Ceridian Corp. v. Franchise Tax Board

• Decision Date: 21 December 2000
• Citation: 85 Cal.App.4th 875,102 Cal.Rptr.2d 611
• Court: California Court of Appeals Court of Appeals
• Parties: (Cal.App. 1 Dist. 2000) CERIDIAN CORP., Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant. A084298 Filed:

102 Cal.Rptr.2d 611 (Cal.App. 1 Dist. 2000)

CERIDIAN CORP., Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant.

A084298

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA, FIRST APPELLATE DISTRICT, DIVISION THREE

Filed: 12/21/00

(San Francisco County Super. Ct. No. 983-377)

Trial Judge: Hon. Carlos Bea

Counsel for Appellant: Bill Lockyer, Attorney General; Randall P. Borcherding, Supervising Deputy Attorney General; Julian O. Standen, Deputy Attorney General

Counsel for Respondent: James P. Kleier, Julie A. Aguilar, PRESTON GATES & ELLIS

Counsel for Amicus Curiae Wells Fargo & Company, in Support of Respondent:

Counsel for Amicus Curiae California Taxpayers' Association, in Support of Respondent: Thomas H. Steele Amy L. Silverstein, Mariah A. Panza MORRISON & FOERSTER, Wm. Gregory Turner CALIFORNIA TAXPAYERS' ASSOCIATION

CERTIFIED FOR PUBLICATION

Parrilli, J.

In this case we hold that Revenue and Taxation Code section 24410 violates the commerce clause of the United States Constitution.

The Franchise Tax Board of the State of California (Board) appeals from a judgment awarding a refund to Ceridian Corporation ("Ceridian"). The trial court ruled that the statute governing taxation of insurance company dividends paid to major corporate stockholders is unconstitutional. The Board claims this ruling was erroneous, and also contends that even if the statute is invalid, a tax refund is not the proper remedy. We agree with the trial court on both issues and affirm the judgment.

I. FACTS

Ceridian, formerly Control Data Corp. ("Control Data"), sought a refund of corporate franchise taxes imposed upon Control Data for the income years 1978 through 1982, and upon Commercial Credit Company ("Commercial Credit") for the income years 1978 and 1979. Ceridian is the successor to all causes of action and rights asserted herein on behalf of Control Data and Commercial Credit. Ceridian is a Delaware corporation, with its commercial domicile in Minnesota. Commercial Credit is a Delaware corporation with its commercial domicile in Maryland. During the income years at issue, Commercial Credit was a wholly-owned subsidiary of Control Data.

During the income years 1978 through 1982, Control Data was engaged in the business of manufacturing and selling computers, computer systems and peripheral equipment, and in providing computer-related services. Commercial Credit was engaged, through its subsidiaries, in the business of providing financial services and insurance to businesses and individual customers.

Control Data and Commercial Credit filed separate California Bank and Corporation Tax returns for themselves and their wholly-owned groups for 1978 and 1979. Thus, each entity calculated its own business income and apportioned income to California based upon the averages of its California property, payroll and sales as a percentage of total property, payroll and sales. For the tax years 1980 through 1982, Control Data and Commercial Credit filed California corporate franchise tax returns on the combined report method. Under this method, the taxable business income for Control Data and Commercial Credit was combined, and then apportioned to California based upon the averages of their combined California property, payroll and sales as a percentage of total combined property, payroll and sales.

In 1985, the Board recomputed the California tax liabilities of Control Data and Commercial Credit for the income years 1978 and 1979 on the basis that a combined report should have been filed, rather than separate returns. Additionally, the Board determined that business income included on these combined returns, as well as the combined returns filed for the 1980 through 1982 years, should have included approximately $78 million in dividends received from the insurance company subsidiaries. Ceridian paid the disputed amount and exhausted its administrative remedies.

On December 19, 1996, Ceridian filed a complaint for refund of taxes, alleging that taxation of Commercial Credit's insurance subsidiary dividends violated due process and the commerce clause of the federal Constitution. The case came before the trial court on stipulated facts. On May 7, 1998, the court issued its tentative decision, finding that Revenue and Taxation Code section 24410 is facially discriminatory and violates the commerce clause. The court awarded Ceridian a tax refund in the stipulated amount of $556,442. Judgment was entered accordingly (Code Civ. Proc., 632; Cal. Rules of Court, rule 232), and the Board filed a timely notice of appeal.

