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Oregon court rules on Subpart F treatment

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The Oregon Tax Court recently revised a previous ruling addressing the treatment of a unitary taxpayer’s unsubtracted 20% portion of its Subpart F income and dividends in computing the group’s sales factor.1 The Court found that the unsubtracted portion of those amounts received from controlled foreign corporations (CFCs) may be included in the sales factor denominator if derived from the taxpayer’s primary business activity. In its original finding, the Court had determined that the unsubtracted portion of Subpart F income should not be included in the sales factor denominator, and did not conclude as to whether the similar portion of dividends received from CFCs should be included.

Background, applicable Oregon law, and previous ruling The taxpayer, Oracle Corporation, is a California-domiciled software corporation with numerous domestic and foreign subsidiaries. For the tax years ending May 31, 2010, through May 31, 2012, the taxpayer conducted its business in foreign countries and jurisdictions using a network of wholly-owned CFCs. Some of these CFCs paid dividends to various members of the group. As required, the taxpayer included these amounts as income in its consolidated federal income tax returns, along with certain income amounts calculated based on various data related to the taxpayer’s CFCs, but not actually paid, representing deemed dividends received (Subpart F income). Some of the CFCs joined in the filing of the taxpayer’s Oregon consolidated returns, on which it indicated that the included subsidiaries and CFCs were engaged in a single unitary business related to software.

In computing state taxable income, Oregon statutes require taxpayers to add back all dividends received and Subpart F income. Subsequently, a subtraction is permitted equal to 80% of the same dividends and Subpart F income.2 For the tax years at issue, Oregon generally prescribed a standard single-factor apportionment formula based solely on the ratio of the taxpayer’s Oregon sales as compared to sales everywhere.3 To compute the sales factor, amounts subtracted from federal taxable income are specifically excluded.4 Further, certain gross receipts are excluded from the definition of “sales.”5 On its Oregon return, the taxpayer first added back 100%, then subtracted 80%, of both the dividends and Subpart F income in computing its Oregon taxable income. With respect to its Oregon sales factor calculation, the taxpayer excluded the 80% amounts it had subtracted in determining its Oregon taxable income, but sought to include the unsubtracted 20% portion of the dividends and Subpart F income in the sales factor denominator with no inclusion in the sales factor numerator. While the parties agreed that the 80% portion of the dividends and Subpart F income should be excluded from both the tax base and sales factor computation, they disagreed as to how the remaining unsubtracted 20% portions should be treated.

In December 2020, the Oregon Tax Court determined that the unsubtracted portion of Subpart F income should be excluded from the sales factor denominator, but could not conclude as to whether the similar portion of dividends and deemed dividends received from CFCs should be included.6 Instead, the Court found outstanding issues of material fact and suggested the parties separately address the matter, leading to the instant case. Prior to the hearing, both parties stipulated that the CFCs are engaged in the same unitary business as the taxpayer and that the dividends and Subpart F income at issue qualify as business income.

Oregon Tax Court 2021 decision The Oregon Tax Court considered whether the dividends and Subpart F income that are attributable to the taxpayer’s CFCs, and are not subtracted from taxable income, should have been included in the calculation of the taxpayer’s Oregon sales factor. The taxpayer sought to include the amounts, claiming that the unsubtracted 20% amounts satisfied the definition of “sales” for Oregon apportionment purposes under Or. Rev. Stat. Sec. 314.665, and that the Oregon provision that allows for exclusion of the 80% amounts from its sales factor necessarily implies inclusion of the unsubtracted 20% in its sales factor. The Department instead argued that the definition of “sales” pursuant to Or. Rev. Stat. Sec. 314.665(6)(a) required the taxpayer to exclude the unsubtracted 20% amount from the sales factor. Specifically, Or. Rev. Stat. Sec. 314.665(6)(a) excludes from the definition of “sales,” “gross receipts arising from the sale, exchange, redemption or holding of intangible assets, including but not limited to securities, unless those receipts are derived from the taxpayer’s primary business activity.” The Department concluded that this language resulted in exclusion of the unsubtracted 20% because those amounts arose from the holding of an intangible (the CFC stock), and the exception for receipts derived from the taxpayer’s primary business activity was inapplicable because the taxpayer’s primary business activity was selling software, not holding CFC stock.

