Opinion
C081522
07-27-2017
FIDELITY NATIONAL INFORMATION SERVICES, INC., Plaintiff and Appellant, v. FRANCHISE TAX BOARD, Defendant and Respondent.
NOT TO BE PUBLISHED California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 34201300148015CUNPGDS)
Fidelity National Information Services, Inc. (Fidelity) appeals from a judgment entered in favor of the Franchise Tax Board after a bench trial on Fidelity's complaint for a refund of taxes. On appeal, Fidelity contends: (1) the trial court erred when it ruled that capital gains from the sale of its stock in Covansys Corporation was business income subject to tax by California and (2) treating the gains as business income violates the due process clauses of the California and federal Constitutions. With respect to the first issue, we agree with Fidelity that the court erred when it failed to address Fidelity's argument that, even if the Covansys stock was an integral part of Fidelity's business operations at one time, it was a nonbusiness investment long before it was sold. We reject Fidelity's other challenges to the trial court's determination. We need not reach Fidelity's constitutional argument because we reverse and remand for further proceedings.
I. BACKGROUND
A. Factual Background
Fidelity is the "world's largest financial technology processor for banks." It provides banking software and support.
Through 2006, Fidelity National Financial owned a significant stake in Fidelity National Information Services, Inc.
Around 2003, Fidelity began searching for an information technology services provider in India as part of an effort to reduce costs. Fidelity wanted to locate a tier-two company because it would have the necessary capabilities but still consider Fidelity to be a significant customer. A tier-one company was less desirable because it might try to approach Fidelity's customers directly. Fidelity selected Covansys. At the time, Covansys's stock was underperforming relative to its peers. Covansys had an existing private equity investor that had installed its own management team.
On April 26, 2004, multiple agreements were entered into: (1) a master service provider agreement between Fidelity and Covansys (Master Service Agreement), (2) a stock purchase agreement between Fidelity and Covansys, (3) a stock purchase agreement between Fidelity and Covansys founder Rajendra Vattikuti and his trust, (4) a recapitalization agreement between Covansys and its existing private equity investor, and (5) a standstill and shareholder rights agreement between Fidelity and Covansys. Through these agreements, Fidelity obtained 29 percent of Covansys's common stock. Under the Master Service Agreement, Fidelity agreed to purchase at least $150 million in services from Covansys over a five-year period or incur a penalty. Brent Bickett, the current president of Fidelity National Financial and the former executive vice president of corporate finance for Fidelity , agreed that Fidelity would have entered into a Master Service Agreement with a third-party vendor regardless of whether it made an equity investment. But he also testified that he wanted to take advantage of the fact that Covansys's stock price would go up the moment the parties signed the Master Service Agreement. The Master Service Agreement was contingent on the completion of the stock purchase outlined in the stock purchase agreement between Fidelity and Covansys. Additionally, the Master Service Agreement contained a "most favored customer" clause guaranteeing Fidelity, Covansys's best prices. The standstill agreement gave Fidelity three seats on Covansys's ten-member board. It also provided that, with exceptions, board committees would include a Fidelity board member as a member or observer. Fidelity also had the right to veto at least two Covansys CEO candidates and a third under specified conditions.
Bickett further testified the Master Service Agreement provided an incentive for Covansys shareholders to approve the stock purchase, but the trial court found this rationale was not credible.
The arrangement between Fidelity and Covansys did not go as planned. By 2006, Fidelity was not meeting the minimum purchase requirement in the Master Service Agreement, and the Covansys board was discussing the applicable penalty payment. Additionally, Fidelity and Covansys had trouble agreeing on a business model or a "go to market" strategy in terms of approaching customers with a price and who would do what and where. After Covansys made a pitch directly to one of Fidelity's customers, Fidelity explored acquiring all of Covansys in order to obtain managerial and operational control and have an effective going-to-market strategy. Ultimately, Fidelity decided to sell all of its interest in Covansys. Between May and July 2007, Fidelity divested itself of its Covansys stock. In August 2007, Fidelity and Covansys amended the Master Service Agreement. This amendment, effective January 1, 2007, eliminated the minimum purchase commitment and the most favored customer clause.
The relationship between Fidelity and Covansys did continue on some level. After total billings of $30 million in 2006 and 2007, respectively, Covansys billed Fidelity more than $21 million for 2008. The Master Service Agreement was later extended through at least December 31, 2014. B. Procedural Background
In its 2007 California tax return, Fidelity, a Florida corporation, reported $309 million in capital gains from the sale of the Covansys stock as nonbusiness income.
