Opposition Brief — Barclays Bank PLC v. Franchise Tax Board of California
Supreme Court brief1992
Ask Donna
What actually matters in this document.
Text
) ULind
No. 92-212 \ or} cerene us |
In The
Supreme Court of the United States
October Term, 1992
*
BARCLAYS BANK PLC,
Petitioner,
FRANCHISE TAX BOARD,
An Agency of the State of California,
Respondent.
* —
On Petition For A Writ Of Certiorari
To The California Supreme Court
o
BRIEF OF RESPONDENT FRANCHISE TAX BOARD
IN OPPOSITION TO PETITION FOR
WRIT OF CERTIORARI
.
DaNiEL E. LUNGREN
Attorney General of
the State of California
TimotHy G. LApDDISH
Assistant Attorney General
(Counsel of Record)
2101 Webster Street, 12th Floor
Oakland, CA 94612-3049
(510) 464-0364
Ropert D. MILAM
Deputy Attorney General
Attorneys for Respondent
COCKLE LAW BRIEF PRINTING CO, (800) 225-6964
OR CALL COLLECT (402) 442-2831
QUESTIONS PRESENTED
1. Whether there is a “final judgment” under the
jurisdictional test set by 28 U.S.C. § 1257 when the Cali-
fornia Supreme Court has decided a Foreign Commerce
Clause issue but has remanded the state tax refund case
to a lower California court for consideration of due pro-
cess issues which, if all were determined in taxpayers’
favor, would result in a complete judgment for taxpayers.
2. If this Court has jurisdiction to consider this case
at this time, whether the California Supreme Court prop-
erly declined to apply a dormant Commerce Clause anal-
ysis and properly held that, due to congressional
acquiescence, California did not violate the Foreign Com-
merce Clause by application of worldwide combined
reporting to determine the taxable California income of
the Barclays taxpayers.
3. If there is such jurisdiction, and if there has been
no violation of the Foreign Commerce Clause, whether
California’s application of worldwide combined report-
ing to the Barclays taxpayers was nevertheless preempted
by the United States Constitution as an intrusion into an
inherently federal area; specifically, whether the Execu-
tive Branch’s foreign affairs powers can eclipse Congress’
exercise of its treaty and Commerce Clause powers to
permit such state use of worldwide combined reporting.
il
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED .. 2005 5s0 se essucnsvecunes i
TABLE OF CONTENTS... «i045 c0sscencueapeuveegaes ii
TABLE OF AUTHORITIOS ©. «.55vichuassuccuesesess iv
JURISDICTION .. «0. .00000s00008 eben ee Cena eee wanes 1
STATUTORY AND CONSTITUTIONAL
PROVISIONS. . ..... <iscncuesceeekeeueeewesaensen es 2
SUPPLEMENTAL STATEMENT OF THE CASE..... 2
1. The California Tax Filings of Petitioners and
the Adjustments Made by the Franchise Tax
Board ....s.scuscsn ccd sake cee eee eee ene 2
2. Awareness of the Use of the Worldwide Com-
bined Report Method of Determining Income... 4
3. The United States/United Kingdom Tax Treaty . 5
4. The California Water’s-Edge Election......... 6
5. This Court’s Recognition of the Merits of For-
mulary Apportionment. ...............0.eeees 6
ARGUMENT
I THIS COURT HAS NO JURISDICTION TO
CONSIDER THIS CASE AT THIS TIME, FOR
THE CALIFORNIA SUPREME COURT’S
DECISION, WHICH REMANDED THE CASE
TO THE COURT OF APPEAL FOR CONSID-
ERATION OF TAXPAYERS’ DUE PROCESS
ISSUES, IS NOT A “FINAL JUDGMENT” AS
REQUIRED BY 26 U.SG. & BoP ccencssisncss 8
iii
TABLE OF CONTENTS - Continued
Page
Il THE CALIFORNIA SUPREME COURT HAS
PROPERLY APPLIED THIS COURT’S WAR-
DAIR DECISION IN HOLDING THAT CON-
GRESSIONAL ACQUIESCENCE IN
CALIFORNIA’S USE OF WORLDWIDE COM-
BINED REPORTING IS DETERMINATIVE OF
THE COMMERCE CLAUSE ISSUE, WITH NO
NEED FOR ANY DORMANT COMMERCE
MME PENUURAST Os bins ccc nssccncecsennveses 17
III THE DETERMINATION OF THE FOREIGN
COMMERCE CLAUSE ISSUE IN THIS CASE
ECLIPSES ANY FOREIGN AFFAIRS PREEMP-
EE 6 Aas 64 554k 04 4a a4 casera dK vaw eed 26
a cee eN anh lak Gavs sida a ess anaes 29
iv
TABLE OF AUTHORITIES
Page
CASES
Alcan Aluminum Corporation v. Franchise Tax Board,
Cal. Ct. of Appeal Nos. 2 Civ. No. B065648, 3
Re WN Sess Rete kacaasnaw sews cenaxceens ces 15
Allied-Signal, Inc. v. Director, Div. of Taxation, __
U.S. __ , 112 S.Ct. 2251 (1992) 2.0... eee ee eee +
Brady v. Maryland, 373 U.S. 83 (1963)................ 11
California v. Rooney, 483 U.S. 307 (1987) ........... 9, 10
Cohan v. Alvord, 162 Cal.App.3d 176 (1984).......... 13
Construction Laborers v. Curry, 371 U.S. 542 (1963) .... 14
Container Corp. of America v. Franchise Tax Bd., 463
U.S. 159 (1983)... cece cece eens 7, 18, 19, 27, 28
Cox Broadcasting Corp. v. Cohn, 420 U.S. 469 (1975)
ET er Ey py rere TT re eT eee . we 3, 2
Dames & Moore v. Regan, 453 U.S. 654 (1981)........ 26
Dows v. Chicago, 11 Wall. 108 (1871)................. 16
Fair Assessment in Real Estate Assn. v. McNary, 454
ib a Bt. | a Pore re Serr ris rere 15, 16
Flynt v. Ohio, 451 U.S. 619 (1981) ......... 9, 13, 14, 15
Fort Wayne Books, Inc. v. Indiana, 489 U.S. 46 (1989) .... 14
Franchise Tax Bd. of Cal. v. Alcan Aluminium, 493
a SR MEE Woo ve dhknk hea so kak sav asenshacwes 16
Hathorn v. Lovern, 457 U.S. 255 (1982)............. 9, 10
Hines v. Davidowitz, 312 U.S. 52 (1941) .............. 27
Illinois Com. Men's Assn. v. State Bd. of Equalization,
ee et eer rere rr ty tore Press 13
Vv
TABLE OF AUTHORITIES - Continued
Page
Kraft General Foods v. Iowa Dept. of Revenue, __
Gs we BER GAL RGD CEG: cen ev cece ssn eed 18
Lewis v. Reynolds, 284 U.S. 281 (1932)................ 8
Mercantile National Bank v. Langdeau, 371 U.S. 555
LEIP ss nvavdsaudionse dean bike ada nn kee eee 14
Minnick v. California Dept. of Corrections, 452 U.S.
We CEPGED s x6 onkscuthdns ean ees ate e ee eee 12
Monroe v. Pape, 365 U.S. 167 (1961).................. 16
O'Dell v. Espinoza, 456 U.S. 430 (1982)............... 10
Radio Station WOW, Inc. v. Johnson, 326 U.S. 120
ti) DEER ee eee ee ee Te SEE re pene eed fr 9, 11
San Diego Gas & Electric Co. v. San Diego, 450 U.S.
