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Gillette: "The Best a [Taxpayer] Can Get!"


UPDATE: In anticipation of the flurry of refund claims likely to be filed by taxpayers following the Court of Appeal's decision in Gillette, the Franchise Tax Board on October 5, 2012, issued FTB Notice 2012-01 clarifying the FTB's position on the Compact Election Issue and addressing the procedures for filing a protective refund claim. According to the notice, the FTB will continue to fight Gillette's right to a refund, despite the holding in Gillette, based on the FTB's position that an election to use the MTC apportionment formula must be made on a taxpayer's original return and cannot be made on an amended return. This comes as no surprise given the dollar amounts at issue. While final resolution of the issue may not come anytime soon, taxpayers should consider filing a protective refund claim before the period of limitations expires for open years. To discuss the options available to your company for filing protective refund claims based on Gillette, contact one of the authors of this Alert.


UPDATE: On October 2, 2012, after nearly 2 months of suspense, the California Court of Appeal issued its decision on rehearing in Gillette, reaffirming the taxpayers' right to elect to apportion their income under the Multistate Tax Compact rules. 


With the Gillette decision in their toolbox, multistate taxpayers now have an additional method for claiming apportionment relief from states' overreaching. In states that are members of the Multistate Tax Compact, taxpayers are beginning to assert their right to elect to follow Compact provisions when they differ from statutory rules. After contests in California and Texas, the scorecard reads: Taxpayers 1 – States 1. But we're still in the early rounds, so taxpayers should take action now to protect potential refund claims.


In The Gillette Company, et. al. v. California Franchise Tax Board, No. A130803 (Cal. Ct. App. July 24, 2012), the California Court of Appeals handed taxpayers a victory when it concluded that taxpayers may elect to use the MTC's evenly-weighted three factor apportionment formula rather than the statutory three factor formula with double-weighted sales. Prior to the court's decision, the California legislature attempted to skirt the issue by passing S.B. 1015, repealing all provisions relating to the Compact and withdrawing the state from Compact membership. Nevertheless, the court held that California is contractually bound to the terms of the Compact by virtue of its membership in the MTC. The court based its reasoning on the Contract Clause and Compact Clause of the United States Constitution, concluding that a valid interstate compact agreement supersedes contradictory state legislation so long as the state remains a party to the compact. To the frustration of many taxpayers, however, the Court of Appeals on August 9, 2012 - by its own motion - vacated its July 24 opinion and scheduled the Gillette case for rehearing. Stay tuned in California …


The Texas Comptroller of Public Accounts recently released an order based on similar facts and a similar issue: Are taxpayers who pay the Texas Margin Tax confined to the single-factor gross receipts apportionment formula outlined in Tex. Tax Code Ann. § 171.106(a)? The taxpayer in the case filed a claim for refund from the Comptroller for tax years 2008, 2009, and 2010 asserting that its taxable margin for those periods should be apportioned to Texas using the Compact's three factor formula. The taxpayer's principal claim was that Texas, as a full member of the MTC, is obligated to offer corporate taxpayers the option to use the MTC formula for apportioning its taxable margin. The Comptroller disagreed, concluding that regardless of the state's membership in the MTC, its agency's interpretation of the statutes in carrying out the Margin Tax is due considerable deference. This interpretation is questionable, given the legislature's failure to make the MTC formula expressly inapplicable to the Margin Tax.

Looking Ahead

The decision in Gillette, if upheld on rehearing, would enable taxpayers to recover millions of dollars in payments to which California was never entitled. This also could be a watershed moment for the MTC, which relies heavily upon funds received from California. Regardless of the pending rehearing in Gillette (or decisions in similar cases pending in Michigan and Oregon) and despite the outcome in Texas, taxpayers should consider filing refund claims for income taxes paid to states who are full members of the MTC Compact – most of which have statutes that depart in some way from Compact provisions. In addition to the apportionment formula, other changes may include apportionment sourcing rules, the definition of business income, throw-back and throw-out. Conceivably, even related-party expense add-back statutes might be considered modifications of the MTC apportionment rules. 

For help determining whether to file refund claims in a particular jurisdiction, and what non-conformity issues may be appropriate for your company to include in its refund claims, contact one of the authors of this Alert.

IRS Circular 230 Disclosure: To comply with certain U.S. Treasury regulations, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication, including attachments, was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on such taxpayer by the Internal Revenue Service. In addition, if any such tax advice is used or referred to by other parties in promoting, marketing, or recommending any partnership or other entity, investment plan, or arrangement, then (i) the advice should be construed as written in connection with the promotion or marketing by others of the transaction(s) or matter(s) addressed in this communication and (ii) the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. To the extent that a state taxing authority has adopted rules similar to the relevant provisions of Circular 230, use of any state tax advice contained herein is similarly limited.

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For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Donald M. Griswold
Partner – Washington, D.C.
Phone: +1 202.624.2730

Jeremy Abrams
Counsel – Washington, D.C.
Phone: +1 202.624.2926