FRANCHISE TAX BOARD OF CALIFORNIA v. ALCAN ALUMINIUM
Legal provision: Article 3, Section 2, Paragraph 1: Case or Controversy Requirement
IN THE SUPREME COURT OF THE UNITED STATES
FRANCHISE TAX BOARD OF CALIFORNIA, ET AL., Petitioners v. ALCAN ALUMINIUM LIMITED, ET AL.
November 1, 1989
The above-entitled matter came on for oral argument before the Supreme Court of the United States at 11:51 a.m.
TIMOTHY G. LADDISH, ESQ., Assistant Attorney General of California, San Francisco, California; on behalf of the Petitioners.
LAWRENCE A. SALIBRA II, ESQ., Cleveland, Ohio; on behalf of the Respondent.
CHIEF JUSTICE REHNQUIST: We'll hear argument next in Number 88-1400, Franchise Tax Board of California versus Alcan Aluminium Limited.
Mr. Laddish, you may proceed.
ORAL ARGUMENT OF TIMOTHY G. LADDISH ON BEHALF OF THE PETITIONERS
MR. LADDISH: Mr. Chief Justice, and may it please the Court:
This is a tax case, but where are the taxpayers? The domestic corporations that do business in California and that are assessed and pay the California taxes are not before this Court today. Counsels employed by those taxpayers are counsel of record here and they are challenging the validity of the California tax. But today they are on the record as representing the taxpayers' sole stockholders, Alcan and Imperial, the foreign corporations which control the domestic taxpayer corporations.
It is that control which has orchestrated these suits so that taxpayers are not before the Court today. It is that control which should lead to the dismissal of these actions under the Tax Injunction Act.
Most of the space in the briefs is taken up with discussions of the standing issues, but since the Tax Injunction Act provides its own plain, speedy and efficient means of resolution of these case, I will discuss the Tax Injunction Act first.
For purposes of this part of the argument it should be assumed that somehow the Respondents have satisfied the Article III and prudential standing rules. If the taxpayer subsidiaries were before the Court today in these federal actions there is no question but that the Tax Injunction Act would apply to bar them from the federal courts and to point them back to the plain, speedy and efficient remedies provided by the California courts. Recognizing that, Respondents, the foreign corporation parents, have decided to hide the taxpayers under their parental skirts and take the federal field themselves. They have filed their actions in the Seventh Circuit, since the Ninth Circuit had denied relief to other foreign corporations, foreign parents --
QUESTION: Mr. Laddish, does the California state board have an office in Chicago, so there is personal jurisdiction, I take it?
MR. LADDISH: There is an office there and audits are conducted there, Your Honor. Not necessarily the audits in this case, but audits are conducted there.
The -- certainly Alcan would not be bringing this action in the Second Circuit because it had already been denied standing in that Circuit to -- to raise these sort of issues. But once they were in the federal courts and were confronted with a Tax Injunction Act, then they said well, the Tax Injunction Act can't apply to us because we have no plain, speedy or efficient remedies in the state courts.
QUESTION: Do they?
MR. LADDISH: They do, in effect, have plain, speedy and efficient remedies.
QUESTION: How? How?
MR. LADDISH: Through the fact that they are the sole stockholders of the taxpayers in this --
QUESTION: You think that the domestic subsidiary can raise the issues for them?
MR. LADDISH: Certainly, Your Honor. The -- the domestic subsidiaries are the taxpayers. They are the parties that have been assessed the tax. What's put in issue in the -
QUESTION: You think they can raise the foreign commerce clause issues, the domestic subsidiary can?
MR. LADDISH: It -- it's only common sense that they can, and also it's, if you look to what is going on in the California courts right now --
QUESTION: You don't think you would be in there arguing against that?
MR. LADDISH: Excuse me?
QUESTION: In the -- you wouldn't be arguing against that in the state courts?
MR. LADDISH: Currently there are cases pending in the California state courts where the issues are being raised by subsidiaries --
QUESTION: And what position is the state taking on those? Is the state saying fine, we're going to litigate those issues?
MR. LADDISH: The state is taking the issue, as to some of them, the state is taking a procedural defense that they did not raise them in the claims for refund. But in no case is the state claiming that the subsidiaries cannot raise those foreign commerce claims. And we -- we would be unsuccessful if we did try to raise that, because --
QUESTION: And how about the claim that it costs more for the parent?
MR. LADDISH: Those claims are being fully litigated in -- in the state courts. In one case, the Barclay's case, I believe that is one of the issues where we are claiming that they did not raise that in the -- in the claim for refund.
QUESTION: Do you think under California state tax law that the state could take the position that it can tax the parent, that the parent's the taxpayer?
MR. LADDISH: Not under the California state law, Your Honor, in that the California --
QUESTION: Well, it reads broadly enough. I mean, you take the position you can tax all their income.
MR. LADDISH: No, Your Honor, we do not.
QUESTION: Well, that you can consider worldwide income in levying the tax.
MR. LADDISH: The California statute states that the -- taxpayer is the person subject to the tax. That doesn't get us anywhere except that the section that does impose the tax, Section 23151 of the California Revenue and Taxation Code, says that -- imposes the tax on every corporation doing business in the state. Now, in these cases the corporations doing business in the state are the domestic subsidiary corporations. And those are the corporations, under the stipulations of fact, that the assessments have been made against, those are the corporations that information has been requested from and those are the corporations that we are determining what their -- what income should be attributed to their California business.
Now, in determining that, California does turn to the income of the unitary business, and looks to the whole unitary business in order to make the apportionment. But the tax is levied on that corporate entity, and the Franchise Tax Board deals with that corporate entity in its tax procedures. In the Container case, this Court recognized that, although California counts income arguably attributable to foreign corporations in calculating the tax -- taxable income of that domestic corporation, the legal incidence of the tax falls on that domestic corporation.
And as a final touch to consider, if that corporation did not pay the tax, under California law there was no means for us to go after the foreign parent corporation. It is that corporation that has the tax liability, and if that corporation goes insolvent we must file claims in the -- in the bankruptcy of that corporation. But there are no provisions that that is not really the taxpayer after all, and we can go after anyone else.
