Oracle Corporation v. Dept. of Rev., TC 5340 (Or Tax, October 6, 2021) concerns, in part, the impact of Subpart F income on a taxpayer's Oregon sales factor.1 The Oregon Tax Court rejected the position of the Oregon Department of Revenue (the Department) that former ORS 314.665(6)(a) (2015) automatically excludes Subpart F income from the sales factor denominator. As described in an article published by the author, the Department, based on this interpretation of ORS 314.665(6)(a), determined that none of the 2017 deemed repatriation required by IRC § 965 can be included in the denominator of the Oregon sales factor.2 Accordingly, taxpayers that report the deemed repatriation on a 2017 return generally should be able to include in the Oregon sales factor denominator the portion of the deemed repatriation included in apportionable income, provided that (1) the deemed repatriation satisfies the "primary business activity" exception, and (2) the income-producing activities for the deemed repatriation can be readily identified and occurred outside Oregon.

Pursuant to IRC § 965, U.S. parent corporations of multinational groups generally had to include in 2017 federal taxable income, as Subpart F income, the deemed repatriation amount, which essentially was the accumulated post-1986 income of a foreign subsidiary not previously subject to U.S. tax. The Oregon dividends received deduction generally allows an 80 percent deduction for Subpart F income, including Subpart F income from the deemed repatriation. The Oregon dividends received deduction statute also provides that the taxpayer cannot include the deducted amount in the corporation's Oregon sales factor.

Questions remained about the 20 percent not deducted. The Department addressed this in Oregon Revenue Bulletin 2018-01. For tax years beginning before January 1, 2018, the Department determined that former ORS 314.665(6)(a) excluded the deemed repatriation from the Oregon sales facto, as a matter of law without the need to consider the applicable facts and circumstance.

As applicable here, former ORS 314.665(6)(a) initially excludes from the Oregon sales factor "[g]ross receipts arising from the * * * holding of intangible assets." However, an excluded gross receipt is reincluded if the "receipts are derived from the taxpayer's primary business activity."  In Oracle, the Department took the positions that:

  1. The Subpart F income arose from the parent holding the stock of the subsidiary.
  1. The Subpart F income derived from the activity of holding the subsidiary stock, which was not its primary business activity.

Although the court expressed concern that "'holding' does not fully capture the depth of the unitary relations," it ultimately agreed that the holding requirement was satisfied. In adopting this broad interpretation of the holding requirement, the court noted "that the legislature adequately addressed dividends from a unitary subsidiary in the inclusion provision [the primary business activity exception]."  The court then rejected the Department's position that the primary business activity exception did not apply, holding that owning stock is not an "activity." Instead, the court determined that the Subpart F income was derived from each subsidiaries' operations. Accordingly, if those operations were part of the parent's primary business activity, former ORS 314.665(6)(a) did not exclude the Subpart F income from the Oregon sales factor.

In the revenue bulletin for the deemed repatriation, the Department used the example of a U.S. company (CORP ZYZ) engaged in shipbuilding having a deemed repatriation from a foreign subsidiary (SUB XYZ) engaged in finance. The Department declared, without analysis, that the primary business activity exception did not apply. However, as noted in the article

linked to above discussing the revenue bulletin:

"The Department's example quoted above does not give background for SUB XYZ, but what if CORP XYZ formed or acquired SUB XYZ for financial services related to its shipbuilding operations?"

The Oregon Tax Court apparently agrees with this critique. CORP XYZ and SUB XYZ each could be engaged in the primary business activity of building and selling ships, including the financing of these sales. This generally should result in reinclusion of 20 percent of the deemed repatriation in the denominator of the Oregon sales factor.

However, the deemed repatriation surviving former ORS 314.665(6)(a) does not fully resolve the matter. Pursuant to former ORS 314.665(4), the taxpayer also must identify the income-producing activities for the deemed repatriation. The decision in Oracle does not address this. However, it does provide guidance generally indicating that the income-producing activities are the activities conducted by the subsidiary that resulted in the earnings and profits deemed repatriation. This could allow for satisfaction of former ORS 314.665(4), clearing the remaining hurdle for including 20 percent of the deemed repatriation in the denominator of the Oregon sales factor.


1 Lane Powell represented Oracle in this matter, but began this representation after the Oregon Tax Court issued its initial order in December 2020.

2 The article also provides general background for the IRC § 965 deemed repatriation and the calculation of the Oregon sales factor.

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