Garcia-Rojas v. Franchise Tax Board

Filed 5/1/26
                      CERTIFIED FOR PUBLICATION

        IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                         FIRST APPELLATE DISTRICT

                               DIVISION THREE

 XAVIER GARCIA-ROJAS et al.,
         Plaintiffs and Appellants,          A172054
 v.
 FRANCHISE TAX BOARD,                        (City & County of San Francisco
         Defendant and Respondent.           Super. Ct. No. CGC23606654)


       In May 2023, Xavier and Sana Garcia-Rojas1 sued the Franchise Tax
Board (Board) seeking a tax refund for 2018 to 2020. The trial court granted
the Board’s motion for summary judgment, concluding that Garcia-Rojas
operated a unitary business and he was properly taxed under California Code
of Regulations, title 18, section 17951-4, subdivision (c) (regulation 17951-
4(c); undesignated regulation references are to this title). We reverse,
holding that the Board did not demonstrate Garcia-Rojas operated a unitary
business so the court erred when it concluded the Board was entitled to
judgment as a matter of law under regulation 17951-4(c). We express no
opinion as to whether the Board can tax Garcia-Rojas under a different legal
theory.
                                BACKGROUND
       Garcia-Rojas is a radiologist who lives in Texas. In 2017, he agreed to
work as an independent contractor for Stat Radiology Medical Corporation



       1 Subsequent references to Garcia-Rojas refer only to Xavier.

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(StadRad). Under the terms of the agreement, StatRad sent him imaging
studies collected at medical facilities in California and other states. From his
Texas home, he read the images and submitted reports using StatRad’s
software. StatRad required him to have medical licenses in 28 states,
including California. It paid all his licensing fees — except for Texas’s — and
provided him with hospital privileges and credentialing in each state. It also
provided him with the hardware necessary to read the images, along with a
phone number, California mailing address, e-mail, training on how to use
their software, and California malpractice insurance.
      Each month, StadRad paid Garcia-Rojas for the images he reviewed.
According to its Internal Revenue Service form 1099s, he earned $305,261.43
in 2018, $410,120.51 in 2019, and $382,122.62 in 2020. He filed a “Schedule
C, Profit or Loss from Business (Sole Proprietorship)” form as part of his
federal tax return.
      In July 2019, the Board requested that Garcia-Rojas file a California
tax return. He filed returns for 2018, 2019, and 2020, paid the amounts
requested by the Board, and then requested a refund. The Board never
responded.
      In May 2023, Garcia-Rojas sued. In September 2024, the trial court
granted the Board’s motion for summary judgment. It ruled that, as “a
matter of law,” Garcia-Rojas “operated ‘a sole proprietorship which carries on
a unitary business’ ” and was thus subject to taxation under regulation
17951-4(c). It concluded he “carried on as a unitary business” because he
“ran the same type of business or functionally integrated enterprise in
California and elsewhere,” his “conduct within and without California was
not so separate and distinct to qualify as separate business[],” and he “used




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StadRad’s software and other resources in the same manner notwithstanding
which state report he worked on.”
                                DISCUSSION
      Garcia-Rojas contends the trial court erred by granting the Board
summary judgment because it did not demonstrate he “carried on a unitary
business.” We agree.
      “A trial court properly grants a motion for summary judgment only if
no triable issue exists as to any material fact and the defendant is entitled to
judgment as a matter of law.” (Bailey v. San Francisco Dist. Attorney’s Office
(2024) 16 Cal.5th 611, 620.) The “party moving for summary judgment bears
the burden of persuasion that there is no triable issue of material fact and
that he is entitled to judgment as a matter of law.” (Aguilar v. Atlantic
Richfield Co. (2001) 25 Cal.4th 826, 850.) We independently review a trial
court’s order granting summary judgment. (County of Santa Clara v.
Atlantic Richfield Co. (2006) 137 Cal.App.4th 292, 316.)
      “Under the Personal Income Tax Law, California taxes the gross
income of nonresident taxpayers ‘derived from sources within this state,’ i.e.,
California source income.” (J.P. Morgan Trust Co. of Delaware v. Franchise
Tax Bd. (2022) 79 Cal.App.5th 245, 265–266; Rev. & Tax. Code, §§ 17041,
subd. (i)(1)(B), 17951.) “For purposes of computing the taxable income of a
nonresident who has gross income from sources both within and without this
state,” “the income ‘shall be allocated and apportioned under rules and
regulations prescribed by the Francise Tax Board.’ ” (J.P. Morgan, at p. 266;
Rev. & Tax. Code, § 17954.) “Under this legislative grant of ‘rulemaking
authority’ ” the Board enacted regulations “dealing with how to
treat . . . nonresident income from a business, trade or profession,” set




