10 Cal.App.4th 1742, C003388, Barclays Bank Internat. Ltd. v. Franchise Tax Bd.

Docket Nº:C003388
Citation:10 Cal.App.4th 1742, 14 Cal.Rptr.2d 537
Opinion Judge:[11] Davis
Party Name:Barclays Bank Internat. Ltd. v. Franchise Tax Bd.
Attorney:[7] John K. Van de Kamp and Daniel E. Lungren, Attorneys General, Timothy G. Laddish, Assistant Attorney General, Robert F. Tyler and Robert D. Milam, Deputy Attorneys General, for Defendant and Appellant. [8] Joanne M. Garvey, Joan K. Irion, Teresa M. Maloney, and Heller, Ehrman, White & McAulif...
Case Date:November 20, 1992
Court:California Court of Appeals

Page 1742

10 Cal.App.4th 1742

14 Cal.Rptr.2d 537



FRANCHISE TAX BOARD, Defendant and Appellant.

BARCLAYS BANK OF CALIFORNIA, Plaintiff and Respondent,


FRANCHISE TAX BOARD, Defendant and Appellant.


California Court of Appeal, Third District

November 20, 1992

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        John K. Van de Kamp and Daniel E. Lungren, Attorneys General, Timothy G. Laddish, Assistant Attorney General, Robert F. Tyler and Robert D. Milam, Deputy Attorneys General, for Defendant and Appellant.

        Joanne M. Garvey, Joan K. Irion, Teresa M. Maloney, and Heller, Ehrman, White & McAuliffe for Plaintiffs and Respondents.

        Lawrence V. Brookes, Valentine Brookes, Jane H. Barrett, F. Eugene Wirwahn, David F. Levi, United States Attorney, William S. Rose, Jr., Assistant United States Attorney General, Gary R. Allen, David English Carmack, John J. McCarthy and Richard A. Correa, as Amici Curiae on behalf of Plaintiffs and Respondents.

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        DAVIS, J.—

        In this case we originally concluded that California's unitary tax method of worldwide combined reporting (based on Rev. & Tax. Code, §§ 25101, 25120-25139), as applied to foreign-based unitary corporate groups, was unconstitutional under the foreign commerce clause in light of the "one-voice" component of judicially established dormant foreign commerce clause analysis. (U.S. Const., art. I, § 8, cl. 3; Japan Line, Ltd. v. County of Los Angeles (1979) 441 U.S. 434 [60 L.Ed.2d 336, 99 S.Ct. 1813]; Container Corp. v. Franchise Tax Bd. (1983) 463 U.S. 159 [77 L.Ed.2d 545, 103 S.Ct. 2933]; Wardair Canada v. Florida Dept. of Revenue (1986) 477 U.S. 1 [91 L.Ed.2d 1, 106 S.Ct. 2369].) In Barclays Bank Internat. Ltd. v. Franchise Tax Bd. (1992) 2 Cal.4th 708 [8 Cal.Rptr.2d 31], the California Supreme Court disagreed with our conclusion and remanded this matter to us. Pursuant to that remand, we have been directed to consider whether the administrative burden for a foreign-based unitary corporate group (such as exemplified by plaintiffs) in complying with worldwide combined reporting violates either the nondiscrimination component of dormant commerce clause analysis (Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274 [51 L.Ed.2d 326, 97 S.Ct. 1076]; Japan Line, supra, 441 U.S. 434) or due process. (Barclays, supra, 2 Cal.4th at pp. 742-743.) We conclude that neither of these principles is violated on "compliance burden" grounds by California's application of worldwide combined reporting to plaintiffs in the context of a properly applied regulation (Cal. Code Regs., tit. 18, § 25137-6) governing such reporting.


        When a corporation conducts business in more than one jurisdiction, either through branches or subsidiaries, the proper allocation of income for tax purposes becomes an issue. Essentially, two methods of allocating income have evolved to resolve this issue: the arm's-length/separate accounting method and the unitary business/formula apportionment method. As to multinational corporations, California employs a common variant of the unitary method called worldwide combined reporting (WWCR).

        Under the arm's-length/separate accounting method, the various affiliated corporations of a multijurisdictional enterprise are viewed as separate from one another and the income attributable to any particular jurisdiction is determined on the basis of internal accounting records reflecting the activity of the affiliate within that jurisdiction. To preclude tax- manipulative intercorporate transfers of goods, services or other value, this accounting method

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requires that the tax reporting entity deal at "arm's length" with its affiliated businesses as if they were simply unrelated entities dealing in the marketplace.

