Brief of Tax Executives Institute, Inc. as amicus curie in support of petitioner

Tax Executive, The, Nov, 1999

Thus, as a result of California's interest offset, P is taxed on $175 of income, rather than its net income of $125; $50 in income is therefore subject to double taxation.

In Allied-Signal, the Court vivified the "necessary limit on the States' authority to tax value or income that cannot in fairness be attributed to the taxpayer's activities within the State." 504 U.S. at 780. "[Acting] as a defense against state taxes which, whether by design or inadvertence, ... attempt to capture tax revenues that, under the theory of the tax, belong of right to other jurisdictions," Trinova Corp., 498 U.S. at 386, the Court must suspend its disbelief about the true effect of California's taxing scheme here. It is to impose an unconstitutional burden on Hunt-Wesson and similarly situated taxpayers.

The State's attempt to reach Petitioner's nontaxable income by reducing its interest expense has the same effect as a direct tax on that income and cannot in fairness be sustained. The Court of Appeal did not dispute this. Indeed, while rejecting Petitioner's challenge on stare decisis grounds, the court below observed that "[i]f we were writing on a clean slate, these arguments might appear persuasive." (App. at 8a.) The court's reliance on the manifestly erroneous decision in Pacific Telephone, however, was clearly misplaced. See United States v. Gaudin, 515 U.S. at 521. This Court can correct the error by wiping the slate clean and striking down the interest-offset rule because it violates the Due Process Clause of the Constitution.

CONCLUSION

For the foregoing reasons, the Court should reverse the decision below.

Respectfully submitted,

(*) Timothy J. McCormally
Mary L. Fahey
Jeffery P. Rasmussen
Tax Executives Institute, Inc.
1200 G Street, N.W., Suite 300
Washington, D.C. 20005-3814
(202) 638-5601

(*) Counsel of Record Counsel for Amicus Curiae Tax Executives Institute, Inc.

November 10, 1999

(1) Pursuant to Rule 37.6, amicus TEI states that no counsel for a party has written this brief in whole or in part and that no person or entity, other than amicus, its members, or its counsel, has made a monetary contribution to the preparation or submission of this brief. Tax Executives Institute has received the written consents of Petitioner and Respondent to the filing of this brief; those consents have been filed with the Clerk of the Court.

(2) "App." references are to the various appendices bound with the Petitioner's Petition for a Writ of Certiorari to the Court of Appeal of California for the First Appellate District in Hunt-Wesson, Inc. v. Franchise Tax Board, No. 98-2043 (filed June 21, 1999).

(3) U.S. CONST. art. I, [sections] 8, cl. 3 (Commerce Clause); U.S. CONST. amend. XIV, [sections] 1 (Due Process Clause).

(4) The unitary business principle calculates the local tax base by first defining the scope of the unitary business of which the taxed enterprise's activities in the taxing jurisdiction form one part, and then apportioning the total income of the unitary business between the taxing jurisdiction and the rest of the world based on a formula "taking into account objective measures of the corporation's activities within and without the jurisdiction." Container Corp., 463 U.S. at 165. Although the terms "allocation" and "apportionment" are often used interchangeably in respect of the division of income among various jurisdictions, "allocation" properly refers to the "attribution of a particular type of income to a designated state, [and] `apportionment' refers to the division of the tax base by formula." JEROME R. HELLERSTEIN & WALTER HELLERSTEIN, STATE TAXATION I: CORPORATE INCOME ANN FRANCHISE TAXES [paragraph] 9.01 (3d ed. 1998).