The Franchise Tax Board apparently audited Fidelity's return and determined the sale constituted business income within the meaning of Revenue and Taxation Code section 25120, subdivision (a). Accordingly, the Franchise Tax Board assessed additional tax against Fidelity. Fidelity paid the tax and filed a claim for a refund with the Franchise Tax Board. The claim was deemed disallowed under section 19385 because the Franchise Tax Board did not take action on it.
Undesignated statutory references are to the Revenue and Taxation Code.
In July 2013, Fidelity filed its complaint for a refund of taxes. After a five-day bench trial, the court issued a proposed statement of decision. Fidelity filed objections, which the trial court largely overruled. On December 31, 2015, the court issued a 20-page final statement of decision and judgment in favor of the Franchise Tax Board. As it had in its proposed statement of decision, the court concluded the gain from the sale of Covansys stock constituted business income and treating it as such does not violate the due process clauses of the California or federal Constitutions. Specifically, the court held the stock purchase was not a passive investment but an integral part of Fidelity's business operations. "The investment in Covansys along with the attendant agreements allowed the relationship with all of its benefits to become interwoven into the taxpayer's business operations such that it became 'indivisible' or inseparable from the taxpayer's business activities with both giving value to each other."
Fidelity timely appealed.
II. DISCUSSION
A. Standard of Review
" 'In a suit for refund of tax, the burden of proof is on the taxpayer. [Citation.] The taxpayer must not only prove that the tax assessment is incorrect, but also [it] must produce evidence to establish the proper amount of the tax. [Citations.] In an action for refund, "the taxpayer has the burden of proof to show that [it] is entitled to [its] claim. [The taxpayer] cannot assert error and thus shift to the state the burden to justify the tax . . . ." ' " (Dicon Fiberoptics, Inc. v. Franchise Tax Bd. (2012) 53 Cal.4th 1227, 1236.)
"On appeal, we apply the substantial evidence test to the trial court's factual findings, but review legal determinations independently." (Fujitsu IT Holdings, Inc. v. Franchise Tax Bd. (2004) 120 Cal.App.4th 459, 470.) " 'When a finding of fact is attacked on the ground that there is not any substantial evidence to sustain it, the power of an appellate court begins and ends with the determination as to whether there is any substantial evidence contradicted or uncontradicted which will support the finding of fact.' " (Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 881.)
Generally, the judgment is presumed correct on appeal and we indulge in all intendments and presumptions in favor of its correctness. (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1133.) However, if the statement of decision "does not resolve a controverted issue, or if the statement is ambiguous and the record shows that the omission or ambiguity was brought to the attention of the trial court . . . , it shall not be inferred on appeal . . . that the trial court decided in favor of the prevailing party as to those facts or on that issue." (Code Civ. Proc., § 634.) B. Business v. Non-Business Income
California's Uniform Division of Income for Tax Purposes Act mirrors the Uniform Division of Income for Tax Purposes Act. (Hoechst Celanese Corp. v. Franchise Tax Bd. (2001) 25 Cal.4th 508, 518 (Hoechst).) Under this scheme, the business income of a multistate business is apportioned to each state by formula but nonbusiness income is allocable only to the taxpayer's commercial domicile. (Id. at pp. 513, 518.) "The tax treatment of corporate income therefore depends on its classification as business or nonbusiness income." (Id. at p. 519.)
Business income is defined as "income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations." (§ 25120, subd. (a).) Nonbusiness income, in turn, "means all income other than business income." (Id., subd. (d).)
