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Agilent Technologies, Inc. v. Department of Revenue of State of Colorado

Court of Appeals of Colorado, Third Division

November 2, 2017

Agilent Technologies, Inc., Plaintiff-Appellee and Cross-Appellant,
v.
Department of Revenue of the State of Colorado and Barbara Brohl, in her official capacity as the Executive Director of the Department of Revenue of the State of Colorado, Defendants-Appellants and Cross-Appellees.

         City and County of Denver District Court No. 14CV393 Honorable Catherine A. Lemon, Judge

          Silverstein & Pomerantz, LLP, Neil I. Pomerantz, Denver, Colorado; Morrison & Foerster LLP, Craig B. Fields, Irwin M. Slomka, New York, New York, for Plaintiff-Appellee and Cross-Appellant

          Cynthia H. Coffman, Attorney General, Terence C. Gill, First Assistant Attorney General, Brendon C. Reese, Noah C. Patterson, Assistant Attorneys General, Denver, Colorado, for Defendants-Appellants and Cross-Appellees

          OPINION

          BOORAS, JUDGE

         ¶ 1 In this taxpayer dispute, we resolve whether a corporation with no property or payroll of its own must be included in a Colorado combined income tax return. Plaintiff, Agilent Technologies, Inc. (Agilent), and defendants, the Department of Revenue of the State of Colorado (Department) and Barbara Brohl, in her official capacity as the Executive Director of the Department (Director), appeal the district court's entry of summary judgment in Agilent's favor. The district court concluded that Agilent was not required to include its holding company, Agilent Technologies World Trade, Inc. (WT), in its Colorado combined corporate income tax returns for the tax years 2000 to 2007. We affirm.

         I. Colorado Corporate Income Tax Law

         ¶ 2 Because it is helpful in understanding the issues in this case, we begin by setting forth some of the legal framework.

         ¶ 3 A "C corporation" is "any organization taxed as a corporation for federal income tax purposes." § 39-22-103(2.5), C.R.S. 2017. Colorado imposes a tax on the income of a C corporation from tangible or intangible property located or having a situs in this state as well as on income from any activities carried on in this state, regardless of whether they are carried on in intrastate, interstate, or foreign commerce. § 39-22-301(1)(d)(II), C.R.S. 2017.

         ¶ 4 Large businesses often operate through multiple related C corporations that are interconnected in complex ways, operating to various degrees inside Colorado, in other states, and in foreign countries. To calculate the taxable income of affiliated corporations attributable to Colorado, the Department applies the "unitary apportionment" accounting method, which has been upheld by the United States and Colorado Supreme Courts. Hewlett-Packard Co. v. State, Dep't of Revenue, 749 P.2d 400, 402 (Colo. 1988).

[The] unitary apportionment [method] is based on a recognition that an integrated business may operate through several separately incorporated entities. In such case, transactions between corporations under common control may lack economic substance; therefore, it is necessary to consider the corporate group as a whole. This method combines the income of all related business entities which are engaged in the same integrated or unitary business to arrive at a net income base. A percentage of this net income base is then apportioned to the relevant taxing jurisdiction according to a formula which measures the contribution of the business activities within the taxing jurisdiction (e.g., Colorado) to the profit of the entire unitary business. This percentage of the net income base, rather than the entire net income base, is then taxed by the state.

Id. at 401.

         ¶ 5 Section 39-22-303, C.R.S. 2017, sets forth rules for determining which related C corporations must be included in a combined, unitary group for the purpose of state taxation. The first step is to determine whether the corporation conducts business primarily inside or outside of the United States:

• Section 39-22-303(8) provides that a corporation is not required to include in a combined report the income "of any C corporation which conducts business outside the United States if eighty percent or more of the C corporation's property and payroll, as determined by factoring pursuant to section 24-60-1301, C.R.S., is assigned to locations outside the United States."
• Section 39-22-303(12)(c) clarifies that an includible C corporation is "any C corporation which has more than twenty percent of the C corporation's property and payroll as determined by factoring pursuant to section 24-60-1301, C.R.S., assigned to locations inside the United States."

         ¶ 6 To require a combined report as part of a unitary business, an affiliated group of C corporations must also satisfy three of the six factors set forth in section 39-22-303(11)(a) for the tax year at issue as well as the two preceding tax years. These factors address characteristics of a unitary business, such as its functional integration, centralization of management, and economies of scale. See Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 178-79 (1983).

         ¶ 7 Finally, section 39-22-303(6) provides as follows:

In the case of two or more C corporations, whether domestic or foreign, owned or controlled directly or indirectly by the same interests, the executive director may, to avoid abuse, on a fair and impartial basis, distribute or allocate the gross income and deductions between or among such C corporations in order to clearly reflect income.

         ¶ 8 The parties appeal the district court's application of these statutes to the facts described below.

         II. Background

         A. Facts

         ¶ 9 Agilent is a parent company of a worldwide group of affiliates. It provides "core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences, and chemical analysis industries." Agilent is incorporated in Delaware, but during the years at issue (tax years 2000 to 2007), it maintained research and development and manufacturing sites in Colorado. Agilent concedes it was subject to Colorado corporate income tax during this time and timely filed corporate income tax returns for these years.

         ¶ 10 WT is a subsidiary of Agilent and is incorporated in Delaware. It was formed as a holding company to own foreign entities operating solely outside the United States. During the years at issue, WT owned four non-United States entities, which operated in Venezuela, Russia, Poland, and Turkey. For federal income tax purposes, WT and the foreign entities elected to be taxed as a single corporation. As a holding company, WT does not own or rent property, has no payroll, and does not advertise or sell products or services of its own. The foreign entities, however, own property and have payroll.

         B. Agilent's Corporate Tax History

         ¶ 11 Agilent did not include WT in its corporate tax returns for the years at issue. In 2010, the Department issued notices of corporate income tax deficiency requiring that Agilent include WT in its Colorado combined returns for those years, assessing tax, interest, and penalties totaling $13, 345, 601. Agilent contested the adjustments made by the Department. The Director upheld the notices of deficiency. The Department issued a "Notice of Final Determination and Assessment and Demand for Payment" in May 2014, including updated interest, in the amount of $13, 720, 507.

         C. The District Court's Order

         ¶ 12 Agilent sought review of the Department's determination in the district court. After considering the parties' motion and cross-motion for summary judgment, the district court ruled in ...


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