Petition for Writ of Certiorari — United States v. International Business MacHines Corp. Certiorari to the United States Court of Appeals for the Federal Circuit

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In the Supreme Court of the Guted States

OCTOBER TERM, 1995

UNITED STATES OF AMERICA, PETITIONER

INTERNATIONAL BUSINESS MACHINES CORPORATION

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

Drew S. Days, III

Solicitor General

LORETTA C. ARGRETT

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor General

GARY R. ALLEN

ERNEST J. BROWN

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 514-2217

QUESTION PRESENTED

Section 4371 of the Internal Revenue Code, 26

U.S.C. 4371, imposes a tax of four cents per dollar on

casualty insurance premiums paid to a foreign in-

surer for the risks of a domestic insured that are

“wholly or partly within the United States” (26

U.S.C. 4372(d)(1)). The question presented in this

case is:

Whether, as applied to casualty insurance for losses

incurred during the shipment of goods from locations

within the United States to purchasers abroad, the

tax imposed by Section 4371 of the Internal Revenue

Code violates the Export Clause of the Constitution

of the United States (U.S. Const. Art. I, § 9, Cl. 5).

(I)

TABLE OF CONTENTS

Page

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GEIEEIED ereccecencenscnasenetesssssnnnanssenseneascscsscncesessscescneees l

Constitutional and statutory provisions involved .......... 2

TEINS sassscossssenscssssencnncsssnnsssesscnesesencsosenecnesocesssoosests 4

Reasons for granting the petition o..........cccccccccccceeeeeeeees 12

GRRE cscentensensccsccsscsntossccsnccscccccsssnsnvecssenocscaccncnseeeees 41

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STEIN TD coscsnscssssscsvencncescensssnentenscscsnsnecensenenensssnesenenss 12a

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GIEETETES G cerccncesarsavensecccscescccevcccscnccenccssocccseveccencenencents ‘4a

TABLE OF AUTHORITIES

Cases:

;

A.G. Spalding & Bros. v. Edwards, 262 U.S, 06

GEIEENIEED conenbendenencenucsnecscossasseqsenccesssscoveunescsesnscoquneneees 21-22

Almy v. California, 65 U.S. (24 How.) 169 (1861)... 19

Anglo-Chilean Nitrate Sales Corp. v. Alabama,

SEE MINED oscistenerecesnnestunsnnnsepmennemeemnssnenncnes rT]

Board of Trustees v. United States, 289 U.S. 48

SETEIEIEE? wepasuseseusscsccsesesenevensennesesseusenseusvensessczessessecerens 0

Brown v. Maryland, 265 US. (12 Wheat.) 419

a eee 15, 16, 17

Canton R.R. v. Rogan, 340 US. 511 (1951) — —_ 22

Complete Auto Transit, Inc. v. Brady, 480 U.S. 274

STD diceeerinrinaintnaariniaaimeespanennunermnieemneaeeneses 21, 22, 24, 26

Cook v. Pennaylvania, 97 US. 566 (1878) ipabewaanananse 18

Cornell v. Coyne, 192 U.S. 418 (1904) 0.000 16, 19

Crew Levick Co. v. Pennaylvania, 245 U.S. 292

ETIIIEED coccnusenegssseesncgnensspatonasenaieunsssennapneessesenstonnsesnsens 22

Crutcher v. Kentucky, 141 U.S. 47 (189)1)............... 20

Department of Revenue of Washington v. Associa.

tion of Washington Stevedoring Coa., 485 U.S. T34

a cosveceeeeeee =, 15, 22, 26, 26, 27, 28

(111)

Cases—Continued: Page

DiSanto v. Pennsylvania, 273 U.S. 34 (1927) ......... 20-21

Fairbank vy. United States, 181 U.S, 283 (1901) ..... 19

Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824) ........ 29-30

Hooven & Allison Co. v. Evatt, 324 U.S. 662

(GED acecccscccnscccccssnssecsnsccsessssosesecsncsssccsconsscssooseneseets 18

Joseph v. Carter & Weekes Stevedoring Co., 330 US.

GBB CBBGD cecreccceccssccsescssscsensnsassencsemsesesesssssscsnscsnscens 22

Kosydar v. National Cash Register Co., 417 US.

GD CIRO cccecccccscsssecevsnsccnccccccccsccescccscsesccsssecccosccsscesee 16

License Cases, 46 U.S. (6 How.) 504 (1847) .............. 17

Limbach vv. Hooven & Allison Co., 466 US, 353

GREED cccnscccsenccnnnsentnsscensansnnstasiinmmmusapsenszemmemntennnssentes 27

Low vy. Austin, 80 U.S. (13 Wall.) 29 (1872)............. 17, 18

May v. New Orleans, 178 US. 496 (1900) ............... 18

Memphis Steam Laundry Cleaner, Inc. v. Stone,

Be Ga GD coccnancemneccssnscsesscensensscspeamnesseeneses 20

Michelin Tire Corp. v. Wages, 423 U.S. 276 9, 16

(BIE ncccccsscocercocccssessnscvsenscsssnensessssssennsceasiecs 22, 23, 24, 27

Nippert v. City of Richmond, 327 U.S. 416 (1946) .. 21

Pace v. Burgess, 92 U.S. 872 (B76) ones 18

Puget Sound Stevedoring Co. v. State Tax Comm'n,

BD CEE, GD CEP ccsncccccsnsccccsccscsnsscsscssccsesescesscssseeses 22

Robbina v. Shelby County Taxing District, 120 U.S.

oe 20

Rodriquez de Quijas v. Shearson/American Express,

Inc., 490 U.S. 477 (1988) ......cccccccccccceceeeeneeeeneenes 9, 10, 13

Spector Motor Service, Inc. v. O'Connor, 340 US,

GB CRBED ncccsccrcnccccsccscscececeveseccscscssecenesssensssoesessanes 21, 26

Thames & Mersey Marine Ina. Co. v. United States,

BBD TE, BD CRB EED cccccccvcccccccccescsccesecesscssescserssens 9, 13, 20, 21

Turpin v. Burgess, 117 U.S. 504 (1886) ................ 16, 19

United States v. American Bar Endowment,

GQ) yey 14

United States v. Goodyear Tire & Rubber Co.,

ee 14

Cases—Continued:

United States v. Hill, 113 8, Ct. 941 (1998) ............ 14

United States v. Hvoslef, 237 U.S. 1 (1915)........... 16, 20

United States v. Marigold, 50 U.S. (9 How.) 560

GEIIEED cncccastiantechecnindienssesctitbavibccesscctteczcsuapenammsecsenedes 90

United States v. The William, 28 Fed. Cas. 614

(D. Mass. 1808) (NO, 16,700) 00000... cccccccceecccceeeeneee 30

Weatern Live Stock v. Bureau of Revenue, 308 US.

EE GEEEEED ccuneencansenananinnsseninsnennidtnengneamasciipicnscmeneceins 22

Youngstown Sheet & Tube Co. v. Bowers, 368 US.

EP IEEE eenstatetnependecseenmmemntnandenempermepenecssnvensessonsccoess 18

Constitution, statutes and regulation

U.S. Conat.:

Art. lL:

§ 8, Cl. 3 (Commerce Clause) ............. 2, 20, 21, 24, 25, 29

$9, CL 5 (Export Clause) ..0.....0.0ccccccccceceeeeeeeeens passim

§ 10, Cl. 2 (Import-Export Clause).................0 passim

Act of Aug. 8, 1882, ch. 468, 22 Stat. 872 ..........0 18

Internal Revenue Code (26 U.S.C.):

REID ccnsenssnspeniiemmiieebatenianipniiinbeseniiomdbeeneccsndesante 4

SERED consnespssssussennssessnsnesnnsnsnesvensenssuenesestnnnensests 4

SOG disemecnscsnscnsccensncnstenscuncenmspensbenssnemnenustenetéensests passim

SOIT stinectnietapecuntencinneurenniineantenneipenimamniinidsadiitdendienss 3

> GD cciinsnicnsanscnecnenessetmenssmmsomneensemmesnentes — 8, 5

ip ITI ininnrenntnpepessenmnineesenmesenenttenecssgnanes %, 5, 12, 14-15

TC 4

ee 4,5

Eee 4, 5,8

§ 4461 (1988 & Supp. V 1998) oo... cccccccccccccceeeeeeees 13, 14

i) Garr cenccrcmresensnnenennsnegcenasenssentenasensansnsscenmpecnsenss 13

> GED #ccnsestensasesnnenanetecesessnnsssctenssenseninseustuecneess 13

> GID ‘chasmnesndctersenemereteencsutenecensennietenisscniioants 14

Statutes and regulation—Continued: Page

War Revenue Act of 1898, ch. 448, 30 Stat. 448 ........ 19, 20

§ 26:

BIR, GD cconccnsccecnssescnsnenccnqnccnnsnesassenesscntssenssnees 19

EID, GED eccccescccccsnccscensatsnccsasnesenencaneumpsionsecesnes 20

BD GRR, GE cccccncccsesscscscsscszscnsscssomsescscssensnsnscsssccess 20

War Revenue Act of 1917, ch. 63, § 600(f) 40 Stat.

GEITEIIET scnincecceenedlensscemnpcessnusnncctonessbenseanemmettesneceseseses 21

OO) hl 14

ee 14

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Miscellaneous:

2 M. Farrand, The Records of the Federal Convention

"| Re ete 29

H.R. Rep. No. 2333, 77th Cong., 2d Sess, (1942) ....... 5, 15, 30

C, Warren, The Making of the Constitution (reprint

BERD CORED ceccccsnscsccssccssescensvscsnctscssasesasesesusersessscsees 2k

In the Supreme Court of the United States

OcTOBER TERM, 1995

No.

UNITED STATES OF AMERICA, PETITIONER

Vv,

INTERNATIONAL BUSINESS MACHINES CORPORATION

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

The Solicitor General, on behalf of the United

States of America, petitions for a writ of certiorari to

review the judgment of the United States Court of

Appeals for the Federal Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (App., infra, la-

lla) is reported at 59 F.3d 1234. The opinion of the

Court of Federal Claims (App., infra, 12a-30a) is

reported at 31 Fed, Cl. 500,

JURISDICTION

The judgment of the court of appeals (App., infra,

$la) was entered on July 10, 1995. The jurisdiction of

this Court is invoked under 28 U.S.C, 1254(1).

(1)

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

1. The Constitution of the United States provides,

in relevant part:

a. Art. 1, § 8, Cl. 3:

The Congress shall have Power * * * To

regulate Commerce with foreign Nations, and

among the several States, and with the Indian

Tribes.

b. Art. 1, $9, Cl. 5:

No Tax or Duty shall be laid on Articles

exported from any State.

ce. Art. 1, § 10, Cl. 2:

No State shall, without the Consent of the

Congress, lay any Imposts or Duties on

Imports or Exports, except what may be

absolutely necessary for executing it’s in-

spection Laws * * *,

2. The Internal Revenue Code provides, in relevant

part:

a. 26 U.S.C, 4871:

There is hereby imposed, on each policy of

insurance, indemnity bond, annuity contract,

or policy of reinsurance issued by any foreign

insurer or reinsurer, a tax at the following

rates:

(1) 4 cents on each dollar, or fractional

part thereof, of the premium paid on the

policy of casualty insurance or the indem-

nity bond, if issued to or for, or in the name

of, an insured as defined in section 4372(d);

+ * * * *

b, 26 U.S.C, 4372;

(a) For purposes of section 4371, the term

“foreign insurer or reinsurer” means an

insurer or reinsurer who is a nonresident

alien individual, or a foreign partnership, or

a foreign corporation, * * *

(b) For purposes of section 4871(1), the

term “policy of casualty insurance” means

any policy (other than life) or other in-

strument by whatever name called whereby

a contract of insurance is made, continued, or

renewed,

+ * + * *

(d) For purposes of section 43871(1), the

term “insured” means—

(1) a domestic corporation or part-

nership, or an individual resident of the

United States, against, or with respect to,

hazards, risks, losses, or liabilities wholly

or partly within the United States, * * *

* * + * *

c. 26 U.S.C. 4373 (1982):'

The tax imposed by section 4371 shall not

apply to—

(1) Any policy, indemnity bond, or

annuity contract signed or countersigned

by an officer or agent of the insurer in a

State, or in the District of Columbia,

within which such insurer is authorized

to do business; * * *

* * * * *

d. 26 U.S.C. 4374:

The tax imposed by this chapter shall be

paid, on the basis of a return, by any person who

makes, signs, issues, or sells any of the docu-

ments and instruments subject to the tax, or for

whose use or benefit the same are made, signed,

issued, or sold. * * *

STATEMENT

1. Respondent International Business Machines

Corporation brought this suit in the Court of Federal

Claims to obtain a refund of $1.5 million in taxes

assessed under Section 4371 of the Internal Revenue

! This provision was amended in 1988 to conform its

language to terminology elsewhere employed by Congress to

describe activities that are “effectively connected” to activities

within the United States and are therefore subject to the

federal income tax. See 26 U.S.C. 864(c), 882(a)(1). The

amendment does not alter the application of the statute in the

context of this case.

Code. IBM does not dispute that the taxes were

correctly assessed under the statute. Instead, IBM

contends that the statute is unconstitutional as

applied to the facts of this case.

a. Section 4371 of the Internal Revenue Code, 26

U.S.C. 4371, imposes a tax of four cents per dollar on

casualty insurance premiums paid to a foreign in-

surer for the risks of a domestic insured that are

“wholly or partly within the United States” (26

U.S.C. 4372(d)(1)).2 The tax is to be paid by “any

person * * * for whose use or benefit” the policy is

“made, signed, issued, or sold.” 26 U.S.C. 4374.

