Hoechst Celanese Corp. v. Franchise Tax Bd. (2001)

HOECHST CELANESE CORPORATION, Plaintiff and Appellant, v. FRANCHISE TAX BOARD, Defendant and Respondent.

(Superior Court of Sacramento County, No. 96AS01954, William M. Gallagher, Judge. fn. *)

(The Court of Appeal, Third Dist., No. C030702, 76 Cal. App. 4th 914.)

(Opinion by Brown, J., with George, C. J., Mosk, Kennard, Baxter, and Chin, JJ., concurring. Dissenting opinion by Werdegar, J. (see p. 540).)

COUNSEL

Morrison & Foerster, Eric J. Coffill, Carley A. Roberts and Lisa R. Brenner for Plaintiff and Appellant.

Bill Lockyer, Attorney General, Lawrence K. Keethe and George C. Spanos, Deputy Attorneys General, for Defendant and Respondent.

Paull Mines and Anne E. Miller for Multistate Tax Commission as Amicus Curiae on behalf of Defendant and Respondent. [25 Cal. 4th 513]

OPINION

BROWN, J.-

States have long struggled to devise an equitable and constitutional method for taxing corporations that do business in multiple states and countries. Like many other states, California has adopted the Uniform Division of Income for Tax Purposes Act (7A pt. 1 West's U. Laws Ann. (1999) U. Div. of Income for Tax Purposes Act, § 1 et seq., p. 361) (UDITPA) in an attempt to resolve this dilemma (see Rev. & Tax. Code, §§ 25120-25141). fn. 1 Under this scheme of taxation, all taxpayer income is divided into business or nonbusiness income. Business income is apportionable to each state using a three-factor formula. Nonbusiness income is allocable only to the taxpayer's commercial domicile. In this case, we consider whether a reversion of surplus pension plan assets is taxable by California as apportionable business income. We conclude that it is.

Factual Background

Hoechst Celanese Corporation (Hoechst), formerly Celanese Corporation, is a Delaware corporation with its principal place of business in New Jersey and its commercial domicile in New York. It manufactures and sells a diversified line of chemicals, fibers and specialty products. Since the late 1960's, Hoechst has conducted business operations in California and filed California franchise tax returns.

In 1947, Hoechst created its first pension plan. Since then, Hoechst's pension plans have undergone numerous changes. For example, the original pension plan required contributions from both Hoechst and its participating employees. In 1969, however, the plan became noncontributory, and only Hoechst had to make contributions. Despite the constant evolution of these plans, their purpose has remained the same. Hoechst has created and maintained these plans "for the general benefit of its employees" in an effort to "retain its current employees and to attract other qualified employees."

The version of the pension plan at issue here was known as the Celanese Retirement Income Plan (CRIP I), and was subject to the terms of the Employee Retirement Income Security Act of 1974 (29 U.S.C. § 1001 et seq.) (ERISA). CRIP I dated back to the original 1947 plan and resulted from the merger in 1982 of several pension plans created and maintained by Hoechst and its controlled subsidiaries. It was a qualified plan under Internal Revenue Code section 401(a) (26 U.S.C. § 401(a)) and covered both active [25 Cal. 4th 514] and retired employees. Under the terms of CRIP I, each plan member only had a "nonforfeitable right" to a predefined level of benefits. (Hughes Aircraft Co. v. Jacobson (1999) 525 U.S. 432, 440 [119 S. Ct. 755, 761-762, 142 L. Ed. 2d 881] (Hughes Aircraft).)

In conjunction with CRIP I, Hoechst created and maintained a trust known as the Celanese Retirement Income Plan Trust (CRIP Trust I). The trust was tax exempt, and Chase Manhattan Bank acted as the trustee. To fund CRIP I, Hoechst made periodic contributions to the CRIP Trust I, and the trust invested these contributions in order to ensure adequate funding for the pension plan. These contributions discharged Hoechst's financial obligations and liabilities to CRIP I subject to any limitations imposed by ERISA. As permitted by law, Hoechst claimed tax deductions for these contributions on its federal and California tax returns. Any surplus assets in excess of those necessary to meet any obligations and liabilities owed under ERISA and CRIP I (surplus pension plan assets) were used to reduce future contributions by Hoechst to the CRIP Trust I and were not used to increase any benefits provided under the plan.

