Chevron U. S. A. Inc. v. Dept. of Rev.

IN THE OREGON TAX COURT

MAGISTRATE DIVISION

Corporation Excise Tax

CHEVRON U.S.A. INC. a Pennsylvania )

Corporation, )

)

Plaintiff, ) TC-MD 190031N

)

v. )

)

DEPARTMENT OF REVENUE, )

State of Oregon, )

) ORDER ON CROSS MOTIONS FOR

Defendant. ) SUMMARY JUDGMENT

This matter came before the court on the parties’ cross motions for summary judgment

concerning the inclusion of Plaintiff’s commodities hedging receipts in the sales factor under

ORS 314.665(6). Oral argument was held by telephone on July 15, 2020. Kristin L. Goodin,

attorney, appeared on behalf of Plaintiff. Marilyn J. Harbur and Daniel Paul, Senior Assistant

Attorneys General, appeared on behalf of Defendant.

I. STATEMENT OF FACTS

A. Overview of Plaintiff’s Business

Plaintiff and its subsidiaries “engage in fully integrated petroleum operations, chemicals

operations, mining operations, power generation and energy services.” (Stip Ex 1 at 5.) It

describes its business in terms of “upstream” and “downstream” operations:

“Upstream operations consist primarily of exploring for, developing and

producing crude oil and natural gas; processing, liquefaction, transportation and

regasification associated with liquefied natural gas; transporting crude oil by

major international oil export pipelines; transporting, storage and marketing of

natural gas; and a gas-to-liquids project. Downstream operations consist

primarily of refining crude oil into petroleum products; marketing of crude oil and

refined products; transporting crude oil and refined products by pipeline, marine

vessel, motor equipment and rail car; and manufacturing and marketing of

commodity petrochemicals, plastics for industrial uses and fuel and lubricant

additives.”

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 1

(Id.; see also Stip Exs 2 at 4, 3 at 6.) Of Plaintiff’s total expenditures, upstream activities

accounted to 89 percent in 2011 and 2012, and 90 percent in 2013. (Stip Ex 3 at 8.)

Plaintiff “is primarily in a commodities business with a history of price volatility. The

single largest variable that affects the company’s results of operations is the price of crude oil,

which can be influenced by general economic conditions, industry inventory levels, production

quotas imposed by the Organization of Petroleum Exporting Countries (OPEC), weather-related

damage and disruptions, competing fuel prices and geopolitical risk.” (Stip Ex 1 at 31.) It is

also “exposed to market risks related to the price volatility of * * * refined products, natural gas,

natural gas liquids, liquefied natural gas and refinery feedstocks.” (Id. at 54.)

B. Plaintiff’s Hedging Program

Plaintiff uses derivative commodity instruments to manage risks relating to “the

purchase, sale and storage of crude oil, refined products, natural gas, natural gas liquids and

feedstock for company refineries.” (Stip Ex 1 at 77.) It “also uses derivative commodity

instruments for limited trading purposes.” (Id. at 54.) Plaintiff’s derivative commodity

instruments “consist mainly of futures, options and swap contracts traded on” stock exchanges

and electronic platforms. (Id.) It also enters swap contracts and option contracts “with major

financial institutions and other oil and gas companies in the ‘over-the-counter’ markets.” (Id.)

Most of Plaintiff’s derivative commodity instruments “can be liquidated or hedged effectively

within one day” and Plaintiff manages its market positions daily. (Id.)

The “majority” of Plaintiff’s “activity in derivative commodity instruments is intended to

manage the financial risk posed by physical transactions.” (Stip Ex 1 at 69.) However,

Plaintiff’s “derivatives are not material to [its] financial position, results of operations or

liquidity. [It] believes it has no material market or credit risks to its operations, financial position

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 2

or liquidity as a result of its commodity derivative activities.” (Id. at 77.)

As required by Treasury Regulation section 1.1221-2(f)(3)(iv), Plaintiff maintains

“Aggregate Hedging Program Descriptions” for its crude oil and natural gas business lines.

