Smithfield ruling- California apportionment

California apportionment factors 

that could potentially provide us with a strong case for substantial tax refund based on the recent court ruling (attached).

 Company formulates, blends, and distributes agricultural chemicals and solutions rather than directly cultivating crops, we have historically filed as a 100% manufacturer, mandating the use of the Single Sales Factor (SSF) for CA state tax return.

• Most recent C-corp tax return : filed under SSF at 8.67%.
• Historical S-corp years (full year returns): filed under SSF with a California apportionment factor reaching as high as 21% in 2023. In simple terms, this means we reported 21% of our total apportionable income as California-sourced and paid CA state tax on that portion.

 

Smithfield Packaged Meats Corp tax ruling: The court ruled that enforcing the SSF method distorts income when an out-of-state taxpayer’s actual in-state economic substance (measured by property and payroll) is minimal.

 

3. Financial impact when switch to the Three-Factor Formula (TFF)

Deploy the court ruling because our core infrastructure (headquarters, production facilities(property), and our workforce (payroll)) is heavily concentrated outside of California compared to the physical presence in California.

• C-corp short period: apportionment drops from 8.67% to 2.89% (cutting tax liability from ~$370,000 down to ~$123,333, a savings delta of ~$246,667) – when we assume that there are no property and payroll, but only sales in California
• Previous S-corp years: Apportionment drops from 21% to 7% (14% reduction in apportioned income).

 

Given that the S corporation’s pass-through income was taxed at both the entity level and at the shareholder level ( individual and the dynasty trust) in California, a reduction of approx., 14% in apportioned income on full-year returns represents a substantial tax benefit.

 

Open tax years:

1. During S-corp time

• FY2021 (1/1/21 ~ 12/31/21): Statute of limitations (SOL) – September 15, 2026
• FY 2022(1/1/22 ~ 12/31/22): SOL- September 15, 2027
• FY 2023(1/1/23 ~ 12/31/23): SOL- September 15, 2028
• FY 2024(short period, 1/1/24 ~ 8/31/24, last S-corp filing): May 15, 2029

2. C-corp time

• FY2024 (short period, 9/1/24 ~ 12/31/24): October 15, 2029
• FY 2025(short period, 1/1/25 ~ 8/31/25): June, 15, 2023

 

Perform the review the possibility of the tax refund based on the Smithfield ruling. Especially, the return for FY2021 will be closed (due to the statute of limitations) on September 15, 2026, we need to submit the ‘Protective Refund Claim’ to FTB before the due date.

The Smithfield ruling is not in final, and the CA FTB is 100% certain to appeal this trial court decision. Therefore, we should file the 2025 return as prepared (i.e., CA state tax return using the standard SSF). After the filing, we need to run the exact financial delta for both the current C-Corp period and the historical S-Corp years using our consolidated out of California state's asset and payroll metrics.

Once quantified, we will file protective refund claims at the corporate and the individual shareholder level to freezes the statute of limitations. When the higher courts inevitably uphold the Smithfield decision, Company and its shareholders will be entitled to refunds millions in overpaid historical taxes (plus interest).