Because the CRIP Trust I held the pension plan assets, Hoechst did not own or hold legal title to these assets and could not use these assets to fund any of its corporate activities. Hoechst, however, retained an interest in any surplus pension plan assets. These surplus assets would revert to Hoechst only upon termination of the plan and satisfaction of all benefits and liabilities owed under CRIP I and ERISA. Until such a reversion, none of the pension plan assets, including any contributions or capital gains, were taxable as Hoechst's income.

Even though Hoechst did not hold legal title to the pension plan assets, it did have some control over them through its power over CRIP I and the CRIP Trust I and their predecessors. For example, Hoechst had the power to amend or discontinue the pension plans at any time, subject to ERISA limitations. The board of directors of Hoechst also had the power to appoint and replace the trustees of the pension plan assets at any timea power that it exercised on numerous occasions.

Hoechst also retained the power to administer its pension plans, including the power to prescribe procedures to follow in obtaining evidence necessary to establish the right of any person to payments under the plans, to interpret the terms of the plans, to prescribe procedures for determining and recording the periods for calculating benefits, and to determine the right of any person to benefits under the plans. To exercise these powers, Hoechst created an [25 Cal. 4th 515] administrative committee composed of Hoechst employees, including corporate officers. Known as the Employee Benefits Administration Committee, the committee handled all paperwork for the plans, determined eligibility for benefits and considered requests for increases in benefits. The committee met in either New York or North Carolina three to six times a year on an irregular basis, depending on the rate that applications accumulated.

Hoechst also created a separate committee responsible for the supervision and review of the financial operation of its pension plans and trusts. The Celanese Pension Plan Investment Committee was comprised of Hoechst's chief financial officer, some of its vice-presidents, its controller and an individual from its human resources department. The committee established, supervised and reviewed the funding and investment policies of the plans and trusts and appointed the investment fund managers who determined the actual investments made by the plans and trusts. Although the committee did not control the specific investments chosen by the fund managers, it had the power to change fund managers and guide their overall investment strategy. On many occasions, Hoechst exercised this power and replaced these fund managers for various reasons, including inadequate performance. For example, in 1978, the committee "drastically revised" the investment strategy of its pension plan and "introduced new managers with a different perspective on their mission."

Due to years of wise investments, the CRIP Trust I accumulated more assets than necessary to fund the defined benefits owed to plan members under CRIP I and ERISA. In 1983, Hoechst decided to recapture these surplus assets in order to preclude their use in a takeover bid. To recapture the surplus assets, Hoechst divided CRIP I into two separate plans with essentially the same provisions as CRIP I. The newly created Celanese Retirement Income Plan (CRIP II) covered active employees, and the Celanese Retirement Security Plan (CRSP) covered retired employees. Like their predecessor, both plans were qualified benefit plans under Internal Revenue Code section 401(a).

Concurrent with its division of CRIP I, Hoechst divided the CRIP Trust I into two separate trusts. The Celanese Retirement Income Plan Trust (CRIP Trust II) funded the newly created CRIP II, while the Celanese Retirement Security Plan Trust (CRSP Trust) funded the newly created CRSP. As part of the split-up, Hoechst allocated all assets of the CRIP Trust I between the CRIP Trust II and the CRSP Trust. In making this allocation, Hoechst made sure that all benefits owed to CRIP II and CRSP members were fully funded as required under the terms of CRIP I and ERISA. [25 Cal. 4th 516]

Using the funds allocated to the CRSP Trust, Hoechst purchased annuities to provide the benefits owed to its retirees. Hoechst then terminated both CRSP and the CRSP Trust in 1985. Upon termination, all surplus assets of that plan and trust reverted to Hoechst. This surplus totaled approximately $388.8 million. After the reversion, Hoechst placed these surplus pension plan assets in its general fund to be used for general corporate purposes.

As part of its 1985 federal tax returns, Hoechst reported the income from the reversion as "miscellaneous income." Hoechst also reported the income from the reversion as "taxable income of the business" in its 1985 New York tax return, and paid New York state income tax on a small percentage of this income. fn. 2 In its 1985 California tax return, however, Hoechst did not apportion any part of the reverted income to California. Consequently, the state Franchise Tax Board (Board) issued a "Notice of Additional Tax Proposed to Be Assessed for 1985" and proposed to impose an additional franchise tax of $292,142 plus interest based on the income from the reversion.

