Comcast Corp. II v. Dept. of Rev. (TC 5265)

250 November 25, 2020 No. 14

IN THE OREGON TAX COURT

REGULAR DIVISION

COMCAST CORPORATION

and Subsidiaries,

Plaintiff,

v.

DEPARTMENT OF REVENUE,

Defendant.

(TC 5265)

On cross-motions for summary judgment, the court considered multiple

issues in light of the Oregon Supreme Court’s decision that determined that

“gross receipts from broadcasting” includes all gross receipts from activities in

Plaintiff’s regular course of business. Comcast Corp. v. Dept. of Rev., 363 Or 537,

423 P3d 706 (2018). The first issue involved the Audience/Subscriber ratio defined

in ORS 314.684(4). The court, after considering the text, context, and legislative

history of the broadcaster apportionment statutes, determined that the “or” in

“audience or subscribers” in the ratio’s numerator included customers of any and

all of Plaintiff’s broadcasting activities, not merely customers of cable services.

The second issue dealt with whether Plaintiff’s sale of stock in three companies

was apportionable to Oregon. The court concluded that, under the test expressed

in Allied-Signal, Inc. v. Director, 504 US 768, 778, 112 S Ct 2251, 119 L Ed 2d 533

(1992), two of the stock sales were nonapportionable because the stock served an

investment, rather than operational, function in Plaintiff’s business. The third

stock sale was left for later determination after further briefing because Plaintiff

held a partnership interest in the entity. Another issue was whether Plaintiff

could contest the Department of Revenue’s adjustments to Plaintiff’s net operat-

ing loss carryforward deductions. The court concluded that there had not been a

determination on this issue in a prior proceeding; therefore, issue preclusion did

not apply. The final issue concerned whether Plaintiff was required under ORS

317.314(1) to add back to its taxable income the amount it paid in Texas “margins”

tax. The court found that the Texas tax was not a tax measured by “net income

or profits” because it substantially limited deductions for typical business costs.

Oral argument on cross-motions for partial summary

judgment was held October 2, 2019, in the courtroom of the

Oregon Tax Court, Salem.

Gregory A. Chaimov, Davis Wright Tremaine LLP,

Portland, filed the motion and Daniel H. Schlueter,

Eversheds Sutherland (US) LLP, Washington D.C., 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.

Cite as 24 OTR 250 (2020) 251

Decision rendered November 25, 2020.

ROBERT T. MANICKE, Judge.

I. INTRODUCTION

In these consolidated cases the parties present mul-

tiple substantive and procedural issues for summary judg-

ment following the Oregon Supreme Court’s resolution of

one issue in Comcast Corp. v. Dept. of Rev., 363 Or 537, 423

P3d 706 (2018). For reasons discussed below, the court first

decides two motions for partial summary judgment filed by

Plaintiff (taxpayer) relating, respectively, to the “audience/

subscriber ratio” component of the special sales factor for

interstate broadcasters, and the classification of three sets

of income items as either apportionable or nonapportion-

able. The court then decides the issues, to the extent not

otherwise addressed, presented in a motion for summary

judgment filed by Defendant Department of Revenue (the

department). Those remaining issues relate to the composi-

tion of taxpayer’s unitary group, the apportionability of cer-

tain income items, a claim for inclusion of certain receipts

in the denominator of taxpayer’s sales factor, taxpayer’s

carryforward deductions for net operating losses incurred

in earlier years, the addback of taxes paid to other states,

and computational issues relating to the Oregon Business

Energy Tax Credit and certain penalties. The court begins

with relevant procedural history of these cases.

A. Procedural Background

1. The 2007-09 Case—No. TC 5265

The Multistate Tax Commission (MTC) audited

taxpayer for tax years 2007 to 2009 and, in April 2012, rec-

ommended various adjustments to taxpayer’s Oregon corpo-

ration excise tax returns, the most significant of which were

(1) an increase to taxpayer’s Oregon apportionment percent-

age; and (2) a reclassification of certain items of taxpayer’s

income from nonbusiness to business. See ORS 305.655,

Art VIII (allowing MTC member states to participate in

interstate audits); ORS 305.675 (electing to participate).1

1

Citations to the Oregon Revised Statutes (ORS) are to the 2007 edition

unless otherwise indicated.

252 Comcast Corp. II v. Dept. of Rev. (TC 5265)

In mid-2012, the department issued notices of deficiency

based on the MTC’s determinations, resulting in an assess-

ment of additional Oregon tax in the amount of $14,367,792.

Taxpayer appealed in the Magistrate Division in 2014, and

on November 23, 2015, the court specially designated the

case for hearing in the Regular Division as case TC 5265

(the “2007-09 Case”).

In 2016, the Regular Division issued a limited judg-

ment in the 2007-09 Case on a threshold issue involving

apportionment of taxpayer’s taxable income as an inter-

state broadcaster under ORS 314.680 to 314.690, which

the Supreme Court affirmed. Comcast, 363 Or 537, aff’g 22

OTR 295 (2016). The Supreme Court decided that, except

for receipts from sales of real or tangible personal property,

all gross receipts from transactions and activities in the

regular course of taxpayer’s trade or business—not solely

receipts from “broadcasting” activities—constitute “gross

receipts from broadcasting” and are included in the numer-

ator of taxpayer’s sales factor in the ratio that taxpayer’s

Oregon audience bears to its total audience. Comcast, 363

Or at 551.

2. The 2010-12 Case—No. TC 5346

Meanwhile, starting in 2014, the department con-

ducted an audit of taxpayer for tax years 2010 to 2012

and made similar adjustments for those years resulting in

notices of deficiency, dated July 24, 2015, assessing addi-

tional Oregon tax of $23,825,934. As in the 2007-09 Case,

the two most significant issues were an increase to taxpay-

er’s apportionment percentage and reclassification of certain

income from nonbusiness to business. Taxpayer appealed in

the Magistrate Division in 2017 (the “2010-12 Case”), and

the magistrate granted taxpayer’s unopposed motion to hold

the 2010-12 Case in abeyance.

3. Consolidation

On October 2, 2018, the Supreme Court issued its

appellate judgment in the 2007-09 Case. In October and

November 2018, the parties resumed proceedings in the

2007-09 Case as to the remaining issues not covered by

Cite as 24 OTR 250 (2020) 253

the limited judgment. Upon the parties’ joint motion, the

Regular Division also reactivated the 2010-12 Case, spe-

cially designated it for hearing in the Regular Division as

case TC 5346, and consolidated it with the 2007-09 Case.2

4. Parties’ substantive motions; table of legal issues

The following table sets forth the issues, in the order

covered below, identifying which party has moved, and with

cross-reference to the claims identified in each of taxpayer’s

complaints.3

Table of Legal Issues

Claim

Issue No. in Which Party’s Motion

Complaint Applies

2007-09

2010 Tax- Depart-

-12 payer ment

A Audience/ VII VI Plaintiff’s Motion None

Subscriber for Partial

Ratio Summary

Judgment

(Apportionment –

Audience Factor

Issue)

B Apportionabil- II, III, I, II, Plaintiff’s Motion Defendant’s

ity of Dividends IV III for Partial Motion for

and Gain from Summary Summary

Vodafone, Time Judgment Judgment

Warner and (Business / (“Def MSJ”),

A&E Nonbusiness §§ III.B. and

Income Issue) III.C

2

On November 17, 2020, the court granted the parties’ joint petition to spe-

cially designate taxpayer’s appeal for tax years 2013, 2014, and 2015 for hearing

in this division (the “2013-15 Case”). The parties represented that the claims in

the 2013-15 Case are substantially similar to those in the 2007-09 and 2010-12

Cases, and that the court’s decision in those Cases is likely to resolve or sub-

stantially narrow the issues in dispute in the 2013-15 Case. On the parties’ joint

motion, the court ordered the 2013-15 Case held in abeyance pending the resolu-

tion of the 2007-09 and 2010-12 Cases. To date, the 2013-15 Case is not consoli-

dated with the 2007-09 and 2010-12 Cases.

3

A similar table, shown in order of taxpayer’s claims, appears on page 2 of

Plaintiff’s Response to Defendant’s Motion for Summary Judgment.

254 Comcast Corp. II v. Dept. of Rev. (TC 5265)

C Composition I None Def MSJ,

of Unitary § III.A.

Group (Comcast

MO Financial

Services, Inc.)

D Apportionabil- II, III, I, II, None Def MSJ,

ity of Other IV III §§ III.B.,

Income Items III.C, III.D.

E Sales Factor V IV None Def MSJ,

Relief § III.E.

F Net Operating VIII VII None Def MSJ,

Loss § III.F.

Carryforward

Deductions

G Deduction/ VIII None Def MSJ,

Addback of Tax § III.G.

Paid to Other

States

H Business IX None Def MSJ,

Energy Tax § III.H.

Credit

I Penalties IX X None Def MSJ,

§ III.I.

— Costs of VI V Decided in Supreme Court Appeal

Performance/

Definition

of “Gross

Receipts from

Broadcasting”

The department moved for summary judgment on

August 1, 2019. Its motion covers each of taxpayer’s claims

except taxpayer’s audience or subscriber ratio claim. On the

same day, taxpayer filed two cross-motions for partial sum-

mary judgment. Taxpayer’s first motion addresses the audi-

ence or subscriber ratio, which is used in determining the

percentage of taxpayer’s taxable income that is apportioned

to Oregon under the statutory regime for interstate broad-

casters in ORS 314.680 to 314.690 as recently construed by

the Supreme Court. The department opposes taxpayer’s first

cross-motion but, as noted, has not filed its own motion on the

issue. In addition to its substantive objections, the depart-

ment urges the court to deny the motion as to tax years 2007

to 2009 on the ground that taxpayer’s asserted computa-

tion method does not relate to any claim in taxpayer’s com-

plaint for those tax years. Taxpayer’s second cross-motion

Cite as 24 OTR 250 (2020) 255

addresses the department’s characterization of certain gain

and dividends as apportionable business income. Together,

taxpayer’s two cross-motions address the great majority of

the dollar amount of the tax deficiency the department has

assessed. Taxpayer opposes the department’s motion as to

all remaining issues.

5. Taxpayer’s motion to strike

The department’s motion for summary judgment

includes a 42-page section entitled “Facts,” of which approxi-

mately 35 pages are what the department describes as “facts

* * * taken from the MTC Audit Report[.]”4 This content is a

verbatim excerpt of the MTC auditor’s “findings and conclu-

sions” upon the completion of his audit for tax years 2007

through 2009. It describes transactions and other events in

taxpayer’s history, interspersed with conclusions about their

legal significance. A substantial part of the content consists

of unattributed quotations with no attempt to identify the

source. Although the department contends that the “auditor

relies heavily on excerpts from plaintiff’s own 10-Ks,” there

is no way to tell to what extent the auditor relied on any

source. The court finds it impossible to separate purported

facts from the subjective impressions, conclusions, or infer-

ences formed by the auditor or persons to whom the auditor

may have been referring. Ignoring all evidentiary concerns,

the court finds the MTC Excerpt devoid of reliable content

or persuasive value. Taxpayer objects to the department’s

characterization of the MTC Excerpt as factual, asserts that

it is inadmissible hearsay incapable of supporting summary

judgment, and asks the court to “strike” the MTC Excerpt.5

The court agrees with taxpayer that the MTC Excerpt is

inadmissible hearsay. OEC 801. The MTC Excerpt therefore

4

The court uses the term “MTC Excerpt” to denote the text at page 4, line 14,

through page 39, line 22, in Defendant’s Motion for Summary Judgment, as well

as the text at page 1, line 16, through page 37, line 3, in the Declaration of Paul

G. Mond dated September 12, 2019.

5

The department originally simply reprinted the MTC Excerpt in the facts

section of its motion. After taxpayer objected under TCR 47, the department filed

a declaration of the MTC auditor that reprints the same excerpt. However, the

declaration makes no effort to address the deficiencies in the substantive con-

tent; the auditor simply authenticates the excerpt as “an excerpt from my MTC

Audit Report findings and conclusions from my MTC Audit Report.” The auditor’s

authentication of the MTC Excerpt does not make it admissible.

256 Comcast Corp. II v. Dept. of Rev. (TC 5265)

does not support the department’s motion. See Tax Court

Rule (TCR) 47 D (“declarations must be made on personal

knowledge, must set forth such facts as would be admissi-

ble in evidence, and must show affirmatively that the * * *

declarant is competent to testify to the matters stated

therein”). The court regards the MTC Excerpt as nothing

more than a statement of the department’s litigation posi-

tion in this case.

In response to taxpayer’s motion to strike, the court

will decline to admit the MTC Excerpt into evidence.6

B. Standard of Review

The court grants a motion for summary judgment

only if “the pleadings * * * declarations, and admissions

on file show that there is no genuine issue as to any mate-

rial fact and that the moving party is entitled to prevail

as a matter of law.” TCR 47 C. See United Streetcar, LLC v.

Dept. of Rev., 23 OTR 418, 426 (2019) (slip op at 10-11) (cit-

ing Two Two v. Fujitec America, Inc., 355 Or 319, 331, 325

P3d 707 (2014)). The party moving for summary judgment

has the burden of demonstrating that there are no material

issues of fact and that it is entitled to judgment as a matter

of law. McKee v. Gilbert, 62 Or App 310, 321, 661 P2d 97

(1983). The court must view the evidence and all reason-

able inferences it may support in the light most favorable to

the nonmoving party. The nonmoving party has the burden

of producing evidence, including by affidavit or declaration,

on any issue raised in the motions as to which the moving

party would have the burden of persuasion at trial. See,

e.g., Hagler v. Coastal Farm Holdings, Inc., 354 Or 132, 142,

144-45, 309 P3d 1073 (2013) (nonmoving party—an injured

customer—had the burden on summary judgment to pro-

duce evidence sufficient to create a genuine issue of material

fact that the moving party—a business owner—“knew or

should have known” that the manner in which it shelved

certain merchandise posed a danger to customers) (citation

omitted).

6

The court observes that, in its briefing filed after its original motion, the

department bases its arguments largely on taxpayer’s public filings with the

Securities and Exchange Commission, rather than on the MTC Excerpt.

Cite as 24 OTR 250 (2020) 257

C. Legal Background Related to Apportionment for Inter-

state Broadcasters

Each of the first five issues listed above (Issues A

through E) relates in some way to the concept of “apportion-

ment,” which in this context refers to a formulaic approach to

determine the share of income of a multistate taxpayer that

any one state may tax under the Due Process and Commerce

Clauses of the United States Constitution. Apportionment

may be contrasted with “allocation,” which generally refers

to the assignment of a specific item of income or loss to a

particular state. As the United States Supreme Court has

explained:

“Because of the complications and uncertainties in allo-

cating the income of multistate businesses to the several

States, we permit States to tax a corporation on an appor-

tionable share of the multistate business carried on in part

in the taxing State. That is the unitary business principle.”

Allied-Signal, Inc. v. Director, 504 US 768, 778, 112 S Ct

2251, 119 L Ed 2d 533 (1992) (emphases added); see Tektronix,

Inc. v. Dept. of Rev., 354 Or 531, 536-37, 316 P3d 276 (2013)

(explaining concepts of allocation and apportionment).

During the 1960s, many states, including Oregon,

adopted a uniform law governing the apportionment and

allocation of income, known as the Uniform Division of

Income for Tax Purposes Act (UDITPA).7 One function of

UDITPA is to define what income must be apportioned or

allocated. UDITPA applies the label “business income” to

refer to income the statute treats as apportionable. See ORS

314.610(1) (defining business income as “income arising from

transactions and activity in the regular course of the taxpay-

er′s trade or business and includes income from tangible and

intangible property if the acquisition, the management, use

or rental, and the disposition of the property constitute inte-

gral parts of the taxpayer′s regular trade or business oper-

ations”); ORS 314.647 - 314.670 (prescribing apportionment

method for business income). The UDITPA label “nonbusi-

ness income” refers to a collection of specific types of income

7

Oregon adopted UDITPA in 1965. See Or Laws 1965, ch 152, codified at

ORS 314.605 - 314.670; see generally Health Net, Inc. v. Dept. of Rev., 362 Or 700,

704-05, 415 P3d 1034 (2018).

258 Comcast Corp. II v. Dept. of Rev. (TC 5265)

items that must be allocated to a particular state. See ORS

314.610(5) (“ ‘Nonbusiness income’ means all income other

than business income.”); ORS 314.625 - 314.645 (identifying

state to which various items of nonbusiness income must be

allocated). The United States Supreme Court has stated: “In

the abstract, [the UDITPA] definitions may be quite com-

patible with the unitary business principle.” Allied-Signal,

504 US at 786. The Court, however, has not adopted the

UDITPA definitions as coextensive with the constitutional

test in all respects; accordingly, this court generally uses

the terms “apportionable” and “allocable” in discussing the

parties’ constitutional arguments and the terms “business

income” and “nonbusiness income” in discussing arguments

under UDITPA.

