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Amicus curiae letter in General Motors Corp. v. Franchise Tax Board: August 31, 2004.

On August 31, 2004, TEI sent the following letter to the Supreme Court of California as amicus curiae requesting the Court grant review of the California Court of Appeal's decision in General Motors Corp., et al. v. Franchise Tax Board. TEI addressed one issue in the case--the Franchise Tax Board's failure to adhere to the unitary business principle in administering California's research tax credit. The letter was prepared under the aegis of the Institute's State & Local Tax Committee, whose chair is Janet M. Wilson of Halliburton Company.

Tax Executives Institute respectfully requests that this Court grant review of the Court of Appeal's decision in General Motors Corp., et al. v. Franchise Tax Board, Case No. S127086. Review is necessary in order to settle an important question of law. Pursuant to California Rule of Court 28(g), Tax Executives Institute submits the following information in support of this request.

I. Interest of the Amicus Curiae

Tax Executives Institute ("TEI" or "the Institute") 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 Institute was organized in 1944 and has approximately 5,400 members who represent more than 2,800 of the leading corporations in the United States, Canada, and Europe. The Institute is dedicated to promoting the uniform and equitable enforcement of the tax laws, reducing the costs and burdens of administration and compliance to the benefit of both the government and taxpayers, and vindicating the Commerce Clause and other constitutional rights of all business taxpayers. The members of the Institute represent a cross-section of the business community in North America and are engaged in interstate commerce.

The multijurisdictional companies represented by the Institute's membership 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. As a result, TEI members will be directly affected by the ultimate outcome of this case. Specifically, the Franchise Tax Board's failure to adhere to the unitary business principle in administering California's research tax credit is a concern not only for the Institute's members within its five chapters located in California, but also for its members worldwide whose companies conduct research activities within the state.

In sum, this case has significant ramifications for taxpayers other than General Motors Corporation and the other members of its unitary business in California. Its resolution will directly affect the tax liabilities of other businesses subject to California's tax system, and could indirectly affect the tax systems of other states. As individuals who must contend daily with the interpretation and administration of the nation's tax laws, the Institute's members have a vital interest in the proper disposition of this case.

II. Review is necessary to settle an important question of law.

This amicus curiae letter addresses the Court of Appeal's failure to overturn the Franchise Tax Board's improper limitation of General Motors Corporation's California research tax credit.

The unitary business principle provides a framework of taxing the in-state income of multistate enterprises. The in-state tax base is calculated by first defining the scope of the unitary business, of which the taxed enterprise's activities in the taxing state form one part, and then apportioning the total income of the unitary business between the taxing state and other jurisdictions based on a formula taking into account objective measures of the corporation's activities within and without the jurisdiction. Container Corp. v. Franchise Tax Board, 463 U.S. 159, 165 (1983).

There is no dispute in this case regarding the members composing the General Motors Corporation unitary group or the particular members subject to California's income tax. Indeed, there is no dispute regarding the apportionment of income and expenses (including research expenses) among the members of the unitary group or even the computation and amount of the California research credit. Rather, the dispute is over the application of the credit: Consistent with unitary business principle, General Motors Corporation takes the position that the credit should be proportionately shared among the members of the group that likewise shared the research expenses giving rise to the credit, whereas the Franchise Tax Board determined that the credit is limited to one separate member of the unitary group, thereby eviscerating its effectiveness.

Untethered by principle or consistency, the Franchise Tax Board's determination results in a mismatch between the unitary tax base and the research tax credit by artificially imposing a separate-entity limitation on the credit's use. The research credit is based upon research expenses-expenses the Franchise Tax Board agrees were appropriately apportioned among the members of the unitary group in determining the net income for computing the California tax liability. Nevertheless, the Board balks at apportioning the credit and insists on a wooden limitation. The sine qua non of the unitary business principle is the elimination of artificial line-drawing between entities engaged in the same general enterprise, which inures to the benefit of taxpayers and tax administrators alike. To apportion the expense but not the related credit is to rob the rules of their logic, exalt form over substance, and undermine the fairness of California's tax system.

This case has ramifications well beyond the dollars at stake for General Motors Corporation and the other enterprises in California. Because of the significance of its 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 permit the unitary treatment of gross income and expenses while limiting the credits arising from the very same unitary expenses to separate entity application, the unitary business principle, as well as the economic incentive engendered by enactment of the research credit, will be undermined. Other states may be drawn to follow California's lead in curtailing the unitary approach in respect of tax benefits, such as a research credit.

III. Conclusion.

In upholding the Franchise Tax Board's determinations, the decision of the Court of Appeal misapprehends the design and purpose of the unitary principle in respect of California's research tax credit. Having thus fostered bad tax policy within the state, the Court of Appeal's opinion will inure to the detriment of multistate taxpayers beyond the borders of California, frustrating the goal of uniform and equitable tax administration among the states. Therefore, this Court should grant General Motor Corporation's Petition for Review in order to settle an important question of law.
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Publication:Tax Executive
Date:Sep 1, 2004
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