Hoechst filed a timely protest. The Board denied the protest and affirmed the proposed assessment in its entirety. Hoechst then appealed to the State Board of Equalization (SBE). Citing Appeal of Borden, Inc. (Feb. 3, 1977) (1971-1978 Transfer Binder) Cal.Tax Rptr. (CCH) paragraph 205-515, page 14,897-57 (Borden), and Appeal of Kroehler Manufacturing Co. (Apr. 6, 1977) (1971-1978 Transfer Binder) Cal.Tax Rptr. (CCH) paragraph 205-646, page 14,897-122 (Kroehler), the SBE held that: (1) the definition of "business income" in subdivision (a) of section 25120 created both a transactional and a functional test; and (2) income from the reversion was business income under the functional test. Thus, the reverted income was apportionable and subject to taxation in California. The SBE also found the tax assessment constitutional under the operational purpose test enunciated in Allied-Signal, Inc. v. Director, Div. of Taxation (1992) 504 U.S. 768, 778 [112 S. Ct. 2251, 2258, 119 L. Ed. 2d 533] (Allied-Signal).

Hoechst then filed a timely claim for refund with the Board. As part of the claim, Hoechst attached a check for $715,791.35which covered the original assessment plus interest. In the claim, Hoechst asked for a full refund, alleging that the income from the reversion did not constitute business income under section 25120. Hoechst further argued that apportionment of the income from the reversion to California violated the due process and commerce clauses of the United States Constitution.

After the Board denied the claim, Hoechst filed a complaint for refund of taxes with the superior court. After a hearing, the court ruled in favor of the [25 Cal. 4th 517] Board. Specifically, the court found that: (1) the statutory definition of "business income" established both a transactional and a functional test; (2) the income from the reversion was apportionable business income subject to taxation in California under the functional test; and (3) taxation of the income from the reversion by California did not violate the due process and commerce clauses of the United States Constitution.

Hoechst appealed, and the Court of Appeal reversed. Although the court applied both a transactional and functional test, it concluded that the reversion did not satisfy either test. First, the court found that the reversion did not meet the transactional test because the reversion was an extraordinary event that did not occur in the regular course of Hoechst's trade or business. Second, the court found that the reversion failed the functional test because Hoechst did not own or hold title to the pension plan assets that generated the income. Thus, the income from the reversion was nonbusiness incomeand not business incomeand was only subject to taxation in Hoechst's commercial domicile, New York.

We granted review to determine whether: (1) income from a reversion of surplus pension plan assets constitutes business income apportionable to California; and (2) subjecting income from a reversion to taxation in California violates the federal due process and commerce clauses.

Discussion

I

[1] Pursuant to "the unitary business principle," a state may "tax a corporation on an apportionable share of the multistate business carried on in part in the taxing State." (Allied-Signal, supra, 504 U.S. at p. 778 [112 S.Ct. at p. 2258].) California employs this " 'unitary business' principle and formula apportionment in applying [its franchise] tax to corporations doing business both inside and outside the State." (Container Corp. v. Franchise Tax Bd. (1983) 463 U.S. 159, 162-163 [103 S. Ct. 2933, 2939, 77 L. Ed. 2d 545] (Container Corp.).) Under the "unitary business/formula apportionment method," a state "calculates the local tax base by first defining the scope of the 'unitary business' of which the taxed enterprise's activities in the taxing jurisdiction form one part, and then apportioning the total income of that 'unitary business' between the taxing jurisdiction and the rest of the world on the basis of a formula taking into account objective measures of the corporation's activities within and without the jurisdiction." (Id. at p. 165 [103 S.Ct. at p. 2940].) Like many other states that use this method of taxation, California has adopted the UDITPA almost verbatim. (Container Corp., at p. 165 [103 S.Ct. at p. 2940]; § 25120 et seq.) [25 Cal. 4th 518]

