A taxpayer’s interest expense was for domestic purposes and was deductible under R&TC §24425. (Apple, Inc. v. FTB (January 26, 2010) Super.Ct. S.F. City and County Case No. CGC-08-471129) The taxpayer showed that there was no connection between its borrowings, which generated the interest expense, and the seven foreign dividend payors.

The taxpayer’s interest expense was not directly for the production of the seven foreign dividend payors’ income in question; the seven foreign dividend payors were cash rich and did not need funds from their parents for their operations overseas.

The judge ordered the FTB to allow all of the taxpayer’s interest expense deductions.

The decision also addressed the taxpayer’s distributions ordering (the order in which dividends are paid from earnings and profits), and held that dividends received from its seven foreign subsidiaries were deductible, in part, under R&TC §24402, and eliminated, in part, under R&TC §25106.

Under Fujitsu v. FTB ((2004) 120 Cal.App.4^th 459) the taxpayer argued that all dividends from the subsidiaries should be eliminated under R&TC §25106, until the previously taxed earnings of the subsidiaries were completely exhausted.

While the judge conceded that the taxpayer’s argument — that the same purpose to avoid double taxation addressed by the Fujitsu court should apply whether multiple years are involved — had “superficial appeal,” the judge concluded that Fujitsu’s holding on the distributions ordering issue was expressly limited to current year earnings.

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