United States: Oregon Tax Court Holds Retailer Required To Include Foreign Insurance Company’s Income In Consolidated Return

The Oregon Tax Court has held that the income of an out-of-state retailer's foreign insurance company subsidiary was required to be included in the retailer's consolidated Oregon corporation excise tax returns.¹ The Court based its determination on the facts that the insurance company was not independently subject to Oregon corporation excise tax and that the insurance company, which was a member of the retailer's federal affiliated group, was also a member of a unitary group with more than one corporation that Oregon had the jurisdiction to tax.

Background

The taxpayer was a Washington corporation engaged in the business of operating retail membership warehouses offering a variety of merchandise throughout the United States, including Oregon. The taxpayer was also the parent corporation of a federal affiliated group (Group),² which included a Bermuda insurance company (Insurance) that elected to be taxed as a domestic corporation includible in the federal consolidated filing group, as well as a number of domestic subsidiaries. Insurance received insurance premiums from Group and the taxpayer to insure Group's general liability, workers' compensation, and automobile liability risks. Insurance also received reinsurance premiums from unrelated third parties.

The parties stipulated that Group consisted of one unitary group, which included the subsidiaries and Insurance, and that Insurance was not required to file a separate Oregon corporation excise tax return.³ The taxpayer filed federal and Oregon consolidated returns on Group's behalf. In calculating the Oregon taxable income for the taxpayer and its subsidiaries, the taxpayer subtracted Insurance's income from the taxpayer's affiliated group's federal taxable income. Insurance was not registered to do business in Oregon, did not rent or own any property in the state, and did not have employees located in Oregon.⁴ Insurance did not file federal or Oregon separate returns during this period. The Oregon Department of Revenue assessed additional tax, plus interest and penalties, to the taxpayer for the years at issue, taking the position that Insurance's income should not have been excluded from the taxpayer's Oregon consolidated tax return. Both parties filed motions for partial summary judgment.

Insurance Company's Income Must Be Included

In reaching its decision that Insurance's income must be included in the Oregon consolidated return, the Court noted that two stipulated facts were particularly important: (i) the taxpayer and Insurance were in a unitary relationship under Oregon law; and (ii) Insurance was not subject to tax in Oregon and was not required to file a separate Oregon return. The Court also assumed there was only one unitary group within the federal affiliated group.⁵ Therefore, the starting point for the determination of the taxpayer's Oregon taxable income included the income of Insurance. The issue before the Court was whether Oregon law permitted the exclusion of Insurance's income from the federal taxable income starting point for determining the taxpayer's Oregon taxable income. The Court concluded that the provisions of the Oregon law relating to the corporation tax return requirements⁶ did not change the conclusion that Insurance's income belonged in the starting amount for the calculation of the taxpayer's appropriate tax base. The Court found that these provisions addressed the requirement to file and the liabilities due, but were silent with respect to the appropriate tax base.

The Court rejected the taxpayer's assertion that Insurance's income could be excluded under the Oregon law allowing for the exclusion of a corporation that is "permitted or required by statute or rule to use different apportionment factors" than the taxpayer or other affiliates that are part of the unitary group.⁷ Because the exclusion applied only to those corporations that were "permitted or required" to use different apportionment factors, the Court concluded that the exclusion must also be limited to only those corporations over which the state has jurisdiction to tax. As Oregon had no independent jurisdiction to tax Insurance as a separate entity, Insurance's income could not be excluded under this provision.

The Court also addressed the taxpayer's argument that the special treatment of foreign insurance companies permitted the exclusion of Insurance's income. The relevant statute specified, "[e]ach foreign or alien insurer...shall make a return of the tax imposed by this chapter on a separate basis."⁸ In weighing the issue as to whether the special provisions applied to Insurance, the Court emphasized again that Oregon did not have the jurisdiction to require Insurance to file a return separately. Insurance was not "doing business" in the state. Since the Court could not subject Insurance to its filing requirements on a separate basis, the exclusion for foreign insurers did not apply.

