United States: Oregon Supreme Court Finds Goodwill Proceeds Excludable From Sales Factor

The Oregon Supreme Court has affirmed an Oregon Tax Court decision holding that a taxpayer's gross receipts from the sale of goodwill should be excluded from the sales factor used to compute its Oregon corporate excise (income) tax liability.1 In doing so, the Court clarified that for purposes of Oregon sales factor apportionment, an Oregon statute specifically excludes gross receipts from the sale of "intangible assets" (of which goodwill is classified) unless those gross receipts are derived from the taxpayer's primary business activity.2 The Court rejected the Tax Court's conclusion that "intangible assets" means only "liquid assets," and held that the term carries its ordinary meaning.

Background

The taxpayer, a developer and seller of test, measurement and monitoring equipment, sold all of the assets of its printer division in 1999 to another corporation for approximately $925 million. Of that total sale price, roughly $590 million represented the gross proceeds from intangible assets, which were comprised of seven different types of intangible assets, generally referred to in total as "goodwill." On its originally filed Oregon corporation income tax return for that year, the taxpayer excluded the $590 million from the calculation of its sales factor. If included, the amount would have significantly increased the taxpayer's Oregon corporation income tax liability.

For the 2002 tax year, the taxpayer filed state and federal tax returns and reported a net capital loss. For federal income tax purposes, the taxpayer sought to carry back and apply that loss to its 1999 federal income tax obligation. In 2005, the Internal Revenue Service (IRS) issued a federal audit Revenue Agent's Report (RAR), which adjusted the amount of the original 2002 tax year loss. At that time, the taxpayer filed an amended 1999 Oregon corporation income tax return and claimed a net capital loss carryback based on the reduced net capital loss reflected in the 2005 RAR. The taxpayer applied the loss against its original 1999 Oregon tax obligation.

After receiving the amended return, the Oregon Department of Revenue permitted the taxpayer to apply the net capital loss carryback against its 1999 tax liability, but also recomputed the taxpayer's Oregon tax liability including the proceeds from the sale of goodwill in the computation of the taxpayer's sales factor for apportionment purposes, thus resulting in a tax assessment of $3.3 million.

The taxpayer challenged this assessment in the Oregon Tax Court on the basis that the Oregon statute of limitations prevented the Department from assessing additional tax based on the change in the sales factor. The Tax Court granted the taxpayer's motion and denied a cross-motion from the Department claiming that the statute of limitations had restarted because of the issuance of the 2005 RAR. The parties then entered into a settlement agreement which allowed the Department to appeal the statute of limitations and sales factor issues.

Oregon Supreme Court Affirms Summary Judgment

In affirming the Tax Court's decision, the Oregon Supreme Court never reached the issue of whether the statute of limitations prevented the Department from imposing additional tax as a result of the sales factor issue. Rather, the Supreme Court concentrated on the substantive issue regarding how to apportion business income under Oregon's version of the Uniform Division of Income for Tax Purposes Act (UDITPA).3 The determination of whether allocation or apportionment is appropriate generally is based on the UDITPA definitions of "business income" and "nonbusiness income."4 Oregon statutes define business income as "income arising from transactions 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."5 For the tax year at issue, business income was apportioned to Oregon via a formula consisting of a property factor, a payroll factor and a double-weighted sales factor.6

At issue in this case was whether the proceeds from the sale of intangibles should be included in the computation of the Oregon sales factor.7 The term "sales" includes all gross receipts of the taxpayer not subject to allocation as nonbusiness income.8 In addition, the statutory definition of "sales": (i) excludes 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; (ii) includes 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; and (iii) excludes 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 business 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.9

Specifically, the Supreme Court focused on whether the gross proceeds from the intangible assets sold constituted "sales" for purposes of determining the Oregon sales factor. The Department argued that since the printer division was central to the taxpayer's primary business activity, the proceeds from such division should be characterized as receipts derived from the taxpayer's primary business activity includable in the sales factor calculation.10 In its analysis, the Supreme Court focused on the applicable statute and related definition of "intangible assets,"11 noting the narrow meaning of that term identified by the Tax Court. Though the Supreme Court considered the Department's position, which was reliant upon: (i) legislative history; (ii) a model regulation adopted by the Multistate Tax Commission; and (iii) other 1999 legislative testimony, it ultimately determined that the term "intangible assets" as used in Or. Rev. Stat. Section 314.665(6)(a) is not limited to include only liquid assets.

Thus, the Supreme Court concluded that the $590 million received by the taxpayer as gross proceeds from the sale of intangible assets met this statutory definition, so those receipts must be excluded from the sales factor unless the receipts were derived from the taxpayer's primary business activity. Despite the fact that the printer division was central to the taxpayer's primary business of manufacturing and distributing electronic products, the sale of that division itself was not the taxpayer's business activity. No evidence was presented by the Department to support its assertion that the taxpayer's primary business was engaging in the sale of its divisions. The Court determined that the $590 million was required to be excluded from the sales factor as those receipts were derived from the sale of intangible assets which were not from the taxpayer's primary business activity.

The Supreme Court's analysis contrasted with that of the Tax Court, which had determined that the term "intangible assets" was generally intended to include only liquid assets associated with a taxpayer's treasury function. Specifically focusing its attention on the legislative record surrounding the adoption of Or. Rev. Stat. Section 314.665(6), the Tax Court noted that there was no indication that the legislation went beyond the treatment of treasury function receipts or addressed the receipts from all sales of intangible property. Concluding that neither Or. Rev. Stat. Section 314.665(6)(a) nor (6)(b) could be a basis for including some or all of the receipts from the taxpayer's disposition of goodwill in the computation of the sales factor, the Tax Court looked to regulatory guidance governing how to treat proceeds from sales of intangible property for sales factor purposes.

