Amicus Curiae Brief — NCR Corp. v. New Mexico Taxation & Revenue Department

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No. 93-541 | KON 4 1993

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

NCR CORPORATION,

Petitioner,

TAXATION AND REVENUE DEPARTMENT

OF THE STATE OF NEW MRXICco,

Respondent.

On Petition for a Writ of Certiorari to the

Court of Appeals of New Mexico

BRIEF OF AMICUS CURIAE

TAX EXECUTIVES INSTITUTE, INC.

IN SUPPORT OF PETITIONER

TIMOTHY J. McCORMALLY

Counsel of Record

MARY L. FAHEy

TAX EXECUTIVES INSTITUTE, INC.

1001 Pennsylvania Ave., N.W.

Suite 320

Washington, D.C. 20004-2505

(202) 638-5601

Counsel for Amicus Curiae

Tar Executives Institute . Ine.

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON. D.C. 20001

= BEST AVAILABLE COPY

TABLE OF CONTENTS

STE Si tiiccitcissanesebielaintata ia acatanigiea

I. NEW MEXICO’S FAILURE TO PROVIDE

II.

ITI.

FACTOR REPRESENTATION VIOLATES

THE COMMERCE AND DUE PROCESS

I ciesealanindciciomcsinendtanisadimaemeetametes.

NEW MEXICO’S TAXING SCHEME INEVI-

TABLY LEADS TO DOUBLE TAXATION

AND THEREFORE VIOLATES THE FOR-

EIGN COMMERCE CLAUSE ............00000..0....

THE DECISION OF THE COURT BELOW

CONFLICTS WITH THIS COURT’S DECI-

SION IN KRAFT GENERAL FOODS ..............

SIND, eet eee eee ee oe

13

ii

TABLE OF AUTHORITIES

CASES: Page

American Tel. & Tel. Co. v. Wisconsin Dep’t of

Revenue, 422 N.W.2d 629 (Wis. App. 1988) ........ 10, 12

Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511

CRUNIIPD asnésssscenuciesscesscdiasiunssecmeeemedaaeaiae ates 8,7

Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm’n,

\ Bt Bt | Pe nemnn eee fa N iD 12

Boston Stock Exch. v. State Tax Comm’n, 429 U.S.

Ae CATED ccontvinsrevecschisnisbeisitdecieeediiiatiniantabadalinns 3, 7, 8, 18

Butler Bros. v. McColgan, 315 U.S. 501 (1942) ....... 10

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

PO CREED wikcenerehivsicrncomatenieincadieaamnaiaenaie 8

Connecticut Gen. Life Ins. Co. v. Johnson, 303 U.S.

TE CRIED . cccistsssnsnonederscetsemtnentademaaian mane 7

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

BED CUNO <scssissncsncenadencecincettcdsacanaiaenhaamceniamiial passim

Homart Dev. Co. v. Norberg, 529 A.2d 115 (R.I.

BE D . cacnixeccccnbinicosscrntensaievotideniididaieiiimuasaicaiaae 12

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

Be Cs FD CSD wictssiecannanscceeeeneenn 14-15

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

GG. CTD vrteiensssecceeremcicameaanaauae 5, 13-14, 15

Kraft Gen. Foods, Inc. v. Iowa Dep’t of Revenue

& Finance, 112 S. Ct. 2365 (1992) ......0000 i. passim

Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976)... 5,

18-14, 15

Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S.

GED CARDOSO? scivecntncnentvetnsstsinniniaiddiaciaameiaane passim

NCR Corp. v. Commissioner of Revenue, 488

N.W.2d 86 (Minn.), cert. denied, 493 U.S. 848

FUP D <iccécacuesssnnsontstienduseenssticnnsaicemsaeinaadaaemaeaen 12

NCR Corp. v. Comptroller of Treasury, 544 A.2d

Te CRs ROUND ccccctnccccccecccctumieaenessee eee 12

NCR Corp. v. South Carolina Tax Comm’n, 402

&§ & BB a a} ean eran 12

Tambrands, Inc. v. State Tax Assessor, 595 A.2d

Be CR. BOGE P sectncictcceretacdaauue ee 11-12

Underwood Typewriter Co. v. Chamberlain, 254

Re RB CIID ccécinscorcotecstntacesasaneaeeeen ee 10

Wisconsin v. J.C. Penney Co., 311 U.S. 485 (1940) .. 8-9

ili

TABLE OF AUTHORITIES—Continued

Page

FEDERAL CONSTITUTIONAL PROVISIONS:

OO ————————————————— 7

if 6 A) 7

FEDERAL AND STATE STATUTES:

Internal Revenue Code (26 U.S.C.) § 243............... om 16

Internal Revenue Code (26 U.S.C.) § 901 .................. 17

N.M. Stat. Ann. §§ 7-2A-2(C) and (I) (Michie

Cy ie 2. |} 16-17

FEDERAL REGULATIONS:

