CenturyTel, Inc. v. Dept. of Rev.

316 March 7, 2013 No. 11

March 353 Or 11

CenturyTel, Inc. v. Dept.7, 2013

of Rev.

IN THE SUPREME COURT OF THE

STATE OF OREGON

CENTURYTEL, INC.,

Appellant,

v.

DEPARTMENT OF REVENUE,

State of Oregon,

Respondent.

(TC 4826; SC S059502)

En Banc

On appeal from the Oregon Tax Court.

Henry C. Breithaupt, Judge.

Argued and submitted September 18, 2012; resubmitted

January 7, 2013.

Gregg D. Barton, Perkins Coie, Seattle, argued the cause

and filed the briefs for appellant. With him on the brief was

Julia E. Markley, Portland.

Darren Weirnick, Assistant Attorney General, Salem,

argued the cause and filed the brief for respondent. With

him on the brief were John R. Kroger, Attorney General,

and Marilyn J. Harbur, Sr. Assistant Attorney General.

KISTLER, J.

The judgment of the Tax Court is affirmed.

Taxpayer reported the gain realized from the sale of its wireless

telecommunications assets as “nonbusiness” income allocable to Louisiana. The

department, on audit, reclassified the gain as apportionable “business income”

under OAR 150-314.280-(B), which incorporates by reference two potentially

conflicting definitions of “business income” from the Uniform Division of Income

for Tax Purposes Act (UDITPA) and the rules promulgated to implement UDITPA.

The Tax Court agreed with the department’s construction of those definitions

of “business income” and granted summary judgment in its favor. Held: The

department’s resolution of the two potentially conflicting definitions of business

income in OAR 150-314.280-(B) is a reasonable one that is consistent with the text

of ORS 314.280. So construed, OAR 150-314.280-(B) is broad enough to reach the

gain from the sale of taxpayer’s wireless telecommunication assets.

The judgment of the Tax Court is affirmed.

Cite as 353 Or 316 (2013) 317

KISTLER, J.

This case presents essentially the same issue that

we decided in Crystal Communications, Inc. v. Dept. of Rev.,

353 Or 300, ___ P3d ___ (2013). CenturyTel, Inc., is a public

utility subject to taxation under ORS 314.280. CenturyTel

operated as a multistate, unitary business that, until 2002,

provided both wireless and wireline telecommunications

services. In 2002, CenturyTel sold its assets related to its

wireless services but continued to provide wireline services.

As in Crystal, CenturyTel reported the gain from the sale of

its wireless assets as “nonbusiness income” and allocated

that gain to its state of commercial domicile. On audit,

the Department of Revenue (the department) reclassified

the gain as apportionable “business income.” CenturyTel

challenged the department’s reclassification, and the Tax

Court, relying on its decision in Crystal, granted summary

judgment in favor of the department. CenturyTel appealed

to this court. Consistently with our decision in Crystal, we

affirm the judgment of the Tax Court.

CenturyTel is a Louisiana corporation with its

commercial domicile and principal place of business in that

state. CenturyTel is the common parent of an affiliated group

of controlled entities (the CenturyTel Group), which included

a wholly owned subsidiary, CenturyTel Wireless, Inc. From

1985 until 2002, the CenturyTel Group provided wireless

cellular telecommunications services through CenturyTel

Wireless, Inc., in various areas of the United States. Before,

during, and after the relevant tax years, the CenturyTel

Group also provided wireline telecommunications services

to rural areas and small to mid-sized cities in 22 states.

Between 1983 and 2002, the CenturyTel Group periodically

considered and acted upon opportunities to acquire and

dispose of various interests in wireless and wireline assets.

In 2002, CenturyTel agreed to sell its wireless assets

to ALLTEL Communications, Inc. The sale was completed

on August 1, 2002, and, in exchange for the wireless assets

described in the sale agreement, CenturyTel received

approximately $1.59 billion.1 CenturyTel used $1.179 billion

1

That amount reflects the value of CenturyTel’s wireless assets, with the

exception of the CenturyTel Group’s 49 percent partnership interest in one wireless

318 CenturyTel, Inc. v. Dept. of Rev.

of that gain to finance the acquisition of wireline assets and

used the remaining amount to pay off certain debts. After the

sale, with the exception of its retained partnership interests,

the CenturyTel Group’s wireless operations were reflected

as “discontinued operations” on its consolidated financial

statements. For federal tax purposes, the transaction was

treated as a “deemed liquidation and cessation” under IRC

§ 338(h)(10). CenturyTel continued to engage in its business

of providing wireline telecommunications services.

