When a taxpayer arguing for its appropriate apportionment can present solid testimony regarding how and where its business is conducted and the economics attributable to the parts of the business, the taxpayer wins – even when the state asks a Court to rewrite its 33-page proposed decision that ruled in the taxpayer’s favor. Smithfield Packaged Meats Corp. v. California Franchise Tax Board, Case No. 21STCV39637 (CA Sup. Ct. LA Cty. Apr. 28, 2026) (statement of decision).
We previously reported that a corporate taxpayer won a proposed decision that concluded it could use a special-industry normal apportionment formula and had the right to use an alternative apportionment formula in California (even if the special-industry normal apportionment formula did not apply). Smithfield, Case No. 21STCV39637 (CA Sup. Ct. LA Cty. Feb. 26, 2026) (proposed statement of decision). The FTB took exception to the proposed decision, but the Court had none of it in its recent final decision.
The taxpayer company, here, is in animal production and harvesting with three separate business segments. It asserted entitlement to use an industry-specific, equally weighted, three-factor formula for agricultural businesses (one need only have more than 50% of gross business receipts from “qualified activities”). Rev. & Tax. Code § 25128(b). California regulations added requirements that were not contained in the applicable statutes. 18 Cal. Code of Regs. 25128-2. That is, the regulations applied a “final product” test, notwithstanding that the statute mandated a “50% of gross receipts” test. In addition to claiming the statutory industry-specific formula, the company claimed a right to the three-factor formula by asserting that the single sales factor formula unfairly reflects and distorts its actual income and activity attributable to California under Rev. & Tax. Code § 25137 (statutory alternative apportionment).
The Court found the company’s witnesses’ testimony was credible as to the three business segments and their economics and found that the testimony proved that the company was entitled to use the three-factor apportionment formula as an agricultural business. Further, the Court ruled that: (1) the regulation was contrary to, and exceeded the scope of, the statute; and (2) the company proved unfair reflection of activities giving rise to its income and distortion arising from use of the single sales factor formula (aka, alternative apportionment). See our prior article for analysis of the proposed decision.
The final decision, following the FTB’s exceptions to the proposed decision, is noteworthy for three reasons:
First, the bulk of the Court’s changes from the 33-page proposed decision to the 33-page final decision were found in two new and short paragraphs. The FTB did not convince the Court to scrap its 33-page analysis.
Second, the completeness of the company’s multiple witnesses’ testimony, including the breadth of the three separate business segments and the depth of the explanation of the segments and the economics attributable to the segments of the business, demonstrated that the Court’s decision was supported by the “greater weight” of the evidence offered by the company. Slip Op. at 31.
Third, the FTB had argued that the company should have first litigated all issues at the audit level and that, because there was new information at trial, the new information was precluded from the Court’s consideration. The Court noted that if the FTB heard anything new at trial such that it believed it had been subject to “unfair surprise,” its purported “surprise” “can be attributed solely to the fact they failed to follow up” on timely discovery (discovery is the name for the court-level information-sharing process). Slip Op. at 33. The Court, in essence, concluded that the company was not required to litigate its challenge at audit and then relitigate it in court.
The Takeaway: The Superior Court of California-level appeal from the denial of a refund claim is not limited by the documents and information reviewed at audit. Further, complete testimony regarding the breadth, locations, and methods of the business segments, as well as the economics of the segments, can win on both the special-industry normal apportionment formula and a fair reflection or unconstitutional distortion challenge!
This update is one in a series of updates written for the May 2026 edition of The BR State + Local Tax Spotlight.
© 2026 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.