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

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QUESTION PRESENTED

Whether there is evidence of a federal policy of allowing

the States to use the worldwide combined report accounting

method so as to remove these cases from a Dormant

Commerce Clause analysis.

TABLE OF CONTENTS

IT IS THE POLICY OF THE FEDERAL

GOVERNMENT, DRAWN FROM FEDERAL

LAW, TO PERMIT THE STATE TAXES HERE

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A. The Actions Of Congress Are Evidence Of A

Policy Of The Federal Government To Permit

The State Taxes Here At Issue......

1. Congressional hearings prior to the

consideration of the United States/United

Kingdom Tax Convention ......

2. Senate Consideration of the United

States/United Kingdom Income Tax

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3. Senate Consideration of the Third Protocol

to the United States/United Kingdom Tax

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TABLE OF CONTENTS

Page

4. Congressional hearings subsequent to the

negotiation of the United States/United

Kingdom Tax Convention ..........

B. The Actions Of The Executive Branch Are

Evidence Of A Policy Of The Federal

Government To Permit The State Taxes Here At

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l.

The positions of the Executive Branch in

negotiating bilateral tax treaties are

evidence of the policy of the United States

The statements of the Executive Branch on

proposed federal legislation, introduced

after this Court’s decision in Container, to

prohibit State use of WWCR is evidence of

the Executive’s recognition of accepted

United States policy ........24.

The Executive Branch’s reservation to the

model tax conventions of the Organization

for Economic Cooperation and

Development (OECD) is evidence of the

policy of the United States to permit the

States touse WWCR ..... 1.2 wees

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16

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TABLE OF AUTHORITIES

CASES: Page

Container Corporation of America v.

Franchise Tax Board, 463 U.S. 159 ............ 16

Itel Containers International Corp. v.

Huddleston, 507 U.S. __ (1993)

Dt ccdetbabeceseeeeeeseces 2

Northwestern States Portland Cement

Company v. Minnesota and Williams v.

Stockham Valves & Fittings, Inc.,

te heh san eheeeebeocesees 6

Wardair Canada, Inc. v. Florida Department

of Revenue, 477 U.S. 1 (1986) ............ passim

CONSTITUTIONAL PROVISIONS:

us Ga, GOR, TA BE GS ccc ccc cc cccccccns 9

STATUTES:

Pub.L. No. 86-272 (15 U.S.C. 381) ............ 6, 7

Vv

TABLE OF AUTHORITIES

MISCELLANEOUS: | Page

Hearing before the Subcommittee on

Taxation and Debt Management of the

Congress on Finance on S. 1113 and

S. 1974, 99th Cong., 2d Sess.

Se Ge CE a a's ob 04 6676-09-46 0 8 088 12, 16

Interstate Taxation Act, H.R. 11798 and

Companion Bills: Hearings before the

Special Subcommittee on State Taxation

of Interstate Commerce of the Committee

of the Judiciary, House of

Representatives, 89th Cong., 2d Sess.

. £666064 00686 sbb0d6 0s Sesceeesees 6

Interstate Taxation, S. 2173: Hearings

before the Senate Committee on the

Judiciary, 95th Cong., 1st and 2d

Be CUTE Se eSeeseeeeeccceccoececss 11

Letter of Submittal, June 8, 1976,

3 Tax Treaties (CCH) 410,938 ............... 13

State Income Taxation of Mercantile and

Manufacturing Corporations: Hearings

before the Special Subcommittee on State

Taxation of Interstate Commerce of the

Committee on the Judiciary House of

Representatives, 86th and 87th Cong.,

DPE seesee Sess eesoroceseceesee 6

vi

TABLE OF AUTHORITIES

MISCELLANEOUS:

State Taxation of Interstate Commerce and

Worldwide Corporate Income, 1980:

Hearings on S. 983 and S. 1688 Before

the Subcomm. on Taxation and Debt

Management Generally of the Senate

Comm. on Finance, 96th Cong., 2d Sess.

GE Soccer ee Seseeerreresvocoes

State Taxation of Interstate Commerce:

Report of the Special Subcommittee on

State Taxation of Interstate Commerce,

Committee on the Judiciary, House of

Representatives, 88th and 89th Cong.,

Ist and 2d Sess. (1964-1965), Vol. 1-4 ......

