# Appendix — Barclays Bank PLC v. Franchise Tax Board of California

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1992
- **Citation:** 506 U.S. 870

## Text

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92-212

0. wee

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.

APPENDICES TO

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. + &.F.. CA 84103 + (415) 864-2300

Appendix A:

Appendix B:

Appendix C:

Appendix D:
Appendix E:
Appendix F:

Appendix G:

TABLE OF CONTENTS

APPENDICES

Opinion of the Supreme Court of California
May 11, 1992.

Opinion of the Court of Appeal of the State of
California in and for the Third Appellate Dis-
trict, November 30, 1990.

Statement of Decision of the Superior Court of
California, County of Sacramento, August 20,
1987.

Constitutional and Statutory Provisions Involved.
Rule 29.1 List.

Brief of the United States as Amicus Curiae in
the Supreme Court of California.

Franchise Tax Board Notice No. 89-714,
November 17, 1989.

APPENDIX A

IN THE SUPREME COURT OF
THE STATE OF CALIFORNIA

BARCLAYS BANK INTERNATIONAL, LTD.,
Plaintiff and Respondeni,
Vv.
FRANCHISE TAX BOARD,
Defendant and Appellant.

BARCLAYS BANK OF CALIFORNIA,
Plaintiff’ and Respondent,
Vv.
FRANCHISE TAX BOARD,
Defendant and Appellant.

S019064
Ct. App. No. C003388
Sacto. Super. Ct.
Nos. 325059 and 352061

Supreme Court Filed May 11, 1992

Robert Wandruff Clerk
DEPUTY

We granted review to decide whether the use by the state
Franchise Tax Board of a three-factor formula to apportion the
income of a foreign-parent multicorporate unitary enterprise for
State tax purposes violates the foreign commerce clause of the
federal Constitution (art. I, § 8, cl. 3). We conclude that relevant
treaty and other materials manifest a federal intent not to prohibit
the states from employing formula apportionment in taxing the
income of such a multinational unitary business. We therefore
reverse the judgment of the Court of Appeal.

A-2

I

Plaintiff taxpayers, Barclays Bank of California and Barclays
Bank International, Ltd. (collectively, the Bank), brought this
refund action to recover assessments of $152,420 and $1,678
levied against them by the Franchise Tax Board (Board) for the
1977 tax year. The basis for the assessments was a finding by the
Board that, together with their United Kingdom-based corporate
parent and related worldwide subsidiaries, the Bank comprised a
unitary enterprise, thereby subjecting it to the three-factor mathe-
matical formula used by the Board to apportion the interjurisdic-
tional income of a unitary business for state corporate income tax
purposes.’ Although the Bank did not contest the Board’s predi-
cate finding of corporate unity, it did claim that application of
California’s apportionment formula to such a_ unitary
group — that is, one whose corporate parent is a foreign domicili-
ary — violates the foreign commerce clause of the federal
Constitution.

Following a bench tnal, the superior court ruled in favor of the
Bank; the Court of Appeal affirmed, holding that California’s

‘During 1977, the tax year at issue here, Revenue and Taxation Code
secuon 25101 provided in relevant part: “When the income of a taxpayer
subject to the tax imposed under this part is derived from or attributable
to sources both within and without the state the tax shall be measured by
the net income derived from or attributable to sources within this state
in accordance with the provisions of Article 2 (commencing with
Section 25120 of this chapter);...”

Section 25120 et seq. of the Revenue and Taxation Code is Califor-
nia’s version of the Uniform Division of Income for Tax Purposes Act
(UDITPA; see 7A West's U. Laws Ann. (1985) p. 331); as explained
more fully later in this opinion, the statute authorizes the use of a three-
factor formula to apportion the net income from a taxpayer's total
business activities in order to determine the net income attributable to
intrastate activities. (See post, p. __ et seq. [typed maj. opn. p. 5 et
seq.]; Rev. & Tax. Code, §§ 25120-25140.)

In this opinion, we sometimes use the term “formula apportionment”
as a shorthand description of this three-factor mathematical formula
employed by the Board to apportion for state tax purposes the interjuris-
dictional income of a worldwide or domestic unitary enterprise.

A-3

formula apportionment method was unconstitutional as applied to
foreign-based unitary groups. In the view of the Court of Appeal,
use of the Board’s method in such a case violated the foreign
commerce clause in two respects. First, its application to a so-
called “foreign parent” unitary business implicated foreign policy
issues that were constitutionally required to be left to the federal
government. Second, use of the formula apportionment method in
the Bank’s case was at odds with a clear federal directive
embodied in presidential and cabinet-level statements, letters, and
press releases, task force reports and the congressional testimony
of senior executive officials to the effect that American foreign
commercial policy supported the use of an alternative accounting
method to determine the taxable income of foreign-based corpo-
rations, one that is incompatible with formula apportionment.

As the Court of Appeal recognized, this suit is not the first
liugation challenging on foreign commerce clause grounds the
Board’s use of a three-factor formula to apportion the worldwide
income of a multinational enterprise. In Container Corp. v.
Franchise Tax Bd. (1983) 463 U.S. 159 (Container), the United
States Supreme Court sustained against foreign commerce clause
challenge the Board’s use of formula apportionment to determine
the taxable income of a domestic-based unitary business group
with foreign-domiciled subsidiaries. Despite the outcome in
Container, the Bank successfully contended before the Court of
Appeal that issues implicated by its foreign parentage are disposi-
tive of the constitutional question and compel the opposite result
in this case.

Although presented with a question left open in Container
(supra, 463 U.S. at p. 189, fns. 26 & 32), we approach its
resolution along a path illuminated by the high court’s analysis in
a series of recent opinions, Container among them, in the contem-
porary evolution of the “dormant foreign commerce clause”
doctrine. Our opinion has two parts. As a prelude to the constitu-
tional question, we first examine the extralegal issues raised by
competing methodologies used to distribute multijurisdictional
corporate income for state tax purposes; we then address the
Bank’s central contention that a dormant foreign commerce
clause analysis is appropriate here and that the Board’s applica-

A-4

tion of formula apportionment to the Bank’s unitary business does
not survive that analysis.

As we explain, neither of the two competing models used to
allocate interjurisdictional income for state tax purposes is de-
monstrably superior to the other, even in an international mul-
ticorporate setting. Both methods meet the constitutional
standard of avoiding “unreasonably” attributing extrastate value
to the taxing jurisdiction. Moreover, the high court’s recent
foreign commerce clause jurisprudence reflects a diminution in
the reach of dormant foreign commerce clause analysis in favor of
an expanded recognition that, under circumscribed conditions,
governmental silence may constitute a ratification of state taxa-
tion of foreign commerce, rendering a dormant analysis inappo-
site. In our view, this is such a case.

II
Background. State Taxation of International Income

A

Limitations on taxation by the states of the income of corpora-
tions doing business in more than one jurisdiction inevitably
implicate the sufficiency of quantitative measures used to identify
that portion of taxable value reasonably attributable to the tax-
payer's intrastate activities. This pivotal role of technique arises
from the stricture of the commerce and due process clauses of the
federal Constitution that “‘a State may not tax value earned
outside its borders.” (ASARCO Inc. v. Idaho State Tax Comm'n
(1982) 458 U.S. 307, 315 (ASARCO).) To meet this limitation,
State tax schemes must comply with multiple criteria designed to
produce a substantially accurate distribution of income so that
only “values created by business within its borders” are taxed.
(Butler Bros. v. McColgan (1942) 315 U.S. 502, 507 (Butler
Bros.).)

Two distinct models have long competed for supremacy in
identifying the required division of multijurisdictional income.
One model, known as the “arm’s length7separate accounting” or
“AL/SA” method, calculates income on a discrete and circum-

A-5

scribed basis, whether geographical, transactional, or functional.
In a multicorporate interjurisdictional setting, the AL/SA
method allocates income to a single taxing “sovereign” rather
than apportioning it among jurisdictions, and treats intercorporate
transfers of value between commonly held or related entities as if
they were “arm’s length” transactions between unaffiliated busi-
nesses. There seems little reason to doubt that, as an operauonal
matter, the AL/SA model is the dominant method employed by
corporations both in the United States and internationally; that is,
a majority of businesses use the AL/SA or a variant method for
their own internal accounting purposes.

The competing model for taxation purposes is the “unitary
business/formula apportionment” method. Founded on the per-
ception that “[i]n the case of a more-or-less integrated business
enterprise operating in more than one State . . . arriving at precise
territorial allocations of ‘value’ is often an elusive goal, both in
theory and in practice” (Container, supra, 463 U.S. at p. 164),
formula apportionment relies on mathematical generalization to
distribute an aliquot share of income or taxable value among
taxing jurisdictions. The dominant variation of formula apportion-
ment — the so-called “three-factor” model employed by the
Board in this case — defines the multijurisdictional scope of the
unitary enterprise of which the taxable intrastate activities are a
part, calculates the combined income of the components of the
unitary group, and distributes a portion of that result to the taxing
state using a mathematical formula based on an averaged ratio of
property, payroll, and sales in the taxing jurisdiction to that of the
unitary enterprise overall.? (See Container, supra, 463 U.S. at
p. 165.)-

? . es . . . . °

“Thus, the taxable income of a multjurisdictional unitary taxpayer in
a State using the three-factor variant of formula apportionment would be
calculated under the following equation:

In-state In-state In-state

Property + Payroll + Sales Total Income
Total Total Total X Corporate = Taxable by

Property Payroll Sales Income the state

3

A-6

So far as taxation of United States-derived income is con-
cerned, the use of formula apportionment is both established and
noncontroversial, being the preferred method of a majority of the
States; a substantially smaller number of American jurisdictions
— California among them — combine and apportion the world-
wide income of multinational corporate taxpayers, a variant some-
times referred to as the “worldwide combined reporting” or
“WWCR” method.’

_ Although AL/SA is the method of choice for corporate opera-
tional and internal accounting purposes, its recognized deficien-
cies in purpo. ing to locate and assign taxable value to a particular
jurisdiction reduce its appeal among state tax administrators, the
chief proponents of competing apportionment methods. These
critics cite several shortcomings in the AL/SA method: compara-
tive distortions in measuring income, and a resulting overtaxation
or undertaxation; administrative complexity generated by the
need to analyze thousands of intercorporate transactions; and the
common absence of uncontrolled comparable prices by which to
verify the value of intercorporate “‘arm’s length” transactions.‘

*(See Moorman Mfg. Co. v. Bair (1978) 437 U.S. 267, 283, fn. 1
(Powell, J., dis.) [45 of 50 states use some form of income apportion-
ment]; Trinova Corp. v. Michigan Dept. of Treasury (1991) ___ US.
___, ___ [111 S.Ct. 818, 831-832]; see also Chairman’s Rep. and
Supplemental Views, Final Rep. of the Worldwide Unitary Taxation
Working Group (Aug. 1984) (hereafter Chairman's Report) p. 1 [all 45
States that levy a corporate income tax use formula apportionment to
distnibute taxable income of single multijurisdictional corporations];
U.S. General Accounting Office, Key Issues Affecting State Taxation of
Multijurisdictional Corporate Income Need Resolving (July I, 1982)
GAO/GGD-82-38 (hereafter GAO Report), at appen. II, pp. 58-67
[tabular breakdown in use of apportionment variants among the
states ].)

