The US Supreme Court declined this week to review a California Supreme Court decision that upheld that state’s right to tax a reversion of surplus pension plan assets as apportionable business income.
The battle started when Hoechst sought a refund of corporate franchise taxes plus interest that it had paid to the state of California for tax year 1985.
A California trial court denied the refund. Hoechst appealed, arguing that taxation of the pension reversion was unconstitutional.
The California Court of Appeals reversed the trial court, finding that California Tax Code Section 25120(a) included both a transactional test and a functional test to determine what constituted business income for purposes of the tax code.
There wasn’t enough proof that the pension reversion was business income, appeals court judges ruled.
The tax fight then moved to the California high court where justices sided with the trial judge.
In May, the California Supreme Court found that the reversion of surplus assets of a pension plan created by a multistate corporation was taxable as apportionable business income under California’s version of the Uniform Division of Income for Tax Purposes Act.
The California Supreme Court overturned the lower court, finding that California’s tax code establishes a separate transactional and functional test for business income.
In Hoechst’s case, the pension reversion satisfied only the functional test, making any income from the reversion an apportionable business income.
The US Supreme Court ruling was Hoechst Celanese Corp. v. California Franchise Tax Board, US, No. 01-265.
– Fred Schneyer email@example.com