Another main function of UDITPA is to prescribe

the formula for apportioning apportionable income. The

original UDITPA formula relied on the relative value of the

taxpayer’s in-state property, payroll, and sales, compared to

property, payroll, and sales everywhere. Since 2005, how-

ever, Oregon’s apportionment formula simply uses sales

(gross receipts) as its sole “factor.” See Or Laws 2005, ch 832,

§ 49. The factor is a fraction, often expressed as a percent-

age. For the Years at Issue, apportionable “business” income

is multiplied by the fraction consisting of taxpayer’s sales

in Oregon divided by its sales everywhere. ORS 314.650(1)

(“All business income shall be apportioned to this state by

multiplying the income by the sales factor.”); ORS 314.665(1)

(“[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.”).

For an interstate broadcaster, ORS 314.684 pre-

scribes a unique and somewhat more complex method to com-

pute the sales factor.8 Under subsection (2) of ORS 314.684,

the denominator of the sales is the total gross receipts from

transactions and activities in the regular course of the

broadcaster’s trade or business. Under subsection (3), the

8

Apart from the sales factor, the other provisions of Oregon’s UDITPA gen-

erally apply to interstate broadcasters in the same manner as to other taxpayers.

See ORS 314.682(2).

Cite as 24 OTR 250 (2020) 259

numerator of the sales factor includes all gross receipts attrib-

utable to Oregon under regular UDITPA provisions, except

that “gross receipts from broadcasting” must be included in

the numerator of the sales factor as specified in subsection (4).

Subsection (4) introduces a second fraction that resides

within the numerator of the sales factor. To calculate the

sales factor numerator, the broadcaster is required to mul-

tiply gross receipts from broadcasting by a fraction, which

the court refers to as the “Audience/Subscriber Ratio.” The

numerator of the Audience/Subscriber Ratio is the interstate

broadcaster’s “audience or subscribers located in this state,”

and the denominator is the “total audience and subscribers

located both within and without this state.” ORS 314.684(4).

The complete sales factor for an interstate broadcaster can

be expressed as follows, with the Audience/Subscriber Ratio

shown in shading:

The Supreme Court proceedings in the 2007-09

Case resolved the question of which receipts are considered

“gross receipts from broadcasting”: all receipts from trans-

actions and activities in the regular course of taxpayer’s

trade or business, except those from sales of real or tangible

personal property. The parties now disagree about how to

determine the Audience/Subscriber Ratio.

260 Comcast Corp. II v. Dept. of Rev. (TC 5265)

The statute defining “interstate broadcaster” states:

“The audience or subscribers ratio shall be determined

by rule of the Department of Revenue.” ORS 314.680(3).

The department has adopted such a rule,9 and each party

9

At all relevant times, OAR 150-314-0465 (which until 2016 was numbered

as OAR 150-314.684(4)) provided:

“(1) In general, if a taxpayer broadcasts to subscribers or to an audi-

ence that is located both within and without this state and the broadcaster

is taxable in another state under the provisions of ORS 314.620, then the

interstate broadcaster is required to use an audience factor to determine the

amount of gross receipts from broadcasting attributable to this state.

“(2) The audience factor for television, radio, or network programming

shall be determined by the ratio that the taxpayer’s in-state viewing or listen-

ing audience bears to its total United States viewing or listening audience.

In the case of television, the audience factor shall be determined by refer-

ence to the rating statistics as reflected in such sources as Arbitron, Nielsen

or other comparable resources or by the average circulation statistics pub-

lished annually in the Television and Cable Factbook, ‘Stations Volume’ by

Television Digest, Inc., Washington, D.C., provided that the source selected

is consistently used from year to year for such purpose. In the case of radio,

the audience factor shall be determined by reference to rating statistics as

reflected in such sources as Arbitron, Birch/Scarborough Research, or other

comparable resources, provided that the source selected is consistently used

from year to year for such purpose.

“(3) If none of the forgoing sources are available, or if available, none is

in form or content sufficient for such purposes, then the audience factor shall

be determined by the ratio that the population of the broadcast area located

within this state bears to the population of the broadcast area in all states.

“(4) Gross receipts from live telecasts and films in release to or by a cable

television system shall be attributed to this state in the ratio (hereafter

‘audience factor’) that the number of subscribers located in this state for such

cable television system bears to the total number of subscribers of such cable

television system in the United States. If the number of subscribers cannot

be accurately determined from the records maintained by the taxpayer, the

audience factor ratio shall be determined on the basis of the applicable year’s

subscription statistics published in Cable Vision, International Thompson

Communications, Inc., Denver, Colorado, if available, or, if not available, by

other published market surveys.

“(5) If none of the foregoing resources are available, or, if available, none

is in form or content sufficient for such purposes, then the audience factor

shall be determined by the ratio that the population of the area served by the

cable system service located within this state bears to the population of the

area served by the cable system in all states in which the cable system has

subscribers.

“(6) To the extent that the gross receipts from such live television broad-

casting, film, or radio programming, as determined pursuant to paragraphs

(2) through (5), include receipts derived from broadcasts to audiences located

outside the United States (‘foreign-based receipts’), the total gross receipts

against which the audience factor shall be applied shall be modified so that

such foreign-based receipts are not used to affect the amount of receipts

that are to be apportioned to the state. Such modification shall consist of

Cite as 24 OTR 250 (2020) 261

asserts that its method of determining the Audience/

Subscriber Ratio complies with the rule and that the other

party’s method does not. However, the basic elements of the

Audience/Subscriber Ratio are stated in ORS 314.684(4),

which provides:

“Gross receipts from broadcasting of an interstate

broadcaster which engages in income-producing activity in

this state shall be included in the numerator of the sales

factor in the ratio that the interstate broadcaster’s audi-

ence or subscribers located in this state bears to its total

audience and subscribers located both within and without

this state.”

Both parties base their arguments on the underly-

ing statutes, principally ORS 314.684(4), and neither party

asserts that the rulemaking authority in ORS 314.680(3)

authorizes the department to promulgate a rule contrary to

the terms of ORS 314.684(4). The court, therefore, analyzes

the Audience/Subscriber Ratio issue as a matter of interpre-

tation of the underlying statutes before turning to analysis

under the department’s rule.

II. ISSUES

A. Taxpayer’s Motion: Audience/Subscriber Ratio Under

Interstate Broadcaster Apportionment Law

1. Facts (Issue A)

Unless otherwise indicated, the following uncon-

tested facts are recited in taxpayer’s brief, with citations to

deducting from total receipts, prior to the application thereto of the audience

factor, that amount of receipts derived from broadcasts to audiences located

outside the United States.

“Example: XYZ Television Network Co. has gross receipts from all

broadcasting of films of $1 billion of which a total of $200,000,000 was

derived from advertising receipts and license fees attributable to releases

of its films in foreign television markets and $800,000,000 attributable

to the United States market. Assume that the foreign countries into

which its programming has been telecast or sold or licensed for telecast

would have jurisdiction to impose their income tax upon XYZ Television

Network Co., then its in-state gross receipts attributable to its telecasting

activity would be determined as follows: $1,000,000,000 – $200,000,000

($800,000,000) = (audience factor).

“(7) Receipts from the sale, rental, licensing or other disposition of audio

or video cassettes, discs, or similar medium intended for home viewing or lis-

tening shall be included in the sales factor as provided in OAR 150-314-0429

and 150-314-0431.”

262 Comcast Corp. II v. Dept. of Rev. (TC 5265)

underlying declarations and documents. Tables in taxpay-

er’s brief show its computations.

During all of the tax years at issue, taxpayer pro-

vided cable television, internet access, and telephone ser-

vice. It also operated a group of national television net-

works and regional sports and news networks, including

E! Entertainment Television, The Golf Channel, and others.

Taxpayer also owned and operated a professional hockey

team (the Philadelphia Flyers) and a multipurpose arena

(the Wells Fargo Center in Philadelphia).

In 2011, the year before the MTC completed its

audit of tax years 2007-09, taxpayer closed a transaction

with the General Electric Company (GE) that resulted in

taxpayer acquiring a 51 percent controlling interest in

NBCUniversal, LLC (NBCU).10 The acquisition expanded

the number of television networks that taxpayer owned

and operated to 29, adding the NBC Television Network,

the USA Network, CNBC, and others. The acquisition

of NBCU also gave taxpayer ownership of a movie studio

(Universal Pictures), and NBCUniversal-branded theme

parks in Florida and California. For financial reporting

purposes, taxpayer’s Annual Report on Form 10-K for 2012

organized taxpayer’s business into five reportable business

segments: (1) cable communications; (2) cable networks;

(3) broadcast television; (4) filmed entertainment; and

(5) theme parks.11

10

A more complete description of the transaction appears below in the dis-

cussion of Issue B, the Apportionability of Dividends and Gain from Vodafone,

Time Warner, and A&E.

11

Taxpayer’s 2012 Annual Report on Form 10-K describes the business seg-

ments as follows:

“Cable Communications: Consists of the operations of Comcast Cable,

which is the nation’s largest provider of video, high-speed Internet and voice

services (‘cable services’) to residential customers under the XFINITY brand,

and we also provide these services to businesses.

“Cable Networks: Consists primarily of our national cable networks, our

regional sports and news networks, our international cable networks, our

cable television production studio, and our related digital media properties.

“Broadcast Television: Consists primarily of the NBC and Telemundo

broadcast networks, our NBC and Telemundo owned local broadcast televi-

sion stations, our broadcast television production operations, and our related

digital media properties.

Cite as 24 OTR 250 (2020) 263

Taxpayer seeks to compute its sales factor using

data from two of its business segments: broadcast televi-

sion and cable networks, and taxpayer includes in its brief-

ing and declarations further detail about the origin of its

receipts from those segments.

Taxpayer’s Television Networks. During all of the

years at issue, taxpayer’s television networks were trans-

mitted to audiences in three primary ways: (i) via over-

the-air broadcasts (in the case of the NBC television net-

work); (ii) via cable television to persons who subscribed

to taxpayer’s cable systems as well as to subscribers to

other cable systems such as Charter Communications; and

(iii) via direct broadcast satellite (DBS) to subscribers to

those systems, including DISH Network and DirecTV.

In general, taxpayer’s cable systems accounted for only a

minority of the networks’ total subscribers. For example,

during 2007, taxpayer’s most widely distributed network

was E! Entertainment Television (E!). It had 82,175,289

total subscribers, of which 21,174,734 (i.e., 25.8 percent) were

taxpayer cable subscribers.

Taxpayer’s television networks generated reve-

nues from two primary sources—license fees and advertis-

ing. Both of these revenue streams were dependent on the

size of each network’s audience. License fees were paid on

a per-subscriber basis (e.g., $0.25 per subscriber, $0.50 per

subscriber, etc.) by the cable and DBS companies that dis-

tributed those networks. The per-subscriber rates varied

depending on the network, its popularity, and other factors.

In the case of advertising revenues, the amounts that adver-

tisers were willing to pay depended in part on the number

of subscribers who received the network. Because payments

to taxpayer depended on the number of network subscribers,

taxpayer kept detailed records of the number of subscribers

for each of its owned networks.

“Filmed Entertainment: Consists primarily of the operations of

Universal Pictures, which produces, acquires, markets and distributes

filmed entertainment worldwide.

“Theme Parks: Consists primarily of our Universal theme parks in

Orlando and Hollywood.”

264 Comcast Corp. II v. Dept. of Rev. (TC 5265)

Beginning in 2011, with taxpayer’s acquisition of

the NBCUniversal television networks, the NBC television

network became taxpayer’s most widely distributed network.

The NBC television network is available to virtually every

television household in the United States. Consequently,

unlike the years 2007 to 2010, beginning in 2011 and 2012,

there was complete overlap between taxpayer’s most widely

distributed network (NBC) and taxpayer’s other networks.

There were no households or subscribers that received one

of taxpayer’s other networks but did not receive NBC.

Taxpayer’s Cable Television Service. In addition to

operating the television networks listed above, taxpayer

also provided cable television service to subscribers in

Oregon and other states. During the years 2007 through

2010, the vast majority of taxpayer’s cable subscribers also

subscribed to one or more of taxpayer’s television networks.

During the years 2007 through 2010, however, taxpayer’s

most basic level of cable service (Basic) did not include any of

taxpayer’s owned and operated networks—for example, E!,

The Golf Channel, etc. Therefore, during those years, tax-

payer’s cable television customers who only received Basic

cable were not subscribers to any of taxpayer’s television

networks.

Beginning in 2011, with taxpayer’s acquisition of

the NBCUniversal networks, there were no longer any sub-

scribers to taxpayer’s cable television service who failed to

receive at least one taxpayer network. This is because the

NBC television network is included in taxpayer’s Basic level

of service. Thus, beginning in 2011, all of taxpayer’s cable

television subscribers also subscribed to at least one of its

networks.

2. Issue (A)

Does taxpayer’s method to compute the Audience/

Subscriber Ratio comply with ORS 314.684?

3. Analysis (Issue A)

The Audience/Subscriber Ratio divides the Oregon

“audience or subscribers” by the total “audience and sub-

scribers.” ORS 314.684(4). The parties do not disagree about

whether particular audience members or subscribers are

Cite as 24 OTR 250 (2020) 265

located in Oregon. They disagree about how to account for

persons who may be part of the “audience” of programming,

either because they “subscribe” to a particular “network” of

television programming that they receive by cable or satel-

lite, or because they receive that programming over the air;

or who “subscribe” to taxpayer’s cable television service; or

who act in some combination of these roles.

Taxpayer’s premise is that the ratio by which it

must multiply its “gross receipts from broadcasting” is

required to consist of a numerator comprising its Oregon

audience and subscribers for all of taxpayer’s activities con-

stituting “broadcasting,” and a denominator comprising its

audience and subscribers within and without Oregon for all

of taxpayer’s activities constituting broadcasting. Taxpayer

has identified two activities that constitute broadcasting:

operating television networks and providing cable television

service. To determine its audience for television networks

broadcast over the air (NBC), taxpayer has used Nielsen

data. In the case of taxpayer’s other television networks

(E!, CNBC, the USA Network, etc.) broadcast over taxpayer’s

cable service, or taxpayer’s television networks broadcast

over cable or satellite services provided by others, taxpayer

has determined the relative number of “subscribers” to each

network. After eliminating duplicates among persons who

are in the audience of, or are subscribers to, multiple net-

works, taxpayer uses the sum of unique Oregon audience

members and subscribers in the numerator, and the sum

of unique nationwide audience members and subscribers in

the denominator.

More specifically, taxpayer has determined the

numerator of its Audience/Subscriber Ratio as the sum of

(i) the Oregon audience and subscribers who received one or

more of taxpayer’s television networks by whatever means;

and (ii) the Oregon audience and subscribers who received

taxpayer’s cable service but did not receive any of taxpayer’s

networks.12 In determining the first number (the audience

and subscribers that received one or more of taxpayer’s tele-

vision networks), taxpayer used two sets of data: (a) for the

12

Taxpayer’s denominator is the same, except that it includes the total audi-

ence and subscribers within and without Oregon.

266 Comcast Corp. II v. Dept. of Rev. (TC 5265)

over-the-air network (NBC), annual reports prepared by the

Nielsen Company; and (b) for all other networks, the relative

number of subscribers.13

In tallying the numbers above, taxpayer sought

to count each audience member or subscriber only once, by

using a “build-up” approach. Under the build-up approach,

taxpayer started with (1) the audience (or subscribers) of its

most widely distributed broadcasting service (E! in 2007 to

2009; NBC in 2010 to 2012); then (2) added the subscribers

to taxpayer’s other networks who were not already included

in (1); and finally (3) added the subscribers to taxpayer’s

cable service not already included in (1) or (2). Taxpayer

argued that, under this method (including the arithmeti-

cally equivalent “reverse build-up” method), no household

or subscriber is counted twice. Taxpayer also presented

computations indicating that a methodology that summed

individual audiences or subscribers for its various networks

and its cable service would yield very similar results. The

department disagrees with taxpayer’s computation method

as discussed below, but the department does not dispute the

accuracy of the data on which taxpayer relies.

The department’s main objection is premised on

characterizing taxpayer as a “cable company.” In its briefing,

the department asserts that “Comcast cannot dispute that

it is a cable company.”14 At oral argument, the department

took a slightly different approach, asserting that taxpayer

was “primarily engaged in subscription activity.” (Emphasis

added.) Based on this premise, the department argues that

taxpayer was required to use only the number of subscrib-

ers to its own cable services to generate the numerator and

denominator of its ratio, without regard to any indicators of

the audience for taxpayer’s other activities that also consti-

tute “broadcasting.”

