Farmer Bros. Co. v. Franchise Tax Bd.

In this case of first impression, we hold that California Revenue and Taxation Code section 24402 (section 24402), known as the “dividends received deduction,” violates the commerce clause of the United States Constitution (commerce clause) by discriminating against corporations engaged in interstate commerce. Section 24402 affords to a corporate taxpayer an income tax deduction for a portion of the dividends it receives from another corporation when the dividends are declared, from income which was included in the payer corporation’s measure of California franchise tax, alternative minimum tax, or corporation income tax. In holding that section 24402 violates the commerce clause, we follow Ceridian Corp. v. Franchise Tax Bd. (2000) 85 Cal.App.4th 875 [ 102 Cal.Rptr.2d 611 ] (Ceridian), in which the First District held that Revenue and Taxation Code section 24410, which governs taxation of insurance company dividends paid to major corporate stockholders, was unconstitutional under the commerce clause.

The Franchise Tax Board (FTB) appeals from a judgment awarding plaintiff Farmer Bros. Co. (Taxpayer) state tax refunds totaling $811,000 for the tax years 1992 through…