So we submit that the foreign parents, having let their subsidiaries keep their California procedures lying fallow while going to the foreign -- the federal courts, that this is a forum shopping, a form of forum shopping that strikes at the very heart of the federalism that Congress meant to preserve in the Tax Injunction Act. This forum shopping strips California of its tax remedies, which Congress meant to protect in the Tax Injunction Act, and subjects California to the expense and peril of litigating the ultimate constitutional validity of its tax structure, regardless of whether the tax has been paid, against nontaxpayers, in actions where California would not have the other procedural or other substantive defenses or issues it might raise against the taxpayer itself.
QUESTION: We'll resume there at 1:00, Mr. Laddish.
MR. LADDISH: Thank you.
(Whereupon at 12:08 p.m., the oral argument in the above-entitled matter was recessed, to reconvene at 1:00 p.m., this same day.)
CHIEF JUSTICE REHNQUIST: You may resume, Mr. Laddish.
MR. LADDISH: Thank you, Mr. Chief Justice. You will recall, we left California confronting a challenge to its basic tax structure in a distant federal forum which has absolutely no familiarity with the procedural or substantive nature of California tax law. The threat that this might occur to other states has caused 39 amici states to join with California in asking this Court to recognize this threat for what it is and give it the fate that it deserves under the Tax Injunction Act.
The Tax Injunction Act has quite clear language to avoid such forum shopping as we see today. These shareholder corporations cannot get the declarative or injunctive relief that they seek if -- where a plain, speedy and efficient remedy may be had in the courts of the state. This Court, in the Grace Brethren case, recognized that, at the time of the Tax Injunction Act's enactment, Congress was well aware that tax refund procedures were the sole remedy offered in many states, and in the same case this Court recognized that California's tax refund remedy, in a similar statute and another tax, provided a plain, speedy and efficient remedy.
Under a very strict reading of the Tax Injunction Act language itself, this recognition would be enough to bar these suits, for at least some interpretation must be had -- given to the language to add the requirement that anyone other than the taxpayer have a plain, speedy and efficient -- remedy. If a requirement were to be read into the statute that the party bringing the federal action must, in effect, have a plain, speedy and efficient remedy in the California courts, that requirement would be met here.
In order to protect the state's finances, the State of California offers its remedy in the usual tax refund form. This is, by its form, limited to the taxpayers. That limitation, though reasonable by itself, could arguably lead to inapplicability of the Tax Injunction Act if the parties before the court, the federal court, only could rely upon the hope of persuading the taxpayers in the state courts to raise certain issues or to raise them in a certain way. But that is not the case before the Court today.
Here we have the sole stockholders of the taxpayers in California, and those stockholders do not need to rely upon the hope of persuasion. They have the certainty of control.
The result of barring these actions under the Tax Injunction Act is not only consistent with the language, it is fully consistent with the purpose underlying the act, which was to limit drastically federal court jurisdiction to interfere with the lifeblood intense local concern of the states in the assessment and collection of their own state taxes. In furtherance of this purpose, this Court, in the Grace Brethren Church case, recognized that the plain, speedy and efficient remedy should be construed narrowly.
Now, in further answer to the question as to whether the taxpayers' remedy themselves, itself, encompasses the ability to raise all the foreign commerce clause issues, I submit that if -- upon reflection, any other result would be absurd. The issue before the Court today is the constitutionality of the California tax. That tax is imposed upon the domestic corporation subsidiaries. If the tax is invalid, the subsidiary would not be liable for that tax, and it only stands to reason as common sense, that the subsidiary necessarily had standing to raise any question going to its own tax liability.
When we move to the standing issue, the subsidiary taxpayer's ability to raise all the issue pertaining to the validity of its tax is also central, and the application of the dispositive rule here, the stockholder standing rule. Under the stockholder standing rule a stockholder will not have standing to litigate an issue if the stockholder's injury is derived from its status as a stockholder, and if the corporation itself would have standing to raise the same issue. Assuming arguendo for the moment that there is Article III standing here, which I will be dealing with in a moment, clearly the stockholder standing rule would apply under the facts of this case as a prudential rule of standing.
QUESTION: May I -- may I give you a hypothetical case --
MR. LADDISH: Sure.
QUESTION: -- that I have been thinking about? Supposing the subsidiary's tax would be the same whether you use the unitary business approach or their, you could somehow or other isolate them, if they claimed it was unconstitutional. But there really didn't make any difference in the tax obligation of the subsidiary, and therefore arguably it wouldn't have standing to raise all sorts of constitutional issues. Might it, nevertheless, be true that in such a case the state's insistence on following the unitary approach would pose a lot of burdens on your adversaries here that were not imposed on the taxpayer, and that there would no forum in which that particular claim could be litigated?
MR. LADDISH: Still, if, as to the validity of the tax, I believe, since California is not only taxing the -- corporation that is doing business in California, it is asking that corporation for all the information pertaining to the assessment of the tax. Why, it is that corporation that has the direct request or demand made upon it by the Franchise Tax Board, and that corporation would have the standing still to challenge, if -- if we're talking about whether the tax is valid because of administrative burdens --
QUESTION: It would even if it didn't affect its tax -- even if it wouldn't affect its tax liability?
MR. LADDISH: I believe so, Your Honor, because it would still be, as is the situation in the litigation in the California courts today, that is one of the grounds that is being raised. And that ground itself, I think, is based on a cost factor. And so, it's more than just an idle question as to -- there would be a case in controversy as to whether or not this corporation would need to supply the information, or undergo the penalties for failing to supply the information.
The stockholder standing rule here clearly applies because all of the injuries flow to -- if there are injuries here, they flow to the Respondents here because of their stockholder status. And I think a hypothetical would make this clear.
If Alcan, say, were not a stockholder in its domestic subsidiary, in other words Alcan and Alcancorp, have absolutely no stockholder relationship, but California somehow didn't get the word and still assessed a tax on Alcancorp taking into account all of Alcan's income, and asking Alcancorp for a considerable amount of information about Alcan, Alcan, not being a stockholder, could just sit by and see how it all comes out if it is even interested in finding out. But there would be absolutely no acrimonic detriment to Alcan. All of the injuries that are alleged in this case and that are found by the Seventh Circuit flow from the stockholder standing, from the stockholder status.
