1/ California's statutes do not expressly provide for the allocation of income of related corporations on the basis of the worldwide unitary business concept method, but rather this method of allocation of income has been adopted by the California Franchise Tax Board in enforcing and administering California's corporate tax statutes.

2/ The transactional or geographical basis of taxation is commonly called the “arm's length” method of taxation because the taxpayer corporation is treated as a unit doing business with every other corporation and entity on an “arm's length” basis even though the other corporations are parents, subsidiaries or sister corporations.

3/ The United States has bilateral income tax treaties with thirty-six nations: Income Tax Treaty with Australia, May 14, 1953, T.I.A.S. No. 2880; Income Tax Treaty with Austria, October 25, 1956, T.I.A.S. No. 3923; Income Tax Treaty with Barbados, December 31, 1984, T.I.A.S. No.; Income Tax Treaty with Belgium, July 9, 1970, T.I.A.S. No. 7463; Income Tax Treaty with Canada, September 26, 1980, T.I.A.S. No. Income Tax Treaty with Cyprus, March 19, 1984, T.I.A.S. No. Income Tax Treaty with Denmark, May 6, 1948, T.I.A.S. No. 1854; Income Tax Treaty with Finland, March 6, 1970, T.I.A.S. 7042; Income Tax Treaty with France, November 24, 1978, T.I.A.S. No. 9500; Income Tax Treaty with Germany, September 17, 1965, T.I.A.S. No. 5920; Income Tax Treaty with Greece, February 20, 1950, T.I.A.S. No. 2902; Income Tax Treaty with Hungary, February 12, 1979, T.I.A.S. No. 9560; Income Tax Treaty with Iceland, May 7, 1975, T.I.A.S. No. 8151; Income Tax Treaty with Ireland, September 13, 1949, T.I.A.S. No. 2356; Income Tax Treaty with Italy, April 17, 1984, T.I.A.S. No. Income Tax Treaty with Jamaica, May 21, 1980, T.I.A.S. No. 10207; Income Tax Treaty with Japan, March 8, 1971, T.I.A.S. No. 7365; Income Tax Treaty with Korea, June 4, 1976, T.I.A.S. No. 9506; Income Tax Treaty with Luxembourg, December 18, 1962, T.I.A.S. No. 5726; Income Tax Treaty with Malta, March 21, 1980, T.I.A.S. No. Income Tax Treaty with Morocco, August 1, 1977, T.I.A.S. No. 10195; Income Tax Treaty with Netherlands, April 29, 1948, T.I.A.S. No. 1855; Income Tax Treaty with Netherlands Antilles, October 23, 1963, T.I.A.S. No. 5665; Income Tax Treaty with New Zealand, March 16, 1948, T.I.A.S. No. 2360; Income Tax Treaty with Norway, December 3, 1971, T.I.A.S. No. 7474; Income Tax Treaty with Pakistan, July 1, 1957, T.I.A.S. No. 4232; Income Tax Treaty with Poland, October 8, 1974, T.I.A.S. No. 8486; Income Tax Treaty with the Republic of the Phillipines, October 1, 1976, T.I.A.S.; Income Tax Treaty with Romania, December 4, 1973, T.I.A.S. No. 8228; Income Tax Treaty with South Africa, July 14, 1950, T.I.A.S. No. 2510; Income Tax Treaty with Sweden, March 23, 1939, T.I.A.S. No. 958; Income Tax Treaty with Switzerland, May 24, 1951, T.I.A.S. No. 2316; Income Tax Treaty with Trinidad and Tobago, January 9, 1970, T.I.A.S. No. 7047; Income Tax Treaty with USSR, June 20, 1973,. T.I.A.S. No. 8225; Income Tax Treaty with United Arab Republic, August 24, 1980, T.I.A.S. No. 10149; Income Tax Treaty with United Kingdom, December 31, 1975, T.I.A.S. No. 9682. In particular, Article IX of the US-Canada convention provides: 1. Where a person in a Contracting State and a person in the other Contracting State are related and where the arrangements between them differ from those which would be made between unrelated persons, each State may adjust the amount of the income, loss or tax payable to reflect the income, deductions, credits or allowances which would, but for those arrangements, have been taken into account in computing such income, loss or tax. Article 9 of the Unites States-United Kingdom convention contains similar language.