TEE SEPOES si cxeae een Vm ce eee eee eee 12
Southland Corp. v. Keating, 465 U.S. 1 (1984)......... 14
Trinova Corp. v. Michigan Dept. of Treasury, ___ U.S.
ere eee Ss.) rrr oer er 7
Underwood Typerwriter Co. v. Chamberlain, 254 U.S.
BED CEE sci kok 4 ck du as aed wee ee ee ae 7
United States v. Curtiss-Wright Export Corp., 299
oe eB | eee ere rere eee 22, 26
United States v. Guy W. Capps, Inc., 204 F.2d 655
Cer GP ROU os nso nsec anes cae er eneeee ae 22, 27
Wardair Canada, Inc. v. Florida Dept. of Revenue, 477
igh. ©. CEE i Fok cs wexckicoaccst ee passim
Western & Southern L.I. Co. v. Bd. of Equalization,
WE ia ee TAPED « 5.6 5k 050han eee 22
Zschernig v. Miller, 389 U.S. 429 (1968) ........... 27, 28
vi
TABLE OF AUTHORITIES - Continued
Page
CONSTITUTIONAL PROVISIONS
U.S. Const. art. I § 8(3) (Commerce Clause)..... passim
US. Comat. ort. 1 6 di vnsscesas sicctancaveeaeneus 2, 28
U.S. Const. art. VI (Supremacy Clause).............. 28
ee: Se eer eer rere 9, 10, 12, 13
Equal Protection Clause.........ccsseevvvessseses 14, 15
Cel Conmit. aft. 237 cicic vce. RRR eo 13
STATUTES
x) Bik oe ob .. : eer ge nA 1, 2, 8, 9, 17, 26
26 USS. | 1bG iii ci iiictsnekneeeeeeoe 16
42 OSC: & TOG vo nccdavinises Fee 16
Federal Aviation Act. i. ...0060sdaveues sedans eeee 20
California Revenue and Taxation Code § 25110. 2, 6, 15
OTHER AUTHORITIES
Convention for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasions with
Respect to Taxes on Income and Capital Gains
(US/UK Treaty), Dec. 31, 1975, 31 U.S.T.
OGD cs ci ssnnnecsvevdscaecsncgnere 5, 23, 24, 25, 28
Chicago Convention on International Civil Avia-
CG on soc cnndaccscetnssscdneuee caneap ee eeeeeaee 20, 21
124 Cong. Rec. (1978)... s.06iscesesesseuaeseneveas 23, 24
No. 92-212
+
In The
Supreme Court of the United States
October Term, 1992
¢
BARCLAYS BANK PLC,
Petitioner,
FRANCHISE TAX BOARD,
An Agency of the State of California,
Respondent.
¢
On Petition For A Writ Of Certiorari
To The California Supreme Court
e
BRIEF OF RESPONDENT FRANCHISE TAX BOARD
IN OPPOSITION TO PETITION FOR WRIT OF CER-
TIORARI
¢
JURISDICTION
Petitioner Barclays Bank PLC (“Barclays”), successor in
interest to taxpayers Barclays Bank International, Inc. (“BBI”)
and Barclays Bank of California (“Barcal”), invokes jurisdic-
tion under 28 U.S.C. § 1257(a). Respondent Franchise Tax
Board argues below that there is no current jurisdiction
under that section because there is not yet any final judg-
ment from the California courts in this litigation.
+
STATUTORY AND CONSTITUTIONAL PROVISIONS
Petitioner Barclays has included some of the relevant
constitutional and statutory provisions in Appendix D to
the petition. Appendix A to this brief in response con-
tains the following: a portion of article II, section 2 of the
United States Constitution; a portion of 28 U.S.C.
§ 1257(a); and California Revenue and Taxation Code
section 25110.
SUPPLEMENTAL STATEMENT OF THE CASE
Respondent Franchise Tax Board believes that peti-
tioner Barclays’ statement regarding the case (Petition for
Certiorari (“Pet.”) 3-14) contains significant omissions.
Therefore, pursuant to Rule 15.1, the Franchise Tax Board
provides this Court with this supplemental statement.
This supplement, which is not necessary to the jurisdic-
tional argument presented below at pp. 8-17, should be
read in conjunction with and in addition to both Barclays’
statement and the California Supreme Court’s statement
of the factual, procedural, legislative and case law back-
ground, which is included herein by reference. Most cita-
tions herein are to the appendices to the Petition for Writ
of Certiorari.
1. The California Tax Filings of Petitioners and the
Adjustments Made by the Franchise Tax Board.
The Barclays Group conducted its business in Califor-
nia through two corporate entities during the year in
issue. Barclays Bank of California (“Barcal”), a wholly
owned, California incorporated, subsidiary of Barclays
Bank International Limited (“BBI”), conducted a commer-
cial banking business in the State of California. C-38, #9.
BBI, a wholly owned, United Kingdom incorporated, sub-
sidiary of Barclays Bank Limited (“BBL”), conducted
business in California as a banking agency. C-36, #1. BBI
was engaged in general retail and commercial banking,
leasing, and consumer and commercial finance, directly
or through subsidiaries, in approximately fifty-five (55)
countries and territories during 1977. C-37, #2.
Both corporations filed California Franchise Tax
returns for the year at issue. Barcal filed a return which
included in its calculations only its individual income
and activities. C-39-40, #19. BBI filed a return based upon
a worldwide combined report which included all of its
worldwide income and activities, and the worldwide
income and activities of all of its controlled subsidiaries,
including Barcal. C-39, #18. The income which served as a
measure of BBI’s California tax was determined by apply-
ing an apportionment formula, which compared BBI’s
California activities to the worldwide activities of BBI
and its subsidiaries, to the worldwide net income of BBI
and its subsidiaries.
At audit the Franchise Tax Board determined that
Barcal, BBI and all of BBI’s other subsidiaries were part of
a single unitary business which also included BBL, the
parent company of BBI, and all of the other controlled
subsidiaries of BBL. C-38, #14. As a result of this deter-
mination the Franchise Tax Board recomputed the Cali-
fornia tax liabilities of Barcal and BBI upon the kasis of a
combined report which included all of the income and
activities of the entities determined to be in the unitary
business, from which the California net incomes of Barcal
and BBI were reached by formulary apportionment. C-38,
#15; C-39, #16; A-5. For purposes of this litigation it is
agreed that BBL and all of its majority-owned subsid-
iaries, including BBI and Barcal, are a single unitary
business. A-2, C-37 #8, C-42 #27.
BBI and Barcal pursued administrative remedies with
the Franchise Tax Board, and modifications were made to
the original audit calculations of the amount of income
attributed to California. BBI and Barcal paid the modified
assessments and filed a suit for refund asking for the
return of all tax and interest amounts paid which were
over the amounts paid with their original returns. Nei-
ther BB} (C-41, #25) nor Barcal (C-41, #24) have claimed
that the amount of tax paid with their original returns
was erroneous. 7
2. Awareness of the Use of the Worldwide Combined
Report Method of Determining Income.
There is evidence which suggests international
awareness of the use of formula apportionment and the
unitary method at least from the mid-1950’s on. A-33. As
early as the late 1940’s the United States negotiators of
Friendship Commerce and Navigation agreements recog-
nized the existence of formulary approaches. A-34. The
use of formula apportionment as an alternative to the
arm’s-length/separate accounting method penetrated the
international financial and diplomatic consciousness as
early as 1924. A-32.
