Petition for Writ of Certiorari — Barclays Bank PLC v. Franchise Tax Board of California

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92-212 a oe

No.

OFFICE OF [HF CLERK

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1992

BARCLAYS BANK PLC

Petitioner,

VS.

FRANCHISE TAX BOARD,

An Agency of the State of California

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF

THE STATE OF CALIFORNIA

JOANNE M. GARVEY

Counsel of Record

JOAN K. IRION

TERESA A. MALONEY

HELLER, EHRMAN, WHITE &

MCAULIFFE

333 Bush Street

San Francisco, CA 94104-2878

(415) 772-6000

Attorneys for Petitioner

BOWNE OF SAN FRANCISCO, INC. + 180 NINTH ST. « S.F.. CA @4103 + (415) 664-2300

QUESTIONS PRESENTED

1. Whether California’s application of worldwide combined

reporting to determine the taxable income of domestic corpora-

tions with foreign parents, or foreign corporationa with either

foreign parents or foreign subsidiaries, is unconstitutional under

the foreign Commerce Clause.

2. Whether California’s application of worldwide combined

reporting to determine the taxable income of domestic corpora-

tions with foreign parents, or foreign corporations with either

foreign parents or foreign subsidiaries, is unconstitutional where

such application imposes discriminatory compliance burdens on

such entities.

3. Whether California’s application of worldwide combined

reporting to determine the taxable income of domestic corpora-

tions with foreign parents, or foreign corporations with either

foreign parents or foreign subsidiaries, intrudes into an inherently

federal area and is preempted by the United States Constitution.

‘3

TABLE OF CONTENTS

Page

QUESTIONS PIs ova cc care rcs ecneseeau es i

py Bee ee err ee ae eer ul

TABLE GP AUTO EORe 6 ccccssndccccsncaasdutas v

PETITION FOR WRIT OF CERTIORARI ........... l

ey er rere Te rere Tee ee 2

LEST GP Pee ic ke Cees week aeea ce maewene ean 2

RULE 2. EGS ac caeneeccriseceea ths cans 2

PUREE LOSS 0 Ski his oe a seue eeek Asan ekenenesa 3

CONSTITUTIONAL AND STATUTORY

ta Bi A | eee errr Tree TTT Tee 3

SLATEMGMITE 6s 0.405465 shone se EER CASTE ERE DAAS ATED 3

1. THE BUSINESS OF THE BARCLAYS GROUP. 4

2. THE INTERNATIONAL STANDARD FOR DI-

VISION OF INCOME AMONG NATIONS FOR

TAR PUES ci nae bweeeeeisueestaiees 5

3. THE IMPACT OF CALIFORNIA’S APPLICA-

TION OF WORLDWIDE COMBINED REPORT-

ING TO FOREIGN OWNED

DEUL Tepe ED cob ees ok ae tak eenbua 6

- Se A os oo oe bare n ke ekbeeen 7

5. THE PROCEEDINGS BELOW .......scccces0: 8

A. How the Federal Questions Were Raised and

Pel SI Seo ook 0 oo a a ee ks 8

B. ‘ERO CR Be bx ccwecndcnraecseesreas 8

(i) California Superior Court and Court of

PTET eee ree eT Eee 8

(ii) California Supreme Court............. ll

TABLE OF CONTENTS

REASONS FOR TAKING THE CASE......\.........

i.

CALIFORNIA WORLDWIDE COMBINED RE-

PORTING IS UNCONSTITUTIONAL UNDER

THE FOREIGN COMMERCE CLAUSE. THE

DECISION BELOW REWRITES' ESTAB-

LISHED FOREIGN COMMERCE CLAUSE JU-

RISPRUDENCE AND IS INCONSISTENT AND

INCOMPATIBLE WITH THIS COURT'S PRIOR

= PP rer re Tre Te Te TTT TTT eT TT Oe

A. This Court Has Established Criteria for Determin-

ing the Constitutionality of State Taxes Under the

Foreign Commerce Clause; the California Court

Disregarded These Criteria ...........cceceee

The Decision Below Contradicts the Conclusions of

eee IE OP I cv cece cn ccaccnaseccans

The Ruling of the California Court Is Irreconcila-

ble with This Court’s Standards for Determining

Whether Congress Has Acted To Permit a State

To Burden Commerce.................05. yea

D. The Decision Below Is Inconsistent with This

Court’s Wardair DeCisiON. ... 2... ccc cccccccees

2. THE DECISION BELOW UNDERMINES ES-

SENTIAL CONSTITUTIONAL RESTRAINTS

ON STATE POWER TO INTERFERE IN THE

CONDUCT OF FOREIGN POLICY, AND, IF

LEFT UNDISTURBED, THREATENS SERIOUS

SRE SP BONE COPRR ORIENT serena cnndntncencecs

THIS COURT’S REVIEW IS ESSENTIAL TO

PREVENT EROSION OF IMPORTANT FED-

ERAL POLICIES; THERE ARE NO JURISDIC-

TIONAL BARRIERS TO REVIEW OF THIS

EUR GAGSAESAASSWASe NASA RENAL GA RSA 5568005

16

17

20

21

22

24

iv

TABLE OF CONTENTS

Appendices

(Bound Separately)