* [Exhibits A through F are letters dated January 30, 1986 which the Secretary of State addressed and sent to the Governors of the States of California, Idaho, Montana, New Hampshire, Alaska and North Dakota. They are virtually identical so only Exhibit A has been reproduced at I.L.M. page 704.]

** [Exhibit G, the President's statement of November 8, 1985, appears at I.L.M. page 739, preceding the U.S. draft legislation to prevent unitary taxation by states.]

4/ See page 2 of Exhibit A. [I.L.M. page 705].

5/ United Kingdom Finance Bill, Clause 27, adopted by the House of Commons July 10, 1985, House of Commons Official Report. Parliamentary Debates (Hansard) 1014-18 (10 July 1985). See also page 3 of Exhibit A. [See I.L.M. pages 734 for the U.K. legislation.]

6/ This state method of taxation is usually justified on the grounds that the tax is not being levied on the out-of-state members of the unitized group but only the in-state member. From this it is argued that only the in state corporation is affected by the tax and has standing to challenge the imposition of the tax. However, this is a distinction without a difference as the predicate for computing the tax is the income of the unitized business group, including the income of the out-of-state members, and the collection of the tax necessarily diminishes the net worth of the foreign parent corporation, as that net worth is based in part on the net worth of the taxed subsidiary corporation. Such a semantical device cannot mask the fact that the tax here involved is based upon the income of foreign corporate members of the unitized group including the plaintiffs and collection of the tax substantially impacts administratively and economically on the foreign corporate parents.

7/ The linchpin of apportionality in the field of state income taxation is the unitary business principle. Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980). The constitutional requirements set forth above as they pertain to the unitary business/formula apportionment method of taxation require that a state not tax a unitary business unless some part of it is conducted within the state, unless there is some minimal connection between interstate activities and the taxing state, and unless there is a rational relationship between the income attributable to the instate corporation and the intrastate values of the unitary enterprise. Container Corp. v. Franchise Tax Board, supra at 166. Exxon Corp. v. Wisconsin Dept. of Revenue, supra at Mobil Oil Corp. v. Commissioner of Taxes, supra at 436, 437; Wisconsin v. J.C. Penney, 311 U.S. 435, 444 (1940). The second requirement above that the income or tax be fairly apportioned has two components: first, fairness requires internal consistency, so that if every state employs the formula the result would be that no more than all the income of the unitary business would be taxed; and secondly there must be external consistency such that the factors used in the apportionment formula reflect a reasonable sense of how the income is generated. Container Corp. v. Franchise Tax Board, 463 U.S. supra at 169. These constitutional considerations also require that there be some bond of ownership or control uniting the purported unitary business. Asarco Inc. v. Idaho State Tax Comm'n., supra at pp. 316-317. In addition, the above principles have required that the out-of-state activities be related in some concrete way to the in-state activities; i.e. that there be some sharing or exchange of value not capable of precise identification or measurement beyond the mere flow of funds arising out of passive investment. Asarco Inc. v. Idaho State Tax Comm'n., supra at 317; Mobil Oil Corp. v. Commissioner of Taxes, supra at pp. 438-432. However, these requirements are not an issue which concerns the United States as an amicus curiae in this case.

8/ In the instant case the United States relies upon the arguments of the plaintiffs that California's tax violates this first requirement for constitutionally taxing an instrumentality of foreign commerce. This brief emphasizes the invalidity of the application of the tax in question to instrumentalities of foreign commerce because the tax prevents the Federal Government from speaking with one voice in the conduct of foreign affairs and in international trade. This emphasis on the second requirement of Container Corp. is not a concession that California's tax does not enhance the risk of double taxation, but rather is a recognition that this tax is an egregious interference with the Federal Executive's conduct of foreign affairs and is thus, patently unconstitutional.

* [The technical explanation of the bill appears at I.L.M. page 740, preceding the U.S. draft legislation.]

* Utah has adopted administrative rules that would abandon worldwide unitary taxation upon implementation of certain federal assistance measures, including the enactment of the federal assistance legislation contained in the proposed bill and described in section IV, below.

* [The U.K. legislation appears at I.L.M. page 734.]