Chase Brass & Copper Co. v. Franchise Tax Board.

Citation10 Cal.App.3d 496,95 Cal.Rptr. 805
CourtCalifornia Court of Appeals
Decision Date29 April 1970
PartiesCHASE BRASS AND COPPER CO., Incorporated, Plaintiff and Respondent, v. FRANCHISE TAX BOARD of the State of California, Defendant and Appellant. Civ. 25911.

Thomas C. Lynch, Atty. Gen., Ernest P. Goodman, Asst. Atty. Gen., John J. Klee, Jr., Deputy Atty. Gen., San Francisco, for appellant.

Valentine Brookes, Charles S. Franklin, San Francisco, for respondent; Kent, Brookes & Anderson, San Francisco, of counsel.

DEVINE, Presiding Justice.

Franchise Tax Board of the State of California (herein, the Board) appeals from a portion of a judgment in the amount of $231,257.32 plus interest, which was awarded to plaintiff in this lawsuit to recover taxes paid under protest. The taxes are upon the franchise to do business in California during the years 1954, 1955 and 1956; but in order to make the reading easier, operations and relationships among companies are sometimes narrated, in this opinion, in the present tense.

Plaintiff, Chase Brass and Copper Co., Incorporated, is a wholly owned subsidiary of Kennecott Copper Corporation. The principal question is whether plaintiff's business is unitary or nonunitary with Kennecott, and a lesser question is whether plaintiff's business is unitary with any of Kennecott's other subsidiary corporations. If the business be unitary, a much larger franchise tax would be imposed than if the business be nonunitary. It is not always unfavorable as to tax for a corporation to conduct a unitary business; for example, in the leading cases of Superior Oil Co. v. Franchise Tax Board, 60 Cal.2d 406, 34 Cal.Rptr. 545, 386 P.2d 33, and Honolulu Oil Corp. v. Franchise Tax Board, 60 Cal.2d 417, 34 Cal.Rptr. 552, 386 P.2d 40, the corporations asserted, successfully, that their California operations were unitary with those conducted outside the state.

In the case before us, plaintiff computed its California income, using an allocation formula which is applied to nonunitary enterprises and which takes into account sales, property and payroll within the state as compared with those existing outside. The Board disagrees with this method of computation; it has assessed taxes at a much higher figure on the 'unitary business' theory.

The Corporations

The parent is Kennecott Copper Corporation (called Kennecott herein), the nation's largest producer of copper, a New York corporation. It does no business in California. It mines, smelts and refines copper, gold, silver and molybdenite. The metals are mined in Utah, Nevada, Arizona and New Mexico. Metals other than copper are sold in operations completely unrelated to plaintiff. Copper is not fabricated by Kennecott, but is sold through a subsidiary of Kennecott, Kennecott Sales Corporation.

Braden Copper Company, a Maine corporation, wholly owned by Kennecott, operates mines in Chile. Ordinarily, it sold copper to the government of Chile and to purchasers in the world market, but not to buyers in the United States. In the years relevant hereto, however, because of shortages, it did sell, through Kennecott Sales Corporation, in this country. Plaintiff was a buyer. Braden does not fabricate; it sells fungible copper.

Bear Creek Mining Company, a Delaware corporation, owned by Kennecott, explored for metals in California in the relevant years, but made no significant discoveries. It is the third company in the mining group consisting of Kennecott, Braden, Bear Creek.

The procedure beyond mining and refining of copper, sales, is committed to Kennecott Sales Corporation (herein, Kennecott Sales), a New York corporation, wholly owned by Kennecott, which in 1934 took over the sales and activity theretofore assigned by Kennecott and Braden to an independent agency. The sale of copper by Kennecott and by Braden within the United States is done by Kennecott Sales. No sales are made in California; Kennecott does no business here. Its sales of copper which enters this state are completed elsewhere. Kennecott Sales charges Kennecott a commission on the sales.

Kennecott Wire and Cable Co. (herein, Kennecott Wire), a Rhode Island corporation, owned by Kennecott, manufactures copper rod, wire and cable for transmission of electricity. It uses refined primary copper, all of which it buys from Kennecott or Braden through Kennecott Sales. Its sales operation in California is largely through plaintiff. Kennecott Wire did not do business in California in the relevant years.

Finally, there is plaintiff, Chase Brass and Copper Co., Incorporated, a Connecticut corporation, wholly owned by Kennecott. Like Kennecott Wire, it is a manufacturer. Its products are brass (made of copper and zinc), bronze (copper and alloys, mostly tin), and copper rod, sheet, wire and tube. The manufacture is done entirely outside California. Copper is bought from Kennecott Sales, derived from Kennecott and Braden, to the extent of 80 to 84 percent of Chase's needed supply. Within California, Chase warehouses and sells its products and those of Kennecott Wire.