Our Supreme Court has held that section 25120 establishes both a "transactional test" and a "functional test" for business income. (Hoechst, supra, 25 Cal.4th at p. 520.) The trial court determined the gain on Fidelity's sale of Covansys stock was business income based on the functional test. This test, in contrast to the transactional test, focuses on the second clause of section 25120, subdivision (a). (Hoechst, supra, at p. 520.) "Under the functional test, corporate income is business income 'if the acquisition, management, and disposition of the [income-producing] property constitute integral parts of the taxpayer's regular trade or business operations.' " (Id. at p. 527.) The income-producing property may be tangible or intangible, but "the nature of the relationship between this property and the taxpayer's 'business operations' is the critical inquiry." (Ibid.) "[T]he phrase 'acquisition, management, and disposition of the property' establishes that the taxpayer must: (1) obtain some interest in and control over the property; (2) control or direct the use of the property; and (3) transfer, or have the power to transfer, control of that property in some manner." (Id. at pp. 528-529, emphasis omitted.) To be integral, property must make more than a contribution but it need not be necessary to the taxpayer's business. (Id. at p. 531.) The meaning of the term "integral" comes from our Supreme Court's decision in Holly Sugar Corp. v. Johnson (1941) 18 Cal.2d 218 (Holly Sugar), which pre-dates its recognition of the functional test. (Hoechst, supra, at p. 531.) "In Holly Sugar, [the court] held that losses suffered by a taxpayer from the forced liquidation of stock were apportionable because 'the stockholding in question was an integral part of [the taxpayer's] unitary sugar business.' [Citation.] The stockholding was 'integral' because it could not 'reasonably be characterized as an extraneous investment separate and apart from the California business' of the taxpayer. [Citation.] Rather, 'the activities of the two companies' constituted 'one indivisible, composite whole, each portion giving value to every other portion.' [Citation.] Because of 'this organic unity of operation,' [the court] regarded the liquidation of the stockholding as an 'integral' part of the unitary business of the taxpayer." (Id. at pp. 531-532.) Thus, "income is business income under the functional test if the taxpayer's acquisition, control and use of the property contribute materially to the taxpayer's production of business income. In making this contribution, the income-producing property becomes interwoven into and inseparable from the taxpayer's business operations." (Id. at p. 532.)
1. The Trial Court's Examination of Evidence Beyond the Stock
The trial court found that the expected increase in the value of the Covansys stock was not the "overriding motivation" for Fidelity's purchase nor was the stock purchase a passive investment. Rather, the equity investment was an integral part of Fidelity's business and its control and use of the property contributed materially to its production of business income by enabling it to procure needed technical expertise at lower costs. Fidelity's challenges to these conclusions rely primarily on its assertion that the trial court erred in considering anything other than the Covansys stock, and specifically that the court conflated the purchase of the stock with the Master Service Agreement. Thus, our rejection of these arguments renders much of Fidelity's claim that the stock did not satisfy the functional test without merit.
As our Supreme Court has explained, our interpretation of the functional test accords with certain State Board of Equalization decisions. (Hoechst, supra, 25 Cal.4th at p. 533.) "On the one hand, the [State Board of Equalization] has consistently found business income under the functional test where the taxpayer's control and use of the property contributed materially to the production of business income and became an indivisible part of the taxpayer's business. . . . [¶] On the other hand, the [State Board of Equalization] has consistently refused to find business income under the functional test where the taxpayer's control and use of the property did not contribute materially to the production of business income and were separate from the taxpayer's business. For example, . . . the [State Board of Equalization] held that income from the sale of stock in a company constituted nonbusiness income where the taxpayer exercised no control over and received no special benefits from that company." (Id. at pp. 533-534.) A closer examination of this later decision in Appeal of Mark Controls Corp. (Dec. 3, 1986) [1986-1990 Transfer Binder] Cal.Tax Rptr. (CCH) ¶ 401-452, p. 24,566 (Mark Controls) provides a helpful framework for understanding Fidelity's claim that the sale of the Covansys stock did not constitute business income under the functional test, and the trial court's response thereto. In Mark Controls, the State Board of Equalization ruled the appellant's sale of its stock in two corporations did not constitute business income. (Id. at p. 24,570.) The appellant was in the business of manufacturing, selling and installing flow control products, environmental control products and lavatory fixtures. (Id. at p. 24,567.) The sale most analogous to the one at issue in this appeal involved the appellant's purchase of 49.5 percent of the stock in Weir Pacific Valves, Ltd. (Weir), a Scottish manufacturer of ball and butterfly valves, with the intent to expand its licensing and manufacturing operations to the United Kingdom. (Ibid.) The appellant and Weir executed a licensing agreement that allowed Weir to manufacture some of the appellant's products. (Ibid.) There were about $200,000 in annual intercompany sales between the two companies during the relevant years. (Ibid.) Additionally, the appellant placed one of its directors on Weir's board of directors, and that director also became an officer in Weir. (Ibid.) After the appellant acquired the Weir stock, it realized Weir was mismanaged. (Ibid.) The appellant provided two executives to Weir in an attempt to improve its performance, but those efforts failed and the appellant sold the stock. (Ibid.) The State Board of Equalization explained that "[a]ll of appellant's actions were, at most, preparatory to integrating Weir into appellant's unitary business." (Id. at p. 24,569.) There was no evidence "that appellant's employee had any say or influence over Weir's corporate policy or day-to-day operations; in fact, the opposite appears to be true." (Ibid.) "The failure to integrate Weir into appellant's unitary business operation was also evident with regard to the intercompany sales. Nothing in those transactions describe any special economic advantage gained by appellant by choosing Weir as either a supplier or buyer of goods. There were no known guaranteed purchases or sales between the corporations, nor was either company given any special price break on its purchases. Furthermore, there is nothing in the record to indicate that the sales were part of a guaranteed supply of raw materials or finished products to either company." (Ibid.) Under Mark Controls, Fidelity contends it had only the potential to integrate. Fidelity asserts it had no say or influence over Covansys's corporate policy or day-to-day operations, and that the existence of other business agreements should not dictate a finding of business income.
