Today I want to talk about Colorado’s attempt to tax $6.4 billion gain from the sale of stock of a Japanese subsidiary by ignoring its own statute and regulation. This case involves Oracle Corporation (Oracle), based out of California, and operating globally through domestic and foreign subsidiaries.
Oracle sold into Japan through a Japanese subsidiary which was owned by Oracle Japan Holding, Inc., a Delaware holding company (OJH), which itself was an Oracle subsidiary. OJH was not an operating company and had no United States payroll or property.
Colorado could only reach the $6.4 billion gain by including OJH in the Oracle Colorado combined return. However, the Colorado statute said that OJH could only be included if it had at least 20% of its payroll and property in the United States.
Colorado argued that a corporation with no U.S. payroll or property can be included in a Colorado combined return. The Court of Appeals dismissed this argument by quoting the statute: “subsection 303(12)(c) defines ‘includable C Corporations’ as any corporation that has ‘more than twenty percent of the C Corporation’s property and payroll’ assigned to locations inside the United States. Therefore, because OJH is not an includable C corporation, it cannot be a member of an affiliated group, and in turn falls outside of the Director’s power to require its inclusion in a combined report.”
The Court also noted that the Colorado Department of Revenue’s position ignores its own regulation: “The Department’s own regulation 39-22-303.12(c), in effect since 1994, supports this conclusion. It reads: Corporations without property and payroll factors. C.R.S. 39-22-303(12)(c) provides that only those corporations whose property and payroll factors are assigned twenty percent or more to locations inside the United States may be included in a combined report. Since corporations that have no property or payroll factors of their own cannot have twenty percent or more of their factors assigned to locations in the United States, such corporations, by definition, cannot be included in a combined report.”
The Colorado Court of Appeals decision is Oracle Corp. v. Colo. Dep’t of Revenue, No. 16CA1316 (Colo. App. Nov. 30, 2017), and can be found at: https://law.justia.com/cases/colorado/court-of-appeals/2017/16ca1316.html
Comment. Colorado’s actions in this case are inexcusable; a blatant failure to follow the rule of law. And this is the 2nd time in several weeks that the Colorado Court of Appeals squashed Colorado’s attempt to ignore its own statute and regulation under similar facts. See Agilent Technologies, Inc. v. Department of Revenue, 2017 COA 137 – Colo: Court of Appeals, 3rd Div. 2017. https://scholar.google.com/scholar_case?case=14336985081945519364&q=Agilent+Techs.,+Inc.+v.+Colo.+Dep%E2%80%99t+of+Revenue&hl=en&as_sdt=4,115
By John McCauley: I help people buy and sell businesses.
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