State Taxation of Interstate Commerce:

Report of the Special Subcommittee on

State Taxation of Interstate Commerce,

Committee on the Judiciary, House of

Representatives, 88th Cong., 2d Sess.

(1964), Vol. 1, p.8..........0ceeeeee

State Taxation of Interstate Commerce:

Hearings before the Subcommittee on

State Taxation of Interstate Commerce

of the Committee on Finance, United

States Senate, 93rd Cong., 1st Sess.

PPPS ETTLILE LT TLE

Vii

TABLE OF AUTHORITIES

MISCELLANEOUS:

Tax Treaties with the United Kingdom, the

Republic of Korea, and the Republic of

the Philippines: Hearings before the

Senate Committee on Foreign Relations,

eee

Nos. 92-1384 and 92-1839

In The

Supreme Court of the United States

October Term, 1993

BARCLAYS BANK PLC,

Petitioner,

vs.

FRANCHISE TAX BOARD,

An Agency of the State of California,

Respondent.

COLGATE-PALMOLIVE COMPANY,

Petitioner,

vs.

FRANCHISE TAX BOARD,

An Agency of the State of California,

Respondent.

On Writs of Certiorari to the Court of Appeal of the

State of California in and for the Third Appellate District

BRIEF OF AMICI CURIAE IN SUPPORT OF

RESPONDENT FRANCHISE TAX BOARD BY THE

STATE OF NORTH DAKOTA AND THE STATES OF

HAWAII AND KANSAS

INTEREST OF AMICI CURIAE

Amici are States which compute the tax liabilities of

multijurisdictional business under the “unitary business

2

principle." Amici have a direct interest in the question of

when this Court’s dormant Commerce Clause analysis applies

and when actions of the Legislative and Executive Branches of

the Federal Government establish that a State tax is permitted.

In 1986, this Court broke new ground in the analysis of

State taxes under the Commerce Clause in its decision in

Wardair Canada, Inc. v. Florida Department of Revenue, 477

U.S. 1 (1986). This Court applied that decision again in the

1992-93 term in Itel Containers International Corp. v.

Huddleston, 507 U.S. ___ (1993), 122 L.Ed.2d 421. Amici

have a continuing interest in the application of Wardair and

Itel to State taxes.

STATEMENT PURSUANT TO RULE 37

This brief is submitted pursuant to Rule 37.3 of this Court

in support of Respondent, Franchise Tax Board, State of

California. Consent to the filing of this brief has not been

requested from the parties because the amici filing this brief

are the Attorneys General of their respective States. Rule

37.5.

SUMMARY OF ARGUMENT

This Court’s decision in Wardair Canada, Inc. v. Florida

Department of Revenue, 477 U.S. 1 (1986), establishes a

framework to evaluate whether the actions of the Legislative

and Executive Branches of the Federal Government permit a

State tax law.

The Federal Government’s actions in the circumstances of

this case evidence a federal policy permitting the State tax at

issue in these cases. Congress has considered the issue of

worldwide combined reporting and the United States Senate

3

has rejected a treaty prohibition on this tax practice. In

addition, the Executive Branch, by its actions, has permitted

worldwide combined reporting.

California’s use of worldwide combined reporting

(hereinafter referred to as WWCR) should be affirmed.

ARGUMENT

IT IS THE POLICY OF THE FEDERAL

GOVERNMENT, DRAWN FROM FEDERAL LAW,

TO PERMIT THE STATE TAXES HERE AT ISSUE

In Wardair Canada, Inc. v. Florida Department of

Revenue, 477 U.S. 1 (1986), the Court found the Federal

Government’s policy, reflected by government action and

inaction, was to affirmatively permit sales taxes imposed on

aviation fuel used by foreign airlines in international travel.

Based upon this finding, the Court determined that a dormant

Commerce Clause analysis, and specifically the “one voice"

element, was inappropriate. “It would turn dormant

Commerce Clause analysis entirely upside down to apply it

where the Federal Government has acted, and to apply it in

such a way as to reverse the policy that the Federal

Government has elected to follow." (Court’s emphasis.) 477

U.S. at 12.