Although we are not bound by administrative decisions construing a controlling statute, we accord " 'great weight and respect to the administrative construction.' " (Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 12.) The weight we give depends " 'upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.' " (Id. at pp. 14-15, italics omitted.) In light of these considerations, our Supreme Court found the State Board of Equalization decisions cited in this opinion highly persuasive in Hoechst. (Hoechst, supra, 25 Cal.4th at pp. 524-525 & fn. 7.)
We conclude the trial court correctly distinguished Mark Controls: "[T]he activities of [Fidelity] and Covansys became integrated as the companies developed a special relationship, providing valuable services to [Fidelity] customers at lower costs than prior to entering into the stock purchase and [Master Service Agreement]." The trial court found the parties gained special advantages through the Master Service Agreement and the stock purchase. Moreover, the "[Fidelity] directors on the Covansys Board had the right to exercise some control[] over Covansys. [Fidelity] had veto authority over the appointment of a Covansys CEO, several of its directors either sat on committees or had guaranteed observer rights to those committees, and through its Board representatives had authority to approve certain transactions, including equity purchases and capital expenditures." Fidelity asserts it was error for the court to conclude, based on the evidence, that it had to "examine the entire transaction including all of the agreements, and surrounding events, and not simply the acquisition of Covansys stock, in isolation, to determine whether the two tests for business income have been met." As indicated above, we disagree with the restrictive application of the functional test urged by Fidelity. Indeed, Mark Controls itself looked beyond the stock to corporate governance and intercompany sales to determine whether the functional test was met. (Mark Controls, supra, [1986-1990 Transfer Binder] Cal.Tax Rptr. (CCH) ¶ 401-452, pp. 24,567-24,570.) And here there was substantial evidence to support the trial court's conclusion that the agreements were entered into in conjunction with one another. In Appeal of CTS Keene, Inc. (Feb. 10, 1993) [1993-1995 Transfer Binder] Cal.Tax Rptr. (CCH) ¶ 402-589, p. 27,569 (CTS Keene), the State Board of Equalization found the functional test was met where the taxpayer and AB Electronic Components, Ltd. (AB) executed new licensing agreements contemporaneously with the taxpayer's acquisition of AB stock. (Id. at p. 27,570.) The State Board of Equalization analyzed the relationship between the licensing agreements and the stock: "The evidence establishes a clear connection between CTS's two purchases of stock from AB and the licensing agreements between the two companies, agreements which expanded AB's manufacturing and marketing of CTS's products in Europe and which generated royalties to CTS that undoubtedly constituted business income." (Id. at p. 27,571.) The trial court found a comparable connection here. Further, the court answered the correct ultimate question when it concluded "that the gain on the sale of Covansys stock should have been properly reported as business income as its acquisition, management and disposition of its equity purchase constituted an integral part of the taxpayer's regular trade or business operations . . . ." To examine the entire relationship between Fidelity and Covansys in reaching this conclusion was not error.
Fidelity argues its minority interest did not give it "control" over Covansys as the trial court concludes. Viewed in context, we do not read the trial court's various uses of the term "control" as manifesting a misunderstanding of the evidence regarding Fidelity's minority interest. Perhaps more significantly, its use of the term "control" does not render its ultimate findings unsupported by substantial evidence.
Fidelity repeatedly and erroneously ascribes one of the Franchise Tax Board's arguments to the trial court. It was the Franchise Tax Board that asserted the trial court must "determine whether the stock . . . and the [Master Service Agreement] contributed materially to Plaintiff's business income." (Italics added.)