Treas. Reg. §§ 1.1502-13(b) (1) (1998) ..............-..... 17

Treas. Reg. §§ 1.1502-14(a) (1) (1993) ......... One 17

UNIFORM LAWS:

Uniform Division of Income for Tax Purposes

BE es TE ID ccccsccsseccescesseeseenmmnnvesvoessocasess 8

MISCELLANEOUS:

Daronco, Karla M., 1986 Corporation Foreign Tax

Credit, A Geographic Focus, 10 STATISTICS OF

INCOME BULL. 31 (IRS Pub. No. 1136, Winter

Sh cc 3

HELLERSTEIN, JEROME R., AND WALTER HELLER-

STEIN, STATE TAXATION I: CORPORATE INCOME

AND FRANCHISE TAXES (2d ed. 1993) .................. 7-8, 11

Rudolph, E. George, State Taxation of Interstate

Business: The Unitary Business Concept and

Affiliated Corporate Group, 25 TAX L. REV. 171

IN THE

Supreme Cot of the United States

OCTOBER TERM, 1993

No. 93-541

NCR CoRPORATION,

Petitioner,

V.

TAXATION AND REVENUE DEPARTMENT

OF THE STATE OF NEW MEXICO,

Respondent.

On Petition for a Writ of Certiorari to the

Court of Appeals of New Mexico

BRIEF OF AMICUS CURIAE

TAX EXECUTIVES INSTITUTE, INC.

IN SUPPORT OF PETITIONER

INTEREST OF AMICUS CURIAE

Pursuant to Rule 37 of the Rules of this Court, Tax

Executives Institute, Inc. respectfully submits this brief

as amicus curiae in support of the petitioner.’ Tax Execu-

tives Institute (hereinafter “TEI” or “the Institute”) is a

voluntary, non-profit association of corporate and other

1 TEI has requested and received the written consents of the Peti-

tioner and the Respondent to the filing of this brief; those con-

sents have been filed with the Clerk of this Court.

2

business executives, managers, and administrators who

are responsible for the tax affairs of their employers. The

Institute was organized in 1944 and has approximately

4,900 members who represent more than 2,400 of the

leading corporations in the United States and Canada.

TEI is dedicated to promoting the uniform and equita-

ble enforcement of the tax laws throughout the Nation,

to reducing the costs and burdens of administration and

compliance to the benefit of both the government and

taxpayers, and to vindicating the Commerce Clause and

other constitutional rights of all business taxpayers. The

members of the Institute represent a cross-section of the

business community in North America and are, almost

without exception, engaged in interstate or foreign com-

merce. The multijurisdictional companies represented by

the Institute’s membership are significantly affected by the

allocation and apportionment of income among the vari-

ous States. As a result, TEI’s members will be directly

affected by the Supreme Court’s decision whether to grant

a writ of certiorari in this case.

The issue presented in this case is whether New Mexico

and other States are precluded from taxing foreign-source

dividends, interest, and royalties that have already been

subject to tax on an unapportioned (i.e., allocated) basis

by foreign countries and, if so, on what basis such tax-

ation may occur. The case raises fundamental issues

about the rights embodied in the Foreign Commerce

Clause of the Constitution and the legitimacy of a State’s

apportionment scheme under the Interstate Commerce and

Due Process Clauses. Amicus TEI submits that a writ of

certiorari should be issued here to enable the Court to

confirm that the Commerce and Due Process Clauses do

not permit apportionment without taking into account the

apportionment factors of the business generating that in-

come and, further, that the Foreign Commerce Clause

3

proscribes the taxing of foreign-source income that is

already subject to tax on an unapportioned basis by for-

eign countries.

There can be no doubt that this case raises a recurring

issue having a broad effect on U.S. companies operating

overseas and receiving dividends, interest, and royalties

from overseas affiliates. The amount of dividends alone

paid or constructively received by domestic corporations

from foreign sources in 1986 totalled over $22 billion.’

Because TEI members and the companies by whom they

are employed will be materially affected by the Court’s

decision, the Institute has a special interest in the out-

come of this case.

SUMMARY OF ARGUMENT

1. Under the Commerce and Due Process Clauses of

the Constitution, a State may not tax value outside its

borders. Such taxation is proscribed because the “funda-

mental purpose of the [Commerce] Clause is to assure

that there be free trade among the several States,” Boston

Stock Exch. v. State Tax Comm'n, 429 U.S. 318, 335

(1977), and because extraterritorial taxation offends fun-

damental notions of due process and constitutes an “un-

reasonable clog upon the mobility of commerce.” Bald-

win v. G.A.F. Seelig, Inc., 294 U.S. 511, 527 (1935).

This Court has rightly observed that dividing income

among the several States bears some resemblance to “slic-

ing a shadow.” Container Corp. v. Franchise Tax Board,

463 U.S. 159, 192 (1983). A reasonable balance must

be struck between the State’s legitimate need for revenue

and the taxpayer’s legitimate right to protection from

overreaching taxing authorities. To pass constitutional

muster, the apportionment formula must be fair: It must

* Karla M. Daronco, 1986 Corporation Foreign Tax Credit, A Geo-

graphic Focus, 10 STATISTICS OF INCOME BULL. 31, 46 (IRS Pub.

