Gross receipts from the sale of Alaska automobile dealerships were properly excluded from a taxpayer’s sales factor for California corporate tax purposes. The receipts were excludable as receipts arising from a substantial and occasional sale.

The taxpayer reported the gain on the sale as business income and used a single-sales factor formula to apportion the income. It included the gross receipts from the sale in the denominator, but not the numerator, of its sales factor. Under a California regulation, substantial amounts of gross receipts from an occasional sale of assets held for use in the regular course of a trade or business are excluded from the sales factor. The taxpayer conceded that the sale of its Alaska dealerships was a substantial and occasional sale. The taxpayer asserted, for various reasons, that the Franchise Tax Board (FTB) could not apply the regulation in this appeal.

The taxpayer argued that the regulation was not part of the standard apportionment formula. If that was the case, the FTB would have to establish that the standard formula was distortive. The Office of Tax Appeals (OTA) refused to overturn longstanding precedent holding that the regulation was part of the standard formula. Next, the taxpayer argued that a different subsection of the regulation applied. The OTA determined that the other subsection did not apply to the tax year in question. Finally, the taxpayer contended that the substantial and occasional sale rule did not fairly represent the extent of its business activities in California. However, the taxpayer failed to provide evidence to that effect. It also failed to show that its proposed alternative was reasonable. Worthington Oil & Gas Corporation, California Office of Tax Appeals, No. 220410163, 2024-OTA-217, March 8, 2024 (released May 2024)