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Keywords

statuteappealtrialcorporationlegislative intent

defendantstatuteprecedentappealtrialcorporation

Related Cases

Abbott Laboratories v. Franchise Tax Bd., 175 Cal.App.4th 1346, 96 Cal.Rptr.3d 864, 09 Cal. Daily Op. Serv. 9316, 2009 Daily Journal D.A.R. 10,837

Facts

Abbott Laboratories owned a 50 percent interest in TAP Pharmaceutical Products, Inc., which declared a dividend. The FTB denied Abbott's claim for a dividends received deduction based on the Farmer Bros. Co. v. Franchise Tax Board decision, which found that the relevant statute violated the commerce clause by discriminating against corporations receiving dividends from non-California corporations. Abbott filed a complaint for a tax refund after paying additional taxes assessed by the FTB, arguing that the statute should be reformed to allow the deduction.

The complaint alleged that section 24402 facially discriminated against taxpayers such as Abbott, which owned stock in corporations doing business outside California, and that the previous taxation by California of income from which dividends are declared is what makes them eligible for total or partial deduction from income.

Issue

Whether the court could rewrite or reform the statute governing the dividends received deduction to sever an unconstitutional subdivision, as proposed by Abbott Laboratories.

Abbott claims on appeal that: 1. The trial court erroneously ruled that Farmer Bros. found section 24402 to be unconstitutional in its entirety; 2. The trial court erroneously failed to sever the unconstitutional limitation of the dividends received deduction from the valid provisions of section 24402; 3. Section 24402, and the Legislature's intent, can be preserved by applying it in a non-discriminatory fashion.

Rule

The court applied the principle that a statute may be reformed to conform to constitutional requirements only if it can be done in a manner that closely effectuates the legislative intent and if the enacting body would have preferred such a reformed version to invalidation of the statute.

The guiding principle is consistency with the Legislature's … intent: a court may reform a statute to satisfy constitutional requirements if it can conclude with confidence that (i) it is possible to reform the statute in a manner that closely effectuates policy judgments clearly articulated by the enacting body, and (ii) the enacting body would have preferred such a reformed version of the statute to invalidation of the statute.

Analysis

The court determined that rewriting the statute to allow deductions for dividends from all corporations, regardless of whether their income was subject to California tax, would contradict the legislative intent of avoiding double taxation on income already taxed in California. The court found that the invalidation of the statute as unconstitutional meant that the percentages used to calculate the deduction could not be applied, and thus, the entire statute was rendered void.

The court also has authority to rewrite a statute to preserve its constitutionality. (Kopp, supra, 11 Cal.4th at p. 615, 47 Cal.Rptr.2d 108, 905 P.2d 1248.)

Conclusion

The Court of Appeal affirmed the trial court's decision, concluding that the statute could not be reformed as proposed by Abbott and that the FTB's denial of the dividends received deduction was justified.

The judgment is affirmed. Costs on appeal are awarded to defendant Franchise Tax Board.

Who won?

Franchise Tax Board prevailed in the case because the court upheld the constitutionality of the FTB's actions based on the Farmer Bros. decision, which found the statute unconstitutional.

The trial court stated that it would not depart from that precedent, which referred to the entire dividends received deduction scheme.

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