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

No. 16 October 6, 2021 359

IN THE OREGON TAX COURT

REGULAR DIVISION

ORACLE CORPORATION

AND SUBSIDIARIES,

Plaintiff,

v.

DEPARTMENT OF REVENUE,

Defendant.

(TC 5340)

On reconsideration of whether Plaintiff’s sales factor includes certain div-

idends and subpart F income from foreign subsidiaries, the court revised and

restated its earlier conclusions. See Oracle Corp. and Subsidiaries v. Dept. of Rev.,

24 OTR 327 (2021). Upon review of additional context, the court concluded that

“gross receipts” under Oregon’s Uniform Division of Income for Tax Purposes

Act includes subpart F income. The court held that the “reinclusion” clause of

ORS 314.665(6)(a) requires comparison of (1) the primary business activity of

the subsidiary generating the earnings and profits out of which the dividend was

paid or subpart F income attributable and (2) the primary business activity of

the parent. If the primary business activities are the same, then the dividend

or subpart F income must be reincluded in the definition of “sales” because it is

“derived from” the taxpayer parent’s “primary business activity.” The court left

the parties to determine the factual matter of determining Plaintiff’s primary

business activity and the primary business activities of its foreign subsidiaries.

Oral argument on Plaintiff’s and Defendant’s motions for

reconsideration was held remotely on June 15, 2021.

Eric J. Kodesch, Lane Powell PC, Portland, filed the

motion and argued the cause for Plaintiff.

Marilyn J. Harbur, Senior Assistant Attorney General,

Department of Justice, Salem, filed the motion and argued

the cause for Defendant.

Decision rendered October 6, 2021.

ROBERT T. MANICKE, Judge.

In this corporation excise tax appeal, Plaintiff

Oracle Corporation and certain of its domestic subsidiar-

ies (collectively, taxpayer)1 and Defendant (the depart-

ment) cross-move for partial summary judgment regarding

1

In this order, a “domestic” corporation refers to one incorporated under the

laws of any state of the United States or under the laws of the United States; a

360 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

whether taxpayer’s sales factor includes certain dividends

and deemed dividends from foreign subsidiaries.

I. FACTS

The following facts are not disputed. Taxpayer’s

common parent, Oracle Corporation, is a Delaware corpo-

ration whose commercial domicile is in Redwood Shores,

California. Oracle Corporation has many domestic and for-

eign subsidiaries. On behalf of itself and certain domestic

subsidiaries, Oracle Corporation filed consolidated federal

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

2011, and 2012 (the “Years at Issue”). At least some of those

domestic subsidiaries also joined in Oregon consolidated

returns that Oracle Corporation filed for the Years at Issue.2

The corporations joining in the Oregon consolidated returns

were engaged collectively in a single unitary business

that involves software. See ORS 317.710(5)(a) (“members of

the same unitary group [joining in a consolidated federal

return] shall file a consolidated state return”).3

During the Years at Issue, taxpayer conducted its

software business in foreign countries and jurisdictions

through a network of wholly owned “controlled foreign corpo-

rations” (CFCs).4 Some of the CFCs paid dividends to various

members of the group comprising taxpayer, and taxpayer

included dividend amounts in its consolidated federal taxable

income. In addition, taxpayer also included in its federal tax-

able income certain amounts that were not paid to taxpayer

but were required to be imputed to it pursuant to subpart F

of the Code, IRC sections 951-965. The court, applying the

“foreign” corporation refers to any other corporation. See Internal Revenue Code

(IRC or the Code) § 7701(a)(4) - (5) (2009).

2

The record does not identify which domestic subsidiaries joined in the

Oregon consolidated return. The court assumes that all domestic affiliates that

were subject to Oregon tax (i.e., that were engaged in business in Oregon and had

“nexus” with Oregon) did so, as discussed below.

3

Unless otherwise noted, the court’s references to the Oregon Revised

Statutes (ORS) are to 2009.

4

Some of the CFCs were less than wholly owned, but Oracle Corporation

directly or indirectly “owned a majority of stock and controlling interest” in all of

them. The department has not raised an argument regarding those CFCs owned

less than 100 percent by Oracle Corporation, and the court occasionally refers to

the CFCs as “wholly owned.”

Cite as 24 OTR 359 (2021) 361

term defined in the Code, refers to these amounts imputed

to taxpayer as “subpart F income.” See IRC § 952(a) (defini-

tion). As is common in tax literature, the parties sometimes

refer to subpart F income amounts as “deemed dividends.”

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

Income Taxation of Intellectual Properties & Intangible Assets

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

categories is imputed to the CFC’s United States sharehold-

ers as a deemed dividend to the extent of the CFC’s earnings

and profits.”).

Taxpayer treated the dividends and subpart F

income from the CFCs as “dividends * * * received or deemed

received” for purposes of the subtraction from the tax base

that is allowed by ORS 317.267, commonly referred to as

Oregon’s “dividends-received deduction” statute.5 The par-

ties agree that 80 percent of the dividends and 80 per-

cent of the subpart F income from the CFCs may be sub-

tracted in computing taxpayer’s Oregon taxable income.

See ORS 317.267(2); see former OAR 150-317.267-(B)(4)

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

the Oregon deduction is permitted on dividends received or

deemed received from foreign as well as domestic corpora-

tions. Income included in federal taxable income pursuant

to IRC Section 951(a) qualifies for the dividend received

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

Consistent with ORS 317.267(3), the parties also agree that

taxpayer must exclude the subtracted 80 percent amount

from its sales factor when apportioning its business income

to Oregon.6 Unless otherwise indicated, the court uses the

terms “Dividends” and “Subpart F Income” to refer to the

20 percent portion of CFC dividends and subpart F income

that taxpayer was required to include in Oregon tax-

able income after the 80 percent subtraction under ORS

317.267(2).

5

The court explains the concepts of the “subtraction” from the tax base

(known as “taxable income”) and the “exclusion” from the “sales factor” in a back-

ground section below.

6

The department points out that taxpayer initially reported incorrect

amounts of its subtractions and exclusions for the tax years ended in 2010 and

2011, and that the department adjusted those errors, some of which adjustments

were in taxpayer’s favor. Taxpayer does not contest those adjustments.

362 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

On reconsideration, the parties agree on two mixed

questions of fact and law: First, the CFCs are engaged

in the same unitary business as taxpayer. Second, the

Dividends and Subpart F Income are “business income” as

defined below. Taxpayer withdrew, for purposes of this case,

its alternative claim that Dividends and Subpart F Income

constitute nonbusiness income.

II. ISSUE

At issue is whether the Dividends and Subpart F

Income that are attributable to taxpayer’s unitary CFCs,

and are not subtracted from taxable income, are included in

taxpayer’s Oregon sales factor.

III. PARTIES’ POSITIONS

Taxpayer seeks to include the Dividends and

Subpart F Income in its Oregon sales factor, contending

that these amounts are “sales” under ORS 314.665.7 On

its returns, taxpayer included the unsubtracted amounts

only in the denominator; it did not include the unsub-

tracted amounts in the numerator of its Oregon sales factor,

because it concluded that the amounts were “sourced outside

of Oregon.” Taxpayer argues that the provision that caused

it to exclude the subtracted 80 percent of these amounts—

ORS 317.267(3)—also implies that taxpayer must include

the unsubtracted 20 percent in its sales factor. Taxpayer

seeks partial summary judgment on that issue.

The department rejects taxpayer’s interpretation of

ORS 317.267(3). The department also argues affirmatively

in its cross-motion for partial summary judgment that a pro-

vision of the sales factor statute applicable to taxpayer, ORS

314.665(6)(a), requires taxpayer to exclude the Dividends

and Subpart F Income from the sales factor.

7

As explained below, the sales factor is a fraction consisting of sales in

Oregon divided by sales everywhere. “Including” an amount in the sales factor

means that the amount must be added to the denominator, or to both the numer-

ator and the denominator, or to neither, based on a set of “sourcing” rules. In

this case, taxpayer determined that the Dividends and Subpart F Income were

“sourced outside of Oregon,” so it added those amounts only to the denominator.

The parties’ motions for partial summary judgment do not address taxpayer’s

“sourcing” of the Dividends and Subpart F Income; therefore, this order does not

reach that issue.

Cite as 24 OTR 359 (2021) 363

Both parties’ positions are based on statutory inter-

pretation. Neither party has raised a constitutional issue.

IV. LEGAL BACKGROUND

A. The Concepts of a Unitary Business, Apportionment, and

Combined Reporting or Consolidated Returns

This case involves three concepts that are essential

to understanding Oregon’s statutory approach to determin-

ing what share of the worldwide income of a business is sub-

ject to Oregon tax. The concept of a “unitary” business arose

from property tax law and offered a solution to the prob-

lem of determining the tax base (property or income) for a

business that operated in more than one taxing jurisdiction

or through more than one legal entity. See Coca Cola Co.

v. Dept. of Rev., 5 OTR 405, 423-24 (1974) (tracing history),

aff’d, 271 Or 517, 533 P2d 788 (1975). The unitary business

concept has two aspects: the multijurisdictional aspect and

the multiple-entity aspect. See Cook v. Dept. of Rev., 23 OTR

107, 114-15 (2018). The first treats a business that spans mul-

tiple states (or countries) as one enterprise for purposes of

measuring total property value or total income, which helps

avoid some difficult challenges of tracing specific in-state

items of income or valuing in-state items of property in iso-

lation. See, e.g., Donald M. Drake Co. v. Dept. of Rev., 263 Or

26, 500 P2d 1041 (1972). The second aggregates the tax base

among related legal entities that are considered to operate

together sufficiently closely,8 which avoids difficulties such

as the need to police whether affiliates employ arm’s-length

transfer pricing when they supply one another with prop-

erty or services.