13

DBS “subscriber” numbers actually are estimates based on Nielsen data

because the DBS companies do not release actual subscriber numbers by state.

14

The department goes on to state, without citation: “That determination

was made by this court in deciding that Comcast was an interstate broadcaster.”

However, the department fails to explain what it means by the term “cable com-

pany” or why such a finding would have been necessary at any prior stage of this

litigation. This court and the Supreme Court at times referred to taxpayer as a

cable company, but this court has found no “determination” on that point.

Cite as 24 OTR 250 (2020) 267

As a factual matter, the department does not dis-

pute that, even during tax years 2007 through 2009 when

taxpayer derived the overwhelming portion of its revenue

from its “cable” business segment,15 taxpayer also oper-

ated television networks that supplied content (the E! net-

work, The Golf Channel, regional sports programming,

etc.), both over taxpayer’s own cable system and by license

to other cable companies and satellite broadcasting compa-

nies. Nor does the department dispute that the proportion

of taxpayer’s activities devoted to operating television net-

works increased dramatically with the acquisition of NBCU,

accounting for approximately 46 percent of taxpayer’s reve-

nue in 2012.16

As a legal matter, the department acknowledges

that taxpayer’s operating of television networks constituted

broadcasting. (Department admits that “Comcast’s televi-

sion network operations constituted ‘broadcasting’ within

the meaning of ORS 314.680(1) * * *.”) The statutory basis

for the department’s position that taxpayer’s Audience/

Subscriber Ratio must be limited to its subscribers to

cable services seems to derive from the word “or” in ORS

314.684(4). The statute provides:17

“Gross receipts from broadcasting of an interstate

broadcaster which engages in income-producing activity in

this state shall be included in the numerator of the sales

factor in the ratio that the interstate broadcaster’s audi-

ence or subscribers located in this state bears to its total

audience and subscribers located both within and without

this state.”

15

Taxpayer’s 2007 Form 10-K provides: “Our Cable segment, which gener-

ates approximately 95% of our consolidated revenues, manages and operates our

cable systems, including video, high-speed Internet and phone services (‘cable

services’), as well as our regional sports and news networks. Our Programming

segment consists primarily of our consolidated national programming networks,

including E!, The Golf Channel, VERSUS, G4 and Style.” (Uppercase in original.)

16

The department does assert at one point that a genuine issue of material

fact exists because taxpayer “refused to provide” its actual subscriber numbers

for the years 2010 to 2012. Taxpayer, however, responded that it had provided the

requested data and cited its responsive document by date and Bates number. The

department did not respond to this point, and the court considers it resolved in

favor of taxpayer.

17

The department’s brief discusses only its arguments based on legislative

history. The department advanced its text-based argument focusing on the word

“or” for the first time at oral argument.

268 Comcast Corp. II v. Dept. of Rev. (TC 5265)

ORS 314.684(4) (emphasis added). The court understands

the department to argue that the reference to audience

“or” subscribers indicates that the legislature intended to

require a “cable company” (a term not used in the statute)

to determine its ratio solely based on the relative number of

its cable service subscribers in Oregon, even if the company

also broadcasts over the air, by satellite, and by licensing its

programming to other cable service providers.

The court reviews the department’s argument apply-

ing the framework of State v. Gaines, 346 Or 160, 171-72,

206 P3d 1042 (2009). The department has offered no discus-

sion of statutory text or context, but it seems to assert that

“or” is restricted to its disjunctive meaning: A broadcaster

must use a ratio of audience or subscribers, but not a mix

of both. However, the Oregon Supreme Court has rejected

the notion that “or” always is disjunctive; “or” may have an

“inclusive” meaning, depending on the context. See Burke v.

DLCD, 352 Or 428, 435-36, 290 P3d 790 (2012). Here, the

context, although not entirely clear, tilts in favor of an inclu-

sive meaning. In the same sentence of subsection (4), the

legislature required the numerator of “audience or subscrib-

ers” to be divided by a denominator of “audience and sub-

scribers” (emphasis added). The department fails to explain

why the audience and subscribers can be combined in the

denominator of the ratio but not in the numerator. The court

concludes that the use of “and” for the denominator confirms

that the legislature intended “or” for the numerator to have

an inclusive meaning.18 The court concludes further that the

18

As further context, the court notes that the definition of “interstate broad-

caster” in ORS 314.680(3) uses “or” in a way similar to the description of the

numerator in ORS 314.684(4):

“ ‘Interstate broadcaster’ means a taxpayer that engages in the for-profit

business of broadcasting to subscribers or to an audience located both within

and without this state.”

ORS 314.680(3). The court concludes that this sentence does not resolve the issue;

it is simply an additional ambiguous use of the word “or.” The next sentence

provides:

“The audience or subscribers ratio shall be determined by rule of the

Department of Revenue.”

ORS 314.680(3). While this sentence could imply that the legislature intended

that a ratio would consist either exclusively of audience numbers in both the

numerator and denominator, or exclusively of subscriber numbers in both the

numerator and denominator, the text of the sentence does not rule out the

Cite as 24 OTR 250 (2020) 269

statutory text and context do not support the department’s

position that the legislature intended to require cable com-

panies to determine their ratio solely by the relative number

of subscribers to their cable services.

The department asserts that the legislative history

“demonstrates that cable companies like Comcast are sub-

ject to apportionment based on their subscriber ratio, not

their audience.” The passages of legislative testimony that

the department quotes, however, make only the general

point that the legislature included the word “subscribers” in

order to establish that cable service providers are within the

definition of “broadcaster.” For example, Jim Gardner, the

principal witness for the broadcasting industry, testified:

“We’ve added a reference at the Department’s request to

‘subscribers’ to make sure it was clear from the definition

of ‘broadcasting’ that this did apply to cable. That reference

is picked up in ‘interstate broadcaster’ by reference to the

words ‘and subscribers’ * * *.”

(Testimony of Jim Gardner, House Committee on Revenue

and School Finance Work Session on HB 2226 (May 15,

1989), Cassette 143, Side A 27-164.) This passage, and the

others the department cites, say nothing about the possi-

bility that a cable company might also broadcast by other

means, and the court finds nothing in the legislative history

suggesting that a business that conducts any, or even most,

of its broadcasting by cable must derive its ratio exclusively

from its cable subscribers.19

possibility of a mix of both. As with ORS 314.684(4), the court concludes that

the use of “total audience and subscribers” in ORS 314.684(4) (emphasis added)

resolves the ambiguity in favor of reading “or” inclusively.

19

The court notes its interpretation of the following colloquy, a portion of

which is excerpted in the department’s response brief:

“[Senator Timms:] Madam Chair?

“[Chair:] Senator Timms.

“[Senator Timms:] Would you define for me, I don’t have the broadcaster

defined here, would that include cable? Is that strictly where the program

originates from originally?

“[Department representative Strauss:] Madam Chair, Senator Timms, that,

that’s correct. Subscribers are the cable television companies and they’re ...

“[Senator Timms:] So they would be included in this?

“[Strauss:] That’s right.

270 Comcast Corp. II v. Dept. of Rev. (TC 5265)

Indeed, requiring an over-the-air broadcasting audi-

ence to be determined based on cable subscribers seems out-

right inconsistent with the choices legislators heard about

and discussed in their committee hearings. At a high level,

the legislature’s purpose in enacting ORS 314.680 to 314.690

was to find a way to account for the location of the market

in the sales factor of interstate broadcasters. Specifically,

legislators were concerned that the state of Washington

had recently adopted a market-based approach that pur-

ported to impose sales tax on Oregon broadcasters measured

by their share of revenues from advertising directed at the

Washington market. (Oregon legislators were concerned with

the effect of recently passed Washington law. “[Washington

has] just adopted a reg. on their sales tax * * * so that * * * if

an advertiser is using media to make sales into Washington

State * * * Washington State is now going to grab those sales

and impose sales and use tax on them.”) Meanwhile, exist-

ing Oregon law applied the costs-of-performance rules under

Oregon’s version of UDITPA, with the result that an over-the-

air broadcaster based in Oregon typically included 100 per-

cent of its advertising revenue in the numerator of its Oregon

sales factor because it incurred the greater proportion of its

costs in Oregon. See ORS 314.665(3) (1987) (“Sales, other than

“[Senator Timms:] So, you could have a cable company in Boise, Idaho, trans-

mits something into Oregon, that would not be, they would not be taxed on

that? While if you had a broadcaster that the program originated with and

then came into Oregon he would be taxed?

“[Strauss:] Well, the cable company would be taxable as well. Because

they’re, they’re broadcast into the state is through the cable, and so then we

look at their subscribers for their audience.

“[Senator Timms:] Okay, anything that’s broadcasted through, through that feed.

“[Strauss:] Right, through radio or through television airways or the coaxial

cables.

“[Chair:] Further questions? * * *”

One possible interpretation of the italicized language is that anything that a

cable company broadcasts “through radio or through television airways or the

coaxial cables” must be apportioned based on the cable company’s subscribers.

The department does not specifically argue for this interpretation, and the court

rejects any such interpretation. Reading the entire colloquy, the court finds

that the more persuasive interpretation is that the department’s representative

Strauss was answering affirmatively Senator Timms’s question whether the defi-

nition of “broadcaster” includes not only an over-the-air radio or television broad-

caster, but also a cable company. The court does not interpret Strauss’s response

as referring to a cable company that also broadcasts over the air.

Cite as 24 OTR 250 (2020) 271

sales of tangible personal property, are in this state if * * * the

income-producing activity is performed both in and outside

this state and a greater proportion of the income-producing

activity is performed in this state than in any other state,

based on costs of performance.”). Absent a change to Oregon

law, such an Oregon-based broadcaster would, roughly speak-

ing, be required to pay tax to both states on the same adver-

tising revenues attributable to the Washington market. Over

the course of the legislative session, the bill was amended

to also ensure that a broadcaster based outside Oregon

would (assuming it had nexus with Oregon) be required to

include an amount in its sales factor reflecting the value of

the Oregon audience to advertisers, as opposed to having no

sales attributed to Oregon under the cost-of-performance

rules. Similarly the legislators concluded: “As redrafted the

bill is essentially a two way street so that if there is nexus

on the part of an out of state broadcaster or a network you

will be able to use the new audience factor apportionment to

apportion the sales of that out of state entity.”

Nearly all discussion of specific situations or hypo-

theticals involved either over-the-air broadcasters or “the

three networks,” including NBC and ABC. The statutory

references to “subscribers” appear to have been an after-

thought. Discussion of this was included in the department’s

legislative history: “We’ve added a reference at the depart-

ment’s request to ‘subscribers’ to make sure it was clear from

the definition of ‘broadcasting’ that this did apply to cable.”20

The legislature appears to have considered “subscribers,” for

a cable company, as a stand-in or substitute for the audience

of an over-the-air broadcaster. Legislators do not appear to

have considered the possibility that a single company might

20

One reason cable companies attracted little attention from the legisla-

tive committee members is that cable companies had little cause for complaint.

The bill did not materially affect their Oregon tax burden because their on-the-

ground cable operations in Oregon gave them “costs of performance” in Oregon

under UDITPA; therefore, any cable company already had an Oregon sales factor

greater than zero. Discussion of this was included in the department’s legisla-

tive history: “[W]e have had no objections from the cable companies to this, pri-

marily because it’s our understanding that the cost of performance method * * *

and the audience factor method have essentially an equivalent effect on cable-

casters.” By contrast, an over-the-air broadcaster with a television tower perched

across the Oregon border, or a television network creating programming in New

York, incurred few costs of performance in Oregon.

272 Comcast Corp. II v. Dept. of Rev. (TC 5265)

broadcast both via cable and over the air. However, legis-

lators repeatedly discussed their desire to apportion over-

the-air broadcast revenues based on relative “audience”

size, and there is no evidence that they would have wanted

those revenues to be apportioned instead by the “subscriber”

proxy. Taxpayer’s methodology uses Nielsen data to deter-

mine the audience for its over-the-air broadcasting activity

and adds that to subscriber data from broadcasting by cable

and satellite. The court finds that methodology consistent

with the text, context and legislative history of the broad-

caster apportionment statutes.

The department characterizes taxpayer’s approach

as “distortive,” asserting that it “sweeps the subscribers of

other entities [(DirecTV and Dish Network)] into Comcast’s

apportionment formula for a very small portion of Comcast’s

revenues: Comcast’s programming activities contribute less

than 5 percent of its overall revenues for 2007-2009.” Taking

this argument initially at face value, the court finds that it,

too, relies on the department’s faulty premise that a com-

pany providing cable service as one of its broadcasting activ-

ities is prohibited from apportioning receipts from other

broadcasting activities based on the audience for those other

broadcasting activities. At a deeper level, the department

fails to supply any proof, other than to cite the percentage

of taxpayer’s revenues derived from providing cable service.

As the department is aware, the term “distortion” has an

established meaning in the context of income tax apportion-

ment. E.g., Stonebridge Life Ins. Co. v. Dept. of Rev., 18 OTR

423, 431 (2006) (describing the “heavy burden” on a party to

prove a “grossly distorted result” when seeking to escape a

state’s apportionment method on the grounds of unfairness).

A claim that an apportionment method is distortive typi-

cally is accompanied by a wealth of data showing extraor-

dinarily high disproportionality between (1) the percentage

of a company’s revenue attributed to the state by the appor-

tionment formula; and (2) the percentage of the company’s

receipts actually generated in the state. See id. at 432-35

(recounting United States Supreme Court opinions finding

impermissible distortion when reaching levels of 250 per-

cent to 470 percent). The department offers nothing of the

sort here. By contrast, taxpayer’s method uses Nielsen-

supported audience data for over-the-air network activity,

Cite as 24 OTR 250 (2020) 273

and for other network activity it uses the “subscriber” data on

which licensees and advertisers actually base the amounts

they pay to taxpayer. Because the court has concluded that

taxpayer’s method satisfies the statutory requirements, the

department would have the burden of proving at trial that

a different method is required. Twentieth Century-Fox Film

Corp. v. Dept. of Rev., 299 Or 220, 233, 700 P2d 1035 (1985).

The court concludes that the department has failed to pro-

duce evidence that would satisfy its burden. See TCR 47 C.

Next, the department’s brief includes a paragraph

asserting:

“In addition, Comcast does not account for its internet

and voice subscribers, even though these services are deliv-

ered through the same fiber and coaxial cable as Comcast’s

television cable service. These services were part of the

reason this court concluded that Comcast was an interstate

broadcaster. The services involve the sending of one-way

electronic signals. Comcast does not explain their absence

of those subscribers from the apportionment formula they

proposed.”

Taxpayer rejects this argument, referring to a Ninth Circuit

opinion and a Federal Communications Commission ruling

concluding, respectively, that providing internet access and

voice service involves two-way transmission, not transmis-

sion of a “one-way electronic signal” as required by the defi-

nition of “broadcasting” in ORS 314.680(1). At oral argu-

ment, the department claimed that the definition should

be read to mean “one way at a time,” referring generally to

the Supreme Court’s discussion of taxpayer’s activities in

the property tax context. See Comcast Corp. v. Dept. of Rev.,

356 Or 282, 337 P3d 768 (2014).21 To the extent that the

21

The department also asserted at oral argument that this court had rejected

taxpayer’s argument. This court’s opinion in the 2007-09 Case, however, does not

do that. Rather, this court stated:

“At the hearing on this matter, and in briefing, there has been a discus-

sion of the difference between ‘transmission of one-way electronic signals’ as

opposed to ‘one-way transmission of electronic signals.’ There has also been

a discussion of whether, as a matter of physics, all electronic signals are ‘one-

way.’ The admissions of taxpayer establish that it engages in at least some

activity covered by the definition of ‘broadcasting’ found in ORS 314.680(1)

such that it is an ‘interstate broadcaster’ under ORS 314.680(3). Therefore,

there is no need for the court to address, in this case, the question of the

actual physics of transmission of electronic signals in general or as accom-

plished by taxpayer.”

274 Comcast Corp. II v. Dept. of Rev. (TC 5265)

department seriously seeks to raise a legal issue, the court

sees no need to address it, because the department makes

no effort to offer facts about how either type of service actu-

ally works. The court declines to rely on this court’s or the

Supreme Court’s descriptions of taxpayer’s business for a

single property tax year (2009-10) in this income tax appeal

spanning six calendar years.

