United States: Colorado Court Finds Holding Company Not Subject To Combination With Operating Affiliates

A Colorado district court has held that the Colorado Department of Revenue erred in requiring the inclusion of a holding company in a corporation's combined corporate income tax returns because the holding company did not meet the definition of an "includible C corporation" under state law. To be considered an "includible C corporation," more than 20 percent of the C corporation's property and payroll must be assigned to locations inside the United States. Because the holding company had no property or payroll of its own, it did not meet the more than 20 percent property and payroll test required to be an "includible C corporation."1


Colorado requires that a combined income tax return be filed by the includible members of an affiliated group of C corporations. Colo. Rev. Stat. Sec. 39-22-303 provides extensive rules governing which C corporations must be included in a combined group.

Under Colorado's combined accounting method, an affiliated corporation or group is defined as "one or more chains of includable C corporations connected through stock ownership with a common parent C corporation."2 An includable C corporation is defined as "any C corporation which has more than twenty percent of the C corporation's property and payroll...assigned to locations inside the United States."3 Further, an includable C corporation must meet at least three of six enumerated factors in the current and two preceding tax years in order to be included in a Colorado combined return.4

Agilent Technologies, Inc. (Agilent), the head of a corporate structure doing business in Colorado, filed Colorado combined corporate income tax returns with several of its unitary affiliates. One of Agilent's affiliates, Agilent Technologies World Trade, Inc. (World Trade), a holding company with its own foreign subsidiaries, was part of Agilent's unitary business. At issue in the case was whether World Trade had to be included in Agilent's Colorado combined corporate income tax returns.

Agilent's arguments

Agilent raised four arguments in support of its position that World Trade was not required to be included in the Agilent Colorado combined return:

  • World Trade and four of its foreign subsidiaries were taxed together as a single entity in their federal return and should have been treated in the same manner for Colorado corporation income tax purposes. Under this treatment, at least 80 percent of the property and payroll of World Trade was located outside the United States and, as a result, World Trade could not be included in Agilent's combined return.
  • World Trade did not meet the definition of an "includible C corporation" under Colo. Rev. Stat. Sec. 39-22-303(12)(c).
  • World Trade did not meet the requirement under Colo. Rev. Stat. Sec. 39-22-303(11)(a) under which a C corporation must meet at least three of six enumerated factors in order to be included in a Colorado combined return
  • Including World Trade in Agilent's Colorado combined returns was unconstitutional because it resulted "in impermissible discrimination against corporations that own foreign subsidiaries, and in favor of corporations that own domestic subsidiaries."

Department's arguments

The Department raised two arguments in response:

  • The Department was not bound by Agilent's federal "check-the-box" designations and all statutory requirements were met to include World Trade in Agilent's Colorado combined return, and such action did not violate the U.S. Constitution's Commerce Clause.
  • In order to accurately reflect Agilent's income apportionable to Colorado, World Trade's income had to "be considered as a part of Agilent's domestic unitary business," and this inclusion was required under its discretionary authority to clearly reflect the taxpayer group's income under Colo. Rev. Stat. Sec. 39-22-303(6) and under the economic substance doctrine.

After addressing each of the above arguments, the court ultimately concluded that World Trade was not required to be included in Agilent's combined return because it did not meet the definition of an "includible C corporation" under Colo. Rev. Stat. Sec. 39-22-303(12)(c).

Department's Regulation Defining "Includible C Corporation"

The court explained that a Department regulation addressed how the includible C corporation designation applies to companies with no property or payroll. The regulation states:

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.5

Based on the regulation, the court concluded that World Trade was not an includable C corporation. As a holding company with no property or payroll of its own, World Trade could not have satisfied the 20 percent United States property or payroll factor tests.

In the opinion, the court rejected the Department's argument that World Trade had value factors that would result in meeting the thresholds required to be an includible corporation, because it used Agilent's property and personnel.6 The court based its decision on the rejection of an earlier version of the Department's regulation at issue, which provided that a "corporation without property and payroll, which functions through the use of personnel services and/or property of an includible corporation, shall also be considered an includible corporation."7 The court noted that the legislative history showed that this regulation was allowed to expire because it directly conflicted with the definition of "includible corporation" in Colo. Rev. Stat. Sec. 39-22-303(12)(c).8

Court's Consideration of Alternative Agilent Arguments

While the court concluded that World Trade did not meet the definition of "includible C corporation," settling the matter in favor of Agilent, it is instructive to consider the analysis used by the court in rejecting Agilent's alternative arguments.