II. DISCUSSION

A. Constitutional Validity of Section 24410

1. The Revenue and Taxation Code¹

With certain exceptions, every corporation doing business in California pays an annual franchise tax measured by its net income. ( 23151.) When that income is derived from or attributable to sources both within and outside the state, it is apportioned in accordance with the Uniform Division of Income for Tax Purposes Act ( 25120 et seq.). ( 25101, 25121.) The Act's allocation formula is based on the proportion of a corporation's total property, payroll and sales which are located in the state. ( 25128-25136.) In computing its taxable income, a corporation may deduct "[d]ividends declared from income under franchise, alternative minimum, or income taxes." ( 24401, 24402.) The purpose of this dividend deduction is "to avoid double taxation at the corporate level of income which has already been subjected to California taxation in the hands of the dividend-declaring corporation. [Citations.]" (Safeway Stores, Inc. v. Franchise Tax Board (1970) 3 Cal.3d 745, 749-750 [Safeway Stores], italics in original.)

In lieu of the corporate franchise tax, insurance companies pay an annual tax based on the amount of gross premiums, less return premiums, received upon business done in this state. ( 12221; Cal. Const., art. XIII, 28.) The statute at issue in this case allows a deduction in computing taxable income ( 24401) for "Dividends received by a corporation commercially domiciled in California, during the income year from an insurance company subject to tax imposed by [the "Insurance Taxation" part] of this division at the time of the payment of the dividends and at least 80 percent of each class of its stock then being owned by the corporation receiving the dividend." ( 24410, subd. (a).) The deduction is "limited to that portion of the dividends received which are determined to be paid from income from California sources determined pursuant to subdivision (c)." ( 24410, subd. (b).) The apportionment formula set out in subdivision (c) uses the average of three factors - gross receipts, payroll, and property - to determine an insurance company dividend payor's gross income from California sources, which is then used to determine the amount of dividends paid from California sources.² The parties herein stipulated that for purposes of subdivision (b), "for each of the years at issue, the average percentage of the payroll, property and gross receipts in California of each insurance company paying dividends" to Ceridian is 1.77 percent.

2. The Commerce Clause

The Constitution gives Congress the power to regulate commerce between the states. (U.S. Const., art. I, 8, cl. 3.) "Though phrased as a grant of regulatory power to Congress, the [Commerce] Clause has long been understood to have a 'negative' aspect that denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce. [Citations.]" (Oregon Waste Systems, Inc. v. Department of Environmental Quality of the State of Ore. (1994) 511 U.S. 93, 98 [Oregon Waste].) "This 'negative' aspect of the Commerce Clause prohibits economic protectionism-that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors. [Citations.] Thus, state statutes that clearly discriminate against interstate commerce are routinely struck down [citations], unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism [citation]." (New Energy Co. of Indiana v. Limbach (1988) 486 U.S. 269, 273-274 [New Energy].) Supreme Court cases "leave open the possibility that a State may validate a statute that discriminates against interstate commerce by showing that it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives. [Citations.] This is perhaps just another way of saying that what may appear to be a 'discriminatory' provision in the constitutionally prohibited sense - that is, a protectionist enactment - may on closer analysis not be so. However it be put, the standards for such justification are high. [Citations.]" (Id. at pp. 278-279; see also Hughes v. Oklahoma (1979) 441 U.S. 322, 337 [facial discrimination invokes "strictest scrutiny.")

3. Discriminatory Taxation

Under the commerce clause, "a State may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State." (Armco Inc. v. Hardesty (1984) 467 U.S. 638, 642.) As it did below, the Board essentially concedes that subdivision (a) of section 24410, which allows only corporations "commercially domiciled" in California to deduct certain insurance company dividends from their taxable income, violates the commerce clause.³ We agree that subdivision (a) violates the commerce clause because it limits the pertinent deduction to those corporations "commercially domiciled" in California. Thus, the only disputed issue in this case is whether subdivision (b), which limits the deduction to dividends "paid from income from California sources" also violates the commerce clause. We conclude that it does.

The trial court found subdivision (b) "patently discriminatory," because "[o]n its face, this taxing scheme discriminates against the owner of insurance companies which do...