Court Opinion

ID: 9795541
Source: CourtListenerOpinion
Date Created: 2023-08-31 03:31:01.40457+00
Date Added: 2024-06-11T08:30:14.950907
License: Public Domain

*540WERDEGAR, J.
I respectfully dissent.
The Uniform Division of Income for Tax Purposes Act (Rev. & Tax. Code, § 25120 et seq.) (UDITPA) was intended to help the several states avoid laying conflicting claims on the income of multistate businesses, thereby facilitating compliance with the due process and commerce clauses of the United States Constitution. In today’s decision, the court encourages conflicting claims by defining as allocable “business income” (Rev. & Tax. Code, § 25120, subd. (a)) precisely the same type of income that the highest court of a sister state in the only other decision directly on point has defined as nonallocable “nonbusiness income” (id., subd. (d); Union Carbide Corp. v. Offerman (2000) 351 N.C. 310 [526 S.E.2d 167]). The court today, in other words, has ensured the UDITPA will not achieve its intended purpose. To what degree the act will fail, only time will tell.
I suspect the act will fail to a large degree, because the majority’s definition of business income is potentially all-encompassing. What the majority calls the transactional test captures income from transactions and activity in the regular course of the taxpayer’s business. The so-called functional test addresses income from property. “[I]ncome is business income under the functional test,” the majority declares, “if the taxpayer’s acquisition, control and use of the property contribute materially to the taxpayer’s production of business income.” (Maj. opn., ante, at p. 532.) The taxpayer’s creation and indirect management of the ERISA (Employee Retirement Income Security Act of 1974; 29 U.S.C. § 1001 et seq.) trust, the majority reasons, “contributed materially to its production of business income by improving the efficiency and quality of its workforce which, in turn, generated Hoechst’s business income.” (Maj. opn., ante, at p. 536.)
The majority’s broad definition of business income under the functional test has two problems, both of which strike at the heart of the UDITPA’s purpose of fostering the uniform, constitutional allocation of a single taxpayer’s income among the various states entitled to claim a portion thereof.
The first problem is that the majority’s definition of business income under the functional test potentially reaches all income from business-owned property, thereby rendering illusory, or nearly illusory, the category of nonallocable “nonbusiness” income recognized in the UDITPA. (Rev. & Tax. Code, § 25120, subd. (d).) The majority permits the casual reader to assume that some corporate investments, even after today’s far-reaching decision, may not be sufficiently integral to the corporation’s business *541operations for their sale to generate allocable business income. (See maj. opn., ante, at pp. 534-535.) The assumption seems to make the decision less far-reaching and therefore more palatable. But the courts and administrative agencies that wrote the opinions the majority cites for reassurance on this point did not have the benefit of today’s decision. After today’s decision, income from property is allocable business income if there is “an organic unity between the taxpayer’s property and business activities whereby the property contributes materially to the taxpayer’s production of business income.” (Maj. opn., ante, at p. 530.) If this test captures income from an ERISA trust, which a corporation does not own and in which the corporation has only a contingent, reversionary interest, then the test must also capture income from other investments in property owned by the corporation and expected at some point to produce income available for business activities. Because a corporation must be able to draw upon its assets for business purposes as and when necessary, the wise management of cash and surplus assets to achieve an appropriate balance of liquidity, risk and return is just as essential to the production of business income as the wise management of human resources. We can, therefore, be sure the State Board of Equalization will soon ask itself whether income from the cash management accounts and other investments, wherever located, of corporations doing some business in California is not subject to taxation in California on the same basis as reversionary income from an ERISA trust. While the majority correctly observes that the former type of income has not been taxed by nondomiciliary states as allocable business income in the past (see maj. opn., ante, at pp. 534-535), the majority’s decision offers no principled basis for predicting that such income will not be taxed as business income in the future.
The second problem is that the majority’s definition betrays a narrow, parochial focus on the decisions of our own State Board of Equalization. We cannot safely assume our sister states will share the majority’s firm conviction that California law is best. While Californians who participated in drafting the UDITPA may well have been influenced in that exercise by their knowledge of California law (see maj. opn., ante, at p. 522-523), it does not follow that we may properly assume the UDITPA adopted prior California law wholesale, or that we may treat the pre-UDITPA decisions of a single state’s administrative agency as equivalent to authoritative interpretations of a uniform, multistate law. The official comments to the UDITPA do not even mention California law.
That said, I nevertheless agree with the majority that it may be “equitable” (maj. opn., ante, at p. 536) for California to tax the reversion to the extent Hoechst Celanese Corporation has deducted its contributions to the pension *542plan on its prior California tax returns. But equity in this sense is not a concern of the UDITPA. It is, instead, the domain of the tax benefit rule, a judicially developed principle that cancels out an earlier deduction when careful examination shows that a later event is fundamentally inconsistent with the premise on which the deduction was initially based. (Hillsboro National Bank v. Commissioner (1983) 460 U.S. 370, 373, 383 [103 S.Ct. 1134, 1138, 1143, 75 L.Ed.2d 130].)