Opinion of the Supreme Court of California,

Wy 32, Te no sexe snes dee sineunas Rrra Appendix A

Opinion of the Court of Appeal of the State of

California in and for the Third Appellate Dis-

trict, Novemiber 30, 1990 .......ccccccccees Appendix B

Statement of Decision of the Superior Court of

California, County of Sacramento, August 20,

UCN hake daeeee bn brin eeds SNR ECR ee Appendix C

Constitutional and Statutory Provisions Involved. . Appendix D

ie ee ee eee .... Appendix E

Brief of the United States as Amicus Curiae in the

Supreme Court of California ............... Appendix F

Franchise Tax Board Notice No. 89-714, Novem-

8 ee rer ere ere re rire Appendix G

Vv

TABLE OF AUTHORITIES

Cases

Page

Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm’n, 266

RES T56 COND. oc casavasdbtaasciaeeeses beeeeees 13

Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520 (1959).. 10

Chy Lung v. Freeman, 92 U.S. 275 (1875) ............. 24

Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541

CIDE vkcccncnachcankskdVatietheaneccaweany ee eh 27, 28

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274

CTRTTE ccnesscncds¥ecsncsdeebevnsc ete eau acanenes 17

Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159

be) eee en Terre erry passim

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469

fo : an Aran Rrry mr re rr ts 27, 28

Dames & Moore v. Regan, 453 U.S. 654 (1981)......... 25

Flynt v. Ohio, 451 U.S. 619 (1981) .........-.. eee eee 27

Gillespie v. United States Steel Corp., 379 U.S. 148

CRE vnc eccidiwhcadap ewes eaaheneeeaseeeeuses 28

Hines v. Davidowitz, 312 U.S. 52 (1941) ............... 24

Hudson Distribs., Inc. v. Eli Lilly & Co., 377 U.S. 386

(SPP rr rr rr rrr rrr rere re err re 27

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

CIGTF) cchnccccavcevascssceuwennsdeuenenaeetess passim

Kraft Gen. Foods, Inc. v. lowa Dep’t of Revenue and Fin.,

—_ US. — 112 S. Ct. 2365, 60 U.S.L.W. 4582

CRDTED 5s wines cncun ccncds ceeesnene eae eeeees 16, 19, 24, 26

Maine v. Taylor, 477 U.S. 131 (1986) .............06- 14, 21

Miami Herald Publishing Co. v. Tornillo, 418 U.S. 241

4 | RETR Eee ere re ere errr er ee 27

Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976)...... 16

New England Power Co. v. New Hampshire, 455 U.S. 331

CORES hos bie kciscdvensncoawavaewnceheeestess caves 21

Northwestern States Portland Cement Co. v. Minnesota, 358

C2 OD CG oi kn kdeadcbhanscaeescucesaneeaeeas 12

South-Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82

4. | a rerernmnernn ter ee ar rn errr 14, 16, 21

Southern Pac. Co. v. Arizona ex rel. Sullivan, 325 U.S. 761

CONES cckkipnbkanus wa dcens ese e cere eee ere 21, 29

iinet

vi

TABLE OF AUTHORITIES

CASES

Page

Sporhase v. Nebraska ex rel. Douglas, 458 U.S. 941

COPED sack ¥specedanke kee bie eee cee 14, 21

United States v. Curtiss-Wnght Export Corp., 299 U.S. 304

fh | Pree ere er eae re ee 10, 25

United States v. Pink, 315 U.S. 203 (1942) ............. 25

Wardair Canada v. Florida Dep’t of Revenue, 477 U.S. 1

CRPGED 0c entkgnas Kine been cas heer ee passim

Wyoming v. Oklahoma, — U.S. —, 112 S. Ct. 789

LEWD coc cccavcwcsa beee serene eens see 14, 16, 21

Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579

CRPGEE 004.6 e0bdd eke bk bon ka ee eeee rake eee 25

Zschernig v. Miller, 389 U.S. 429 (1968) ............... 25

United States Constitution

cic. GOR. OE. BO A Bn oo kG ie eee passim

LS Geek. OB. VE GR Si cicsatendeveiccecs eae 3

Statutes and Rules

SD Ween BERET 04 66052525 RRR ORR eee ae

Cal. Cav. Peas. Cope OGRE «csi duane caceuas Pee gees. 8

Cal. Rev. & Tan. Code § 291G) «oc... seca cnccs Perr 3, 11

CAR. GR. Hh, FOOD 6 0 eis cceiedisejaescss sae 2

No.

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1992

BARCLAYS BANK PLC

Petitioner,

VS.

FRANCHISE TAX BOARD,

An Agency of the State of California

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF

THE STATE OF CALIFORNIA

PETITION FOR WRIT OF CERTIORARI

This petition for a writ of certiorari seeks this Court’s review of

the judgment of the Supreme Court of California on a nationally

and internationally important matter relating to the limitations

under the United States Constitution on the power of the states to

apportion and tax the income of domestic corporations with

foreign parents, or foreign corporations with either foreign parents

or foreign subsidiaries, under worldwide combined reporting.

2

OPINIONS BELOW

The opinion of the Supreme Court of California (Appen-

dix A)’ is reported at 2 Cal. 4th 708 (1992). The opinion of the

Court of Appeal of the State of California in and for the Third

Appellate District (App. B) was reported at 232 Cal. App. 3d

1187 (1990) and again at 3 Cal. App. 4th 1034 (1990) to permit

tracking of the case pending review by the California Supreme

Court. Pursuant to the California Rules of Court, Rule 976(d),

the opinion of the Court of Appeal was vacated by the Supreme

Court of California’s grant of review on February 28, 1991. The

Statement of Decision of the California Superior Court (App. C)

is an unreported decision.

LIST OF PARTIES

The parties are as stated in the caption. In the courts below, the

plaintiffs and respondents were Barclays Bank International Lim-

ited, a United Kingdom corporation, and Barclays Bank of Cali-

fornia, a California corporation which was wholly owned by

Barclays Bank International Limited. As appears in the Rule 29.1

Statement, Barclays Bank International Limited was merged with

Barclays Bank PLC and Barcal was sold to Wells Fargo &

Company with the present tax matters and claims for refund

being assumed by Barclays Bank PLC.

RULE 29.1 STATEMENT

Pursuant to Rule 29.1 of the Rules of this Court, petitioner

states during the income year 1977, Barclays Bank International

Limited (“BBI’’), a United Kingdom corporation, was a wholly

owned subsidiary of Barclays Bank Limited (“BBL”), also a

United Kingdom corporation. During income year 1977, Barclays

Bank of California (“Barcal”), a domestic corporation, was a

wholly owned subsidiary of BBI. On February 15, 1982, BBL

reregistered as a public company under the provisions of the

' All references to the appendices in this petition are denominated

“App.” followed by the letter to each item and, where necessary, a page

reference.

3

Companies Act 1980 of the United Kingdom and changed its

name to Barclays Bank PLC. On January 1, 1985, under the

terms of the Barclays Bank Act 1984 of the United Kingdom, the

United Kingdom banking business of Barclays Bank PLC was

merged with the international and other overseas banking opera-

tions of BBI under the name Barclays Bank PLC. The ultimate

parent of Barclays Bank PLC is now Barclays PLC, listed on the

London Stock Exchange. On February 20, 1988, Barclays Bank

PLC sold the stock of Barcal to Wells Fargo & Company. Under

the terms of the agreement, Barclays Bank PLC assumed any tax

liability at issue herein and retained all claims for refund. Barclays

Bank PLC’s non-wholly owned subsidiaries are listed in Appen-

dix E to this petition.

JURISDICTION

The decision of the Supreme Court of California in these

actions was rendered on May 11, 1992. Jurisdiction of this Court

is invoked pursuant to 28 U.S.C. § 1257(a).

CONSTITUTIONAL AND STATUTORY PROVISIONS

INVOLVED

The relevant portions of the following constitutional and

Statutory provisions are reproduced in Appendix D: Article I,

Section 8, Clause 3 of the United States Constitution (the

Commerce Clause); Article VI, Clause 2 of the United States

Constitution (the Supremacy Clause); and California Revenue &

Taxation Code Section 25101.

STATEMENT

The issues raised by this case — issues specifically reserved by

this Court in Container Corp. of America v. Franchise Tax Board,

463 U.S. 159 (1983) — concern the powers of a state to tax a

domestic corporation with a foreign parent, or a foreign corpora-

tion with either a foreign parent or foreign subsidiaries, under

worldwide combined reporting. The precise question presented is

whether California’s application of worldwide combined reporting

to Barcal, a domestic corporation with a foreign parent, and to

4

BBI, a foreign corporation with a foreign parent and foreign

subsidiaries, is unconstitutional.

California’s action already has caused serious national and

international repercussions, and the United States has appeared

as amicus curiae in the courts below to assert that this action is

“patently unconstitutional.’”

1. THE BUSINESS OF THE BARCLAYS GROUP.

In 1977 Barcal and BBI, the California taxpayers, were part of

the Barclays Group, a United Kingdom banking group of over

220 corporations doing business in some 60 nations.’ The ultimate

parent, BBL (now Barclays Bank PLC), was one of the United

Kingdom clearing banks. Only two of such subsidiaries (Barcal

and Barclays Bank of New York) were incorporated in the United

States and only one other subsidiary, BBI, also did business in the

United States. The Barclays Group conducted over ninety-eight

percent (98%) of its business outside the United States. The

Barclays Group was and is involved in all phases of international

banking, including retail, merchant, and commercial banking,

leasing and consumer credit and finance.

