Oracle Corp. v. Dept. of Rev.

No. 63 January 19, 2012 567

IN THE OREGON TAX COURT

MAGISTRATE DIVISION

ORACLE CORPORATION,

Oracle Systems Corporation and Subsidiaries,

Plaintiffs,

v.

DEPARTMENT OF REVENUE,

Defendant.

(TC-MD 070762C)

Plaintiffs appealed from Defendant’s assessments of corporation excise tax

regarding gain from sales of stock in its subsidiary corporations, arguing that the

gains should be excluded in computing its Oregon taxable income on the grounds

that the gains had no connection with Oracle’s business activities in Oregon and

the gains were therefore not includable in its business income subject to appor-

tionment for purposes of Oregon’s corporate excise tax liability. Defendant argued

that the sales factor denominator does not include proceeds from sales outside the

regular course of business, and Plaintiff’s stock sales were not transactions or

activities in the regular course of Plaintiff’s business. Following trial, the court

found that gains from the sale of Oracle Japan stock were business income, and

that those gains were to be included in the sales factor denominator under ORS

314.665 for purposes of determining the correct amount of the tax under the

state’s weighted three factor apportionment formula. The court further found

that it did not have the authority to exclude those gains from the denominator

under ORS 314.670.

Trial in the matter was held on September 14 through 16,

2010, in the courtroom of the Oregon Tax Court, Salem.

John H. Gadon, Lane Powell PC, Portland, argued the

cause for Plaintiffs (taxpayer).

Marilyn J. Harbur, Senior Assistant Attorney General,

Department of Justice, Salem, argued the cause for

Defendant (the department).

Decision for Plaintiffs rendered January 19, 2012.

DAN ROBINSON, Magistrate.

Plaintiffs appeal from Defendant’s July 3, 2007,

assessments of corporation excise tax to “Oracle Corporation

& Subsidiaries” for tax years ended (TYE) May 31, 1999,

May 31, 2000, and May 31, 2001. There are essentially

three entities involved in the appeal: (1) Oracle Corporation,

568 Oracle Corp. v. Dept. of Rev.

Oracle Systems Corporation and Subsidiaries (Oracle)1;

(2) Oracle Corporation Japan (Oracle Japan); and (3) Liberate

Technologies, Inc. (Liberate). The primary issues in the case

concern the treatment of Plaintiffs’ gains from the sale of

stock in two entities: Oracle Japan and Liberate.

Trial in the matter was held in the courtroom of

the Oregon Tax Court on September 14, 15, and 16, 2010.

Plaintiffs were represented by John H. Gadon, Attorney

at Law, and Charles F. Hudson, Attorney at Law, Lane

Powell. Defendant was represented by Marilyn J. Harbur,

Senior Assistant Attorney General, and Darren Weirnick,

Assistant Attorney General, Oregon Department of Justice.

Testifying for Plaintiffs was Jon Iverson (Iverson),

Senior Director of Tax for Oracle Corporation (Oracle), who

has been with the company for 10 years and is in charge of

all of Oracle’s state taxes, including income, property, sales,

and the business license taxes. Just prior to going to work

for Oracle, Iverson worked in the state and local tax depart-

ments of several of the “big four” public accounting firms.

Iverson, a certified public accountant in Colorado, has sev-

eral undergraduate degrees including a Bachelor of Science

degree in accounting from Brigham Young University, and

a Master of Science in Taxation degree from Golden Gate

University.

Also testifying for Plaintiffs was Sherry Warburton

(Warburton), who began working for Oracle in 1989.

Warburton is unquestionably a computer expert, with years

of experience in the design and development of various forms

of computer software and hardware, and electronic informa-

tion delivery systems. Warburton worked for Oracle, then

Liberate, and then Seachange, International (Seachange),

when Seachange acquired a portion of Liberate in 2005. At

the time of trial, Warburton was the Vice President of the

Chief Technology Office for Seachange. Seachange primar-

ily builds software for the delivery of video in the broadcast

television (TV) industry. Seachange provides software for

the broadcast of TV, video on demand, and set-top boxes.

1

The subsidiaries of Oracle include (or included) Oracle Japan Holding, Inc.

(OJH) and Oracle International Investment Corp. (OIIC). Both of those entities

held stock and Oracle Japan prior to 1999.

Cite as 20 OTR-MD 567 (2012) 569

Warburton’s position is to provide strategy for Seachange.

Warburton was, among other things, Vice President of

Engineering at Liberate, and helped with the transition of

her team at Liberate into Seachange.

Testifying for Defendant was Shirley Yee, a 30-year

employee of the Department of Revenue with multiple

degrees, who spent the last 15 years as a Senior Corporate

Tax Auditor for the Department of Revenue.

For ease of reference, the parties (Plaintiffs and

Defendant) will be referred to as Oracle and the Department.

I. STATEMENT OF FACTS

A. Introduction and Overview

By their pleadings, the parties agree to the follow-

ing salient facts, with minor stylistic changes and restate-

ments made by the court.

1. Oracle

Oracle is a corporation organized and existing

under the laws of the State of Delaware, with a California

commercial domicile. Oracle develops database and applica-

tion business software for computers. According to informa-

tion contained in Oracle’s Form 10-K form for TYE May 31,

2000, filed with the Securities and Exchange Commission

(SEC) shortly thereafter, Oracle defines itself as follows:

“[Oracle] is the world’s leading supplier of software for

information management. The Company develops, manu-

factures, markets and distributes computer software that

helps corporations manage and grow their businesses.

“* * * * *

“Oracle’s product development platform is based on an

Internet computing architecture. The Internet computing

architecture is comprised of data servers, application serv-

ers and client computers or devices running a web browser.

***

“The Company believes that electronic commerce (the

exchange of goods and/or services electronically over the

Internet) is revolutionizing businesses by providing a

relatively low-cost means of distributing products and

570 Oracle Corp. v. Dept. of Rev.

expanding markets globally, increasing efficiencies, and

providing better, more personalized customer services. * * *

“The Company continually enhances its existing products

and develops new products to meet its customers’ changing

requirements as well as to expand its product base. * * *

“The Oracle relational database management system

(‘DBMS’) , the key component of Oracle’s Internet platform,

enables storing, manipulating and retrieving relational,

object-relational, multi-dimensional, and other types of

data. Oracle Version 8i is a database specifically designed

as a foundation for Internet development and deployment,

extending Oracle’s technology in the areas of data manage-

ment, transaction processing and the data warehousing to

the new medium of the Internet. * * *

“Oracle Lite Version 8i is the Company’s mobile database for

Internet computing. The Oracle Lite database management

system can be used to run applications on portable devices

and to temporarily store data on these devices which can

be replicated back to Oracle. Oracle Lite is a complete and

comprehensive platform for building, deploying and man-

aging mobile applications that principally run on laptops

and information appliances such as hand-held devices, cell

phones, smart phones, pagers, smart cards and television

set top boxes.

