Bank of America Wins $5.7 Million Refund From California

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By Laura Mahoney

Bank of America Corp.’s dividends from its $3 billion investment in a Chinese bank weren’t integral enough to its operations to be taxable California business income, the State Board of Equalization said.

In a 4-1 ruling Nov. 14, the five-member elected board rejected arguments from the Franchise Tax Board that Bank of America Corp.’s (BAC) operational ties with China Construction Bank Corp. (CCB) showed the relationship was more than a mere investment. The FTB unsuccessfully pointed to a leasing joint venture, employee exchanges, reciprocal customer referrals and wire transfers, and mutual fee waivers for customers using the other bank’s automatic teller machines as evidence of the ties.

The board granted BAC’s claim for a $5.7 million refund of tax paid on $582 million in net dividends it received in 2008. The bank reported the income on its original return as business income, but filed a claim for refund in 2013 claiming the dividends were nonbusiness income ( In re Bank of America Corp., Cal. Board of Equalization, No. 983272, ruling 11/14/17 ).

The appeal was one of the last major income tax cases the board will hear before the Office of Tax Appeals takes over in January. Lawmakers and the governor stripped the elected board of most of its duties after finding that board members were misusing resources, interfering in daily operations, and threatening managers who wouldn’t go along with them. The board will hear tax appeals for the last time at its December meeting.

One-Way Exchange

BAC told the board that its investment in CCB, which lasted from 2005 to 2011, was a one-way relationship to help the Chinese bank modernize. The Chinese government was seeking investors to improve the country’s bank system as it was preparing to join the World Trade Organization, and a state-owned investment company controlled the Chinese bank.

“It was a one-way exchange of information,” Lauren Hood, who managed the relationship between the two banks for BAC as a senior vice president at the time, told the board. She currently serves as senior vice president for diversity and inclusion at BAC. BAC’s role in the investment was mainly to provide training and expertise in specific areas at the Chinese bank’s request, she said.

BAC’s total ownership of the Chinese bank varied between 8 percent and 19 percent, and it had one person on the CCB board of directors. The American bank sold its investment at the height of the financial crisis as it was shedding investments that weren’t part of its core business, David Belk, senior vice president for global corporate strategy and development at BAC, told the board.

Strategic Agreement

During the investment period, the two banks had a strategic assistance agreement under which BAC agreed to halt retail banking in China and only serve its existing clients, Derick Brannan, managing director at PricewaterhouseCoopers in Sacramento, representing BAC, told the board. Growth in BAC’s business in China at the time was due to overall economic growth—not the investment.

“We could not make any of CCB’s business integral as a matter of contract,” Brannan said. “The primary owner was the Chinese government.”

The FTB argued that BAC’s annual reports, statements from its chief executive officer, and news releases showed the investment included strong operational ties. Any one of the activities performed through the investment was enough to meet the legal test to be classified as business income, Thomas Lo Grossman, attorney for the FTB argued.

For example, the reciprocal wire transfers and client referrals helped BAC increase its client base and serve its clients better, which are fundamental to the American bank’s business, he said.

According to the hearing summary prepared by the SBOE appeals division, the BAC’s loan business grew from $172 million in 2005 to $3.9 billion in 2011.

‘Not Integral’

SBOE Chair Diane Harkey (R) and members Jerome Horton (D), Fiona Ma (D), and George Runner (R) voted to grant the bank’s claim for refund. Members said they didn’t see evidence of integration or interwoven ties between BAC and CCB, as is required under the California Supreme Court’s 2001 ruling in Hoechst Celanese Corp. v. Franchise Tax Board.

Ma, who said she leads delegations to China regularly, said she saw it as an investment that didn’t have much benefit for BAC.

“When you invest in China, it will never be integral to your business,” Ma said. “It is their business. They need your expertise until they get to that level where they don’t need you anymore.”

Yvette Stowers, deputy controller for taxation representing State Controller Betty T. Yee (D), voted against the motion.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif., at

To contact the editor responsible for this story: Cheryl Saenz at

For More Information

Text of the hearing summary is at

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