Oracle Corp. and Subsidiaries I v. Dept. of Rev.

No. 15 December 16, 2020 327

IN THE OREGON TAX COURT

REGULAR DIVISION

ORACLE CORPORATION

AND SUBSIDIARIES

Plaintiff,

v.

DEPARTMENT OF REVENUE,

Defendant.

(TC 5340)

On cross-motions for partial summary judgment, Plaintiff argued that

ORS 317.267(3) impliedly includes, in Plaintiff’s Oregon sales factor, the unsub-

tracted 20 percent of dividends and Subpart F income from Plaintiff’s wholly

owned controlled foreign corporations. Defendant rejected Plaintiff’s interpre-

tation of ORS 317.267(3) and asserted that Plaintiff was required to exclude the

unsubtracted 20 percent from the sales factor under ORS 314.665(6)(a). After

examining the text, context, and legislative history of ORS 317.267(3), the court

rejected Plaintiff’s argument because the statute was not intended to address

the inclusion or exclusion of the unsubtracted 20 percent at issue. In a portion of

the decision later overturned on reconsideration, the court concluded that ORS

314.665(6)(a) does not apply to the Subpart F income because that income did not

constitute “gross receipts.” Oracle Corp. and Subsidiaries v. Dept. of Rev., 24 OTR

359 (2021) (Oracle II).

Oral argument on cross-motions for partial summary

judgment was held November 25, 2019, in the courtroom of

the Oregon Tax Court, Salem.

Eric J. Kodesch, Schwabe, Williamson & Wyatt PC,

Portland, filed the motion and argued the cause for Plaintiff.

Marilyn J. Harbur, Senior Assistant Attorney General,

Department of Justice, Salem, filed the cross-motion and

argued the cause for Defendant Department of Revenue.

Decision rendered December 16, 2020.

ROBERT T. MANICKE, Judge.

In this corporation excise tax appeal, Plaintiff

(collectively, taxpayer) and Defendant (the department)

cross-move for summary judgment regarding whether

taxpayer may include in its sales factor, for apportion-

ment purposes, amounts that are subtracted from federal

taxable income pursuant to ORS 317.267(2) and are not

328 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

expressly excluded from the apportionment formula by ORS

317.267(3).1

I. FACTS

The following facts are not disputed. Taxpayer’s

common parent, Oracle Corporation, is a Delaware corpo-

ration whose commercial domicile is in Redwood Shores,

California. Oracle Corporation has many domestic and for-

eign subsidiaries. On behalf of itself and certain domestic

subsidiaries, Oracle Corporation filed consolidated federal

income tax returns for the tax years ending May 31, 2010,

2011, and 2012 (the “Years at Issue”). Some or all of those

domestic subsidiaries also were included in Oregon consoli-

dated returns that Oracle Corporation filed for the Years at

Issue. The corporations joining in the Oregon consolidated

returns were engaged collectively in a single unitary busi-

ness that involves software. See ORS 317.710(5)(a).

During the Years at Issue, taxpayer conducted its

software business in foreign countries and jurisdictions

through a network of wholly owned “controlled foreign corpo-

rations” (CFCs). Some of the CFCs paid dividends to various

members of the group comprising taxpayer, and taxpayer

included those dividend amounts (the “Dividends”) in its con-

solidated federal taxable income. In addition, taxpayer also

included in its federal taxable income certain amounts that

were calculated based on various data related to taxpayer’s

CFCs, but that were not paid to taxpayer; these amounts

were required to be included pursuant to subpart F of the

Internal Revenue Code (IRC or the Code), IRC sections 951-

965.2 The court, applying the term defined in the Code, refers

to these includible amounts of taxpayer as the “Subpart F

Income.” See IRC § 952(a) (defining “Subpart F Income”).

As is common in tax literature, the parties sometimes refer

to the Subpart F Income amounts as “deemed dividends.”

See, e.g., Postlewaite, Cameron & Kittle-Kamp, Federal

Income Taxation of Intellectual Properties & Intangible

Assets ¶ 14.08[2] (Nov 2020) (“The sum of these [subpart

F] income categories is imputed to the CFC’s United States

1

Unless otherwise noted, references to the Oregon Revised Statutes (ORS)

are to the 2009 edition.

2

Unless otherwise noted, citations to the Code are to the 2012 edition.

Cite as 24 OTR 327 (2020) 329

shareholders as a deemed dividend to the extent of the CFC’s

earnings and profits. This deemed dividend is subject to tax

at ordinary income rates, even though such income has not

been received by the shareholders.”).

Taxpayer treated the Subpart F Income and the

Dividends as “dividends * * * received or deemed received”

for purposes of the subtraction allowed by ORS 317.267,

commonly referred to as Oregon’s “dividends-received deduc-

tion” statute. Applying that statute, taxpayer subtracted

80 percent of the Subpart F Income and 80 percent of the

Dividends in computing taxpayer’s Oregon taxable income.3

See ORS 317.267(2). The department does not contest that

ORS 317.267 applies to both categories of taxpayer’s income

from the CFCs and that taxpayer was entitled to subtract

80 percent of both. See former OAR 150-317.267-(B)(4)

(2012) (“Unlike the federal dividend received deduction,

the Oregon deduction is permitted on dividends received or

deemed received from foreign as well as domestic corpora-

tions. Income included in federal taxable income pursuant

to IRC [s]ection 951(a) qualifies for the [dividends-received]

deduction. Such income is a dividend ‘deemed received.’ ”).

Consistent with ORS 317.267(3), taxpayer also excluded the

80 percent amount from its sales factor when apportioning

its business income to Oregon.

II. ISSUE

At issue is the effect, if any, of the remaining

(“unsubtracted”) 20 percent of the Subpart F Income and

the unsubtracted 20 percent of the Dividends on taxpayer’s

Oregon sales factor.

III. PARTIES’ POSITIONS

Taxpayer seeks to include the unsubtracted 20 per-

cent of the Subpart F Income and the unsubtracted 20 per-

cent of the Dividends in its Oregon sales factor, contending

that these amounts are “sales” under ORS 314.665. On its

returns, taxpayer included the unsubtracted amounts only

3

Although disputed in the briefs, the parties agreed at oral argument on

these motions that, under ORS 317.267(2), the proper percentage of the Oracle

Dividends to be excluded from the apportionment factor is 80 percent for all of the

years at issue. See ORS 317.267(2)(b).

330 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

in the denominator; it did not include the unsubtracted

amounts in the numerator of its Oregon sales factor, because

it concluded that the amounts were not “in this state.”

Taxpayer argues that the provision that caused it to exclude

80 percent of the Subpart F Income and 80 percent of the

Dividends from its sales factor, ORS 317.267(3), also implies

that taxpayer must include the unsubtracted 20 percent in

its sales factor. Taxpayer seeks partial summary judgment

on that issue.

The department rejects taxpayer’s interpretation of

ORS 317.267(3). The department also argues affirmatively

in its cross-motion that a provision of the sales factor stat-

ute applicable to taxpayer, ORS 314.665(6)(a), requires tax-

payer to exclude the unsubtracted 20 percent of the Subpart

F Income and the unsubtracted 20 percent of the Dividends

from the sales factor.

IV. LEGAL BACKGROUND

This case involves the interplay among Oregon’s

consolidated return regime, Oregon’s modification of “tax-

able income” as determined under federal law, and the

Oregon sales factor for apportioning the income of a group

of corporations engaged in the same unitary business. The

court therefore starts by laying out in sequence the six main

steps to determine the Oregon taxable income of a multi-

national group of corporations, focusing on the steps at which

the “dividends-received deduction” and the apportionment

formula apply. See generally StanCorp Financial Group, Inc.

v. Dept. of Rev., 21 OTR 120 (2013); Costco Wholesale Corp.

v. Dept. of Rev., 20 OTR 537 (2012); US West / Qwest Dex

Holdings v. Dept. of Rev., 20 OTR 342 (2011).

Since 1986, the first step to determine the Oregon

taxable income of a corporation has been to determine its

“taxable income” under federal income tax law. Or Laws

1984, ch 1, § 5(10) (Spec Sess) (incorporating “taxable

income” as defined under federal law); id. § 20(1) (change

effective for tax years beginning on or after January 1,

1986). In this case, Oracle Corporation joined with affiliates

incorporated in the United States in filing a federal consoli-

dated income tax return for each of the Years at Issue, which

generally means that the corporations’ separate income and

Cite as 24 OTR 327 (2020) 331

losses were pooled, and intercompany dividends and other

transactions among members of that group were largely

eliminated. Boris I. Bittker & Lawrence Lokken, Federal

Taxation of Income, Estates & Gifts ¶ 97.2.1 (Nov 2020)

(“The basic principle of the consolidated return is that a

consolidated group is taxed on its consolidated taxable income,

representing principally the results of its dealings with the

outside world after elimination of intercompany profit and

loss.”); id. ¶ 97.4.1 (“[I]ntercompany transactions are, with

some exceptions to prevent tax avoidance, eliminated in

computing the group’s consolidated taxable income.”). Those

affiliates that were subject to Oregon tax also were required

to join in filing Oregon consolidated returns, and the Oregon

starting point became the federal “consolidated” taxable

income of the group filing federal consolidated returns. See

ORS 317.715(1). Under federal law, corporations formed under

the laws of foreign countries and other non-United States

jurisdictions generally are not subject to income tax unless

they have United States-source income or income effectively

connected with the conduct of business in the United States.