In concluding that that proceeds from the sale of goodwill was excludible, the Tax Court focused on a Department regulation providing that if business income from an intangible asset cannot readily be attributed to a particular business activity of the taxpayer, the proceeds from the sale of that intangible asset must be excluded from the calculation of the sales factor, to exclude the proceeds from the sale of goodwill from the taxpayer's sales factor computation.12 In its decision, the Tax Court noted that "the goodwill at issue here is a composite of all of the business activities of a taxpayer over time and in all locations where the business of the taxpayer is carried on. . . . That being the case, it is the conclusion of the court that the amount paid by the purchaser to taxpayer in this case cannot 'readily' be attributed to any particular income producing activity."13

Commentary

This case is interesting in that it specifically focuses on the treatment of proceeds from the sale of goodwill for sales factor purposes. Despite the substantial sums often attributed to goodwill in sales transactions, little specific guidance exists with respect to the treatment of related proceeds for sales factor purposes. Although many states provide rules and limited guidance regarding the treatment of proceeds from sales of intangible assets in general, most do not specifically address goodwill. Presumably, since many states, like Oregon, rely on statutory language similar to that suggested by UDITPA and source proceeds from readily identifiable income producing activities based on the location of the related activity or where its benefit is received, the results here have potential wide-reaching effect.

Besides the specific treatment of goodwill proceeds, the following ancillary issues are evident from the case:

  1. Though this case specifically deals with the treatment of gross proceeds from the sale of goodwill, it is possible that the conclusion could apply to proceeds from sales of other intangible assets as well, especially since relevant statutory language does not typically distinguish between goodwill and other intangible assets. For example, proceeds from the sale of patents, copyrights and other intangible assets could also potentially be excluded from the sales factor computation based on similar reasoning.
  2. It is notable that since the relevant time period in this case, some changes have occurred which could have potentially changed its outcome. For example, an administrative rule that has since been promulgated in Oregon now lists seven specific criteria used to determine a taxpayer's primary business activity.14 Had this rule been in existence for the tax period in issue, certainly the Court would have focused much more attention on whether the proceeds from the sale of goodwill were derived from the taxpayer's primary business activity and were, therefore, necessarily includable in the taxpayer's sales factor computation.
  3. The statutory exclusion from the sales factor computation for a substantial amount of gross receipts from an incidental or occasional sale in Oregon applies specifically to fixed assets used in the regular course of the taxpayer's trade or business. Though the taxpayer asserted at the Tax Court level that its goodwill was a fixed asset, the Tax Court never reached the merits of this argument, and it is entirely conceivable that the term "fixed" could be construed to require that the asset is tangible in nature. Even so, it would be interesting to see what conclusions other courts might reach based on this reasoning.
  4. Though the taxpayer in this instance did not assert that the proceeds from the sale of its goodwill were allocable nonbusiness income, it is not difficult to imagine a taxpayer with a similar fact pattern making such assertion. This argument would have led to a very different analysis by the Court and potentially a different conclusion.
  5. The discussions by both the Tax Court and the Supreme Court in this instance provide detailed commentary regarding whether intangibles include more than simply liquid assets. Potential implications of including goodwill and other "non-liquid" assets in this category could include both property tax and sales tax issues, depending on particular definitions and their applicability in various jurisdictions.

With the increased level of corporate transaction activity over the past several years, corporations receiving proceeds from the sale of goodwill should carefully analyze this decision and consider whether it could have any potential impact on their state income tax liability or tax provision.

Footnotes

1 Tektronix, Inc. v. Department of Revenue, Oregon Supreme Court, No. SC S060912, Dec. 12, 2013.

2 OR. REV. STAT. § 314.665(6)(a).

3 OR. REV. STAT. §§ 314.605-314.675.

4 See Crystal Communications, Inc. v. Department of Revenue, 297 P.3d 1256 (Or. 2013). Under UDITPA, whether income is allocated or apportioned depends on whether that income is classified under the statute as "business income" or "nonbusiness income."

5 OR. REV. STAT. § 314.610(1).

6 OR. REV. STAT. § 314.650(1). The current version of the statute no longer includes the property or payroll factors. Instead, apportionment is based solely upon the sales factor.

7 The Oregon sales factor is a fraction, the numerator of which is the taxpayer's total sales in Oregon during the tax period, while the denominator is the taxpayer's total sales everywhere during the tax period. OR. REV. STAT. § 314.665(1).

8 OR. REV. STAT. § 314.610(7).

9 OR. REV. STAT. § 314.665(6)(a)-(c).

10 After a review of the legislative history surrounding the enactment of OR. REV. STAT. § 314.665(6)(a), the Tax Court had determined that the exclusion of "intangible assets" found in the statute referred only to "liquid assets" (i.e., those assets held to provide a relatively immediate source of funds to satisfy the liquidity needs of the trade or business). Tektronix, Inc. v. Department of Revenue, Oregon Tax Court, No. TC 4951, June 5, 2012.

11 "Intangible asset" broadly means "any nonphysical asset or resource that can be amortized or converted to cash, such as patents, goodwill, and computer programs, or a right to something, such as services paid for in advance." Black's Law Dictionary 134 (9th ed. 2009).

12 OR. ADMIN. R.150-314.665(4)(3).

13 Tektronix, Inc. v. Department of Revenue, Oregon Tax Court, No. TC 4951, June 5, 2012.

14 OR. ADMIN. R.150-314.665(6)(3), effective Dec. 31, 2000.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions