United States v. Toyota Motor Corp.

• Decision Date: 08 April 1983
• Docket Number: No. CV 83-0687-CHH.,CV 83-0687-CHH.
• Citation: 561 F. Supp. 354
• Court: U.S. District Court — Central District of California
• Parties: UNITED STATES of America, Petitioner, v. TOYOTA MOTOR CORPORATION, et al., Respondents.

561 F. Supp. 354

UNITED STATES of America, Petitioner, v. TOYOTA MOTOR CORPORATION, et al., Respondents.

No. CV 83-0687-CHH.

United States District Court, C.D. California.

April 8, 1983.

Stephen S. Trott, U.S. Atty., Charles H. Magnuson, Asst. U.S. Atty., Chief, Tax Div., Los Angeles, Cal., Daniel F. Ross, Trial Atty., Tax Div., Dept. of Justice, Washington, D.C., for petitioner.

Gibson, Dunn & Crutcher, Robert S. Warren, James G. Phillipp, Phillip L. Bosl, Los Angeles, Cal., for respondents Toyota Motor Sales, U.S.A., Inc. and Mr. Isao Makino.

Musick, Peeler & Garrett, Bruce A. Bevan, Jr., P.C., William McD. Miller, III, Los Angeles, Cal., Miller & Chevalier, Chartered, John S. Nolan, Jay L. Carlson, Mark L. Evans, Homer E. Moyer, Jr., Washington, D.C., for respondent Toyota Motor Corp.

MEMORANDUM OPINION

CYNTHIA HOLCOMB HALL, District Judge.

This is an action brought under section 7604 of the Internal Revenue Code, 26 U.S.C. § 7604,¹ to enforce two summonses,² one issued to Toyota Motor Corporation, a Japanese corporation ("Toyota Japan"), and the other to Toyota Japan's wholly-owned subsidiary, Toyota Motor Sales, U.S.A., Inc. ("Toyota U.S.A."). The Internal Revenue Service ("IRS") issued these summonses during the course of an audit of Toyota U.S.A.'s income tax liability for fiscal years 1975 through 1978, in order to determine whether Toyota U.S.A. shifted any of its income to its foreign parents³ and thereby avoid United States taxes. This inquiry is conducted pursuant to the provisions of Internal Revenue Code section 482, which states that:

In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.

In order to make a section 482 determination, the IRS summoned, among other items, certain books and records allegedly possessed by Toyota Japan. This memorandum opinion deals with four preliminary issues raised by Toyota Japan in opposing enforcement of the IRS summons: (1) whether the court has personal jurisdiction over Toyota Japan; (2) whether subject matter jurisdiction exists over the IRS enforcement petition; (3) whether venue is proper in the Central District of California; and (4) whether Toyota Japan was properly served with process.

The Court denied Toyota Japan's motion to dismiss on all four points in its Order of March 14, 1983, as amended March 29, 1983. The basis for that decision is set forth below:

I. JURISDICTIONAL FACTS

Toyota Japan is a corporation organized under the laws of Japan with its headquarters and principal place of business in Japan. It is primarily engaged in the manufacture and sale of motor vehicles, which are marketed in Japan, the United States, and other nations throughout the world. Toyota U.S.A., a California corporation headquartered in Torrance, California, is a wholly-owned subsidiary of Toyota Japan and is the exclusive importer of Toyota passenger cars, light duty trucks, and cab/chassis into the continental United States. All sales of Toyota vehicles are FOB Japan, and Toyota U.S.A. handles all shipping to and distribution within the United States. All advertising and marketing of Toyota products are handled by the United States subsidiary. Although Toyota U.S.A. is operated as a distinct corporate entity, with its own books, records, bank accounts, tax returns, financial statements, and accounting procedures, there is a significant overlap between the senior management and board of directors of the parent and the subsidiary. For example, Isao Makino, President of Toyota U.S.A., serves as Senior Managing Director of Toyota Japan, and both the President and Chairman of Toyota Japan serve as directors of Toyota U.S.A. In addition to the interlocking directorates of the parent and subsidiary, approximately two dozen employees of Toyota U.S.A. were formerly employed by Toyota Japan and, in all likelihood, will eventually return to the employment of the Japanese parent.⁴

Toyota Japan derives substantial economic benefits from the sales of its vehicles by its subsidiary in the United States. In fiscal year 1982, for example, Toyota U.S.A.'s sales exceeded $5 billion, and the subsidiary paid $10 million in dividends to the parent. Toyota U.S.A. imports and sells over 600,000 vehicles each year, and employs approximately 2,100 people throughout the United States. These operations produce profits for Toyota Japan, both from the dividends paid it by Toyota U.S.A. and from Toyota U.S.A.'s purchases of automobiles from the parent corporation. Indubitably, the management, directors, and owners of Toyota Japan knew and intended that the automobiles manufactured by their corporation would be purchased by consumers in the United States.