The department accepted CenturyTel’s IRC

§ 338(h)(10) election, and, on its 2002 state income tax

returns, CenturyTel reported a capital gain of $820,863,205

from the asset sale transaction. For reasons similar to those

stated by the taxpayer in Crystal, CenturyTel reported

that gain as nonbusiness income allocable to Louisiana.

The department audited CenturyTel’s records and, among

other adjustments, reclassified the gain as apportionable

business income. CenturyTel sought review of the auditor’s

adjustment in the Tax Court, and the parties filed cross-

motions for summary judgment in that court. The Tax Court

ruled, as it had in Crystal, that the gain CenturyTel realized

was apportionable income under ORS 314.280.

As in Crystal, CenturyTel is a multistate utility

subject to taxation under ORS 314.280. That statute gives

the department the authority to determine whether “income

from [CenturyTel’s] business activity” should be apportioned

among the states in which CenturyTel engages in business,

but it does not specify whether some or all of CenturyTel’s

income should be apportioned. On that issue, the department

has adopted, by rule, the standards from the Uniform

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

at ORS 314.605 to 314.675.2 See OAR 150-314.280-(B)

(adopting those standards). Under UDITPA, only “business

income,” which is defined both by statute and by rule, is

market and the assets purchased by certain partners in the CenturyTel Group’s

markets pursuant to those partners’ rights of first refusal. The retained 49 percent

partnership interest was excluded from the sale based on a cross-ownership

restriction that precluded the sale of that interest. As the Tax Court noted, that

retained interest and its associated assets “are not material for purposes of th[is]

analysis.”

2

As a general matter, UDITPA governs taxation of income earned by

businesses that are not subject to ORS 314.280.

Cite as 353 Or 316 (2013) 319

subject to apportionment. See ORS 314.610(1) (defining

business income under UDITPA); OAR 150-314.610(1)-(B)

(defining business income for the purposes of UDITPA).

The issue in this case arises, as it did in Crystal,

because CenturyTel argues that the income it realized

when it liquidated its wireless subsidiary did not constitute

“business income” as that phrase is defined in UDITPA.

CenturyTel recognizes that the definition of business

income in the rule implementing UDITPA is broad enough

to encompass the income it realized, but it argues that the

rule defining business income is invalid to the extent that it

goes farther than the statutory definition of that phrase.

As we explained in Crystal, we need not decide

whether the gain that CenturyTel realized when it sold its

wireless subsidiary would be classified as business income

within the meaning of UDITPA. Rather, in implementing

ORS 314.280, the department adopted a rule that includes

two definitions of business income—one comes from the

statutory definition of that term in UDITPA, the other

from the rule implementing that statutory definition. See

OAR 150-314.280-(B) (incorporating both definitions of

business income). For the reasons set out in Crystal, our

goal in interpreting OAR 150-314.280-(B) is to give effect to

both definitions, if possible. We can do that by interpreting

the statutory definition incorporated in OAR 150-314.280-

(B) consistently with Hoechst Celanese Corp. v. Franchise

Tax Board, 25 Cal 4th 508, 22 P3d 324, cert den, 534 US

1040 (2001). So interpreted, the two definitions of business

income in OAR 150-314.280-(B) are consistent with one

another and reach the income that CenturyTel realized on

the sale of its wireless subsidiary.3

3

In its opening brief, CenturyTel asserted, without elaboration, that

taxing businesses subject to ORS 314.280 (utilities and financial organizations)

differently from businesses subject to UDITPA would violate the Uniformity

Clause of the Oregon Constitution and the Equal Protection Clause of the federal

constitution. We decline to reach those claims for the essentially the same reasons

that we did in Crystal. Not only does CenturyTel’s argument rest on a premise

that we have not yet decided, but CenturyTel provides little or no reason to think

that either the Uniformity Clause or the Equal Protection Clause would prevent

the state from taxing utilities and financial institutions differently from other

types of businesses. In these circumstances, we decline to reach CenturyTel’s

constitutional claims. See State v. Montez, 309 Or 564, 604, 789 P2d 1352 (1990)

(declining to reach constitutional arguments that had been raised only in passing).

320 CenturyTel, Inc. v. Dept. of Rev.

Given that holding, we need not reach CenturyTel’s

argument that the gain it realized does not constitute

business income within the meaning of UDITPA. Conversely,

we need not reach the department’s argument that, viewed

from a larger perspective, CenturyTel ‘s activities show that

it was in the business of buying and selling wireless and

wireline assets with the result that the gain it realized came

within even CenturyTel’s definition of business income under

UDITPA. Rather, it is sufficient to hold that CenturyTel’s

gain was “business income” within the meaning of OAR

150-314.280-(B), the rule that the department enacted to

implement ORS 314.280.

The judgment of the Tax Court is affirmed.