Amicus curiae brief on behalf of Tax Executive Institute, Inc. in support of plaintiffs-appellants

Tax Executive, The, May-June, 2005

IN THE SUPREME COURT OF THE STATE OF CALIFORNIA No. S127086

GENERAL MOTORS CORPORATION, et al., Plaintiffs and Appellants,

v.

FRANCHISE TAX BOARD, Defendant and Appellant.

On April 27, 2005, Tax Executives Institute filed the following brief amicus curiae in General Motors Corporation v. Franchise Tax Board with the Supreme Court of California regarding the Franchise Tax Board's failure to adhere to the unitary business principle in administering California's research tax credit. Last August, TEI sent letter a supporting General Motors' petition requesting the California Supreme Court review the case; that letter appears in the September-October 2004 issue of The Tax Executive at page 412. The brief was prepared under the aegis of the Institute's State and Local Tax Committee, whose chair is Janet M. Wilson of Halliburton Company. Ed. note: Because no member of the Institute's legal staff is admitted to practice in California, Kendall L. Houghton of Sutherland Asbill & Brennan LLP agreed to serve as TEI's counsel of record.

I. Introduction

Tax Executives Institute, Inc. ("TEI" or "the Institute") respectfully requests that the decision of the Court of Appeal that only one member of General Motors Corporation's California unitary group ("unitary group") is entitled to a research credit against the group's California tax liability be reversed.

TEI, organized in 1944, is a voluntary, non-profit association of corporate and other business executives, managers, and administrators who are responsible for the tax affairs of their employers. The more than 2,800 multi-jurisdictional companies represented by the Institute's nearly 5,700 members are significantly affected by the allocation and apportionment of income and expenses--along with the attendant issues related to computation of tax liability--among the various states.

Today, TEI has five California-based chapters and a majority of its non-California-based members work for companies with property, payroll, or sales in the state. Moreover, the companies represented by TEI members collectively engage in substantial research activities, both in California and elsewhere. Thus, the disposition of the research tax credit issue in this case is a concern not only for members within the Institute's five chapters located in California, but for all its members whose companies conduct research activities within the state.

General Motors Corporation and certain affiliated commercial enterprises ("General Motors") compose a unitary business for California tax purposes. California uses the definition of unitary business recognized by the Supreme Court of the United States a quarter-century ago: a business that exhibits "contributions to income resulting from functional integration, centralization of management, and economies of scale." Mobil Oil Corp. v. Comm'r of Taxes, 445 U.S. 425, 438 (1980). The Franchise Tax Board ("FTB") acknowledges that to pass constitutional muster, a finding of a unitary business must be predicated on "a flow of value, not a flow of goods." Container Corp. v. Franchise Tax Bd. 463 U.S. 159, 178 (1983). See FTB Publication 1061, 2004 Guidelines for Corporations Filing A Combined Report 3 (2004) ("[O]nce it is determined that a business with income from sources within and outside the state is unitary, formulary apportionment MUST be utilized.").

Pursuant to Section 23609 of the Revenue and Taxation Code of California, in 1988 General Motors claimed a research credit for its qualifying activities in the state. Section 23609 authorizes a tax credit for California research expenses, based in substantial part on the federal research tax credit provided by Section 41 of the Internal Revenue Code. (1) On audit, the FTB limited the entire amount of the credit to the one member of the unitary group (Delco Electronics) that had nominally incurred the research expenses for the benefit of the unitary group, even though the research expenses had been apportioned among the members of the unitary group in accordance with California's mandatory apportionment formula. As a result of the FTB determination, General Motors was denied the benefit of more than half of the research credit for the 1988 tax year. (2) The FTB's determination was upheld by the Court of Appeal.

No dispute exists regarding the composition of the unitary group subject to California's franchise tax. There is also no dispute regarding the apportionment of income and expenses (including California research expenses) among the members, or even the computation and amount of the California research credit. Rather, this case arises because of the FTB's unfounded singling-out of one member of the unitary group and insistence that it be treated as a separate entity insofar as California's research tax credit is concerned.

II. Argument

By upholding the FTB's single-entity limitation on the application of California's research tax credit in this case, the Court of Appeal ignores the doctrinal underpinnings of the unitary business principle. It likewise misapprehends the operation of California's research tax credit, and, in so doing, renders it inconsistent with unitary theory. The FTB limitation thwarts the intended policy and purpose of the tax credit.