II. PERSONAL JURISDICTION

The Court's adjudicatory authority over Toyota Japan requires a two-step test. An outer boundary of in personam jurisdiction is defined for a federal district court by the due process clause of the Fifth Amendment, and requires considerations of fairness and comity. Within this boundary, or in some cases coextensive with it, is the authority conferred upon the Court by statute. See Taubler v. Giraud, 655 F.2d 991, 993 (9th Cir.1981); Data Disc, Inc. v. Systems Technology Associates, Inc., 557 F.2d 1280 (9th Cir.1977); Stabilisierungsfonds fur Wein v. Kaiser Stuhl Wine Dist. Pty. Ltd., 647 F.2d 200, 203 (D.C.Cir.1981) (hereinafter cited as "Kaiser Stuhl").

In this case, personal jurisdiction is conferred by 26 U.S.C. §§ 7402(b) and 7604(a). The Court's initial inquiry is whether Toyota Japan can be compelled to appear in this court by the terms of these statutes. If so, the Court must then determine whether this compulsion is constitutionally permitted.

A. JURISDICTION CONFERRED BY STATUTE

Section 7604(a) of the Internal Revenue Code provides that the IRS may bring a petition to enforce a summons in the "district court for the district in which the person summoned resides or is found." The parties agree that Toyota Japan "resides" in Japan by virtue of the fact that it is organized under the laws of Japan and has its principal place of business in that nation. The initial statutory issue presented is whether Toyota Japan can be "found," for jurisdictional purposes, in the Central District of California.

Statutory interpretation must begin with the language of the statute. In this instance, there does not appear to be any case law interpreting "found" in the context of this statute. The legislative history is silent concerning the congressional intent underlying the enactment of this provision.⁵ Because of this dearth of authority, the parties have based their arguments on the interpretation given "found" in other statutes defining judicial power. Toyota Japan initially argues that a construction of "found" should be based upon the decision in People's Tobacco Co. v. American Tobacco Co., 246 U.S. 79, 38 S.Ct. 233, 62 L.Ed. 587 (1918), which gave the word a restrictive interpretation in the context of the Sherman Act of 1890. This argument is flawed, as People's Tobacco was based upon the physical power concepts discarded in International Shoe v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945).⁶ More recent cases, by contrast, have construed "found" to evince a legislative intent to expand adjudicatory authority. See, e.g., Varsic v. United States District Court, 607 F.2d 245 (9th Cir.1979). This approach is well illustrated by the interpretation given the copyright venue provisions of 28 U.S.C. § 1400(a), where it has been said that "a corporation is `found' in any district in which personal jurisdiction might be obtained over it." Mode Art Jewelers Co. v. Expansion Jewelry Ltd., 409 F.Supp. 921, 923 (S.D.N.Y.1976). Given the Ninth Circuit's view in Varsic, there are no semantical constraints to reading "found" as conferring broad jurisdictional authority upon the district courts.

An expansive reading of "found" is supported by the statutory scheme authorizing IRS summons power. Internal Revenue Code section 7602 states that the IRS may examine any relevant records in the custody of any person to determine the liability of any person for any internal revenue tax.⁷ The apparent breadth of this authority has been repeatedly confirmed by the Supreme Court, most recently in United States v. Euge, 444 U.S. 707, 711, 100 S.Ct. 874, 878, 63 L.Ed.2d 141 (1980):

This Court has consistently construed congressional intent to require that if the summons authority claimed is necessary for the effective performance of congressionally imposed responsibilities to enforce the tax Code, that authority should be upheld absent express statutory prohibition or substantial countervailing policies.

In the case at hand, the Government has alleged that Toyota Japan has custody of books, papers, records and other data necessary to determine the tax liability of Toyota U.S.A. Nothing in the language of section 7602 precludes issuance of a summons against a foreign parent corporation possessing information relevant to the taxation of its subsidiary.⁸ Instead, this sort of investigation appears to fall within the scope of inquiries authorized by section 482 of the Internal Revenue Code. When income flows from a subsidiary to its corporate parent, the IRS may seek to make adjustments that clearly reflect the subsidiary's income. See, e.g., E.I. du Pont de Nemours & Co. v. United States, 608 F.2d 445 (Ct.Cl. 1979), cert. denied, 445 U.S. 962, 100 S.Ct. 1648, 64 L.Ed.2d 237 (198...