Wardair provides guidance on the factors to be considered

by courts when determining United States policy regarding

State taxation. The Court analyzed three items: 1) the

Chicago Convention on International Civil Aviation; 2) a

Resolution adopted by the International Civil Aviation

Organization, an organization of which the United States is a

member; and 3) 70 bilateral agreements entered into by the

4

United States with other foreign governments.' With respect

to these items, the Court held:

1. The Chicago Convention "precludes the imposition

of local taxes on fuel only when the fuel is ‘on board

an aircraft . . . on arrival . . . and retained on board

on leaving’ . . . it does not prohibit taxation of fuel

purchased." Ibid. The Court also stated that the

provision Gemonstrated “awareness of the problem"

and a decision to “address the problem by curtailing

and limiting only some of the localities’ power to

tax, while implicitly preserving other aspects of that

authority.” Ibid.

2. The Resolution did not establish United States policy

because even though it was the “work product of an

international organization of which the United States

is a member; it has not been specifically endorsed,

let alone signed, entered into, agreed upon,

approved, or passed by either the Executive or

Legislative Branch of the Federal Government." /d.

at 11.

3. The 70 bilateral agreements explicitly “commit[ted]

the United States to refrain from imposing national

taxes on aviation fuel” but in none of the

"agreements has the United States agreed to deny the

States the power" to tax. Jbid. This omission was

interpreted by the Court as "a policy choice by the

contracting parties, especially in light of the. . .

' The bilateral agreements involved were Executive Agreements and

did not qualify as treaties. Therefore, the agreements were not subject to

the advice and consent of the United States Senate.

5

Resolution." Jbid. Finally, the Court found that the

"course of conduct suggests that the parties to the

Agreement and those most immediately affected by

it understood it to permit this sort of taxation." Jd. at

12.

Applying Wardair, United States policy will be

determined by considering the following factors:

1. Awareness of a problem and a decision to address

the problem by curtailing some elements of authority

while implicitly preserving other elements of that

authority. Jd. at 10.

2. The adoption of a policy at the national level, while

excluding subnational jurisdictions from the policy.

Id, at 11.

3. A course of conduct suggesting that the taxation

involved was understood and permitted. Jd. at 12.

Applying these evidentiary factors to Legislative and

Executive Branch actions establishes that it is federal policy to

permit the States to use WWCR.

A. The Actions Of Congress Are Evidence Of A

Policy Of The Federal Government To Permit The

State Taxes Here At Issue

1. Congressional hearings prior to the consideration

of the United States/United Kingdom Tax

Convention

Prior to the United States/United Kingdom Income Tax

Convention, Congress studied and considered the States’ use

of WWCR and took no action. The Court’s decision in

6

Northwestern States Portland Cement Company v. Minnesota

and Williams v. Stockham Valves & Fittings, Inc., 358 U.S.

450 (1959), prompted Congress to quickly enact Public Law

86-272. Public Law 86-272 established a minimum

jurisdictional standard for the imposition of State income taxes

and "initiated a comprehensive study of all matters pertaining

to the taxation of income derived from interstate commerce.

. . ." State Taxation of Interstate Commerce: Report of the

Special Subcommittee on State Taxation of Interstate

Commerce, Committee on the Judiciary, House of

Representatives, 88th Cong., 2u Sess. (1964), Vol. 1, p. 8.

The Subcommittee, chaired by Representative Willis,

conducted its study and hearings over several years. The

results of this study are contained in five separate volumes and

total over 2,600 pages of text and appendices. State Income

Taxation of Mercantile and Manufacturing Corporations:

Hearings before the Special Subcommittee on State Taxation

of Interstate Commerce of the Committee on the Judiciary

House of Representatives, 86th and 87th Cong. (1961-1962)

and State Taxation of Interstate Commerce: Report of the

Special Subcommittee on State Taxation of Interstate

Commerce, Committee on the Judiciary, House of

Representatives, 88th and 89th Cong., 1st and 2d Sess. (1964-

1965), Vol. 1-4. Two of the issues considered by the

Subcommittee are whether States should be allowed to use

combined reporting and whether States should be able to

consider income and activities reported as being outside of the

United States. No legislation was enacted as a result of these

hearings, study, or report.

