The PACIFIC TELEPHONE AND TELEGRAPH COMPANY, a corporation, Plaintiff and Respondent, v. The FRANCHISE TAX BOARD, Defendant and Appellant.
Defendant Franchise Tax Board (Board) appeals from a judgment in the sum of $1,324,591.96. plus interest, in favor of The Pacific Telephone and Telegraph Company, a corporation (Pacific). The judgment resulted from an action brought by Pacific for a refund of a portion of the franchise taxes paid to the State of California for the year 1960.
Pacific is a corporation having its commercial domicile in California. As a corporation doing business within the limits of this state the measure of the franchise tax due from it is the ‘net income’ for the preceding year. (Rev. and Tax.Code, § 23151.1 ) Accordingly, as applied to the instant case the franchise tax due from Pacific in 1960 is measured by its 1959 income.
Pacific, a subsidiary of American Telephone & Telegraph Company, a corporation (American), is a member of a group of affiliated corporations engaged in a unitary communications business. At times pertinent to this case this unitary business (Bell System) consisted of American, Pacific and 53 other corporations. Other than Pacific, all of these corporations had their commercial domiciles and principal business operations outside of California. With the exception of four members of the Bell System, American owned more than 50 percent of the stock of Pacific and the other members.
As a member of a unitary business Pacific had income derived from or attributable to sources both within and without this state. Because of this circumstance its tax was measured by the ‘net income’ derived from or attributable to sources within this state. (§ 25101.)2 In determining this ‘net income’ it was necessary to ascertain the ‘net income’ of the Bell System and to apportion a part of that income to California. This was accomplished by applying a formula apportionment, pursuant to principles established in Edison California Stores v. McColgan, 30 Cal.2d 472, 183 P.2d 16 which procedure is not disputed.3
In the year 1959, the dividends received by the members of the Bell System amounted to the sum of $772,122,249. Of the total dividends received the amount of $763,777,655 (intercompany dividends) was received from other members of the Bell System and $8,344,594 was received from other companies who were not members off the Bell System. Of the total intercompany dividends in the sum of $763,777,655, the sum of $95,373,025 was paid by Pacific. Included in the total amount of intercompany dividends was the sum of $2,329,250 received by Pacific from its wholly owned subsidiary, Bell Telephone Company of Nevada (Bell of Nevada).
During the year 1959, the Bell System incurred interest expense in the sum of $226,715,715. The deductibility of this interest in determining the ‘net income’ of the Bell System is at the heart of the issue in the instant litigation. The Board determined that none of this interest expense was deductible in arriving at such ‘net income.’ Pacific paid the taxes attributable to the disallowed interest deduction under protest and then brought the instant action for a refund. The court below, in finding in favor of Pacific's claim, held that said interest expense was a deductible item in arriving at ‘net income.’
Also at issue in the present case was the question whether dividends received by Pacific from Bell of Nevada should be included in the measure of Pacific's California franchise tax. The Board determined that these dividends were income notwithstanding that they came from a subsidiary which was a member of the Bell System. Pacific took the position that these dividends must be disregarded in the computation of the combined net income. The trial court also found in favor of Pacific on this issue. This determination was erroneous in view of the recent decision of the Supreme Court in Safeway Stores, Inc. v. Franchise Tax Board, 3 Cal.3d 745, 91 Cal.Rptr. 616, 478 P.2d 48, decided subsequent to the trial of the instant case.
In Safeway, it was held that at the times there involved dividends paid to a corporation having a commercial domicile in California by subsidiary corporations were subject to franchise tax where the parent company and the subsidiaries were engaged in a single unitary business and where such dividends were paid from that portion of the total operating income of the group which had not been taxed when the apportionment formula was applied. (3 Cal.3d at pp. 750–753, 91 Cal.Rptr. 616, 478 P.2d 48.) The Supreme Court concluded that the fact that the total net operating income of the entire group was itself determined on the basis of a consolidated net income report did not mean that the total gross operating income had at one time been included in the measure of tax imposed by the California act. Accordingly, it was held in Safeway that the proper method of taxation for the years in question with respect to a corporation's income from its subsidiaries was to tax dividend income from that portion of the group's total operating income that had not already been taxed by California, namely, by allowing for each dividend received a section 244024 deduction only in the ratio that each subsidiary's earnings and profits attributable to California bore to its total earnings and profits. Under section 24402, deduction is allowed in computing taxable income of ‘Dividends received during the income year declared from income which has been included in the measure of the taxes imposed * * * upon the taxpayer declaring the dividends.’ (See § 24401.)
