Alcan Aluminum Ltd. v. Franchise Tax Bd. of State of Cal.

• Decision Date: 19 October 1988
• Docket Number: 87-2295,Nos. 87-2239,s. 87-2239
• Parties: ALCAN ALUMINIUM LIMITED, Plaintiff-Appellant, v. FRANCHISE TAX BOARD OF the STATE OF CALIFORNIA, et al., Defendants-Appellees. IMPERIAL CHEMICAL INDUSTRIES PLC, Plaintiff-Appellant, v. FRANCHISE TAX BOARD OF the STATE OF CALIFORNIA, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 688

860 F.2d 688

57 USLW 2289

ALCAN ALUMINIUM LIMITED, Plaintiff-Appellant, v. FRANCHISE TAX BOARD OF the STATE OF CALIFORNIA, et al.,

Defendants-Appellees.

IMPERIAL CHEMICAL INDUSTRIES PLC, Plaintiff-Appellant, v. FRANCHISE TAX BOARD OF the STATE OF CALIFORNIA, et al.,

Defendants-Appellees.

Nos. 87-2239, 87-2295.

United States Court of Appeals Seventh Circuit.

Argued Jan. 20, 1988.

Decided Oct. 19, 1988 ^*

Rehearing and Rehearing En Banc Denied Jan. 9, 1989.

Lawrence A. Salibra, Alcan Aluminum Corp., Cleveland, Ohio, James M. Carter, ICI Americas Inc., Wilmington, Del., for plaintiff-appellant.

Patricia Streloff, Office of Atty. Gen. of Cal., San Francisco, Cal., for defendants-appellees.

Before CUDAHY, FLAUM and RIPPLE, Circuit Judges.

CUDAHY, Circuit Judge.

Alcan Aluminium Limited ("Alcan") and Imperial Chemical Industries PLC ("Imperial"), two foreign corporations with American subsidiaries that do business in California, appeal from the district court's dismissal of their constitutional challenge to California's franchise tax. The district court found that the parent companies were injured only in their capacity as shareholders and therefore lacked standing under the well established rule that shareholders must ordinarily demonstrate a direct and independent injury to bring suit. Alcan Aluminium Ltd. v. Franchise Tax Bd., Nos. 84 C 6932, 84 C 8902, mem. op. at 8-10 (N.D.Ill. July 29, 1987) . We find that Alcan and Imperial have incurred injuries that are sufficiently direct and independent of the injuries incurred by their subsidiaries to confer standing. We therefore reverse and remand.

I.

Appellants are foreign corporations with majority interests in domestic companies that conduct business in California. Alcan, a Canadian company, is the sole stockholder of Alcan Aluminum Corporation ("Alcancorp"), an Ohio corporation with operations in California. ¹ Imperial, an English holding company, owns over fifty percent of ICI Americas, Inc. ("Americas"), a Delaware corporation that also conducts business in California. California's Franchise Tax Board ("FTB") has assessed, or is in the process of assessing, taxes against both Alcancorp and Americas under California's franchise tax law. See Cal.Gov't Code Secs. 15700-15703 (West 1980 & Supp.1988); Cal.Rev. & Tax Code Sec. 26422 (West 1979). ²

California does not employ conventional geographic or transactional accounting techniques to determine the locally taxable income of California businesses that transact business with affiliated companies outside the state. Instead, California, like a number of other states, employs a unitary tax approach--known in the California Code as the "unitary business/formula apportionment method." FTB first determines the scope of the "unitary business" in which a California corporation participates with affiliated companies and calculates the total earnings of this unitary enterprise. It then computes an allocation fraction for each affected taxpayer. This fraction is an unweighted average of three ratios, the ratios of California payroll to total payroll, California property value to total property value and California sales to total sales. Multiplying a corporation's allocation fraction by the total income of the unitary business in which it participates yields that corporation's taxable income for purposes of the franchise tax. Cal.Rev. & Tax Code Secs. 25128-25137 (West 1979). The Supreme Court has repeatedly rejected claims, in cases involving domestic parent companies, that this three-factor method violates the commerce clause or foreign commerce clause by unfairly overstating the income attributable to operations in the taxing state. See Container Corp. v. Franchise Tax Bd., 463 U.S. 159, 180-84, 103 S.Ct. 2933, 2948-50, 77 L.Ed.2d 545 (1983); Mobil Oil Co. v. Commissioner of Taxes, 445 U.S. 425, 438-39, 100 S.Ct. 1223, 1233, 63 L.Ed.2d 510 (1980); see also Moorman Mfg. Co. v. Bair, 437 U.S. 267, 271-75, 98 S.Ct. 2340, 2343-45, 57 L.Ed.2d 197 (1978). However, the Court has expressly left open the issue that appellants now seek standing to raise: whether application of the unitary tax to domestic subsidiaries of foreign corporations violates foreign commerce clause prohibitions on multiple taxation and the impairment of federal uniformity. See Container Corp., 463 U.S. at 189 n. 26 & 195 n. 32, 103 S.Ct. at 2952-53 n. 26 & 2956 n. 32; see also Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 446-51, 99 S.Ct. 1813, 1820-23, 60 L.Ed.2d 336 (1979) (discussing concerns about multiple taxation and the national uniformity that are peculiar to foreign commerce context). These questions have prompted heated diplomatic protest and threats of retaliation by the domiciliary countries of affected foreign corporations.

