih ten ici 3

Iu the Supreme Court of the United States

OCTOBER TERM, 1993

No. 92-1384

BARCLAYS BANK, PLC, PETITIONER

Vv.

FRANCHISE TAX BOARD OF CALIFORNIA

No. 92-1839

COLGATE-PALMOLIVE COMPANY, PETITIONER

Vv.

FRANCHISE TAX BOARD OF CALIFORNIA

ON WRITS OF CERTIORARI TO THE COURT OF APPEAL

OF THE STATE OF CALIFORNIA, IN AND

FOR THE THIRD APPELLATE DISTRICT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

SUPPORTING RESPONDENT

INTEREST OF THE UNITED STATES

The Constitution confers upon Congress the power to

“regulate Commerce with foreign Nations” (Art. I, § 8,

Cl. 3) and authorizes the President, “by and with the

Advice and Consent of the Senate, to make Treaties”

(Art. Il, § 2, Cl. 2). The United States has a substantial

interest in cases that address the constitutional allocation

of authority over matters affecting foreign commerce and

foreign relations. These consolidated cases present such

issues. At the Court’s invitation, the United States filed

(1)

2

a brief amicus curiae in No. 92-1384 at the petition

stage.

STATEMENT

Different methods have been used to identify and allo-

cate among taxing jurisdictions the income received by

multinational corporations. The method employed by the

United States is known as the “separate accounting” or

“arm’s length” method. This method generally treats each

corporation as a distinct tax unit, required to report in-

come from its transactions with every other corporation

(including its parent, subsidiaries or affiliates) on an

arm’s length basis. The separate accounting method of

taxation is employed in the Internal Revenue Code and

in the many bilateral tax treaties to which the United

States is a party (92-1384 Pet. App. H43).’ The separate

accounting method is also employed by most other nations

for both domestic and international purposes.

During the tax years at issue in these cases,’ California

employed a different method of allocating corporate

income known as “worldwide combined reporting”

(WWCR). Under the California tax provisions then in

effect, the State generally treated parents, subsidiaries and

affiliates engaged in a unitary business as a single entity

for tax purposes, pooled their global income, and allo-

cated a portion of that combined income to California

based upon a multi-factor formula.* See Container Corp.

v. Franchise Tax Board, 463 U.S. 159, 162-163 (1983).

1 There are, of course, provisions of the Internal Revenue Code

designed to forestall potential abuses of the separate accounting

method. See, e.g., 26 U.S.C. 482.

2 No. 92-1384 involves tax year 1977. No. 92-1839 involves tax

years 1970-19738.

3 Under legislation enacted in 1986 (effective in 1988), California

provided all corporations with a “water’s edge” alternative to

WWCR. See Cal. Rev. & Tax. Code § 25110 (West 1992); 92-1384

Pet. App. B4 n.2. In general, the “water’s edge” method permits

a taxpayer to report its income separately from the income of its

foreign parents or affiliates. This case does not directly consider

3

Petitioners in these cases contend, inter alia, that the

former California taxing scheme violated the Foreign

Commerce Clause because it “impair[ed] federal uni-

formity in an area where federal uniformity [was] essen-

tial, and prevent[ed] the Federal Government from speak-

ing with one voice in international trade.” Container

Corp., 463 U.S. at 193 (citations and internal quotations

omitted). Proper resolution of this claim, we believe,

requires a thorough understanding of the development of

the federal government’s policy regarding the States’ use

of WWCR.

1. Significant controversy over the States’ use of

WWCR first arose during the late 1970’s when the Senate

debated the United States-United Kingdom Tax Conven-

tion. The treaty was initially signed on December 31,

1975. Convention for Avoidance of Double Taxation,

December 31, 1975, United States-United Kingdom, 31

U.S.T. 5670, T.I.A.S. No. 9682. The chief concession

made by the British government was to reduce significantly

the discriminatory impact of U.K. tax provisions regarding

dividends paid by U.K. corporations. This provision was

given an effective date of January 1, 1975, and it was

expected to result in very substantial tax refunds to U.S.

investors.

Within the United States, controversy over the treaty

centered chiefly on Article 9(4). 31 U.S.T. 5677. As

originally drafted, this provision appeared to bar the

States’ application of WWCR even to U.S. corporate

parents with U.K. subsidiaries or affiliates. Apparently

or address the “water’s edge” method of taxation because it con-

cerns tax years that preceded California’s adoption of that method.

On September 10, 1993, California enacted legislation to remove

the fee the State previously had imposed on corporations that

elected “water’s edge” treatment under the 1986 legislation and

also to remove the regulatory authority under which respondent

could disregard a “water’s edge” election and require a corporation

to report its income on a worldwide basis. See Cal. S.B. 671, §§ 16,

23, 24, 26 (1993). Under this new legislation, all corporations sub-

ject to tax in California may now freely elect taxation under the

“water’s edge” method.

4

so broad a limitation had not been intended, and in re-

sponse to the States’ objections the U.S. and U.K. ex-

changed notes making clear that the States were barred

from applying WWCR only in determining the tax liability

of U.K.-controlled corporations. See Tax Treaties with the

United Kingdom, the Republic of Korea and the Republic

of the Philippines: Hearings Before the Senate Comm. on

Foreign Relations, 95th Cong., Ist Sess. 305-306 (1977

Hearings) (1977) (Treasury Department Memorandum).

So modified, the treaty was transmitted to the Senate by

President Ford on June 24, 1976. 122 Cong. Rec. 20,348

(1976).

Even after this revision, individuals both inside and

outside the Senate continued to express a wide range of

objections to Article 9(4). Restrictions on the States’

use of WWCR were said to constitute an improper inter-

ference with state autonomy. See, e.g., 124 Cong. Rec.

18,427 (1978) (Sen. Stevens). Other Senators took the

less sweeping position that any federal limitations on the

States’ taxing powers should be effected by legislation

rather than through an international agreement negotiated

by the executive branch alone. See, e.g., id. at 18,417

(Sen. Church); id. at 18.423 (Sen. Kennedy). Some

participants, chiefly state taxing officials, argued that the

arm’s length method was unworkable and subject to ma-

nipulation by corporate taxpayers. See. e.g., ibid.; 1977

Hearings 69 (prepared statement of the National Asso-

ciation of Tax Administrators). Opponents of the provi-

sion warned that the treaty would establish a dangerous

precedent, and that the States’ freedom to apply WWCR

to the corporations of other countries would quickly be

negotiated away. Senator Church led the opposition in

the Senate, offering a reservation that would render Arti-

cle 9(4) inapplicable to political subdivisions. See 124

Cong. Rec. 18,416 (1978).

