Communications Satellite Corp. v. Franchise Tax Bd.

• Citation: 156 Cal.App.3d 726,203 Cal.Rptr. 779
• Court: California Court of Appeals Court of Appeals
• Decision Date: 31 May 1984
• Parties: COMMUNICATIONS SATELLITE CORPORATION, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant. AO16317.

Page 779

203 Cal.Rptr. 779

156 Cal.App.3d 726

COMMUNICATIONS SATELLITE CORPORATION, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant.

AO16317.

Court of Appeal, First District, Division 4, California.

May 31, 1984.

As Modified on Denial of Rehearing June 29, 1984.

Hearing Denied Aug. 29, 1984.

John K. Van de Kamp, Atty. Gen., Patricia Streloff, Deputy Atty. Gen., San Francisco, for defendant and appellant.

Robert L. Dunn, Bancroft, Avery & McAlister, San Francisco, for plaintiff and respondent.

RATTIGAN, Associate Justice. ^*

Plaintiff and respondent Communications Satellite Corporation (hereinafter "Comsat") is a District of Columbia corporation doing business in California. It is also a member of an international consortium which owns and operates commercial satellites orbiting in outer space. As a member of the consortium, Comsat owns an interest in the satellites and receives income from their use. It also derives income from transmitting telecommunications signals to the satellites, and receiving signals from them, at an "earth station" located in California and similar facilities elsewhere.

Defendant and appellant Franchise Tax Board ("the Board") assessed certain corporate income taxes against Comsat pursuant to a special formula which resulted in an apportionment of its total income, to California, on the bases of factors which included the value of the satellites and income received by Comsat from their use. Comsat paid the taxes and commenced this action against the Board to recover them, challenging the validity of the special formula. After a nonjury trial on stipulated facts and other evidence, the court found in favor of Comsat and entered a judgment ordering refund of the disputed taxes plus interest. The Board appeals from the judgment.

The Pleadings

Comsat commenced the action by filing a "Complaint For Refund Of Income Taxes" in which it alleged as follows:

                 Value of Comsat's interest in
                 California property in 1970             $ 3,761,556
                 -----------------------------      =  --------------  =    2.8296%
                 Value of Comsat's interest in          $132,933,655
                 property everywhere in 1970
                "including its undivided
                 52.5% interest" in the satellites
                

Comsat is a corporation "duly organized and existing" pursuant to the Communications Satellite Act of 1962 (47 U.S.C. § 701, et seq.) and the District of Columbia Business Corporation Act. Its principal place of business is located in Washington, D.C. Comsat returned and paid California income taxes to the Board for the calendar years 1970, 1971, and 1972. In May of 1975, the Board notified Comsat that it "proposed to reassess additional income taxes" for these years. Comsat "protested the proposed reassessments," but the Board "affirmed the proposed assessments in full and denied ... [Comsat's] protest." Comsat paid "the additional amounts" and "additional interest," and filed timely claims for refunds. The claims were "disallowed" by the Board.

Comsat further alleged: "The income taxes assessed ... and the interest paid thereon, were illegally, erroneously and arbitrarily determined, assessed and collected ..., without factual basis for such determination, assessment and collection," and that they were "void" on specified grounds.

In the prayer of the complaint, Comsat requested "refund" of the additional income taxes paid for the years 1970, 1971, and 1972, "plus all interest paid thereon ..."; interest "on the said amounts of tax and interest paid ... from the date of said payment[ ] to the date of refund"; and general relief.

The Board filed an answer in which it generally denied the allegations made in the complaint.

The Stipulated Facts

After the issues had been joined on the pleadings, the parties filed a written "Stipulation of Facts" executed by their respective attorneys. This document, and the facts stipulated in it, may be summarized and quoted as follows (paragraphing ours):

"Comsat is the United States participant in the International Telecommunications Satellite Consortium ('Intelsat'), an international joint venture which operates the [sic ] global commercial communications satellite system. The joint venture consisted of 83 member countries as of December 31, 1972. Intelsat was established in 1964 by an intergovernmental agreement known as the Agreement ... for a Global Communications Satellite System, which was signed by the United States Government and other governments. Comsat was designated "The function of the Intelsat system is to relay telecommunications between countries throughout the world. Telecommunications relayed through the ... system include 'voice' (telephone) traffic, 'record' traffic of various types (telegraph, telex, facsimile, photogram and data)[,] and television."

by the President of the United States as the United States signatory to a companion agreement known as the Special Agreement, which governed the operation of Intelsat."