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forth in regulation section 17951-4. (J.P. Morgan, at p. 266.) Under
regulation 17951-4(c), if “a nonresident’s business, trade or profession is a
sole proprietorship which carries on a unitary business, trade, or profession
within and without the state, the amount of net income derived from sources
within this state shall be determined” in accordance with, as relevant here,
the “Uniform Division of Income for Tax Purposes Act.” (Italics added.)
      The Board did not demonstrate that Garcia-Rojas operated a unitary
business, and the trial court thus erred by granting summary judgment on
that basis. (Aguilar v. Atlantic Richfield Co., supra, 25 Cal.4th at p. 850.)
In its moving papers, the Board did not cite any authority supporting its
contention that a sole proprietor that engages in one business activity and
receives compensation from one corporation — even when that corporation’s
clients are found both in and outside of California — is a unitary business.
Nor here. Although it cites various cases, none apply the unitary business
theory to a single person or sole proprietorship engaging in one business
activity. (See, e.g., Barclays Bank PLC v. Franchise Tax Bd. (1994) 512 U.S.
298, 301–302, 307–308, 310 [member of “multinational banking enterprise”
and parent company of “multinational manufacturing and sales enterprise”
unitary with their scores of worldwide businesses]; Butler Brothers v.
McColgan (1941) 17 Cal.2d 664, 665, 678 [corporation with “seven wholesale
distributing houses at Chicago, Jersey City, Baltimore, Minneapolis, St.
Louis, Dallas and San Francisco” operating “independently of each other”
a unitary business]; Edison California Stores v. McColgan (1947) 30 Cal.2d
472, 474, 482 [corporation which was one of 15 subsidiaries in 15 states
part of unitary business]; A.M. Castle & Co. v. Franchise Tax Bd. (1995)
36 Cal.App.4th 1794, 1798–1799 [business with “service centers throughout
the United States” and “more than 1,300 employees” selling industrial metals


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unitary with a wholly owned subsidiary of “70 employees” distributing
“specialty metal”].)
      Our research suggests that Garcia-Rojas does not operate a unitary
business. Unitary business has a long “recognized meaning in California” —
“ ‘ “two or more business entities that are commonly owned and integrated
in a way that transfers value among the affiliated entities. ” ’ ” (Bunzl
Distribution USA, Inc. v. Franchise Tax Bd. (2018) 27 Cal.App.5th 986, 991;
General Motors Corp. v. Franchise Tax Bd. (2006) 39 Cal.4th 773, 779, fn. 3.)
Here, Garcia-Rojas is operating — at most — a sole proprietorship engaging
in one business activity. Our Supreme Court has never applied the theory to
facts such as these. (See, e.g., Microsoft Corp. v. Franchise Tax Bd. (2006)
39 Cal.4th 750, 757 [software company and its worldwide subsidiaries were
unitary business]; John Deere Plow Co. v. Franchise Tax Bd. (1951) 38 Cal.2d
214, 217, 221–222 [wholesaler selling “full line of agricultural machinery,
implements, and tractors” with five “jobbing houses” in five states “unitary
enterprise of Deere & Company”].) Neither have we or our sister courts.
(See, e.g., Harley-Davidson, Inc. v. Franchise Tax Bd. (2018) 27 Cal.App.5th
245, 250 [enterprise comprised of commonly owned and functionally
integrated businesses a unitary business]; Dental Ins. Consultants, Inc. v.
Franchise Tax Bd. (1991) 1 Cal.App.4th 343, 346 [company and wholly owned
subsidiary were unitary enterprise]; Mole-Richardson Co. v. Franchise Tax
Bd. (1990) 220 Cal.App.3d 889, 892 [two corporations were unitary].)
      The Board’s contrary arguments fail to persuade. It relies on Appeal of
Bindley (Cal. OTA, May 30, 2019, No. 18032402), but that decision is not
binding on this court.2 (Yamaha Corp. of America v. State Bd. of


      2 We grant the Board’s request for judicial notice, filed November 18,

2025. (Evid. Code, § 452, subd. (c).)
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Equalization (1998) 19 Cal.4th 1, 12.) Moreover, its reasoning is
unconvincing. Bindley held that a “self-employed screenplay writer” in
Arizona was a unitary business, and thus could be taxed under regulation
17951-4(c). (Bindley, at pp. 1, 4–5.) But in doing so, it focused on the tests
to determine whether two different businesses are unitary. (Bindley,
at pp. 4–5.) It ignored that there must be separate business activities to
unite. (Ibid.; Bunzl Distribution USA, Inc. v. Franchise Tax Bd., supra,
27 Cal.App.5th at p. 991.) The Board also relies on regulation 25120,
subdivision (b), but that regulation states it applies only if there are “two or
more businesses of a single taxpayer.” (Capitalizations omitted.) Thus, the
Board failed to show that Garcia-Rojas is a unitary business as a matter of
law. (Aguilar v. Atlantic Richfield Co., supra, 25 Cal.4th at p. 850.)
                                  DISPOSITION
      We reverse the trial court’s judgment and order granting summary
judgment.3 The matter is remanded for further proceedings consistent with
this opinion. Appellants shall recover their costs on appeal. (Cal. Rules of
Court, rule 8.278(a)(1) & (2).)




      3 Given our decision, we need not address Garcia-Rojas’s remaining

arguments.
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                                        _________________________
                                        RODRÍGUEZ, J.


WE CONCUR:


_________________________
FUJISAKI, Acting P. J.


_________________________
PETROU, J.




A172054; Garcia-Rojas v. Franchise Tax Bd.




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Superior Court of the City and County of San Francisco, Hon. Richard B. Ulmer, Jr.

Greenberg Traurig, Bradley R. Marsh, Shail Shah, Jennifer Vincent, Shauna E. Imanaka,
for Plaintiffs and Appellants.

Rob Bonta, Attorney General, Tamar Pachter, Assistant Attorney General, Lisa W. Chao
and Laura E. Robbins, Deputy Attorneys General, for Defendant and Respondent.




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