In the present case Pacific now concedes that ‘Safeway is decisive on the taxability of the Bell Telephone Company of Nevada dividends and any argument to the contrary on this issue is removed from the instant case.’
Turning to the sole issue remaining in this case, i. e., the deductibility of the interest expense in the sum of $226,715,715, we observe that the basic statute which we are called upon to construe in this regard is section 24344, which provides as follows: ‘(a) Except as limited by subsection (b), there shall be allowed as a deduction all interest paid or accrued during the income year on indebtedness of the taxpayer. (b) If income of the taxpayer is determined by the allocation formula contained in Section 25101, the interest deductible shall be an amount equal to interest income subject to allocation by formula, plus the amount, if any, by which the balance of interest expense exceeds interest and dividend income (except dividends deductible under the provisions of Section 24402) not subject to allocation by formula. Interest expense not included in the preceding sentence shall be directly offset against interest and dividend income (except dividends deductible under the provisions of Section 24402) not subject to allocation by formula.’
In applying section 24344 to the instant case we must take cognizance of the fact that under section 25101 the franchise tax is to be measured only by that portion of Pacific's income which had its ‘source’ in California. With respect to dividend income the ‘source’ is the stock upon which the dividend was paid, and, under the doctrine of mobilia sequuntur personam, the taxable situs of the stock is generally held to be at the domicile of the owner of the stock. (Miller v. McColgan, 17 Cal.2d 433, 437–440, 110 P.2d 419; Holly Sugar Corp. v. Johnson, 18 Cal.2d 218, 223, 115 P.2d 8; Southern Pacific Co. v. McColgan, 68 Cal.App.2d 48, 58, 68–69, 156 P.2d 81; Fibreboard Paper Products Corp. v. Franchise Tax Bd., supra, 268 Cal.App.2d 363, 367, 74 Cal.Rptr. 46.) Accordingly, under this rule dividend income from securities are specifically allocable to the domicile of the owner of the stock. (Southern Pacific Co. v. McColgan, supra, 68 Cal.App.2d at pp. 53–56, 156 P.2d 81; Fibreboard Paper Products Corp. v. Franchise Tax Bd., supra.) Thus, dividend income of a foreign corporation doing business in this state, but whose commercial domicile is not in California, is not included in the measure of the California franchise tax (Southern Pacific Co. v. McColgan, supra, 68 Cal.App.2d at p. 57, 156 P. 2d 81) since it is axiomatic that tangible or intangible personal property which is outside of the taxing jurisdiction generally cannot be subject to a property tax.5 (Frick v. Pennsylvania, 268 U.S. 473, 489, 45 S.Ct. 603, 69 L.Ed. 1058; Montgomery Ward & Co. v. Franchise Tax Bd., 6 Cal.App.3d 149, 156, 85 Cal.Rptr. 890; and see Southern Pacific Co. v. McColgan, supra, 68 Cal.App.2d at p. 69, 156 P.2d 81.)
In the instant case the Board applied the doctrine of mobilia sequuntur personam to the dividend income received by the corporate members of the Bell System by specifically allocating the income to the state of the commercial domicile of the corporation which received the dividends. Accordingly, of the total dividends in the sum of $772,122,249 received by members of the Bell System, $2,329,250 of such dividends, i. e., the dividends received by Pacific from Bell of Nevada, were specifically allocated to California. The balance of such dividends amounting to $769,792,999 were directly allocated to states other than California.
The Board, by reason of the use of the specific allocation method required by the rule of mobilia sequunter personam, treated such dividend income as nonunitary. Accordingly, in computing the combined unitary income of the Bell System to which the three-factor allocation formula was applied in order to arrive at the amount of income allocated to California the Board excluded from the combined income all of the total dividend income in the sum of $772,122,249.