8

The concept of a unitary group of entities conducting a single trade or busi-

ness derives from federal constitutional limitations on state taxation. See, e.g.,

Allied-Signal, Inc. v. Director, Div. of Taxation, 504 US 768, 778-80, 112 S Ct

2251, 119 L Ed 2d 533 (1992). Oregon has codified a definition of a unitary “single

trade or business,” based on an interpretation of constitutional case law, as a

business enterprise in which there is a “sharing or exchange of value” as demon-

strated by “centralized management or a common executive force”; “centralized

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

of goods, capital resources or services demonstrating functional integration.” See

ORS 317.705(2), (3). Commentators sometimes use the term “enterprise unity” to

refer to the multi-entity aspect of the unitary business concept. See Jerome R.

Hellerstein & Walter Hellerstein, State Taxation: Third Edition ¶ 8.08[2][b][i] 4-5

(Aug 2021).

364 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

“Apportionment” is a tool to implement the multi-

jurisdictional aspect of the unitary business concept. As

used in state income tax law, “apportionment” is the pro-

cess of determining the tax base for any one state by for-

mula, rather than by separately accounting for each item

of income with a connection to that state. See ORS 314.650

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

multiplying the income by the sales factor.”). Oregon’s origi-

nal formula relied on the relative presence of three “factors”

in Oregon (the taxpayer’s property, payroll, and sales), com-

pared to their presence everywhere. Or Laws 1929, ch 427,

§ 7 (net income allocated according to rules adopted by

the commission); State Tax Commission Regulation (Reg.)

Art. 45 (1929) (giving three-factor formula). The average

of these three ratios, expressed as a percentage, was mul-

tiplied by net, or “taxable,” income,9 resulting in the share

of the overall tax base that was subject to Oregon tax. In

1965, under threat of federal legislation to create a national

apportionment formula, Oregon and many other states

adopted the Uniform Division of Income for Tax Purposes

Act (UDITPA),10 which codified the three-factor formula

for businesses other than financial organizations or “public

utilities.” Oregon, like many other states, has since shifted

to a ratio based on only one factor: “sales” within Oregon

compared to sales everywhere. Compare ORS 314.650 (1987)

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

multiplying the income by a fraction, the numerator of which

is the property factor plus the payroll factor plus the sales

factor, and the denominator of which is three.”) with ORS

314.650 (2009) (“All business income shall be apportioned

to this state by multiplying the income by the sales factor.”).

UDITPA did not apportion all income by formula. Rather,

“business income,” as defined, was apportioned, while items

9

Oregon law described the tax base as “net income” until 1983, when Oregon

adopted the federal term “taxable income” for corporations. Or Laws 1983, ch 162

§ 7.

10

See Minutes, House Committee on Taxation, HB 1003, Feb 3, 1965, 3 (tes-

timony of Ted De Looze, Assistant Attorney General, State Tax Commission)

(urging enactment of UDITPA as opposed to “wait[ing] until action is taken by

the U.S. Congress, which would involve as many if not more problems as this

bill”).

Cite as 24 OTR 359 (2021) 365

fitting within the catch-all term “nonbusiness income” were

assigned entirely to one state (“allocated”).11

“Combined” reporting and “consolidated” returns

are a tool that a state can use to implement the multiple-

entity aspect of the unitary business concept.12 Although

distinct, the two reporting regimes share a common feature:

Transactions among the related entities joining in the com-

bined report or consolidated return are “eliminated,” result-

ing in a tax base that reflects only the group’s aggregate

income from transactions with third parties, such as cus-

tomers of the unitary business. See Hellerstein et al, State

Taxation at ¶ 8.11[1] (discussing distinctions between con-

solidated returns and combined reports). Dividends paid

by one member of the unitary group to another, as well as

intercompany sales and interest from intercompany loans,

are among the types of transactions that are eliminated.

See id. Oregon initially provided for consolidated returns for

corporations by statute, but that mechanism applied only to

corporations under 95 percent common ownership and, like

the federal consolidated return regime, did not expressly

require a unitary relationship. Or Laws 1929, ch 427, § 25;

see also State Tax Commission Reg. Art. 47 (1929). As early

as the 1940s, the department’s predecessor used delegated

authority to allow or require combined reporting for uni-

tary groups, applying a 50 percent ownership threshold.

See Hines Lumber Co. v. Galloway, 175 Or 524, 529, 154

P2d 539 (1944) (disallowing loss attributable to subsidiary

found nonunitary; reciting that taxpayer included income

and deduction of unitary subsidiaries on its return); Zale-

Salem, Inc. v. Tax Com., 237 Or 261, 391 P2d 601 (1964)

(approving requirement of combined reporting for tax years

ending March 1959 and 1960); State Tax Commission

11

For example, rent from real property held as an investment and not within

the definition of “business income” would be allocated entirely to the state where

the property was located. See ORS 314.630(1).

12

Of the 45 states that impose a corporate income tax, approximately 17

so-called “separate return” states generally do not require combined reporting.

See https://www.cbpp.org/28-states-plus-dc-require-combined-reporting-for-the-

state-corporate-income-tax; see generally Hellerstein et al, State Taxation at

¶ 8.11 (discussing combined reporting and consolidated returns, finding “no justi-

fication, in principle at least, for failing to apply formulary apportionment to the

income of a group of controlled corporations that compose a unitary business”).

366 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

Reg. 4.280(1)-(B) (1961). The passage of UDITPA in 1965

precipitated a statutory overhaul; although UDITPA itself

did not address the concepts of consolidated returns or com-

bined reporting, which vary from state to state, the change

in law cast doubt on the department’s authority to require

combined reporting. See Cook, 23 OTR at 121-22. The leg-

islature enacted a combined reporting statute for corpora-

tions with more than 50 percent common ownership in 1975,

which remained unchanged through 1984. Or Laws 1975,

ch 760, § 2, codified as ORS 314.363 (1983).

B. Oregon’s 1984 “Water’s Edge” Law Excludes Foreign

Unitary Affiliates from “Consolidated” Return; Dividends

from Foreign Affiliates Are No Longer “Eliminated” from

Income

As of 1983, Oregon fully embraced one of the logi-

cal consequences of combined reporting for a unitary group:

Even corporations formed under the laws of foreign countries

and operating entirely abroad were required to be included

in the combined report filed by an affiliate subject to Oregon

tax. See Exhibit 15, Special House Committee on Revenue,

HB 3029, July 25, 1984, at 5-6 (examples illustrating inclu-

sion of foreign subsidiary corporation in Oregon combined

report). Although the United States Supreme Court upheld

the constitutionality of that approach, multinational busi-

nesses and countries including Japan, the United Kingdom

and others objected to this “worldwide unitary” approach

as amounting to taxation of foreign-source income in viola-

tion of national sovereignty, imposing burdensome record-

keeping requirements and conflicting with international

accounting norms. See Exhibit 3, Special House Committee

on Revenue, HB 3029, July 25, 1984, at 2-3 (discussing

Container Corp. of America v. Franchise Tax Bd., 463 US

159, 103 S Ct 2933, 77 L Ed 2d 545 (1983)); U.S. West/Qwest

Dex Holdings v. Dept. of Rev., 20 OTR 342, 347 (2011). In

1983, the Secretary of the Treasury convened a working

group that recommended that states voluntarily restrict

their income tax base to the “water’s edge.” Exhibit 3,

Special House Committee on Revenue, HB 3029, July 25,

1984, at 8. On July 31, 1984, the secretary declared his

intention to recommend federal legislation to mandate such

Cite as 24 OTR 359 (2021) 367

a limitation if states failed to do so. Office of the Secretary,

Department of the Treasury, Final Report of the Worldwide

Unitary Taxation Working Group: Chairman’s Report and

Supplemental Views at iii (1984), available at https://books.

google.com/books?id=vTGPPnYFtIcC&newbks=0&printsec=

frontcover&dq=inauthor:%22United+States.+Department+

of+the+Treasury.+Worldwide+Unitary+Taxation+Working+

Group%22&hl=en#v=onepage&q&f=false; Hellerstein et al,

State Taxation at ¶ 8.18.

At the same time, in July 1984, Governor Victor

Atiyeh convened a one-day special legislative session, at

which the legislature adopted his proposal for a water’s-edge

approach that would exclude the income of foreign affiliates

from the Oregon tax base. The new law adopted the federal

consolidated return regime, which generally included within

the consolidated return all domestic affiliates of which the

common parent directly or indirectly owned at least 80 per-

cent of the stock but excluded all foreign affiliates no matter

the percentage of ownership. Or Laws 1984, ch 1; Exhibit 2,

Special House Committee on Revenue, HB 3029, July 30,

1984 (Revenue Analysis); see IRC § 1504(a)(1) (1983) (defin-

ing “affiliated group” to mean “1 or more chains of includi-

ble corporations” that meet certain criteria); id. § 1504(b)(3)

(1983) (excluding foreign corporations from the definition of

“includible corporations”).13 The 1984 Oregon act retained

the concept of a unitary group14 and contained mechanisms

to apply the federal intercompany transaction elimination

regulations to those domestic corporations engaged in a uni-

tary business and joining in a consolidated return.15 The

13

Under federal law, corporations formed under the laws of foreign countries

and other non-United States jurisdictions generally are not subject to income tax

unless they have United States-source income or income effectively connected

with the conduct of business in the United States. See generally, Boris I. Bittker

& Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ¶¶ 65.3.1,

65.3.2, 67.1.1. As an extension of this principle, foreign corporations such as the

CFCs in this case are excluded from a consolidated return.

14

See ORS 317.705(2) (1985) (“ ‘Unitary group’ means a corporation or group

of corporations engaged in business activities that constitute a single trade or

business.”).

15

See, e.g., ORS 317.710(5)(a) (1985) (requiring affiliates joining in federal

consolidated return to join in Oregon consolidated return if unitary and subject

to Oregon tax).

368 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

resulting Oregon consolidated return regime functioned

similarly to the prior combined reporting regime but was

limited to domestic, unitary, 80 percent affiliates.

