Opposition Brief — Alcan Aluminum Corp. v. Franchise Tax Board

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No. 92-1751 JUN 0 2 1995 :

Se ee eae

In The

Supreme Court of the United States

October Term, 1992

*

ALCAN ALUMINUM CORPORATION,

Petitioner,

v.

FRANCHISE TAX BOARD

OF THE STATE OF CALIFORNIA,

Respondent.

*

On Petition For A Writ Of Certiorari

To The Court Of Appeal Of The State Of California

In And For The Second Appellate District

.

BRIEF OF RESPONDENT FRANCHISE TAX BOARD

IN OPPOSITION TO.

PETITION FOR WRIT OF CERTIORARI

4

Danie. E. LUNGREN

Attorney General of

the State of California

Tmotrny G. LappisH

Assistant Attorney General

(Counsel Of Record)

2101 Webster Street, 12th Floor

Oakland, CA 94612-3049

(510) 286-0364

Pour C. Grirrin

Deputy Attorney General

QUESTIONS PRESENTED

1. Whether the California Courts properly declined

to apply a dormant Commerce Clause analysis and prop-

erly held that, due to congressional acquiescence, Califor-

nia did not violate the Foreign Commerce Clause by

application of worldwide combined reporting to deter-

mine the taxable California income of petitioner.

2. Whether the petitioner’s trial stipulation, limiting

the issues in this case to those involving “one voice” and

“multiple taxation” contentions, has limited this Court’s

jurisdiction, with the result that petitioner is barred from

raising questions concerning the four elements of the

dormant Commerce Clause analysis set forth in Complete

Auto Transit, Inc. v. Brady, 430 U.S. 274 (1974), including

whether the tax assessed against petitioner was out of all

proportion to its business in California.

3. If a dormant Commerce Clause analysis were

appropriate, would California’s use of worldwide com-

bined reporting violate the “multiple taxation” test or the

dormant portion of the “one voice” test?

ii

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED 0ucccccccbaseseccasecuses i

tes eee err Pere epee pian a eye 1

STATUTORY AND CONSTITUTIONAL PROVI-

PORTE x ko. has 0.5.05 05an a Sheks ce kave be ekaae 2

SUPPLEMENTAL STATEMENT OF THE CASE..... 2

PU SIREIGE 6s 5 iis vin 6G EGS A ya ees 6

I THE CALIFORNIA COURTS HAVE PROPERLY

II

Ill

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 .

PETITIONER’S STIPULATION LIMITING THE

ISSUES TO BE LITIGATED IN THIS CASE BARS

PETITIONER FROM PRESENTING FOR THIS

COURT’S CONSIDERATION THE FOUR ELE-

MENTS OF DORMANT COMMERCE CLAUSE

ANALYSIS SET FORTH IN COMPLETE AUTO

TRAICOEE OT, DOMEE bx i wes SE Cae ahah haere Kae

EVEN IF A DORMANT COMMERCE CLAUSE

ANALYSIS WERE TO BE APPLIED, THERE

WOULD BE NO VIOLATION OF THE MULTI-

PLE TAXATION OR “ONE VOICE” ELEMENTS

OF FRG Me Oee BATU SUES chose kei daese diese

Fis SE GN oie ak bc cesvnecccepeatacms

x ME NS Cn 0g seb oho Nb cicadas beesexeves s

CONS cs: «3s ccajins hae

12

iii

TABLE OF AUTHORITIES

Page

Cases

Allied-Signal, Inc. v. Director, Div. of Taxation, __

di SORE, EOE AROEDD ci vnnsncicdaennces 13

Barclay's Bank Internat., Ltd. v. Franchise Tax Bd., 2

MED 25 SUV 6 dives eccss veces’ » 7, @ 11

Barclays Bank PLC v. Franchise Tax Board, No.

MMR CUM AA OMKGND Le CU e wi peG NK dawn coh'e0 oes’ 2

Bd. of Dirs. of Rotary Int'l v. Rotary Club, 481 U.S.

Ra aha ck be dik aku is'n oA V0.8 2 va Veh 12

Cardinale v. Louisiana, 394 U.S. 437 (1969) ........... 16

Carmichael v. Reitz, 17 Cal.App.3d 958 (1971)........ 14

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

TM UR, Vale Whe sh vba csc s¥soccncss passim

Container Corp. of America v. Franchise Tax Bd., 463

i aes hues CE TUTES (5a. c4 052 as passim

Ernst v. Searle, 218 Cal. 233 (1933) ...............0.. 14

Franchise Tax Bd. of Cal. v. Alcan Aluminium, 493

GSE aes et rr 15

In re Lamkin, 355 U.S. 59 (1957)...............00000. 12

Itel Containers International Corp. v. Huddleston, __

ESS SE ee 7

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

EG oN C ato Li canes daccenas Sosa ce 12, 16, 18

Kraft General Foods v. Iowa Dept. of Revenue, __

ON cel BUM Ms OOO COUR). esc cc ecccevescss 14

iv

TABLE OF AUTHORITIES - Continued

Page

McKesson Corp. v. Florida Alcohol & Tobacco Div.,

AD Tk Pe Aa 6 AROS Salk 4 eee hn ke cache denackeks 15

Street v. New York, 394 U.S. 576 (1969) ........... 12, 16

Title Ins. Co. v. State Bd. of Equalization, 4 Cal.4th

S$. | AR Ae err eee ere ere 14

Trinova Corp. v. Michigan Dept. of Treasury, ___ U.S.

