RKO Teleradio Pictures, Inc. v. Franchise Tax Bd.

• Decision Date: 05 December 1966
• Citation: 55 Cal.Rptr. 299,246 Cal.App.2d 812
• Court: California Court of Appeals Court of Appeals
• Parties: RKO TELERADIO PICTURES, INC. formerly known as RKO Radio Pictures, Inc., Plaintiff and Respondent, v. FRANCHISE TAX BOARD, successor under law to the Franchise Tax Commissioner, Defendant and Appellant. Civ. 23248.

Page 299

55 Cal.Rptr. 299

246 Cal.App.2d 812

RKO TELERADIO PICTURES, INC. formerly known as RKO Radio Pictures, Inc., Plaintiff and Respondent, v. FRANCHISE TAX BOARD, successor under law to the Franchise Tax Commissioner, Defendant and Appellant.

Civ. 23248.

Court of Appeal, First District, Division 3, California.

Dec. 5, 1966.

Hearing Denied Feb. 1, 1967.

Thomas C. Lynch, Atty. Gen., Ernest P. Goodman, Asst. Atty. Gen., John J. Klee, Jr., Deputy Atty. Gen., San Francisco, for appellant.

James J. Reilly, San Francisco, for respondent.

SALSMAN, Justice.

Appellant Franchise Tax Board appeals from a judgment in favor of respondent RKO Teleradio Pictures, Inc., hereinafter referred to as RKO, directing a refund of taxes paid under protest for the income years 1945 and 1946.

The facts were stipulated. RKO's business is the production and distribution of motion pictures. It is a wholly owned subsidiary of Radio-Keith-Orpheum Corporation. Its principal offices are in New York City, where its managing officers control its entire business operation, involving all phases of the production and world-wide distribution of motion picture films. RKO produces motion pictures and distributes them through its own distribution facilities, but it also distributes films produced by others. At all times relevant here, RKO produced its films in its own studios at Hollywood and Culver City. It made its studio facilities available to independent film producers, helped finance their production, and by agreement, distributed such films through its distribution network. The same personnel and facilities were used by RKO in the distribution of all films, whether produced by RKO or by others. RKO would have had to maintain the distribution system even if no outside production had been utilized, but of course the stream of films produced by others added substantially to RKO's gross income.

In the years 1939 to 1944 the Franchise Tax Commissioner permitted motion picture companies to apportion their income between that received from the production and distribution of their own films, and that received from the distribution of films produced by others, and in the determination of California income, to apply separate allocation formulas based upon factors described in Revenue and Taxation Code section 25101. ¹ In 1945, however, the commissioner's office advised the motion picture industry, including respondent RKO, that the practice of using multiple allocation formulas in computing income from California sources would no longer be permitted, and that as to future taxable years a single formula would be required. Despite this warning, RKO determined to and did file its income tax returns for the years 1945 (filed in 1946) and 1946 (filed in 1947) and computed its income from California sources by use of a double formula rather than a single one as required by the commissioner.

In summary, RKO's method of stating its income involved a separation of its total income into two parts, first, income derived from the production and distribution of its own films, and second, income derived from the distribution of the films of others. With respect to income from the production and distribution of its own films RKO applied a formula which consisted of a comparison of its California property, payroll and revenues with its total property, payroll and revenues, both within and outside of California. RKO applied a second formula to income received from the distribution of others' films. Both formulas used the same revenue factor, a comparison of RKO's California revenues with its total revenues. But the second formula used for its California payroll and property factors only payroll and property relating to RKO's distribution activities.

In the examination of respondent's tax returns for 1945 and 1946 the Franchise Tax Board determined that a single three-factor formula should have been used by RKO in the computation of its California income. The board's formula consisted of a comparison of RKO's California property, payroll and revenues with RKO's total property, payroll, and revenues, both within and outside of California. The board's method thus did not allow RKO to divide its income from the distribution of films between that received from distribution of films produced by it and that received from distribution of films produced by others. The board's formula resulted in a substantial increase in RKO's taxes.

