Opinion ID: 1297749
Heading Depth: 1
Heading Rank: 10

Heading: California Bank and Corporation Franchise Tax.

Text: [27] Pacific complains that in arriving at test-period expenses the commission deducted $1,425,000 from taxes actually paid under state law, and that the only issue on this point was how much tax Pacific was legally required to and did pay under the California Bank and Corporation Franchise Tax Act. (Rev. & Tax. Code, § 25102.) Pacific provides no supporting reference to the record herein, showing the amount of tax expense claimed by it and disallowed by the commission. However, from the decision of the commission and its answer filed in this review proceeding, it appears that Pacific's parent company, American, elects to file a consolidated federal income tax return to save millions of dollars of taxes that would otherwise result from the intercorporate payment of dividends. The California Franchise Tax Board requires that state taxes be paid on a combined return basis (see Rev. & Tax. Code, § 25102); as a result some of the intercompany dividends are subject to state income tax. For rate-fixing purposes the commission treats both federal and California taxes as though Pacific paid them by separate returns; i.e., Pacific is regarded as though it were an unaffiliated corporation, and both the tax burdens and the tax benefits resulting from Pacific's position as a unit of the Bell System are passed on to the rate payers. As the commission states in its decision, If we were to treat this matter as [Pacific] contends, namely, determine state income tax on a consolidated return basis and federal income tax on a separate return basis, we would be forcing [Pacific's] rate payers to assume the entire load of California taxes on American's holding company functions. We have elsewhere herein found that [Pacific's] expenses for rate-fixing purposes should not include costs of American's holding company functions. Similarly, if we were to treat this matter on a consolidated return basis for both State and Federal income tax, we would be inconsistent in our treatment of American's holding company functions. We find that the ... separate return method for both California and Federal income tax allowance for rate-making purposes is fair and reasonable. The income taxes allowed as test-period expenses were fixed accordingly, and no error is shown. (Cf. Dyke Water Co. v. Public Utilities Com., supra, 56 Cal.2d 105, 126-127.) In Galveston Electric Co. v. Galveston (1922) 258 U.S. 388 [42 S.Ct. 351, 66 L.Ed. 678], cited by Pacific, dismissal of a federal court action to enjoin an allegedly confiscatory rate set by city ordinance was affirmed; the case did not involve the point whether the burden of higher taxes resulting from an intercorporate structure should be met by the ratepayer while the benefits of the combined return are retained by the shareholders. Nor does any of the other cases cited by Pacific touch this question.