BBI was a corporation organized under the laws of England and

was domiciled and doing business in the United Kingdom. BBI

also did business in over 33 nations and territories outside the

United Kingdom including the United States. BBI operated a

banking agency in California. BBI itself owned, directly or indi-

rectly, more than fifty percent (50%) of over 70 subsidiary

corporations which operated in approximately 34 nations and

territories outside the United Kingdom. Barcal, a California

banking corporation, was a wholly owned subsidiary of BBI.

*The United States appeared as amicus curiae in the California

Superior Court, Court of Appeal and Supreme Court. The brief filed in

the California Supreme Court is reproduced at App. F.

*BBI and BBL agreed for purposes of the litigation that they were

members of a worldwide unitary business for 1977. App. C at 42.

5

2. THE INTERNATIONAL STANDARD FOR DIVISION

OF INCOME AMONG NATIONS FOR TAX

PURPOSES.

The United States, the United Kingdom and other nations of

the world divide the income of multinational enterprises among

nations for tax purposes by the arm’s length separate accounting

method (“the arm’s length method”). The arm’s length method

treats each corporation as “an independent entity dealing at arm’s

length with its affiliated corporations, and subject to taxation only

by the jurisdictions in which it operates and only for the income it

realizes on its own books.” Container, 463 U.S. at 185. Where a

corporation crosses national boundaries, the host (non-domicili-

ary) country taxes that corporation only on the profits earned in

the host country and as if those profits were earned by a separate

enterprise.

The United States has been a leader in establishing the arm’s

length method as the international standard. Both the United

States and its trading partners use this standard in all bilateral tax

treaties and in their internal tax laws. The standard is “universally

used and favored” by the nations of the world both “as an ideal

and as a working methodology.” App. C at 20-21. The arm's

length standard is the international practice. Container, 463 U.S.

at 184.

California uses a different and incompatible method to divide

the income of a multinational enterprise for tax purposes —

worldwide combined reporting. This method aggregates the in-

come of all entities which form a part of the unitary business

wherever they do business and determines California’s share of

this aggregate income by a formula, generally the average of the

property, payroll and sales within and without California.

California worldwide combined reporting requires worldwide

tax information for all members of the unitary group, not just for

taxpayers. The income allocated to a tax jurisdiction under the

arm’s length method can and does differ substantially from the

income apportioned to that jurisdiction under worldwide com-

bined reporting. There is no way to reconcile these differences.

6

Only a handful of states of the United States have ever used

worldwide combined reporting. No nation uses worldwide com-

bined reporting.

3. THE IMPACT OF CALIFORNIA’S APPLICATION OF

WORLDWIDE COMBINED REPORTING TO FOR-

EIGN OWNED MULTINATIONALS.

In the early 1970’s respondent first extended worldwide com-

bined reporting to foreign owned multinationals. The extension of

this conflicting method into the international arena brought im-

mediate complaints from both foreign business and foreign gov-

ernments. Foreign governments bombarded the United States

government: with formal and informal diplomatic protests about

worldwide combined reporting as applied to foreign multination-

als. These included diplomatic notes from virtually every devel-

oped country in the world, protestations from heads of nations

including Prime Minister Thatcher of the United Kingdom,

Prime Minister Nakasone of Japan, and Prime Minister Trudeau

of Canada directly to the President, delay in Treaty negotiations

by the Netherlands and West Germany, and strong representa-

tions from the French, Danish, Italian and German governments.

The Canadian and French tax treaty negotiators insisted on an

exchange of notes which called attention to their concerns and

which obligated the United States to reopen discussions with each

country if an acceptable solution could be devised. There were

even unprecedented direct foreign government attempts at per-

suasion at the state level.

Finally, in 1985, after years of diplomatic effort, the United

Kingdom enacted retaliatory legislation which would deny certain

treaty benefits for United States corporations operating in unitary

states. The legislation had a chilling effect on the willingness of

United Kingdom subsidiaries of such corporations to repatriaie

dividends.

The Federal Executive has steadfastly promoted and adhered

to a policy of the use of arm’s length separate entity accounting

for the division of international income and opposed the use of

worldwide combined reporting through a// administrations con-

fronted with this issue. Initially, the United States added Arti-

——————<&

7

cle 9(4) to the tax treaty then being negotiated with the United

Kingdom.* Article 9(4) would have required states to use the

arm’s length method when taxing affiliates of United Kingdom

companies. Although a reservation which would remove Arti-

cle 9(4) from the Treaty was defeated in both the Senate Foreign

Relations Committee and the full Senate, the majority vote of the

Senate for the Treaty including Article 9(4) fell five votes short

of the two-thirds majority necessary for ratification. The Treaty

was resurrected after parliamentary maneuvering in which the

reservation was added without a separate vote, and the Treaty,

with the reservation, was ratified by the Senate.’ The United

Kingdom House of Commons ratified the Treaty only after strong

assurances from the United States that the matter of worldwide

combined reporting would be resolved. The United States has

continued with efforts at resolution. The appearance of the United

States as amicus curiae in all three California courts below in

support of BBI and Barcal is a part of such efforts.

Congress has enacted no legislation dealing with this issue.

Bills concerning unitary taxation have been introduced, but there

has never been a vote in a congressional committee or in either

house of Congress on such a bill. None of the bills has dealt solely

with worldwide combined reporting as applied to foreign multina-

tional enterprises.

4. THE ASSESSMENTS.

Respondent California Franchise Tax Board audited the Cali-

fornia tax returns of BBI and Barcal for 1977 and determined that

BBI and Barcal were part of a worldwide unitary business con-

ducted by the members of the Barclays Group. Respondent

assessed additional taxes of $4,076 to BBI and $254,699 to Barcal,

subsequently reduced during the administrative process to $1,678

and $152,420, respectively. BB! and Barcal paid the additional

assessed taxes and filed suit for refund, challenging the constitu-

‘The United States/United Kingdom Income Tax Convention is

hereafter referred to as the US/UK Treaty or Treaty.

‘The reservation was included in the Third Protocol to the Treaty

which also contained other changes.

8

tionality of the application of worldwide combined reporting to

foreign owned multinational groups.

5. THE PROCEEDINGS BELOW.

A. How the Federal Questions Were Raised and Passed

On Below.

In their complaints and briefs in the California Superior Court,

and in their briefs in the California Court of Appeal and in the

California Supreme Court, BBI and Barcal contended, inter alia,

that the foreign Commerce Clause of the United States Constitu-

tion precluded the application of worldwide combined reporting to

taxpayers that are members of a foreign owned and controlled

unitary group. These courts explicitly noted and ruled on these

constitutional contentions.

B. The Decisions Below.

(i) California Superior Court and Court of Appeal.

The California Superior Court found and the California Court

of Appeal affirmed, on the basis of substantial evidence, that

respondent’s application of worldwide combined reporting to

foreign owned multinational groups violated the foreign Com-

merce Clause because it “impair[ed] federal uniformity in an

area where federal uniformity is essential” and “prevent[ed] the

Federal Government from ‘speaking with one voice when regulat-

ing commercial relations with foreign governments.’” Japan

Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 448, 451

(1979) (hereafter the “one voice” test).

