TWIST - October 18, 2021

Welcome to TWIST for the week of October 18th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

Today we are covering a number of corporate income tax developments.  First, the Oregon Tax Court revised its opinion in the Oracle decision originally issued last December. The substantive issue in the case was whether the sales factor included foreign dividends and Subpart F income that remained in the tax base after applying the state’s 80 percent dividends-received deduction. The tax court first revised its original conclusion that Subpart F income was not considered a gross receipt.  Having determined that Subpart F and dividends are both gross receipts, the court next considered whether the non-subtracted amounts were excluded from the sales factor under a statutory exclusion for gross receipts arising from holding intangible assets. An exception to the exclusion applies if holding intangible assets is the taxpayer’s primary business activity.  To make this determination, the court concluded it is necessary to compare the primary business activity of the subsidiary that generated the earnings and profits out of which the dividend was paid (or to which any subpart F income is attributable) to the primary business activity of the parent. If these are the same, then the dividend or Subpart F income is included in the sales factor because it is “derived from” the parent’s “primary business activity.”

In other corporate income tax news, a Texas appeals court concluded that a taxpayer’s apportionment factor was properly adjusted to include only net gains from sales of securities.  Under Texas law, generally only net proceeds from the sale of loans or securities are included in the sales factor. An exception to this general rule applies if a loan or security is treated as inventory of the seller for federal income tax purposes. Although the taxpayer had elected for federal purposes to treat the securities similarly to inventory securities, the securities at issue were not the taxpayer’s inventory.  As such, the court held that only the net gains from the sale of those securities were included in gross receipts.

In another Texas development, the Comptroller determined that having a single employee engaged in back office customer service activities from his home was sufficient to create sale and use and franchise tax nexus for the pre-Wayfair tax years at issue. The Comptroller rejected the taxpayer’s position that because the employee was only a representative for purposes of in-bound customer service calls, his activities should not create nexus for the company.

Finally, an Alaska Administrative Law Judge (ALJ) upheld a penalty imposed on a taxpayer for not filing an amended corporate income tax return electronically. The ALJ further interpreted the penalty to be calculated based on the amount of tax owed on the original return, although the taxpayer claimed a refund of tax on the amended paper return.