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California FTB Takes Harley-Davidson for a Ride: Securitization Subsidiaries Are Financial Corporations with Nexus in California

By Shane Lord and Andrew Appleby

The California Superior Court ruled that certain special purpose entities (SPEs) owned by Harley-Davidson

May 23, 2013

By Shane Lord and Andrew Appleby

The California Superior Court ruled that certain special purpose entities (SPEs) owned by Harley-Davidson, Inc. had nexus in California. The taxpayer formed the SPEs as securitization subsidiaries, which the court held were subject to California income taxation because the SPEs: (1) were “financial corporations” under California law; and (2) had substantial nexus with California because the SPEs had agents in the state. The court determined that independent dealerships and the SPEs’ parent and sister corporations were agents of the SPEs. The taxpayer argued that the SPEs were not “financial corporations” because the SPEs were bankruptcy remote subsidiaries of the taxpayer and were not in substantial competition with national banks, as required by Cal. Code Regs. tit. 18, § 23183. The court did not address the implications of the SPEs constituting bankruptcy remote subsidiaries. The court ultimately held that the SPEs were in substantial competition with national banks because the SPEs and national banks conducted the same activities of bundling loans and selling securities backed by those loans. In addition to the above issues, the court sustained a demurrer early in the case, dismissing the taxpayer’s two other causes of actions: (1) the Franchise Tax Board discriminated against the taxpayer by not allowing it to file separate returns; and (2) the taxpayer was entitled to use an equal-weighted three-factor apportionment formula (see Gillette Co. v. Franchise Tax Bd., 147 Cal. Rptr. 3d 603 (Cal. Ct. App. Oct. 2, 2012)). Harley-Davidson, Inc. & Subs. v. Franchise Tax Bd., No. 37-2011-00100846-CU-MC-CTL (San Diego Super. Ct. May 1, 2013).

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