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A particular accounting system, though useful or necessary as a business aid, may not fit the different requirements when a State seeks to tax values created by business within its borders. That may be due to the fact that a State in attempting to place upon a business extending into several states its fair share of the burden of taxation is faced with the impossibility of allocating specifically the profits earned by the processes conducted within its borders. Furthermore, the particular system used may not reveal the facts basic to the State's determination.
The tax in dispute is for the calendar year 1936. Butler Brothers paid the minimum tax of $25, asserting that it operated in California during 1935 at a loss of $82,851. The tax commissioner made an additional assessment of $3,798.43 which Butler Brothers paid, together with interest, under protest. This suit was brought to recover back the amount so paid on the theory that the method of allocation employed by the tax commissioner attributed to California income derived wholly from business done without that State. Butler Brothers challenged the California's Bank and Corporation Franchise Tax Act (act) as applied. The act's tax was applied to corporations doing business within the state and the tax was measured by the corporation's net income for the preceding year.
Was the act constitutional as applied?
The court found the tax commissioner’s method of allocation proper as fairly calculated to assign to California that portion of the net income "reasonably attributable" to the business done there. The tax assessed by the tax commissioner was, therefore, acceptable, and the act itself was constitutional as applied.