“* * * * *

“Oracle offers Internet Application Server (IAS) Wireless

Edition formerly Portal-to-Go, which enables information

and services to be accessed through wireless and other

devices. These devices include * * * modem equipped per-

sonal organizers and television set-top boxes. Using IAS

Wireless Edition, mobile operators, content providers, and

wireless Internet service providers can quickly implement

wireless portals * * * for providing personalized services and

content through wireless devices.”

Iverson testified that database software runs

“behind the scenes,” and is used by computer specialists

commonly known as information technology personnel. Such

software is typically not used by end-users. Application soft-

ware is business-related programs used by everyday com-

puter users as well as experts (both of which are referred to

Cite as 20 OTR-MD 567 (2012) 571

as “end users”), and includes spreadsheets, accounting soft-

ware, etc.

Iverson testified that, for the years at issue, Oracle

was in four lines of business: (1) the sale of software; (2) the

installation of software; (3) software support (at home and

abroad); and (4) Oracle University (where individuals go to

receive training and certification).

According to Iverson, Oracle’s Oregon activities

included sales, consultants involved in the installation

of software, and on-site university training in this state.

There was no direct support activity by Oracle employees in

Oregon.

2. Oracle Japan

Oracle Japan is a Japanese corporation. Prior to

1999, two of Oracle’s subsidiaries, Oracle Japan Holding, Inc.

(OJH), and Oracle International Investment Corporation

(OIIC), held stock in Oracle Japan.

Oracle Japan sold software (mostly Oracle soft-

ware) to the Japanese market through various licenses with

Oracle. According to the testimony, Oracle Japan had to

modify Oracle’s software so that it would be “localized,” and

thus usable by purchasers in that country. Iverson testified

that Oracle Japan had a large group of developers and soft-

ware engineers who took that software and made it work for

the local market. To do that, they did two things: First, they

“localized” it, which, according to Iverson, converted every-

thing into the Japanese language and made sure that the

reports that came out of the software were compatible with

the Japanese business community, including conformance

to Japanese Securities and Exchange Commission (SEC)

reporting requirements; second, what Oracle Japan did,

which none of the other companies within the Oracle group

around the world did, was a significant amount of addi-

tional testing to ensure that the systems and software used

were compatible with the rest of Oracle’s software. Because

of that additional necessary testing, Oracle software intro-

duced to the Japanese market usually lagged six to eight

months behind the introduction of similar software in other

markets around the world.

572 Oracle Corp. v. Dept. of Rev.

Iverson testified that, in addition to Oracle’s United

States-based support centers, Oracle also has support cen-

ters in Australia, India, Romania, and Ireland. Those sup-

port centers are located where they are because they are all

in different time zones, and, according to Iverson, all of the

support centers are “interconnected.” As a result, custom-

ers from all of Oracle’s affiliates around the world, except

Oracle Japan, had 24-hour support provided by technicians

in any of the five countries, depending on the time of day (or

night). However, Oracle Japan had its own support mecha-

nism. Iverson testified that Oracle Japan “put its own per-

sonnel around the world in its own support centers.”

Oracle began selling software to Oracle Japan in

the 1980s. In the early 1990s, Oracle began experiencing

financial difficulties, and acquired funding from an unre-

lated corporation (Nippon Steel) in exchange for a share of

Oracle. That transaction gave rise to the creation of Oracle

Japan Holding, Inc. Oracle Japan Holding, Inc. held stock

in Oracle Japan. Oracle Japan “went public” in 1999 and

became a publicly traded Japanese business. Iverson testi-

fied that Oracle Japan Holding, Inc., sold 10 percent of its

Oracle Japan Stock in the year 2000 or 1999, and used at

least some of that money (approximately $6.4 billion) as a

loan to Delphi, a separate business owned by Oracle. Iverson

further testified that Delphi invests “excess cash,” and that

they gave Oracle the $6.4 billion, which Oracle, in turn, used

to purchase more of its own publicly traded stock. Iverson

testified that the decision to sell Oracle Japan stock in 1999

and 2000 was “made in California.” Furthermore, accord-

ing to Iverson, the activity related to the sale took place

in Japan because the stock was traded on the Tokyo Stock

exchange. There was no Oregon activity related to that sale.

Accordingly, on its Oregon return, Oracle did not include the

gain from the sale of Oracle Japan.

3. Liberate

Liberate, originally known as Network Computer,

Inc. (NCI), was formed by Oracle in December 1995 and

began as a division of Oracle. Iverson testified that Oracle

started a hardware company that, through a process of

formations, incorporations, acquisitions and mergers, and

Cite as 20 OTR-MD 567 (2012) 573

name changes, gave birth to Liberate. Liberate was incor-

porated in April 1996 as NCI, a wholly-owned subsidiary of

Oracle.

In August 1997, Oracle acquired Navio Communi-

cations, Inc. (Navio), a subsidiary of Netscape Communica-

tions. Navio was merged into NCI, with NCI emerging as

the surviving entity. After the merger, Oracle owned approx-

imately two-thirds of Liberate’s stock.2 In May 1999, NCI

changed its name to Liberate Technologies.3

Liberate was in the business of developing and

licensing software that provided two-way interactive net-

work communications with consumer appliances, primarily

television set-top boxes. NCI was a developer of software

and appliances for use by consumers to access the Internet.

During TYE May 31, 2000, and May 31, 2001, Liberate was

not a member of Oracle’s “affiliated group” for purposes of

Internal Revenue Code (IRC) sections 1501 to 1505 (1986).

Liberate “went public” in late July 1999 through

an initial public offering (IPO) of Liberate stock. Oracle’s

stock ownership in Liberate was substantially reduced

after Liberate’s IPO in 1999. In early April 1999, Oracle

still owned over 70 percent of Liberate. Later that month,

an issuance of Liberate preferred stock reduced Oracle’s

ownership to 59.2 percent. At the time of the Liberate IPO

in July 1999, Oracle still owned more than 50 percent of

Liberate’s stock. According to the uncontroverted testimony

and documentary evidence, Oracle’s interest reduced to

47.4 percent on or about February 2, 2000, to 40.9 percent

on or about February 24, 2000, to 34.5 percent on or about

July 31, 2000, and to 32 percent on July 31, 2001.