Finally, the court examines whether the depart-

ment’s administrative rule requires a different result. The

rule, like the statutes, does not address the possibility of a

single entity operating both an over-the-air network and a

cable service. See OAR 150-314-0465. Subsection (2) reca-

pitulates the legislature’s intention, based on the legisla-

tive history, to use Nielsen or comparable viewership data

to determine the audience for “television, radio, or network

programming.” Although subsection (4) of the rule requires

a “cable television system” to use the number of subscrib-

ers as its “audience factor,” the rule does not define a “cable

television system.” In the absence of a definition, the court

defers to the intention expressed in legislative proceedings

to assign over-the-air broadcasts based on Nielsen data and

subscription broadcasts based on subscription data, which is

the method taxpayer proffers.

The department attacks the position taxpayer takes

on summary judgment as insufficiently related to any claim

raised in taxpayer’s complaint for the 2007-09 Case.22 Tax-

payer asserts that its position is grounded in its seventh

claim, which reads:

“Interstate broadcasters that broadcast to subscribers

or to an audience that is located both within and without

Oregon, and that are taxable in another state under the

provisions of ORS 314.620, are required to use an audience

factor to determine the amount of gross receipts from broad-

casting attributable to this State. OAR 150-314.684(4)(1) (1).

“Defendant erroneously determined that Plaintiff was

an ‘interstate broadcaster’ within the meaning of OAR

150-314.684(4) and used an estimate to calculate Plaintiff’s

Comcast Corp. v. Dept. of Rev. (TC 5265), 22 OTR 295, 299 n 5.

22

The department does not make this procedural claim with respect to the

2010-12 Case.

Cite as 24 OTR 250 (2020) 275

audience factor. In the event Plaintiff is determined to be an

interstate broadcaster, Plaintiff is entitled to an audience

factor determined by the ratio that the population of the area

served by the cable system service located within this State

bears to the population of the area served by the cable system

in all states in which the cable system has subscribers pursu-

ant to OAR 150-314.684(4)(1) (1).”

(2007-09 Case (emphasis added).) The department asserts

that the italicized language requests apportionment by pop-

ulation, while taxpayer’s motion requests apportionment

by audience. Taxpayer argues that its motion is consistent

with its claim as pled because the claim seeks apportion-

ment based on the department’s rule, which is based on

audience and subscribers. The court finds that taxpayer’s

motion is adequately based in the claim because the claim

seeks an Audience/Subscriber Ratio “pursuant to OAR 150-

314.684(4)(1).” Moreover, the department has acknowledged

that it has not been prejudiced by the specific method for

determining the Audience/Subscriber Ratio requested in

taxpayer’s motion.23 In fact, the department’s own requested

method differs substantially from either the strictly

population-based method referred to in taxpayer’s claim or

the combination of Nielsen and subscriber data requested

in taxpayer’s motion; therefore, regardless of which method

taxpayer advocated, the department would be in the same

position of requesting a ratio based solely on the relative

number of subscribers to taxpayer’s cable system.

4. Conclusion (Issue A)

The text, context, and legislative history of the

interstate broadcaster apportionment statutes support tax-

payer’s position and do not support the department’s posi-

tion. The court will grant taxpayer’s motion on this issue.

B. Taxpayer’s Motion: Apportionability of Dividends and

Gain from Vodafone, Time Warner, and A&E

Taxpayer’s second cross-motion for partial summary

judgment asks the court to retain taxpayer’s classification

23

The court notes that taxpayer alleges, and the department does not refute,

that under the method in taxpayer’s motion and a population method, “the num-

bers are almost the same anyway * * *.” (Citing emails from taxpayer’s counsel to

the department so stating.)

276 Comcast Corp. II v. Dept. of Rev. (TC 5265)

of three large income items as nonapportionable: gain from

the sale of ownership interests in three companies and div-

idends from two of those same companies.24 Taxpayer has

chosen to not dispute the department’s reclassification of all

other income items as apportionable. Accordingly, the court

begins with taxpayer’s motion, which is limited to the treat-

ment of income from ownership interests in Vodafone Group

PLC (Vodafone), Time Warner Inc. (Time Warner) and A&E

Television Networks LLC (A&E). The table below shows the

sources and amounts of the income items remaining at issue

and the years in which taxpayer realized them.

Vodafone Time Warner A&E

Year Gain on Dividends Gain on Divi- Gain on

Sale of on Sale of dends Redemp-

Common Preferred Stock on Stock tion

Stock Stock (Sale) of

Member-

ship

Interest

2007 $60,917,130 $85,773,588 $938,677,072 $3,929,569 —

2008 — $84,859,500 — — —

2009 — $84,859,500 — — —

2010 — $84,859,500 — — —

2011 — $84,859,500 — — —

2012 — $84,859,500 — — $777,196,727

1. Facts (Issue B)

Unless otherwise indicated, the following facts are

recited in taxpayer’s brief, with citations to underlying dec-

larations and documents, and are uncontested.

Vodafone. During the time periods relevant here,

Vodafone was a public limited company headquartered

in the United Kingdom in the business of providing wire-

less mobile telecommunications services. As a public com-

pany, Vodafone’s shares traded on various overseas stock

exchanges, including the London Stock Exchange and the

24

Taxpayer’s briefing primarily discusses the sales of the ownership inter-

ests, referring at times to three “transactions.” However, taxpayer clarified at

oral argument that the issues it contests include the treatment of dividends tax-

payer received while holding the shares of Vodafone and Time Warner, not solely

the gain taxpayer accrued when it sold its interests in the three companies.

Cite as 24 OTR 250 (2020) 277

Frankfurt Stock Exchange. Domestic instruments known

as American Depositary Shares (ADSs) represented the

stock and were publicly traded in the United States. (For

convenience, the court refers to the underlying Vodafone

“stock” rather than to the ADSs.) Taxpayer acquired its

interest in Vodafone in 2002 when taxpayer acquired AT&T

Broadband, a subsidiary of AT&T Corporation (AT&T).

AT&T had, in turn, acquired its interest in Vodafone from a

company known as MediaOne Group, Inc. (MediaOne), which

AT&T acquired in June 2000. At the time of its acquisition

by AT&T, MediaOne owned common and preferred stock in

Vodafone, the former constituting a 4.9 percent ownership

interest.

AT&T’s acquisition of MediaOne was subject to

review by the Federal Communications Commission (FCC).

In its order approving the transaction, the FCC identified

the Vodafone stock interest held by MediaOne and acquired

by AT&T as a “passive equity interest,” and as a “minority,

noncontrolling interest that is not attributable for purposes

of our cellular cross-ownership rules.” During the years

2001 and 2002, AT&T disposed of approximately two-thirds

of its Vodafone common stock holdings.

Taxpayer acquired AT&T’s remaining shares in

Vodafone when it acquired AT&T Broadband on November 18,

2002. At that time, Vodafone was the world’s largest wire-

less mobile telecommunications company. It operated in 28

countries worldwide. Combined, the common and preferred

Vodafone stock acquired by taxpayer represented less than

three percent of Vodafone’s total voting shares.

During the time taxpayer held its interest in

Vodafone, (1) Vodafone’s headquarters were located in

Newbury, in the United Kingdom, and taxpayer’s headquar-

ters were located in Philadelphia, Pennsylvania; (2) no tax-

payer employees were involved in the day-to-day operations

or management of Vodafone, and no Vodafone employees

were involved in the day-to-day operations or management

of taxpayer; (3) taxpayer had no right to appoint any mem-

bers of Vodafone’s board of directors, and no members of

Vodafone’s board of directors were employees or directors of

taxpayer; (4) the companies did not share common facilities

278 Comcast Corp. II v. Dept. of Rev. (TC 5265)

or services, including corporate office space, tax, finance,

office technology, human resources, or employee benefit

plans, nor did the companies share or transfer technology,

intellectual property, or any other resource; and (5) taxpayer

never pledged its interest in Vodafone as security for repay-

ment of debt or used its interest in Vodafone as a financ-

ing vehicle to secure funds for taxpayer’s general business

operations.

Shortly after its acquisition of AT&T Broadband,

taxpayer began to dispose of its Vodafone stock. Taxpayer

sold the last of its Vodafone stock (approximately 2 million

shares) in 2007 at a gain of $60,917,130. Taxpayer contin-

ued to retain ownership of Vodafone’s dividend-paying pre-

ferred shares (which contained no management, operational

or board appointment rights in the absence of any default on

required dividend payments) and received dividends in the

approximate amount of $85 million on the preferred shares

during each of the tax years 2007 through 2012. Taxpayer

treated the gain and dividend income as nonapportionable,

nonbusiness income not allocable to Oregon, and the depart-

ment determined that the gain and dividend income was

business income subject to apportionment.

Time Warner. During all of the years at issue, Time

Warner was a media and entertainment company headquar-

tered in New York City. Time Warner’s shares were traded

on various stock exchanges, including the New York Stock

Exchange. As of February 17, 2006, it had more than 4.4

billion shares of common stock outstanding. As discussed

below, the gain at issue in this case is from taxpayer’s sale

in 2007 of shares of Time Warner common stock that tax-

payer acquired in a conversion transaction on March 31,

2005.

Further facts regarding the earlier AT&T Broadband

and MediaOne transactions are helpful: At the time that

AT&T acquired MediaOne in June 2000, MediaOne held a

25.51 percent minority ownership interest in Time Warner

Entertainment Company, LP (TWE). TWE owned and oper-

ated various Time Warner entertainment business assets

and operations, including filmed entertainment, television

production, television broadcasting, theme parks, and cable

Cite as 24 OTR 250 (2020) 279

television systems. The remaining 74.49 percent interest in

TWE was held by Time Warner.

AT&T’s acquisition of MediaOne was subject to

review by the FCC. In approving the transaction, the FCC

imposed several conditions on AT&T’s ownership of TWE to

comply with the FCC’s cable ownership rules then in effect,

which prohibited any cable operator from having attributed

ownership interests in cable systems serving more than

30 percent of cable subscribers nationwide. Specifically,

the FCC required AT&T to (a) divest its interests in TWE;

(b) terminate its involvement in TWE’s video programming

activities; or (c) divest interests it held in other cable sys-

tems, such that it would have attributable ownership inter-

ests in cable systems serving no more than 30 percent of

cable subscribers nationwide. In addition, the FCC imposed

interim conditions restricting AT&T’s ability to exert influ-

ence over TWE. Among other things, the FCC prohibited

AT&T and TWE from sharing officers and directors.

Upon acquiring AT&T Broadband from AT&T on

November 18, 2002, taxpayer acquired the interest that

AT&T or AT&T Broadband held in TWE.25 Like AT&T’s

acquisition of MediaOne, taxpayer’s acquisition of AT&T

Broadband was subject to review by the FCC. In its order

approving the transaction, dated November 13, 2002, the

FCC imposed conditions on taxpayer’s ownership of TWE

similar to those it had imposed on AT&T. Specifically, no

officer or director of taxpayer was allowed to be an offi-

cer or director of TWE, and no officer, director, or other

employee of taxpayer was allowed to influence or attempt

to influence TWE’s video programming activities. In addi-

tion, the FCC required taxpayer to place the TWE inter-

est, and any successor interests, in trust overseen by an

independent trustee, and to fully divest itself of any such

interests within five and one-half years of taxpayer’s acqui-

sition of AT&T Broadband. Under the trust, the trustee had

exclusive authority to exercise any management or gover-

nance rights associated with taxpayer’s interest, including

all voting, director appointment, consent, and management

25

The record is not entirely clear whether the minority interest in TWE was

held by parent company AT&T or subsidiary AT&T Broadband. The court does

not find this point material.

280 Comcast Corp. II v. Dept. of Rev. (TC 5265)

rights. The trust agreement stated that “trustee * * * will

have the exclusive power and authority to manage the trust

assets and to exercise [taxpayer’s] rights relating to the

TWE Interest, including all voting, director appointment,

consent, and management rights.”

To facilitate taxpayer’s required divestiture of

TWE, taxpayer and Time Warner entered into a restructur-

ing of taxpayer’s TWE interest on March 31, 2003. Under

the restructuring, taxpayer exchanged its interest in TWE

for convertible preferred stock in Time Warner,26 certain

additional cash consideration, and a 17.9 percent interest

in a new subsidiary of Time Warner, called Time Warner

Cable, Inc. (TWC), which operated the cable systems for-

merly owned by TWE. The interests taxpayer acquired in

the March 2003 restructuring, including the Time Warner

stock, were required to be held in trust, subject to the same

FCC requirements described above, including the require-

ment to dispose of the interests within five and one-half

years.

On March 31, 2005, the Time Warner convertible

preferred stock was converted into 83,835,883 shares of

Time Warner common stock, which represented approxi-

mately 1.9 percent of Time Warner’s outstanding common

stock. Taxpayer began selling its shares of Time Warner

stock in 2005.

On July 31, 2006, taxpayer disposed of its 17.9

percent interest in TWC and its residual 4.7 percent inter-

est in TWE. It did so pursuant to an April 2005 agree-

ment with Time Warner in which Time Warner redeemed

those interests. Taxpayer’s 2007 Form 10-K describes the

redemptions together with a transaction involving Adelphia

Communications (Adelphia). The description indicates that

taxpayer (i) paid cash to Adelphia for interests in two cable

system partnerships and other assets; (ii) had its interests

in TWE and TWC redeemed in exchange for interests in

subsidiaries of each of those companies, respectively; and

(iii) transferred the partnership interests to Time Warner

Cable, Inc.

26

Taxpayer retained a “residual” equity interest of 4.7 percent in TWE.

Cite as 24 OTR 250 (2020) 281

By the end of 2007, consistent with the FCC’s order

requiring it to dispose of the Time Warner stock, taxpayer

disposed of all of its stock in Time Warner, either by sale or

charitable contribution.

During the time taxpayer held its interest in

Time Warner, (1) taxpayer maintained its headquarters

in Philadelphia, while Time Warner maintained separate

headquarters in New York City; (2) no taxpayer employ-

ees were involved in the day-to-day operations or manage-

ment of Time Warner, and no Time Warner employees were

involved in the day-to-day operations or management of tax-

payer; (3) taxpayer had no right to appoint any members of

Time Warner’s board of directors, and no members of Time

Warner’s board of directors were employees or directors of

taxpayer; (4) taxpayer shared no common facilities or ser-

vices with Time Warner: the companies did not share cor-

porate office space, tax, finance, office technology, human

resources, or employee benefit plans, nor did the companies

share or transfer technology, intellectual property, or any

other resource; and (5) taxpayer never pledged its Time

Warner stock as security for repayment of debt or used its

Time Warner stock as a financing vehicle to secure funds

for taxpayer’s general business operations. Setting aside the

department’s discussion below of the July 31, 2006, redemp-

tion and exchange transaction, neither party points to any

instance in which taxpayer employed its Time Warner stock

in furtherance of taxpayer’s operations.

In 2007, taxpayer received dividends on its Time

Warner stock in the amount of $3,929,569. In the same

year, Taxpayer realized gain of $938,677,072 from the sale

of the last of its stock in Time Warner. On its tax return

for the 2007 tax year, taxpayer treated the gain and div-

idend amounts related to its ownership of Time Warner

stock as nonapportionable, nonbusiness income not alloca-

ble to Oregon. The department determined that the gain

and dividend amounts were business income subject to

apportionment.

A&E. Taxpayer’s acquisition of its controlling inter-

est in NBCU closed in January 2011. NBCU was formed

as a new company, owned 51 percent by taxpayer and 49

282 Comcast Corp. II v. Dept. of Rev. (TC 5265)

percent by GE. GE contributed to the new company the busi-

nesses of NBCUniversal, Inc., which operated the historic

NBCUniversal business, including its television networks,

movie studios, and theme parks. Taxpayer contributed to

the new company entertainment and other assets, includ-

ing taxpayer’s own television networks, and also paid cash

consideration to GE. Among GE’s contributions was an indi-

rect wholly owned subsidiary of NBCU, NBC-A&E Holding,

Inc. (NBC-A&E). NBC-A&E held a 15.8 percent ownership

interest in A&E.

A&E was in the business of operating certain cable

networks, including the A&E Network, Lifetime, and the

History Channel. The remaining 84.2 percent of A&E was

owned by Disney/ABC International Television, Inc. and

affiliates (ABC) and Hearst Communications and affiliates

(Hearst), each of which owned 42.1 percent. The interest in

A&E held by NBCUniversal, Inc. or its subsidiaries dated

back to the mid-1980s and at no time exceeded 25 percent.

The rights and obligations of NBC-A&E, ABC, and

Hearst with respect to A&E were memorialized in a limited

liability company agreement (the “A&E LLC Agreement”).

The A&E LLC Agreement limited the participation and con-

trol of its individual members, providing that the company

be run by a nine-person board of directors, and expressly

stating that the LLC members lacked the power to bind

the company individually. NBC-A&E, ABC and Hearst

were each permitted to appoint three directors. At all

meetings, the presence of at least three directors, includ-

ing one appointed by each member, constituted a quorum

for the transaction of business. The directors were required

to cast a single vote for the member they represented. The

A&E LLC Agreement provided that the board had com-

plete authority, power and discretion to manage and con-

trol the business, affairs, and properties of the company.