Additional hearings on specific bills were held by the

same Subcommittee in 1966. Interstate Taxation Act, H.R.

7

11798 and Companion Bills: Hearings before the Special

Subcommitiee on State Taxation of Interstate Commerce of the

Committee of the Judiciary, House of Representatives, 89th

Cong., 2d Sess. (1966). The reports of these hearings total

over 1,800 pages. The subject matter of these bills was State

tax practices with regard to interstate and foreign businesses,

limitations on State use of combined reporting, and inclusion

of the income and activities of foreign incorporated entities.

None of these bills were enacted.

Similar hearings were held in 1973, State Taxation of

Interstate Commerce: Hearings before the Subcommittee on

State Taxation of Interstate Commerce of the Committee on

Finance, United States Senate, 93rd Cong., 1st Sess. (1973).

The extensive studies undertaken by House and Senate

committees demonstrate an awareness of the problems

associated with the States’ use of WWCR. The only action

taken by Congress with respect to these concerns was the

passage of Public Law 86-272. Because Congress did not

adopt any other legislation, despite years of direct

consideration of the “problems,” Congress implicitly

preserved other aspects of State tax authority.

2. Senate Consideration of the United States/United

Kingdom Income Tax Convention

In 1975, the Executive Branch concluded discussions with

the United Kingdom on a renegotiation of the bilateral Income

Tax Convention. The revisions to the Treaty included a

provision, proposed Article 9(4), which would have applied to

subnational taxation. Proposed Article 9(4) would have

prevented States from considering the results and activities of

entities organized outside of the United States which were

owned and controlled by United Kingdom organized

corporations.

In the Senate Committee on Foreign Relations Hearings

on the United States/United Kingdom Tax Treaty held in July

of 1977, one of the principal items of focus was the proposed

Article 9(4). Tax Treaties with the United Kingdom, the

Republic of Korea, and the Republic of the Philippines:

Hearings before the Senate Committee on Foreign Relations,

96th Cong., Ist Sess. (1977). Stip. | 37c, BJA-24.?

In June of 1978, the proposed United States/United

Kingdom Tax Convention (US/UK Tax Convention) was

presented to the Senate for its advice and consent. During the

debate on the proposed treaty, Senator Frank Church

presented a reservation, the Church reservation,’ to the treaty

which would revise the provisions of proposed Article 9(4) so

that it would not apply to State taxes and would not prohibit

the States from using WWCR. The Senate debated the issue

of whether this reservation should be attached to the treaty

with respect to Article 9(4) and whether the Senate should

give its advice and consent to the Convention with Article 9(4)

as proposed on June 22 and June 23, 1978. Ex. 36C, BJA-

238 and Ex. 36D, BJA-311.

On June 23, 1978, the Senate voted on whether it should

give its advice and consent to the Convention with Article 9(4)

as proposed by the Executive Branch. The recorded vote was

49 yeas and 32 nays.‘ Ex. 36D, BJA-311 at 393-394. The

* References to BJA are to the Joint Appendix in Barclays.

> So named because its sponsor was Senator Frank Church of Idaho.

* Senator Muskie, who was present and had voted against the treaty,

withdrew his vote because Senators Bentsen and Long were not present but

(continued...)

a These actions, when analyzed in relation to the factors

Sidered in Wardair, Clearly evidence a federal polic

allow the States to apply WWCR. ascie

sss: The Senate, by declining to give its advice and

; ' the treaty, dealt with one element of the “problem”

y restricting the use of WWCR for national taxation and

the other element, subnational taxation.

re “problem” in unequivocal terms.

— Except as to discrimination, all United States Income

ax Conventions are limited in their coverage to national

taxes. See for example, Article 2, "Taxes Covered." United

10

States/United Kingdom Tax Convention, Ex. 40GG, BJA-444

at 445 et seq. In the circumstance of the US/UK Tax

Convention, the question of whether subnational taxes should

be accorded national treatment was presented and rejected by

the U.S. Senate.

The Senate’s consideration of the US/UK Tax Convention

satisfies the Wardair factors. The Senate’s course of conduct

conclusively established that the Senate, and all other parties

involved, understood and permitted the use of WWCR.