Fidelity similarly accuses the trial court of conflating the Covansys stock and the Master Service Agreement. For instance, the trial court found the equity purchase allowed Fidelity to lower its costs and obtain needed technical expertise not found domestically. Fidelity contends the equity purchase itself was not necessary to achieving its goals of lower costs and access to technical expertise, and that the purchase had no bearing on the Master Service Agreement. The problem with Fidelity's argument is that the trial court disagreed, and made logical factual findings to the contrary. For instance, the trial court found the equity purchase allowed Fidelity to obtain the most favored customer clause in the Master Service Agreement. We reject Fidelity's assertion that this finding was not supported by substantial evidence. The Master Service Agreement was contingent on the stock acquisition, and the most favored customer clause was deleted after Fidelity divested itself of the stock. The trial court found this sequence of events demonstrated that the stock purchase was integral to Fidelity's business. Substantial evidence may consist of inferences, so long as they are " 'a product of logic and reason' " and " 'rest on the evidence.' " (Kuhn v. Department of General Services (1994) 22 Cal.App.4th 1627, 1633.) Because the trial court's finding regarding the most favored customer clause was anchored in the evidence and reason, we will not second guess it, even if there is direct testimony to the contrary. (Ibid.; Louis & Diederich, Inc. v. Cambridge European Imports, Inc. (1987) 189 Cal.App.3d 1574, 1584.) Therefore, as a general matter, the trial court's conclusion that "the gain on the sale of Covansys stock should have been properly reported as business income as [Fidelity's] acquisition, management and disposition of its equity purchase constituted an integral part of the taxpayer's regular trade or business operations" was supported by substantial evidence. (See CTS Keene, supra, [1993-1995 Transfer Binder] Cal.Tax Rptr. (CCH) ¶ 402-589, p. 27,571 [finding taxpayer's "real goal was not to achieve a return on the stock itself, but rather was to support AB's efforts, under the licensing agreements, to help create a broader worldwide market for the various products developed by the CTS unitary group"].) Nonetheless, as we discuss next, we find merit to Fidelity's challenge to the trial court's refusal to answer its timing question.
Fidelity also argues the trial court made some erroneous factual findings that render its decision "irrevocably flawed." The parties appear to agree that at least two statements in the trial court's decision were not supported by substantial evidence: (1) Fidelity had the ability to veto any Covansys CFO candidate and (2) "[u]pon completion of the stock purchase, the current CEO of Covansys was replaced with Raj Vattakuti, [Fidelity]'s choice for CEO." We see no reason to conclude these statements rendered the trial court's ultimate decision unsupported by substantial evidence. But because we reverse on other grounds, we need not address these erroneous findings further. --------
2. The Trial Court's Analysis of the Applicable Time Period
Fidelity contends the determination of whether income is properly characterized as business or nonbusiness income should be made at the time of the decision to sell the property. Fidelity asserts that even if the Covansys stock was an integral part of Fidelity's unitary business, at some earlier point in time, the stock was a nonbusiness investment "long before" its sale. There is some support for this factual claim. For instance, the parties began negotiating the amendments to the Master Service Agreement a year before the sale of the stock. Bickett testified the decision to sell the stock had nothing to do with the ongoing Master Service Agreement relationship between Covansys and Fidelity. He also testified the decision to sell the stock was based, at least in part, on Fidelity's interest in liquidity. Nonetheless, the trial court ruled it was not required to apply the functional test at specific moments in time. This was error. State Board of Equalization decisions hold that "[t]he moment of judgment will generally be when the decision to sell is made." (Appeal of Occidental Petroleum Corp. (June 21, 1983) [1981-1984 Transfer Binder] Cal.Tax Rptr. (CCH) ¶ 400-394, p. 22,616, fn. 3 (Occidental Petroleum).) The Franchise Tax Board claims this rule "would turn nearly every asset held by a business into a non-integral asset at the moment of sale . . . ." This argument confuses the question of whether property is integral with whether it is necessary. (Hoechst, supra, 25 Cal.4th at p. 531 ["Construing 'integral' as 'necessary or essential to,' however, is too restrictive. Under this interpretation, many sales of corporate property could not satisfy the functional test because a corporate taxpayer presumably will not sell property unless the property is no longer necessary or essential to its business"].) Property that is integral, in that the taxpayer uses and controls it to contribute materially to the taxpayer's production of business income, may still be expendable. (See ibid.) Regardless, it is possible for a taxpayer to convert stock into a nonbusiness investment prior to its sale. (See Occidental Petroleum, supra, [1981-1984 Transfer Binder] Cal.Tax Rptr. (CCH) ¶ 400-394, p. 22,616, fn. 3 ["If the stock is an integral part of the taxpayer's unitary business at that moment [when the decision to sell is made], the gain or loss will be business income if the sale is made as expeditiously as practicable and the taxpayer has done nothing to covert the stock or the underlying asset into a nonbusiness investment prior to the actual sale"]; see also Cal. Code Regs., tit. 18, § 25120, subd. (c)(2) ["Gain or loss from the sale . . . of real or tangible or intangible personal property constitutes business income if the property while owned by the taxpayer was used in the taxpayer's trade or business. However, if such property was utilized for the production of nonbusiness income or otherwise was removed from the property factor before its sale . . . the gain or loss will constitute nonbusiness income"].) The Franchise Tax Board concedes that this, at least, is the state of the law. The trial court, however, ruled otherwise.