ch ER ee TE IER 068 bu ws hen gtsesswayace 13

Wardair Canada, Inc. v. Florida Dept. of Revenue, 477

APS eu cd § C4) tae hntnndhssseeiasames ss passim

Western & Southern L.I. Co. v. Bd. of Equalization,

ee Bay MEERA cos 0 0A 2 oS bbR dew Cd eeiice bain ga oe 8

Williams v. Georgia, 349 U.S. 375 (1955).............. 15

CONSTITUTIONAL PROVISIONS

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

SE I I iis cay 50ck PAR ea eee Ra 3, 4, 15

STATUTES

I oo an ll ee ae a i 22

California Revenue and Taxation Code

Vv

TABLE OF AUTHORITIES - Continued

Page

OTHER AUTHORITIES

Convention Between the Govenment of the United

States of America and the Government of Can-

ada with Respect to Taxes on Income and on

Capital (U.S./Canada Treaty), September 26,

SEEPS LT Ny Si al gee RNR 5, 10, 20, 21

Convention fur 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. 5668... .8, 9

O.E.C.D. Model Tax Convention................... 5, 21

124 Cong. Rec. 18416 (June 22, 1978)................. 9

124 Cong. Rec. 19076 (June 27, 1978)................. 9

Unrtep States Supreme Court RuLes

SEIS ted y bP Gk S's does bbcode we acuwiak cular 3

WE MR a ee te ee ee oe ee ae oi 2

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No. 92-1751

¢

In The

Supreme Court of the United States

October Term, 1992

~

ALCAN ALUMINUM CORPORATION,

Petitioner,

V.

FRANCHISE TAX BOARD

OF THE STATE OF CALIFORNIA,

Respondent.

a

On Petition For A Writ Of Certiorari

To The Court Of Appeal Of The State Of California

In And For The Second Appellate District

¢

BRIEF OF RESPONDENT FRANCHISE TAX BOARD

IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

¢

JURISDICTION

Petitioner Alcan Aluminum Corporation (“Alcan-

corp”) invokes jurisdiction under 28 U.S.C. § 1257(a). As

argued below at pages 12-16, no such jurisdiction exists

as to issues beyond the limited issues designated in the

portion of the trial stipulation which is reproduced herein

in Appendix A at App. 1.

STATUTORY AND CONSTITUTIONAL PROVISIONS

Appendix B hereto is California Revenue and Taxa-

tion Code section 25110, regarding California’s “water’s

edge” election. |

SUPPLEMENTAL STATEMENT OF THE CASE

This case involves precisely the same primary issue

as was presented to this Court in the petition in Barclays

Bank PLC v. Franchise Tax Board, No. 92-1384. Both Barclays

and Alcan involve California’s application of worldwide

combined reporting (“WWCR”) to determine the Califor-

nia taxable income of corporations which are parts of

multinational, multicorporate unitary businesses headed

by foreign corporations. As long as the California

Supreme Court has properly held (in Barclay’s Bank Inter-

nat., Ltd. v. Franchise Tax Bd., 2 Cal.4th 708, 829 P.2d 279

(1992)) that the United States Congress has acquiesced in

such use of WWCR by the states, there is no need to grant

the petition for certiorari in either Barclays or Alcan. On

May 17, 1993, this Court requested the views of the

Executive Branch as to the Barclays petition.

Respondent Board believes that Alcancorp’s state-

ment of the case contains significant omissions which,

among other things, go to the issue of whether this Court

has jurisdiction over issues which petitioner seeks to

have reviewed. Therefore, pursuant to rule 15.1, the Fran-

chise Tax Board provides this Court with this supplemen-

tal statement.

Petitioner Alcancorp does not comply with this

Court’s rule 14(h), which requires a showing in the state-

ment of the case “that the federal question was timely

and properly raised so as to give this Court jurisdiction to

review the judgment on a writ of certiorari.” The reason

for this noncompliance is simple: Alcancorp did not prop-

erly raise the federal questions involving the dormant

Commerce Clause requirements set forth in Complete Auto

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

Prior to the commencement of trial in this matter the

parties entered into the following stipulation with respect

to the issues in this case:

“ISSUES

“For the purposes of this litigation, these

parties hereby stipulate that the only legal issues

before this Court are whether the Board’s appli-

cation of the unitary method of accounting

under Section 25101 et. seg. of the California

Revenue and Taxation Code, and implementing

regulations, as applied to the facts in this case

violated the Foreign Commerce Clause of the

United States Constitution in that such applica-

tion impermissibly prevents the federal govern-

ment from speaking with one voice or

impermissibly gives rise to either the risk of or

actual multiple taxation. For purposes of this liti-

gation, Alcan is not contesting the Board’s

determination that the Alcan Group Companies

constitute a single unitary business under the

tests formulated by the California Courts and

the United States Supreme Court, or contending

that the tax assessed violated the Due Process

Clauses of the United States Constitution or the

California Constitution.” Appendix A hereto at

App. 1 (CT 0062) (emphasis added).

The appellate court decision below found that Alcan-

corp had waived by stipulation the consideration of any

Due Process Clause grounds and specifically the claim

that “compliance would impose an undue administrative

burden on [Alcan] Aluminum.” Pet. App. A-3, n. 2. Nei-

ther the trial court, the appellate court nor the California

Supreme Court found it necessary to rule upon the effect

of the stipulation as to any dormant Commerce Clause

issues in this case, because the California courts’ applica-

tion of this Court’s decision in Wardair Canada, Inc. v.

Florida Dept. of Kevenue, 477 U.S. 1 (1986), precluded the

need for any dormant Commerce Clause analysis.

This Court need not accept Alcancorp’s invitation

(Pet. 19-21, 23-24) to delve into the complex facts concern-

ing Alcancorp’s Riverside facility, for (1) Alcancorp first

says it does not need to rely upon separate accounting to

establish alleged distortion under worldwide combined

reporting, then proceeds to do so; (2) Alcancorp (at Pet.