For TYE May 31, 1999, May 31, 2000, and May 31,

2001, Oracle’s income was determined under the Oregon

Uniform Division of Income for Tax Purposes Act (UDITPA),

codified in ORS 314.605 to 314.675. Oracle filed consolidated

2

Netscape Communications personnel apparently received 35 percent of the

NCI stock as part of the merger.

3

It is unclear whether NCI actually became Liberate through a name change,

as Plaintiff asserts, or by way of merger, as Defendant contends. However, the

court need not resolve that question in order to decide this case.

574 Oracle Corp. v. Dept. of Rev.

federal income tax returns for three tax years, TYE May 31,

1999, through May 31, 2001. Oracle timely filed consolidated

Oregon corporate excise tax returns for those same years,

and paid the tax shown as due therein.

The Department issued notices of assessment for

the years at issue: $17,734 for TYE May 31, 1999; $5,061,872

for TYE May 31, 2000; and $93,590 for TYE May 31, 2001

(approximately $5.17 million). The Department also assessed

interest in the amounts of $10,541.84, $2,553,420.83, and

$38,127.73, respectively, for those three years (approxi-

mately $2.6 million).

B. Sale of Oracle Japan Stock

During TYE May 31, 1999, and May 31, 2000, Oracle4

sold shares of Oracle Japan common stock. Those sales

occurred on or about February 1999 and April 2000. Oracle’s

gains from those sales were $24 million and $6.4 billion,

respectively. Oracle reported capital gains from these sales

on its federal consolidated corporate income tax returns.

Oracle excluded the gains from those sales in computing its

Oregon taxable income on its Oregon corporate excise tax

returns, on the grounds that the gain had no connection

with Oracle’s business activity in Oregon.

C. Sale of Liberate Stock

During TYE May 31, 2000, and May 31, 2001,

Oracle sold shares of Liberate common stock and recog-

nized capital gains on those sales for federal income tax

purposes. Those sales took place in February 2000, when

Oracle sold approximately 4,000,000 shares of stock for a

gain of $441,363,085, and October 2000, when Oracle sold

shares for a gain of $31,208,148.5 Oracle excluded those

4

The stock that was sold was owned and sold by Oracle Japan Holding, Inc.,

a wholly-owned subsidiary of Oracle Systems Corp. (“Oracle”). For purposes of

this decision, all of the sale transactions are referred to as Oracle sales.

5

Although the evidence is not entirely clear regarding the date of the sale

in TYE May 31, 2001, the court finds the Department’s conclusion that the sale

took place in October 2000 a reasonable inference from the evidence cited by

the Department in its Post-Trial Memo on page 17. The Department notes that

the larger sale of Liberate stock in February 2000 (seven months after the IPO)

was approved by the Delphi board that same month, and that the Delphi board

subsequently approved the second, smaller, sale of Liberate stock in October

2000. Given that the first of the two sales occurred in the same month the board

Cite as 20 OTR-MD 567 (2012) 575

gains in computing its Oregon taxable income. The rationale

for excluding the gains on the sales on its Oregon corporate

excise tax returns was that the sales were unrelated and

unconnected to Oracle’s Oregon business activities, and the

gains were not part of the business of Oracle’s unitary group

doing business in Oregon. In July 1999, Liberate undertook

an IPO and became a public company.

II. ISSUES

A. Are Oracle’s gains from the sales of stock in Oracle

Japan in February 1999 (TYE May 31, 1999) and April 2000

(TYE May 31, 2000) excluded from the sales factor denom-

inator under ORS 314.665 and the corresponding Oregon

Administrative Rules (OAR)?

B. If those gains are not excludable under the statute and

regulations, does the court have the authority to exclude the

gain on the sale of the Oracle Japan stock from the denomi-

nator of Oracle’s sales factor under ORS 314.670?

C. Are Oracle’s gains from the sales of stock in Liberate in

February 2000 (TYE May 31, 2000) and October 2000 (TYE

May 31, 2001) includable in Oracle’s business income under

ORS 314.610?

D. If the gains from sales of Liberate stock are business

income under ORS 314.610, is Oregon barred from taxing

those gains under the federal due process and commerce

clauses?

E. If the gains from the sales of Liberate stock are taxable by

Oregon under the statute, and if Oregon is not constitution-

ally prohibited from taxing those gains, are the gains from

the sales excludable from the sales factor denominator under

ORS 314.665 and the corresponding OAR?

F. Did the Department err in its treatment of Oracle’s gains

from the sales of stock in two other entities - Apogee and

Virata?6

approved of the action, it is reasonable to assume that the second sale of Liberate

stock occurred shortly after the board approved of that action.

6

Virata is a business connected with Oracle or a subsidiary, but is not men-

tioned in Plaintiffs’ Complaint. The court briefly addresses this issue later in this

Decision.

576 Oracle Corp. v. Dept. of Rev.

III. ANALYSIS

A. Statutory Overview

For the years at issue, Oregon used a weighted

three factor formula for apportioning business income under

UDITPA. ORS 314.650(1).7 Under that formula, business

income apportionable to Oregon is multiplied by a fraction,

the numerator of which is comprised of a property factor and

a payroll factor “plus two times the sales factor.” Id. The

sales factor, in turn, “is a fraction, the numerator of which

is the total sales of the taxpayer in this state during the tax

period, and the denominator of which is the total sales of the

taxpayer everywhere during the tax period.” ORS 314.665(1)

(emphasis added).

ORS 314.610(7) defines “sales” as “all gross

receipts of the taxpayer not allocated under ORS 314.615

to 314.645[,]” unless the context requires otherwise.

(Emphasis added.) In defining “sales” for purposes of deter-

mining the sales factor in Oregon’s apportionment formula,

ORS 314.665(6) specifically provides that sales “[e]xcludes

gross receipts arising from the sale * * * of intangible assets,

including but not limited to securities, unless those receipts

are derived from the taxpayer’s primary business activity.”

ORS 314.665(6)(a). However, the statute further provides

that sales “[i]ncludes net gain from the sale * * * of intan-

gible assets not derived from the primary business activ-

ity of the taxpayer but included in the taxpayer’s business

income.” ORS 314.665(6)(b).