The debate on the States’ use of worldwide combined
reporting (“WWCR”) methodologies was recognized by
the Executive Branch of the federal government as span-
ning at least two decades as of 1984. A-33, n. 14. Congres-
sional bills dealing in part with the subject of the states’
use of WWCR have been introduced since at least 1965
(A-31) and have included measures sponsored by the
United States Treasury. For over 25 years senior tax and
foreign policy officials of the Executive Branch had been
aware of the complaints and demands of foreign govern-
ments regarding worldwide combined reporting. A-27.
3. The United States/United Kingdom Tax Treaty.
In 1975, the Ford administration concluded negotia-
tion of a bilateral income tax convention (“US/UK
Treaty”) with the United Kingdom which would have
prevented the use of the WWCR methodology here at
issue. A-28. in 1978, with explicit recognition of the “neg-
ative implications” of its act, the United States Senate
rejected the income tax convention negotiated by the exec-
utive branch. A-27. It was only approved after the clause
limiting the states’ use of worldwide combined reporting
was removed. A-27. tn the wake of the Senate rejection of
the limiting clause, the executive scuttled its effort to
achieve a treaty-imposed curb on the states’ use of
WWCR. A-28 and A-37, n. 20. -
The Parliament of the United Kingdom ratified the
treaty in 1980, without the clause prohibiting the states’
use of WWCR. A-30, n. 11 and C-56, #40gg. The ratifica-
tion occurred after representative of the two countries
negotiated the Third Protocol to the Treaty. C-56, #40gg.
In 1985 Parliament enacted legislation which
empowered the Prime Minister to institute retaliatory
taxation against United States companies if the use of
WWCR was continued. C-49, #34. This power has never
been exercised. The Executive Branch has indicated to
Congress that exercising this power would constitute a
clear violation of the treaty by the United Kingdom. Exh.
37i, p. 12.
4. The California Water’s-Edge Election.
In 1986 California enacted legislation which allows
both foreign and domestic based businesses to elect out
of the use of WWCR in favor of a “water’s-edge” method,
which in general confines WWCR to United States incor-
porated entities, certain tax advantage subsidiaries of
United States corporations and, in limited circumstances,
some portion of foreign incorporated entities. A-36 and
C-73, #55; Cal. Revenue and Taxation Code § 25110 (see
Appendix A hereto). The enactment of the California
water’s-edge legislation prompted senior Treasury offi-
- cials to retreat from their previous insistence that Con-
gress prohibit state use of worldwide formula
apportionment. A-36-37.
5. This Court’s Recognition of the Merits of Formulary
Apportionment.
As noted above, worldwide combined reporting is
based upon formulary apportionment of the total net
income of a unitary business. Use of such formula appor-
tionment of income does not result in a taxation of non-
California corporations or in a taxation of non-California
income; it is only the means of determining what portion
of the unitary income can be fairly attributed to the part
of the unitary business that is actually being carried out
in California. Container Corporation v. Franchise Tax Board,
463 U.S. 159, 164-65, 184, 192 (1983) (hereinafter “Con-
tainer”).
The Container decision, id., upheld the merits of Cali-
fornia’s use of unitary apportionment and WWCR as to
worldwide unitary businesses headed by domestic corpo-
rations. The Container Court held California’s version of
WWCR to be a “proper and fair method of taxation” (463
_ U.S. at 184) which reflects “a reasonable sense of how
income is generated” (id. at 169-70) and which avoids the
“basic theoretical weaknesses” of arm’s length/separate
accounting methods (id. at 181), the alternative to WWCR.
which petitioner Barclays claims must be applied to the
Barclays taxpayers. Among the separate accounting
weaknesses pointed out in Container are that separate
accounting “is subject to manipulation and imprecision,
and often ignores or captures inadequately the many
subtle and largely unquantifiable transfers of value that
take place among the components of a single enterprise”
(id. at 164-65).
As this Court stated in Trinova Corp. v. Michigan Dept.
of Treasury, ___ U.S. __, 111 S.Ct. 818, 831 (1991), “since
Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113
(1920), we have recognized the impracticability of assum-
ing that all income can be assigned [by geographic desig-
nation] to a single source.” This Court has very recently
stated, “The principal virtue of the unitary business prin-
ciple of taxation is that it does a better job of accounting
for ‘the many subtle and largely unquantifiable transfers
of value that take place among the components of a single
enterprise’ than, for example, geographical or transac-
tional accounting.” Allied-Signal, Inc. v. Director, Div. of
Taxation, __ U.S. __, 112 S.Ct. 2251, 2261 (1992).
+
ARGUMENT
I
THIS COURT HAS NO JURISDICTION TO CON-
SIDER THIS CASE AT THIS TIME, FOR THE CALI-
FORNIA SUPREME COURT’S DECISION, WHICH
REMANDED THE CASE TO THE COURT OF APPEAL
FOR CONSIDERATION OF TAXPAYERS’ DUE PRO-
CESS ISSUES, IS NOT A “FINAL JUDGMENT” AS
REQUIRED BY 28 U.S.C. § 1257.
The ultimate issue to be finally determined in a tax-
payer’s tax refund suit is whether the taxpayer has over-
paid its tax. Lewis v. Reynolds, 284 U.S. 281, 283 (1932).
That issue clearly has not yet been determined by the
California courts. The California Supreme Court has
decided the Foreign Commerce Clause issue in favor of
the Franchise Tax Board, and it has remanded the case
back to the California Court of Appeal for consideration
of due process issues. If all those due process issues were
to be determined in taxpayers’ favor, taxpayers would
then receive a final and favorable California judgment for
refunds of their taxes as prayed for in their complaints.
Such a judgment in favor of taxpayers would render moot
the Foreign Commerce Clause issue and holding as to this
case, unless the Franchise Tax Board petitioned this Court
for relief from the Due Process Clause judgment and
taxpayers preserved the Foreign Commerce Clause issue
in their response. On the other hand, if taxpayers ulti-
mately lose the Due Process Clause issue in-a final judg-
ment rendered by the highest California court in which a
decision could be had, there can be no question that
taxpayers then properly could raise both the Due Process
Clause issues and the Foreign Commerce Clause issues in
a petition for certiorari to this Court. Hathorn v. Lovern,
457 U.S. 255, 261 (1982); accord, California v. Rooney, 483
U.S. 307, 311-12 n. 2 (1987).
Under these circumstances, is the California Supreme
Court’s May 1992 interlocutory opinion a “final judg-
ment” for purposes of section 1257 jurisdiction? Proper
application of this Court’s recent decisions establishes
that it is not.
28 U.S.C. § 1257 limits the jurisdiction of this Court in
State-originated cases to “[flinal judgments or decrees
rendered by the highest court of a State in which a
decision could be had... .” “In general, the final-
judgment rule has been interpreted ‘to preclude
reviewability . . . where anything further remains to be
determined by a state court, no matter how dissociated
from the only federal issue that has finally been adjudi-
cated by the highest court of the State.’ Radio Station
WOW, Inc. v. Johnson, 326 U.S. 120, 124 (1945).” Flynt v.
Ohio, 451 U.S. 619, 620 (1981). One of the goals behind the
final-judgment rule is to avoid piecemeal review of the
various federal issues which might be present in a Partic-
ular case. See id. at 621. If this Court were to take this
case now and sustain the California Supreme Court on
the merits of the Foreign Commerce Clause issue, this
10
Court could well then be faced, either later this term or
next term, with a petition from a final California decision
on Due Process Clause issues in the same litigation.
Barclays, citing Cox Broadcasting Corp. v. Cohn, 420
U.S. 469 (1975), argues that the California Supreme
Court’s decision “meets the criteria established by this
Court for finality under 28 U.S.C. § 1257 where further
state proceedings may occur. Cox, 420 U.S. at 476-87.” Pet.
