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Assessing Taxpayer Risks While Gillette Litigation Continues to Unfold(1)

Friday, December 21, 2012

By Deborah Swann  

In Gillette Co. et al. v. California Franch. Tax Bd.,1 the California Court of Appeal held that the formula under the Multistate Tax Compact for allocating and apportioning income remains available to California multistate taxpayers, notwithstanding the state's attempt to repeal and supersede the Compact formula with a double-weighted sales factor for most business activity.

The case has sent shock waves through California and other states that are members of the Multistate Tax Compact. The California Franchise Tax Board (FTB) responded on Nov. 13, 2012, by filing a Petition for Review to the California Supreme Court. Should the court decide to take discretionary review and ultimately rule in favor of the taxpayers (thereby upholding their right to elect allocation and apportionment under the Compact), California could owe $750 million in refunds, and hundreds of state statutes could be called into question.

With a taxpayer victory in Gillette and facing $34 million in tax refunds to the Gillette taxpayers alone, it might seem reasonable for California to consider some form of retroactive legislation to avoid paying these refunds, especially in light of the U.S. Supreme Court having upheld retroactive tax legislation against due process challenge in United States v. Carlton.2 However, such a statute denying the refund of taxes could be argued to constitute a retroactive withdrawal from the Compact, which both the Compact and Gillette say cannot be done. This and other unresolved issues will be briefly addressed in this article.

What Happened in Gillette:

Gillette addressed whether taxpayers were entitled to elect the Compact formula or had California's 1993 amendment to § 25128 of Cal. Rev. & Tax. Code repealed and superseded that formula, thereby making the state alternative apportionment formula mandatory.3 The Court of Appeal concluded that the Compact was a valid multistate Compact, and that California was bound by it and its apportionment election provision for the years at issue (1997 through 2006) because California had not repealed the Compact and withdrawn from its provisions.

The court stated that, were this a simple matter of statutory construction involving two statutes, § 25128 and the former § 38006, it would be willing to entertain the FTB's argument that § 25128 overrode the election provision of § 38006 that allows taxpayers to apportion income under the Compact formula. The court, however, rejected this construction of § 25128 as ignoring the dual nature of former § 38006, as not just a statute but also the codification of an interstate compact in California.4 The court concluded that:

 

through enactment [of the Compact], California had entered a binding, enforceable agreement with other signatory states… . First, under established compact law, the Compact superseded subsequent conflicting state law. Second, the federal and state Constitutions prohibit states from passing laws that impair the obligations of contracts. And finally, the FTB's construction of the effect of the amended section 25128 runs afoul of the reenactment clause of the California Constitution.5  

 

1. Valid Enforceable Interstate Compact.

Starting with the Compact's dual function as an enforceable contract between member states and as a statute with legal standing within each state, the court concluded that the Compact trumped § 25128, such that for the years at issue, the enactment and subsequent amendment of § 25128 could not override the election offered to multistate taxpayers by § 38006, Art. III(1).

The election provision of § 38006 was characterized as a key mandatory provision of the Compact that required member states to offer multistate taxpayers the option of using either the Compact's three-factor formula to apportion and allocate income for state income tax purposes, or the state's own alternative apportionment formula. Were California to unilaterally delete this “baseline uniformity provision” of the Compact, the state would render the binding nature of the Compact “illusory” and “contribute to defeating one of its key provisions … to promote uniformity or compatibility in significant components of tax systems.”6

2. Impairment of Contracts.

To the extent § 25128 sought “to override and disable California's obligation under the Compact to afford taxpayers the option of apportioning income under the UDITPA7 formula,” it was unconstitutional. Section 25128 violated the federal and state constitutional prohibition against the impairment of contracts.

3. California's Reenactment Rule.

The court determined the legislature had never repealed the three-factor formula contained in the Compact. Under California's constitutional reenactment rule,8 a statute (here, the Compact's election provision, § 38006) may not be amended by reference to its title, and may not be amended unless the section is re-enacted as amended. The stated purpose of the reenactment rule was to avoid enactment of statutes in terms so blind that legislators themselves are deceived in regard of their effect and the public fails to become apprised of the changes made in the laws. Here, § 25128's purported repeal of the taxpayer election to apportion under the Compact left the deleted election provision in § 38006. The court, therefore, concluded that “[t]he Legislature did not repeal, amend or reenact any part of the Compact at the time and thus neither the public nor the legislators had adequate notice that the intent of this amendment was to eviscerate former § 38006.”9

The court reversed the dismissal of the taxpayers' refund suits, with the FTB to bear costs on appeal.