Those who opposed the Church reservation (and sup-

ported the treaty with Article 9(4) included) countered

with a variety of arguments. Advocates of Article 9(4)

relied in substantial part upon the contention that the

5

arm’s length approach provided a superior method for

distinguishing foreign from domestic income. In a letter

to the head of the California Franchise Tax Board dated

February 15, 1977,* Secretary of the Treasury Blumenthal

stated that “[t]he unitary apportionment system is in-

consistent with accepted tax treaty policy which prohibits

one country from taxing the business profits of an enter-

prise of the other unless that enterprise is engaged in

business through a permanent establishment in the first

country.” The letter explained that “[u]nder unitary ap-

portionment, if the profit rate of a foreign member of a

unitary group exceeds the profit rate of the member doing

business in California, the effect is tantamount to taxing

the profits of the foreign enterprise.” Blumenthal went

on to state that “it is our experience, as well as that of

most other countries, that the determination of income

on the basis of an arm’s-length standard is not only more

accurate but also far less arbitrary,” and argued that

California’s use of an apportionment method different

from “the internationally accepted approach” would often

lead to double taxation. The Secretary also stated that

“(t]he unitary system imposes a substantial compliance

burden on multinational corporations” and that the gov-

ernment was “aware of cases where this burden has dis-

couraged foreign investment in the United States.” The

letter concluded: “For all of these reasons, I repeat, the

provisions of the proposed income tax treaty with the

United Kingdom seem to me wholly appropriate and

desirable.”

Treasury officials also emphasized, however, that the

provision’s impact on the States should be small because

the treaty applied only to U.K.-controlled corporate tax-

payers, leaving the States free to employ WWCR in tax-

ing the income of corporations controlled by the nationals

of other foreign countries. Thus, Assistant Secretary of

the Treasury Laurence N. Woodworth explained that un-

*Secretary Blumenthal’s letter is reprinted in 1977 Hearings

104-105.

6

der Article 9(4), “if the U.K. corporation is itself con-

trolled by, say, a New York corporation, or by a Dutch

corporation, California may take into account the income

and expense of the entire group.” 1977 Hearings 35.

Opponents of the Church reservation also emphasized the

closely related argument that Article 9(4) should be

viewed not in isolation, but as a necessary quid pro quo

for substantial concessions made by the British. Secre-

tary Blumenthal reminded the head of the California

Franchise Tax Board that “a treaty is a negotiated docu-

ment containing a number of concessions by both part-

ners. In the pending treaty, the United Kingdom made

very important concessions, particularly in the treatment

of dividends paid to U.S. investors. We view the Article

9(4) provision as an appropriate quid-pro-quo for the

concessions made by the United Kingdom.” 1977 Hear-

ings 104. In a subsequent letter to state Governors dated

April 28, 1978, the Secretary sounded a similar theme,

Stating: “I realize that the merits of the unitary method

can be debated. My purpose in writing is not to enter

that debate but simply to note that the treaty restriction

on this method represents a narrowly drawn and relatively

minor concession, by any measure, in relation to the

overall balance of benefits in the treaty.” Letter from the

Secretary of the Treasury to State Governor 2 (Apr. 28,

1978). A Treasury Department memorandum, respond-

ing to objections to Article 9(4) raised in testimony

before the Senate Foreign Relations Committee, contested

the assertion that “every treaty country will obtain the

same provisions as the United Kingdom.” The memo-

randum responded that “renegotiation of our complete

treaty network will not occur for several years; and the

Treasury Department will agree to the provision only in

the context of a treaty beneficial to the United States.”

1977 Hearings 305.°

5 On the final day of floor debate, Senator Javits relied heavily

on this répresentation, stating that “[i]f the treaty is approved,

Treasury will consider the inclusion of similar provisions in other

treaties, but only in return for commensurate concessions on the

7

On June 23, 1978, the Senate voted 44-34 to reject

the Church reservation. 124 Cong. Rec. 18,670. The

subsequent vote on the treaty itself was 49-32 in favor,

ibid.—five votes less than the two-thirds required by the

Constitution. On June 27, 1978, the treaty was approved

by the Senate subject to the Church reservation. 7d. at

19,076. U.S. and U.K. negotiators ultimately agreed upon

a third protocol to the treaty, which incorporated the

Church reservation on a bilateral basis and included con-

cessions to the British on offshore drilling profits and

the insurance premiums excise tax. That protocol was

approved by the Senate by a vote of 98-0 (125 Cong.

Rec. 17,433 (1979)) and soon thereafter was approved

by the House of Commons.

The Carter Administration addressed the WWCR issue

on at least one additional occasion. On March 31, 1980,

Assistant Secretary of the Treasury for Tax Policy Donald

C. Lubick presented before the House Ways and Means

Committee the Treasury Department’s views on H.R.

5076 (96th Cong., 2d Sess. (1980)), a bill that would

have essentially barred the States’ use of WWCR. The

Assistant Secretary’s statement noted that “[a]lthough the

bill makes no distinction between corporate groups under

United States control and those under foreign control,

such a distinction may be warranted.” 92-1384 J.A. 588.

He explained, in particular, that “the application of a

unitary system to U.S. controlled corporate groups repre-

sents much less of an international irritant, if in fact that

problem is present at all.” Jd. at 589. The statement con-

other side.” 124 Cong. Rec. 18,657 (1978). Senator Javits had

previously characterized Article 9(4) as “but a part of a larger

whole which is of great interest and of great importance to the

United States,” and as “a concession which we have made to the

United Kingdom.” 124 Cong. 18,418 (1978). Other Senators ex-

pressed similar views, opposing the Church reservation on the

ground that the treaty as a whole would benefit the United States,

and that acceptance of the Church reservation would imperil British

acceptance of the accord. See id. at 18,652-18,653 (Sen. Hayakawa) ;

id. at 18,669 (Sen. Dole).

cluded that “[t]he Treasury Department supports the goals

of [this provision] of the bill, with respect to affiliated

groups controlled by foreign persons. We do not oppose

the provisions of [this part] of the bill insofar as U.S.

controlled corporate groups are concerned.” I[bid.

2. The brief amicus curiae filed by the United States

in Chicago Bridge & Iron Company v. Caterpillar Tractor

Co., No. 81-349, in January 1982 was in two respects a

departure from prior executive branch practice. For the

first time the government’s criticisms of the worldwide

method were couched in constitutional terms. Second, the

government’s opposition to the States’ use of WWCR was

extended to cover the method’s application to domestic

corporations with foreign subsidiaries. The government

argued, inter alia, that the Illinois taxing scheme was

invalid because the “unitary method impairs the other-

wise uniform international custom that is the basis of the

treaties between the United States and numerous foreign

countries that are intended to prevent international double

taxation of income.” Br. 16. The brief noted that several

foreign governments had protested the States’ continued

use of WWCR. Ibid. The brief did not, however, cite any

statement by an executive branch official setting forth the

position of the federal government regarding the States’

use of WWCR.