17-18, 22-23) is asking this Court to discard “present

doctrine,” that is, to overrule more than 70 years of

precedents, including Container Corp. of America v. Fran-

chise Tax Bd., 463 U.S. 159 (1983); (3) Alcancorp’s stipula-

tion in the trial court limited the legal issues so as to

exclude the distortion issue, thus relieving respondent

Board from any burden of presenting any evidence con-

cerning the Riverside facility in order to establish the lack

of distortion; and (4) as established below at pages 6-11,

Congress’ exercise of its Commerce Clause powers in

acquiescing in the states’ use of worldwide combined

reporting has rendered unnecessary any consideration (as

part of a dormant Commerce Clause analysis) of the facts

concerning the Riverside facility.

Beyond the stipulated limitation of issues, Alcancorp

also has stipulated (App. A hereto at App. 1-2, 23) that

petitioner Alcancorp did not elect to petition the Board

for relief under the authority of California Revenue and

Taxation Code section 25137, cited by petitioner (Pet. 3-4)

as a statutory provision involved in this case.

This Court should also be aware of the actions of

Canada in this area. Canada and the United States con-

cluded renegotiations of their bilateral income tax treaty

in 1980. Although a letter indicated the Canadians’ dis-

pleasure with the states’ use of worldwide combined

reporting (“WWCR”), the renegotiated treaty had no pro-

vision restricting such use, because (as recognized by the

Canadians) the United States Senate had recently rejected

such a proposed limitation. This situation was acknowl-

edged in a note from G. William Miller, Secretary of the

Treasury of the United States, to Allan I. MacEachen,

Minister of Finance of Canada, and it was agreed that

discussions would be reopened on this issue if an accept-

able solution were found. Exhibit XXVI-1, attached hereto

as Appendix C.

Canada and the United States are members of the

Organization for Economic Cooperation and Develop-

ment (OECD). This organization has drafted a Model Tax

Convention for use by its members, wherein arm’s

length/separate accounting requirements would be

applied to both national and subnational taxes. Exhibit

XXIII, pp. 24, 28-29. Both Canada and the United States

noted exceptions to the Model Treaty clause which would

make the treaty applicable to subnational taxes. Exhibit

XXIII, p. 50.

€

ARGUMENT

I

THE CALIFORNIA COURTS HAVE PROPERLY

APPLIED THIS COURT’S WARDAIR DECISION IN

HOLDING THAT CONGRESSIONAL ACQUIES-

CENCE IN CALIFORNIA’S USE OF WORLDWIDE

COMBINED REPORTING IS DETERMINATIVE OF

THE COMMERCE CLAUSE ISSUE, WITH NO NEED

FOR ANY DORMANT COMMERCE CLAUSE ANAL-

YSIS.

Alcan’s contentions regarding Wardair Canada, Inc. v.

Florida Dept. of Revenue, 477 U.S. 1 (1986), are based upon

a direct misrepresentation of this Court’s Wardair hold-

ing. Alcan’s petition contains the following remarkable

contention: “In Wardair, this Court did not conclude that

a dormant Commerce Clause analysis was not appropri-

ate because Congress had acted to permit the tax. Rather,

this Court concluded that the case was not appropriate

for a dormant Commerce Clause analysis because both of

the parties agreed that none of the elements for such an

analysis existed... .” Pet. 25. This contention finds no

basis in the Wardair record or opinion.

Directly contrary to petitioner’s contention, in War-

dair this Court rejected dormant Commerce Clause “one

voice” arguments on the basis that “in the context of this

case we do not confront federal governmental silence of

the sort that triggers dormant Commerce Clause analysis.

On the contrary, . . . the Federal Government has affirma-

tively acted, rather than remained silent, with respect to

the power of the States to tax [in the challenged manner],

and thus . . . the case does not call for dormant Commerce

Clause analysis at all.” 477 U.S. at 9. “[T]he law as it

presently stands acquiesces in taxation . . . by political

subdivisions of countries.” Id. at 10 (emphasis in origi-

nal). “By negative implication . . . the United States has at

least acquiesced in state taxation. ...” Id. at 12. “In our

view, the facts presented by this case show that the Federal

Government has affirmatively decided to permit the States to

impose these . . . taxes... .” Id. at 12 (emphasis added).

In Barclay’s Bank Internat., Ltd. v. Franchise Tax Bd., 2

Cal.4th 708, 829 P.2d 279 (1992), the California Supreme

Court correctly applied Wardair in a manner fully consis-

tent with this Court’s February 1993 holding in Itel Con-

tainers International Corp. v. Huddleston, __ U.S. __, 113

S.Ct. 1095, 1105 (1993), the most recent Foreign Com-

merce Clause tax case. In Alcan the California Court of

Appeal has followed the California Supreme Court's

application of Wardair in holding that no dormant Com-

merce Clause analysis is applicable in this case. Pet. App.

AS-A7. The California Supreme Court has denied review.

Pet. App. A9. As the Board has argued in opposition to

the Barclays petition, there is no need for this Court to

exercise its jurisdiction to revisit this constitutional area

at this time. The California courts have properly applied

Wardair; both the Barclays and the Alcan petitions should

be denied.

The California Supreme Court’s Commerce Clause

holding in Barclay’s applies Wardair to conclude that Con-

gress has acted to acquiesce in the state tax practice

which both Barclays and Alcan are challenging. That

being so, the California Supreme Court pointedly did not

engage in any dormant Commerce Clause analysis. 2

Cal.4th at 742; 829 P.2d at 300. This approach is consistent

with this Court’s\ warning in Wardair: “It would turn

dormani 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.” 477 U.S. at 12

(emphasis by this Court).1

In holding that the Wardair rule was applicable to

permit California’s use of worldwide combined reporting

(“WWCR”) in the present case, the California Supreme

Court placed its primary reliance on the United States/

United Kingdom (“US/UK”) Treaty which was negoti-

ated and ratified in the 1970’s. Convention for the Avoid-

ance of Double Taxation 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.

