Argued and submitted September 16, 2013
On appeal from the Oregon Tax Court. [*] Henry C. Breithaupt, Judge. TC 4951
Marilyn J. Harbur, Senior Assistant Attorney General, Salem, argued the cause and filed the brief for defendant-appellant. With her on the brief were Ellen F. Rosenblum, Attorney General, and Douglas M. Adair, Senior Assistant Attorney General.
Robert T. Manicke, Stoel Rives LLP, Portland, argued the cause and filed the brief for plaintiff-respondent. With him on the brief were Eric J. Kodesch and Brad S. Daniels.
The judgment of the Tax Court is affirmed.
This case is before us on direct appeal from a general judgment of the Tax Court. See ORS 305.445 (authorizing such appeals). In 2006, the Department of Revenue (department) issued a notice of deficiency against Tektronix, Inc. (taxpayer) for $3.7 million in additional tax for taxpayer's 1999 tax year. Taxpayer contended that (1) the statute of limitations barred the department from assessing that deficiency, and (2) in any event, the department had incorrectly calculated its tax liability. The Tax Court granted partial summary judgment for taxpayer on both grounds. Tektronix, Inc. v. Dept. of Rev.___, OTR ___, 2012 Ore Tax LEXIS 175 (Or Tax Ct June 5, 2012). The department appeals. For the reasons that follow, we agree with taxpayer that the department incorrectly calculated taxpayer's tax liability, and we affirm the Tax Court.
On appeal from a grant of summary judgment, we consider whether the Tax Court erred in concluding that there was no genuine issue of material fact and that taxpayer was entitled to summary judgment as a matter of law. See TCR 47 C (standard for granting summary judgment); Martin v. City of Tigard, 335 Or 444, 449, 72 P.3d 619 (2003) (applying that standard on appeal from Tax Court decision). In this case, the relevant facts do not appear to be disputed.
Taxpayer is in the business of developing and selling test, measurement, and monitoring equipment. During its 1999 tax year, taxpayer sold its printer division to another corporation for approximately $925 million. Of that sale price, roughly $590 million represented the gross proceeds for intangible assets, which taxpayer refers to generally as "goodwill." When taxpayer filed its original tax return for its 1999 tax year, it did not include the $590 million in the "sales factor, " a figure used to apportion business income between states and that, if included, would have increased taxpayer's Oregon tax liability. (We will discuss the sales factor in detail later.) Taxpayer claimed and received an Oregon tax refund for that year.
Ordinarily, the department has three years from the date that a tax return is filed to give notice of a deficiency. ORS 314.410(1) (2005). In this instance, the department did not give notice of deficiency within three years of the date that taxpayer filed its 1999 tax return.
For the tax year 2002, taxpayer filed state and federal tax returns that reported a net capital loss. Under federal and state law, that net capital loss allowed taxpayer to take what is known as a "net capital loss carryback, " in which a taxpayer applies some of its net capital loss from one year to its tax obligations from previous years. See West's Tax Law Dictionary 148 (2013) ("carryback" refers to "[t]he application of a deduction or credit from a current tax year to a prior tax year"); Black's Law Dictionary 242 (9th ed 2009) ("carryback" means "[a]n income tax deduction (esp. for a net operating loss) that cannot be taken entirely in a given period but may be taken in an earlier period (usu. the previous three years)"). Taxpayer sought to apply its 2002 net capital loss to its federal tax obligation for 1999, filing a form with the federal Internal Revenue Service (IRS). The form asked for a tentative refund of taxpayer's 1999 federal taxes, which the IRS paid.
In 2005, however, the IRS audited taxpayer's returns for tax years 2000-02 and issued a Revenue Agent's Report that adjusted taxpayer's tax liability. The report concluded that taxpayer had claimed too much net capital loss for 2002, and it reduced that amount. Because taxpayer was not entitled to as much net capital loss for 2002 as it had claimed, taxpayer also was not entitled to carry back to 1999 as much of that loss as it had done when it filed the form with the IRS. The report that the IRS issued in 2005 reduced the net capital loss carryback that taxpayer could claim in 1999 and required taxpayer to repay part of the tentative refund that it had received for that year. The report did not adjust taxpayer's 1999 taxes in any other way.
After the IRS issued its 2005 report, taxpayer filed an amended 1999 tax return for Oregon. In that return, taxpayer claimed a net capital loss carryback based on the reduced net capital loss reflected in the 2005 IRS report and applied it against taxpayer's 1999 Oregon tax obligation.
The department permitted taxpayer to apply the net capital loss carryback against its 1999 tax obligation, but it also concluded that the IRS's 2005 adjustment of taxpayer's net capital loss carryback reopened the entirety of taxpayer's 1999 Oregon tax return for audit. The department conducted an audit and determined (among other things) that taxpayer should have included the $590 million in the sales factor used to apportion business income between states. Although taxpayer would have been entitled to a refund for its net capital loss carryback in the amount of approximately $370, 000, the department assessed an additional $3.7 million in tax obligation based primarily on the recalculated sales factor. As a consequence, instead of receiving a refund, taxpayer owed net taxes of approximately $3.3 million.
Taxpayer challenged the department's assessment by filing a complaint in the Tax Court. Taxpayer moved for partial summary judgment, arguing that the statute of limitations barred the department from assessing any additional tax and that the $590 million should not be included in the sales factor. The department countered with a cross-motion for summary judgment. The department maintained that the actions by the IRS in 2005 had restarted the statute of limitations for the 1999 tax year and that the relevant statutes required the $590 million to be included in the sales factor.
The Tax Court granted taxpayer's motion for partial summary judgment and denied the department's cross-motion. The parties then entered into a settlement agreement that resolved the issues between the parties, but allowed the department to appeal the two issues resolved against it on summary judgment. The Tax Court then entered a general judgment memorializing the terms of the settlement. The department appeals.
For the reasons that follow, we agree with taxpayer that the $590 million should not be included in the sales factor. As a result, it is not necessary for us to resolve the statute of limitations issue. Even if the department were correct that the actions that the IRS took in 2005 reopened the entirety of taxpayer's 1999 Oregon tax return for audit, the department's argument would fail on its merits. See, e.g., Harding v. Bell, 265 Or 202, 210, 508 P.2d 216 (1973) (court's conclusion that complaint failed to state claim for relief "renders unnecessary any discussion of plaintiffs' remaining assignments of error concerning * * * the statute of limitations in this type of action").
The substantive tax issue that we address concerns how to apportion business income under Oregon's version of the Uniform Division of Income for Tax Purposes Act ("UDITPA"), ORS 314.605 - 314.675 (1999). The uniform act exists to ensure that a taxpayer doing business across state boundaries has all of its income taxed, but that no income is taxed twice by different states. See Twentieth Century-Fox Film v. Dept. of Rev., 299 Or 220, 226-27, 700 P.2d 1035 (1985) (drafter of UDITPA explained that "'[t]he uniform act, if adopted in every state having a net income tax or a tax measured by net income, would assure that 100 per cent of income, and no more or no less, would be taxed'" (quoting William J. Pierce, The Uniform Division of Income for State Tax Purposes, 35 Taxes 747, 748 (1957))).
UDITPA provides for two ways in which income is attributed to a state for tax purposes: by allocation and by apportionment. That distinction is, we believe, helpful to place the issue here in the correct legal framework.
Allocation occurs when certain types of income (identified below) are directly attributed to (usually) a single state:
"When income is allocated, it is attributed to the particular state or states that are considered to be the source of the income, often on the basis of the location of the property that gave rise to the income or on the ...