Magazine article The CPA Journal

Significant Unitary Developments in California May Provide Refund Opportunities

Magazine article The CPA Journal

Significant Unitary Developments in California May Provide Refund Opportunities

Article excerpt

A number of significant unitary tax developments have occurred over the past year in California. The following is a brief overview of some of the major developments as well as the potential refund opportunities related thereto.

Worldwide Combined Reporting

On November 30, 1990, the Barclays Bank case (225 Cal. App. 3d 1342) was decided by the California Court of Appeals. The court ruled that worldwide combined reporting as applied to a multinational foreign parent is unconstitutional.

The case involves a foreign parent, Barclays Bank International Ltd., whose U.K. subsidiary conducts business in California. The Franchise Tax Board employed the worldwide combined (unitary) reporting method to compute the tax liability of the two subsidiaries engaged in business in California. The Court held that worldwide combined reporting as applied to a unitary group headed by a foreign parent is unconstitutional under the Foreign Commerce Clause. The Appeals Court based its decision almost entirely on the fact that worldwide combined reporting "not only implicated foreign policy issues which must be left to the federal government but violated a clear federal directive as well." The court also concluded that worldwide combined reporting prevents the federal government from "speaking with one voice."

The State Does Not Give Up

The state has appealed the decision to the California Supreme Court which has recently decided to hear the appeal. If the state loses at this level, it is likely that it will appeal the decision to the U.S. Supreme Court. Thus, the issue will not be resolved until a final judgment is entered by one or both of these courts. In any event, it is important for taxpayers that are affected by the Barclays decision to file a protective claim for refund with the California Franchise Tax Board for each year that is not already closed by the statute of limitations.

The California statute of limitations is generally four years from the due date of the return, including extensions. One interesting issue to keep in mind regarding the statute of limitations is that if the corporation's federal income tax return for any year is under audit by the IRS, and the taxpayer has agreed to extend the statute for federal purposes, the California statute of limitations is automatically extended until six months after the expiration of the federal statute.

Right behind Barclays in the California court system is Colgate-Palmolive. At the end of 1988, a California Trial Court Judge held worldwide combined reporting unconstitutional as applied to a domestic multinational. Thus, both domestic and foreign parent multinationals have victories against worldwide combination.

Interestingly, Gray Davis, the Controller of California, estimates that approximately $300 million could be due to foreign corporations like Barclays, if the decision is not reversed. He also estimates that the refund total could increase to approximately $500 million if pending administrative appeals and audits are included. Extending the ruling to cover U.S. based corporations such as Colgate-Palmolive could cost the state approximately $3.3 billion.

Diverse Lines of Business

Another significant development in California deals with the taxation of corporations operating diverse lines of business. In the past, the state has taken the position that corporations conducting diverse businesses generally do not constitute a unitary group. Obviously, these findings disregard the regulatory presumption that the activities of a taxpayer are unitary when strong centralized management exists. …

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