B. Gains from the sale of Oracle Japan Stock

1. Pertinent Facts

During the years at issue, Oracle held shares of

Oracle Japan stock through two of its wholly owned sub-

sidiaries, Oracle Japan Holding, Inc. (OJH), and Oracle

International Investment Corporation (OIIC). Those subsid-

iaries held the stock prior to 1999. Oracle, by and through

its subsidiaries (OJH and OIIC), sold shares of Oracle

7

The court’s references to the Oregon Revised Statutes (ORS) are to the

1999 edition, unless noted otherwise.

Cite as 20 OTR-MD 567 (2012) 577

Japan common stock during TYE ending May 31, 1999, and

May 31, 2000, and received substantial gains from those

sales ($24 million for TYE May 31, 1999, and $6.4 billion for

TYE May 31, 2000).

Oracle reported the gains from the sales of Oracle

Japan stock on its federal consolidated corporate income tax

returns, but excluded the gains in computing its Oregon tax-

able income on the grounds that the gains had no connection

with Oracle’s business activities in Oregon and the gains

were therefore not includable in its business income subject

to apportionment for purposes of Oregon’s corporate excise

tax liability. The Department adjusted Oracle’s Oregon

returns for those years to include Oracle’s gains from the

sale of Oracle Japan stock in Oracle’s business income.

In their Complaint to this court, Plaintiffs argued

that “Defendant erred by including in Plaintiff’s business

income subject to apportionment * * * Plaintiff’s gain on the

sales of Oracle Japan stock.” This court issued Opinions

in Crystal Communications, Inc. v. Dept. of Rev., 20 OTR

111, WL 2827462 (July 19, 2010) (Crystal Comm’s); and

CenturyTel, Inc. v. Dept. of Rev., 20 OTR 169, WL 3122632

(Aug 9, 2010), ruling in favor of the Department on the ques-

tion of whether certain gains recognized by the taxpayer

in each of those cases was business or nonbusiness income

(concluding that a correct interpretation and application of

the functional test for business income under ORS 314.610

rendered the gain from sale of certain intangible assets8 by

taxpayers not domiciled in Oregon business income). After

those Opinions were issued, Plaintiffs notified the court by

letter dated September 7, 2010, that, for purposes of this

case, “Oracle is therefore electing, with respect to the gains

on the sale of Oracle Japan stock, to no longer litigate in the

magistrate division the question of whether the gain on the

sale of Oracle Japan stock is includible in Oracle’s business

income under ORS 314.610(1) for Oregon corporate excise

tax purposes.” (Emphasis added.)

8

Proceeds from the sale of an FCC license in Crystal Comm’s and the sale of

stock in CenturyTel.

578 Oracle Corp. v. Dept. of Rev.

2. Issue

Accordingly, with respect to the proper treatment of

Oracle’s gain from the sale of stock of Oracle Japan in TYE

May 31, 1999, and May 31, 2000, the parties have narrowly

framed the issue as whether such gain is includable in the

denominator of the sales factor under Oregon’s apportion-

ment formula described above.9

3. ORS 314.665 and OAR 150-314.665(1)-(A)(5)

The Department contends “it is uncontested that

[Oracle’s] sales of stock in [Oracle Japan] * * * were not

transactions or activities in the regular course of [Oracle’s]

business” and that it “included the gain from the sale of

stock in [Oracle] Japan * * * in business income only under

the functional test for business income.” Furthermore, the

Department “excluded the proceeds from the sales [of Oracle

Japan stock] from the sales factor denominator under OAR

150-314.665(1)-(A)(5)” because “[t]he sales factor denomina-

tor does not include proceeds from sales outside the regular

course of business[.]”

OAR 150-314.665(1)-(A)(5) provides: “[t]he denomi-

nator of the sales factor will include the total gross receipts

derived by the taxpayer from transactions and activity in

the regular course of its trade or business.”10

The Department expanded slightly on that argu-

ment later in its Post-Trial Memorandum by stating that

its auditor included the disputed gain in Oracle’s business

income under the functional test based on a “conclu[sion]

that the Oracle Group’s ownership of [Oracle] Japan was ‘an

integral part of Oracle’s business[,]’ ” but that, according to

the auditor’s testimony, “the Oracle Group’s sales of [Oracle]

Japan stock did not occur in the regular course of the Oracle

Group’s business of selling software.”

9

T he Department clarifies in a footnote that “[i]f the proceeds are not

entirely excluded from the sales factor, the department does not argue that the

proceeds are included in the numerator of the sales factor.”

10

The audit period covers TYE May 31, 1999 through May 31, 2001 (calendar

years June 1, 1998, through May 31, 2001). All of the court’s references to the

OARs are to the January 2004 edition. As near as the court can tell, that is the

year the parties relied upon in their memorandums, and the 2004 rules were in

effect during the time period in which the years at issue were open to audit.

Cite as 20 OTR-MD 567 (2012) 579

If the court correctly understands the Department’s

position, the Department appears to be arguing that,

although Oracle owned Oracle Japan, that asset was an inte-

gral part of its business, but the sale of its Oracle Japan stock

was not part of Oracle’s regular business, which was the sale

of software. In fact, in arguing for the exclusion of the gain

from the denominator under ORS 314.665 and the corre-

sponding administrative rule (OAR 150-314.665(1)-(A)(5)),

the Department plainly states that “[t]here is no evidence

in this proceeding that the Oracle Group regularly sold sub-

stantial stakes in its unitary subsidiaries.” (Emphasis in

original.)

Oracle responds as follows. First, Oracle insists

that it is undisputed that: (1) the Oracle Japan stock was an

intangible asset; (2) Oracle’s gains on the sales of its Oracle

Japan stock “w[ere] not derived from Oracle’s primary busi-

ness activity[;]” and (3) “[t]he gain on the sales of the stock

was included in Oracle’s business income.”11 Oracle proceeds

to argue that the gains on the sales of Oracle Japan stock

clearly constitute “sales” under ORS 314.610(7) because the

gains were gross receipts not otherwise allocated under

ORS 314.615 to 314.645. Furthermore, Oracle argues that

the gains “resulted from sales of intangible assets (stocks)

not derived from Oracle’s primary business activity but

included [by the Department] in Oracle’s business income.”

Accordingly, under ORS 314.665(6)(b), Oracle insists that the

gains must be included in Oracle’s sales factor denominator.

For the years at issue, ORS 314.665(6)(b) provided

in relevant part that, in calculating the sales factor, sales

“[i]ncludes net gain from the sale * * * of intangible assets

not derived from the primary business activity of the tax-

payer but included in the taxpayer’s business income.”