Preliminary background To begin its analysis, the Court performed an exhaustive historic review of Oregon’s approach to the taxation of unitary worldwide enterprises, including the concepts of unitary business, apportionment, and combined reporting. Oregon generally adopted water’s edge unitary reporting in 1984, in which the income of foreign affiliates is excluded from the Oregon tax base. This treatment significantly impacts the tax treatment of a domestic parent corporation with foreign unitary subsidiaries. Further, the Court examined Oregon’s treatment of dividends, taking note of the progressive statutory evolution of Or. Rev. Stat. Sec. 314.665(6)(a), described above, which narrowed the definition of “sales” in 1995.7 Finally, the Court denoted the necessary steps to determine Oregon taxable income for the years at issue.8

Subpart F income treated as gross receipts Before addressing the primary issue, the Court revisited its original conclusion regarding whether the Subpart F income received by the taxpayer should be treated in the same manner as the dividends from the CFCs for apportionment purposes. IRC Sec. 316 historically defined “dividend” as any distribution of property made by a corporation to its shareholders out of earnings and profits. While the Court had originally concluded in its original ruling that Subpart F income did not constitute gross receipts, it was ultimately persuaded by arguments from both the taxpayer and the Department to revise its original conclusion. Both parties argued that a contemporaneous statutory definition of the term “received,” along with other strong contextual evidence, supported their conclusion that the legislature intended “gross receipts,” as defined by Or. Rev. Stat. Sec. 317.010(13), to be construed according to the taxpayer’s tax accounting method. Accepting this interpretation, the Court concluded that Subpart F income constitutes gross receipts for apportionment purposes and should be treated in the same manner as the dividends that some of the CFCs actually paid to the taxpayer.

Taxpayer’s argument for inclusion in sales factor denominator In support of its position that the unsubtracted 20% amounts should be included in the denominator of the sales factor, the taxpayer claimed that Or. Rev. Stat. Sec. 317.267(3), which required exclusion of the 80% amounts from its sales factor, necessarily implied inclusion of the unsubtracted 20%.

Taking a similar approach to the issue as in its original analysis, the Court noted that the text of the statute did not specify how to treat the unsubtracted portion for sales factor purposes. Based on an extensive review of the statutory context and other laws in place at the time of its enactment, the Court found that Oregon law permits the use of several different apportionment formulas. Accordingly, the legislature did not intend for the statute to specifically address the inclusion or exclusion of the unsubtracted portion of the dividends and Subpart F income. Thus, the Court reiterated its original finding that the legislature likely intended to leave this determination to the substantive law governing the particular apportionment formula applicable to the taxpayer.

Department’s argument for exclusion from sales factor calculation As in its original decision, to determine the treatment of the Subpart F income and dividends for sales factor purposes, the Court examined whether they “arose from the sale, exchange, redemption or holding of intangible assets,” and if so, whether they were “derived from the taxpayer’s primary business activity,”9 and qualified as “sales.” As to whether the dividends “arose” from the taxpayer’s “holding” of the intangible assets in question (i.e., the shares of the CFC stocks that paid the dividends), the CFC stock clearly constituted “intangible assets.” Instead, the Court focused on the taxpayer’s activity with respect to the CFC stock and what the legislature meant by “arising from” and “holding” of intangible assets in the statutory phrase in Or. Rev. Stat. Sec. 314.665(6)(a) excluding certain receipts from the sales factor calculation. Distinguishing from its original decision, the Court found that the plain and technical statutory meaning was that the gross receipts must originate from the possession or legal ownership of shares. On reconsideration, the dividends and Subpart F income at issue “arose from” taxpayer’s “holding” of the CFC stock.10 The Court rejected the Department’s position, characterizing it as overly broad and potentially leading to the exclusion of all types of dividends from the sales factor computation. Further, the legislature adequately addressed the treatment of dividends from a unitary subsidiary in the reinclusion provision of Or. Rev. Stat. Sec. 314.665(6)(a).

Turning to the proper application of the reinclusion statute, the Court considered whether the dividends were “derived from the taxpayer’s primary business activity” and thus qualified as reincludable “sales” under Or. Rev. Stat. Sec. 314.665(6)(a). Based upon a thorough examination of the legislative history of the terms “derived from” and “primary business activity” as used in the statute, the Court concluded that the plain meaning of the terms implied a degree of movement or activity, which cast doubt on the possibility that an “activity” might simply include the holding of stock or other property. Further, by examining the underlying state business apportionment concepts upon which Oregon’s statutes were based, the Court found that usage of the term “business income” confirmed that a taxpayer may have more than one “activity” comprising its business and “activity” means a fairly high-level description of something the taxpayer did in its business. After also considering Or. Admin. Reg. Sec. 150-314.665(3)(2), a relevant administrative rule further defining “income-producing activity,”11 the Court concluded that the legislature “did not consider the holding of stock to be a contender for ranking as a taxpayer’s ‘primary business activity’ because the holding of stock simply was not an activity.” Finally, the Court confirmed its understanding of the reinclusion provision, which directs that an amount must be reincluded if derived from the taxpayer’s business activity, but notably does not say that the amount must be reincluded if the “sale exchange, redemption or holding of the intangibles constitutes the taxpayer’s primary business activity.” As the CFCs engage in a single, unitary trade or business with the taxpayer, the dividends and Subpart F income must be reincluded in the sales factor if the facts show that they are derived from the taxpayer’s primary business activity.