“The critical literature assessing both methods is extensive. (For a
sampling, see Chairman's Rep., supra; GAO Rep., supra; Note, State
Worldwide Unitary Taxation: The Foreign Parent Case (1985) 23
Colum. J. Transnat’l L. 445; Comment, California's Corporate
Franchise Tax: Taxation of Foreign Source Income? (1980) 20 Santa

A-7

More fundamentally, critics of the AL/SA method have
pointed to a theoretical failure of the model to account for income
created by the effects of unitary interdependency. As the high
court has stated in the case of a unitary business enterprise,
“separate [geographical] accounting, while it purports to isolate
portions of income received in various States, may fail to account
for contributions to income resulting from functional integration,
centralization of management, and economies of scale. [Cita-
tion.] Because these factors of profitability arise from the opera-
tion of the business as a whole, it becomes misleading to
characterize the income of the business as having a single
identifiable ‘source.’” (Mobil Oil Corp. v. Commissioner of
Taxes (1980) 445 U.S. 425, 438 (Mobil Oil).)

Of course, formula apportionment has its critics, as well. They
too point to distortions in the measurement of taxable income,
especially in a multinational setting where a relatively larger
proportion of foreign to United States activities may result in
overtaxation of the income of foreign-based unitary businesses;
the substantial administrative burden of complying with income
reporting requirements in United States dollars and accessing
financial information that in some cases may be in the hands of
literally hundreds of worldwide corporate affiliates; and the ab-
sence of uniform standards among the states for defining a unitary

Clara L.Rev. 123; Rudy, The California Unitary Tax Concept as
Applied to the Worldwide Activities of Foreign Corporations: A Modern
Commerce Clause Analysis (1980-81) 15 U.S.F. L.Rev. 371; Note,
Multinational Corporations and Income Allocation under Section 482 of
the Internal Revenue Code (1975-1976) 89 Harv.L.Rev. 1202; Helier-
stein, State Income Taxation of Multijurisdictional Corporations: Re-
flections on Mobil, Exxon, and H.R. 5076 (1978) 79 Mich. L.Rev. 113;
Hellerstein, State Income Taxation of Multijurisdictional Corporations,
Part II: Reflections on ASARCO and Woolworth (1982) 81 Mich.
L.Rev. 157; Hellerstein, State Taxation Under the Commerce Clause:
An Historical Perspective (1976) 29 Vand. L.Rev. 335; Corrigan,
Interstate Corporate Income Taxation— Recent Revolutions and a
Modern Response (1976) 29 Vand. L.Rev. 423; Langbein, The Unitary
Method and the Myth of Arm's Length (1986) 30 Tax Notes 625; see
also Hearings Before the House Com. on Ways and Means on H.R. No.
5076, 96th Cong., 2d Sess. (1980).)

a

A-8

business.” Not surprisingly, partisans on both sides of the issue
contend that their method is the accepted standard — in the
international arena in the case of AL/SA, and in the taxation of
multijunisdictional unitary groups in the case of formula
apportionment.°

B

The United States Supreme Court first considered the suffi-
ciency of formula apportionment in the constitutional sense over
70 years ago, upholding Connecticut's use of a single-factor
formula to apportion the income of a Connecticut business
machine manufacturer whose products were marketed nationally.
The high court rejected the taxpayer's due process claim that the
formula taxed business conducted “beyond the boundaries of the
State.” As the Supreme Court explained, “|t]he profits of the
[company are] largely earned by a series of transactions begin-
ning with manufacture in Connecticut and ending with the sale in
other states.... The legislature in attempting to put on this
business its fair share of the burden of taxation was faced with the
impossibility of allocating specifically the profits earned by the
processes conducted within its borders.” (Underwood T'writer
Co. v. Chamberlain (1920) 254 U.S. 113, 120-121
(Underwood).)

Since Underwood, supra, 254 U.S. 113, the Supreme Court has
confronted recurrent claims of the comparative superiority of
each of these two theoretically irreconcilable techniques in re-
sponding to the distributive imperatives of the commerce clause.
Despite claims of the surpassing merit of the separate accounting
method, the court has refused to erect a “theoretical constitu-
tional preference for one method of taxation over another” by
mandating its use. (Mobil Oil, supra, 445 U.S. at p. 444.)

*(See, e.g., Chairman's Rep., supra, at pp. 1-8; GAO Rep., supra, at
pp. 32-40; and matenals cited ante, at fn. 4.)

The trial court found as a matter of fact that the AL/SA method was
the “international standard of accounting” and that “[n]o other system
is used internauonally.”

A-9

Likewise, it has rejected appeals to prescribe a variant of the
formula apportionment method as a uniform national standard for
interstate taxation. (Moorman Mfg. Co. v. Bair, supra, 437 U.S.
267, 278 (Moorman).)

Although the high court has refused to impose “national
uniform rules for the division of income” rooted in the commerce
clause (Moorman, supra, 437 U.S. at p. 279), it has repeatedly
validated the comparative empirical accuracy and constitutional
adequacy of formula apportionment. Thus, not long after uphold-
ing the due process sufficiency of formula apportionment in
Underwood, supra, 254 U.S. 113, the court authorized its use in a
multinational setting to apportion the combined income of a
United Kingdom-headquartered brewer whose separate account-
ing showed no United States net income for the tax years at issue.
Contending that the state was in effect taxing foreign income, the
taxpayer asserted violations of the foreign commerce and due
process clauses. (Bass, Etc., Lid. v. Tax Comm. (1924) 266 U.S
271 (Bass).)

The high court rejected the challenge. The taxpayer’s business,
the court explained, was a unitary enterprise conducted transna-
tionally, “in which its profits were earned by a series of transac-
tions beginning with the manufacture in England and ending in
sales in New York and other places — the process of manufactur-
ing resulting in no profits until it ends in sales. . . ." The state was
thus justified “in attributing to [itself] a just proportion of the
profits earned by the Company from such [a] unitary business.”
Moreover, since the taxpayer had failed, as in Underwood, supra,
254 U.S. 113, to show that formula apportionment “produced an
unreasonable result,” its use was not unconstitutional. (Bass,
supra, 266 U.S. at pp. 282, 283.) |

In Butler Bros., supra, 315 U.S. 502, the taxpayer also chal-
lenged the state’s use of formula apportionment on the ground
that separate accounting showed its sales office in the taxing
jurisdiction had no net income for the tax year at issue and that
apportionment thus resulted in the taxation of extraterritonal
value. The court rejected this showing as insufficient, explaining
that it “need not impeach the integrity of [the separate] account-
ing system to say that it does not prove [taxpayer's] assertion that

A-10

extraterritorial values are being taxed. ... A particular accounting
system, though useful or necessary as a business aid, may not fit
the different requirements when a State seeks to tax values
created by business within its borders.”’ (/d., at p. 507.)

And in Exxon Corp. v. Wisconsin Dept. of Revenue (1980) 447
U.S. 207, the court rejected the attempt of a vertically integrated,
multistate petroleum company to demonstrate, based on its iater-
nal use of the separate accounting method applied to distinct
operating divisions, that income was allocable to extrastate com-
ponents and thus constitutionally was not subject to apportion-
ment. “[A] company’s internal accounting techniques are not
binding on a State for tax purposes,” the court wrote. ““Exxon’s
use of separate functional accounting . . . does not defeat the clear
and sufficient nexus between [its] interstate activities and the
taxing State’’ upon which the finding of corporate unity was
based. [/d., at pp. 221, 225.)

Again, in Mobil Oil, supra, 445 U.S. 425, a nondomiciliary
corporate taxpayer challenged the state’s inclusion in its appor-
uonment formula of foreign source dividend income received by
the taxpayer from subsidiaries and affiliates, on the ground that its
foreign ongin made it constitutionally unapportionable. Although
the taxpayer was able to isolate its foreign dividend income using
separate accounting, the court observed that “the linchpin of
apportionability in the field of state income taxation is the unitary
business principle.” (/d., at p. 439.) The divisibility of income
produced by a ‘separate accounting treatment, the court said,
“may fail to account for contributions to income resulting from
functional integration, centralization of management, and econo-
mies of scale.... Although separate geographical accounting
may be useful for internal auditing, for purposes of state taxation
it is not constitutionally required.” (/d., at p. 438.) (See also
ASARCO, supra, 458 U.S. 307; F. W. Woolworth Co. v. Taxation
& Revenue Dept. (1982) 458 U.S. 354; and Amerada Hess Corp.
v. N. J. Taxation Div. (1989) 490 U.S. 66, 74.)

in a slightly different context, the high court recently re-
affirmed its views of both the theoretical problems inherent in
locating the “source” of multijurisdictional income, and the
validity for commerce clause purposes of the formula apportion-

eS mm

A-ll

ment method. Last term, in upholding Michigan's “value added”
tax against commerce clause challenge, the court wrote that “the
discrete components of a state income tax may appear in isolation
susceptible of geographic designation. Nevertheless, since Under-
wood ... we have recognized the impracticability of assuming
that all income can be assigned to a single source.” (7rinova
Corp. v. Michigan Dept. of Treasury, supra, US.
[111 S.Ct. 818, 831].)

The court went on to reiterate its statement in Container,
supra, 463 U.S. at page 170, that the three-factor formula “has
become something of a benchmark against which other appor-
tionment formulas are judged,” noted its incorporation into
UDITPA, adopted by almost half of the states, and acknowledged
its accuracy in reflecting “the activities by which [taxable] value
is generated.” “The same factors,” the court wrote, “that prevent
determination of the geographic location where income is gener-
ated, factors such as functional integration, centralization of
management, and economies of scale, make it impossible to
determine the location of value added with exact precision.”
(Trinova Corp. v. Michigan Dept. of Treasury, supra, US.
=n (545 SAX, OO. Been

Thus, the rule that has emerged from this series of high court
encounters — spanning over 70 years — with the contending mer-
its of two “theoretically incommensurate” systems (Mobil Oil,
supra, 445 US. at p. 444) is that, for state tax purposes, neither
the commerce clause nor the due process clause of the federal
Constitution mandates the use of a particular methodology to
allocate or distribute multijurisdictional income. Either of the two
principal methods and their variants is constitutionally permissi-
ble, as long as the one chosen does not operate “‘unreasonably and
arbitrarily” to attribute to the taxing state a percentage of total
income “out of all appropriate proportion to the business trans-
acted by the [taxpayer] in that State.” (Hans Rees’ Sons v. No.
Carolina (1931) 283 U.S. 123, 135.) Or, as the high court stated
in Moorman, supra, 437 U.S. 267, 274, “the States have wide
latitude in the selection of apportionment formulas and...a
formula-produced assessment will only be disturbed when the
taxpayer has proved by clear and cogent evidence that the income

A-12

attnbuted to the State is in fact out of all appropriate proportion
to the business transacted... in that State.” (Internal quotation
marks omitted. )

We present this extended account of the competing division-of-
income methods and their treatment at the hands of the high
court in order to meet at the outset the Bank’s unpersuasive
contenuon that formula apportionment is an inherently inequita-
ble method, at least when applied to foreign-based unitary groups
such as the Bank and its affiliates.’ In substance, this argument is
no different from the one explicitly rejected by the court in
Container, supra, 463 U.S. 159. There the taxpayer presented
related challenges to California’s use of the three-factor formula
to apportion the global income of a domestic-based unitary
enterprise. Specifically, the taxpayer claimed that its foreign
affiliates were significantly more profitable, and that by ignoring
underlying economic realities such as lower wage and production
costs among its foreign subsidiaries, three-factor formula appor-
tionment systematically distorted the “true” allocation of income
between unitary components, unfairly inflating the income appor-
tioned to California.