The Franchise Tax Law

When a corporation engages in multistate business, including business in California, and the business is unitary, there must be an allocation of income by formula. Separate accounting is not allowable, although it is usable for a corporation which, by operating here and elsewhere, conducts a nonunitary business. In the case of Chase itself, it was always recognized by the company that its own business is unitary, wherefore its own computation of the franchise tax was done according to formula. But the Board contends that the geographic unitary character of Chase is not all that is to be considered; there must also be taken into account the whole intercorporate parentage and affiliation of the Kennecott family. Mainly, it is the vertical aspect which is put before us: the relationship of Chase to Kennecott Sales, to Braden and to Kennecott. Secondarily, there is to be considered the horizontal relationship of Chase to Kennecott Wire.

Intercorporate unitary character of business, in which the activities of the parent are considered, under an appropriate factual situation, is a valid concept for taxing purposes. (Edison California Stores v. McColgan, 30 Cal.2d 472, 183 P.2d 16.) This holding of the Edison Stores case was but a logical sequence of the holding in Butler Brothers v. McColgan, 17 Cal.2d 664, 111 P.2d 334, in which a single company had operated through wholly controlled branches. In both cases, there were strong and embracing central controls. The general test which we are to apply is this: 'If the operation of the portion of the business done within the state is dependent upon or contributes to the operation of the business without the state, the operations are unitary.' (Edison California Stores v. McColgan, Supra, 30 Cal.2d at p. 481, 183 P.2d at p. 21; Superior Oil Co. v. Franchise Tax Board, 60 Cal.2d 406, 412, 34 Cal.Rptr. 545, 386 P.2d 33.) A more particular statement of the test is that a business is unitary if these circumstances are present: '(1) Unity of ownership; (2) Unity of operation as evidenced by central purchasing, advertising, accounting and management divisions; and (3) unity of use of its centralized executive force and general system of operation.' (Butler Brothers v. McColgan, Supra, 17 Cal.2d at p. 678, 111 P.2d at p. 341; Superior Oil Co. v. Franchise Tax Board, Supra, 60 Cal.2d at p. 412, 34 Cal.Rptr. 545, 386 P.2d 33.)

In applying these tests, we are considering a question of law only, because the facts, as placed before the trial court and before us, consist of a lengthy stipulation between the parties and some uncontradicted testimony. We must, therefore, make our own judgment on the question of law, and we cannot rest upon findings of fact made by the trial judge. (Standard Register Co. v. Franchise Tax Board, 259 Cal.App.2d 125, 129--130, 66 Cal.Rptr. 803; Household Finance Corp. v. Franchise Tax Board, 230 Cal.App.2d 926, 930, 41 Cal.Rptr. 565; Montgomery Ward & Co. v. State Board of Equalization, 272 A.C.A. 823, 828--829, 78 Cal.Rptr. 373. See also RKO Teleradio Pictures, Inc. v. Franchise Tax Board, 246 Cal.App.2d 812, 816, 55 Cal.Rptr. 299; Superior Oil Co. v. Franchise Tax Board, 60 Cal.2d 406, 413, 34 Cal.Rptr. 545, 386 P.2d 33.)

Unity of Ownership

As is usual in disputes of this kind, ownership of one corporation by another is present. This means, of course, that the owner (its stockholders and directors) expects, or at least hopes, that its subsidiary will make a profit. But more is required for a business to be unitary, that is, fulfilment of the other two tests.

Unity of Operation

Although there is not a clear demarcation between what is 'operation' and what is 'use,' in general it may be said that the acts falling within the category of 'operation' are the staff functions, and those within 'use' are the line functions.

The staff functions of a vertically integrated enterprise probably are not so markedly unitary as they are in a horizontally integrated business. This is so because, in the case of horizontal integration, functions such as central control of advertising of the same product, central purchasing, and the like are designed to give advantages to the business despite geographic differences. In the case of vertical integration involving various steps in the production and distribution, integration of staff functions probably will be considerably less. Nevertheless, when we consider each of the functions of Chase coming under the heading 'Unity of Operation,' in connection with those of its parent, Kennecott, we find considerable cooperation.

Purchasing: Under this heading, we consider the buying of items other than the purchase of copper, because copper buying is an essential 'line' function. As to the auxiliary supplies, it is stipulated that Chase had its own...

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