In the pending-precedential decision Appeal of Southern Minnesota Beet Sugar Co-op., the California Office of Tax Appeals (OTA) ruled that payroll, property and sales that generated deductible agricultural cooperative income under Cal. Rev. & Tax. Code Section 24404 must be included in the taxpayer’s corresponding payroll, property and sales factors.
The California Franchise Tax Board (FTB) argued that such payroll, property and sales should be excluded from both the numerator and denominator of the apportionment factors because the activities produced deductible income. The FTB relied on Legal Ruling 2006-01, which reflects the agency’s long-standing position that activities not resulting in net business income should not be reflected in the apportionment formula. Despite the FTB’s request for deference to its interpretation, the OTA disagreed with the FTB’s position. Looking to the plain language of the governing apportionment statutes, the OTA concluded that there were no grounds to exclude activities that give rise to apportionable business income whether or not deductible. Specifically, the OTA drew a distinction between income that is deducted, and income that is “exempted,” “excluded,” or “not recognized” under the terms of the Revenue and Taxation Code, the latter of which “generally do not enter into gross income (or gross receipts) to begin with.”
In the Matter of the Appeal of Southern Minnesota Beet Sugar Co-op., 2023-OTA-342P (Cal. OTA March 17, 2023), petition for rehearing denied, 2023-OTA-343 (Cal. OTA June 6, 2023).