Tektronix, Inc. & Subsidiaries v. Department of Revenue
Docket: TC 4951; SC S060912
Court: Oregon Supreme Court; December 11, 2013; Oregon; State Supreme Court
A direct appeal from the Tax Court involves a judgment against the Department of Revenue, which issued a $3.7 million deficiency notice to Tektronix, Inc. for the 1999 tax year. Tektronix argued that the statute of limitations barred the assessment and that the tax calculation was incorrect. The Tax Court granted partial summary judgment favoring Tektronix on both issues, leading to the department's appeal. The appellate court determined the department miscalculated Tektronix's tax liability and upheld the Tax Court's decision.
Key facts include that Tektronix sold its printer division for approximately $925 million in 1999, with about $590 million attributed to intangible assets or goodwill, which was not included in the sales factor on its tax return. This omission would have increased the tax liability in Oregon. The department failed to issue a deficiency notice within the three-year limitation period following the 1999 tax return filing. In 2002, Tektronix reported a net capital loss, enabling a carryback to 1999, which the IRS initially approved. However, a subsequent IRS audit reduced the net capital loss claimed, affecting the carryback amount to 1999.
In 2005, the IRS reduced the taxpayer's net capital loss carryback for 1999, requiring repayment of part of a tentative refund, but did not alter the overall tax for that year. Following this adjustment, the taxpayer submitted an amended 1999 tax return for Oregon, reflecting the reduced carryback. The Oregon Department of Revenue accepted the carryback but determined that the IRS's actions reopened the entire 1999 tax return for audit. The audit revealed that the taxpayer should have included $590 million in the sales factor for apportioning business income. Consequently, instead of a refund of approximately $370,000, the taxpayer faced an additional tax obligation of $3.7 million, resulting in a net tax owed of about $3.3 million. The taxpayer contested this assessment in Tax Court, arguing that the statute of limitations barred any additional tax assessment and that the $590 million should not be included in the sales factor. The department argued that the IRS's 2005 actions restarted the statute of limitations and justified the inclusion of the $590 million. The Tax Court ruled in favor of the taxpayer on the partial summary judgment, rejecting the department's cross-motion. Following a settlement that allowed the department to appeal the unfavorable issues, the court confirmed the settlement terms. On appeal, the court agreed with the taxpayer that the $590 million should not be included in the sales factor, negating the need to address the statute of limitations. The court emphasized that the issue pertains to apportioning business income under Oregon's UDITPA, which aims to ensure proper taxation without double taxation across states.
UDITPA outlines two methods for attributing income to states for tax purposes: allocation and apportionment. Allocation involves directly attributing certain types of income, usually to a single state, based on the location of the income source or the taxpayer’s commercial domicile. This includes nonbusiness income categories like rents, royalties, and interest when the taxpayer is domiciled in Oregon, as specified in ORS 314.625-645. In contrast, apportionment applies to business income, which is divided among states based on a formula that considers property, payroll, and sales factors. This formula averages the taxpayer’s ratios of these factors within Oregon compared to all locations. Business income is defined as income from regular trade or business activities, which includes transactions involving both tangible and intangible property. Under UDITPA, all business income is apportioned, while nonbusiness income is allocated. The apportionment method, established in ORS 314.650-665, utilizes a three-factor formula to determine the share of income attributable to each state, with specific definitions for property, payroll, and sales factors outlined in ORS 314.655, 314.660, and 314.665, respectively. The case at hand focuses on the apportionment of business income.
The case revolves around the calculation of the sales factor, which is defined as the ratio of a taxpayer's Oregon sales to their total sales. The numerator consists of total sales within Oregon during the tax period, while the denominator includes total sales everywhere during the same period, as per ORS 314.665(1). "Sales" is defined as all gross receipts not allocated under ORS 314.615 to 314.645 (ORS 314.610(7)).
ORS 314.665 further refines this definition, specifying exclusions for gross receipts from the sale of intangible assets unless derived from the taxpayer's primary business activity. The statute also includes net gains from the sale of intangible assets not derived from the primary activity but included in business income, and excludes incidental sales of fixed assets if a substantial amount of gross receipts arise from such sales (ORS 314.665(6)(a)(c)).
The appeal focuses on the exclusion of gross receipts from intangible assets under ORS 314.665(6)(a), which states that such receipts may be considered sales if they are derived from the taxpayer's primary business activity. The Department of Revenue argues that a sum of $590 million, which both parties classify as business income, should be included in both the numerator and denominator of the sales factor calculation. The taxpayer contends that this amount should be excluded from the sales factor, as it falls under the statutory exclusion, thereby affecting the apportionment formula by increasing the tax base in Oregon. The taxpayer's calculation of the sales factor resulted in 6.9162 percent, while the Department's inclusion of the $590 million led to a recalculated sales factor of 34.3678 percent. The Department relies on ORS 314.665(6)(a) to support its position in both the Tax Court and the current appeal.
The department claimed that the $590 million from the sale of intangible assets should be classified as gross receipts under the 'unless' clause of ORS 314.665(6)(a), which permits certain gross receipts from intangible asset sales to be included in sales calculations. The department argued that this amount was derived from the taxpayer’s primary business activity, specifically through the sale of the printer division. The taxpayer agreed that the $590 million was from intangible assets but argued it was not from its primary business activity, contending that the 'unless' clause did not apply, thereby excluding the receipts under ORS 314.665(6)(a). The Tax Court ruled in favor of the taxpayer, determining that the exclusion under ORS 314.665(6)(a) pertains only to 'liquid assets'—assets that provide immediate cash liquidity—not to the proceeds of the printer division sale. The court's interpretation was based on legislative history, concluding that including such receipts could distort the sales factor favorably for the state of the corporation's headquarters. Consequently, the $590 million was considered not excluded from the definition of 'sales' in ORS 314.610(7). On appeal, the department contended that the Tax Court misinterpreted 'intangible assets' in ORS 314.665(6)(a), arguing that the court relied too heavily on legislative history rather than the statutory text, which defines intangible assets broadly, covering nonphysical resources that can be amortized or converted to cash. Both parties acknowledged that the $590 million qualified as deriving from intangible assets per the common legal understanding of the term.
