General Motors Corp. v. Franchise Tax Bd.

Decision Date17 August 2006
Docket NumberNo. S127086.,S127086.
Citation47 Cal.Rptr.3d 233,139 P.3d 1183,39 Cal.4th 773
CourtCalifornia Supreme Court
PartiesGENERAL MOTORS CORPORATION et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Appellant.

Morrison & Foerster, Eric J. Coffill and Carley A. Roberts, Sacramento, for Toys "R" Us, Inc., and Affiliates and The Limited Stores, Inc., and Affiliates as Amici Curiae on behalf of Plaintiffs and Appellants.

Pillsbury Winthrop, Jeffrey M. Vesely, San Francisco, Kerne H.O. Matsubara, Richard E. Nielsen and Annie H. Huang, San Francisco, for Council on State Taxation as Amicus Curiae on behalf of Plaintiffs and Appellants.

Nielsen, Merksamer, Parrinello Mueller & Naylor, John E. Mueller, Mill Valley, and Eric J. Miethke, Sacramento, for California Business Coalition as Amicus Curiae on behalf of Plaintiffs and Appellants.

Sutherland Asbill & Brennan and Kendall L. Houghton for Tax Executives Institute, Inc., as Amicus Curiae on behalf of Plaintiffs and Appellants.

Michael P. Boyle, Michael J. Bernard, Kurt A. Lamp; Preston Gates & Ellis, James P. Kleier, Brian W. Toman, Charles R. Zubryzcki; Baker & McKenzie and J. Pat Powers, Palo Alto, for Microsoft Corporation as Amicus Curiae on behalf of Plaintiffs and Appellants.

Bill Lockyer, Attorney General, W. Dean Freeman and Stephen Lew, Deputy Attorneys General, for Defendant and Appellant.

Frank Katz and Shirley Sicilian for Multistate Tax Commission as Amicus Curiae on behalf of Defendant and Appellant.


[139 P.3d 777]

Like many large companies, plaintiff General Motors Corporation has an active treasury department. Its treasury department

[139 P.3d 778]

supplements the company's other income-generating activities by investing the company's idle cash in short-term marketable securities. These investments present special analytical problems under the Uniform Division of Income for Tax Purposes Act (UDITPA),1 which California has adopted (Rev. & Tax.Code, § 25120 et seq.)2 and which it uses to determine what portion of a multistate company's corporate income it may tax. A key part of the UDITPA, the sales factor, helps allocate a company's income to various states in accordance with the amount of gross receipts the company generates in each state. In turn, this raises the question what proceeds qualify as gross receipts.

Unlike Microsoft Corporation, whose treasury department activities we addressed in the companion case Microsoft Corporation v. Franchise Tax Bd. (Aug. 17, 2006, S133343) ___ Cal.4th ___, 47 Cal.Rptr.3d 216, 139 P.3d 1169, 2006 WL 2371455 (Microsoft Corporation), General Motors Corporation's treasury department preferred not simply to hold its investments until maturity during the tax years in question. Rather, it generated the bulk of its proceeds through repurchase agreements, commonly referred to as "repos." (See generally Bewley v. Franchise Tax Bd. (1995) 9 Cal.4th 526, 529, 37 Cal.Rptr.2d 298, 886 P.2d 1292.) In this case, we must decide how repos should be treated under the UDITPA: in particular, what portion of the proceeds from a repo should be treated as gross receipts for purposes of allocating a company's income among the various states? The consequences of the answer are significant; here, for example, the answer may effect a nearly twofold change in the amount of state income tax due. We conclude a repo is analogous to a secured loan for UDITPA purposes and thus only the interest received should be treated as gross receipts.

This case also poses a second question. Like the federal government and many states, California subsidizes new research through a partial tax credit for increases in research spending. When research is performed by one member of a corporate family, does the credit go only to that member or may it be spread among the other members of the corporate family? Here, under the terms of the governing statutes, we conclude only the taxpaying corporation that performed the research is entitled to the credit.