Chicago Bridge & Iron was held over to the following

Term, and the Court granted certiorari in Container

Corp. The United States did not submit a brief in Con-

tainer Corp., and this Court upheld the use of WWCR

as applied to a domestic corporation with foreign subsid-

iaries. The Court distinguished its prior decision in Japan

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

The brief acknowledged, however, that application of WWCR

to foreign-controlled corporations raised even greater concerns;

accordingly, the brief cautioned that “the Court should not decide

this case on any ground that would foreclose any claims that may

be raised in a future case involving the imposition of the combined

reporting method to a group of corporations with a foreign parent.”

81-349 Amicus Br. at 19.

9

(1979), by noting, inter alia, that “in this case, unlike

Japan Line, the Executive Branch has decided not to file

an amicus curiae brief in opposition to the state tax.”

463 U.S. at 195. It acknowledged the government's filing

in Chicago Bridge & Iron, but asserted that “there has

been no indication that the position taken by the Govern-

ment in Chicago Bridge & Iron Co. still represents its

views, or that we should regard the brief in that case as

applying to this case.” Jd. at 195 n.33. The dissent took

issue with this statement, arguing that there was “no

reason to ignore [the Government’s] view in one case

currently pending before the Court when considering an-

other case that raises exactly the same issue,” and noting

that “[t]he Solicitor General has not withdrawn his memo-

randum, nor has he supplemented it with anything taking

a contrary position.” /d. at 204 (Powell, J., dissenting).

This Court’s decision in Container Corp. was issued on

June 27, 1983." In the wake of that decision, President

Reagan established the Worldwide Unitary Taxation

Working Group, a diverse group of federal and state

officials and representatives of the business community.

That group was “charged with producing recommenda-

tions . . . that will be conducive to harmonious inter-

national economic relations, while also respecting the

fiscal rights and privileges of the individual states.” Chair-

man’s Report on the Worldwide Unitary Taxation Work-

ing Group at 3 (1984). The Group considered com-

ments from a wide spectrum of interested parties, includ-

ing foreign governments and foreign taxpayers.

On July 31, 1984, Secretary of the Treasury Regan,

as chairman of the Worldwide Unitary Taxation Work-

ing Group, transmitted his report to the President. Mem-

bers of the Working Group agree on three principles that

should guide state taxation of multinationals’ income:

(1) a water’s edge limitation on the States’ application of

7 Nine days later the Court dismissed the appeal in Chicago

Bridge & Iron for want of a substantial federal question. Chicago

Bridge & Iron Co. Vv. Caterpillar Tractor Co., 463 U.S. 1220 (1983).

10

formula apportionment to both foreign and domestic cor-

porations; (2) federal administrative assistance to the

States in their application of the arm’s length method; and

(3) “[c]ompetitive balance for U.S. multinationals, foreign

multinationals, and purely domestic businesses.” Chair-

man’s Report at ii.

The report did not propose immediate federal action

to implement these principles. Rather, Secretary Regan’s

cover letter noted that “[iJf states enact legislation based

on the three principles agreed upon by the Working

Group, the United States will be able to speak with one

voice in dealing with its foreign trading partners, and

this irritant to international commercial relations will

have been eliminated.” Chairman’s Report at iii. Secre-

tary Regan recommended that the administration shou'd

support federal legislation only if the States failed to

make appreciable progress in implementing the Group's

recommendations within a suitable interval. /bid.

3. Subsequent progress at the state level proved in-

adequate, however, and on November 8, 1985, President

Reagan issued a statement calling for federal legislation

to impose a water’s edge standard on state taxation of

multinationals. 92-1839 J.A. 7. The President stated that

“(slince states have not universally accepted these princi-

ples, I am instructing the Secretary of the Treasury to

initiate the process of crafting Federal legislation to in-

corporate these principles into law.” Ibid. The President’s

statement also noted that “[fJurther, I am instructing the

Attorney General to ensure that the United States’ inter-

ests are represented in appropriate controversies and cases

consistent with this approach.” /d. at 8.

On December 18, 1985, the Treasury Department pro-

posed legislation that would prohibit the States’ use of

WWCR and provide the States with federal assistance in

their application of the arm’s length method. That legis-

lative proposal was introduced in the Senate as S. 1974

(99th Cong., Ist Sess. (1985)), and in the House as H.R.

3980 (99th Cong., Ist Sess. (1985)). In a letter ad-

dressed to the Speaker of the House and President of the

11

Senate, Secretary of the Treasury Baker explained that

“[t}]he practice of a small but important minority of the

States of assessing corporate income tax on a worldwide

unitary basis has caused serious difficulties with the con-

duct by the federal government of our foreign economic

policy.” Letter from the Secretary of the Treasury to the

President of the Senate 1 (Dec. 18, 1985) (hereafter

“Baker letter”). The Secretary noted that this country’s

trading partners had raised numerous objections to the

worldwide method and stated, “We agree with these con-

tentions.” /bid. The Secretary further observed that con-

tinued use of WWCR at the state level had resulted in the

adoption (though not yet in the implementation) of retali-

atory legislation by the U.K., and he asserted that “{i]t

has become clear that the ability of the federal government

to speak with one voice in the conduct of foreign eco-

nomic affairs is significantly weakened because of these

State tax practices.” Ibid.

The Secretary acknowledged that significant progress

had been made after dissemination of the Working Group’s

recommendations, but he concluded that “[t]he failure

to date to achieve voluntary compliance by all states with

the principles adopted by the Working Group, and the

increasing international difficulties caused by continued

adherence by a few states to the worldwide unitary

method, have led the Administration to conclude that re-

strictive legislation should now be adopted.” Baker letter

at 2. The Secretary also noted that the administration

bill would bar the use of WWCR as to both foreign and

domestic corporations. He acknowledged that “the prin-

cipal foreign commerce issues raised by state worldwide

unitary taxation would be resolved if states were to agree

that they would not impose worldwide unitary tax on

foreign controlled entities.” Ibid. The Secretary asserted,

however, that such an approach would cause other serious

problems by effecting a form of discrimination between

domestic and foreign businesses (in favor of the latter).

Ibid. The Secretary also emphasized that the legislation

12

provided for federal assistance in the States’ administration

of the arm’s length method. /d. at 2-3.

On January 30, 1986, Secretary of State Shultz wrote

to the governors of the States that continued to employ

WWCR. The letter stated: “I am writing to explain to

you the foreign policy concerns that prompted this legis-

lation and to urge you to act promptly to reconsider your

state’s use of the worldwide unitary method of taxation.”

92-1384 J.A. 601. The letter noted that the States’ use

of WWCR had prompted diplomatic complaints from

numerous countries and retaliatory legislation from the

U.K., and concluded: “For these reasons I believe state

worldwide unitary taxation to be inappropriate. Con-

tinued state taxation on a worldwide unitary basis will

greatly impair the ability of the federal government to

carry out its tax and investment policy in the interna-

ional arena and to manage the sensitive issue of inter-

national double taxation.” Jd. at 602-603.