Just as clearly, as I mentioned before, pure common sense says that the corporation itself would have standing to raise all of the issues that are being -- meant to be raised today by the Respondent. And I point out that the Grace Brethren Church case, again, in looking at a similar California tax refund statute for another tax, particularly recognized that the taxpayer there could raise all the arguments pertaining to the validity of the tax.
Respondents have not come forward with any policy reasons justifying the departure, any departure from the use of the stockholder standing rule as a prudential rule of standing. To the contrary, there are strong policy reasons supporting the application of the rule in this case.
QUESTION: Well, the Seventh Circuit found, didn't it, Mr. Laddish, or perhaps found isn't the right word, maybe held, that the corporations here did sustain a different kind of injury from the taxpayer?
MR. LADDISH: The Seventh Circuit, Your Honor, mixed the merits with the standing issue, when considering the standing issue forgot to consider the strong issues of federalism that we can maintain underlie both the standing issue and the Tax Injunction Act issue in this case, and did find this injury that was really, as I understand it, would be, gee, there's a good chance that foreign commerce is being interfered with here, and these people are in foreign commerce, and therefore we will find an injury where we might not otherwise find. It is submitted that that injury is not cognizable standing injury, even under Article -- Article III standards. It certainly would fit under the stockholder standing rule, without the stockholder link there would be no standing. And certainly I think it could be raised by the taxpayer corporation as a violation of the foreign commerce clause.
But, under Article III standing, when boiled down to its essence, that, that injury, as found by the Seventh Circuit, is really that if a state imposes any tax upon a subsidiary, why, then, that -- the subsidiary's parent, whether it is an interstate or foreign commerce, would feel this burden upon its decision making as to whether to do business in that state through the use of the subsidiary.
It is submitted that that is basically saying corporation don't like standing and, to borrow a term from First Amendment cases, if you impose a -- tax on a corporation and its parent is doing business in interstate or foreign commerce, that is a chilling effect on interstate and foreign commerce. And it is submitted than an analogous approach was taken in Meese v. Keen in 1987 First Amendment case of this Court, which found that -- noted that such arguments of a subjective chill would not be cognizable injury.
Moving back to the stockholder standing rule itself, this Court in Hawes v. Oakland, more than 100 years ago, decided that it was perfectly appropriate to apply the stockholder standing rule to prevent forum shopping through the abuse of federal diversity jurisdiction. And then in 1945 this Court, in the Shindley Corporation case, held that it was particularly appropriate to apply the stockholder standing rule when there was a situation where you had sole stockholder, since that sole stockholder could control the litigation of its subsidiary, precisely the situation we have today.
The facts of today's case and the forum shopping aspects of it that I described earlier, and the combination of these policy currents that we have seen from prior cases, show that the stockholder standing rule as applied in this case certainly would not be an anachronism. It is supported -- that application would be supported by the same concerns that underlay the Tax Injunction Act itself: the basic principles of federalism which recognize the imperative need of the state to administer its own fiscal operations regarding its own taxes.
Now, a somewhat closer question comes up when we talk about whether Alcan and Imperial have Article III standing. I have already discussed the Seventh Circuit's found injury that Alcan and Imperial didn't know they had until the Seventh Circuit pointed it out to them. But as to the injuries that they assert as far as the standard double taxation injuries and cost of compliance injuries that they assert, I would point out that there is -- although the rule may be different in other areas, when a party is challenging the validity of a statute, federal or state, in order to establish a distinct and palpable injury to himself, that party must demonstrate a realistic danger of sustaining a direct injury as a result of the statute's operation or enforcement.
That rule was most recently stated in the case of Penel v. City of San Jose in 1988. That rule would apply to the facts of this case in that the only actions by the Franchise Tax Board were taken as against the stockholder -- excuse me, as against the subsidiary corporation, the California taxpayer in this case. And any effect of those actions would be indirect upon the Respondent.
As to Imperial's argument that if its United States subsidiary had issued any dividends, why then a double taxation injury would have occurred to Imperial because of the United Kingdom statutes having to do with dividend credits, we submit that that purported injury would fail for two reasons. Number one, it is hypothetical. There never were any such dividends. We don't know exactly what would happen when that occurred, and the only source for determining that is an affidavit where the United Kingdom person giving the affidavit was not -- was very forthright in saying he wasn't entirely certain what would happen under the law. But the second reason that that injury should be rejected is that, under this Court's decision in Warth v. Seldin, the line of causation that has to do with the requirement, Article III requirement, that the injury must be fairly traced to the actions of the defendant, that line of causation would be broken by any intervening acts of the tax authorities, in this case it would be the United Kingdom tax authorities.
Franchise Tax Board is in full agreement with Imperial in one respect, and that is that Alcan is wrong when it argues that this Court must decide the ultimate constitutional merits of this case in order to decide the standing issue. This Court, barely six months ago in ASARCO Inc. v. Kadish, stated the established rule that federal standing in no way depends on the merits of the claim. And it certainly makes sense in the foreign commerce clause area, where you might have an undoubted injury -- I'm giving you a hypothetical example -- a party may, may be subjected to the same injury that the taxpayer in Japan Line felt, double taxation injury, and yet upon analysis this Court might find that Congress had taken the same line of actions as was taken in the case of Ward Air Canada v. Florida Department of Revenue.
In that case this Court decided that Congress, through its actions, had indicated that the states could tax as they pleased in a particular area, and Congress, being in control of foreign commerce, not the executive, would have control, and that would not be a violation of the foreign commerce clause, even though the taxpayer might have an injury that, in Japan Line, led to a decision in its favor in the merits.
Moving to the question as to what effect does the pleadings have in the -- on the standing issue in this case. The -- if standing was being decided at the pleading stage, by non-speculative allegations of the complaint certainly would be binding on the standing issue. But here we have stipulations of fact which have superseded the complaints in many respects.
