Citicorp v. Franchise Tax Bd.
| Decision Date | 02 October 2000 |
| Docket Number | No. A086925.,A086925. |
| Citation | 100 Cal.Rptr.2d 509,83 Cal.App.4th 1403 |
| Court | California Court of Appeals Court of Appeals |
| Parties | CITICORP NORTH AMERICA, INC., et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent. |
Eric J. Coffill, Lisa R. Brenner, Carley A. Roberts, Morrison & Foerster, Sacramento, Attorneys for Appellants/Plaintiffs—Citicorp North America, Inc. & Affiliates.
Bill Lockyer, Attorney General, David Druliner, Chief Assistant Attorney General, Ronald A. Bass, Senior Assistant Attorney General, David Lew, Deputy Attorney General Attorney General's Office, Attorneys for Respondent/Defendant—Franchise Tax Board.
Citicorp North America, Inc. (Citicorp) and its affiliates appeal from a decision of the superior court in favor of the Franchise Tax Board (FTB) in this action for refund of corporate franchise taxes.1 We affirm the trial court's judgment. The FTB properly included the California sales of Citicorp's Citibank (South Dakota), a member of the unitary corporate group, in calculating the amount of income apportionable to California operations under the rule in effect at the time Citicorp filed its amended returns. We also reject Citicorp's contention that the gain on sales of real property, including its corporate headquarters, was not business income.
The facts of this case are not in dispute. The parties submitted a joint stipulation and exhibits to the trial court regarding the relevant facts, which are summarized as follows. Citicorp is a Delaware corporation, with its principal place of business in New York. Citicorp and its affiliate corporations are part of a worldwide financial services organization. Citicorp directly and indirectly owns several hundred foreign and domestic corporations that offer lending, deposit taking, investment management and other traditional financial and banking services. At the relevant time Citicorp owned over 550 domestic corporations, 88 of which are California taxpayers. The two disputed issues in this appeal are the FTB's allocation of California destination sales by Citicorp's Citibank (South Dakota) affiliate, and characterization of the gain on sales of four properties as "business income."
Taxes Attributable to Sales by Citibank (South Dakota)
For the tax years ending December 31, 1985 through December 31, 1988, Citicorp and its affiliates filed separate company franchise tax returns in California. In 1992 and 1993, the Citicorp group filed amended returns requesting refunds for the challenged years, taking the position that Citicorp was conducting a worldwide unitary business, and that the combined franchise tax must be computed on a unitary basis. FTB has not challenged Citicorp's position regarding its unitary business.
Prior to Citicorp's filing of the amended returns, the State Board of Equalization (SBE) issued its two decisions in Appeal of Finnigan Corporation Changing the way in which an out-of-state affiliate's sales are apportioned to determine the income of the unitary business, Finnigan overruled the precedential decision of Appeal of Joyce, Inc. which had guided allocation of corporate franchise taxes in California for 22 years. Finnigan was applied retroactively in the subsequent case of Appeal of the NutraSweet Company (Oct. 29, 1992) [1992-1993 Transfer Binder] Cal.Tax Rptr. (CCH) ¶ 402-524, p. 27,351. (Appeal of Joyce, Inc. (Nov. 23, 1966) [1966-1971 Transfer Binder] Cal.Tax Rptr. (CCH) ¶ 203-523, p. 13,115; Cal. Franchise Tax Bd., Notice No. 90-3 (June 8, 1990) [1991-1992 Transfer Binder] Cal. Tax Rptr. (CCH) ¶ 401-820, p. 25,856 (Notice No. 90-3).)
Citicorp's amended returns constituted timely claims for refund. It is undisputed that Citibank (South Dakota), a South Dakota affiliate that handles VISA and MasterCard credit card business, was a member of the unitary group for the years in question. It is also undisputed that Citibank (South Dakota) had no physical presence in California, its only office was located in South Dakota, and it was not subject to California's corporate franchise or income tax during the years in question. Citibank (South Dakota) had numerous credit card customers in California. In calculating its California sales, Citicorp excluded California sales by Citibank (South Dakota) in accordance with the holding in the overruled Appeal of Joyce, Inc. decision.
