Chase Brass & Copper Co. v. Franchise Tax. Bd.

• Decision Date: 07 June 1977
• Citation: 70 Cal.App.3d 457,138 Cal.Rptr. 901
• Court: California Court of Appeals Court of Appeals
• Parties: CHASE BRASS & COPPER CO., INC., Plaintiff, Respondent and Appellant, v. FRANCHISE TAX BOARD of the State of California, Defendant, Appellant andRespondent. Civ. 38789.

Page 901

138 Cal.Rptr. 901

70 Cal.App.3d 457

CHASE BRASS & COPPER CO., INC., Plaintiff, Respondent and Appellant, v. FRANCHISE TAX BOARD of the State of California, Defendant, Appellant andRespondent.

Civ. 38789.

Court of Appeal, First District, Division 2, California.

June 7, 1977.

As Modified on Denial of Rehearings July 7, 1977.

Hearing Denied Aug. 11, 1977.

Evelle J. Younger, Atty. Gen. of Cal., Ernest P. Goodman, Asst. Atty. Gen., Timothy G. Laddish, Deputy Atty. Gen., San Francisco, for Franchise Tex Board of California.

Valentine Brookes, Lawrence V. Brookes, San Francisco, for Chase Brass & Copper Co., Inc.

TAYLOR, Presiding Justice.

Both the taxpayer, Chase Brass & Copper Co., Inc. (hereafter Chase) and the state Franchise Tax Board (hereafter Board) appeal ¹ from a 1975 judgment in the total amount of $57,578.77 ² for the recovery of corporate franchise taxes, plus interest, for the years 1954, 1955 and 1956. The 1975 judgment was entered after retrial and recomputation pursuant to the limited remand of this court (Division Four) in Chase Brass & Copper Co. v. Franchise Tax Bd., 10 Cal.App.3d 496, 95 Cal.Rptr. 805 (hereafter Chase I). We have concluded that: 1) the court below acted within the scope of the remand; 2) as to the Board, the doctrine of the law of the case was properly applied as to the 'other metals' and prevents redetermination of that issue here; 3) the Board did not abuse its discretion in using a three-factor formula of sales, property and payroll to determine the allocation of Chase's income to California and in using cost rather than fair market value for the property factor; and 4) the method of recomputation used by the Board was not arbitrary or erroneous, and was fairly calculated to assign to California that portion of the net income of the unitary business reasonably attributable to the business done in this state.

In view of the posture of this appeal, we first restate the pertinent facts and issues determined in Chase I. On that appeal, as in the instant one, the facts were stipulated; accordingly, only questions of law were determined. Chase, a Connecticut corporation, is a wholly owned subsidiary of Kennecott Copper Corporation (hereafter Kennecott), the nation's largest producer of copper, a New York corporation. Kennecott does no business in California; it mines, smelts and refines copper, gold, silver and molybdenite and other metals. The copper and other metals are mined in Utah, Nevada, Arizona and New Mexico. Metals other than copper are sold in operations completely unrelated to Chase. Copper is not fabricated by Kennecott, but is sold through a subsidiary of Kennecott, Kennecott Sales Corporation (hereafter Kennecott Sales). Chase I also involved the question of whether two other out-of-state Kennecott subsidiary corporations, Braden Copper Company (hereafter Braden) and Bear Creek Mining Company (hereafter Bear Creek), were part of the unitary business, as well as a goods-in-transit issue settled by the parties after Montgomery Ward & Co. v. Franchise Tax Bd., 6 Cal.App.3d 149, 85 Cal.Rptr. 890.

Kennecott Wire and Cable Co. (hereafter Kennecott Wire), a Rhode Island corporation owned by Kennecott, manufactures copper rod, wire and cable for transmission of electricity. Kennecott Wire uses refined primary copper, all of which it buys from Kennecott through Kennecott Sales; Kennecott Wire's sales operation in California is largely through Chase. Kennecott Wire did not do business in California in 1954, 1955 and 1956.

Chase, like Kennecott Wire, is a manufacturer. Chase's products are brass (made from copper and zinc), bronze (copper and alloys, mostly tin), and copper rod, sheet, wire and tube. The manufacture is done entirely outside California. Chase buys 80--84 percent of its needed copper supply from Kennecott Sales, derived from Kennecott and Braden. In California, Chase warehouses and sells its products and those of Kennecott Wire.

