Plaintiff taxpayer challenged a judgment of the Superior Court of Sacramento County (California), which found in favor of defendant, the franchise tax board’s commissioner (commissioner), in an action to recover additional franchise tax paid under protest.

The taxpayer operated a national manufacturing and retail business with operations and investments in California, which were subjected to a franchise tax as a unitary business. The taxpayer brought an action for overpayment of franchise taxes based on the method of allocation. The trial corporate business lawyers determined that the commissioner properly allocated the taxpayer’s income from its unitary business based on a reasonable three-factor formula that included property, payroll, and sales in computing net income. The court affirmed the trial court’s judgment and concluded that the taxpayer was a typical unitary business that was subject to formula allocation to approximate the income accrued in a given state. The fact that the taxpayer’s accounting system showed less profit in one state or even a loss did not preclude the application of the allocation formula. The formula gave adequate weight to the essential elements responsible for producing income and did not include as income non-business income or extra-territorial value. Rather, the business was evaluated as a whole, without segregating in-state or out-of-state activity. Thus, the formula for the rough approximation of taxes owed sufficed.

The court affirmed the lower court’s judgment for the commissioner in an action by the taxpayer to recover an overpayment of franchise taxes.

Plaintiff trustee brought two actions, to recover franchise taxes and interest paid. The taxes were imposed under the Massachusetts or Business Trust Tax Act of California (Act), Stats. 1933, ch. 1049, p. 2694; Stats. 1935, ch. 323, p. 1084, on the theory that the trust was a business trust doing business within the state. The Superior Court of Sacramento County (California) held that the trust was not a Massachusetts or business trust.

The trust in question was established when the trustee, his mother, and his sister, entered into an agreement which provided that they would vest the title of their respective properties in the trustee, with the trustors as beneficiaries. The whole title to the trust property, both legal and equitable, was vested in the trustee, and the declaration provided that the beneficiaries took no interest or estate therein, their only interest consisted of the right to enforce due performance. On appeal, defendant, the State Treasurer, contended that the trust was a business trust within the meaning of the Act, and that it was doing business and therefore subject to be taxed for such privilege. After review, this court concluded that the transactions engaged in by the trustee were evidence that the trust was doing business within the meaning of the Act. This court was satisfied that the trust was a business trust doing business in the state during the period in controversy, within the meaning of the Act.

The superior court’s judgment was reversed.