## Facts

- Microsoft, a multistate corporation doing business in California, invested excess cash through its treasury function in short-term marketable securities (e.g., commercial paper).
- When the securities matured, Microsoft redeemed them at face value, producing small net gains but very large gross redemption proceeds.
- California applied UDITPA’s three-factor apportionment formula (property, payroll, sales), where the sales factor uses “all gross receipts” not otherwise allocated.
- For tax year 1991, Microsoft included the full redemption proceeds in its sales-factor “gross receipts,” greatly increasing the total-sales denominator and reducing California’s apportionment percentage from about 11% to about 3%.
- The Franchise Tax Board (FTB) limited Microsoft’s sales-factor inclusion to net gains and asserted that full inclusion distorted the standard formula; it invoked Cal. Rev. & Tax. Code § 25137 to apply an alternative method.
- Microsoft sued for a refund; the trial court ruled for Microsoft, the Court of Appeal reversed, and the California Supreme Court granted review.

## Issues

1. Whether redemption of short-term marketable securities at maturity generates “gross receipts” that must be included in the UDITPA sales factor.
2. If the proceeds are “gross receipts,” whether the FTB proved that the standard formula did not fairly represent Microsoft’s California business activity and that an alternative method under Cal. Rev. & Tax. Code § 25137 was justified.

## Decision

- The court held that redemption of marketable securities at maturity generates “gross receipts” includible in the sales factor under California’s UDITPA-based definition.
- The court further held that, on these facts, the FTB met its burden under § 25137 to show that including the full redemption proceeds would materially distort apportionment and that an alternative method was reasonable.
- The court affirmed the judgment for the FTB.

## Legal Principles

- Under California’s UDITPA framework, “sales” generally includes “all gross receipts” not otherwise allocated; “gross receipts” ordinarily means total amounts received, not merely net gains.
- Cal. Rev. & Tax. Code § 25137 permits deviation from the standard apportionment formula when the standard method does not fairly represent the extent of the taxpayer’s business activity in California; permissible remedies include exclusion or modification of factors or other reasonable methods.
- The party seeking special apportionment bears the burden to show (1) unreasonable distortion under the standard formula and (2) reasonableness of the proposed alternative.
- Large, low-margin treasury redemptions may be treated as “gross receipts” in principle yet still support special apportionment when their inclusion drives an apportionment percentage that materially understates in-state business activity.

## Conclusion

The court recognized full redemption proceeds as “gross receipts” for the sales factor but allowed California to apply § 25137 in this case because the extraordinary volume of treasury redemptions caused the standard formula to understate Microsoft’s California business activity and produced an unreasonably distorted tax result.


Microsoft Corp. v. Franchise Tax Bd., 39 Cal. 4th 750, 139 P.3d 1169 (Cal. 2006)