On March 7, 1986, the United States filed a brief

amicus curiae in Alcan Aluminum Ltd. v. Franchise Tax

Board, No. 84-C-6932 (N.D. Ill.), a suit seeking injunc-

tive relief against California’s application of WWCR to

foreign corporations. The government’s brief argued that

the California tax violated the Foreign Commerce Clause.

The Shultz letter was attached as an exhibit in support

of the contention that the California law had adversely

affected the nation’s foreign policy.*

On September 29, 1986, J. Roger Mentz, Assistant

Secretary of the Treasury for Tax Policy, testified before

a Senate subcommittee regarding the pending legislative

proposal. Assistant Secretary Mentz asserted that sig-

nificant progress had been made in inducing States to

abandon WWCR without the passage of federal legisla-

8 The complaint in Alcan was dismissed on jurisdictional grounds.

The United States did not participate in the case in either the court

of appeals or this Court, in which the only issue was federal juris-

diction. This Court ultimately held that Alcan’s suit was barred

by the Tax Injunction Act, 28 U.S.C. 1341. See Franchise Taz

Board v. Alcan Aluminium Ltd., 493 U.S. 331, 338-341 (1990).

r-

13

tion, and that “the most significant progress is California.”

S. Hrg. 1066, 99th Cong., 2d Sess. 63 (Sept. 29, 1986).

(California had amended its tax statute on September 5,

1986, to provide for a water’s edge election, albeit an

election contingent upon the payment of a significant

fee. See note 3, supra.) The Assistant Secretary acknowl-

edged that “California’s legislation also has some elements

in it that are inconsistent with the President’s statement,

and with §. 1974,” but concluded, “since there has been

such significant progress, that restrictive Federal legislation

is not warranted at this time.” /bid. Instead, the Assistant

Secretary recommended that “congressional action on

S. 1974 should be deferred until the remaining worldwide

unitary states have a full opportunity to act, California

has an opportunity to consider and respond to comments

on its recently enacted legislation, and we have an oppor-

tunity to evaluate the actual operation of water’s edge

legislation passed by the several states when fully in

effect.” Id. at 71-72 (92-1384 J.A. 441).

4. The federal government continued its involvement,

however, in litigation challenging the constitutionality of

the former California taxing scheme. On September 17,

1986, the United States filed a bvief amicus curiae in the

California Superior Court supporting Barclays Bank in

the instant suit for refund of taxes paid in tax year 1977.

In support of its claim that California’s use of WWCR

had undermined the federal government’s conduct of

foreign economic policy, the brief cited (1) the Shultz

letter of January 30, 1986, (2) the retaliatory legislation

enacted by the U.K. in the summer of 1985, and (3) pro-

tests received from other trading partners. The govern-

ment maintained its support for Barclays throughout the

state-court litigation. The United States has not, how-

® At an earlier stage of this case, the United States expressed in

this Court the view that California’s application of WWCR to

foreign-controlled corporate multinationals violated the Commerce

Clause. 92-212 U.S. Amicus Br. at 12-13.

14

ever, participated as amicus curiae at any stage of Col-

gate’s lawsuit.

SUMMARY OF ARGUMENT

1. A state taxing scheme may not constitutionally be

applied to foreign commerce if it will “impair federal

uniformity in an area where federal uniformity is essen-

tial, and prevent[] the Federal Government from speak-

ing with one voice in international trade. Container

Corp., 463 U.S. at 193 (citation and internal quotations

omitted). In applying this test to concrete cases, the

question is whether the state action at issue is incompati-

ble with federal policy as adopted and explicated by offi-

cials of the executive and legislative branches. In under-

taking this inquiry, moreover, the court must look to

federal policies in effect at the time the tax was levied,

lest States unjustly be held liable for refunds of taxes

that violated no federal policy, and were thus in no way

unlawful, at the time the disputed tax liability was

incurred.

2. Judged against this standard, Barclays’ claim must

fail. As of 1977 (the tax year in question) executive

branch officials had expressed a preference for the arm’s

length method and had negotiated a treaty prohibiting

application of WWCR to U.K.-controlled corporate tax-

payers. These officials had not, however, indicated that

further use by the States of WWCR would be incompati-

ble with a standard to which the United States was com-

mitted by general agreement with its trading partners.

To the contrary, executive branch officials during the

treaty debate gave assurances that in the event of the

treaty’s approval by the Senate, States could continue to

apply WWCR to corporations controlled by other (i.c.,

non-U.K.) foreign nationals, and that their right to do so

would not be bargained away except in return for con-

cessions from our trading partners. Against this back-

drop, the executive branch’s negotiation of the treaty and

15

efforts to effect its approval by the Senate cannot accu-

rately be viewed as manifesting a then-existing federal

policy requiring uniformity among the States.

3. Colgate-Palmolive Company, a domestic corpora-

tion, seeks refunds of taxes paid from the years 1970-

1973. That claim should be denied. During the years

in question, no federal policy precluded the States’ appli-

cation of WWCR to domestic taxpayers; indeed, the U.S.-

U.K. treaty was renegotiated in 1976 to make clear that

it would not bar the States from applying the worldwide

method to domestic corporations with British subsidiaries.

Moreover, although the executive branch in 1982 and

thereafter has opposed the application of WWCR to do-

mestic taxpayers, that opposition has not been based on

foreign relations concerns. California’s application of

WWCR to Colgate should be upheld even if Barclays pre-

vails in its legal challenge, since Colgate’s “equal treat-

ment” argument is without merit.

4. Finally, if this Court concludes that the taxes at

issue in these cases were unlawfully collected, it should

make clear that in the unusual circumstances presented

here, California is under no federal constitutional obliga-

tion to provide refunds. The taxes here were not inher-

ently beyond California’s power to levy; petitioners were

not immune from income taxation in California, and they

did not suffer unlawful discrimination vis-a-vis some other

class of taxpayers. Rather, the gravamen of petitioners’

claim is that California’s use of WWCR during prior

years impaired the federal government's ability to conduct

foreign commercial policy. California’s payment of money

to the petitioners will not, of course, undo any disruption

of federal government policy that may have already

occurred, and in light of the recent modification of

California’s tax scheme, the executive branch has con-

cluded that the provision of refunds for past years is

unnecessary to protect the federal government’s ability to

speak with one voice in international trade.