Section 4371 was enacted in 1942 to “eliminate an

unwarranted competitive advantage now favoring

foreign insurers” who are not subject to the federal

income tax. H.R. Rep. No. 2333, 77th Cong., 2d Sess.

61 (1942). The tax therefore does not apply if the

insurance policy issued by the foreign insurer is

“signed or countersigned by an officer or agent of the

insurer in a State, or in the District of Columbia,

within which such insurer is authorized to do

business.” 26 U.S.C. 4373(1) (1982). See also note 1,

supra; 26 C.F.R. 46.4371-2(a).

b. IBM manufactures a variety of business prod-

ucts that it sells throughout the world. During

the period involved in this case, IBM shipped prod-

ucts for international sales from its manufacturing

facilities in Arizona, California, Colorado, Florida,

Minnesota, New York, North Carolina, Virginia and

Texas (App., infra, 13a-14a). IBM made its inter-

® The term “foreign insurer” is defined to mean an insurer

“who is a nonresident alien individual, or a foreign partnership,

or a foreign corporation” (26 U.S.C. 4372(a)).

national sales through a network of more than one

hundred wholly owned subsidiares (id. at 14a-15a):

Sales outside the United States of IBM prod-

ucts manufactured within the United States

were accomplished by a purchase order to IBM

from its foreign subsidiary, under which IBM

billed the subsidiary and generally shipped the

goods directly to the subsidiary’s customer.

Lower priced goods might be shipped to a

- consolidation center in the foreign country, and

maintained as inventory by the foreign subsidiary

to fill future orders. * * *

Shipment of products from the United States to

the foreign customer began by truck on a com-

mon carrier (from the manufacturing plant or

warehouse). The goods generally were destined

for a United States airport (typically, John F.

Kennedy in New York for shipments to Europe

and the Middle East, Miami International for

shipments to Latin America, and San Francisco

International for shipments to the Far East), but

some shipments were by sea. While traveling

within the United States, the products would

typically be unloaded at one or more intermediate

freight forwarder locations, where they would

typically remain for two to five days, but could

remain * * * as long as thirty days. The prod-

ucts would be reloaded at the freight forwarders’

facilities and continue ultimately to the point of

embarkation, where they were loaded onto an

airplane or a ship. Once the products reached the

air or sea port in the foreign country, they were

unloaded, cleared customs, and loaded on trucks

for shipment to their final destination.

The terms of sale specified that title to the goods, and

risk of loss, passed from IBM to its foreign sub-

sidiaries only when the goods cleared customs in

the foreign country. The foreign subsidiaries were

nonetheless required to bear the cost of insuring the

products against damage or loss during the entire

shipment (App., infra, 15a).

The insurance obtained for these shipments was

“point to point”: it covered the risk of damage or loss

during transportation of the goods from the IBM

facility in the United States to the point of foreign

delivery. When IBM made the arrangements, the

insurance was placed with a domestic insurer and

the cost was billed to the foreign subsidiary. When

the foreign subsidiary made the arrangements, the

insurance was often placed with a foreign carrier,

which the subsidiary paid directly. In both situations,

IBM and its foreign subsidiary were listed as joint

beneficiaries on the policies of insurance (App., infra,

15a-16a).

If damage occurred before the goods cleared

customs—while IBM retained title to the goods and

risk of loss—IBM received the insurance proceeds

directly under these policies. If the loss occurred

after the goods cleared customs—when title and risk

of loss had passed to the importing foreign subsidiary

—the insurance proceeds were paid to the subsidiary.

In the latter event, the proceeds were used by the

subsidiary to pay the full purchase price of the

damaged products to IBM or, if IBM had already been

paid, to reimburse the subsidiary for its loss (App.,

infra, 16a).

c. IBM filed federal excise tax returns for 1975

through 1984 but did not report any liability under

Section 4371 of the Internal Revenue Code. On audit,

the Internal Revenue Service determined that the

premiums paid to foreign insurers were subject to the

tax imposed by Section 4371 and that, pursuant to

Section 4374, IBM was liable for the tax as a named

beneficiary of the insurance policies.

The foreign subsidiaries reported to IBM that,

during 1980, they had paid premiums of $2,065,137 to

foreign insurers for “point to point” insurance for

shipments of products that IBM manufactured in the

United States. The tax applicable to those premiums

under Section 4371 of the Code—calculated by mul-

tiplying the premiums by four percent—is $82,605.

The parties stipulated that the foreign insurance

premiums attributable to shipments of IBM products

in each of the years 1975-1979 and 1981-1984 were the

same as in 1980. The IRS therefore assessed the

same amount of tax for each of those years under

Section 4371 (App., infra, 18a).

2. IBM paid the resulting assessments and filed

claims for refund. When those claims were denied,

IBM commenced this refund suit in the Court of

Federal Claims.

a. IBM contended that the tax imposed by Section

4371 of the Internal Revenue Code—as applied to

insurance premiums for losses occurring during the

shipment of goods from locations within the United

States to purchasers abroad—violates the Export

Clause of the Constitution, which provides that “[nJo

Tax or Duty shall be laid on Articles exported from

any State.” U.S. Const. Art. I, § 9, Cl. 5. IBM

contended that the tax on insurance for export

shipments is a “Tax or Duty * * * laid on Articles

exported” and is invalid under the specific holding of

this Court in Thames & Mersey Marine Ins. Co. v.

United States, 237 U.S. 19 (1915). In Thames &

Mersey, the Court held a federal stamp tax on policies

insuring marine risks unconstitutional as applied to

shipments for export.

The United States contended that the analysis of

Thames & Mersey is no longer valid. The govern-

ment reasoned that subsequent decisions of the

Court, such as Michelin Tire Corp. v. Wages, 423

U.S. 276 (1976), and Department of Revenue of

Washington v. Association of Washington Steve-

doring Cos., 435 U.S. 734 (1978), require the con-

clusion that the Export Clause does not invalidate a

generally applicable, nondiscriminatory tax that does

not fall uniquely and discretely on articles of export

or export transactions.

b. The Court of Federal Claims held that ap-

plication of the tax imposed by Section 4371 to

insurance premiums for goods in export transit

violates the Export Clause because it “amounts to a

tax on exports” (App., infra, 26a). The court reasoned

that this conclusion follows from the precise holding

of this Court’s 1915 decision in Thames & Mersey,

which stated (237 U.S. at 26):

It cannot be doubted that insurance during the

voyage is by virtue of the demands of commerce an

integral part of the exportation.

The Court of Federal Claims emphasized that,

under Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477, 484 (1989), lower courts

“must adhere to the accepted practice of following

Supreme Court precedent unless the Supreme Court

clearly states that it is overruling earlier cases and

explains why it is doing so” (App., infra, 28a). The

court found no clear evidence that Thames & Mersey

has been overruled or that its analysis has been

discarded by this Court. The court held that Thames

& Mersey therefore remains authoritative and that it

compels the conclusion that the tax imposed by

Section 4371 is unconstitutional as applied in this

case (id. at 29a).

The court acknowledged that this Court’s more

recent decisions under the Import-Export Clause in

Michelin Tire and Washington Stevedoring have

upheld application of nondiscriminatory state taxes to

and services involved in importation and

exportation. The court concluded, however, that

those decisions could be distinguished on their facts.

The court explained that Washington Stevedoring—

which upheld application of a state gross receipts tax

to a stevedoring company that handled export and

import shipments—concerned “stevedoring” rather

than “insurance” and that “stevedoring is a service

whose value is not necessarily tied to the value of the

goods it serves” (App., infra, 29a). The court further

stated that Michelin Tire—which upheld application

of a state property tax to imported goods located

within the borders of the State—is inapposite because

“in Michelin the [imported goods] had left the import

stream and were * * * thus outside the scope of the

Import-Export Clause” (ibid.).

3. The court of appeals affirmed (App., infra, la-

lla). The court noted (id. at 1la) that this Court

has admonished the lower courts that (Rodriguez de

Quijas v. Shearson/American Express Co., 490 U.S.

at 484)

liJf a precedent of this Court has direct application

in a case, yet appears to rest on reasons rejected

in some other line of decisions, the Court of

Appeals should follow the case which directly

controls, leaving to this Court the prerogative of

overruling its own decisions.

The court of appeals stated that it was therefore

bound to follow Thames & Mersey, and hold the tax

imposed by Section 4371 unconstitutional as applied in

this case, unless subsequent decisions of this Court

“clearly signaled” an intent to overrule that earlier

decision (App., infra, 8a).

The court of appeals concluded that it was “not so

sure” (App., infra, 8a) that Washington Stevedoring

and Michelin Tire signaled the requisite clear intent

of this Court to abandon the analysis of Thames

& Mersey. The court of appeals did not dispute

that, if an analysis “similar” to that applied un-

der the Import-Export Clause in Michelin Tire and

Washington Stevedoring were applied under the

Export Clause, the holding and reasoning of Thames

& Mersey would be discredited (App., infra, 7a-8a).

Instead, the court stated that it was not certain that a

similar analysis would be applied because there is a

difference in the language of the two Clauses that

could require a different result: the Import-Export

Clause bars States from laying “Imposts or Duties on

Imports or Exports”; the Export Clause bars the

United States from laying any “Tax or Duty * * *

on Articles exported from any State.” The court of

appeals stated (id. at 9a-10a):

Although the [Supreme] Court at first expressed

the view that the “diversity in language” between

the two clauses did not reflect any difference in

“the act which is prohibited,” Brown v. Mary-

land, 26 U.S. (12 Wheat.) 419, 425 (1827), in both

Michelin and Washington Stevedoring the Court

has noted and attached significance to the dif-

ference between the narrow term “Imposts and

Duties” * * * and the broader term “Tax” * * *.

See Michel », ‘23 U.S. at 290; Washington Steve-

doring, 435 U.S. at 759.

Reasoning that a “tax” that might be permitted

under the “narrow” language of the Import-Export

Clause might nonetheless be invalid under the

“broader” language of the Export Clause (App., infra,

10a), the court concluded that the recent Import-

Export Clause decisions fail to provide the requisite

clear guidance that would permit a lower court to

“disregard[| a higher court decision that all agree is

binding precedent if it is still valid” (id. at 10a-11a).”

The court therefore held “that [its] duty is to follow

Thames & Mersey and hold Section 4371 invalid as

applied” (id. at 11a).

REASONS FOR GRANTING THE PETITION

The decision in this case holds a federal statute

unconstitutional as applied to a significant, recurring

set of commercial transactions. The court of appeals

concluded that the federal tax on insurance premiums

paid to a foreign insurer for risks that are “wholly

or partly within the United States” (26 U.S.C.

4372(d)(1))}—as applied to casualty insurance for

shipments from within the United States to foreign

countries—repesents a “Tax or Duty * * * laid on

* The court of appeals noted that the United States had

conceded that, “if Thames & Mersey is still good law, the

assessments at issue in this case are invalid” (App., infra, 6a).

Articles exported” (U.S. Const. Art. 1, § 9, Cl. 5) and

therefore violates the Export Clause of the Con-

stitution. The court stated, in reaching that con-

clusion, that it was compelled to follow this Court's

1915 decision in Thames & Mersey Marine Ins. Co. v.

United States, supra, even though the analysis of

that decision has been placed in question by more

recent decisions of this Court.

Only this Court has “the prerogative of overruling

its own decisions.” Rodriguez de Quijas v. Shearson/

American Express Co., 490 U.S. at 484. The Court

has directed lower courts to “follow the case which

directly controls” even when that case “appears to

rest on reasons rejected in some other line of

decisions” (ibid.). As the result, only this Court can

determine whether the considerations that led it to

uphold generally applicable, nondiscriminatory state

taxes under the Import-Export Clause—in Michelin

Tire and Washington Stevedoring—also require that

the generally applicable, nondiscriminatory federal

statute involved in this case be upheld under the

Export Clause of the Constitution.

The question presented in this case is of

substantial recurring importance. The proper scope

of the Export Clause has significance not only for the

tax imposed under Section 4371 but also for other

nondiscriminatory federal taxes of general appli-

cation. For example, Section 4461 imposes on all ship-

pers a “tax on any port use” of 0.125 percent of the

value of all commercial cargo loaded or unloaded in

United States ports. See 26 U.S.C. 4461(a), (b) (Supp.

V 1993), 4462(aX1). Approximately 700 cases are

currently pending in the United States Court of

International Trade challenging the constitutionality

of that statute under the Export Clause. See United

States Shoe Corp. v. United States, No, 94-11-00668

(Ct. Int. Trade). The Federal Circuit has exclusive

jurisdiction over any appeal from the decision in those

cases. 28 U.S.C. 1295(a)(5).

The Federal Circuit is a court of nationwide juris-

diction. Since all taxpayers are entitled to pay a

challenged tax and sue for a refund within the Federal

Circuit, it is unlikely that other courts of appeals will

have an opportunity to review this issue under Sec-

tion 4371 or other affected statutes. In similar cir-

cumstances, this Court has recognized the need for

plenary review of Federal Circuit decisions that

present issues of substantial importance. See, ¢.g.,

United States v. Hill, 113 8. Ct. 941, 945 (1993);

United States v. Goodyear Tire & Rubber Co., 493

U.S. 132, 138 (1989); United States v. American Bar

Endowment, 477 U.S. 105, 109 (1986). Review by this

Court of a decision of the Federal Circuit holding

a statute of Congress unconstitutional is fully

warranted.

