Please use this 4 steps pattern for all the questions:
1. What are the facts in this scenario?
2. Explain what the law is in this situation?
3. Come up with the analysis. (Use Facts & Laws in your analysis)
4. Come up with a conclusion. Is it taxable or no? Why it is taxable or why it is not? The important part is the argument and how to get the conclusion, not the conclusion itself.
Question 1
Corporation Hallmark, located in California, was in the business of manufacturing custom-ordered greeting cards, boxes, wrapping paper, and other paper products. Its operation is vertically integrated and includes the production of paper products from raw materials and wastepaper as well as its composition into the finished products ordered by customers. During this time, Hallmark controlled 35 foreign subsidiaries located in Asia, Australia and Africa. Its percentage ownership of the subsidiaries (either directly or through other subsidiaries) ranged 50% to 100%. In those instances, where Hallmark did not own a 100% interest in the subsidiaries, the remainder was owned by local nationals. Five of the subsidiaries were holding companies that had no payroll, sales or property, but did have income. Another three were inactive. The rest were all engaged in their respective local markets in essentially the same business as Hallmark.
Most of Hallmark’s subsidiaries were, like Hallmark it, fully integrated, although a few bought paper products from elsewhere. Sales of materials from Hallmark to its subsidiaries accounted for about 40% of the subsidiaries total purchases. The subsidiaries were also relatively autonomous with respect to matters of personnel and day-to-day management. For example transfers of personnel from Hallmark to its subsidiaries were rare and occurred only when a subsidiary could not fill a position locally. Training was conducted for the subsidiaries’ employees in California and in other countries. Hallmark and its subsidiaries visited each other frequently to familiarize themselves with Hallmark’s method of operation. Hallmark charged four senior vice presidents and eight other officers with the task of overseeing the operation of the subsidiaries. These officers established general standards of professionalism, profitability and ethical process and dealt with major problems and long-term decisions; day-to-day management of the subsidiaries, however, was left in the hands of local executives who were always citizens of the host country. However, whenever the subsidiaries needed help, they would call/email/text Hallmark. Although local decisions regarding capital expenditures were subject to review by Hallmark, problems were generally worked out by consensus rather than outright domination. Hallmark also had a number of its directors and officers on the boards of directors of the subsidiaries, but they did not generally play an active role in management decision.
The relationship between Hallmark and the subsidiaries were close. For example approximately 75% of the subsidiaries’ long-term debt was either held directly, or guaranteed by Hallmark. Hallmark also provides advice and consultation regarding manufacturing techniques, engineering, design, and architecture by entering into technical service agreements or by informal arrangements. Hallmark did not provide insurance but when needed would provide accounting work to the subsidiaries. Hallmark many times helped its subsidiaries in their procurement of equipment either by selling them used equipment of its own or by employing its own purchasing department to act as agent for the subsidiaries.
a) Whether Hallmark and its subsidiaries constituted a unitary business;
b) If so, whether the apportionment was fair;
c) If so, did the Foreign Commerce Clause preclude California from applying its combined reporting approach on a worldwide basis?
Question 2
Mr. Heller stein is a professor at Tahoe Law School located in Tahoe California. He lives in Nevada and commutes to Tahoe Law School, which is only a 50-mile, commute one way. During academic semesters, Professor Heller stein commutes to Tahoe, California, Monday through Thursday each workweek to teach his classes and meet with his students. On Friday, he stays at home, where he prepares examinations, writes student recommendations and conducts scholarly research and writing. When school is not in session, and during his sabbatical leave, he works exclusively in Nevada. On his non-resident income tax return filed in California, he apportioned to California the percentage of his total salary that reflected the number of days he commuted to the law school. California disagrees and states that the entire law school salary is subject to California taxes. Mr. Heller stein appeals the decision.
You are a Supreme Court judge and this case has come before you. Please give me your decision.
Question 3
Please select either question (a) or question (b). Do NOT answer both questions.
a. Mr. William Randolph Hearst is an entrepreneur based in California. He owns many newspaper-publishing companies in California. Mr. Hearst contracted with several syndicates in California for its supply of comic strips. The syndicates carry out these contracts by sending Mr. Hearst fibber mats bearing impressions of the current sequence of strips. These mats are manufactured by the syndicates, from the original drawings, by a photo-engraving process. Mr. Hearst uses the mats in the first of a series of operations culminating in the production of a metal plate from which the comic page is printed. Mr. Hearst pays the syndicates for the comic strip mats sums, which are greatly in excess of the price of blank mats. Was this transaction subject to sales tax?
b. The Ashram is a retirement community in Davis, California. Next to the Ashram is the Ashram Church. The Ashram operates as a non-profit corporation having obtained tax-exempt status from both the federal and state taxing authorities. In determining whether to accept an applicant for residence in the Ashram, the board of directors considered the applicant’s moral character, the recommendation of the Ashram church, and his/her physical and financial condition. Residents make a one-time nonrefundable donation to the Ashram of $100,000, which guaranteed lifetime healthcare. The residents also pay a modest monthly maintenance fees ranging from $300.00-$500.00 per month. Residents of efficiency apartments in the Ashram were not requested to make the “one-time donation” but they paid $700.00 per month. Officials of the Ashram did not recall refusing an applicant for residents due to inability to pay the fees, yet the ability to pay was a factor in the evaluation of an application. The Ashram claimed that the property was exempt because it was used purely and exclusively for religious and /or charitable purpose. California disagrees and the matter is now before you for a decision.