See generally Bittker & Lokken, ¶¶ 65.3.1; 65.3.2; 67.1.1. As

an extension of this principle, foreign corporations such as the

CFCs in this case are excluded from a consolidated return.

See IRC § 1504(a)(1) (defining “affiliated group” to mean

“1 or more chains of includible corporations” that meet cer-

tain criteria); id. § 1504(b)(3) (excluding foreign corporations

from the definition of “includible corporations”). This means

that the CFCs’ income and losses were not pooled with those

of the consolidated group, and dividends from the CFCs were

not eliminated but instead counted as gross income to the

consolidated group. Therefore, Oregon’s starting point (fed-

eral consolidated taxable income) did not include the CFCs’

income or losses, but it did include dividends paid to the cor-

porations that joined in the federal consolidated return.4

The second step is to determine whether the fed-

eral consolidated group consists of more than one “unitary

4

The Oregon legislature adopted the consolidated return approach as a

way to voluntarily limit the extranational reach of the state’s taxing power in

response to pressure from Congress and foreign governments, while still pooling

the income and loss of affiliated corporations in a manner similar to the prior

“combined” reporting system. See generally StanCorp, 21 OTR at 125.

332 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

group”; if so, each separate unitary group doing business

in Oregon may be required to file its own Oregon consoli-

dated return. See ORS 317.715(2) (requiring separation of

unitary groups); ORS 317.070 (imposing corporation excise

tax on a corporation “doing business within this state”). The

concept of a “unitary group” derives not from the Internal

Revenue Code but from federal constitutional regulation of

state taxation. As applied here, the term refers to a group

of corporations engaged in a common business enterprise,

operating in more than one state, that is sufficiently inte-

grated (unitary) that any state where a member is taxable

may fairly be permitted to tax a share of the value or income

of the entire business enterprise, rather than taxing only

the discrete items of value or income directly traceable to

the state. See Allied-Signal, Inc. v. Director, Div. of Taxation,

504 US 768, 778-80, 112 S Ct 2251, 119 L Ed 2d 533 (1992).

Oregon has codified a definition of “unitary business,” based

on an interpretation of constitutional case law, as a busi-

ness enterprise in which there is a “sharing or exchange of

value” as demonstrated by “centralized management or a

common executive force”; “centralized administrative ser-

vices or functions resulting in economies of scale”; or a “flow

of goods, capital resources or services demonstrating func-

tional integration.” See ORS 317.705(2), (3).

Assuming that all of the affiliates in the federal

consolidated group are engaged in the same “unitary busi-

ness” (a point not at issue in these motions), the third step

is to apply the various “additions,” “subtractions,” and other

modifications to federal consolidated taxable income that

Oregon law prescribes. See ORS 317.715(3)(a). The “dividends-

received deduction” under ORS 317.267 is the modification

that occurred in this case; taxpayer’s motion relies on that

statute. When a corporate taxpayer receives a dividend from

an affiliate outside the consolidated return group, federal law

generally allows the payee to claim a deduction for a specified

portion of that dividend. See generally IRC § 243. Subsection

(1) of ORS 317.267 generally requires the taxpayer to add that

deducted amount back to federal taxable income. With the

slate thus clean, subsection (2) allows the taxpayer to sub-

tract 80 percent of the dividend, assuming that the taxpayer

has at least a 20 percent ownership interest in the payor.

Cite as 24 OTR 327 (2020) 333

Assuming that the unitary business is taxable in

more than one state, the fourth, fifth, and sixth steps deter-

mine Oregon’s taxable share of post-modification income.

This occurs pursuant to state “allocation” and “apportion-

ment” laws and consistent with federal constitutional lim-

itations. See ORS 317.010(10)(a) - (c); see also Tektronix, Inc. v.

Dept. of Rev., 354 Or 531, 536-38, 316 P3d 276 (2013), aff’g on

other grounds, 20 OTR 468 (2012) (defining and describing

allocation and apportionment under Oregon’s version of the

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

ORS 314.605 to 314.670). Step four is to subtract all non-

apportionable “nonbusiness” income; step five is to multiply

the remaining amount (apportionable “business” income) by

the percentage determined by the Oregon apportionment

formula; and step six is to add back any amounts of non-

business income that must be “allocated” to Oregon under

Oregon’s version of UDITPA. The result of these six steps is

Oregon “taxable income.”

At issue in this case is the apportionment formula (step

five above). For the Years at Issue, Oregon’s UDITPA pre-

scribed a standard single-factor formula based solely on the

taxpayer’s “sales” in Oregon compared to sales everywhere.

See ORS 314.650 (all business income to be apportioned to

Oregon “by multiplying the income by the sales factor”). The

term “sales” is defined as “all gross receipts of the taxpayer

not allocated” as nonbusiness income. ORS 314.610(7). The

standard UDITPA formula may be contrasted with other

formulas reserved for specific businesses, such as a “pub-

lic utility,” a “financial organization,” an “insurer,” or an

“interstate broadcaster.” See ORS 314.615 (excluding pub-

lic utility or financial organization from UDITPA); ORS

314.280 (authorizing department to adopt apportionment

formulas by rule for public utilities and financial organiza-

tions); ORS 317.660 (apportionment of insurer income); ORS

314.680 - 314.695 (interstate broadcasters). For any business

subject to the standard UDITPA formula, the department

may allow or require a tailored apportionment method (or

separate accounting) if the UDITPA formula does not “fairly

represent” the extent of the taxpayer’s business activity in

Oregon. ORS 314.670(1) (allowing alternative methods of

assigning taxable income to Oregon). In this case, taxpayer’s

334 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

returns applied UDITPA’s standard formula. That formula

is set forth in ORS 314.665(1), which states:

“[T]he sales factor 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.”

The remainder of ORS 314.665 contains rules to determine

whether a sale must be included in the numerator, along

with special rules such as the exclusion from the definition

of “gross receipts” under ORS 314.665(6)(a) that is the sub-

ject of the department’s motion.

V. ANALYSIS

With this background in mind, the court returns to

the parties’ arguments.

A. Taxpayer’s argument: Does ORS 317.267(3) require inclu-

sion of unsubtracted amounts?

Taxpayer relies on subsection (3) of ORS 317.267,

which states:

“There shall be excluded from the sales factor of any

apportionment formula employed to attribute income to

this state any amount subtracted from federal taxable

income under subsection (2) of this section.”

Taxpayer urges the court to determine that, because subsec-

tion (3) requires it to exclude the 80 percent of the Subpart F

Income and Dividends that taxpayer subtracted, subsection

(3) also necessarily requires taxpayer to include the unsub-

tracted 20 percent. Taxpayer describes its position as the

“clear corollary” of ORS 317.267(3) and relies on the princi-

ple of statutory interpretation known as “inclusio unius est

exclusio alterius” (the inclusion of the one is the exclusion

of the other), and on ORS 174.020(2), which states that “a

particular intent controls a general intent” when the two

are inconsistent.

Under the analytical framework that the Oregon

Supreme Court has prescribed for interpreting statutes,

the court starts not with the maxims taxpayer cites, but

with the text and context, as well as any helpful legisla-

tive history, before consulting maxims “if the legislature’s

Cite as 24 OTR 327 (2020) 335

intent remains unclear.” State v. Gaines, 346 Or 160, 171-

72, 206 P3d 1042 (2009). The text of subsection (3) does not

state that the unsubtracted portion of a dividend must be

included in an apportionment formula. The text does not

specify whether the unsubtracted portion must be included

or excluded. This silence can mean one of three things:

(a) the legislature intended to imply that the unsubtracted

portion must be included; (b) the legislature intended to imply

that the unsubtracted portion must, like the subtracted por-

tion, be excluded (a position neither party advances here);

or (c) the legislature did not intend subsection (3) to answer

the question. The court proceeds to statutory context for any

further insight.

Statutory context includes other laws in place at the

time of enactment. See Unger v. Rosenblum, 362 Or 210, 221,

407 P3d 817 (2017) (“[W]e do not consider the meaning of a

statute in a vacuum; rather, we consider all relevant stat-

utes together, so that they may be interpreted as a coher-

ent, workable whole.”) (citing Lane County v. LCDC, 325 Or

569, 578, 942 P2d 278 (1997)); Gaines, 346 Or at 177 n 16

(“Ordinarily, only statutes enacted simultaneously with or

before a statute at issue are pertinent context for interpret-

ing that statute.”). The legislature enacted subsection (3) of

ORS 317.267 in 1985, as part of a large technical correc-

tions bill making numerous changes to the 1984 corporation

excise tax overhaul act referred to above. See Or Laws 1985,

ch 802, § 33; see also Tape Recording, House Committee on

Revenue and School Finance, Subcommittee on Income Tax,

HB 2011, May 9, 1985, Tape 213, Side A (testimony of Elizabeth

Stockdale) (testifying, as attorney-in-charge for tax section

of Oregon Department of Justice, that bill was necessary to

“eliminate * * * ambiguities” because 1984 bill “was drafted in

kind of a hurry”). Then as now, the UDITPA formula in ORS

314.650 and ORS 314.665 was not the only apportionment

formula allowed or required under Oregon law.5 The depart-

ment has identified two circumstances in 1985 in which

dividends were entirely excluded from the apportionment

formula. First, the formula for airlines, under ORS 314.280

5

The court reads the reference to “any” apportionment formula in subsec-

tion (3) as a recognition that a variety of formulas exists.

336 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

and what is now OAR 150-314-0078, provided: “Passive

income items such as interest, rental income, dividends, etc.,

will not be included in the denominator * * *.” Former OAR

150-314.280-(G)(3)(b)(D) (1983). Second, for any taxpayer, a

rule under the “fairly represent” provision in ORS 314.670

provided:

“Where business income from intangible property can-

not readily be attributed to any particular income pro-

ducing activity of the taxpayer, such income cannot be

assigned to the numerator of the sales factor for any state

and shall be excluded from the denominator of the sales

factor. For example, where business income in the form of

dividends received on stock, royalties received on patents

or copyrights, or interest received on bonds, debentures or

government securities results from the mere holding of the

intangible personal property by the taxpayer, such divi-

dends and interest shall be excluded from the denominator

of the sales factor.”

Former OAR 150-314.670-(C)(3) (1983).

Taxpayer’s position, that inclusion of the unsub-

tracted portion of a dividend is the implied logical corollary

of the express exclusion of the subtracted portion, would

mean that the legislature also intended to include the

unsubtracted portion in the formula in both of these cir-

cumstances. The court finds it unlikely that the legislature

had that intention because the result would be that in both

circumstances other “passive” receipts attributable to the

“mere holding” of intangibles would remain fully excluded,

while the unsubtracted portion of dividends would have

to be included even if the airline or other taxpayer was a

merely passive holder of the stock. Taxpayer offers no rea-

son why the legislature would have wanted to single out

passive interests in stock for treatment different from pas-

sive interests in other intangibles, and the court sees no rea-

son to think that the legislature would have considered that

treatment more fair or accurate than complete exclusion of

the receipts. The court finds the department’s explanation

more logical: the legislature did not intend subsection (3)

of ORS 317.267 to address the inclusion or exclusion of the

unsubtracted portion of a dividend. Based on the statutory

context, the court tentatively concludes that subsection (3)

Cite as 24 OTR 327 (2020) 337

leaves it to the substantive law governing the particular

apportionment formula applicable to the taxpayer to deter-

mine inclusion or exclusion.

The court finds nothing in legislative history that

changes this conclusion. The department has presented an

analysis of the legislative history from both 1985 and 1984.

Unsurprisingly, given the bulk of the bill, neither party has

proffered legislative history that specifically addresses the

addition of ORS 317.267(3).

This leaves taxpayer’s arguments based on maxims

of statutory construction. The principle that “inclusio unius

est exclusio alterius” may be useful in the absence of other

evidence of legislative intent, but it cannot overcome the

strong indicators in the statutory context discussed above.

As to the principle that the more specific intent controls,

the court concludes that taxpayer erroneously assumes that

the legislature has articulated in ORS 317.267(3) a specific

intention to require inclusion of the unsubtracted dividend

in the sales factor. The legislature did not do that, however;

it was silent on that point. Taxpayer’s argument assumes

the conclusion that it seeks.

The court will deny taxpayer’s motion.

B. Department’s argument: Does ORS 314.665(6)(a) require

exclusion of unsubtracted amounts?

The court turns to the department’s argument in

its cross-motion that ORS 314.665(6)(a) requires taxpayer

to exclude the unsubtracted amounts from the sales factor.

That provision states:

“For purposes of this section, ‘sales’:

“(a) Excludes gross receipts arising from the sale,

exchange, redemption or holding 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). The department argues that this lan-

guage excludes the unsubtracted 20 percent of the Subpart

F Income and of the Dividends because those amounts arise

from the holding of the CFC stock. The department argues

further that the exception for receipts derived from the

338 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

taxpayer’s primary business activity does not apply because

taxpayer’s primary business activity is selling software, not

holding the CFC stock.

1. Subpart F Income

Before analyzing whether the exclusion in ORS

314.665(6)(a) applies, the court steps back to consider the

general rule in ORS 314.665(1), reprinted above. That

provision defines the sales factor as a fraction, of which

the numerator is the taxpayer’s “sales” in Oregon and the

denominator is the taxpayer’s “sales” everywhere. The term

“sales” is defined as “all gross receipts of the taxpayer not

allocated under ORS 314.615 to 314.645.” ORS 314.610(7).

The term “gross receipts” is not defined in UDITPA or else-

where in chapter 314. Although the parties seem to have

proceeded on the assumption that all amounts at issue are

“gross receipts,” and therefore “sales,” the court feels com-

pelled to test this assumption as applied to the Subpart F

Income.

Although items that constitute income typically can

be matched with the receipt of cash payments or property,

in many circumstances that match is lacking or is subject

to a significant time lag. Common examples of cash or prop-

erty receipts that are not income include certain damages

payments, insurance recoveries, condemnation proceeds if

timely reinvested in property that is “similar or related in

service or use,” distributions from a corporation that consti-

tute a return of capital rather than a dividend, or payments

constituting recovery of the taxpayer’s “basis” in property

the taxpayer sells.6 Examples of income not accompanied by

6

See Bittker & Lokken, ¶ 13.1 (discussing the exclusion of damages payments

from gross income); id. ¶ 12.1 (discussing the exclusion of life insurance, annu-

ity, and endowment contracts, and employee death benefits from gross income);

id. ¶ 44.3 (discussing nonrecognition of gain on the involuntary conversion of

property, such as by condemnation, under IRC section 1033); id. ¶ 92.1 (“To the

extent not covered by current or accumulated earnings and profits, a distribution

is treated as a return of the shareholder’s capital and applies in reduction of the

adjusted basis of the stock[.]”); id. ¶ 41.1 (“On a sale of property, gain or loss is

the difference between the amount realized and the taxpayer’s adjusted basis for

the property. This fundamental principle * * * permits the taxpayer’s investment

to be recovered tax-free before the taxpayer is charged with gain on the sale[.]”)

(internal footnote omitted).

Cite as 24 OTR 327 (2020) 339

a receipt of cash or property include certain debt forgiveness

amounts, items of income that the taxpayer accrues under

its method of accounting before actually receiving them,

income that the taxpayer has “constructively” received, and

cash that the taxpayer diverts to another under the doctrine

of “anticipatory assignment of income.”7

Subpart F income is in the latter category. Congress

enacted subpart F of the Internal Revenue Code in 1962

because the federal principle that limits the taxation of cor-

porations formed under foreign law enables a domestic par-

ent corporation to indefinitely defer tax on income earned

by foreign subsidiaries by causing the foreign subsidiaries

to not pay dividends. See id. ¶ 69.1 (quoting S Rep No 1881,

87th Cong, 2d Sess (“[N]o U.S. tax is imposed with respect

to the foreign source earnings of these corporations . . . until

dividends paid by the foreign corporations are received by

their American parent corporations or their other American

shareholders.” (Ellipsis in original.)). Subpart F income is

a collection of specific types of income of the CFC, each of

which is separately computed according to rules designed to

limit any incentive to shelter that type of income from US or

foreign tax, or (in some cases) to punish overtly illegal behav-

ior such as the payment of bribes or kickbacks. See id.; Boris

I. Bittker & James S. Eustice, Federal Income Taxation of

Corporations & Shareholders ¶ 15.62[1] (Nov 2020) (explain-

ing computation of subpart F income). The CFC shareholder

must include in federal gross income the sum of these items,

capped by the CFC’s earnings and profits for the year. See

IRC §§ 951(a)(1), 952(c)(1)(A). When a CFC pays an actual

dividend, the payment generally reduces the CFC’s earn-

ings and profits for the year; thus, to the extent the CFC

pays actual dividends, the amount that the US shareholder

must include as subpart F income is generally reduced as

well. See Bittker & Eustice, ¶ 15.61[3].

