Oracle Corporation and subsidiaries, Plaintiff-Appellee and Cross-Appellant,
Department of Revenue of the State of Colorado; and Barbara Brohl, in her official capacity as Executive Director of the Department of Revenue of the State of Colorado, Defendants-Appellants and Cross-Appellees.
and County of Denver District Court No. 15CV31175 Honorable
A. Bruce Jones, Judge.
Silverstein & Pomerantz, LLP, Neil I. Pomerantz, Mark E.
Medina, Michelle Bush, Denver, Colorado, for
Plaintiff-Appellee and Cross-Appellant
Cynthia H. Coffman, Attorney General, Terence C. Gill, First
Assistant Attorney General, Noah C. Patterson, Senior
Assistant Attorney General, Russel D. Johnson, Assistant
Attorney General, Denver, Colorado, for Defendants-Appellants
1 In this tax dispute, 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
summary judgment in favor of plaintiff, Oracle Corporation
(Oracle). The district court held that Oracle could not be
required to include Oracle Japan Holding, Inc. (OJH), a
wholly owned domestic subsidiary holding company, in its
Colorado combined corporate income tax returns for the tax
years 2000 to 2005, because OJH was not includable under
section 39-22-303(12)(c), C.R.S. 2017. The court also
rejected the Department's assertion that it could require
Oracle to include OJH or otherwise tax a portion of OJH's
income under section 39-22-303(6), allegedly to prevent tax
abuse. In so holding, however, the court rejected
Oracle's alternative argument that OJH was not includable
under section 39-22-303(11)(a). Oracle cross-appeals this
portion of the summary judgment order. Neither party disputes
preservation of any issue nor argues that summary judgment
was improper because of a disputed issue of material fact.
2 We affirm the summary judgment against defendants and on
that basis dismiss the cross-appeal as moot.
Background and Procedural History
3 Oracle, a Delaware corporation headquartered in California,
is the parent of a worldwide group of affiliated
corporations. Oracle Corporation Japan (Oracle Japan), formed
in 1985, is a foreign subsidiary operating exclusively within
Japan. OJH, formed in 1991, holds stock in Oracle Japan. In
the tax year ending (TYE) May 31, 2000, OJH sold 8.7 million
shares of Oracle Japan stock on the Tokyo Stock Exchange for
a gain of $6.4 billion (OJH Gain).
4 Following an audit of Oracle's Colorado income tax
returns for TYEs May 31, 2000, through May 31, 2005, the
Department issued an assessment that Oracle owed Colorado
income tax on the OJH Gain. Oracle protested this assessment.
The Director issued a corrected final determination upholding
the assessment. Oracle timely commenced this action
Overview of Colorado Corporate Income Tax Law
5 A "C corporation" is "any organization taxed
as a corporation for federal income tax purposes."
§ 39-22-103(2.5), C.R.S. 2017. Large businesses often
function through multiple, related C corporations,
interconnected in complex ways, operating to various degrees
inside Colorado, in other states, and sometimes in foreign
6 A state's taxing power is constitutionally limited to
the income of a corporation, or a group of affiliated
corporations, that is attributable to activities within the
state. Allied-Signal, Inc. v. Dir., Div. of
Taxation, 504 U.S. 768, 777 (1992). In other words,
states may tax a unitary business based on an apportioned
share of the multistate activities carried on in the taxing
state. Id. at 778. Colorado taxes the income of a C
corporation from tangible or intangible property located or
having a situs in this state, as well as the income from any
activities carried on in this state, regardless of whether
such activities are also part of interstate or even foreign
commerce. § 39-22-301(1)(d)(II), C.R.S. 2017.
7 To calculate the taxable income of affiliated C
corporations attributable to Colorado, the Department applies
the "unitary apportionment" accounting method,
which has been upheld by both the Supreme Court and Colorado
Supreme Court. As explained in Hewlett-Packard Co. v.
Department of Revenue, 749 P.2d 400, 401 (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.
8 Section 39-22-303 contains rules for determining which
related C corporations the Director may require be included
in a "combined report" for the purpose of income
taxation. Three subsections are relevant.
. Section 39-22-303(8) provides that the
Director shall not require a corporation "which conducts
business outside the United States" to be included in a
combined report "if eighty percent or more of the C
corporation's property or 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(11)(a) allows the
Director to require, and the taxpayer to file, a combined
report for an affiliated group of C corporations, but only to
the extent that members of the affiliated group satisfy at
least three of six factors.
. Section 39-22-303(12)(c) clarifies that
for purposes of subsection 303(11), an "affiliated
group" of 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."
9 Apart from these combined reporting rules, section
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.
The District Court's Summary Judgment Order
10 The parties filed cross-motions for summary judgment. In a
thorough and well-reasoned order, the district court
articulated three principal rulings.
