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

Tax Executive, The, May-June, 2005

III. Conclusion

This case has ramifications well beyond the dollars at stake for General Motors Corporation and other business enterprises operating in California. Because of the significance of the state's economy and its status as a compact member of the Multistate Tax Commission, California plays a prominent role in the development of tax policy among the states. Should California apportion gross income and expenses in accordance with the unitary principle while allocating the credits arising from the very same (unitary) expenses to separate members of the unitary group, the unitary business principle will be undermined. Equally important, the incentive effect of the research tax credit will languish. In upholding the FTB's determinations, the Court of Appeal misconstrued California's research tax credit and how it can and should be cohesive with the unitary business principle. Therefore, this Court should reverse the decision below.

(1) R.T.C. Section 23609 allows a tax credit "in an amount determined in accordance with Section 41 of the Internal Revenue Code" for research expenses.

(2) Although the balance of the credit has been carried over to subsequent tax years by Delco Electronics, a portion of the credit remains unused.

(3) In fact, the issue associated with the availability of the research tax credit is distinct from the apportionment calculation issues considered in Appeal of Joyce, Inc., Cal. St. Bd. of Equaliz., Dkt. No. 66-SBE-070 (Nov. 23, 1966) and Appeal of Finnigan, Cal. St. Bd. of Equaliz., Dkt. No. 88-SBE-022 (Aug. 25, 1988).

(4) Under California's unitary tax regime, the ultimate liability for tax does indeed fall on the individual members of a unitary group and is remitted individually. The income and expenses giving rise to the research credit and the tax liability of each member, however, are determined on a group basis and apportioned to the members of the unitary group.

(5) The FTB acknowledges this distinction, Respondent's Answer Brief on the Merits, p.50, n.21.

(6) R.T.C. Section 23051.5(h)(7). In any event, Section 41 was incorporated into R.T.C. Section 23609 for purposes of determining the amount of the credit, and not its application. To the extent Section 41 does apply, it supports the General Motors' approach because in determining the amount of the credit "all members of the same controlled group of corporations shall be treated as a single taxpayer," with each member of the group entitled to a credit equal to "its proportionate share of the increase in qualified research expenses giving rise to the credit." I.R.C. Section 41(f)(1).