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State of California Franchise Tax Board

LEGAL RULING NO. 234

CALIFORNIA FRANCHISE TAX BOARD
Legal Ruling No. 234

October 27, 1959

ALLOCATION: APPORTIONMENT OF THE CALIFORNIA INCOME OF A UNITARY BUSINESS.

The California income of a unitary business must be divided among corporations having activities in this state, by assigning it to each corporation in accordance with the average ratio that the California factors of each such corporation bear to the total factors of the group.

The relative factor method of separating the income of a unitary business between the corporations, having activities in this state, approved by the State Board of Equalization in the Appeal of Kaiser-Frazer Sales Corporation, November 7, 1958, is revised as illustrated below.

Assume that the unitary income of a group of corporations is $1,000,000 and it does 13-1/3% of its business in California. The total factors and California factors of each member are as follows:

Denominators

ABCTotal
Property500,00064,00036,000600,000
Payroll300,00074,00026,000400,000
Sales4,000,000600,000400,0005,000,000

 

Numerators

ABCTotal
Property24,000-36,00060,000
Payroll14,000-26,00040,000
Sales150,000450,000400,0001,000,000

 

Under the new method of computation, this result would follow:

A

B

C

Total

Property4%-6%10%
Payroll3.5-6.510%
Sales3.0

9

820%

Total

10.5%9%9%40%

Average

3.5%3%3%13 1/3%

 

Applied to income of $133,333.

A -- 3.5% X $1,000,000 =35,000
B -- 3% X $1,000,000 = 30,000
C -- 6.83 1/3% X $1,000,000 =68,333
 $133,333

This method appears to produce a more accurate result than the relative factor method. If two or more corporations contribute to the earnings of the California income, the relative contributions of each is measured by the relationship of their California factors to the total factors of the group, rather than the ratio that the California factors bear to each other.

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