Alcancorp and Americas, appellants' subsidiaries, are in the midst of contesting the FTB's assessments before California administrative officials and courts. The Tax Injunction Act, 28 U.S.C. Sec. 1341 (1982), prohibits the subsidiaries from obtaining review of the constitutionality of the tax by a federal court until they have exhausted their California appeals. ³ The FTB maintains that the subsidiaries have standing to challenge the franchise tax under the foreign commerce clause in California court and, ultimately, in the United States Supreme Court. Appellants seem to assert, though their position on this point is confused and perhaps inconsistent, that their domestic subsidiaries have no standing to challenge the constitutionality of the franchise tax. ⁴ In any event, appellants have not given us any convincing reason to doubt that the California courts will entertain Alcancorp's and Americas' foreign commerce clause arguments; so we must proceed on the (perhaps not wholly clear) assumption that the subsidiaries can press these constitutional claims in state court.

This case requires us to revisit an issue identified but left unresolved in Alcan Aluminium Ltd. v. Department of Revenue, 724 F.2d 1294 (7th Cir.1984) ("Alcan II "). Alcan II dismissed Alcan's challenge to Oregon's unitary tax as unripe for adjudication until such time as Oregon actually determined that Alcancorp owed franchise taxes. Although we stressed that the dismissal on ripeness grounds implied no position "as to whether appellant will have standing to challenge appellees' actions if appellees do assess Alcancorp as part of a unitary business including appellant," we stated in dictum that if Alcan's factual allegations were taken as true neither Alcan's shareholder status nor the Tax Injunction Act's bar on federal district court suits for declaratory or injunctive relief against state taxes would prevent Alcan from obtaining standing once the dispute became ripe. Id. at 1299. The case before us places the standing issue, an issue which may have important implications for the growing conflict between the United States and nations where parent corporations affected by unitary taxes are domiciled, squarely before this court.

II.

Standing doctrine imposes two types of restrictions on litigants seeking access to federal courts: "constitutional limitations on federal court jurisdiction and prudential limitations on its exercise." Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 2205, 45 L.Ed.2d 343 (1975); see Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 99-100, 99 S.Ct. 1601, 1607-08, 60 L.Ed.2d 66 (1979). The FTB does not seriously contest plaintiffs' claims that their interest in challenging the California franchise tax satisfies the case or controversy requirement of article III, section 2. The plaintiffs' ownership interests in their domestic subsidiaries alone, considered apart from the direct harms they incur as participants in foreign commerce (discussed below), clearly give them "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).

The dispute here centers on the more elusive, prudential guidelines that the "Court [has] developed, for its own governance in the cases confessedly within its jurisdiction." Ashwander v. Tennessee Valley Auth., 297 U.S. 288, 346, 56 S.Ct. 466, 482, 80 L.Ed. 688 (1936) (Brandeis, J., concurring). The prudential aspect of the standing inquiry, like the constitutional aspect, derives fundamentally from "concern about the proper--and properly limited--role of the courts in a democratic society." Warth, 422 U.S. at 498, 95 S.Ct. at 2205; see also Duke Power Co. v. Carolina Envtl. Study Group, Inc., 438 U.S. 59, 80, 98 S.Ct. 2620, 2634, 57 L.Ed.2d 595 (1978); Peoples Gas, Light & Coke Co. v. United States Postal Serv., 658 F.2d 1182, 1195 (7th Cir.1981). No single formula has been devised for resolving all standing issues in the manifold contexts in which they arise; nothing in the Supreme Court's recent standing decisions belies the observation, now nearly two decades old, that "[g]eneralizations about standing to sue are largely worthless as such." Association of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 151, 90 S.Ct. 827, 829, 25 L.Ed.2d 184 (1970).

Two large and familiar features of the jumbled standing landscape stand out as useful guideposts for our inquiry in this case. First, it is clear that a plaintiff may only bring suit to vindicate a particularized, personal interest. Generalized grievances do not confer standing, nor do claims to relief resting on "the legal rights or interests of third parties." Warth, 422 U.S. at 499, 95 S.Ct. at 2205; see Tileston v. Ullman, 318 U.S. 44, 63 S.Ct. 493, 87 L.Ed. 603 (1943). This principle of judicial self-restraint prevents courts from interfering unnecessarily in "abstract questions of wide public significance" that "other governmental institutions may be...