We explained the relevant principles of the UDITPA in detail in Microsoft Corporation, supra, ___ Cal.4th at pages ___ _ ___, 47 Cal.Rptr.3d at pages 219-20, 139 P.3d at pages 1171-72, and summarize them only briefly here. The UDITPA is designed to determine what portion of

[139 P.3d 779]

a business's income is properly attributable to its activities in a given state and thus what portion of that income the state may tax. Under the UDITPA, a unitary business's3 income is divided into "business" and "nonbusiness" income, each subject to different attribution rules. (§ 25120, subds.(a), (d).) Here, we are concerned only with business income. Business income is allocated to each state according to a three-factor formula that considers the amount of property, payroll, and sales a company has in each state. (§ 25128.) As in Microsoft Corporation, only the sales factor is at issue. That factor measures the portion of income attributable to a given state by dividing in-state "gross receipts" by all worldwide gross receipts. (§§ 25120, subd. (e), 25134.) The size of this fraction can vary greatly depending on what qualifies as gross receipts. Therein lies the heart of the dispute here.


General Motors Corporation and certain affiliated corporations (collectively, General Motors) engage in a unitary business that operates partially within California. General Motors is engaged principally in manufacturing motor vehicles and motor vehicle parts.

General Motors maintains a treasury department in New York. The treasury department manages General Motors' excess cash from its motor vehicle sales. The investment activities of the treasury department often produce a significant portion of General Motors' net income. During the tax years at issue, 1986-1988, General Motors' net corporate income totaled approximately $7 billion, of which the treasury department generated over $550 million.

During the years at issue, the treasury department used its excess cash to invest in various marketable securities. These included United States Treasury bonds, notes, and bills, and bank certificates of deposit, generally on a very short-term basis.4 Income from these investments derived from (1) direct sales, (2) redemptions, and (3) repos. Direct sales of securities, i.e., sales before maturity other than pursuant to a repurchase agreement, accounted for 4 percent of treasury department proceeds. Redemptions, i.e., redemptions on maturity of the security, accounted for 6 percent of proceeds. The bulk of treasury department proceeds, 90 percent, derived from repos.

[139 P.3d 780]

Defendant Franchise Tax Board (the Board) audited General Motors' 1986-1988 income tax returns. In its initial California tax returns, General Motors treated the majority of the treasury department income as nonbusiness income, not subject to taxation in California. On audit, the Board treated all of General Motors' treasury income as business income subject to California apportionment and taxation. In calculating income to be apportioned to California, the Board included as gross receipts only General Motors' net proceeds from the treasury department's securities transactions. General Motors argued that the gross proceeds from these transactions, totaling almost $1 trillion over the three-year period, were all gross receipts. The Board's inclusion of only net proceeds resulted in almost twice as much income being apportioned to California for 1986 through 1988.5 General Motors paid all taxes involved, filed claims for refund, and filed protests as the result of certain adjustments made during and after the audit. The Board denied relief.

After exhausting its administrative remedies, General Motors filed a refund complaint for 1986-1988 in the superior court. As relevant here, General Motors raised two issues. First, it challenged the Board's exclusion of the treasury department's gross proceeds from the sales factor (the gross receipts issue). Second, it claimed that a $2.8 million research credit earned for research expenses incurred in the 1988 tax year (see § 23609) should be applied to the tax liabilities of all corporations in its unitary business group that had California tax liability (the research credit issue). The Board allowed only Delco, the member of the General Motors unitary business group that originally incurred qualifying expenses, to use the credit. Because the credit exceeded Delco's tax liability, the Board allowed Delco a credit of approximately $1 million for 1988 and required that the remaining credit be rolled over to future years.

The trial court denied General Motors' motion for summary adjudication on both the gross receipts issue and the research credit issue, and granted the Board's cross-motion for summary adjudication on the research credit issue. Thereafter, the parties agreed a trial would be unnecessary and entered a series of stipulations resolving disputed issues. As relevant here, they agreed that approximately $497 million of treasury department income would be treated as apportionable business income, and gross proceeds from direct sales would be treated as gross receipts. Based on its rulings on the motions for summary adjudication and on the parties' stipulation to judgment, the trial

[139 P.3d 781]

court entered a judgment finding that General Motors had overpaid its California franchise taxes and awarding General Motors a refund of approximately $7.4 million.

The Court of Appeal affirmed. It ruled that redemptions and repos were in essence secured loans and that only the net proceeds from these transactions were includible in General Motors' sales factor. It further held that only Delco, and not any other member of the unitary reporting group, was entitled to use the research tax credit. We granted review.

I. ...

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