Discussion:Joyce vs. Finnigan State Rules

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Discussion Forum Index --> Basic Tax Questions --> Joyce vs. Finnigan State Rules

Discussion Forum Index --> Tax Questions --> Joyce vs. Finnigan State Rules

Ryn11307 (talk|edits) said:

17 September 2008
What is the difference between and state using joyce rules and a state using finnigan rules?

KatieJ (talk|edits) said:

17 September 2008
Honest, I didn't plant this question <G> ....

"Joyce" and "Finnigan" refer to two different ways of calculating the sales factor numerator in a unitary combined report or consolidated return filed by a group of affiliated corporations. The names come from two decisions of the California State Board of Equalization: Appeal of Joyce, Inc., No. 66 SBE 069 (Cal. SBE Nov. 11, 1966), and Appeal of Finnigan Corporation, Cal. St. Bd. of Equal., August 25, 1988 (Finnigan I); Opin . on Pet. for Rhrg, Cal. St. Bd. of Equal., January 24, 1990 (Finnigan II). I'll describe the difference by reference to a California combined report, but the same principles apply in any state that allows or requires a unitary combined report or a true consolidated return (i.e., a state consolidated return that includes all of the members of the federal consolidation, as opposed to a nexus consolidation, which includes only those members that have nexus with the taxing state).

A "taxpayer" corporation, for purposes of this discussion, is a corporation that has due process/commerce clause nexus with California and is not protected from income taxation by Public Law 86-272. A California combined report calculates the liability of each of the taxpayer members of the group with reference to the income and apportionment factors of all of the members of the unitary group, both taxpayers and nontaxpayers. In the sales factor, sales of tangible personal property are assigned in the numerator to the state to which the property is shipped or delivered, unless the seller is not a taxpayer in the destination state. In that case, the sale is "thrown back" and included in the numerator of the state where the shipment originated. What if a nontaxpayer makes sales to California customers? This can happen, for example, when the nontaxpayer corporation is protected from California tax by P.L. 86-272. What happens to those sales in the sales factor numerator? Are they included in the California numerator, or thrown back to the origin because the seller is not a California taxpayer?

The answer to this question depends on how you look at the combined group. Is it a group of separate corporations, each with its own tax liability, or is it a single taxpayer (more similar to a federal consolidated return)?

In Joyce, U.S. Shoe and its subsidiaries, including Joyce, were engaged in a unitary business of manufacturing and selling women's shoes. Both U.S. Shoe and Joyce, Inc., a subsidiary, sold shoes to retail stores in California. Joyce was a California taxpayer; U.S. Shoe was not a taxpayer because it was protected by P.L. 86-272. The SBE ruled that U.S. Shoe's sales shipped to California stores had to be thrown back to Ohio, the origin of the shipments, and could not be included in the California sales factor numerator, because U.S. Shoe was not a taxpayer. From that time (1966) forward, the FTB applied the Joyce rule to both inbound and outbound sales. Thus, if a corporation shipped sales from California to a state where it did not have DP/CC nexus or was protected by P.L. 86-272, those sales would be thrown back to California even though other members of the unitary group were taxpayers in the destination state.

The Finnigan decision involved outbound sales. Finnigan and its subsidiary, Disc, were both taxable in California. Both Finnigan and Disc shipped sales to customers in states where Finnigan was taxable but Disc was not. Consistent with the Joyce rule, the FTB threw Disc's sales back and included them in the numerator in California, where the shipments originated. The SBE, applying a statutory construction analysis rather than a nexus analysis, ruled that the word "taxpayer" in the throwback statute referred to the unitary group as a whole, not to each corporate member. Therefore, Disc's sales to customers in states where Finnigan was a taxpayer were not thrown back to California.

Finnigan I (1988) did not make clear what would happen with respect to inbound sales -- would the Joyce rule continue to apply in that scenario, or not? In Finnigan II (1990) the Board clarified that it was overturning Joyce and would apply the Finnigan rule to both inbound and outbound sales.

In the Appeal of Huffy Corporation, Cal. St. Bd. of Equal. No. 99-SBE-005, April 22, 1999, the California SBE overruled Finnigan and reinstated Joyce. However, the Board applied its decision prospectively only. As a result, the taxpayer in Huffy did not receive a refund. Huffy filed suit for refund in Superior Court, and the case was settled; presumably they did get at least part of their money back in the end.

So California was Finnigan from August 1988 to April 1999, and then reverted to Joyce. In 2000 the FTB adopted Reg. 25106.5 governing the mechanics of combined reporting, which incorporates the Joyce rule. The California Court of Appeal upheld the Finnigan approach in Citicorp North America Inc., et al. v. Franchise Tax Board, No. A086925, Oct 2, 2000, cert. den. U.S. Supreme Court, Dkt No. 00-1537,June 29, 2001. The same court reached the same result in Deluxe Corporation v. FTB, No. A088142 (unpublished), Apr. 26, 2001, cert. den. U.S. Supreme Court, Dkt. No. 01-603, 1-7-02. The Court of Appeal basically held that either Finnigan or Joyce was a reasonable approach and could be applied by the state as long as it was consistent.

Any state that has a sales throwback rule and allows or requires a combined report or true consolidated return has to deal with the Joyce-Finnigan issue. Some go one way, some the other. Kansas, Indiana, Arizona, and Wisconsin, for example, follow Finnigan, while South Carolina, Maine, and Illinois follow Joyce.

The inconsistency between states sometimes creates odd results. A sale shipped from a Joyce state to a Finnigan state will be included in the sales factor numerator in both states. On the other hand, if it is shipped from a Finnigan state to a Joyce state, it will not be included in either state's numerator.

By the way, the issue arises even in states that do not have sales throwback rules, or where sales of other than tangible personal property are involved. For example, New York is a non-UDITPA state and has no throwback rule. In Disney Enterprises et al., No. 818378, New York Division of Tax Appeals, 2/12/2004, an administrative law judge held that sales shipped to New York customers by three Disney subsidiaries whose activities in New York, Disney argued, were protected by P.L. 86-272 must be included in the numerator of the sales factor on the combined return filed by Disney and its subsidiaries (a Finnigan approach). While the ALJ held that the three subsidiaries were not protected by P.L. 86-272 because of the activities of Disney and other members of the group in New York on their behalf, he stated that their status as taxpayers was not determinative of the requirement that their New York sales be included in the numerator. Instead, it was the inextricable relationship of the subsidiaries to the taxpayer’s unitary business that justified their inclusion.

Eeh1007 (talk|edits) said:

13 August 2012
I have an easy way to remember this.

Joyce is single and Finnigan is married.

Whatever Joyce does "she" does by herself. Whatever Finnigan does "his spouse" must also do.

I hope this helps someone!

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