The interpretation of "intangible assets" as used in ORS 314.665(6)(a) requires consideration of statutory text and context. The phrase that follows the term, which includes but is not limited to securities, does not restrict its meaning. No additional statutory context supports a narrower interpretation. Legislative history was reviewed, but overcoming clear statutory language with this history poses challenges. Legislative history can confirm or illuminate statutory meaning, but if a statute has a single clear meaning, legislative history suggesting otherwise holds no weight.
The Tax Court relied on legislative hearings from 1995, where a witness indicated that ORS 314.665(6)(a) addresses the "treasury function" problem, affirming that gross receipts from the sale of short-term liquid assets are included as "intangible assets" since they are nonphysical and convertible to cash. However, the legislative history does not restrict ORS 314.665(6)(a) solely to this problem, as statutes often contain broader language.
Additionally, the Tax Court referenced a model regulation from the Multistate Tax Commission adopted in 1997 to support a limited definition of "intangible assets" as only liquid assets. However, this model regulation could not have influenced the 1995 legislative decision, and the absence of a counterpart in UDITPA for ORS 314.665(6)(a) means that the general instructions for uniformity do not apply to this specific provision. The difference between Oregon's statute and the model code must be acknowledged.
The Tax Court's interpretation of "intangible assets" in ORS 314.665(6)(a) as only meaning "liquid assets" was deemed incorrect. Legislative testimony from 1999, which suggested this interpretation, was found irrelevant for interpreting a law passed by prior legislators. The court affirmed that the $590 million at issue originated from various intangible property interests, which are legally defined as "intangible assets." Receipts must be excluded from the sales factor unless derived from the taxpayer’s primary business activity. The department argued that the $590 million was linked to the taxpayer's primary business, specifically the goodwill developed through its Color Printing Division, which was integral to its electronics manufacturing and distribution. However, the taxpayer contended that the $590 million came from the sale of a division, not from manufacturing tangible products, and therefore did not derive from its primary business activity. The court agreed with the taxpayer, emphasizing that the sale of a division does not equate to the primary business of manufacturing electronics. The Tax Court's judgment was affirmed on alternative grounds, clarifying that the $590 million, resulting from a one-time sale of intangible assets, should be excluded from the sales factor as it did not derive from the taxpayer's primary business activity. The department's claim that the $590 million was mischaracterized as goodwill was noted, but the opinion concluded that the classification of the intangible assets, including goodwill, was not essential to the decision.
In 2007, the legislature amended ORS 314.410, making the changes retroactive to tax years beginning January 1, 1999. However, these amendments did not substantively alter the statutes relevant to this case, and both parties, along with the Tax Court, have opted to reference the 2005 version. The revised stipulation of facts indicates that the IRS adjustments for the 1999 Tax Year stemmed solely from a reduction in the 2002 Tax Year’s net capital loss. References to the Oregon Revised Statutes and Administrative Rules will primarily be to the 1999 versions, applicable at the time the taxpayer sold its printer division.
ORS 314.625 pertains to the allocation of nonbusiness income but does not explicitly state it applies to all nonbusiness income, suggesting some types may not be allocated or apportioned, a notion contested by Hellerstein. Conversely, business income is always apportioned under ORS 314.650(1), which historically required a three-factor formula involving property, payroll, and sales. The current version has shifted to apportionment based solely on the sales factor, which applies exclusively to apportioned income.
The Department of Revenue's rule, OAR 150-314.665(1)(A)(1), defines 'sales' as gross receipts from regular business activities, excluding receipts from the sale or exchange of intangible assets unless derived from the taxpayer’s primary business. The taxpayer argues that $590 million should not be included in the sales factor calculation, as it does not fit the definition of 'sales.' The agreement with the taxpayer's interpretation negates the need to examine its alternative argument based on the rule. Additionally, it is noted that adding the same non-zero value to both the numerator and denominator of a fraction increases the fraction’s value if it is initially less than one.
Adding one to both the numerator and denominator of the fraction 1/2 results in 2/3, while adding one to 3/4 yields 4/5. The department initially referenced ORS 314.665(6)(b) regarding the inclusion of net gains from the sale of intangible assets not related to the taxpayer’s primary business in its adjustments for the 1999 tax year. However, by the time the case reached the Tax Court, the department had shifted to solely relying on ORS 314.665(6)(a), abandoning any reliance on ORS 314.665(6)(b), and has not pursued that statute in subsequent proceedings. The 'treasury function' pertains to the management of liquid assets to meet business cash flow needs, such as liquidity for business cycles and reserves for contingencies. The Tax Court determined that $590 million was excluded from the sales factor under OAR 150-314.665(4)(3)(b) as business income from intangible property that could not be attributed to any specific income-producing activity. The taxpayer's Form 10-K for the fiscal year ending May 1999 describes Tektronix as a manufacturer and distributor of electronic products across three segments: Measurement, Color Printing and Imaging, and Video and Networking. The department has introduced an administrative rule outlining seven criteria to assess a taxpayer’s primary business activity, but neither party claims this rule is applicable or influences the resolution of the current issue.