“The problem with this argument,” the court said, “is...
[that] the profit figures relied on by [the taxpayer] are based on
precisely the sort of formal geographical accounting whose basic
theoretical weaknesses justify resort to formula apportionment in
the first place.” And the difficulty with the taxpayer’s evidence of
differing costs, the court said, “is that it does not by itself come

’To forestall any conceptual misunderstanding, we note that one of
the two elements of the dormant foreign commerce clause analysis
developed by the high court in Japan Line, Lid. v. County of Los
Angeles (1979) 441 U.S. 434 and subsequent cases (see post, p. — et
seq. [typed maj. opn. p. 19 et seq.]) is the risk of multiple taxation
posed by the challenged state taxation method. Although the high
court's assessment of the principal division of income methods speaks to
that risk, the foregoing summary is undertaken for the limited purpose of
gauging the comparative technical or “accounting” merits of the two
models, not as part of a dormant commerce clause analysis. (See post,
p. — et seq. [typed maj. opn. p. 33 et seq.].)

A-13

close to impeaching the basic rationale behind the three-factor
formula. ...[{{]] Both geographical accounting and formula ap-
portionment are imperfect proxies for an ideal which is not only
difficult to achieve in practice, but also difficult to describe in
theory....” (Container, supra, 463 U.S. at p. 182.) “Of course,
even the three-factor formula is necessarily imperfect,” the court
continued, “‘[b]ut we have seen no evidence demonstrating that
the margin of error (systematic or not) inherent in the three-
factor formula is greater than the margin of error (systematic or
not) inherent in the sort of separate accounting urged upon us by
[taxpayer].” (/d., at pp. 183-184.)

In light of this analysis and the precedents summarized above,
we conclude that, in considering the Bank’s case for relief, neither
of the two methods can lay claim to a decisive technical superior-
ity or greater constitutional stature than the other.* We turn, then,
to the merits of the Bank’s contention that a dormant foreign
commerce clause analysis renders unconstitutional the Board’s
application of the three-factor apportionment formula to the
Bank’s unitary enterprise.

*The Bank argues that the conclusion in the Container opinion
(supra, 463 U.S. at p. 184) that three-factor formula apportionment is a
“proper and fair method of taxation” does not mean that its application
to foreign-based multinationals produces an accurate determination of
their intrastate income. The Container characterizations, the Bank
contends, are merely the outcome of the four-part dormant interstate
commerce clause analysis developed in Complete Auto Transit, Inc. v.
Brady (1977) 430 U.S. 274. This argument stnkes us as semantical at
best.

The court made clear in Trinova Corp. v. Michigan Dept. of Treasury,
supra, US. [111 S.Ct. 881, 835], that if a state tax
complies with the requirement of fair apportionment, constitutonal
demands are exhausted. Moreover, even under a dormant foreign
commerce clause analysis, both the trial court and the Court of Appeal
concluded — largely under the compulsion of the identical holding in
Container, supra, 463 U.S. 159 — that the Board’s use of worldwide
formula apportionment in this case did not offend the nsk-of-multiple-
taxation leg of the dormant analysis.

III

The Dormant Foreign Commerce Clause Doctrine

Despite the framers’ explicit commitment to Congress of the
power to “regulate commerce with foreign nations, and among the
several states” (U.S. Const., art. I, § 8, cl. 3), by far the bulk of
commerce clause jurisprudence has been developed by the high
court itself under the judicially created doctrine of the “‘unexer-
cised,” “negative,” or “dormant” commerce clause. From its
origin early in the nation’s constitutional history with the opinion
of Chief Justice Marshall in Gibbons v. Ogden (1824) 22 US.
(9 Wheat.) 1, 209, through its reformulation at the hands of
Justice Curtis in Cooley v. Board of Wardens of Port of Philadel-
phia et al. (1852) 53 U.S. (12 How.) 298, the high court has
posited irreducible and self-executing constitutional minima that
limit state action affecting interstate and foreign commerce, even
where Congress has failed to exert its plenary commerce clause
power. “[T]he Commerce Clause was not merely an authoriza-
tion to Congress to enact laws for the protection and encourage-
ment of commerce among the States, but by its own force created
an area of trade free from interference by the States. In short, the
Commerce Clause even without implementing legislation by
Congress is a limitation upon the power of the States....”
(Freeman v. Hewit (1946) 329 U.S. 249, 252; see also Southern
Pacific Co. v. Arizona (1945) 325 U.S. 761, 769 [“For a hundred
years it has been accepted constitutional doctrine that the com-
merce clause, without the aid of Congressional legislation...
affords some protection from state legislation inimical to the
national commerce, and that in such cases, where Congress has
not acted, this Court, and not the state legislature, is under the
commerce clause the final arbiter of the competing demands of
state and national interests. [Citations.]"”]; Hood & Sons v. Du
Mond (1949) 336 U.S. 525, 534; Northwestern Cement Co. v.
Minn. (1959) 358 U.S. 450, 458; Hughes v. Oklahoma (1979)
441 U.S. 322, 326, fns. 2 & 3; Wyoming v. Oklahoma (Jan. 22,
SPE) consensus : [60 U.S.L. Week 4119, 4124].)

In the modern era, the consolidative work of the court led it to
recast the interstate dimension of the dormant commerce clause
doctrine as it applies to state taxation. In Complete Auto Transit,

eS

A-15

Inc. v. Brady, supra, 430 U.S. 274, the court adopted a four-part
test to evaluate state tax schemes to ensure compliance with the
inherent demands of the “unexercised”’ commerce clause. If a tax
“is applied to an activity with a substantial nexus with the taxing
State, is fairly apportioned, does not discriminate against inter-
state commerce, and is fairly related to the services provided by
the State,” it does not burden impermissibly interstate commerce.
(/d., at p. 279.)

This four-part test is not adequate, however, to subserve the
additional policies underlying the foreign commerce clause. In
Japan Line, Lid. v. County of Los Angeles, supra, 441 U.S. 434
(Japan Line), the court held that “[w]hen construing Congress’
power to ‘regulate Commerce with foreign Nations,’ a more
extensive constitutional inquiry is required.” (Jd., at p. 446.)
Specifically, “two additional considerations, beyond those articu-
lated in Complete Auto, come into play.” (Jbid.) “In addition to
answering the nexus, apportionment, and nondiscrimination ques-
tions posed in Complete Auto, a court must also inquire, first,
whether the tax, notwithstanding apportionment, creates a sub-
stantial risk of international multiple taxation, and second,
whether the tax prevents the Federal Government from ‘speaking
with one voice when regulating commercial relations with foreign
governments.’ If a state tax contravenes either of these precepts, it
is unconstitutional under the [foreign] Commerce Clause.” (/d.,
at p. 451, emphasis added.)

Although the court’s opinion in Japan Line, supra, 441
U.S. 434, stressed the paramount national need for and plenary
nature of congressional power over foreign commerce — greater,
perhaps, than Congress’s textually parallel power over interstate
commerce (id., at p. 448 & fns. 12-13) — as one of the funda-
mental policies animating the framers, it had little to say concern-
ing the preemptive role of Congress in defining the contours of
permissible state taxation of foreign commerce. The court illumi-
nated that question a year later when it decided Mobil Oil, supra,
445 U.S. 425, a challenge by Mobil to Vermont’s tax on foreign
dividend income. Rejecting what it termed Mobil’s “forced”
analogy to California’s tax on Japanese shipping containers at
issue in Japan Line, the court said that the real issue before it was

0

A-16

not one of multiple taxation at the international level, as in Japan
Line, but of multiple taxation at the state level.

“Concurrent federal and state taxation of income, of course, is
a well-established norm,” the court wrote. “Absent some explicit
directive from Congress, we cannot infer that treatment of foreign
income at the federal level mandates identical treatment by the
States. The absence of any explicit directive to that effect is
attested by the fact that Congress has long debated, but has not
enacted, legislation designed to regulate state taxation of income.
[Citations.]” (Mobil Oil, supra, 445 U.S. at p. 448, emphasis
added.)

The view taken in Mobil Oil, supra, 445 U.S. 425, that
Congress, under its “ ‘exclusive and absolute’ power . . . over for-
eign commerce” (Japan Line, supra, 441 U.S. at p. 448, fn. 13,
quoting Buttfield v. Stranahan (1904) 192 U.S. 470, 492), is the
source of “explicit directive[s]” preempting state taxation of
foreign commerce, was amplified in the court’s treatment of the
issue in Container, supra, 463 U.S. 159. The court first noted that
“allocating income among various jurisdictions bears some resem-
blance. . . to slicing a shadow,” and concluded that “it would be
perverse, simply for the sake of avoiding double taxation, to
require California to give up one allocation method that some-
times results in double taxation [i.e., formula apportionment] in
favor of another allocation method [i.e.. AL/SA] that also
sometimes results in double taxation.” (Jd., at pp. 192-193.) It
then turned to the “second inquiry suggested by Japan Line,”
namely, whether California’s use of formula apportionment in an
international context might “ ‘impair federal uniformity in an area
where federal uniformity is essential,’ ’’ and “ ‘prevent the Federal
Government from “speaking with one voice” in international
trade.” ” (Ibid.)

In examining the “one voice” branch of the dormant commerce
clause doctrine, the court in Container was careful to distinguish
between state tax schemes that are unconstitutional because they
implicate foreign affairs and those that, although they may have
“foreign resonances,” are void because they “‘violate[] a clear
federal directive.” While either infirmity will offend the “one
voice” standard, the latter does so, the court said, not as a result

of a dormant commerce clause analysis, but because of “some
explicit directive from Congress.” This latter analysis, the court
noted, “‘is, of course, essentially a species of pre-emption... .”
(Container, supra, 463 U.S. at p. 194, emphasis added.)

Applying the “explicit directive from Congress” language of
Mobil Oil, supra, 445 U.S. 425, and canvassing “specific indica-
tions of congressional intent,” the Container opinion found
neither statutory preemption by Congress nor any requirement
that the AL/SA method be applied to the states in any of the
many bilateral tax treaties to which the United States was a
signatory. Indeed, the court pointed out, “the Senate has on at
least one occasion, in considering a proposed treaty, attached a
reservation declining to give its consent to a provision in the treaty
that would have extended [an AL/SA] restriction to the States.”
(Container, supra, 463 U.S. at pp. 196-197.) “[I]t remains true,”
the court concluded, “as we said in Mobil, that ‘Congress has long
debated, but has not enacted, legislation designed to regulate state
taxation of income.’ ” (/bid.)

Although the court concluded in Container that the Board’s use
of formula apportionment did not violate the foreign commerce
clause under a dormant analysis, it is important for our purposes
to observe that the opinion carefully separates the analytical
thread of congressional preemption from what the court termed a
“more relaxed standard which takes into account our residual
concern about the foreign policy implications of California’s tax.”
(Container, supra, 463 U.S. at p. 197.) In the former case, there
obviously is no need for resort to a dormant analysis since
Congress has explicitly exerted its plenary authority under the
commerce power to preempt a state tax scheme that, far from
“implicating foreign affairs,” has only “foreign resonances.”’ As

*Compare the court's statement in Merrion v. Jicarilla Apache Tribe
(1982) 455 U.S. 130, 154-155, that “we only engage in [dormant
analysis] review when Congress has not acted or purported to act.
[ Citation.] Once Congress acts, courts are not free to review state taxes
or other regulations under the dormant Commerce Clause. When
Congress has struck the balance it deems appropriate, the courts are no

slate tinier

A-18

the Container opinion makes clear, however, the court will not
lightly overturn the historic prerogatives of the states to adminis-
ter their own tax systems. Before being declared nullified by
Congress under this “species of pre-emption,” the “federal direc-
tive” that a state tax scheme allegedly violates must be “‘clear.”
(463 U.S. at p. 194.)

The “more relaxed standard” of a dormant analysis — based on
“residual concern[s]” about the “foreign policy implications” of a
given state tax scheme — is appropriate only “in the absence of
explicit action by Congress” preempting a given state taxation
method. It is undertaken by a judiciary with “little competence in
determining precisely when foreign nations will be offended by
particular acts, and even less competence in deciding how to
balance a particular risk of retaliation against the sovereign right
of the United States as a whole to let the States tax as they
please.” (Container, supra, 463 U.S. at p. 194.) Thus, it is for
reasons of its limited foreign policy expertise that, in conducting a
dormant “one voice” inquiry, the “best that [a court] can do, in
the absence of explicit action by Congress [preempting a chal-
lenged state tax scheme], is to attempt to develop objective
standards that reflect very general observations about the impera-
tives of international trade and international relations.” (Jbid.)
Where they apply, the development of such standards is informed
significantly by the views of executive officials charged with
implementing the nation’s foreign policy — including its foreign
commercial policy — “whose nuances ... are much more the
province of the Executive Branch and Congress than of this
Court.” (/d., at p. 196.)

As might be expected, the Bank argues at length that the
Board’s application of formula apportionment to the unitary
business of which it is a part offends the foreign commerce clause

longer needed to prevent States from burdening commerce, and it
matters not that the courts would invalidate the state tax or regulation
under the Commerce Clause in the absence of congressional action.
[ Citation.] Courts are final arbiters under the Commerce Clause only
when Congress ha: not acted.”

A-19

precisely because it violates a “clear federal directive.” That
directive, the Bank tells us, is embodied in an impressive array of
federal executive communications — presidential statements and
press releases; official letters from cabinet officers charged with
overseeing national monetary, trade, and foreign policies; the
testimony of senior Treasury Department officials; and the “white
paper” of an executive task force established to study and present
recommendations on the issues surrounding state use of formula
apportionment to foreign-based unitary groups. Without excep-
tion, the Bank argues, these executive sources vigorously and
explicitly support the exclusive use of the AL/SA method in such
circumstances and condemn the use of formula apportionment by
the states.

The Court of Appeal essentially agreed with the Bank’s under-
lying premise that executive pronouncements of what national
foreign commercial policy should be qualifies as a source of the
“clear federal directive.” It reasoned that because the Container
opinion (supra, 463 U.S. 159) subsumed the search for specific
indications of congressional intent within the “‘one voice” stan-
dard, congressional intent must therefore be an integral compo-
nent of the dormant commerce clause test. From that analytical
keystone, it had little difficultly in concluding on the basis of a
substantial executive-compiled record that the federal directive
was clear and explicit: according to executive branch officials,
formula apportionment, in the words of the Court of Appeal, “‘is
not to be applied to foreign-based corporate groups — those
groups are to be taxed by the states only on income derived from
the United States.”

Were we confronted with the Bank’s argument in the immedi-
ate aftermath of the Container decision, it might carry some
force, although given the absence of textual support for the
claim — both in the Container opinion and the commerce clause
itself — it is by no means facially convincing. The fact is, how-
ever, that dormant foreign commerce clause jurisprudence has
evolved in the nine years since Container, supra, 463 U.S. 159,
was decided, an evolution that, as we parse the cases, has
reoriented the doctrine. That development has reduced the scope

A-20

for a dormant analysis and makes its invocation here particularly
inappropmiate. .

IV
Wardair: A “Governmental Silence” of a Different Kind.

Three years after its opinion in Container, supra, 463 U.S. 159,
upholding California’s use of formula apportionment in calculat-
ing the intrastate tax liability of a domestic-based unitary busi-
ness, the high court decided Wardair Canada v. Florida Dept. of
Revenue (1986) 477 U.S. 1 (Wardair). At issue was a Canadian-

, based international air carrier’s challenge to an excise tax assessed

by Florida on intrastate fuel purchases by common carriers,
including airlines. The tax was levied at the rate of 5 percent on a
deemed fuel price of $1.148 per gallon; air carriers were liable for
the full amount of the tax whether the fuel was consumed in
flights within or outside the state, regardless of the amount of
intrastate business transacted by the taxpayer. (/d., at p. 4.)

In attacking application of the tax to its Florida fuel purchases
on foreign commerce clause grounds, the carrier — joined by the
United States as amicus curiae — conceded that the tax, being
assessed on discrete intrastate transactions, presented no risk of
multiple international taxation. It relied instead entirely on the
“one voice” element of the dormant foreign commerce clause
analysis, the last of the six factors identified by the court in Japan
Line, supra, 441 U.S. 434.

Specifically, the carrier contended that a patchwork of recipro-
cal tax exemptions, embodied in a network of multilateral agree-
ments and conventions to which the United States was a party,
manifested a national policy to exempt from state taxation the
instrumentalities of international air commerce, including avia-
tion gasoline. Florida’s excise on aviation fuel purchased by a
foreign carrier engaged in international air commerce, the carrier
claimed, was inconsistent with that univocal national policy, thus
threatening “the ability of the Federal Government to ‘speak with
one voice.” (Wardair, supra, 477 US. at p. 9.)

A-21

The high court rejected the claim. Not only did the matrix of
international conventions, resolutions and air commerce agree-
ments relied on by the carrier and the United States fail to sustain
a federal policy pretermiting Florida’s excise on aviation fuel, the
high court said, “but, even more fundamentally, [it] shows also
that in the context of this case we do not confront federal
governmental silence of the sort that triggers dormant Commerce
Clause analysis.” In point of fact, the court continued, “the
international agreements cited demonstrate that the Federal Gov-
ernment has affirmatively acted, rather than remained silent, with
respect to the power of the States to tax aviation fuel, and thus
that the case does not call for dormant Commerce Clause analysis
at all.” (Wardair, supra, 477 U.S. at p. 9.)

As we explain below, the court’s opinion in Wardair, supra, 477
U.S. 1, establishes an interpretive framework for educing from a
compilation of legislative materials a species of governmental
silence that forecloses resort to a dormant foreign commerce
clause analysis. In some cases where Congress affirmatively
declines to adopt certain measures, the resulting governmental
“silence” is not the sort that triggers use of a dormant foreign
commerce clause analysis. Properly applied under the appropriate
conditions, the Wardair methodology interdicts judicial resort to
executive branch opinions as to the international commercial
effect of a challenged state taxation practice because Congress
has “acquiesced in” the contested practice, thereby validating it.
(/d., at p. 12.) Where appropriate, Wardair supplants what the
court has termed the “quagmire” of dormant commerce clause
analysis (Northwestern Cement Co. v. Minn., supra, 358 U.S.
450, 458) with a heightened judicial attentiveness to expressions
of congressional foreign commerce policy. Because it delimits use
of dormant foreign commerce clause analysis in important ways,
it is useful to lay out the analytical lines of the Wardair paradigm
in some detail before applying it to the case before us.

The foreign carrier in Wardair, supra, 477 US. 1, relied on a
hierarchy of multinational agreements to support its thesis that
federal policy precluded state taxation of intrastate aviation fuel
purchases by international carriers: the Chicago Convention on
International Civil Aviation (Convention), signed in 1944 by the

A-22

United States, Canada, and 155 other nations; a resolution
adopted in 1966 by the International Civil Aviation Organization,
of which the United States was a member by virtue of being a
signatory to the Convention; and more than 70 bilateral-interna-
tional aviation agreements between the United States and foreign
nations, including a United States-Canadian aviation agreement.
(Wardair, supra, at p. 10.) But it was these very texts, the high
court concluded, that in combination impeached the existence of
a national policy to exempt international air commerce from state
taxation and, by their “negative implications,” supported an
inference that “the United States has at least acquiesced in state
taxation of fuel used by foreign carriers in international travel.”
(/d., at p. 12.)

First, a provision of the Convention explicitly prohibited taxa-
tion by both national and subnational governmental units of fuel
“on board” arriving international aircraft. The Convention failed,
however, to reach the issue of taxing intrastate fuel purchases by
foreign aircraft following their arrival. This omission, the court
reasoned, demonstrated by “negative implication” the “interna-
tional community’s awareness of the problem of state and locai
taxation of international air travel... and represent[ed] a deci-
sion by the parties to [the] Convention to address the problem by
curtailing... only some of the localities’ power to tax, while
implicitly preserving other aspects of that authority.” ( Wardair,
supra, 477 U.S. at p. 10.)

Second, the resolution relied on by the carrier, although en-
dorsing an international regime prohibiting duties of any kind by
any taxing authority on international air travel, had “not been
specifically endorsed, let alone signed, entered into, agreed upon,
approved, or passed by either the Executive or Legislative Branch
of the Federal Government. In other words, no action has been
taken to give the Resolution the force of law.” (Wardair, supra,
477 U.S. at p. 11.) It thus could not tenably represent, the court
concluded, “a policy of the United States, as opposed to a policy
of an organization of which the United States is one of many
members.” (/bid., emphasis in original.)

Third, in the years following the Convention, the United States
entered into more than 70 bilateral international civil aviation

A-23

agreements, “in not one of [which] has the United States agreed
to deny the States the power asserted by Florida in this case.”
Significantly, most of these agreements “explicitly commit the
United States to refrain from imposing national taxes on aviation
fuel used by airlines of the other contracting party... but...
none... explicitly interdicts state or local taxes on aviation fuel
used by foreign airlines in international traffic.” (Wardair, supra,
477 U.S. at p. 11, emphasis in original internal quotation marks
omitted.) Reenforcing this view, the United States-Canadian
agreement also limited tax exemptions granted foreign air carriers
to “national duties and charges,” an “omission [to reach subna-
tional duties] which must be understood as representing a policy
choice by the contracting parties....” (/bid.)

Summing up the implications of this mosaic of texts for a
dormant commerce clause attack on Florida’s tax, the court
concluded that “[w]hat all of this makes abundantly clear is that
the Federal Government has not remained silent with regard to
the question whether States should have the power to impose
taxes on aviation fuel used by foreign carriers in international
travel.” (Wardair, supra, 477 U.S. at p. 12.) “It would tum
dormant commerce Clause analysis entirely upside down,” the
court continued, “to apply it where the Federal Government has
acted, and to apply it in such a way as to reverse the policy that
the Federal Government has elected to follow. For the dormant
Commerce Clause, in both its interstate and foreign incarnations,
only operates where the Federal Government has not spo-
ken....” (Jbid., first emphasis in original, second emphasis
added.)

For our purposes, the high court’s analysis of the textual
materials in Wardaiz, supra, 477 U.S. 1, can be abstracted into a
kind of protocol for identifying those kinds of governmental
silences that give rise to “negative implications” supporting an
inference of federal acquiescence in the state tax under challenge.
Thus, in Wardair the court found that bilateral recognition of an
international taxation issue and its specific treatment at the
national level (numerous international aviation agreements ex-
empting foreign air carriers from national duties), impliedly
supported a finding that the failure to address the correlative issue

A-24

at the subnational level represented ‘“‘a policy choice by the
contracting parties.” (/d., at p. 11.)