The issues to be determined under the California Franchise Tax Law were summarized in Chase I, as follows, 10 Cal.App.3d at pages 501 and 502, 95 Cal.Rptr. at 807: 'When a corporation engages in multistate business, including business in California, and the business is unitary, there must be an allocation of income by formula. Separate accounting is not allowable, although it is usable for a corporation which, by operating here and elsewhere, conducts a nonunitary business. In the case of Chase itself, it was always recognized by the company that its own business is unitary, wherefore its own computation of the franchise tax was done according to formula. But the Board contends that the geographic unitary character of Chase is not all that is to be considered; there must also be taken into account the whole intercorporate parentage and affiliation of the Kennecott family. Mainly, it is the vertical aspect which is put before us; the relationship of Chase to Kennecott Sales, to Braden and to Kennecott. Secondarily, there is to be considered the horizontal relationship of Chase to Kennecott Wire.

'Intercorporate unitary character of business, in which the activities of the parent are considered, under an appropriate factual situation, is a valid concept for taxing purposes. (Edison Cal. Stores, Inc. v. McColgan, 30 Cal.2d 472, 183 P.2d 16.) This holding of the Edison Stores case was but a logical sequence of the holding in Butler Bros. v. McColgan, 17 Cal.2d 664, 111 P.2d 334, in which a single company had operated through wholly controlled branches. In both cases, there were strong and embracing central controls. The general test which we are to apply is this: '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 v. McColgan, supra, 30 Cal.2d at p. 481, 183 P.2d at p. 21; Superior Oil Co. v. Franchise Tax Board, 60 Cal.2d 406, 412, 34 Cal.Rptr. 545, 386 P.2d 33.)' (Emphasis added.)

After applying the three particulars of the test, Justice Devine in Chase I, at page 506, 95 Cal.Rptr. 805, disagreed with a portion of the lower court's holding, and held that the business of Kennecott, Kennecott Sales, Kennecott Wire and Chase was unitary and, therefore, subject to an allocation of income by formula. This resulted in an assessment of Chase's corporate franchise tax at a much higher figure as a result of the application of the 'unitary business' theory. ³ At the same time, Justice Devine agreed with two of the parts of the lower court's holding, namely, that: 1) Chase's business was not unitary with two other foreign Kennecott subsidiary corporations, Braden and Bear Creek; and (2) 'Kennecott's sales of gold, silver and molybdenite metals, which are not bought by Chase or Kennecott Wire, are not part of the unitary business.' (Chase I, p. 506, 95 Cal.Rptr. p. 810.) ⁴

In addition, as the Board conceded that there was an error in the application of the property factor as the result of the intervening decision of McDonnell Douglas Corp. v. Franchise Tax Bd., 69 Cal.2d 506, 72 Cal.Rptr. 465, 446 P.2d 313, Justice Devine noted at page 506, 95 Cal.Rptr. at page 810 that 'the case must be remanded in any event. Our decision requires further revisions of the formula.' The judgment was reversed with directions to proceed in accordance with the Chase I opinion. On denial of the petition for rehearing, this court added the further rulings and explanations, set forth below, so far as pertinent, ⁵ at pages 50l and 507, 95 Cal.Rptr. at pages 810--811. Subsequently, the state Supreme Court denied Chase's petition for hearing (June 24, 1970) and the U.S. Supreme Court dismissed Chase's petition for lack of jurisdiction (400 U.S. 961, 91 S.Ct. 365, 27 L.Ed.2d 381). In both of these further review proceedings, the Board did not challenge the portion of the Chase I judgment holding that Kennecott's sales of the metals other than copper were not a part of the unitary business.

Preliminarily, we turn to the issues pertaining to the scope of review on this appeal. At the retrial, the court, on the basis of the law of the case, prohibited the introduction of new evidence as to the net income from the metals other than copper to be used in recomputing the unitary net income; the court used the figures contained in Finding 2(h) of the Chase I trial court decision, ⁶ which had been challenged on the Chase I appeal. However, in its first conclusion of law, the court after the retrial stated that the use of these figures for 'the net income from the sales of metals other than copper is erroneous and produces the ludicrous result that the depletion allowances and other expenses attributable to metals other than copper are allowed as expenses of the copper business, thus understating the amount of unitary net income of the copper business. This Court would like to remedy this error but feels that it does not have the authority to do so within the scope of the remand.'

On this appeal, the Board first maintains that the lower court's limited interpretation of the scope of the remand on the retrial constituted reversible error. The Board argues that a finding of fact, as distinct from a conclusion of law, cannot be the basis for the application of the doctrine of the law of the case and, in any event, the rule is only a procedural one that does not go to the power of the court and should not be adhered to where its application will result in an unjust decision (People v. Scott, 16 Cal.3d 242, 246, 128 Cal.Rptr. 39, 546 P.2d 327, reiterating People v. Shuey, 13 Cal.3d 835, 845, 120 Cal.Rptr. 83, 533 P.2d 211). ⁷

We, however, agree with Chase's contention that in the instant case, the determination that Kennecott's 'other metals' business was not a part of the unitary business, was one of law. As clearly indicated in Chase I, 10 Cal.App.3d at page 502, 95 Cal.Rptr. 805, the facts were...