River Garden Retirement Home v. Franchise Tax Board

For years Revenue and Taxation Code section 24402 allowed California corporate taxpayers to deduct a portion of the dividends they received from another corporation when those dividends were included in the payer’s measure of California franchise, income, or alternative minimum tax. The court in Farmer Bros. Co. v. Franchise Tax Bd. (2003) 108 Cal.App.4th 976, 980, 986-987 [ 134 Cal.Rptr.2d 390 ] (Farmer Bros.) held that section 24402 violates the commerce clause of the United States Constitution by allowing the dividends received deduction where the dividend-paying corporation was subject to California tax, but disallowing it where such corporation was not subject to California tax.

Appellant River Garden Retirement Home (River Garden or the company) claimed the dividends received deduction for tax years 1999 and 2000, but, in the wake of Farmer Bros., respondent Franchise Tax Board (FTB) disallowed the deductions for tax years ending on or after December 1, 1999, and issued notices of proposed assessment for additional tax for the two years at issue in this case. As well, the FTB imposed an amnesty penalty under California’s tax amnesty program because River Garden did…