XX\V-33). 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

worldwide combined reporting (“WWCR’”).

1 Since the Commerce Clause (U.S. Const. art. I, § 8(3))

gives the power to regulate foreign and interstate commerce to

Congress, “any action taken by a State within the scope of the

congressional authorization is rendered invulnerable to Com-

merce 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. -

After much debate, and several votes in the Senate,

the treaty was ratified only after that provision was ren-

dered totally inapplicable to the states. 124 Cong. Rec.

18416 June 22, 1978; Exh. XXIX-3), 19076 (June 27, 1978;

Exh. XXIX-6). 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 treaty with the prohibition of

WWCR applicable only to the national governments, not

to the states. 31 U.S.T. 5709, 5713. Thus the states’ use of

WWCR was directly considered as a tax issue during 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 and acknowledged choice before the Senate was

' either to ratify the 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 Packwood; Exh. XXIX-4). By more than the

required two-thirds vote (82 yeas, 5 nays), the Senate

chose to ratify the treaty while permitting (by implica-

tion) state use of WWCR. 124 Cong. Rec. 19076 (June 27,

1978; Exh. XXIX-6). In the words of the Wardair decision,

the Senate has “at least acquiesced” in the use of WWCR

10

by the states, and under the Wardair holding such acqui-

escence is fully sufficient to establish that the federal

government has “affirmatively decided to permit” state

use of WWCR. 477 US. at 12-13.? i

The California Supreme Court correctly analogized

its holding on the present issue 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, seems 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),

‘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

2 It is significant in the present case that, in negotiating the

current U.S./Canada Income Tax Treaty (which also has no

restriction upon the states’ use of WWCR), the government of

Canada recognized that the Senate had rejected proposed treaty

limitations of the states’ use of WWCR. Exh. XXVI-1, attached

hereto as Appendix C. As this Court stated in Wardair, referring

to another U.S.-Canadian agreement, “in the U.S.-Canadian

Agreement only ‘national’ charges are barred, and we presume

that drafters from two federalist nations understood this as

representing a choice not to preclude local taxation.” 477 U.S. at

12. ;

Si raat wi te 4

Bice hes rE EBs, ya,

ye ae PT, OF

11

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.” Bar-

clay’s Bank, 2 Cal.4th at 735, 829 P.2d at 295-96

(emphasis in original; footnote omitted).

Recognizing that formula apportionment such as

WWCR has been a matter of international interest from at

least the mid-1950’s (2 Cal.4th at 737-38, 829 P.2d at

297-98), and noting that indications of such federal acqui-

escence also were to be found in the history of other

bilateral income tax treaties (id. at 736-39, 829 P.2d at

296-98) and in legislative histories of congressional bills

(id. at 736, 829 P.2d at 296), 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 Con-

gress has acted to permit such application, no dormant

Commerce Clause analysis was necessary. As the Califor-

nia Supreme Court properly applied Wardair in its Bar-

clay’s decision, once it is determined that Congress has

acquiesced in the type of state taxation which is being

challenged, there is absolutely no need for the courts to

engage in any dormant Commerce Clause analysis. There-

fore, in this case there is no necessity for this Court to

review petitioner’s claim that California’s application of

WWCR resulted in a violation of any of the elements of

dormant Commerce Clauss analysis.

Se OE Be ey Te ee PE OO Le SER CUE Wie as eR, OS SRE es SEW eae eee

12

II

PETITIONER’S STIPULATION LIMITING THE

ISSUES TO BE LITIGATED IN THIS CASE BARS PETI-

TIONER FROM PRESENTING FOR THIS COURT’S

CONSIDERATION THE FOUR ELEMENTS OF DOR-

MANT COMMERCE CLAUSE ANALYSIS SET FORTH

IN COMPLETE AUTO TRANSIT v. BRADY.

Jurisdiction of this Court to review state court deci-

sions is conferred by 28 U.S.C. § 1257. “It is well settled

that this Court will not review a final judgment of a state

court unless ‘the record as a whole shows either expressly

or by clear implication that the federal claim was ade-

quately presented in the state system.’” Bd. of Dirs. of

Rotary Int'l v. Rotary Club, 481 U.S. 537, 550 (1987). The

issue of whether a federal question was sufficiently

raised is itself ultimately a question to be decided by this

Court. Street v. New York, 394 U.S. 576, 583 (1969). A

litigant, however, must follow state procedures in raising

the federal question. In re Lamkin, 355 U.S. 59 (1957).

The trial stipulation in this case (quoted above at

pages 3-4) provides that the constitutional issues raised

involve only the “one voice” and “multiple tax” elements

of Foreign Commerce Clause analysis. Dormant Interstate

Commerce Clause analysis as described in Complete Auto

Transit, Inc. v. Brady, 430 U.S. 274 (1977), has four ele-

ments. These elements are the question of nexus, the

question of fair apportionment, the question of discrimi-

nation, and the question of relationship between the ser-

vices provided and the benefits received. With respect to

dormant Foreign Commerce Clause analysis, this Court in

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

(1979), indicated that in addition to those four elements,

13

two additional elements are also involved: enhanced risk

of multiple taxation and impairment of the ability of the

federal government to speak with one voice.? In the pres-

ent case, the stipulation specifically limits the issues

involved to the questions of “one voice” and “multiple

taxation.” This stipulation does not mention any of the

four Complete Auto elements.‘

3 The “one voice” issue has both nondormant and dormant

Commerce Clause components: if Congress has acted so as to

either permit or prohibit the type of state tax at issue, the one

voice has spoken and all necessary Commerce Clause analysis is

concluded; if the one voice has not spoken, then there is a

dormant Commerce Clause context in which the courts must

determine whether the challenged state tax implicates foreign

policy issues which must be left to the Federal Government. See

Wardair, 477 U.S. at 12-13, 7-9; Container, 463 U.S. at 194.

