Opinion
For Opinion on Hearing see, 91 Cal.Rptr. 616, 478 P.2d 48.
Opinion on pages 972 to 978 omitted
HEARING GRANTED
See 3 Cal.3d 745 for subsequent opinion.
Thomas C. Lynch, Atty. Gen., of California, Ernest P. Goodman, Asst. Atty. Gen., John J. Klee, Jr., Deputy Atty. Gen., San Francisco, for appellant.
Orrick, Herrington, Rowley & Sutcliffe, William D. McKee, San Francisco, for respondent.
CALDECOTT, Associate Justice.
Plaintiff and respondent, Safeway Stores, Inc., hereinafter referred to as Safeway, brought this action for a refund of a portion of the franchise tax paid to the State of California for the income years 1947 through 1950. The superior [86 Cal.Rptr. 175]court rendered judgment for Safeway and the defendant Franchise Tax Board has appealed from that judgment.
Amendments to the Bank and Corporation Franchise Tax Act, enacted subsequent to the 1947-1950 income years, have substituted 'Franchise Tax Board' for 'Franchise Tax Commissioner.'
As the facts of the case were stipulated to by the parties and as the parties agreed that Safeway and its subsidiaries operated a single unitary business, a detailed description of Safeway's organization and operation is not necessary. Briefly stated, the salient facts of the case are as follows: During the years 1947 through 1950 Safeway operated, directly or through subsidiary corporations, a chain of more than 2000 retail food markets and related meat, grocery, produce and egg warehouses in 23 states, the District of Columbia and the five western provinces of Canada. In connection with its food store business, Safeway, either directly or through subsidiaries, also conducted large scale purchasing, manufacturing and processing operations throughout the United States and Canada. In addition, Safeway, either directly or through subsidiaries, maintained approximately 35 organizations which provided the entire Safeway organization with services in such fields as accounting, financing, advertising and law.
It is agreed that Safeway and its subsidiaries were engaged in a single unitary business. Accordingly, under the principles established in Edison California Stores v. McColgan, 30 Cal.2d 472, 183 P.2d 16 the amount of income earned in California by the members of the group which did business in California was determined by applying a three-factor apportionment formula to the total operating income of the group. The appropriateness of that procedure is not disputed.
In addition to its operating income Safeway was paid dividends by subsidiaries engaged with it in the unitary grocery business described above. These dividends were wholly paid from income from unitary business operations of the declaring corporation or from dividends paid to the declaring corporation by a subsidiary corporation out of the latter's income from unitary business operations. All of the income, from which the dividends were declared, had at one time been included in the combined total of the operating income of Safeway's unitary corporations to which the Franchise Tax Board applied an apportionment formula in arriving at income from California sources.
The only question presented by this appeal is how those intercompany dividends are to be taxed by the franchise tax law.
The Franchise Tax Board contends: (a) that stating that a corporation is a unitary business is just another way of saying that the corporation is doing business both within and without the State of California; and that the business in state and out of state is so related that income earned in California must be determined by formula apportionment rather than by separate accounting; (b) that the unitary concept has nothing to do with taxability of income other than unitary (operating) income, and therefore, the taxability of dividend income is non-apportionable income and should not be affected by whether California's share is computed by the apportionment formula or by separate accounting; that once the California portion of the unitary income is determined, the separate corporate entity of each corporation is recognized, and that this is what is meant by the California Supreme Court in Edison California Stores v. McColgan, supra, 30 Cal.2d 472, 183 P.2d 16; that to the corporation's California share of unitary income must be added all non-unitary income which has a source in California.
The Franchise Tax Board further contends that there is no statutory exemption declaring that dividends are not income when the recipient computes its California share by formula apportionment instead of separate accounting.
Safeway contends that the intercompany dividends do not constitute taxable income and that they must be eliminated, as are all [86 Cal.Rptr. 176]other intercompany items in the consolidated report. It is Safeway's position that the Franchise Tax Board was acting under both section 10 and section 14 of the [86 Cal.Rptr. 177]Bank and Corporation Franchise Tax Act, not just section 10 as the Board contends.
'See. 10. When the income of the bank or corporation is derived from or attributable to sources both within and without the State, the tax shall be measured by the net income derived from or attributable to sources within this State. Such income shall be determined by an allocation upon the basis of sales, purchases, expenses of manufacture, pay roll, value and situs of tangible property or by reference to any of these or other factors or by such other method of allocation as is fairly calculated to determine the net income derived from or attributable to sources within this State. Income from business carried on partly within and partly without this State shall be allocated in such a manner as is fairly calculated to apportion such income among the States or countries in which such business is conducted. Income attributable to isolated or occasional transactions in States or countries in which the taxpayer is not doing business shall be allocated to the State in which the taxpayer has its principal place of business or commercial domicile. Income derived from or attributable to sources within this State includes income from tangible or intangible property located or having a situs in this State and income from any activities carried on in this State, regardless of whether carried on in intrastate, interstate or foreign commerce.
'Sec. 14. In the case of two or more corporations or banks or of one or more banks and one or more corporations, owned or controlled directly or indirectly by the same interests, the commissioner may permit or require the filing of a combined report and such other information as he deems necessary and is authorized to impose the tax due under this act as though the combined entire net income was that of one corporation, or to distribute, apportion, or allocate the gross income or deductions between or among such corporations or banks, if he determines that such consolidation, distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such corporations or banks.
In 1949 the statutory provisions were codified as the Bank and Corporation Tax Law, which became operative July 1, 1951, and is now found in section 23001 et seq. of the Revenue and Taxation Code.