No. 1136, Winter 1990-91).

4

be marked by both internal and external consistency.

Container Corp., 463 U.S. at 169.

Here, the issue is whether the apportionment formula

used by New Mexico is properly designed to ensure

against the proscribed taxation of extraterritorial values.

In this case, the State of New Mexico included all of

NCR Corporation’s dividends, interest, and royalties from

its foreign subsidiaries in its apportionable tax base, even

though that income was subject to tax on an allocated

(or unapportioned) basis in the foreign countries where

NCR Corporation does business. Moreover, the State

refused to include in the denominator of the three-factor

apportionment formula the property, payroll, and sales

that produced that income.

Amicus TEI submits that an apportionment formula

that fails by design to take into account the factors

generating the apportioned income is constitutionally

flawed. Thirteen years ago, the Court acknowledged that

the factor representation issue could be one of constitu-

tional import, but declined to resolve it on the ground

that the issue had not been properly raised by the taxpayer.

Mobil Oil Corp. v. Commissioner of Taxes, 445 USS.

425, 441 n.15 (1980). Justice Stevens, however, found

the issue dispositive and would have proscribed “lump-

[ing] huge quantities of investment income that have no

special connection with the taxpayer’s operations in the

taxing State into the tax base” without taking into ac-

count the factors that produced that income. /d. at 461

(Stevens, J., dissenting).

Without a doubt, New Mexico’s apportionment formula

should be struck down as violating Container Corp.'s re-

quirement of fairness: It is internally inconsistent in that

if it were applied by every jurisdiction it would result

in more than 100 percent of NCR Corporation’s income

being taxed, and it is externally inconsistent in that it

does not represent a reasonable sense of how the income

5

was generated. Only by requiring factor representation

can the Court vindicate the constitutional requirement of

a “fair” apportionment formula.

2. The constitutional prohibition against state taxa-

tion of foreign commerce is “broader than the protec-

tion afforded to interstate commerce... .” Kraft Gen.

Foods, Inc. v. lowa Dep’t of Revenue & Finance, 112

S. Ct. 2365, 2370 (1992). Amicus TEI submits that,

even if New Mexico’s statute does not offend the Inter-

state Commerce and Due Process Clauses, it must fall

under the Foreign Commerce Clause.

To prevent multiple taxation of interstate commerce, a

State’s apportionment formula must be applied in a man-

ner such that “no instrumentality of commerce is sub-

jected to more than one tax on its full value.” Japan

Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 447

(1979). If a State’s taxing scheme “inevitably” leads to

multiple taxation, it must be struck down under the For-

eign Commerce Clause. Container Corp., 463 U.S. at

188; Japan Line, 441 U.S. at 447.

In this case, the State of New Mexico included in the

apportionable tax base the dividends, interest, and royal-

ties received by the taxpayer from its foreign subsidiaries

—income that was subject to tax in full without appor-

tionment by foreign taxing authorities. If other States

were to follow New Mexico’s lead, “various instrumental-

ities of commerce could be subjected to varying degrees

of multiple taxation, a result that would plainly prevent

this Nation from ‘speak[ing] with one voice’ in regulating

commerce.” Japan Line, 441 U.S. at 450-51 (quoting

Michelin Tire Corp. v. Wages, 423 U.S. 276, 285

(1976)).

Amicus TEI submits that the Foreign Commerce Clause

does not permit such apportionment of foreign income

without taking into account the property, payroll, and

sales factors that generated the income. The Court should

6

grant a writ of certiorari to address the question left

open in Mobil.

3. A writ of certiorari should also issue in this case be-

cause the decision of the New Mexico Court of Appeals

conflicts with this Court’s 1992 decision in Kraft General

Foods. In that case, the Court found that the State’s pref-

erence for domestic commerce (which was evidenced by

permitting a deduction for dividends received from do-

mestic, but not foreign subsidiaries) over foreign com-

merce was inconsistent with the Constitution. The Court

therefore invalidated the Iowa statute because it “facially

discriminate[d] against foreign commerce and _ therefore

violate[d] the Foreign Commerce Clause... .” 112 S. Ct.

at 2372.

Like the Iowa statute involved in Kraft General Foods,

the New Mexico statute here defines “net income” as fed-

eral taxable income with certain adjustments for New

Mexico tax purposes. Because NCR Corporation filed

returns on a federal consolidated basis, transactions be-

tween members of the domestic consolidated group (such

as dividends, interest, and royalties) were effectively elim-

inated from NCR Corporation’s apportionable base for

New Mexico tax purposes. Thus, under the New Mexico

statute, NCR Corporation’s taxable income did not gen-

erally include dividends, interest, and royalties received

from domestic subsidiaries, but did include similar inter-

company payments received from its foreign subsidiaries.