QUESTION: Well, if there is no standing, do we ever reach the Tax Injunction Act?
MR. LADDISH: There is, if there is no standing there is no need to reach the Tax Injunction Act.
QUESTION: No need, but can we?
MR. LADDISH: I believe this Court can assume standing --
QUESTION: Assume it? Assume it?
MR. LADDISH: -- and reach the Tax Injunction Act.
QUESTION: And reach the, and say, and dismiss the case on the --
MR. LADDISH: That even if there were standing, why the Tax Injunction Act would apply. I believe so, Your Honor.
QUESTION: Would that be true if there were no Article III standing?
MR. LADDISH: I believe the Court could take that approach. I believe the Court has at times decided that it would not reach a particular issue because another issue would apply even it -- no matter what it decided on the first issue.
QUESTION: Even where that issue was a standing issue? I mean, that is sort of remarkable. We can decide all sorts of things though where there is no standing, so long as we decide them against the person who asserts standing, we can reach all sorts of issues.
MR. LADDISH: I would be perfectly happy, Your Honor, if you decided for me on the standing issue and left the Tax Injunction Act issue alone.
QUESTION: I think --
MR. LADDISH: I wanted to argue the tax --
QUESTION: I always thought we had to resolve standing issues before we got to other issues.
MR. LADDISH: That certainly makes practical sense to me, and I believe --
QUESTION: It is very impractical. I think it --
QUESTION: You just wanted to make sure to get the Tax Injunction Act argued before you ran out of time.
MR. LADDISH: That is absolutely correct, Your Honor.
The -- also we should point out that the allegations of the complaint should not be irrefutable for standing purposes when they are indeed matters of law. As an example, Alcan's complaint in paragraph 17 of page 10 of the Joint Appendix says that since California is using worldwide unitary income as its base, it is therefore imposing a tax upon Alcan. There is no sense to bind California to that for standing purposes, when just this last term in Shell Oil Company v. Iowa Department of Revenue this Court decided that the mere inclusion of income in the preapportionment tax base does not by itself constitute taxation of that income.
I would like to reserve the remainder of my time, if I could.
QUESTION: Thank you, Mr. Laddish.
ORAL ARGUMENT OF LAWRENCE A. SALIBRA II ON BEHALF OF THE RESPONDENT
MR. SALIBRA: Mr. Chief Justice, and may it please the Court:
I represent two foreign parents, Alcan Aluminium Limited and Imperial PLC. They have some common characteristics that give rise to this litigation that I think are important to consider. The first is they are foreign parents and do not operate in the United States. They have no permanent establishment in the United States, as that term is generally recognized in the tax area. They operate exclusively in the U.S. through subsidiaries. Both are assessed by California on the worldwide combined apportionment method. And both, in their view, feel that as a result of that assessment the promises made to their government, that when they invested in the United States through a subsidiary they would have no impact on their operations outside of the United States, except as derived from the shareholder status, is being in fact undermined by the California tax.
We see this case not as a Tax Injunction Act case, but as a shareholder case. Is this tax treating us like a mere shareholder or a passive investor? It came up out of the district court in that way. Judge Williams ruled that we had no right to pursue this case because the only possible injury we could have is the injury derived from a passive shareholder investor. We think that is incorrect.
We think, and we agree with the Seventh Circuit, that when you look at this case and you look at the impact of the tax, it is the fact that we are not being treated like a shareholder which gives rise to our right to standing and gives rise, simultaneously, to our objection to the tax on constitutional grounds.
QUESTION: You're not being treated at all by California.
MR. SALIBRA: On the contrary, Justice Scalia. We are in fact being treated as though we in fact were operating in the United States as a permanent establishment.
QUESTION: You don't get any bill from California, do you?
MR. SALIBRA: We get a bill from California in this sense. California says there is, there is a single unitary business. It is operating in our state. We want to determine what income is available to is. We have determined that based on that worldwide operation, and we are sending that bill to that portion of the unitary business that is in our state. Do they send it to Alcan Aluminium? No. Is there a real worldwide impact from the tax? Yes.
I think the most telling example that probably answers your question perhaps more directly than whether we get a bill is the example I used in the brief concerning the impact on a totally independent operation halfway around the world. If there is a business manager in an Alcan facility --
QUESTION: May I interrupt before you go with --
MR. SALIBRA: Yes, you may.
QUESTION: Are you assuming this totally independent operation is part of the unitary business?
MR. SALIBRA: I am, Your Honor.
QUESTION: Then it is not totally independent.
MR. SALIBRA: Well, it is not -- it is part of the unitary business, that is correct, it is not totally independent. That may be a wrong -- it is part of the business; it is operating in India. As it operates, the business manager of that facility decides that, some employees are retiring, and he can do two things. He can not replace those employees and maintain the same productivity level, and he can not replace, he can actually change the process and eliminate some of his capital equipment. The result of that plant decision, his California tax goes up. That is where the impact --
QUESTION: Well, is that true? The total income goes up, but isn't it also true that the percentage of the business done in California goes down?
MR. SALIBRA: No, no. I didn't say that. It is the tax goes up, I am sorry. The tax goes up, the California tax goes up.
QUESTION: Well, does it? Because --
MR. SALIBRA: The income --
QUESTION: The gross income goes up.
MR. SALIBRA: No, the total income stays the same. He is making his same level of productivity. He has produced -- the same amount of goods are produced now as they were before. All that has happened is he has reduced his payroll and he has reduced his property factors.
QUESTION: Oh, I see.
MR. SALIBRA: Fewer people, same income, California tax goes up. He has made a limited operational decision, a plant decision in India, and California tax goes up. And that is the impact. That is what they are doing to us that is the cause of concern.
And I might add, Justice Scalia --
QUESTION: (Inaudible) like a little different -- you present this argument to the court of appeals?
MR. SALIBRA: Oh, yes.
QUESTION: Are you arguing standing now?
MR. SALIBRA: Yes. And I am arguing why that --
QUESTION: Well, they -- did they agree with you?
MR. SALIBRA: I believe they did. They ruled in our favor.