Interplay of Federal Check-the-Box Rules and 20 Percent Calculation

Agilent argued that the federal income tax treatment of World Trade and four of its foreign subsidiaries as a single entity (pursuant to the subsidiaries' check-the-box elections) should have resulted in similar treatment for purposes of determining whether the 20 percent payroll and property test was met. The court determined that the federal check-the-box designations did not automatically inform the treatment of Colorado taxpayers under the combined reporting / unitary business rules. Accordingly, the four foreign subsidiaries did not need to be grouped with World Trade for purposes of determining whether the definition of "includible C corporation" was satisfied pursuant to the 20 percent test.

Applicability of Combination Factors

Agilent also argued that World Trade was not subject to combination with Agilent's group because the three of six factor test for combination was not met. Specifically, Agilent claimed that it did not meet the requirement that World Trade substantially use "the trademarks or other proprietary materials of Agilent" as required under Colo. Rev. Stat. Sec. 39-22-303(11)(a)(IV). In disagreeing with Agilent, the court noted that Agilent trademarked the terms "Agilent" and "Agilent Technologies" and World Trade's use of Agilent's trademark constituted "substantial use" within the meaning of Colo. Rev. Stat. Sec. 39-22-303(11)(a).9

Constitutionality of Corporate Income Tax Regime

Finally, the court rejected Agilent's argument that Colorado's corporate income tax regime discriminated against corporations with non-combinable foreign subsidiaries and favored corporations with domestic subsidiaries, on the basis that the treatment of dividends received from United States subsidiaries differed from dividends received from foreign subsidiaries. Instead, the court concluded that Colorado's version of combined reporting, which may have contributed to the disparity in treatment, was constitutional, both facially and as applied to Agilent.10

Department's Discretionary Authority Statute and Economic Substance Doctrine Inapplicable

The Department argued that its power of discretionary authority to clearly reflect the taxpayer group's income, as well as the economic substance doctrine, required that World Trade be included in Agilent's Colorado combined return. The court rejected both these arguments.

Discretionary Authority to Clearly Reflect Income

The Department argued that Colo. Rev. Stat. Sec. 39-22-303(6) allows it to "allocate income without the combination of affiliated corporations." The court disagreed, pointing to language in 1 Colo. Code Regs. 201-2, Sec. 39-22-303.6 which indicates that Colo. Rev. Stat. Sec. 39-22-303(6) "is not a vehicle for combining income of affiliated corporations, and cannot be used to circumvent the combined reporting regime found in C.R.S. §§ 39-22-303(8) through (12)." To hold otherwise would "render Colorado's combined reporting statutory regime moot," the court said.

Economic Substance

The Department also argued that the economic substance doctrine allowed it to "disregard a structure that has no practical effect beyond the creation of tax benefits." The court rejected this argument, finding that the economic substance doctrine did not apply because there was nothing to indicate that the Agilent/World Trade structure was created to avoid Colorado tax. The court noted that World Trade provided "bona fide" non-tax related benefits such as protection against foreign creditors' claims.


The decision by the Colorado district court provides valuable guidance on the treatment of holding companies under Colorado's combined reporting regime. While the court's decision turned on whether World Trade met the statutory and regulatory definition of an "includible C corporation," its detailed analysis of the arguments made by both the Department and Agilent provide guidance on the potential inclusion of holding companies in a combined return.

The decision provides the taxpayers with some clarity on an issue that has been the subject of debate with regard to proposed updates to Colorado's combined reporting regulations. Specifically, the Department has indicated its desire to issue a regulation expanding its discretionary powers to combat perceived taxpayer abuse of the combined reporting rules to include or exclude affiliates from the Colorado combined filing group. As the court noted, allowing the Department such "broad authority" would "render Colorado's combined reporting statutory regime moot." It would be reasonable to assume that the Department will view this aspect of the opinion as a setback.

On the other hand, the Department will likely find value in the court's language defining the most vague of the tests of unity, relating to the "...substantial use of patents, trademark, service marks, logo-types, trade secrets, copyrights, or other proprietary materials owner by [another affiliate]." Observing that World Trade incorporates "Agilent" into its formal legal name, the court applied a common sense approach in concluding that such use "is important to both World Trade and Agilent in that it reflects a unified group. World Trade's use of the trademark conveys an affiliation with Agilent to all third-parties in the ordinary course of trade."

The court's interpretation of the nature of the federal entity classification rules may cause issues for taxpayers that have long assumed that a check-the-box election for federal income tax purposes is fully recognized for all aspects of Colorado corporation income taxation. The court stated that "[t]he federal "check-the-box" rules...allow affiliated companies to elect consolidation for federal tax calculation by choosing to be disregarded as a separate entity." However, instead of concluding that the election governed determinations under the Colorado corporation income tax statute, the court surprisingly found that "an entity's choice of federal designation is not binding for purposes of state application." Taxpayers that may have relied on the "flow through" of attributes (payroll and property) from disregarded entities, foreign or domestic, in determining whether entities meet the more than 20 percent property and payroll test must now re-evaluate positions taken on current and prior returns. The conclusion that the federal "check-the-box" rules are not binding on the state could have further unintended consequences for all Colorado taxpayers with such entity classification elections in place.