C. First Statute at Issue (1984): Although Not “Eliminated,”

a Large Portion of Dividends Is “Subtracted” from Income

under ORS 317.267(3) (so-called “Dividends-Received

Deduction”)

The 1984 law thus fundamentally changed the tax

treatment of a domestic parent corporation with respect to

its foreign unitary subsidiaries. Before the 1984 law, income

that the foreign subsidiaries earned from dealings with

third parties was pooled with the income earned by domes-

tic subsidiaries and the parent itself. Dividends that the

parent received from domestic and foreign unitary subsid-

iaries were eliminated from income as intercompany trans-

actions. After the 1984 law became effective, a domestic

parent was required to treat foreign-subsidiary dividends as

income (along with dividends from nonunitary corporations)

and to apply UDITPA to determine what amount of the

dividends, if any, would be assigned to Oregon as (1) “busi-

ness income” based on the formulary apportionment rules;

or (2) “nonbusiness” income directly allocable to Oregon,

as opposed to another state. The impact of this change on

US-headquartered enterprises with foreign subsidiaries

was lessened by a “subtraction” provision in the 1984 law,

which reduced the amount of virtually all kinds of unelim-

inated business income from dividends substantially, by

80 percent (taking into account a 1987 amendment).16 This

revision to ORS 317.267 meant that the problematic task of

determining whether and how to apportion or allocate the

dividend income pursuant to UDITPA was limited to only

the remaining “unsubtracted” 20 percent of the dividend

income.

16

The 1984 act provided for a subtraction of 85 percent of the dividend; the

1987 legislature changed the subtraction to 80 percent of the dividend. Or Laws

1987, ch 293, § 39 (amending ORS 317.267(2)). An amendment in 1989 changed

the subtraction to 70 percent, except for dividends from a corporation of which

the payee owned at least 20 percent of the stock. See Or Laws 1989, ch 625, § 21

(adding paragraph (c) to ORS 317.267(2)).

Cite as 24 OTR 359 (2021) 369

D. Dividends Not Eliminated or Subtracted Are Either

Apportionable “Business Income” or Specifically Allocable

“Nonbusiness Income” under UDITPA; Federal Constitu-

tional Principles

If a dividend was not eliminated in a consolidated

return, any portion not subtracted under ORS 317.267

was required to be apportioned by formula if it fit within

the definition of “business income.” If it did not fit within

that definition, it was, per se, “nonbusiness” income and

was required to be allocated to Oregon only if the payee’s

commercial domicile was in Oregon. See ORS 314.610(5)

(“ ‘Nonbusiness income’ means all income other than busi-

ness income.”); ORS 314.640 (“Interest and dividends are

allocable to this state if the taxpayer’s commercial domicile

is in this state.”). Although in this case the parties now agree

that the Dividends and the Subpart F Income are business

income, the court sets forth the definition of that term here

because the court finds its components relevant for purposes

of the later discussion of the 1995 law at issue:

“ ‘Business income’ means income arising from trans-

actions and activity in the regular course of the taxpayer’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

integral parts of the taxpayer’s regular trade or business

operations.”

ORS 314.610(1). The Oregon Supreme Court, like a number

of courts in other states, has held that the statutory defini-

tion has two parts, a “transactional test” and a “functional

test.” “If the income in question satisfies either test, then it

may be apportioned as ‘business income.’ ” Pennzoil Co. v.

Dept. of Rev., 332 Or 542, 546-47, 33 P3d 314 (2001). Under

the “transactional test,” business income is “income arising

from transactions and activity in the regular course of the

taxpayer’s trade or business.” Id. at 547 (internal quotation

marks omitted). Under the “functional test,” income from

tangible and intangible property is business income if “the

acquisition, the management, use or rental, and the disposi-

tion of the property constitute integral parts of the taxpay-

er’s regular trade or business operations.” ORS 314.610(1);

370 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

see Willamette Industries, Inc. v. Dept. of Rev., 331 Or 311, 15

P3d 18 (2000).

The “functional” test under UDITPA has a coun-

terpart concept under constitutional law that focuses on

whether the property serves an “operational function” in the

business,17 as opposed to an “investment function.” A state

may constitutionally require apportionment if the property

generating the income serves an operational function in the

recipient’s business, even if the property is stock in a cor-

poration that is not engaged in the same unitary business

as the recipient. See Allied-Signal, 504 US at 787-88.18 In

a case involving dividends from a unitary subsidiary that

were not eliminated under combined reporting, the Court

held that the dividends were apportionable. Mobil Oil Corp.

v. Commissioner of Taxes, 445 US 425, 100 S Ct 1223, 63 L

Ed 2d 510 (1980).

E. Under Pre-1995 Law Dividends that Were Business

Income Were Apportioned Based on the Location of the

“Income-Producing Activity”

For dividends or other items apportionable as

business income, the next step was to apply the statutes

prescribing the apportionment formula, of which one of

the three factors was the ratio of “sales” within Oregon to

“sales” everywhere. Before 1995, determining the sales fac-

tor required (1) testing whether the item—more specifically,

the gross receipts comprising that item—fit within the defi-

nition of “sales” in ORS 314.610(7), and if so; (2) applying

one of two “sourcing” methods to determine whether the item

should appear in the numerator of the sales factor as a sale

“in this state,” increasing the percentage of total net income

apportioned to Oregon. The definition of “sales” contained no

17

The United States Supreme Court has stated that the definitions of busi-

ness income and nonbusiness income under UDITPA “may be quite compati-

ble with the unitary business principle,” but has stopped short of equating the

UDITPA terms with the constitutional concepts of apportionable and nonappor-

tionable income. See Allied-Signal, Inc. v. Director Div. of Taxation, 504 US 768,

786-87, 112 S Ct 2251, 119 L Ed 2d 533 (1992).

18

Commentators also use the term “asset unity” to describe the relationship

between a business entity and property that generates apportionable business

income because the property serves an operational function. See Hellerstein et al,

State Taxation: Third Edition ¶ 8.08[2][b][i] at 4-5 (Aug 2021) (describing “asset

unity” and “enterprise unity”).

Cite as 24 OTR 359 (2021) 371

limitations relevant to this case; the text simply read: “ ‘Sales’

means all gross receipts of the taxpayer not allocated under

ORS 314.615 to 314.645.” ORS 314.615 to 314.645 were all

of the provisions for allocating items of nonbusiness income

to one specific state. Therefore, if the income was business

income, it also fit within the definition of “sales.”

As to the “sourcing” methods, UDITPA contained one

method for sales of tangible personal property, and another

method for all other kinds of sales, reflecting UDITPA’s ori-

gins at a time when the national economy was dominated by

the manufacturing and sale of goods. Sales of tangible per-

sonal property generally were in this state if the property

was delivered in this state. See ORS 314.665(2)(a) (1993). Any

other kind of sale was in this state if the “income-producing

activity” was in this state. ORS 314.665(4) (1993).19 UDITPA

did not define “income-producing activity.” The court dis-

cusses the meaning of that term in its analysis below.

F. Second Statute at Issue (1995): ORS 314.665(6) Excludes

Certain “Intangibles” Income from the Sales Factor

In 1995, the legislature enacted the second major

statute at issue in this case, which narrowed the definition

of “sales”:

“For purposes of this section, ‘sales’ excludes:

“(a) Gross receipts arising from the sale, exchange,

redemption or holding of intangible assets, including but

not limited to securities, unless those receipts are derived

from the taxpayer’s primary business activity.”

ORS 314.665(6)(a).20

19

Alternatively, if the income-producing activity was both within and

without Oregon, the sale was in Oregon if the greater proportion of the income-

producing activity was in Oregon, based on “costs of performance.” Id.

20

The 1995 law also excluded from “sales”:

“Gross receipts arising from an incidental or occasional sale of a fixed

asset or assets used in the regular course of the taxpayer’s trade or busi-

ness if a substantial amount of the gross receipts of the taxpayer arise from

an incidental or occasional sale or sales of fixed assets used in the regular

course of the taxpayer’s trade or business. Insubstantial amounts of gross

receipts arising from incidental or occasional transactions or activities may

be excluded from the sales factor unless the exclusion would materially affect

the amount of income apportioned to this state.”

Or Laws 1995, ch 176, § 1 (1995) (adding subsection (b) to ORS 314.665(6)). A 1999

amendment limited the exclusion under ORS 314.665(6)(a) in ways not relevant

372 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

As explained in Tektronix, Inc. v. Dept. of Rev., 354

Or 531, 545, 316 P3d 276 (2013), the legislature intended

to address the so-called “ ‘treasury function’ problem: gross

receipts from the sale of short-term liquid assets that a cor-

poration used to store cash for business purposes” at least

arguably constituted “sales” and thus were included in the

denominator of the sales factor. However, when the buying

and selling of securities “ ‘really isn’t [the] business’ ” of the

taxpayer, including a high volume of such receipts in the

denominator could dilute the sales factor for most states

while inflating it for the state where the largest share of

the “income-producing activity” of overseeing and carrying

out the securities trades took place. See id. (quoting Tape

Recording, House Committee on State and School Finance,

HB 2203, Apr 25, 1995, Tape 186, Side A) (statement of

Steve Bender, Legislative Revenue Office). As the Supreme

Court held, the 1995 legislature did not limit the exclusion

from “sales” to gross receipts from the sales of securities;

the court concluded that “gross receipts arising from the

sale * * * of intangible assets” encompassed the taxpayer’s

receipts from selling the goodwill identified when the tax-

payer sold an entire division of its business to a competitor.

See id.

The final clause in ORS 314.665(6)(a) creates an

exception that “reincludes” (the court’s term) gross receipts

that previously were excluded from “sales,” if those receipts

are “derived from the taxpayer’s primary business activity,”

another undefined term analyzed below.

G. Overview of Steps to Determine Oregon Taxable Income

for Years at Issue

With the foregoing historical background in mind,

the court now turns to the Years at Issue and briefly lays out

in sequence the six main steps to determine the Oregon tax-

able income of a multinational group of affiliated corpora-

tions, focusing on the steps at which the “dividends-received

to this case, declaring that “sales” “[i]ncludes net gain from the sale, exchange or

redemption of intangible assets not derived from the primary business activity

of the taxpayer but included in the taxpayer’s business income.” Or Laws 1999,

ch 143, § 8 (adding subsection (b) to ORS 314.665(6) and renumbering the “occa-

sional sale” provision as new subsection (c)).

