Magazine article The CPA Journal

California Lower Court Upholds Worldwide Combined Reporting

Magazine article The CPA Journal

California Lower Court Upholds Worldwide Combined Reporting

Article excerpt

The California Superior Court, in Alcan Aluminum Corporation v. Franchise Tax Board, County of Sacramento, No. 322638, May 31, 1991, held that worldwide combined reporting ("WWCR") as applied to a domestic taxpayer with a foreign parent does not violate the Foreign Commerce Clause of the U.S. Constitution. The court chose to rely on the theory espoused in Wardair Canada Inc. v. Florida Department of Revenue, 477 US 1, 106 S.Ct. 2369 (1986), by the U.S. Supreme Court in determining when the tests established in Japan Lines Ltd. v. County of Los Angeles, 441 US 434 (1979), apply. Under this theory, the risk of multiple taxation and "one voice" tests need not be applied when the federal government "has affirmatively acted in a manner which permits the state tax."

The Superior Court found that the federal government had affirmatively acted on this issue through its failure to include a provision prohibiting states from applying WWCR in a 1978 foreign treaty with the United Kingdom, as well as subsequent treaties, and in failing to pass proposed legislation which would have prohibited the methodology. Based on its finding that WWCR does not violate the Foreign Commerce Clause under the principles set forth in Wardair, the court declined to analyze the tax scheme under the principles set forth in Japan Line.

The California Superior Court reached a contrary result on the same issue in Barclays Bank International v. Franchise Tax Board, County of Sacramento, No. 325059, 325061, June 16, 1987. That decision was subsequently affirmed by the California Court of Appeals. Relying on the Japan Line tests, both courts found that the taxing method violated the Foreign Commerce Clause. In the Barclays decision, the Superior Court stated that the U.S. Supreme Court decision in Wardair had no "sufficient similarity...to suggest its application (to Barclays)...." In addition, the court commented that the failure of Congress to explicitly prohibit the WWCR method in foreign treaties and the lack of legislation to prohibit the WWCR method were not indicative signs of accepting or condoning the WWCR method.

A HIGHER AUTHORITY

The California Supreme Court accepted review of Barclays. …

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