Tektronix, Inc. v. Dept. of Rev. , 20 Or. Tax 468 ( 2012 )

468 June 5, 2012 No. 56
IN THE OREGON TAX COURT
REGULAR DIVISION
TEKTRONIX, INC.
and Subsidiaries,
Plaintiffs,
v.
DEPARTMENT OF REVENUE,
Defendant.
(TC 4951)
Plaintiffs (taxpayer) appealed from a Magistrate Division decision as to
application of the statute of limitations on deficiency assessments. Parties also
addressed questions as to the proper computation of the sales factor used to
apportion the income of taxpayer to Oregon for the 1999 tax year as related to
goodwill. In granting taxpayer’s motion for partial summary judgment, the court
ruled that ORS 314.410(3)(b) did not authorize the department to assert a defi-
ciency in the 1999 tax year based on federal action for 2002, and that the net gain
from the disposition of goodwill should not enter into the calculation of the sales
factor for the 1999 year of taxpayer.
Oral argument on cross-motions for summary judgment
was held June 20, 2011, in the courtroom of the Oregon Tax
Court.
Robert T. Manicke, Stoel Rives LLP, Portland, filed the
motion and argued the cause for Plaintiffs (taxpayer).
Marilyn J. Harbur, Senior Assistant Attorney General,
Department of Justice, Salem, filed the cross-motion and
argued the cause for Defendant (the department).
Decision for Plaintiffs rendered June 5, 2012.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This matter is before the court on cross-motions for
summary judgment, with that of Plaintiffs (taxpayer) being
a motion for partial summary judgment. Taxpayer and
Defendant Department of Revenue (department) are sepa-
rated by differing views on the application of the statute of
limitations on deficiency assessments. In addition, regard-
less of which party prevails on the limitations issue, there
Cite as 20 OTR 468 (2012) 469
remains a question as to the proper computation of the sales
factor used to apportion the income of taxpayer to Oregon
for the 1999 tax year.1
On the issues related to the statute of limitations,
unless otherwise noted, reference is made to the 2005 edi-
tion of the Oregon Revised Statutes (ORS). As to computa-
tion of the sales factor, reference is made to the 1999 edi-
tion of ORS and the rules of the department in effect for
1999. References to the Internal Revenue Code of 1986, as
amended, are abbreviated as “IRC.”
ORS 314.380 and ORS 314.410 are important in the
discussion of the statute of limitations issue. Each of those
statutes makes reference to actions of the Internal Revenue
Service (IRS) or officials of other states. In this matter no
party relies upon any action by officials of other states and
the discussion of ORS 314.380 and ORS 314.410 is under-
taken only with respect to actions of the IRS.
II. FACTS
The facts in this case have been partially estab-
lished by two stipulations, the first of which was submitted
to the Magistrate Division prior to the special designation of
this case to this division of the court. The second stipulation
is referred to in this opinion as “Stip Facts.” In addition tax-
payer has submitted affidavits that have not been contested
by the department by way of counter-affidavit.2
A. Taxpayer’s Operations and the Sale of CPID
Taxpayer was founded and incorporated in 1946 by
C. Howard Vollum and Jack Murdock, the inventors of the
first triggered oscilloscope, a device that tests and measures
1
Referred to by the parties as the 1999 year, the period in question is the
period ended May 27, 2000—the last Saturday in May of the tax year beginning
in 1999. There is also reference to the 2002 year, a reference to the period begin-
ning in 2002 and ended on the last Saturday in May of 2003.
2
By letter dated February 14, 2012, the court inquired as to whether the
parties could stipulate certain additional facts. By letter dated March 12, 2012,
taxpayer responded that the parties were unable to enter into a stipulation but
taxpayer submitted a supplemental affidavit of Mark Modjeski that, together
with an attachment, addressed the facts about that the court had inquired. The
department informed taxpayer that it took no position as to taxpayer’s action or
the submission of the supplemental affidavit of Mr. Modjeski.
470 Tektronix, Inc. v. Dept. of Rev.
voltage. Over time, taxpayer’s Measurement Business Div-
ision (“MBD”) manufactured other test, measurement and
monitoring equipment, and taxpayer is a leading developer
of test, measurement and monitoring equipment. In the
1970s, taxpayer expanded its high-tech business operations
by acquiring all of the stock of The Grass Valley Group, Inc.,
a California corporation (“GVG”). GVG manufactured video
disk recorders, business network computers and nonlinear
digital editing systems, among other items. In 1996, GVG
merged with and into taxpayer and, together with other busi-
nesses, subsequently operated as the Video and Networking
Division (“VND”). In the early 1980s, taxpayer created a
printer division to enable printing the output of an oscillo-
scope screen. This printer division eventually became CPID
and generally manufactured high-end color printers. CPID
operations grew over time, and taxpayer’s activities related
to the development and operation of CPID occurred in var-
ious jurisdictions around the world. As of the beginning of
the 1999 tax year, taxpayer conducted its global business
operations through these three divisions, MBD, VND and
CPID, and these divisions engaged in a single unitary busi-
ness throughout the world.
In 1999, taxpayer sold VND and CPID in separate
transactions, of which the CPID sale was by far the larger.
In June 1999, taxpayer announced its intent to spin off CPID
to investors in a transaction pursuant to IRC § 355. After
this announcement was made, however, Xerox Corporation,
a New York corporation (“Xerox”), made an unsolicited offer
to purchase CPID. On September 22, 1999, taxpayer and
Xerox entered into an Amended Asset Purchase Agreement
pursuant to which taxpayer sold to Xerox all of the assets
used in CPID’s trade or business operations. The sale trans-
action closed on January 1, 2000. Taxpayer received total
gross proceeds of approximately $925,000,000 from the sale
of CPID assets, which included real property, plant, equip-
ment, and various tangible and intangible assets. Taxpayer
recognized taxable gain of $589,834,393 related to the sale
of goodwill. That goodwill, of prime importance in this case,
will be referred to as “the goodwill.”
Taxpayer created all of the intangible assets com-
prising the goodwill in activities and transactions in which
Cite as 20 OTR 468 (2012) 471
taxpayer claimed current deductions for the associated
expenses, such as wages. Taxpayer had no tax basis in the
goodwill. In general, the Goodwill reflected an accumulation
of value over periods of time; it was not transitorily held, and
it was illiquid in nature. In calculating its Oregon sales fac-
tor for the 1999 tax year, taxpayer excluded approximately
$800 million from the sale of the CPID assets ($798,798,574
from the numerator and $800,731,519 from the denomina-
tor). Of the amounts in the numerator and denominator,
$589,834,393 is the goodwill at issue in these motions.