What Happens Next?

Assuming the California Supreme Court accepts review of Gillette and upholds the lower court's decision, the taxpayers' $34 million tax refund suit would be reinstated and go forward for trial.10 At that stage, the doctrine of elections, which requires making an election on an original return, arguably prevents taxpayers from receiving refunds on amended returns serving as their refund claims. The doctrine was highlighted in S.B. 1015, which California enacted shortly after oral argument in Gillette.

S.B. 1015 withdraws California from the Multistate Compact and seeks to bar taxpayers from filing refund claims electing to use the Compact apportionment formula.11 Specifically, S.B. 1015 states “that an election affecting the computation of tax must be made on an original timely filed return for the taxable period for which the election is to apply and once made is binding.” The binding election on an original return is not a change in existing law, but is declaratory of existing law, according to S.B. 1015.

1. S.B. 1015 and Withdrawal From the Compact.

The validity of S.B. 1015's statutory repeal of the Compact comes into question under California's Proposition Proposition 26 (Cal. Const., Art. XIIIA, Sec. 3). Proposition 26 requires a two-thirds legislative vote for any change in a state statute which results in any taxpayer paying a higher tax.12

S.B. 1015 appears to have this result-- of at least one taxpayer paying higher taxes--but was not enacted with a two-thirds vote in both houses. However, it is possible the Legislature will reenact S.B. 1015 with a two-thirds vote in the 2013 session to make it ironclad against Proposition 26 challenges.

2. Doctrine of Elections.

Under the doctrine of elections as declared by S.B. 1015, elections must be made on original timely filed returns. The doctrine generally binds a taxpayer to his initial choice, where the taxpayer had a right to choose one or more alternatives. The doctrine presupposes a choice, however. Here, the FTB has taken the position for the years at issue in Gillette, as well as currently, that § 25128 overrides the Compact apportionment formula, thus excising taxpayers' option to make use of the Compact election. Having taken the position that taxpayers must apportion under §25128, it would appear inconsistent to require taxpayers to have exercised a choice when it is FTB's position that no choice existed at the time of the filing of the original return.

3. Penalties.

Moreover, making a Compact election on an original return can expose taxpayers to the 20 percent large corporate understatement penalty in California, if Gillette is later overturned.13 The penalty applies to corporate taxpayers with an understatement of tax that exceeds the greater of $1 million or 20 percent of the tax shown on an original return.

However, “[a]s long as Gillette is good case law in the state of California, taxpayers will have a comparatively stronger argument for use of the Compact election in California than in other Compact states,” Jamie Yesnowitz, Principal at Grant Thornton LLP in Washington, DC, said.

With respect to other Multistate Tax Compact member states, taxpayers that file a return taking a Compact election position, that is to say, using the equally-weighted three-factor formula (plus any other elements of UDITPA from which the Compact member state has deviated - e.g., business income, cost of performance sourcing, etc.), risk being subjected to penalties.

Another risk is the contradictory rulings in other states. Kendall L. Houghton and Matt Hedstrom, of Alston & Bird LLP in Washington, DC, and New York, are of the view that “Gillette has persuasive weight,” but that taxpayers “must weigh the risks in light of the opposite reasoning and result reached by the court in Michigan in IBM.”14 There the Michigan court's view of the issue was quite different from the California court's, and “[a]lthough the decision was unpublished (and from an intermediate court), it deserves consideration.” Houghton also cautions that taxpayers should also be following the Graphic Packaging Corp. litigation,15 which is pending in Texas. “These risks implicate the necessity of conducting a financial statement reserves analysis,” she stated referring to FIN 48.16

 

4. Refund Claims.

One way to avoid the risk of penalties would be to file a refund claim. But any relief granted to these claims will most likely be in the far future. Filing a refund claim (protective or otherwise), would eliminate the risk of penalties. However, taxpayers are getting in line behind other taxpayers, per guidance issued by Texas (denying the refund claims of businesses attempting to elect to apportion their income under the Compact)17 and Oregon (deferring action on all protective claims until the outcome of the Health Net is known).18 Other Compact member states have also indicated they will deny or defer such refund claims, according to Houghton. This means that resolution of the taxpayer's right to a refund will inevitably be slow in coming.