(Ptf’s Exs 4, 5.) It describes Plaintiff’s hedging program and provides specific guidance to its

staff regarding whether financial contracts should be identified as “either hedge or speculative

trades” before any gains or losses are realized. (Ptf’s Ex 4 at 2.) Plaintiff’s physical traders trade

in oil and oil products, as well as natural gas and related products. (Id.; Ptf’s Ex 5 at 2)

Plaintiff’s “structural financial traders” “trade around the resulting net exposure from the

physical traders’ activities * * *.” (Ptf’s Ex 4 at 1.) “This structure activity is focused on

pricing, exposure, financial trading, and balancing financial and physical exposures[.]” (Id.)

Examples of “physical” contracts that create risk are those “for purchase or sale of physical

volumes of crude LPG or refined products,” transport of those products, and storage of those

products. (Id. at 3.) “A critical strategy” is to manage the “risks inherent in the crude, LPG and

product trading markets[,]” one of which is price risk. (Id. at 2.) “The primary purpose” of

Plaintiff’s financial trading “is to mitigate the price risks associated with its physical

transactions[.]” (Id. at 3.) Plaintiff uses financial contracts to “eliminate the risk that market

prices will change as margins earned on physical deals will be reduced or lost.” (Id. at 3.) The

financial contracts “ ‘lock in’ margins on physical deals[.]” (Id.)

C. Plaintiff’s Accounting for Hedging Transactions

“Derivatives beyond those designated as normal purchase and normal sale contracts are

recorded at fair value” on Plaintiff’s balance sheet, in accordance with relevant accounting

standards, “with resulting gains and losses reflected in income.” (Stip Ex 1 at 54.) The tax

treatment of hedging requires reporting on a realization basis. (Ptf’s Ex 4 at 5.) Hedges are

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 3

“matched to the underlying physical business, and upon settlement the gain or loss is recognized

as ordinary income.” (Ptf’s Ex 4 at 5.) By contrast, “trades classified as speculative recognize

the full mark to market earnings impact as capital gains and losses in the current reporting

period.” (Id.) Ordinary tax treatment of a hedge “allow[s] net annual losses to be offset by

[Plaintiff’s] ordinary profits.” (Id. at 7.)

D. Plaintiff’s Tax Returns and Defendant’s Adjustments

Plaintiff “filed amended Oregon Corporation Excise Tax Returns for the tax years 2011,

2012, and 2013 to reflect the inclusion of gross hedging receipts in the Oregon sales factor.”

(Ptf’s Mot for Summ J at 2, citing Compl.) Defendant issued notices of deficiency for each of

those years. (Compl at 3.) At Plaintiff’s request, Defendant held a conference and the sole issue

was whether Plaintiff’s gross hedging receipts were includable in the Oregon apportionment

sales factor. (Compl, Ex A at 2.) Defendant concluded that the gross hedging receipts were not

includable in Plaintiff’s sales factor under ORS 314.665(6)(a) because they arose from the sale

of intangible assets and were not derived from Plaintiff’s primary business activity. (Id. at 4-5.)

Defendant included the net gain from Plaintiff’s hedging activities under ORS 314.665(6)(b)

because hedging activity was an integral part of Plaintiff’s business and, therefore, generated

business income under ORS 314.610(1). 1 (Id. at 6.) Finally, Defendant reached an alternative

conclusion that including gross hedging receipts in Plaintiff’s sales factor would not fairly

represent Plaintiff’s business activity in Oregon under ORS 314.667. (Id. at 6-7.) Defendant

issued notices of assessment following its conference decision. (Id. at 3.) This appeal ensued.

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1

Defendant wrote that “this adjustment will not change the result of [Plaintiff’s] tax.” (Compl, Ex A at 7.)

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 4

II. ISSUES, PARTIES’ POSITIONS, STANDARD OF REVIEW

The issues presented for the 2011, 2012, and 2013 tax years are: 1) whether Plaintiff’s

hedging receipts arise from the “sale, exchange, redemption or holding of intangible assets”

under ORS 314.665(6)(a); and, if so, 2) whether those receipts derive from Plaintiff’s “primary

business activity” under ORS 314.665(6)(a). If the answer to the first question is yes and the

answer to the second question is no, then the gross receipts are excluded from the sales factor

under ORS 314.665(6)(a). 2

Plaintiff moves for summary judgment on the first issue, arguing that commodity hedging

transactions are inextricably linked to the underlying commodity and therefore are different in

kind from other forms of financial and speculative hedging for investment or cash management

purposes. (Ptf’s Mot for Summ J at 8.) Plaintiff argues that gross hedging receipts should be

apportioned to Oregon under ORS 314.665(2) in the same manner as the underlying commodity.