Both courts carefully considered, among other authority, Japan

Line, 441 U.S. 434, Container, 463 U.S. 159, and Wardair

Canada v. Florida Department of Revenue, 477 U.S. 1 (1986),

and applied the dormant Commerce Clause analysis set forth in

*Although there are some stipulations, App. C at 36 and 70, the case

was tried on a contested record. The Statement of Decision of the

Superior Court (App. C) explains the factual and legal basis for its

decision as to each of the controverted issues at trial. Cal. Civ. Proc.

Code § 632.

9

Japan Line and Container in reaching their decisions. Both courts

rejected the contentions of respondent that five factors, by anal-

ogy to Wardair, showed a congressional policy “to permit the

states to tax as they please” by “negative acquiescence” without

congressional legislation.’ Both courts held that these factors, only

one of which even involved worldwide combined reporting,® were

too general to evidence either the policy urged or congressional

acquiescence to such policy. Both courts then tested the applica-

tion of worldwide combined reporting in this case under the

standards of Japan Line and Container.

* The most obvious foreign policy implication — the threat of

offending our trading partners and leading them to retaliate

(Container, 463 U.S. at 194) — was present.

¢ Worldwide combined reporting created automatic asymmetry

in international taxation in that United States companies did

not face worldwide combined reporting abroad.

* The legal incidence of the tax fell on a foreign corporation

and its domestic subsidiary.

« The tax burden was more a function of the methodology than

the tax rate.

Further the United States had appeared as amicus curiae to

inform the courts of foreign policy implications. In light of these

"The factors were: no coverage of state taxes in United States treaties

or the United States Model Income Tax Convention, except in nondis-

crimination clauses; failure of the Senate to ratify the US/UK Tax

Treaty with Article 9(4); failure of Congress to enact legislation

restricting state taxes; reservations to the OECD and UN Model Income

Tax Conventions; and no coverage of state taxes in treaties of friendship,

commerce, and navigation. The Court of Appeal noted that this Court

had before it several of the same items in Container and still engaged in

a dormant Commerce Clause analysis. App. B at 21.

‘Failure of the Senate to ratify Article 9(4). Neither court could see

how the expressed preference of a majority of the Senate to limit state

taxes could, in the circumstances, be “transmogrified” into an affirma-

tive policy endorsing such taxes.

10

distinctions between this case and Container and the radical

differences between the arm’s length international standard and

worldwide combined reporting, both courts found that a direct

adverse impact on foreign affairs from the use of worldwide

combined reporting was “inevitable.”

Neither court, like “[this] court in Container,” App. B at 21,

found congressional expression one way or another and the Court

of Appeal found a clear and thoroughly grounded policy of the

Executive to require the arm’s length method to divide income of

foreign multinational enterprises. In the face of congressional

inertia and inaction and in an area where the Executive has

traditionally been given great deference,'° the policy constituted a

“clear federal directive.” Thus, worldwide combined reporting in

this context also violated the second prong of the Container “one

voice” test.’

*Although the Superior Court found both “definite risk of, as well as

actual double taxation” in this case and characterized such double

taxation as “more aggravated” in the “foreign multinational context,”

App. C at 25-26, it ruled worldwide combined reporting in this context

did not fail the first additional test of Japan Line (double taxation)

because double taxation was not “inevitable.” The Court of Appeal

affirmed.

See, e.g., United States v. Curtiss-Wright Export Corp., 299 U.S. 304

(1936); Container, 463 U.S. 159.

''The Superior Court also found de facto discrimination amounting to

economic protectionism in that foreign based multinationals did not

have readily available the necessary financial accountings from many of

their foreign subsidiaries (without incurring substantial costs to create

an accounting system solely for that purpose) to enable them to comply

with worldwide combined reporting and concurrently to take advantage

of certain benefits under California tax law. App. C at 26-28. Competi-

tive enterprises not conducting business in other nations do not have this

burden. The Superior Court also found that water’s edge taxation, which

is consistent with the custom of nations in taxing multinational enter-

prises, was a less intrusive alternative. App. C at 28. The Court of

Appeal noted that, while it did not “use costs alone to constitutionally

invalidate the use of [worldwide combined reporting] (see Bibb v.

an eee

1]

The Superior Court also ruled that there was a violation of the

due process clauses of the California and United States

Constitutions:

What does constitute a due process violation is the fact that

all witnesses agreed that with customarily and currently

available accounting data, literal compliance with [ world-

wide combined reporting] requirements is impossible for

foreign multi-nationals such as Plaintiffs, and the only way to

“comply” is by supplication and negotiation (absent an

unduly burdensome cost of compliance).

App. C at 29. The Court of Appeal did not reach this issue.!2

(ii) California Supreme Court.

In reversing the decision of the Court of Appeal, the California

Supreme Court recognized that it was “presented with a question

left open in Container, (supra, 463 U.S. at p. 189, fns. 26 & 32),”

App. A at 3, but rejected analysis under the tests of this Court set

forth in Container and Japan Line. Rather, the California court

declared that Wardair had “reoriented” the dormant Commerce

Navajo Freight Lines (1959) 359 U.S. 520, 526... ), this legal analysis

[of the Superior Court] — based on a factual foundation of substantial

evidence — demonstrates just how serious the administrative burden

can be for the foreign entity.” App. B at 26-27. The Court of Appeal

determined on the basis of this evidence that California’s allocation

method rather than its rate was the primary source of difficulty and that

foreign anger was even more understandable “in light of the critical role

the United States has played in attempting to construct a coherent and

nondiscriminatory tax policy for all nations” based on Separate account-

ing. App. B. at 26.

"The Court of Appeal stated:

Having decided that California’s application of [worldwide combined

reporting] (Rev. & Tax. Code, § 25101) to foreign-based unitary groups

is unconstitutional under the foreign commerce clause of the federal

Constitution, it is unnecessary for us to consider the plaintiffs’ due

process challenge.

App. B at 36-37,

12

Clause and had reduced the scope for dormant Commerce Clause

analysis so as to make such analysis “particularly inappropriate”

in this case. App. A at 20. Instead, “Wardair supplants what the

court has termed the ‘quagmire’ of dormant commerce clause

analysis ([ Northwestern States Portland Cement Co. v. Minne-

sota}, supra, 358 U.S. 450, 458) with a heightened judicial

attentiveness to expressions of congressional foreign commerce

policy.” App. A at 21. From this perspective, the court “ab-

stracted” this Court’s analysis of the “textual materials” in

Wardair “into a kind of protocol for identifying those kinds of

governmental silences that give rise to ‘negative implicatioas’

supporting an inference of federal acquiescence in the state tax

under challenge.” App. A at 23.”

The California court constructed its own test to determine

whether a state tax violates the foreign Commerce Clause:

whether in the absence of legislation, Congress’ “inaction” consti-

tuted a “pattern of congressional action” which “evidences both

an awareness of [the] issue and a refusal to adopt the remedy

urged upon it.” App. A at 39. The court took the same five items

which the lower courts had rejected as evidences of congressional

policy and under its new test treated them as “those kinds of

governmental silences ... [implying] federal acquiescence in the

state tax under challenge.” App. A at 23.’