16

ARGUMENT

1. This Court’s opinion in Complete Auto Transit,

Inc. v. Brady, 430 U.S. 274, 279 (1977), sets forth the

factors governing dormant Commerce Clause challenges

to the States’ regulation of domestic commerce. This

Court has made clear, however, that “an inquiry more

elaborate than that mandated by Complete Auto is neces-

sary when a State seeks to tax the instrumentalities of

foreign, rather than of interstate, commerce.” Japan

Line, 441 U.S. at 451. In particular, a state taxing

scheme may not constitutionally be applied to foreign

commerce if it will “impair federal uniformity in an area

where federal uniformity is essential, and prevent[{] the

Federal Government from speaking with one voice in

international trade.” Container Corp., 463 U.S. at 193

(citation and internal quotations omitted) .”°

This more searching scrutiny is appropriate, in part,

because “[floreign commerce is preeminently a matter of

national concern.” Japan Line, 441 U.S. at 448. In

addition, however, this Court’s approach reflects a recog-

nition that in the sphere of foreign relations, federal

officials are particularly likely to act by methous lacking

legal formalities. That is, in the foreign sphere, federal

policy is especially likely to take the form of informal

agreements, understandings, long-term strategies, etc.,

that have not been codified in a statute or treaty. Cf.

United States v. Curtiss-Wright Export Corp., 299 U.S.

304, 320 (1936) (noting that President’s power in the

1” As an initial matter, the United States notes its disagreement

with the California Supreme Court’s reliance on this Court’s deci-

sion in Wardair Canada Inc. Vv. Florida Department of Revenue,

477 U.S. 1 (1986). The most extensive congressional consideration

of the States’ use of WWCR—the 1977-1978 debate over ratification

of the U.S.-U.K. Tax Convention—produced a substantial majority

within the Senate in favor of Article 9(4). The Senate’s final action

on the treaty, in our view, should not be seen as affirmative per-

mission for States to use the worldwide method; indeed, much of

this Court’s analysis in Container Corp. would have been unneces-

sary if Congress had already spoken.

17

field of international relations “does not require as a

basis for its exercise an act of Congress”).'’ The Presi-

dent’s ability to deal with foreign governments in an

effective manner would be seriously undermined if the

accoras he reaches could not be binding upon the States.

Inquiry under the Commerce Clause is thus particularly

searching where foreign commerce is concerned, because

in this context it is particularly likely that a state law will

disrupt federal policy even where it is preempted by no

federal law.”

The difficulty, of course, lies in identifying those areas

“where federal uniformity is essential.” In the present

dispute, it is quite clear that federal law has long em-

bodied a preference for the arm’s length method, in the

sense that this method is used in computing the federal

income tax liability of multinational corporations. This

Court has recognized, however, that “[c]Joncurrent federal

1! Supersedure of state law by federal policies uncodified in any

statute, treaty, or regulation is unusual, but it is not confined to

the Foreign Commerce Clause. In Boyle v. United Technologies

Corp., 487 U.S. 500 (1988), for example, this Court held that a

state-law tort suit alleging negligent design could not lie against

a contractor that had furnished military equipment to the govern-

ment in compliance with precise contractual specifications. In areas

of “uniquely federal interest,” the Court recognized, state law

would be displaced where “a significant conflict exists between an

identifiable federal policy or interest and the operation of state

law.” 487 U.S. at 507 (brackets and internal quotations omitted).

12 1t is entirely clear, of course, that a federal statute or treaty

prohibiting the States’ use of WWCR would be a permissible exer-

cise of federal power. In a certain sense it is thus at least potentially

misleading to say that a State’s method of taxation can ever “pre-

vent” the federal government from speaking with one voice. See

Itel Containers Int’l Corp. v. Huddleston, 118 S. Ct. 1095, 1108

(1998) (Scalia, J., concurring in part and concurring in the judg-

ment). The danger, more precisely stated, is that a State’s taxing

scheme may prevent the federal government from implementing its

policies by methods other than statutes or treaties. That danger is

particularly acute in the realm of foreign relations, where im-

portant international understandings may for various reasons be

less formalized.

18

and state taxation of income, of course, is a_ well-

established norm. Absent some explicit directive from

Congress, we cannot infer that treatment of foreign in-

come at the federal level mandates identical treatment by

the States.” Mobil Oil Corp. v. Commissioner of Taxes,

445 U.S. 425, 448 (1980). Nor is it dispositive that the

federal government has not embraced the WWCR method

under its numerous bilateral agreements. This Court

must look in addition to other factors to determine whether

divergence between state and federal methods of taxation

is tolerable in a particular sphere. We believe the Court's

inquiry should be guided by the following principles:

a. This Court in Container observed that “[t]he most

obvious foreign policy implication of a state tax is the

threat it might pose of offending our foreign trading

partners and leading them to retaliate against the Nation

as a whole.” 463 U.S. at 194. Accord, Japan Line,

441 U.S. at 450 (foreign “retaliation of necessity would

be directed at American transportation equipment in

general, not just that of the taxing state, so that the

Nation as a whole would suffer’). The prospect of

foreign retaliation serves to explain why a state tax may

raise issues of national concern even when it is not im-

posed upon residents of other States. Threats of retalia-

tion by foreign governments, however, cannot be sufficient

in themselves to render a state tax invalid. Such a legal

rule would in essence give foreign governments a “heck-

ler’s veto” over state taxing authorities. The rule would,

moreover, encroach upon executive power by depriving

the President of the authority to resist foreign demands

when he considers resistance to be appropriate. Thus, in

applying the “one voice” standard, foreign reaction can-

not be dispositive in determining the propriety of a con-

tested state tax.

The corollary to this proposition is that the political

branches must be given primary responsibility for de-

veloping and articulating the foreign policy of the United

States. As the Court observed in Container Corp., “(this

19

Court has little competence in determining precisely when

foreign nations will be offended by particular acts, and

even less competence in deciding how to balance a par-

ticular risk of retaliation against the sovereign right of

the United States as a whole to let the States tax as they

please.” 463 U.S. at 194. The second of these concerns

is of particular importance. The factual question whether

a particular state tax will precipitate foreign complaints,

although far more expertly addressed by the political

branches, is not wholly insusceptible of resolution through

judicial proceedings. Questions concerning the federal

government’s proper response to such complaints, how-

ever, raise issues of foreign policy falling entirely outside

the judicial ken.”

Thus, in applying the “one voice” test, the crucial

question is whether the state action at issue is incompati-

ble with federal policy as explicated by officials of the

political branches."* We do not contend that executive

branch personnel have the power to issue binding pro-

nouncements declaring state taxing practices unconstitu-

tional. In determining whether a state tax impairs the

federal government’s ability to speak with one voice, how-

ever, the Court must ascertain the contours of federal

policies not codified in any statute or treaty; and in that

process the statements of executive branch officials are

entitled to substantial evidentiary weight.

13“ 'Mlatters relating ‘to the conduct of foreign relations .. .

are so exclusively entrusted to the political branches of government

as to be largely immune from judicial inquiry or interference.’”

Haig v. Agee, 453 U.S. 280, 292 (1981) (quoting Harisiades v.

Shaughnessy, 342 U.S. 580, 589 (1952)). Cf. Japan Whaling Ass’n

Vv. American Cetacean Society, 478 U.S. 221, 230 (1986).

