General Mills, Inc. v. Franchise Tax Board
146 Cal. Rptr. 3d 475
Cal. Ct. App.2012Background
- General Mills is a unitary group headquartered in Minneapolis and operating nationwide; it hedges prices of agricultural commodities through futures trading as part of its core business support functions.
- CA Franchise Tax Board sought an alternate UDITPA formula for General Mills, arguing futures trading receipts should be treated differently in the sales factor.
- General Mills I held the full futures sales price should be counted as gross receipts in the UDITPA sales factor, since hedging is a legitimate business activity.
- On remand, the trial court found including futures receipts in the sales factor did not fairly represent CA activity and allowed an alternate formula based on net gains from futures.
- The trial court then admitted seven alternate formulas but ultimately adopted the Net Gains Alternative as reasonable; the trial judgment was entered in 2011.
- The court noted that a later 2011 statutory amendment excludes hedging gross receipts from the sales factor for years beginning in 2011 onward, but the issue here concerns years before that amendment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the standard UDITPA sales factor fairly represents General Mills’ CA activity | General Mills contends the standard formula distorts CA activity due to futures | FTB argues the standard formula may misrepresent activity and warrants 25137 relief | Yes; standard formula does not fairly represent activity and 25137 relief warranted |
| Whether hedging futures is qualitatively different from core sales | General Mills argues hedging is integral; not qualitatively different | FTB contends hedging is qualitatively different and distorts the formula | Yes; hedging is qualitatively different and distorts the sales factor |
| Whether there is substantial quantitative distortion justifying 25137 relief | N/A | FTB shows distortions in profit margins and state allocations | Yes; substantial distortion supports 25137 relief |
| Whether Net Gains Alternative is a reasonable 25137 alternative | N/A | Net Gains Alternative reasonably represents hedge activity | Yes; Net Gains Alternative reasonable and permissible under 25137 |
Key Cases Cited
- Microsoft Corp. v. Franchise Tax Bd., 39 Cal.4th 750 (Cal. 2006) (establishes framework for 25137 relief when standard formula unfairly represents activity)
- Limited Stores, Inc. v. Franchise Tax Bd., 152 Cal.App.4th 1491 (Cal. Ct. App. 2007) (treasury-type distortions can justify 25137 relief)
- Crocker National Bank v. City and County of San Francisco, 49 Cal.3d 881 (Cal. 1989) (mixed questions of fact and law; framework for review of 25137 challenges)
- Ghirardo v. Antonioli, 8 Cal.4th 791 (Cal. 1994) (analysis of 25137 fair representation and mixed questions)