Specifically, the board had the authority to make all deci-

sions regarding those matters and to perform any and all

other acts or activities customary or incident to the man-

agement of the company’s business, including approval

of (i) the hiring and firing of key executives; (ii) compen-

sation of key executives; (iii) the Annual Operating Plan;

Cite as 24 OTR 250 (2020) 283

(iv) programming acquisitions; (v) marketing and brand-

ing strategies; (vi) strategic initiatives; and (vii) corporate

finance matters. A simple majority vote was required for

the general management and control of the business.27 The

voting provisions of the A&E LLC Agreement, however, pro-

vided that ABC and Hearst agreed to cast their votes in the

same manner, and NBC-A&E prospectively consented to

their doing so. Consequently, ABC and Hearst had control of

the day-to-day operations of A&E and its strategic direction.

During the time that taxpayer, through NBC-A&E,

held its interest in A&E, (1) A&E had its own management

and employees, and no taxpayer or NBCU employees were

involved in the day-to-day operations or management of

A&E; (2) there was no shared use of A&E’s facilities, no cen-

tralized or joint purchasing, no joint marketing programs, no

joint ownership of trademarks or similar intangible rights,

no transfers of employees or technology between companies,

and no intercompany financing or loan guarantees; and

(3) in its Form 10-K filings with the Securities and Exchange

Commission, taxpayer did not identify A&E as one of its

cable networks.

The A&E LLC Agreement included mechanisms

whereby NBC-A&E could either elect to sell (via put option),

or be required to sell (via call option), its interest to the other

members over the course of a 15-year option period. On July 9,

2012, NBC-A&E entered into a redemption agreement

whereby A&E agreed to redeem NBC-A&E’s entire 15.8 per-

cent equity interest in A&E Television Networks, LLC. The

redemption resulted in gain of $777,196,727, which taxpayer

treated as nonapportionable, nonbusiness income not allo-

cable to Oregon, and which the department determined was

instead apportionable business income.

27

As an exception, certain actions required unanimous consent pursuant to

“anti-squeeze-out” provisions that generally gave NBCU the right to receive writ-

ten notice, increased board representation and veto rights with respect to certain

transactions. Those transactions included the issuance of new debt, transfers

and distributions of noncash assets, and major dispositions with respects to both

assets and cash. The anti-squeeze-out provisions indicated that as a minority

stakeholder, NBC-A&E was vested only with those powers required to protect its

existing investment in A&E; they did not grant NBC-A&E the ability to control

the day-to-day operations of A&E or its strategic direction.

284 Comcast Corp. II v. Dept. of Rev. (TC 5265)

2. Issue (B)

Which, if any, of the items of income from Vodafone,

Time Warner and A&E is apportionable?

3. Analysis (Issue B)

Taxpayer argues that the above facts show that

none of the dividend income or gain is apportionable because

(1) none of the three companies was engaged in a unitary busi-

ness with taxpayer; and (2) none of taxpayer’s direct or indi-

rect stock holdings in Vodafone, Time Warner or A&E served

an operational function in taxpayer’s business. Taxpayer

bases its arguments on the Due Process and Commerce

Clauses of the United States Constitution, as interpreted by

the United States Supreme Court and Oregon courts. The

department accepts taxpayer’s first point, that none of the

companies were engaged in a unitary business with tax-

payer. However, the department disputes the second point,

arguing that taxpayer’s holdings did serve an operational

function under Allied-Signal because taxpayer’s “mergers

and acquisitions activity * * * was a part of [taxpayer’s] reg-

ular course of business.” On the same grounds, the depart-

ment also makes two affirmative arguments. The depart-

ment’s first affirmative argument is that the dividends and

gain at issue are apportionable “business income” under the

UDITPA definition in ORS 314.610(1). The second is that, in

any event, the dividends and gain are apportionable because

“the interstate broadcaster definition is broader than busi-

ness income.”28 The court begins with the department’s affir-

mative arguments, because those appear on their face to be

based on statute. See Pennzoil Co. v. Dept. of Rev., 332 Or

542, 546, 33 P3d 314 (2001) (pertinent statutes are consid-

ered before state and federal constitutions) (citing Stelts v.

State of Oregon, 299 Or 252, 257, 701 P2d 1047 (1985)).

a. Department’s “business income” argument

The court first notes its prior conclusion in sev-

eral cases that the Oregon legislature intended, both in its

adoption of UDITPA and in its prior apportionment stat-

utes, that Oregon’s income taxes on multistate businesses

28

This appears to be a reference to the definition of “gross receipts from

broadcasting” in ORS 314.680(2).

Cite as 24 OTR 250 (2020) 285

reach to the limits allowed by the Oregon and United States

Constitutions. See Crystal Communications, Inc. v. Dept. of

Rev., 20 OTR 111, 118 (2010) (recounting history of UDITPA

and its predecessors), aff’d, 353 Or 300, 297 P3d 1256 (2013);

Fisher Broadcasting Co. v. Dept. of Rev., 22 OTR 69, 74 (2015)

(explaining the “congruity of the statutory and constitu-

tional tests” for apportionable business income). Indeed, on

the very subject of a multistate business’s gain from the sale

of stock, the United States Supreme Court has held that

constitutional limits may constrain what otherwise would

be “business income” under UDITPA. While noting that the

UDITPA definitions of “business income” and “nonbusiness

income” “[i]n the abstract * * * may be quite compatible with

the unitary business principle,” the Court has stated that

“[i]t does not follow * * * that apportionment of all income

is permitted by the mere fact of corporate presence within

the State * * *.” Allied-Signal, 504 US at 786-87 (emphasis

added).

The department does not appear to contest this gen-

eral understanding of the relationship between UDITPA and

the constitutional limitations on a state’s taxing jurisdiction.

Assuming the department were to prevail in its argument

that taxpayer’s dispositions of stock or partnership inter-

ests occurred in the “regular course” of taxpayer’s business

(a component of UDITPA’s definition of “business income”

(emphasis added)), taxpayer still would win the argument if

it could show that the dispositions did not generate appor-

tionable income under the constitutional test. Nor does the

department rely on any other specific text in UDITPA that

would be dispositive for either party if inconsistent with the

constitutional test. For this reason, the court sees no need to

undertake a statutory analysis. The court will examine the

department’s argument that the dividends and gain at issue

are “business income” by applying the constitutional tests

for apportionability as discussed below.

b.  Department’s argument based on “gross receipts

from broadcasting”

The court turns to the department’s second affir-

mative argument, that Oregon may tax an apportioned

share of the dividends and gain because ORS 314.680(2)

286 Comcast Corp. II v. Dept. of Rev. (TC 5265)

defines “gross receipts from broadcasting” broadly. The

court finds this argument misplaced. Even assuming the

broadest possible meaning of the term, ORS 314.680(2)

does not define what types or items of income may be appor-

tioned; it defines only one of the components of the sales fac-

tor, which determines how to apportion income. The types

or items of income that may be apportioned are set by the

definition of “business income” under UDITPA, which, as

concluded above, the court considers for purposes of this

case to be coextensive with income that may be apportioned

under Allied-Signal and other constitutional authority. ORS

314.682 makes this apparent: subsection (1) states that

the special statutory provisions for interstate broadcasters

“apply to the apportionment of the income of an interstate

broadcaster.” ORS 314.682(1) (emphasis added). Subsection

(2) states that UDITPA (ORS 314.605 to 314.675) otherwise

applies to interstate broadcasters. The UDITPA statutory

series includes ORS 314.610(1), which defines “business

income.”

To illustrate, the court reprints the sales factor

formula shown above, enhanced to add the role of “busi-

ness income” (shaded) in relation to “gross receipts from

broadcasting.”

The court rejects the department’s second affirma-

tive argument because “gross receipts from broadcasting”

does not replace “business income” in a broadcaster’s sales

Cite as 24 OTR 250 (2020) 287

factor formula. Rather, “gross receipts from broadcasting”

modifies “business income.” And that modification can

only reduce the amount of business income apportioned to

Oregon because (as the Supreme Court concluded) both the

numerator and the denominator of the sales factor include

gross receipts from transactions and activities in the reg-

ular course of the broadcaster’s trade or business.29 See

Comcast, 363 Or at 548 (rejecting taxpayer’s argument that

would have created a “top-heavy” sales factor). Therefore,

contrary to the department’s argument, the definition of

“gross receipts from broadcasting” is arithmetically incapa-

ble of broadening the meaning of “business income.”

c. Taxpayer’s constitutional argument

The court now turns to the sole remaining issue

regarding the character of the dividends and gain: Tax-

payer’s constitutional argument that the dividends and gain

are not apportionable because none of taxpayer’s direct or

indirect stock holdings in Vodafone, Time Warner, or A&E

served an operational function in taxpayer’s business.

The parties do not contest that Allied-Signal is the

principal United States Supreme Court opinion governing

whether the income at issue in this case is apportionable.30

The taxpayer in that case, based in Michigan, manufactured

four lines of products: automotive; aerospace/electronics;

industrial/energy; and forest products. Allied-Signal, 504

US at 773-74. Its primary operations in New Jersey were

the development and manufacture of aerospace products.

Id. at 774. The taxpayer bought a total of 20.6 percent of the

outstanding shares of ASARCO on the open market from

December 1977 through November 1978 and sold them back

to ASARCO in 1981 for a gain of $211.5 million. Id. New

Jersey sought to tax an apportionable share of that gain.

Id. The Court first applied its three-factor test of “business

29

The court ignores the components “All other gross receipts attributable to

Oregon” and “Any receipts excluded under Department rules,” as no receipts in

either category are at issue here.

30

At one point in oral argument, the department invited the court to con-

sider the dissenting opinion in Allied-Signal. The court declines to do so because

the department did not brief this point or articulate any basis for this court to

depart from the Court’s majority holding.

288 Comcast Corp. II v. Dept. of Rev. (TC 5265)

unity” to the stipulated facts, concluding that the taxpayer

and ASARCO were not engaged in a unitary business

because there was no functional integration, economies of

scale, or centralized management. Id. at 788. ASARCO was

involved in the nonferrous metal production business and

was not involved in any of the taxpayer’s lines of business.

Id. at 774. The parties stipulated that:

“ ‘There were no common management, officers, or employ-

ees of [the taxpayer] and Asarco. There was no use by [the

taxpayer] of Asarco’s corporate plant, offices or facilities

and no use by Asarco of [the taxpayer]’s corporate plant,

offices or facilities. There was no rent or lease of any prop-

erty by [the taxpayer] from Asarco and no rent or lease of

any property by Asarco from [the taxpayer]. [The taxpayer]

and Asarco were each responsible for providing their own

legal services, contracting services, tax services, finance

services and insurance. [The taxpayer] and Asarco had

separate personnel and hiring policies ... and separate pen-

sion and employee benefit plans. [The taxpayer] did not

lend monies to Asarco and Asarco did not lend monies to

[the taxpayer]. There were no joint borrowings by [the tax-

payer] and Asarco. [The taxpayer] did not guaranty any

of Asarco’s debt and Asarco did not guaranty any of [the

taxpayer]’s debt. Asarco had no representative on [the tax-

payer]’s Board of Directors. [The taxpayer] did not pledge

its Asarco stock. As far as can be determined there were no

sales of product by Asarco itself to [the taxpayer] or by [the

taxpayer] to Asarco. There were certain sales of product

in the ordinary course of business by Asarco subsidiaries

to [the taxpayer] but these sales were minute compared

to Asarco’s total sales.... These open market sales were at

arms length prices and did not come about due to the [tax-

payer’s] investment in Asarco. There were no transfers of

employees between [the taxpayer] and Asarco.’ ”

Id. at 775 (citing reference omitted; ellipses in Allied-Signal).

The extensive stipulation included a statement that the tax-

payer and ASARCO “ ‘were unrelated business enterprises

each of whose activities had nothing to do with the other.’ ”

Id. at 774 (citing reference omitted).

After concluding that the taxpayer and ASARCO

were not engaged in a common unitary business, the Court

considered whether, as intangible assets, the taxpayer’s hold-

ings in ASARCO served, “on the one hand, an investment

Cite as 24 OTR 250 (2020) 289

function, or, on the other, an operational function.” Id. at

785. Income from assets satisfying the “operational func-

tion” test is apportionable; income from assets serving only

an “investment function” is not apportionable. See id. at 785-

87. The operational function test “focuses on the objective

characteristics of the asset’s use and its relation to the tax-

payer and its activities within the taxing State.” Id. at 785.

As an example, the Court stated that a “State may include

within the apportionable income of a nondomiciliary corpo-

ration the interest earned on short-term deposits in a bank

located in another State if that income forms part of the

working capital of the corporation’s unitary business, not-

withstanding the absence of a unitary relationship between

the corporation and the bank.” Id. at 787-88. The Court later

concluded that the taxpayer’s holdings in ASARCO were not

comparable to these kinds of bank deposits because the tax-

payer held the ASARCO shares for over two years. Id. at

789-90.31 The Court also referred to the possibility that a

holding in intangibles such as futures contracts might serve

an operational function as a hedge against price fluctuations

for raw materials. Id. (referring to Corn Products Refining

Co. v. Comm’r, 350 US 46, 50-53, 76 S Ct 20, 100 L Ed 29

(1955)); see also MeadWestvaco Corp. v. Ill. Dept. of Rev., 553

US 16, 29, 128 S Ct 1498, 170 L Ed 2d 404 (2008) (describing

Corn Products hedging transaction); Fisher Broadcasting

Co., 22 OTR 69, 77 (summarizing Allied-Signal’s operational

function test). The Court did not conclude that the taxpay-

er’s holdings in ASARCO were analogous to Corn Products

investments.

31

Although the quoted language at page 787 of the opinion refers to the

“income” as “form[ing] part of the working capital,” the sentence ends with a

cross-reference to a later passage in the opinion, in which the Court applies

this principle to the facts. The latter passage states: “Nor can it be maintained

that [the taxpayer’s] shares of ASARCO stock, which it held for over two years,

amounted to a short-term investment of working capital analogous to a bank

account or certificate of deposit.” Id. at 789-90 (emphases added). This court con-

cludes that it is the underlying asset (in that case, the cash deposited with the

bank, or the ASARCO stock) that must serve an operational function. In other

words, the Court did not imply on page 785 that the taxpayer’s use, for invest-

ment or operational purposes, of the proceeds (bank interest or gain from the sale

of the stock) determines whether the “operational function” test is satisfied. The

Court rejected such an implication when it reiterated its rejection of the “pur-

pose” test in ASARCO Inc. v. Idaho State Tax Comm’n, 458 US 307, 102 S Ct 3103,

73 L Ed 2d 787 (1982). See Allied-Signal, 504 US at 789.

290 Comcast Corp. II v. Dept. of Rev. (TC 5265)

The Court also described limitations on the “oper-

ational function” doctrine, stating that the “mere fact that

an intangible asset was acquired pursuant to a long-term

corporate strategy of acquisitions and dispositions does not

convert an otherwise passive investment into an integral

operational one.” Allied-Signal, 504 US at 788. Finally, the

Court rejected the New Jersey Supreme Court’s reliance

on the taxpayer’s intent to use the proceeds of the sale of

ASARCO stock to acquire Martin Marietta, a corporation

that, like the taxpayer, was in the aerospace business. Even

assuming that the taxpayer had undertaken the acquisition

and operated Martin Marietta as part of the taxpayer’s uni-

tary business, the Court stated: “[T]hat reveals little about

whether ASARCO was run as part of [the taxpayer’s] uni-

tary business.” Id. at 789 (emphasis added). The Court con-

cluded that the gain on the taxpayer’s sale of its stock in

ASARCO was not apportionable. Id. at 790.

The Court’s only post-Allied-Signal opinion to

discuss the concept of “operational function” apportion-

able income does not break new ground in the substantive

issue here, but it clearly delineates the concepts that may

be referred to as “enterprise unity” and “asset unity.”32

MeadWestvaco Corp., 553 US 16. Enterprise unity may be

lacking because the “payor” of the income at issue is engaged

in a different unitary business from that of the “payee”—

the classic example being a bank and its business cus-

tomer. See id. at 28 (citing Allied-Signal, 504 US at 787-88).