Moreover, the factors that generated that income from

the domestic subsidiaries were included in NCR Corpora-

tion’s apportionable tax base, whereas the factors relating

to the foreign subsidiary income were not.

In Kraft General Foods, the Court found the dichotomy

between the treatment of dividends received from domes-

tic and foreign subsidiaries discriminatory, unjustified,

and constitutionally fatal. /d. at 2372. Amicus TEI sub-

7

mits that the New Mexico statute is similarly flawed. See

also Boston Stock Exch., 429 U.S. at 329, where the

Court unequivocally held that the Commerce Clause pro-

scribes the granting of a preference to one form of com-

merce over another. This Court should grant certiorari

to reject this preference.

ARGUMENT

I. NEW MEXICO’S FAILURE TO PROVIDE FACTOR

REPRESENTATION VIOLATES THE COMMERCE

AND DUE PROCESS CLAUSES

Under the Commerce and Due Process Clauses of the

Constitution,® a State may not tax value outside its

borders. E.g., Connecticut Gen. Life Ins. Co. v. Johnson,

303 U.S. 77, 80-81 (1938). Such taxation is proscribed

because the “fundamental purpose of the [Commerce]

Clause is to assure that there be free trade among the

several States,” Boston Stock Exch. v. State Tax Comm'n,

429 U.S. 318, 335 (1977), and because extraterritorial

taxation offends fundamental notions of due process and

constitutes an “unreasonable clog upon the mobility of

commerce.” Baldwin v. G.A.F. Seelig, Inc., 294 US.

511, 527 (1935).

This Court has rightly observed that dividing income

among the several States bears some resemblance to “slic-

ing a shadow.” Container Corp. v. Franchise Tax Board,

463 U.S. 159, 192 (1983).* Absolute consistency, even

3U.S. Const. art. I, § 8, cl. 3 (Commerce Clause); U.S. Const.

amend. XIV, § 1 (Due Process Clause).

4 Although the terms “allocation” and “apportionment” are often

used interchangeably in respect of the division of income among

various jurisdictions, “allocation” properly refers to the “attribu-

tion of a particular type of income or receipt or property or the

like to a designated State, [and] ‘apportionment’ refers to the

division of the tax base by formula.” JEROME R. HELLERSTEIN &

WALTER HELLERSTEIN, STATE TAXATION I: CORPORATE INCOME AND

FRANCHISE TAXES § 9.01, at 9-5 n.1 (2d ed. 1993). A typical “three-

factor” formula—similar to the one used by the State of New Mexico

8

among taxing authorities using the same apportionment

formula, “may just be too much to ask,” id.,” but there

are constitutiona! limits on a State’s use of an apportion-

ment formula, especially in respect of income derived in

foreign commerce.® In other words, a balance must be

struck between the State’s unmistaken need for revenue

and the taxpayer’s legitimate right to protection from

overreaching taxing authorities. It is for this Court to

ensure that the balance is a reasonable one.’ If the State

in this case—compares (i) the taxpayer’s property, payroll, and

sales (receipts) within the taxing State to (ii) the taxpayer’s total

property, payroll, and sales. UNIFORM DIVISION OF INCOME FOR

TAX Purposes AcT (U.L.A.), §§ 9-15. Some jurisdictions use single-

factor, double-factor, or weighted-factor formulae. HELLERSTEIN &

HELLERSTEIN, supra, at { 9.06.

5 Although an apportionment formula may be “imperfect,” it is

nevertheless an “acceptable method of measuring the in-state earn-

ings of an integrated business.” Mobil Oil Corp. v. Commissioner

of Taxes, 445 U.S. 425, 452 (1980) (Stevens, J., dissenting). One

means of taxing in-state income is the use of the unitary business

principle which calculates the local tax base by first defining the

scope of the unitary business of which the taxed enterprise’s ac-

tivities in the taxing jurisdiction form one part, and then appor-

tioning the total income of the unitary business between the taxing

jurisdiction and the rest of the world based on a formula taking

into account objective measures of the corporation’s activities

within and without the jurisdiction. Container Corp., 463 U.S. at

165. The apportionment system used by the State of New Mexico

is based on the unitary business principle. Appendix B to NCR

Corporation’s Petition for a Writ of Certiorari to the Court of

Appeals of New Mexico (App.), at 4la-42a (No. 93-541).

6In evaluating challenges to state taxing schemes, the Court

examines the practical effect of a challenged tax to determine

whether it “is applied to an activity with a substantial nexus with

the taxing State, is fairly apportioned, does not discriminate

against interstate commerce, and is fairly related to the services

provided by the State.” Complete Auto Transit, Inc. v. Brady, 430

U.S. 274, 279 (1977).

7 See Boston Stock Exch., 429 U.S. at 329 (the Court has a duty

“to make the delicate adjustment between the national interest

in free and open trade and the legitimate interest of the individual

States in exercising their taxing powers’).