By a kind of parity of reasoning, Wardair found that the explicit
treatment of some subnational aspects of an international taxation
issue (Convention -prohibition on state taxation of fuel aboard
arniving foreign aircraft) supported an inference of international
“awareness of the problem” at the state level and a “deci-
sion ...to address the problem by [limited curtailment of the
subnational power] ... while implicitly preserving other aspects
of [subnational] authority.” (477 U.S. at p. 10.) Last, the court
found that notwithstanding an international aspiration to erect a
particular tax regime (the resolution’s endorsement of the com-
plete eradication of national and subnational duties on interna-
tional air travel), the fact that domestic “/aw as it presently stands
acquiesces in taxation... by political subdivisions” was decisive
of the commerce clause issue. (/bid., emphasis in original.)

Before considering the history of congressional consideration of
curbs on the states’ application of formula apportionment to
foreign-based multinationals in light of the court’s analysis in
Wardair, we first consider the treatment of Wardair at the hands
of the Court of Appeal.

V

The Wardair Canon and Congressional Refusal to Prohibit
State Use of Formula Apportionment

A

As noted ante, the Court of Appeal declined to accept the view
that Wardair, supra, 477 U.S. 1, represents, if not a change of
course in the high court’s dormant foreign commerce clause
jurisprudence, at least a retrenchment in its scope. It also con-
cluded that statements of executive branch officials as to United
States foreign commercial policy could constitute the “clear
federal directive’ component to the “one voice” analysis of Japan
Line, supra, 441 U.S. 434, Mobil Oil, supra, 445 U.S. 425, and
Container, supra, 463 U.S. 159.

———————————

A-25

In our view, both of these conclusions are born of the root error
of failing to grasp the conceptual impact of Wardair, supra, 477
U.S. 1, on dormant foreign commerce clause doctrine. As we
explain, the failure of the Court of Appeal to appreciate
Wardair’s limitations on dormant commerce clause analysis is
cognate to its erroneous view that executive branch aspirations as
to what national foreign commercial policy ought to be can
constitute a “clear federal directive,” at least where, under a
Wardair analysis, Congress has decreed otherwise.

The Court of Appeal rejected the Board’s argument that Japan
Line, Container, and Wardair demonstrate a trend in foreign
commerce clause jurisprudence toward a heightened attention to
governmental expressions of United States foreign commercial
policy. Instead, it concluded that “the theoretical underpinning
has remained intact through these cases.” What was different in
them, it thought, “was the degree to which foreign affairs and
international commercial relations where implicated” by the chal-
lenged state tax scheme.

It may-be that the application of such a theme to these three
cases would produce a coherent alternative explanation of the
results reached by the high court. To contend, however, that
Wardair, supra, 477 U.S. 1, turns on “the degree of which foreign
affairs and international commercial relations were implicated,” is
to misread fundamentally the court’s opinion. Such a view ignores
the high court’s explicit statement that in Wardair it “[did] not
confront federal governmental silence of the sort that tnggers
dormant Commerce Clause analysis,” that the case “does not call
for dormant Commerce Clause analysis at all,” and that “[iJt
would turn dormant Commerce Clause analysis entirely upside
down to apply it where the Federal Government has acted.” (/d.,
at pp. 9, 12.) We are confident that the overarching significance
of Wardair lies in its explicit limitation on when a dormant
foreign commerce clause analysis is appropriate, its affirmation
that the analysis “only operates where the Federal Government
has not spoken,” and its statement that the court “[has] never
suggested... that the Foreign Commerce Clause insists that the
Federal Government speak with amy particular voice.” (/d., at
pp. 12, 13, emphasis in original.)

———————————

A-26

The Court of Appeal’s misapprehension of this central meaning
of Wardair, supra, 477 U.S. 1, led it to a related error — the
conclusion, against the backdrop of an explicit congressional
refusal to adopt curbs on state use of formula apportionment, that
a tnal of letters, press releases, task force reports, transcripts of
congressional testimony of Treasury Department officials, and like
communications orchestrated by the executive branch could con-
stitute a “clear federal directive” condemning state use of formula
apportionment in foreign parent cases. As we have indicated,
however, the “clear federal directive” formulation in Container,
supra, 463 U.S. 159, has no role to play in a dormant foreign
commerce clause analysis; rather, it confirms the preemptive
power of Congress to interdict state tax schemes that would, had
Congress not chosen to act, survive challenge under a dormant
foreign commerce clause analysis because they present only
“foreign resonances.” (/d., at p. 194.)

Whether, in the absence of a congressionally enacted “clear
federal directive,” the executive branch can itself assume a
preemptive role and in effect nullify state tax schemes as they
affect foreign-based businesses is a distinctly different question.
The Court of Appeal, relying principally on the concurring opin-
ion of Justice Jackson in Youngstown Co. v. Sawyer (1952) 343
U.S. 579, 634— the famous “steel seizure case” — concluded
that such a nower inhered in the President’s authority to conduct
foreign affairs and that the executive had spoken with sufficient
clarity to prohibit state application of formula apportionment to
foreign parent unitary groups such as the Bank.

In light of Wardair, supra, 447 U.S. 1, we need not and do not
reach this issue. For in the debate over state use of worldwide
formula apportionment — a controversy waged on multiple fronts
by foreign governments, multinationals and their domestic and
foreign affiliates, state tax authorities, senior Treasury and State
Department officials, the White House and Congress — we hear
the din of a “governmental silence” that cannot be ignored. In our
view, Congress, after being repeatedly pushed and pulled in bot?
directions, at least for the present has decided not to prohibit state
use of formula apportionment in cases of this kind. To paraphrase
the Wardair opinion, international agreements demonstrate that

* *. *

A state tax may, of course, have foreign policy implica-
tions other than a threat of retaliation. We note, however,
that in this case, unlike Japan Line, the Executive Branch
has decided not to file an amicus curiae brief in opposition to
the state tax. The lack of such a submission is by no means
dispositive. Nevertheless, when combined with all the other
considerations we have discussed, it does suggest that the
foreign policy of the United States — whose nuances we
must emphasize again, are much more the province of the
Executive Branch and Congress than of this Court — is not
seriously threatened by California’s decision to apply the
unitary business concept and formula apportionment in cal-
culating appellant’s taxable income.

Having found this tax as applied in Container Corp. not to
enhance the risk of double taxation, and further not to implicate
foreign policy issues, the Supreme Court upheld the tax in
question. However, the Supreme Court in Container Corp. ex-

F-28

pressly reserved judgment as to whether the constitutionality of
the tax would be upheld as applied to a foreign controlled
corporate group, the issue presented in this case. Container Corp.,
supra at 189, n.26, and 195 n.32.

The third case germane to the instant controversy is Wardair
Canada, Inc. v. Florida Department of Revenue, 477 US. 1
(1986). In that case the State of Florida’s sales taxation of all fuel
purchased in Florida was challenged by a Canadian airline operat-
ing charter flights to and from the United States. The airline
attacked the validity of Florida’s tax statute insofar as it autho-
rized assessment of a tax on fuel used by foreign airlines engaged
exclusively in foreign commerce. The airline argued: that by the
Federal Aviation Act Congress preempted the field of foreign air
travel and thus left no room for local government taxation of such
travel; that the tax violated the Foreign Commerce Clause of the
United States Constitution and a federal policy expressed in the
Convention on International Civil Aviation of 1944 (Chicago
Convention) to which Canada, the United States, and 155 other
nations were parties; and that the tax was inconsistent with the
Nonscheduled Air Services Agreement between the United
States and Canada regulating air charter service between the
United States and Canada.

The Supreme Court in Wardair first analyzed the preemption
argument and noted that Congress through the Federal Aviation
Act had regulated aviation extensively. But the Supreme Court
held that state law is not automatically preempted wherever there
is a federal regulation of an activity, an industry or an area of the
law. The Court noted that when Congress legislates within the
scope of its constitutionally granted powers, that legislation may
displace state law. Whether or not there is such a preemption
depends upon whether Congress intended to displace state law. If
there is an actual conflict between state law and federal law then
it is presumed that Congress intended preemption. Where there is
no actual conflict between federal and state law, the Supreme
Court has required evidence of a congressional intent to preempt
the field. Wardair Canada, Inc., supra at 6. In Wardair the
Supreme Court found that not only was there a lack of evidence
of an intent to preempt the field but to the contrary, the Federal

F-29

Aviation Act expressly permitted state sales taxation of purchases
of airline fuel. Thus, there was no preemption in the carrier's
favor. (477 U.S. at 7.)

With respect to the Foreign Commerce Clause argument, the
Supreme Court likewise held the state tax valid. The Supreme
Court first recognized that in cases where the Federal Govern-
ment had not acted, it is the responsibility of the judiciary to
strike down action taken by state or local authorities that unduly
threatens the values protected by the Commerce Clause. (Jbid.)
The parties in Wardair claimed the tax in question impaired the
ability of the United States to speak with-one voice in the field of
foreign relations.

The Court in Wardair noted a special need in the area of
foreign commerce for federal uniformity, citing Board of Trustees
v. United States, 289 U.S. 48, 59 (1933), and Japan Line, Lid. v.
County of Los Angeles, supra. The Court stated that “In interna-
tional relations and with respect to foreign intercourse and trade
the people of the United States act through a single government
with unified and adequate national power.” Wardair Canada, Inc.,
supra at 8. The Supreme Court in Wardair then reiterated the
two additional requirements for testing the validity of a state tax
affecting foreign commerce as posited in Japan Line, Lid. to wit:
whether the state tax enhances the risk of international multiple
taxation; and whether the tax impairs the Federal Government
from speaking with one voice when regulating commercial rela-
tions with foreign governments. (477 U.S. at 8.) In Wardair it
was admitted that there was no threat of multiple taxation as the
Florida tax was imposed solely upon the sale within the state of
airline fuel. Rather the carriers contended that the tax was invalid
because there existed a federal policy of reciprocal tax exemptions
for the instrumentalities of international air traffic, including
aviation fuel, and that this policy represents the statement that
the “‘one voice” of the Federal Government wished to make, and
this “one voice” statement was threatened by the state tax in
question (/d. at 9.)

The Supreme Court in Wardair held that the various conven-
tions and agreements cited by the parties did not evidence any
such federal policy as contended by the parties but rather showed

eee

F-30

that the Federal Government had accepted and allowed state
taxation of fuel purchased within the taxing states’ bordeis.
Further, the affirmative action by the Federal Government in
these conventions and agreements in allowing such state taxation
removed this case from the context of a dormant Foreign Com-
merce Clause situation in which the Federal Government had
remained silent and had allowed the states to act in this area
without any need for uniformity. (/d. at 9.) In short, rather than
preempting the fieid in favor of the carrier, the Congress by
affirmatively allowing state taxation of aviation fuel in the Chi-
cago Convention and in the more than 70 bilateral agreements
governing international aviation to which the United States was a
party, had affirmatively decided to permit such state taxation. The
Supreme Court in Wardair concluded that there was no silence
on the issue which would tngger a dormant Foreign Commerce
Clause analysis and there was no announced federal policy on the
issue which the Flonda tax contravened. Accordingly, the Florida
sales tax on aviation fuel as levied on foreign aviation carriers was
upheld by the Supreme court in Wardair.

It is submitted that under the foregoing rationales of the
Supreme Court’s decisions in Japan Line, Lid., Container Corp.,
and Wardair, California’s application of its worldwide unitary
apportionment formula method of computing income tax is un-
constitutional as applied to a unitary group of corporations con-
trolled by a foreign parent corporation. Such an application
impairs the ability of the United States to speak with one voice in
the conduct of foreign commercial relations in an area where
federal uniformity is necessary. Application of this tax has dis-
rupted the foreign relations of the United States as conducted by
the Federal Executive and has given nse to retaliatory legislation
by one foreign nation.

