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Oracle Corp. v. Department of Revenue of State of Colorado

Court of Appeals of Colorado, Third Division

November 30, 2017

Oracle Corporation and subsidiaries, Plaintiff-Appellee and Cross-Appellant,
v.
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.

         City 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 and Cross-Appellees

          OPINION

          WEBB JUDGE.

         ¶ 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.

         I. 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 challenging it.

         II. 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 countries.

         ¶ 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"[1] 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.[2]
. 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 39-22-303(6) provides:

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.

         III. 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 combined return."
. 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.

         IV. 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 C.R.C.P. 56(c).

         ¶ 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."

         BP 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 statute. Id.[3]

         V. OJH Is Not an Includible C Corporation Under the Test in Section 39-22-303(12)(c)

         ¶ 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 certain characteristics.
. 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.

         Therefore, 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 combined report.

         ¶ 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 ...


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