To the extent that the gain is excluded from the

sales factor under the statute (ORS 314.665(6)), but included

under the corresponding administrative rule (OAR 150-

314.665(1)-(A)(5)), the rule is invalid because an agency

11

As indicated earlier in this court’s Decision, Oracle did not and has not

actually “conceded” that the gain should be includable in Oracle’s business

income, only that “Oracle chose not to contest the Department’s characterization

of the gain as business income in the Magistrate Division.”

580 Oracle Corp. v. Dept. of Rev.

cannot adopt a rule that conflicts with a statute. Garrison v.

Dept. of Rev., 345 Or 544, 548-549, 200 P3d 128 (ruling that

an “agency rule that conflicts with a statute is invalid to

the extent that it so conflicts and that a rule created within

a statutory scheme cannot amend, alter, enlarge upon, or

limit statutory wording so that it has the effect of under-

mining the legislative intent”) (citing Miller v. Employment

Division, 290 Or 285, 289, 620 P3d 1377 (1980).

Oracle then refutes the Department’s assertion

that the gains should be excluded from the denominator by

noting that the Department included the gains in business

income under the “functional test” and, under that test, the

income “must arise from property the acquisition, use and

disposition of which constitutes ‘an integral part of the tax-

payer’s regular trade or business operations.’ ” (Emphasis in

original.) Oracle argues that the Department cannot, on the

one hand, make a determination that Oracle’s acquisition,

use, and disposition of the Oracle Japan stock “was an inte-

gral part of Oracle’s regular trade or business for purposes

of ORS 314.610(1),” and then “turn around and claim that it

is not for purposes of OAR 150-314.665(1)(A).” (Emphasis in

original.) The court agrees. The test for the determination

of whether gains constitute business income under the func-

tional test (and therefore become subject to tax under the

state’s weighted three factor formula) is whether the activi-

ties giving rise to the gain were “integral parts” of the tax-

payer’s “regular trade or business operations.” However, the

statutory requirement for inclusion of the gain in the sales

factor denominator (as part of the calculation of the percent-

age by which business income is taxed) is that the gain not be

derived from the taxpayer’s “primary business activity.”12 ORS

314.610(1) (defining business income); ORS 314.665(6)(b)

(defining sales for purposes of the sales factor formula)

(Emphasis added.)

12

The statute (ORS 314.665(6)(b)), of course, does include the additional

requirement that the gain be “included in the taxpayer’s business income[,]”

but the Department has clearly included the gain in Oracle’s business income.

Accordingly, the requirement that the gain be included in the taxpayer’s business

income was not included in the court’s discussion of the specific language of the

statutory definitions of business income and sales under the sales factor portion

of the formula.

Cite as 20 OTR-MD 567 (2012) 581

Another point is in order. This court recently

rejected the argument the Department appears to be mak-

ing in this case, which is that the gain can be included in

business income under the functional test because owner-

ship of Oracle Japan stock was an integral part of Oracle’s

business, but the sale of the Oracle Japan stock can be

(and should be) excluded from the sales factor denomina-

tor because the sale did not occur in the regular course of

Oracle’s business of selling software. In Crystal Comm’s, this

court rejected the taxpayers’ argument that under the func-

tional test the gain on the disposition of an asset (there an

FCC license) cannot be included in business income unless

the “disposition [was] a regular part of the business of the

taxpayer.” Crystal Comm’s, 20 OTR at 123. Remember, under

the functional test, a test so named by Oregon courts based

on the wording of Oregon’s business income statute, busi-

ness income “includes income from tangible and intangible

property if the acquisition, the management, use or rental,

and the disposition of the property constitute integral parts

of the taxpayer’s regular trade or business operations.” ORS

314.610(1). It is generally recognized that there are four sep-

arate activities set forth in that test: (1) acquisition; (2) man-

agement; (3) use or rental; and (4) disposition. See Crystal

Comm’s, 20 OTR at 123, (citation omitted).

The court stated that, in applying the functional

test, the parties’ “arguments focus on how to read the lan-

guage of ORS 314.610 * * * [and] especially the word ‘and[,]’ ”,

which is the statutory connector for the four activities delin-

eated in the so-called functional test (acquisition, manage-

ment, use or rental, and disposition). Crystal Comm’s, 20

OTR at 123. In framing the question, the court noted that

“[p]articularly in the case of gain from a disposition of prop-

erty, must the taxpayer be in a business that regularly dis-

poses of the type of property in question, or is it sufficient

that the property was an integral part of the trade or busi-

ness at the time of its disposition?” Id. In rejecting the tax-

payers’ contention that the disposition of the asset must have

been a regular part of its business, the court declared that

“[t]axpayers’ construction has the effect of rendering the

functional test * * * completely redundant or duplicative of

the ‘transactional test.’ ” Id. In reaching its decision, the

582 Oracle Corp. v. Dept. of Rev.

court in Crystal Comm’s cited the California case of Hoechst

Celanese Corp. v. Franchise Tax Bd., 25 Cal 4th 508, 106

Cal Rptr 2d 548, 22 P3d 324, cert den 534 US 1040, 122 S

Ct 614, 151 LEd2d 537 (2001), which found the functional

test to exist and apply to dispositions of property used in

the business. Crystal Comm’s, 20 OTR at 123. If you do not

distinguish between the use and disposition of an asset in

determining whether a given gain is business income under

the functional test, which requires that those activities (and

others) “constitute integral parts of the taxpayer’s regular

trade or business operations,” per ORS 314.610, then the

court sees no reason for distinguishing between the own-

ership and sale (or use and disposition) of an asset when

determining business income and calculating the sales fac-

tor. That is what the Department did in including Oracle’s

gain from the sale of Oracle Japan stock in Oracle’s business

income based on Oracle’s ownership of Oracle Japan, but

excluding gains from the sale of Oracle Japan from Oracle’s

sales factor denominator because the Department deter-

mined that Oracle did not sell stock as part of its regular

course of business. Rather, the disputed income is business

income and is included in the sales factor denominator.

Finally, although it does not appear that there is

any dispute between the parties, the court wants to be clear

that the disputed gains are not included in the numera-

tor of Oracle’s sales factor per ORS 314.665(4) because the

income-producing activity giving rise to the gain on the

sales of Oracle Japan stock took place outside Oregon.