27. But Barclays never singles out nor completely sets
forth any of the four Cox exceptions to the general rule.
The reason for this omission is clear: Barclays’ circum-
stances meet none of the four exceptions in Cox.
The Cox decision provides “a limited set of situa-
tions” which provide exceptions to the above general
rule. O'Dell v. Espinoza, 456 U.S. 430 (1982). There are four
categories of cases listed in Cox as comprising that lim-
ited set of exceptions. The first and third categories are
not pertinent here.! The second and fourth categories
deserve attention.
The wisdom of applying the final-judgment rule to
deny jurisdiction in this case can be demonstrated by a
1 The first exception does not apply here because the For-
eign Commerce Clause determination is not conclusive of the
rest of the state proceedings — the case is not for all practical
purposes concluded. See Cox, 420 U.S. at 479. The third excep-
tion is not applicable here because Barclays would be able to
seek review in this Court on the Foreign Commerce Clause issue
if Barclays were to lose on the merits in the further California
proceedings. See Cox, 420 U.S. at 481; see also Hathorn and
Rooney, cited above at p. 9.
11
close analysis of the second Cox exception. Cox presents
the second exception as follows:
“Second, there are cases such as Radio Sta-
tion WOW, supra, and Brady v. Maryland, 373 U.S.
83 (1963), in which the federal issue, finally
decided by the highest court in the State, will
survive and require decision regardless of the
outcome of future state-court proceedings. In
Radio Station WOW, .. . [t]he federal issue was
held reviewable here despite the pending [state
proceedings] on the ‘presupposition . . . that the
federal questions that could come here have
been adjudicated by the State court, and that the
[further state proceedings] could not remotely
give rise to a federal question . . . that may later
come here. .. . ’ 326 U.S., at 127. . . . Nothing
that could happen in the course of the [further
State proceedings], short of settlement of the
case, would foreclose or make unnecessary deci-
sion on the federal question.” 420 U.S. at 480.
The second exception in Cox is premised upon two
conditions: (1) that no further decision of the state courts
will render moot the federal question which has already
been decided, and (2) that no other federal question will
be a subject of the state court proceedings to come. Bar-
clays argues in part that this Court should take jurisdic-
tion imniediately in order to keep the Foreign Commerce
Clause question from becoming moot. To the contrary, the
second exception in Cox establishes that if the federal
question might be rendered moot in the further state
proceedings, that usually is sufficient reason to find that
there has not been a “final judgment” in the state courts.
This approach is tied to this Court’s recognition that the
final- judgment limitations on this Court's jurisdiction are
12
‘4
closely connected to the “ ‘policy of strict necessity in
disposing of constitutional issues. . . . ’” Minnick v.
California Dept. of Corrections, 452 U.S. 105, 122-23 & n. 30
(1981).
By also conditioning this second exception in Cox
upon the absence of any possibility that any other federal
question might arise in the remaining state court proceed-
ings, this exception avoids the possibility of there being
two or more “final judgments” in the same state case, a
situation which could give rise to piecemeal consider-
ation by this Court of various federal issues in the same
state case. The present case provides an example: imme-
diate consideration on the merits of Barclays’ Foreign
Commerce Clause claims could well be followed soon by
another petition on Due Process Clause grounds, with
both petitions arising from exactly the same California
litigation. To avoid this situation, this Court has held that
when further state proceedings are necessary to resolve
another federal question, there is no “final judgment”
and thus no jurisdiction under section 1257. San Diego Gas
& Electric Co. v. San Diego, 450 U.S. 621, 633 (1981).
Although the second Cox exception clearly does not
apply to this case, its consideration in the context of this
case demonstrates some of the reasons why the present
case should not be excepted from the general rule. Any
attempt to expand any other exception from Cox in order
to apply it here should be given extremely careful scru-
tiny.
Without being specific, Barclays refers to just a por-
tion of the fourth exception in Cox. In order for this Court
to have jurisdiction, Barclays must establish that this case
13
now meets all of the necessarily intertwined conditions of
the fourth exception. See Flynt v. Ohio, 451 U.S. 619. That
exception requires that (1) “the federal issue has been
finally decided in the state courts with further proceed-
ings pending in which the party seeking review here might
prevail on the merits on nonfederal grounds, thus rendering
unnecessary review of the federal issue by this Court,” '
(2) “reversal of the state court on the-federal issue would
be preclusive of any further litigation on the relevant
cause of action rather than merely controlling the nature
and character of, or determining the admissibility of evi-
dence in, the state proceedings still to come,” and (3) “a
refusal immediately to review the state-court decision
might seriously erode federal policy. ...” Cox, 420 U.S. at
482-83 (emphasis added).
The first requirement for this exception is not met by
this case. While the Franchise Tax Board has argued that
there are California procedural bars to the consideration
of the due process claims on their merits, there is no way
that Barclays can ultimately prevail on the merits in the
further state proceedings without establishing that there
has been a denial of due process of law.?
? Although article I, section 7 of the California Constitution
also guarantees “due process” rights, that provision has not
been interpreted in tax cases as providing any rights different
from those guaranteed in the federal Due Process Clause. See
Cohan v. Alvord, 162 Cal.App.3d 176, 184-86 (1984); Illinois Com.
Men's Assn. v. State Bd. of Equalization, 34 Cal.3d 839 (1981). In
this case the Barclays taxpayers have never argued to the Cali-
fornia courts that the California due process guarantee has a
broader coverage here than the federal Due Process Clause.
14
The third requirement for this Cox exception also is
not met in this case. The third requirement has been
satisfied in cases where First Amendment rights are
directly at stake in the delays involved in further state
proceedings (see, e.g., Fort Wayne Books, Inc. v. Indiana,
489 U.S. 46, 55-56 (1989)) and cases where the federal
question involves such procedural questions as proper
jurisdiction, venue, or arbitration with regard to which
the claimed federal interest would be sacrificed or seri-
ously undermined by continuation of contrary state court
procedures (see, e.g., Southland Corp. v. Keating, 465 U.S. 1,
6-9 (1984); see also Mercantile National Bank v. Langdeau,
371 U.S. 555 (1963), and Construction Laborers v. Curry, 371
U.S. 542° (1963), which are cited as examples for the fourth
exception in Cox, 420 U.S. at 483, and in Flynt v. Ohio, 451
U.S. 619, 622 (1981)).
In Flynt, id., this Court refused to consider whethef
permitting a particular criminal prosecution to proceed in
state courts was violative of the Equal Protection Clause,
holding ihat the resolution of that question could await
final state judgment without “any adverse effect upon
important federal interests.” Id. at 122. This Court
reached this holding even though the first two conditions
of the fourth Cox exception were met. In the words of this
Court, “A contrary conclusion would permit the fourth
exception to swallow the rule.” Id. at 622. In other words,
the mere fact that the state courts had reached their final
holding on a vital federal constitutional issue does not
mean that a delay in United States Supreme Court review
of that holding will “seriously erode federal policy.”
Barclays argues that failure to give immediate review
to the California Supreme Court’s interlocutory decision
15
would seriously erode an alleged “federal economic pol-
icy of promoting a uniform standard for division of
income for tax purposes between nations.”3 Barclays fails
to explain why Barclays’ purported economic policies
somehow must be protected immediately in this case
while the Equal Protection Clause claims in the criminal
proceedings in Flynt could wait.4
Barclays fails to recognize that there is an extremely
strong federal policy of comity which would be seriously
eroded if Court were to take this case at this juncture. This
Court has long recognized that “ ‘the modes adopted [by
the states] to enforce the taxes levied should be interfered
with as little as possible.’ ” Fair Assessment in Real Estate
3 Barclays fails to recognize that if, as the California
Supreme Court has held, Congress has taken this case out of the
dormant Commerce Clause context by acquiescence in Califor-
nia’s taxing procedures, there can be no federal economic policy
which can overshadow this congressional position.