1. The tax imposed by Section 4371 of the Internal

Revenue Code is not specifically directed to nor

directly “laid on Articles exported” (U.S. Const. Art.

1, § 9, Cl. 5). Instead, it applies to insurance

paid to foreign insurers for any casualty risk that

is “wholly or partly within the United States” (26

* Similar litigation is also pending in the federal district

court in Maryland. See American Ass'n of Exporters and

Importers, Inc. v. Bentsen, No. L94-1839 (D. Md.). The United

States has moved to dismiss that case on the grounds that

exclusive jurisdiction over cases under Section 4461 lies in the

Court of International Trade. See 28 U.S.C. 1581(a); 26 U.S.C,

4462(f (2).

U.S.C, 4872(d)(1)). It thus applies without discrim-

ination to “wholly” domestic transactions as well

as to risks that are only “partly” within the United

States. As the House Ways and Means Committee

observed when the statute was enacted in 1942,

Section 4371 is designed to “eliminate an unwar-

ranted competitive advantage now favoring foreign

insurers” who are not subject to the federal income

tax. H.R. Rep. No. 2333, supra, at 61.

As a generally applicable, nondiscriminatory tax

that is not discretely and exclusively imposed on

“Articles exported,” the tax imposed under Section

4371 is constitutional. It violates neither the text

nor the object of the Export Clause and is validated by

the recent decisions of this Court. In particular, in

Michelin Tire, the Court “initiated a different ap-

proach to Import-Export Clause cases” that upholds

generally applicable taxes that reach “services

provided * * * to imports, exports, and other goods”

without discrimination. Department of Revenue of

Washington v. Association of Washington Steve-

doring Cos., 435 U.S. at 752, 761. The analysis of

Michelin Tire and Washington Stevedoring applies

equally to challenges to federal taxes under the

Export Clause and, under that analysis, the tax

imposed by Section 4371 should be sustained.

2. a. The Export and Import-Export Clauses

Are Complementary in Scope. In this Court’s first

case under either the Import-Export or the Export

Clause, Chief Justice Marshall observed of the two

Clauses that “[t)here is some diversity in language,

but none is perceived in the act which is prohibited.”

Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 445

(1827). That observation has been repeated by this

Court on numerous occasions.” In the more nu-

merous cases under the Import-Export Clause and

the less numerous cases under the Export Clause,

the Court has routinely cited cases under the two

Clauses without differentiation. Moreover, the anal-

ysis applied in opinions under the two Clauses has not

varied.

b. The “Original Package” Doctrine Under the

Import-Export Clause. In Brown vy. Maryland, a

Maryland statute required that importers or whole-

salers of foreign articles or commodities purchase a

license costing $50 to sell such goods. 25 U.S. (12

Wheat.) at 436. Brown was convicted of having im-

ported and sold a package of foreign dry goods without

having obtained a license. In holding that the statute

violated the Import-Export Clause, the Court ex-

plained that a tax on the privilege of sale was, in sub-

5 See, ¢.g., Turpin v. Burgess, 117 U.S, 504, 506-507 (1886);

Cornell v. Coyne, 192 U.S. 418, 427 (1904); United States v.

Hvoslef, 237 U.S. 1, 14 (1915); Kosydar v. National Cash

® The suggestion of the court of appeals that the language of

the Export Clause may be “broader” in its prohibitive scope

than the language of the Import-Export Clause (App., infra,

10a) does not withstand analysis. The entire text of the two

Clauses must be considered. The Import-Export Clause pre-

cludes States from imposing “Imposts or Duties on Imports or

Exports”; the Export Clause specifies that no federal “Tax or

Duty shall be laid on Articles exported.” U.S, Const, Art, I,

§ 10, Cl, 2; Art. 1, § 9, Cl. 5. An “impost” on an “export” is

a “tax” on an “Article exported”; a “tax” on an “Article

exported” is an “impost.” Under the text of the two Clauses,

it is the charge collected on the item exported that is at issue,

A “tax” that is not “laid on” “Articles exported” does not fall

within the scope of the Export Clause. See Michelin Tire Corp.

v. Wages, 423 U.S. at 293-294; pages 23-24, infra.

stance, a duty upon things imported for sale, /d. at

439. Rejecting the suggestion that this would mean

that imported goods would be perpetually immune

from taxation, the Court stated that an import retains

its “distinctive character” only while in the “original

form or package in which it was imported” (id. at 442).

In the License Cases, 46 U.S. (5 How.) 504 (1847),

Chief Justice Taney acknowledged that a tax directed

at imports would be invalid and did not question the

validity of the “original package” doctrine. But he

concluded that a generally applicable, nondiscrimina-

tory state property tax would not be unconstitutional

merely because it also applied to imported goods (id.

at 576):

Undoubtedly a State may impose a tax upon its

citizens in proportion to the amount they are

respectively worth; and the importing merchant is

liable to this assessment like any other citizen,

and is chargeable according to the amount of his

property, whether it consists of money engaged in

trade, or of imported goods which he proposes to

sell, or any other property of which he is the

owner, But a tax of this description stands upon a

very different footing from a tax on the thing

imported, while it remains a part of foreign

commerce, and is not introduced into the general

mass of property in the State.

In Low v. Austin, 80 U.S. (183 Wall.) 29 (1872), how-

ever, the Court reached a different conclusion,

holding that a generally applicable California prop-

erty tax could not be imposed upon a shipment of

French champagne held in an importer’s warehouse

in the “original package” in which shipped. /d. at 35.

In doing so, the Court neglected to consider the con-

trary conclusion of Chief Justice Taney in the

License Cases, although his approval of the “original

package” doctrine was cited by the Court. Jd. at 33-

34.’

ce. The Early Export Clause Cases. The Export

Clause was invoked in Pace v. Burgess, 92 U.S. 372

(1876), by a tobacco manufacturer who, in 1868, was

subject to a federal excise tax on tobacco products.

Although tobacco intended for export was exempt

from the tax, the exemption was subject to the

requirement that packages for export be identified

by an affixed engraved stamp costing 25 cents. The

manufacturer brought suit to recover the price of

the exemption stamps, claiming that they constitut-

ed a prohibited tax on exports. The Court denied

recovery, explaining that the exemption stamps were

designed to prevent fraud and did not represent a tax.

Id. at 375.

In 1882, however, Congress discontinued the charge

for the exemption stamp in a statute that referred to

the stamp as an “export tax.” Act of Aug. 8, 1882, ch.

468, 22 Stat. 372. On that basis, another tobacco

manufacturer sued to recover the amounts he had

paid for exemption stamps before the charge was

discontinued. The Court adhered to its decision in

Pace v. Burgess, but with a somewhat different

rationale. In describing the Export and Import-

7 The so-called “original package” rule was also followed in

Cook v. Pennsylvania, 97 U.S. 566 (1878), Anglo-Chilean

Nitrate Sales Corp. v. Alabama, 288 U.S. 218 (1933), and

Hooven & Allison Co. v. Evatt, 324 U.S. 652 (1945). See also

May v. New Orleans, 178 U.S. 496 (1900), and Youngstown

Sheet & Tube Co. v. Bowers, 358 U.S. 534 (1959).

Export Clauses, the Court stated (Turpin v. Burgess,

117 U.S. 504, 507 (1886) (emphasis added)):

The prohibition in both cases has reference to the

imposition of duties on goods by reason or because

of their exportation or intended exportation, or

whilst they are being exported. * * * But a

general tax, laid on all property alike, and not

levied on goods in course of exportation, nor

because of their intended exportation, is not

within the constitutional prohibition.

Relying upon the above passage, the Court

subsequently held that a manufacturer of cheese for

export could not—merely from the fact that the

cheese was intended for export—escape liability for

the federal tax of one cent per pound upon that

product. Cornell v. Coyne, 192 U.S. 418, 428 (1904).

The Court explained that the Export Clause “does not

mean that articles exported are relieved from the

prior ordinary burdens of taxation which rest upon all

property similarly situated” (id. at 427).

d. The Decision in Thames & Mersey. The direct

ancestor of Thames & Mersey was Fairbank v.

United States, 181 U.S. 283 (1901). That case involved

a provision of the War Revenue Act of 1898 that

imposed a variety of stamp taxes on written in-

struments, including “bills of lading * * * for any

goods, merchandise, or effects, to be exported from a

port or place in the United States to any foreign port

or place” (ch. 448, § 26, 30 Stat. 459). In Fairbank, the

Court held that the stamp tax on bills of lading for

exported goods violated the Export Clause. Invoking

a prior, similar holding under the Import-Export

Clause (Almy v. California, 65 U.S. (24 How.) 169

(1861)), the Court held that the tax upon the bill of

lading was invalid because it was equivalent to a tax

upon the exported articles themselves.

Two cases argued on the same day are the cases

upon which IBM relies. Like Fairbank, they involved

taxes imposed by the War Revenue Act of 1898.

Unlike Fairbank, however, neither tax was imposed

expressly or directly on export transactions. United

States v. Hvoslef, 237 U.S. 1 (1915), involved a federal

stamp tax upon any “Contract or agreement for the

charter of any ship” (§ 26, 30 Stat. 460). Thames &

Mersey, on which IBM most directly relies, involved

a federal stamp tax on policies of marine insurance

“whether against peril by sea or on inland waters”

(§ 26, 30 Stat. 461). Since these statutes did not dif-

ferentiate between domestic voyages and shipments

to foreign ports, it might have been supposed that

they would be sustained as general taxes of neutral

application under the reasoning of Turpin v. Burgess

and Cornell v. Coyne. See page 19, supra.

In Hvoslef, however, the Court instead invoked

Fairbank without acknowledging that the stamp tax

challenged in Hvoslef, unlike the tax challenged in

Fairbank, was of general, not limited, application. In

support of its decision in Hvoslef, the Court also

invoked Robbins v. Shelby County Taxing District,

120 U.S. 489 (1887). Robbins was the first of “a long

line of ‘drummer’ cases” under the Commerce Clause,

in which the Court held that a State could not impose

a licensing fee on a person who solicited orders for

goods to be shipped from another State." The Court

stated in Robbins (id. at 497):

* See Memphis Steam Laundry Cleaner, Inc. v. Stone, 342

U.S. 389, 392 (1952). Robbins had a numerous progeny. See,

e.g., Crutcher v. Kentucky, 141 U.S. 47 (1891); DiSanto

It is strongly urged, as if it were a material

point in the case, that no discrimination is made

between domestic and foreign drummers—those of

Tennessee and those of other states; that all are

taxed alike. But that does not meet the difficulty.

Interstate commerce cannot be taxed at all, even

though the same amount of tax should be laid on

domestic commerce, or that which is carried on

solely within the state.

Having applied Fairbanks and Robbins to immunize

export transactions from broadly applicable taxing

provisions in Hvoslef, the Court entered its decision

in Thames & Mersey two weeks later on the author-

ity of Hvoslef. 237 U.S. at 27.

The decisions in Hvoslef and Thames & Mersey

established a pattern that this Court subsequently

followed of immunizing export transactions from

generally applicable federal taxes. For example, when

Congress imposed a general tax on various sporting

goods under the War Revenue Act of 1917, ch. 63,

§ 600(f), 40 Stat. 316-317, the Court invoked Hvoslef

and Thames & Mersey to hold that the Export Clause

prohibited imposition of the tax to a shipment of

baseballs and bats to a purchaser in Venezuela. A.G.

v. Pennsylvania, 273 U.S. 34 (1927); Nippert v. City of

Richmond, 327 U.S. 416 (1946). Among the more recent was

Spector Motor Service, Inc. v. O'Connor, 340 U.S. 602 (1951),

which this Court overruled in Complete Auto Transit, Inc. v.

Brady, 430 U.S. 274 (1977). See page 25, infra. These deci-

sions concerning the negative implications of the Commerce

Clause are not logically relevant to analysis under the Export

Clause. Although the Commerce Clause is a limitation on the

powers of the States, it confers powers on the United States.

See page 29, infra.

Spalding & Bros. v. Edwards, 262 U.S. 66 (1923). See

also Crew Levick Co. v. Pennsylvania, 245 U.S. 292

(1917) (same under Import-Export Clause). Similarly,

in Puget Sound Stevedoring Co. v. State Tax

Commission, 302 U.S. 90 (1937), and Joseph v. Carter

& Weekes Stevedoring Co., 330 U.S. 422 (1947), the

Court held that gross receipts or sales taxes could

not be imposed upon payments for loading or

unloading ship cargoes transported in interstate or

foreign commerce.

e. The Modern Doctrine. Toward the end of this

period of decisions, there were indications of recon-

sideration. For example, in Western Live Stock v.

Bureau of Revenue, 303 U.S. 250, 254-255 (1938), the

Court heavily qualified, if it did not contradict, the

broad rationale of Robbins on which Hvoslef was

based. And, in Canton R.R. v. Rogan, 340 U.S. 511

(1951), the Court indicated a revised view of the

proper treatment of taxes upon transactions related

or collateral to importation and exportation when it

wrote (id. at 514-515):

The difference [between this case and cases such

as Spalding] is that in the present case the tax is

not on the goods but on the handling of them at

the port. * * * [Whhen the tax is on activities

connected with the export or import the range of

immunity cannot be so wide.

Full reconsideration finally came in Michelin Tire

Corp. v. Wages, 423 U.S. 276 (1976), Complete Auto

Transit, Inc. v. Brady, 430 U.S. 274 (1977), and De-

partment of Revenue of Washington v. Association

of Washington Stevedoring Cos., 435 U.S. 734 (1978).

See also Limbach v. Hooven & Allison Co., 466 U.S.