7

See Bittker & Lokken, ¶ 7.1 (discussing income from discharge of indebt-

edness); id. ¶ 5.9 (discussing the accrual method of accounting, under which the

taxpayer “takes sales and other transactions into account when they occur, even

though the taxpayer must wait for payment”; discussing constructive receipt of

income, which is income “not actually reduced to a taxpayer’s possession [but] is

constructively received by him in the taxable year during which it is credited to

his account, set apart for him, or otherwise made available so that he may draw

upon it at any time[.]”); id. ¶ 75.2 (discussing anticipatory assignments of income).

340 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

a. Was taxpayer’s Subpart F Income “gross

receipts”?

The court analyzes the term “gross receipts” to

determine whether the legislature intended the term to

include subpart F income. The court first reviews contempo-

raneous general and legal dictionaries to identify the plain

meaning and any “technical” meaning of the term when the

Oregon legislature adopted it. See Comcast Corp. v. Dept. of

Rev., 356 Or 282, 295-96 & n 7, 337 P3d 768 (2014) (stressing

the importance of consulting dictionary definitions contem-

poraneous with enactment of the statute); EAN Holdings,

LLC v. Dept. of Rev., 24 OTR 200, 203 (2020) (explaining

that the court must determine whether words have a spe-

cialized or technical meaning “that differs from the plain

meaning” and “determine whether the legislature intended

to use the term in that different, technical sense”) (citing

State v. McNally, 361 Or 314, 321-22, 392 P3d 721 (2017);

DCBS v. Muliro, 359 Or 736, 745-56, 380 P3d 270 (2016)).

The definition of “sales,” including the reference to “gross

receipts,” has not changed since the Oregon legislature

adopted UDITPA in 1965. See Or Laws 1965, ch 152, § 2.

At that time, neither Webster’s Third New International

Dictionary nor Black’s Law Dictionary included a definition

of “gross receipts.” The relevant definitions of “receipt” in

Webster’s were:

“3: the act or process of receiving <in [receipt] of a salary

which he had earned –O. S. J. Gogarty> <ports equipped

for the [receipt] of large vessels –L. D. Stamp>[;]

“4: something (as food, goods, money) that is received —

usu[ally] used in pl[ural] <ranks about tenth in the United

States in volume of fresh fruit and vegetable [receipt]s

–Calif. Agric. Bull.> <improve the harbor to accommo-

date larger raw material [receipt]s –Steel Facts> <took

the day’s [receipt]s to the bank’s night depository –J. C.

Furnas>[;]

“5: a writing acknowledging the taking or receiving of

goods or money delivered or paid <could offer only poor

paper money or [receipt]s to pay for it –F. V. W. Mason>

<paid the bill in cash and was given a [receipt]>[.]”

Cite as 24 OTR 327 (2020) 341

Webster’s Third New Int’l Dictionary 1894 (unabridged ed

1961) (emphasis omitted). The primary definition of “receive”

was “to take possession or delivery of.” Id.

Similarly, Black’s Law Dictionary did not define

“gross receipts” but defined “receipt” in pertinent part as

the “[a]ct of receiving; also, the fact of receiving or being

received; that which is received; that which comes in, in dis-

tinction from what is expended, paid out, sent away, and the

like.” Black’s Law Dictionary 1433 (4th ed 1951). And the

definition of “receive” in Black’s was “[t]o take into posses-

sion and control; accept custody of.” Id.

The court concludes that the plain meaning of

“receive” and its derivative “receipt” referred to the act

of taking something into possession. Those terms had an

established legal meaning that was indistinguishable

except perhaps in its emphasis on physical possession. The

court proceeds to review relevant statutory context.

The court starts with the remaining provisions of

UDITPA, because the 1965 legislature adopted UDITPA as

a complete bill, making very few changes to the uniform

language that had been the work of a national committee

for nearly a decade. See Powerex Corp. v. Dept. of Rev., 24

OTR 146, 172-76 (2020) (discussing Oregon-specific changes

upon adoption of UDITPA). Because the process of drafting

UDITPA played out in public over a number of years and

was the subject of contemporaneous commentary, the court

refers to deliberations and published reports on that pro-

cess as additional relevant “context” for the bill as presented

to the Oregon legislature for approval. Cf. Powerex Corp. v.

Dept. of Rev., 357 Or 40, 346 P3d 476 (2015) (citing UDITPA

commentary); Twentieth Century-Fox Film Corp. v. Dept. of

Rev., 299 Or 220, 700 P2d 1035 (1985) (same).

The text of UDITPA includes an express statement

of purpose: “to make uniform the law of those states which

enact it.” Or Laws 1965, ch 152, § 20. The court notes, how-

ever, that the object of this effort is not a uniform defini-

tion of “income,” but only a uniform method of attributing

an appropriate portion of a multistate taxpayer’s overall net

income to each state; UDITPA nowhere attempts to define

342 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

“income.”8 UDITPA also contains an implied statement of

purpose: to “fairly represent the extent of the taxpayer’s

business activity in this state[.]” Id. § 19 (allowing depart-

ment to permit or require separate accounting or alterna-

tive, “equitable,” apportionment if standard UDITPA for-

mula does not fairly represent extent of taxpayer’s business

activity in the state); see Fisher Broadcasting, Inc. v. Dept. of

Rev., 321 Or 341, 355, 898 P2d 1333 (1995) (finding UDITPA’s

apportionment method that fairly represents in-state “busi-

ness activity” “materially different” from goal of fairly and

accurately reflecting taxpayer’s in-state “net income” under

ORS 314.280). These statements of purpose suggest that the

drafters thought of income as something different from the

factors used to attribute income to a particular state.

Notwithstanding this general distinction between

income and the factors involved in apportioning it, the defi-

nition of “sales” reveals some conflation of the terms “gross

receipts” and “income”: “ ‘Sales’ means all gross receipts of

the taxpayer not allocated under ORS 314.615 to 314.645.”

ORS 314.610(7). Yet the cited provisions do not purport to

allocate “gross receipts” but rather nonbusiness “income,”

including net rents and royalties, capital gains from sales of

real property, and interest and dividends. See ORS 314.630 -

314.640. This usage, standing alone, weighs in favor of

treating subpart F income as gross receipts even though the

United States shareholder of a CFC does not take “posses-

sion” of any cash associated with the subpart F income.

8

In fact, section 4 of UDITPA recognizes that states at that time (as now)

imposed a variety of different taxes, including taxes measured by “net income”

and taxes imposed on other kinds of tax bases. Or Laws 1965, ch 152, § 4 (taxpayer

considered “taxable” in another state if the other state has “jurisdiction to subject

the taxpayer to a net income tax regardless of whether, in fact, the state does or does

not”); see also Minutes, Proceedings in Committee of the Whole Uniform Division

of Income for Tax Purposes Act at 2, July 9, 1957 (statement of George V. Powell),

available at https://www.uniformlaws.org/viewdocument/committee-archive-93?

CommunityKey=f2ef73d2-2e5b-488e-a525-51be29fbee47&tab=librarydocuments

(Act is “designed for adoption only in those states which have taxes upon net

income or which are in some fashion measured by net income. * * * It does not

amend the income tax law. All it does is apportion the tax among the states.”);

William J. Pierce, The Uniform Division of Income for State Tax Purposes, 35

Taxes—The Tax Magazine 747 (Oct 1957) (“[T]he uniform act assumes that the

existing state legislation has defined the base of the tax * * * [and] does not deal

with the problem of ascertaining the items used in computing income or the

allowable items of expense.” (Emphasis in original.)).

Cite as 24 OTR 327 (2020) 343

For further context, the court reviews the remain-

ing components of the apportionment formula as adopted

in 1965: the “property” factor and the “payroll” factor. The

1965 act assigned equal weight to each of the three factors,

and that equal weighting remained in place until 1989.9 The

property factor consisted of the average value of the taxpay-

er’s “real and tangible personal property” in Oregon divided

by the value of its real and tangible personal property every-

where, with owned property valued at its “original cost” and

property rented from others valued at eight times the net

annual rental rate. See Or Laws 1965, ch 152, §§ 11-12. The

average values were redetermined at least annually. See id.

§ 13.

The court finds two features of the property fac-

tor significant. First, only tangible personal property and

real property were included, although the UDITPA draft-

ers knew about intangible property and the Oregon legis-

lature’s experience with centrally assessed property cer-

tainly made it aware that intangible property could be a

substantial component of the value of a multistate business.