* In making this argument, Barclays also fails to inform this
Court that under current California law, Barclays subsidiaries
doing business in California can choose to not have worldwide
combined reporting used in the determination of their taxes;
thus such Barclays subsidiaries do not need to experience
worldwide combined reporting while the California state court
proceedings proceed to a truly final judgment. See Pet. App.
A-36 & n. 19, citing Cal. Rev. & Tax Code § 25110 et seq. Barclays
also fails to inform this Court of two other cases (Alcan Alumi-
num Corporation v. Franchise Tax Board, Cal. Ct. of Appeal Nos. 2
Civ. No. B065648, 3 Civ. No. 11530), currently proceeding in two
separate districts of the California appellate courts, wherein
another taxpayer is actively raising the same Foreign Commerce
Clause issue which Barclays wishes to argue now in this Court.
Thus even if the Foreign Commerce Clause issue is mooted out
in Barclays’ further state court proceedings, another taxpayer
may soon be asking this Court to consider it.
16
Assn. v. McNary, 454 U.S. 100, 102 (1981), quoting Dows v.
Chicago 11 Wall. 108, 110 (1871).5 In Fair Assessment this
Court held that, as long as the state legal tax remedies
were “plain, adequate, and complete,” the above funda-
mental principle of comity in determining constitutional
issues in state tax cases overcame the doctrine, enunci-
ated in Monroe v. Pape, 365 U.S. 167 (1961), that comity
does not apply in civil rights damages cases brought
under 42 U.S.C. § 1983. 454 U.S. at 116.© This fundamental
federal principle of comity with regard to state taxes
certainly outweighs and overwhelms Barclays’ purpor-
tedly applicable economic policy. Given this fundamental
federal principle of comity in cases dealing with state
taxes, a principle which strongly favors allowing state tax
proceedings to go to true completion before reviewing
any federal issues in this Court, it is even more clear that
Cox’s fourth exception to the “final judgment” rule does
not apply in this case.
5 In 28 U.S.C. § 1341, which bars the federal district courts
from jurisdiction to enjoin the assessment or collection of state
taxes where there is a plain, speedy and efficient remedy in the
state courts, “Congress also recognized that the autonomy and
fiscal stability of the States survive best when state tax systems
are not subject to scrutiny in federal courts.” Fair Assessment in
Real Estate Assn., 454 U.S. at 102-03. “This legislation, and the
decisions of this Court which preceded it, reflect the fundamen-
tal principle of comity between federal courts and state govern-
ments that is essential to ‘Our Federalism,’ particularly in the
area of state taxation.” Id. at 103.
6 This Court has specifically held under 28 U.S.C. § 1341
that the California tax refund remedies now being pursued in
the California courts are plain, speedy and efficient. Franchise
Tax Bd. of Cal. v. Alcan Aluminium, 493 U.S. 331, 338-41 (1990).
17
There has been no final judgment in the California
courts as jurisdictionally required by 28 U.S.C. § 1257.
Barclays’ current petition for certiorari-should be denied.
II
THE CALIFORNIA SUPREME COURT HAS PROPERLY
APPLIED THIS COURT’S WARDAIR DECISION IN
HOLDING THAT CONGRESSIONAL ACQUIESCENCE
IN CALIFORNIA’S USE OF WORLDWIDE COMBINED
REPORTING IS DETERMINATIVE OF THE COMMERCE
CLAUSE ISSUE, WITH NO NEED FOR ANY DORMANT
COMMERCE CLAUSE ANALYSIS.
Respondent Franchise Tax Board submits that, even if
this Court did have jurisdiction to grant Barclays’ petition,
the California Supreme Court has correctly applied existing
precedent of this Court. Under these circumstances there
would be no need for this Court to exercise its jurisdiction.
The California Supreme Court’s Commerce Clause
holding is based upon an application of Wardair Canada,
Inc. v. Florida Dept. of Revenue, 477 U.S. 1 (1986) (hereinaf-
ter “Wardair”), to conclude that Congress has acted to
acquiesce in the state tax practice which Barclays is chal-
lenging. That being so, the California Supreme Court
pointedly did not engage in any dormant Commerce
Clause analysis. A-39.7 Barclays spends most of its
7 Given the California Supreme Court’s holding, respon-
dent Franchise Tax Board will not in this response engage in a
lengthy dormant Commerce Clause analysis. No admission
should be inferred from this attempt at succinctness; the Fran-
chise Tax Board stands ready to establish its dormant Commerce
Clause position if called upon to do so by a granting by this
Court of Barclays’ petition.
18
petition attempting to make points which only are rele-
vant to a dormant Commerce Clause analysis. Other than
a few citations, Barclays confines its Wardair contentions
to two partial pages near the back of its petition. Pet.
22-2
ke 23.
In Wardair this Court cautioned that “It would turn
dormant Commerce Clause analysis entirely upside down
to apply it when 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.” Id. at 12. In
criticizing the California Supreme Court for “disre-
gard[ing]” established dormant Commerce Clause criteria
(Pet. 17) in a case where Congress has acted to allow the
state tax practice in issue, the Barclays petition attempts
to lead this Court into just such an upended and illogical
exercise.§
In Container Corp. of America v. Franchise Tax Board,
463 U.S. 159 (1983) (hereinafter “Container”), this Court
held that California’s worldwide combined reporting
method as applied to a multinational unitary business
with a domestic ultimate parent was constitutional. This
Court reserved the question of whether it would reach
8 There is no need or basis to apply in this case the results
or dormant Commerce Clause analysis from such cases as Kraft
General Foods v. lowa Dept. of Revenue, ___ U.S. ___, 112 S.Ct. 2365
(1992%, cited Pet. at 16, 19, 24, and 26. The fact that the dormant
Commerce Clause analysis is broader in the foreign commerce
context than in the domestic context (id. at 2370) cannot affect
Congress’ total power to remove all Commerce Clause restric-
tions upon any state tax practice in which Congress chooses to
acquiesce. See also n. 11 below at p. 22.
19
the same result if (as in this case) the ultimate parent
corporation were foreign. 463 U.S. at 193-97.9
Three years after Container, in Wardair, this Court
provided the analytic tool which, as properly applied by
the California Supreme Court to uncontradicted facts in
the current record, mandates the resolution of this
reserved question in favor of California’s use of WWCR.
Noting that a dormant Commerce Clause analysis should
not be applied when federal law indicates an authorita-
tive federal decision to permit the challenged state tax,
this Court held in Wardair that such a permissive decision
can exist by implication, i.e., under circumstances where
® When dealing with the question of the “one voice” of the
federal government in foreign commerce, the Container Court
only considered whether California’s application of WWCR vio-
lated either one of two branches of the one voice standard,
indicating that the state tax “will violate the ‘one voice’ stan-
dard if it either implicates foreign policy issues which must be
left to the Federal Government [the dormant clause branch of
the standard] or violates a clear federal directive.” 463 U.S. at
194 (emphasis by the Court). Thus the only non-dormant For-
eign Commerce Clause analysis in Container was a consider-
ation whether the one voice had spoken to preempt California’s
use of WWCR. Id. In the words of the Barclays trial court, Con-
tainer “did not address the question of whether such policy was
expressed Congressionally for it.” C-31 (emphasis by the court).