Originally promulgated by the National Conference of Commissioners on Uniform State Laws (Commissioners) in 1957, the UDITPA has two main objectives: "(1) to promote uniformity in allocation practices among the 38 states which impose taxes on or measured by the income of corporations, and (2) to relieve the pressure for congressional legislation in this field." (Keesling & Warren, California's Uniform Division of Income for Tax Purposes Act (1967) 15 UCLA L.Rev. 156, 156 (Keesling & Warren).) Initially, the UDITPA received a tepid response as few states adopted it. In 1965, however, Congress proposed comprehensive legislation regulating state taxation of interstate commerce. Spurred by the specter of congressional intervention, many states, including California, adopted the UDITPA. (See Peters, The Distinction Between Business Income and Nonbusiness Income (1973) 25 So.Cal. Tax Inst. 251, 279 (Peters).) Currently, 22 states plus the District of Columbia have adopted the UDITPA. fn. 3 In addition, some states have modeled their corporate tax scheme after the UDITPA. (See, e.g., Polaroid Corp. v. Offerman (1998) 349 N.C. 290 [507 S.E.2d 284, 294] (Polaroid) [North Carolina's "Corporate Income Tax Act is modeled after [the] UDITPA"]; Kroger Co. v. Dept. of Revenue (1996) 284 Ill.App.3d 473 [220 Ill.Dec. 566, 673 N.E.2d 710, 714] (Kroger) [the Illinois Income Tax Act "was modeled after the UDITPA"].)

California's Uniform Division of Income for Tax Purposes Act (California UDITPA) mirrors the UDITPA. (Compare §§ 25120-25141 with 7A pt. 1 West's U. Laws Ann., supra, UDIPTA, §§ 1-22, pp. 361-403.) Like the UDITPA, the California UDITPA divides all corporate income into two categoriesbusiness income and nonbusiness incomeand uses the UDITPA definition of these categories. (§ 25120.) " 'Business income' means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations." (§ 25120, subd. (a).) " 'Nonbusiness income' means all income other than business income." (§ 25120, subd. (d).) All business income is "apportioned to this state" through a formula based on the property, sales and payroll of the taxpayer. (§ 25128.) fn. 4 In contrast, nonbusiness income is generally "allocated in full to the state in which the taxpayer is domiciled." (Robert Half Internat., Inc. v. Franchise Tax Bd. (1998) 66 Cal. App. 4th 1020, [25 Cal. 4th 519] 1023 [78 Cal. Rptr. 2d 453] (Robert Half ).) The tax treatment of corporate income therefore depends on its classification as business or nonbusiness income.

Because section 25120 defines "nonbusiness income" in relation to business income, the definition of "business income" is the key to determining whether corporate income is apportionable or allocable. [2] To construe this definition, we apply the well-established rules of statutory construction and seek to " 'ascertain the intent of the Legislature so as to effectuate the purpose of the law.' " (Wilcox v. Birtwhistle (1999) 21 Cal. 4th 973, 977 [90 Cal. Rptr. 2d 260, 987 P.2d 727] (Wilcox), quoting DuBois v. Workers' Comp. Appeals Bd. (1993) 5 Cal. 4th 382, 387 [20 Cal. Rptr. 2d 523, 853 P.2d 978].) As always, we begin with the words of a statute and give these words their ordinary meaning. (Wilcox, at p. 977.) If the statutory language is clear and unambiguous, then we need go no further. (Lungren v. Deukmejian (1988) 45 Cal. 3d 727, 735 [248 Cal. Rptr. 115, 755 P.2d 299].) If, however, the language is susceptible to more than one reasonable interpretation, then we look to "extrinsic aids, including the ostensible objects to be achieved, the evils to be remedied, the legislative history, public policy, contemporaneous administrative construction, and the statutory scheme of which the statute is a part." (People v. Woodhead (1987) 43 Cal. 3d 1002, 1008 [239 Cal. Rptr. 656, 741 P.2d 154].) Where the Legislature adopts a uniform act, the history surrounding the creation and adoption of that act is also relevant. fn. 5 (See In re Marriage of Bonds (2000) 24 Cal. 4th 1, 16-19 [99 Cal. Rptr. 2d 252, 5 P.3d 815] (Bonds).)

In the instant case, Hoechst contends the statutory definition of "business income" creates a single transactional test, and the 1985 reversion of surplus pension plan assets does not satisfy this test or any other test. Thus, the [25 Cal. 4th 520] income from the reversion is nonbusiness income that is only taxable by Hoechst's commercial domicile, New York. The Board counters that the definition establishes both a transactional and functional test, and the reversion meets both tests. Thus, the reverted assets are apportionable to California. As explained below, we conclude that the statutory definition establishes separate transactional and functional tests for business income and that the reversion satisfies only the functional test. Therefore, the income from the reversion is apportionable business income.

