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

Supreme Court of Colorado, En Banc

May 29, 2019

Department of Revenue of the State of Colorado; and Michael Hartman, in his official capacity as the Executive Director of the Department of Revenue of the State of Colorado, Petitioners/Cross-Respondents:
v.
Agilent Technologies, Inc. Respondent/Cross-Petitioner:

          Certiorari to the Colorado Court of Appeals Court of Appeals Case No. 16CA849

          Attorneys for Petitioners/Cross-Respondents: Philip J. Weiser, Attorney General Terence C. Gill, First Assistant Attorney General Noah C. Patterson, Senior Assistant Attorney General Denver, Colorado

          Attorneys for Respondent/Cross-Petitioner: Silverstein & Pomerantz LLP Neil I. Pomerantz Denver, Colorado Morrison & Foerster LLP Craig B. Fields Irwin M. Slomka New York, New York

          Attorneys for Amicus Curiae Council on State Taxation: Holland & Hart LLP Christina F. Gomez Jonathan S. Bender Denver, Colorado

          Attorney for Amici Curiae Professors David Gamage, Hayes Holderness, and Darien Shanske: Isaac L. Lodico Denver, Colorado

          OPINION

          GABRIEL, JUSTICE

         ¶1 This case principally requires us to decide two questions. First, we must determine whether the Colorado Department of Revenue and Michael Hartman, in his official capacity as the Executive Director of the Department (the "Director" and collectively with the Department, the "Department"), can require Agilent Technologies, Inc. ("Agilent") to include its holding company, Agilent Technologies World Trade, Inc. ("World Trade"), in its Colorado combined income tax returns for the tax years 2000-07. Second, if the answer to that question is no, then we must consider whether the Department may nevertheless allocate World Trade's gross income to Agilent in order to avoid abuse and to clearly reflect income.[1]

         ¶2 As to the first question, we now conclude that sections 39-22-303(11)-(12), C.R.S. (2018), do not authorize the Department to require Agilent to include World Trade in its combined tax returns for the tax years at issue because World Trade is not an includable C corporation within the meaning of those provisions. As to the second question, we likewise conclude that the Department may not allocate World Trade's income to Agilent under section 39-22-303(6) because (1) that section has been superseded by section 39-22-303(11) as a vehicle for requiring combined reporting for affiliated C corporations and (2) even if section 39-22-303(6) could apply, on the undisputed facts presented here, no allocation would be necessary to avoid abuse or clearly reflect income.

         ¶3 Accordingly, we conclude that the district court properly granted summary judgment in Agilent's favor, and we therefore affirm the judgment of the division below.[2]

         I. Facts and Procedural History

         ¶4 Agilent is a Delaware corporation headquartered in California, and it is the parent company of a worldwide family of affiliated corporations that develops and manufactures bio-analytic and electro-analytic devices. Agilent maintains research and development and manufacturing sites in Colorado and is thus subject to Colorado corporate income tax.

         ¶5 World Trade is a Delaware corporation and a wholly owned subsidiary of Agilent. During the time period at issue, World Trade did not own any real or tangible personal property and did not have any employees or payroll of its own. Rather, World Trade served as a holding company, and, as pertinent here, it owned the stock of four foreign subsidiaries that operated exclusively outside of the United States. World Trade earned substantial dividends on its shares in the above-noted subsidiaries, and it is the tax treatment of these dividends that has given rise to the dispute that is now before us.

         ¶6 For the tax periods beginning June 3, 2000, and ending October 31, 2007, Agilent filed separate company Colorado corporate income tax returns and did not include World Trade in its Colorado corporate tax returns for those periods, notwithstanding the fact that, for federal income tax purposes, each of the above-noted foreign subsidiaries of World Trade made so-called "check-the-box" elections to be treated as disregarded entities (and therefore as divisions of World Trade) for federal income tax purposes.