Nevertheless, if “asset unity” is present because the asset

generating the income serves an operational function within

the unitary business of the payee, the income is apportion-

able, and the state where the business entity operates may

tax its apportioned share of that income as determined by

32

Commentators interpreting United States Supreme Court opinions use

the term “enterprise unity” to refer to the relationship between legal entities

(such as separate corporations); enterprise unity exists if the relationship is char-

acterized by “functional integration, centralized management, and economies of

scale.” MeadWestvaco, 553 US at 30 (citing Mobil Oil Corp. v. Comm’r of Taxes of

Vt., 445 US 425, 438, 100 S Ct 1223, 63 L Ed 2d 510 (1980)). “Asset unity” is the

label that commentators apply to the relationship between a business entity and

an intangible asset that generates the income at issue. Hellerstein & Hellerstein,

State Taxation: Third Edition ¶ 8.08[2][b][i] 6-7 (July 2020) (discussing ASARCO

Inc., 458 US 307). Both “enterprise unity” and “asset unity” are tests within the

overarching “unitary business principle.”

Cite as 24 OTR 250 (2020) 291

the apportionment formula. See id. In the foregoing example,

the account is an intangible asset in the hands of the busi-

ness customer. If the account serves an operational function

in the customer’s business, interest from the account may be

apportionable even though the customer and the bank are

not engaged in a unitary business. In MeadWestvaco, the

Court vacated the decision of the Illinois appellate courts

because those courts had erroneously used a version of an

“operational function” test to determine whether the main

business of the taxpayer (producing paper) was unitary with

the business of its operating division Lexis/Nexis. Id. at 24

(“We perceive a more fundamental error in the state courts’

reasoning. In our view, the state courts erred in consider-

ing whether Lexis served an ‘operational purpose’ in Mead’s

business after determining that Lexis and Mead were not

unitary.”).

The Oregon Supreme Court applied Allied-Signal in

Pennzoil Co. v. Dept. of Rev., 332 Or 542, 33 P3d 314 (2001).

In that case, the taxpayer sought to treat a payment in set-

tlement of a tort judgment as nonapportionable under both

UDITPA and the constitutional test in Allied-Signal. See

Pennzoil, 332 Or at 544. A jury had concluded that Texaco

interfered with the taxpayer’s contract with the Getty Trust

to acquire a large portion of the shares of Getty Oil, and

had awarded Pennzoil monetary damages; in a subsequent

settlement, Pennzoil agreed to accept a reduced amount of

cash in satisfaction of the judgment. Id. The taxpayer’s con-

tract with the Getty Trust called for those parties to nego-

tiate a restructuring of Getty Oil or, if they could not do so,

to divide Getty Oil’s oil and gas reserves and other assets

between them. Id. The taxpayer’s damages claim was based

on the cost of finding and developing oil reserves. Id. The

court rejected the taxpayer’s argument that the payment

arose from Texaco’s interference with the taxpayer’s contract

with the Getty Trust, but the court, applying federal income

tax principles applicable to settlement payments, concluded

that the contract itself was the source of the payment. Id.

at 547-48. The court then examined the taxpayer’s purpose

of entering into the contract and agreed with the depart-

ment that the taxpayer’s purpose was “to gain access to

Getty’s oil reserves.” Id. at 548. The court concluded that the

292 Comcast Corp. II v. Dept. of Rev. (TC 5265)

payment was “in lieu of Pennzoil’s right to acquire an inter-

est in Getty’s oil reserves. The acquisition of oil reserves

is related—indeed is vitally important—to the continued

blending and distribution of motor oil in Oregon.” Id. at 550.

The court thus allowed the settlement payment to be appor-

tioned under Allied-Signal and UDITPA. Id.

This court has previously applied Allied-Signal in

unappealed decisions, most recently in Fisher Broadcasting,

22 OTR 69. The facts, discussed in more detail below, involve

a complex series of transactions, but the key conclusion is

straightforward. The taxpayer, a broadcaster, pledged stock

representing a minority interest in an insurance company

as security to obtain a loan for operational purposes, includ-

ing building a new headquarters building, paying off other

debt, and for “general corporate purposes.” Id. at 73. This

court held that, by doing so, the taxpayer assigned an oper-

ational function to an asset that otherwise might have been

considered to serve a mere investment function. See id. at

84; see also Hellerstein & Hellerstein, State Taxation: Third

Edition ¶ 8.08[2][f][iii] 20 (July 2020) (arguing that stock

pledged to secure financing for essential operations should

be considered used in the business).

In a 1994 case in this court, it was the taxpayer that

argued to have a large item of income apportioned under both

UDITPA and Allied-Signal. US Bancorp v. Dept. of Rev., 13

OTR 84 (1994). The taxpayer, a bank that at the time was

based in Oregon, bought common and preferred shares of

stock in a troubled Washington-based bank in a “stakeout”

transaction intended to allow the taxpayer to later acquire

the Washington bank outright. Id. at 86. The preferred

stock included “detachable warrants” that gave the taxpayer

a right to buy additional shares of common stock. Id. The

taxpayer also extended a $20 million line of credit to the

Washington bank and agreed to loan it another $10 million

if necessary. Id. During the four years the taxpayer held the

stock, it paid dividends to the taxpayer. Id. The Washington

bank then attempted to rebuff the taxpayer by redeem-

ing the preferred stock, resulting in gain to the taxpayer.

Id. at 87. The taxpayer, however, retained the detachable war-

rants, discouraging other potential merger partners, and the

taxpayer ultimately merged with the Washington bank. Id.

Cite as 24 OTR 250 (2020) 293

The taxpayer (again, based in Oregon at the time)

argued that the dividends and gain were business income,

seeking to apportion some of the income away from Oregon.

Id. The court concluded that the purchase of the stock was

not a mere investment. First, by including the detachable

warrants, the preferred stock was “structured to provide

[the taxpayer] with ownership opportunities when they

became possible.” Id. at 92. Second, the court found it sig-

nificant that the taxpayer also loaned substantial sums to

the Washington bank. Id. The court concluded that “[t]he

nature of the transaction was such that [the taxpayer] was

not just investing its capital in a passive investment. Its

stock purchase and loans were designed to result in addi-

tional banking subsidiaries.” Id. The court upheld the tax-

payer’s reported position that the dividends and gain were

apportionable. Id. at 96.

In approaching the facts in this case, the court thus

keeps in mind the basic rule of Allied-Signal, that income

from an intangible asset, to be apportionable under the

United States Constitution, must serve an operational func-

tion in the business that the taxpayer carries on in the tax-

ing state, as opposed to a mere investment function that may

benefit the taxpayer generally. See Allied-Signal, 504 US at

787-89. The court notes Allied-Signal’s rejection of a test

based solely on a taxpayer’s “long-term corporate strategy

of acquisitions and dispositions” or the taxpayer’s intended

use of the income from the asset. See id. at 788. The court

also considers the following nonexclusive examples from the

foregoing cases illustrating assets that may serve an opera-

tional function:

• A bank account representing short-term investments

of the taxpayer’s working capital (Allied-Signal);

• Futures contracts that serve as a hedge against

price fluctuations for raw materials or other busi-

ness inputs (Allied-Signal);

• Stock, or a contract to buy stock, if the purpose of

buying the stock is to acquire the underlying assets

of the target corporation (Pennzoil; US Bancorp),

especially when accompanied by loans to the target

(US Bancorp); and

294 Comcast Corp. II v. Dept. of Rev. (TC 5265)

• A previously passive, minority interest in an unre-

lated company engaged in a different line of busi-

ness that the taxpayer has pledged as security for

a loan, using the loan proceeds to pay expenses to

operate its regular business (Fisher Broadcasting).

The court now turns to the facts in this case, focus-

ing on each “asset’s use and its relation to the taxpayer and

its activities within the taxing State.” See Allied-Signal,

504 US at 785. Applying the court’s summary judgment

standard set forth above, the court starts by reviewing the

uncontested facts, then the department’s objections.

The general picture painted by the uncontested facts

shows that taxpayer held its interests in each of Vodafone,

Time Warner and A&E as a passive investment. Each was a

minority interest during the entire time taxpayer held it; at

the relevant time, taxpayer held less than three percent of

Vodafone’s voting shares, 1.9 percent of Time Warner’s com-

mon stock, and a 15.8 percent interest in A&E. Taxpayer

had little to no control over any of the respective companies.

The department does not attempt to refute taxpayer’s asser-

tion that taxpayer was not engaged in a unitary business

with any of the three companies. Taxpayer acquired each

interest from a third party (AT&T, GE) as part of a larger

transaction, and in the case of the Vodafone common stock

and the Time Warner shares, taxpayer was under an FCC

order to sell off the interests. In the case of A&E, taxpayer

sold its interest about 18 months after acquiring it. From

these facts, the court finds no indication that taxpayer used

its interests for an operational function. At a high level, the

court sees substantial overlap with the facts in Allied-Signal,

where the Court concluded that the taxpayer manufacturer

held its 20.6 percent interest in ASARCO as an investment,

such that the gain on sale of the stock four years after acqui-

sition could not be apportioned. See Allied-Signal, 504 US at

778-90.

Reviewing the examples of operational-function

assets, the court finds nothing about taxpayer’s stock

in Vodafone or Time Warner, or its interest in A&E, that

resembles an investment of “working capital,” short-term

or otherwise. There is no evidence that taxpayer bought

Cite as 24 OTR 250 (2020) 295

any of the stock using cash it would otherwise keep on

hand to pay wages or other day-to-day business expenses.

Cf. Sperry & Hutchinson Co. v. Dept. of Rev., 270 Or 329,

333-34, 527 P2d 729 (1974) (income from short-term secu-

rities apportionable, where purpose of holding them was to

satisfy needs for liquid capital during periods of cash flow

deficit). Taxpayer acquired the stock of each company as an

incident to a merger or acquisition of a different company in

a larger transaction. In each case, the company that was the

target of taxpayer’s acquisition had been holding the same

minority interest in the stock for some time, and, although

taxpayer’s purchase price for the target undoubtedly took

into account the minority stock interest, taxpayer succeeded

to the stock interest by operation of law upon acquiring the

target.

The court also finds no evidence that the stock

that generated the dividends and gain served as a hedge

against fluctuations in taxpayer’s operating costs, as was

the case in the futures contracts for raw materials in Corn

Products. The dividends and gain undoubtedly benefited

taxpayer’s business, but even the dissent in Allied-Signal

acknowledged that benefiting the taxpayer’s business in

general does not suffice for the operational function test. See

Allied-Signal, 504 US at 794 (O’Connor, J., dissenting) (“As

the Court points out, any investment a corporation makes is

intended to benefit the corporation in general.”). The Allied-

Signal Court’s reference to Corn Products implies that the

taxpayer’s intent when acquiring the asset plays some role.

See Corn Products, 350 US at 50-51 (hedging purchases were

“initiated for just this reason” of insuring against increases

in price of raw corn; relying in part on corporate officer

testimony that company was “ ‘trying to protect a part of

(its) manufacturing costs’ ”). The evidence here reveals no

intent by taxpayer to have the holdings serve an operational

function.

Nor does the court find evidence that taxpayer

acquired its interests in Vodafone, Time Warner, or A&E

for the purpose of acquiring the underlying assets of those

companies, as the courts found in Pennzoil and US Bancorp.

Vodafone was a wireless mobile telecommunications com-

pany based in the United Kingdom, and taxpayer began

296 Comcast Corp. II v. Dept. of Rev. (TC 5265)

selling the Vodafone common stock shortly after acquiring

it. Taxpayer held the Time Warner stock subject to an FCC-

mandated trust agreement, pursuant to which taxpayer

was required to dispose of the stock. Taxpayer’s interest in

A&E was somewhat different in that A&E operated cable

networks. However, the short mentions of A&E in taxpayer’s

Form 10-K for 2011, the year taxpayer acquired its interest

in A&E, merely list A&E’s channels, quantify the dividends

taxpayer received from A&E, and describe the mechanisms

by which taxpayer’s interest in A&E could be disposed of.

The next year’s Form 10-K mentions A&E only in discus-

sions of the redemption of taxpayer’s interest. Comcast

Corp., Annual Report 2, 46, 62, 65, 91-92 (Form 10-K) (filed

Feb 21, 2013, for fiscal year ending Dec 31, 2012).

Finally, unlike the facts in Fisher Broadcasting, tax-

payer asserts that it never pledged its interests in Vodafone,

Time Warner, or A&E as security for a loan, and the depart-

ment makes no attempt to refute that.

4. Tentative conclusion (Issue B)

Having reviewed the facts in light of the relevant

cases, the court tentatively concludes that the dividends and

gain at issue are not apportionable because taxpayer’s inter-

ests did not serve an operational function.

5. Department’s arguments (Issue B)

The court now turns to the department’s arguments.

Vodafone. The department asserts that the Vodafone

stock served an operational function because “the fact that

Vodafone stock was used as a collar and collateralization

indicates an operational asset.” (Emphases added.) The

department quotes as follows from taxpayer’s Form 10-K for

2003:

“Exchangeable Notes

“We have outstanding notes exchangeable into the com-

mon stock of Cablevision NY Group (“Cablevision”) Class A

common stock, Microsoft Corporation (“Microsoft”) common

stock, Vodafone ADRs and Comcast Class A Special com-

mon stock (together, the “Exchangeable Notes”). At matu-

rity the Exchangeable Notes are mandatorily redeemable

Cite as 24 OTR 250 (2020) 297

at our option into (i) a number of shares of common stock

or ADRs equal to the underlying shares multiplied by an

exchange ratio (as defined), or (ii) its cash equivalent. The

maturity value of the Exchangeable Notes varies based

upon the fair market value of the security to which it is

indexed. The Exchangeable Notes are collateralized by

our investments in Cablevision, Microsoft and Vodafone,

respectively.

“The Comcast exchangeable notes are collateralized

by our Class A Special common stock held in treasury.

We have and intend in the future to settle the Comcast

exchangeable notes using cash.

“During 2003, we settled $1.851 billion of our obligations

relating to certain of our Exchangeable Notes by delivering

the underlying shares of common stock or cash to the coun-

terparty upon maturity of the instruments, and the equity

collar agreements related to the underlying shares expired

or were settled.

“As of December 31, 2003, our debt includes an aggre-

gate of $4.318 billion of Exchangeable Notes, including

$2.427 billion and $1.891 billion within current portion

of long-term debt and long-term debt, respectively. As of

December 31, 2003, the securities held by us collateralizing

the Exchangeable Notes were sufficient to satisfy the debt

obligations associated with the outstanding Exchangeable

Notes.”

Comcast Corp., Annual Report 24 (Form 10-K) (fiscal year

ending Dec 31, 2003) (emphasis added). The department

offers little interpretation of this passage, contending sim-

ply: “Thus, the $60,917,130 gain on the sale of Vodafone

stock in 2007 is business income.”

Regarding the department’s use of the term “collat-

eralization,” it is evident from the 2003 quotation that the

Verizon shares had, at some point, been pledged as secu-

rity for debt in the form of the “Exchangeable Notes.” The

department seems to argue that, for that reason, the shares

necessarily are factually analogous to the Safeco stock in

Fisher Broadcasting. In Fisher Broadcasting, this court held

that the Safeco stock became an operational asset when

the taxpayer pledged it as security for debt and used the

debt proceeds to repay other debt, finance construction of

298 Comcast Corp. II v. Dept. of Rev. (TC 5265)

a new corporate headquarters, and “for general corporate

purposes.” See 22 OTR at 73, 83-84. The stock continued to

serve an operational function when the taxpayer replaced

the original debt with new financing; although the taxpayer

did not affirmatively pledge the Safeco stock to secure repay-

ment of the new financing, the taxpayer agreed to what the

court termed a “negative pledge” that essentially prohibited

the taxpayer from selling the stock for any purpose other

than repaying the debt or using the sale proceeds to “oper-

ate and expand the unitary business * * *.” Id. at 83-84. The

court found that the initial pledge and later restrictions

“result[ed] in a flow of value from the stock to the business

of the pledgor, at least where, as here, borrowed funds are

used in the business of the pledgor.” Id. at 78.

In response to the department’s argument, tax-

payer has presented evidence, which the department has

not contested, showing that it was not taxpayer, but rather

a prior owner of the Verizon stock, that pledged the stock as

security for debt. Recall that the Vodafone stock changed

hands at least twice: MediaOne owned it until 2000, and

AT&T owned it from 2000 to 2002, when taxpayer acquired

it along with the AT&T Broadband business. One of taxpay-

er’s tax managers, who had previously been employed first

by MediaOne and then by AT&T Broadband, submitted a

declaration and copies of MediaOne and AT&T SEC reports

showing that the collateralization referred to in the 2003

quotation above

“pre[-]dated Comcast’s acquisition of the Vodafone interest.