9

has not “given anything for which it can ask return” in

respect of the person, property, or transaction it seeks to

tax, Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444

(1940), the Commerce and Due Process Clauses operate

as a constitutional brake upon the State’s raw power to

tax.

To pass constitutional muster under the Commerce and

Due Process Clauses, the apportionment formula must,

first and foremost, be fair. Container Corp., 463 USS.

at 169. There must be internal consistency: “[T]he

formula must be such that, if applied by every jurisdic-

tion, it would result in no more than all of the unitary

business’ income being taxed.” Jd. There must also be

external consistency: “[T]he factor or factors used in

the apportionment formula must actually reflect a reason-

able sense of how income is generated.” /d.

Here, the issue is whether the apportionment formula

used by New Mexico is properly designed to ensure

against the proscribed taxation of extraterritorial values.

In this case, the State of New Mexico included all of

NCR Corporation’s dividends, interest, and royalties from

its foreign subsidiaries in its apportionable tax base,

even though the income was subject to tax on an allocated

(or unapportioned) basis in the foreign countries where

NCR Corporation does business. (App. B at 25a-26a.)

Moreover, the State refused to include in the denominator

of the three-factor apportionment formula the property,

payroll, and sales that produced that income.* Thus, New

8 The parties stipulated that the gross amount of the payments

received by NCR Corporation in the form of dividends, royalties,

and interest was gross income earned directly by NCR Corpora-

tion. Consequently, NCR Corporation was subject to the taxing

jurisdiction of each of the host countries in respect of this income.

The tax on the income was generally paid through a withholding

mechanism that required the subsidiary to withhold tax on the

payment at a flat rate and pay over the amount of NCR Corpora-

tion’s tax liability to the foreign country. The withholding rates

ranged from 0 percent to 40 percent of the gross amount. (App.

B at 25a-26a.)

10

Mexico’s taxing scheme did not provide for “factor rep-

resentation” in respect of NCR Corporation’s foreign

income.

Amicus TEI submits that an appcrtionment formula

that fails by design to take into account the factors that

generated the apportioned income is constitutionally flawed

because there can never be a “rational relationship be-

tween the income attributed to the State and the intrastate

values of the enterprise.” Mobil, 445 U.S. at 436-37. The

failure to provide factor representation is “inherently arbi-

trary,” Underwood Typewriter Co. v. Chamberlain, 254

U.S. 113, 121 (1920), and cannot help but produce a

result that reflects neither “a reasonable sense of how [the]

income [was] generated” (as required by Container Corp..,

463 U.S. at 169) nor “the relative contribution of the

activities in the various States [specifically, New Mexico]

to the production of total unitary income” (Butler Bros.

v. McColgan, 315 U.S. 501, 509 (1942)).° This Court’s

prior holdings teach this conclusion and common sense

confirms it.

In Mobil, the Court acknowledged that the factor rep-

resentation issue could be one of constitutional import,

but declined to resolve it on the ground that the issue had

not been properly raised by the taxpayer. 445 U.S. at

434, 441 n.15, 449." Justice Stevens, however, found

® The skewed manner in which the State of New Mexico applies

its apportionment formula is readily apparent when one considers

that the State seeks to include the foreign-source income in the

calculation, but “refuses to go any further in recognizing the

unitary principle” by including the apportionment factors. See

American Tel. & Tel. Co. v. Wisconsin Dep’t of Revenue, 422 N.W.2d

629, 632 (Wis. App. 1988).

10The lower court’s statement in this case (App. A at 16a)

notwithstanding, the Court did not reject the concept of factor

representation in Mobil. Rather, the Court reserved the question,

stating that “we need not, and do not, decide whether combined

apportionment of this type [inclusion of the Mobil subsidiaries’ and

affiliates’ sales, payroll, and property in the apportionment formula]

11

the issue dispositive and would have proscribed “lump-

[ing] huge quantities of investment income that have no

special connection with the taxpayer’s operations in the

taxing State into the tax base” without taking into ac-

count the factors that produced that income. 445 U.S.

at 461 (Stevens, J., dissenting). Justice Stevens explained:

Unless the sales, payroll, and property values con-

nected with the production of income by the payor

corporations are added to the denominator of the

apportionment formula, the inclusion of earnings at-

tributable to those corporations in the apportionable

tax base will inevitably cause Mobil’s Vermont in-

come to be overstated.

Id. (emphasis added). See also JEROME R. HELLERSTEIN

& WALTER HELLERSTEIN, STATE TAXATION I: CORPORATE

INCOME AND FRANCHISE TAXES § 9.13[3][b], at 9-87 (2d

ed. 1993) (if the unitary concept is the foundation for the

inclusion of dividends in the apportionable base, that con-

cept “should carry through to all aspects of the tax com-

putation,” including factor representation).