B. The Original and First Amended Oregon Tax Returns
for the 1999 Tax Year
Taxpayer applied for and received an extension
of time within which to file the federal income tax return
for the 1999 tax year. The extended due date for filing was
February 15, 2001. Taxpayer timely filed its federal income
tax return for the 1999 tax year on February 14, 2001.
Taxpayer timely filed its original Oregon corpora-
tion excise tax return for the 1999 tax year on March 15,
2001. In April 2001, the IRS commenced an audit of tax-
payer’s federal returns for the 1997 through 1999 tax years.
On December 13, 2002, based on the outcome of the fed-
eral audit, taxpayer filed amended Oregon returns, listing
$326,767 in additional Oregon tax for 1997, claiming an
increase to taxpayer’s net operating loss for 1998 and claim-
ing a $987,213 refund for 1999.
Taxpayer did not enter into any agreement with the
IRS extending the statute of limitations for assessment of
deficiencies for the 1999 tax year. The department does not
assert or rely on the existence of any agreement between the
taxpayer and the department extending the statute of lim-
itations for assessment of deficiencies for Oregon purposes.
Taxpayer was not engaged in the business of sell-
ing intangible assets like the goodwill (rather, as described
above, taxpayer generally was engaged in the manufac-
ture and sale of tangible personal property). Nonetheless,
because taxpayer used the goodwill in its trade or business
operations, taxpayer treated the gain from the sale of the
goodwill as apportionable business income on the original
472 Tektronix, Inc. v. Dept. of Rev.
and amended Oregon returns for the 1999 tax year. In calcu-
lating its Oregon sales factor for the 1999 tax year, taxpayer
determined that the occasional sale rule applied to the sale
of the goodwill and thus excluded amounts received from the
sale of the goodwill from the numerator and denominator.
As of December 13, 2002, the department had not
made any adjustment to taxpayer’s Oregon corporation
excise tax return for the 1999 tax year. By check dated
March 19, 2003, the department issued a refund to taxpayer
in the amount of $698,533.91, reflecting the net Oregon cor-
poration excise tax, including interest, owed to taxpayer for
the 1997, 1998 and 1999 tax years.
C. 2002 Tax Year Net Capital Loss and IRS Adjustment
On February 17, 2004, and March 15, 2004, respec-
tively, taxpayer filed original federal and Oregon returns for
the 2002 tax year, reporting a net capital loss for that year.
As described below, the IRS accepted the return for the 2002
tax year for processing, but the IRS ultimately disagreed
with some of the amounts claimed on the return and audited
taxpayer. For federal purposes, taxpayer claimed the ben-
efits of the 2002 tax year net capital loss carryback with
respect to the 1999 tax year by filing, on February 17, 2004,
federal Form 1139, Corporation Application for Tentative
Refund. The IRS issued to taxpayer the tentative refund
that taxpayer claimed on its Form 1139, less a small amount
owed for reasons unrelated to this case. Taxpayer did not
file an amended Oregon return for the 1999 tax year at that
time. Taxpayer did not specifically research whether Oregon
tax law (or any other state’s tax law) allowed a carryback
for net capital losses. In addition, taxpayer was continually
under examination by the IRS on a regular cycle, and the
2002 tax year appeared to be the last year of the cycle next
to be examined. Accordingly, when taxpayer filed its orig-
inal Oregon return for the 2002 tax year, taxpayer antic-
ipated a federal audit and decided to wait until after the
conclusion of that audit before undertaking a state-by-state
investigation of the state tax treatment of the 2002 tax year
net capital loss.
Cite as 20 OTR 468 (2012) 473
On March 28, 2005, the IRS concluded its audit
of the 2000-2002 tax years and issued a Revenue Agent’s
Report making various adjustments. At the time of this
audit, the IRS generally was time-barred from assessing
additional tax for the 1999 tax year. However, the IRS could
(1) assess any deficiency in any amount “attributable to”
the application of the 2002 net capital loss carryback; and
(2) assess any deficiency not attributable to the carryback
up to the amount of the tentative refund. IRC § 6501(a), (h),
(k). As a result of the audit, the IRS reduced the amount of
taxpayer’s net capital loss for the 2002 tax year and assessed
taxpayer to recover a portion of the previously issued tenta-
tive refund. In doing so, the IRS used its authority under
IRC § 6501(h) and assessed a deficiency “attributable to” the
capital loss carryback. Taxpayer returned a portion of the
tentative refund it had received with respect to the 1999
tax year. Taxpayer did not appeal the IRS’s reduction of
the 2002 tax year net capital loss or the resulting reduc-
tion in taxpayer’s refund for the 1999 tax year. On April 21,
2005, taxpayer signed and filed IRS Form 870, Waiver of
Restrictions on Assessment and Collection of Deficiency in
Tax and Acceptance of Overassessment.
D. Oregon Impact of the 2002 Tax Year Net Capital Loss
On or around April 15, 2005 (i.e., shortly before
filing the IRS Form 870), taxpayer began to research the
state implications of the federal audit, including whether
taxpayer should amend state tax returns for prior years to
obtain the benefits of the 2002 tax year net capital loss. On
or about May 2, 2005, taxpayer’s tax department completed
a matrix that, in part, identified which states allowed the
carryback of a net capital loss. Taxpayer determined that in
many of the states that allowed net capital loss carrybacks
the administrative costs of preparing amended returns were
greater than the potential refund. Taxpayer did decide,
however, to claim the benefit of the 2002 tax year net capital
loss by filing amended returns for the 1999 tax year in four
states in addition to Oregon: Arizona (amended return filed
August 2, 2005), Delaware (amended return filed October 5,
2005), Virginia (amended return filed August 2, 2005)
and Wisconsin (amended return filed July 13, 2005). Had
474 Tektronix, Inc. v. Dept. of Rev.
taxpayer not waited until after the federal audit of the 2002
tax year, it would have had to file five state refund claims
twice—first in 2003 when taxpayer filed its original 2002 tax
year returns, and then again in 2005 after the federal audit.
By deferring until after the audit, taxpayer saved itself the
costs of preparing the unnecessary first refund claims and
saved the department (as well as the taxing authorities in
Arizona, Delaware, Virginia and Wisconsin) from expend-
ing resources to process the unnecessary first refund claim.
On July 27, 2005, taxpayer filed an amended Oregon
return for the 1999 tax year, on which for the first time it
claimed a refund for the net capital loss carryback deduction
from the 2002 tax year (i.e., the Oregon Refund Claim). The
Oregon Refund Claim was timely filed pursuant to a special
rule applicable to refunds for net capital loss carrybacks. See
ORS 314.415(5)(a).
