Franchise Tax Board of California v. Alcan Aluminium Limited, 88-1400

• Decision Date: 10 January 1990
• Docket Number: No. 88-1400,88-1400
• Citation: 110 S.Ct. 661,493 U.S. 331,107 L.Ed.2d 696
• Parties: FRANCHISE TAX BOARD OF CALIFORNIA, et al., Petitioners v. ALCAN ALUMINIUM LIMITED et al
• Court: U.S. Supreme Court

493 U.S. 331

110 S.Ct. 661

107 L.Ed.2d 696

FRANCHISE TAX BOARD OF CALIFORNIA, et al., Petitioners

v ALCAN ALUMINIUM LIMITED et al.

No. 88-1400.

Argued Nov. 1, 1989.

Decided Jan. 10, 1990.

Syllabus

Respondents—foreign corporations and sole shareholders of domestic corporations conducting business in California—brought separate suits against petitioner California Franchise Tax Board (Board) and certain of its employees, seeking declaratory and injunctive relief on Foreign Commerce Clause grounds from the Board's method of determining the taxable income of respondents' subsidiaries that is allocable to California. The District Court dismissed the suits, but the Court of Appeals reversed, holding that respondents had alleged injuries sufficiently direct and independent of the injuries to their subsidiaries to confer both Article III and stockholder standing. It also held that respondents' federal actions were not barred by the Tax Injunction Act, which prohibits district courts from enjoining, suspending, or restraining the assessment, levy, or collection of any state tax where a plain, speedy, and efficient remedy may be had in state court.

Held:

1. Respondents have Article III standing. A judicial determination that the Board's accounting method is unconstitutional would prevent the actual financial injury to respondents that would be caused by a tax that illegally reduced the return on their investments in their subsidiaries and lowered the value of their stockholdings. Pp. 335-336.

2. Assuming that respondents have stockholder standing, their actions are nevertheless barred under the Tax Injunction Act. As sole shareholders, respondents have under their direction and control entities that, as actual taxpayers, possess a plain, speedy, and efficient remedy for their claims. Respondents' argument that even if they are treated as effectively having all of their subsidiaries' remedies, they do not have a plain, speedy, and efficient remedy because their subsidiaries would not be permitted to raise a Foreign Commerce Clause challenge to the tax, or at least could not base such a challenge on the allegedly distinct foreign commerce injuries suffered by their parent corporations, is rejected. Respondents have not demonstrated that their remedy is uncertain and thus inadequate to bar federal jurisdiction. Petitioners have represented that in no case currently pending in the state courts is the State claiming that the subsidiaries cannot raise foreign commerce claims, and no case has been cited in which the state courts have refused to hear similar claims; in fact, there is authority to the contrary. This Court cannot hold the Tax Injunction Act inapplicable on mere speculation. Pp. 336-341.

860 F.2d 688 (CA 7), reversed.

WHITE, J., delivered the opinion for a unanimous Court.

Timothy G. Laddish, San Francisco, Cal., for petitioners.

Lawrence A. Salibra, II, for respondents.

Justice WHITE delivered the opinion of the Court.

This case presents two questions: First, whether a foreign company, sole shareholder of an American subsidiary, has standing to challenge in federal court, on Foreign Commerce Clause grounds, the accounting method by which the State of California determines the locally taxable income of that subsidiary; and second, whether such a federal action for injunctive and declaratory relief is barred by the Tax Injunction Act, 28 U.S.C. § 1341 (1982 ed.). The Court of Appeals for the Seventh Circuit held that the foreign companies involved in this case had alleged injuries sufficiently direct and independent of the injuries to their subsidiaries to confer both Article III and stockholder standing, and that their federal actions were not barred by the Tax Injunction Act or the principle of comity that underlies that Act. 860 F.2d 688 (1988). We granted certiorari, 490 U.S. 1019, 109 S.Ct. 1741, 104 L.Ed.2d 179 (1989), and conclude that there is an Article III case or controversy, as- sume that respondents have standing as stockholders, and hold that these actions are barred by the Tax Injunction Act. Accordingly, we reverse.