In a 1991 case, the Maine Supreme Court forthrightly

addressed this issue and held that the lack of factor rep-

resentation was constitutionally fatal to a taxing scheme:

[Without factor representation,] [t]he ineluctable re-

sult is that more of the business activity of the

unitary business is attributed to [the State] than is the

actual case. Thus, the income taxable by [the State]

under the Assessor’s formula does not truly reflect

[the corporation’s] connection with [the State] and

is constitutionally required.” 445 U.S. at 441 n.15. See also id.

at 449 (“[b]ecause the issue has not been presented, we need not,

and do not, decide what the constitutent elements of a fair appor-

tionment formula applicable to such income would be”). The reser-

vation of this issue was specifically recognized by the Court in

Container Corp., 463 U.S. at 168 n.5, and by the hearing officer

in this case, App. B at 54a.

ene ee

12

fails to meet the test of fairness required by the due

process Clause.

Tambrands, Inc. v. State Tax Assessor, 595 A.2d 1039,

1044 (Me. 1991).”

The compelling nature of Justice Stevens’s reasoning !s

illustrated by the following example. Assume that the

taxpayer's activities within the United States are conducted

exclusively in New Mexico—that is to say, 100 percent

of its domestic property, payroll, and sales are in that

State. Assume further that the taxpayer owns a foreign

subsidiary whose property, payroll, and sales are equal

to the taxpayer’s U.S. (New Mexico) factors. Finally,

assume that the taxpayer makes $100 from its New Mex-

ico Operations and receives a $100 dividend from its for-

eign subsidiary (which dividend is subject to a withhold-

ing tax by the foreign country). Under New Mexico’s

taxing scheme, all of the taxpayer’s income would be ap-

portioned to New Mexico. Thus, 100 percent of the foreign

11J—n addition to Maine, other States have concluded that the

failure to provide factor representation in applying the apportion-

ment rules to unitary businesses contravenes the Due Process and

Commerce Clauses. See, e.g., American Tel. & Tel. Co. v. Wisconsin

Dep’t of Revenue, 422 N.W.2d at 636 (involving dividends from

unitary subsidiaries) ; Homart Dev. Co. v. Norberg, 529 A.2d 115,

121 (R.I. 1987) (involving distributive share from partnership).

See also NCR Corp. v. South Carolina Tax Comm’n, 402 S.E.2d

666, 674 (S.C. 1991) (case remanded to determine appropriate

factors to include with respect to interest and royalties from unitary

subsidiaries); NCR Corp. v. Comptroller of Treasury, 544 A.2d

764, 781 (Md. 1988) (same with respect to dividends from unitary

subsidiaries). See E. George Rudolph, State Taxation of Inter-

state Business: The Unitary Business Concept and Affiliated Cor-

porate Group, 25 TAx L. REv. 171, 205 (1970) (“Obviously, if the

foreign source income is included in the base for apportionment,

foreign property, payrolls, and sales must be included in the appor-

tionment fractions. This was recognized in Bass [, Ratcliff &

Gretton, Ltd. v. State Tax Comm’n, 266 U.S. 271 (1924)].. .”).

But see NCR Corp. v. Commissioner of Revenue, 438 N.W.2d 86,

94 (Minn.), cert. denied, 493 U.S. 848 (1989) (excluding foreign

subsidiaries’ factors does not result in constitutional violation).

13

dividend would be apportioned to, and taxed by, the State,

even though that dividend was taxed on an allocated, or

unapportioned, basis in the foreign country and even

though the foreign factors generating that dividend

equalled the taxpayer’s New Mexico factors. In other

words, the taxpayer would be subject to tax on $300—

$100 by the foreign jurisdiction and $200 by New Mex-

ico—even though it earned only $200.

Without a doubt, New Mexico’s apportionment formula

should be struck down as violating Container Corp.’s re-

quirement of fairness: It is internally inconsistent in that

if it were applied by every jurisdiction it would result in

more than 100 percent of NCR Corporation’s income be-

ing taxed, and it is externally inconsistent in that it does

not represent a reasonable sense of how the income was

generated. See Container Corp., 463 U.S. at 169-70. The

Court should grant a writ of certiorari in this case to

clarify that where a State seeks to apportion nondomicili-

ary income, the State’s apportionment formula must in-

clude an appropriate portion of the taxpayer’s payroll,

property, and sales. Only by requiring factor representa-

tion can the Court vindicate the constitutional requirement

of a “fair” apportionment formula. Container Corp., 463

U.S. at 169.

II. NEW MEXICO’S TAXING SCHEME INEVITABLY

LEADS TO DOUBLE TAXATION AND THERE-

FORE VIOLATES THE FOREIGN COMMERCE

CLAUSE

The constitutional prohibition against state taxation of

foreign commerce is “broader than the protection afforded

to interstate commerce ....” Kraft Gen. Foods, Inc. v.

lowa Dep’t of Revenue & Finance, 112 S. Ct. 2365, 2370

(1992) (citing Japan Line, Ltd. v. County of Los An-

geles, 441 U.S. 434, 445-46 (1979)). Thus, a state tax

cannot survive scrutiny under the Foreign Commerce

Clause if the tax creates a substantial risk of international

multiple taxation, or prevents “the Federal Government

14

from ‘speak[ing] with one voice when regulating commer-

cial relations with foreign governments.’” Japan Line,

441 U.S. at 451 (quoting Michelin Tire Corp. v. Wages,

423 U.S. 276, 285 (1976)). The elevated protection for

foreign commerce—which extends not only to foreign

taxpayers but to U.S. taxpayers engaged in such com-

merce—owes itself to the realization that a State’s inter-

ference with “foreign commerce may create problems,

such as the potential for international retaliation, that con-

cern the Nation as a whole.” Kraft Gen. Foods, 112

S. Ct. at 2370. Amicus TEI submits that, even if New

Mexico’s statute did not offend the Commerce and Due

Process Clauses, it should fall under the Foreign Com-

merce Clause.