5. Retroactive Legislation.

Should the procedural approach taken in S.B. 1015--that of relying on the doctrine of elections--be struck down, California may be forced to retroactively change its tax statutes to deny refunds based on Compact elections. Should California decide to legislate a change in its tax law to avoid paying Gillette refund claims simply by retroactively changing its tax law, Constitutional limitations will become relevant. And where tax is concerned retroactive legislation is an open horizon.

In United States v. Carlton,19 retroactive alterations of a federal estate tax statute met the requirements of due process. The Court found that Congress' purpose in enacting the amendment was neither illegitimate nor arbitrary (it had acted to correct a mistake in the original provision that would have created a significant and unanticipated revenue loss), and Congress had acted promptly and established only a modest period of retroactivity.

Following the Carlton prescription, two recent state court cases, General Motors Corp. v. Dept. of Treasury,20 and Miller v. Johnson Controls Inc.,21 upheld retroactive legislation barring certain corporate taxpayers from claiming refunds, thereby allowing statutes with retroactive periods of 6 to 11 years.

Beyond a constitutional test, the compact nature of Gillette raises a significant additional problem. California bound itself by enacting and entering into the Multistate Tax Compact, both as a statutory regime and as a contract, under the terms of which “California could not, by subsequent legislation, unilaterally alter or amend.”22 “As an interstate compact, the Compact is superior to prior and subsequent … law of member states.”23 Therefore, California may run into serious barriers should it decide by one legislative device or another to refuse payment of adjudicated tax refunds. As the court of appeal noted, California would be required to withdraw from the Compact, by enacting a statute repealing the same, and after withdrawal, the state remains liable for any obligations incurred prior to withdrawal.24

Impact on Other States

Currently there are 18 states that have adopted the Compact; 19 counting the District of Columbia.25 Any state that has enacted the Compact could face challenges similar to those in Gillette.

1. Michigan.

Gillette focused on compact law; yet nowhere in the recent unpublished decision of International Business Machines Corp. v. Michigan Dept. of Treas.,26 did the Michigan Court of Appeals focus on classic compact law (as the California Court of Appeal did in Gillette). Instead, the court addressed the conflict between a nonconforming statute and the Compact provisions largely in terms of statutory construction, requiring IBM to compute its tax liability pursuant to the calculation method set forth in the Michigan Business Tax Act, not the Compact. In treating the issue as one of statutory construction, because the Compact was not a binding contract, the court held that the Compact's election provision conflicted with the later-enacted and more specific Business Tax Act, and was thus, repealed by implication. Therefore, the taxpayer did not have the right to elect the Compact's three-factor apportionment formula.

“In the absence of exceedingly clearly-expressed intent by the Legislature,” which would require the Legislature to specifically use the words “contract” or “covenant,” or to explicitly “surrender its power to make such changes,” the Compact's election provision could not survive the enactment of the Business Tax Act nor function as an exception to the Business Tax Act's dictates. The court cited a Michigan Supreme Court advisory opinion and quoted the state's constitution that “[t]he power of taxation shall never be surrendered, suspended or contracted away.”

Faced with what it saw as two conflicting statutory provisions, and finding no way to harmonize them, the court concluded that the Business Tax Act, in essence, repealed by implication the election provision found in the Compact, said Matthew Hedstrom, of Alston & Bird LLP in New York. While the court acknowledged that repeals by implication are disfavored, and that “enacting a conflicting statute might arguably be an improper way to repeal the Compact, [it was] not an impermissible one.”27

Hedstrom noted that right now, we have two very distinct rulings and disparate analytical processes on an issue that implicates and creates some tension with the U.S. Supreme Court's analysis in U.S. Steel,28 which upholds the constitutionality of the Compact.

Michael Herbert, a tax partner in PricewaterhouseCoopers' State and Local Tax practice in San Francisco who assisted Gillette in filing its claims, added that, if the IBM analysis is correct, then the 16 other non-congressionally approved compacts Michigan has entered into from 1947 through 2009 may be ineffectual as binding agreements with the other states.