        In contrast, under the unitary business/formula apportionment method of accounting employed by California (WWCR), the affiliated corporations of a multijurisdictional enterprise are treated as units of a single business—that is, as a "unitary group." (Cal. Code Regs., tit. 18, § 25137-6.) If a corporation doing business in California is deemed to be part of a unitary group, the total income for that group, including corporations or affiliates operating wholly outside California or the United States for that matter, is apportioned to California by a three-factor formula. The formula takes into account property, payroll, and sales (revenue in this case) for the group in California, as a fraction of total worldwide property, payroll, and sales. (See Rev. & Tax. Code, §§ 25128-25136; Note, State Worldwide Unitary Taxation: The Foreign Parent Case (1985) 23 Colum. J. Transnat'l L. 455, fn. 2 (hereafter 23 Columbia Journal).) The fraction is then multiplied against the unitary group's total income, producing an apportioned amount of such income taxable by California. Because intercorporate transactions are disregarded, it is unnecessary to make "arm's length" adjustments.

        The present controversy involves challenges to additional tax assessments for the year 1977 resulting from California's use of WWCR. Those additional assessments were levied after the defendant California Franchise Tax Board (Board or the Board) determined that the plaintiff taxpayers, Barclays Bank of California (Barcal) and Barclays Bank International (BBI), and their ultimate corporate parent, Barclays Bank Limited (BBL), as well as the significant subsidiaries of BBI and BBL, constituted a unitary group. Barcal was directed to pay an additional $152,420 and BBI an additional $1,678. Under protest Barcal and BBI (referred to collectively as plaintiffs) paid the additional taxes and this suit ensued.


        1. The Sufficiency of Plaintiffs' Claims for Refund

         As a preliminary matter, the Board contends that plaintiffs are foreclosed from litigating the compliance burden as it relates to the commerce clause and the due process clause because these issues were not set forth in plaintiffs' claims for refund. We disagree.

        The California Constitution in article XIII, section 32 provides that "[a]fter payment of a tax claimed to be illegal, an action may be maintained to

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recover the tax paid, with interest, in such manner as may be provided by the Legislature." (See Shiseido Cosmetics (America) Ltd. v. Franchise Tax Bd. (1991) 235 Cal.App.3d 478, 486-488 [286 Cal.Rptr. 690].) Pursuant to this constitutional authority, the Legislature has provided the procedures for seeking refunds in cases such as this one. Under Revenue and Taxation Code section 26074 (all further statutory references are to this code), a claim for refund must state the specific grounds upon which it is based. A taxpayer can bring an action only upon these grounds. (§ 26102.) In fact, courts are without jurisdiction to consider grounds not set forth in the claim. (Atari Inc., v. State Bd. of Equalization (1985) 170 Cal.App.3d 665, 672 [216 Cal.Rptr. 267].) This is because the specific constitutional source of legislative power to control tax refund suits mandates strict adherence to the administrative procedures set forth by the Legislature before a court action can be filed. (See Shiseido Cosmetics (America), supra, 235 Cal.App.3d at p. 488; Patane v. Kiddoo (1985) 167 Cal.App.3d 1207 [214 Cal.Rptr. 9]; Woosley v. State of California (1992) 3 Cal.4th 758 [___ Cal.Rptr.2d ___, ___ P.2d ___].)

         Here, plaintiffs did not file claims for refund as such. Instead, they filed written protests against proposed additional taxes (§ 25664) which were transformed by law into claims for refund. (§ 26078.) Under section 26078, if a taxpayer pays the protested tax before the Board decides the protest, the protest is treated as a claim for refund. Like a claim for refund, a section 25664 protest must specify the grounds upon which it is based.

        The plaintiffs set forth the following grounds in their consolidated protests based on the commerce clause and due process clause:

        "The Foreign Commerce Clause of the federal Constitution and treaties prohibit application of the unitary filing to the taxpayer.

        "Whether the Commerce Clause of the United States Constitution limits the taxation of a unitary business to income derived from activities carried on within the United States.

        "Whether the Due Process ... Clause[] of the United States Constitution limit[s] the application of the California method of reporting and tax to activities carried on within the United States because of arbitrary and unreasonable distortions created by including non-U.S. source income in the tax base or because the method falls unfairly on taxpayers owned by foreign affiliates whose income is used as a measure of the tax."

        We think these stated grounds are sufficient to encompass the "compliance burden" issues. The protests allege that California's method of reporting falls

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unfairly on taxpayers owned by foreign affiliates. The direct implication of this language is that foreign-based unitary groups bear an unfair burden in complying with WWCR. Two decisions provide some guidance regarding the specificity required for a refund claim. In Wallace Berrie & Co. v. State Bd. of Equalization (1985) 40 Cal.3d 60 [219 Cal.Rptr. 142], the court concluded that a particular issue had been raised in the claim although it was set forth only indirectly. (Id. at p. 66, fn. 2.) In King v. State Bd. of Equalization (1972) 22 Cal.App.3d 1006 [99 Cal.Rptr. 802], this court deemed a refund claim's assertion of " 'erroneously and illegally' collected...

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