In computing interest expense applicable to the California situs, the Board, in applying section 24344, determined that the dividend income of $772,122,249 plus nonunitary interest in the sum of $22,701,920, or a total of $794,824,169, constituted ‘exclusions.’ Since the total of these ‘exclusions' exceeded the interest unitary expenses of $226,715,715, the Board disallowed the entire interest unitary expense as a deduction in arriving at the unitary net income. The Board thus determined the ‘combined allocable income'6 without any deduction for unitary interest expense. The Board then applied the allocation formula percentage of 10.3422 percent to the ‘combined allocable income’ so determined to arrive at the amount of combined income allocated to California. To this sum the Board added the amount of dividends paid by Bell of Nevada to Pacific in the sum of $2,329,250 and other interest income allocated wholly to California. The resulting total was the sum of $245,250,401. From this sum the Board deducted applicable interest expense in the sum of $686,949, leaving a balance of $244,563,452 as net income for California purposes.
The interest deduction in the sum of $686,949 ultimately allowed as an interest expense in arriving at net income for state purposes was computed thusly: The Bell of Nevada dividends in the sum of $2,329,250, plus Pacific's portion of nonunitary interest in the sum of $79,077, or a total sum of $2,408,327, was divided into the total sum of $794,824,169, representing the total dividend income and nonunitary interest of the whole reporting group. The resulting ratio of .30300 percent, designated ‘Calif. to Total,’ was applied to the total unitary interest expense of $226,715,715 to arrive at the sum of $686,949 as interest expense applicable to the California situs.
The Board contends that the extent, if any, to which the Bell System's $226,715,715 of interest expense is deductible in computing operating income of the group is controlled solely by section 24344. The Board argues that pursuant to the provisions of section 24334 the interest deduction is limited to that amount of interest expense which exceeds ‘interest and dividend income not subject to allocation by formula.’ Accordingly, the Board contends that interest expense is not allowed as a deduction in computing income subject to allocation by formula to the extent that the unitary business has interest and dividend income which was not included in the computation of unitary income. In sum, the Board's position is that the subject income from dividends constituted dividend income ‘not subject to allocation by formula’ within the meaning of section 24344.
In support of its position the Board argues that since section 242717 has always provided that ‘dividends' are included within the definition of ‘gross income,’ and since during the tax period in question there was no statutory basis for treating intercompany dividends any differently from any other dividends for purposes of interest deductions, it follows from the very language of section 24344 that none of the $226,715,715 interest expense incurred by the Bell System in 1959 can be deducted in the computation of unitary net income of the group because the amount claimed does not exceed $772,122,249, the amount of the group's dividend income which was not subject to allocation by formula.8
Pacific, on the other hand, contends that the Board's position disregards the very essence of the combined report concept. It is Pacific's position that ‘income in the combined report procedure means income of the reporting group as a whole and that intercompany dividends are not ‘income’ since the payment of such dividends is tantamount to ‘taking money from one pocket and putting it in another.’ Pacific argues that the term ‘taxpayer’ as used in section 24344 means the unitary group making the combined report and that, therefore, the taxpayer cannot be deemed to have received dividend income from itself. Accordingly, it is contended by Pacific that the income reported pursuant to the combined report procedure means the income of the reporting group and that in determining this income all intergroup transactions must be eliminated.
An analysis of the respective contentions indicates that the merit of the respective arguments turns upon the meaning of the phrase ‘dividend income * * * not subject to allocation by formula’ as used in section 24344. In ascertaining such meaning we are satisfied that we must not read the provisions of section 24344 as if they were contained in a vacuum, but that we must read them in conjunction with other statutes which are in pari materia.
In considering the respective contentions we first observe that Pacific is incorrect when in asserts that under section 24344 the term ‘taxpayer’ means the unitary group, i. e., the System. As used in the Bank and Corporation Tax Law (see § 23001) ‘taxpayer’ means any person or bank subject to the California franchise or corporation income tax. (§ 23037.) Accordingly, whenever the term ‘taxpayer’ is used in the statutes pertinent to this case the term has reference to Pacific as the person subject to the franchise tax in question.
Adverting to the issue presented we reiterate, initially, that pursuant to section 23151 Pacific, as a corporation doing business in this state, was required to pay a franchise tax according to or measured by its net income. The term ‘net income’ means ‘gross income’ less certain specified deductions. (§ 24341.) As provided in section 24271, ‘ * * * gross income means all income from whatever source derived, including * * * (7) dividends.’ (Emphasis added.) Among the deductions allowed is interest paid or accrued during the income tax year on the indebtedness of Pacific. (§ 24344.) Since Pacific is a member of a unitary business and its income is derived from or attributable to sources both within and without California, its tax is measured by the net income derived from or attributable to sources within this state according to the formula allocation method. (§ 25101.)