The trial court erroneously relied on Jim Beam Brands Co. v. Franchise Tax Bd. (2005) 133 Cal.App.4th 514 (Jim Beam) to reject Fidelity's argument that the court must examine whether the stock was integral to Fidelity's business operations at the time it was sold. In Jim Beam, the court of appeal rejected the taxpayer's argument that the acquisition, management and disposition of property must each be integral to the taxpayer's regular trade or business operation. (Id. at p. 525.) Jim Beam had stipulated that its acquisition, control and use of the property had contributed materially to its production of business income, but argued the sale of the property did not contribute to its business because the property was profitable and the proceeds from the sale were distributed outside of its unitary business. (Ibid.) The appellate court held it was enough under Hoechst that the control and use of the property contributed materially to Jim Beam's production of business income prior to the sale. (Id. at p. 526; accord Hoechst, supra, 25 Cal.4th at pp. 529, 532.) The appellate court noted Jim Beam's argument incorrectly focused on the income-producing transaction rather than the income- producing property. (Jim Beam, supra, at p. 525; see Hoechst, supra,at p. 527 ["the nature of the relationship between this property and the taxpayer's 'business operations' is the critical inquiry"].) A claim that the sale of the property was not integral to a company's business is different from a claim that the property was only investment property by the time of its sale. Because only the former was at issue in Jim Beam, it is distinguishable from this appeal.
The Franchise Tax Board argues that, despite the trial court's conclusion that it need not reach the issue, it "found that the Covansys equity remained integral to [Fidelity]'s business through the date on which [Fidelity] disposed of the stock." In support of this claim, the Franchise Tax Board relies on the italicized portion of one sentence in the trial court's statement of decision: "The liquidation of the stock was integral as the property was so interwoven into the fabric of the taxpayer's business operations that it becomes indivisible or inseparable from the taxpayer's business activities with both 'giving value' to each other." (Italics added.) As we just explained, whether the sale of stock is integral is fundamentally different from whether the stock itself was integral. (See Jim Beam, supra, 133 Cal.App.4th at p. 525.) The trial court's finding is at best ambiguous as to whether the court—not understanding this distinction—meant to convey that the stock was integral at the time of its liquidation. The trial court misunderstood the law that was applicable to its ruling and, as a result, it did not explicitly or correctly make the necessary legal findings. And Code of Civil Procedure section 634 precludes us from implying that it did so because Fidelity objected to the tentative decision, clarified that it was not making the argument rejected in Jim Beam, repeated its claim that the determination of whether the property was integral should be made at the time of the decision to sell, and noted that the proposed statement of decision did not resolve the legal issue as to when the characterization of income is made. (See In re Marriage of Arceneaux, supra, 51 Cal.3d at p. 1133 [appellate court may not imply findings in favor of the prevailing party when omissions or ambiguities in statement of decision are timely brought to trial court's attention].) The trial court overruled this objection. We recognize, given the other findings contained in its ruling, that the trial court will likely conclude the Covansys stock was still integral at the time of its sale, but we must remand for the trial court to make this determination in the first instance. (See CTS Keene, supra, [1993-1995 Transfer Binder] Cal.Tax Rptr. (CCH) ¶ 402-589, p. 27,571-27,572 ["while appellant would have us believe that the AB stockholding had become a mere investment by the time it was sold, there is no evidence that CTS's reason for owning it ever changed"].) "Where the trial court decides the case by employing an incorrect legal analysis, reversal is required regardless of whether substantial evidence supports the judgment." (Dyer v. Dept. of Motor Vehicles (2008) 163 Cal.App.4th 161, 174.)
III. DISPOSITION
The judgment is reversed and the cause is remanded to the trial court for further proceedings consistent with the views stated herein. The parties shall bear their own costs on appeal. (Cal. Rules of Court, rule 8.278(a)(5).)
/S/_________
RENNER, J. We concur: /S/_________
HULL, Acting P. J. /S/_________
BUTZ, J.