The Department has already indicated that new or revised regulations are likely to be promulgated to address issues arising from this case. In addition, taxpayers should be aware that the Department issued a notice cautioning taxpayers against relying on the Department's regulation in certain circumstances.11 The Department explained that the regulation was intended to apply to foreign sales corporations (FSCs) and not to domestic holding companies. In the notice, the Department states that "some taxpayers have interpreted Regulation 303.12(c) to apply to domestic holding companies with no foreign operations and have argued that they can exclude any domestic C corporation from their combined returns if it has no property or payroll, even if it does not do business in a foreign country." The Department specifically states that it disagrees with this interpretation. Noting that this issue is currently being litigated, the Department said that it would revisit the matter after a decision is released: "Pending that determination, taxpayers should not rely on this regulation except as it applies to an FSC."


1 Agilent Technologies, Inc. v. Colorado Department of Revenue, District Court, 2nd Judicial District (Colorado), No. 2014CV393, January 20, 2016.

2 COLO. REV. STAT. § 39-22-303(12)(a).

3 COLO. REV. STAT. § 39-22-303(12)(c).

4 COLO. REV. STAT. § 39-22-303(11).

5 1 COLO. CODE REGS. 201-2, Reg. 39-22-303.12(c). It should be noted that COLO. REV. STAT. § 39-22-303(12)(c) statutorily defines the term "includable C corporations" as "any C corporation which has more than twenty percent of the C corporation's property and payroll . . . assigned to locations inside the United States." In contrast, Colorado's regulation states that the test for classification as an includible C corporation may be met when a corporation has "twenty percent or more" of its property and payroll factors assigned to the United States.

6 Based on a reading of COLO. REV. STAT. § 24-60-1301(IV)(10) and 1 COLO. CODE REGS. 201-3, Reg. IV.18.(b). COLO. REV. STAT. § 24-60-1301 (IV)(10) provides: "The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in this State during the tax period and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period." 1 COLO. CODE REGS. 201-3, Reg. IV.18.(b) provides: "If property owned by others is used by the taxpayer at no charge or rented by the taxpayer for a nominal rate, the net annual rental rate for such property shall be determined on the basis of a reasonable market rental rate for such property."

7 Former 1 COLO. CODE REGS. 201-2, Sec. 39-22-303.12(c).

8 Citing to a memorandum from the Office of Legislative Services to the General Assembly's Committee on Legal Services: "Both regulations conflict with the definition of "includible corporations" as set forth in section 39-22-303(12)(c), C.R.S. The regulations allow corporation with no property or personnel to be considered includible corporations even though such corporations do not satisfy the statutory requirements of having more than twenty percent of its property and payroll located in the United States. By allowing such corporations to qualify as includible corporations, Regulations 39-22-303.8(2) and 39-22-303.12(c) modify the definition of "includible corporations" as set forth in section 39-22-303(12)(c), C.R.S."

9 "World Trade is a wholly owned subsidiary of Agilent that employs the trademarked terms "Agilent" and "Agilent Technologies" in its own name and in its tax returns, regulatory filings, its agreements with third parties, and in its accounting statements. This use is not incidental or occasional but systemic and intentional to signify its place in a unified group. The trademarked name carries prestige and credibility, and its use is important to both World Trade and Agilent in that it reflects a unified group. World Trade's use of the trademark conveys an affiliation with Agilent to all third-parties in the ordinary course of trade."

10 Citing to In re Appeal of Morton Thiokol, Inc., 864 P.2d 1175 (Kan. 1993); Emerson Elec. Co. v. Tracy, 735 N.E.2d 445 (Ohio 2000); E. I. Du Pont de Nemours & Co. v. State Tax Assessor, 675 A.2s 82 (Me. 1995); Caterpillar, Inc. v. Comm'r of Rev., 568 N.W.2s 695 (Minn. 1997); Bernard Egan & Co. v. State De't of Rev., 769 S.2d 1060 (Fla. Dist. Ct. App. 2000); Caterpillar Fin. Servs. Corp v. Whitley, 680 N.E.2d 1082 (Ill. App. Ct. 1997); GE v. Comm'r, 914 A.2s 246 (N.H. 2006), cert. denied, 552 U.S. 989 (2007). The court distinguished itself from the unconstitutional tax system found in General Foods, Inc. Iowa Dep't of Rev., 505 U.S. 71 (1992).

11 Colorado Department of Revenue, "Notice Regarding Revenue Regulation 39-22-303(12)(c)," Jan. 19, 2016.

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.

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.