A. The Business Income Tests

[3a] Subdivision (a) of section 25120 states: " 'Business income' means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations." Thus, the statutory definition of "business income" consists of two clauses joined together by the conjunction and predicate, "and includes." (Ibid.) In interpreting this language, all courts agree that the first clause establishes a transactional test. Some courts have, however, construed the second clause as a separate functional test for business income. (Uniroyal Tire Co. v. Dept. of Finance (Ala. 2000) 779 So. 2d 227, 230 (Uniroyal Tire).) Under this construction, corporate income is business income if it satisfies either the transactional or functional test. (Ibid.) Other courts have rejected this approach and construed the two clauses as a single transactional test. Under this construction, the second clause modifies the first clause and merely exemplifies "what fits within the definition." (Polaroid, supra, 507 S.E.2d at p. 290.) Not surprisingly, Hoechst contends the statutory definition of business income establishes only a transactional test, while the Board contends the definition establishes both a transactional and functional test. We agree with the Board.

We initially note that the statutory language is ambiguous and reasonably susceptible to either interpretation. On the one hand, the grammatical structure of the business income definition arguably creates both a transactional and functional test. "Business income" is the subject of the sentence. (§ 25120, subd. (a).) Two predicate clauses containing different verbs, objects and prepositional phrases and separated by a conjunction follow this subject. As such, the definition arguably contains a "compound predicate" that states two independent definitions of business income. (Kroger, supra, 673 N.E.2d at p. 713.) In other words, "the statute could grammatically be read as stating: 'Business income means income arising from transactions [25 Cal. 4th 521] and activity in the regular course of the corporation's trade or business, and [business income] includes income from tangible and intangible property ....' " (Polaroid, supra, 507 S.E.2d at p. 290.)

Such an interpretation accords with the different language used in the first and second clauses. The first clause focuses on "transactions and activity" and their relationship to "the regular course of the taxpayer's trade or business." (§ 25120, subd. (a).) In contrast, the second clause focuses on "property" and its relationship to "the taxpayer's regular trade or business operations." (Ibid.) The creation of two separate predicate clauses with different verbs, objects and prepositional phrases strongly suggests that "the second clause contains a definition distinct from that set forth in the first." (Polaroid, supra, 507 S.E.2d at p. 291.) The apparent expansion of "the definition of business income" by the second clause bolsters such a conclusion because a broader definition can hardly exemplify a narrower definition. (Kroger, supra, 673 N.E.2d at p. 713.)

[4] On the other hand, the addition of the word "includes" after the conjunction linking the two clauses suggests that the second clause is a subset of the first clause under the last antecedent doctrine. (See § 25120, subd. (a).) According to this doctrine, " 'qualifying words, phrases and clauses are to be applied to the words or phrases immediately preceding and are not to be construed as extending to or including others more remote.' " (White v. County of Sacramento (1982) 31 Cal. 3d 676, 680 [183 Cal. Rptr. 520, 646 P.2d 191], quoting Board of Port Commrs. v. Williams (1937) 9 Cal. 2d 381, 389 [70 P.2d 918].) Arguably, the word "includes" makes the second clause a qualifying clause that modifies the first clauseand not just "business income." (Uniroyal Tire, supra, 779 So.2d at p. 232.) In other words, "[t]he concluding twenty-six words ... are added to include transactions involving disposal of fixed assets by taxpayers who emphasize the trading of assets as an integral part of regular business." (Phillips Petroleum v. Dept. of Revenue (Iowa 1994) 511 N.W.2d 608, 610 (Phillips Petroleum), italics added.)

The language of the second clause provides some support for such an interpretation. The second clause states that the "acquisition, management, and disposition" of property must be "integral parts" of the taxpayer's "regular" "business operations." (§ 25120, subd. (a), italics added.) The use of "and" suggests that the second clause merely exemplifies the first because the sale of property " 'that is not regularly disposed of, but rather is held indefinitely,' " arguably cannot be an integral part of the taxpayer's business operations. (Uniroyal Tire, supra, 779 So.2d at p. 234, quoting Faber, When [25 Cal. 4th 522] Does the Sale of Corporate Assets Produce Business Income for State Corporate Franchise Tax Purposes? (May-June 1995) The Tax Executive 179, 187.)

Moreover, the apparent breadth of the second clause equally supports the rejection of the functional test. As the Alabama Supreme Court observed: "If income is business income under the transactional test, then, a fortiori, it is business income under the functional test. In other words, the functional test would include everything that the transactional test includesand much more." (Uniroyal Tire, supra, 779 So.2d at pp. 235-236.) As such, construing section 25120 to create two alternative tests for business income arguably renders the first clause mere surplusage, in violation of the rules of statutory construction. (See People v. Cruz (1996) 13 Cal. 4th 764, 782 [55 Cal. Rptr. 2d 117, 919 P.2d 731].)