Section 10 provides the formula by which a corporation's income derived from sources both within and without the state, is taxed. Section 14 authorizes the Franchise Tax Board, in taxing two or more corporations owned by the same business, to impose the tax due as though the combined entire net income was that of one corporation and to assess the tax against 'either' corporation whose income is involved in the report.
The parties have stipulated that 'Safeway and its subsidiaries operated a single unitary business.' However, the Franchise Tax Board maintains that the unitary business concept has nothing to do with the taxation of nonoperating income, i.e., intercompany dividends, and as far as the dividends are concerned, it is immaterial whether California's share of the total net income is computed by the apportionment formula (§ 14) or a separate accounting for each corporation. Safeway contends that the Board has elected to tax the respondent as a unitary business under section 14.
If the Board has elected to tax Safeway under section 14, as a single unitary business, then the subsidiaries' income is included together with the parent Safeway's income, and the formula is applied to this total net income. If this has been done the intercompany dividends received by Safeway were declared from income which was included in the measure of tax imposed and hence were paid from income taxed under the act.
Under the stipulation of facts, previously referred to, the parties agreed that the dividends were wholly paid from income which either arose from unitary business operations of the declaring corporation or from dividends declared to the declaring corporation by a subsidiary out of the subsidiary's income from unitary business operation. Also, that all of said income, from which the dividends were declared, had at one time been included in the combined total of the operating income of Safeway's unitary group of corporations to which the Franchise Tax Board applied its apportionment formula in arriving at income from California sources.
Although the tax was not assessed primarily against the subsidiaries, it was assessed against Safeway, their income was included in the total income, and thus their income was being taxed.
Section 8 of the act provides in part as follows: 'Sec. 8. In computing 'net income' the following deductions shall be allowed: * * * (h)(1) Dividends received during the income year declared from income which has been included in the measure of the tax imposed by this act upon the bank or corporation declaring the dividends, or from income which has been taxed under the provisions of the Corporation Income Tax Act to the corporation declaring the dividends.' (Cal.Stats.1943, ch. 352, pp. 1414-1415.)
Therefore, in accordance with section 8(h)(1) in computing the 'net income' the intercompany dividends would be deductible.
Looking to see whether the Franchise Tax Board has elected to tax Safeway under section 14 we find the commissioner (now the Board) may permit or require the filing of a combined report and is authorized to impose the tax due as though the combined entire net income was that of one corporation and to assess the tax against 'either' corporation involved in the report. This the Franchise Tax Board elected to do by combining the income of the parent Safeway and the subsidiaries and then imposing the entire tax on one corporation, namely Safeway. Only section 14 permits this procedure. Thus, if this procedure is used the Franchise Tax Board must be proceeding under section 14. Furthermore, the Board's assessment [86 Cal.Rptr. 178]has in effect eliminated all intercompany charges and credits, and it is only under section 14 that this action can be taken. The Franchise Tax Board points out that Safeway did not file a consolidated return but filed separate returns for each corporation. This, however, is immaterial and does not constitute an election by Safeway to be taxed as a separate entity for the reason that the election to file a consolidated return or separate returns does not rest with the taxpayer (with certain exceptions not material here) but rests with the Franchise Tax Commissioner. (§ 14.)
It is clear from these facts that the Franchise Tax Board has elected to proceed under section 14 and that being the case here, section 8(h)(1) is applicable and in computing net income the intercompany dividends are deductible.
The other contentions of the parties need not be discussed.
The judgment is affirmed.
DRAPER, P. J., and HAROLD C. BROWN, J., concur.
'If the commissioner reallocates net income upon his examination of any return, he shall, upon the written request of the taxpayer, disclose to him the basis upon which his reallocation has been made.' (Cal.Stats.1939, ch. 1050, p. 2944.)
'In the case of a corporation doing business within the meaning of this act, whether under agreement or otherwise, in such manner as either directly or indirectly to benefit the members or stockholders of the corporation, or any of them, or any person or persons, directly or indirectly interested in such business, by rendering services of any nature whatsoever, or acquiring or disposing of its products or the goods or commodities in which it deals, at less than a fair price therefor, the commissioner, in order to prevent evasion of taxes or clearly to reflect the income of such corporation, may require a report of such facts as he deems necessary, and may determine the amount which shall be deemed to be the entire net income allocable to this State of the business of such corporation for the calendar or fiscal year, and compute the tax upon such net income. In determining the entire net income the commissioner shall have regard to the fair profits which, but for any agreement, arrangement, or understanding, might be or could have been obtained from dealing in such products, goods or commodities.
'In the case of a corporation liable to report under this act owning or controlling, either directly or indirectly, another corporation, or other corporations, and in the case of a corporation liable to report under this act and owned or controlled, either directly or indirectly, by another corporation, the commissioner may require a consolidated report showing the combined net income or such other facts as he deems necessary. The commissioner is authorized and empowered, in such manner as he may determine, to assess the tax against either of the corporations whose net income is involved in the report upon the basis of the combined entire net income and such other information as he may possess, or he may adjust the tax in such other manner as he shall determine to be equitable if he determines it to be necessary in order to prevent evasion of taxes or to clearly reflect the net income earned by said corporation or corporations from business done in this State.
'Direct or indirect ownership or control of more than 50 per centum of the voting stock of the bank or corporation shall constitute ownership or control for the purposes of this section.' (Cal.Stats.1943. ch. 352, pp. 1434-1435.)