Furthermore, the Court took the position that its decision was consistent with a prior decision, Penn Independent, reached by the Court in 1999.⁹ In this prior decision, the Court found that the income of an insurance company could not be excluded from a consolidated excise tax return because the insurance company was not separately subject to the excise tax due to an "insurance company" exemption that was available during the relevant years.¹⁰

Therefore, upon consideration of the arguments, the Court ruled that the income of Group attributable to Insurance should have been included in the calculation of taxpayer's Oregon taxable income for the years at issue.

Commentary

Under this decision, Oregon has not directly levied tax on a foreign corporation or otherwise asserted jurisdiction over a foreign corporation by imposing a filing requirement. The state has simply maintained its ability to assess tax on the totality of income, on an apportioned basis, of all members of a "unitary group," some members over which the state indeed has jurisdiction.

Interestingly, the Court summarily dismissed the taxpayer's argument that the income was excludable based on an exclusion for corporations that are "permitted or required" to use different apportionment factors. According to the Court, it was "completely illogical" to conclude that this exclusion was available to corporations that were without Oregon nexus. However, it may not be so clear that the state requires taxing jurisdiction over an entity that can be excluded from a unitary group based on the special apportionment rules.

The Court stressed the fact that Insurance elected to be treated as a domestic corporation. If Insurance had not made this election and had not been included in the federal consolidated return, then it would have constituted a foreign corporation excludable from the Oregon return based on Oregon's water's-edge approach.

Notably, the Court did not address apportionment considerations, as this issue was reserved for a later stage of the litigation. Presumably, the taxpayer would have argued for inclusion of Insurance in the Oregon filing group had the apportionment impact of Insurance diluted the overall Oregon apportionment factor. If Insurance were included in the Oregon filing group, the taxpayer would need to consider the special apportionment provisions that apply to insurance companies, and how such provisions would cohere with the apportionment factors of the other businesses in the filing group. Oregon law requires insurance companies to apportion net income by using an insurance sales factor that is based on premiums, sourced according to the location of policies and contracts that generated the premiums¹¹ Oregon generally uses a single sales factor,¹² but the computation of the sales factor differs for insurance companies.

Subsequent to this decision, the Oregon Tax Court considered another case Financial Group which concerned the taxation of corporations filing federal consolidated income tax returns that included an insurance company.¹³ In Stancorp, the Court reached the opposite result and held that the dividends received by the parent company from the insurance company were not included in the determination of the parent company's Oregon taxable income. However, the Court noted that Stancorp differed from the prior case because the insurance company in Stancorp had a connection with Oregon and was required to file its own income tax return in the state. Therefore, the decisions can be reconciled with each other due to the significant differences in the facts.

Footnotes

1 Costco Wholesale Corp. v. Department of Revenue, Oregon Tax Court, No. TC 4956, July 16, 2012. Oregon imposes on corporations an "excise tax" measured by income (OR. REV. STAT. § 317.010(5)).

2 As the term is used in IRC § 1504 and OR. REV. STAT. § 317.705(1).

3 "Unitary group" means a corporation or group of corporations engaged in business activities that constitute a single trade or business. OR. REV. STAT. § 317.705.

4 Oregon corporation excise tax is imposed for the privilege of "doing business" in Oregon (OR. ADMIN. R. § 150-317.070(1)). "Doing business" is not specifically defined in Oregon statutes or regulations. However, Insurance was not subject to Oregon corporation excise tax on a standalone basis.

5 If there was more than one unitary group, the separate determination of income of each unitary group would have been permitted. OR. REV. STAT. § 317.715(2). The Court pointed out that while separate determination was permitted, there was nothing within Oregon law that indicated that the total income of all "unitary groups" within one federal consolidated return could be less than the consolidated federal taxable income on the federal tax return.

6 OR. REV. STAT. § 317.710.

7 OR. REV. STAT. § 317.710(5)(b) (emphasis added). Note that special apportionment provisions apply to insurers under OR. REV. STAT. § 317.660.

8 OR. REV. STAT. § 317.710(7) (emphasis added).

9 Department of Revenue v. Penn Independent Corp., Oregon Tax Court, No. 4321, Nov. 17, 1999.

10 Id.

11 OR. REV

12 OR. REV 13 Stancorp Financial Group, Inc. v. Department of Revenue 2012. Tax professional standards statement.

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