QUESTION: Well, I know. I thought they invented another sort of --
MR. SALIBRA: Well, I take issue with the fact that they invented that, Your Honor. In fact I would like to get to the point. I will.
QUESTION: Well, that's all right. I'm sorry.
MR. SALIBRA: The -- we did argue this. Because, you have to understand the impact of the tax to understand the nature of our claim. Okay. Our claim is that none of these impacts would have been visited upon us, nor was there expectation when we invested in the United States through a subsidiary vehicle, if in fact the understanding between our governments had been observed. Now --
QUESTION: That goes to the merits of the question, doesn't it, Mr. Salibra?
MR. SALIBRA: Well, it -- I think it does not, and let me just answer that by looking what the Seventh Circuit said. The issue is whether or not the choice that we made, that is, are we simply here for seeing some economic impact, or is there some decision that is uniquely our decision that has been infringed? What the Seventh Circuit said is, in the context of the unitary tax, what happens is there is a fundamental choice that needs to be made by foreign operations who wish to invest in international commerce. They have three options. They can either, one, operate in the other foreign company directly. They can, two, operate via a subsidiary. Or, three, they can operate by contract. Different tax considerations, different business considerations, are associated with each choice. You -- the foreign investor looks at the options, makes the decision.
What the Seventh Circuit said is that, in the context of Aluminium and Imperial, the California tax takes away one of the options. There was an agreement between nations that we would have three options; California takes away one of the options.
QUESTION: But whether they are options or not depends on the merits, doesn't it?
MR. SALIBRA: Well, I agree with you. This is why -- and this is the case -- the point we made in our brief, it is impossible to determine -- okay -- to really -- to review the share, whether we are being effected by the tax as a shareholder or independently, without in fact addressing the merits. I think it is possible to determine that there is sufficient injury, as the Seventh Circuit did, and say there is sufficient injury but we have not found -- determine whether that injury is elevated that that constitutes a constitutional violation.
However, if there is a determination that there is no injury, I think you are forced to the conclusion that there is no constitutional burden. That is, in fact, what the Second Circuit did in our case. It decided, I think incorrectly, and we can all agree, that Mobil decided the constitutional issue with respect to worldwide combined apportionment applied in the foreign parent context. It said so specifically. And then it decided, because of that, there is no injury and there can be no standing. Because the -- any injury that Alcan would see, or Imperial would see, would be derived solely through their status as a shareholder.
Here the Seventh Circuit recognized that there is a direct injury, a choice, a choice of how you will invest, how you will conduct foreign commerce, and that choice is a choice that only the foreign parent can make.
QUESTION: It seems to me that would give shareholder standing in connection with wholly-owned subsidiaries in an awful lot of areas. If that is a valid principle it seems to me hard to limit it to foreign commerce considerations. Presumably domestic sole owners may have considerations and options as to what they are going to do. And I don't see how you can ever limit that to foreign commerce.
MR. SALIBRA: I can understand that concern. I can assure you, Justice Rehnquist, that that doesn't exist. And the reason is simple. The tax --
MR. SALIBRA: I understand that. I am going to try to explain why --
MR. SALIBRA: Shouldn't exist, yes. It shouldn't exist because the nature of the unitary method of taxation is such that what it does is it ignores the concept of the subsidiary in assessing the tax. It says there is one business, it is operating just like a single entity, and it -- and therefore we are going to compute the tax in effect like it is a single entity. There are no other shareholders, sole shareholder cases, that would fall within that doctrine unless --
QUESTION: Well, but wait a minute.
MR. SALIBRA: -- they were unitary.
QUESTION: But what if it was, what if the parent, instead of being an English or Canadian corporation, was a New York corporation, and had subsidiaries all over the United States, and maybe one or two in Canada.
MR. SALIBRA: Yeah, okay. And to the extent that it was unitary, one could argue that, at least with respect to the unitary issue, it would apply. The Seventh Circuit said, we think that standing in this case, and that the shareholder rule in this case, differs to the extent that there is the condition in addition that we impose that it be both unitary and that that impact be on foreign commerce. Because the choice --
QUESTION: Well, but the New York corporation might want to build a plant in India too. And its decision might be affected by how much they pay for things, and all the rest, in India.
MR. SALIBRA: In guess -- I apologize. I miss seeing the --
QUESTION: I am assuming that the parent is not a foreign, not a United -- non-United States corporation; it is a New York corporation.
MR. SALIBRA: Okay.
QUESTION: It has hundreds of subsidiaries, a few of which may be in India or Great Britain.
MR. SALIBRA: Okay.
QUESTION: Why isn't your principle applicable to that company?
MR. SALIBRA: Why wouldn't -- let me just see if I understand this. Why wouldn't an American company investing in India have standing to challenge the unitary tax independently because the California tax is affecting --
QUESTION: Its investment decision in India.
MR. SALIBRA: Well, I guess what I don't understand is what level of protection exists. Here the level of protection, the issue --
QUESTION: Well, they claim the statute is basically unconstitutional, as I understand you do.
MR. SALIBRA: Well, no, no. You see, I think that is where we disagree. I think the point that we are making is that the injury that we are alleging is an agreement between our nation, Canada, the U.K., an agreement between our nation and the United States as to how we will be treated. I don't see, in your example --
QUESTION: Well, you rely on, basically on the treaty as -- I don't think --
MR. SALIBRA: Well, the agreement of the kind -- I think the answer to that is that there is -- there are two levels. The first level, there are treaties that express the fundamental concept, Canada refers to it in its amicus brief, that investments in the United States will not result in taxation beyond the shareholder role, except --
QUESTION: But if you accept the theory of the unitary tax it doesn't. The only thing that is being taxed is the subsidiary. You just measure the tax by its percentage of the total business.
MR. SALIBRA: Well, once again, what I am saying is I understand if you accept the philosophy, but I think your example is why isn't -- why wasn't -- why doesn't the U.S. have standing in a claim, and the answer is there is no alleged foreign commerce injury.
QUESTION: Well, there is a foreign commerce injury but not a treaty violation.
