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Microsoft Corp. v. Franchise Tax Bd.

Supreme Court of California

August 17, 2006, Filed



 [**1171]  [***218]   WERDEGAR, J.—Ours is a global economy. In contrast, government and the taxing authority used to fund it are national and local. This geographic disparity generates difficulties when each jurisdiction seeks its piece of the economic pie, a pie generated by economic activity that knows no borders.


 The Uniform Division of Income for Tax Purposes Act (UDITPA) 3 attempts to address these problems and fairly assess corporate taxes. Adopted by the District of Columbia and 22 states, including California, it seeks to establish uniform rules for  [***219]  the attribution of corporate income, rules that in theory will result in an equitable taxation scheme—equitable to each jurisdiction, seeking its own fair share, and equitable to the taxpayer, who in the absence of uniform rules faces the prospect of having the same income taxed by two, three, or more different states.

CA(1)(1) The UDITPA's application [****3]  is not always clear. 4 This case requires us to resolve how the UDITPA should apply to income arising from the redemption of marketable securities, a critical aspect of the operations of the treasury departments of many large corporations, including plaintiff Microsoft Corporation (Microsoft). We conclude (1) ] the redemption of marketable securities at maturity generates “gross receipts” that are includible in the formula used to calculate a multistate entity's tax, but (2) the Franchise Tax Board (the Board) has met its burden of establishing that, in this instance, an alternate formula should be used to calculate Microsoft's tax.


CA(2)(2) The United States Constitution bars taxation [****4]  of extraterritorial income. (Container Corp. v. Franchise Tax Bd. (1983) 463 U.S. 159, 164 [77 L. Ed. 2d 545, 103 S. Ct. 2933] (Container Corp.); ASARCO Inc. v. Idaho State Tax Comm'n (1982) 458 U.S. 307, 315 [73 L. Ed. 2d 787, 102 S. Ct. 3103]; Barclays Bank Internat., Ltd. v. Franchise Tax Bd. (1992) 2 Cal.4th 708, 714 [8 Cal. Rptr. 2d 31, 829 P.2d 279] (Barclays Bank).) However, it permits taxation of “an apportionable share of the multistate business carried on in part in the taxing State” (Allied-Signal, Inc. v. Director, Div. of Taxation  [**1172]  (1992) 504 U.S. 768, 778 [119 L. Ed. 2d 533, 112 S. Ct. 2251]) and grants states some leeway in separating out their respective shares of this multistate income, not mandating they use any particular formula (Container Corp., at p. 164). One constitutional method of apportionment, the unitary business/formula apportionment method, “calculates the local tax base by first  [*756]  describing the scope of the ‘unitary business’ 5 of which the taxed enterprise's activities in the taxing jurisdiction form one part, and then apportioning the total income of that ‘unitary business’ between the taxing jurisdiction and the rest of the world on the basis of a formula [****5]  taking into account objective measures of the corporation's activities within and without the jurisdiction.” (Container Corp., at p. 165.) The UDITPA is generally based on this method. (Ibid.)

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39 Cal. 4th 750 *; 139 P.3d 1169 **; 47 Cal. Rptr. 3d 216 ***; 2006 Cal. LEXIS 9522 ****; 2006 Daily Journal DAR 10843

MICROSOFT CORPORATION, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant.

Subsequent History: Companion case at General Motors Corp. v. Franchise Tax Bd., 39 Cal. 4th 773, 47 Cal. Rptr. 3d 233, 139 P.3d 1183, 2006 Cal. LEXIS 9523 (2006)

Time for Granting or Denying Rehearing Extended Microsoft Corporation v. Franchise Tax Board, 2006 Cal. LEXIS 12564 (Cal., Sept. 7, 2006)

Rehearing denied by Microsoft Corp. v. Franchise Tax Bd., 2006 Cal. LEXIS 14122 (Cal., Oct. 25, 2006)

Prior History:  [****1]  Superior Court for City and County of San Francisco, No. 400444, Donald S. Mitchell, Judge. Court of Appeal of California, First Appellate District, Division Three, No. A105312.

Microsoft Corporation v. Franchise Tax Board, 2006 Cal. LEXIS 6778 (Cal., May 11, 2006)

Disposition: The judgment of the appellate court was affirmed.


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Tax Law, Income Taxes, Corporations & Unincorporated Associations, Imposition of Tax, Business & Corporate Law, Corporations, General Overview, State & Local Taxes, Administration & Procedure, Civil Procedure, Appeals, Standards of Review, Questions of Fact & Law, Governments, Legislation, Types of Statutes, Interpretation, Evidence, Burdens of Proof, Clear & Convincing Proof