It arose out of monetization transactions entered into by

MediaOne * * * and AT&T * * * before Comcast acquired

the Vodafone interest. The attendant obligations of these

transactions subsequently were acquired by Comcast,

along with the underlying securities. [6.] The entities that

realized monetary benefit from these Vodafone monetiza-

tion transactions were MediaOne and AT&T, not Comcast,

as the transactions occurred before Comcast acquired the

underlying securities.”

See MediaOne Group, Inc., Annual Report 31-32 (Form

10-K) (fiscal year ending Dec 31, 1999).

The court finds that these undisputed facts refute

the department’s argument based on collateralization of

Cite as 24 OTR 250 (2020) 299

the Verizon stock. Fisher Broadcasting, interpreting Allied-

Signal and Container Corp. of America v. Franchise Tax Bd.,

463 US 159, 103 S Ct 2933, 77 L Ed 2d 545 (1983), deter-

mined that asset unity requires that there be a “flow of

value” from the asset to the operation of the business. Fisher

Broadcasting, 22 OTR at 78. This flow may occur when the

owner of the asset—typically, stock—pledges the stock to

secure a loan and uses the cash proceeds from the loan for

operational purposes. Here, however, taxpayer received the

stock as a transferee after the stock already had been sad-

dled by the debt. Any flow of value from the debt proceeds

had gone to one or more prior owners, and taxpayer took

the stock subject to the debt, holding it as a company might

hold land subject to a preexisting mortgage. The court con-

cludes that the “collateralization” of the Verizon stock did

not cause the stock to serve an operational function in tax-

payer’s business.

Regarding the second term in the department’s

argument—“collar”—taxpayer responds that the depart-

ment misunderstands the transaction. Taxpayer explains,

by reference to the same 2003 Form 10-K, that the “collar”

arrangement in this case is a set of option arrangements

by which taxpayer protected itself from fluctuations in the

value of the Verizon stock itself.33 The court sees nothing

inherent in the use of a collar that could transform the func-

tion of an intangible asset from an investment function into

an operational function.34 A company might choose to use a

collar mechanism to protect the value of any asset, regard-

less of which function the asset serves. The court agrees

with taxpayer that the presence of the collar structure did

not affect the function of the Verizon stock.

33

As taxpayer explains, by reference to the same 2003 Form 10-K, Comcast’s

investment in Vodafone was “accounted for as [a] trading securit[y].” Comcast

Corp., Annual Report 56-57 (Form 10-K) (fiscal year ending Dec 31, 2003). The

stated purpose of the collars (i.e., “option agreements”) was to “limit [Comcast’s]

exposure to and benefits from price fluctuations in the * * * Vodafone ADRs.” Id.

at 57. Comcast recorded the Vodafone collars “in investments at fair value, with

unrealized gains or losses being recorded to investment income (loss), net.” Id.

Any “unrealized gains or losses [were] substantially offset by the changes in the

fair value of shares of * * * Vodafone ADRs.” Id.

34

The transaction in Fisher Broadcasting also apparently involved a “collar”

of the Safeco stock. 22 OTR at 73. That fact, however, does not appear to have

contributed to the court’s analysis.

300 Comcast Corp. II v. Dept. of Rev. (TC 5265)

The department also argues that the Vodafone stock

was a “phone business investment[ ] acquired as part of the

AT&T Broadband acquisition, and Comcast was * * * laying

plans for wireless telephone service, which it began market-

ing in the last couple of years.” The department offers no

facts supporting its assertion about taxpayer’s “plans” and

does not contest taxpayer’s evidence of the absence of shared

management, employees, facilities, intellectual property, or

services. The court rejects this argument.

The department’s final argument is that the divi-

dends taxpayer received on the Vodafone preferred stock are

apportionable. The department does not articulate an exact

rationale, but it seems to rely solely on the fact that “[t]he

preferred stock provides [taxpayer] an assured $85 mil-

lion to use in its business annually.” Later, the department

asserts without citation that “[taxpayer] does not engage in

transactions or activities that do not, through some angle,

enhance its business activities.” This court concludes that

Allied-Signal dispatches this argument. It amounts to the

same argument that New Jersey raised unsuccessfully in

Allied-Signal with respect to gain, that income from intan-

gible property “acquired, managed or disposed of for pur-

poses relating or contributing to the taxpayer’s business” is

per se apportionable. See Allied-Signal, 504 US at 788-89

(internal quotations omitted).35 The mere fact that taxpayer

earned dividends on the stock, and used those dividends in

its regular business, tells the court nothing about whether

the stock served an operational function. The court finds no

evidence that it did.

The court concludes that taxpayer’s dividends on its

preferred shares of Vodafone stock, and the gain on its sale

of its shares of Vodafone common stock, are not subject to

apportionment.

Time Warner. Regarding the Time Warner stock,

the department makes no attempt to rebut taxpayer’s factual

evidence. Rather, it seeks to cast doubt with general asser-

tions that the court finds lead nowhere. The department

35

Idaho had raised the same argument unsuccessfully in ASARCO with

respect to both dividends and gain. ASARCO, 458 US at 326 (rejecting appor-

tionment of dividends from corporations not engaged in unitary business with

taxpayer).

Cite as 24 OTR 250 (2020) 301

first quotes a passage from taxpayer’s 2007 Form 10-K

describing the July 31, 2006, transactions involving tax-

payer’s acquisition of certain Adelphia assets (including

partnership interests) and Time Warner’s redemption of

taxpayer’s interests in TWE and TWC in exchange for the

partnership interests.36 These transactions were complex,

to be sure. However, the department provides no support

or analysis for its conclusion that taxpayer, through these

transactions or otherwise, “used its stock holdings in Time

Warner as an operational asset.” Because the court does not

lightly grant summary judgment on an issue of such factual

complexity, the court has attempted to reconstruct directly

from the evidence whether the department’s vague asser-

tion might justify any inference in the department’s favor.

This has proved a time-consuming and fruitless endeavor.

As taxpayer points out, there is simply no evidence that

taxpayer deployed its shares of stock in Time Warner (the

asset that actually generated the gain and dividends) in any

operational function. The facts recited above, including the

FCC-mandated divestiture and trust arrangement and the

testimony taxpayer supplied, point in the opposite direction.

Nor does the court find any basis to conclude that taxpayer’s

partnership interest in TWE, or its stock in TWC, served an

operational function in taxpayer’s business, or that if those

assets had served an operational function, the function of

the Time Warner stock somehow would have become oper-

ationalized by extension. The court finds no genuine issue

of material fact in the department’s allegation about the

July 31, 2006, transactions.

The department makes two remaining points

regarding the Time Warner stock, appearing in two sen-

tences of its reply dedicated to the treatment of dividends:

“[D]ividends paid to Comcast by Airtouch/Vodafone,

TimeWarner, and others, were from Comcast’s stock hold-

ings in related businesses that had been acquired by

Comcast in the regular course of its business. Those stock

holdings were used to position Comcast for growth of its

business in the communications industry and serving more

customers in its day-to-day operations.”

36

The department also mentions this transaction in its reply relating to its

own motion.

302 Comcast Corp. II v. Dept. of Rev. (TC 5265)

As to the first quoted sentence, that taxpayer’s

income from intangibles became apportionable simply

because taxpayer acquired a lot of intangibles as part of its

growth strategy, the Allied-Signal Court squarely rejected

the same argument:

“[T]he mere fact that an intangible asset was acquired pur-

suant to a long-term corporate strategy of acquisitions and

dispositions does not convert an otherwise passive invest-

ment into an integral operational one.”

Allied-Signal, 504 US at 788. As to the department’s second

sentence, it is a mere allegation. Despite a factual record of

several thousand pages, the department makes no attempt

to explain how taxpayer may have “used” any of its hold-

ings in Time Warner (or Vodafone or A&E) to “position” itself

for growth. The operational function test in Allied-Signal

requires an individualized factual showing about the tax-

payer’s deployment of the particular intangibles generating

the income. It is not sufficient for purposes of the operational

function test that the intangibles consist of stock or other

ownership interests in a company in the same industry or a

related industry. See Allied-Signal, 504 US at 773-75; 788-89

(taxpayer’s holding in ASARCO did not generate apportion-

able income even though taxpayer was a manufacturer of

mechanical and electronic products);37 cf. Pennzoil, 332 Or at

544, 548 (citing evidence from terms of thwarted stock pur-

chase agreement and company statements that “the reason

for its agreement with Getty was to gain access to Getty’s

oil reserves”); US Bancorp, 13 OTR at 86-87, 91-92 (citing

taxpayer’s loan to struggling target bank and options to buy

additional stock in concluding that taxpayer’s acquisition of

stock was “designed to result in additional banking subsid-

iaries”). The fact that two entities are engaged in the same or

related industries clearly is relevant when testing for enter-

prise unity, but there is no evidence that taxpayer’s business

was unitary with that of Time Warner (or Vodafone or A&E),

and the department does not argue that it was. The court

thus rejects the department’s remaining points.

37

The court also notes that ASARCO subsidiaries sold metals products to

the taxpayer in Allied-Signal at arm’s-length prices, although “these sales were

minute compared to ASARCO’s total sales.” Allied-Signal, 504 US at 775.

Cite as 24 OTR 250 (2020) 303

The court concludes that taxpayer’s dividends

on its shares of Time Warner stock, and the gain on its

sale of its shares of Time Warner stock, are not subject to

apportionment.

A&E. The department makes two arguments

regarding taxpayer’s income from its interest in A&E. First,

in its response to taxpayer’s partial summary judgment

motion, the department again makes generalized recitations

and assertions about taxpayer’s “eager[ ]” acquisitiveness.

As discussed above regarding the Time Warner stock, the

court again rejects this argument based on Allied-Signal’s

refusal to automatically treat gain or dividends as appor-

tionable due to the taxpayer’s “long-term corporate strategy

of acquisitions and dispositions.” Allied-Signal, 504 US at

788.

Second, the department quotes a passage from tax-

payer’s 2012 Form 10-K, emphasizing that taxpayer, through

NBCUniversal, received “dividends” from A&E “which were

included in net cash provided by operating activities.”38

(Quoting Comcast Corp., Annual Report 65 (Form 10-K)

(filed Feb 21, 2013, for fiscal year ending Dec 31, 2012).)

Nowhere does the department explain the significance of

the accounting treatment of this item. Taxpayer responds

that generally accepted accounting principles require all

dividends to be classified as cash from “operating activities,”

without regard to whether a dividend must be apportioned

or allocated for state tax purposes. The department has

made no effort to refute this point.

But for the following discussion, the court is inclined

to conclude that taxpayer’s gain on the sale of its interests in

A&E is not subject to apportionment.

38

A&E itself was a limited liability company that was classified for tax pur-

poses as a partnership; as such it would not have paid “dividends” under income

tax law, and it is unlikely that it would have paid “dividends” in the corporate-law

sense. (A&E LLC Agreement) (indicating A&E was classified as a partnership

for tax purposes). The court assumes that corporate subsidiaries of A&E may

have paid dividends to A&E that A&E’s members included in their gross income

based on their distributive shares in A&E. The briefing is not clear on this point,

but for purposes of taxpayer’s motion the court considers the point immaterial

because that motion does not challenge the treatment of the A&E dividends. The

court expresses no view on whether taxpayer’s share of the A&E “dividends” was

apportionable.

304 Comcast Corp. II v. Dept. of Rev. (TC 5265)

The parties have not briefed whether, or in what

circumstances, a partnership interest when sold should be

treated as an item of intangible property akin to the stock

in Allied-Signal, or whether an aggregate theory of partner-

ship applies, perhaps requiring the court to look through

the partnership to its underlying assets. See generally

Hellerstein, State Taxation ¶ 9.12[2] at 1 (characterizing

question as unresolved under original UDITPA; no discus-

sion of constitutional test). See also Jamie S. Fenwick et al,

State Taxation of Pass-Through Entities and Their Owners

¶ 11.03[2] 2 (2016) (asserting without citation that Allied-

Signal test “should” apply to gain from sale of an ownership

interest in a pass-through entity). Application of Oregon’s

version of UDITPA, as amended in 1989, would perhaps

result in some amount of Oregon tax liability regardless of

whether the gain is apportionable “business income.” See

ORS 314.635(4) (requiring gain from sale of a partnership

interest to be “allocated” to Oregon by formula based on

original cost of partnership tangible personal property in

Oregon vs. everywhere; alternatively, applying prior year’s

sales factor for the partnership if more than 50 percent of

partnership assets consists of intangibles); see Or Laws 1989,

ch 625, § 64. However, the court is not aware of any cases

addressing whether Oregon’s statutory method for assign-

ing gain from disposition of a partnership interest complies

with the constitutionally mandated treatment of income

that is not subject to taxation on an apportioned basis. The

court will deny both parties’ motions on this issue, and the

court will allow leave for either party to seek summary

judgment on the constitutional or statutory treatment of

the gain from the sale of the A&E interests as partnership

interests.39

39

Similarly, neither party has set forth adequate facts or adequately briefed

the argument, raised in the department’s motion but not in taxpayer’s motion,

that income that passed through A&E was required to be apportioned because

A&E was a partnership. In its reply brief and at oral argument, the department

stated its position that income passing through a partnership is “simply gross

receipts from the regular course of its business,” on the theory that a partner

always is engaged in the business of the partnership. The court will deny the

department’s motion on this point and, as with the issue of gain from the sale of

taxpayer’s interests in A&E, will allow leave for either party to seek summary

judgment on this issue. See CRIV Investments, Inc. v. Dept. of Rev., 14 OTR 181

(1997).

Cite as 24 OTR 250 (2020) 305

6. Conclusion (Issue B)

The court concludes that taxpayer’s dividends and

gain from the Vodafone and Time Warner stock were non-

apportionable because that stock did not serve an opera-

tional function in taxpayer’s business. The court will grant

taxpayer’s motion on apportionability as to the Vodafone

and Time Warner stock. As to taxpayer’s interests in A&E,

the court will deny taxpayer’s motion (as well as the depart-

ment’s motion to the extent it addresses the same issue),

with leave to either party to file a new motion that takes

into account the statutory and constitutional treatment of

the A&E interests as partnership interests.

C. Department’s Motion: Composition of Unitary Group

(Comcast MO Financial Services, Inc.)

The department seeks summary judgment on tax-

payer’s claim that taxpayer was not engaged in a single

unitary business with Comcast MO Financial Services, Inc.

and subsidiaries (collectively, the “MOFS Group”). Taxpayer

argues that the department has failed to show that there

is no genuine issue of material fact. In support of its posi-

tion on this issue, the department relies extensively on the

MTC Excerpt, which the court has declined to admit into

evidence. By contrast, in resisting the department’s motion,

taxpayer has put into evidence declarations of persons

with first-hand knowledge and supporting documents. The

department’s attempt on reply to refute taxpayer’s position

using taxpayer’s evidence and public filings is inadequate

to satisfy the department’s burden as the moving party.

The court readily concludes that the department has failed

to show that there is no genuine issue as to any material

fact. The court will deny the department’s motion as to this

argument.

D. Department’s Motion: Apportionability of Other Income

Items

The department’s motion seeks to recharacter-

ize as business income all items that taxpayer classified

as nonbusiness income for any of the Years at Issue. As

explained above, taxpayer has chosen to not contest this

306 Comcast Corp. II v. Dept. of Rev. (TC 5265)

recharacterization except with respect to dividends and

gain from taxpayer’s stock in Time Warner and Vodafone,

and pass-through income and gain from taxpayer’s interest

in A&E. The court has addressed all arguments that the

court considers colorable in its discussion above of taxpay-

er’s apportionability motion (Issue B). As to the treatment,

as apportionable or not apportionable, of gain from the sale

of taxpayer’s interests in A&E, as well as income passing

through A&E as a partnership, the court will deny the

department’s motion, with leave to either party to file a new

motion that takes into account the statutory and constitu-

tional treatment of the A&E interests as partnership inter-

ests. As to the treatment, as apportionable or not apportion-

able, of other income items not identified in this paragraph,

the court will grant the department’s motion.

E. Department’s Motion: Sales Factor Relief

Taxpayer makes an alternative claim for each of the

Years at Issue. Taxpayer claims that, if the court upholds

the department’s reclassification as business income of any

capital gains and losses, dividends or pass-through income

and losses, those amounts “constitute ‘sales’ for Oregon

sales factor apportionment purposes and must be included

in the denominator of the sales factor pursuant to ORS

314.665(1).” The department’s motion urges the court to deny

this claim on the grounds that, under the Oregon Supreme

Court’s opinion, “the numerator (before the audience ratio is

applied to it) must be the same as the denominator.” While

this statement appears to agree with taxpayer’s claim, tax-

payer takes particular issue with the department’s next

assertion: “The better approach is to exclude these intan-

gible income items from the denominator, but if they are

included then they must be included in the numerator as

well—resulting in a ‘wash.’ ” Because this claim is an alter-

native claim, the court’s conclusion as to the Vodafone and

Time Warner items has rendered the claim moot as to those

items. With respect to all other receipts, the court finds the

factual record inadequate. The court will deny the depart-

ment’s motion as to this claim, with leave to either party

to seek summary judgment on a more complete factual

record.