' For example, the court characterized the failure of treaties to

address an international tax problem as to subnational taxes while

addressing it as to national taxes as a “congressional policy choice” to

permit subnational taxes.

“The California Supreme Court did not address the findings of both

the lower California courts that there had never been a vote on any

congressional legislation and that the bills introduced did not deal solely

with the matter at issue. The court also determined that the preliminary

votes on Article 9(4) hy which a majority of the Senate would have

restricted state power were not to be taken as any evidence of intent and

that the final vote on the entire Treaty with Article 9(4) reserved was to

be considered a “refusal” to curb the state. To overcome the fact that

many of the tax treaties and all of the treaties of friendship, commerce,

and navigation predated California’s extension of worldwide combined

13

The California court concluded that the “clear federal direc-

tive” test in Container was not part of the dormant Commerce

Clause analysis, but served only to determine whether Congress

had acted to preempt an otherwise valid state tax. Thus, the Court

of Appeal was incorrect in giving any consideration to executive

action in formulating any such directive.

Further, since congressional acquiescence precluded resort to

dormant Commerce Clause analysis, the “Wardair methodology

interdict[ed] judicial resort to executive branch opinions as to the

international commercial effect of a challenged state taxation

practice....” App. A at 21. Accordingly, the California court

rejected the views of the United States, appearing as amicus

curiae, that Califcrnia’s use of worldwide combined reporting

interfered with the “Federal Executive’s conduct of foreign af-

fairs.” App. A at 38 n.22.

Thus, the court did not consider the findings below of burden

on commerce or the foreign policy implications in the application

of worldwide combined reporting, including retaliation and threats

of retaliation, but concluded that it was “adher[ing]” to this

Court’s “central meaning” in Wardair in holding that Congress’

“refusal to legislate restrictions on state use of worldwide [com-

bined reporting]” was not silence which triggered dormant Com-

merce Clause analysis. App. A at 39.

The California Supreme Court noted that the Court of Appeal

had explicitly declined to decide the due process issue. Stating

that “examination of the [due Process] issue would profit from a

consideration of its merits free of the view that a dormant foreign

reporting to foreign owned multinational groups, so that failure to cover

State taxes might not reflect a “policy choice” to permit this method, the

California court assumed that this Court’s 1924 decision in Bass, Ratcliff

& Gretton, Ltd. v. State Tax Comm'n, 266 US. 271 (1924), on the

constitutionality of formulary apportionment (but not worldwide com-

bined reporting) and the application of worldwide combined reporting to

domestic owned multinationals in the 1960’s, evidenced Congress’ (and

the international community’s) awareness of the possibility of worldwide

combined reporting as an alternative to the arm’s length standard.

App. A at 32.

14

commerce clause analysis is appropriate in the circumstances

present here,” App. A at 39-40, the court remanded that issue to

the Court of Appeal.

REASONS FOR TAKING THE CASE

This Court in Container specifically reserved the question in

this case, the “constitutionality of combined apportionment with

respect to state taxation of domestic corporations with foreign

parents or foreign corporations with either foreign parents or

foreign subsidiaries.” 463 U.S. at 189 n.26. Nevertheless, the

California Supreme Court, perceiving a “diminution in the reach

of dormant foreign commerce clause analysis,” App. A at 4, held

the very analysis used by this Court in Container inapplicable to

resolve the question reserved. The California court fashioned a

new test in Commerce Clause jurisprudence, permitting a court to

disregard “sensitive matters of foreign relations and national

sovereignty,” Japan Line, 441 U.S. at 456, and to search instead

for “those kinds of governmental silences that give rise to ‘nega-

tive implications’ supporting an inference of federal acquiescence

in the state tax under challenge.” App. A at 23. This conclusion is

inconsistent with holdings of this Court on the application of the

dormant foreign Commerce Clause. See Japan Line, 441 US.

434; Container, 463 U.S. 159. It is also irreconcilable with the

decisions of this Court on the need for explicit congressional

action to remove state laws which burden commerce from the

reach of the Commerce Clause. See Wyoming v. Oklahoma,

U.S___, 112 S. Ct. 789 (1992); Maine v. Taylor, 477 U.S.

131 (1986); South-Central Timber Dev., Inc. v. Wunnicke,

467 U.S. 82 (1984); Sporhase v. Nebraska ex rel. Douglas,

458 U.S. 941 (1982).

The limitation on a state’s right to burden commerce is an

important and recurring issue before this Court and a number of

cases and administrative proceedings in California are dependent

on the outcome of this case on this issue. See App. G. The

decision, if left undisturbed, will stimulate aggressive unconstitu-

tional taxation not just by California but by other states.

15

The issues presented here are of paramount national impor-

tance. The application of this tax method to foreign owned

multinational businesses has already led to enactment of retalia-

tory legislation by the United Kingdom, threats of retaliation, and

strong and continuing protests by all of the major trading partners

of the United States. In its appearance as amicus curiae in all

three California courts below, the United States has attested that

the use of worldwide combined reporting in these circumstances

is “an egregious interference with the Federal Executive’s con-

duct of foreign affairs and is... patently unconstitutional.” See

App. F at 26 n.13.

The decision below erodes United States foreign economic

policy by spreading confusion as to how the policy is formulated,

confusion as to who speaks for the United States, and even

confusion as to what that policy, based on a uniformly accepted

international standard to divide income among nations for tax

purposes, actually is,

This Court’s review of this case is necessary to prevent erosion

of federal policy. There are no jurisdictional barriers to review of

the foreign Commerce Clause issues. The judgment of the Cali-

fornia Supreme Court is final as to these issues, is not subject to

further review and is already being applied by California. The

foreign Commerce Clause issues are separable from and indepen-

dent of the due process issue, and too important to be left

unreviewed by this Court.

16

1, CALIFORNIA WORLDWIDE COMBINED REPORT-

ING IS UNCONSTITUTIONAL UNDER THE FOR-

EIGN COMMERCE CLAUSE. THE DECISION BELOW

REWRITES ESTABLISHED FOREIGN COMMERCE

CLAUSE JURISPRUDENCE AND IS INCONSISTENT

AND INCOMPATIBLE WITH THIS COURT’S PRIOR

DECISIONS.

Whether state taxes may permissibly burden commerce has

been a recurring question before this Court.'°

This Court has recognized that: “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 and Fin., U.S , 1123. Cr.

2365, ____, 60 U.S.L.W. 4582, 4584 (1992) (citing Japan Line,

441 U.S. at 445-46). The reason for the broader protection of

foreign commerce is that “matters of concern to the entire Nation

are implicated. [Japan Line, 441 U.S.] at 448-451.” Kraft,

U.S. at ___, 112 S. Ct. at ___, 60 U.S.L.W. at 4584. Discrimi-

natory treatment of foreign commerce may create problems “such

as the potential for international retaliation” that will concern and

harm the Nation as a whiole. Id.'*

'S See, e.g, Wyoming v. Oklahoma, U.S , 112 S. Ct. 789;

Kraft Gen. Foods, Inc. v. lowa Dep't of Revenue and Fin.,

U.S , 112 S. Ct. 2365, 60 U.S.L.W. 4582 (1992); Container,

463 U.S. 159; Japan Line, 441 U.S. 434.

'°The same policies underlie the import-export clause. See Michelin

Tire Corp. v. Wages, 423 U.S. 276 (1976) and Japan Line, 441 U.S.

