235 Cal.App.3d 478, C008051, Shiseido Cosmetics (America) Ltd. v. Franchise Tax Bd.

Docket Nº:C008051
Citation:235 Cal.App.3d 478, 286 Cal.Rptr. 690
Opinion Judge:[10] Sims
Party Name:Shiseido Cosmetics (America) Ltd. v. Franchise Tax Bd.
Attorney:[7] McDonough, Holland & Allen, Richard E. Brandt and Robert R. Rubin for Plaintiff and Appellant. [8] Daniel E. Lungren, Attorney General, James B. Cuneo and John D. Schell, Deputy Attorneys General, for Defendant and Respondent.
Case Date:October 21, 1991
Court:California Court of Appeals

Page 478

235 Cal.App.3d 478

286 Cal.Rptr. 690

SHISEIDO COSMETICS (AMERICA) LTD., Plaintiff and Appellant,


FRANCHISE TAX BOARD, Defendant and Respondent.

Nos. C008051, C009273.

California Court of Appeal, Third District

Oct. 21, 1991.

Certified for Partial Publication [*]

Review Denied Feb. 20, 1992.

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[Copyrighted Material Omitted]

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McDonough, Holland & Allen, Richard E. Brandt and Robert R. Rubin, Sacramento, for plaintiff and appellant.

Daniel E. Lungren, Atty. Gen., James B. Cuneo, Supervising Deputy Atty. Gen., and John D. Schell, Deputy Atty. Gen., for defendant and respondent.

SIMS, Associate Justice.

In these cases consolidated for appeal, plaintiff Shiseido Cosmetics (America) Ltd. ("SCA") sought refund of franchise taxes resulting from defendant Franchise Tax Board ("FTB") assessments applying the unitary tax method of worldwide combined reporting (WWCR) (REV. & TAX.CODE, § 251011 et seq.) based on the determination that SCA was engaged in a unitary business with Shiseido Co., Ltd. ("Shiseido"), its Japanese parent

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company, and Shiseido's subsidiaries and affiliates located throughout the world. SCA claimed the application of WWCR violates the United States Constitution.

Both lawsuits involve tax years 1971 through 1975. In the first action, the trial court granted summary judgment in FTB's favor on the ground that SCA failed to exhaust administrative remedies by failing to file a postpayment administrative refund claim before filing suit.

SCA filed the second action after submitting a "perfected" refund claim to FTB for the same tax years that were at issue in the first lawsuit. The trial court granted FTB's motion for judgment on the pleadings in the second suit, on the ground the refund claim was untimely.

SCA appeals from both judgments, contending (1) exhaustion of administrative remedies does not apply, because its action raised only constitutional claims, beyond FTB's jurisdiction; (2) SCA sufficiently complied with the claim filing requirement; (3) FTB should be estopped from urging the exhaustion doctrine because its original answer to the first lawsuit admitted the allegation that SCA had exhausted administrative remedies; (4) the doctrine of equitable tolling served to toll the time within which SCA had to file a claim for refund; and (5) the trial court abused its discretion in allowing FTB to amend its answer to deny that SCA had exhausted administrative remedies.

In this published portion of the opinion we will conclude (1) SCA's constitutional claims are not exempt from the statutory requirement that SCA file a claim for refund; and (2) no sufficient refund claim was filed. In an unpublished portion of the opinion, we reject SCA's remaining contentions. We will therefore affirm the judgments.


In December 1978, SCA protested notices of proposed FTB assessments for tax years 1971 to 1975 based on Shiseido's worldwide operations, on the ground such assessment imposed a tax on companies not doing business in California or the United States, and on income from sources outside of California. The protest, filed under section 25137, 2 stated the proposed

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assessments were contrary to the statutes (§§ 25101, 25102) and "in contravention of the Commerce Clause and Foreign Relations Clause of the United States Constitution and the Due Process Clause of the Fourteenth Amendment to the United States Constitution and the Treaty of Friendship, Commerce and Navigation between the United States and Japan." 3

Apparently, the protest was unsuccessful, because in February 1980, SCA petitioned the State Board of Equalization (SBE) for redetermination. (§ 25667.)

In June 1980, FTB and SCA stipulated to remove the administrative appeal from SBE's active calendar pending the outcome of litigation by other taxpayers on the constitutional issue. In March 1984, SBE wrote to SCA requesting points and authorities, in light of a United States Supreme Court case 4 assertedly deciding the issue in FTB's favor. SCA responded that the United States Supreme Court had expressly declined to address the applicability of its decision to state taxation of domestic (United States) corporations with foreign (non-United States) parents or foreign subsidiaries.