Cite as 24 OTR 250 (2020) 307

F. Net Operating Loss Carryforward Deductions

Taxpayer claimed deductions on its returns for tax

years 2007 through at least 2010 resulting from its carrying

forward of net operating losses (NOLs) that it incurred in tax

years 2003 through 2006 (“taxpayer’s NOL Years”).40 The

department denied the carryforward deductions and seeks

summary judgment on two grounds. Taxpayer resists the

department’s motion but has not cross-moved on this issue;

taxpayer asserts that if the court denies the department’s

motion, thereby allowing taxpayer to contest the denial of

its carryforward deductions, trial will be necessary to deter-

mine the facts establishing the amount of its income or loss

in taxpayer’s NOL Years and whether it is entitled to any

carryforward deductions for the Years at Issue.

Both parties refer to the Oregon Supreme Court’s

recent decision in Hillenga v. Dept. of Rev., 358 Or 178, 361

P3d 598 (2015). That opinion thoroughly explained the con-

cept of an NOL and how the amount of an NOL incurred in

one year may be “carried forward” to later tax years and

deducted from gross income in those “carryforward years.”

See id. at 180-82.41 The court held that the fact that the NOL

year may be closed to audit does not preclude the department

from seeking to recalculate the taxpayer’s taxable income

or loss for the NOL year for the limited purpose of deter-

mining the correct amount of a carryforward deduction the

taxpayer claimed on a return for a carryforward year. Id. at

194. The court found persuasive the federal case law on the

same issue and noted that “[t]he rule that the federal courts

have announced is not one-sided; it does not favor only the

taxing authority.” Id. at 191 (citing Springfield St. Ry. Co. v.

United States, 312 F2d 754 (Ct Cl 1963) (taxpayer allowed to

recalculate taxes for a closed year for which it had failed to

take an allowable deduction).

40

It is unclear from the record whether taxpayer claimed carryforward

deductions from taxpayer’s NOL Years beyond 2010.

41

The Oregon statutory authority differs as between the personal income

taxpayers who were plaintiffs in Hillenga and a corporate taxpayer such as the

plaintiff in this case. ORS 317.344 requires a corporate taxpayer to add back any

federal NOL carryover or any NOL carryback when computing Oregon taxable

income. ORS 317.476 allows a carryforward of NOLs for up to 15 years but does

not allow a carryback of NOLs. The court does not consider the statutory differ-

ences material for resolution of the department’s motion.

308 Comcast Corp. II v. Dept. of Rev. (TC 5265)

1. Issue (F)

May taxpayer contest the department’s adjustments

to taxpayer’s NOL carryforward deductions for the Years at

Issue?

2. Analysis (Issue F)

Taxpayer asserts that Hillenga controls this case

and requires the court to deny the department’s motion.

The department seeks to distinguish Hillenga on two

grounds, which the court labels, solely for ease of reference,

an “equity” principle and a “substantive” issue. The depart-

ment’s written arguments are very short, comprising a total

of three pages in two briefs. The court finds it necessary to

restate the arguments in order to analyze them.

The department’s “equity” argument is that tax-

payer could have appealed its income or loss for taxpayer’s

NOL Years but failed to take the right steps to do so timely

and has thereby lost its right to contest the department’s

adjustments to taxpayer’s carryforward deductions for the

Years at Issue. The department argues that, because the

statute of limitations for appeal to the Tax Court, ORS

305.280,42 now bars taxpayer from litigating its income or

42

ORS 305.280 generally imposes a 90-day limitations period for an initial

appeal to this court, other than an appeal from an order of a county board of

property tax appeals, although subsection (3) allows certain appeals within two

years after the tax has been paid. The statute provides in relevant part:

“(1) Except as otherwise provided in this section, an appeal under ORS

305.275 (1) or (2) shall be filed within 90 days after the act, omission, order

or determination becomes actually known to the person, but in no event later

than one year after the act or omission has occurred, or the order or deter-

mination has been made. An appeal under ORS 308.505 to 308.665 shall be

filed within 90 days after the date the order is issued under ORS 308.584 (3).

An appeal from a supervisory order or other order or determination of the

Department of Revenue shall be filed within 90 days after the date a copy of

the order or determination or notice of the order or determination has been

served upon the appealing party by mail as provided in ORS 306.805.

“(2) An appeal under ORS 323.416 or 323.623 or from any notice of assess-

ment or refund denial issued by the Department of Revenue with respect to

a tax imposed under ORS chapter 118, 308, 308A, 310, 314, 316, 317, 318, 321

or this chapter, or collected pursuant to ORS 305.620, shall be filed within

90 days after the date of the notice. An appeal from a proposed adjustment

under ORS 305.270 shall be filed within 90 days after the date the notice of

adjustment is final.

“(3) Notwithstanding subsection (2) of this section, an appeal from a

notice of assessment of taxes imposed under ORS chapter 314, 316, 317 or 318

Cite as 24 OTR 250 (2020) 309

loss from the NOL Years in an appeal as to those years, the

court cannot allow taxpayer to invoke Hillenga or other case

law as to the carryforward deductions. To do so, the depart-

ment argues, would allow taxpayer to “dodge the statute of

limitations by collaterally attacking earlier years’ adjust-

ments that were not appealed * * *.” Taxpayer acknowledges

that the department audited taxpayer’s NOL Years but

rejects the department’s factual premise on the grounds that

it has paid the tax asserted in the department’s notices, has

timely filed a refund claim for the NOL Years, and is await-

ing the department’s action on that claim. The department

rejects taxpayer’s contention that a timely refund claim is

pending.

The court finds that at least two sets of facts rele-

vant to the department’s “equity” argument are contested.

First, the department cites no evidence for its assertion

that taxpayer failed to timely exercise its appeal rights as

to taxpayer’s NOL Years. In the normal progression of an

income tax audit that results in an appeal to this court, the

department issues two notices after completing the audit of

the taxpayer’s returns: (1) a notice of deficiency, from which

the taxpayer may appeal within the department via a writ-

ten objection and an optional request for a “conference,” and

(2) a notice of assessment after the taxpayer either has pur-

sued its administrative appeal rights without success, or

has not acted on its administrative appeal rights. See ORS

305.265. Here, taxpayer submitted the department’s audit

report and notices of deficiency for taxpayer’s NOL Years

as exhibits to a declaration by employee Thomas Donnelly.43

Those documents show that the department did indeed

conduct an audit of taxpayer’s NOL Years, after which the

auditor issued notices of deficiency explaining the auditor’s

conclusions and taxpayer’s administrative “appeal” rights.

Nothing in the record indicates that taxpayer pursued any

appeal within the department. Nor did either party introduce

may be filed within two years after the date the amount of tax, as shown on

the notice and including appropriate penalties and interest, is paid.”

43

Curiously, at oral argument, the department objected, on relevance

grounds, to the admission of the deficiency notices and to a demonstrative exhibit

that explained them. The court overrules the department’s objection, as the doc-

uments are fundamental to the premise of the department’s own position that it

audited taxpayer for the NOL Years.

310 Comcast Corp. II v. Dept. of Rev. (TC 5265)

evidence relating to taxpayer’s alleged payment of the tax

and subsequent refund claim for taxpayer’s NOL Years.

Finally, although the department refers to ORS 305.280 as

the statute that taxpayer seeks to “dodge,” the department

has introduced no evidence that the department has issued

a “notice of assessment” (referred to in subsections (2) and

(3)), nor has the department identified any other “act, omis-

sion, order or determination” that would have started the

running of a 90-day limitations period under subsection (1).

The court lacks any basis to decide whether taxpayer still

has an opportunity to contest its taxable income or loss for

the NOL Years in an appeal to this court stemming from the

notices of deficiency or the alleged refund claim; therefore,

the department’s motion fails on this factual ground.

Second, the department’s “equity” argument implic-

itly seeks to apply principles of claim preclusion or issue pre-

clusion, but the department offers no evidence on the nature

or scope of the allegedly unappealed prior proceedings.44

Given that there is no evidence whether taxpayer pursued

any administrative remedies, the issue is whether the audit

itself has preclusive effect. No statute provides that failure

to appeal from the result of an audit precludes adjudication

of an issue that a taxpayer contested or could have contested

in the audit, and the department asserts no constitutional

basis for preclusion. See Fisher, 321 Or at 347 (“Issue preclu-

sion can be based on the constitution, common law, or stat-

ute.”). Accordingly, the question is whether the common-law

doctrine of issue preclusion applies. One element of the

common-law test is that “[t]he prior proceeding [be] the

type of proceeding to which this court will give preclusive

effect.” See Nelson v. Emerald People’s Utility Dist., 318 Or

99, 104, 862 P2d 1293 (1993) (establishing five-part test for

issue preclusion). Courts look to the degree of formality or

44

In Fisher Broadcasting, Inc. v. Dept. of Rev., 321 Or 341, 345 n 4, 898 P2d

1333 (1995), the court explained the overall concept of preclusion by former adju-

dication and its two main branches of claim preclusion (res judicata) and issue

preclusion (collateral estoppel). The court here refers to issue preclusion because

the question is whether taxpayer can litigate a discrete issue (its taxable income

or loss for taxpayer’s NOL Years) in these consolidated cases for the purpose of

determining any carryforward deduction for the Years at Issue. See also Drews v.

EBI Companies, 310 Or 134, 139-45, 795 P2d 531 (1990) (explaining doctrine of

preclusion by former adjudication and its branches).

Cite as 24 OTR 250 (2020) 311

comprehensive nature of the administrative procedure. See

Lethin v. Dept. of Rev., 278 Or 201, 206, 563 P2d 687 (1977)

(county assessor’s appraisal in one year does not preclude

revaluation in different year); see also State v. Ratliff, 304

Or 254, 744 P2d 247 (1987) (license suspension proceedings

before Department of Motor Vehicles not preclusive for crim-

inal proceedings on driving under influence of intoxicants).

This court seriously questions whether an income tax audit

of the kind typically seen in this court could have preclusive

effect on later judicial proceedings. But since the depart-

ment has made no effort to introduce facts relevant to the

common-law test, the court concludes that it cannot deter-

mine whether the audit prevents taxpayer from challenging

the department’s carryforward adjustments. The depart-

ment’s motion fails on this factual ground as well.45

The court also questions whether any other equi-

table or prudential doctrine would bar taxpayer from con-

testing the department’s recalculations of its income or loss

from the NOL Years. The department seems to argue that

its adjustments to taxpayer’s carryforward deductions are

immune from challenge by taxpayer because the department

was at a procedural disadvantage until taxpayer sought to

carry forward the NOLs and use them on its returns for

the Years at Issue. Specifically, the department asserts that

any comparison between its position in Hillenga and that of

taxpayer would be a “false equivalency” because the depart-

ment’s right to act on an overstated NOL is constrained,

while a taxpayer has an unconstrained right to appeal

whatever action the department does take. The constraint

that the department refers to is explained in Hillenga:

“The department has no general authority to take issue

with every deduction claimed by a taxpayer on a particular

tax year’s return. Rather, that authority arises only if the

45

To the extent that the department’s argument could be read as an alle-

gation that taxpayer has failed to exhaust administrative remedies before

seeking to contest the department’s carryforward adjustments in these consol-

idated cases, the argument fails for lack of the same basic facts of events after

the department’s notices of deficiency for taxpayer’s NOL Years. See generally

Charter Communications Holding Co., LLC v. Dept. of Rev., 24 OTR 88 (2020)

(applying Tuckenberry v. Board of Parole, 365 Or 640, 451 P3d 227 (2019)); con-

cluding no exhaustion requirement for centrally assessed property tax appeal

under ORS 308.584).

312 Comcast Corp. II v. Dept. of Rev. (TC 5265)

deduction affects the amount of tax owed by a taxpayer for

a given tax year. Specifically, after a taxpayer files a tax

return for a given year, the department is charged with

examining the return as soon as practicable, computing the

tax owed for the period covered by the return, and notify-

ing the taxpayer if the department discovers a ‘deficiency.’

ORS 305.265(2). A deficiency, for that purpose, basically

means taxes owed but unpaid. * * *

“For the department to issue a notice of deficiency, there

must be some tax owed. Accordingly, there can be no defi-

ciency if the taxpayer has no taxable income. That point

becomes significant when one considers that the taxpay-

er’s taxable income may be less than zero, as is true when

the taxpayer has a net operating loss. If a taxpayer incor-

rectly claims deductions leading to a net operating loss of

$400,000, but the department concludes that the taxpayer’s

actual net operating loss was only $40,000, the department

has no ability to issue a deficiency. Whether the true loss is

$40,000 or $400,000, it is still a loss, the taxpayer still owes

no taxes, and the department cannot issue a deficiency.”

Hillenga, 358 Or at 184-85 (internal footnote omitted). The

department invites the court to compare this constraint on

the department with a taxpayer’s rights to appeal, appar-

ently arguing that a taxpayer is not constrained from

appealing whatever action the department takes as to an

NOL year. Applying the Supreme Court’s example above,

the department appears to assert that a taxpayer can chal-

lenge the department’s reduction of its NOL from $400,000

to $40,000 in an appeal for the tax year of the NOL. And

if the taxpayer fails to do so within 90 days of the reduc-

tion, the department seems to argue, the taxpayer is forever

barred from contesting the department’s denial of carry-

forward deductions attributable to the $360,000 that the

department disallowed for the NOL year.

The statute conferring the taxpayer’s right to appeal

to this court is ORS 305.275. That statute requires the tax-

payer to be “aggrieved by and affected by” an act, order or

determination of the department that affects the taxpay-

er’s property, and there must be “no other statutory right

of appeal for the grievance.” ORS 305.275(1). The depart-

ment seems to argue that adjustments that merely reduce

the amount of an NOL but do not result in a deficiency cause

Cite as 24 OTR 250 (2020) 313

the taxpayer to be “aggrieved” by the adjustment, even

though the taxpayer owes no additional tax for the NOL

year.46 This court sees no need to decide whether a taxpayer

is “aggrieved” and has “recourse” to contest the amount of

an NOL reduction for the NOL year, however, because the

court concludes that, so long as the amount of the taxpayer’s

taxable income or loss for the NOL year has not actually

been litigated in a proceeding with preclusive effect, there

is no equitable reason to deny the parties the chance to do

so for purposes of a carryforward deduction. The purpose of

allowing recalculation under Hillenga is to determine the

correct amount of tax due for the carryforward year. If the

facts needed to make that determination have not yet been

established in a prior proceeding, the court sees no reason

why the court should be precluded from doing so.

The court now turns to the department’s second

argument based on “taxpayer identity.” The department

asserts that the NOL that taxpayer carried forward from

tax years 2003 to 2006 “simply flows from the department’s

decision as to the composition of [taxpayer’s] unitary group

under Oregon chapter 317.” The department characterizes

this decision as a “determination as to the very identity

of the ‘taxpayer,’ i.e., which companies should have been

included in the unitary group consolidated returns” filed for

the loss-generation years. According to the department, the

nature of the substantive issue “goes beyond a question of

NOL calculation” as in Hillenga and other loss recalculation

cases.

The court sees no logic in the department’s argu-

ment that a recalculation of underlying NOLs is sometimes

permissible and sometimes not, depending on what sub-

stantive issues cause the department to believe that the

taxpayer claimed an excessive NOL on its return. A tax-

payer may report an NOL on its return for any combination

of reasons that basically reduce to claiming more deductions

than gross income for the tax year. See IRC § 172(c) (defining

46

The Oregon Supreme Court’s recent opinion in Seneca Sustainable Energy,

LLC v. Dept. of Rev., 363 Or 782, 796-98, 429 P3d 360 (2018), discusses the

aggrievement requirement but had no need to address the specific fact pattern

here.

314 Comcast Corp. II v. Dept. of Rev. (TC 5265)

“net operating loss” as “the excess of the deductions allowed

by this chapter over the gross income”).47 Recalculating the

NOL can mean redetermining the propriety of every item on

the return as well as items that the taxpayer may have omit-

ted from the return. The department refers to no Oregon or

federal authority that establishes or supports the limitation

it asks the court to apply, and the cases are remarkable for

the wide range of underlying issues involved. In Hillenga,

the taxpayers had claimed, but failed to adequately substan-

tiate, business expense deductions for automobile, travel,

and entertainment expenditures. Hillenga v. Dept. of Rev.,

22 OTR 301, 302 (2016) (on remand). In Springfiel

This text is long and has been trimmed here. Open the source document for the complete record.