353 (1984). Those decisions expressly overruled many

of the decisions previously discussed and, without

cataloging them in detail, rejected other decisions

that had disposed of the same issues in the same

fashion.

(i) Michelin Tire involved the constitutionality of

a state property tax as applied to imported tires held

in the importer’s warehouse in Georgia. Invoking the

“original package” doctrine applied in Low v. Austin,

the importer maintained that its imported tires were

exempt from state tax. The Court rejected that

claim, holding that (423 U.S. at 279)

Georgia’s assessment of a nondiscriminatory ad

valorem property tax against the imported tires is

not within the constitutional prohibition against

laying “any Imposts or Duties on Imports * * *”,

and * * * insofar as Low v. Austin, 13 Wall. 29

(1872) is to the contrary, that decision is over-

ruled.

In reaching that decision, the Court reviewed the

text and object of the Import-Export Clause, as well

as its historical origin. 423 U.S. at 283-284. The

Court noted that the considerations that gave rise to

the Clause were that: (i) the federal government must

speak with one voice in regulating commercial

relations with foreign governments, and state tariffs

on exports and imports could conflict with that

requirement; (ii) import revenues were to be the

major source of revenue to the federal government

and should not be diverted to the States; and (iii)

harmony among the States would be disrupted if the

seaboard States could tax goods passing through

their harbors to or from their inland neighbors. /d.

at 285. The Court observed that nondiscriminatory

property taxes interfere with none of the constitu-

tional concerns of the Import-Export Clause. /d. at

286-290.

Addressing the specific text of the Import-Export

Clause in Michelin Tire, the Court “decline|d] to

presume it was intended to embrace taxation that

does not create the evils the Clause was specifically

intended to eliminate” (423 U.S. at 293-294). The

Court explained that the “original package” language

of Brown v. Maryland had been misunderstood (id. at

298):

[I]t is clear that the Court’s view in Brown lv.

Maryland| was that merely because certain

actions taken by the importer on his imported

goods would so mingle them with the common

property within the State as to “lose their

distinctive character as imports” and render them

subject to the taxing power of the State, did not

mean that in the absence of such action, no

exaction could be imposed on the goods. Rather,

the Court clearly implied that the prohibition

would not apply to a state tax that treated

imported goods in their original packages no

differently from the “common mass of property in

the country”; that is, treated it in a manner that

did not depend on the foreign origins of the goods.

The Court further noted that the opinion in Low v.

Austin had misread Chief Justice Taney’s opinion in

the License Cases which “makes crystal clear that

the prohibition applied only to state exactions upon

imports as imports and did not apply to nondiscri-

minatory ad valorem property taxes.” 423 U.S. at 300.

See pages 16-17, supra.

(ii) In Complete Auto Transit, Inc. v. Brady, 430

U.S. 274 (1977), the Court held that the Commerce

Clause does not bar application of a generally appli-

cable state tax to the gross revenues of a company

engaged exclusively in the transportation of motor

vehicles in interstate commerce. The Court recon-

sidered and overruled its decision in Spector Motor

Service, Inc. v. O'Connor, 340 U.S. 602 (1951), which,

following Robbins, had held that Connecticut could

not impose a tax for the privilege of engaging in

interstate commerce. See page 20 & note 8, supra.

The Court noted in Complete Auto that it was

unquestioned that the activity engaged in by the

taxpayer was sufficiently connected to the State to

justify a tax, that the tax was fairly related to the

benefit provided to the taxpayer, that the tax did not

discriminate against interstate commerce, and that

the tax was not unfairly apportioned. 430 U.S. at 287.

Under those circumstances, the Court concluded that

“the Spector rule does not address the problems with

which the Commerce Clause is concerned” and over-

ruled that decision. /d. at 288. The Court’s holding

in Complete Auto necessarily, albeit implicitly, over-

ruled Robbins and the “long line of ‘drummer’ cases”

that that decision had spawned. See note 8, supra.

(iii) In Department of Revenue of Washington v.

Association of Washington Stevedoring Cos., 435

U.S. 734 (1978), the Court considered the State of

Washington’s renewed attempt to apply its gross

receipts tax to the proceeds generated from loading

and unloading ocean-going vessels. In the earlier

decisions in Puget Sound and Carter & Weekes,

the Court had invoked the Commerce Clause to

hold unconstitutional the application of the State’s

tax to the proceeds of stevedoring cargoes in inter-

state and foreign commerce. See page 22, supra. In

Washington Stevedoring, however, the Court had

little difficulty, after Complete Auto, in overruling

those decisions insofar as the Commerce Clause was

involved. 435 U.S. at 743-751.

The Import-Export Clause required separate con-

sideration. Michelin Tire had inquired whether a

generally applicable tax that does not favor or

disfavor imports or exports conflicts with any of the

policies leading to the adoption of the Import-Export

Clause and had upheld the application of the property

tax to imported goods, whether or not in the original

package, when it found no friction or inconsistency.

A similar inquiry led the Court to conclude in

Washington Stevedoring that the generally appli-

cable Washington tax on gross receipts from

stevedoring offended none of the policies of the

Import-Export Clause. 435 U.S. at 754-755. The

Court specifically rejected the suggestion that the

fact that Michelin Tire dealt only with goods no

longer in transit required that the cases be

differentiated. Jd. at 755-757. The Court noted that

Canton Railroad demonstrated that the analysis that

prevailed in Michelin Tire was not to be discarded

simply because the goods were in transit. bid.

Moreover, the fact that Michelin Tire involved only

imports while the Washington tax related to proceeds

from stevedoring exports as well did not call for a

different conclusion. /d. at 757-758. The Court con-

cluded that the considerations that led to the deci-

sion in Michelin Tire were equally applicable to the

Washington tax. /bid.”

® Justice Powell concurred separately in Washington

Stevedoring. He concluded that the controlling factor in that

case, as in Michelin Tire, is that local taxpayers should not be

(iv) In Limbach v. Hooven & Allison Co., 466 U.S.

353 (1984), the Court made clear that more than just a

few named decisions had been overruled by Michelin

Tire and Washington Stevedoring. Instead, in over-

ruling an earlier decision that had invalidated the

application of a “nondiscriminatory ad valorem per-

sonal property tax to imported fibers still in their

original packages” (id. at 354), the Court emphasized

that the reasoning that underlay those earlier de-

cisions had been “repudiated” (id. at 362). The fact

that the Court in Michelin Tire did not explicitly

name all of the cases whose reasoning had been re-

jected does not indicate that those older decisions

retain “current validity.” Jd. at 361.

f. Application of the Modern Doctrine to the

Export Clause. There is no reason why the more

recent decisions of this Court should not be auth-

oritative with respect to the Export Clause, and

every reason why they should be. As we have noted,

beginning with Brown v. Maryland and periodically

since then, the Court has stated that the two Clauses

have the same scope. Moreover, cases under the two

Clauses have been cited by the Court without

differentiation. Most recently, in Washington Steve-

doring, the Court cited Spalding (an Export Clause

case) along with cases involving state taxes and the

Import-Export Clause to illustrate reasoning that

was no longer approved. 435 U.S. at 752.

As this Court explained in Washington Steve-

doring, the Court in Michelin Tire “surveyed the

required to subsidize the services used and enjoyed by

importers and exporters; instead, the consumers of such goods

should pay for the services rendered by government just as

they paid transportation costs. 435 U.S. at 761-764.

history and purposes of the Import-Export Clause to

determine, for the first time, which taxes fell within

the absolute ban on ‘Imposts and Duties’” (435 U.S.

at 751). The Court concluded from this examination

that a generally applicable tax that merely falls, with-

out discrimination, on imports and exports as well

as other goods, does not violate the Import-Export

Clause. 423 U.S. at 302.

An examination of the history and objectives of the

Export Clause similarly demonstrates that the

generally applicable, nondiscriminatory tax imposed

by Section 4371 of the Internal Revenue Code does not

violate that Clause. As the court of appeals noted

(App., infra, 4a), the Export Clause reflected the fear

of the agricultural and exporting southern States

that the more populous and numerous northern

States would impose discriminatory taxes on the

export of their products. The debate is well described

in Charles Warren’s classic The Making of the

Constitution 570-574 (reprint 1993) (1928)." See also

” The central portion of Warren's description is as follows

(at 571-572) (footnote omitted):

The question of a prohibition of taxes and duties on exports

now brought these sectional differences into an outbreak in

the Convention.

It is to be noted, as a preliminary to consideration of

this clash, that the Committee’s proposal to forbid export

duties was a very radical departure from the theory and

practice theretofore prevailing in governmental taxation.

As has been well said: “To attempt to organize a Govern-

ment without the power to tax exports was an innovation.

From time immemorial, every nation had taxed whatever

productions of its soil its inhabitants might presume to

export. In the old economy, its maxim was to tax exports

but to admit imports free.” The prohibition of export duty

App., infra, 4a; Madison’s Notes of Debates in the

Federal Convention, reproduced in 2 M. Farrand,

The Records of the Federal Convention of 1787, at

305-308, 359-363, 441-442 (1966) (proceedings of August

16, 21, 28, 1787).

It is beyond question that the tax imposed by

Section 4371 is generally applicable and discriminates

against no region or product. It applies equally to

fire, storm, flood, and earthquake insurance, and to

insurance against damage or loss for shipments from,

for example, San Francisco to Alaska, Hawaii, or

Guam, or from New York to Miami or Galveston, as it

does to insurance covering IBM’s shipments to its

foreign subsidiaries or their customers. Moreover,

the United States—like the States—assists and

protects IBM’s shipments over highways within the

United States (financed in substantial part by the

federal government) as well as in the movement of

such goods by sea or air beyond our borders.

It must also be recognized that the Commerce

Clause gives Congress comprehensive authority over

exports and imports. It was established early that

Congress had the power to embargo or otherwise

control the export of such goods or materials as it

chose. Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 191-192

now inserted in the new Constitution was not based,

however, on any change in economic theory but on purely

political and sectional conditions. The South, being agri-

cultural and having three great crops which grew nowhere

else,—tobacco, rice, and indigo,—feared that the possession

of this power by Congress would enable the North to

discriminate against it, by a tax which would operate only

on the peculiarly Southern articles of export. This fear

had been expressed early in the Convention.

(1824); United States v. Marigold, 50 U.S. (9 How.)

560, 566-567 (1850); United States v. The William, 28

Fed. Cas. 614,620-623 (D. Mass. 1808) (No. 16,700). It

is, of course, well established that the taxing power

may be employed in the regulation of foreign com-

merce. Board of Trustees v. United States, 289 U.S.

48, 57, 58 (1933). The Export Clause removes only a

small and narrowly defined area from this far-ranging

authority.

Considering the origins of the Export Clause, and

this Court’s more recent decisions, the prohibitions

of that Clause should be confined to taxes directly

and exclusively assessed upon, and discriminating

against, “Articles exported.” The federal statute that

the court of appeals held unconstitutional in this case

does not violate that standard.

3. The statute that the court of appeals invalidated

cannot effectively be enforced without this Court’s

further review. Under the decision in this case, any

taxpayer who obtains foreign insurance for export

shipments may pay an assessment under Section 4371

and obtain a refund by bringing suit within the

Federal Circuit. See page 14, supra. Congress en-

acted the tax imposed by Section 4371 to raise “an

appreciable amount of revenue” and to “eliminate an

unwarranted competitive advantage” for foreign

insurers who do not pay federal income taxes. H.R.

Rep. No. 2333, supra, at 61. Absent review by this

Court, these statutory objectives will plainly be

defeated. And, as the court of appeals recognized

(App., infra, lla), it is uniquely the responsibility of

this Court to complete the task of eliminating in-

consistency in its own jurisprudence in this area.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted.

Drew S. Days, III

Solicitor General

LORETTA C. ARGRETT

Assistant Attorney General

LAWRENCE G. WALLACE

Deputy Solicitor General

KENT L. JONES

Assistant to the Solicitor General

GARY R. ALLEN

ERNEST J. BROWN

Attorneys

OCTOBER 1995

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

No. 94-5164

INTERNATIONAL BUSINESS MACHINES CORPORATION,

PLAINTIFF-APPELLEE

THE UNITED STATES, DEFENDANT-APPELLANT

Appealed from: U.S. Court of Federal Claims

DECIDED: July 10, 1995

Before: ARCHER, Chief Judge, PLAGER and BRYSON,

Circuit Judges.

BRYSON, Circuit Judge.

This case raises a question concerning the

constitutionality of a federal statute. The govern-

ment, as appellant, acknowledges that a 1915 Supreme

Court decision is directly on point and that, if the

decision is still good law, the statute at issue must be

held unconstitutional as applied. The government

argues, however, that the 1915 decision has been

undermined by subsequent Supreme Court authority,

and it asks us to regard that case as no longer

binding. We do not regard it as clear that the

(la)

Supreme Court’s more recent decisions have re-

pudiated the 1915 decision. We therefore affirm the

decision of the Court of Federal Claims invalidating

the taxes at issue in this case.

During the pertinent tax years, 1975 through 1984,

International Business Machines Corporation (IBM)

sold information processing systems and related

products to domestic and foreign customers. With

respect to many of its foreign sales, IBM manu-

factured products in the United States, sold them to

its foreign subsidiaries, and shipped them either

directly to the foreign customers or to consolidation

centers in the customers’ countries. The products

were shipped by common carrier from IBM’s domestic

manufacturing plants to domestic ports or airports,

where they were loaded onto ships or airplanes. Upon

arrival in the foreign country, the products were

cleared through customs and shipped to the foreign

customers or consolidation centers. Title to the

products passed from IBM to its foreign subsidiaries

when the goods cleared customs in the foreign

countries. In some cases, IBM’s foreign subsidiaries

purchased insurance from foreign insurers for the

products during their shipment; in those cases, both

IBM and the foreign subsidiaries were listed as

insured beneficiaries.