See ORS 308.510(1) (1965) (“property” used in a centrally

assessed business included “all property, real and personal,

tangible and intangible”); e.g., Knappton Towboat Co. v.

Chambers, 202 Or 618, 627, 276 P2d 425 (1954) (describing

method to determine value of the unit’s intangible assets).

For apportionment purposes, identifying a physical location

for the property was key. Second, because the value of each

item of owned property was frozen at the acquisition price,

and the total value of the taxpayer’s property was redeter-

mined periodically, the property factor essentially was an

annual snapshot of the taxpayer’s historical outlay of funds

to acquire real and personal property in the state, compared

9

In 1989, the legislature assigned additional weight to the sales factor, com-

mencing a trend that, as of the Years at Issue, has eliminated all weight for the

property and payroll factors for most taxpayers. Compare Or Laws 1965, ch 152,

§ 10 (apportioning business income “by multiplying the income by a fraction, the

numerator of which is the property factor plus the payroll factor plus the sales

factor, and the denominator of which is three”), with Or Laws 1989, ch 1088, § 1

(amending subsection (1) to state that the numerator of the sales factor “is the

property factor plus the payroll factor plus two times the sales factor, and the

denominator of which is [three] four.”) (emphasis and brackets in original to flag

added (boldface) and removed (bracketed) language) and ORS 314.650 (business

income is multiplied “by the sales factor”).

344 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

to such expenditures everywhere. Consistent with the statu-

tory focus on “the extent of the taxpayer’s business activity”

in the state, the valuation feature thus depended on the tax-

payer’s actual expenditures and ignored the possibility of

market-based appreciation or depreciation, or depreciation

due to obsolescence.10

The payroll factor consisted of the “total amount

paid in this state during the tax period for compensation”

divided by the total compensation paid everywhere. Or

Laws 1965, ch 152, § 14.11 “Compensation” was limited to

“wages” and other amounts “paid” to employees as remu-

neration. See id. § 2(3). To determine where compensation

was “paid,” the act looked first to where the employee per-

formed the services, and if the employee performed services

in more than one state, the act then looked to the location

of the base of operations or the place from which the service

was directed or controlled. Id. § 15. The payroll factor made

no attempt to determine where the benefit of the employ-

ee’s services might be received or enjoyed; wages paid to an

architectural draftsperson working in Oregon were sourced

to Oregon even if the building was in Washington. Cf. OAR

10

The 1957 minutes suggest that cost, rather than value, also was selected

because that amount was readily determinable and could be measured uni-

formly without regard to states’ varying rates of calculating depreciation for

income tax purposes. Minutes, Proceedings in Committee of the Whole Uniform

Division of Income for Tax Purposes Act at 18, July 9, 1957 (statement of George

V. Powell), available at https://www.uniformlaws.org/viewdocument/committee-

archive-93?CommunityKey=f 2ef 73d2-2e5b-488e-a525-51be29f bee47&tab=

librarydocuments; see also Charles F. Conlon, The Apportionment of Multistate

Business Income—the NCCUSL Uniform Division of Income Act, 12 Tax Executive

220 (1960).

11

The UDITPA drafters adopted the provisions for determining the sourcing

of compensation nearly verbatim from the Model Unemployment Compensation

Tax Act in order to facilitate taxpayer compliance. See Minutes, Proceedings in

Committee of the Whole Uniform Division of Income for Tax Purposes Act at

19-20, July 9, 1957 (statement of George V. Powell), available at https://www.

uniformlaws.org/viewdocument/committee-archive-93?CommunityKey=f2ef73d2-

2e5b-488e-a525-51be29fbee47&tab=librarydocuments (reading the compensa-

tion sourcing rules under UDITPA and then stating, “I would like to point out

that this is the exact language of the Model Unemployment Compensation Act

which is in force in all of the states.”); see also id. at 21 (statement of Pierce)

(“The reason we took this language verbatim is this: Every corporation will have

already computed all the figures for the payment of their unemployment tax to

the several states in which they do business, so that for computing this factor

they just take everything that they have already reported to the individual states

for paying the unemployment tax and put it here.”).

Cite as 24 OTR 327 (2020) 345

150-314-0435(4)(b)(B) (2018) (under market-based sourcing

rules, assigning receipts to location of customer or custom-

er’s property in various circumstances). In all aspects, the

payroll factor focused on the physical location of the individ-

ual worker or of the persons controlling the worker’s actions,

again reflecting physical business activity in the state.

This review of the property and payroll appor-

tionment factors weighs against treating “gross receipts”

as identical to “income.” The property and payroll factors

used concrete, readily determined metrics of cash expendi-

tures tied to physical locations, as opposed to more legally

nuanced concepts such as the fair market value of property

or the location where a customer receives the benefit of ser-

vices. This context suggests that “gross receipts” was more

likely to refer to cash or property of which the taxpayer took

possession, rather than amounts that became income solely

by imputation as a matter of law.

An Oregon Supreme Court decision, and subsequent

Oregon legislation, supply important context to understand

how the 1965 legislature would have viewed the relationship

between “gross receipts” and “income.” In Corbett Inves’t Co.

v. State Tax Com. The taxpayer was an investment company

that derived income from rental properties but, in the year

at issue (1944), sold some property at a loss of $115,718.14.

181 Or 244, 245, 181 P2d 130 (1947). The taxpayer sought

exemption from the corporation excise tax based on a provi-

sion that exempted “[e]very corporation whose gross receipts

to the extent of at least ninety-five (95) percent thereof

is derived from rentals of real property owned by it * * *.”

Id. at 245-46 (quoting OCLA § 110-1511(k)) (emphasis added;

ellipsis in original). Although the taxpayer incurred a loss

on the sale, the cash it received from the sale apparently

caused its receipts from rent to drop below 95 percent of its

overall receipts for the year, a fact that prompted the attor-

ney for the State Tax Commission to acknowledge that the

taxpayer’s claim for exemption had “an appealing equity.”

Id. at 245, 250. Nevertheless, the commission argued that

“gross receipts” had a broad meaning that included the sale

proceeds, ignored the loss, and rendered the taxpayer ineli-

gible for the exemption. Id. at 247.

346 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

Seeking an established definition of “gross receipts,”

the court considered a wide range of terms occurring in case

law and treatises, including “gross income,” “gross proceeds,”

and “gross earnings.” Id. at 249. The court found conflicting

views as to whether or how to distinguish the terms, ulti-

mately concluding that “[g]ross income or gross receipts are

terms whose meaning depends largely upon the context and

subject matter of the act in which they are used.” Id. at 248-

49 (citing First Trust Co. of St. Paul v. Commonwealth Co.,

98 F2d 27 (8th Cir 1938)).

Upon reviewing the statutory history of the Oregon

real estate rental company exemption, the court found that,

as originally enacted as part of the corporation excise tax

act in 1929, the exemption provision contained the identi-

cal language, except that it used the term “gross income.”

Or Laws 1929, ch 427, § 11(j). The 1929 act defined “gross

income” to include “gains, profits or income from dealings

in real or personal property.” Or Laws 1929, ch 427, § 2(g).

The court concluded that under the original 1929 text the

exemption would have applied to the taxpayer because the

taxpayer incurred no “gain” or “profit” from the sale, only a

loss. See Corbett, 181 Or at 247 (“Prior to this amendment, it

is clear that * * * the plaintiff * * * would have been entitled

to exemption, because a loss could in no sense be considered

as a part of income.”); id. at 249 (“ ‘income’ implies a gain or

profit”). The court also stated: “The United States Supreme

Court has definitely rejected the broad contention that all

receipts—‘everything that comes in’—are income within the

meaning of ‘gross income’ as used in tax legislation.” Id. at

248 (citing Southern Pacific Co. v. Lowe, 247 US 330, 38 S Ct

540, 62 L Ed 1142 (1918)).12

12

In Southern Pacific, the Court eliminated earnings and profits accumu-

lated before the effective date of the Federal Income Tax Act of 1913 and the

adoption of the Sixteenth Amendment to the Constitution of the United States

as the measure of taxable dividends paid after the effective date of the act. 247

US at 335-37. The court held that “the accumulations that accrued to a corpo-

ration prior to January 1, 1913, [were] capital, not income, for purposes of the

act.” Id. at 335. The Court also found it important that the dividend-payor was

the wholly owned subsidiary of the taxpayer and therefore the two entities “were

in substance identical because of the complete ownership and control which

the latter possessed over the former, as stockholder and in other capacities.”

Id. at 337.

Cite as 24 OTR 327 (2020) 347

The court explained that the legislature in 1933

amended the exemption statute to replace “gross income”

with “gross receipts.” Corbett, 181 Or at 247; see Or Laws

1933, ch 33, § 4 (Spec Sess). However, the court stated

that the intent of the original 1929 act was “to relieve the

heavy burden of taxes imposed upon real property. It was

provided therein that corporations whose income consisted

principally of rentals of real property should be exempted

in order to avoid double taxation.” Corbett, 181 Or at 246.