In determining ‘gross income’ we apprehend the term ‘dividend,’ as used in section 24271, to mean dividends which, under the doctrine of mobilia sequuntur personam, had their situs California, since only such dividends could have a bearing on Pacific's net income derived from or attributable to sources within California. Accordingly, in the present case the Board was justified in including as part of Pacific's gross income the dividends in the sum of $2,329,250 received by it from Bell of Nevada since these dividends had their situs in California. By the same token the Board acted properly in excluding from consideration as gross unitary income the dividends aggregating $772,122,249 received by members of the Bell System who did not have their commercial domiciles in California. It is apparent, therefore, that these dividend allocations were ‘specific allocations' and that they were allocated without reference to the formula apportionment provided for in section 25101. Accordingly, the excluded dividends in the sum of $777,122,249 were properly excluded from the combined allocable income to which the formula allocation percentage was applied.
Adverting to the interest expense in the sum of $226,715,715, we observe that since this was a unitary expense it was required to be treated as a unitary deduction. (§ 24344.) ‘A unitary deduction is substracted from gross multistate unitary income to produce the net income figure of which part is then allocated to California and included in the measure of the corporation's franchise tax.’ (Fibreboard Paper Products Corp. v. Franchise Tax Bd., supra, 268 Cal.App.2d 363, 373, 74 Cal.Rptr. 46, 53; see §§ 24271, 24341, 23151.) As observed in Fibreboard, such a deduction ‘is in effect ‘allocated’ of California—in whole or in part—in much the same way as income is allocated.' (At p. 373, 74 Cal.Rptr. at p. 53.)
In the instant case, however, the unitary interest expense of $226,715,175 was subject to the application of the restrictions provided in subdivision (b) of section 24344 in determining the extent, if any, to which it should be allowed as a deduction in arriving at the net income of the Bell System. Section 24344, subdivision (b), provides that where the income of the taxpayer is determined by the allocation formula, as is the case here, certain specific applications must be employed. The statute first provides that the interest deductible shall be an amount equal to interest income subject to allocation by formula, plus the amount, if any, by which the balance of interest expense exceeds interest and dividend income not subject to allocation by formula. The first part of this proviso is not applicable here because there was no unitary interest income subject to allocation by formula. The ‘balance of interest expense’ for purposes of the application of the second part of the proviso is, therefore, the total unitary interest expense of $226,715,715. Accordingly, our next inquiry is whether this amount, or any part thereof, exceeds interest and dividend income not subject to allocation by formula. We first observe that the interest not subject to allocation by formula, i. e., nonunitary interest, amounted to $22,701,920. We also observe that of the total amount of dividend income in the sum of $772,122,249, the sum of $8,344,594 was clearly dividend income not subject to allocation since ti came from outside the reporting group. Under the second proviso of section 24344, subdivision (b), providing that interest expense not included in the first proviso shall be directly offset against interest and dividend income not subject to allocation by formula, the interest expense of $226,715,715 is clearly offset against the sum of $31,046,514 representing the total of the aforementioned interest and dividend income, respectively, of $22,701,920 and $8,344,594. We are thus left with the crux of our inquiry, i. e., whether the intercompany dividends in the sum of $763,777,655 constitute dividend income not subject to allocation by formula. We have concluded that while such dividends, broadly speaking, were not subject to allocation by formula they did not constitute dividend income for the purposes and within the contemplation of section 24344.