In light of these competing arguments, we conclude that the statutory language is ambiguous as to the existence of a separate functional test. At a minimum, we cannot find that either interpretation is unreasonable based solely on the statutory language. Indeed, the conflicting opinions of our sister courts interpreting the very same language demonstrate that reasonable minds may disagree over whether the business income definition creates a functional test. fn. 6 Therefore, we must now turn to extrinsic aids in an effort to ascertain the Legislature's intent. These aids establish that the Legislature intended to create both a transactional and functional test for business income.

As an initial matter, the legislative history behind the UDITPA strongly supports the inclusion of a functional test. Because the Legislature adopted the UDITPA almost verbatim (Keesling & Warren, supra, 15 UCLA L.Rev. [25 Cal. 4th 523] at p. 156), we look to the history behind the UDITPA for guidance (see Bonds, supra, 24 Cal.4th at pp. 16-19). This history reveals that the UDITPA definition of "business income" derives from "California decisional law" which employed a separate functional test for business income. (Peters, supra, 25 So.Cal. Tax Inst. at p. 278.)

The first draft of the UDITPA did not distinguish between business and nonbusiness income. (Peters, supra, 25 So.Cal. Tax Inst. at pp. 272-273.) After concerns about the constitutionality of the first draft arose, John S. Warren, a California tax administrator, suggested that the Commissioners divide all income into apportionable business income and allocable nonbusiness income. As part of his suggestion, Warren proposed a definition of business income based on language used in certain SBE decisions. (Id. at pp. 275-276.) The Commissioners liked Warren's proposal, and "[t]he final draft of the [UDITPA] contained the definitions of business income and nonbusiness income proposed by Mr. Warren." (Peters, supra, at p. 276.) Thus, the UDITPA's definition of business income was based on pre-UDITPA decisions of the SBE, and the UDITPA's distinction between business and nonbusiness income was "in line with ... California practice" at the time of its enactment. (Keesling & Warren, supra, 15 UCLA L.Rev. at pp. 163-164; see also Polaroid, supra, 507 S.E.2d at p. 294 ["the uniform definition of business income, as set forth in UDITPA, finds its origins in early California jurisprudence"].) Accordingly, our interpretation of the business income definition should be guided by the SBE's pre-UDITPA decisions applying language similar to the language of the UDITPA.

These SBE decisions consistently applied an independent functional test when determining whether income constituted business income. In doing so, the SBE used language virtually identical to the language in the second clause of the statutory definition. For example, in Appeal of Marcus-Lesoine, Inc. (July 7, 1942) 2 SBE 338, 340-341, the SBE held that interest income from conditional sales contracts constituted business income solely because "the acquisition, management and liquidation of the intangibles constitute[d] integral parts of the corporation's regular business operations." Similarly, the SBE found that copyright royalties were business income solely because the "acquisition, management and disposition of the intangibles constitute[d] integral parts of the corporation's regular business operations." (Appeal of Houghton Mifflin Co. (Mar. 28, 1946) 3 SBE 344, 345 (Houghton Mifflin).) The SBE also relied solely on the functional test when it held that patent royalties constituted business income. (Appeal of National Cylinder Gas Co. (Feb. 5, 1957) 6 SBE 153, 154 ["We have consistently held ... that income from intangibles is includible in unitary income and subject to [apportionment] if the acquisition, management and disposition of the intangibles [25 Cal. 4th 524] constitute integral parts of the unitary business"]; Appeal of Intern. Business Machines Corp. (Oct. 7, 1954) 6 SBE 5, 6-7 ["we have previously held that income from such intangibles [patents] is subject to [apportionment] where the acquisition, management and disposition of the intangibles constitute integral parts of the owner's regular business operations"].) Because these SBE decisions construe the language of the second clause as an independent test for business income, we hold that a separate functional test exists.

The comments to section 1, subdivision (a) of the UDITPA prepared by the Commissioners (Commissioners Comments) bolster our holding. The comment states in part that "[i]ncome from the disposition of property used in a trade or business of the taxpayer is includible within the meaning of business income." (Comrs. Coms., UDITPA, com. foll. § 1, subd. (a), p. 2, reprinted at