4 Alcancorp’s stipulation as to the issucs also provides that

“Alcan is not contesting the Board’s determination that the Alcan

Group Companies constitute a single unitary business. .. . ”

Appendix A hereto. Under Container, 463 U.S. at 169-71, 180-85,

and as further clarified as to the discrimination element in

Trinova Corp. v. Michigan Dept. of Treasury, ___ U.S. __, 111 S.Ct.

818, 835 (1991), it is clear that Alcan’s acceptance of the Board’s

determination that a unitary business exists necessarily leads to

a conclusion in favor of California’s use of worldwide combined

reporting with respect to all four of the elements involved in a

Complete Auto examination of the tax. It is no wonder that Alcan-

corp would like this Court to find that the reasoning in Container

is “flawed” (Pet. 22) and would like to see a change in this

Court’s “present doctrine” (Pet. 18), even though such a sugges-

tion is directly contrary to this Court’s very recent confirmation

that “the unitary business principle of taxation . . . does a better

job of accounting for ‘the many subtle and largely unquantifia-

ble 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,

__: US. __, 112 S.Ct. 2251, 2261 (1992).

ld

California follows the “theory of trial” doctrine with

respect to its appellate practice. The “theory of trial”

doctrine is based upon the rationale that a party should

“...not [be] permitted to change his position and adopt

a new and different theory on appeal. To permit him to

do so would not only be unfair to the trial court, but

manifestly unjust to the opposing litigant.” Ernst v. Searle,

218 Cal. 233, 240-41, 22 P.2d 715, 718 (1933). A corollary to

this rule is that “. . . stipulations as to legal issues .. .

entered into in the trial court must be adhered to upon

appeal.” Carmichael v. Reitz, 17 Cal.App.3d 958, 969, 95

Cal.Rptr. 381, 386 (1971). The California Supreme Court

has recently confirmed the California procedural rule that

the California courts “will respect a stipulation limiting

the issues in a case.” Title Ins. Co. v. State Bd. of Equaliza-

tion, 4 Cal.4th 715, 733, 842 P.2d 121, 132 (1992). Under the

general “theory of trial” doctrine, and under the more

specific procedural rule respecting stipulations which

limit issues, in this case the California courts properly

would not consider petitioner’s assertion of dormant

Commerce Clause grounds other than “one voice” and

“multiple taxation.”

Petitioner in its filings with the California courts did

not cite to or discuss Complete Auto except belatedly in its

filing of a supplemental brief with the Court of Appeal

after this Court’s decision in Kraft General Foods, Inc. v.

Iowa Dept. of Revenue, U.S. __, 112 S.Ct. 2365 (1992),

and in its petition and reply in the California Supreme

Court. The Board recognizes that petitioner has through-

out the proceeding peppered its arguments with allusions

to nexus; fair apportionment and discrimination concerns

15

despite its stipulation as to the issues. The Board, how-

ever, has objected throughout the proceedings to peti-

tioner’s efforts to inject these dormant Commerce Clause

considerations and Due Process Clause considerations

into this case. Because the California Courts have found

that all dormant Commerce Clause analysis is inappropri-

ate under this Court’s ruling in Wardair Canada, Inc. v.

Florida, 477 U.S. 1 (1986), they have not found it necessary

to address petitioner’s efforts to broaden this case beyond

the issues stated in the stipulation.5

State procedural rules which restrict the raising of

federal questions to the early stages in a case have been

recognized as valid exercises of state power. See

McKesson Corp. v. Florida Alcohol & Tobacco Div., 496 U.S.

18, 44-45 (1990); Williams v. Georgia, 349 U.S. 375, 382-383

(1955). In this case, the California courts have not

needed to give a direct ruling that Alcancorp’s stipulation

barred it from arguing the Complete Auto Transit dormant

Commerce Clause elements. However, this Court has

held with respect to silence on a federal question that “it

5 An exception should be noted in that the California appel-

late court specifically noted that Due Process Clause issues were

not present in the case as a result of the stipulation. Pet. App.

A-3, n. 2.

6 In this Court’s 1990 opinion in Franchise Tax Bd. of Cal. v.

Alcan Aluminium, 493 U.S. 331, 340-41 (1990), this Court’s denial

of Tax Injunction Act relief to Alcancorp’s parent corporation

was based in part on an assurance that the subsidiaries had the

capability of raising all potential Commerce Clause arguments

in the California Courts. In making that assurance in oral argu-

ment, counsel for the Board was careful to point out that such

capability would be subject to procedural defenses regularly

provided by California law. Tr. of 11/1/89 Oral Arg. 6.

16

will be assumed that the omission was due to want of

proper presentation in the state courts, unless the

aggrieved party in this Court can affirmatively show the

contrary.” Street v. New York, 394 U.S. 576, 582 (1969). The

same rationale is applicable in the instant : ae

In discussing a supporting rationale for the jurisdic-

tional bar when the federal issue was not ruled upon or

considered by the state courts, this Court has recognized,

“Questions not raised below are those on which the

record is very likely to be inadequate, since it certainly

was not compiled with those questions in mind.” Cardi-

nale v. Louisiana, 394 U.S. 437, 439 (1969). If ever there

were a situation in which such a rationale had applica-

tion, it must be in the circumstances of a case tried solely

on stipulated facts with a limiting stipulation as to the

issues involved. Respondent Board tried and defended

this case under petitioner Alcancorp’s stipulation as to

the issues presented. To allow consideration of issues

upon which respondent offered no evidence because the

opposing litigant had stipulated them out of the case

would be a grave injustice.