(Ptf’s Reply at 2.) Such treatment is consistent with federal income tax law. (Ptf’s Mot for

Summ J at 8-15.) Plaintiff asks the court to deny summary judgment on the second issue,

asserting that issues of material fact exist. (Ptf’s Reply at 4.)

Defendant also moves for summary judgment on the first issue, arguing that Plaintiff’s

commodity hedging receipts arise from the transfer of intangible assets, a term which is defined

broadly under Tektronix, Inc. v. Dept. of Rev., 354 Or 531, 316 P3d 276 (2013). (Def’s Mot for

Summ J at 3-5.) As with “cash management” or investment receipts, including gross hedging

receipts would distort the sales factor due to the significant number of financial transactions. (Id.

at 3-4.) Defendant moves for summary judgment on the second issue, arguing that the hedging

2

However, Defendant included the net gain from Plaintiff’s hedging activities under ORS 314.665(6)(b)

because hedging activity was an integral part of Plaintiff’s business.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 5

receipts to not derive from Plaintiff’s primary business activity based on the factors set forth in

OAR 150-314.665(6)(3). (Id. at 5-7.)

The court grants a motion for summary judgment if all the documents on file “show that

there is no genuine issue as to any material fact and that the moving party is entitled to prevail as

a matter of law.” Tax Court Rule (TCR) 47. 3 “No genuine issue as to a material fact exists if,

based upon the record before the court viewed in a manner most favorable to the adverse party,

no objectively reasonable juror could return a verdict for the adverse party * * *.” Id.

III. ANALYSIS

This court recently described the six-step process for determining the Oregon taxable

income of a multinational group of corporations. Oracle Corp. v. Dept. of Rev., TC 5340, 2020

WL 7765776 at *2 (Or Tax, Dec 16, 2020). The issues here pertain to step five: determining the

correct Oregon apportionment formula by which apportionable business income is multiplied.

See id. at *3. For the tax years at issue, “Oregon’s UDITPA prescribed a standard single-factor

formula based solely on the taxpayer’s ‘sales’ in Oregon compared to sales everywhere.” Id.;

ORS 314.650. 4 Sales are defined as “all gross receipts of the taxpayer not allocated” as

nonbusiness income. ORS 314.610(7). Notwithstanding that definition, ORS 314.665(6)(a)

excludes “gross receipts arising from the sale, exchange, redemption or holding of intangible

assets, including but not limited to securities, unless those receipts are derived from the

///

3

TCR 47 is made applicable by Tax Court Rule – Magistrate Division (TCR-MD) 13 B which provides

that “[t]he court may apply TCR 47 to motions for summary judgment, to the extent relevant.”

4

The court’s references to the Oregon Revised Statutes (ORS) are to 2009. Although the 2011 edition of

the ORS is applicable to the 2012 and 2013 tax years, the relevant statutes are the same as in 2009. Oregon applies

special apportionment formulas for certain industries such as public utilities, financial organizations, insurers, and

interstate broadcasters. See ORS 314.615, 314.280, 317.660, and 314.682. There is not contention that any of those

special formulas apply here.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 6

taxpayer’s primary business activity.” ORS 314.665(6)(b) allows the inclusion of net gain from

those sales if they are “included in the taxpayer’s business income.”

A preliminary question is whether Plaintiff’s hedging activity yielded “gross receipts”

and therefore sales within the meaning of UDITPA. See Oracle, 2020 WL 7765776 at *6-11

(analyzing the text, context, and legislative history of “gross receipts” to determine if certain

income met the definition). On this point, the parties agree that Plaintiff’s hedging receipts are

“gross receipts” under UDITPA and the court sees no basis for a contrary conclusion. (See Ptf’s

Mot for Summ J at 6, Def’s Mot for Summ J at 3.) The next question is whether the receipts

arose from the transfer or holding of intangible assets.

