General Motors Corp. v. Franchise Tax Bd.

Decision Date30 June 2004
Docket NumberNo. B165665.,B165665.
Citation16 Cal.Rptr.3d 41,120 Cal.App.4th 114
CourtCalifornia Court of Appeals Court of Appeals
PartiesGENERAL MOTORS CORPORATION et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Appellant.

Ajalat, Polley & Ayoob, Charles R. Ajalat, Glendale, Christopher J. Matarese for Plaintiffs and Appellants.

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


In this action for a refund of taxes, General Motors Corporation and its affiliated corporations appeal from the superior court's judgment. The California Franchise Tax Board also appeals. We affirm the trial court's judgment. We conclude that, in calculating the amount of income apportionable to California, the Franchise Tax Board properly excluded gross receipts from certain sales of securities. We also conclude that only Delco, a member of General Motors California unitary group, was entitled to a research credit against its taxes, and that General Motors is not entitled to certain deductions related to foreign taxes. As to the Franchise Tax Board's cross-appeal, we conclude that the superior court correctly found unconstitutional Revenue and Taxation Code section 24402,1 which provides an income tax deduction for certain dividends received from other corporations.


General Motors Corporation is a Delaware corporation, and its commercial domicile is located in the State of Michigan. General Motors and certain affiliated corporations (collectively, GM) engage in a "unitary business" that operates partially within California. A unitary business is one that receives income "from or attributable to sources both within and without the state ...." (§ 25101.) "A unitary business is generally defined as two or more business entities that are commonly owned and integrated in a way that transfers value among affiliated entities." (Citicorp North America, Inc. v. Franchise Tax Bd. (2000) 83 Cal.App.4th 1403, 1411, 100 Cal.Rptr.2d 509, fn. 5 (Citicorp).) Not all of the corporations in the GM "unitary group" are subject to taxation in California.

"If a unitary business exists, taxes are apportioned by formula to allocate to California for taxation, `its fair share of taxable values of the taxpayer ....' (Butler Brothers v. McColgan [(1941)] 17 Cal.2d 664, 667-668 .)" (Citicorp, supra, 83 Cal.App.4th at p. 1411, 100 Cal.Rptr.2d 509.) Thus, GM files a single combined "Unitary Corporate Tax Return" in California. (See Colgate-Palmolive Co. v. Franchise Tax Bd. (1992) 10 Cal.App.4th 1768, 13 Cal.Rptr.2d 761.) The income reported in the unitary return arises out of numerous commercial activities including investment in securities. That income is then apportioned among the members of the unitary group that are subject to taxation in California.

Respondent Franchise Tax Board of the State of California (the FTB) conducted a lengthy field audit at the corporate offices of GM in Michigan. (The audit apparently commenced in 1991 with the principal audit work being accomplished in 1992. The audit concluded in 1997.) The audit pertained to the 1986-1988 income years. Both prior to and after the audit, GM paid all the taxes involved ($19,586,850). GM filed claims for refund (totaling $8,983,063) on December 11, 1997. GM also filed protests as the result of certain adjustments made during and after the audit.

To apportion income of unitary businesses, California has adopted the Uniform Division of Income for Tax Purposes Act (UDITPA, § 25130 et. seq.), as have numerous other states. In apportioning GM's worldwide income (i.e., that income attributable to GM's unitary group), UDITPA and thus California law require the use of a percentage derived from a statutory formula that is based on three factors: payroll, property and sales.2 Section 25134 (as amended by Stats. 2000) provides: "The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the taxable year, and the denominator of which is the total sales of the taxpayer everywhere during the taxable year." Section 25120, subdivision (e), defines "`[s]ales'" as "all gross receipts of the taxpayer...." Thus, in this formula, the sales factor is represented by a fraction, the denominator of which is based on "all gross receipts" of the taxpayer "everywhere" in the world. Consequently, the smaller the "gross receipts" number in the denominator, the larger the portion of the taxpayer's income that is taxable to California; conversely, the larger the denominator of the fraction is, the less the amount of tax. Although "sales" is defined as "all gross receipts," "gross receipts" is nowhere defined in the statute.