3. Senate Consideration of the Third Protocol to

the United States/United Kingdom Tax

Convention

As a result of the Senate’s action in attaching the Church

reservation to the proposed US/UK Tax Convention, the treaty

was resubmitted to the United Kingdom. Before the treaty

was approved by the United Kingdom, additional negotiations

took place resulting in the Third Protocol to the Treaty.

Along with other changes, the Third Protocol recognized the

Church reservation. For further discussion see B.2., infra.

The Senate gave its advice and consent to the Third

Protocol by a vote of 98 yeas and 0 nays. Ex. 36B, BJA-193

at 228.

The federal policy to allow WWCR is reinforced by the

actions of the United States and the United Kingdom on the

Third Protocol. The course of conduct of both countries

indicates an understanding that the policy of the United States

was to allow the States to use WWCR. These actions

demonstrate awareness of the “problem” and the decision to

curtail, at most, federal use of the WWCR method and not to

curtail subnational use.

——e «+

11

4. Congressional hearings subsequent to the

negotiation of the United States/United Kingdom

Tax Convention

The existence of federal policy is further established by

Congressional activities contemporaneous with and subsequent

to the US/UK Tax Convention. Despite numerous legislative

proposals concerning WWCR, Congress refused to enact any

prohibitions on the States’ use of it.’ In 1977 and 1978,

while the Senate was considering the US/UK Tax Treaty,

hearings were held on federal regulation of State income

taxation of interstate and foreign commerce. Interstate

Taxation, S. 2173: Hearings before the Senate Committee on

the Judiciary, 95th Cong., 1st and 2d Sess. (1977-1978).

Stip. | 37g, BJA-24.

In 1980, the Senate Finance Committee held hearings on

S. 983 and S. 1688. The primary purpose of these bills was

to prohibit State use of WWCR. State Taxation of Interstate

Commerce and Worldwide Corporate Income, 1980: Hearings

on S. 983 and S. 1688 Before the Subcomm. on Taxation and

Debt Management Generally of the Senate Comm. on Finance,

96th Cong., 2d Sess. (1980). Stip. 4 37e, BJA-24.

Again in 1986, a Subcommittee of the Senate Finance

Committee held hearings on S. 1113 and S. 1974, bills which

were specifically introduced to limit the States’ ability to use

WWCR. Hearing before the Subcommittee on Taxation and

* A list of some of the bills which have been introduced in Congress

which would have affected the States’ use of worldwide combined

reporting is set forth at ¢ 38 of the Barclays Joint Stipulation, BJA-24.

None of these bills has been enacted. A list of the hearings which have

been held by various Committees of Congress is set forth at | 37 of the

Barclays Joint Stipulation, BJA-23.

12

Debt Management of the Congress on Finance on S. 1113 and

S. 1974, 99th Cong., 2d Sess. (September 29, 1986). Second

Stip. 4 37i, BJA-47.

This course of conduct indicates Congress was aware of

the States’ use of WWCR and acquiesced in its use.

B. The Actions Of The Executive Branch Are

Evidence Of A Policy Of The Federal Government

To Permit The State Taxes Here At Issue

The bilateral tax agreements establish a federal policy

permitting states’ use of WWCR. A consistent federal policy

is also evidenced by the conduct of the Executive Branch

when negotiating income tax conventions with foreign

countries. These treaties show that all parties were aware of

the concerns surrounding WWCR and understood that federal

policy was to restrict only national, and not subnational, use

of WWCR.

1. The positions of the Executive Branch in

negotiating bilateral tax treaties are evidence of

the policy of the United States

In 1977 the Executive Branch published a Model United

States Income Tax Treaty. Ex. 45, BJA-560. It revised this

document in 1981. Stip. 4 45, BJA-37. In the statement of

taxes covered, the treaty excludes subnational taxes. In June

of 1979 at the Hearing Before the Committee on Foreign

Relations of the United States Senate on Six International Tax

Treaties and Protocols, in response to a question by Senator

Church, Assistant Secretary of Treasury for Tax Policy,

Donald C. Lubick, explained why State taxes were not

included:

13

"These local U.S. taxes are not covered because it is

unlikely that the United States would consent to the

ratification of any treaty provision that restricted the

rights of the various states to impose their own taxes."