The Container Court's consideration of “specific indications of
congressional intent” (463 U.S. at 196) was restricted to the
preemptive analysis, with the Court deciding that “we cannot
conclude that the California tax at issue here is preempted by
federal law. ...” Id. at 197. Since the Container Court did not
even consider whether the federal government’s one voice had
spoken to permit California’s use of WWCR, it certainly is not
inconsistent with Container to apply the later Wardair analysis in
the present case to find such permission.
20
there is no explicit statement of such permission. Such
“implications” are to be drawn from “the law as it pres-
ently stands,” not from any “aspiration” for what the law
might become. Id. at 10 (emphasis by the Court).
In Wardair, a Canadian airline challenged Florida’s
imposition of a tax on all aviation fuel sold within the
state insofar as that tax was assessed on fuel used by
foreign airlines exclusively in foreign commerce. On the
Commerce Clause issue in Wardair,!° the taxpayer and the
Solicitor General as amicus curiae argued that the Florida
tax unconstitutionally interfered with the ability of the
federal government to speak with one voice because there
was a federal policy of exempting such fuel from tax. As
evidence of the alleged federal “policy,” Wardair and the
Solicitor General principally relied on (1) the Chicago
Convention on International Civil Aviation, an interna-
tional treaty to which the United States and 156 other
countries, including Canada, are parties; (2) a resolution
adopted by the International Civil Aviation Organization
in 1966; and (3) more than 70 bilateral agreements into
which the United States has entered with various coun-
tries dealing with international aviation. Discussing each
of these in turn, this Court pointed out: (1) that the
Chicago Convention by its terms precludes the imposi-
tion of local taxes on fuel only when the fuel already is on
10 The Wardair Court also held that the Florida tax was not
preempted by the Federal Aviation Act, but the Court explicitly
stated that it did not rely on a permissive provision of that act
“to answer the Commerce Clause issue” present in Wardair. 477
U.S. at 6-7. Thus Barclays errs in implying (Pet. 23) that the
Federal Aviation Act served in any way as a basis for the War-
dair Commerce Clause holding.
21
board an arriving aircraft, thus giving rise to the “nega-
tive implication” of “a decision by the parties to that
convention to address the problem of [state and local
taxation] by curtailing and limiting only some of the
localities’ power to tax, while implicitly preserving other
aspects of that authority” (id. at 10); (2) that the resolution
adopted by the ICAO, while it endorses an international
scheme of tax exemption, is merely the work product of
an international organization of which the United States
is a member and has no force of law (id. at 11); and (3)
that while most of the 70 bilateral agreements commit the
United States to refrain from imposing national taxes of
the type imposed by Florida, in none of these agreements
has the United States agreed to deny the states the power
to tax the sale of aviation fuel; in particular, the agree-
ment between the United States and Canada makes no
mention of taxation by political subdivisions, “an omis-
sion which must be understood as representing a policy
choice by the contracting parties... .” Id. at 11.
This Court went on to say:
“What all of this makes abundantly clear is
that the Federal Government has not remained
silent with regard to the question of whether
States should have the power to impose taxes on
aviation fuel used by foreign carriers in interna-
tional travel. By negative implication arising out
of more than 70 agreements entered into since
the Chicago Convention, the United States has
at least acquiesced in state taxation of fuel used
by foreign carriers in international travel.
Again, in the U.S.-Canadian Agreement only
‘national’ charges are barred, and we presume
22
that drafters from two federalist nations under-
stood this as representing a choice not to preclude
local taxation. It would turn dormant Commerce
Clause analysis entirely upside down to apply it
when 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.” Id.
at 12 (emphasis in original).
Thus in Wardair the federal government had consid-
ered whether to bar a type of tax practice by international
agreement, but the states were not restricted from apply-
ing that tax practice when the agreements were finally
adopted as a part of United States law. Under this Court’s
Wardair rule, the implications to be drawn from such an
action establish that in formulating federal law Congress
has elected to permit the states to apply such a tax
practice. Id. at 10, 12.1!
11 It must be kept in mind that the United States Constitu-
tion gives the power to regulate foreign and interstate com-
merce to Congress. U.S. Const. art. I, § 8(3); Pet. App. D. Thus, as
to foreign or interstate commerce matters, congressional action
prevails over any conflicting actions or desires of the Executive
Branch. See United States v. Curtiss-Wright Export Corp., 299 U.S.
304 (1936); United States v. Guy W. Capps, Inc., 204 F.2d 655 (4th
Cir. 1953), aff'd on other grounds, 348 U.S. 296 (1955). If Con-
gress has exercised its commerce powers so as to permit state
action there cannot possibly be any violation of the Commerce
Clause; once such permission is ascertained, “any action taken
by a State within the scope of the congressional authorization is
rendered invulnerable to Commerce Clause challenge.” Western
& Southern L.I. Co. v. Bd. of Equalization , 451 U.S. 648, 653 (1981);
see also Wardair, 477 U.S. at 12-13. In short, in granting such
permission Congress is unrestricted by any of the policy stan-
dards which would apply in a dormant Commerce Clause con-
text.
|
23
In holding that the Wardair rule was applicable in the
present case, the California Supreme Court placed its
primary reliance on the United States/United Kingdom
(“US/UK”) Treaty which was negotiated and ratified in
the 1970’s. Convention for the Avoidance of Double Taxa-
tion and the Prevention of Fiscal Evasions with Respect to
Taxes on Income and Capital Gains, Dec. 31, 1975, U.S.-
U.K., 31 U.S.T. 5668 (Exh. 40gg). For the first and only
time, the federal Executive Branch negotiated a provision
for that treaty, article 9(4), which would have explicitly
prohibited any state’s use of WWCR. A-29. After much
debate, and several votes in the Senate, the treaty was
only ratified when that provision was rendered totally
inapplicable to the states by a reservation. 124 Cong. Rec.
18416 (June 22, 1978) (Exh. 36c), 19076 (June 27, 1978)
(Exh. 36d); A-29. After more bargaining with the United
Kingdom, wherein the United Kingdom exacted other
federal tax concessions from the United States, the United
Kingdom accepted the treaiy with the prohibition of
WWCR only applicable to the national governments, not
to the states. 31 U.S.T. 5709, 5713 (Exh. 40g2). Thus the
States’ use of WWCR was directly considered as a tax
issue in the formulation of the treaty, but the states’ use of
WWCR ultimately was not restricted in the final adoption
of the treaty as a part of United States law.
The US/UK Treaty provides a perfect context for the
application of the Wardair rule: a clear congressional con-
sideration of whether a state tax practice (WWCR) should
be permitted, and a final ratification of a treaty which by
clear implication permitted the states’ application of that
tax practice (WWCR). At the time of the final Senate vote,
the clear choice before the Senate was either to ratify the
24
US/UK treaty while permitting the states to use WWCR
or (since ratification with original article 9(4) had proved
impossible) not to ratify the treaty. See 124 Cong. Rec.
18709-12 (June 23, 1978) (statements of Senators Byrd,
Church, Javits, Stevens, Sparkman, Cranston and Pack-
wood) (Exh. 36d). By more than the required two-thirds
vote (82 yeas, 5 nays), the Senate chose to ratify the treaty
while permitting (by implication) state use of WWCR. 124
Cong. Rec. 19076 (June 27, 1978) (Exh. 36d). In the words
of the Wardair decision, the Senate has “at least acqui-
esced” in the use of WWCR by the states, and under the
Wardair holding such acquiescence is fully sufficient to
establish that the federal government has “affirmatively
decided to permit” state use of WWCR. 477 U.S. at
12-13.12
The California Supreme Court correctly analogized
the present case to Wardair:
“The parallels between this evidence of
‘governmental silence’ or refusal to act and that
regarded as decisive in Wardair, supra, 477 U.S.