On May 18, 1984, SBE replied: "We gather that you are heavily relying upon constitutional arguments which would essentially place this matter beyond the decision-making authority of our Board. If you are willing to concede all but the constitutional arguments and would stipulate with the Franchise Tax Board that the first final reported appellate decision on the constitutional issue in either of the two pending California court actions, i.e. Alcan Aluminum Corporation and Beecham, Inc., would be totally binding and dispositive of the appeal, we would have a firm basis for a continued deferral."

SCA wrote back that three classes of issues were involved: (1) constitutionality of utilization of the unitary business approach to taxation of

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corporate groups with non-United States parent companies; (2) whether the business of the local company, i.e., SCA, and the business of its foreign affiliates constitute a unitary business; and (3) assuming a unitary business and the constitutionality of the unitary business approach, whether the figures used by FTB correctly represented the tax base properly allocable to California.

SCA was willing to bind itself to the first legislative or judicial decision on the constitutional issue and to stipulate, for purposes of the appeal, to being a unitary business. However, it wanted to leave open the third issue, so that in the event FTB's tax approach was upheld, SCA could challenge FTB's calculations, which were based on figures taken from Moody's OTC Industrial Manual.

SBE informed SCA that FTB had objected to the continued deferral of the cases, because decision on the constitutional issues in the near future was remote, and facts relating to calculations tend to become lost or otherwise unavailable over time. Consequently, SBE set a date for filing of memoranda.

In April 1985, SCA withdrew its fact-based claims, stating in part: "[SCA] has decided not to contest the issues of whether its business constituted a unitary business together with that of its corporate parent, Shiseido Co., Ltd. of Tokyo, Japan and whether the amounts allocated and apportioned to California represent a proper allocation and apportionment of the tax base of the business to California for the years before [SBE] at this time. [p] The only issue remaining is the issue of whether the State of California has the legal right under the applicable provisions of the United States Constitution to impose the unitary basis of taxation on corporations incorporated in one of the United States, which have a non-United States parent company by bringing into the tax base the financial status and results of that non-United States parent company. That issue, as we both agree, is one which is beyond the jurisdiction of [SBE] under Section 3.5 of Article III of the Constitution of the State of California. 5 [p] Accordingly, [SCA] has decided not to file a memorandum or oppose the entry of a decision by

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[SBE] assessing additional franchise tax for the years in question as proposed by [FTB], subject to the reservation of its rights to pursue in the appropriate forum its claims under the United States Constitution as indicated above."

SBE sent a copy of SCA's April 1985 letter to FTB. In June 1985, SBE entered its decision sustaining FTB action on the protest against the proposed assessments and stating in part: "[SCA]'s decision not to contest the issues of whether [its] business constituted a unitary business with that of its corporate parent [ ], and whether the amounts allocated and apportioned to California represent a proper allocation and apportionment of the tax base of the business to California for the years at issue, left only a constitutional issue before the Board. The Board determined that section 3.5 of Article III of the California Constitution precludes it from deciding the constitutional issue."

In November 1985, SCA paid the tax and interest. The checkstubs and transmittal letter stated: "Paid under protest." Counsel for SCA later declared it had been his opinion, based on unspecified FTB public pronouncements and an unspecified conversation with an FTB director, that filing a claim for refund would be a futile act. According to a later statement by an FTB director, "The ordinary practice of the [FTB] upon receipt of such correspondence is to note its receipt and route it to the Claims Section for review. A clerk in the Claims Section refers it to an auditor for determination as to whether a valid claim has been filed. In our normal practice, these statements are not viewed as a valid claim. However, an inquiry would normally be sent to the taxpayer querying whether a claim was intended and indicating that a valid claim was not filed because no grounds were specified as to why a refund should be allowed. A reasonable opportunity is then provided to perfect such documents to a claim for refund. We have no evidence that any of these steps were undertaken in this case."

In January 1986, SCA filed a verified complaint, limiting the alleged ground for refund to its claim that the application of WWCR to a foreign parent unitary business violated the Due Process and Commerce Clauses of the United States Constitution, the laws of the United States, and the treaty of Friendship, Commerce and Navigation between the United States and Japan.

FTB's original answer to the complaint, filed in March 1986, admitted the complaint's allegation...

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