Cite as 24 OTR 359 (2021) 373

deduction” and the apportionment formula apply. See gener-

ally StanCorp Financial Group, Inc. v. Dept. of Rev., 21 OTR

120 (2013); Costco Wholesale Corp. v. Dept. of Rev., 20 OTR

537 (2012); US West, 20 OTR 342.

The first step is to determine the “taxable income”

under federal income tax law of the relevant group of domes-

tic affiliates. In this case, Oracle Corporation joined with

domestic affiliates in filing a federal consolidated income tax

return for each of the Years at Issue, which generally means

that the separate income and losses of Oracle Corporation

and those affiliates were pooled, and intercompany divi-

dends and other transactions among members of that group

were eliminated. Those domestic affiliates that were subject

to Oregon tax because they carried on business in Oregon

and met the constitutional “nexus” requirements for taxa-

tion also were required to join in filing an Oregon consol-

idated return, and the Oregon starting point became the

federal “consolidated” taxable income of the larger domestic

group filing federal consolidated returns. See ORS 317.070

(imposing tax on corporation “doing business” within the

state); Capital One Auto Finance, Inc. v. Dept. of Rev., 22 OTR

326 (2016) (constitutional “nexus” analysis), aff’d on statu-

tory grounds, 363 Or 441, 423 P3d 80 (2018); ORS 317.715(1)

(starting point is federal consolidated taxable income). This

means that the CFCs’ income and losses were not pooled

with those of the consolidated group, and dividends from the

CFCs were not eliminated from the income of the consoli-

dated group. Therefore, Oregon’s starting point (federal con-

solidated taxable income) did not include the CFCs’ income

or losses, but it did include dividends the CFCs paid to the

corporations that joined in the federal consolidated return,

as well as subpart F income deemed to have been received

from the CFCs.

The second step is to determine whether the fed-

eral consolidated group consists of more than one “unitary

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

Oregon may be required to file its own Oregon consolidated

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

unitary groups). In this case, this step is irrelevant because

the parties have raised no issue of multiple unitary groups.

374 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

The third step is to apply the various “additions,”

“subtractions,” and other modifications to federal consoli-

dated taxable income that Oregon law prescribes. See ORS

317.715(3)(a). The “dividends-received deduction” under

ORS 317.267 is the modification that occurred in this case;

taxpayer’s motion relies on that statute. When a corporate

taxpayer receives a dividend from a corporation outside the

consolidated return group, federal law generally allows the

payee to claim a deduction for a specified portion of that div-

idend. See generally IRC § 243. Subsection (1) of ORS 317.267

generally requires the taxpayer to add that deducted amount

back to federal taxable income. With the slate thus clean,

subsection (2) allows the taxpayer to subtract 80 percent of

the dividend, assuming that the taxpayer has at least a 20

percent ownership interest in the payor.

Assuming that the unitary business is taxable in

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

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

applying the “allocation” and “apportionment” laws discussed

above, including the definition of “sales” in ORS 314.665(6)(a)

that is the subject of the department’s motion. See ORS

317.010(10)(a) - (c); ORS 314.605 - 314.670. Step four is to sub-

tract all nonapportionable “nonbusiness” income; step five

is to multiply the remaining amount (apportionable “busi-

ness” income) by the percentage determined by the Oregon

apportionment formula; and step six is to add back any

amounts of nonbusiness income that must be “allocated”

to Oregon. The result of these six steps is “Oregon taxable

income.”

H. Definition of “Dividend”; Treatment of Subpart F Income

As a final piece of legal background, the court dis-

cusses the definition of the key term “dividend” and its rela-

tion to subpart F income.

1. Definition of “dividend”

“Dividend,” as used in federal and Oregon income tax

law, has a specific meaning. During the Years at Issue, as well

as in 1995 when the legislature adopted ORS 314.665(6)(a),

and in 1984 when the legislature incorporated the federal

consolidated return regime as a water’s-edge mechanism,

Cite as 24 OTR 359 (2021) 375

section 316 of the Internal Revenue Code defined “dividend”

as “any distribution of property made by a corporation to its

shareholders * * * out of its earnings and profits * * *.” 21 IRC

§ 316(a).22 A distribution thus qualifies as a “dividend” for

income tax purposes only when paid out of “earnings and

profits.” As a leading commentator explains:

“So long as a corporation’s original shareholders retain

their stock, the reason for gearing the taxability of distri-

butions to the corporation’s record of earnings and profits is

clear enough. Until a corporation has profits, any distribu-

tion to shareholders is a return of their investment rather

than income. Once the corporation has realized profits, dis-

tributions may pro tanto be fairly regarded as income to

the stockholders.”

Boris I. Bittker & Lawrence Lokken, Federal Taxation of

Income, Estates and Gifts ¶ 92.1.1.

Although Congress has not defined “earnings and

profits,” and exact computations can be complex, “earn-

ings and profits” is related to the corporate law term “sur-

plus” and to the income tax term “taxable income,” and the

amount of earnings and profits is “usually computed start-

ing from taxable income.” Id. ¶ 92.1.3. “ ‘[T]he amount of the

earnings and profits in any case will be dependent upon

the method of accounting properly employed in computing

taxable income,’ thus precluding a corporation from comput-

ing taxable income with the cash method of accounting and

earnings and profits with the accrual method, or vice versa.”

Id. (quoting Treas Reg § 1.312-6(a) (2020)); see also Treas

Reg § 1.312-6(a) (quoted text identical).

2. Subpart F Income as “gross receipts”

On reconsideration, the court revises its original con-

clusion regarding whether the Subpart F Income should be

21

“Property” included “money,” as well as any other property other than the

payor’s own stock. IRC § 317(a) (2018); see also IRC § 317(a) (1994); IRC § 317(a)

(1982).

22

Oregon’s definition before incorporating the federal definition was mate-

rially the same. See ORS 317.010(7) (1981) (“ ‘Dividend’ means any distribution

(except distributions in complete or partial liquidation of a corporation) made

by a corporation to its stockholders, whether in money or in other property, * * *

out of its earnings or profits whenever accumulated * * *.”); ORS 317.010(7) (1961)

(same).

376 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

treated in the same manner as the Dividends for apportion-

ment purposes, specifically, whether the Subpart F Income

fits within the definition of “sales” as “all gross receipts of

the taxpayer not allocated under ORS 314.615 to 314.645.”

ORS 314.610(7). The court’s original opinion concluded that

the Subpart F Income, which is required to be included in

federal taxable income but is not actually paid, did not con-

stitute gross receipts as the Oregon legislature would have

understood that term in 1965, based on Oregon case law

and other sources suggesting that gross receipts include

only amounts actually received in cash. Oracle Corporation

and Subsidiaries v. Dept. of Rev., 24 OTR 327, 340-48 (2020).

Both parties disagreed with that conclusion. On reconsider-

ation, the court is persuaded by a contemporaneous statu-

tory definition of “received,” along with other strong contex-

tual evidence, that the legislature intended “gross receipts”

to be construed according to the taxpayer’s tax accounting

method. See ORS 317.010(13) (1965). Subpart F functions

essentially as a mandatory accounting method, preventing

domestic controlling shareholders from using the simple

postponement of the payment of dividends to indefinitely

defer income earned by foreign-incorporated subsidiar-

ies. Accordingly, the court now agrees that the Subpart F

Income constitutes gross receipts for apportionment pur-

poses and is treated in the same manner as the Dividends

that some of the CFCs actually paid to taxpayer. The details

of the court’s reasoning do not directly affect the remaining

issues in the case. However, because the court’s conclusion

has changed, the court feels obliged to briefly discuss them

in the following paragraphs.

The term “gross receipts” is not defined in UDITPA

or elsewhere in chapter 314. Applying the framework of

State v. Gaines, 346 Or 160, 206 P3d 1042 (2009), the court

first reviews contemporaneous general and legal dictio-

naries to identify the plain meaning and any “technical”

meaning of the term when the Oregon legislature used it

in UDITPA in 1965. See Comcast Corp. v. Dept. of Rev., 356

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

importance of consulting dictionary definitions contempora-

neous with enactment of the statute). At that time, neither

Webster’s Third New International Dictionary nor Black’s

Cite as 24 OTR 359 (2021) 377

Law Dictionary included a definition of “gross receipts.”

The relevant definitions of “receipt” in Webster’s referred

to the verb “receive,” the primary definition of which was

“to take possession or delivery of.” Webster’s Third New

Int’l Dictionary 1894 (unabridged ed 1961). Black’s Law

Dictionary contained similar definitions. Black’s Law

Dictionary 1433 (4th ed 1951) (defining “receipt” in pertinent

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

being received; that which is received; that which comes in,

in distinction from what is expended, paid out, sent away,

and the like”; defining “receive” as “[t]o take into possession

and control; accept custody of”). The court concludes that

the plain meaning, as well as the general legal meaning, of

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

taking something into possession. Standing alone, this defi-

nition would seem to limit gross receipts to amounts actu-

ally received as cash, as the court concluded in its original

decision.

The court turns to relevant context, starting with

other contemporaneous Oregon income tax statutes. Gaines,

346 Or at 177 n 16 (“Ordinarily, only statutes enacted simul-

taneously with or before a statute at issue are pertinent con-

text for interpreting that statute.”). ORS 317.010(13) (1965)

contained the following definition:

“ ‘Received,’ for the purpose of the computation of net

income under this chapter, means ‘accrued or received.’ The

words ‘accrued or received’ shall be construed according to

the method of accounting upon the basis of which the net

income is computed under this chapter.”

