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California Repatriated Dividends Included in Sales Factor Denominator

Tax Development Mar 06, 2024

California Repatriated Dividends Included in Sales Factor Denominator

On February 14, 2024, the California Office of Tax Appeals (OTA) denied a request for rehearing in the Appeal of Microsoft Corporation and Subsidiaries1 made by the California Franchise Tax Board (FTB). Based on the unanimous OTA ruling in July 2023, Microsoft was allowed to include 100% of its foreign dividend income in its sales factor denominator on its water’s-edge combined return.


For the 2017 tax year, Microsoft Corporation, a computer software and services company, filed a water’s-edge return and repatriated $108 billion in dividends from its unitary Controlled Foreign Corporations (CFC) as required for federal purposes under Internal Revenue Code (IRC) § 965. On its original 2017 California return, Microsoft deducted the amount eligible for the 75% dividends-received deduction under Revenue and Taxation Code (R&TC) Section 24411. The full amount of the dividends was included in the apportionable income base but was erroneously omitted from the sales factor denominator. Microsoft filed an amended 2017 return to include the dividends in the sales factor and correct the error. The resulting refund requested was more than $93 million, which the FTB denied, and Microsoft appealed to the OTA.

After an oral hearing, OTA issued an Opinion, which held that 1) qualifying dividends deducted from income pursuant to R&TC Section 24411 are includable in Microsoft’s sales factor; 2) gross receipts from the qualifying dividends should not be excluded from the sales factor as a substantial and occasional sale, pursuant to California Code of Regulations Section 25137(c)(1)(A); and 3) FTB has not shown that the use of an alternative apportionment method is warranted, pursuant to R&TC Section 25137. Ruling in favor of Microsoft resulted in a refund of approximately $100 million, with interest.

Petition for Rehearing 

After the ruling was issued, the FTB filed a Petition for Rehearing, arguing that a rehearing should be granted because, in its view, the Opinion is contrary to law, but also asserts there were errors in law and irregularities in the appeal proceedings, and FTB argued that there was newly discovered, material evidence. In denying the petition, the OTA did not find any evidence to support a rehearing and concluded that the FTB did not provide sufficient evidence of any errors in law, irregularities in proceedings, or any new material evidence.

This Opinion is not subject to further appeal, resulting in the OTA’s July 2023 decision being final on its merits.

Please contact our Ryan tax professionals below for how this case impacts your business.

1 OTA Case No. 21037336.


Josh Booth

Gina Rodriquez

Greg Rottjakob

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