I

Respondent Alcan Aluminium Limited (Alcan) is a Canadian company and indirect sole shareholder of Alcan Aluminium Corporation (Alcancorp), an Ohio corporation with operations in California. Respondent Imperial Chemical Industries PLC (Imperial) is a British company and indirect sole shareholder of ICI Americas, Inc. (Americas), a Delaware corporation that conducts business in California. This case arises out of two separate lawsuits brought in the District Court for the Northern District of Illinois by Alcan and Imperial against petitioners herein, the Franchise Tax Board of the State of California (Board) and certain of its Chicago employees. Respondents' lawsuits sought declaratory and injunctive relief from the Board's method of determining the taxable income of Alcancorp and Americas allocable to California. Under that method, known as the "unitary business/formula apportionment method," the Board calculates the total earnings of the "unitary business" of which the California taxpayer is a part. It then calculates an allocation fraction for the taxpayer by taking an unweighted average of three ratios: California payroll to total payroll, California property value to total property value, and California sales to total sales. Finally, to obtain the taxpayer's taxable income allocable to California, the Board multiplies the taxpayer's allocation fraction by the total income of the unitary business.

Respondents allege that application of this "unitary tax" to domestic subsidiaries of foreign corporations violates the Foreign Commerce Clause, U.S. Const., Art. I, § 8, cl. 3. See Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 451, 99 S.Ct. 1813, 1823, 60 L.Ed.2d 336 (1979). We expressly left open this issue when we addressed similar claims made by a domestic parent company with foreign subsidiaries. See Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 189, n. 26, and 195, n. 32, 103 S.Ct. 2933, 2952, n. 26, and 2956, n. 32, 77 L.Ed.2d 545 (1983).

II

The first issue in this case is whether respondents have standing to bring these actions. We have treated standing as consisting of two related components: the constitutional requirements of Article III and nonconstitutional prudential considerations. See Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 2204, 45 L.Ed.2d 343 (1975). We stated the requirements for an Article III case or controversy in Valley Forge Christian College v. Americans United for Separation of Church & State, Inc., 454 U.S. 464, 472, 102 S.Ct. 752, 758, 70 L.Ed.2d 700 (1982):

"Art. III requires the party who invokes the court's authority to 'show that he personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant,' Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 99, 99 S.Ct. 1601, 1607, 60 L.Ed.2d 66 (1979), and that the injury 'fairly can be traced to the challenged action' and 'is likely to be redressed by a favorable decision,' Simon v. Eastern Kentucky Welfare Rights Org., 426 U.S. 26, 38, 41, 96 S.Ct. 1917, 1924, 1925, 48 L.Ed.2d 450 (1976)."

The Seventh Circuit stated that the Board did not seriously contest Article III standing, 860 F.2d, at 691-692, and ruled that respondents' ownership interests in their domestic subsidiaries alone, considered apart from any direct harms suffered as participants in foreign commerce, gave Alcan and Imperial " 'such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the Court so largely depends for illumination of difficult constitutional questions.' Baker v. Carr, 369 U.S. 186, 204, 82 S.Ct. 691, 703, 7 L.Ed.2d 663 (1962)." Id., at 692. The Board takes issue with the Seventh Circuit's characterization of its position with respect to Article III standing: "[T]he Board has never accepted the proposition that a shareholder seeking to redress a corporate injury has standing in the constitutional sense." Brief for Petitioners 20, n. 4. Petitioners emphasize that a plaintiff must show that he personally has suffered an actual or threatened injury and question whether a sole shareholder's ownership interest in a corporation is sufficient by itself to satisfy the "injury in fact" requirement of Article III. Ibid.

We think that the Court of Appeals was quite right in holding that respondents have Article III standing to challenge the taxes that their wholly owned subsidiaries are required to pay. California's accounting method determines the amount of the taxes assessed against the subsidiaries. If those taxes are higher than the law of the land allows, that method threatens to cause actual financial injury to Alcan and Imperial by illegally reducing the return on their investments in Alcancorp and Americas and by lowering the value of their stockholdings. A judicial determination that the Board's accounting method is unconstitutional under the Foreign Commerce Clause would prevent such injuries. That is all that is required for Article III standing.

The more difficult issue is whether respondents can meet the prudential requirements of the standing doctrine. One of these is the requirement that "the plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." Warth v. Seldin, supra, 422 U.S., at 499, 95 S.Ct., at 2205. Related to this principle we think is the so-called shareholder standing rule. As the Seventh Circuit observed, the rule is a longstanding equitable restriction that generally prohibits shareholders from initiating actions to enforce the rights of the corporation unless the corporation's management has refused to pursue the same action for reasons other than good-faith business judgment. 860 F.2d, at 693. There is,...