B. Under the controlling constitutional principles the instant
tax as applied to the taxpayers is unconstitutional.

The Federal Government is responsible for the formulation and
implementation of the foreign policy of the United States. State
statutes or practices conflicting with or impeding the Federal

F-31

Government's responsibilities with respect to the foreign relations
of the United States are void under the Federal Constitution.

The trial and appellate courts below, citing Container Corp.
concluded that Congress had not enacted any statute either
favoring or opposing income taxation by states of foreign nationals
through application of the worldwide unitary business concept
and three-factor apportionment formula. (Slip Opinion, pp. 17,
21-30; CT. 1740, 1758.)'* Thus the courts below properly found
that there was no direct conflict between the state tax as applied
and any federal statute or Congressional policy, hence there was
no issue of preemption. (Slip Opinion, pp. 17, 21-30; CT. 1745.)
Accordingly, the courts below proceeded to apply a dormant
Foreign Commerce Clause Analysis to the facts of this case.

The Court of Appeal and the trial court correctly found the
Federal Executive to have taken the position that California's
method of computing the income tax of a member of a unitary
business group owned by a foreign parent corporation should be

'‘*The Court of Appeal and the trial court noted that the Federal
Executive had negotiated in the 1975 United States-United Kingdom
Tax Treaty a clause (Clause 9(4)) proscribing a state’s use of the
worldwide unitary business concept and three-factor formula in comput-
ing a foreign corporation income tax; and that this clause was inserted at
the instance of the United Kingdom as a result of California's extension
of the said method of income tax computation to foreign nationals. The
Senate Foreign Relations Committee defeated in committee a reserva-
tion with respect to Clause 9(4) by a vote of 10 to 5. On the Senate floor
the reservation was again defeated by a vote of 46 to 34; thereafter the
treaty received a favorable vote of 49 to 32, five votes short of the % vote
required for advice and consent to ratification. Subsequently
Clause 9(4) was reserved to without a vote and the treaty was approved
with the reservation. The courts below held that these three votes
favoring Clause 9(4) (one in committee and two on the Senate floor)
did not evidence a Congressional policy for California's method of
taxation but rather, if anything, a Congressional preference, not amount-
ing to a policy, favoring discontinuance of California's method of
taxation. (Slip Opinion, pp. 28-29; CT. 1739-1740.)

F-32

discontinued as contrary to internationally accepted accounting
standards (Slip Opinion, pp. 34, -45, 52; CT. 1741) and the
international practice favoring the arm’s length method of tax
computation (Slip Opinion, p. 54; CT. 1749). The application of
California’s method of taxation in computing the tax of the
taxpayers involved in this case is unconstitutional under the
Foreign Commerce Clause as an impermissible interference with
the Federal Government’s policy and conduct of foreign relations.

The adoption by the Federal Executive of this policy is evi-
denced by the letter of January 30, 1986, from the Secretary of
State for the United States to the Governor of California, wherein
the Federal Executive advises that in the conduct of foreign
affairs it has taken “the position that the ‘arm’s length’ adjust-
ment method of allocating income among commonly controlled
corporations doing business in various national jurisdictions is the
appropriate method to be employed.” (Letter.) The letter further
states that this view is reflected in the bilateral tax treaties to
which the United States is a party. Those tax treaties provide that
income attributable to “permanent establishment” in the territory
of a party will be taxed by that party on the basis of the arm’s
length method of apportionment. (See footnote 5, supra.)'> The
Internal Revenue Code also adopts this apportionment method.
Moreover, this letter from the Secretary of State clearly expresses
the position taken by the Federal Executive that the arm’s length
apportionment method is the “international standard” and “inter-
national rule” which has been adopted generally by foreign tax
systems, and is prescribed in the model income tax treaties
published by the Organization for Economic Cooperation and

‘SContrary to the Appellant's argument (Br. 32, n.23), there is
nothing in the recent treaties departing from the arm's length method.
Indeed, Article 9(3) of the Income Tax Treaty with Barbados, Decem-
ber 31, 1984, T.1.S.A. No. 11090, was added to make it clear that the
United States retained the nght to apply its inter-company pricing rules,
which apply the arm's length standard. (Code Sec. 482 (of the arm's
length standard) ). S. Exec. Rept. 99-9, 99th Cong. Ist Sess. at 25.

F-33

Development (OECD) and the United Nations. (Letter.) Arti-
cle II of the Constitution vests the power to conduct and control
the foreign affairs of the United States solely with the President of
the United States and his duly appointed aides; and the Executive
has the particular expertise needed to identify and assess which
ruies and practices are generally accepted and followed by the
international community and which are not. Its determinations in
such regard are entitled to very great weight by the courts.
Container Corp., 463 U.S. at 195. See also Factor v. Lauben-
heimer, 290 U.S. 276, 295 (1933); Charlton v. Kelley, 229 US.
447, 468 (1913).

It is the position of the United States Government, as reflected
in the letter of the Secretary of State to the Governor of
California, that the unitary tax is at odds with the “‘arm’s length”
accounting method which is the international rule and standard,
and that adherence to the “arm’s length” method of taxing
corporations with foreign parents is essential to avoid adverse
consequences for the foreign relations of the United States.
(Letter.) Under these circumstances, state tax methods which
contravene this position cannot be reconciled with the Foreign
Commerce Clause of the United States Constitution. The conflict
between this position adopted by the United States in the conduct
of foreign relations and the California tax as applied in the instant
case to taxpayers with foreign parents must, therefore, be resolved
in favor of the position taken by the United States.

This conflict is precisely the type of state action which the
Supreme Court in Container Corp., supra, found would be uncon-
stitutional in that it prevents the Federal Government from
speaking with one voice in foreign relations. Moreover, this
conflict is substantial in nature, as is evidenced by the Secretary
of State’s letter to the Governor of California to the effect that
state worldwide unitary taxes have become a source of conflict
with numerous foreign governments, including those of Australia,
Belgium, Canada, Denmark, France, the Federal Republic of
Germany, the United Kingdom, Greece, Ireland, Italy, Japan,
Luxembourg, the Netherlands and Switzerland. (Letter.) The

F-34

Secretary of State concluded in his letter to Governor
Deukmejian (Letter at 2) that:

Continued state taxation on a worldwide unitary basis will
greatly impair the ability of the federal government to carry
Out its tax and investment policy in the international arena
and to manage the sensitive issue of international double
taxation. The worldwide unitary issue has seriously compli-
cated our economic relations with many of our closest allies.

Further, the conflict has resulted in the United Kingdom’s
enactment of retaliatory legislation. (Letter.) The Supreme Court
in Container Corp. pointed out 463 U.S. at 194, that the most
obvious interference with foreign affairs which a state tax statute
could pose was offending foreign trading partners to such an
extent that they might enact retaliatory legislation against the
United States as a whole, but that there was no such retaliatory
legislation demonstrated in Container Corp. The Supreme Court
in Container Corp. stated that it had little competence in deter-
mining precisely when foreign nations will be offended by particu-
lar acts and how to balance the risk of such retaliation against the
sovereign right of the United States as a whole to allow states to
tax as they please. Container Corp., supra at 194. The letter from
Secretary Schultz to Governor Deukmejian cites the United
Kingdom’s retaliatory legislation as one of the difficulties Califor-
nia’s taxing method has precipitated in the conduct of foreign
affairs. (Letter at 3.) This is precisely the type of impediment to
the conduct of foreign affairs which Container Corp. indicated
would render a state tax unconstitutional. 463 U.S. at 194.

The Supreme Court further pointed out, in Container Corp.,
463 U.S. at 195, that a state tax could have foreign policy
implications other than retaliatory legislation, but that the nu-
ances of foreign policy are much more the province of the Federal
Executive than the Supreme Court. Since the Federal Executive
did not elect to file an amicus curiae brief in Container Corp., the
Supreme Court assumed that there were no substantial foreign
policy considerations which the state tax in that case contravened.
Therefore, it upheld the application of the tax in question there to
a domestic corporation with foreign subsidiaries. Container Corp.

v. Franchise Tax Board, 463 U.S. at 195-196.'® Container Corp.
involved the application of California’s tax to a domestically
controlled group of corporations and it was. that issue on which
the Federal Executive expressed no view. The Supreme Court in
Container Corp., as stated before, expressly reserved judgment on
the issue in the instant case. To allay any doubts as to the Federal
Executive’s position on the issue herein, this amicus brief is being
filed. Thus, this Court should have no difficulty in determining the
Federal Executive’s views. The statements of the Secretary of
State (Letter) and of the President of the United States (State-
ment) demonstrate that the Federal Government has a clearly
articulated policy in favor of “arm’s length” accounting in the
conduct of foreign affairs, and that California’s worldwide com-
bined unitary business method is in conflict with the internation-

F-35

‘The trial court below also held California’s tax as applied to be
unconstitutional as it discriminated against instruments of foreign com-
merce (CT. 1751-1754) and violated the Due Process Clause
(CT. 1754-1756). The trial court found that each foreign nation has its
own version of “generally accepted accounting principles” (GAAP),
and that a foreign corporation using its own national version of GAAP is
able to file an “arm's length” tax return with its own country and with
the United States without any inordinate additional expenses.
(CT. 1752.) However, a foreign corporation using its national version of
GAAP would have to incur an inordinate expense to comply with
California’s income tax method involved herein. (CT. 1752, 1753.) The
trial court found this inordinate expense to discriminate against foreign
corporations. (CT 1753.) As an alternative to this inordinate expense
the foreign corporation could seek advance rulings from the California
Franchise Tax Board or could seek the Board's approval to use estimates
instead of actual accounting entries. However, the trial court held that
advance rulings and use of estimates was entirely at the discretion of the
taxing authorities and such total discretion was a lack of due process.
(CT. R. 1754-1756.) The Court of Appeal did not reach this issue as it
deemed it unnecessary. (Slip Opinion, pp. 54-55.) We submit that this
discriminatory treatment and lack of due process is but another facet of
California’s tax as applied herein which has exacerbated the Federal
Executive's problems in dealing with foreign nations in this area.

F-36

ally accepted standard and policies, and custom, and has caused
serious disputes and difficulties for the United States in the
conduct of foreign affairs. Because of these foreign policy consid-
erations and because of their gravity, the Department of Justice,
at the direction of the President, is filing this amicus curiae brief.

C. Appellant's argument

The Appellant argues (Br. 20-27) that under the rationale of
Wardair there in affirmative Congressional action allowing Cali-
fornia to utilize its apportionment formula in computing appel-
lees’ tax liabilities, and that this Congressional action and policy
obviates the need for any dormant Foreign Commerce Clause
analysis. The Appellant argues (Br. 22) that Wardair permitted
negative implications to be drawn that the state tax in Wardair
was permissible under federal law in two circumstances: (1) when
there was a treaty restricting the national governments’ abilities to
tax but not restricting the subnational governments; and (2) when
there were treaties restricting the power of subnational govern-
ments to enact some taxes but not restricting their power to enact
other taxes. (Appellant Br. 22.) The Appellant points to the
various bilateral tax treaties between the United States and
foreign countnes as examples of treaties restricting national
governments but not subnational governments, and derives there-
from a negative inference that states are authorized by federal law
to impose taxes such as the one at issue. (App. Br. 22-24.)
Appellant cites the non-discrimination tax clause made applicable
to the states in some of the United States’ tax treaties as examples
of treaties which restrict some state tax powers, but not other
state tax powers, and thus form a basis for implying that the non-
banned powers are authorized as a matter of federal law.
(App. Br. 26-27.) Appellant concludes that the negative implica-
tions to be drawn from the above described treaties amounts to a
clear federal congressional decision authorizing the state tax
method in issue, and thus, under Wardair negates any dormant
Foreign Commerce Clause analysis under Container Corp.
(App. Br. 20-27.)

