Capitol Industries-EMI, Inc. v. Bennett
| Citation | 681 F.2d 1107 |
| Decision Date | 22 July 1982 |
| Docket Number | INC,INDUSTRIES-EM,80-4114,Nos. 80-4113,s. 80-4113 |
| Parties | CAPITOL, Plaintiff-Appellant, v. William M. BENNETT, Kenneth Cory, Richard Silberman, individually and asmembers of, and Martin Huff, individually, and as Executive Officer of, theFranchise Tax Board, State of California, Defendants-Appellees. EMI LIMITED, Plaintiff-Appellant, v. William M. BENNETT, Kenneth Cory, Richard Silberman, individually and asmembers of, and Martin Huff, individually and as Executive Officer of, theFranchise Tax Board, State of California, Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Valentine Brookes, San Francisco, Cal., argued, for plaintiff-appellant; Lawrence V. Brookes, Brookes & Brookes, San Francisco, Cal., on brief.
Charles C. Kobayashi, Deputy Atty. Gen., Sacramento, Cal., for defendants-appellees.
On Appeal from the United States District Court for the Northern District of California.
Before WALLACE and PREGERSON, Circuit Judges, and BYRNE, * District Judge.
WM. MATTHEW BYRNE, Jr., District Judge:
This appeal involves two companion cases brought by an United Kingdom corporation and its United States subsidiary corporation, respectively, for injunctive and declaratory relief to prevent officials of the State of California from assessing additional income taxes against the subsidiary.
Appellant in the first action (No. 80-4113), Capitol Industries-EMI, Inc. ("Capitol"), is a Delaware corporation, with its principal place of business in California. Capitol is in the business of recording phonograph records and tapes for sale through commercial channels. Capitol contends that its business is conducted almost exclusively in the United States.
Appellant in the second action (No. 80-4114), EMI, Limited ("EMI"), is a United Kingdom corporation, which owns more than 70% of the stock of Capitol. 1 EMI owns a group of subsidiaries, fourteen of which operate outside of the United Kingdom. EMI, through its subsidiaries other than Capitol, is engaged in the same business as Capitol, but primarily in markets other than in the United States. In addition, EMI and its foreign subsidiaries, other than Capitol, are engaged in diversified businesses unrelated to the recording industry.
In the seven years involved in this tax dispute, 1968-1974, Capitol has paid annual income taxes in California. 2 Neither EMI nor its subsidiaries, other than Capitol, have filed any income tax returns with the United States or any state therein. However, EMI and its other subsidiaries have paid income taxes in their respective home countries.
The Franchise Tax Board, State of California ("FTB"), contends that California law requires a combined report of a taxpayer, including all commonly owned or controlled corporations that are engaged in a unitary business. The FTB has determined that Capitol, EMI and other EMI subsidiaries are engaged in a single business. Therefore, the FTB has proposed to assess against Capitol an additional tax liability for the seven years in question, based on the state's "unitary method" of taxation. 3 It is this proposed assessment that Capitol and EMI challenge.
Application of the unitary scheme under California law, as proposed by the FTB, involves the combining of the net incomes of Capitol, EMI, and all of EMI's other subsidiaries, related to the music portion of their businesses, and the apportioning of that combined income between California and the rest of the world, based on a formula using the California ratio of property, payroll, and sales, to the world-wide figures for the same factors. 4
In the course of the FTB's investigation of Capitol, it has demanded that Capitol provide certain business records of EMI, and EMI's other subsidiaries, under the threat that Capitol's failure to comply would result in a penalty assessment. EMI informed Capitol that it would not provide some of the information demanded because, under the Official Secrets Act of the United Kingdom, some of the information (presumably information related to military contracts entered into by EMI and the British government) is not disclosable. EMI refused to provide other information on the grounds that it either lacked access to such information, or because it asserts that California lacks jurisdiction over EMI and its non-United States subsidiaries.