The court considered what intention the 1933 legislature

might have had in substituting the term “gross receipts” for

“gross income,” but the court concluded that assigning the

broadest meaning to the term “gross receipts” would yield

an “absurd, unreasonable and unjust result * * *.” Id. at

248. The court hypothesized that the legislature could not

have intended, for example, to disqualify from the exemp-

tion a corporation that happened to receive proceeds from

the involuntary conversion of property as a result of emi-

nent domain proceedings, or proceeds from insurance after

property was destroyed by fire. Id. Accordingly, the court

declined to give a “strict or literal construction” to the term

“gross receipts” and held that, “consonant with the purpose

and spirit of the excise tax law,” the term “gross receipts”

includes only “receipts within the classification of ‘income.’ ”

Id. at 249-50.

Six years after Corbett, in 1953, the legislature

inserted a special definition of “gross receipts” into the real

estate rental company exemption statute. As amended,

the definition conformed to, and tightly circumscribed, the

court’s opinion in Corbett:

“For the purposes of this subsection, ‘gross receipts’

shall mean the gross amount of all receipts, any part of

which is included within the term ‘gross income’ as defined

in section 110-1506, subsection (3), O.C.L.A., undiminished

by any deductions, exemptions or exclusions whatsoever;

but, in the case of a sale, exchange or involuntary conver-

sion of property not held for sale in the ordinary course of

the trade or business, only the amount of gain, computed in

accordance with section 110-1512, O.C.L.A., as amended,

and recognized under the provisions of section 110-1513,

O.C.L.A., as amended, shall constitute gross receipts.”

348 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

Or Laws 1953, ch 653, § 1, amending OCLA § 110-1511,

as amended by Or Laws 1949, ch 406, § 1. The legislature

eliminated the exemption altogether in 1955. Or Laws 1955,

ch 592, § 5.

Based on Corbett, the legislature in 1965 would have

understood that the “literal” meaning of “gross receipts”

encompassed cash proceeds as distinct from “income,” even

though the court found an overriding legislative intention to

equate the two terms for purposes of the exemption at issue

in that case. The legislature in 1965 also would have been

aware of its own action in 1953 to create a specific defini-

tion of “gross receipts”—solely for the purpose of applying

the real estate rental company exemption—that deviated

from the general definition and conformed to the exception

created in Corbett. The court finds that this context weighs

heavily in favor of interpreting “gross receipts,” as used in

the definition of “sales” for apportionment purposes, as a con-

cept different from “income.” Whereas “income” bore legal

interpretations that substituted gain for the total amount

received from a sale, and ignored altogether any amount

received as eminent domain compensation or an insurance

recovery, the 1965 legislature would have understood “gross

receipts” to mean “everything that comes in.” The court

finds this meaning of “gross receipts” also consistent with

the focus on “taking possession” in the dictionary definitions

and the focus on actual cash expenditures in the property

and payroll factors.

The court has found nothing relevant to this issue

in the written materials comprising the legislative history

of Oregon’s adoption of UDITPA, nor in the available record-

ings of oral proceedings.

b. Conclusion: ORS 314.665(6)(a) does not apply to

taxpayer’s Subpart F Income

Based on the text, context, and legislative history,

the court concludes that “gross receipts,” and therefore

“sales” for purposes of Oregon’s sales factor under UDITPA,

does not encompass subpart F income. This means that

it misses the mark to focus on whether the 1995 legisla-

ture intended the exclusion in ORS 314.665(6)(a) for “gross

receipts arising from the sale, exchange, redemption or

Cite as 24 OTR 327 (2020) 349

holding of intangible assets” to apply to taxpayer’s Subpart

F Income. ORS 314.665(6)(a) cannot apply because taxpay-

er’s Subpart F Income was never gross receipts in the first

place. Rather, the Subpart F Income is simply additional

income; the record to date does not indicate that taxpayer’s

Subpart F Income was matched to any item of actual gross

receipts that were accounted for in the apportionment fac-

tor. The department’s motion poses only the narrow ques-

tion whether ORS 314.665(6)(a) requires the unsubtracted

portion of taxpayer’s Subpart F Income and Dividends to

be excluded from the apportionment factor, assuming it is

apportionable business income. Having concluded that the

answer is “no,” the court will deny the department’s motion

as to taxpayer’s Subpart F Income.13

2. Dividends

The court now turns to the Dividends. Here, there is

no lack of a match; the Dividends were actual distributions

of gross receipts that also constituted income to taxpayer.14

The question is whether the Dividends “ar[ose] from the sale,

exchange, redemption or holding of intangible assets,” and if

so, whether the Dividends were “derived from the taxpayer’s

primary business activity.” See ORS 314.665(6)(a). The court

13

The court notes that it finds nothing inconsistent in treating the Subpart

F Income as not “gross receipts” for apportionment purposes while treating it as

“deemed” dividends for purposes of the subtraction under ORS 317.267, as both

parties have done in this case. Federal income tax commentators regularly refer

to subpart F income as “deemed” dividends, and the Oregon legislature included

the reference to “dividends * * * received or deemed received” in ORS 317.267(2)

in 1984, some 20 years after Congress had adopted subpart F of the Code. See

Or Laws 1984, ch 1, § 9(2) (Spec Sess); Revenue Act of 1962, Pub L No 87-834, 76

Stat 1006 (codified as amended at 26 USC §§ 901 et seq.); Postlewaite, Cameron

& Kittle-Kamp, ¶ 14.08[2] (“The sum of these [subpart F] income categories is

imputed to the CFC’s United States shareholders as a deemed dividend to the

extent of the CFC’s earnings and profits. This deemed dividend is subject to tax

at ordinary income rates, even though such income has not been received by the

shareholders.”).

14

As the department points out in arguing against taxpayer’s position on

the meaning of ORS 317.267(3), the express exclusion from the apportionment

formula of the subtracted portion of an actual dividend helps to preserve the

integrity of this match: the taxpayer gets the benefit of the subtraction from

income, but an out-of-state taxpayer may not “double dip” by still counting the

subtracted portion as gross receipts in the sales factor denominator, thereby

diluting its Oregon sales factor. Likewise, an in-state taxpayer that benefits from

the subtraction is not “punished” by having to count the subtracted portion in the

numerator (as well as the denominator) of its sales factor.

350 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

again applies the State v. Gaines framework. The court sees

no issue regarding the “sale,” “exchange,” or “redemption”

of assets; if the statute applies, it is because the Dividends

“ar[ose] from” taxpayer’s “holding” of the intangible assets

in question, namely, the shares of stock in the CFCs that

paid the Dividends.15

a. Did the Dividends arise from taxpayer’s “hold-

ing” of the CFC stock?

The court now examines whether the Dividends

arose from taxpayer’s “holding” of the intangible shares

of CFC stock.16 In Webster’s, the first listed definition of

the verb “hold” was synonymous with “possess”: “to retain

in one’s keeping : maintain possession of : not give up or

relinquish.” Webster’s at 1078 (unabridged ed 1993). The

many additional listed meanings generally referred to var-

ious kinds of control or power over an object, for example,

“to impose restraint upon or limit in motion or action,” “to

have or keep in the grasp,” and “to receive and retain.” Id.

Similarly, the first definition in Black’s was “[t]o possess

in virtue of a lawful title; as in the expression, common in

grants, ‘to have and to hold,’ or in that applied to notes, ‘the

owner and holder.’ ” Black’s at 730 (6th ed 1990). From these

definitions, the court concludes that the plain and technical

legal meaning of “arising from” the “holding” of intangible

assets was that the gross receipts at issue must originate

from the possession or legal ownership of the shares.17

15

Taxpayer argues that the legislature’s reference to “securities” indicates

an intention to limit the object of the exclusion to only those intangible assets

that fit within the definition of a security. See ORS 314.665(6)(a) (excluding gross

receipts arising from sale, exchange, redemption, or holding of intangible assets,

“including but not limited to securities” unless receipts are derived from taxpay-

er’s primary business activity). Consistent with Tektronix, the court rejects this

argument. Tektronix, 354 Or at 544 (“The additional phrase that follows the term

‘intangible assets’—’including but not limited to securities’—does not limit the

meaning of the term.”).

16

As of 1995, the plain meaning of “arise” was “to originate from a specified

source,” to “come into being,” to “come about,” or to “become apparent in such a

way as to demand attention.” Webster’s at 117 (unabridged ed 1993). The term

also had an established legal meaning, but that meaning was indistinguishable:

“To spring up, originate, to come into being or notice * * *.” Black’s at 108 (6th ed

1990). The court sees no need to discuss this term further.

