A surprising development: the California Court of Appeal for the Second Appellate District has, on its own motion, vacated its March 20, 2009 opinion and order regarding the Farmer Bros. remedy in the Abbott Labs case.1

In the court's March 20 unpublished opinion and order (www.reedsmith.com/Abbott), the Second District had ruled against Abbott in its challenge of the Franchise Tax Board's Farmer Bros. remedy. Recall, back in 2003, the Second District had held that California Revenue and Taxation Code § 24402, which allowed a deduction only for the portion of a dividend paid out of income that had already been taxed by California, was unconstitutional because it discriminated against interstate commerce.2 For years ending after November 30, 1999, the FTB's Farmer Bros. remedy has been to disallow any dividend-received deduction under Cal. Rev. & Tax Code § 24402. The Second District, in the March 20 opinion and order, upheld the FTB's remedy. Now, the court has vacated that order. The court has not ordered any further briefing or argument. We expect that the court will issue a replacement decision by June.

Taxpayers should keep this development in mind when evaluating questions such as: (1) whether to report § 24402 dividend-received deductions on any amended return they may file by June 1 in connection with the 20 percent understatement levy3; (2) how to risk-weight this issue in connection with negotiations at the FTB's settlement bureau; and (3) whether to continue to raise § 24402 as an alternative to other dividend-received deductions and eliminations, such as those under Cal. Rev. & Tax Code §§ 24411 or 25106.4

Meanwhile, a case involving the same issue, River Garden Retirement Home v. FTB,5 is pending in the First Appellate District. Briefing is under way in that case and the case may be argued this fall. And Apple Inc., which may affect how dividends are eliminated under Cal. Rev. & Tax Code § 25106, is pending in the trial court in San Francisco.6 The trial in Apple Inc. took place in February, so a decision in that case may be issued any day.

Of course, even if Abbott or these other cases end badly for taxpayers and taxpayers must include dividend income in their tax base, taxpayers should consider claiming factor representation related to the property, payroll and sales of the companies that paid the dividend. Recall that in January, the State Board of Equalization itself ordered factor representation in Appeal of Argonaut Group, Inc.7