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Tax refunds for corporations at issue in California compact case

In a complex federal system, determining how much taxpayers owe to each taxing authority requires not only careful calculation. It also requires proper application of the law.

California corporate taxpayers are therefore seeking resolution of a controversy over the apportionment of taxes for business that cross state borders. As many as 80,000 corporate tax returns may be affected by the issue, which is now before the California Supreme Court.

Last month, a California appeals court ruled that the state must allow California businesses to apportion their multistate income using the formula in the Multistate Tax Compact. The compact is designed to encourage uniform taxing procedure in states participating in it.

The wrinkle is that California has repealed its participation in the compact. Businesses are concerned that this will lead other states to defect from the compact as well. This could, in turn, undercut the goal of promoting uniform tax procedures across state lines.

The California Franchise Tax Board, however, is trying to get the state supreme court to overturn the appeals court decision.

The franchise board argues that it could cost California at least $750 million if businesses are allowed to continue using the multistate formula. In the court case itself, the amount at stake is only $34.6 million. But the franchise board says that if it has to give tax refunds to similarly situated taxpayers, the amount could climb to the $750 million figure or beyond.

"California will potentially face additional litigation from taxpayers seeking to raise claims for tax refunds based on Compact provisions that conflict with subsequent legislative changes," the franchise board said in its legal petition.

Sometimes tax litigation is unavoidable, however, if that is the best way to make sure that taxpayers are treated fairly.

Source: "California Sees $750 Million in Refunds at Risk in Court," Bloomberg, Laura Mahoney, 11-21-12

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our California tax litigation page.

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