17

The court also checked for a tax-law specific definition of “hold” or “hold-

ing,” but the only definition found was not relevant for this discussion. See West’s

Cite as 24 OTR 327 (2020) 351

The court turns to statutory context. Because ORS

314.665(6)(a) is part of Oregon’s statutory mechanism to

determine Oregon’s taxable share of the income of a multi-

state enterprise, the court considers how that mechanism

addressed dividends as of 1995. Under the constitutional

principles to which Oregon’s statutes sought to conform, it

was clear at that time that dividends might be either non-

apportionable nonbusiness income, or apportionable busi-

ness income. The United States Supreme Court had deter-

mined that dividends were apportionable in either of two

circumstances: (1) where the payor subsidiary was in the

same unitary business as the payee, as described in Mobil

Oil Corp. v. Commissioner, 445 US 425, 439-43, 100 S Ct

1223, 63 L Ed 2d 510 (1980); or (2) where the payor and payee

were not in the same unitary business, but the payee used

the payor’s stock in an “operational function” in the payee’s

business, as opposed to holding the stock for an “investment

function,”18 as described in Allied-Signal, 504 US at 787-88.

One well-recognized example of an “operational function”

was the generation of income that formed “part of the work-

ing capital of the [payee] corporation’s unitary business[.]”

Id. at 787 (interest earned on short-term deposits in a bank

is apportionable if the account is part of the company’s work-

ing capital).

In this case, taxpayer’s Oregon returns reported

the Dividends as apportionable business income.19 The

department agrees that the Dividends are apportionable

business income, but argues that the gross receipts consti-

tuting the Dividends are excluded from the apportionment

factor under ORS 314.665(6)(a). Evidence in the record to

date suggests that taxpayer as payee may be engaged in the

Tax Law Dictionary 412 (1995) (defining “holding” as the “conclusion of law

reached by a court as to the legal effect of a case.”).

18

If the payor and the payee were not engaged in the same unitary busi-

ness, and the stock served only an “investment function,” the dividends were not

apportionable at all, but were required to be allocated to a specific state. See ORS

314.625 and ORS 314.640 (dividends constituting nonapportionable, nonbusiness

income must be allocated to state of payee’s commercial domicile).

19

In this appeal, taxpayer asserts an alternative claim that the Subpart F

Income and the Dividends were nonbusiness income allocable to taxpayer’s com-

mercial domicile. That alternative claim is not at issue in these cross-motions,

and the court expresses no view on that issue.

352 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

same unitary business as the CFC payors (circumstance (1)

above).20 If that proves accurate, then at least for due pro-

cess purposes the form of the income as dividends becomes

largely irrelevant: “So long as dividends from subsidiaries

and affiliates reflect profits derived from a functionally inte-

grated enterprise, those dividends are income to the parent

earned in a unitary business.” Mobil Oil, 445 US at 440;

see also Jerome R. Hellerstein & Walter Hellerstein, State

Taxation ¶ 9.15[2] (Sept 2019) (“The rationale for holding

intangible income apportionable when the payor and payee

are engaged in a unitary business is that such income is, in

substance, the operating income of the unitary enterprise

even though it takes the form of intangible income paid by

the subsidiary to its parent.” (Internal footnote omitted.)).

Against this constitutional backdrop distinguish-

ing among dividends from a unitary payee, dividends from

stock serving an operational function such as cash manage-

ment, and dividends serving an investment function, the

20

Although taxpayer submitted scant evidence or argument addressing

the CFCs’ integration, or not, with taxpayer’s unitary business, the department

submitted as evidence taxpayer’s Form 10K for the fiscal year ended May 31,

2012 (the “2012 10K”). The 2012 10K purports to describe the activities of the

entire group of corporations consolidated under Generally Accepted Accounting

Principles (GAAP). GAAP at that time—unlike the federal consolidated income

tax rules—appears to have generally required controlled foreign corporations to

be included in consolidated financial reports. See Paul E. Holt, A case against the

consolidation of foreign subsidiaries’ and a United States parent’s financial state-

ments, Accounting Forum (Oct 20, 2003), available at https://www.tandfonline.

com/doi/full/10.1016/j.accfor.2003.10.001 (“[A]ccording to generally accepted

accounting principles (GAAP) in the United States, [multinational corporations]

which own more than 50% of the voting stock of foreign corporations are required

to prepare consolidated financial statements” unless “control is temporary” or

“control does not exist.”); see also Steven M. Bragg, GAAP 2012 Interpretation and

Application of Generally Accepted Accounting Principles 589-94 (2011) (stating

that business entities that possess a controlling financial interest in one or more

subsidiaries must, under GAAP, file consolidated financial statements that show

“all of its subsidiaries presented as a single economic entity,” and not discussing

any general exceptions that allow parent entities to exclude foreign subsidiaries

from consolidated financial returns on the basis that the subsidiary is a foreign

entity (emphasis added)). Most of the narrative of the 2012 10K is phrased in the

first-person plural (“we,” “our”), and it generally does not distinguish between

activities of domestic US or foreign affiliates. However, the few descriptions that

do so tend to confirm that the activities of foreign subsidiaries are included.

The department also submitted an April 2000 offering memorandum by Oracle

Corporation Japan describing that company’s “business, results of operation and

financial position” as “dependent on the policies, business, results of operation

and financial position of Oracle and on the performance, acceptance and compet-

itiveness of Oracle products in the United States and internationally.”

Cite as 24 OTR 327 (2020) 353

legislature enacted ORS 314.665(6)(a) in 1995 as a stand-

alone bill. See Or Laws 1995, ch 176, § 1. There is no other

text within the same bill to shed light on the meaning of

the terms at issue here. The court has found no references

within the income tax chapters of the ORS at the time that

deviate from the plain and technical meaning of “holding”

intangible assets as having to do with their possession.21

The court proceeds to the legislative history of the

1995 law, which the Oregon Supreme Court reviewed in

Tektronix. 354 Or at 544-45. In that case, the taxpayer had

sold all the assets of its printer division, including intangi-

bles that it referred to as goodwill, and the taxpayer sought

to exclude from the sales factor the gross receipts attribut-

able to the goodwill. Id. at 533-34. This court concluded that

the legislative history indicated an intent to limit the term

“intangible assets” as used in ORS 314.665(6)(a) solely to

“liquid assets” that taxpayers bought, held for short periods,

and sold as a way to manage cash flow, creating a high vol-

ume of gross receipts that tended to skew the apportionment

of income to the headquarters state. 20 OTR at 494-501.

Accordingly, this court held that ORS 314.665(6)(a) provided

no basis to exclude the taxpayer’s obviously illiquid good-

will from the sales factor. Id. at 495. Although the Supreme

Court agreed that the legislative history indicated an intent

to address the so-called “treasury function” problem, the

plain meaning of “intangible assets” encompassed a much

broader class of assets. 354 Or at 545. Nothing in the leg-

islative history showed any intent to limit the plain mean-

ing of “intangible assets.” Id. Therefore, the Supreme Court

rejected this court’s conclusion and held that the taxpayer’s

21

See, e.g., ORS 314.260 (1995) (income of a real estate mortgage investment

conduit or REMIC taxable “to the holders of the interests in the REMIC”); ORS

314.421 (1995) (income tax lien not valid as against any purchaser or “holder” of

a security interest, etc., until warrant recorded); ORS 314.718(3) (1995) (partner-

ship’s holding period of property contributed by a partner includes period during

which the property was “held” by that partner); ORS 316.683(4) (disallowing cer-

tain losses on sale or exchange of share “held by the taxpayer” for six months or

less). One use of the term “holding” suggests that the legislature distinguished

between possession of property and the other activities of managing, buying

or selling the property. ORS 316.871(3)(d) (for purposes of deferral program for

reinvestment of gain on sale of “small business corporation” securities, defining

“small business corporation” as, among other things, “not engaged primarily in

the business of managing, holding, buying or selling real property”).

354 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

goodwill was an “intangible asset” that was required to be

excluded from the sales factor.

In this case, there is no dispute that the CFC stock

constitutes “intangible assets” under ORS 314.665(6)(a).

The focus here is on taxpayer’s activity with respect to those

assets, specifically what the legislature meant by the “hold-

ing” of intangible assets.22 In his overview introducing the

bill to members of the House Revenue Committee, Steve

Bender of the Legislative Fiscal Office described the provi-

sion that became ORS 314.665(6)(a) as follows:

“What that means is if a business, for example, has a cash

account and they * * * maintain securities that earn inter-

est and they sell those and buy new ones in an investment

process, where that really isn’t their business, the ques-

tion is, well, every time they sell those securities is that

included in the sales factor or not. This would exclude those

types of sales.”