2. Oregon.

In Health Net Inc. v. Oregon Dept of Rev.,29 the taxpayer has asserted the right to elect the Compact's three-factor formula instead of Oregon's single-sales-factor apportionment. While Oregon has not repealed the Compact nor purported to do so, the Oregon Department of Revenue is deferring action on all protective claims until the outcome of the litigation is known.

3. Texas.

In September 2012, a complaint was filed in Graphic Packaging Corp. v. Comptroller of Public Accounts.30 Taxpayer asserted that Texas law allows election of the Compact's three-factor apportionment formula, and that taxpayer properly made the election with respect to its Texas margin tax. Squarely at issue in this case is whether the Texas margin tax is more akin to an income or gross receipts tax. The election to apportion and allocate in accordance with Article IV of the Compact extends to any taxpayer subject to income tax.

Recent case law in In re Nestle USA Inc.31 and In re Allcat Claims Service L.P.32 indicates that the Texas margin tax is an income tax--that the legislature shifted the basis of tax from capital to net earned surplus, i.e., income.

 

Opportunities for Taxpayers

Article III of the Compact allows a multistate taxpayer to elect to apportion its income to a member state under the laws of the member state or Article IV of the Compact, which is often referred to as UDITPA (Uniform Division of Income for Tax Purposes Act). The Compact election entails using the three-factor apportionment formula33 and “everything else that goes along with UDITPA,” according to Kendall Houghton. The following analytical framework for deciding whether to go forward with a Compact election was posed by Houghton:

•  Making a Compact election means using the UDITPA provisions as incorporated into the Compact. A taxpayer would not be able to pick and choose among the specific Compact provisions of Article IV and conflicting laws of the member state.

•  But does making a Compact election mean the taxpayer ignores all non-UDITPA provisions? UDITPA addressed a set number of issues but not all tax issues a taxpayer may confront in filing its return. At issue is whether using the additional provisions of the state that UDITPA does not itself include or address would be consistent with making a Compact election. In these circumstances the taxpayer might conclude that it is appropriate to use both Compact and state “add-on” provisions, and perhaps it could characterize such a hybrid usage as an “alternate apportionment” election under UDITPA's Article IV, § 18.34

•  What part do the Multistate Tax Commission's (the MTC's) interpretative regulations play in a taxpayer's Compact election? Is the taxpayer bound by those regulations if the state has adopted them? If the state has not adopted the MTC regulations into its law, would the regulations nevertheless serve as mandatory - or elective - interpretative guidance regarding Article IV (UDITPA) provisions of the Compact, or of a Compact election?

•  May electing taxpayers use state-promulgated regulations that are on point but not part the MTC regulations?

 

“This is the heart of the election analysis, and the number of decisions that are to be made as part of this 'Compact decision tree’ practically guarantees that taxpayers with identical facts and figures will produce different Compact election tax returns,” Houghton said.

State Law Compared With UDITPA
1. Differing Definitions of Business and Nonbusiness Income.

Jeffrey S. Reed, of Mayer Brown, New York, New York, noted that many states, including, for example, Alabama, Kansas, and Pennsylvania, have case law interpreting UDITPA provisions to allow gain from the sale of non-core businesses to be treated as nonbusiness income (not included in a corporation's tax base) as long as the corporation no longer conducts such business after the sale. See, e.g., Uniroyal Tire Co. v. Alabama Dept. of Rev.,35Appeal of Chief Industries Inc.,36 and Laurel Pipe Line Co. v. Pennsylvania.37 In response to these decisions and others like them, states have generally amended their statutes to provide that all income is business income within constitutional limits. However, if Gillette continues to be good law and taxpayers can make a Compact election they could then elect into the UDITPA business and nonbusiness income definitions and the favorable case law interpreting those definitions in the disposition of a business.

2. Cost of Performance Sourcing.

In recent years, with respect to services and “sales other than tangible personal property,” states have moved away from a costs-of-performance sourcing regime toward a market sourcing regime. UDITPA § 17(b) requires that sales of other than tangible personal property be sourced to a state if “a greater portion of the income-producing activity is performed in [the state] than in any other State, based on costs of performance.” As a result, the Compact election would implicate using the three-factor apportionment formula and UDITPA sales factor sourcing--i.e., costs of performance--for sourcing sales of services and intangibles, rather than market-based sourcing.