E. The Department’s Audit of the 1999 Tax Year
On or about August 19, 2005, the department com-
menced an audit of tax years 1999, 2000 and 2001. On
May 12, 2006, the department issued the Notice of Deficiency
with an Explanation of Adjustments asserting that taxpayer
had an additional Oregon tax liability of $3,700,328. The
additional tax resulted solely from the department’s increas-
ing the numerator and denominator of taxpayer’s Oregon
sales factor each by $618,048,157. More than 95 percent of
this increase relates to the goodwill, and this is the only
portion of the increase at issue in this motion.3
As detailed in the Explanation of Adjustments,
the department asserted that the Notice of Deficiency was
timely because the federal audit caused subsection 3(b) of
ORS 314.410(3)(b) to apply to the 1999 tax year, and thus
reopened the 1999 tax year to audit. With respect to the
increase in the Oregon sales factor related to the goodwill,
3
The $3,700,328 of additional tax did not take into account any portion of
the Oregon Refund Claim. After issuing the Notice of Deficiency, the depart-
ment issued a Notice of Liability Balance, dated May 22, 2006. Pursuant to the
Auditor’s Report and Explanation of Adjustments included with this notice, the
department reduced the Oregon Refund Claim to $369,200, which reduced the
asserted $3,700,328 of additional tax liability to $3,331,128. As described above,
the Oregon Refund Claim is not at issue in this motion.
Cite as 20 OTR 468 (2012) 475
the department asserted that the occasional sale rule applies
“to the sale of fixed assets. The federal Schedules D’s [sic]
examined indicate the receipts in question were received for
the intangibles and goodwill.” The department asserted that
the net gain from the sale of the goodwill was includable in
the numerator and denominator of the Oregon sales factor
pursuant to 6(b) and that the occasional sale rule did not
affect this inclusion.4 The department’s deficiency assess-
ment and its offset of the Oregon Refund Claim were based
on a determination that taxpayer had improperly excluded
certain types of gross receipts from its Oregon sales factor
for the 1999 tax year. Taxpayer had excluded these cate-
gories of gross receipts from its Oregon sales factor on its
March 15, 2001, original Oregon corporation excise tax
return; its December 13, 2002, amended Oregon corporation
excise tax return; and its July 27, 2005, amended Oregon cor-
poration excise tax return. The department’s determination
substantially increased taxpayer’s Oregon sales factor for
the 1999 tax year, which substantially increased taxpayer’s
Oregon apportionment percentage and increased taxpayer’s
Oregon taxable income for the 1999 tax year.
III. ISSUES
There are two issues in this case at this stage:
(1) Is the action of the department in respect of the 1999
year barred by the provisions of Oregon law regarding stat-
utes of limitation, except to the extent of the refund claimed
by taxpayer?
(2) In any event, are the gross or net receipts recognized
by taxpayer in respect of the disposition of certain assets in
the nature of goodwill includable in the calculation of the
sales factor as defined in ORS 314.665?
IV. ANALYSIS
This case is the latest in a series of cases address-
ing the complex and changing rules regarding the statute
of limitations applicable to the issuance of deficiency notices
4
Notwithstanding the actual text of its explanation of adjustments, the
department in its brief to this court, while it relies on ORS 314.665(6)(a) asserts
that it is not relying on ORS 314.665(6)(b). As will be apparent below, the court
will address both paragraphs of that statute.
476 Tektronix, Inc. v. Dept. of Rev.
by the department. Here, as in many cases, the department
asserts that its actions are timely only because of the appli-
cation of ORS 314.410(3)(b)(A).5
Under ORS 314.410(3)(b) the analytical focus must
start with the identification of the particular year for which
the department made its assessment. This is so because the
statute speaks of an action of the federal government that
results in certain consequences (assessment of tax or issu-
ance of a refund) that are linked, under the Oregon stat-
ute, to an action in Oregon (notice of a deficiency) occurring
“for the corresponding tax year.” ORS 314.410(3)(b)(A) The
statute cannot be applied without identifying a particular
federal tax year and then looking at what results may occur
for the Oregon year that corresponds to the federal year and
that occur “as a result of” a change or correction made by a
federal official for the year being analyzed.
A. Discussion of the 1999 and 2002 years of taxpayer
1. The 1999 year of taxpayer
In this case the 1999 tax year is the year that
must be tested to see if actions of federal officials resulted
in assessment of tax or issuance of a refund at the federal
level.6
5
ORS 314.410(3)(b)(A) states:
“If the Commissioner of Internal Revenue or other authorized officer
of the federal government or an authorized officer of another state’s taxing
authority makes a change or correction as described in ORS 314.380(2)(a)(A)
and, as a result of the change or correction, an assessment of tax or issuance
of a refund is permitted under any provision of the Internal Revenue Code
or applicable law of the other state, or pursuant to an agreement between
the taxpayer and the federal or other state taxing authority that extends the
period in which an assessment of federal or other state tax may be made, then
notice of deficiency under any Oregon law imposing tax upon or measured
by income for the corresponding tax year may be mailed within two years
after the department is notified by the taxpayer or the commissioner or other
tax official of the correction, or within the applicable three-year or five-year
period prescribed in subsections (1) and (2) of this section, whichever period
expires later.”
6
This case is quite complicated, if for no other reason, because tax items
from the 2002 year have some effect not only in that year but also in the 1999
year by reason of the operation of loss carryback provisions of Oregon and federal
law. This makes a reference to a “corresponding tax year” both quite important
and something requiring focused attention.
Cite as 20 OTR 468 (2012) 477
In determining the meaning of ORS 314.410(3)(b)
the first question is whether, as to 1999, the federal changes
and corrections that occurred in this case, occurring when
they did, could have resulted in an “assessment of tax” for
the 1999 year. As to this question, the court must determine
what the Oregon statute means when it refers to an “assess-
ment of tax” by a federal official.
One possibility is that the phrase refers to the
assessment of an amount of tax in no way limited other than
by the particular facts present in a year. However, another
possibility is an “assessment of tax” could also include an
assessment of an amount limited, under federal law, includ-
ing the amount of a refund claimed by a taxpayer and which,
in the words of ORS 314.410(3)(b)(A), could be “issued” to a
taxpayer.
A review of ORS 314.410 and other relevant statutes
indicates that when the Oregon legislature meant to refer
to an assessment of tax limited, for example, to an amount
of refund claimed, it spoke of an action to “reduce” a claim
for refund—as is done in ORS 314.410(3)(c)—or an “adjust-
ment” that would “decrease the amount of the refund claim”
as is done in ORS 305.270(3). However, when an assess-
ment of tax was not so limited, and went beyond the amount
of a refund claimed, the Oregon statutes speak of a “defi-
ciency,” the ultimate assertion of which is an “assessment.”