. The parties agree that Oracle and OJH met
the common officers test in section 39-22-303(11)(a)(VI) for
tax years 1998-2000. They dispute whether OJH satisfies the
substantial use of intellectual property test in subsection
303(11)(a)(IV) and the common directors and officers test in
subsection 303(11)(a)(V). The court concluded that OJH
substantially used Oracle's trademarked name, although
not in connection with the sale of goods and services. It
further concluded that the common directors and officers test
was met as to one director of OHJ who also held an officer
title at Oracle, even though he had never been appointed an
officer by Oracle's board, as its bylaws required.
. Although section 39-22-303(12)(c) allows a
C corporation that has less than twenty percent of its
property and payroll inside the United States to be excluded
from a parent corporation's combined tax return, it does
not address a holding company such as OJH, which has no
property or payroll of its own, inside or outside the United
States. But according to Department of Revenue Regulation
39-22-303.12(c), 1 Code Colo. Regs. 201-2, "[s]ince
corporations that have no property or payroll factors of
their own cannot have twenty percent or more of their factors
assigned to locations in the United States, such
corporations, by definition, cannot be included in a combined
report." While the statute may be ambiguous, in the
court's view, "Regulation 12(c) is directly
applicable to the facts of this case." The court
concludes, "OJH is not an includable C corporation under
[sub]section 303(12)(c), and the Department erred when it
required the inclusion of OJH in Oracle's Colorado
. Section 39-22-303(6) did not provide the
Department with an alternative method of allocating income
apart from the combination of affiliated corporations
required by subsections (11)(a) and 12(c).
11 For these reasons, the court entered summary judgment in
favor of Oracle.
Appellate Review and Statutory Interpretation
12 An appellate court reviews a district court's summary
judgment de novo. Medved v. State, 2016 COA 157,
¶ 12. "Summary judgment is a drastic remedy and,
therefore, is only appropriate where there are no disputed
issues of material fact and the moving party is entitled to
judgment as a matter of law." Id.; see
13 Statutory interpretation is also a question of law subject
to de novo review. Colo. Dep't of Revenue v. Creager
Mercantile Co., Inc., 2017 CO 41M, ¶ 16. Familiar
standards inform that process.
14 "When construing a statute, we must ascertain and
give effect to the intent of the General Assembly. To
determine legislative intent, we look first to the plain
language of the statute. When the statutory language is clear
and unambiguous, 'we look no further and apply the words
as written, '" without resorting to legislative
history or further rules of statutory construction.
Id. (citations omitted); see also Smith v. Exec.
Custom Homes, Inc., 230 P.3d 1186, 1189 (Colo. 2010). As
part of de novo review, a court may consider and even defer
to an agency's interpretation of the statute, although it
is not bound by the agency's interpretation. BP Am.
Prod. Co. v. Colo. Dep't of Revenue, 2016 CO 23,
¶ 15. But in interpreting Part 3 of Article 22, the
Director's administrative interpretations "shall be
given no greater weight than the interpretation of the
taxpayer . . . unless such administrative interpretation or
construction is set forth in rules and regulations
promulgated by the executive director." §
39-22-310, C.R.S. 2017. As well, "[d]eference is not
warranted where the agency's interpretation is contrary
to the statute's plain language."
Am. Prod. Co., ¶ 15.
15 Generally, a court resolves all doubts regarding the
language in a tax statute in favor of the taxpayer.
Id. at ¶ 16. Deductions and exemptions are not
allowed, however, unless they are clearly provided for in the
Is Not an Includible C Corporation Under the Test in Section
16 The Department contends the district court erred when it
held that OJH was not an includible C corporation under
section 39-22-303(12)(c), but it does not assert that this
section is ambiguous. We agree with the district court's
conclusion, but do not share the court's view that the
statute is ambiguous.
17 Applying the plain language of section 39-22-303(12)
involves the following steps.
. To begin, the Director's power under
subsection 303(11) to require a combined report applies only
to "an affiliated group of C corporations."
. Subsection 303(12)(a) limits the phrase
"affiliate group, " as used in subsections 303(10)
and (11), to "includable C corporations" having
. And as relevant here, subsection
303(12)(c) defines "includable C Corporations" as
any corporation that has "more than twenty percent of
the C Corporation's property and payroll" assigned
to locations inside the United States.
because OJH is not an includable C corporation, it cannot be
a member of an affiliated group, and in turn falls outside of
the Director's power to require its inclusion in a
18 Even so, this application of subsection 303(12)(c) must
survive two challenges.
19 First, as the district court recognized, subsection
303(12) does not address whether a corporation like OJH - a
holding company that has no tangible property or payroll of
its own, anywhere -must be included in or may be excluded
from a combined report. If this silence renders the
subsection ambiguous, then interpretation must begin with
deciding whether it is a tax imposition or a tax exemption
statute and also consider legislative history.
20 Second, everyone agrees that OJH is a domestic corporation
which does not "conduct business outside the United
States, " the phrase that limits the Director's
power to require inclusion in a combined report under
subsection 303(8). According to the Department, because the
following subsections also concern the scope of combined
reports, they should be read in ...