14 Similarly in Boyle, this Court did not attempt to determine by

dint of its own expertise which state-law design requirements, if

applied to military contractors, would impinge unduly upon the

implementation of federal policy. Rather, the Court asked whether

particular state-law requirements conflicted with contractual design

specifications actually negotiated by federal procurement officials.

See 487 U.S. at 509, 512.

20

The danger of improper encroachment on the Presi-

dent’s conduct of foreign affairs, as noted above, is not

limited to the situation where a State’s method of taxa-

tion conflicts with an international understanding agreed

to by the President or otherwise undermines the nation’s

international trade policies. Executive power is also im-

properly diminished when a court strikes down a state

law on the basis of a foreign complaint that the President

has determined to resist. Thus, in the absence of a dis-

positive statute or treaty, the courts must respect the

judgments of the President regarding matters of foreign

policy both where the President has determined that state

compliance with an international norm is essential and

where he has determined that foreign governments should

not be allowed to dictate the practices of the States. The

executive branch must be free in addition to adopt a

middle ground: to acknowledge the validity of foreign

concerns, and to attempt to persuade state officials to

respond thereto, without insisting upon the States’ im-

mediate conformity with the federal norm. The courts

therefore should not lightly infer a Foreign Commerce

Clause violation from the mere fact that executive branch

officials have attempted to persuade state authorities to

alter their policies. Such an approach not only risks

undue impairment of legitimate state prerogatives; it may

also reduce presidential power by diminishing the execu-

tive’s ability to employ “jawboning” and informal negoti-

ation without invoking the specter of a constitutional

confrontation.

b. In the past the Court has responded to these con-

cerns partly by attaching special significance to the gov-

ernment’s decision whether to file a brief amicus curiae

in litigation brought by private taxpayers. See, e.g., Con-

tainer Corp., 463 U.S. at 195-196; Itel Containers, 113

S. Ct. at 1105. The Court has thus treated amicus partici-

pation by the United States as significant evidence of the

state tax’s likely effect on the federal government’s ability

to conduct foreign policy. This pronounced reluctance to

invalidate state laws as violative of the “one voice” princi-

21

ple in the absence of an amicus submission by the federal

government has helped to ensure both that legitimate state

taxing choices are not unnecessarily precluded and that

the Court does not unwittingly subvert the President’s con-

duct of foreign economic policy.

c. There are, however, difficulties—both theoretical

and practical—with this approach. It is highly unusual

that a legal brief should be given (in effect) evidentiary

weight in the very case in which it is filed. It is unusual

as well to permit the introduction of evidence at the

appellate stage of legal proceedings. The most serious

problem, however, arises in suits (such as this one) seek-

ing refunds of taxes collected during prior years.” A brief

filed by the government in 1994 provides a clear indica-

tion of current executive branch policy. It is not entitled

to the same weight, however, in determining what policy

was in place in 1977. Inordinate reliance on the govern-

ment’s current policy can therefore present the risk that

States will be held liable for refunds of taxes that violated

no federal policy, and were thus in no way unlawful, at

the time of their collection.

Our prior briefs in this case were flawed, we now be-

lieve, not in their discussion of the generally applicable

legal principles, but because they failed adequately to

consider the state tax’s consistency with federal policy

during the particular tax vears in question. These briefs

cited no executive branch pronouncements antedating

President Regan’s Statement of November 8. 1985. In

contending that the state tax was contrary to the federal

eovernment’s foreign commercial nolicy. we argved in the

California Sinreme Court that “[tlhe adoption by the

Fede-al Executive of this policy is evidenced by the letter

of January 30, 1986, from the Secretary of State for the

United States to the Governor of California.” 92-1384

Pet. App. H-31. Similarly, our brief amicus curiae in

15 Because of the Tax Injunction Act, 28 U.S.C. 1341, a Commerce

Clause challenge to a State’s taxing scheme is far more likely to

reach this Court in the context of a suit for refund than in any

other posture. See Alcan Aluminium, 493 U.S. at 338-341.

22

this Court at a prior stage of this case asserted that the

California tax “prevents the United States from speaking

with one voice on this sensitive and important matter

(92-212 U.S. Amicus Br. at 12-13), but did not examine

the contours of federal policy as it existed in 1977—the

tax year at issue. '

A focus on current federal policy would be appropriate

in a suit for declaratory or injunctive relief against con-

tinued imposition of a contested state tax. We now be-

lieve, however, that proper analysis of Barclays’ refund

claim requires a focus on federal policy during the tax

year in question. Throughout this litigation the govern-

ment has argued that a~state tax violates the Foreign

Commerce Clause if it is incompatible with an interna-

tional standard to which the United States has committed

itself by general agreement with its trading partners. We

adhere to that view, which was accepted by this Court

in Japan Line. To establish a constitutional violation,

however, petitioner must show that the incompatibility

existed prior to the accrual of the disputed tax liability.

Recent developments in related areas of the law make

a precise focus on the contested tax year particularly

important. Just last Term, this Court made clear that

its decisions in civil cases must be given retroactive effect.

Harper v. Virginia Dep’t of Taxation, 113 S. Ct. 2510,

2517 (1993). Harper, together with McKesson Corp. Vv.

Division of Alcoholic Beverages & Tobacco, 496 U.S. 18,

31, 39-41 (1990), also established that when a state tax

is determined to have been unlawfully collected, the Con-

stitution requires meaningful retrospective relief, ordinarily

in the form of refunds. Harper, 113 S. Ct. at 2519-2520.

These cases underscore the importance of a rigorous

approach to the question whether a State tax was fatally

inconsistent with federal foreign policy at the time the

disputed tax liability accrued. ,

d. For the foregoing reasons, the Court’s inquiry in

the present case should focus on the federal government's

23

foreign economic policy as it existed in 1977..° In our

view, no federal policy precluding the States’ application

of WWCR existed at that time."

As of 1977, federal officials had not indicated that

further use by the States of WWCR would be incom-

patible with a standard to which the United States was

committed by general agreement with its trading partners.

Rather, the sole executive branch initiative to constrain

the States’ use of the worldwide method was its negotia-

tion of Article 9(4) of the United States-United Kingdom

Tax Convention. In defending that provision, Treasury

Department officials asserted that the arm’s length ap-

proach was the more accurate method of distinguishing

domestic from foreign income. These officials also em-

phasized, however, that Article 9(4) should be judged

not in isolation, but as part of a larger agreement offer-

ing substantial advantages to the United States. Perhaps

most significantly, executive branch officials gave assur-

ances that in the event of the treaty’s approval by the

Senate, States could continue to apply WWCR to cor-

porations controlled by other (i.e., non-U.K.) foreign

16 This case does not present the question whether California’s

taxing scheme was fatally inconsistent with federal policy during

any year subsequent to 1977, and the United States accordingly

does not address that question, which, in our view, should ultimately

be resolved in accordance with the legal standards set forth in

this brief.

