Calif. SC refuses to hear Apple tax case

SACRAMENTO, Calif. (Legal Newsline) - The California Supreme Court last week declined to review an appeals court decision forcing the state's Franchise Tax Board to refund more than $900,000 in taxes that it charged Apple Inc. in the 1980s.

In its refusal, the Court also declined to review an aspect of the decision that could have relieved other U.S. multinational corporations, like Apple, from millions in California taxes on income from their foreign subsidiaries.

Despite winning one aspect of the case, the company petitioned the state's high court for review. According to its website, the Court denied Apple's petition Wednesday.

Apple, one of the world's largest multinational corporations, is incorporated in California and has its principal place of business in the state, but operates worldwide as the parent of a number of wholly owned foreign subsidiary corporations.

At issue in the case was California's tax treatment of repatriated dividends paid to the company from certain subsidiaries in its 1989 tax year.

More specifically, the issue was the appropriate method to account for the source from which repatriated dividends are paid, and which of two competing methods is more consistent with the provisions of the state's tax code -- that foreign subsidiary income is appropriately taxed, but only once.

Also in dispute was an interest deduction taken by Apple in its 1989 tax year, but disallowed by the state's Franchise Tax Board.

The board is responsible for administering two of the state's major tax programs: personal income tax and corporation tax.

Apple argued that the board improperly subjected it to double taxation when it applied a last-in-first-out proration of its income, treating the dividends as paid first from current year's earnings, and only then from the most recent prior years' earnings on a year-by-year basis.

The company claimed that a section of the state's tax code requires that such dividends instead be subject to "preferential ordering" and be deemed to be paid first out of income already taxed in prior years and thus eliminated entirely from the recipient's income subject to state tax.

Apple also argued that the board improperly disallowed an interest expense deduction on its domestic borrowing, which the board allocated in part to nontaxable dividends repatriated in the 1989 tax year.

Following a nonjury trial, the San Francisco City and County Superior Court ruled against the company on the dividend ordering issue, but in its favor on the disputed interest deduction.

As a result, the superior court ordered that a refund be paid to Apple in the amount of $920,482.80 plus interest -- the full amount sought by the company in its complaint.

Apple appealed to California's First Appellate District, Division Five, on the dividend ordering issue.

The board cross-appealed, challenging the determination on the interest deduction and the refund order.

The appeals court, in its Sept. 12 opinion, affirmed the superior court's rulings.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.