Ill

EVEN IF A DORMANT COMMERCE CLAUSE ANAL-

YSIS WERE TO BE APPLIED, THERE WOULD BE NO

VIOLATION OF THE MULTIPLE TAXATION OR “ONE

VOICE” ELEMENTS OF THE JAPAN LINE TEST.

Alcan Aluminum Corporation seeks to raise a

number of dormant Commerce Clause concerns in its

petition. As set forth in argument I above, respondent

17

Board believes that the California courts correctly con-

cluded that this Court’s decision in Wardair, supra, ren-

ders unnecessary any consideration of any dormant

Commerce Clause arguments. In addition, as argued in

argument II above, petitioner’s stipulation bars it from

raising any dormant Commerce Clause issues beyond

“one voice” and “multiple taxation” in this lawsuit.

Therefore, respondent Board will address only the “one

voice” and “multiple tax” elements of dormant Com-

merce Clause analysis in this portion of the argument. (By

doing so, the Board does not intend to waive any right to

argue that the other elements of a dormant Commerce

Clause analysis would preclude Alcancorp’s challenge to

California’s use of worldwide combined report account-

ing.)

As noted above at page 13 n. 4, Alcancorp’s stipula-

tion removing any issue that it was not engaged in a

unitary business as determined by the Board (and any

issue that Alcancorp was denied due process) necessarily

leads under Container to a conclusion that California’s use

of WWCR was nondistortive. Under these circumstances,

and if Wardair were somehow inapplicable, the only dor-

mant Commerce Clause issues in this case would be

whether this “proper and fair method of taxation,” because

of its differences from other tax accounting methods,

either (1) violates the “enhanced risk of multiple taxa-

tion” standard, or (2) “ ‘impair[s] federal uniformity in an

area where federal uniformity is essential.’ ” Container,

463 U.S. at 185-86 (emphasis added).

18

A. Multiple Taxation

This Court in Container analyzed the multiple taxa-

tion element of Japan Line’s dormant Commerce Clause

analysis in the context of the California tax here at issue.

The Court stated:

“In Japan Line, we said that ‘[e]ven a slight

overlapping of tax - a problem that might be

deemed de minimis in a domestic context -

assumes importance when sensitive matters of

foreign relations and national sovereignty are

concerned.’ [Citations omitted.] If we were to

take that statement as an absolute prohibition

on state-induced double taxation in the interna-

tional context, then our analysis here would be

at an end. But, in fact, such an absolute rule is

no more appropriate here than it was in Japan

Line itself. . . . Although double taxation in the

foreign commerce context deserves to receive

close scrutiny, that scrutiny must take into

account the context in which the double taxation

takes place and the alternatives reasonably

available to the taxing State.” 463 U.S. at 189.

This Court’s conclusion that, “ . . . it would be perverse,

simply for the sake of avoiding double taxation, to

require California to give up one allocation method that

sometimes results in double taxation in favor of another

allocation method that also sometimes results in double

taxation” (id. at 193), is just as applicable in the present

context. There is nothing in this Court's Container reason-

ing with respect to double taxation that is dependent on

the domicile of the parent company. The law with respect

to this issue is settled and is dispositive of the multiple

tax issue in this case.

eee eR ee ee ee ee See ee ene *

t -

19

B. One Voice

In Container this Court set forth the standard to be

applied in a dormant Foreign Commerce Clause “one

voice” analysis. The Court stated:

“In conducting this inquiry, however, we must

keep in mind that if a state tax merely has

foreign resonances, but does not implicate for-

eign affairs, we cannot infer, ‘[aJbsent some

explicit directive from Congress, . . . that treat-

ment of foreign income at the federal level man-

dates identical treatment by the States.’” 463

U.S. at 194.

In the truly dormant Commerce Clause portion of the

“one voice” analysis (a pre-emption analysis falls outside

of a dormant Commerce Clause analysis, see above at

note 3) in Container, this Court determined that Califor-

nia’s use of worldwide combined reporting with respect

to a unitary business headed by a domestic corporation

did not “impair federal uniformity in an area where

federal uniformity is essential” by “implicat[ing] foreign

policy issues which must be left to the Federal Govern-

ment....” Id. at 193, 194 (emphasis added). In making

that determination, this Court applied the test of whether

California’s application of worldwide combined report-

ing in the Container context might “justifiably lead to

significant foreign retaliation.” Id. at 194. Under the Con-

tainer facts, the Court found that three factors (lack of

automatic asymmetry, entity upon whom the tax is

imposed, and the amount of the tax burden) weighed

strongly against there being any such justifiable retalia-

tion. Except for the fact that the taxpayer corporation in

the present case has a foreign parent corporation, those

20

same distinctions apply with equal force in this case. In

addition, other factors establish that no retaliation could

be justified.

A disagreement between a foreign country and this

Court as to the fairness and propriety of worldwide com-

bined reporting cannot form the basis for a “justifiable”

retaliation, no matter how predictable retaliation might

be given the foreign country’s historical opposition to

WWCR. This Court has held that the California tax at

issue is a “proper and fair method of taxation” (463 U.S.

at 184) which “reflect[s] a reasonable sense of how

income is generated” (id. at 169-170) and which avoids

the “basic theoretical weaknesses” of arm’s length/sepa-

rate accounting methods (id. at 181). In light of these

conclusions of this Court, retaliation based on contrary

views cannot be “justifiable.”