Ex. 37H, BJA-436 at 438.

In transmitting the Income Tax Convention with the

Union of Soviet Socialist Republics to the Senate Foreign

Relations Committee, the State Department made a similar

Statement regarding “Taxes Covered" in the Technical

Explanation:

"The taxes imposed by the Union Republics of the Soviet

Union (comparable to states of the United States) are not

covered by the Convention because, in keeping with past

U.S. policy the taxes of the state and local governments

of the United States are excluded from the scope of the

Convention, except for purposes of Article X

(Nondiscrimination)." (Emphasis added.) Second Stip.

{ 60, BJA at 49, Ex. 60, p. 18.

The long debate concerning the US/UK Tax Convention

further evidences that United States policy permits WWC'.

In transmitting the proposed treaty to the Senate for its advice

and consent, the Executive Branch noted, "A second new

provision is found in paragraph 4 of Article 9 (Associated

Enterprises). This provision represents the first attempt to

bind State and local taxing authorities by a substantive

provision of the treaty (other than non-discrimination).”

(Emphasis added.) Letter of Submittal, June 8, 1976, 3 Tax

Treaties (CCH) 410,938.

After the United States Senate had approved the proposed

treaty, with the Church reservation, members of the Executive

14

Branch negotiated the Third Protocol to the Treaty to reflect

the action of the Senate. According to Treasury, one of the

changes made to the treaty by the Third Protocol related to the

North Sea permanent establishment rules. The British viewed

the North Sea change as a concession by the United States in

exchange for British acceptance of the United States

reservation on Article 9(4). Reply of Donald C. Lubick to

question posed by Senator Church, Ex. 37H, BJA-436 at 437.

Other members of the international community

subsequently understood that United States policy did not

prohibit the States’ use of WWCR. In 1978, George S. Vest,

Assistant Secretary of State for European Affairs, and

Francois de Laboulaye, Ambassador of France, set forth the

position of their respective governments on including a treaty

prohibition on the States’ use of WWCR as follows:

It is understood that the Senate of the United States has

not consented to any limitation on the taxing jurisdiction

of the states by treaty and that a provision which would

have restricted the use of unitary apportionment in the

case of United Kingdom corporations was recently

rejected by the Senate. The Government of France

continues to be concerned about this issue as it affects

French multinationals. If an acceptable provision on this

Subject can be devised, the United States agrees to reopen

discussions with France on this subject. Ex. 43, BJA-480

at 481-482.

In addition, Donald C. Lubick of the Department of the

Treasury, in a letter dated April 22, 1980, advised Barber B.

Conable, Jr. of the House of Representatives, with respect to

the French Treaty:

15

The unitary apportionment issue was discussed at length

during the negotiation of the recent Protocol to the U.S.-

French income tax Convention. The French negotiators

accepted the fact that, on the basis of our experience with

the U.K. treaty, the Treasury was unable to achieve

ratification of a Protocol limiting unitary apportionment.

Ex. 46C, BJA-568 at 570.

Further, in 1980, Allan J. MacEachen, Deputy Prime

Minister and Minister of Finance of Canada, and G. William

Miller, Secretary of Treasury of the United States, exchanged

notes concerning Canada’s desire for a limitation on the

States’ use of WWCR. The note of G. William Miller stated

in part:

It is understood that the Senate of the United States has

not consented to any limitation on the taxing jurisdiction

of the states by a treaty and that a provision which would

have restricted the use of unitary apportionment in the

case of the United Kingdom corporations was recently

rejected by the Senate. Canada continues to be concerned

about this issue as it affects Canadian multinationals. If

an acceptable provision on this subject can be devised,

the United States agrees to reopen discussions with

Canada on this subject. Ex. 42, BJA-477 at 478.

There is no confusion in the international community and

the Executive Branch about United States policy. That policy

permits States to use WWCR.

