Standard Register Co. v. Franchise Tax Bd.

• Citation: 66 Cal.Rptr. 803,259 Cal.App.2d 125
• Court: California Court of Appeals
• Decision Date: 19 February 1968
• Parties: The STANDARD REGISTER COMPANY, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant. Civ. 24113.

Page 803

66 Cal.Rptr. 803

259 Cal.App.2d 125

The STANDARD REGISTER COMPANY, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant.

Civ. 24113.

Court of Appeal, First District, Division 3, California.

Feb. 19, 1968.

Rehearing Denied March 20, 1968.

Hearing Denied April 17, 1968.

Thomas C. Lynch, Atty. Gen. of California, Ernest P. Goodman, Asst. Atty. Gen., E. Clement Shute, Jr., Deputy Atty. Gen., San Francisco, for appellant.

Paul E. Anderson, Valentine Brookes, Richard A. Wilson, San Francisco, for respondent; Kent, Brookes & Anderson, San Francisco, Turner, Wells, Granzow & Spayd, Dayton, Ohio, of counsel

BRAY, Associate Justice ^*

This is an appeal by defendant from judgment, after court trial, in favor of plaintiff in the sum of $112,486.65, being refund of portions of franchise taxes for income years 1956 through 1959.

QUESTIONS PRESENTED

1. This court is not bound by the trial court's conclusions on undisputed facts.

2. Plaintiff was conducting a single unitary operation as its Pacific Division was not operated as an independent unit.

3. Applying the three-factor apportionment formula to Standard's net national income is not arbitrary.

RECORD

For the years 1956 through 1959, defendant assessed franchise taxes against plaintiff on the theory set forth in plaintiff's tax returns that plaintiff was conducting a single unitary business, including the operation of its Pacific Division. Accordingly, income from California sources was ascertained by comparing California property, payroll and sales for the entire business and applying the average of the resulting ratios to the company's total net income.

In 1961 plaintiff filed refund claims seeking an adjustment of its franchise tax for the years 1956 through 1959 by applying the tax formula to each of two separate business incomes, that is, to the Pacific Division operation income separately from the income from the Eastern Division's operations. Defendant contended that the former of these separate computations constitutes the income of plaintiff attributable to California.

Upon the refusal of defendant to grant the requested refund, plaintiff brought this action. The trial court found that in the years in question 'the Pacific Division and the Eastern Division of plaintiff did share unity of ownership but did not share unity of operations or unity of use * * * the Pacific Division was not a part of a unitary business with the Eastern Division of plaintiff. The Pacific Division was conducted as a separate and independent business * * *' That neither division contributed to nor was dependent upon the operations of the other division and that 'The use of the defendant's three-factor formula to allocate the net income of the Pacific Division is more fairly calculated to determine the net income derived by plaintiff from the State of California than is the use of the defendant's three-factor formula to the plaintiff's national net income.' Thereupon, the court gave judgment for a partial refund of the franchise taxes paid by plaintiff for the years in question, such refund being based upon the formula applied as if the Eastern and Pacific Divisions were separate business operations of plaintiff.

The Applicable Law.

Before discussing the evidence, it is well to consider the law applicable here. The California Bank and Corporation Franchise Tax is measured by income from California sources. During the years in question the basic statute relating to the method of determining the franchise tax of a taxpayer whose income is derived from sources within and without this state was section 25101 of the Revenue and Taxation Code which then provided in pertinent part: 'When the income of a taxpayer subject to the tax imposed under this part is derived from or attributable to sources both within and without the State, the tax shall be measured by the net income derived from or attributable to sources within this State. Such income shall be determined by an allocation upon the basis of sales, purchases, expenses of manufacture, pay roll, value and situs of tangible property or by reference to any of these or other factors or by such other method of allocation as is fairly calculated to determine the net income derived from or attributable to sources within this State; * * *'

In interpreting this section the courts have held that if a taxpayer having business both within and without this state conducts the California business separately and distinctly from its business elsewhere, a separate accounting method for California taxes may be used but if the California business is operated unitarily with the other business, then the tax formula of section 25101 must be applied to the entire business of the taxpayer.

