Citations
- 36 Cal. App. 4th 1794
Full opinion text
Opinion
PARRILLI, J.
A. M. Castle & Co. (Castle) appeals after the trial court denied its claim for a refund of corporate franchise taxes for the tax years 1975 through 1978. The court concluded Castle was unitary with its wholly owned subsidiary, Hy-Alloy Steels Co. (Hy-Alloy), and found that California could therefore include Hy-Alloy’s income in its tax calculation, even though Hy-Alloy did not directly do business in California. We affirm.
I. Facts
California imposes a franchise tax on corporations doing business within this state. The tax depends on the corporation’s net income attributable to in-state sources. (Rev. & Tax. Code, §§ 23151, 25101.) When a corporation doing business in this state has a wholly owned subsidiary operating outside the state, the Franchise Tax Board (Board) must determine whether the subsidiary is “unitary with” the business operating in this state. If it is, the Board combines the income from the out-of-state subsidiary with the income from the corporation doing business in this state and, based on an objective formula, taxes that portion of the total income which is attributable to this state. (See Tenneco West, Inc. v. Franchise Tax Bd. (1991) 234 Cal.App.3d 1510, 1518-1519 [286 Cal.Rptr. 354].) Here, the Board determined that Castle and Hy-Alloy were a unitary business for tax years 1975 through 1978. The Board accordingly combined the income from the two companies and assessed an additional tax of $242,568.49. Castle paid the tax and filed this action for refund.
Castle is a Delaware corporation with headquarters in Franklin Park, Illinois. It is a nationwide competitor in the “metals service center industry.” Generally, Castle buys bulk metals from various mills, and then warehouses and processes those metals for resale to industrial customers. Castle has offices and service centers throughout the United States, including six in California. During the tax years at issue, Castle had more than 1,300 employees nationwide.
Castle sells a wide range of steel, nickel, copper-alloy and aluminum products. Customers may purchase all metal products in standard shapes and dimensions which Castle maintains in its inventory. In addition, Castle often processes the metals to a customer’s individual specifications. Castle has sophisticated metal processing equipment at all of its service centers.
For the period pertinent to this appeal, Hy-Alloy was Castle’s wholly owned subsidiary. Hy-Alloy is a Delaware corporation with a single office in Bedford Park, Illinois. It has approximately 70 employees at that one site. Hy-Alloy distributes specialty metal alloy shapes, including rounds, squares, hexes, flats and tubing for use in aircraft and other high technology commercial products. It buys these shapes directly from the manufacturers. Unlike Castle, Hy-Alloy does not process metal to its customers’ specifications; at most, it provides simple cutting services. Nevertheless, the Department of Commerce has classified the two companies as belonging to the same industry. Hy-Alloy makes sales nationwide from its single office in Illinois. All Hy-Alloy sales to California are free on board (FOB), Bedford Park, Illinois. Hy-Alloy has no facilities or agents in California.
Castle purchased Hy-Alloy in 1973 to gain access to the specialty aircraft metals market. Castle’s 1973 annual report stated that “[i]n February of 1973, the Company purchased the assets of Hy-Alloy Steels Company, a merchandiser of alloy bars and tubing. This acquisition makes Castle a major factor in the distribution of alloy steels in the Midwest and provides a basis for expanding our alloy operations in other parts of the country.”
Before Castle acquired Hy-Alloy, Castle’s sales of Hy-Alloy’s product line were minimal. After the acquisition, Hy-Alloy’s sales to Castle—and Castle’s resales of those products to its own customers—grew substantially. In 1975 Castle accounted for 31 percent of Hy-Alloy’s total sales of approximately $10.9 million. By 1978 Castle accounted for 48 percent of HyAlloy’s total sales, which then amounted to $26.9 million. Similarly, Castle’s purchases from Hy-Alloy accounted for only 2.05 percent of Castle’s total metal purchases in 1975, but by 1978 that figure had increased to 5.44 percent of total metal purchases. During the tax years in question, Castle’s sales of alloy steels, expressed as a percentage of its total sales, were 12 percent in 1975, 9 percent in 1976, 12 percent in 1977, and 17 percent in 1978. Castle purchased alloy steels from Hy-Alloy at Hy-Alloy’s lowest bracket market prices.
In its 1978 annual report, Castle recognized Hy-Alloy’s importance to its overall corporate strategy. The report noted that, in order to decrease the impact of economic cycles in the metals industry, Castle management “decided to emphasize the more technical products such as alloy steels [and other products]. [