Hedstrom told BNA that, presumably, such an election would benefit taxpayers that are subject to market-based sourcing regimes with significant out-of-state presence. However, whether such an election would benefit any particular taxpayer would involve a multistate review and analysis. “Notably, since a taxpayer would not be able to pick and choose among the specific Compact provisions of Article IV and conflicting laws of the member state, the impact of the Compact election will be dynamic.”

Multistate Tax Commission model regulations generally define costs of performance as direct costs of the taxpayer to produce an intangible or perform a service that gives rise to a particular item of income. Here, again the question is raised as to what part do the Compact regulations play in interpreting Compact provisions to the extent that a state deviates in a meaningful way from the MTC model regulations, Hedstrom added. “The Compact election would also impact conflicting state regulations that specifically address the sourcing of receipts from the license and/or sale of intangibles.”

In 2009, California enacted section § 25128.5, which provided taxpayers with an election to use a single sales factor and market-based sourcing for tax years beginning on or after Jan. 1, 2011. Taxpayers electing single sales factor apportionment must assign sales of services to California “to the extent the purchaser of the service received the benefit of the service in this state.”38 And, sales from intangible property are sourced to California “to the extent the property is used in this state.”39 Those taxpayers that did not make the election were able to continue to use costs-of-performance.

In November, California voters passed Proposition 39, mandating the single-sales factor and market based sourcing for tax years beginning on or after Jan. 1, 2013. Thus, under current California law, the law does not source receipts from services and intangibles using costs of performance, while the compact provisions generally do.

“The question now becomes,” Hedstrom noted, “what options exist for California taxpayers going forward, that is, for tax years 2012 and 2013? May taxpayers elect to apportion using the Compact election for California purposes in either or both tax years?”

He believes the answer implicates what will likely be the subject of future litigation: S.B. 1015, Proposition 39, and the concept of implied repeal/withdrawal (a concept that was addressed by the Michigan Court of Appeals in IBM). Did S.B. 1015 and/or Proposition 39 effectively repeal the Compact? And although Proposition 39 was approved by a majority of California voters, it is highly unclear whether the single-sales factor apportionment formula it requires will become the exclusive method of apportioning income for multistate corporations doing business in California. He advises taxpayers to stay tuned as the Gillette (and IBM) litigation continues to unfold, and other states introduce repealing legislation of their own.

In answering the question: Would the taxpayers benefiting from a costs of performance sourcing rule generally be the taxpayers who would also benefit from an equally weighted three-factor apportionment formula? Hedstrom stated that as a general rule, when looking at the issue isolated to a particular state, out-of-state taxpayers would prefer both costs-of-performance sourcing and three-factor apportionment (as opposed to single sales and market). However, the bottom-line impact for any particular taxpayer would be a fact-specific analysis.

Future of the Multistate Tax Commission

Joe Huddleston, executive director of the Multistate Tax Commission, told BNA that the ultimate effect of the Gillette ruling on MTC will be structural, since California has repealed the compact, and the FTB and Board of Equalization have not yet decided whether the state will continue to pay dues as sovereign members.

The work of MTC began because of the Compact, and many of those efforts can continue with or without the Compact, such as the audit, nexus, and litigation programs, Huddleston said. Even so, the impact of Gillette on the commission may not be as severe as many are predicting. “After the initial tsunami, a lot of people have calmed down and realized it doesn't impact them the same way, or at all,” Huddleston said.

Greg Turner, senior tax counsel with the Council On State Taxation (COST), is not so sanguine. He observed that the MTC makes two conflicting arguments about its function in light of Gillette. On the one hand, the MTC represents itself as a quasi-governmental entity that exists to administer the compact. On the other hand, in its briefs filed in the Gillette case, the MTC argues the compact is not binding and states are free to deviate from it.

“How are they quasi-governmental if the predicate for their existence is a compact that they're arguing before the courts does not mean anything?” Turner asked. “Who are they now if the compact is merely an advisory document?”

Conclusion

Given what has happened so far in the multistate litigation, Yesnowitz sums it up as entirely possible that the highest state courts hearing these matters could come to non-congruent conclusions, which could eventually result in a request for the U.S. Supreme Court to consider whether state legislative efforts to terminate the effect of the Compact election are presumptively valid.