The franchise tax imposed by section 25151 is measured by a corporate taxpayer's net income of the preceding income year. Since the Board has required Pacific to file a combined report based on earnings of the entire Bell System group, the overriding objective is to determine the real net income of the affiliated group so as to find by apportionment the real net income of Pacific, the California taxpaying member. Accordingly, since the primary objective of the computation is to ascertain the combined net income of the entire reporting group, the inclusion of intercompany dividends under the combined report procedure distorts the net income of the reporting group. This result was apparently recognized by the Board when it properly excluded the intercompany dividends in computing the gross income of the affiliated group. In treating such dividends as an offset against the deduction for interest the Board, in effect, increases the net income of the group by the amount of interaffiliate dividends, even though the real net income of the group remains the same. Under the Board's computation the measure of tax is built up because such computation has the effect of treating intercompany dividends as if they had originally been included as gross income. In sum, the Board adopts an inconsistent position when it excludes intercompany dividends in computing the net income of the unitary group but includes them as income for the purpose of the interest expense offset.9
We are persuaded that the conclusion we have reached finds support in Safeway Stores, Inc. v. Franchise Tax Board, supra, 3 Cal.3d 745, 91 Cal.Rptr. 616, 478 P.2d income attributed to sources outside California when the apportionment formula is applied are not included in measure of the tax imposed by California and that ‘The fact that the combined or consolidated report of the group of corporations reflected total gross income and total deductions of all of the corporations, in order to arrive at the group's total net operating income to which the apportionment formula was applied, does not mean that the total gross income was included in the measure of the tax. * * *’ (At p. 750, 91 Cal.Rptr. at p. 619, 478 P.2d at p. 51.)
The Board argues that the legislative history of section 24344 supports its interpretation of that section. The present text of section 24344 was adopted by the Legislature in 1957 (Stats.1957, ch. 543, § 1, p.1600). Prior to the 1957 revision, the section excluded from the computation, pursuant to section 24344, dividends from corporations, 50 percent or more of the outstanding stock of which was owned by the taxpayer. In 1957, section 24344 was revised to read as it does today. The revision, inter alia, eliminated the exception for dividends from corporations, 50 percent or more of whose stock was owned by the taxpayer. As revised, the section, however, retained the exceptions with respect to dividends deductible under section 24402.10
The Board argues that, since the statute prior to 1957 excluded dividends from 50-percent-or-more-owned affiliates from the section 24344 computation, this had the effect of automatically removing all intercompany dividends. Accordingly, the Board contends that by the elimination of this exception in 1957 the Legislature intended to include intercompany dividends in the section 24344 computation. Reliance is placed on the maxim expressio unius est exclusio alterius, i. e., the mention of one thing implies the exclusion of another thing, for this interpretation. This analysis is incorrect. The pre-1957 exception for dividends paid by a 50-percent-or-more-owned subsidiary was not directed at intercompany dividends in a combined report situation. Intercompany dividends, under a combined report procedure, require ownership or control of more than a 50 percent interest and the conduct of a single unitary business by the affiliated corporations. (See § 25105.) The exception in section 24344, which was eliminated in 1957, applied to dividends paid by a corporation in which the taxpayer owned 50 percent or more of the outstanding stock and to dividends from a corporate affiliate which was not conducting a unitary business with the taxpayer.11 Furthermore, the exception applied to dividends ‘from corporations * * * owned by the taxpayer.’ Intercompany dividends in a combined report situation, however, may be received not only by the taxpayer, but also by other affiliated members of the reporting group, as is true here of nearly all the intercompany dividends in the Bell System.
The Board also makes the point that the 1957 amendment was drafted and proposed by it on the basis of its position, in reliance upon a State Board of Equalization decision (Dohrmann Commercial Co. (1956) 6 Cal. Tax Cases 92), that intercompany dividends were no different from other dividends. The Dohrmann case was not concerned with the application of section 24344; rather, it involved the question whether intercompany dividends received by a corporation domiciled in California could be directly taxed. That question has now been finally resolved in Safeway Stores, Inc. v. Franchise Tax Board, supra, 3 Cal.3d 745, 91 Cal.Rptr. 616, 478 P.2d 48.
Finally, the Board contends that deductions are a matter of legislative grace and that the burden is on the taxpayer to demonstrate that the Legislature had authorized the deduction. Reliance is placed by the Board on the fundamental principle in both federal and California income tax law that expense deductions are allowable only to the extent and in the manner prescribed by statute. (See Commissioner of Internal Revenue v. Sullivan (1958), 356 U.S. 27, 28, 78 S.Ct. 512, 2 L.Ed.2d 559; Hetzel v. Franchise Tax Board (1958), 161 Cal.App.2d 224, 229, 326 P.2d 611.) This principle has no relevance to the instant case. There is no dispute that the interest expense of $226,715,715 is an incurred business expense which is deductible under section 24344, subdivision (a). The only issue is whether the deduction may be offset by dividends paid by various members of the unitary group to other members of the same group. In this context, exclusion of intercompany dividends from section 24344, subdivision (b) computation does not depend on any specific exception, but rather upon the fact that intercompany dividends are not ‘dividend income’ of the combined group.