4. ORS 314.670 Reapportionment

The Department argues in the alternative that, if

the court includes the gain from the sale of Oracle Japan

stock from the sales factor denominator under ORS 314.665

(and other statutes), then the gain should nonetheless be

excluded under ORS 314.670. Not surprisingly, Oracle stren-

uously disagrees, arguing that “ORS 314.670 applies only

to administrative actions by the Department which must be

taken prior to assessment.” (Emphasis in original.)

Cite as 20 OTR-MD 567 (2012) 583

ORS 314.670(1) provides in relevant part that “[i]f

the application of the allocation and apportionment provi-

sions of ORS 314.605 to 314.675 do not fairly represent the

extent of the taxpayer’s business activity in this state, the

taxpayer may petition for and the Department of Revenue

may permit, or the department may require, in respect to

all or any part of the taxpayer’s business activity [one of a

number of alternative methods of allocating and apportion-

ing the taxpayer’s income].”

Again, the court finds Oracle has the better argu-

ment. In Stonebridge Life Ins. Co. I v. Dept. of Rev., 18 OTR

423, 443 (2006), this court ruled that “neither ORS 314.670

nor ORS 314.280 grants power to a court to reapportion

a taxpayer’s income; they grant that power only to the

department.”

C. Gains from the Sale of Liberate Stock

There were two significant sales of Liberate stock

during TYE May 31, 2000, and May 31, 2001. The first sale

occurred in February 2000, and the second in October 2000.

Oracle recognized gains of approximately $441 million and

$31 million, respectively, from those transactions.

Oracle argues that the gains are not includable in

its Oregon taxable income because, after Liberate’s IPO,

Oracle and Liberate were no longer unitary, and Oracle did

not hold the Liberate stock as part of its unitary business.

The Department contends that Oracle’s gains from the sale

of Liberate stock are includable in Oracle’s business income

because Oracle held the Liberate stock as an integrated part

of its unitary business, and that the gain is business income

under the “functional test” found in ORS 314.610(1).

The Department insists that Oracle “acquired and

managed Liberate as part of [its] unitary business” and that

the two “were engaged in a unitary business at least until

an initial public offering (‘IPO’) of Liberate stock in late July

1999.” Oracle responds that it is irrelevant that Oracle and

Liberate were at some point in time unitary because “the

purpose for which Oracle held Liberate stock changed well

before the stock was sold.”

584 Oracle Corp. v. Dept. of Rev.

A unitary business is “a corporation or group of cor-

porations engaged in business activities that constitute a

single trade or business.” ORS 317.705(2). A ‘ “[s]ingle trade

or business’ may include, but is not limited to, a business

enterprise the activities of which[ ][a]re in the same gen-

eral line of business (such as manufacturing, wholesaling or

retailing)[.]” ORS 317.705(3)(b). Although subsection (3)(b)

falls short of establishing a presumption that corporations

engaged in the same line of business are unitary, the United

States Supreme Court found such an administrative pre-

sumption would be “reasonable,” stating that:

“[w]hen a corporation invests in a subsidiary that engages

in the same line of work as itself, it becomes much more

likely that one function of the investment is to make better

use—either through economies of scale or through opera-

tional integration or sharing of expertise—of the parent’s

existing business-related resources.”

Container Corp of Am. v. Franchise Tax Board, 463 US 159,

178, 165, 103 SCt 2933, 77 L Ed2d 545 (1983).

The distinguishing element of a unitary business

is “a sharing or exchange of value” between the member

parts of the enterprise demonstrated by: “(A) [c]entralized

management or a common executive force; (B) [c]entralized

administrative services or functions resulting in economies

of scale; and (C) [f]low of goods, capital resources or services

demonstrating functional integration.” ORS 317.705(3)(a).

Oracle contends that, after the IPO in July 1999,

Liberate and Oracle were in completely different lines of

business. The court finds that Oracle’s contention consti-

tutes a distinction without a difference. Oracle’s business

focus was corporate software, and Liberate’s business focus

was on personal consumer products that utilized Oracle’s

software. The focus of both businesses was on computer soft-

ware technology, and Liberate’s focus promised to generate

significant revenues for Oracle.

There is no question that Oracle and Liberate were

originally unitary. Liberate, originally known as NCI, began

as a division within Oracle, and in April 1996, Liberate was

incorporated as a wholly-owned subsidiary of Oracle. Oracle

Cite as 20 OTR-MD 567 (2012) 585

formed Liberate and later merged Navio, another company

Oracle acquired, into Liberate in the regular course of

Oracle’s unitary business. Those activities, and particularly

the formation of Liberate, were key components of Oracle’s

growing business. Oracle’s 1996 annual report states in

part:

“Oracle has conspicuously championed the Network

Computer during 1996, and while we won’t be a manu-

facturer, we stand to benefit greatly if it proves to be as

successful as we expect. Not only will we make software

for these machines, but our database business will grow as

tens of millions of new Network Computer users access the

Information Highway * * *.”

(Emphasis added.)

The acquisition of Navio in 1997 and Liberate’s

subsequent emphasis on set-top boxes and other interactive

media was part of Oracle’s strategic vision, which empha-

sized research and development in areas that complemented

Oracle’s software business. Oracle’s Form 10-K for the fiscal

year ending May 31, 1998, states, in part:

“As part of its business strategy, [Oracle] completed the

acquisition of Navio * * * in fiscal 1998, and expects to con-

tinue to make acquisitions of, or significant investments in,

businesses that offer complementary products, services and

technologies.”

(Emphasis added.)

Liberate was one of those businesses that comple-

mented and grew Oracle’s business. Oracle further explains

in Form 10-K that “[t]he Company has in recent years

expanded its technology into a number of new business

areas to foster long-term growth, including application serv-

ers, internet/electronic commerce, interactive media and

network computing.”

The court agrees with the Department that, after

the merger with Navio, Liberate’s operations remained uni-

tary with the operations of Oracle, at least until the IPO in

July 1999. At that time, Oracle still owned over 50 percent

of Liberate’s stock. Moreover, as the Department notes in

its Post-Trial Memorandum, Liberate’s Board of Directors

586 Oracle Corp. v. Dept. of Rev.

included the CEO and the CFO of Oracle, as well as David

Roux, who, as the Department notes, “recently had served

as both an Executive Vice President of Oracle * * * and CEO

of Liberate.”