The Internal Revenue Service audited IBM’s

federal excise tax returns for 1975 through 1984 and

determined that, as a beneficiary, IBM was subject to

a four percent excise tax on the premiums paid to

foreign insurers. The excise tax was assessed under

the authority of 26 U.S.C. § 4371, which imposes a

four percent tax on each policy of casualty insurance

issued by a foreign insurer to a domestic entity for

risks or liabilities wholly or partly within the United

States. Section 4371 applies only to insurance ob-

tained from foreign insurers who are not subject to

federal income tax; it was designed to offset the

advantage that such insurers would otherwise have

over domestic insurance companies that are subject

to domestic income taxes. See H.R. Rep. No. 2333,

77th Cong., 2d Sess. 61 (1942).

IBM paid the assessed excise taxes and filed suit in

the Court of Federal Claims, seeking a full refund of

the taxes paid. In a thorough opinion on which we

rely, the Court of Federal Claims held that the excise

tax on premiums charged by foreign insurers, as

applied to casualty insurance on goods in the export

stream, was in effect a tax upon the exported products

themselves and thus ran afoul of the Export Clause of

the Constitution, Article I, Section 9, Clause 5.

International Business Machines Corp. v. United

States, 31 Fed. Cl. 500 (1994). In so holding, the court

relied on the Supreme Court’s decision in Thames &

Mersey Marine Insurance Co. v. United States, 237

U.S. 19 (1915), which struck down a similar tax on

marine insurance policies.

The Court of Federal Claims rejected the govern-

ment’s argument that the analysis in the Thames &

Mersey case has been repudiated in subsequent

Supreme Court decisions, and that the excise tax

imposed on foreign insurance policies should be

upheld as a permissible tax of general application that

does not discriminate against exports. Instead, the

court concluded that casualty insurance is an

integral part of commercial exportation, that the

value of exported goods bears a close relationship to

the value of insurance policies on those goods, and

that the tax imposed in this case therefore amounted

to a tax on exports, prohibited by the Export Clause.

This case presents the question whether the

Supreme Court analysis of the Export Clausé in the

Thames & Mersey case retains its vitality in the

wake of subsequent Supreme Court decisions

involving the Import-Export Clause, Article I,

Section 10, Clause 2, in which the Court has modified

its approach to issues arising under that Clause.

The Export Clause provides, in one sentence: “No

Tax or Duty shall be laid on Articles exported from

any State.” Along with the Import-Export Clause,

which prohibits any State, without the consent of

Congress, from laying “any Imposts or Duties on

Imports or Exports,” the Export Clause was “one of

the compromises which entered into and made

possible the adoption of the Constitution.” Fairbank

v. United States, 181 U.S. 283 (1901).

At the Constitutional Convention, strong senti-

ments were voiced on the subject of export taxes.

Representatives of the Southern States expressed

concern that a Congress controlled by the more

numerous and populous Northern States would

impose burdensome levies on Southern exports.

Charles Pinckney of South Carolina insisted that

security against taxes on exports be included in the

Constitution, on a par with security against the

emancipation of the slaves. 2 The Records of the

Federal Convention of 1787 95 (Max Farrand ed.

1927). According to Madison’s notes, George Mason

of Virginia likewise “urged the necessity of

connecting with the power of levying taxes duties &c,

... that no tax should be laid on exports. ... He hoped

the [Northern] States did not mean to deny the

Southern this security.” Jd. at 305. Concern over the

risk of abuse of the power to tax exports was

expressed even by a Northern delegate, Elbridge

Gerry of Massachusetts, who stated his view that

“the legislature could not be trusted with such a

power. It might ruin the Country. It might be

exercised partially, raising one and depressing

another part of it.” Jd. at 307.

Acknowledging the importance of the Export

Clause and its flat prohibitory language, the Supreme

Court has consistently given the Clause a broad

construction. In one of the first major decisions

applying the Export Clause, the Court struck down a

stamp tax imposed on bills of lading relating to goods

designated for foreign export. Such a tax, the Court

explained, “is in substance and effect equivalent to a

tax on the articles included in that bill of lading, and,

therefore, a tax or duty on exports, and in conflict

with the constitutional prohibition.” Fairbanks v.

United States, 181 U.S. at 312.

In applying that test, the Court distinguished

between taxes imposed on property prior to its

entering the export stream and taxes imposed,

directly or indirectly, on property during the export

process. For example, in Cornell v. Coyne, 192 U.S.

418 (1904), the Court upheld a tax on filled cheese that

was imposed prior to its exportation, holding that a

nondiscriminatory tax on manufactured cheese was

not unconstitutional simply because the manu-

facturer intended from the outset to export the

cheese. By contrast, in United States v. Hvoslef, 237

U.S. 1 (1915), the Court struck down a tax imposed on

charter parties for the carriage of cargo to foregin

ports. As applied to the charter parties for export at

issue in the case before it, the Court held that the tax

was “nothing else than a tax on exportation” and thus

prohibited by the Export Clause. /d. at 18. It did not

matter, the Court held, that the statute in question

was not limited to charter parties for exports, but

applied to charter parties generally; even if the

statute in question created a nondiscriminatory tax

or general application, it was unconstitutional to the

extent that it was applied to charter parties for

export, because in so doing, it had the prohibited

effect of imposing a tax on exports. /d.

Two weeks after Hvoslef, the Supreme Court in

the Thames & Mersey case struck down a stamp tax

on policies of marine insurance to the extent that it

applied to policies insuring exports. The Court put

the question as whether “the tax upon such policies

[is] so directly and closely related to the ‘process of

exporting’ that the tax is in substance a tax upon the

exportation and hence within the constitutional

prohibition.” 237 U.S. at 25. Finding that marine

insurance “is by virtue of the demands of commerce

an integral part of the exportation,” id. at 26, the

Court concluded that the tax at issue, as a practical

matter, fell upon the exporting process and therefore

was invlaid under the Export Clause.

The government concedes that if Thames &

Mersey is still good law, the assessments at issue in

this case are invalid. In the government’s view,

however, subsequent decisions construing the

Import-Export Clause have rendered Thames &

Mersey analytically unsound. The government con-

tends that the Export Clause should be interpreted

not to outlaw taxes of general application, as long as

they do not discriminate against exported goods or

services relating to exports. The government there-

fore invites this court to disregard the Supreme

Court’s contrary analysis of the Export Clause in

Thames & Mersey.

In pressing its case against Thames & Mersey, the

government relies particularly on two decisions

construing the Import-Export Clause, Michelin Tire

Corp. v. Wages, 423 U.S. 276 (1976), and Department

of Revenue v. Association of Washington Steve-

doring Companies, 435 U.S. 734 (1978). Prior to the

Michelin decision, the Supreme Court viewed the

Import-Export Clause as erecting a general pro-

hibition against state taxation of imports and exports.

The focus of inquiry was on whether the impact of the

tax fell on goods that were in foreign commerce; if it

did, the tax was forbidden (except in the limited

circumstances permitted by the Clause itself). See

Almy v. California, 65 U.S. (24 How.) 169 (1861); Low

v. Austin, 80 U.S. (13 Wall.) 29 (1872).

In the Michelin case, the Court jettisoned that

mode of analysis and adopted a new approach based on

the text and purposes of the Import-Export Clause.

Overruling its prior decision in Low v. Austin, the

Court held that a nondiscriminatory ad valorem

property tax does not run afould of the Import-Export

Clause simply because it is applied to goods that have

recently been imported. The Court noted that the

Import-Export Clause bans only “Imports or Duties”;

it “is not written in terms of a broad prohibition of

every ‘tax.’” Michelin, 423 U.S. at 290. Moreover,

the Court explained that the Framers adopted the

Import-Export Clause to ensure that the federal

government would speak with one voice in regulating

commerce with foreign nations, to preserve import

revenues for the federal government, and to protect

states without port facilities from exploitation by

those directly engaged in foreign commerce. None of

those concerns, the Court stated, is triggered by a

nondiscriminatory ad valorem tax “which is also

imposed on goods that are no longer in import

transit.” 423 U.S. at 286.

The Supreme Court used similar reasoning to

reach a similar result two years later in the

Washington Stevedoring case. In that case, which

involved an Import-Export Clause challenge to a state

tax on stevedoring services, the Court rejected an

argument that the tax was impermissible when

applied to stevedoring services relating to foreign

imports and exports. A nondiscriminatory tax on

stevedoring services was not an “import or duty” on

imports or exports, the Court concluded, but simply a

local tax on services that happened to facilitate the

importation and exportation of goods.

Relying on Michelin and Washington Steve-

doring, the government argues that Section 4371

should be upheld as a nondiscriminatory tax that does

not specifically target exports and therefore is not an

invalid “tax or duty” laid “on articles exported from

any State.” Although Michelin and Washington

Stevedoring arose under the Import-Export Clause,

rather than the Export Clause, the government

argues that the Supreme Court is likely to follow a

similar analysis under the Export Clause when the

occasion arises.

The government finds additional support for its

position in cases decided under the Commerce Clause.

As under the Import-Export Clause, early Commerce

Clause cases struck down even nondiscriminatory

taxes on the privilege of doing business in a state

when applied to an activity that was part of interstate

commerce. See, e.g., Spector Motor Service v.

O'Connor, 340 U.S. 602 (1951); Robbins v. Shelby

County Taxing Dist., 120 U.S. 489 (1987). That line

of cases, however, was overturned in Complete Auto

Transit, Inc. v. Brady, 430 U.S. 274 (1977), in which

the Court held that the Commerce Clause is not

violated by the application of a fairly apportioned and

nondiscriminatory tax on the privilege of doing

business in a state, even if the tax is applied to an

interstate activity.

The government points out that in Hvoslef (and by

extension in Thames & Mersey, which relied on

Hvoslef) the Court invoked the line of Commerce

Clause authority that was disapproved in Complete

Auto. The government also points out that the

Court’s analysis of the Export Clause in Thames

& Mersey paralleled the Court’s then-governing

approach to the Import-Export Clause, which has

also been disapproved. Accordingly, the government

submits, the analytical foundations of Thames &

Mersey have been removed, and its demise is a

foregone conclusion.

We are not so sure. While the Supreme Court may

at some point reconsider Thames & Mersey, it has

not clearly signaled that it is ready to do so. Support

for the continuing vitality of Thames & Mersey can

be found both in the Court’s Import-Export Clause

decisions and in the distinctions in language and

policy betewen the Import-Export Clause and the

Export Clause.

In Canton Railroad Co. v. Rogan, 340 U.S. 511

(1951), a predecessor of the Washington Stevedoring

case, the Supreme Court upheld state taxes on

transportation services as applied to goods being

imported or exported. The Court was careful to

distinguish Thames & Mersey, noting that the tax on

marine insurance policies addressed in Thames &

Mersey was “the equivalent of a direct tax on the

articles.” 340 U.S. at 513-14. And in Washington

Stevedoring, the Court recognized that the tax on

insurance policies in Thames & Mersey was on an

“activity so connected with the goods that the levy

amounted to a tax on the goods themselves.” 435 U.S.

at 756.21. Although the Washington Stevedoring

Court acknowledged that “the basis for distin-

guishing Thames & Mersey is less clear” than for

other similar cases (because marine insurance

policies arguably have a value apart from the value of

the insured goods), the Court noneless noted that

“the value of goods bears a much closer relation to

the value of insurance policies on them than to the

value of loading and unloading ships.” Jd. Thus,

while the Court’s treatment of Thames & Mersey

may reflect less than a ringing endorsement of that

decision, the Court’s characterization of Thames &

Mersey as distinguishable from, rather than in

tension with, the Canton Railroad and Washington

Stevedoring cases significantly undermines the

government’s contention that Thames & Mersey

must be regarded as a dead letter.

The Supreme Court has also pointed to the

difference in language between the Import-Export

Clause and the Export Clause. Although the Court at

10a

first expressed the view that the “diversity in

language” between the two clauses did not reflect any

difference in “the act which is prohibited,” Brown v.

Maryland, 25 U.S. (12 Wheat.) 419, 425 (1827), in

both Michelin and Washington Stevedoring the

Court has noted and attached significance to the

difference between the narrow term “Imposts and

Duties” (the language of the Import-Export Clause)

and the broader term “Tax” (the language of the

Export Clause). See Michelin, 423 U.S. at 290;

Washington Stevedoring, 435 U.S. at 759.

The Court has suggested that a difference in policy

underlies the difference in language. While the

Import-Export Clause was intended to prohibit States

from imposing a “transit fee” on goods moving in

foreign commerce, Washington Stevedoring, 435

U.S. at 764 (Powell, J., concurring in part and

concurring in the result), the Export Clause served

the broader purpose of “forbid|ding] federal taxation

of exports.” Washington Stevedoring, 435 U.S. at

758. The Supreme Court’s current narrower view of

the prohibition in the Import-Export Clause thus

does not dictate that the Export Clause be given a

similarly narrow construction.

