Container Corp. of America v. Franchise Tax Bd.

• Citation: 173 Cal.Rptr. 121,117 Cal.App.3d 988
• Court: California Court of Appeals Court of Appeals
• Decision Date: 14 April 1981
• Parties: CONTAINER CORPORATION OF AMERICA, Plaintiff and Appellant, v. FRANCHISE TAX BOARD, Defendant and Respondent. Civ. 48990.

Page 121

173 Cal.Rptr. 121

117 Cal.App.3d 988

CONTAINER CORPORATION OF AMERICA, Plaintiff and Appellant, v. FRANCHISE TAX BOARD, Defendant and Respondent.

Civ. 48990.

Court of Appeal, First District, Division 4, California.

April 14, 1981.

Rehearing Denied May 4, 1981.

Hearing Denied June 17, 1981.

Franklin C. Latcham, Prentiss Willson, Jr., Morrison & Foerster, San Francisco, for plaintiff and appellant.

George Deukmejian, Atty. Gen., Neal J. Gobar, Deputy Atty. Gen., San Diego, for defendant and respondent.

CHRISTIAN, Associate Justice.

Container Corporation of America appeals from a judgment denying partial refund of corporation franchise taxes paid for the income years 1963, 1964 and 1965. We affirm the judgment.

The question is whether, under stipulated facts, appellant was properly treated as deriving income from sources both within and outside California (Rev. & Tax.Code, § 25101) ¹ on the basis that appellant and its foreign subsidiaries constituted a unitary enterprise.

Appellant, a Delaware corporation headquartered in Chicago, is engaged in the production and distribution of paperboard packaging materials. Appellant is subject to corporation franchise taxes on its activities in California. During the disputed tax years, appellant controlled 20 subsidiaries in Western Europe and Latin America. All these subsidiaries except one were engaged in the paperboard packaging business.

Appellant has assigned responsibility for its United States operations to regional vice-presidents, each responsible for corporate operations in his area. This same policy of decentralization was followed in setting up the foreign subsidiaries. Appellant's first foreign operation was established in Colombia in 1944. The Colombian group directed legal work, selected and trained personnel, and promoted local sales; the parent corporation managed the technical and financial aspects of the business and supplied some equipment and raw materials. All the foreign subsidiaries were managed predominately by local citizens. Self-reliance by the subsidiaries was encouraged.

During the years in question, 38 of appellant's approximately 13,400 employees were assigned to foreign subsidiaries; some other employees of appellant were transferred to foreign subsidiaries and were no longer on appellant's payroll. Appellant had no special aim of transferring employees to the foreign subsidiaries. Such transfers generally responded to a specific need of a subsidiary. If the subsidiary requested assistance from appellant in finding a person with particular qualifications, appellant might suggest one of its own employees. Employees transferred to foreign subsidiaries usually continued to draw some pay from appellant, and fringe benefits except participation in appellant's stock bonus plan were continued even after transfer. Language and cultural differences, and a perceived need to present an acceptable local image, did substantially inhibit transfer of employees from the parent corporation to the foreign subsidiaries.

Only three of appellant's executives dealt regularly with the foreign subsidiaries. Local employees were in day-to-day control, but all important moves of the subsidiaries were subject to review by appellant's management. Appellant and its foreign subsidiaries usually reached decisions by mutual consent, but appellant held local management responsible for the performance of foreign subsidiaries. Appellant was represented on the board of directors of most of the subsidiaries.

There was no regular program for training in the United States of employees of foreign subsidiaries. But 10 or 12 times a year a foreign employee came to the United States for several weeks to learn appellant's operations. The foreign subsidiaries paid the cost of these visits.

Appellant made loans to its subsidiaries totaling $7,704,987, $7,155,714 and $3,223,371, for the three disputed years. The subsidiaries also borrowed from local sources; appellant guaranteed approximately one-third of these loans.

The foreign subsidiaries' budgets were regularly sent to appellant for its information but specific approval was not required. Current financial data were furnished to appellant each month. The foreign subsidiaries provided appellant with a more detailed financial statement at the end of each year. Although appellant's management thus kept informed of operations of the foreign subsidiaries, most financial decisions were made by the management of the individual companies.

All the foreign subsidiaries except those in the Netherlands and Germany were audited by the accounting firm which appellant used for its own audits. On the other hand, tax returns to foreign governments were locally prepared. These returns reported only the revenue produced and costs incurred by the subsidiary in the taxing jurisdiction. Each subsidiary used local law firms.

Appellant purchased no raw materials or finished products from its subsidiaries and did not engage in joint marketing efforts with them. Appellant sold paperboard and raw materials in small amounts to the foreign subsidiaries; those materials could have been obtained from other sources. Appellant also purchased paper products from outside parties, for the benefit of the foreign subsidiaries. Appellant entered into technical service agreements with some subsidiaries and provided such services for other subsidiaries under informal arrangements. Appellant did not cooperate so extensively with any nonaffiliated companies.