A. Were Plaintiff’s Derivative Commodity Instruments Intangible Assets?

The Oregon Supreme Court considered the meaning of “intangible assets” in Tektronix,

354 Or 531, holding that the taxpayer’s sale of goodwill associated with its printer division was

properly excluded from the sales factor under ORS 314.665(6)(a) as an intangible asset. The

court reviewed the text, context, and legislative history, finding that the term “intangible assets”

had a “well-defined and therefore applicable legal meaning.” Id. at 543-545. It means “any

nonphysical asset or resource that can be amortized or converted to cash” and “property

representative of a right rather than a physical object.” Id. at 543-44 (citing Black’s Law

Dictionary 134 (9th ed 2009) and West’s Tax Law Dictionary 570 (2013)). Examples include

copyrights, patents, trademarks, stocks, bonds, goodwill, franchises, and computer programs. Id.

Intangible property may be contrasted with “tangible personal property.” 5 The Oregon

Supreme Court considered the meaning of that term under ORS 314.665(2)(a) in Powerex v.

5

The definition of “tangible personal property” is also relevant because Plaintiff argues that its hedging

receipts should be sourced using the rules applicable to such property.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 7

Dept. of Rev., 357 Or 40, 346 P3d 476 (2015), holding that electricity was tangible personal

property. This court had determined that electricity was not tangible property based on expert

testimony from physics professors, so it allocated taxpayer’s sales of electricity to the state

where the greater part of its income-producing activity occurred. Id. at 57-58. The Oregon

Supreme Court disagreed that principles of physics controlled the outcome, looking instead to

the context in which the term was used – UDITPA – including the text, context, and legislative

history. Id. at 60. The court concluded that the relevant qualities

“were whether the property sold was perceptible to the senses, could be located

physically within a state, and could be delivered or shipped to a place. A related

quality was that the physical properties of tangible personal property were what

made it useful while the physical properties of intangible property had little or no

relation to that property’s value or usefulness. Rather, the value of intangible

property derives from the rights and obligations it represents.”

Id. at 65. Although electricity does not fall neatly into either category, the court held it was

tangible, noting it was “perceptible to the senses,” valuable based on its physical properties, and

could “be physically located within a state and shipped from one state to another.” Id. at 66.

Turning to the derivative commodity instruments at issue (futures, options, and swap

contracts), the court begins with an overview of these types of contracts.

“A commodity futures contract consists of a firm, legal agreement between a

buyer (or seller) and an established commodity exchange or its clearinghouse

whereby the trader agrees to accept (or deliver) between designated dates, a

carefully specified ‘lot’ of a commodity meeting the quality and delivery

conditions prescribed by the commodity exchange, with cash settlement on

delivery date at a settlement price to be prescribed. The trader agrees to an

arrangement with a qualified broker (or the clearinghouse) to provide him with a

margin deposit as required, and also agrees to reimburse him or accept credit for

all interim gains or losses in value of that futures contract resulting from day-to-

day changes in its price on the floor of the established commodity exchange. The

trader has an option which permits him to close out his contract at any time (at the

market) simply by notifying his broker of his desire; and, on the other side, it

permits the broker to close out the commitment if the margin is impaired by

disposing of the contract at the market.”

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 8

Vickers v. Comm’r, 80 TC 394, 396-97 (1983). Like stocks – which are specifically identified as

intangible assets – derivative commodity instruments are traded on exchanges. Although the

value of the contract relates to the price of the underlying commodity, the contracts are

nonphysical assets that can be quickly converted to cash. 6 They represent a right rather than a

physical object; namely, the right to buy or sell a commodity at an established price on a given

date. See Modesto Dry Yard, Inc. v. Comm’r, 14 TC 374, 385 (“Transactions in commodity

futures are commonly spoken of as purchases and sales of a specific commodity such as corn,

wheat, or cotton, but the traders really acquire rights to the specific commodity rather than the

commodity itself. These rights are intangible property which may appreciate or depreciate in

value.”); see also Comcast, 2020 WL 6948453 at *21 (referring to futures contracts as

“intangibles”). The court preliminarily concludes that derivative commodity instruments are

intangible assets within the meaning of ORS 314.665(6)(a).