The Court of Appeal (Slip. Op. pp. 22-30) correctly pointed
out that Wardair provides no support for Appellant’s argument.

F-37

Wardair involved a situation wherein the plaintiff, a Canadian
company engaged only in foreign commerce, claimed that Flor-
ida’s imposition of a sales tax on aviation fuel purchased by the
carrier in Florida was unconstitutional under the Foreign Com-
merce Clause as it impaired the United States’ ability to speak
with one voice in the conduct of foreign affairs. The Supreme
Court in Wardair, however, decided the case against the taxpayer
finding that there was an affirmative federal policy allowing such
taxation. This finding was based upon the Chicago Convention,
the Federal Aviation Act, and more than 70 bilateral agreements
on aviation to which the United States was a party. In 1944 the
United States and 156 other nations, including Canada, became
signatories to the Chicago Convention. Wardair Canada, 477
U.S. at 10. This convention expressly addressed the sales and use
tax problem on aviation fuel, and explicitly prohibited only the
imposition of such taxes with respect to fuel on board a foreign
carrer when it entered the taxing jurisdiction. /bid. at 10. The
necessary negative implication of this provision was that other
local sales and use taxes on aviation fuel were not prohibited. bid.
at 10. The Supreme Court in Wardair also pointed out that
Section 1113 of the Federal Aviation Act addresses the problem
of state taxation of air commerce expressly forbidding some state
taxes and expressly allowing certain state taxes. /d. at 6. Among
the permissible taxes under that statute are state sales and use
taxes. Jd. at 7. Next the Supreme Court in Wardair noted that
after the Chicago Convention addressed the state sales tax issue
in 1944, the United States entered into more than 70 bilateral
aviation agreements, most of which explicitly prohibited national
taxes on aviation fuel used by carriers of the other contracting
party, but none of which interdicted state taxes on such fuel. /d. at
11. The Supreme Court in Wardair held that the Chicago
Convention demonstrated the United States’ and the international
community’s awareness in 1944 of the state and local sale
taxation problem with respect to aviation fuel, and the provisions
of that convention represented a decision by the parties to the
convention to address the problem by curtailing and limiting only
some of the local taxing authorities’ power to tax, thereby preserv-
ing other aspects of that local power to tax. Jd. at 10. Further, the
Supreme Court found that in the 70 bilateral aviation agreements

F-38

entered into since the Chicago Convention, the United States was
aware of the sales tax problem, knew of the Chicago Convention’s
treatment of the problem, and elected not to change that treat-
ment but knowingly acquiesced in state sales taxation of aviation
fuel. Jd. at 12.

The Supreme Court held these knowing acts formed an affirm-
ative decision and policy by the United States to allow sales
taxation of aviation fuel. Accordingly, the Supreme Court found
that the United States’ position was in accord with Florida’s and
there was no need to resort to any dormant Foreign Commerce
Clause Analysis to see if the tax in question was unconstitutional.
Id. at 9, 13.

In advancing its argument that a dormant Foreign Commerce
Clause analysis is not warranted, the Appellant contends that
prior to the ratification of the United States-United Kingdom tax
convention in 1978 there were numerous United States tax
conventions which did not prohibit the taxation method employed
herein. In finding a federal policy favoring the tax there involved,
the Appellant equates these tax conventions with the 70 bilateral
aviation agreements that the Supreme Court noted in Wardair.
As the Court of Appeal correctly pointed out (Slip. Opinion,
pp. 25-26), Appellant’s argument overlooks one significant differ-
ence between the 70 bilateral agreements involved in Wardair and
the tax conventions it cites here which were ratified before 1978.
Although both sets of agreements are silent as to the respective
State taxation involved, the 70 bilateral agreements involved in
Wardair were entered into after the Chicago Convention had
addressed specific local taxes that were precluded. There are no
foundation agreements dealing with the instant issue of state
taxation to which the tax treaties can be related. Thus, as the
Court of Appeals recognized (/bid.), no negative inference can be
drawn supporting the tax method in issue from the fact that the
various United States bilateral tax treaties did not purport to
restrict state taxing power. None of those treaties, except for the
United States-United Kingdom, mentions the unitary tax
method. Equally inapposite are the nondiscrimination clauses of
the treaties of Friendship, Commerce, and Navigation because
the subject matter of such clauses is so dissimilar to clauses

F-39

authorizing or prohibiting a particular type of tax or tax method as
were present in Wardair.

Moreover, as the courts below pointed out (Slip Opinion,
pp. 23-24; CT. 1738), the unitary method of taxation was never a
serious factor in foreign affairs until it was first applied to foreign
controlled multinational corporations in 1972. Indeec, the trial
court concluded that one could not realisticaliy determine any
such reaction or policy position until Appellant's expanded use of
the unitary method of taxing foreign multinational corporations
was felt through audits, assessments, protests and negotiations
between the United States and foreign governments. (CT. 1738.)
Thus, as the courts below concluded (Slip Opinion, pp. 23-24;
CT. 1739, 1758-1759), the numerous tax and Commerce, Navi-
gation and Friendship conventions in force as of 1978, which do
not address the taxation issue here presented, and of which the
treaty parties were not seriously concerned, are of no significance
as the 70 treaties were in Wardair.

A further ground for rejecting the Appellant’s argument that
there exists a federal policy allowing the method of taxation here
and thus no dormant Foreign Commerce Clause analysis is
warranted, is the fact that the Supreme Court, in considering in
Container Corp. the identical method of taxation involved herein
as applied to a domestically controlled and owned unitary group
of corporations doing business domestically and overseas, ex-
amined the constitutionality of the tax there in issue using a
dormant Foreign Commerce Ciause analysis. Container Corp. v.
Franchise Tax Board, 463 U.S. at 185-196. If the Supreme Court
in Container Corp. had found a Congressional policy favoring
unitary taxation of domestically owned multicorporate groups
doing business overseas, that would have ended the inquiry and
there would have been no need to engage in a dormant Foreign
Commerce Clause analysis. But the Supreme Court expressly
found no such policies and thus resorted to the dormant Foreign
Commerce Clause analysis. Container Corp. v. Franchise Tax
Board, 436 U.S. at 196. The courts below correctly interpreted
Container Corp. as holding there is no Congressional policy either
for or against such method of income taxation. (Slip Opinion, pp.
29-30; CT. 1758.) -

F-40

Another ground advanced by Appellant for the existence of a
federal policy permitting the tax method in issue is the fact that
the Senate in 1978 approved the United States-United Kingdom
Tax Convention with a reservation negating language contained in
Clause 9(4) which would have barred California’s tax in this
case. (Appellant Br. 14-16, 25.) Both the Court of Appeal and
the tnal court below specifically addressed this argument and
correctly found it without merit. (Slip Opinion, pp. 28-29; CT.
1739-1740.) The trial court noted that the Federal Executive had
inserted Clause 9(4) in the proposed United States-United King-
dom tax cvnvention at the insistence of the United Kingdom and
that Clause 9(4) would have barred the application of the instant
tax. (CT. 1739.) However, the Court of Appeal and the trial
court pointed out that when a reservation to Clause 9(4) was
introduced in hearings before the Senate Finance Committee on
the proposed tax convention, the Committee defeated the reserva-
tion by a vote of 10 to 5; next on the Senate floor this reservation
to Clause 9(4) was defeated by a vote of 44 to 34. (Slip Opinion,
p. 289; CT. 1739.) On this basis the proposed tax convention was
submitted to the Senate for a vote for ratification and the Senate
voted 49 to 32 for ratification, 5 votes short of the % vote
necessary for ratification. (Slip Opinion, p. 28.) Next the Senate
reserved Clause 9(4) without a vote and the tax convention was
approved with the reservation. The Court of Appeal and the trial
court in their opinions expressly noted that the reservation to
Clause 9(4) received a minority of votes in each of 3 votes: the
vote in committee and the votes on the floor of the Senate. (Slip
Opinion, p. 28; CT. 1739.) Accordingly, the courts below held
that this vote represented not a vote for a policy favoring the
allowance of states to impose the worldwide combined unitary
business method of income taxation, but rather represented a
preference, not amounting to a policy, against such a method of
income taxation. (Slip Opinion, p. 29; CT. 1740.) The Court of
Appeal stated that it failed to see how three majority votes in the
Senate essentially approving Clause 9(4) could be transmogrified
into a Congressional of disapproval of Clause 9(4) and approval
of the tax method in issue. (Slip Opinion, p. 29.) In any event, in
these special circumstances of treaty making does not establish
federal policy in favor of such state taxation methods. Therefore,

F-4]

the Court of Appeal and the trial court rejected this argument and
so should this Court."’

In view of the foregoing it is submitted that the Court of
Appeal correctly concluded that there was no affirmative federal
policy permitting California’s use of the tax method in issue, and
that therefore the issues herein should be resolved by a dormant
Foreign Commerce Clause analysis as stated in Container Corp.
(Slip Opinion, pp. 24-30).

The Appellant argues that the Court of Appeal erred when it
found that the United States Executive could be the “one voice”
which established a federal policy prohibiting the tax method at
issue, rather than the voice of Congress. (Appellant Br. 28-32.)
Appellant maintains that the Executive cannot exercise the “one
voice” in foreign affairs but only Congress can. (Appellant
Br. 29). From this Appellant concludes that the Court of Appeal
erred in its dormant Foreign Commerce Clause analysis by
considering the Executive’s actions as the United States “one
voice” speaking in the conduct of foreign affairs. (Appellan:
Br. 29.) No statutory or case law authority is offered for this
argument, and it completely ignores the long and clearly estab-
lished rule that the Executive Branch conducts the foreign affairs
of the United States, and if Congress has not acted in this area,
actions of the Executive are the acts of the United States and
represent United States’ policy until Congress acts to the con-
trary. Chicago & Southern Air Lines, Inc. v. Waterman Steamship
Corp., supra; United States v. Pink, supra; United States v.
Belmont, supra; United States v. Curtiss-Wright Export Corp.,
supra; Oetjen v. Central Leather Co., supra, see also: Dames &
Moore v. Regan, 453 U.S. 654 at 678-684 (1981).

Appellants also argue (Br. 28-29) that the Court of Appeal
erred in its dormant Foreign Commerce Clause analysis by

‘It is absurd to conclude, as does the Appellant, that three losing
minority votes in the Senate against the reservation of Clause 9(4)
could be the basis of a policy position of the whole Senate.

F-42

looking to the Executive Branch for a federal directive and policy.
Appellants lose sight of why the Court of Appeal looked to federal
policy as expounded by the Executive Branch. That Court fol-
lowed faithfully the directions of the Supreme Court in Container
Corp., which mandates that state taxing practices must give way if
they intruded into the conduct of the foreign relations of the
United States and interfered with the conduct of foreign affairs.
The Court of Appeal specifically found that the tax method in
question was in conflict with the norms and standards of interna-
tional commerce, had offended numerous foreign countries,
caused a number of disputes and problems in the United States’
conduct of foreign affairs, and had led to retaliatory legislation by
the United Kingdom. (Slip Opinion, pp. 32-34.)'® The Court of
Appeal then concluded (Slip, Opinion, pp. 42-45) that the
Federal Executive had exercised its lawful powers in the conduct
of foreign affairs in this area in order to eliminate disputes with its
trading partners and that contrary state law must give way to the
“One Voice” requirement of the dormant Foreign Commerce
Clause Analysis. When California frustrates this “one voice” of
the federal government speaking in the conduct of foreign affairs,
the Foreign Commerce Clause of the United States Constitution
is infringed.