See ORS 314.410(3)(c) (“give notice of a deficiency” and
ORS 314.410(4) (“tax deficiency must be assessed”) Further,
ORS 305.270(3) speaks of the reduction of a refund claim
as an “adjustment” up to the point that the “adjustment”
goes beyond reduction of a refund claim and seeks recovery
from the taxpayer. At that point, the action is referred to as
“the finding of a deficiency.” That distinction in Oregon law
is not just nomenclature. It has procedural consequences,
as can be seen by comparing ORS 305.270(5) (adjustments
to refund claims without assertion of a deficiency) and ORS
305.270(6) (adjustments to refund claims that result in the
assertion of a deficiency).
The court has no difficulty concluding, given the
overall statutory context in which ORS 314.410(3)(b) finds
itself, that when the legislature refers to an “assessment of
478 Tektronix, Inc. v. Dept. of Rev.
tax” whether an assessment by Oregon or by another govern-
ment, the reference is to a demand for a payment limited by
nothing other than the facts present in any given year. It is
not a demand limited by relevant law to some lesser amount
such that, for example, the assertion of tax due serves only
as a reduction, off-set or elimination of a claimed refund.
The question then is whether, when the federal
action on which the department relies here—the reduction of
the loss amount applicable to the 1999 year—was taken, the
federal government could have assessed or asserted a defi-
ciency in excess of the amount of refund claimed. The answer
is that no such positive assessment of tax or deficiency could
have occurred. At the time the federal action occurred, the
federal statute of limitations for the assessment of deficien-
cies in respect of 1999 had run.7 Under IRC section 6501(k)
the federal government could only recover up to the amount
of tax refunded to taxpayer under the tentative carryback
provisions of IRC section 6411, but no more.8
Therefore, applying the provisions of ORS 314.410(3)(b),
while an adjustment or reduction of a refund claim could be
made, no “assessment of tax” could have resulted from the
actions of the federal officials at the time those officials took
the actions on which the department relies. The “assess-
ment of tax” prong of ORS 314.410(3)(b) does not help the
department.
The only remaining question is whether, at such
time, a refund of tax could have resulted from the actions of
the federal officials. There is no question that the issuance
of a federal refund to taxpayer was not the product of any
action of a federal official with respect to the 1999 tax year.
The refund was solely a result of changes made for the 2002
year, the application of the mandatory loss carryback provi-
sions of IRC section 1212 and the extended time for refund
provisions of IRC section 6511(d)(2).
7
At the time of the federal action in 2005, the basic three year statute of
limitations period under IRC section 6501 (measured from the date of filing of
the return in February 2001) had run and there was no agreement between the
taxpayer and the IRS extending the statute of limitations.
8
Under IRS section 6501(k) the amount could, in some instances, be less if
other assessments were also allowed. IRC § 6501(h) or (j).
Cite as 20 OTR 468 (2012) 479
Recall that given the “corresponding tax year” lan-
guage of ORS 314.410(3)(b), the focus here is on the 1999
year. The test question is whether a refund for that year
was the “result” of an action of a federal official. It was not.
The proof of this point is easily seen by noting that a federal
refund would have been due to the taxpayer in this case, even
if there had been no “change or correction” by federal officials,
either for the 2002 year or the 1999 year, or both. The refund
did not come “as a result” of an action of a federal official.9
Without doubt, federal substantive law is a necessary
condition to the receipt of a refund, but ORS 314.410(3)(b)
does not refer to federal substantive law, it refers only to
changes or corrections made by federal officials, with
respect to a given year, at a point in time when an assess-
ment or refund can result.10 In addition, as noted above, the
taxpayer had no choice as to the year to which the capital
loss was to be carried or in which it was to be applied. Under
IRC section 1212 the loss had to first be carried back to the
earliest of the three years preceding 2002 and only if not
exhausted by such application to later years.
2. The 2002 tax year
The change or correction was a result of action taken
in respect of tax items in the 2002 year. Giving effect to
the provisions of ORS 314.410(3)(b), the only deficiency that
would be allowed for the department under ORS 314.410(3)(b)
would be for the “corresponding year,” namely 2002. There
was a change or correction for the 2002 year that had a con-
sequence in the 1999 year. However, the Oregon legislature
tied the year for which a change or correction is made by
federal officials to the same Oregon tax year for purposes
of determining the timeliness of actions of the department.
Had the legislature intended to authorize the department
to have broad deficiency authority in any year in which a
federal change or correction for a different year could have a
“consequence,” it could have said so. It did not.
9
The amount of refund was affected, but that was by action taken in respect
of the 2002 tax year.
10
Indeed, the reference in ORS 314.410(3)(b) is not to federal substantive
law, but only to provisions of federal law governing time limits on deficiency
assessments.
480 Tektronix, Inc. v. Dept. of Rev.
Throughout ORS 314.410(3)(b) the statutory text
links a federal change or correction to a result occurring
in one year for which one particular change or correction is
made. The concept is singular—there is a change or correc-
tion in year A and that must lead to a deficiency or refund
for year A. The statutory language does not admit of a con-
struction in which a change or correction in year A results
in a consequence in year B. Thus, ORS 314.410(3)(b)(A)
talks of “the” corresponding year and not any year or years.
Likewise, ORS 314.410(3)(b)(B), discussing the scope of defi-
ciency authority under the statute, speaks of a deficiency
that arrives at the correct Oregon liability “for the tax year
for which the federal * * * change or correction is made.”
(Emphasis added). The statute does not talk of correct
Oregon liability in any year that is affected by the federal
change or correction.
In application to the facts of this case, there is no
question that the change or correction on which the depart-
ment relies was the reduction of the amount of capital loss for
the 2002 year. Had it not been made, there would be no basis
for even considering the provisions of ORS 314.410(3)(b).11
Accordingly, the authority of the department is limited to
deficiencies with respect to that year: 2002. It is the year
corresponding to the year of the federal change on which
the department relies. No such deficiency was asserted for
the 2002 year by the federal government. ORS 314.410(3)(b)
does not authorize the department to assert a deficiency in
the 1999 year based on federal action for 2002.
The foregoing construction does not render any pro-
vision of ORS 314.410(3)(b) without meaning. As to any given
year, action of a federal official in the nature of a change or
correction for that year, whether it produced a deficiency or a
refund, would serve as the predicate action called for by the
statute. As to that year, but no other, the Oregon limitations
period would not run until two years following the report of
the federal action.12
11
Recall that the basic statute of limitations of three years had run and the
department had no other statutory provision or agreement with the taxpayer
providing for any additional time within which to act.
