July 5, 2022

Volume XII, Number 186

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July 05, 2022

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How California's Clean Energy Fund Has Made Applying California's Pseudo-Foreign Corporation Law More Difficult

In 2012, the voters of California approved Proposition 39 which established a Clean Energy Fund for the purpose of "funding projects that create jobs in California improving energy efficiency and expanding clean energy generation."  In order to raise revenue for the Clean Energy Fund, the proposition requires that most (but not all) multi-state corporations to use the single-sales factor method of apportioning their income.  Previously, most California corporate taxpayer apportioned their income based on  three factors - property, payroll, and double-weighted sales.  See Section 2115: Beware of Double Counting.

So what does this have to do with California Corporations Code Section 2115?  As readers should know, Section 2115 imposes many provisions of the California General Corporation Law on foreign corporations to the exclusion of the laws of the jurisdictions in which they are incorporated.  A foreign corporation becomes subject to Section 2115 if it meets two tests.  One of these tests is met if the average of the property, payroll and sales factors is more than 50% during the last fiscal year.  Because most corporations applied these three factors to apportion their California income, one could find these factors on Schedule R of their tax returns.  As a result of Proposition 39, you will no longer find these three factors on many corporations' Schedule Rs.

Although Proposition 39 was approved a decade ago, a taxpayer recently filed a lawsuit challenging the initiative measure.  One Technologies LLC v. Franchise Tax Board, Los Angeles County Superior Court, Case No. 21STCV21844.  The basis for the challenge was that the measure violated California's single subject rule.  Cal. Const. Art. II, § 8(d) ("An initiative measure embracing more than one subject may not be submitted to the electors or have any effect.").   That case is currently on appeal.

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XII, Number 117
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

949-851-5428
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