‘T We do not suggest, of course, that this case is governed by

Commerce Clause jurisprudence as it existed in 1977. Harper makes

clear that principles of law announced by this Court after 1977

apply to Barclays’ claim for refunds. See 113 S. Ct. at 2517. This

Court’s task, however, is to apply these legal principles to the facts

—including, where pertinent, the contours of executive branch

policy—as they existed when the disputed tax liability accrued.

Similarly, in applying the “government contractor” defense recog-

nized in Boyle, a court’s focus must be on government procurement

specifications as they existed when the product at issue was manu-

factured. See 487 U.S. at 512. A contractor that complied with

existing specifications could not be held liable on a theory of im-

proper design simply because federal procurement policy had

changed by the time the suit was finally resolved.

24

nationals, and that their right to do so would not be

bargained away except in return for concessions from our

trading partners.

Against this backdrop, executive branch actions prior

to and during the tax year in question cannot accurately

be viewed as manifestations of a then-existing federal

policy requiring uniformity among the States. As of 1977,

the executive branch had expressed a preference for the

arm’s length method and had proposed the adoption of

a legal bar on the States’ application of WWCR to British-

controlled corporations. Surrounding events make quite

clear, however, that the United States had not at that time

acceded to any general international understanding regard-

ing the impropriety of the worldwide method. To the

contrary, during the 1977-1978 debates, executive branch

officials expressly affirmed that States would remain free

to apply WWCR to other foreign-controlled corporations

even if the treaty were approved. California’s application

of WWCR to foreign-controlled corporations in 1977

therefore did not impermissibly intrude upon the federal

government’s conduct of foreign relations."*

18 Barclays also contends (92-1384 Pet. Br. 32-34) that Cali-

fornia’s application of WWCR to foreign-controlled multinationals

creates a constitutionally impermissible risk of international double

taxation. This Court held in Container that the risk of double

taxation, though real, was not sufficiently grave to warrant inval-

idation of the WWCR method as applied to domestic corporations.

463 U.S. at 189-193. This Court reserved the question whether

the tax could validly be applied to a foreign corporation, id. at

189 n.26, and noted that “[e]ven a slight overlapping of tax—a

problem that might be deemed de minimis in a domestic context—

assumes importance when sensitive matters of foreign relations

and national sovereignty are concerned.” Jd. at 189 (quoting Japan

Line, 441 U.S. at 456).

While the Court has sometimes appeared to treat double taxation

and interference with federal foreign policy as separate dangers,

see Container Corp., 463 U.S. at 185-186, in fact in this context

they are fundamentally intertwined. A level of double taxation that

is constitutionally acceptable with respect to a domestic corpora-

tion could be deemed unacceptable with respect to a foreign tax-

payer only on the ground that its application to foreign entities

25

3. Colgate-Palmolive Company, the petitioner in No.

92-1839, seeks refunds of taxes paid for the years 1970-

1973. Colgate, a United States corporation, first argues

that application of WWCR to domestic multinational

corporations is impermissible because it impairs the

federal government's ability to conduct foreign rela-

tions. Colgate contends that Container Corp. is not con-

trolling because “(t]he missing evidence of the Executive

Branch’s Opposition to worldwide combined reporting,

which was crucial to the Court’s decision in Container,

uas been supplied” (92-1839 Pet. Br. at 34) by subse-

quent executive branch pronouncements. In the alterna-

tive, Colgate contends that, even if application of WWCR

to domestic corporations does not itself impair the con-

duct of foreign policy, a holding in Barclays’ favor would

require that the tax be invalidated as to domestic corpora-

tions as well, on the ground that application of different

rules to domestic and foreign corporations “would seri-

ously undermine the level playing field for different forms

of protected commerce.” Jd. at 46. Colgate’s claim

should be rejected.

_ a. It is entirely clear that during the tax years in ques-

tion there existed no federal policy against the States’

application of WWCR to domestic corporations. Indeed,

in 1976 the U.S.-U.K. Tax Convention was renegotiated

in order to make clear that the treaty would nor bar the

States from applying WWCR to domestic corporations

with British subsidiaries. As late as 1980, when the Treas-

ury Department first expressed support for federal legisla-

tion barring the States from applying WWCR to foreign

corporations, the Department noted that “[a]lthough the

bill makes no distinction between corporate groups under

might trigger complaints or retaliation from other governments

and hence disrupt our foreign commercial policy. Cf. Japan Line

441 U.S. at 450-451. Since (as we demonstrate above) California’s

aplication of WWCR to foreign-controlled corporations in 1977

did not impermissibly intrude upon the federal government’s con-

duct of foreign relations, Barclays’ double taxation argument

correspondingly fails.

26

United States control and those under foreign control,

such a distinction may be warranted.” 92-1384 J.A.

588." Application of WWCR to demestic corporations

during the period at issue in this case therefore cannot be

said to have “prevent[ed! the Federal Government from

speaking with one voice in international t ade.” Container

Corp., 463 U.S. at 193 (citations and internal quotations

: 20

oy we have noted, see pp. 8, 11-12, the executive

branch since 1982 has opposed the States’ application of

WWCR to domestic as well as foreign corporations. The

executive has not asserted, however, that application of

WWCR to domestic taxpayers interferes with the federal

government's conduct of foreign relations. In submitting

the Treasury Department's 1985 legislative proposal to

Congress. Secretary Baker acknowledged that the eriart-

pal foreign commerce issues raised by state worldwide

unitary taxation would be resolved if states were to agree

that they would not imrose worldwide unitary tax on

foreign controlled entities.” Baker letter at 2. The Secre-

tary defended the scope of the proposed legislation (which

would have barred the application of WWCR to both

domestic and foreign taxpavers) not on foreign policy

grounds, but as a means of preserving “competitive bal-

ance for domestic multinationals. foreign multinationals

and purely domestic businesses in any resolution of the

1 The Assistant Secretary of the Treasury for Tax Policy ex-

plained, in particular, that “the application of a unitary system

to U.S. controlled corporate groups represents much less of an

international irritant, if in fact that problem is present at all.

92-1384 J.A. 589.

20 also es that California’s application of the unitary

acai haan = hee federal directive” within the meaning

of this Court’s decision in Container Corp., 92-1839 Pet. Br. at

84-36; see 463 U.S. at 194. This Court’s analysis of the “clear

federal directive” test in Container Corp. focused exclusively on

pertinent congressional enactments, see id. at 196-197, and did not

discuss executive branch pronouncements. In any event, Colgate

has identified no pertinent executive branch pronouncement issued

prior to or during 1970-1973, the tax years in question.

