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White House Aids State in Tax Dispute : Courts: In policy shift from past two administrations, U.S. no longer opposes California's position in legal fight over taxes on foreign-owned businesses. At stake is $4 billion in disputed levies.


WASHINGTON — The White House, abandoning a policy pursued by the Ronald Reagan and George Bush administrations, has decided to side with California officials in their court fight to keep as much as $4 billion in taxes collected from foreign-owned businesses operating in the state.

The Administration's decision came after a high-level review that ended in an Oval Office meeting Tuesday, and it reflects Clinton's intense political interest in California and the state's shaky economy, officials said.

The lawsuit, now before the Supreme Court, could ultimately force the state to pay back $4 billion in taxes collected in earlier years. The White House position on the suit is certain to draw protests from foreign governments whose companies have urged the courts to throw out the method California once used to calculate taxes owed by foreign-owned businesses.

Although little-known to the public, the case has been the subject of intense lobbying behind the scenes by state officials, including legislative leaders and Gov. Pete Wilson, and by foreign governments and businesses.

Administration officials declined to go as far as California had asked in the case and will not actively defend the state's interests before the high court. Instead, Clinton has directed the solicitor general's office, which represents the government before the high court, to stay neutral.

But lawyers familiar with the case said that the White House decision for neutrality is significant because it will mean abandoning the position of the previous administrations. The change, in turn, is likely to prompt the Supreme Court to allow California's policy to stand.

"Silence is golden," said Brad Sherman, chairman of the state Board of Equalization, who has led California's lobbying campaign. Assuming that the high court follows the Administration's lead, the state will receive more than $1 billion currently held in escrow, Sherman said. Should the state lose in the high court, it will have to rebate nearly $1 billion to foreign companies and could face additional claims of more than $3 billion.

State Sen. David A. Roberti (D-Van Nuys), president pro-tem of the California Senate, said that Clinton's decision "could save California billions of dollars at just the time when we need it the most. It really does help for California to have a friend in the White House."

The issue at the heart of the case involves how California determines the amount of income actually earned by a foreign-owned company that does business in the state.

California has followed a rule known as unitary taxation that treats all of a multinational company's worldwide businesses as a single entity and levies taxes based, essentially, on how much of that business is conducted within the state. Most other states, by contrast, allow multinational companies to calculate the income of their domestic subsidiaries separately.

The California method, foreign companies have complained, subjects them to unfair taxation on income never earned in the state. State officials argue that other methods of calculating income allow companies to evade taxation by bookkeeping methods that shift income from domestic subsidiaries to overseas units.

California changed its law in 1988 and now uses a form of unitary taxation more favorable to foreign companies. But the court challenges continued afterward over back taxes.

Last year, the state Supreme Court upheld California's tax policy. Barclay's Bank, a British-owned corporation, appealed that ruling to the U.S. Supreme Court.

Clinton's decision marks a sharp reversal of a policy dating to 1985, when the Reagan Administration, responding to appeals by foreign governments led by Britain, actively urged U.S. courts to throw out California's law. Former President Reagan and then-Secretary of State George P. Schultz personally filed declarations with the courts saying that California's policy was harmful to U.S. diplomatic interests.

In abandoning that position, Administration officials sought to cushion the blow by saying that they would work with foreign governments to resolve disputes about the state's current law but that they did not want to see the courts force California to repay more than a decade's worth of tax money that has long since been spent.

"Whatever we work out as our final policy, for us to go out of our way to file a brief about a repealed law in a case that could be so harmful to the California economy, was not something we were going to do," said one senior White House official.

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