‘*Appellant also argues that the conduct of foreign affairs is not
significanuly implicated because the retaliation by Great Bnitain is not
justified under United States law. It is submitted that the conduct of
foreign affairs is necessarily determined not by whether a foreign
country’s 2cuions are justified under our law as opposed to foreign law
but rather whether there is a dispute with a foreign country and what is
the most efficient and beneficial manner of resolving that dispute.
Accordingly, whether or not Great Britain's retaliatory legislation is or is
not justified under our law is of no great moment. The fact remains that
a potenually serous dispute exists with Great Britain, and retaliatory
legislation by Great Bnitain is in place, both of which can have adverse
effects on the United States’ foreign commercial relations. This alone is
a serious matter in the conduct of the United States’ foreign affairs
which must be addressed by the Federal Executive.

F-43

CONCLUSION

For the reasons stated above, the decision below is correct and
should be affirmed on the ground that the method of taxation
involved is unconstitutional as it impairs the United States’
ability to speak with one voice in an area where federal uniformity
is essential.

Respectfully submitted,

SHIRLEY D. PETERSON
Assistant Atiorney General

GARY R. ALLEN (202) 514-3361
DAVID ENGLISH
CARMACK (202) 514-2933

JOHN J. McCARTHY —= (202) 307-6398
Attorneys, Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

RICHARD H. JENKINS
United States Attorney

MAY 1991

——————oOOoooe

: F-44 -

APPENDIX A

THE SECRETARY OF STATE
WASHINGTON

January 30, 1986

Dear Governor Deukmejian:

As you are aware, federal legislation was recently introduced
with the full support of the Administration which would prohibit
states from taxing corporations under the worldwide unitary
method and from taxing more than an equitable share of foreign
source dividends. This action was taken at the express direction of
the President. I am writing to explain to you the foreign policy
concerns that prompted this legislation and to urge you to act
promptly to reconsider your state’s use of the worldwide unitary
method of taxation.

When a corporation (or related group of corporations) operates
across state or national boundanes, competing tax claims of the
junsdictions in which the corporate group operates are resolved by
idenufying the income attnbutable to each junsdiction. Two
different methods are in use for making the determination with
respect to transnational income: separate accounting and
worldwide unitary combination. The longstanding policy of the
federal government has been to follow the separate accounting
method. The United States has advocated and adopted the
position that the ‘‘arm’s-length” adjustment method of allocating
income among commonly controlled corporations doing business
in various national junsdictions is the appropnate method to be
employed. This view is embodied in the Internal Revenue Code
and is a central feature in our bilateral tax treaties. Separate
accounting is also the international standard. It is prescribed in
the model income tax treaties published by the Organization for
Economic Cooperation and Development (“OECD”) and the
United Nations (“UN”) and by foreign country tax systems

————— ll

F-45

generally. In contrast, the worldwide unitary method of taxation is
followed only by seven of the U.S. states. Your state’s employ-
ment of the worldwide unitary method of tax accounting is at
odds with the position of the United States and has become a
source of conflict with foreign states.

In an environment in which separate accounting is the federal
policy and the generally accepted international rule, state taxation
on a worldwide unitary basis creates a clear risk of double
taxation. Because labor costs and property values vary sharply on
an international basis, the rates of profitability of affiliates operat-
ing within and without the jurisdiction of the unitary staie are
often different. Double taxation will result if the reiative profit-
ability of the investment in the unitary tax state is less than that of
the affiliated overseas operations that are taxed abroad on a
separate accounting basis. This risk of double taxation may distort
investment decisions, thereby reducing the overall flow of invest-
ment into the United States.

Our concern over the worldwide unitary method of taxation’s
inhibiting effect on foreign investment in the United States is
shared by many foreign governments. They have advised us of
their view that “The [unitary tax] method can chill international
investment and decrease efficient allocation of resources and
employment opportunities. In particular, the unitary method can
impede foreign entry into the United States market.” They
contend that the unitary method of taxation constitutes “...a
serious obstacle to the further development of our trade and
investment relationships.” (Diplomatic note signed by the Am-
bassadors of Australia, Belgium, Canada, Denmark, France, Fed-
eral Republic of Germany, the United Kingdom, Greece, Ireland,
Italy, Japan, Luxembourg, the Netherlands, and Switzerland.)

The administration of the worldwide unitary method of taxation
also imposes unreasonable and costly compliance burdens on an
enterprise which is considered to be part of a worldwide unitary
group. The information required by the tax authorities of the
jurisdiction practicing a worldwide unitary method of taxation
may not be readily available to the enterprise and, in the case of
foreign-controlled entities which are not required to keep data
under U.S. tax and financial accounting rules on their non-US.

F-46

operations for any other reason, will require costly conversion into
a form usable by the jurisdiction’s tax authority.

For these reasons I believe state worldwide unitary taxation to
be inappropriate. Continued state taxation on a worldwide unitary
basis will greatly impair the ability of the federal government to
Carry out its tax and investment policy in the international arena
and to manage the sensitive issue of international double taxation.
The worldwide unitary issue has seriously complicated our eco-
nomic relations with many of our closest allies. During my tenure
as Secretary of State, this has been a difficult and long-lasting
issue. The Department of State has received diplomatic notes
complaining about state use of the worldwide unitary method of
taxation from virtually every developed country in the world. The
unitary issue has been partially responsible for stalling some
bilateral tax treaty negotiations.

Most seriously, the U.K. Parliament, in July, 1985, unani-
mously adopted anti-unitary retaliatory legislation permitting the
U.K. government to deny, on a unilateral basis and retroactive to
April, 1985, a very valuable benefit of the U.S.-U.K. tax treaty for
U.S. corporations operating in worldwide unitary states. This
legislation, by virtue of a provision which makes possible the
retroactive imposition of heavy penalties, was having a chilling
effect on the willingness of U.S. companies to repatriate earnings
of their U.K. subsidiaries to the United States and on their
willingness to claim benefits properly available to them under the
treaty. While the U.K. has agreed to defer implementation of this
legislation for the time being, this incident makes it clear that
state worldwide unitary taxation is adversely affecting the United
States’ foreign economic relations.

While the Administration has proposed federal legislation
prohibiting worldwide unitary taxation and limiting state taxation
of foreign dividends, I would welcome swift legislative or adminis-
trative action by your state to terminate your state’s use of the
worldwide unitary method of taxation and to limit appropriately
your state’s taxation of foreign source dividends.

Sincerely yours,

George P. Shultz

F-47
APPENDIX B

THE WHITE HOUSE
Office of the Press Secretary

For Immediate Release November 8, 1985
STATEMENT BY THE PRESIDENT

Since early in this Administration, we have been working with
the states, the business community, and foreign governments in
an effort to resolve issues related to state use of the worldwide
unitary method of taxation. At this time I believe it appropriate
for the Federal Government to state its support for the concept of
legislation that would:

1. Effect a requirement that multinationals be taxed by states
only on income derived from the territory of the United
States (“the water’s edge requirement”), and

2. Address the question of equitable taxation of foreign source
dividends.

We hoped that by this time these principles would have been
enacted by the various states that have unitary taxation. Since
states have not universally accepted these principles, I am in-
structing the Secretary of the Treasury to initiate the process of
crafting Federal legislation to incorporate these principles into law
and to work with the Congress for passage, and also, where
appropriate, to enter into negotiations to amend double taxation
agreements. I am also instructing the Secretary of the Treasury to
pursue enactment of the domestic “spreadsheet” legislation,
which has been previously proposed, and which is designed to
assist nonunitary states with tax enforcement respecting multina-
tional corporations in order to promote full taxpayer disclosure
and accountability.

Further, I am instructing the Attorney General to ensure that
the United States’ interests are represented in appropriate contro-
versies and cases consistent with this approach.

F-48

CERTIFICATE OF SERVICE

It is hereby certified under penalty of perjury that service of the
foregoing brief amicus curiae has been made on counsel by
mailing a copy to each on this __ day of May, 1991, in
envelopes, with postage prepaid, properly addressed to each of

them, respectively, as follows:

Daniel E. Lungren, Esquire
Attorney General of the State of
California

Timothy G. Laddish, Esquire
Assistant Attorney General

Robert D. Milam, Esquire

Deputy Attorney General, State of
California

Department of Justice

2101 Webster Street, 12th Floor
Oakland, California 94612-0364
Attorneys for California Franchise Tax
Board

Joanne M. Garvey, Esquire

Joan K. Irion, Esquire

Heller, Ehrman, White & McAuliffe

333 Bush Street, 32nd Floor

San Francisco, California 94104
Attorneys for Barclays Bank International,
Ltd. and Barclays Bank of California

Lawrence V. Brookes, Esquire

Sullivan, Roche & Johnson

333 Bush Street, 18th Floor

San Francisco, California 94104
Attorneys for Amicus Curiae Thorn-EMI,
PLC and EMI Ltd.

Allan H. Friedman, Esquire
General Counsel

Scott D. Smith, Esquire
Assistant Counsel

Multistate Tax Commission
444 North Capita! Street, N.W.
Suite 409

Washington, D.C. 2000!

Jane H. Barrett, Esquire

F. Eugene Wirhann, Esquire

ARTER, HADDEN, LOWLES, FELIX
& HALE

700 South Flower Street

Los Angeles, California 90017
Government of the United Kingdom and
Government of Canada

Clerk

Court of Appeal

Third Appellate District

Library and Courts Building

914 Capitol Mall

Sacramento, California 95814-4869

State Bar Court

State Bar of California

818 West Seventh Street

Los Angeles, California 90017

Roy E. Crawford, Esquire

Russell D. Uzes, Esquire

BROBECK, PHLEGER & HARRISON
One Market Plaza

Spear Street Tower

San Francisco, California 94105
Attorneys for Amicus Banque Nationale
de Paris and Bank of the West

GARY R. ALLEN

Gary R. Allen

APPENDIX G

[§ 401-774] FTB Notice No. 89-714, Franchise Tax Board,
November 17, 1989.

Corporation franchise (income) — Refund claims — Deferrals
of action on refund claims until outcome of pending
appeal.— Deferrals of action on corporate tax refund claims will
be available to taxpayers who have filed claims for refund that are
limited to the question of law presented in the pending appeal of
Barclays Bank International v. Franchise Tax Board (see § 401-
552 for the lower court’s decision). In Barclays, the California
Court of Appeal has been asked to decide the “one voice” issue;
that is, whether, in determining the corporate tax liabilities of an
entity that is part of a multinational enterprise involving a foreign
parent corporation, California’s imposition of the requirements of
the worldwide combined reporting is consistent with the federal
foreign affairs powers contained in the Commerce Clause of the
United States Constitution.

No deferrals will be available for claims for refund that raise
factual issues such as whether a unitary business exists or whether
an individual taxpayer’s cost of compliance is constitutionally
impermissible; those claims will be acted upon using existing
procedures.

Deferrals will be available only when the matter is in the claim
status, with no action having been taken with respect to the claim.
The notice outlines how this requirement applies at the audit
level, the protest level, and the appeal level. A taxpayer seeking
deferral of action should specify in the taxpayer’s claim for
deferral that the claim is limited to the “one voice” issue
currently before the Third Appellate District Court in the
Barclays case, and that the taxpayer requests deferral of action
pending the outcome of that case pursuant to FTB Notice 89-714.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_1077%3A02. Public record. Not legal advice.