Opinion ID: 1353007
Heading Depth: 1
Heading Rank: 7

Heading: ADDITIONAL CONTENTION AS TO THE CONSTRUCTION OF SUBSECTION (b) MADE BY AMICUS CURIAE, FRANK M. KEESLING

Text: It is urged that subsection (b) is applicable only where a single corporation engages in a unitary business both within and without the state and is not applicable where the unitary business is carried out by several affiliated corporations. Amicus points out that section 24344 uses the singular term taxpayer, not the plural, and urges that when there are several corporations in the group, some may be foreign corporations not doing business within the state, that literally such corporations are not taxpayers, and that their interest expense is not subject to the limitation. Amicus concludes that literally construed subsection (b) is not applicable to the situation where several corporations file a combined report, that there would then be a hiatus in the statutes as to interest expense in this situation, and that we should fill the gap by adopting rules for the interest deduction analogous to those that would be applied to the case of a single taxpayer conducting a unitary business both within and without the state. [12] It is further concluded that, since such a single taxpayer could not receive intercompany dividends, intercompany dividends should be disregarded in computing the interest expense deduction where there is a group of corporations rather than a single corporation conducting the unitary business. There are several defects in this line of reasoning. First, even assuming that the word taxpayer is limited to a corporation which does business within the state, section 24344 could be applied to the multi-corporation situation, and there is no need to resort to the adoption of rules by analogy. The word taxpayer appears in both subsections of section 24344, and subsection (a), it will be recalled, is the section which makes interest expense a deduction. Applying taxpayer as urged and the balance of the section literally would mean that the only interest expense allowed under subsection (a) would be that of the corporation doing business in California, and according to subsection (b) the only dividends to be used to reduce that interest expense would be those received by the corporation doing business in the state. Thus, all interest paid by corporations which, although members of the unitary group, did no business in California would be entirely ignored and so would the dividends received by those corporations. Interest and dividends which would be recognized in California would then be treated the same as outlined in the earlier part of this opinion. For example, the interest paid by Pacific would be taken into account under subsection (a) as a deduction, and then under subsection (b) dividends received by Pacific would be taken into account to reduce the deduction. The same would be done with American, Western Electric, and Bell Laboratories, each of which does some business in California and therefore would be a taxpayer. Interest expense and dividend income of the remaining corporations of the Bell System would be entirely ignored. The argument of amicus must be rejected because even assuming his definition of taxpayer were correct, his next premise would not follow. Contrary to his position, the statute could still be applied to the multi-corporation situation, and there would be no need to adopt rules by analogy. Moreover, even if we were required to resort to analogy, it appears that amicus has chosen the wrong analogy. The problem is whether to analogize to a single corporation conducting a unitary business in several states or to a corporation receiving dividends from unaffiliated corporations. In Safeway, where we were concerned with a unitary business and intercompany dividends for purposes of income, we concluded that those dividends would be treated substantially the same as dividends from unaffiliated corporations and rejected the argument that, since no tax would be due if there was only a single corporation, intercompany dividends should not be taxable. (3 Cal.3d at p. 749.) The same should be true where, as here, we are concerned with intercompany dividends for purposes of calculating the interest expense deduction. [13] We are satisfied that the argument made by amicus is intrinsically unsound, and it is unnecessary to consider other objections to his argument.