12
Of course, a different year affected by a change in year A might also be
open to assertion of unlimited deficiencies by reason of the application of federal
Cite as 20 OTR 468 (2012) 481
Of course, the federal change or correction would
most probably have to occur within the time permitted for
such action under the federal statute of limitations provi-
sions. However, that fact is one which, as will be discussed
below, is perfectly in line with how ORS 314.410(3)(b) has
developed over time as a result of case law and legislative
action.
B. Legislative History and Development of ORS 314.410(3)
The department suggests that the Oregon legisla-
ture intended ORS 314.410(3)(b) to permit unlimited defi-
ciency assessments by the department in years otherwise
closed under the federal and Oregon statutes of limitation
where federal officials adjusted the amount of a loss carry-
back to such closed year. The analysis set forth above demon-
strates that such a result is not justified by an analysis of
the actual provisions of the statute. The statutory and leg-
islative history of ORS 314.410(3) and relevant case law is
consistent with the construction that the court has given to
the statute and it is to this history that the court now turns.
The discussion of statutory and case law begins
with the decision in Swarens v. Dept. of Rev., 320 Or 326,
883 P2d853 (1994). The Oregon Supreme Court in Swarens
approached the proper construction of ORS 314.410(3)(b),
the same statute at issue here. An appropriate analytical
approach is to determine whether the department’s notice
would have been timely under the statutes applicable in and
the logic of the Swarens decision and, if not, whether any
subsequent case law or statutory enactment would provide
the missing support for the action of the department.
1. Validity under Swarens
Swarens stands clearly for the proposition that
the federal action referred to in ORS 314.410(3)(b) must be
taken within the time period that a deficiency notice, under
Oregon law, could have been issued—without regard to the
provisions of ORS 314.410(3)(b) itself. As the Supreme Court
stated:
or Oregon statutory provisions to that year A or action for that year A by a federal
official that resulted in a refund. Such a year would not, however, be opened by
reason of actions for a year in respect of which a change or correction was made.
482 Tektronix, Inc. v. Dept. of Rev.
“We conclude that, under ORS 314.410(3), a correction by
the IRS extends the statute of limitations only if that cor-
rection is made before the state statute of limitations has
run.”
Swarens, 320 Or at 335. (Emphasis added.)
In analyzing ORS 314.410(3)(b), the court in
Swarens also considered the provisions of ORS 314.380 that
both describe certain actions that may be taken by federal
officials and specify certain reporting responsibilities of
Oregon taxpayers when such actions are taken. However,
that analysis of ORS 314.380 was only done for the purpose
of reviewing the context in which ORS 314.410(3)(b) was
found. See Swarens, 320 Or at 332-33. Although notifica-
tion to the department is referred to in both ORS 314.380
and ORS 314.410(3)(b), nothing in ORS 314.380 serves
to expand whatever time limitations on federal action are
found in ORS 314.410(3)(b).13
Here the federal actions on which the department
relies—the reduction of the amount of capital loss in 2002—
occurred in 2005, more than three years after the filing of
the Oregon return. There were no agreements between the
taxpayer and the department extending the time for the
assessment of deficiencies. The department does not invoke
any other provision of ORS 314.410 or federal law in support
of its assessment.
Finally, as has been determined above, the action
taken by the federal officials in respect of 1999 was the
reduction of a refund claim and not an “assessment of tax.”
When Swarens was decided, ORS 314.410(3)(b) was acti-
vated only in the event that federal actions resulted in the
assessment of a tax. See 320 Or at 331-32. Accordingly, if
the statutes and logic applicable in Swarens were applica-
ble here, the action of the department against this taxpayer
would be time barred for the reason that the relevant federal
13
If ORS 314.380 requires a report, the failure to file will, if ORS 314.410(b)
applies, yield an adverse consequence for the taxpayer as to measurement of the
limitations period—but no estoppel arises. The department suggests that certain
language in U.S. Bancorp v. Dept. of Rev., 17 OTR 232 (2003) should result in
some estoppel of taxpayer. See 17 OTR at 245. However, comments made there
had to do with burden of proof.
Cite as 20 OTR 468 (2012) 483
actions took place at a time beyond the time limit for defi-
ciencies under Oregon law.
The logic of Swarens has not been altered, but leg-
islative changes to ORS 314.410(3)(b) have occurred, and to
those actions the court now turns.
2. 1997 Legislation
In response to one aspect of the decision in Swarens,
the 1997 legislature amended ORS 314.380 and ORS
314.410(3)(b). Or Laws 1997, ch100, § 3. These amendments
were included in Senate Bill 165. The changes made to
ORS 314.380 and ORS 314.410(3) were, in relevant part, as
follows:
“(2)(a) If the amount of a taxpayer’s federal taxable
income, tax credit or other amount taken into account
in determining the taxpayer’s federal tax liability as
reported on a federal income tax return for any taxable
year is changed or corrected by the United States Internal
Revenue Service or other compentent authority, resulting
in a change in the taxpayer’s [net] taxable income [which]
that is subject to tax by this state or in the taxpayer’s
tax liability paid to or owing this state, the taxpayer
shall report [such] the change or correction [in federal tax-
able income] to the department. The report shall either
concede the accuracy of the determination or state
wherein the taxpayer believes it to be erroneous.
“* * * * *
“(3) * * * (b) If the Commissioner of Internal Revenue
or other authorized officer of the Federal Government
makes a change or correction [resulting in a change in tax
for state excise or income tax purposes] as described in
ORS 314.280(2)(a) and, as a result of the change or
correction, an assessment of tax is permitted under
any provision of the Internal Revenue Code, then
notice of deficiency under any state law imposing tax upon
or measured by income for the corresponding tax year may
be mailed within two years after the department is notified
by the taxpayer or the commissioner of [such] the federal
correction, or within the applicable three-year or five-year
period prescribed in subsections (1) and (2) of this section,
respectively, whichever period expires the later.”
484 Tektronix, Inc. v. Dept. of Rev.
Or Laws 1997, ch 100, § 3. The legislative history and
committee discussions of SB 165 indicate clearly that the
amendment to ORS 314.410(3)(b) was to change the time
limit for federal action so that federal changes made within
the time limits of federal law would serve to trigger the
“two years after notification” rule of ORS 314.410(3)(b).
This change was effected by adding references to “taxable
income” in ORS 314.410(3)(b) and removing the pre-existing
reference to Oregon excise or income tax. The prior refer-
ence in ORS 314.410(3)(b) to changes in Oregon tax rather
than taxable income had been an important textual founda-
tion for the holding in Swarens that federal changes had to
occur within Oregon time limits. See 320 Or at 331-32. After
the amendment, the federal change triggering the expanded
time period in ORS 314.410(3)(b) could occur within federal
rather than Oregon time limits.