The task of determining the taxpayer’s primary business activity and identifying whether that activity is in fact the primary business activity of each CFC whose earnings and profits resulted in a dividend or Subpart F income for the years at issue remains unresolved.12 Based on the outstanding factual issue, the Court denied the Department’s motion for summary judgment and suggested that the parties attempt to reach a final agreement on their own.

Commentary The revised Oracle decision clarifies that the unsubtracted amounts of Subpart F income and dividends should be treated similarly and may be includible in the sales factor, depending upon the facts and circumstances of the primary business activity of the taxpayer and the paying CFCs. Notably, the Court distinguished its conclusion from the Tektronix13 decision, in which the Oregon Supreme Court held that the taxpayer’s receipts attributable to goodwill upon the sale of a division to an unrelated corporation were not derived from the taxpayer’s business activity, finding that in this case, the dividends and Subpart F income are, by definition, profit from a single worldwide trade or business related to software that the taxpayer conducts with domestic subsidiaries and the CFCs.

The Court’s approach to the issue at hand closely resembled that of its original Oracle decision in terms of its reliance upon a significant amount of historical and legislative analysis to reach a conclusion. Again, the determination highlights the continued relevance of legislative history and contemporaneous testimony to derive the meaning and intent of statutory language. Further, by denying both parties’ motions for summary judgment and once more directing the parties to confer privately in order to resolve the remaining issues of fact, the Court has reinforced its function as a body to interpret law, rather than investigate facts.

For Oregon purposes, the logic employed in this decision could also extend to other items of income for which deductions under Or. Rev. Stat. Sec. 317.267 are permitted, including global intangible low-taxed income (GILTI) and IRC Sec. 965 dividend amounts that are federally created concepts of income recognized by taxpayers with international reach long after the tax years at issue in this case. Oregon-domiciled taxpayers and taxpayers with dividend income, Subpart F income, GILTI and 965 dividend amounts should re-evaluate their Oregon sales factor calculations in light of this case.



1 Oracle Corporation and Subsidiaries v. Department of Revenue, No. 5340 (Oct. 6, 2021), revising Oracle Corporation and Subsidiaries v. Department of Revenue, No. 5340, Oregon Tax Court (Dec. 16, 2020). See GT SALT Alert: Oregon Rules on Subpart F Sales Factor Inclusion.
2 OR. REV. STAT. § 317.267(1) and (2), subject to a taxpayer owning at least 20 percent of the payor.
3 OR. REV. STAT. § 314.650. For taxpayers in certain industries, such as public utilities and financial organizations, alternative apportionment formulas are provided.
4 OR. REV. STAT. § 317.267(3).
5 OR. REV. STAT. § 314.665(6)(a).
6 Oracle Corporation and Subsidiaries v. Department of Revenue, No. 5340, Oregon Tax Court (Dec. 16, 2020).
7 OR. REV. STAT. § 314.665(6)(a), adopted in 1995, excludes from the definition of “sales” for apportionment factor purposes, “gross receipts arising from the sale, exchange, redemption or holding of intangible assets, including but not limited to securities, unless those receipts are derived from the taxpayer’s primary business activity.”
8 Specifically: (i) determination of “taxable income” under federal income tax law of the relevant group of domestic affiliates; (ii) determination of whether the federal consolidated group consists of more than one Oregon “unitary group”; (iii) application of required additions, subtractions, and other modifications to federal consolidated taxable income required by Oregon law; (iv) subtraction of all non-apportionable, nonbusiness income; (v) multiplication of the remaining amount (apportionable business income) by the percentage determined by the Oregon apportionment formula; and (vi) addition of any amounts of nonbusiness income allocated to Oregon.
9 OR. REV. STAT. § 314.665(6)(a).
10 Citing Tektronix v. Dept. of Rev., 354 Or. 531 (2013), in which the Oregon Supreme Court addressed the treatment of treasury function receipts for purposes of the sales factor computation.
11 Or. Admin. R. 150-314.665(d). Income producing activity includes, but is not limited to, the following: (d) the sale, licensing, or other use of intangible personal property.
12 Although both parties characterized the taxpayer’s primary business activity in similar terms, and the Department acknowledged that the primary business activity of at least some of the CFCs is the same as that of the taxpayer, the Court did not read the Department’s briefing as conceding that fact as to all of the CFCs.
13 Tektronix v. Dept. of Rev., 354 Or. 531 (2013).



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