Barclays Bank PLC v. Franchise Tax Bd. of Cal., 512 U.S. 298, 9 (1994)

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306

BARCLAYS BANK PLC v. FRANCHISE TAX BD. OF CAL.

Opinion of the Court

those corporations recognize on their own books. See Container Corp., 463 U. S., at 185.5

At one time, a number of States used worldwide combined reporting, as California did during the years at issue. In recent years, such States, including California, have modified their systems at least to allow corporate election of some variant of an approach that confines combined reporting to the United States' "water's edge." See 1 Hellerstein & Hell-erstein, supra n. 1, ¶ 8.16, at 8-185 to 8-187. California's 1986 modification of its corporate franchise tax, effective in 1988, 1986 Cal. Stats., ch. 660, § 6, made it nearly the last State to give way. 1 Hellerstein & Hellerstein, supra n. 1,

¶ 8.16, at 8-187.

California corporate taxpayers, under the State's water's edge alternative, may elect to limit their combined reporting group to corporations in the unitary business whose individual presence in the United States surpasses a certain threshold. Cal. Rev. & Tax. Code Ann. § 25110 (West 1992); see Leegstra, Eager, & Stolte, The California Water's-Edge Election, 6 J. St. Tax'n 195 (1987) (explaining operation of California's water's edge system). The 1986 amendment conditioned a corporate group's water's edge election on payment of a substantial fee, and allowed the California Franchise Tax Board (Tax Board) to disregard a water's edge election under certain circumstances. In 1993, California again modified its corporate franchise tax statute, this time to allow domestic and foreign enterprises to elect water's edge treatment without payment of a fee and without the threat of disregard. 1993 Cal. Stats., ch. 31, § 53; id., ch. 881,

5 Under the Internal Revenue Code, a foreign corporation reports only income derived from a United States source or otherwise effectively connected with the corporation's conduct of a United States trade or business. 26 U. S. C. §§ 881, 882, 884, 864(c). Domestic corporations must report all income, whether the source is domestic or foreign, § 11, though they receive a tax credit for qualifying taxes paid to foreign sovereigns, 26 U. S. C. §§ 901-908 (1988 ed. and Supp. IV).

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