434. The broader protection accorded to foreign commerce also requires

stricter scrutiny in considering whether Congress has acted to permit

such burden. See South-Central Timber, 467 U.S. 82.

—————————————————eEeeaE/_™

17

A. This Court Has Established Criteria for Determining

the Constitionality of State Taxes Under the Foreign

Commerce Clause; the California Court Disregarded

These Criteria.

Japan Line. Recognizing and stressing the need for uniformity

in dealing with other nations when foreign commerce is impli-

cated, this Court in Japan Line added two additional tests to the

basic four part test'’ for determining whether a state tax unconsti-

tutionally burdened commerce:

* whether the tax, notwithstanding apportionment, created a

substantial risk of multiple taxation; and

* whether the tax impaired federal uniformity in an area where

federal uniformity is essential and prevented the Nation from

speaking with one voice when regulating foreign commerce.

Japan Line, 441 U.S. at 451. With respect to multiple taxation,

this Court pointed out that “even 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.” Japan Line, 441 U.S. at

456. A tax could prevent the Nation from speaking with one voice

and frustrate achievement of federal uniformity by leading to

international disputes over reconciling apportionment formulae,

by creating asymmetry in the international tax structure leading

to retaliation which causes harm to the Nation as a whole, not just

to the state, and by increasing the potential for varying degrees of

multiple taxation should other states follow the taxing state.

Japan Line, 441 U.S. at 450-51.

"The four part test applicable to all taxes implicating commerce,

foreign and domestic, is: (1) the tax must be applied to an activity with

a substantial nexus with the taxing state; (2) the tax must be fairly

apportioned; (3) the tax must not discriminate against interstate com-

merce; and (4) the tax must be fairly related to the services provided by

the taxing state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274,

279 (1977).

18

Container. Container involved the same California taxation

method at issue here, worldwide combined reporting, but applied

to a domestic owned multinational group. In Container, this

Court reaffirmed the two additional Japan Line tests, but found

constitutionally significant that double taxation was not an inevi-

table result of the California taxing scheme and that the tax fell

not on foreign owners but on domestic corporations. Elaborating

on the “one voice” inquiry, this Court stated that a state tax at

variance with federal policy would fail the one voice standard if

“it either implicates foreign policy issues which must be left to the

Federal Government or violates a clear federal directive.”

Container, 463 U.S. at 194. The most obvious foreign policy

implication of a state tax was the “threat it might pose of

offending our foreign trading partners and leading them to retali-

ate against the Nation as a whole.” Jd. Recognizing its limited

competence in determining precisely when foreign nations would

be offended by particular acts, this Court established three

“objective standards” in the absence of explicit action by Con-

gress to determine when foreign nations would be offended and to

permit the Court to decide how to balance the risk of retaliation

against the sovereign right of the United States to let the states

tax as they please. The standards reflected general observations

about the imperatives of international trade and foreign relations.

When applied in the factual context of Container, these factors

did not lead to the conclusion that the California tax might

justifiably lead to foreign retaliation: the tax did not create

automatic asymmetry in international taxation; the tax fell not on

2 foreign entity but on a domestic corporation;"® and, even if

foreign nations had a legitimate interest in reducing tax burdens

of domestic corporations, the amount of tax paid by the domestic

taxpayer was more a function of the tax rate than the allocation

‘*This Court also reserved the question of whether its analysis as to

the importance of the incidence of the tax might be different if the

taxpayer were a domestic subsidiary of a foreign corporation. Container,

463 US. at 189 1.26.

mn

19

method. This Court also noted the absence of a brief by the

Executive branch.'®

Tested by these same factors, worldwide combined reporting

applied to members of a foreign owned multinational group, as

here, is unconstitutional. Worldwide combined reporting clearly

implicates foreign policy issues which must be left to the federal

government and prevents the Nation from speaking with one

voice.” This Court need not speculate as to foreign offense: in this

case there is actual retaliation as well as threats of retaliation.

There is automatic asymmetry in international taxation as United

States corporations are not subjected to worldwide combined

reporting by any nation. The California tax falls on a foreign

corporation as well as on the domestic subsidiary of a foreign

corporation. The amount of tax paid is a function of the allocation

method, not the tax rate. Finally, the United States has appeared

as amicus curiae in all three California courts.

The California Supreme Court never tested worldwide com-

bined reporting by the standards set forth in Container and Japan

Line because it held that changes in this Court’s Commerce

Clause jurisprudence made such analysis inappropriate.

The California Supreme Court further held that the “clear

federal directive” prong of Container was not a dormant Com-

“Chief Justice Rehnquist notes in his dissent in Kraft that the

domestic nature of the petitioner and the absence of a United States

amicus brief were the distinctions between Container and Japan Line.

Kraft, _ US. at__, 1112S. Ct at __» 60 U.S.L.W. at 4586.

Petitioner contends that worldwide combined reporting applied to

taxpayers which are members of a foreign owned multinational group

also violates the first additional test, enhanced risk of or actual double

taxation. The California Superior Court found actual double taxation

and enhanced risk of double taxation in this case but, following

Container, held that such double taxation was not inevitable. App. C at

25-26. Whether the Container requirement of “inevitability” would

apply in the circumstances of a taxpayer which is a member of foreign

owned multinational business has not been decided and should also be

resolved by this Court.

20

merce Clause test and applied only to invalidate otherwise valid

state taxes. It thus avoided the question of whether worldwide

combined reporting in these circumstances was fatally inconsis-

tent with federal policy, the more relaxed “species of preemption”

standard adopted by this Court in Container, 463 U.S. at 194. It

also avoided any consideration of the role of the Executive in

formulating federal policy on the ground that only Congress

played any role in creating such policy.

This Court should affirm that dormant Commerce Clause

analysis remains applicable and appropriate, decide the reserved

question in Container, and give guidance on the scope and

application of the “clear federal directive” test.

B. The Decision Below Contradicts the Conclusions of

This Court in Container.

This Court in Container held that failure of treaties to cover

subnational taxes or to restrict states to the arm’s length method,

failure of the Senate to pass the US/UK Treaty with a provision

which would have restricted state use of a non-arm’s length

method, and failure of Congress to enact legislation restricting

state taxation did not constitute “specific indications of congres-

sional intent.” Container, 463 U.S. at 196. The California court

determined that these same items constituted evidences of con-

gressional “acquiescence” amounting to ratification of the use of .

worldwide combined reporting. App. A at 34. If such items

evidence a congressional policy sufficient to remove this case from

the dormant Commerce Clause, presumably this Court would not

have bothered with the balance of its analysis in Container. This

contradiction illustrates the confusion created by the California

court in its search for negative acquiescence. Essentially, the

California court is holding that the Wardair case, on which it rests

its new test, has overruled Container sub silentio. This Court

should resolve this conflict.

Or

21

C. The Ruling of the California Court Is Irreconcilable

with This Court’s Standards for Determining Whether

Congress Has Acted To Permit a State To Burden

Commerce.

This Court has consistently held that, to exempt a state tax or

other regulation which burdens commerce from scrutiny, “Con-

gress must manifest its unambiguous intent before a federal

Statute will be read to permit or approve of such a violation of the

Commerce Clause... .” Wyoming v. Oklahoma, __US. at a

112 S. Ct. at 802. See also Maine y. Taylor, 477 U.S. at 139:

South-Central Timber, 467 U.S. at 91; Sporhase, 458 U.S. 941.