To prevent multiple taxation of interstate commerce, a

State’s apportionment formula must be applied in a man-

ner such that “no instrumentality of commerce is sub-

jected to more than one tax on its full value.” Japan

Line, 441 U.S. at 447. Although in the domestic context

the Court may “enforce full apportionment by all poten-

tial taxing bodies,” it cannot ensure full aportionment

when one of the taxing authorities is a foreign nation.

Id. In such situations, if a State’s taxing scheme “in-

evitably” leads to multiple taxation, it must be struck

down under the Foreign Commerce Clause. Container

Corp., 463 U.S. at 188; Japan Line, 441 U.S. at 447.

In this case, the State of New Mexico included in the

apportionable tax base the dividends, interest, and royal-

ties received by the taxpayer from its foreign subsidiaries

—income that was subject to tax in full without apportion-

ment by foreign taxing authorities. (App. B at 31la-33a.)

Thus, one taxing jurisdiction has claimed the right to tax

a given value in full, and another taxing jurisdiction has

claimed the right to tax the same entity in part—‘‘a com-

bination resulting necessarily in double taxation.” /tel

Containers Internat’l Corp. v. Huddleston, 113 S. Ct.

1095, 1103 (1993) (quoting Container Corp., 463 U.S.

15

at 188): * accord Mobil, 445 U.S. at 444-45 (“[t]axation

by apportionment and taxation by allocation to a single

situs are theoretically incommensurate .. .”). If other

States were to follow New Mexico’s lead (and, regrettably,

many have adopted similarly flawed schemes), “various

instrumentalities of commerce could be subjected to vary-

ing degrees of multiple taxation, a result that would

plainly prevent this Nation from ‘speak[ing] with one voice’

in regulating commerce.” Japan Line, 441 U.S. at 450-51

(quoting Michelin Tire Corp., 423 U.S. at 285).”

Amicus TEI submits that the Foreign Commerce Clause

does not permit such apportionment of foreign income

without taking into account the property, payroll, and

sales factors that generated the income. Requiring the

12In Jtel, the Court stated that the Foreign Commerce Clause

cannot be interpreted to demand that a state refrain from taxing

any business transaction that is potentially subject to taxation by

a foreign sovereign. 113 S. Ct. at 1104. Here, in contrast, the

lower court found multiple taxation to be real. (App. A at 11a.)

Moreover, the tax upheld in /tel fell on a discrete transaction

occurring within Tenuessee and the State there provided a credit

for any tax properly paid in another jurisdiction, foreign or domes-

tic, on the same transaction. 113 S. Ct. at 1104. In this case, New

Mexico included the taxpayer’s entire foreign dividend, interest,

and royalty income in the apportionment formula without providing

any sort of credit.

13 The hearing officer in this case averred that multiple taxation

was not inevitable because not every foreign country in which

the taxpayer operated chose to tax its dividends, interest, and

royalties. (App. B at 49a-50a.) Such a facile analysis, however,

misapprehends the Court’s foreign commerce jurisprudence: there

is no requirement that an apportionment scheme result in tax in

every instance, only that multiple taxation—whether in one or

more jurisdictions—be unavoidable. Japan Line, 441 U.S. at 452.

As the Court found in Japan Line, “[e]ven a slight overlapping of

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

context—assumes importance when sensitive matters of foreign

relations and national sovereignty are concerned.” ZJd. at 456

(footnote omitted). Even the New Mexico Court of Appeals con-

ceded that multiple taxation was “real.” (App. A at lla.)

16

States to provide factor representation is necessary to

prevent the inevitable multiple taxation that would other-

wise ensue." In Mobil, the Court left open the question

whether the Foreign Commerce Clause required factor

representation because the issue had not been properly

raised. 445 U.S. at 449. The Court should grant a writ

of certiorari to redress this constitutional violation.

Ill. THE DECISION OF THE COURT BELOW CON-

FLICTS WITH THIS COURT’S DECISION IN

KRAFT GENERAL FOODS

A writ of certiorari should issue in this case because

the decision of the New Mexico Court of Appeals con-

flicts with this Court’s 1992 decision in Kraft General

Foods. In that case, this Court scrutinized an—lowa_ stat-

ute that used the federal definition of “net income” with

certain adjustments. For federal tax purposes, corpora-

tions are generally allowed a deduction for dividends re-

ceived from domestic subsidiaries. I.R.C. § 243 (1986).