FTB audited the amended returns and recalculated the California sales to include the California sales by Citibank (South Dakota) pursuant to the rule of Finnigan. The FTB's calculation reduced the amount of the refund due to Citicorp. The question presented to the trial court was whether application of the Finnigan rule was appropriate and constitutional.
The second issue involves characterization of the income from the sale of corporate properties. With respect to the year ended December 31, 1987, the FTB concluded that gains from the sale of four parcels of real property constituted business income and should be included in Citicorp's business income subject to apportionment in California. The four properties included the corporate headquarters of a wholly owned subsidiary, a nine-story office building partially occupied by corporate personnel, a 59-story building known as Citicorp Center, and a residence and land in Osaka, Japan.
During the income years at issue and prior to the sale of the properties, Citicorp included the original cost of the four properties in the denominator of the property factors used to determine business income in an apportionment formula.2 Citicorp also included any rental income and expenses associated with the management of the buildings in determining its business income attributable to California sources. However, when it filed its amended return, Citicorp characterized the gain on the sale of these properties as nonbusiness income. In its audit of Citicorp's amended return and request for refund, the FTB recharacterized the gain on sale of these properties as business income.
On October 22, 1997, Citicorp filed a suit for refund in the superior court. The complaint contained six causes of action. The first through fourth causes of action alleged that inclusion of the sales of Citibank (South Dakota) violated the Uniform Division of Income For Tax Purposes Act (UDITPA, adopted in California as Rev. & Tax.Code, § 25120 et seq.) and the due process and equal protection clauses of the United States and California Constitutions, and the commerce clause of the United States Constitution.3 The fifth cause of action alleged that the gains from sales of the buildings were nonbusiness income under the applicable statutes and regulations. The sixth cause of action was resolved between the parties and no issue regarding it is raised in this appeal.
On March 3, 1999, the court issued its amended statement of decision, deciding the matter in favor of the FTB. Citicorp and its affiliates appealed.
Citicorp challenges the FTB's inclusion of the property and sales of the South Dakota affiliate in the numerator of the formula used to apportion the group's California income. Citicorp argues that including property and sales of the South Dakota affiliate is inconsistent with the Revenue and Taxation Code and the unitary method of taxation in that it ignores separate business identities. Citicorp also contends that the FTB's position violates the holding of Current, Inc. v. State Bd. of Equalization (1994) 24 Cal.App.4th 382, 29 Cal.Rptr.2d 407 by taxing nontaxable property of the out-of-state affiliate.4 Citicorp argues that application of the rule of Finnigan violates the UDITPA principle of uniformity because other states did not adopt it. Citicorp urges this court to ignore Finnigan in light of the FTB's initial opposition to that rule and the SBE's overruling of Finnigan and the prospective return to the old rule of Joyce after the judgment in this case.
Citicorp's second challenge is to the characterization of the four sales of real property as business income. Citicorp argues that the resulting gains are not business income under a transactional test and that the trial court erred in applying a separate functional test of business income. Citing the FTB's own regulations, Citicorp argues that the challenged gains are not business income under any test. Finally, Citicorp contends that it is unconstitutional to tax the gain on these sales. We review Citicorp's arguments in the order presented and affirm the judgment of the trial court.
This case involves apportionment of the income of a unitary business. A unitary business is one that receives income "from or attributable to sources both within and without the state...."5 (§ 25101.) If a unitary business exists, taxes are apportioned by formula to allocate to California for taxation, "its fair share of the taxable values of the taxpayer...." (Butler Brothers v. McColgan (1941) 17 Cal.2d 664, 667-668, 111 P.2d 334.) In calculating corporate franchise taxes of a unitary business, the FTB apportions income generated by the unitary business based on the relationship of the combined income to the income derived from California sources.
The California statutory apportionment formula takes into account three fractions. The first fraction, known as the "property factor," has a numerator of the average value of California real and tangible personal property and a denominator of all real and tangible...
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