27

unitary issue.” /bid. Since that time the executive branch

has continued to express the view that “[a]s a tax policy

matter, we are equally opposed to the use of worldwide

unitary appo-tionment to determine the income of

domestic-parent multinational corporations and that of

foreign-parent multinational corporations.” 92-1839 J.A

35. The executive has not, however, asserted that appli-

cation of WWCR to domestic corporations will impair the

government's conduct of foreign relations, nor has the gov-

ernment participated in support of Colgate’s constitutional

claim at any stage of this litigation. Colgate therefore has

wholly failed to show that California’s application of the

worldwide method to domestic taxpayers has “prevent[ed]

the Federal Government f-om speaking with one voice in

international trade.” Container Corp., 463 U.S. at 193

(citations and internal quotations omitted).

c. Finally, we believe that California’s application of

WWCR to Colgate should be upheld even if Barclays

prevails in its legal challenge, since Colgate’s “equal treat-

ment” argument is without merit. The executive branch.

we acknowledge, has previously expressed the view that

divergent treatment of foreign and domestic taxpavers is

undesirable as a matter of tax policy. Colgate cites no

authority, however, holding that discrimination in favor

of foreign taxpayers raises constitutional concerns under

the Foreign Commerce Clause. The difference in treat-

ment would be rationally justified by a finding that appli-

cation of WWCR to foreign corporations has impaired

the federal government's conduct of foreign economic

policy and engendered frequent complaints by foreign

nations, while application of this accounting method to

domestic taxpayers has had neither of these consequences."

2! Taken to its logical conclusion, Colgate’s argument implies that

whenever a domestic taxpayer raises a Commerce Clause challenge

to a state tax law, the reviewing court must determine whether

that law could permissibly be applied to a foreign taxpayer, and

must strike it down on “equal treatment” grounds if its application

in the foreign context would be improper. That cannot be the law.

Indeed, the whole point of Japan Line is that taxing practices that

28

4. For the foregoing reasons, we believe that the taxes

at issue in these cases violated no federal policy and

therefore were not unlawfully collected. If the Court

holds otherwise, however, we believe it should make clear

that in the unusual circumstances presented here—spe-

cifically, the recent modification of the State’s taxing

scheme—California is under no federal constitutional

obligation to provide refunds.”

When a state tax is determined to have been unlawfully

collected, “the Due Process Clause of the Fourteenth

Amendment obligates the State to provide meaningful

backward-looking relief to rectify any unconstitutional

deprivation.” McKesson, 496 U.S. at 31 (footnotes

omitted). Accord Harper, 113 S. Ct. at 2519. Under

some circumstances—as, for example, where the tax “was

beyond the State’s power to impose,” McKesson, 496 US.

at 39, or where “the taxpayers were absolutely immune

from the tax,” ibid.—the required remedy is a refund of

taxes previously collected. In other situations, however,

are permissible with respect to domestic commerce are sometimes

unlawful as applied to foreign commerce and/or foreign taxpayers.

22 The supplemental brief filed by Barclays at the petition stage

asserts that the United States, in its brief amicus curiae filed

in October 1993, “completely omits amy reference to the other six

states that use worldwide combined reporting.” 92-1384 Supp. Pet.

Br. at 7. Although this statement was unsupported by statutory

citations, petitioner’s counsel of record has indicated that Alaska,

Idaho, Montana, North Dakota, Tennessee, and Utah are the six

States at issue. However, none of these States uses a WWCR

system like the California system at issue here. In Utah, for

example, WWCR is entirely elective for taxpayers. Utah Code Ann.

§§ 59-7-804(3) (repealed effective 1/1/94) and 59-7-403 (effective

1/1/94) (1992 & Supp. 1993). Idaho, Montana, and North Dakota

allow taxpayers to elect “water’s edge” treatment in lieu of WwWcer.

Idaho Code 63-3027B (1989 & Supp. 1993); Montana Code Ann.

§§ 15-831-822 to 15-31-326 (1993); North Dakota Century Code

ch. 57-38.4-02 (1993). Alaska and Tennessee require WWCR

only for certain sectors (oil and gas and financial institutions,

respectively), Alaska Stat. § 43.20.073 (1990 & Supp. 1992) and

Tennessee Code Ann. § 67-4-812(c)(1)(B) (1989 & Supp. 1993),

and we are not aware of any objections expressed by the affected

taxpayers.

A a

SO Ne a ee ee eee —

St eee ee nes @

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MA ee ee ee EE ee te OT ee

29

the State “retains flexibility” to devise alternative adjust-

ments that will cure the illegality, even if those adjust-

ments do not involve the payment of money to the plain-

tiff taxpayer. /bid.; Harper, 113 S. Ct. at 2519. Thus,

where a state tax is found to have discriminated imper-

missibly against interstate commerce, “the State may as-

sess and collect back taxes from [the taxpayer’s] competi-

tors who benefited from the rate reductions during the

contested tax period, calibrating the retroactive assess-

ment to create in hindsight a nondiscriminatory scheme.”

McKesson, 496 U.S. at 40.

In the present case, the tax at issue was not beyond

the State’s power to impose; it utilized a constitutionally

fair method of apportioning income under this Court’s

decision in Container Corp. The petitioners were not im-

mune from income taxation in California. Nor have peti-

tioners suffered unlawful discrimination vis-a-vis some

other class of taxpayers. Rather, the gravamen of peti-

tioners’ claim is that California’s use of WWCR during

prior years impaired the federal government's ability to

conduct foreign commercial policy.

California’s payment of money to the petitioners will

not, of course, undo any disruption of federal government

policy that may have already occurred. This is conse-

quently a rare situation in which the provision of “mean-

ingful backward-looking relief” is infeasible because the

alleged constitutional injury—the impairment of the fed-

eral government's ability to conduct the nation’s foreign

policy—simply is not remediable by judicial order. A

monetary remedy might nonetheless be appropriate if it

appeared likely that the State’s failure to provide refunds

would itself become a subject of international contention

or inspire reprisals from foreign governments. In light of

the recent modification of California’s tax scheme, how-

ever, the executive branch has concluded that the provi-

sion of refunds for past years is unnecessary to protect

the federal government'’s present or future ability to speak

in the future with one voice in international trade—i.e.,

that California’s prospective change suffices to eliminate

30

the basis for invalidating the taxes at issue. Indeed, the

United Kingdom has deferred the implementation of

retaliatory measures and has indicated that it will retaliate

“only if it is found that the [1993 California] legislation

is being applied in a way which exposes UK owned com-

panies to damage from taxation that is inconsistent with

the arm’s length principle.” 92-1384 Supp. Pet. Br. App.

A-36. In these unusual circumstances, we believe that the

Constitution imposes upon California no duty to provide

a retrospective monetary remedy to corporate entities

whose taxes were previously calculated on the basis of

the worldwide method.

CONCLUSION

With respect to the questions discussed in this brief, the

judgments of the court of appeal should be affirmed.

Respectfully submitted.

Drew S. Days, III

Solicitor General

LORETTA C, ARGRETT

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

MALCOLM L. STEWART

Assistant to the Solicitor General

JANUARY 1994

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