The Intelsat system consists of a "space segment" and a "ground segment." The assets in the space segment "are owned in undivided shares by members of Intelsat, including Comsat, in varying percentages." In 1970, 1971, and 1972, Comsat's "percentage ownership interest" in these assets was "approximately 52.5 percent." Comsat "serves as manager" of "all facilities" in the space segment.

The assets in the space segment consist of (1) "communications satellites" orbiting in outer space and (2) four "tracking, telemetry[,] and command stations" from which the satellites are "monitored and controlled." The four tracking stations are located in Maine, Italy, Australia, and Hawaii. The satellites are launched into space from Cape Canaveral, Florida. Each satellite is "located in outer space in a 'synchronous' orbit 22,300 miles over a fixed point on the Equator. A 'synchronous' orbit is one in which the orbital speed of the satellite is synchronized with the speed of the earth's rotation so that the satellite appears to remain stationary over a fixed point on earth. Intelsat satellites are positioned over the Atlantic, Pacific, and Indian Oceans. They never pass over California, even during launch."

"A communications satellite performs a function similar to an ordinary microwave tower; it receives and transmits signals carrying telecommunications. The principal difference is that microwave towers must be spaced within a few miles of each other because of the curvature of the earth and because the signals travel in a straight line, while a satellite, being 22,300 miles in space, can receive and transmit signals across thousands of miles of the earth's surface."

The "ground segment" of the Intelsat system consists of "earth stations in various countries owned by entities in the respective countries. Earth stations have large antennas with supporting electronic equipment. They transmit signals to, and receive signals from, the satellites.... Comsat has a 50 percent ownership interest in seven United States earth stations in the Intelsat system." One of these seven stations (the "California earth station") is at Jamesburg, in Monterey County, California, where it was located because of favorable atmospheric and related conditions. The other six earth stations are at Brewster, Washington, and in Maine, West Virginia, Puerto Rico, Hawaii, and Guam. Comsat also owns "a 100 percent interest" in an eighth earth station located at Talkeenta, Alaska. "All of these earth stations became operational before 1970 (with the exception of the Talkeenta station, which did not become operational until July 1970) and remained in operation throughout 1970, 1971[,] and 1972." Comsat "serves as manager" of all of these earth stations except for the one in Guam.

"In addition to the California earth station, Comsat maintains a small engineering office" in Los Angeles County. Intelsat has no property or employees in California.

"Comsat's revenues are generated primarily from the leasing of 'half circuits' ... to United States international communications common carriers.... A 'half circuit' is a two-way communications channel between an Intelsat satellite and an earth station. This channel, when combined with a similar channel (another half circuit) between the satellite and another earth station, permits the establishment of a whole satellite circuit capable of carrying telecommunications between the two earth stations. In order to be able to lease half circuits to the carriers, Comsat leases from Intelsat capacity in the Intelsat satellites and pays 'use charges' to Intelsat for such "Comsat is not involved in transmitting telecommunications between the California earth station [at Jamesburg] and other points in California and does not receive any income from such transmission. Comsat's activities at the California earth station are concerned only with the leasing of half circuits between the California earth station and Intelsat satellites. The California earth station communicates with Intelsat satellites operating in the Pacific Ocean region."

                capacity."   All of Intelsat's revenues are generated by "use charges."
                

"The California earth station operates as follows: (1) A communications signal destined for a foreign country or an offshore United States point is received at the California earth station from its place of origin in the United States through terrestrial facilities (telephone lines, microwave relay systems, etc.) owned and operated by communications carriers other than Comsat. (2) The earth station transmits the signal to an Intelsat satellite in orbit, which in turn transmits it to an earth station in a foreign country or an offshore United States point. (3) Likewise, communications from foreign countries and offshore United States points are received via satellite by the California earth station and are then transmitted to their point of destination in the United States through terrestrial facilities owned and operated by communications...