1, seem to us both evident and compelling. As in
Wardair, an international agreement (here the
bilateral income tax treaty between the United
States and the United Kingdom) demonstrates
that while federal executive branch officials
aspired to eliminate a state tax practice (here the
use of formula apportionment to calculate the
tax liability of foreign-based multinationals),
12 Contrary to Barclays’ attempt to characterize the Senate’s
ratification of the treaty as a “stalemate” (Pet. 23 n. 23), the final
outcome was a clear defeat for those who had attempted to bar
exactly the type of state tax practice which Barclays is challeng-
ing in this case.
25
‘the law as it presently stands acquiesces’ in the
states’ continued use of that practice. As in War-
dair, the ‘negative implications’ of international
agreements (here the tax treaty as ratified by the
Senate) support recognition of a federal policy
that acquiesces in the states’ tax practice. And
certainly, in the circumstances of Senate consid-
eration detailed above, the explicit removal of
‘political subdivisions’ from the scope of article
9(4) effected by the Church reservation, like the
omission of restrictions on taxation by political
Subdivisions in the international agreements
considered in Wardair, ‘must be understood as
representing a policy choice by the contracting
parties.’ (Wardair, supra, 477 U.S. at p. 11.)”
A-29-30 (emphasis in Original; footnote omit-
ted).
Recognizing that formula apportionment such as
WWCR has been a matter of international interest from at
least the mid-1950’s (A-33-34), and noting that indications
of such federal acquiescence also were to be found in the
history of other bilateral income tax treaties (A-31-34) and
in legislative histories of congressional bills (A-31), the
California Supreme Court applied Wardair to hold that (1)
California’s application of WWCR in this case has been
permitted by Congress under its Commerce Clause
powers and (2) since Congress has acted to permit such
application, no dormant Commerce Clause analysis was
necessary. Respondent Franchise Tax Board submits that
one does not have to do more than apply the Wardair rule
to the US/UK treaty to determine that the California
Supreme Court’s holdings were fully consistent with all
current precedents of this Court. The California Supreme
Court has not formulated and applied a “new test” of its
26
own (see Pet. 12, 23, 24) to reach these holdings; it has
correctly applied the test provided to it by this Court in
Wardair. Even if these correct holdings of the California
Supreme Court were held to constitute a “final judgment”
under section 1257, there would be no need for this Court
to take jurisdiction of this case.
III
THE DETERMINATION OF THE FOREIGN COM-
MERCE CLAUSE ISSUE IN THIS CASE ECLIPSES
ANY FOREIGN AFFAIRS PREEMPTION ISSUE.
Even if section 1257 gave jurisdiction to consider a
foreign affairs pre-emption issue on the merits, such an
issue could not be determinative in this foreign commerce
context. It is clear that at the heart of the California
Supreme Court's opinion is an issue pertaining directly to
the Foreign Commerce Clause. It is undisputed that the
Constitution gives to Congress alone the power “[t]o
regulate commerce with foreign nations. ...” U.S. Const.
art. I, § 8(3). If, as the Board contends, proper application
of the Wardair rule in this case confirms that federal law
pertaining to foreign commerce contains a permission for
the states’ use of WWCR, then no contrary foreign affairs
aspirations of the Executive Branch could eclipse that
permission. The Executive Branch’s power in the field of
foreign relations, “ ‘like every other governmental power,
must be exercised in subordination to the applicable pro-
visions of the Constitution.’ ” Dames & Moore v. Regan,
453 U.S. 654, 661 (1981), quoting United States v. Curtiss-
Wright Export Corp., 299 U.S. 304, 319-20 (1936).
27
But what of authorities such as Hines v. Davidowitz,
312 U.S. 52 (1941), and Zschernig v. Miller, 389 U.S. 429
(1968)? Barclays relies on these cases as barring any state
act which has a direct impact upon foreign relations and
which may well adversely affect the power of the central
government to deal with foreign affairs issues. The
answer in this case must be given in the foreign com-
merce context. If Congress has acted so as to permit state
action in a foreign commerce context, no further authori-
zation is needed, even though foreign relations neces-
sarily are also involved. See Wardair, 477 U.S. at 12-13; see
also United States v. Guy W. Capps, Inc., 204 F.2d 655 (4th
Cir. 1953), aff'd on other grds., 348 U.S. 296 (1955). Alter-
natively, if there is a dormant Foreign Commerce Clause
situation with no clear congressional directive, the Con-
tainer decision teaches that a state tax at variance with the
federal tax approach and affecting foreign commerce will
violate the Foreign Commerce Clause if it “ ‘may impair
federal uniformity in an area where federal uniformity is
essential’... and ‘prevents the Federal Government from
“speaking with one voice” in international trade. ...’”
463 U.S. at 194. In reaching its Foreign Commerce Clause
holding, the Container decision contains many references
to “foreign affairs,” “foreign relations,” and “foreign pol-
icy” (see 463 U.S. at 189, 194, 195, 196, 197); it rejected the
dissent’s position that California’s application of WWCR
was “an intrusion on national policy in foreign affairs
that is not permitted by the Constitution.” 463 U.S. at 206
(dissent). Thus Container establishes that a holding that
WWCR does not violate the dormant Foreign Commerce
Clause includes consideration of foreign affairs issues,
leaving no room for any determination that the federal
28
government’s foreign affairs powers bar the application
of WWCKR to that taxpayer. If a state tax affecting foreign
commerce is valid either by way of congressional authori-
zation or under the dormant Foreign Commerce Clause
tests (which include the balancing of foreign policy con-
siderations), it cannot be made unconstitutional on the
basis of infringement upon foreign affairs, particularly
since the Congress and the President share authority over
foreign affairs. Container, 463 U.S. at 196; Zschernig v.
Miller, 389 U.S. 429, 432 (1968).
Application of Barclays’ foreign affairs preemption
argument in this case would also rewrite the treaty
powers provisions of the United States Constitution. Con-
gress, through the Senate’s actions on the many bilateral
income tax treaties, and through the Senate’s action on
article 9(4) of the US/UK Treaty, has taken affirmative
action which allows the states to tax unfettered by sepa-
rate accounting restrictions placed on the national gov-
ernment and unfettered by proposed article 9(4), and has
therefore impliedly authorized state use of WWCR. This
Court cannot construe the Executive Branch’s foreign ‘
policy aspirations as authoritative federal policy without
disabling not only Congress, but also the Constitution,
which requires that treaties can become law only upon
ratification by two-thirds vote of the Senate. U.S. Const.
art. II, § 2 (App. A hereto.) By rejecting the Executiv:
Branch’s aspirations which were given voice in proposed
article 9(4) of the US/UK Treaty, Congress’ implied acqui-
escence in the state use of WWCR has become a part of
the “supreme law of the land” (U.S. Const. art. VI(2); it
cannot then be voided merely by relabeling the Executive
Branch’s thwarted aspirations as “foreign policy.”
a
TY
29
CONCLUSION
For the reasons given above, it is respectfully submit-
ted that the petition for writ of certiorari should be
denied.
Dated: September 1, 1992.