Urging us to anticipate the overruling of Thames

& Mersey, able counsel for appellant has called our

attention to the opinion of Judge Learned Hand,

dissenting in Spector Motor Service, Inc. v. Walsh,

139 F.2d 809, 823 (2d Cir. 1943). In his opinion in that

case, Judge Hand explained that a lower court should

not feel obliged to follow a higher court decision “in

the face of changes plainly foreshadowed,” simply

because the higher court decision has not yet been

explicitly overruled. While that proposition may be

sound in extreme cases, we do not agree with counsel

that it applies to this case. Here, unlike in the case

Judge Hand put, we do not believe the change the

government anticipates is “plainly foreshadowed.”

Although the Supreme Court may yet reconsider

the Thames & Mersey decision, and with it the

Court’s traditional analysis of the Export Clause, we

do not feel free in this case to take the extraordinary

step of disregarding a higher court decision that all

agree is binding precedent if it is still valid. Thus,

the precedent that seems to us most pertinent is

not Judge Hand’s dissent in the Spector Motor case,

but the Supreme Court’s own more recent directive

to inferior courts, in Rodriguez de Quijas Vv.

Shearson/American Express, Inc., 490 U.S. 477, 484

(1989):

If a precedent of this Court has direct application

in a case, yet appears to rest on reasons rejected

in some other line of decisions, the Court of

Appeals should follow the case which directly

controls, leaving to this Court the prerogative of

overruling its own decisions.

In light of that instruction, and the undisputed

applicability of Thames & Mersey to the tax imposed

in this case, we conclude that our duty is to follow

Thames & Mersey and hold Section 4371 invlaid as

applied.

AFFIRMED.

12a

APPENDIX B

IN THE UNITED STATES COURT

OF FEDERAL CLAIMS

No. 388-89T

(Filed: June 23, 1994)

INTERNATIONAL BUSINESS MACHINES CORPORATION,

PLAINTIFF

Vv.

THE UNITED STATES, DEFENDANT

Taxation: Excise Tax on Foreign Insurers;

Export Clause (Art. I, § 9, el. 5)

OPINION

Lypon, Senior Judge:

In this litigation, International Business

Machines Corporation (IBM) seeks to recover de-

ficiencies assessed by the Internal Revenue Service

after the Service determined that IBM failed to pay a

four percent excise tax on premiums paid to foreign

insurers that issued policies covering products IBM

sold to its foreign subsidiaries. No facts are in

dispute, and each party has moved for summary

judgment. The issue presented in the summary

judgment motions is whether the excise tax on

foreign insurance premiums violates the con-

stitutional prohibition against taxing exports. Be-

cause the court agrees with IBM that the tax at issue

l3a

in this case is prohibited by the Constitution, the

court grants summary judgment in favor of IBM.

Sal - IBM Prod Outside the United Stat

The following facts have been stipulated by the

parties or are otherwise undisputed. IBM is a do-

mestic corporation incorporated under the laws of the

State of New York, whose principal place of business

is in Armonk, New York. IBM is a developer and

manufacturer of sophisticated information processing

systems and related products, sold throughout the

world. During the tax years at issue in this case,

1975-84, sales of IBM products outside the United

States were made through a worldwide network

of more than one hundred wholly owned foreign

subsidiary corporations. IBM products sold by for-

eign subsidiaries were manufactured either in their

own overseas plants (or in the plants of other IBM

foreign subsidiaries) or by IBM at manufacturing

plants in the United States.

During the tax years in issue, IBM products

manufactured in the United States and sold outside

the United States through foreign subsidiaries

included (but were not limited to) the following items,

manufactured at the locations indicated:

Locations:

Mainframe computers Poughkeepsie, NY

Tape drivers,

large printers,

magnetic tape Tucson, AZ

Dise drives San Jose, CA

Copiers, toner, supplies Boulder, CO

Intermediate computers Rochester, MN,

Austin, TX

l4a

Personal computers,

keyboards Austin, TX, Boca

Raton, FL

Point of sale banking

machines, circuit cards Charlotte, NC

Communication devices,

cathode ray terminals Raleigh, NC

Semiconductors Manassas, VA, East

Peekskill, NY,

Burlington, NY

Large circuit boards,

specialized intermediate

computers Endicott, NY

Sales outside the United States of IBM products

manufactured within the United States were ac-

complished by a purchase order to IBM from its

foreign subsidiary, under which IBM billed the

subsidiary and generally shipped the goods directly to

the subsidiary’s customer. Lower priced goods might

be shipped to a consolidation center in the foreign

country, and maintained as inventory by the foreign

subsidiary to fill future orders. Depending upon the

particular product, IBM would fill a subsidiary’s

order either by (1) building the product to particular

specifications contained in a purchase order (“built

to order”), or (2) utilizing ongoing production at a

factory or inventory warehouse (“built to plan”).

Shipment of products from the United States to

the foreign customer began by truck on a common

carrier (from the manufacturing plant or warehouse).

The goods generally were destined for a United

States airport (typically, John F. Kennedy in New

York for shipments to Europe and the Middle East,

Miami International for shipments to Latin America,

and San Francisco International for shipments to the

15a

Far East), but some shipments were by sea. While

traveling within the United States, the products

would typically be unloaded at one or more inter-

mediate freight forwarder locations, where they

would typically remain for two to five days, but could

remain while awaiting space on an airliner for as long

as thirty days. The products would be reloaded at the

freight forwarders’ facilities and continue ultimately

to the point of embarkation, where they were loaded

onto an airplane or a ship. Once the products reached

the air or sea port in the foreign country, they were

unloaded, cleared customs, and loaded on trucks for

shipment to their final destination.

When foreign subsidiaries purchased IBM

products from IBM during the years in issue, the

terms of sale called for title to the products (and the

risk of loss) to pass from IBM to the subsidiary when

the goods cleared customs in the foreign country.

The terms of sale also called for the purchasing

subsidiary to bear the cost of insuring the products

against damage or destruction during shipment.

seepaiee Samatne Se Sepa. £6 Ses Feasts Foreign Subsidiari

All U.S.-manufactured products IBM sold to

foreign subsidiaries were covered by casualty

insurance against damage or destruction during

shipment. Insurance was “point to point,” that is, it

covered the risk of loss to goods during trans-

portation by surface or air transportation from the

IBM facility in the United States until delivered to

the foreign customer or a foreign consolidation

center. In some cases, IBM arranged for the

insurance; when it did so, insurance was placed with a

U.S. insurance carrier, and the cost was billed to the

foreign subsidiary. In other instances, the foreign

subsidiary placed the insurance; when it did so, the

insurance often was with a foreign carrier, which the

subsidiary paid for directly. In all cases, both IBM

16a

and its foreign subsidiary were listed as insured

beneficiaries.

When a foreign subsidiary obtained its own

insurance coverage with a foreign insurer, the policy

covered not only shipments to it by IBM from the

United States, but shipments of goods purchased

from foreign affiliates in other countries as well. The

insurer would charge a separate premium to cover

each shipment, the amount of which was determined

by multiplying the declared value of the particular

shipment by the premium rate applicable to that

shipment. The premium rate depended on such

underwriting factors as the place of origin and

destination of the goods, the type of goods involved

and how they were packaged, the time and distance of

the trip, the route and mode of transportation, and the

amount of material handling expected during the trip.

If damage to an IBM product being shipped to

a foreign country occurred while IBM had title to

the goods (and the risk of loss), then IBM would

be entitled to the insurance proceeds under the

insurance policy (whether issued by a U.S. company

or a foreign insurer). If the loss occurred, however,

after the importing foreign subsidiary acquired title

to the products, the insurance proceeds would be

payable to the subsidiary. In the latter case, the

subsidiary would use the proceeds to pay IBM the full

purchase price of the damaged products, or to

reimburse itself for the purchase price if IBM had

already been paid. Since most IBM products shipped

to foreign subsidiaries were packaged in containers,

damage was frequently not discovered until after the

products arrived at their destination. As a practical

matter, it was often impossible to determine when a

loss occurred and therefore who was legally entitled

to receive the policy proceeds. In most cases

involving foreign insurance carriers, therefore, the

insurance company simply paid the insurance

17a

proceeds to the foreign subsidiary which used the

proceeds to pay IBM for the goods.

The Service’s Position During the Audit

For the tax periods at issue in this litigation, each

quarter during the years 1975 through 1984, IBM

filed federal excise returns that did not report any

liability under § 4371 of the Internal Revenue Code of

1954, a four percent excise tax on premiums paid for

certain policies of insurance issued by foreign

insurers. On audit, the Service determined that IBM

was liable for the § 4371 tax as a result of the policies

purchased from foreign insurance companies insofar

as those policies applied to IBM products being

exported from the United States.

As part of the audit process, IBM requested the

Service’s District Director to seek technical advice

from the Service’s National Office on whether the

§ 4371 tax as applied to IBM’s exports was in violation

of Article I, § 9, clause 5 of the United States Consti-

tution, which will be referred to throughout this

opinion as the Export Clause. In a Technical Advice

Memorandum dated May 12, 1982, the National Office

rejected IBM’s constitutional argument on the

grounds that the § 4371 tax was not a “tax” within the

meaning of the Export Clause because the primary

object of the tax statute was regulatory as opposed to

revenue-raising.

On reconsideration, the Service issued a second

Technical Advice Memorandum, dated November 6,

1984, reaffirming its earlier position and adding a

second argument, that the Export Clause did not

restrict application of the § 4371 tax because the

incurred risks included some transportation within

the United States. The Service found that the

Export Clause had no application at all to an export

voyage if some portion of the total voyage included an

intra-U.S. transportation leg. Because the insurance

policies in question here covered not just the

18a

overseas portion of the export shipments but also the

inland leg from the IBM manufacturing facilities to

the U.S. air or sea port, the Service concluded that

the Export Clause had no application to any of the

shipments. Presently, the government is not relying

on the positions advanced by the Service described

above.

The Assessments

The Service determined that the premiums paid to

foreign insurers with respect to U.S. manufactured

IBM products sold to its foreign subsidiaries were

subject to the tax imposed by § 4371. During the

audit, IBM sent questionnaires to its foreign sub-

sidiaries and determined that the premiums paid by

them to foreign insurers during the year 1980,

allocable to U.S.-manufactured IBM products sold

outside the United States, totaled $2,065,137. For

expediency in making assessments under § 4371, IBM

and the Service agreed that the foreign insurance

premiums attributable to such products in each of the

years 1975-79 and 1981-84 were the same as the

premiums paid in 1980. Accordingly, the Service

assessed § 4371 taxes of $82,605 per year (a figure

calculated by multiplying the annual premiums by

four percent), along with interest and delinquency

penalties for each quarter in issue. IBM paid its

assessments in full, and timely filed claims for

refund. The Service denied these claims on

December 23, 1988. IBM timely filed its action in this

court on July 11, 1989. Since then, the government

has since abated the penalty assessments and

refunded the amounts so assessed to IBM, with

interest. The assessments for tax and interest,

which are still in dispute, total $1,532,235.87.

19a

The P Moti

The sole question presented by the motions for

summary judgment is whether § 4371 is constitu-

tionally impermissible, given the facts agreed to by

the parties. Article I, section 9, clause 5 of the

United States Constitution, the Export Clause,

provides: “No Tax or Duty shall be laid on Articles

exported from any State.” This provision was in-

tended to free all exportations from the burdens of

national taxation.

Section 4371 provides:

There is hereby imposed, on each policy of

insurance, indemnity bond, annuity contract, or

policy of reinsurance issued by a foreign insurer

or reinsurer, a tax at the following rates:

(1) Casualty insurance and indemnity bonds.—4

cents on each dollar, or fractional part thereof, of

the premium paid on the policy of casualty

insurance or the indemnity bond, if issued to or

for, or in the name of, an insured as defined in

section 4372(d);

The parties appear to agree that as the terms

“foreign insurer,” “policy of casualty insurance,” and

“insured” are defined in § 4372, the premiums on

casualty insurance that IBM purchased are facially

subject to the tax imposed by § 4371.

A. IBM’s Argument

IBM directs the court’s attention to Thames &

Mersey Marine Insurance, Co. v. United States, 237

U.S. 19, 35 S.Ct. 496, 59 L.Ed. 821 (1915), cited for the

holding that the Export Clause prohibits the levying

of taxes on policies of marine insurance on exports.

20a

In Thames & Mersey, the taxpayer sought to recover

amounts it paid in stamp taxes on policies insuring

exports against marine risks. In its analysis, the

Court turned quickly to United States v. Hvoslef, 237

U.S. 1, 35 S.Ct. 459, 59 L.Ed. 813 (1915), a case decided

two weeks before Thames & Mersey. In Hvoslef, the

Court invalidated a tax levied on charter parties

which were exclusively for the carriage of cargo from

state ports to foreign ports because the tax was

essentially a tax on exports. The Thames & Mersey

court said that its issue followed directly, for the

question presented by both Hvoslef and Thames &

Mersey was: “Is the tax upon such policies so directly

and closely related to the ‘process of exporting’ that

the tax is in substance a tax upon the exportation and

hence within the constitutional prohibition?” Thames

& Mersey, 237 U.S. at 25, 35 S.Ct. at 498. Put another

way by the Court, the constitutionality of this tax

depended on “whether policies of insurance against

marine risks during the voyage to foreign ports are

not so vitally connected with exporting that the tax

on such policies is essentially a tax upon the

exportation itself.” Jd. at 26, 35 S.Ct. at 498. An-

swering this question by examining “the exigencies

of trade [to] determine what is essential to the

process of exporting,” the Court held that marine

insurance policies are so vitally connected to the

export process that a tax on the policies amounts to a

tax on the exports themselves, in contravention of the

Export Clause. Cf. Fairbank v. United States, 181

U.S. 283, 21 S.Ct. 648, 45 L.Ed. 862 (1901) (stamp tax

on bill of lading for exported goods is in effect a tax on

the articles included in the bill of lading, and is.

therefore a tax on exports).