In following the federal scheme, Iowa permitted a de-

duction for dividends from domestic subsidiaries, but in-

cluded dividends from foreign subsidiaries in taxable in-

come. The Court found that the “State’s preference for

domestic commerce over foreign commerce [was] incon-

sistent with the Commerce Clause... .” 112 S. Ct. at

2370. The Court therefore held the Iowa statute uncon-

stitutional because it “facially discriminate[d] against for-

eign commerce and therefore violate[d] the Foreign Com-

merce Clause.” Jd. at 2372.”

Like the Iowa statute involved in Kraft General Foods,

the New Mexico statute here defines “net income” as fed-

14 The failure to provide factor representation thus distinguishes

this case from Container Corp., where the sustained California tax-

ing scheme included not only the combined income, but also the

combined factors of the taxpayer and its subsidiaries. 463 U.S. at

174-75.

15 The Court also held that the flow of value, including dividends,

between Kraft and its foreign subsidiaries constituted “foreign

commerce.” 112 S. Ct. at 2369.

17

eral taxable income with certain adjustments for New

Mexico tax purposes. N.M. Stat. Ann. §§ 7-2A-2(C) and

(1) (Michie 1978) (1993 Repl.). (App. D at 71a.) Be-

cause NCR Corporation filed returns on a federal consoli-

dated basis (App. B at 21a), transactions between mem-

bers of the domestic consolidated group (such as divi-

dends, interest, and royalties) were effectively eliminated

from NCR Corporation’s apportionable base for New

Mexico tax purposes.*® Thus, under the New Mexico

statute, NCR Corporation’s taxable income did not gen-

erally include dividends, interest, and royalties received

from domestic subsidiaries, but did include similar inter-

company payments received from its foreign subsidiaries.”

(App. B at 26a-27a.) Moreover, the factors that gener-

ated that income from the domestic subsidiaries were in-

cluded in NCR Corporation’s apportionable tax base,

whereas the factors relating to the income from the for-

eign subsidiaries were not.

In Kraft General Foods, the Court found the dichotomy

between the treatment of dividends received from domes-

tic and foreign subsidiaries discriminatory, unjustified,

16 Under the applicable Treasury Regulations, dividends distrib-

uted from one member of a consolidated group to another member

are eliminated in calculating taxable income. Treas. Reg. § 1.1502-

14(a)(1) (1993). With respect to interest and royalties, there is

essentially a “wash” between the two members of a consolidated

group. Thus, if Member A makes an interest payment on an in-

debtedness to Member B, Member A receives a deduction for the

interest and Member B is required to take the interest payment

into income. -Freas. Reg. § 1.1502-13(b) (1) (1993) (setting forth

the rules for treatment of intercompany transactions). Because

foreign subsidiaries are not generally part of the consolidated group,

no member of the consolidated group may take a deduction for

federal tax purposes for income payments received from foreign

subsidiaries opearting abroad.

17 The dividends, interest, and royalties NCR Corporation received

from its foreign subsidiaries were also included in its federal tax-

able income, but the federal] taxing scheme allows a credit for taxes

paid to foreign taxing authorities. I.R.C. § 901 (1986); see App. B

at 23a. New Mexico does not allow such a credit for foreign taxes.

errr

18

and constitutionally fatal. Jd. at 2372. The New Mexico

statute is similarly flawed.

With respect to dividends, Kraft General Foods un-

waveringly teaches that a statute that differentiates be-

tween the deduction for domestic dividends and the de-

duction for foreign dividends facially discriminates against

foreign commerce. In dddition, the New Mexico statute

treats interest and royalties received from foreign sub-

sidiaries differently from the payments received from

domestic subsidiaries. Finally, New Mexico failed to take

into account the factors generating the income for the

foreign subsidiaries, while the factors for domestic sub-

sidiaries were included in the formula. New Mexico thus

“imposes a burden on foreign subsidiaries that it does not

impose on domestic subsidiaries.” Kraft Gen. Foods, 112

S. Ct. at 2371. See also Boston Stock Exch., 429 U.S. at

329, where the Court unequivocally held that the Com-

merce Clause proscribes the granting of a preference to

one form of commerce over another. This discrimination

between foreign and domestic entities is “wholly incon-

sistent with the free trade purpose of the Commerce

Clause.” See id. at 336. This Court should grant cer-

tiorari to reject this preference.

CONCLUSION

For the foregoing reasons, the Court should grant a

writ of certiorari in this case.

Respectfully submitted,

TIMOTHY J. MCCORMALLY

Counsel of Record

MArY L. FAHEY

TAX EXECUTIVES INSTITUTE, INC.

1001 Pennsylvania Ave., N.W.

Suite 320

Washington, D.C. 20004-2505

(202) 638-5601

Counsel for Amicus Curiae

November 4, 1993 Tax Executives Institute, Inc.