An independent reason why retaliation is not justi-

fied in this case is the formulation of the U.S./Canada tax

treaty now in force. Canada tried, and failed, to outlaw

the states’ use of worldwide combined reporting with

respect to Canadian companies. Canada’s acceptance of

this fact is reflected in diplomatic notes exchanged

between Canada and the United States. Exhibit XXVI-1

(App. C). Just as retaliation by the United Kingdom

would be a direct violation of the US/UK treaty,’

7 The Executive Branch has explicitly recognized that the

United Kingdom’s threatened implementation of a retaliatory

measure would clearly violate the US/UK treaty; Executive

Branch testimony to Congress includes the following statement

regarding the United Kingdom’s retaliatory measure:

21

retaliation now by Canada would be inconsistent with the

bargained-for U.S./Canada Treaty and thus clearly not

justifiable.

Also, Canada has a federal system of government

which is similar to that of the United States. This sim-

ilarity, and Canada’s concern for the sovereign rights of

its provinces, led it to express a reservation (just as the

United States did) to the OECD Model Treaty provisions

which include subnational taxes within its reach. Exhibit

XXIII, p. 50. Such separation and protection of the sover-

eign powers of its own subnational units of government

would be inconsistent with a generalized retaliation by

Canada against United States-related corporations

because of California’s method of tax accounting.

Finally, in 1986 California enacted legislation, opera-

tive in 1988, which allows both foreign and domestic

based businesses, upon payment of a fee, to elect out of

the use of WWCR and use a “water’s-edge” method. In

general, the “water’s edge” method determines Califor-

nia taxable income of corporations which are part of

multinational enterprises by applying formulary appor-

tionment only to unitary activities within the “water’s

edge.” Arm’s length/separate accounting is used in

analyzing transactions between corporations within the

“water’s edge” group and their foreign affiliates. Stip.

“We believe that its existence is inconsistent with the

U.S.-U.K. bilateral income tax treaty to the extent its

threatened use causes U.S. taxpayers to refrain from

claiming benefits under the treaty. [ts actual implemen-

tation would be a clear violation of the treaty.” Exh.

XXX-9, p. 12 (emphasis added).

22

q 169, App. A hereto at App. 2, J 169; Cal. Revenue and

Taxation Code § 25110 (see Appendix B hereto). Since

California has changed its law to provide an option to

avoid WWCR, no foreign retaliation now for pre-1988 use

of WWCR could be justifiable.

¢

CONCLUSION

For the reasons given above, it is respectfully submit-

ted that the petition for writ of certiorari should be

denied. If this Court should decide to grant the petition,

it is respectfully submitted that the issues to be argued

should be limited solely to whether a dormant Commerce

Clause analysis has been rendered unnecessary by con-

gressional acquiescence in the states’ use of WWCR, and,

if any dormant Commerce Clause analysis is necessary,

whether the “one voice” and “multiple taxation” ele-

ments of dormant Commerce Clause analysis would ren-

der California’s actions impermissible.

Dated: June 2, 1993.

Respectfully submitted,

Daniet E. LUNGREN

Attorney General of the

State of California

Timotnuy G. LappisH

Assistant Attorney General

(Counsel of Record)

Puiuir C. GriFFin

Deputy Attorney General

Attorneys for Respondent

App. 1

APPENDIX A

EXCERPTS FROM STIPULATION OF FACTS

(Filed in the Superior Court of the State of California,

County of Los Angeles, No. C-196604)

p. 2 (CT 0062):

ISSUES

For the purposes of this litigation, these parties

hereby stipulate that the only legal issues before this

Court are whether the Board’s application of the unitary

method of accounting under Section 25101 et seq. of the

California Revenue and Taxation Code, and implement-

ing regulations, as applied to the facts in this case vio-

lated the Foreign Commerce Clause of the United States

Constitution in that such application impermissibly pre-

vents the federal government from speaking with one

voice or impermissibly gives rise to either the risk of or

actual multiple taxation. For purposes of this litigation,

Alcan is not contesting the Board’s determination that the

Alcan Group Companies constitute a single unitary busi-

ness under the tests formulated by the California Courts

and the United States Supreme Court, or contending that

the tax assessed violated the Due Process Clauses of the

United States Constitution or the California Constitution.

pp. 9-10 (CT 0069-0070):

23. Alcancorp has paid the additional assessments

and has pursued administrative remedies with the Board

regarding the Board assessments for the years 1965

through 1974, and has instituted suits for refund as

authorized by California law. Alcancorp did not elect to

App. 2

petition the Board for relief under the provisions of Cali-

fornia Revenue and Taxation Code Section 25137. (See

Exhibit XIX-1 for a copy of the original Los Angeles

complaint and Exhibit XIX-2 for a copy of the original

Sacramento complaint.)

p. 66 (CT 0126):

169. The California Legislature has passed and the

Governor has signed various bills allowing taxpayers to

elect to not use the worldwide combined report method.

California Senate Bill 85 (Alquist) signed by Governor

Deukmejian September 5, 1986, an act to add Chapter 1.9

(commencing with Section 15365), Chapter 6 (commenc-

ing with Section 15397), and Chapter 7 (commencing with

Section 15398) to Part 6.7 of Division 3 of, and to add

Article 12 (commencing with Section 16429.30) to Chapter

2 of Part 2 of Division 4 of, Title 2 of, the Government

Code, to amend Sections 24274, 24344, 24348, 24667, and

24668 of, to amend and renumber Section 25110 of, to add

Sections 24411 and 24670 to, and to add and repeal Arti-

cle 1.5 (commencing with Section 25110) of Chapter 17 of

Part II of Division 2 of, the Revenue and Taxation Code,

relating to taxation is attached hereto as Exhibit XXXVII.