In Superior Oil Co. v. Franchise Tax Bd. (1963) 60 Cal.2d 406, 411, 34 Cal.Rptr. 545, 548, 386 P.2d 33, 36, the court quoted from Butler Brothers v. McColgan (1941) 17 Cal.2d 664, 111 P.2d 334, stating: "It is only if its business within this state 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. Where, however, interstate operations are carried on and that portion of the corporation's business done within the state cannot be clearly segregated from that done outside the state, the unit rule of assessment is employed as a device for allocating to the state for taxation its fair share of the taxable values of the taxpayer. * * * If there is any evidence to sustain a finding that the operations of appellant in California during the year 1935 contributed to the net income derived from its entire operations in the United States, then the entire business of The test of what is the unitary nature of a business is set forth in Household Finance Corp. v. Franchise Tax Board (1964) 230 Cal.App.2d 926, 929, 41 Cal.Rptr. 565, 567, as follows: "(1) unity of ownership; (2) unity of operation as evidenced by central purchasing, advertising, accounting and management divisions; and (3) unity of use in its centralized executive force and general system of operation." The court also stated: '(I)f plaintiff's income is 'derived from or attributable to sources both within and without the State' (Rev. & Tax.Code, § 24301, now § 25101) 'then an allocation of total net income would naturally follow from the mandatory language of (this statute) and a separate accounting * * * could not be approved' (Superior Oil Co. v. Franchise Tax Board, supra, 60 Cal.2d p. 411, 34 Cal.Rptr. p. 548, 386 P.2d p. 36). '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, Inc. v. McColgan, 30 Cal.2d 472, 481, 183 P.2d 16, 21) and use of an allocation formula is required (Superior Oil Co. v. Franchise Tax Board, supra, 60 Cal.2d at pp. 416--417, 34 Cal.Rptr. p. 552, 386 P.2d p. 40).' (P. 929, 41 Cal.Rptr. p. 567.)

appellant is so clearly unitary as to require a fair system of apportionment by the formula method in order to prevent overtaxation to the corporation or undertaxation by the state." (See also Honolulu Oil Corp. v. Franchise Tax Bd. (1963) 60 Cal.2d 417, 34 Cal.Rptr. 552, 386 P.2d 40; Superior Oil Co. v. Franchise Tax Bd. (1963) 60 Cal.2d 406, 34 Cal.Rptr. 545, 386 P.2d 33.)

This Court's Function.

Plaintiff erroneously contends that this court's only duty is to see whether there is substantial evidence to support the trial court's findings. The correct rule, however, as the evidence in the case at bench is not conflicting, is that the determination of whether Standard's operation was a unitary one is a question of law involving the classification of uncontradicted facts. Therefore, the trial court's findings are not binding on this court. Standard contends that there is a conflict in the facts which was resolved by the trial court. However, an examination of the record discloses that there is no conflict in the facts themselves, it is the conclusions to be drawn therefrom which Standard claims, in effect, are in conflict. As to these conclusions, this court is not bound by the trial court's determination. We see no difference in the situation here than in any other appellate matter where there is no conflict in the evidence. As said in Automatic Canteen Co. of America v. State Board of Equalization (1965) 238 Cal.App.2d 372, at page 381, 47 Cal.Rptr. 848, at page 853 of its opinion, the court stated: 'Scope of Review. Since the issues here involve the applicability of taxing statutes to uncontradicted facts,8 we are

confronted purely with a question of law and are not bound by the findings of the trial court. (fn. 9 omitted.) (Citations.)'

In Household Finance Corp. v. Franchise Tax Board, supra, 230 Cal.App.2d 926, 41 Cal.Rptr. 565, the trial court made specific findings of fact to the effect that the business conducted by Household in California was separate from its other business. In spite of the findings by the trial court, the Court of Appeal reversed the trial court and held that Household conducted a unitary business within and without the State of California. At page 930, 41 Cal.Rptr. at page 567 of the opinion the court stated: 'To the extent that the findings of fact conflict with the views we have expressed, they are either contrary to the stipulated facts or are but conclusions of law, and thus not binding on appeal.' (See also RKO Teleradio Pictures, Inc. v. Franchise Tax Board (1966) 246 Cal.App.2d 812, 816 Therefore, it is the duty of this court to examine the evidence and determine whether the trial court's conclusions therefrom are warranted, particularly Ultimate Finding No. 3, which states: 'The Pacific Division did not contribute to and was not dependent upon the operations of the Eastern Division; and similarly the Eastern...