MR. SALIBRA: Well, there is no --
QUESTION: Does your case boil down to special standing because you claim a treaty violation?
MR. SALIBRA: Well, because we claim that there is a violation of an understanding between the United States, a course of conduct exemplified in some treaties and exemplified in the fact that there is a common understanding among nations, recognized by this Court in Container, that international transactions will be evaluated under Section 42 arm's length standards.
QUESTION: So something to do with the merits confers standing.
MR. SALIBRA: To the -- well, something to do with the merits confers standing to the extent that, yes, it is true there must be a foreign commerce injury.
QUESTION: The Seventh Circuit said we are only going to apply this where foreign commerce is involved. But logically, why should it be limited? What is peculiar about foreign commerce to this particular question of standing, other than the arguments on the merits?
MR. SALIBRA: Well, I -- my analysis of that would be very simply that it -- that one could, I think, make the argument that you suggested. When you unitize a company with its subsidiary, regardless of whether it is a foreign unity or an American -- or a U.S. unity, the shareholder role no longer exists. The shareholder role has been defeated, because he is not being treated like a shareholder, he is being treated like one common element of a single business. I think that is what you are saying. You are saying why should you add in addition to that -- am I correct?
QUESTION: I asked you a question.
MR. SALIBRA: Yeah. And, I guess my an -- I guess I am not clear. The question is why is it tied to the merits?
QUESTION: Yes. You know, you say the Seventh Circuit says we won't apply this except in the area of foreign commerce. But I don't see anything there that would logically limit that principle to foreign commerce, other than something to do with these treaties you are talking about, which are basically questions of the merits.
MR. SALIBRA: Well, Your Honor, I don't disagree with that. I guess I am saying I agree with you. They limit it to foreign commerce. I think it is logically possible to say whenever the shareholder role has been eliminated, whenever the shareholder isn't being treated like a shareholder any longer, then the -- then one is precluded from coming in when he wants to vindicate a right and say you can't come in because you are a shareholder. I agree with that. That is not what the Seventh Circuit said. It said there were reasons why it was limiting it to foreign commerce. But I agree that, to the extent that a shareholder is not -- is suffering an injury that is not derivative through his role as a shareholder, he should have a right of action, is in fact the fundamental principle that all of us recognize. I agree with that. There is established law on that principle that shareholders who suffer injury, Universal -- Schaffer v. Universal Rundle, that shareholders who suffer injury, and that injury is not injury that derives from their shareholder position but is unique and personal to them, have a right of action. And I agree that that is a rational position.
The important point, I think, in this case, from the point of view of some of the foreign parents, is that, as I said, is that in this case once you decide we are not a shareholder -- or, I am sorry, that we are a shareholder, and that is the only derivative impact we see from the unitary method of taxation, the ability for us to go in and say this tax affects us in a way that violates the foreign commerce clause requirements is, in our view, lost. We can't make it anymore.
QUESTION: Well, I thought I understood counsel for the state to say that the argument can be raised in state court by the domestic subsidiary.
MR. SALIBRA: Well, I --
QUESTION: I asked specifically about that, and was informed yes, it can be litigated in state court. Now, if that is true, why isn't that sufficient?
MR. SALIBRA: Well, I don't believe that is true. I think the issue is if there is a determination by this Court that the worldwide combined apportionment method, as it applies to foreign parents in this case, treats them just like a shareholder, with no other impact. Just derivative shareholder --
QUESTION: Suppose the holding here is you don't have standing, you don't have shareholder standing.
MR. SALIBRA: Then I believe --
QUESTION: Now, they say you can litigate -- that the domestic subsidiary can litigate your concerns about the unitary tax scheme in state court.
MR. SALIBRA: And my, I guess my answer to that is you have determined the merits. There is nothing to litigate. We would go in and we would say that the unitary method of taxation is imposing an unconstitutional burden upon us. The court would say what is that burden. The Supreme Court has determined that the only impact that this tax on you has --
QUESTION: So, you're telling me that if we find you, your clients have no standing, that you are going to give up any attempt to go to state court and have the domestic subsidiary raise that argument. We are finished.
MR. SALIBRA: I am saying that if you hold that there is -- that there is no injury beyond the injury of a normal shareholder, I don't see what claim we could make.
QUESTION: The state is quite willing to assume you do have standing. And then it says go ahead and, but nevertheless, the Tax Injunction Act applies and you must go to the state remedies.
MR. SALIBRA: It says we do have standing.
QUESTION: Well, it says they are willing to assume to have -- they started out arguing the Tax Injunction Act saying let's assume that there is standing, and nevertheless the Tax Injunction Act bars going forward to this suit in the Seventh Circuit.
MR. SALIBRA: And we would, we would disagree it doesn't bar that. The Tax Injunction Act applies, and the principle of comity applies, when there is a plain, speedy and efficient remedy. And there is no plain, speedy and efficient --
QUESTION: Well, now, why not? The state says that these very issues, even though you have standing, these very issues can be litigated in the state courts.
MR. SALIBRA: And the -- and our answer is the fact that the -- assuming that the issues could be litigated, assuming the issues could be litigated, the Tax Injunction Act still wouldn't apply.
QUESTION: Why not?
MR. SALIBRA: And it wouldn't apply because of the uniform recognition of this Court and those courts, every court in this case which applied that doctrine, that absent the plain, speedy and efficient remedy, the fact that there may be similarities of interest, similarities of claims, does not bar the action of another party without a remedy.
QUESTION: Well, why should anybody but the taxpayer have a speedy remedy?
MR. SALIBRA: For the very same reason the Ninth Circuit recognized a direct and immediate injury to the foreign parent.
QUESTION: Well, the foreign parent then can litigate it through the sub.
MR. SALIBRA: Well, I think what we are speaking of is whether that is in fact a principle under the Tax Injunction Act and an intention of Congress. And I think this Court has interpreted that and stated clearly that the fact that another party has a remedy --
QUESTION: But the other party is the actual taxpayer here. As Justice Scalia says, your client isn't getting any bill from the California State Tax Commission.