Respectfully submitted,
Daniet E. LUNGREN
Attorney General of the
State of California
TimotHy G. LappisH
Assistant Attorney General
(Counsel of Record)
Rosert D. Mitam
Deputy Attorney General
Attorneys for Respondent
App. 1
APPENDIX A
CONSTITUTIONAL AND STATUTORY PROVISIONS
UNITED STATES CONSTITUTION
Article II, section 2, clause 2 (in part):
[The President} shall have power, by and with
the advice and consent of the Senate, to make
treaties, provided two-thirds of the Senators
present concur... .
UNITED STATES CODE
28 U.S.C. section 1257(a), in part:
(a) Final judgments or decrees rendered by the
highest court of a State in which a decision
could be had, may be reviewed by the Supreme
court by writ of certiorari ... where the validity
of a statute of any State is drawn in question on
the ground of its being repugnant to the Consti-
tution, treaties, or laws of the United States, or
where any title, right, privilege, or immunity is
specially set up or claimed under the Constitu-
tion or the treaties or statutes of, or any commis-
sion held or authority exercised under, the
United States.
CALIFORNIA REVENUE AND TAXATION CODE
Section 25110 (water’s edge election):
(a) Notwithstanding Section 25101, a qualified
taxpayer, as defined in paragraph (2) of subdivi-
sion (b) which is subject to the tax imposed
under this part, may elect to determine its
income derived from or attributable to sources
within this state pursuant to a water’s-edge
election in accordance with the provisions of
App. 2
this part, as modified by this article. A taxpayer
which makes a water’s-edge election shall take
into account the income and apportionment fac-
tors of the following affiliated entities only:
(1) Affiliated banks or corporations which
are eligible to be included in a federal consoli-
dated return as described in Sections 1501 to
i505, inclusive, of the Internal Revenue Code,
other than corporations making an election
under Section 936 of the Internal Revenue Code.
(2) Domestic international sales corpora-
tions, as described in Sections 991 to 994, inclu-
sive, of the Internal Revenue Code and foreign
sales corporations as described in Sections 921
to 927, inclusive, of the Internal Revenue Code.
(3) Any corporation, regardless of the
place where it is incorporated if the average of
its property, payroll, and sales factors within the
United States is 20 percent or more.
(4) Banks and corporations which are
incorporated in the United States, excluding cor-
porations making an election pursuant to Sec-
tions 931 to 936, inclusive, of the Internal
Revenue Code, of which more than 50 percent of
their stock is controlled directly or indirectly by
the same interests, which are not included in
paragraph (1).
(5) A bank or corporation which is not
described in paragraphs (1) to (4), inclusive, or
paragraph (6), but only to the extent of its
income derived from or attributable to sources
within the United States and its factors assign-
able to a location within the United States in
accordance with paragraph (3) of subdivision
(b). Income of such a bank or corporation
App. 3
derived from or attributable to sources within
the United States as determined by federal
income tax laws shall be limited to and deter-
mined from the books of account maintained by
the bank or corporation with respect to its activ-
ities conducted within the United States.
(6) Export trade corporations, as described
in Sections 970 to 972, inclusive, of the Internal
Revenue Code.
(7) Any affiliated bank or corporation
which is a “controlled foreign corperation”, as
defined in Section 957 of the Internal Revenue
Code, if all or part of the income of that affiliate
is defined in Section 952 of Subpart F of the
Internal Revenue Code (“Subpart F income”).
The income and apportionment factors of any
affiliate to be included under this paragraph
shall be determined by multiplying the income
of and apportionment factors of that affiliate
without application of this paragraph by a frac-
tion (not to exceed one), the numerator of which
is the “Subpart F income”, of that bank or cor-
poration for that income year and the denomi-
nator of which is the “earnings and profits” of
that bank or corporation for that income year, as
defined in Section 964 of the Internal Revenue
Code.
(8) (A) The income and factors of the
above-enumerated banks and corporations shall
be taken into account only if the income and
factors would have been taken into account
under Section 25101 if this section had not been
enacted.
(B) The income and factors of a bank or
corporation which is not described in para-
graphs (1) to (4) inclusive, and (6) and which is
App. 4
an electing taxpayer under this subdivision shall
be taken into account in determining its income
only to the extent set forth in paragraph (5).
(b) For purposes of this article and Section
24411:
(1) An “Affiliated bank or corporation”
means a bank or corporation which is related to
a bank or corporation, required to file under this
part, because of any of the following:
(A) It owns directly or indirectly more than
50 percent of the voting stock of the bank or a
corporation required to file under this part.
(B) More than 50 percent of its voting
stock is owned directly or indirectly by a bank
Or corporation required to file under this part.
(C) More than 50 percent of voting stock of
both it and the bank or corporation required to
file under this part is owned or controlled
directly or indirectly by any bank or person (as
defined in Section 7701(a)(1) of the Internal Rev-
enue Code).
(2) A “qualified taxpayer” means a bank
or corporation which does both of the following:
(A) Files with the state tax return on
which the water’s-edge election is made a con-
sent to the taking of depositions at the time and
place most reasonably convenient to all parties
from key domestic corporation individuals and
to the acceptance of subpoenas duces tecum
requiring reasonable production of documents
to the Franchise Tax Board as provided in Sec-
tion 26423 or by the State Board of Equalization
as provided in Title 18, California Code of Regu-
lations, Section 5005, or by the courts of this
App. 5
State as provided in Chapter 2 (commencing
with Section 1985) of Title 3 of Part 4 of, and
Section 2025 of, the Code of Civil Procedure.
The consent relates to issues of jurisdiction and
service and does not waive any defenses a tax-
payer may otherwise have. The consent shall
remain in effect so long as the water’s-edge
election is in effect and shall be limited to pro-
viding that information necessary to review or
to adjust income or deductions in a manner
authorized under Sections 482, 861, Subpart F of
Part III of Subchapter N, or similar provisions of
the Internal Revenue Code, together with the
regulations adopted pursuant to those provi-
sions, and for the conduct of an investigation
with respect to any unitary business in which
the taxpayer may be involved.
(B) Agrees that for purposes of this article,
dividends received by any bank or corporation
whose income and apportionment factors are
taken into account pursuant to subdivision (a)
from either of the following are functionally
related dividends and shall be presumed to be
business income:
(i) A bank or corporation of which more
than 50 percent of the voting stock is owned,
directly or indirectly, by members of the unitary
group and which is engaged in the same general
line of business.
(ii) Any bank or corporation which is
either a significant source of supply for the uni-
tary business or a significant purchaser of the
Output of the unitary business, or which sells a
Significant part of its output or obtains a signifi-
cant part of its raw materials or input from the
unitary business. “Significant,” as used in this
App. 6
subparagraph, means an amount of 15 percent
or more of either input or output.
All other dividends shall be classified as
business or nonbusiness income without regard
to this subparagraph.
(3) The definitions and locations of prop-
erty, payroll, and sales shall be determined
under the laws and regulations which set forth
the apportionment formulas used by the indi-
vidual states to assign net income subject to
taxes on or measured by net income in that
state. If a stale does not impose a tax on or
measured by net income or does not have laws
or regulations with respect to the assignment of
property, payroll, and sales, the laws and regu-
lations provided in Article 2 (Commencing with
Section 25120) shall apply.
Sales shall be considered to be made to a
state only if the bank or corporation making the
sale may otherwise be subject to a tax on or
measured by net income under the Constitution
or laws of the United States, and shall not
include sales made to a bank or corporation
whose income and apportionment factors are
taken into account pursuant to subdivision (a) in
determining the amount of income of the tax-
payer derived from or attributable to sources
within this state.
(4) “The United States” means the 50)
states of the United States and the District of
Columbia.
(c) All references in this part to income
determined pursuant to Section 25101 shall also
mean income determined pursuant to this sec-
tion.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.