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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0384%3A38

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1994
- **Citation:** 512 U.S. 298

## Text

BEST AVAILABLE COPY

:
ont
CS ee
Arg
"
i

a+ »
mathe
pe
ry

4

i
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

gf PPPrVrerrTrrrirreriie

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

De é6eacctéesseeens

3. Senate Consideration of the Third Protocol
to the United States/United Kingdom Tax

Renn «cetectbesese cee

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
a +6 és abe beebeens 4064060468

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

CUTTS ccc ccc cece esececeseces

ll

12

12

16

iv
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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0384%3A38. Public record. Not legal advice.