The court also finds persuasive the Department’s

argument that additional indicia of the close unitary rela-

tionship between Oracle and Liberate “is reflected in the

related party transactions described in Liberate’s Form

10-K for TYE 2000, including, for example, Oracle’s $10M

guaranty of a lease of office space to Liberate * * * a three-

year Technology License Agreement entered into during

TYE 1998 between Oracle and Liberate by which Oracle

marketed and distributed Liberate’s products, a Services

Agreement entered into during TYE 1998 pursuant to which

Oracle provided professional services to Liberate customers,

and a tax indemnity and allocation agreement, under which

Oracle still owed Liberate $923,000 for the use of Liberate’s

tax losses.”

Further evidence of the unitary relationship

between the two entities is found in Oracle’s Oregon cor-

porate excise tax return for TYE May 31, 1999, in which

Oracle reported that it was engaged in a unitary business

with Liberate as of May 31, 1999. That return states, in per-

tinent part: “Since, Oracle Corporation’s ownership percent-

age is over 50% and has unitary relationship with [Liberate],

the entire fiscal 1999 taxable loss is being reported on the

Oregon Corporation Excise Tax Return.”

The existence and establishment of a unitary busi-

ness relationship between two entities satisfies at least part

of the constitutional requirement necessary for Oregon to

apportion the business income under the UDITPA provi-

sions of ORS 314.605 to ORS 314.675. Moreover, the term

“trade or business” as part of the definition of “business

income” in ORS 314.610(1) “means the unitary business of

the taxpayer.” OAR 150-314.610(1)-(A)(3)(e).

That brings the court to the question of whether

the disputed gains constitute business income. Oregon

courts recognize that the definition of business income

found in ORS 314.610 includes a “transactional test” and a

Cite as 20 OTR-MD 567 (2012) 587

“functional test.” Pennzoil Co. v. Dept. of Rev., 332 Or 542,

546, 33 P3d 314 (2001) cert den 535US 927,122 SCt 1297,

152 LEd2d 210 (2002) (citing Willamette Industries, Inc. v.

Dept. of Rev. (Willamette Industries), 331 Or 311, 316, 15 P3d

18 (2000); see also Simpson Timber Company v. Dept. of Rev.,

326 Or 370, 374, 953 P2d 366 (1998)).

The Department insists the disputed gains consti-

tute business income under the functional test. Under the

functional test, business income “includes income from tan-

gible and intangible property if the acquisition, the man-

agement, use or rental, and the disposition of the property

constitute integral parts of the taxpayer’s regular trade or

business operations.” ORS 314.610(1); see also Willamette

Industries at 315-31.13

For purposes of this case, the only real question is

whether the disposition (i.e., sale) of the stock constituted

an integral part of Oracle’s regular trade or business oper-

ations. Oracle argues that “[i]t is a fundamental principle

of tax law that it is the character of the property and the

purpose for which it was held at the time it was sold that

controls.” Continental Can Co., Inc. v. United States, 422 F2d

405, 410 (Ct Cl 1970) (emphasis in original). Oracle notes

that “[t]he purpose for which property is held may change

over time[,]” and that, “[i]n this case, the testimony is uncon-

troverted that the purpose for which Oracle held Liberate

stock changed well before the stock was sold. Liberate had

completely abandoned network computing and the business

market to focus on interactive television and the consumer

market months before the IPO.” Oracle further argues that

“[a]t the time of the IPO and thereafter, Liberate served no

functional purpose for Oracle[,]” and that Oracle “retained

13

Willamette Industries identified two tests for business income:

“ORS 314.610(1) defines business income as income derived from two sources.

The first source is ‘income arising from transactions and activity in the regu-

lar course of the taxpayer’s trade or business.’ We will refer to that portion of

the definition as a ‘transactional’ test.

“The second source is ‘income from tangible and intangible property if the

acquisition, the management, use or rental, and the disposition of the prop-

erty constitute integral parts of the taxpayer’s regular trade or business

operations.’ We will refer to that portion of the definition as a ‘functional’

test.”

Id. at 316 (emphasis in original).

588 Oracle Corp. v. Dept. of Rev.

the stock [of Liberate] as an investment.” Oracle notes that

the retention of the stock as an investment “turned out to be

a very prudent investment because after the IPO Liberate

created a buzz in the marketplace and its stock price

increased substantially.”

The court finds Oracle’s argument unpersuasive.

Neither the facts nor the law support Oracle’s position.

Oracle was in the computer software business and routinely

started, bought, and sold related hardware and software

businesses. That was all part of Oracle’s overall business

strategy discussed above. Oracle owned or controlled a num-

ber of affiliates and subsidiaries in the same line of business,

and annually bought and sold assets and investments for

various purposes related to its comprehensive and vision-

ary business model. Those entities included Oracle Japan

Holding, Inc. and Oracle International Investment Corp.,

both of which were Oracle subsidiaries that at one time

held stock in Oracle Japan. Oracle also owned Apogee Open

Systems (Apogee), which originally operated as a separate

entity out of Denver, Colorado. “Apogee was in the busi-

ness of developing industry-specific software to improve the

operational efficiencies of businesses in the energy indus-

try.” Oracle purchased all of Apogee’s assets for cash in the

mid-1990.

As to the legal argument, the applicable adminis-

trative rule provides in relevant part:

“Under the functional test, business income need not be

derived from transactions or activities that are in the reg-

ular course of the taxpayer’s own particular trade or busi-

ness. It is sufficient, if the property from which the income

is derived is or was an integral, functional, or operative

component used in the taxpayer’s trade or business opera-

tions, or otherwise materially contributed to the production

of business income of the trade or business * * *.”

OAR 150-314.610(1)-(A)(5)(a).

As to the particular timing question and Oracle’s

contention that the asset that generated the gains the

Department seeks to tax (gain from the sale of Liberate

stock) had been converted to an investment, the facts and

applicable administrative rule defeat that claim.

Cite as 20 OTR-MD 567 (2012) 589

The regulation provides in relevant part that

“[p]roperty that has been converted to nonbusiness use

through the passage of a sufficiently lengthy period of time

(generally, five years is sufficient) or that has been removed

as an operational asset and is instead held by the taxpayer’s

trade or business exclusively for investment purposes has

lost its character as a business asset[.]” Id.

Factually, the evidence shows that in April 1999

Oracle owned approximately 70 percent of Liberate, and

as of May 31, 1999, Oracle owned approximately 59 per-

cent of Liberate. Thus, Oracle owned more than one-half

of Liberate’s stock just prior to the IPO in late July 1999.

The two subsequent stock sales here at issue occurred

shortly thereafter, in February and October 2000. As

the Department notes in its Post-Trial Memorandum,

“[s]elling an asset that has played an operational role in the

taxpayer’s business does not produce nonbusiness income

merely because the taxpayer makes plans to sell the asset

or because the asset takes some time to sell.”