16

2. The statements of the Executive Branch on

proposed federal legislation, introduced after this

Court’s decision in Container, to prohibit State

use of WWCR is evidence of the Executive’s

recognition of accepted United States policy

Subsequent to this Court’s decision in Container, the

Executive Branch initiated efforts in 1985 to obtain passage of

federal legislation which would "[e}ffect a requirement that

multinationals be taxed by states only on income derived from

the territory of the United States (‘the water’s edge of

requirement’)." Ex. 36A, BJA-191. As way of explanation,

President Reagan stated, "We hoped that by this time these

principles would have been enacted by the various states that

have unitary taxation. Since states have not universally

accepted these principles, I am instructing the Secretary of the

Treasury to initiate the process of crafting Federal legislation

to incorporate these principles into law..." Ex. 36A, BJA-

191.

The Executive Branch recognized: 1) the law did not

require the States to forgo the use of WWCR and 2) the need

to accomplish the desired change by the action of the

Congress. This is not evidence of a United States policy

against the States’ use of WWCR, but rather evidence of an

aspiration that United States policy be changed.

In September of 1986, the bill the President requested, S.

1974, came to a hearing. At the Hearing Before the

Subcommittee on Taxation and Debt Management of the

Senate Finance Committee on S. 1113 and S. 1974, Roger

Mentz, Assistant Secretary (Tax Policy) Department of

Treasury, testified as follows:

17

In general, $.1974 would prohibit states from levying

corporate income taxes on a worldwide unitary basis, . . .

I am pleased to report that, since the introduction of the

legislation, Idaho, New Hampshire, Utah and, on

September 5, California, have enacted "“water’s edge"

legislation. The Administration applauds these states’

actions. These state legislative developments g0 a long

way toward resolving the difficult unitary tax issue.

Moreover, they illustrate the Successful operation of the

Federal system. (Emphasis added.) . . .

We have not, however, reached the end of the road with

respect to this issue... . We believe, however, that such

significant progress has been made that restrictive Federal

legislation is not warranted at this time. Ex. 371, BJA-

440-44].

The Executive Branch was aware that the policy of the

Federal Government permitted the States to use WWCR and

that voluntary action was an appropriate and constitutionally

permitted way to accommodate the needs of both the Federal

Government and the States.

3. The Executive Branch’s reservation to the model

tax conventions of the Organization for

Economic Cooperation and Development

(OECD) is evidence of the policy of the United

States to permit the States to use WWCR

In Wardair, this Court considered the significance of the

adoption by an_ international Organization of a model

agreement which would have treated national and subnational

taxes in an identical manner. This Court held that the action

of the international agency was of no evidentiary value in

SS FP ee itis

18

determining whether there was a policy of the United States

against the State tax at issue in Wardair because the United

States had taken no action to endorse, adopt, or enact the

policy.

In 1963, and again in 1977, the Committee of Fiscal

Affairs to the Council of the OECD published a Model

Double Tax Convention on Income and On Capital. Ex. 44,

BJA-484-559. The Executive Branch of the United States

announced its reservation to that portion of the Model Treaty

which made it applicable to subnational taxes. Ex. 44, BJA-

484 at 501. This expressed reservation is evidence of federal

law as it existed.

Under the Wardair analysis, the OECD Model Treaty

cannot establish a United States policy prohibiting the State

tax at issue because the United States did not endorse, adopt,

or enact the policy. To the contrary, the Executive Branch’s

announcement of a reservation to the OECD Model Treaty

evidences the United States policy not to restrict subnational

taxation and, therefore, to permit the States to use WWCR.

CONCLUSION

The actions of both the Executive Branch and the

Legislative Branch of the Federal Government provide clear

and convincing evidence that the United States’ policy is to

permit the States to use WWCR. In many respects, the

evidence present in these cases is more compelling than that

relied upon by this Court in Wardair.

ao ett it wld

19

Use of WWCR by California and the other States is

constitutionally permissible and the judgments of the

California courts should be affirmed.

Dated: January 19, 1994

Respectfully submitted,

M.K. Heidi Heitkamp

North Dakota Attorney General

Counsel of Record

Office of the Attorney General

State Capitol

600 E. Boulevard

Bismarck, ND 58505

Attorney for Amici

Of Counsel:

Donnita A. Wald

Assistant Attorney General

State Tax Department

State Capitol

600 E. Boulevard

Bismarck, ND 58505