1. Treatment of commodity hedging transactions under federal tax law

Notwithstanding their character as intangible assets, Plaintiff argues that its hedging

receipts should be sourced in the same manner as the underlying physical commodity being

hedged because that is how federal tax law treats such transactions and Oregon corporate excise

tax adopts by reference those portions of the IRC and other federal law pertaining to the

determination of taxable income. (Ptf’s Mot for Summ J at 8 (citing ORS 317.013).) It

maintains that Tektronix does not control the outcome here because it did not consider “the

unique nature of commodity hedging transactions.” (Ptf’s Reply at 4.) Defendant agrees that

Oregon looks to federal law to compute taxable income and also agrees with Plaintiff’s

6

According to Plaintiff, most of its derivative commodity instruments “can be liquidated or hedged

effectively within one day.” (Stip Ex 1 at 54.)

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 9

description of the federal income tax treatment of commodity hedging, but disagrees that that

federal law is relevant here because “[t]he apportionment of taxable income between the many

states is an issue unique to state taxation.” (Def’s Mot for Summ J at 8; Reply at 1-2.) The

federal law cited by Plaintiff concerns whether hedging transactions yield ordinary or capital

gains and losses, an issue which “has no bearing on the definition of sales for apportionment

under ORS 314.665.” (Def’s Mot for Summ J at 8.)

Hedging transactions, clearly identified as such on the day of acquisition, origination, or

entry, are excluded from the definition of “capital asset” under IRC section 1221(a)(7). 7 A

“‘hedging transaction’ means any transaction entered into by the taxpayer in the normal course

of the taxpayer’s trade or business primarily [] to manage risk of price changes or currency

fluctuations with respect to ordinary property which is held or to be held by the taxpayer[.]” IRC

§ 1221(b)(2)(A)(i). “[G]ain or loss on a short sale or option that is part of a hedging transaction

* * * is ordinary income or loss.” Treas Reg § 1.1221-2(a)(2). “The fact that a taxpayer

frequently enters into and terminates positions (even if done on a daily or more frequent basis) is

not relevant to whether these transactions are hedging transactions.” Treas Reg § 1.1221-2(d)(7).

The treatment of commodity hedging transactions as generating ordinary, rather than

capital, income and loss dates back to the “Corn Products doctrine.” In Corn Products Refining

Co v. Comm’r, 350 US 46, 76 S Ct 20, 100 L Ed 29 (1955), the Court held that taxpayer’s

purchases and sales of corn futures generated ordinary rather than capital income. It explained

that “Congress intended that profits and losses arising from the everyday operation of a business

be considered as ordinary income or loss rather than capital gain or loss.” Id. at 52. 8 Taxpayer –

7

By contrast, speculative trading of futures contracts yields capital gains or losses. See Vickers, 80 TC at

405-410 (summarizing cases so holding).

8

Notwithstanding that reasoning, the Court declined to extend the Corn Products doctrine to capital stock

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 10

a manufacturer that used raw corn in its operations – purchased and sold corn futures “as a form

of insurance against increases in the price of raw corn,” not to speculate. Id. at 50-51. Thus, the

futures were not “separate and apart from [taxpayer’s] manufacturing operation.” Id. at 50. The

Court subsequently explained that “Corn Products is properly interpreted as standing for the

narrow proposition that hedging transactions that are an integral part of a business’ inventory-

purchase system fall within the inventory exclusion of § 1221.” Arkansas Best Corp. v. Comm’r,

485 US 212, 108 S Ct 971, 99 L Ed 2d 183 (1988).

Even though most commodity derivatives are settled through offset 9 rather than through

physical delivery of the commodity, courts have treated the offsets as constructive delivery and

therefore sales. See Board of Trade of the City of Chicago v. Christie Grain and Stock Co., 198

US 236, 246-50, 25 S Ct 637, 49 L Ed 1031 (1905) (“in not less than three quarters of the

transactions in the grain pit there is no physical handing over of any grain”; rather, contracts to

buy are set off against contracts to sell, with the difference of price paid in cash); 10 Lyons Milling

Co. v. Goffe & Carkener, Inc., 46 F2d 241, 247 (10th Cir 1931) (“A set-off is a method by which

a contract to purchase is set off against a contract to sell without the formality of an exchange of

warehouse receipts or other actual delivery and, in legal effect, is a delivery.”); The Hoover

Company v. Comm’r, 72 TC 206, 248-50 (1979) (rejecting taxpayer’s argument that currency

in a bank that taxpayer held for business rather than investment purposes. Arkansas Best Corp. v. Comm’r, 485 US

212, 108 S Ct 971, 99 L Ed 2d 183 (1988).