Additionally, as the Department points out in its

Post-Trial Memorandum:

“Notably, plaintiffs also classified the gain from the

sale of Liberate in TYE 2000 and TYE 2001 as business

income on their combined California corporation fran-

chise tax return. Plaintiffs cannot reasonably distinguish

the treatment of the gain on their California and Oregon

returns. Both Oregon and California recognize a separate

functional test, according to which gain from the sale of

property is business income if the property was used in

the taxpayer’s business. See Crystal, 20 OTR 111 (2010),

TC No. 4769 (July 19, 20[0]0); Hoechst-Celanese Corp. v.

Franchise Tax Bd., 25 Cal 4th 508, 22 P3d 324, cert den 534

US 1040, 122 S Ct 614, 151 L Ed3d 537 (2001). Both Oregon

and California have adopted the applicable provisions of

Multistate Tax Commission regulations pursuant to which

gain from the sale of an asset that was part of the tax-

payer’s unitary business is business income. Cf. OAR 150-

314.610(1)-(B)(2) with 18 CAL CODE REGS § 25120(c)(2).”

For the foregoing reasons, the court concludes that

the gains from the sales of Liberate stock were business

income.

590 Oracle Corp. v. Dept. of Rev.

The next question is whether Oregon is constitu-

tionally barred from taxing those gains under the federal

due process and commerce clauses. Having determined

that Oracle and Liberate were unitary, Oregon may tax the

gains, provided there is “a ‘minimal connection’ or ‘nexus’

between the interstate activities and the taxing State,

and ‘a rational relationship between the income attributed

to the State and the intrastate values of the enterprise.’ ”

Exxon Corp. v. Wis. Dep’t. of Rev., 447 US 207, 219-20, 100

SCt 2109, 65 LEd2d 66 (1980) (citations omitted); see also I.

Jerome R. Hellerstein & Walter Hellerstein, State Taxation,

¶ 8.07[2] (3rd ed 1998) (noting that if the court finds that

a unitary business relationship exists, then the state can

constitutionally tax the earnings). The “nexus is sufficient

if the corporation has availed itself of the ‘substantial privi-

lege of carrying on business’ within the state.” Miami Corp.

v. Dept. of Rev., TC-MD 021295C, WL 1083751 at *16 (Feb 17,

2005) (quoting Mobil Oil Corp. v. Comm’r of Taxes of Vt., 445

US 425, 457, 100 SCt 1223, 63 LEd2d 510 (1980)). Oracle

acknowledges that it was doing business in Oregon for the

years at issue.

There is an additional requirement under the due

process and commerce clauses that the apportionment be

“fair.” Container Corp. of Am. v. Franchise Tax Bd., 463 US

159, 169, 103 SCt 2933 (1983). To be fair, a state’s apportion-

ment formula must have “internal consistency,” so that if the

formula were “applied in every jurisdiction, it would result

in no more than all of the unitary business’[es] income being

taxed,” and “external consistency” in that the factors used in

the formula must actually reflect a reasonable sense of how

income is generated. Id. Furthermore, “the formula must

also be fair in its application” to the individual taxpayer.

Schuler Homes of Oregon, Inc. v. Dept. of Rev., 19 OTR-MD

152, 175 (2006). There is insufficient evidence in this case to

demonstrate a lack of constitutional fairness.

The final question is whether the gains from the

sales of Liberate stock should be included in the sales fac-

tor denominator under ORS 314.665 and the corresponding

administrative rule. Here, the court finds that Oracle has

the better argument and that the gains are included in the

denominator for the same reasons the gains from the sale of

Cite as 20 OTR-MD 567 (2012) 591

Oracle Japan have been found to be included in the denomi-

nator of the sales factor.

D. Gains from the Sale of Apogee and Virata

According to the Complaint, Oracle purchased

Apogee in the mid-1990s, and Apogee was a “division” of

Oracle operating in Denver, Colorado. In February 2000,

Oracle sold Apogee’s assets, recognizing a capital gain that

it reported on its federal income tax return, but not on its

Oregon corporate excise tax return. Oracle claims that

Apogee was a separate business that was not unitary with

Oracle, and that the gain from the sale of the Apogee assets

was unrelated and unconnected to Oracle’s Oregon busi-

ness activities, and that the gain constituted nonbusiness

income allocable to a state other than Oregon. Oracle con-

tends that the Department erred in including the gains in

Oracle’s business income subject to apportionment for TYE

May 31, 2000. The Department, in its Answer, denied those

allegations. The Department included the gain in Oracle’s

business income subject to apportionment for TYE May 31,

2000.

Oracle did not produce sufficient evidence of its

claims at trial to show that the gains should not be taxed

as the Department determined was appropriate, and the

Department’s inclusion of those gains in Oracle’s business

income is therefore upheld.

The final matter in this case has to do with gains

from the sale of Virata. There is no mention of that entity

in the Complaint. The court allowed Oracle to present

testimony on the gain from the sale of Virata, over the

Department’s objection. The basis for the Department’s

objection was that Oracle never raised the issue in its

lengthy and detailed Complaint. The court has reviewed the

rather limited testimony and documentary evidence on the

question of the tax treatment of the disputed gain by Oregon

and concludes that there is insufficient evidence to overturn

the Department’s treatment of that income. Accordingly, the

Department’s determination that the gain was includable in

Oracle’s apportionable business income, and its treatment

thereof, is hereby upheld.

592 Oracle Corp. v. Dept. of Rev.

IV. CONCLUSION

For the reasons set forth above, the court concludes

that the gains from the sale of Oracle Japan stock are busi-

ness income, and that those gains must be included in the

sales factor denominator under ORS 314.665 for purposes of

determining the correct amount of the tax under the state’s

weighted three factor apportionment formula. The court fur-

ther concludes that it does not have the authority to exclude

those gains from the denominator under ORS 314.670.

The court further concludes that Oracle’s gains

from the sale of the Liberate stock are includable business

income under ORS 314.610, that Oregon is not barred from

taxing those gains under the federal due process and com-

merce clauses, and the gains are included in the sales factor

denominator under ORS 314.665.

Finally, the court is upholding the Department’s

tax treatment of Oracle’s gains related to sales of Apogee

and Virata. Now, therefore,

IT IS THE DECISION OF THIS COURT that

Plaintiffs’ appeal is granted in part, as set forth above.