Hearings in the Senate make it abundantly clear,
however, that the basic rule of Swarens was not changed—
there was a time limit on the predicate federal action that
could make ORS 314.410(3)(b) applicable. Federal action
taken beyond that time limit could not serve to “re-open” or
keep open Oregon years. However, the “applicable” statute of
limitations for the federal action would be the federal time
limit and not, as under Swarens, the Oregon time limit.
This limited scope of the changes was carefully
documented by one member of the Senate whose law firm
had been involved in the Swarens litigation. As the repre-
sentative of the department testified when asked specifically
about the effect of the legislation on the Swarens decision:
“The point that the department is trying to make, or the
thing that we’d like to modify in section 3 in senate bill
165 with regard to Swarens is not to overturn the Swarens
case. In the Swarens case, the taxpayer was dealing with
the federal government and the federal government waited
too long to bill. They, for whatever reason, they made their
adjustments and they waited too long to bill the taxpayer
and actually issue an assessment. So the federal govern-
ment sent the taxpayer a notice of informational changes
only, but didn’t bill, because it was past the statute of lim-
itations. When the Department of Revenue got the notice
we thought that our statute was still open on it, because it
Cite as 20 OTR 468 (2012) 485
was extended by the federal statute, and it didn’t run until
we got a copy of the final notice. We built off of it. When it
went to court, the court told the Department of Revenue
that we don’t have the ability to bill those because the stat-
ute wasn’t open for federal government and we don’t have
any problem with that. We agree with that. The part that
we’re trying to address here in this particular section is
that the tax court seemed to intimate that the Department
of Revenue didn’t have the ability to bill unless our normal
statute, or normal 3 year statute, was open, not extended
by any federal audit. We believe that our statute and the
statute supports that our statute is open by the action of
the federal government on the taxpayer where it wouldn’t
open it or something that was already closed by the federal
statute, but only if it was still open by the department. So
we’re not trying to overturn Swarens, we’re just trying to
clarify one piece of it.”
While this testimony is not a model of clarity, the
court has no doubt that the department, in response to
pointed and specific questions as to the effect of the amend-
ment upon the holding in Swarens, was telling the legisla-
ture that the proposals it was making would not affect the
basic holding of Swarens. Rather, the language would permit
changes made by federal agents within federal limitations
periods to be the federal action triggering the “two years after
notification” rule of ORS 314.410(3)(b). What is absolutely
clear is that the department gave no indication to the legis-
lature, and the legislators in the Senate hearing in no way
indicated, that federal action taken after federal limitations
had run could serve to re-open, under ORS 314.410(3)(b),
otherwise closed Oregon years.
Therefore, as of the effective date of these amend-
ments, the actions of the federal government in this case,
taken as they were after the expiration of the federal stat-
ute of limitation for assessment of tax in 1999, could not
serve as the basis for timely department action under ORS
314.410(3)(b) with respect to the 1999 Oregon tax year.
3. 2001 Legislation
In the 2001 legislative session, HB 2274, which
became Oregon Laws 2001, chapter 9, made changes to ORS
314.380 and ORS 314.410(3). The changes to ORS 314.380
486 Tektronix, Inc. v. Dept. of Rev.
expanded the requirements to report to the department in
the case of actions taken by the taxpayer or the failure of
the taxpayer to file returns with other tax authorities and
permitted the department to treat the report as a claim for
refund in certain cases. However, the court is not concerned
with reporting requirements. This is because failure to com-
ply with those requirements, while it may extend the expo-
sure time of a taxpayer assuming timely federal changes
have been made, does not lengthen or redefine the time lim-
its for federal action under Swarens and the 1997 legisla-
tion. Rather, the court is concerned with the effect, if any,
of the 2001 legislation on ORS 314.410(3)(b), the provision
upon which the department bases its assessment.
In 2001 the full text of what is now ORS 314.410(3)(c)
was added. It provides:
“If the taxpayer files an original or amended federal or
other state return as described in ORS 314.380(2)(a)(B),
the department may reduce any claim for refund as a result
of a change in Oregon tax liability related to the original
or amended federal or other state return, but may not give
notice of a deficiency for an adjustment to Oregon tax lia-
bility following the expiration of the applicable period pre-
scribed in subsections (1) and (2) of this section and para-
graph (a) of this subsection.”
Or Laws 2001, ch 9, § 5. That change first makes reference
to ORS 314.380 (2)(a)(B) for the type of taxpayer action to
which it refers. The provision goes on to say that if such
action results in a claim for refund, the department is lim-
ited in the extent to which it may go beyond reducing that
claim to the stage of affirmatively assessing additional tax.
The added provision states that such an affirmative assess-
ment of a deficiency may occur only as to years still open
to assessment under subsections (1) and (2) of ORS 314.410
and paragraph (a) of subsection (3) of the same statute.
The parties spend considerable energy in debating
the significance of new paragraph (c) of ORS 314.410(3)
and its reference to ORS 314.380(2)(a)(B), particularly the
phrase “that is accepted by the Internal Revenue Service” as
qualifying the reference to “an original or amended federal”
return. The phrase can only serve a role in the application
Cite as 20 OTR 468 (2012) 487
of paragraph (c). It does not modify or qualify paragraph (b),
the statutory provision on which the department relies in
its arguments. Therefore no further consideration of that
phrase is needed at this point.
In 2001 three changes were made to ORS 314.410(3)(b).
The first added the words “or issuance of a refund” describing
the types of federal actions that, under ORS 314.410(3)(b)
could serve to potentially extend the Oregon statute of
limitations. The second change clarified that for federal
changes, the relevant time period was not limited only to
one permitted under federal law, but also included periods
extended by agreement with the federal government.14 The
third change stated that deficiencies issued pursuant to the
section could assert any adjustment necessary to arrive at
the correct amount of Oregon taxable income and Oregon
tax liability.
Of those three changes, the court is not concerned
with the second. In this case there was never an agreement
between taxpayer and the federal government extending
the time within which the IRS had to issue a notice of defi-
ciency. Nor is the court concerned with the third change as
it describes the scope of Oregon deficiency assessments if,
but only if, they are timely made. The question therefore
is only what, if any, alteration in the state of the law was
intended by reason of the addition of the words “or issuance
of a refund” to ORS 314.410(3)(b) and whether the assess-
ment here was timely made.
On this question, the legislative history of the
bill amending the statute is instructive, although almost
all of the material from the committee of the House of
Representatives deals with unrelated matters. However,
the bill was introduced to the relevant committee in the
House of Representatives by a staff person as a bill con-
taining changes proposed by the department and address-
ing “some tax fairness issues.” (Audio Recording, House
14
It is not clear to the court why this provision was needed as extension
agreements are contemplated in the federal limitations statutes and the extended
period agreed to would seem clearly to be one as to which an assessment of tax or
refund would or could be “permitted under any provision of the Internal Revenue
Code”—the preexisting language. See ORS 314.410(3)(b) (1999).