         ¶7 The Department subsequently audited Agilent's corporate tax returns and in August 2010 issued notices of tax deficiencies for the periods at issue. As pertinent here, these notices required Agilent to file Colorado combined corporate income tax returns for the periods at issue and to include World Trade in those returns. These notices also advised Agilent that the Department had assessed tax, interest, and penalties against it totaling $13, 345, 601.

         ¶8 Agilent protested this assessment, but the Director upheld it, and in 2014, the Department issued a "Notice of Final Determination and Assessment and Demand for Payment," which included additional interest and brought the assessment to $13, 720, 507.

         ¶9 Agilent then filed a proceeding in the Denver district court challenging the Department's determination. The parties subsequently cross-moved for summary judgment, and the court ultimately granted summary judgment in favor of Agilent and against the Department.

         ¶10 As pertinent here, the court rejected Agilent's contentions that (1) the Department was required to respect the foreign subsidiaries' check-the-box elections and similarly treat World Trade and the four subsidiaries as a single C corporation for Colorado income tax purposes and, therefore, (2) more than 80% of World Trade's property and payroll fell outside of the United States, thus precluding the Department, under section 39-22-303(8), from requiring World Trade's inclusion in Agilent's combined return. The court further rejected Agilent's contention that World Trade did not satisfy at least three of the six factors set forth in section 39-22-303(11)(a), as required to mandate inclusion in a Colorado combined return.

         ¶11 The court proceeded to determine, however, that World Trade did not meet the definition of an includable C corporation for purposes of section 39-22-303(12)(c). The court based this conclusion on the facts that (1) World Trade was a holding company with no property or payroll of its own in the United States and (2) the Department's own regulation, Colo. Code Regs. section 201-2:39-22-303.12(c) (2019), provided that such a corporation could not be included in a combined return. The court further rejected the Department's alternative argument that the inclusion of World Trade's income in Agilent's combined return was warranted under section 39-22-303(6). In reaching this conclusion, the court again turned to the Department's regulations, this time Colo. Code Regs. section 201-2:39-22-303.6 (2019), which provides, in substance, that section 39-22-303(6) is not a vehicle for combining income of affiliated corporations and cannot be used to circumvent the combined reporting requirements set forth in sections 39-22-303(8)-(12).

         ¶12 The Department appealed, Agilent cross-appealed, and in a unanimous, published opinion, a division of the court of appeals affirmed. Agilent Techs., Inc. v. Dep't of Revenue, 2017 COA 137, P.3d . As pertinent here, the division agreed with the district court that the foreign subsidiaries' check-the-box elections did not preclude the Department from requiring World Trade's inclusion in Agilent's Colorado combined returns. Id. at ¶¶ 27-31. Like the district court, however, the division further concluded that World Trade, as an entity without property or payroll of its own in the United States, was not an "includable C corporation" under section 39-22-303(12)(c) and the applicable regulation. Id. at ¶¶ 18-26. And the division concluded that section 39-22-303(6) did not provide the Department with an alternative basis for taxing World Trade's income because, on the undisputed facts presented, Agilent's formation of World Trade did not constitute "abuse" within the meaning of that provision. Id. at ¶¶ 33-38. In light of these determinations, the division affirmed the district court's judgment and declined to reach Agilent's contention that that court had erred in holding that World Trade satisfied at least three of the six factors set forth in section 39-22-303(11)(a). Id. at ¶¶ 44-46.

         ¶13 The Department petitioned this court for certiorari review, and Agilent cross-petitioned, requesting that we review those of its arguments that the division had rejected. We granted both parties' petitions.

         II. Analysis

         ¶14 The Department principally contends that under sections 39-22-303(11)-(12), the Department can require Agilent to include World Trade in its Colorado combined tax returns. The Department further contends that even if it may not do so under those provisions, pursuant to section 39-22-303(6), it may nevertheless allocate World Trade's gross income to Agilent in order to avoid abuse and to clearly reflect income. We begin by setting forth our standard of review and the pertinent principles of statutory construction. We then address the Department's various statutory and ...


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