This Court, in South-Central Timber, has further stated that the

need for “affirmative approval” of the state statute or regulation is

“heightened” when the statute has “substantial ramifications

beyond the Nation’s borders.” 467 U.S. at 92 n.72!

In fact, the “burden [is on the state to] demonstrat[e] a clear

and unambiguous intent on behalf of Congress to permit the

discrimination against interstate [and foreign] commerce... .”

Wyoming v. Oklahoma, __US. at =—— 112 S. Ct. at 802.

This Court has held that such intent was not demonstrated by

reservation to the states of the regulation of local utility rates in

the Federal Power Act (Wyoming v. Oklahoma), consistency of

the state regulation with federal legislation (South-Central Tim-

ber), deferral by Congress to state law in thirty seven statutes

(Sporhase), or approval by Congress of several interstate water

compacts (id.). The congressional enactment must be “an affirm-

ative grant of power to the states to burden... . commerce ‘in a

manner which would otherwise not be permissible.’ Southern

Pacific Co. v. Arizona ex rel. Sullivan, [325 U.S. 761,] 769.” New

England Power Co. v. New Hampshire, 455 U.S. 331, 341

(1982). These cases presuppose some federal enactment which

demonstrates such affirmation. Here there is no such enactment.

*'The reason that “congressional authorization not be lightly implied”

is the need for a consistent and coherent foreign policy which is the

exclusive responsibility of the federal government. South Central-Tim-

ber, 467 U.S. at 92 n.7.

22

The California court’s approach eliminates the threshold in-

quiry of burden on commerce and the evidentiary burden on the

state to show the “clear and unambiguous intent” of Congress to

permit a violation of the Commerce Clause. Rather, the Califor-

nia court would assume a tax valid unless Congress says “no.”

The decision below cannot be reconciled with the decisions of

this Court on removal of state action from Commerce Clause

scrutiny. The decision is an invitation to state taxation unre-

strained by constitutional limitations.

D. The Decision Below Is Inconsistent with This Court’s

Wardair Decision.

Wardair concerned a state sales tax on a discrete transaction

(purchase of fuel in Florida) occurring only within one national

jurisdiction. The case had neither actual nor possible international

multiple taxation. After strongly reaffirming the policies of the

dormant Commerce Clause, this Court determined that the

federal policy urged by the petitioner, reciprocal tax exemptions

for aircraft, did not exist. On the contrary, “in the context of this

case,” the evidence demonstrated that the federal government

had “affirmatively acted, rather than remained silent, with respect

to the power of the state to tax aviation fuel.” Wardair, 477 U.S.

at 9. This Court found congressional action constituting law in the

Chicago Convention, a treaty entered into by the United States

and 156 other nations, which by its terms precluded the imposi-

tion of local taxes on fuel in certain circumstances but did not

prohibit the taxation of fuel in the circumstances before the

Court. This text demonstrated:

the international community’s awareness of the problem of

state and local taxation of international air travel, specifically

aviation fuel, and represent[ed] a decision by the parties to

that Convention to address the problem by curtailing and

limiting only some of the localities’ power to tax, while

implicitly preserving other aspects of that authority.

23

Wardair, 477 U.S. at 10. Subsequent treaties, including the

United States/Canadian Treaty,” dealt only with national taxes,

ieading to the inference that Congress had “negatively acqui-

esced” in the Florida tax.

This Court explicitly said not only that it was not addressing,

but also that “nothing in this opinion should be understood to

address, whether, in the absence of these international agree-

ments, the Foreign Commerce Clause would invalidate Florida’s

tax." Wardair, 477 U.S. at 13. Nevertheless, the California court

seized on the decision as heralding a change in this Court’s

dormant foreign Commerce Clause jurisprudence. The California

court’s new test, congressional “refusal” to act while aware of the

problem, does not appear in Wardair.” This Court proceeded in

Wardair against an extensive background of enacted congres-

sional legislation — the Federal Aviation Act domestically and

the Chicago Convention internationally — both of which dealt

with state sales taxes and the latter with state Sales taxes on

aviation fuel. Here there is no seminal statute or other enactment

which addresses the specific problem.

~The Canadian Provinces also were applying a tax similar to that

imposed by Florida, an indication that there was no uniform policy

against such taxes.

“Other than Article 9(4) of the US/UK Treaty, none of the items

which the court below used as evidence of awareness and refusal even

deals with worldwide combined reporting applied to foreign multina-

tional groups. Under the California court’s approach, the stalemate

created by the minority in the Senate over Article 9(4) becomes an

explicit “refusal” to act evidencing Congress’ exercise of its “power...

[t]o regulate Commerce with foreign Nations ....” U.S. Const. art. I,

§ 8, cl. 3.

24

2. THE DECISION BELOW UNDERMINES ESSENTIAL

CONSTITUTIONAL RESTRAINTS ON STATE POWER

TO INTERFERE IN THE CONDUCT OF FOREIGN

POLICY, AND, IF LEFT UNDISTURBED, THREAT-

ENS SERIOUS HARM TO THE NATION.

The decision below has implications far beyond the question of

constitutionality of worldwide combined reporting as applied

herein. The California court proceeds on the assumption that

Wardair presages a diminution in the reach of the dormant

foreign Commerce Clause.“ Although it recognized that foreign

governments objected strenuously to the practice of worldwide

combined reporting and that “executive branch officials charged

with conducting American foreign commercial policy agree[d]

with them,” App. A at 37 n.21, the California court used the

alleged diminution as its predicate for ignoring both the United

States and the foreign governments. Given the importance of

foreign Commerce Clause jurisprudence, which concerns “sensi-

tive matters of foreign relations and national sovereignty,” Japan

Line, 441 U.S. at 456, this Court should clarify that there is no

such diminution.

The California court’s substitute test, if left to stand, would

lead to serious harm to the Nation. A recurring theme in this

Court’s decisions on foreign commerce issues is concern over

harm to the nation as a whole from state actions which may lead

to retaliation. Japan Line, 441 U.S. 434; Container, 463 U.S. 159;

Kraft, — U.S. —, 112 S. Ct. 2365, 60 U.S.L.W. 4582; Chy Lung

v. Freeman, 92 U.S. 275 (1875). These decisions recognize that

all nations have a proper concern for the well being of their

nationals, that nations do not take these concerns lightly, that

response is a national, not a state, responsibility and that states

have no role in the process. Hines v. Davidowitz, 312 U.S. 52

*The California court refers to this Court’s “recent foreign Com-

merce Clause jurisprudence” but relies only upon Wardair. The decision

below was issued prior to Kraft, __ U.S. —, 112 S. Ct. 2365, 60

U.S.L.W. 4582.

25

(1941); Zschernig v. Miller, 389 U.S. 429 (1968); Japan Line,

441 US. 434.

The decision below, however, trivializes nation-to-nation initia-

tives to resolve conflicts, including such efforts as those in this

case to have the states voluntarily cease use of the apportionment

method.” Patience by nations is viewed by the California court as

further evidence of congressional acquiescence. If any test is

destined to lead to retaliation by foreign governments, it is the

California court’s new test.