488 Tektronix, Inc. v. Dept. of Rev.
School Funding and Tax Fairness/Revenue Committee, HB
2274, Jan 19, 2001, at 1:21 PM (statement of Ed Waters,
Economist, Legislative Revenue Office).)15
In the Senate Revenue Committee, the department
witness summarized for the committee the basic statute
of limitations provisions in Oregon tax law and the effect
of the Swarens decision and the 1997 legislation on those
provisions. That testimony was completely consistent with
the descriptions discussed above and in no way indicated
that adoption of the bill would cause any departure from the
principles of the Swarens decision, as altered by the 1997
amendments to ORS 314.410(3)(b). The witness then stated,
as to the amendment proposed:
“What we’re doing this time is clarifying. We have some
difficulty in the language as to whether or not we can issue
a refund based on that federal audit report. It seems clear
that we can issue a deficiency but if the taxpayer actually
has a refund coming it’s not clear in the words in the stat-
ute that we can issue that refund, and we think it’s fair
to go either way. If the taxpayer owes more tax, we should
be able to issue a bill. If they are entitled to a refund, we
should be able to issue a refund based on that report. So
that’s what we are trying to do in sections 4 through 7.”
Nothing further was provided to the committee by the
department representative as to the meaning of the amend-
ment the department desired to have adopted. The Chair of
the committee summarized the amendment as follows:
“Really what the bill apparently does is open up the poten-
tial for Oregon Department of Revenue to take action if
there’s been an action at the federal level during an open
year.”
(Emphasis added.) Based on this legislative history, the
court must conclude that the 2001 Legislature did not intend
to make any change to the time limitation rules as they
stood after the Swarens decision and the 1997 amendment.
15
In its briefing on the 1995 revisions to ORS 314.665(6), the department
argued that the court could take into account “staff measure summaries and
analyses” prepared by legislative staff. On this his same principle the court sees
no reason not to consider statements made by legislative staff members during
committee hearings.
Cite as 20 OTR 468 (2012) 489
The addition of the phrase “or issuance of a refund” to ORS
314.410(3)(b) was described to the Senate committee as one
working in favor of taxpayers and designed to achieve fair-
ness by clarifying that federal actions producing refunds
could lead to Oregon refunds. But as the department wit-
ness assured the committee, the question of deficiencies was
already covered. Of course the law covering the matter was
the statute as interpreted by Swarens and changed slightly
by the 1997 legislation.
The court cannot conclude that the addition of a ref-
erence to “issuance of a refund” had the effect of reversing
the Swarens principle—the principle that federal changes
referred to in ORS 314.410(3)(b) must be made within, as
clarified in 1997, the federal statute of limitations. No one
testified or could have understood that the proposed phrase
referring to refunds would open otherwise closed years in
Oregon to deficiency assessments by the department when
federal action, of whatever type, was taken after the federal
time limitation or deficiency assessments had expired.
C. Other Considerations
The result reached here is consistent with the text
of ORS 314.410(3)(b) considered by itself and in the context
of Supreme Court case law interpreting that statute and leg-
islation adopted within the context of that Supreme Court
case law. The result also does not condition the substance
of Oregon results on technical differences or completely
accidental occurrences. The court says this because the
result for which taxpayer contends could have been secured
without question if taxpayer had followed a permitted, but
slightly different, federal procedural route on the same sub-
stantive facts.
With the filing of its 2002 tax return, showing a cap-
ital loss, taxpayer could have waited until the audit of that
return was completed by the federal government. The time
period to claim a refund in the 1999 year would have been
extended by ORS 314.415(5) so as to include the time within
which the federal audit of the 2002 year in fact occurred
here—even though the general statutes of limitation on
the 1999 year had expired. Upon the completion of the fed-
eral audit, taxpayer could then have simply taken action
490 Tektronix, Inc. v. Dept. of Rev.
under ORS 314.410(3)(c) by filing an amended return for
the 1999 year consistent with the amount of loss allowed in
the audit. That return would certainly be “accepted” under
any construction of that word. At that point, a notice of defi-
ciency could only have been issued by the department under
ORS 314.410(3)(c), within the periods of time “prescribed in
subsections (1) and (2) of [ORS 314.410] and paragraph (a)
of [ORS 314.410(3)]”. None of those time periods were open.
The three year period of subsection (1) had run, there was
no assertion of substantial understatement of income so as
to make subsection (2) applicable and there has been no
assertion of a false or fraudulent return as described in sub-
section (3)(a) of ORS 314.410.
The result would then have been that the provisions
of ORS 314.410(3)(c) would have fit “like a glove” and the
department would have been permitted to reduce the claim
for refund for the 1999 year but would not have been permit-
ted to assess the deficiency it did in this case.16
The only difference in fact in this case when com-
pared with the foregoing hypothetical is that in this case
taxpayer took advantage of the tentative refund provisions
of federal law, which have no counterpart under Oregon law,
and then later repaid a portion of the tentative refund after
the federal audit of 2002 was completed. No change in the
substance of the federal action in reducing the amount of
capital loss in 2002 occurred. Given the principle of Swarens
and its continued vitality through the legislative changes
made in 1997 and 2001, the court simply cannot conclude
that the Oregon legislature intended to have a taxpayer in
the position of this taxpayer suffer such substantial differ-
ences in exposure to deficiency assessment based on such
minor and permitted options as to what is employed at the
federal level process. The way to give effect to that conclu-
sion is to further conclude that on these facts the provisions
of ORS 314.410(3)(b) do not apply and the provisions of ORS
314.410(3)(c) do apply.
The department had opportunity to audit 1999 and
did. It had opportunity to adjust 2002 and it did not; 1999 is
16
Because ORS 314.410(3)(a)(B) applies.
Cite as 20 OTR 468 (2012) 491
only possibly in play because 2002 affects 1999 under provi-
sions of federal law and Oregon law, the purposes of which
are to benefit the taxpayer. Nor does the carryback expose
the department to any risk of taxpayers gaming the system.
In theory neither the department nor any taxpayer expect
carryback, or if they do both have the same information.
When the carryback item is generated the department has
already most often had the opportunity to audit the years
effected by the carryback and, if it felt it needed more time,
an opportunity to get an extension agreement. For the year
the carryback item is generated, the department has its full
panoply of tools to give it adequate time to insure the car-
ried loss is in the correct amount. It can rely on the three
year rule or if more is needed, get an extension agreement.17
And it has the protection of ORS 314.410(3)(b) insofar as it
wants to let the IRS go first.