MR. SALIBRA: No, but our client --
QUESTION: Wait a minute.
MR. SALIBRA: I am sorry. I apologize.
QUESTION: It is only -- it is only the domestic subsidiary, which your client owns, that gets the bill from the State Tax Commission. And the state says that domestic subsidiary can litigate all the foreign commerce issues it wants to in the California proceedings.
MR. SALIBRA: Well, that brings -- I am not convinced they can do that. I -- I believe that the foreign commerce issues, the foreign commerce issue, which is the right we have to select the remedy, is a remedy that we can only argue. California, I don't think -- Alcancorp, I don't think, can come in and say we are here litigating the fact that our parent Aluminium is being deprived of its choices of how it wants to operate, or --
QUESTION: Well, that is what the Seventh Circuit cooked up. But I mean the ordinary foreign commerce rule, that the tax on the domestic subsidiary on a unitary basis violates the foreign commerce clause.
MR. SALIBRA: Well, I think it is incorrect to say that they cooked it up. I think what they had said was there is a unique -- they, I think they recognize that there is a unique injury here to Alcan. That that injury is a -- is a injury that we have to evaluate in terms of how we are going to make an investment.
QUESTION: (Inaudible) said that there wasn't a plain and speedy remedy.
MR. SALIBRA: That is uncontested, Your Honor.
QUESTION: What do you mean, it is uncontested?
MR. SALIBRA: California, they asked California quite directly, is there a remedy for Alcan --
QUESTION: Well, I just heard the state say that you have a plain and speedy remedy through your subsidiary.
MR. SALIBRA: And our response to that is --
QUESTION: And I would -- I think if this case had come from the Ninth Circuit we might, I might say we ought to give some credence to their holding that there is no such a remedy, but gee, this is the Seventh Circuit. What do they know about California?
MR. SALIBRA: Well, I think the answer is there was a question posed to California, is there a remedy for Alcan, and the answer was no, there is no remedy.
QUESTION: How could they have -- not for the parent.
MR. SALIBRA: Not for the parent.
QUESTION: I mean, they can't go in, they can't go in there and litigate themselves, but they can litigate through their subsidiary. They own it.
MR. SALIBRA: But that was exactly the issue, Your Honor, that they litigated in EMI 1 in the Ninth Circuit, and the Ninth Circuit said the same thing that the Seventh Circuit said. There is no plain and speedy remedy for EMI. Capitol may have a plain, speedy and efficient remedy, but EMI doesn't. And therefore the Tax Injunction Act and its policies doesn't apply -- don't apply.
QUESTION: That's, but that makes the judgment, which we can certainly review here, that a remedy for the sub does not amount to a remedy for the -- for the principal corporation. And if we say that is wrong, then we just say, you know, both the Seventh and the Ninth have been wrong.
MR. SALIBRA: That is correct, that is correct. You can say that. But I think it is incorrect to say that the Ninth Circuit held differently. It held --
QUESTION: But, on that point the Ninth Circuit isn't describing California law. It is not saying that California will not let the sub raise Alcan's claims. What it is saying is that even if the sub can raise Alcan's claims, that is not enough.
MR. SALIBRA: And that is our position. That isn't enough.
QUESTION: Right. Okay.
MR. SALIBRA: That is precisely our position.
QUESTION: But that point is not a point of California law, it is a point --
MR. SALIBRA: It is a point of U.S. law, which I think is well established. There is not, in our view and in the Seventh Circuit's view, any dispute about that. Nor is there a dispute by any court that has ever reviewed that issue. And that is why the doctrine doesn't apply.
QUESTION: Well, it's just hard for me to understand, if we assume that the sub, your subsidiary can raise all, every question that you want raised there, and you can direct how they do it and who they hire to press it, I can't imagine why that isn't a plain and speedy remedy for the parent.
MR. SALIBRA: If we were to -- if Alcancorp would just be the surrogate, is that what you're saying? That we would go under their name and we would in fact try the case?
QUESTION: Well, that's what you will --
MR. SALIBRA: That's what you're saying.
QUESTION: That is what is going to happen anyway.
MR. SALIBRA: And I think, once again, I am going to do it very quickly, but once again --
QUESTION: That's probably what is happening now.
MR. SALIBRA: I think the answer to that is, once again you assume that they can raise all -- that when this case is adjudicated, resolved under California, they can resolve all the claims. I don't think that is true.
QUESTION: But let's assume it is. Just assume it is.
MR. SALIBRA: Okay, I assume that it is.
QUESTION: Then how about the Tax Injunction Act?
MR. SALIBRA: That still doesn't apply.
QUESTION: Why not?
MR. SALIBRA: And it doesn't apply because of the continued holdings of this Court --
QUESTION: Because you mean that --
MR. SALIBRA: You're saying is there a policy why it shouldn't apply?
QUESTION: You mean because the, there is no way that the parent itself can file for a refund?
MR. SALIBRA: No, no. They have that, there is no remedy for itself, right. I think there is, you can either file for a refund of you can, as the Ninth Circuit suggested, permit them to have access to the court indirectly, through the same procedure that the --
QUESTION: Mr. Salibra, can you tell me a specific argument that you think you can make to Judge Williams in Chicago that you cannot make in California?
MR. SALIBRA: Yes, yes. Well, that I couldn't make in California?
QUESTION: That you could not -- one you could make to Judge Williams but not to the California forum.
MR. SALIBRA: Yes. I would argue that I think that I could argue to Judge Williams that this, that the burden that we are litigating here is the impact on our, Alcan Aluminium's, ability to conduct its foreign commerce through the vehicles that there has been agreement were available to them. California has preempted that.
QUESTION: But why -- how do you know you can't make that argument in California?
MR. SALIBRA: I believe we cannot make that argument in California because California would say that argument is not an argument for Alcan to make; you are not the right party. The right party, the real party in interest, the injured party with respect to that claim is not here.
QUESTION: Well, they can't say that --
QUESTION: He means can you make it through the sub, I thought.
QUESTION: Yeah, make it through the sub.
MR. SALIBRA: Through the sub.