Tape recording, House Committee on State and School

Finance, HB 2203, Apr 25, 1995, Tape 86 Sides A & B at

03:17 (testimony of Steve Bender). Jim Manary, a represen-

tative for the department, testified:

“[I]f you have a manufacturing business that then has some

other assets—has an investment pool—where they turn

over stocks and other intangibles and earn money on it,

* * * that technically is a sale, a sale of stocks, you want to

count that kind of sale in with manufacturing sales, ’cause

the sale will be attributed to wherever that investment is.

It could be in New York that they’re doing the investment.

“* * * * *

“None of the states currently will include all that kind

of a turnover of intangibles in the sales factor because it

distorts where the regular business’s income is, and the

states are split. * * * Part of them do not include it, as you

can see from this, 17 of the states include the gain from

that. So, if you are turning over intangible stock and you

have gain from that, they will include that as a sale.”

Id. at 7:00 (testimony of Jim Manary).

22

In Tektronix the nature of the taxpayer’s activity under ORS 314.665

(6)(a) was clear: The gross receipts arose from the “sale” of intangible assets. The

taxpayer sold its printer division, including the goodwill, to another corporation

(Xerox Corporation). See 20 OTR at 470.

Cite as 24 OTR 327 (2020) 355

Before the Senate Revenue Committee, Steve Bender

testified:

“What this is dealing with is, is a situation where you don’t

have a financial company, * * * and they may hold a set of

financial assets. And they might sell these assets to pur-

chase new ones, and they may be short-term investments

or what have you. And they’re churning these assets and

selling them and buying new ones, and just using that as a

cash management mechanism. The question is, well, when

they sell these assets, should that be included in the appor-

tionment formula or not. This bill would exclude those.”

Tape recording, Senate Committee on Government Finance

and Tax Policy, HB 2203, May 5, 1995, Tape 113 Sides A & B

at 0:50 (testimony of Steve Bender). Jim Manary then testified:

“If in fact you do have a manufacturing operation, and

you’re trying to apportion the income among the states, do

you want to now also include investment income as a way of

doing that. We’ve had—there are some large corporations

that might, on their primary business have $10 billion in

sales a year, and they’ve got $100 billion in turnover in

their investment portfolio. So you can distort, and that’s—I

didn’t use the right numbers but that is an actual example

to give you an idea—because they will go into the securities

market each day and they might * * * buy $10 or $20 mil-

lion of stock and sell it that night. So they can turn over a

lot, and the problem is distorting where that income really

ought to be apportioned.”

Id. at 07:05 (testimony of Jim Manary).

From this legislative history, especially the refer-

ences to “turnover” and “churning,” the court concludes that

the legislature was focused on a passive “holding” of intan-

gibles as “investments” for short periods (often less than

a day) in anticipation of appreciation in value, or for the

generation of interest or dividends, and then for sale. The

examples discussed before the revenue committees involved

securities the taxpayer held as part of an investment “pool”

or “portfolio,” further implying that the taxpayer did not

control the issuers or manage the issuers’ business.

Given the constitutional context and this legislative

history, the court is concerned that describing taxpayer’s div-

idends from the CFCs as arising from the “holding” of the

356 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

CFC stock may be a seriously misleading understatement. To

be sure, the immediate origin of the dividends in taxpayer’s

hands was taxpayer’s ownership and possession of the shares

when the CFCs paid dividends, but taxpayer’s relationship

with the CFCs went far beyond that of passively “holding”

shares pooled in an investment portfolio with the securities

of other issuers, and cashing periodic interest and dividend

checks before selling off the shares. The record as developed

to date indicates that taxpayer owned 100 percent of the

stock of most of the CFCs and, as described above, may have

been engaged in the same unitary business with some or all

of them. If the facts do show that the CFCs are engaged with

taxpayer in a single, unitary business, then by definition

this would mean that taxpayer’s operations were thoroughly

integrated with those of the CFCs, based on some combina-

tion of centralized management, centralized administrative

services, and a flow of goods, capital resources, or services.

See Allied-Signal, 504 US at 781-82; see also ORS 317.705(3)

(defining “unitary business”). Taxpayer, as sole shareholder

and perhaps also as a principal supplier or customer, may

have been in a position to determine whether and when a

CFC should pay it a dividend. There is strong evidence that

taxpayer formed at least one of the CFCs (Oracle Japan), and

as sole or majority shareholder, taxpayer may well have been

empowered under local law to merge a CFC out of existence

or dissolve it. In contrast to Tektronix, where the action gener-

ating the receipts was no more and no less than the “sale” of

the intangible assets to a third party (Xerox) at arm’s length,

in this case the court declines to decide on summary judg-

ment that the Dividends arose from taxpayer’s “holding” of

the CFC shares, where uncontroverted evidence indicates

that taxpayer may have influenced or controlled the CFCs’

business, including their formation and continued existence.

The court will deny the department’s cross-motion

as to whether the Dividends arose from the “holding” of the

CFC stock.

b. Were the Dividends derived from taxpayer’s pri-

mary business activity?

Even if the Dividends can fairly be said to have

arisen from taxpayer’s holding of the CFC shares, the

Cite as 24 OTR 327 (2020) 357

Dividends still could not be excluded from the apportion-

ment factor under ORS 314.665(6)(a) if the Dividends were

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

314.665(6)(a).23 Taxpayer’s primary business activity was

developing and selling software and computer hardware,

and as discussed above there is evidence in this case that

the CFCs were part of that very business. By definition, the

Dividends were paid out of the CFCs’ “earnings and profits”

from their business; therefore, the evidence in the record to

date suggests that the requirements of the exception may

be satisfied. To be sure, the examples in the legislative his-

tory indicate that the legislature intended this exception

to prevent the exclusion of receipts where the taxpayer was

in the primary business of selling short-term securities or

passively holding intangibles that produce interest or div-

idends. However, the logic of Tektronix requires the court

to inquire whether the exception is limited to that circum-

stance. By its plain terms, it is not.

The department argues that to consider the primary

business activity of the CFCs for purposes of the exclusion

under ORS 314.665(6)(a) would necessarily require the court

to disregard the form of taxpayer’s business structure as a

group of separate, although wholly owned, corporations. The

court disagrees. Moline Properties and related cases require

the separate existence of a corporation to be respected if a

two-part test is satisfied: first, the corporation must have

been created for business purposes; second, the corporation

must actually conduct business activity in corporate form.24

Moline Properties, Inc. v. Comm’r, 319 US 436, 438-39, 63 S

Ct 1132, 87 L Ed 1499 (1943) (“Whether the purpose be to

gain an advantage under the law of the state of incorpora-

tion or to avoid or to comply with the demands of creditors or

to serve the creator’s personal or undisclosed convenience,

so long as that purpose is the equivalent of business activity

23

At the time ORS 314.665(6)(a) was enacted, the plain and technical defi-

nitions of “derived” were “formed or developed out of something else : derivative

: reflected or secondary in character : not original or primary,” Webster’s at 608

(unabridged ed 1993), and “received from a specified source,” Black’s at 444 (6th

ed 1990). As with the meaning of “arising from,” discussed above, the court sees

no need to discuss this term further.

24

The court does not address whether the two-part test is disjunctive or

conjunctive.

358 Oracle Corp. and Subsidiaries I v. Dept. of Rev.

or is followed by the carrying on of business by the corpo-

ration, the corporation remains a separate taxable entity.”

(Internal footnotes and citations omitted.)). The court sees

no reason why a corporation could not maintain its sepa-

rate existence under Moline Properties while complying with

the demands of a sole or controlling shareholder to pay div-

idends and to run its operations efficiently as part of a uni-

tary group. The question, in any event, is one of fact to be

determined, if raised, at trial.

The court will deny the department’s cross-motion

as to whether the Dividends were derived from taxpayer’s

primary business activity.

VI. CONCLUSIONS

For the foregoing reasons, the court concludes that

(1) ORS 317.267(3) does not require the unsubtracted amounts

of either taxpayer’s Subpart F Income or the Dividends to

be included in the apportionment formula; (2) ORS 314.665

(6)(a) does not apply to the unsubtracted portion of taxpayer’s

Subpart F Income because there are no “gross receipts” that

constitute or match to taxpayer’s Subpart F Income; and

(3) a genuine issue of material fact exists regarding whether

the Dividends arose from taxpayer’s “holding” of the CFC

stock and if so, whether under ORS 314.665(6)(a) the

Dividends were derived from taxpayer’s primary business

activity. Now, therefore,

IT IS ORDERED that Plaintiff’s Motion for Partial

Summary Judgment is denied; and

IT IS FURTHER ORDERED that Defendant’s

Cross-Motion for Partial Summary Judgment is denied.