(Emphases added.) See also ORS 316.010(13) (1965) (similar,

for personal income taxpayers); ORS 317.160 - 317.195 (1965)

(specific tax accounting provisions for corporations). This

definition deviates from the plain and technical meanings

of “receive” discussed above and instead looks to the tax-

payer’s “method of accounting” to determine whether and

when an item is considered received. Oregon’s tax account-

ing method laws at that time were similar to those under

federal law. See former State Tax Commission Reg. 314.275

(1965) (identifying ORS 314.275 (1965) as “modeled after”

IRC section 481 (1954) (governing change in taxpayer’s

378 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

accounting method)); but see Lottis v. Commission, 2 OTR

434, 438 (1966) (identifying differences and determining

that department’s predecessor not “bound to follow the fed-

eral interpretation although it does so in many instances”);

see also Ruth Realty Co. v. Tax Commission, 222 Or 290, 294,

353 P2d 524 (1960) (noting apparent legislative intent to

“harmonize” Oregon income tax laws with federal law, “par-

ticularly * * * where the laws involve methods of accounting

relating to similar transactions subject to tax by both state

and federal authority”). Oregon and federal income tax law

recognized the concepts of cash-method and accrual-method

accounting, as well as other methods. See ORS 314.275

(1965) (citing examples of changed methods of accounting);

ORS 317.265(2) (allowing elective method for deducting

property taxes for accrual-method corporate taxpayers); IRC

§ 446 (1964) (requiring taxpayers to compute taxable income

using, among other permissible methods, accrual method or

cash receipts and disbursements method; limiting taxpay-

er’s ability to change methods without consent of Internal

Revenue Service). Although neither Oregon tax statutes nor

the contemporaneous versions of the Internal Revenue Code

and Treasury regulations contained an all-purpose definition

of “gross receipts,” statutes,23 regulations,24 and case law25

23

E.g., former IRC § 970(a)(1)(B) (1964) (allowing CFC shareholders to defer

certain “export trade income” of CFC, subject to limitations including “10 percent

of * * * gross receipts * * * accruing to” CFC from certain export trade income).

24

E.g., former IRC § 1372(e)(4), (5) (1964) (corporation’s status as S corporation

terminates if “more than 80 percent of its gross receipts” are from sources outside

United States or “such corporation has gross receipts more than 20 percent of which

is derived from” certain passive sources); former Treas Reg § 1.1372-4(b)(5)(ii)

(1961) (“The term ‘gross receipts’ means the total amount received or accrued

under the method of accounting used by the corporation in computing its taxable

income.” (Emphasis added.)); see Branch v. United States, 20 AFTR 2d 5302 (ND

Ga 1967) (construing regulation; determining that certain option payments were

gross receipts to taxpayer when accrued to accrual-method taxpayer, not when

received in the form of cash).

25

See, e.g., Pursell v. Comm’r, 38 TC 263, aff’d, 315 F2d 629 (3d Cir 1963)

(applying “transitional adjustment” rules to taxpayer who changed from cash

method of accounting to accrual method; requiring taxpayer to treat cash

amounts as gross receipts in first year of accrual method, where amounts would

have been accruable in prior year when taxpayer used cash method); Reaver v.

Comm’r, 42 TC 72 (1964) (allowing spouses operating a small business to elect

annual installment method of accounting to report gain from one-time sale of

business real property; rejecting Internal Revenue Service argument that tax-

payers were required to treat entire gain as income in year of transaction because

they originally reported their cash payments as “gross receipts”).

Cite as 24 OTR 359 (2021) 379

in various areas established clearly that the taxpayer’s

method of accounting determined whether and when an

amount was counted in “gross receipts” for income tax

purposes.

Additional context supports the view that the 1965

legislature likely intended “gross receipts” to have a meaning

consistent with the manner in which gross income, deduc-

tions and other items are taken into account in determining

“net” or “taxable” income. First, in one instance the definition

of “sales” in UDITPA seems to treat the term “gross receipts”

as interchangeable with “income”: “ ‘Sales’ means all gross

receipts of the taxpayer not allocated under ORS 314.615 to

314.645.” ORS 314.610(7). Yet the allocation provisions them-

selves refer to the allocation of “nonbusiness income” (empha-

sis added), not gross receipts. See ORS 314.615 (requiring

taxpayer to “allocate and apportion the net income of the

taxpayer” (emphasis added)); ORS 314.625 (requiring alloca-

tion of rents, royalties, capital gains, etc., to Oregon “to the

extent that they constitute nonbusiness income” (emphasis

added)); ORS 314.610(5) (defining “nonbusiness income” as

all income other than business income” (emphasis added)).

Second, as the department points out in its response on

reconsideration, ORS 314.665(4) has always provided that

“sales” of “other than tangible personal property” are in

Oregon “if (a) the income-producing activity is performed in

this state; or (b) 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.”26 (Emphases

added.) Although a term used in defining the tax base is

not always relevant context for a term used in apportion-

ing the tax base,27 the court concludes that the legislature

itself has established a link between “gross receipts” for

26

In pointing out the connection in ORS 314.665(4) between “sales” and

“income,” the department preserves its argument that the Dividends and

Subpart F Income in this case nevertheless are excluded from “sales” by later

amendments to Oregon’s UDITPA.

27

See, e.g., Crystal Communications, Inc. v. Dept. of Rev., 19 OTR 524, 536-37

(2008) (in interpreting “business, trade, profession or occupation” for purposes of

apportioning nonresident’s income from intangibles under ORS 316.127(3), court

not required to follow federal meaning of “trade or business” as used to determine

“taxable income”).

380 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

income tax accounting purposes and for apportionment

purposes.28

The court has found nothing relevant to this issue

in the written materials comprising the legislative his-

tory of Oregon’s adoption of UDITPA, nor in the available

recordings of oral proceedings. Based on the statutory text

and context of ORS 314.610(7), the court concludes that the

legislature intended “gross receipts” to be defined consis-

tently with taxpayer’s method of accounting for income tax

purposes.

The court next analyzes whether this conclusion

extends to the treatment of subpart F income. Although sub-

part F is not framed as an accounting method, its purpose

overlaps substantially with that of an accounting method:

to “clearly reflect” actual income. See former ORS 317.160

(1965) (requiring corporate taxpayers to use their regular

book accounting method “unless such method employed does

not clearly reflect the net income”); former IRC § 446 (simi-

lar; allowing Internal Revenue Service to prescribe account-

ing method for taxpayer whose regular method “does not

clearly reflect income”). Case law as of 1965 establishes

that the timing of inclusion of items in income was a key

issue in determining whether an accounting method clearly

reflected income. See, e.g., Kuhns et ux v. State Tax Com.,

223 Or 547, 551, 355 P2d 249 (1960) (finding “no question”

that member of agricultural cooperative would have income

from patronage dividends; declaring “The crucial question

is ‘when?’ ”; rejecting State Tax Commission’s effort to sub-

stitute an accounting method that would include patronage

dividends in income upon issuance of a certificate therefor

under former ORS 316.160 (1953)); Branch, 20 AFTR 2d

5302; Pursell, 38 TC 263.

28

The court’s original order relied in part on Corbett Inves’t Co. v. State Tax

Com., 181 Or 244, 181 P2d 130 (1947). In that case, the court determined that

“gross receipts” for purposes of an Oregon corporation excise tax exemption had

the same meaning as “gross income” and referred to gain on the sale of real prop-

erty rather than total gross proceeds. On reconsideration in this case, the parties

correctly point out that Corbett did not involve deferral or other timing-related

accounting issues. Because the court is persuaded that those latter issues are the

proper focus of its contextual inquiry, the court now concludes that Corbett sheds

little light on the issues in this case.

Cite as 24 OTR 359 (2021) 381

The principal purpose of subpart F, as summa-

rized by the Internal Revenue Service, is to prevent domes-

tic United States shareholders from engaging in unlim-

ited deferral of higher-rate United States income taxes on

income earned by foreign subsidiaries operating abroad.

See TD 8767, 1998-1 CB 875 (“Subpart F was enacted by

Congress to limit the deferral of U.S. taxation of certain

income earned outside the United States by foreign corpo-

rations controlled by U.S. persons.”).29 The opportunity for

deferral arises when domestic owners of foreign corporations

can choose to cause the foreign subsidiaries to not pay divi-

dends. See Bittker & Lokken, ¶ 69.1 (quoting S Rep No 1881,

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

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

dividends paid by the foreign corporations are received by

their American parent corporations or their other American

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

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

which is separately computed according to rules designed to

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

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

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

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

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

ing computation of subpart F income). The CFC shareholder

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

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

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

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

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

pays actual dividends, the amount that the US shareholder

must include as subpart F income is generally reduced as

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

29

A historical study offers a more nuanced view of the varied motivations

and intentions that led to the enactment of subpart F, including concerns about

abusive practices involving “paper transactions” in “tax haven” jurisdictions. See

1 National Foreign Trade Council, International Tax Policy for the 21st Century,

ch 2 at 52 (2001), cited in Bittker & Lokken, ¶ 69.1 n 14, available at https://www.

nftc.org/default/tax/fip/NFTC1a%20Volume1_part1.pdf. The study concludes, how-

ever, that limiting abuse by limiting the deferral of income was the principal

motivator. See National Foreign Trade Council, International Tax Policy for the

21st Century at 56 (“[C]oncerns about the protection of the U.S. tax base moved

Congress to end deferral for certain categories of income that were deemed to be

most susceptible of being moved out of the United States for tax reasons.”).

382 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

Subpart F, therefore, differs from an accounting

method in that subpart F prescribes a set of mandatory

requirements for the inclusion of items in income, while

a tax “accounting method” generally is based or overlaid

on the taxpayer’s own existing book accounting method.

Nonetheless, the court concludes that the statutes govern-

ing accounting methods and the income inclusion require-

ments under subpart F share the same important goals of

regulating when income is recognized in relation to when

the underlying business activity occurs. Because the court

concludes that the drafters of UDITPA and the Oregon legis-

lature intended “gross receipts” for apportionment purposes

to be recognized based on the taxpayer’s accounting method,

the court also concludes that “gross receipts” under Oregon’s

UDITPA includes amounts included in income under

subpart F.

V. ANALYSIS OF PARTIES’ ARGUMENTS

A. Taxpayer’s Issue: Does ORS 317.267(3) require inclusion

in “sales” of the unsubtracted portions of the Dividends

and Subpart F Income?