QUESTION: The sub make it on the ground that you, California, are treating the sub and the parent as a unitary business. This is an injury to the unitary business, which happens to impact directly on the parent, which I can describe to you.
MR. SALIBRA: I understand what you are saying.
QUESTION: Ergo, I want to make the argument. And you are telling me California won't listen to it. It seems inconsistent with their posture that you are all one business.
MR. SALIBRA: Well, I understand that. But if you assume that we're all one business, then we should be able to come in anyway.
QUESTION: You should be able to make any argument that would tend to show that the California procedures are unconstitutional in the California forum.
MR. SALIBRA: Your Honor, we could make it. The -- I, I think there is a serious risk that they will say --
QUESTION: Well, there is always risk.
MR. SALIBRA: -- you're wrong, you're not the right party.
QUESTION: Well, maybe you can read back to the person making that argument the transcript of the oral argument today when Mr. Laddish conceded that you could.
MR. SALIBRA: Well, it's -- it's interesting, the only, I guess my response to that, Justice O'Connor, is that courts sometimes decide that, regardless of what the other side concedes, it, they are going to apply the doctrine as they see it and is appropriate. In fact the entire standing issue that we are discussing here today was raised not by California --
QUESTION: But that determination in itself would result in a judgment from the state court that could be reviewable here.
MR. SALIBRA: That would be true.
MR. SALIBRA: That would be true. We would, we are trying to avoid, however, coming back too many times.
I would just like to conclude by saying that this case involves, in our view, very serious interests, that are interests that the nations of the world have recognized are interests of foreign nationals. The foreign nationals have no remedy. The Seventh Circuit indicated that there is a sound basis in international comity for recognizing a need for foreign nationals to have their own independent remedy to recognize the injury to them, and not a derivative injury, and that that is another sound basis for this Court to hold the Seventh Circuit's reasoning is in fact rational, and in fact makes sense in the context of the unitary method of taxation.
There is, in our view, really no doubt that there is a substantial and overwhelming burden on foreign companies imposing this tax, on which this tax is imposed. The problem is not --
QUESTION: Why is it that a foreign corporation has standing to object to a violation of the United States Constitution if it is not doing business here? Is it only because you are doing business here that you get that standing?
MR. SALIBRA: No, I think every -- I think it is recognized that we have a right to object to a constitutional violation.
QUESTION: Why? Because you are doing business here?
MR. SALIBRA: Because I think this Court has recognized that the right, constitutional rights that are available under the constitution are available to anyone in the position to argue them. We have come here to argue those rights.
QUESTION: You mean someone in India can argue that there is a violation of the Constitution of the United States that affects them?
MR. SALIBRA: If there is some injury to someone in India for which there is a remedy in this Court, for which there is a constitutional violation that is cognizable in the constitutional law, it could come here and argue that.
QUESTION: Thank you, Mr. Salibra.
Mr. Laddish, do you have rebuttal? You have three minutes.
REBUTTAL ARGUMENT OF TIMOTHY G. LADDISH ON BEHALF OF THE PETITIONERS
MR. LADDISH: Just a couple of points, Your Honor.
The argument for the other side basically is arguing the merits as to the validity of California's method of taxation. These are not properly before the Court today, and I will not counter with our own counterarguments.
I would point out a few things that this Court has held in the past, and that is, in Amerada Hess just last term, this Court held that you -- a taxpayer cannot meet the burden of demonstrating no rational relationship between the income attributed to California and the inter -- intra-state values of the enterprise in California, if the unitary method -- unitary nature of the activities are established, which they are stipulated in this case, and if the benchmark three factor apportionment formula is used, which the stipulations show it was used in this case.
QUESTION: But, Mr. Laddish, I guess I don't agree with you that it's not fair game to argue the merits along with the standing issue. It is not at all unusual that the merits issue and the standing issue boil down to one and the same thing. It happens all the time.
MR. LADDISH: I think that --
QUESTION: Now, a chilling effect, whether someone who is chilled by a First Amendment or something else, the question whether the person has standing to sue and the question whether he wins by reason of a chill, whether a chill would be enough to give him victory, are one and the same question. So, you know, --
MR. LADDISH: There are certainly times, Your Honor, when that is true, but I think when you are dealing with the foreign commerce clause in the situation we are here, for the reasons that I stated before, they are not one and the same. Certainly there are statutes that create injuries, and if you violate that statute you are injured. And it would be very hard to separate out the standing injury from the -- from the decision on the merits. But that is not the case today. If it is determined that they do not have standing here, that does not mean that that does away with all the arguments that they are making as far as it being invalid under the foreign commerce clause. The taxpayers can make that argument and, as pointed out by one of the amici supporting the Respondents today, there are -- there is litigation in the California courts that are raising these issues now, and one of the litigants is a subsidiary and the other one is an intervening parent, but the ultimate parent is not a part of the litigation.
QUESTION: I understand from your adversary to say the Ninth Circuit has decided that these issues can't be raised.
MR. LADDISH: The Ninth Circuit has only decided that as to the -- the Ninth Circuit first decided that there was no standing. But as to the Tax Injunction Act, the Ninth Circuit decided, in a rather mechanical version, that the control that the sole stockholder would have over its taxpayer should not be considered by the court as giving it an effective remedy in the California courts. It just said since they cannot proceed in their own name --
QUESTION: Well, you're arguing that it is an effective remedy.
MR. LADDISH: Yes, I certainly am, Your Honor.
QUESTION: So you are arguing the Ninth Circuit is wrong, as well as the Seventh?
MR. LADDISH: On that, yes. Thank you very much.
CHIEF JUSTICE REHNQUIST: Thank you, Mr. Laddish. The case is submitted.
(Whereupon, at 1:52 p.m., the case in the above-entitled matter was submitted.)
Argument of Speaker
Mr. Speaker: The opinions of the Court in two cases will be announced by Justice White.
Argument of Justice White
Mr. White: The first of these cases is No. 88-1400, Franchise Tax Board of California against Alcan Aluminium Limited.
The judgment of the Court of Appeals for the Seventh Circuit is reversed in a unanimous opinion on file with the Clerk.