Pacific has raised an alternate contention to the effect that if the intercompany dividends should be regarded as income in the combined report situation, such income would be ‘unitary income’ rather than ‘income not subject to allocation by formula’ to which section 24344 applies. The conclusion reached by us does not require that we discuss this contention. However, we have determined to do so in order to put such contention at rest. We observe that there is a vast distinction between intercompany transactions which are part of the very operation of the unitary business (such as sales of the telephone receivers by Western Electric to the operating companies) and income received by a corporation by virtue of its ownership of stock. The intercompany dividends do not arise from unitary business transactions but result from payments made pursuant to decisions respecting the declaration of dividends made after income has been generated by the business operations.
Pacific's alternate argument was rejected in Southern Pacific Co. v. McColgan, supra, 68 Cal.App.2d 48, 156 P.2d 81. There Southern Pacific received dividends from several subsidiaries. It was not engaged in the securities business but was merely a holding company receiving dividend income. The dividend income was held not to be unitary income subject to formula apportionment, but held to be taxable in California under the mobilia doctrine because, although Southern Pacific was a foreign corporation, it had a commercial domicile in California so as to give the income-producing securities a ‘taxable situs' in California. (At pp. 51, 55, 66–68, 80–82, 156 P.2d 81.)
Pacific's reliance on Holly Sugar Corp. v. Johnson, supra, 18 Cal.2d 218, 115 P.2d 8, as authority for the proposition that dividends are unitary income, is misplaced. That case expressly affirmed the mobilia doctrine, but held that under the particular facts of the case an exception to the doctrine arose. Holly Sugar holds that intangibles owned by a foreign corporation, engaged in a unitary business in California and elsewhere, may acquire a taxable situs in this state by reason of their association with the local phase of the unitary business and that this may occur even though the corporation's domicile is another state (At pp. 223, 227, 115 P.2d 8.) (See Fibreboard Paper Products Corp. v. Franchise Tax Bd., supra, 268 Cal.App.2d 363, 368, 74 Cal.Rptr. 46.)
In summary, we conclude that the proper computation in the instant case is as follows: We start with the sum of $2,348,128,003 which the Board determined to be the combined net income subject to allocation by formula. This sum, however, did not allow any deduction for interest expense. Pursuant to section 24344 the allowable interest deduction is the sum of $195,669,201 computed as follows: From the total interest expense of $226,715,715 there is deducted the nonunitary interest income of $22,701,920 and the nonunitary dividend income in the sum of $8,344,594. Deducting said interest expense of $195,669,201 from said sum of $23,348,128,003 we arrive at the combined net income in the sum of $2,152,458,802. Applying the three-factor formula of 10.3422 percent to such combined net income, we obtain the net income allocable to California in the sum of $222,611,594. To this sum is added the sum of $2,323,230, representing the Bell of Nevada dividends in the sum of $2,329,250 less $6,020 loss on sale, in items of income which are wholly California. The result is a net income for tax purposes in the sum of $224,934,824. Applying the tax rate of 5.5 percent to this amount, we obtain a tax in the sum of $12,371,415. There was paid on account of this tax the sum of $12,539,204, resulting in an overpayment in the sum of $167,789.
Pacific was required to pay an additional tax in the sum of $911,786 resulting in the sum of $1,079,575 as Pacific's overpayment paid under protest. Pacific was assessed the sum of $116,907 in interest of the alleged deficiency of $911,786 for the period from March 15, 1960 to May 4, 1962 when said deficiency and interest was paid by Pacific. Pacific thus overpaid interest in the sum of $116,907. Accordingly, Pacific is entitled to judgment in the sum of the tax overpayment of $1,079,575 and the interest overpayment in the sum of $116,907, or a total of $1,196,482 together with interest thereon as provided in section 26107.
The judgment is therefore modified by striking therefrom the figures $1,324,591.96 and inserting in lieu thereof the figures $1,196,482, and as so modified, said judgment is affirmed. Each party is to bear its own costs.
It is ordered that the opinion modified herein be published in the official reports.
The petition for rehearing is denied.