Occasionally, appellant assisted subsidiaries in the acquisition of equipment and machinery. Some of the equipment was purchased directly from appellant. Appellant also sometimes acted as a sales broker for the foreign subsidiaries. Although this function could have been performed by independent brokers, the commissions charged by the latter would probably be higher than the charge appellant made for the same services.

Appellant contends that its California and out-of-state operations do not comprise a unitary enterprise to which respondent board may properly apply its formula for apportionment of income. Constitutional principles prohibit taxation in the absence of a link between the property to be taxed and the taxing entity. (See Mobil Oil Corp. v. Commissioner of Taxes (1980), 445 U.S. 425, 436-437, 100 S.Ct. 1223, 1231, 63 L.Ed.2d 510; Miller Bros. Co. v. Maryland (1954) 347 U.S. 340, 344-345, 74 S.Ct. 535, 538-39, 98 L.Ed. 744.) Appellant maintains that the "unitary method of ownership, use and operation of the business of the parent and its subsidiaries" was not established here. (See Edison California Stores v. McColgan (1947) 30 Cal.2d 472, 482, 183 P.2d 16.)

Because the parties submitted the case to the trial court on a stipulation, the case presents no conflicting evidence. Therefore, this court is not constrained by the substantial evidence rule. The trial court's findings are not binding on us and we must make our own determination of the questions of law presented by the stipulated facts. (Rice Growers' Association of California v. County of Yolo (1971) 17 Cal.App.3d 227, 230, 94 Cal.Rptr. 847, cert. den. 404 U.S. 941, 92 S.Ct. 286, 30 L.Ed.2d 255; Dealers Installation Service, Inc. v. State Bd. of Equal. (1970) 13 Cal.App.3d 395, 399, 90 Cal.Rptr. 888; Chase Brass & Copper Co. v. Franchise Tax Bd. (1970) 10 Cal.App.3d 496, 502, 95 Cal.Rptr. 805, cert. den. 400 U.S. 961, 91 S.Ct. 365, 27 L.Ed.2d 381; Standard Register Co. v. Franchise Tax Board (1968) 259 Cal.App.2d 125, 129-130, 66 Cal.Rptr. 803.)

A corporate taxpayer's income must be subjected to apportionment ² when it "is derived from or attributable to sources both within and without the State." (Rev. & Tax.Code, § 25101, set out in fn. 1, ante; Honolulu Oil Corp. v. Franchise Tax Bd. (1963) 60 Cal.2d 417, 425, 34 Cal.Rptr. 552, 386 P.2d 40; Superior Oil Co. v. Franchise Tax Bd. (1963) 60 Cal.2d 406, 417, 34 Cal.Rptr. 545, 386 P.2d 33.) "(T)he linchpin of apportionability in the field of state income taxation is a unitary-business principle." (Mobil Oil Corp. v. Commissioner of Taxes, supra, 445 U.S. 425, 439, 100 S.Ct. 1223, 1232, 63 L.Ed.2d 510.) The fairness of allocating to California a just proportion of the profits earned from a unitary business ³ is settled. (See Butler Bros. v. McColgan (1942) 315 U.S. 501, 509, 62 S.Ct. 701, 705, 86 L.Ed. 991; El Dorado Oil Works v. McColgan (1950) 34 Cal.2d 731, 738, 215 P.2d 4, app. dism., 340 U.S. 801, 71 S.Ct. 52, 95 L.Ed. 589; Edison California Stores v. McColgan (1947) 30 Cal.2d 472, 478, 183 P.2d 16; Butler Bros. v. McColgan (1941) 17 Cal.2d 664, 677-678, 111 P.2d 334, aff'd in 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991; Handlery v. Franchise Tax Bd., supra, 26 Cal.App.3d 970, 974, 103 Cal.Rptr. 465.)

The propriety of applying the unitary concept in taxing foreign corporations was established in Butler Bros. v. McColgan, supra, 17 Cal.2d 664, 111 P.2d 334. The court there noted that only in circumstances where the corporation's California business is "truly separate and distinct from its business without this state, so that the segregation of income may be made clearly and accurately, that the separate accounting method may properly be used." (Id., at pp. 667-668, 111 P.2d 334.) The court set out a three-part test to determine the unitary nature of a taxpayer's business: "(1) unity of ownership; (2) unity of operation as evidenced by central purchasing, accounting and management divisions; and (3) unity of use in its centralized executive force and general system of operation." (Id., at p. 678, 111 P.2d 334; see Honolulu Oil Corp. v. Franchise Tax Bd., supra, 60 Cal.2d 417, 423, 34 Cal.Rptr. 552, 386 P.2d 40; Superior Oil Co. v. Franchise Tax Bd., supra, 60 Cal.2d 406, 412, 34 Cal.Rptr. 545 386 P.2d 33; John Deere Plow Co. v. Franchise Tax Bd. (1951) 38 Cal.2d 214, 229, 238 P.2d 569, app. dism., 343 U.S. 939, 72 S.Ct. 1036, 96 L.Ed. 1345; Edison California Stores...