Oregon Tax Court finds Subpart F income is sale for apportionment

November 2021

In brief

On October 6, the Oregon Tax Court’s Regular Division reversed its prior decision and held that Subpart F income included in Oregon taxable income qualifies as a “gross receipt” for sales factor apportionment purposes. This finding allowed the Tax Court to evaluate whether a sales factor statutory provision operates to include or exclude such Subpart F income from the sales factor. 

The Tax Court concluded that Subpart F income would be excluded from the sales factor. However, “reinclusion” would occur if the income is “derived from the taxpayer’s primary business activity.” Because this is a factual matter and the Tax Court was ruling on motions for summary judgment, the proceedings remain with the parties to work through the factual considerations.

The takeaway: Although further proceedings remain, the Tax Court’s conclusions are significant. Acknowledging that Subpart F income qualifies as “gross receipts” allows such income to enter the sales factor unless otherwise excluded. Oregon taxpayers receiving Subpart F income should consider whether they could include unsubtracted Subpart F income in their Oregon sales factors. 

Both the Department and the taxpayer in this case disagreed with the Tax Court’s December 16, 2020, decision regarding the characterization of Subpart F income. Both filed motions for reconsideration on the gross receipts issue. Accordingly, it seems questionable whether the Department would seek to appeal the gross receipts determination to a higher court. 

[Oracle Corp. v. Department of Revenue, Oregon Tax Court, Regular Division, No. TC 5340 (October 6, 2021)]

In detail


Oracle Corp. and certain of its domestic subsidiaries (Taxpayer) filed Oregon consolidated returns for the 2010 to 2012 tax years. During those years, Taxpayer included within its federal taxable income Subpart F income imputed to it from its wholly-owned controlled foreign corporations (CFCs). For Oregon purposes, Taxpayer applied the state’s dividend received deduction (DRD) and subtracted 80% of such Subpart F income in arriving at its Oregon taxable income. Taxpayer did not include the 80% amount in its apportionment sales factor; however, Taxpayer included in its sales factor the 20% of Subpart F income represented in its Oregon taxable income (i.e., its “unsubtracted” Subpart F income). 

At issue before the Oregon Tax Court was whether its unsubtracted Subpart F income is included in Taxpayer’s Oregon sales factor.

December 2020 Tax Court ruling

Before the Tax Court, Taxpayer and the Department moved for summary judgment. An element of the Tax Court’s December 16, 2020, decision concluded that Subpart F income did not qualify as a “gross receipt” and, therefore, could not be included in a taxpayer’s sales factor. The Tax Court reasoned that the plain meaning of a “receipt” requires that something is “received” or taken into possession and that “gross receipts include only amounts actually received in cash.” The Tax Court distinguished “actual cash expenditures” from the concept of “income” and held that Subpart F income is not “received” by a taxpayer and therefore could not qualify as a “gross receipt.”  

Both the Department and Taxpayer disagreed with this conclusion and filed motions for reconsideration.

Sales factor 80% DRD exclusion does not equate to the inclusion of remaining dividends

ORS 317.267(3) provides that: “[t]here shall be excluded from the sales factor . . . any amount subtracted from federal taxable income.” This provision requires that the 80% of Subpart F income subtracted from taxable income is excluded from a taxpayer’s sales factor. Taxpayer asserted that this treatment logically requires that the unsubtracted Subpart F income must be included within the sales factor. Taxpayer relied on statutory interpretation principle “inclusio unius est exclusio alterius” (the inclusion of the one is the exclusion of the other).

The Tax Court disagreed with Taxpayer in its December 2020 ruling and repeated its reasoning in its 42-page October 6, 2021, decision. Before considering elements of statutory construction, the Tax Court first reviewed text of other Oregon laws in place and found that the legislature did not intend subsection ORS 317.267(3) to address the inclusion or exclusion of the unsubtracted portion of a dividend. The statute “leaves it to the substantive law governing the particular apportionment formula applicable to the taxpayer to determine inclusion or exclusion.” Accordingly, the Tax Court found that ORS 317.267(3) did not require the sales factor inclusion of Taxpayer’s unsubtracted Subpart F income.

Subpart F income qualifies as a “gross receipt” for sales factor purposes

ORS 314.665(6)(a) provides that, for sales factor purposes, the term “sales” “[e]xcludes 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 argued that Taxpayer’s Subpart F income was a “receipt” arising from the “holding” of an intangible asset (its CFCs) and therefore excluded from the sales factor. Since the “receipt” (the activity of receiving a dividend) was not Taxpayer’s primary business (selling software), the final clause of ORS 314.665(6)(a) did not operate to “reinclude” Subpart F income in the sales factor.

As noted above, the Tax Court’s December 2020 decision concluded that Subpart F income was not a “receipt” and, therefore, found that ORS 314.665(6)(a) did not apply “because Taxpayer’s Subpart F income was never gross receipts in the first place.” 

In its October 6, 2021, decision, the Tax Court revised its December conclusion to find that “gross receipts” should be construed “according to the taxpayer’s tax accounting method.” Accordingly, the Tax Court found that “Subpart F Income constitutes gross receipts for apportionment purposes and is treated in the same manner as . . . dividends.”

The Tax Court also concluded that the exclusionary provisions of ORS 314.665(6)(a) applied to Taxpayer’s Subpart F income because such income “arose” from the “holding” of “intangible assets.”

Proceedings continue to determine primary business activity

As noted above, the Tax Court concluded that the first clause of ORS 314.665(6)(a) serves to exclude Taxpayer’s Subpart F income from its sales factor. However, such income would be included if “those receipts are derived from the taxpayer’s primary business activity.”

The Department asserted that the “activity” relating to the receipt of Subpart F income was the “holding” of CFC interests. The Tax Court disagreed, concluding that the plain meaning of “activity” requires “a greater degree of engagement or participating than the ‘holding’ of stock.”

The Tax Court determined that a comparison of two activities is required: (1) the primary business activity of the CFC that generated the earnings and profits to which Subpart F income is attributable  and (2) 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 Subpart F income is “derived from” the taxpayer parent’s “primary business activity.”

The Tax Court stated that the answer to such a question raises a factual matter “as to which the parties may be able to reach agreement without the assistance of the court.” The Tax Court “directs the parties to confer and to advise the court as to the need for further proceedings to resolve any remaining factual differences.”

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Tina Skidmore

Tina Skidmore

National Practice Leader, State and Local Tax, PwC US

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