Multistate Tax Alert: California Court of Appeal Rules General Mills’ Hedging Receipts Impermissibly Distorted Sales Factor
Court concludes that it was appropriate for the Franchise Tax Board (“FTB”) to use an alternative apportionment formula
The California Court of Appeal recently held in General Mills, Inc. v. Franchise Tax Board (“General Mills II”)1 that including the taxpayer’s gross receipts from grain commodities hedging in the California sales factor impermissibly distorted the amount of business that the taxpayer conducted in the state. Citing this distortion, the court concluded that it was appropriate for the Franchise Tax Board (“FTB”) to use an alternative apportionment formula under Cal. Rev. & Tax. Code (“CRTC”) Sec. 25137.2 Further, the Court of Appeal held that the FTB’s alternative apportionment formula using net gains was reasonable.
As background, this marks the second time that the Court of Appeal has heard this case involving General Mills Inc. (“General Mills”). In 2009 (General Mills I),3 the court concluded that General Mills’ hedging receipts from futures contracts were “sales” for which gross amounts were includible in the sales factor.However, because the issue of distortion had not been addressed at the trial court level, the court remanded the case for a determination of whether including commodities hedging gross receipts in the sales factor distorted the amount of business conducted by General Mills in California, thereby permitting the use of an alternative apportionment formula. On remand, the trial court held that the FTB had supplied clear and convincing evidence that General Mills’ hedging activities were qualitatively different from its primary business, that such receipts quantitatively distorted the amount of business General Mills conducted in California, and that the FTB had supplied a reasonable alternative apportionment formula.
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1 General Mills, Inc. v. Franchise Tax Board, No. A131477 (Cal. Ct. App. Aug. 29, 2012).
2 Unless otherwise specified, all “Section” or “Sec.” references herein are to the CRTC.
3 General Mills, Inc. v. Franchise Tax Board, 172 Cal. App. 4th 1535 (Cal. Ct. App. 2009).