The trial court accepted the stipulated facts as true, and concluded that the production and distribution of motion pictures owned by RKO was a separate and distinct operation from the distribution of pictures owned and produced by independent producers; that the application of a single formula to the separate and distinct operations of RKO to determine its California income was arbitrary, unreasonable and resulted in a tax upon extra-territorial values, and that a fair and reasonable tax would result from the application of the double formula used by respondent in its calculation of California income.

The appellant board contends that RKO was operating a single unitary business consisting of the production and distribution of motion pictures; that formula allocation of its income is mandatory under Revenue and Taxation Code section 25101, and that separate accounting in allocating the income of a unitary business is not permissible. Respondent, on the other hand, takes the position, as it successfully urged in the trial court, that the production by it of motion pictures in California and distribution of its own product throughout the world is a unitary business subject to the use of one formula, while the distribution of pictures produced and owned by others is a separate and distinct operation to which a separate formula is applicable.

The decisive issue in the case is whether respondent was engaged in a single unitary business, or in two separate and distinct business operations. As we have seen, the trial court sustained respondent's contentions, and found that it was in fact engaged in two separate and distinct business operations, and that a fair tax would result from the application of separate formulas to determine California income. The facts, however, were stipulated. There was no dispute about them, and although some oral testimony was received, no factual question was raised. The trial court's findings of fact are confined to a single line, and merely recite that the stipulated facts are accepted as true. Where, as here, there is no dispute as to the facts, the trial court's findings amount only to conclusions of law, and therefore are not binding upon us. (San Diego T. & S. Bank v. San Diego County, 16 Cal.2d 142, 153, 105 P.2d 94, 133 A.L.R. 416; Leis v. City and County of San Francisco, 213 Cal. 256, 258, 2 P.2d 26; Household Finance Corp. v. Franchise Tax Board, 230 Cal.App.2d 926, 931, 41 Cal.Rptr. 565; 33 Cal.L.Rev. 646, 648.) Upon the stipulated facts, the only conclusion that can be reached here is that respondent was engaged in a single unitary business as a matter of law, and that the application of a single formula embodying factors described in Revenue and Taxation Code section 25101 results in a fair allocation to California of a share of respondent's income.

The Supreme Court of the United States has repeatedly held that a corporation whose income results from a series of transactions involving manufacture in one state with sales in other states is engaged in a unitary business. (See Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 41 S.Ct. 45, 65 L.Ed. 165; Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm., 266 U.S. 271, 45 S.Ct. 82, 69 L.Ed. 282.) Our Supreme Court has reached the same conclusion. Thus, in Butler Brothers v. McColgan, 17 Cal.2d 664, 111 P.2d 334 (affirmed by the United States Supreme Court in Butler Bros. v. McColgan, 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991) our court held that the appellant there was engaged in a single unitary business. In that case the corporation maintained wholesale distributing houses in different states, each serving a separate trading area, and where each handled its own sales, credit and collections, and maintained its own books of account. There was a unity of the whole, however, as evidenced by such common factors as executive salaries, central purchasing and advertising, as well as other items of general corporate expense. The court found a unity of ownership, a unity of operation and a unity of use (17 Cal.2d p. 678, 111 P.2d 334), and determined that the corporation was engaged in a unitary business and that formula allocation of its income was appropriate. Later cases follow the rule of Butler Brothers. (See Edison California Stores v. McColgan, 30 Cal.2d 472, 183 P.2d 16; John Deere Plow Co. v. Franchise Tax Bd., 38 Cal.2d 214, 223--224, 238 P.2d 569, and cases cited; Household Finance Corp. v. Franchise Tax Board, supra.) In Edison California Stores, 30 Cal.2d at page 481, 183 P.2d 334, the court pointed out that 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 corporation's operations are unitary.

The unities of ownership, operation and use described in Butler Brothers are clearly present here. We are concerned here with a single corporate entity having a single corporate income. Thus unity of ownership is obvious and cannot be disputed. Unity of operation appears from the stipulated facts, which disclose the...