9

Older cases use the term “set-off” whereas newer cases, IRC section 1221, and Treasury Regulation

1.1221-2 use the term “offset.” The terms appear to be interchangeable.

10

The case concerned whether such derivative transactions were illegal gambling. The court concluded

that they were not; the contracts were made in “good faith” and “for serious business purposes.” 198 US at 248-49.

Commodity derivative transactions must involve the transfer of property, otherwise such transactions could not “be

distinguished from mere wagering * * * betting or gambling.” Covington v. Comm’r, 120 F2d 768, 769-70 (1941)

(rejecting taxpayer’s argument that his commodity futures losses were ordinary rather than capital because he did

not own or acquire property; rather, he entered into and closed out executory contracts at a profit or loss without any

sale or exchange of property).

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 11

forward sale contract offsets were “mere releases” that did not meet the “sale or exchange”

requirement for treatment as capital losses; offsetting is “the most common method of settling a

forward sale contract” and “has been held to be delivery under the sale contract * * * satisfying

the sale or exchange requirement on the date the contract is settled”); Vickers, 80 TC at 398-99

(“Most commodity futures contracts are terminated without actual delivery of the commodity.”

A “sale or exchange” occurred when taxpayer closed out his contracts through offsetting.).

In sum, federal tax law treats commodity derivative instruments as capital assets unless

they are “hedging transactions” i.e., designated as such, and used by a taxpayer to manage price

risk with respect to property held in its trade or business. Commodity derivative instruments

used for hedging are treated like inventory or other raw materials used in the taxpayer’s business.

This is so even if the taxpayer settles its derivative contracts through offset rather than physical

delivery or receipt of the commodity. The question becomes whether that treatment of

commodity hedging under federal tax law changes the court’s preliminary conclusion that

derivative commodity instruments are intangible assets under ORS 314.665(6)(a).

2. Context of UDITPA and state apportionment

Plaintiff relies on ORS 317.013(1), which adopts by reference those portions of the IRC

and federal law “pertaining to the determination of taxable income of corporate taxpayers.” That

statute further directs the Department of Revenue to “apply and follow the administrative and

judicial interpretations of the federal income tax law.” ORS 317.013(2). The Oregon legislature

has declared its intent “[t]o make the Oregon corporate excise tax law, insofar as it relates to the

measurement of taxable income, identical to the provisions of the federal [IRC] * * * to the end

that taxable income for Oregon purposes is the same as it is for federal income tax purposes[.]”

ORS 317.018(1). To achieve that purpose, Oregon applies IRC provisions “relating to the

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 12

definitions for corporations, of income, deductions, accounting methods, accounting periods,

taxation of corporations, basis and other pertinent provisions relating to gross income.” ORS

317.018(2). It does not look to the IRC for computation of tax or tax credits. Id.

Although the court is bound to apply the IRC and federal law in its determination of

Plaintiff’s taxable income, the composition of the sales factor used to apportion Plaintiff’s

income to Oregon is a matter of state, not federal, law. See Dept. of Rev. v. Washington Federal,

20 OTR 507, 2012 WL 3024189 at *5 (2012) (“as to allocation and apportionment of income of

corporations operating in two or more states, the governing provisions are derived solely from

Oregon law”). To be sure, definitions and concepts from federal tax law may be relevant to

understand terms used in Oregon law. See, e.g., Comcast Corp. v. Dept. of Rev., TC 5265, 2020

WL 6948453 at *35-37 (Or Tax, Nov 25, 2020) (in determining the meaning of “net income or

profits” as used in Oregon statute, the court considered the context of the term when it entered

Oregon law, including the IRC). Moreover, courts – including this one – have cited the Corn

Products doctrine when analyzing whether an asset satisfies the operational function test of

Allied-Signal, Inc. v. Director, 504 US 768, 112 S Ct 2251, 119 L Ed 2d 533 (1992) to determine

whether income is apportionable under the U.S. Constitution. See id. at *20-21.

Here, the question is whether the Corn Products doctrine and related federal law is

relevant to the treatment of derivative commodity instruments in Oregon’s UDITPA sales factor.