The second prong of IBM’s contention is that as

far as certain taxes are proscribed by the Export

Clause of the Constitution, § 4371 is such a tax. IBM

states that the predecessor of § 4371 was a stamp tax

enacted as part of a comprehensive wartime revenue

2la

bill, the Revenue Act of 1918. Ch. 18, § 1107, 40 Stat.

1057, 1138. The excise tax on foreign insurers was

re-enacted as part of a World War II revenue bill, the

Revenue Act of 1942. Ch. 619, § 502, 56 Stat. 798, 955.

A House report discussing this revenue measure,

cited by (BM. stated: “It is believed that the revised

provision will yield an appreciable amount of revenue,

and at the same time eliminate an unwarranted

competitive advantage now favoring foreign insurers

[who are not subject to income tax].” H.R.Rep. No.

2333, 77th Cong., 2d Sess. 61 (1942).

Finally, IBM argues that export protection begins

as soon as goods enter the “export stream,” and

accordingly the prohibition against taxation that

burdens exports extends to the payment of taxes on

premiums by IBM in this case. The “export stream”

is the final, continuous journey out of the country,

and tax immunity attaches as soon as the journey

begins. Dep't of Revenue v. Ass'n of Washington

Stevedoring Cos., 435 U.S. 734, 752, 98 S.Ct. 1388,

1400, 55 L.Ed2d 682 (1978). Referring again to

Thames & Mersey, IBM argues that the payment of

these taxes is so directly and closely related to the

process of exporting that the tax is in substance a

tax upon the exportation, and thus constitutionally

prohibited. Section 4371, argues IBM, falls outside

the spirit of the Supreme Court’s thoughts in

Fairban’ v. United States, 181 U.S. 283, 21 S.Ct. 648,

45 L.Ed. 862 (1901). There, the court stated:

[T]he purpose of the restriction is that

exportation, all exportation, shall be free from

national burden... . [I]t is clear that the

framers of the Constitution intended not

merely that exports should not be made a

source of revenue to the National Government,

but that the National Government should put

nothing in the way of burden upon such

exports.

Id. at 292-93, 21 S.Ct. at 652.

22a

B. The Government’s Argument

As mentioned previously, the government is not

presently ee eae positions defended by the

Service’s National that it took on § 4371 during

the audit process, namely, that § 4371 does not impose

a tax that has any constitutional ramifications

because its wy ae is regulatory instead of

revenue-raising, that Thames & Mersey is

distinguishable because these shipments were not

pure exportation in that they included an inland leg

from a plant inside the United States to a port.

In its cross-motion, the government does not

disagree with the admonition in Fairbank that ex-

ports cannot be burdened by taxation that interferes

with the export process. Where IBM goes astray,

the government, is in its argument that

Thames & Mersey controls this case. The govern-

ment says that Txwames & Mersey is silent on the

question of whether the excise tax imposed by § 4371

targeted exports in a discriminatory fashion or

whether the tax was facially neutral in this regard.

The thrust of the government’s motion for summary

judgment is that Thames & Mersey has been

superseded by Supreme Court decisions that have

shifted the critical “Export Clause” question to

whether a tax discriminates against exports in their

capacity as exports.

The government’s argument is premised on its

interpretation of two related Supreme Court de-

cisions. In Michelin Tire Corp. v. Wages, 423 U.S.

276, 96 S.Ct. 535, 46 L.Ed.2d 495 (1976), the State of

Georgia assessed ad valorem property taxes against

Michelin’s inventory of imported tires and tubes.

Michelin argued that the ad valorem tax was

prohibited by the “Import-Export Clause” of the

Constitution, Article I, § 10, clause 2, which provides:

“No State shall, without the Consent of the Con-

gress, lay any Imposts or Duties on Imports and

Exports, except what may be absolutely necessary for

23a

executing its own inspection Laws... .” The Court

rejected Michelin’s proposition, stating: “Nothing in

the history of the Import-Export Clause even re-

motely suggests that a nondiscriminatory ad valorem

property which is also imposed on imported goods

that are no longer in transit was the type of exaction

that was regarded as objectionable by the Framers of

the Constitution.” /d. at 286, 96 S.Ct. at 541.

Critical to the Court’s holding in Michelin was

its discussion of Low v. Austin, 80 U.S. (13 Wall.) 29,

20 L.Ed. 517 (1872). The Court characterized Low as

“the leading decision of this Court holding that the

States are prohibited by the Import-Export Clause

from imposing a nondiscriminatory ad valorem

property tax on imported goods until they lose their

character as imports and become incorporated into

the mass of property in the State.” Michelin, 423

U.S. at 282, 96 S.Ct. at 539. Low, the Court con-

tinued, improperly expanded the prohibition of the

Import- Export Clause, rejecting the more reasoned

views expressed by Justice Marshall in Brown v.

Maryland, 25 U.S. (12 Wheat.) 419, 6 L.Ed. 678 (1827),

and Justice Taney in the License Cases, 46 U.S. (5

How.) 504, 12 L.Ed. 256 (1847), that an examination

of the origins of the Clause “makes crystal clear

that the prohibition applied only to state exactions

upon imports as imports and did not apply to

nondiscriminatory ad valorem property taxes.”

Michelin, 423 U.S. at 300, 96 S.Ct. at 547. Accord-

ingly, the Court found that Low was wrongly decided

and explicitly overruled it. Jd. at 301, 96 S.Ct. at 548.

What in Michelin the Supreme Court said about

the taxation of imports qua imports, it extended to

the taxation of exports qua exports in Washington

Stevedoring. There, the Court resumed a discus-

sion it began in Michelin. The Court noted that

“Michelin initiated a different approach to Import-

Export Clause cases. It ignored the simple question

whether the tires and tubes were imports. Instead, it

24a

analyzed the nature of the tax to determine whether

it was an ‘Impost or Duty.’” Washington Steve-

doring, 435 U.S. at 752, 98 S.Ct. at 1400. The import

tax in Michelin was upheld because it did not offend

the three main concerns of the Framers of the

Import-Export Clause: the government speaking

with one voice when regulating commercial relations

with foreign governments; preventing federal sources

of import revenues from being diverted to the states;

and preventing states from levying taxes on citizens

of other states by taxing goods merely flowing

through their ports to other states.

Although the Court in Washington Stevedoring

recognized that there were some formal factual

distinctions between it and Michelin, it extended the

Michelin “three concerns” analysis to taxation

involving exports. The Court pointed out that an

export tax need only be measured against the first

and third concerns: the export-tax ban of the Import-

Export Clause does not serve the second concern,

protection of federal revenues, because that objective

is satisfied by the Export Clause of Article I, § 9. In

sum, the Court decided that an export tax should be

tested for its conformance with the first and third

policies of the Import-Export Clause, and if the

constitutional interests are not disturbed, the tax

should not be considered an “Impost or Duty” pro-

hibited by the Constitutional ban.

Among the distinctions drawn by the Washington

Stevedoring Court between its facts and those

in Michelin was that in Michelin the tax fell on

the goods themselves, whereas in Washington

Stevedoring the tax fell on stevedoring, the business

of loading and unloading ships. The Court noted that

a tax on stevedoring does not relate to the value of the

goods being transported, and therefore cannot be

considered a tax on the goods themselves. /d. at 757,

98 S.Ct. at 1402. To reach this conclusion, Washing-

ton Stevedoring turned briefly to Canton Railroad

25a

Co. v. Rogan, 340 U.S. 511, 71 S.Ct. 447, 95 L.Ed. 488

(1951), in which the Court upheld a gross-receipts tax

on a railroad that engaged in a variety of services

relating to importing and exporting on the grounds

that the immunity of services incidental to exporting

and exporting was not as broad as the immunity of the

goods themselves, a distinction described in Canton

Railroad that found favor in Washington Steve-

doring.

Of course, no bright-line test for distinguishing

between goods and related services emerged from

Canton Railroad, but as the Court in Washington

Stevedoring noted, Canton Railroad did distinguish

the tax it upheld from other taxes which the Court

had previously invalidated. Among the cases distin-

guished was Thames & Mersey. In the words of the

Washington Stevedoring Court:

In [the cases in which the Court had previously

struck down taxes,] the State had taxed either

the goods or activity so connected with the

goods that the levy amounted to a tax on the

goods themselves. ... [T]he stamp tax on bills

of lading in Fairbank effectively taxed the

goods because the bills represented the goods.

- The basis for distinguishing Thames &

Mersey is less clear because there the tax fell

upon marine insurance policies. Arguably, the

policies had a value apart from the value of the

goods. In distinguishing that case from the

taxation of stevedoring activities, however, one

might note that the value of goods bears a

much closer relation to the value of insurance

policies on them than to the value of loading

and unloading ships.

Washington Stevedoring, 435 U.S. at 756 n. 21, 98

S.Ct. at 1402 n. 21.

In its motion, the government suggests that a

reading of Washington Stevedoring and the cases

26a

leading up to it indicates that there has been a

fundamental revision in the way the Supreme Court

approaches cases that invoke both the Import-Export

Clause and the Export Clause. It argues that there is

no meaningful difference between a tax on the

proceeds of stevedoring services and a tax on

premiums paid for policies of casualty insurance, a

transaction the government describes as _ being

incidental to the process of exporting. Taking its cue

from Michelin, the government says that as ap-

plied to IBM in this case the § 4371 tax is “non-

discriminatory” because it doesn’t “discriminate”

against exports, i.e., the tax doesn’t target exports as

exports but instead is a generally applicable tax on

insurance policies written by foreign insurers that

applies regardless of whether the insured goods are

in the export stream, and because the tax as such is

“non-discriminatory” it does not run afoul of the

Export Clause.

Having carefully considered the parties’ briefs and

the cases relied on therein, the court cannot agree

with the government that Michelin and Washington

Stevedoring control the facts of this case. Plainly

enough, the parties agree that § 4371 imposes a “tax,”

as that term is generally used and understood. And,

the court agrees with IBM that the tax imposed by

§ 4371 is a tax that amounts to a tax on exports. That

the imposition of an excise tax on insurance that

must be purchased to secure against the risks

amounts to a tax on the goods themselves was

recognized years ago by the Supreme Court, which

wrote that “[iJt cannot be doubted that insurance

during the voyage is by virtue of the demands of

commerce an integral part of the exportation; the

business of the world is conducted upon this basis.”

Thames & Mersey, 237 U.S. at 26, 35 S.Ct. at 498.

27a

Thus, because the § 4371 tax is essentially a

burden on the exportation process under the rule of

Thames & Mersey, to avoid application of the rule and

prevail on its motion the government must dem-

onstrate either that Thames & Mersey has been

explicitly overruled, or if it has not been, that later

precedent more properly controls. The court does not

think that the government has successfully demon-

strated either of these propositions.

The government argues that Thames & Mersey

has been overruled because Washington Stevedoring

overruled its decisions in Puget Sound Stevedoring

Co. v. State Tax Comm’n, 302 U.S. 90, 58 S.Ct. 72, 82

L.Ed. 68 (1937) and Joseph v. Carter & Weekes

Stevedoring Co., 330 U.S. 422, 67 S.Ct. 815, 91 L.Ed.

993 (1947), two cases in which the Court invalidated

state taxes on the proceeds from stevedoring

interstate and international cargoes because they

violated the Import-Export Clause. A partial dissent

and partial concurrence in Carter & Weekes held that

the Import-Export Clause prevented the stevedoring

tax from applying to cargoes to and from foreign

ports, invoking Thames and Mersey as grounds for

its conclusions regarding exports. The government

maintains that because Washington Stevedoring

overruled Carter & Weekes, then Thames & Mersey

must also have been overruled.

The court rejects this argument. Carter &

Weekes was explicitly overruled in Washington

Stevedoring. The Court in Michelin wrote many

pages to explain in detail why it was overruling the

long-standing rule of Low v. Austin. Washington

Stevedoring does specifically overrule two cases and

endorses a new way of examining cases that involve

the Import-Export Clause, but the court does not read

Washington Stevedoring as stating that the Court

has abandoned the rule it expanded in Thames &

Mersey in an analysis of the Export Clause. The

court must adhere to the accepted practice of

28a

following Supreme Court precedent unless the

Supreme Court clearly states that it is overrul-

ing earlier cases and explains why it is doing

so. Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477, 484, 109 S.Ct. 1917, 1921,

104 L.Ed.2d 526 (1989) (“If a precedent of this Court

has direct application in a case, yet appears to rest on

reasons rejected in some other line of decisions, the

Court of Appeals should follow the case which

directly controls, leaving to this Court the pre-

rogative of overruling its own decisions.”) Washing-

ton Stevedoring overruled two prior decisions that

relied on the Import-Export Clause to invalidate

taxes on stevedoring. In the absence of explicit

instruction from the Supreme Court that its long-

standing approach to evaluating challenges under the

Export Clause should be disregarded, the court

declines to presume that such an instruction has been

implicitly given.

Furthermore, the court is not inclined to read

Washington Stevedoring as overruling Thames «&

Mersey when the Court in Washington Stevedoring

cites Thames & Mersey as a precedential case that in

the present context had to be distinguished. In its

discussion of Canton Railroad, the Court in Wash-

ington Stevedoring drew parallels to that earlier

case, noting that:

[tjaxation in neither [stevedoring nor railroad

services] relates to the value of goods, and

therefore in neither can it be considered taxation

on the goods themselves. The force of Canton R.

