Oregon: Non-subtracted dividend amounts not included in sales factor

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Detailed Oregon Development

In an unpublished decision, the Oregon Tax Court recently addressed whether a taxpayer properly included in its sales factor denominator dividends and Subpart F income that remained in the tax base after applying the state’s dividends-received deduction. The taxpayer at issue subtracted 80 percent of its foreign dividends and Subpart F income in computing its Oregon tax base. The taxpayer also excluded 80 percent of these amounts from the sales factor.  The non-subtracted 20 percent was included in the sales factor denominator, but it was not included in the Oregon numerator. On audit, the Department protested this treatment.

Under Oregon law, there is a statutory exclusion from the sales factor of any amount subtracted from federal taxable income. The statutory text of the exclusion does not specify whether the unsubtracted portion must be included or excluded from the factor. The taxpayer argued that the logical corollary of the express 80 percent exclusion was that the legislature intended the remaining portion to be included in the sales factor. The Department, on the other hand, argued that the exclusion statute was not intended to address the treatment of the remaining twenty percent amount and that other authorities operated to exclude the amount not subtracted. The court, rejecting the taxpayer’s position, concluded that the statute did not require the unsubtracted amounts of either Subpart F Income or dividends to be included in the apportionment formula.

Under Oregon law,  the definition of “sales” for purposes of the sales factor excludes gross receipts arising from the 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. In the Department’s view, this statute required the taxpayer to exclude the unsubtracted 20 percent of its Subpart F income and dividends because those amounts arose from holding its CFCs’ stock.   The court noted that the first inquiry was whether the taxpayer’s dividend and Subpart F income constituted “gross receipts.” After a lengthy discussion, the court concluded that “gross receipts,” and therefore “sales” for purposes of Oregon’s sales factor under UDITPA, did not encompass subpart F income. With respect to whether the exclusion applied to the dividends received from the taxpayer’s CFCs, the court concluded that there was a genuine issue of material fact as to whether the dividends arose from the taxpayer’s holding of the CFC stock. As such, the case will appear to have to go to trial. Please contact Rob Passmore at (503) 820-6803 with questions on Oracle Corp. v. Dep’t of Revenue.

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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US