Contributing to this report were Laura Mahoney (Sacramento, Calif.) and Steven Roll, assistant managing editor for state tax with Bloomberg BNA.

1 147 Cal. Rptr. 3d 603 (Oct. 2, 2012).

2 512 U.S. 26 (1994). See also, General Motors Corp. v. Dept. of Treasury, 290 Mich. App. 355, 803 N.W.2d 698 (Ct. App. 2010), cert. denied, 132 S. Ct. 1143, 181 L. Ed. 2d 1018 (2012); Miller v. Johnson Controls Inc., 296 S.W.3d 392 (Ky. 2009), cert. denied,130 S. Ct. 3324, 176 L. Ed. 2d 1240 (2010).

3 Under Article III(1) of the Multistate Tax Compact, adopted by California in 1974:

Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax purposes pursuant to the laws of a party State … may elect to apportion and allocate his income in the manner provided by the laws of such States … without reference to this compact, or may elect to apportion and allocate in accordance with Article IV. Cal. Rev. & Tax. Code §38006, Art III(1).

Article IV of the Compact states:

All business income shall be apportioned to this State by multiplying the income by a fraction the numerator of which is the property factor plus the payroll factor plus the sales factor and the denominator of which is three. Cal. Rev. & Tax. Code §38006, Art IV(9).

In 1993, however, the California Legislature amended § 25128, to set out a different apportionment method from the Compact Formula and leads to a different California apportionment factor for some taxpayers. Section 25128 provides:

Notwithstanding Section 38006, all business income shall be apportioned to this state by multiplying the business income by a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four… . Cal. Rev. & Tax. Code §25128.

4 After oral argument in the case, California enacted S.B. No. 1015, which states: “Part 18 (commencing with Section 38001) of Division 2 of the Revenue and Taxation Code is repealed.” (Stats. 2012, ch. 37, §3, eff. June 27, 2012.) However, neither the effect nor the validity of S.B. 1015 was before the court.

5Gillette, 147 Cal. Rptr. 3d at 615-616. In its analysis of interstate compacts, the court quoted C.T. Hellmuth v. Washington Metro. Area Trans., 414 F. Supp 408, 409 (D.Md. 1974), that, “upon entering into an interstate compact, a state effectively surrenders a portion of its sovereignty; the compact governs the relations of the parties with respect to the subject matter of the agreement and is superior to both prior and subsequent law. Further, when enacted, a compact constitutes not only law, but a contract which may not be amended, modified, or otherwise altered without the consent of all parties.” See also, McComb v. Wambaugh, 934 F.2d 474, 479 (3d Cir. 1991).

6Gillette, 147 Cal. Rptr. 3d at 616. In addition, the court rejected the FTB's alternative argument that § 38006 was superseded and repealed pursuant to the Compact's own withdrawal provision as inconsistent with the Compact's express terms. Under the Compact, a party state is free to withdraw from the Compact “by enacting a statute repealing the same.” Cal. Rev. & Tax. Code §38006, Art X(2). The court construed the withdrawal provision as allowing only for complete withdrawal from the Compact.

7 What the court refers to as the “UDITPA formula” is the apportionment formula provided in Article IV of the Compact.

8 Cal. Const., art. IV, §9.

9Gillette, 147 Cal. Rptr. 3d at 619.

10 The suit represents six consolidated cases: Gillette Company v. California Franch. Tax Bd., No. A130803; Procter & Gamble Manufacturing Co. v. California Franch. Tax Bd., CGC-10-495912;

Kimberly-Clark Worldwide Inc. v. California Franch. Tax Bd., CGC-10-495916;

Sigma-Aldrich Inc. v. California Franch. Tax Bd., CGC-10-496437;

RB Holdings (USA) Inc. v. California Franch. Tax Bd., CGC-10-496438; and

Jones Apparel Group v. California Franch. Tax Bd., CGC-10-499083.

11 The statute provides: “Part 18 (commencing with Section 38001) of Division 2 of the Revenue and Taxation Code is repealed.” (Stats. 2012, ch. 37, §3, eff. June 27, 2012.)