The court bears in mind the context and purpose of UDITPA: to create “a uniform method of

attributing an appropriate portion of a multistate taxpayer’s overall net income to each state;” not

“a uniform definition of ‘income[.]’ ” Oracle, 2020 WL 7765776 at *8. UDITPA’s sales factor

refers to “gross receipts” rather than “income,” terms which were not viewed synonymously by

UDITPA’s drafters, suggesting income is “something different from the factors used to attribute

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 13

income to a particular state.” Id. (emphasis in original). Historically, UDITPA applied three

equally weighted factors to apportion income to Oregon: property, payroll and sales. Id. at *9.

The property factor included only real and tangible personal property. Id. “For apportionment

purposes, identifying a physical location for the property was key.” Id. The payroll factor also

“focused on the physical location of the individual worker or of the persons controlling the

worker’s actions, again reflecting physical business activity in the state.” Id.

Applying the foregoing, the court finds that the character of hedging receipts under

federal tax law (ordinary rather than capital) is not relevant to determining how such receipts

should be reflected in the sales factor used to apportion income to Oregon. Notwithstanding the

“constructive delivery” doctrine applied to offsets, Plaintiff’s hedging transactions do not result

in physical delivery of the underlying commodity. In that respect, they are not tangible personal

property under ORS 314.665(2)(a) and should not be treated as such for apportionment purposes.

3. History of ORS 314.665(6)(a): the “treasury function” receipts problem

The court briefly considers the legislative history of ORS 314.665(6). Although not

limited to such assets, ORS 314.665(6) was enacted to address the problem of “treasury

function” gross receipts. See Tektronix, 354 Or at 545. This court described the problem more

fully in its Tektronix opinion: Prior to the enactment of ORS 314.665(6),

“a company buying and selling large quantities of financial instruments in

connection with the cash management functions of the company would have

extremely large gross receipts from the sales of intangibles. In some cases

companies would buy and sell, on a daily basis, hundreds of millions of dollars of

short term instruments, producing hundreds of millions of dollars of gross

receipts—even though the net gain on such transactions could be very small. As

the income producing activity associated with the treasury function activity

occurred, typically, at the headquarters of the company, the numerator of the sales

factor for the headquarters state would have, some felt, an improperly large

number in the numerator of sales factor. That would, in the minds of some, skew

the apportionment of income of the company to the headquarters state.”

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 14

Tektronix, Inc. v. Dept. of Rev., 20 OTR 468, 493-94 (2012), aff’d but criticized. Plaintiff’s

hedging transactions serve a purpose beyond cash management and so do not fall within the

precise definition of the “treasury receipts” as described in Tektronix. However, Plaintiff’s

hedging receipts may create the same distortion problem described by the court given the number

of such transactions and the resulting quantity of gross receipts. Excluding Plaintiff’s gross

hedging receipts under ORS 314.665(6)(a) is consistent with the legislative intent of that statute.

4. Treatment of hedging receipts by other states

Finally, Plaintiff argues that other states that have adopted UDITPA have included gross

hedging receipts in the state apportionment factor. (Ptf’s Mot for Summ J at 16-17 (citing

General Mills v. Franchise Tax Board, 172 Cal App 4th 1535, 92 Cal Rptr 3d 208 (2009), and In

Re: Archer Daniels Midland Company, Pennsylvania Board of Finance and Revenue, Docket

No. 1523133 (2018)).) The court has reviewed the cases cited by Plaintiff and concludes that

they do not change the outcome of this analysis because neither involved a statute like ORS

314.665(6), that excludes from the sales factor gross receipts from the sale of intangible assets.

Each case concerned whether hedging transactions were “sales” for purposes of the sales factor –

a point not in dispute here – and, in General Mills, the amount of gross receipts to be included.

See 172 Cal App 4th at 1548(concluding “ ‘gross receipts’ from a futures sales contract are

equivalent to the full sales price of the contract”).