Co. therefore prompts the conclusion that the

Michelin policy analysis should not be discarded

merely because the goods are in transit, at least

where the taxation falls upon a service distinct

from the goods and their value.

29a

Washington Stevedoring, 435 U.S. at 757, 98 S.Ct. at

1403. Clearly, the Court no longer considers a tax

on stevedoring to be a tax on exports because

stevedoring is a service whose value is not nec-

essarily tied to the value of the goods it serves. In

that same discussion, however, the Court distin-

guished a tax on stevedoring from the tax on the

marine insurance policies invalidated in Thames &

Mersey, stating that “the value of goods bears a much

closer relation to the value of insurance policies on

them than to the value of loading and unloading

ships.” Jd. at 756 n. 21, 98 S.Ct. at 1402 n. 21.

Thus, even if the government is correct in its

assertion that all taxes that involve exports, whether

considered in light of the Export Clause or the

Import-Export Clause, should be examined to see if

they discriminate against exports qua exports, it

appears that in the Court’s view a tax such as that

imposed by § 4371 could indeed be considered a tax on

exports in their capacity as exports. The present

case is distinguishable from Michelin and Washing-

ton Stevedoring: in Michelin the tires had left the

import stream and were held to be beyond the import

stream and thus outside the scope of the Import-

Export Clause, and in Washington Stevedoring the

Court said that the Import-Export Clause was not

violated because stevedoring bore no significant

relationship to the goods transported. In the present

case, the casualty insurance policies were at all times

within the export stream and were significantly

related to the exportation process. Whether the

§ 4371 tax would be impermissible even without the

support of Thames & Mersey is, we realize, not stated

dispositively by the Court, but there is nothing in

Washington Stevedoring that indicates that Thames

& Mersey and the connection drawn in that case

between insurance policies and the value of goods

have been banished into irrelevance.

30a

For the reasons discussed above, the court finds

that the § 4371 tax imposed on IBM violates the terms

of the Export Clause. Plaintiff’s motion for summary

judgment is granted, and defendant’s motion for

summary judgment is denied. The parties are

directed to confer and agree on the judgment award

that should be entered in favor of the plaintiff. The

parties shall advise the court in this regard within

thirty days.

/s/

THOMAS J. LYDON

Senior Judge

3la

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

No. 94-5164

INTERNATIONAL BUSINESS MACHINES CORPORATION,

PLAINTIFF-APPELLEE

Vv.

THE UNITED STATES, DEFENDANT-APPELLANT

JUDGMENT

ON APPEAL from the United States Court of

Federal Claims

in CASE NO(S). 388-89T

This CAUSE having been heard and considered, it

is ORDERED and ADJUDGED:

AFFIRMED

ENTERED BY ORDER OF THE COURT

DATED: July 10,1995 /s/ Francis X. Gindhart

FRANCIS X. GINDHART

Clerk

ISSUED AS A MANDATE: August 31, 1995

32a

APPENDIX D

IN THE UNITED STATES

COURT OF FEDERAL CLAIMS

No. 388-89T

INTERNATIONAL BUSINESS MACHINES CORPORATION

THE UNITED STATES

[Filed Aug. 31, 1994]

AMENDED JUDGMENT

Pursuant to the court’s opinion of July 28, 1994,

granting plaintiff’s motion for summary judgment,

IT IS ORDERED AND ADJUDGED this date,

pursuant to Rule 58, that plaintiff recover of and from

the United States the sum of $1,532,235.87 which

covers the assessed taxes and interest, covering tax

years 1975-1984 in the manner set forth in the

attached exhibit which is incorporated and made part

of the judgment herein, plus statutory interest on

such assessed taxes and interest as provided by law.

No costs.

David A. Lampen

Clerk of Court

August 31, 1994 By: /s/ Jack L. Wilson

Deputy Clerk

NOTE: As to appeal, 60 days from this date, see

RCFC 72, re number of copies listing of all plaintiffs.

Filing fee is $105.00.

33a

JOINT EXHIBIT 1—ASSESSED TAXES AND INTEREST

Tax Period

Endin

Assessed

Taxes

Assessed

Interest

Total Taxes

& Interest

S112

S412

otal

34a

APPENDIX E

IN THE UNITED STATES

COURT OF FEDERAL CLAIMS

No. 388-89T

(Senior Judge Thomas J. Lydon)

INTERNATIONAL BUSINESS MACHINES CORPORATION,

PLAINTIFF

THE UNITED STATES, DEFENDANT

STIPULATION OF FACTS

The parties hereby stipulate that the following

facts, including the attached Joint Exhibit 1, may be

accepted as true for purposes of this case. The

parties believe that this stipulation of facts is

comprehensive, that no genuine issues of material

fact exist, and that the case may be resolved on cross

motions for summary judgment. Nevertheless, the

parties reserve the right to introduce other evidence

that is not inconsistent with the facts stipulated.

The parties also reserve the right to object to the

relevance, materiality, and admissibility of any of the

stipulations or the attached exhibit.

PROCEDURAL BACKGROUND

J Plaintiff, International Business Machines

Corporation (IBM), is a domestic corporation

incorporated under the laws of the State of

New York. IBM’s principal place of business is

in Armonk, New York.

2. This case involves the four percent federal

excise tax imposed by Section 4371(1) of the

35a

Internal Revenue Code (26 U.S.C.) on pre-

miums paid for certain policies of insurance

issued by foreign insurers.

3. The periods involved are each of the quarters

during the years 1975 through 1984, inclusive

(the “quarters in issue”).

4. IBM filed federal excise returns for the

quarters in issue that did not report any lia-

bility under Section 4371.

5. On audit of IBM’s federal excise tax returns

for the quarters in issue, the Internal Revenue

Service (“IRS”) determined that IBM was

liable for the tax imposed by Section 4371 as a

result of certain foreign insurance trans-

actions hereafter described. The IRS assessed

IBM for Section 4371 taxes, interest, and

“delinquency” or “failure to pay” penalties for

each of the quarters in issue (the “assess-

ments”).

6. IBM paid the assessments in full, and timely

filed claims for refund with the IRS for all

amounts paid in satisfaction of the assess-

ments. The IRS denied IBM’s claims for

refund on December 23, 1988. This tax refund

action was timely filed by IBM on July 11, 1989.

The parties believe that this Court has

jurisdiction of the action under 28 U.S.C.

Section 1491(aX1) and Section 7422 of the

Internal Revenue Code (the “Code”) (26 U.S.C.

Section 7422).

7. Defendant has abated the IRS’ penalty assess-

ments and refunded the amounts so assessed to

IBM, with interest. ;

SALES OF IBM PRODUCTS OUTSIDE THE

UNITED STATES

s. IBM is a developer and manufacturer of

sophisticated information processing systems

and related products, sold throughout the

10.

36a

world. During the quarters in issue, sales of

IBM products outside the United States were

made through a worldwide network of more

than 100 wholly owned foreign subsidiary

corporations. For example, IBM products were

sold using the quarters in issue by cor-

porations organized and operating in Abu

Dhabi, Argentina, Belgium, Brazil, Canada,

Egypt, Germany, Haiti, India, Japan, Kuwait,

Malaysia, Norway, Peru, South Africa,

Switzerland, Thailand, the former U.S.S.R.,

Vietnam, and Zambia.

IBM products sold by foreign subsidiaries were

manufactured either in their own overseas

plants (or in the plants of other IBM foreign

subsidiaries) or by IBM at manufacturing

plants in the United States.

During the quarters in issue, IBM products

manufactured in the United States and sold

outside the United States through foreign

subsidiaries included (but were not limited to)

the following items, manufactured at the

locations indicated:

Locations:

Mainframe computers Poughkeepsie, NY

Tape drivers,

large printers,

magnetic tape Tucson, AZ

Dise drives San Jose, CA

Copiers, toner, supplies Boulder, CO

Intermediate computers Rochester, MN,

Austin, TX

ll.

12.

13.

37a

Personal computers,

keyboards Austin, TX, Boca

Raton, FL

Point of sale banking

machines, circuit cards Charlotte, NC

Communication devices,

cathode ray terminals Raleigh, NC

Manassas, VA, East

Peekskill, NY,

Burlington, NY

Semiconductors

Large circuit boards,

specialized intermediate

computers Endicott, NY

Sales outside the United States of IBM pro-

ducts manufactured within the United States

were accomplished by a purchase order to IBM

from its foreign subsidiary, under which IBM

billed the subsidiary and generally shipped the

goods directly to the subsidiary’s customer.

Lower priced goods might be shipped to a con-

solidation center in the foreign country, and

maintained as inventory by the foreign sub-

sidiary to fill future orders.

Depending upon the particular product, IBM

would fill a subsidiary’s order either by (1)

building the product to the particular specifi-

cations contained in a purchase order (“build to

order”), or (2) utilizing ongoing production at a

factory or inventory at a warehouse (“built to

").

ipment of products from the United States

to the foreign customer began by truck on a

common carrier (from the manufacturing plant

or warehouse). The goods generally were

14.

38a

destined for a United States airport (typically,

John F. Kennedy in New York for shipments to

Europe and the Middle East, Miami Inter-

national for shipments to Latin America, and

San Francisco International for shipments to

the Far East), but some shipments also were

by sea. While traveling within the United

States, the products would typically be un-

loaded at one or more intermediate freight

forwarder locations, where they would typi-

cally remain for 2-5 days, but could remain

while awaiting space on an airliner for as long

as 30 days. The products would be reloaded at

the freight forwarders’ facilities and continue

ultimately to the point of embarkation, where

they were loaded onto an airplane or a ship.

Once the products reached the air or sea port

in the foreign country, there were unloaded,

cleared customs, and loaded on trucks for

shipment to their final destination. For pur-

poses of the parties’ cross motions for

summary judgment, the parties agree that any

variations from these typical fact patterns

were not significant and are not relevant to the

resolution of the motions.

When foreign subsidiaries purchased IBM

products from IBM during the years in issue,

in terms of sale called for title to the products

(and the risk of loss) to pass from IBM to the

subsidiary when the goods cleared customs in

the foreign country. The terms of sale also

called for the purchasing subsidiary to bear the

cost of insuring the products against damage

or destruction during shipment.

INSURANCE COVERING THE SHIPMENT OF

1BM_ PRODUCTS SOLD TO FOREIGN SUB-

SIDIARIES

15.

16.

17.

39a

All U.S.-manufactured products IBM sold to

foreign subsidiaries were covered by casualty

insurance against damage or destruction

during shipment. Insurance was “point to

point”, that is, covered the risk of loss to goods

during transportation by surface or air

transportation from the IBM facility in the

United States until delivered to the foreign

customer or a foreign consolidation center. In

some cases, IBM arranged for the insurance;

when it did so, insurance was placed with a

U.S. insurance carrier, and the cost was billed

to the foreign subsidiary. In other instances,

the foreign subsidiary placed the insurance;

when it did so, the insurance often was with a

foreign carrier, which the subsidiary paid for

directly. In all cases, both IBM and its foreign

subsidiary were listed as insured beneficiaries.

When a foreign subsidiary obtained its own

insurance coverage with a foreign insurer, the

policy covered not only shipments to it by IBM

from the United States, but shipments of goods

purchased from foreign affiliates in other

countries as well. The insurer would charge a

separate premium to cover each si.upment, the

amount of which was determined by the

declared value of the particular shipment,

multiplied by the premium rate applicable to

that shipment. The premium rate depended on

such underwriting factors as the place of

origin and destination of the goods, the type of

goods involved and how they were packaged,

the time and distance of the trip, the route and

mode(s) of transportation, and the amount of

material handling expected during the trip.

If damage to an IBM product being shipped to a

foreign country occurred while IBM had title

to the goods (and the risk of loss), then IBM

18.

40a

would be entitled to the insurance proceeds

under the insurance policy (whether issued by

a U.S. company or a foreign insurer). If the

loss occurred, however, after the importing

foreign subsidiary acquired title to the

products, the insurance proceeds would be

payable to the subsidiary. In the latter case,

the subsidiary would use the proceeds to pay

IBM the full purchase price of the damaged

products, or to reimburse itself for the

purchase price, if IBM had already been paid.

Since most IBM products shipped to foreign

subsidiaries were packaged in containers,

damage was frequently not discovered until

after the products arrived at their designation.

As a practical matter, it was often impossible

to determine when a loss occurred and

therefore who was legally entitled to receive

the policy proceeds. In most cases involving

foreign insurance carriers, therefore, the

insurance company simply paid the insurance

proceeds to the foreign subsidiary which used

the proceeds to pay IBM for the goods.

THE ASSESSMENTS

19.

The Internal Revenue Service determined that

the premiums paid to foreign insurers with

respect to U.S. manufactured IBM products

sold to its foreign subsidiaries were subject to

the four percent excise tax imposed by Section

4371 of the Internal Revenue Code (26 U.S.C.).

During the audit, IBM sent questionnaires to

its foreign subsidiaries and determined that

premiums paid by them to foreign insurers

during the year 1980, allocable to U.S.-

manufactured IBM products sold outside the

United States, totaled $2,065,137. For expedi-

ency in making assessments under Section

4371, IBM and the IRS agreed that the foreign

21.

4la

insurance premiums attributable to such

products in each of the years 1975-1979 and

1981-1984 were the same as in 1980. Accord-

ingly, the Internal Revenue Service assessed

Section 4371 taxes of $82,605 per year, cal-

culated by multiplying the annual premiums by

four percent.

The Internal Revenue Service’s assessments

of Section 4371 tax and interest for each of the

quarters in issue, which are the amounts in

this case, are set forth in Joint Exhibit 1.

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