App. 3

APPENDIX B

STATUTORY PROVISIONS

CALIFORNIA REVENUE AND TAXATION CODE

Section 25110 (water’s edge election):

(a) Notwithstanding Section 25101, a qualified taxpayer,

as defined in paragraph (2) of subdivision (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 elec-

tion in accordance with the provisions of this part, as

modified by this article. A taxpayer which makes a

water’s-edge election shall take into account the income

and apportionment factors of the following affiliated enti-

ties only:

(1) Affiliated banks or corporations which are eligible to

be included in a federal consolidated return as described

in Sections 1501 to 1505, inclusive, of the Internal Reve-

nue Code, other than corporations making an election

under Section 936 of the Internal Revenue Code.

(2) Domestic international sales corporations, as

described in Sections 991 to 994, inclusive, of the Internal

Revenue Code and foreign sales corporations as

described in Sections 921 to 927, inclusive, of the Infernal

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.

App. 4

(4) Banks and corporations which are incorporated in

the United States, excluding corporations making an elec-

tion pursuant to Sections 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 assignable

to a location within the United States in accordance with

paragraph (3) of subdivision (b). Income of such a bank

or corporation derived from or attributable to sources

within the United States as determined by federal income

tax laws shall be limited to and determined from the

books of account maintained by the bank or corporation

with respect to its activities 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 “con-

trolled foreign corporation”, 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 fraction (not to

exceed one), the numerator of which is the “Subpart F

income”, of that bank or corporation for that income year

App. 5

and the denominator 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 corpora-

tion which is not described in paragraphs (1) to (4) inclu-

sive, and (6) and which is 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 purpose 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

Revenue Code).

(2) A “qualified taxpayer” means a bank or corporation

which does both of the following:

App. 6

(A) Files with the state tax return on which the water’s-

edge election is made a consent to the taking of deposi-

tions 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 Section 26423 or by the State Board

of Equalization as provided in Title 18, California Code of

Regulations, Section 5005, or by the courts of this 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 taxpayer

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 providing 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 Subchap-

ter N, or similar provisions of the Internal Revenue Code,

together with the regulations adopted pursuant to those

provisions, 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 func-

tionally 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

App. 7

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 unitary 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 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 property, payroll,

and sales shall be determined under the laws and regula-

tions which set forth the apportionment formulas used by

the individual states to assign net income subject to taxes

on or measured by net income in that state. If a state does

not impose a tax on or measured by net income or does

not have laws or regulations with respect to the assign-

ment of property, payroll, and sales, the laws and regula-

tions 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 taxpayer derived from or attributable to

sources within this state.

App. 8

(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 deter-

mined pursuant to this section.

App. 9

APPENDIX C

STIPULATION EXHIBIT XXVI-1

September 26, 1980

The Honorable

Alan J. MacEachen

Deputy Prime Minister and

Minister of Finance of Canada

Sir:

I have the honor to acknowledge receipt of your note

of September 26, 1980, which reads as follows:

“I have the honour to refer to the Convention

between Canada and the United States of America with

Respect to Taxes on Income and on Capital, signed today,

and to confirm certain understandings reached between

the two Governments with respect to the Convention.

1. In French, the term “societe” also means “corpo-

ration” within the meaning of Canadian law.

2. The competent authorities of each of the Con-

tracting States shall review the procedures and require-

ments for an organization of the other Contracting State

to establish its status as a religious, scientific, literary,

educational or charitable organization entitled to exemp-

tion under paragraph 1 of Article XXI (Exempt Organiza-

tions), or as an eligible recipient of the charitable

contributions or gifts referred to in paragraphs 5 and 6 of

Article XXI, with a view to avoiding duplicate application

by such organizations to the administering agencies of

both Contracting States.

If a Contacting State determines that the other Con-

tracting State maintains procedures to determine such

App. 10

status and rules for qualification that are compatible with

such procedures and rules of the first-mentioned Con-

tracting State, it is contemplated that such first-men-

tioned Contracting State shall accept the certification of

the administering agency of the other Contracting State

as to such status for the purpose of making the necessary

determinations under paragraphs 1, 5 and 6 of Article

XXI.

It is further agreed that the term “family,” as used in

paragraphs 5 and 6 of Article XXI, means an individual’s

brothers and sisters (whether by whole or half-blood, or

by adoption), spouse, ancestors, lineal descendants and

adopted descendants.

3. It is the position of Canada that the so-called

“unitary apportionment” method used by certain states

of the United States to allocate income to United States

offices or subsidiaries of Canadian companies results in

inequitable taxation and imposes excessive administra-

tive burdens on Canadian companies doing business in

those states. Under that method the profit of a Canadian

company on its United States business is not determined

on the basis of arm’s-length relations but is derived from

a formula taking account of the income of the Canadian

company and its world-wide subsidiaries as well as the

assets, payroll and sales of all such companies. For a

Canadian multinational company with many subsidiaries

in different countries to have to submit its books and

records for all of these companies to a state of the United

States imposes a costly burden. It is understood that the

Senate of the United States has not consented to any

limitation on the taxing jurisdiction of the states by a

treaty and that a provision which would have restricted

App. 11

the use of unitary apportionment in the case of United

Kingdom corporations was recently rejected by the Sen-

ate. Canada continues to be concerned about this issue as

it affects Canadian multinationals. If an acceptable posi-

tion on this subject can be devised, the United States

agrees to reopen discussions with Canada on this subject.

4. I have the honour to propose to you that the

present Note and your reply thereto shall constitute an

agreement between our two Governments on these mat-

ters.”

I confirm these understandings on behalf of the Gov-

ernment of the United States of America. These under-

standings constitute an agreement between our two

Governments on this matter, which will enter into force

on the date of entry into force of the Convention between

the Government of the United States of America and the

Government of Canada with Respect to Taxes on Income

and on Capital which was signed today.

Accept, Sir, the renewed assurances of my highest

consideration.

(Signed by: G. William Miller

Secretary of the Treasury)