GM maintains a "Treasury Department" in New York City. The Treasury Department manages the excess cash of GM and its various related corporate entities and subsidiaries in the United States. For GM, "excess cash" means that cash on any particular day that GM is not actually going to spend. (Or, as another GM official stated, "[a]ny cash that wasn't needed for funding forecasted payments.") The major share of GM's cash is derived from sale of motor vehicles and motor vehicle parts. The investment activities of GM's Treasury Department often produce a significant portion of GM's net income. Sometimes GM's "tax and financial staff" produce more of GM's profits than its manufacturing operations. During the tax years at issue here, GM's net corporate income totaled over $7 billion of which the Treasury Department generated over a half billion dollars in income.

During the tax years at issue in this appeal (1986-1988), the Treasury Department used its excess cash to purchase various marketable securities, which are characterized as "liquid assets." These investments would be in such items as U.S. Treasury bonds, notes, and bills as well as bank certificates of deposit (CD's), etc., that bore maturity dates at which times both principal and interest were returned to GM. The security transactions fall into three categories: (1) direct sales, (2) maturities, and (3) repurchase agreements. The parties by stipulation agreed that "`direct sales'" of securities (6 percent of GM's Treasury Department proceeds from security transactions) were defined "as the sale of a security, other than a sale pursuant to a repurchase agreement, that occurred before the date the security matures at the end of its stated term." Approximately 90 percent of the proceeds listed by GM as gross receipts are from "repurchase transactions" (i.e., pursuant to a written master agreement, the securities broker repurchases or sells the security held in GM's account.) The repurchase transaction would occur either on a date certain or upon demand.3 The balance of the gross receipts is from "maturities," which constitute 4 percent of the Treasury Department securities proceeds.

In its initial California tax returns, GM treated the majority of the Treasury Department income as nonbusiness income, not subject to taxation in California. But on audit, the FTB treated all of GM's treasury income as business income subject to California apportionment and taxation. And in its audit adjustments of GM's tax returns and in calculating income to be apportioned to California for tax purposes, the FTB considered as gross receipts only GM's net proceeds from the Treasury Department's securities transactions and excluded gross proceeds from such transactions.

According to GM, the proceeds from the redemption of these securities are all "gross receipts," totaling almost a trillion dollars ($968,741,764,769) over the three-year period. Thus, according to GM's numbers, the average annual gross return from these investments is about $309 billion. But GM admitted that the average balance of its investment in short-term securities during the tax years at issue was approximately $2.75 billion. This fact led to the FTB's conclusion that GM rolled over its short-term marketable securities every 3.25 days. GM's investment policy allowed investment periods of from one day to two years. At times the maximum range for these investments was 40 to 45 days. GM also noted that the FTB's calculations resulted in the amount of income apportioned to California for the years 1986 through 1988 being almost 50 percent higher than GM postulated.

The FTB denied GM's claims and protests, causing GM to file an appeal with State Board of Equalization (the SBE). Subsequently, GM and the FTB jointly requested that the SBE deny the appeal without prejudice. GM and the FTB also stipulated that GM had exhausted its administrative remedies so as to permit GM to file a timely complaint in the superior court.

In part, the Treasury Department's income also consisted of dividends from various corporations as to which GM owned less than 50 percent sharehold interest. GM refers to these corporations as "its nonunitary subsidiaries." During the tax period in question, GM received approximately $4 million in dividends from these corporations. The FTB treated these dividends as business income and did not permit GM to take a deduction for them.

General Motors Acceptance Corporation, one of GM's corporate entities, received a total of $314 million in dividends from its unitary subsidiary Motors Insurance Company during the years 1986 through 1988. Motors Insurance Company pays a gross premiums tax in lieu of the corporation franchise tax and maintains its own separate management. The FTB did not permit GM to take a deduction for these dividends.

GM claimed a $2,844,797 research credit for the 1988 tax year pursuant to section 23609. For 1988, GM calculated that the California franchise tax liability of Delco, as noted earlier, another of GM's corporate entities, was...

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