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State & Local Tax Bulletin (December 1998)

Interest Offset Survives Round Two

By Jeffrey M. Vesely, a tax partner in the San Francisco office of Pillsbury Winthrop Shaw Pittman LLP. If you have or can obtain the Acrobat Reader, or have an Acrobat-enabled web browser, you may wish to download or view our December 1998 State & Local Tax Bulletin (a 100K pdf file), containing a printed version of this article and also available via ftp at ftp.pmstax.com/state/bull9708.pdf.

This information is only of a general nature, intended simply as background material, omits many details and special rules and cannot be regarded as legal or tax advice.

On December 11, 1998, in a pair of unpublished opinions,[fn. 1] the First District of the California Court of Appeal upheld the constitutionality of California's controversial interest offset rule. In Hunt-Wesson, Inc. v. Franchise Tax Board, No. A079967, and F. W. Woolworth Company, et al. v. Franchise Tax Board, No. A075506, the Court of Appeal rejected the taxpayers' arguments that California Revenue and Taxation Code Section 24344 was unconstitutional under Commerce, Due Process and Equal Protection Clauses of the United States Constitution. The Court of Appeal relied heavily on the doctrine of stare decisis and the California Supreme Court's decision in Pacific Tel. & Tel. Co. v. Franchise Tax Board, 7 Cal.3d 544 (1972). In so ruling, the Court of Appeal reversed the trial court in Hunt-Wesson and affirmed the trial court in Woolworth.[fn. 2]

Those who have filed claims for refund challenging the interest offset rule should not discard those claims quite yet. A petition for review most likely will be filed with the California Supreme Court by one or both of the taxpayers. While review is discretionary, it will be interesting to see whether the current California Supreme Court agrees with the Court of Appeal's interpretation of the 1972 California Supreme Court's decision in Pacific Telephone.


  1. In California, unpublished opinions are not precedential and cannot be cited or relied on by a court or party in any other action or proceeding. California Rule of Court 977(a).[return to text]

  2. In Woolworth, the Court of Appeal also affirmed the trial court's decision in favor of the Franchise Tax Board, that during the years in issue, Woolworth and Kinney Shoes were not conducting a unitary business.[return to text]

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