In its Motion for Partial Summary Judgment, tax-

payer relies on subsection (3) of ORS 317.267, which states:

“There shall be excluded from the sales factor of any

apportionment formula employed to attribute income to

this state any amount subtracted from federal taxable

income under subsection (2) of this section.”

Taxpayer urges the court to determine that, because subsec-

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

Income and Dividends that taxpayer subtracted, subsection

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

tracted 20 percent. Taxpayer describes its position as the

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

ple of statutory interpretation known as “inclusio unius est

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

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

particular intent controls a general intent” when the two

are inconsistent.

Cite as 24 OTR 359 (2021) 383

Under the analytical framework that the Oregon

Supreme Court has prescribed for interpreting statutes,

the court starts not with the maxims taxpayer cites, but

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

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

intent remains unclear.” Gaines, 346 Or at 171-72. The text

of subsection (3) does not state that the unsubtracted por-

tion of a dividend must be included in an apportionment

formula. The text does not specify whether the unsub-

tracted portion must be included or excluded. This silence

can mean one of three things: (a) the legislature intended

to imply that the unsubtracted portion must be included;

(b) the legislature intended to imply that the unsubtracted

portion must, like the subtracted portion, be excluded (a

position neither party advances here); or (c) the legisla-

ture did not intend subsection (3) to answer the question.

The court proceeds to statutory context for any further

insight.

Statutory context includes other laws in place at the

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

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

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

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

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

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

(“Ordinarily, only statutes enacted simultaneously with or

before a statute at issue are pertinent context for interpret-

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

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

tions bill making numerous changes to the 1984 corpora-

tion excise tax overhaul act referred to above. See Or Laws

1985, ch 802, § 33; see also Tape Recording, House Committee

on Revenue and School Finance, Subcommittee on Income

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

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

section of Oregon Department of Justice, that bill was neces-

sary to “eliminate * * * ambiguities” because 1984 bill “was

drafted in kind of a hurry”). Then as now, the UDITPA for-

mula in ORS 314.650 and ORS 314.665 was not the only

apportionment formula allowed or required under Oregon

384 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

law.30 The department has identified two circumstances

in 1985 in which uneliminated business income from div-

idends was entirely excluded from the apportionment for-

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

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

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

not be included in the denominator * * *.” OAR 150-314.280-

(G)(3)(b)(D) (1983). Second, for any taxpayer, a rule under

the “fairly represent” provision in ORS 314.670 provided:

“Where business income from intangible property can-

not readily be attributed to any particular income pro-

ducing activity of the taxpayer, such income cannot be

assigned to the numerator of the sales factor for any state

and shall be excluded from the denominator of the sales

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

dividends received on stock, royalties received on patents

or copyrights, or interest received on bonds, debentures or

government securities results from the mere holding of the

intangible personal property by the taxpayer, such divi-

dends and interest shall be excluded from the denominator

of the sales factor.”

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

Taxpayer’s position, that inclusion of the unsub-

tracted portion of a dividend is the implied logical corollary

of the express exclusion of the subtracted portion, would

mean that the legislature also intended to include the

unsubtracted portion in the formula in both of these cir-

cumstances. The court finds it unlikely that the legislature

had that intention because the result would be that in both

circumstances other “passive” receipts attributable to the

“mere holding” of intangibles would remain fully excluded,

while the unsubtracted portion of dividends would have

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

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

son why the legislature would have wanted to single out

passive interests in stock for treatment different from pas-

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

son to think that the legislature would have considered that

treatment more fair or accurate than complete exclusion of

30

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

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

Cite as 24 OTR 359 (2021) 385

the receipts. The court finds the department’s explanation

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

of ORS 317.267 to address the inclusion or exclusion of the

unsubtracted portion of a dividend. Based on the statutory

context, the court tentatively concludes that subsection (3)

leaves it to the substantive law governing the particular

apportionment formula applicable to the taxpayer to deter-

mine inclusion or exclusion.

The court finds nothing in legislative history that

changes this conclusion. The department has presented an

analysis of the legislative history from both 1985 and 1984.

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

proffered legislative history that specifically addresses the

addition of ORS 317.267(3).

This leaves taxpayer’s arguments based on maxims

of statutory construction. The principle that “inclusio unius

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

evidence of legislative intent, but it cannot overcome the

strong indicators in the statutory context discussed above.

As to the principle that the more specific intent controls,

the court concludes that taxpayer erroneously assumes that

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

intention to require inclusion of the unsubtracted dividend

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

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

the conclusion that it seeks.

The court will deny taxpayer’s motion.

B. Department’s Issue: Does ORS 314.665(6)(a) exclude

from “sales” the unsubtracted portions of the Dividends

and Subpart F Income?

The department’s motion is based on the follow-

ing provision enacted as part of the 1995 statute discussed

above:

“For purposes of this section, ‘sales’ excludes:

“(a) Gross receipts arising from the sale, exchange,

redemption or holding of intangible assets, including but

not limited to securities, unless those receipts are derived

from the taxpayer’s primary business activity.”

386 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

ORS 314.665(6)(a).31 The department contends that the

Dividends and the Subpart F Income are excluded from

“sales” under the first part of the statute because they

“arise from” taxpayer’s “holding” of the CFC stock, within

the plain meaning of those terms. The department argues

further that the Dividends and Subpart F Income are not

reincluded in “sales” because taxpayer’s “primary business

activity” is the sale of software, rather than the receipt of

dividends from holding the CFC stock. Taxpayer argues

that the Dividends and Subpart F Income are not excluded;

or if they are, they must be reincluded pursuant to the “pri-

mary business activity” provision in the last clause of the

statute. The court starts its analysis with the text and con-

text of the exclusionary provision before proceeding to the

reinclusion provision.32

1. Exclusionary provision of ORS 314.665(6)(a)

Taxpayer’s shares of stock in the CFCs unquestion-

ably are “intangible assets” within the plain meaning of

that term. See Tektronix, 354 Or at 543-44 (citing dictionary

definition that includes “stocks”). The terms “arising from”

and “holding” require further analysis under the Gaines

framework, as applied in Tektronix.

a. Text: “arising from”

As of 1995, the most relevant plain meaning of “arise”

was “to originate from a specified source.” Webster’s at 117

31

The 1995 law also excluded from “sales”:

“Gross receipts arising from an incidental or occasional sale of a fixed

asset or assets used in the regular course of the taxpayer’s trade or busi-

ness if a substantial amount of the gross receipts of the taxpayer arise from

an incidental or occasional sale or sales of fixed assets used in the regular

course of the taxpayer’s trade or business. Insubstantial amounts of gross

receipts arising from incidental or occasional transactions or activities may

be excluded from the sales factor unless the exclusion would materially affect

the amount of income apportioned to this state.”

Or Laws 1995, ch 176, § 1 (adding subsection (b) to ORS 314.665(6)). A 1999

amendment limited the exclusion under ORS 314.665(6)(a) in ways not relevant

to this case, declaring that “sales” “[i]ncludes net gain from the sale, exchange or

redemption of intangible assets not derived from the primary business activity

of the taxpayer but included in the taxpayer’s business income.” Or Laws 1999,

ch 143, § 8 (adding subsection (b) to ORS 314.665(6) and renumbering the “occa-

sional sale” provision as new subsection (c)).

32

Except as noted below, the court has found nothing helpful in the legisla-

tive history of ORS 314.665(6)(a).

Cite as 24 OTR 359 (2021) 387

(unabridged ed 1993). “Originate,” in the foregoing intransi-

tive usage, meant “to take or have origin : be derived : arise,

begin, start,” as in “the train originated in Washington.”

Id. at 1592. “Origin” referred to “ancestry” or “parentage,”

as well as the “rise, beginning or derivation from a source”

or the “primary source or cause : fountain, spring.” Id. at

1591. The term “arise” also had an established legal mean-

ing, but that meaning was indistinguishable: “To spring up,

originate, to come into being or notice * * *.” Black’s at 108

(6th ed 1990).

Applying this definition, the court concludes that

“arise from” was an elastic term that could refer to a clear,

immediate source (as the reference to “parentage” suggests)

or to one that was more diffuse or attenuated (as suggested

by the references to “ancestry” and to the city of “origination”

of a train that might have stops along the way). However, if

the statute included a “specified source,” the court need look

no further. As used in ORS 314.665(6)(a), the court easily

concludes that the plain meaning of “arising from” referred

to the immediate “sources” of gross receipts that the legis-

lature “specified” in the same sentence: a sale, exchange or

redemption of stock, or the payment of a dividend on stock

held by the shareholder.

b. Text: “holding”

In Webster’s, the first listed definition of the verb

“hold” was synonymous with “possess”: “to retain in one’s

keeping : maintain possession of : not give up or relinquish.”

Webster’s at 1078 (unabridged ed 1993). The many addi-

tional listed meanings generally referred to various kinds

of control or power over an object, for example, “to impose

restraint upon or limit in motion or action,” “to have or keep

in the grasp,” and “to receive and retain.” Id. Similarly,

the first definition in Black’s was “[t]o possess in virtue of

a lawful title; as in the expression, common in grants, ‘to

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

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

the court concludes that the plain and technical legal mean-

ing of “arising from” the “holding” of intangible assets was

that the gross receipts at issue must originate from the pos-

session or legal ownership of the shares.

388 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

c. Conclusion under Tektronix regarding exclu-

sionary provision of ORS 314.665(6)(a)

The department posits a meaning of “holding” that

would exclude all dividends, even those paid by a subsidiary

owned entirely by the parent company and engaged in the

same unitary business, because the immediate source of the

dividends as such is the parent’s possession of the shares. In

its original opinion, the court declined to accept this inter-

pretation on the grounds that describing the relationship of

a parent company to a wholly owned unitary subsidiary as

the “holding” of stock is so broad as to be inaccurate because

it fails to fully describe legal entities that, by definition, are

under common control and share centralized management,

economies of scale, and functional integration. See ORS

317.705(3)(a).