In addition, the legislature found and declared the following:

(a) The doctrine of election (see generally Pacific Nat. Co. v. Welch (1938) 304 U.S. 191), provides that an election affecting the computation of tax must be made on an original timely filed return for the taxable period for which the election is to apply and once made is binding.

(b) The doctrine of election described in subdivision (a) applies to any election that affects the computation of tax under Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001) of Division 2 of the Revenue and Taxation Code, unless otherwise provided.

(c) Subdivision (b) does not constitute a change in, but is declaratory of, existing law.

12 Cal. Const., Art. XIIIA, Sec. 3.

13https://www.ftb.ca.gov/professionals/tax_news_flash/2012/100512.shtml.

14International Business Machines Corp. v. Michigan Dept. of Treas, Mich. Ct. App., No. 306618, unpublished, 11/20/12.

15Graphic Packaging Corp. v. Comptroller of Public Accounts, Tex. Civ. App. No. GN-12-003038 (petition filed 9/27/12).

16 Fin 48 (now Accounting Standards Codification 740-10, or ASC 74010) prescribes a detailed framework for determining unit of account, recognition, measurement, and disclosure for the financial accounting and reporting of uncertain tax positions. It is significantly different from, and more specific than International Financial Reporting Standards (IFRS) or other existing GAAP frameworks, and provides that a tax position for financial statement purposes is not recognized unless the position more likely than not will be sustained upon examination based solely on the position's technical merits. Under FIN 48 an enterprise may recognize the benefits of a tax position if it is more likely than not (a more than 50 percent likelihood), based on the technical merits of the position, that it will be sustained if challenged on examination (including subsequent appeals or litigation).

17 Tex. Comp. of Pub. Accts., Comptroller's Decision,Hearing Nos. 106,508 (July 13, 2012) and 104,752 (Aug. 18, 2011).

18Health Net Inc. v.Oregon Dept of Rev., Or. Tax Ct., No. 120649D, (pending).

19 512 U.S. 26 (1994).

20 290 Mich. App. 355, 803 N.W.2d 698 (Ct. App. 2010), cert. denied, 132 S. Ct. 1143, 181 L. Ed. 2d 1018 (2012).

21 296 S.W.3d 392 (Ky. 2009), cert. denied,130 S. Ct. 3324, 176 L. Ed. 2d 1240 (2010).

22Gillette, 147 Cal. Rptr. 3d at 616.

23Id.  

24Id. Under Article X (2) of the Compact, “[a]ny [State] may withdraw from this compact by enacting a statute repealing the same. No withdrawal shall affect any liability already incurred by or chargeable to a party State prior to the time of such withdrawal.”

25 Full members include Alabama, Alaska, Arkansas, Colorado, Hawaii, Idaho, Kansas, Michigan, Minnesota, Missouri, Montana, New Mexico, North Dakota, Oregon, South Dakota, Texas, Utah, Washington) and Washington, D.C.

26 Dkt. No. 306618 (Mich. Ct. App. 2011) (Nov. 20, 2012).

27International Business Machines Corp. v. Michigan Dept. of Treas.,Mich. Ct. App., No. 306618 (Nov. 20, 2012).

28U.S. Steel Corp. v. Multistate Tax Comm, 434 U.S. 452 (1978).

29 Or. Tax Ct., No. 120649D, (pending).

30 Tex. Civ. App., No. GN-12-003038.

31In re Nestle USA Inc., Tex., No. 12-0518 (Oct. 19, 2012).

32In re Allcat Claims Service L.P., Tex., No. 11-0589 (Jan. 27, 2012).

33 Under the three-factor formula, all business income is apportioned to a state by multiplying the income by a fraction, the numerator of which is the property factor, plus the payroll factor, plus the sales factor and the denominator of which is three.

34 Section 18 of UDITPA provides that ''[i]f the allocation and apportionment provisions of this Act do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any part of the taxpayer's business activity, if reasonable: (a) separate accounting; (b) the exclusion of any one or more of the factors; (c) the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or (d) the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.’’

35 779 So 2d 227 (Ala. 2000).

36 875 P2d 278 (Kan. 1994).

37 642 A2d 472 (Penn. 1994).

38 Cal. Rev. & Tax Code §25136(b)(1).

39 Cal. Rev. & Tax Code §25136(b)(2).

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