5. Conclusion: Plaintiff’s derivative commodity instruments are intangible assets

Plaintiff’s derivative commodity instruments are intangible assets within the meaning of

ORS 314.665(6)(a). They do not share important characteristics of tangible personal property

and should not be sourced as such. The fact that such assets are used in Plaintiff’s commodity

hedging program and treated as ordinary rather than capital assets under federal tax law does not

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 15

alter that conclusion because the rules for apportioning income to Oregon serve a different

purpose than the rules for determining federal taxable income. Including gross hedging receipts

in Plaintiff’s sales factor may result in the type of distortion that ORS 314.665(6) was enacted to

prevent.

B. Whether Plaintiff’s Hedging Receipts Derive from its Primary Business Activity

Having concluded that Plaintiff’s hedging receipts arose from sales of intangible assets,

the next question is whether they may nevertheless be included in Plaintiff’s sales factor because

they derive from Plaintiff’s “primary business activity.” Defendant moves for summary

judgment on this question, arguing that Plaintiff’s business included two segments – upstream

and downstream – neither of which included its hedging activities. (Def’s Mot for Summ J at 5-

6.) Plaintiff asks the court to deny summary judgment, alleging that issues of material fact exist.

In Tektronix, the Oregon Supreme Court concluded that taxpayer’s sale of goodwill did

not derive from its primary business activity, reasoning that “taxpayer’s ‘primary business’ was

‘manufacturing and distributing electronics products’” and not “engaging in the sale of its

divisions[.]” Id. at 547-48. More recently, this court observed that – although the legislative

history of ORS 314.665(6)(a) indicates that the primary business exception applies to taxpayers

“in the primary business of selling short-term securities or passively holding intangibles that

produce interest or dividends” – it is not limited by its terms to that circumstance. Oracle, 2020

WL 7765776 at *16. 11 Indeed, Defendant’s administrative rule identifies seven non-exhaustive

11

Previously, in recounting the history of ORS 314.665(6), this court described it as dividing “the world

into two hemispheres[:] * * * companies whose primary business involved the sale of intangible assets assets—for

example, firms trading securities for their own account” and all others. Tektronix, 20 OTR at 495. However, the

court in that opinion limited the scope of ORS 314.665(6)(a) to the “treasury function” problem described in the

legislative history. The Oregon Supreme Court rejected that conclusion, observing that the legislature used the

broader language of “intangible assets” – indicating its intention for a broader application of ORS 314.665(6)(a).

Tektronix, 354 Or at 543, 546. Similarly, the term “primary business activity” is broader than the examples given in

legislative history indicating it is not narrowly limited by those examples.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 16

factors to consider when identifying a taxpayer’s primary business activity:

(a) The stated business in the articles of incorporation.

(b) The business category entered on the Securities and Exchange Commission

Form 10-K of a publicly held corporation.

(c) The business designation in a “mission statement.”

(d) The business activity with the greatest average investment in tangible and

intangible assets from the balance sheet for the tax return.

(e) The business designation in advertising.

(f) The business with the greatest amount of net sales of product and services as

reported under Generally Accepted Accounting Principles.

(g) The business activity from which working capital is transferred to investments

in intangible assets and to which the working capital and income is returned.

OAR 150-346.665(6)(3) (2011). Plaintiff has presented evidence of the integral role that

hedging plays in its business and requested the opportunity to present additional evidence on the

question of its primary business activity. Given the fact-dependent nature of the inquiry, the

court concludes that summary judgment is not appropriate at this time.

IV. CONCLUSION

Upon careful consideration, the court concludes that Plaintiff’s commodity hedging

receipts arose from sales of intangible assets within the meaning of ORS 314.665(6)(a).

Accordingly, the gross receipts are excluded from Plaintiff’s sales factor unless they derive from

Plaintiff’s primary business activity, a question of fact. Now, therefore,

IT IS ORDERED that Plaintiff’s Motion for Summary Judgment is denied.

IT IS FURTHER ORDERED that Defendant’s Motion for Summary Judgment is granted

in part and denied in part.

///

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 17

IT IS FURTHER ORDERED that, within 30 days from the date of this Order, the parties

shall file a joint written status report proposing next steps.

Dated this ____ day of April 2021.

ALLISON R. BOOMER

PRESIDING MAGISTRATE

This interim order may not be appealed. Any claim of error in regard to this

order should be raised in an appeal of the Magistrate’s final written decision

when all issues have been resolved. ORS 305.501.

This document was signed by Presiding Magistrate Allison R. Boomer and

entered on April 14, 2021.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 18