On reconsideration, the court accepts that the

Dividends and Subpart F Income “arose from” taxpayer’s

“holding” of the CFC stock as described above, even though

“holding” does not fully capture the depth of a unitary rela-

tionship, such as the one between taxpayer and the CFCs in

this case. The court is guided by the Supreme Court’s inter-

pretation of the exclusionary provision in Tektronix, where

the court relied on the uncontroverted fact that the good-

will at issue was an “intangible asset” and saw no need to

look beyond that to the subset of “liquid assets” specifically

discussed in the legislative proceedings. See Tektronix, 354

Or at 545 (referring to “legislature’s decision to address a

narrow problem with a broader solution”). Moreover, upon

closer examination, the court concludes that the legislature

adequately addressed dividends from a unitary subsidiary

in the reinclusion provision.

2. Reinclusion provision of ORS 314.665(6)(a)

The court proceeds to examine whether the last

clause of ORS 314.665(6)(a) requires the Dividends and

Subpart F Income to be reincluded in the definition of “sales.”

a. Text: “derived from”

As of 1995, the plain meaning of “derive” included

“to take or receive especially from a source”; to “obtain or

gain through heredity or by transmission from environment

Cite as 24 OTR 359 (2021) 389

or circumstance”; to “acquire, get or draw (as something

pleasant or beneficial),” as in “the mutual benefits that

nations can derive from trading which flows in both direc-

tions”; and to “adapt,” as in “a movie derived from a novel.”

Additional definitions included “to be descended or formed

from,” as in “all were probably derived from the same ances-

tral stock.” Webster’s at 608 (unabridged ed 1993) (empha-

ses in original). These definitions contemplate that some-

thing will be transferred to a new person, place or thing, but

they otherwise overlap substantially with the term “arising

from.” See also id. at 1592 (listing “arise” and “be derived” as

synonyms for “originate”).

The contemporaneous definition of “derive” in Black’s

is: “To receive from a specified source or origin. * * * To pro-

ceed from property, sever from capital, however invested

or employed, and to come in, receive [sic] or draw [sic] by

taxpayer for his separate use, benefit, and disposal.” Black’s

at 444 (6th ed 1990). Black’s cites two federal income tax

cases that focus on the requirement that someone actually

“receive” the amount at issue before it can be considered

“derived” and therefore “income.” See Crews v. Commissioner,

89 F2d 412, 416 (10th Cir 1937) (statutory definition of “gross

income” as “derived from” various sources implies that tax-

payer must “receive” the amount at issue before it becomes

“income”). That final step is referred to as a “realization

event.” See Staples v. United States, 21 F Supp 737, 739 (ED

Penn 1937) (“gain is, however, not taxable until it is real-

ized”). The court concludes that this technical meaning of

“derive” is a subset of, and is not inconsistent with, the plain

meaning.

As with “arising from,” the court concludes that

both the plain and technical legal meanings of “derived

from” direct the court to look to any “specified source” in the

statute and to look no further if the statute identifies one. In

the statute at issue, that source is the taxpayer’s “primary

business activity.”

b. Text: “primary business activity”

Neither the phrase “primary business activity” nor

any of its component words is defined by statute. The court

focuses on “primary” and “activity.” As the department points

390 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

out, the plain and technical meanings of “primary” are

“first,” “chief,” or “principal” (quoting Black’s at 1190 and

Webster’s at 1800 (2002)). The court finds that the concept

of “primary” requires a comparison of at least two things,

all of which, under the statute at issue, must be “activities.”

As of 1995, the first and second dictionary defini-

tions of “activity” were, respectively, the “quality or state of

being active” and “physical motion or exercise of force * * *

: liveliness.” Webster’s at 22 (unabridged ed 1993). “Business

activities” appeared as one example under the definition

“an occupation, pursuit or recreation in which a person is

active.” See id. The third definition was “natural or normal

function or operation.” Id. The first and second definitions of

“active,” in turn, were “characterized by action rather than

by contemplation or speculation,” and “productive of action

or movement.” Id. Black’s defined “activity” as “[a]n occupa-

tion or pursuit in which [a] person is active,” and “active” as

“[t]hat is in action; that demands action; actually subsisting;

the opposite of passive.” Black’s at 32-33 (6th ed 1990). A

provision of the Internal Revenue Code that was specifically

incorporated in Oregon law referred to losses from a “pas-

sive activity,” which paradox is explained in the term’s defi-

nition as “any activity * * * which involves the conduct of any

trade or business, and in which the taxpayer does not mate-

rially participate.” IRC § 469(c)(1) - (2) (1993); ORS 314.300

(1993). It was fundamentally the lack of participation by

the taxpayer, therefore, that caused an endeavor to be “pas-

sive” with respect to that taxpayer.33 See Bittker & Lokken,

¶ 28.1 (“Very generally, a ‘passive activity’ is an investment

in a trade or business in which the investor is not an active

participant or in a rental activity.”). The court concludes

that the plain meaning, as well as the legal and income tax-

specific definitions, connoted a degree of movement or exer-

tion of energy. These definitions cast doubt on the possibility

that an “activity” might encompass the “holding” of stock or

other property. The court turns to relevant context, starting

with the key term “primary business activity.”

33

“Passive activity” also included “any rental activity,” but an exception

caused even rental activity to be nonpassive if the taxpayer performed more than

750 hours of services in real property trade or businesses and met certain other

requirements. See IRC § 469(c)(7).

Cite as 24 OTR 359 (2021) 391

c. Context: “derived from” and “primary business

activity”

Oregon’s UDITPA and related statutes used the

term “activity” in ways that shed more light on the 1995

legislature’s likely understanding of that term. The court

first observes that those uses clarify two basic points. First,

usage in the definition of “business income” confirms that a

taxpayer may have more than one “activity” comprising its

overall trade or business. See ORS 314.610(1) (1993) (defin-

ing “business income” under “transactional test” as “income

arising from transactions and activity in the regular course

of the taxpayer’s trade or business” and under functional

test as “includ[ing] income from tangible and intangible

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

and the disposition of the property constitute integral parts

of the taxpayer’s regular trade or business operations”

(emphases added)). Second, examples of “activities” in other

parts of UDITPA give a sense of the level of specificity that

the 1995 legislature may have had in mind: An “activity”

could include acting as a “bank,” an “investment company,”

or an “insurance company”; or the “transmission of com-

munications,” the “transportation of goods or persons,” or

the “production, storage, transmission, sale, delivery or fur-

nishing” of electricity, water, gas or certain other commodi-

ties. See ORS 314.610(4), (6) (1993). The court finds that the

UDITPA examples used the term “activity” to mean a fairly

high-level description of something the taxpayer did in its

business.34

The examples also generally support the court’s ini-

tial interpretation of the plain meaning of an “activity” as

requiring a greater degree of engagement or participation

than the “holding” of stock. The plain meaning of “bank”

was “an establishment for the custody, loan, exchange, or

issue of money, for the extension of credit, and for facilitat-

ing the transmission of funds by drafts or bills of exchange

also : an institution incorporated for performing one or more

34

A statute enacted after and outside of UDITPA, the special apportionment

regime for broadcasters, is a noteworthy exception, referring to the “activity” of

broadcasting in highly specific terms as “transmitting any one-way electronic

signal by radio waves, microwaves, wires, coaxial cables, wave guides or other

conduits of communications.” ORS 314.680(1) (1993).

392 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

of such functions.” Webster’s at 172 (unabridged ed 1993).

The term “investment company” had a plain meaning that

suggested a passive function: “a company that holds secu-

rities of other corporations for investment benefits only —

compare holding company.” Id. at 1190. However, the defi-

nition of an investment company in Black’s (citing federal

securities law) included more active terms such as “trading”

and “investing,” as follows:

“Any issuer which: (1) is or holds itself out as being engaged

primarily, or proposes to engage primarily, in the busi-

ness of investing, reinvesting, or trading in securities;

(2) is engaged or proposes to engage in the business of issu-

ing face-amount certificates of the installment type, or has

been engaged in such business and has any such certifi-

cates outstanding; or (3) is engaged or proposes to engage

in the business of investing, reinvesting, owning, holding,

or trading in securities, and owns or proposes to acquire

investment securities having a value exceeding 40 percen-

tum of the value of such issuer’s total assets (exclusive of

Government securities and cash items) on an unconsoli-

dated basis. Investment Company Act, § 3.”

Black’s at 826 (6th ed 1990). An “insurance company” was

“a corporation or association whose business is to make con-

tracts of insurance.” Id. at 807. The active verbs “transmis-

sion” and “transportation,” as well as “production,” “stor-

age,” “transmission,” “sale,” “delivery,” and “furnishing,” in

conjunction with a commodity, speak for themselves.

An administrative rule of the department offers

what the court considers an important contextual clue as to

whether “holding” intangible property was within the defi-

nition of an “activity.” OAR 150-314.665(3)(2) (1994).35 The

rule, in language unchanged since 1973, sought to define the

critical statutory term “income-producing activity,” which,

as discussed in the introduction above, determines whether

dividends and other receipts from intangibles or services

are assigned to the numerator of the sales factor and thus

increase the percentage of income that Oregon may tax:

35

In amending ORS 314.665 in 1995, the legislature is considered to have

been aware of the department’s longstanding administrative interpretation of

the term “income-producing activity” within the same statutory section. First

EUB Church v. Commission, 1 OTR 249, 260-61 (1963).

Cite as 24 OTR 359 (2021) 393

“Accordingly, income producing activity includes but is not

limited to the following:

“(a) The rendering of personal services by employes or

the utilization of tangible and intangible property by the

taxpayer in performing a service.

“(b) The sale, rental, leasing, licensing or other use of

real property.

“(c) The rental, leasing, licensing or other use of tangi-

ble personal property.

“(d) The sale, licensing or other use of intangible per-

sonal property.

“The mere holding of intangible personal property is not,

of itself, an income producing activity.”

Id. (emphasis added); see ORS 314.665(4) (1993) (“Sales,

other than sales of tangible personal property, are in this

state if (a) the income-producing activity is performed in

this state; or (b) 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.”).

