Apple, Inc. v. Franchise Tax Board
132 Cal. Rptr. 3d 401
Cal. Ct. App.2011Background
- Apple, Inc. filed a refund suit in California seeking $920,482.80 plus interest for 1989 franchise tax adjustments.
- Apple used a water’s-edge unitary approach and had undistributed foreign earnings; it repatriated dividends in 1989 from foreign subsidiaries.
- The key dispute: whether dividends are eliminated under section 25106 using preferential ordering (prior taxed income) or by LIFO within the year.
- FTB allocated and denied parts of interest deductions under sections 24425 and 24402, based on how dividends were treated.
- Trial court ruled against Apple on the 25106/LIFO issue but in Apple’s favor on the interest deduction; judgment granted a full refund to Apple.
- Both sides appealed; the appellate court affirmed in full, including on the interest deduction and attorney-fee rulings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether section 25106 requires preferential ordering or LIFO for dividends | Apple favors preferential ordering to exclude dividends taxed previously. | FTB argues LIFO between years is consistent with law and regulation. | LIFO between tax years is proper; preferential ordering rejected. |
| Whether the interest deduction allocation was properly disallowed under 24425 | Apple contends direct allocation shows dominant domestic purpose; no indirect allocation needed. | FTB argues allocation via fungibility is appropriate to disallow part of the interest deduction. | Court affirmed trial court’s finding that direct allocation applied; no indirect allocation required. |
| Attorney fees award under sections 19717 and 1021.5 | Apple seeks prevailing-party fees due to public-benefit aspects of the decision. | FTB argues no abuse of discretion; fees are not warranted under either statute. | No abuse; fees denied. |
Key Cases Cited
- Fujitsu IT Holdings, Inc. v. Franchise Tax Bd., 120 Cal.App.4th 459 (Cal.App.4th 2004) (discusses inclusion ratio and Eaton-like treatment of Subpart F income in unitary context)
- Microsoft Corp. v. Franchise Tax Bd., 39 Cal.4th 750 (Cal. 2006) (global unitary principles and apportionment framework)
- Safeway Stores, Inc. v. Franchise Tax Bd., 3 Cal.3d 745 (Cal. 1970) (concerning when gross income is included for unitary/combined reporting)
- Farmers Bros. Co. v. Franchise Tax Bd., 108 Cal.App.4th 976 (Cal.App.4th 2003) (SBE/administrative treatment of deductions for nontaxable income)
- Hunt-Wesson, Inc. v. Franchise Tax Bd., 528 U.S. 458 (U.S. 2000) (allocation of interest deductions between taxable and nontaxable income; fungibility cautions)
- Abbott Laboratories v. Franchise Tax Bd., 175 Cal.App.4th 1346 (Cal.App.4th 2009) (treatment of dividends under 24402/24411 post-1989 changes)
- Great Western Financial Corp. v. Franchise Tax Bd., 4 Cal.3d 1 (Cal. 1971) (foundational discussion of allocations and double taxation concepts)
- Northwest Energetic Services, LLC v. California Franchise Tax Bd., 159 Cal.App.4th 841 (Cal.App.4th 2008) (fee-shifting and private attorney general considerations in tax refund actions)