The decision of the court below, if left unreviewed, would

emasculate the Federal Executive in foreign affairs any time a

State chose to interfere and Congress did not enact legislation

curbing the state. The “one voice” test proceeds from the strong

presumption of the need for federal uniformity in the area of

\oreign commerce. Japan Line, 441 U.S. 434; Wardair, 477

U.S. 1. However, the California court would silence the Execu-

tive’® and in the silence of Congress permit a cacophony of state

voices. How are our foreign trading partners to discern the foreign

policy of the United States if there is no text? Who can tell our

foreign trading partners what that policy is? Can our foreign

trading partners rely upon the responses of the Executive? Is this

not exactly the situation which will lead to retaliation and harm to

the nation as whole?

The issue is even more serious since it is the United States that

has been the leader in establishing the international standard. The

“The California court calls the results of such efforts “meliorative

measures designed to pacify critics,” App. A at 36, a clear invitation to

the states to revoke such “measures” when they tire of “pacification.”

**The Federal Executive has substantial power in the area of foreign

affairs. Curtiss-Wright Export, 299 U.S. 304; United States v. Pink, 315

U.S. 203 (1942); Youngstown Sheet & Tube Co. y. Sawyer, 343 U.S.

579 (1952). In the absence of congressional action, executive action,

particularly, as here, against a backdrop of enacted national policy

designed specifically to deal with international division of income, is

entitled to great weight. Youngstown Sheet, 343 U.S. 579; Dames &

Moore v. Regan, 453 U.S. 654 (1981).

26

standard forwards the long established and overarching United

States foreign economic policy to open markets and remove

barriers to trade. United States business benefits from this stand-

ardization. Other nations will not long tolerate increased taxes on

their nationals from this aberrant system, increased burdens of

compliance arising from the requirement of their nationals to

respond to two separate systems to divide and report their interna-

tional income among competing jurisdictions, and possible impact

on their fiscs without retaliating against American business.’

If a state of the United States which is economically the

equivalent to the seventh or eighth largest nation in the world is

permitted to promote its incompatible and inconsistent tax sys-

tem, how can the United States seek the cooperation of its trading

partners in adhering to the international standard.

3. THIS COURT’S REVIEW IS ESSENTIAL TO PRE-

VENT EROSION OF IMPORTANT FEDERAL POLI-

CIES; THERE ARE NO JURISDICTIONAL BARRIERS

TO REVIEW OF THIS CASE.

California’s use of worldwide combined reporting in these

circumstances is undermining the federal economic policy of

promoting a uniform standard for division of income for tax

purposes between nations. In addition to removing trade barriers,

the federal policy promotes the management of conflict and the

mitigation of double taxation, and encourages American trade

and competitiveness. Left unreviewed, the judgment of the Cali-

fornia court, by perpetuating and encouraging worldwide com-

bined reporting, or any other aberrant method of dividing

international income, will continue the erosion of this important

federal policy. Moreover, the California court’s judgment in-

troduces new confusion into Commerce Clause jurisprudence,

and draws into question this Court’s settled policy of exhibiting

greater sensitivity in matters of international concern. See Japan

Line, 441 U.S. at 448-51; Kraft, __ U.S. at —__, 112 S. Ct. at

—__., 60 U.S.L.W. at 4584. It would be “intolerable to leave

unanswered” this importart constitutional question with national

7’The United Kingdom already has.

27

and international implications. Cox Broadcasting Corp. v. Cohn,

420 U.S. 469, 484-85 (1975) (quoting Miami Herald Publishing

Co. v. Tornillo, 418 U.S. 241, 247 n.6 (1974)).

No jurisdictional barriers to this Court’s review of this case

exist. The judgment of the California Supreme Court, that

worldwide combined reporting did not violate the foreign Com-

merce Clause when applied to apportion the income of foreign-

owned multinational business, meets the criteria established by

this Court for finality under 28 U.S.C. § 1257 where further state

proceedings may occur. Cox, 420 U.S. at 476-87. The judgment is

of the highest California court, is not subject to further review in

California and is binding on all lower California courts.

That the further state proceedings may involve a federal ques-

tion (i.e., the due process issue) is not determinative. This Court

has shown a willingness to hear cases with unresolved federal

issues in certain circumstances. Hudson Distribs., Inc. v. Eli Lilly

& Co., 377 U.S. 386 (1964); see also Flynt y. Ohio, 451 U.S. 619

(1981). The circumstances of this case warrant immediate review

of the foreign Commerce Clause issues. These issues are separa-

ble from the issue remanded and will not be affected by any

proceedings on the remand.* The foreign Commerce Clause

issues are “too important to be denied review and too independent

[of the remanded issue] to require that appellate consideration be

deferred until the whole case is adjudicated.” Cohen vy. Beneficial

Indus. Loan Corp., 337 US. 541, 546 (1949). A favorable

decision by this Court on the issue decided by the California

Supreme Court will dispose both of this and of other pending

litigation.” On the other hand, if this Court were to deny review

*Unlike the eminent domain cases discussed in Cox, 420 U.S. at 477-

78 n.6, where the two federal questions are part of an integral problem,

the due process issue is not integral to or any part of the foreign

Commerce Clause issues.

*That a decision in petitioner’s favor on the foreign Commerce

Clause issues will dispose of the case is shown by the fact that the

California Court of Appeal found it unnecessary to reach the due

Process issue after ruling in petitioner’s favor on the issues presented

28

and if petitioner were to prevail below, the foreign Commerce

Clause issues may be mooted and these important questions

would not reach this Court. See Cox, 420 U.S. at 482-83.

This Court has stated on numerous occasions that the rule of

finality is to be given a practical rather than a technical interpreta-

tion. Gillespie v. United States Steel Corp., 379 U.S. 148, 152-53

(1964); Cohen, 377 U.S. at 546. In making this practical deter-

mination, this Court has stated that where “refusal immediately

to review the state-court decision might seriously erode federal

policy, [this] Court has entertained and decided the federal issue,

which itself has been finally determined by the state courts for

purposes of the state litigation.” Cox, 420 U.S. at 483. The

policies at stake here surely merit this Court’s attention.

here. In addition, a number of cases await the outcome of this case, but

only on the foreign commerce “one voice” issue. Respondent required

waiver of all issues except the “one voice” issue in cases seeking a

deferral. See App. G.

29

CONCLUSION

This Court has established a framework for analysis of state

taxes which may burden foreign commerce. The California court

has not only jettisoned the anaiytical framework created by this

Court in Japan Line and Container, it has essentially embraced

an approach which this Court has rejected many times, namely

that the states are free to tax until Congress tells them to stop.

See, e.g., Japan Line, 441 US. at 454-55; Southern Pac. Co. y.

Arizona ex rel. Sullivan, 325 U.S. 761, 769 (1945). The decision

below cannot be reconciled to the principles established by this

Court and it carries grave dangers of harm to the Nation. For the

foregoing reasons this Court should grant this petition for Writ of

Certiorari.

Respectfully submitted,

By: JOANNE M. GAaRVEY

Counsel of Record

JOAN K. IRION

TERESA A. MALONEY

HELLER, EHRMAN, WHITE &

MCAULIFFE

333 Bush Street

San Francisco, CA 94104-2878

(415) 772-6000

Attorneys for Petitioner