Oregon: Tax Court Reconsiders Decision Addressing Inclusion of Subpart F in Sales Factor

In December 2020, the Oregon Tax Court addressed whether a taxpayer properly included in its sales factor denominator foreign dividends and Subpart F income that remained in the tax base after applying the state’s 80 percent dividends-received deduction. 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 of Revenue denied the inclusion of these amounts in the sales factor, arguing that a provision defining “sales” for purposes of the sales factor required exclusion of the non-subtracted 20 percent from the factor entirely because both the dividends and Subpart F income arose from holding stock in a Controlled Foreign Corporation (CFC). This provision excludes from the definition of “sales” any “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 activities.” In a lengthy opinion, the tax court determined that the twenty percent that remained in the tax base related to Subpart F income should be excluded from the sales factor because the sales factor only includes “gross receipts” and Subpart F income is not a “receipt.” The court remanded the case to determine whether the dividends were excluded under a provision that 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.” Notably, it was unclear to the court whether the dividends  resulted from merely holding CFC stock (in which case they would be excluded from the sales factor), or whether the dividends were from the taxpayer’s primary business activity (in which case they would be included). 

Both parties sought reconsideration of the tax court’s December 2020 opinion.  On October 6, 2021, the motions for reconsideration were granted, and the tax court judge issued a revised opinion. Importantly, the tax court revised its original conclusion that Subpart F income was not considered a gross receipt. Per the decision, the court was “persuaded” by a contemporaneous statutory definition of “received,” along with other strong contextual evidence that the legislature intended “gross receipts” to be construed according to the taxpayer’s accounting method.  Subpart F, the court noted, functions essentially as a mandatory accounting method, preventing domestic controlling shareholders from using the simple postponement of the payment of dividends to indefinitely defer income earned by foreign-incorporated subsidiaries. Accordingly, the court concluded that Subpart F income constituted gross receipts for apportionment purposes and should be treated in the same manner as the dividends that were actually paid. Having determined that Subpart F and dividends were both gross receipts, the court next addressed whether the non-subtracted amounts were excluded from the sales factor under the exclusion for gross receipts arising from holding intangible assets. The taxpayer’s shares of stock in its CFCs were unquestionably “intangible assets” that were related to the taxpayer holding the CFC stock. As a result, these amounts would be excluded unless the receipts were derived from the taxpayer’s primary business activity under the so-called re-inclusion provision.  The court next concluded that two things must be compared to determine if the so-called re-inclusion provision applied. The first is 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). The second is the primary business activity of the parent. If these are the same, then the dividend must be reincluded in the definition of “sales” because the dividend (or subpart F income) is “derived from” the taxpayer parent’s “primary business activity.” The next step in the case at hand was to determine the taxpayer’s primary business activity and to identify whether that activity was also the primary business activity of each CFC whose earnings and profits resulted in a dividend or Subpart F income for the years at issue. In the court’s optimistic view, this was a factual matter as to which the parties may be able to reach agreement without the assistance of the court.  Please contact Kristina Cauthorn with questions on Oracle Corporation and Subsidiaries v. Department of Revenue.