Capitol filed a protest with the FTB concerning the proposed assessment, which is still pending. 5 In addition, Capitol has petitioned the FTB to authorize the use of a reporting scheme other than the unitary method, as applied to the proposed assessment. 6 Subsequent to oral argument on appeal, the FTB denied that petition. 7
Capitol filed its action in United States District Court against William Bennett, Kenneth Cory, Richard Silberman and Martin Huff ("Board Members"), individually and as members of the FTB. 8 Capitol seeks injunctive and declaratory relief to prevent the proposed assessment. Essentially, Capitol argues that unitary treatment of its business and that of EMI and other EMI subsidiaries is inappropriate under California law and violates the Foreign Commerce Clause of the United States Constitution, Art. I, Sec. 8, Clause 3. 9
EMI filed its action in federal court against the identical defendants and asserts essentially the same claims as Capitol. 10 Additionally, EMI alleges that the proposed assessment on its subsidiary Capitol would negatively affect its stock holdings in Capitol. Both EMI and Capitol also seek relief from the FTB's demand that Capitol provide certain records of EMI and its foreign subsidiaries.
The Board Members filed motions to dismiss both actions. Capitol and EMI then filed motions for summary judgment. The district court treated the Board Members' motions as motions for summary judgment, pursuant to Federal Rule of Civil Procedure 56. The district court denied Capitol's and EMI's motions and granted the Board Members' motions on the ground that the Anti-Injunction Act precluded subject matter jurisdiction because a "plain, speedy and efficient" state court remedy existed for the claims asserted by Capitol and EMI. 28 U.S.C. § 1341. 11 Capitol and EMI appeal from that order.
Section 1341 provides that "district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under state law where a plain, speedy and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1341. 12 This statute has its roots in equity practice, the principles of federalism, and in recognition of the need of a state to administer its own fiscal operations. Tully v. Griffin, Inc., 429 U.S. 68, 73, 97 S.Ct. 219, 222, 50 L.Ed.2d 227 (1976); Great Lakes Dredge & Dock Co. v. Huffman, 319 U.S. 293, 298, 63 S.Ct. 1070, 1073, 87 L.Ed. 1407 (1943) ("Great Lakes"). This Court has held that Section 1341 also generally bars actions for declaratory relief against the assessment or collection of state taxes. See Housing Authority of the City of Seattle v. State of Washington, 629 F.2d 1307, 1310 (9th Cir. 1980); 13 see also Great Lakes, 319 U.S. at 300, 63 S.Ct. at 1074. The jurisdictional bar of Section 1341 is not avoided by challenging the constitutionality of the state statute that authorizes the subject assessment or collection. Mandel v. Hutchinson, 494 F.2d 364, 366 (9th Cir. 1974) citing Matthews v. Rodgers, 284 U.S. 521, 525-26, 52 S.Ct. 217, 219, 76 L.Ed. 447 (1932). The issue here is whether California affords Capitol and EMI a "plain, speedy and efficient" remedy.
We first address the state remedies available to Capitol. Under California law, a suit for an injunction, declaratory relief, or other equitable process to prevent or enjoin the assessment or collection of any taxes is forbidden. Section 32, Art. XIII, Calif.Const.; Cal.Rev. & Tax Code § 26101 (). California, however, does provide corporate taxpayers with administrative and judicial remedies for challenging assessments. The taxpayer may petition the FTB to seek authorization to use a method other than the unitary method of reporting. Cal.Rev. & Tax.Code § 25137. 14 In addition, a taxpayer that believes it has been illegally or excessively assessed may file a protest with the FTB. Cal.Rev. & Tax.Code § 25664. 15 If the protest is denied, the taxpayer may file an appeal with the California State Board of Equalization. Cal.Rev. & Tax.Code § 25667. 16 Upon the disposition of such an appeal, and payment of the assessed tax, the taxpayer may bring an action in state court against the FTB for a refund. Cal.Rev. & Tax.Code § 26102. 17
This Court has held that such administrative proceedings, followed, if necessary, by a trial de novo in state court, provide a taxpayer with an adequate remedy, for purposes of Section 1341. See Mandel, 494 F.2d at 367; 18 Aronoff v. Franchise Tax Board of the State of California, 348 F.2d 9, 11 (9th Cir. 1965) (); 19 see also Harsh California Corp. v. County of San Bernardino, 262 F.2d 626 (9th Cir. 1958); Adams County v. Northwestern Pacific Railway Co., 115 F.2d 768, 775 (9th Cir. 1940) (). 20
Capitol argues, however, that the application of the doctrine of exhaustion of administrative remedies renders its state remedies far less "speedy and efficient" than a declaratory or injunctive action in federal court.
It is unclear to what extent a taxpayer must exhaust its administrative remedies before bringing a refund action in California state court. A taxpayer can expedite the state proceedings by paying the proposed...
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