1. Unless otherwise indicated, all statutory references are to the Revenue and Taxation Code.
2. Section 25101, in pertinent part, provides: ‘When the income of a taxpayer subject to the tax imposed under this part is derived from or attributable to sources both within and without the state the tax shall be measured by the net income derived from or attributable to sources within this state. * * *’
3. Under the ‘formula allocation’ a three-factor arithmetical computation is applied to the multistate income so as to produce a dollar portion thereof which is reasonably derived from or attributable to sources within California. (Fibreboard Paper Products Corp. v. Franchise Tax Bd., 268 Cal.App.2d 363, 366–367, 74 Cal.Rptr. 46.) In the instant case the three factors used were property, payroll and sales. By a comparison of these factors as applied to Pacific's instate operations to those of the Bell System everywhere a percentage allocable to California was arrived at.
4. The provisions of section 24402 were formerly contained in section 8 of the Bank and Corporation Franchise Tax Act. (Stats.1929, p. 19 et seq., as amended through the year 1950.)
5. There is an exception to the general rule embodied in the maxim mobilia sequuntur personam to the effect that intangible property may acquire a situs for taxation other than the domicile of the owner if it has become an integral part of some local business. (Holly Sugar Corp. v. Johnson, supra, 18 Cal.2d at p. 223, 115 P.2d 8; Southern Pacific Co. v. McColgan, supra, 68 Cal.App.2d at pp. 51–52, 156 P.2d 81; Fibreboard Paper Products Corp. v. Franchise Tax Bd., supra, 268 Cal.App.2d at p. 368, 74 Cal.Rptr. 46.) No contention is made that this exception is applicable to the instant case.
6. In arriving at the ‘combined allocable income’ the Board credited and debited other items designated as ‘state adjustments.’ These items are not pertinent to the issues to be determined in this case.
7. Section 24271, in pertinent part, defines ‘Gross income’ as follows: ‘Except as otherwise provided in this part, gross income means all income from whatever source derived, including (but not limited to) the following items: * * * (7) Dividends; * * *’
8. We observe here that in 1967, by the enactment of section 25106, intercompany dividends paid from unitary income were made nontaxable. Section 25106 provides as follows: ‘In any case in which the tax of a corporation is or has been determined under this chapter with reference to the income and apportionment factors of another corporation with which it is doing or has done a unitary business, all dividends paid by one to another of such corporations shall, to the extent such dividends are paid out of such income of such unitary business, be eliminated from the income of the recipient and shall not be taken into account under Section 24344 or in any other manner in determining the tax of any such corporation.‘In view of pending litigation concerning the proper treatment of intercompany dividends, it is not intended by enactment of this section that any inference be drawn from it in such litigation.’
9. Pacific places strong reliance on sections 25102 and 25104, and asserts that these statutes provide for the use of the combined report procedure and, accordingly, are authority for the proposition that the combined net income of the group is to be determined ‘as though the combined entire net income was that of one person.’ This contention is without merit. A close reading of these statutes indicates that they are applicable in the situation where two or more corporations, both or all of which, are taxable as doing business within this state and such corporations file a consolidated return. Such was the holding in Edison California Stores v. McColgan, supra, 30 Cal.2d 472, 480, 183, P.2d 16, which construed section 14 of the Bank and Corporation Franchise Tax Act, the predecessor of sections 25102 and 25104. It was made clear in Edison that the statutory authority for computing the income of a corporation doing business in California when it is a part of a unitary business, pursuant to the combined report approach, was to be found in section 10 of the Act, now section 25101 of the Revenue and Taxation Code.
10. Prior to 1957, section 24344 provided: ‘There shall be allowed as a deduction all interest paid or accrued during the income year on indebtedness of the taxpayer to the extent that such interest exceeds the income of the taxpayer from interest and dividends, except: (a) dividends deductible under provisions of Section 24402 and (b) dividends from corporations, 50 percent or more or more of the outstanding stock of which is owned by the taxpayer, which is not included in the measure of the tax imposed by this part; or to the extent of interest and dividends included in the measure of the tax imposed by this part, whichever is the greater.’
11. Section 24344, as it reads today, makes specific reference to section 25101, the formula apportionment section. There was no such reference in the section's pre-1957 language.
MOLINARI, Presiding Justice.
SIMS and ELKINGTON, JJ., concur.