This portion of the “income-producing activity” rule

declares the department’s view that the “holding” of intan-

gibles, “of itself,” is not an “activity” at all. No other inter-

pretation is possible, since the holding of stock obviously

suffices to “produce income” for the shareholder when a div-

idend is paid. The legislature acted consistently with this

interpretation when it referred to the “holding” of intangible

assets as giving rise to receipts that must be excluded from

the definition of “sales.”36 The court concludes that the 1995

36

The rule went on to call for dividends from the “mere holding” of stock to be

excluded from both the numerator and the denominator of the sales factor, because

those receipts cannot be attributed to an “activity.” See OAR 150-314.665(3)(b)

(1994) (“Where business income from intangible property cannot readily be

attributed to any particular income producing activity of the taxpayer, such income

cannot be assigned to the numerator of the sales factor for any state and shall be

excluded from the denominator of the sales factor. For example, where business

income in the form of dividends, royalties received on patents or copyrights, or

interest received on bonds, debentures or government securities results from the

mere holding of the intangible personal property by the taxpayer, such dividends

and interest shall be excluded from the denominator of the sales factor.”).

394 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

legislature did not consider the “holding” of intangibles an

“activity.”

It follows from this context that the legislature did

not consider the holding of stock to be a contender for rank-

ing as a taxpayer’s “primary business activity,” because the

holding of stock simply was not an “activity.” This suggests

that the department misses the mark when it compares the

relative amounts taxpayer received from the Dividends and

Subpart F Income, on the one hand, with the amounts tax-

payer received from selling software, on the other hand, in

an effort to determine which of the two was taxpayer’s pri-

mary “activity.”

The text of the reinclusion provision confirms

the court’s understanding. ORS 314.665(6)(a) directs that

an amount excluded as arising from the sale, exchange,

redemption or holding of intangible assets must neverthe-

less be reincluded if derived from the taxpayer’s primary

business activity. It notably does not say that the amount

must be reincluded if the sale, exchange, redemption or

holding of the intangibles constitutes the taxpayer’s pri-

mary business activity. In the specific case of dividends

(and subpart F income) from a unitary subsidiary owned

entirely (or nearly so) by a parent corporation, it is not diffi-

cult to identify the two items that must be compared under

the reinclusion provision. As discussed above, a “dividend,”

as defined under income tax law, is by definition paid out

of the payor’s “earnings and profits.” IRC § 316(a) (1994).

Where the payor has been continually engaged in a “uni-

tary” business with the payee, those earnings and profits

have, by definition, been earned in a “single trade or busi-

ness” conducted by both of them. See ORS 317.705(2) (1993)

(“ ‘Unitary group’ means a corporation or group of corpo-

rations engaged in business activities that constitute a

single trade or business.”). A “single trade or business” is

a common enterprise that involves “sharing or exchange

of value” among the members, demonstrated by “central-

ized management,” “centralized administrative services”

resulting in “economies of scale,” or a flow of goods or

other resources demonstrating “functional integration.”

See ORS 317.705(3) (1993). Such a dividend must, there-

fore, be viewed as income from the taxpayer’s own trade or

Cite as 24 OTR 359 (2021) 395

business.37 The two things that must be compared under the

reinclusion provision are, therefore, (1) the primary busi-

ness activity of the subsidiary that generated the earnings

and profits out of which the dividend was paid (or to which

any subpart F income is attributable) and (2) the primary

business activity of the parent. If these are the same, then

the dividend must be reincluded in the definition of “sales”

because the dividend (or subpart F income) is “derived from”

the taxpayer parent’s “primary business activity.”38

37

The degree of control that a corporate parent exercises as sole shareholder

reinforces this conclusion: Where the payee of the dividend owns all or nearly all

of the stock of the payee, that controlling shareholder generally can elect all of

the directors, who, at least under typical United States corporate law, appoint all

of the officers, who in turn hire all of the employees, all of whom together with

the directors and officers make all the decisions about running the business of

the subsidiary paying the dividend. See, e.g., ORS 60.251 (1993) (directors elected

by plurality of shares entitled to vote); ORS 60.371(1) (1993) (officers appointed

by board of directors). Given its high percentages of ownership of the CFCs and

their consolidation with Oracle Corporation and its domestic affiliates for finan-

cial reporting purposes, the court assumes that Oracle Corporation, directly or

through other subsidiaries, enjoys a similar level of control over the CFCs under

the laws of their countries of incorporation. See Paul E. Holt, A case against the

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

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

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

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

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

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

“control does not exist.”).

38

The court finds that the United States Supreme Court’s reasoning on

the parallel question of “asset unity” under constitutional principles supplies

additional context, of which the 1995 legislature would have been aware, that

supports this court’s conclusion. See Johnson v. Gibson, 358 Or 624, 635, 369

P3d 1151 (2016) (legislature presumed to have been aware of existing common

law). In Mobil Oil, the Court addressed whether the taxpayer was required to

apportion the income it received as dividends from subsidiaries formed under

the laws of other states and other countries. The taxing state in that case was

Vermont, which did not allow the taxpayer to file a combined report or a consoli-

dated return with its unitary subsidiaries and thus, like Oregon in this case, did

not “eliminate” the dividends as intercompany transactions. Mobil Oil, 445 US

at 441 n 15. Based on the unitary nature of the business, the Court held that the

Due Process Clause of the United States Constitution allowed Vermont to require

the taxpayer to apportion the dividend income, as opposed to treating it as non-

apportionable income taxable only in the taxpayer’s state of commercial domicile.

The Court stated:

“So long as dividends from subsidiaries and affiliates reflect profits derived

from a functionally integrated enterprise, those dividends are income to the

parent earned in a unitary business. One must look principally at the under-

lying activity, not at the form of investment, to determine the propriety of

apportionability.

396 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

d. Comparison with Tektronix

The court reviews the Supreme Court’s opinion in

Tektronix to test this court’s conclusion that the Dividends

and Subpart F Income are “sales” if derived from a busi-

ness activity that is primary to both taxpayer and the payor

CFC. In Tektronix, the court held that the taxpayer’s receipts

attributable to goodwill upon the sale of the taxpayer’s

printer division to an unrelated corporation were not derived

from the taxpayer’s primary business activity. Tektronix,

354 Or at 546-48. The court rejected the department’s argu-

ment that ORS 314.665(6)(a) required the receipts to be rein-

cluded as “sales” because they were derived from an asset

that the taxpayer had “ ‘developed * * * over many years’ ”

and that was “ ‘central to [taxpayer’s] primary business of

manufacturing and distributing electronics products.’ ”

Id. at 547 (quoting department’s brief in this court) (brack-

ets in original). The court easily distinguished the sale of

the goodwill from the sale of electronics products; to accept

the department’s argument would have required the court

to transform goodwill into something it was not. See id. at

547-48. In this case, by contrast, the Dividends and Subpart

F Income are, by definition, profit from the single worldwide

trade or business related to software that taxpayer conducts

with domestic subsidiaries and the CFCs. For many decades

before the 1984 water’s-edge act, Oregon law would have

eliminated the Dividends and Subpart F Income altogether

as intercompany transactions. The 1984 act requires the

amounts to be taken into account as dividends, and for that

reason the exclusion provision in ORS 314.665(6)(a) requires

them to be excluded from “sales.” However, it is precisely

because the amounts are dividends (or, in the case of the

Subpart F Income, treated as such) that the reinclusion pro-

vision applies to them. They are profits that the CFC sub-

sidiaries earned. And because the CFCs engage in a single,

unitary trade or business with their parent, taxpayer, the

“* * * * *

“* * * Had [the taxpayer] chosen to operate its foreign subsidiaries as sep-

arate divisions of a legally as well as a functionally integrated enterprise,

there is little doubt that the income derived from those divisions would meet

due process requirements for apportionability.”

Id. at 440-41.

Cite as 24 OTR 359 (2021) 397

amounts are derived from taxpayer’s trade or business and

must be reincluded in “sales” if the facts show that they also

are derived from the “specified source,” namely the same

business activity that is “primary” for taxpayer.

VI. CONCLUSIONS

As discussed, taxpayer’s motion under ORS

317.267(3) must be denied as a matter of law. The court con-

cludes that the department’s motion, too, must be denied

as a matter of law because the department misapprehends

the comparison that must be made under the reinclusion

clause of ORS 314.665(6)(a). Under the theory the court has

explained above, the remaining task is to determine taxpay-

er’s primary business activity and to identify whether that

activity is the primary business activity of each CFC whose

earnings and profits resulted in a Dividend or Subpart F

Income for the Years at Issue. This is a factual matter as to

which the parties may be able to reach agreement without

the assistance of the court. The parties characterize taxpay-

er’s primary business activity in similar terms, and each

party’s characterization appears consistent with the level

of specificity the legislature used elsewhere in UDITPA.

The department describes it as “selling software and soft-

ware support.” Taxpayer describes it as “developing and

selling software and computer hardware.” The department

acknowledges that the primary business activity of at least

some of the CFCs is the same as that of taxpayer, but the

court does not read the department’s briefing as conceding

that fact as to all of the CFCs. The department refers in its

motion for reconsideration to “[s]ome of the CFCs whose own

primary business activity consisted of selling software and

software support”; and in its motion for summary judgment

that “[t]he fact that the foreign subsidiaries * * * also pro-

vide computer software and support, hardware systems, or

related services to their customers as their primary activity

is irrelevant.” (Emphasis added.)

The court directs the parties to confer and to advise

the court as to the need for further proceedings to resolve any

remaining factual differences related to the department’s

motion or to other issues not covered by either party’s cross-

motions for partial summary judgment. Now, therefore,

398 Oracle Corp. and Subsidiaries II v. Dept. of Rev.

IT IS ORDERED that Plaintiff’s Motion for Partial

Summary Judgment Pursuant to Tax Court Rule 47 is

denied; and

IT IS FURTHER ORDERED that Defendant’s

Cross-Motion for Partial Summary Judgment is denied.