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Oregon rules on Subpart F sales factor inclusion

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The Oregon Tax Court recently addressed 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 Specifically, the Court determined that the unsubtracted portion of Subpart F income should not be included in the sales factor denominator, but was unable to conclude as to whether the similar portion of dividends received from controlled foreign corporations (CFCs) should be included.

Background and applicable Oregon law 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. Also as required in computing its consolidated federal taxable income, the taxpayer included certain income amounts calculated based on various data related to 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 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. This treatment would have substantially diluted the taxpayer’s Oregon sales factor. 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. This dispute represented the sole issue addressed by the Oregon Tax Court.

Oregon Tax Court decision To determine the proper treatment of the 20% amounts for sales factor purposes, the Oregon Tax Court separately evaluated the taxpayer’s argument for inclusion and the Department’s argument for exclusion of the unsubtracted amounts.

Taxpayer’s argument for inclusion In support of its position that the 20% amounts should be included in the denominator of the sales factor, the taxpayer claimed 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 implied inclusion of the unsubtracted 20% in its sales factor.

In addressing the taxpayer’s contention with respect to such implied inclusion, the Court noted that the text of the statute did not clarify how to treat the unsubtracted portion for sales factor purposes. This led to the Court considering whether or not the legislature intended to imply how to treat such amounts in its adoption of the statute. Based on an extensive review of the statutory context and other laws in place at the time of the enactment of the statute, the Court found that Oregon law permits the use of several different apportionment formulas, including at least two which exclude dividends entirely from the calculation. Accordingly, the Court held that the legislature did not intend for the statute to address the inclusion or exclusion of the unsubtracted portion of the dividends and Subpart F income. Instead, the Court held 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 The Department 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.

In considering the Department’s argument that Or. Rev. Stat. Sec. 314.665(6)(a) required exclusion of the unsubtracted amounts from the sales factor, the Court first examined the term “sales,” defined as “all gross receipts of the taxpayer not allocated under Or. Rev. Stat. Secs. 314.615 to 314.645”6 Although not disputed by the parties, the Court found a lack of clarity regarding whether the term “gross receipts” included subpart F income. As part of its analysis, the Court reviewed the dictionary definitions of “sales” and “receipts,” as well as the historical property and payroll apportionment factors. After review of the definitions and historical factors, the Court found that “gross receipts” was more likely to refer to actual cash expenditures or property which the taxpayer took actual possession of, than rather amounts that became income solely by imputation as a matter of law, such as subpart F income. Therefore, the Court held that Subpart F income did not qualify as “gross receipts,” and therefore “sales,” for purposes of Oregon’s sales factor. Accordingly, it had to be excluded from the sales factor calculation.

To determine the treatment of the 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,”7 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), there was no dispute that the CFC stock constituted “intangible assets.” Instead, the Court focused on the taxpayer’s activity with respect to the CFC stock and what the legislature meant by “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. Based upon a thorough review of the legislative history, the Court concluded that the legislature was focused on excluding receipts related to the passive holding of intangibles as investments in anticipation of appreciation in value or for the generation or interest or dividends. Specifically, the Court noted that, “The examples discussed before the revenue committees involved securities the taxpayer held as part of an investment ‘pool’ or ‘portfolio,’ further implying that the taxpayer did not control the issuers or manage the issuers’ business.” Here, in contrast, the Court found that the taxpayer’s relationships with the CFCs went “far beyond that of passively ‘holding’ shares pooled in an investment portfolio with the securities of other issuers, and cashing period interest and dividend checks before selling off the shares.”8 Absent further information to verify this conclusion, the Court declined to rule as to whether the dividends arose from the taxpayer’s “holding” of the CFC shares.

Further, the Court considered whether the dividends were “derived from the taxpayer’s primary business activity” and thus qualified as “sales” under Or. Rev. Stat. Sec. 314.665(6)(a). As indicated on its returns, the taxpayer’s primary business activity was developing and selling software and computer hardware. There was evidence that the CFCs were part of this business activity. Also, the dividends were paid out of the CFCs earnings and profits from their businesses, thus suggesting that the requirements of the exception may be satisfied. However, since genuine issues of material fact remained, the Court again denied the Department’s motion for summary judgment, suggesting instead that the parties take the issue to trial.

Commentary The Oracle decision clarifies that the unsubtracted amounts of Subpart F income are not includible in the sales factor, but leaves open the same question with respect to dividends received from CFCs. The Tax Court’s determination that Subpart F income did not qualify as “gross receipts” could be particularly important for Oregon-domiciled taxpayers that sourced a portion of receipts from Subpart F income to their sales factor numerators, thereby also impacting their state minimum tax computation.9

The decision also provides insight into the relevance of legislative intent in determining whether and how items not explicitly referenced in existing state law should be excluded from the sales factor. Notably, other states using similar statutory language to define partial or complete dividends received deductions specific to the apportionable tax base could extend the exclusion for unsubtracted amounts to their sales factors under similar logic.

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 enacted legislation during 2019 treating GILTI income in the same manner as a dividend. Thus, the 80% dividends received deduction generally applies, resulting in a similar 20% unsubtracted amount. No further guidance appears to clarify the treatment of this 20% amount for apportionment factor purposes.10 With respect to IRC Sec. 965 dividends, Oregon’s starting point for computing taxable income conforms to the federal tax treatment treating the amounts as income. An addback of IRC Sec. 965(a) amounts with no IRC Sec. 965(c) offset is required, with an 80% dividends received deduction allowed for the full IRC Sec. 965(a) amount if derived from a 20% or more owned corporation, and a 70% dividends received deduction allowed otherwise.11 The Department issued guidance explaining when the mandatory deemed repatriation under IRC Sec. 965 may receive sales factor representation under Oregon law.12 For tax years beginning before Jan. 1, 2018, the Department determined that the deemed repatriation amount was required to be excluded from the sales factor unless the repatriation gross receipts were derived from the taxpayer's primary business activity. For tax years beginning on or after Jan. 1, 2018, the deemed repatriation amount was to be excluded from the sales factor without exception. 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 guidance and the Oracle determination.



1 Oracle Corporation and Subsidiaries v. Department of Revenue, No. 5340, Oregon Tax Court (Dec. 16, 2020).
2 OR. REV. STAT. § 317.267(1) and (2), subject to taxpayer owning at least 20% of 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 OR. REV. STAT. § 314.665(1).
7 OR. REV. STAT. § 314.665(6)(a).
8 The facts indicated that the taxpayer owned 100% of the stock of most of the CFCs and may have been engaged in the same unitary business with some or all of these companies.
9 Oregon imposes a “minimum tax” ranging from $150 - $100,000 based on the amount of a corporation’s Oregon gross receipts.
10 S.B. 851, Laws 2019, amending OR. REV. STAT. § 317.267. Notably, with respect to GILTI income, a subtraction from income is not allowed for foreign-source dividend income, as described in IRC § 245A, which is included in gross income. In this instance, the amount deducted under IRC § 245A is specifically excluded from the sales factor of the apportionment formula.
11 Or. Rev. Stat. § 317.267.
12 Oregon Revenue Bulletin 2018-01, Oregon Department of Revenue (Nov. 9, 2018).



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