What the department is seeking here is a wind-
fall ability to reopen 1999 for a second audit because of a
change in the 2002 year. That change is one in respect of
which it is fully protected from taxpayer overstatement. It
is claiming that because the loss from 2002 passes through
to 1999, changes to 2002 are treated as passed through to
and become changes to 1999. It does not need its arguments
to have the ability to offset other deficiencies so as to poten-
tially reduce or eliminate the statutorily authorized refund
claim. It has that under Smurfit Newsprint Corp. v. Dept. of
Rev., 14 OTR 434 (1998), and ORS 314.410(3) (c). Rather, it
wants the advantage the legislature provided to taxpayers
in the form of carryback provisions to magically turn from a
beneficial carryback refund claim to a drastic burden aris-
ing because any adjustment to the carryback and reduction
of refund amount by the federal authorities will reopen the
1999 year to deficiency assessments without limit.
The court does not understand taxpayer to argue
that, pursuant to ORS 314.410(3)(c) or otherwise, the depart-
ment is precluded from taking action as to the 1999 year
that could reduce or eliminate the refund claimed for that
17
Of course if a taxpayer refused to extend time limits the department could
make a protective assessment to preserve its rights.
492 Tektronix, Inc. v. Dept. of Rev.
year. Nor does taxpayer argue that adjustments made by the
department must only be as to the amount of loss actually
generated in 2002. Taxpayer appears to accept that, to the
extent of the refund claimed for 1999, the department may
take action to offset the refund claim under on any basis.
The department has done so and to that action the court
now turns.
D. Calculation of Sales Factor
The question is the substantive validity, or invalid-
ity, of the department’s assertions as to the tax consequences
of transactions that occurred in 1999. The position on which
the department substantively bases all of its actions relates
to the calculation of the sales factor used for apportionment
of income in 1999.
The reduction or elimination of the refund request
of taxpayer for the 1999 year depends on whether and how
the receipts from the sale of the goodwill by taxpayer in that
year are included in the sales factor for apportionment pur-
poses. The relevant statute is ORS 314.665(6) (1999), which
provides:
“For purposes of this section, ‘sales’:
“(a) 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.
“(b) Includes net gain from the sale, exchange or redemp-
tion of intangible assets not derived from the primary busi-
ness activity of the taxpayer but included in the taxpayer’s
business income.
“(c) Excludes gross receipts arising from an incidental or
occasional sale of a fixed asset or assets used in the reg-
ular course of the taxpayer’s trade or business if a sub-
stantial 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 busi-
ness. Insubstantial amounts of gross receipts arising from
incidental or occasional transactions or activities may be
excluded from the sales factor unless the exclusion would
Cite as 20 OTR 468 (2012) 493
materially affect the amount of income apportioned to this
state.”18
The department has adopted rules regarding the computa-
tion of the sales factor and the particular issues surround-
ing how to treat receipts from the disposition of intangible
property. A review of the statutes and the department’s
rules, together with the legislative history of the statutory
provisions and parallel developments in case law is neces-
sary: In this process the court will first determine whether
ORS 314.665(6)(a) or (6)(b) apply to sales of goodwill. The
court will then consider the role, if any, of ORS 314.665(6)(c)
in this matter. Finally, the court will consider the applica-
tion of OAR 150-314.665(4)(3)(b).
E. ORS 314.665(6)(a) and (6)(b): Actions of Court and
Multistate Tax Commission Regarding Treasury Func-
tion Receipts
The provisions of paragraphs (a) and (b) of sub-
section (6) of ORS 314.665 and related rules were adopted
in reaction both to the decision in Sherwin-Williams Co.
v. Dept. of Rev., 14 OTR 384 (1998), aff’d, 329 Or 599, 996
P2d 500 (2000) and recommendations of the Multistate Tax
Commission (MTC). The actions of the MTC are especially
significant as it is the organization charged with helping
to ensure uniform treatment under the Uniform Division
of Income for Tax Purposes Act (UDITPA), a uniform law
that, subject to certain modifications not at issue in this
case, Oregon has adopted.19
The actions of the courts, the legislature, and the
MTC referred to above dealt with the problem of the proper
sales factor treatment of so called “treasury function” gross
receipts, about which a brief discussion is appropriate.
Recall that the sales factor looks to all gross receipts of the
taxpayer not allocated under ORS 314.615 to ORS 314.645.
ORS 314.610(7). Prior to the developments discussed
18
See footnote 1 as to two statutes of limitation applicable in this case.
19
Our Supreme Court has shown particular concern for the goal of uniform
treatment under the provisions of UDIPTA, and our Supreme Court’s holdings on
questions of proper and uniform interpretation of UDITPA have led to promul-
gation of proposed regulations by the MTC. See Atlantic Richfield Co. v. Dept. of
Rev., 300 Or 637, 717 P2d 613 (1986) and MTC Proposed Reg. IV.11.(a).
494 Tektronix, Inc. v. Dept. of Rev.
here—in particular the addition of subparagraphs (a) and
(b) to ORS 314.665(6), those statutory provisions meant
that a company buying and selling large quantities of finan-
cial instruments in connection with the cash management
functions of the company would have extremely large gross
receipts from the sales of intangibles. In some cases compa-
nies would buy and sell, on a daily basis, hundreds of mil-
lions of dollars of short term instruments, producing hun-
dreds of millions of dollars of gross receipts—even though
the net gain on such transactions could be very small. As
the income producing activity associated with the treasury
function activity occurred, typically, at the headquarters of
the company, the numerator of the sales factor for the head-
quarters state would have, some felt, an improperly large
number in the numerator of sales factor. That would, in the
minds of some, skew the apportionment of income of the
company to the headquarters state.
The department was one party holding the view
that treasury function gross receipts could be highly dis-
tortive in the apportionment process. Feeling this way, the
department proceeded, by construction of its existing rules,
to take the position that only the net gain from the sale of
intangibles, and not gross receipts, were includable in the
determination of the sales factor. In Sherwin Williams this
court concluded that the position of the department was
inconsistent with the statutory definition of sales—a defini-
tion tied to gross receipts, not net gain or income. 14 OTR at
388-89. The court invalidated the deficiency proposed by the
department for the 1987 through 1992 years. The Supreme
Court affirmed in a per curiam opinion. Sherwin-Williams,
329 Or at 600.
As noted, the years at issue in Sherwin Williams
were the 1987 through 1992 years. During the pendency
of the dispute resolved ultimately against the department,
the legislature, in 1995, added what is now paragraph (a)
to subsection (6) of ORS 314.665. See Or Laws 1995, ch 176
§ 1. A review of the legislative history of that action indi-
cates that the department presented the legislature with a
statutory response to a narrow problem, namely the prob-
lem of treasury function gross receipts. The response was
Cite as 20 OTR 468 (2012) 495
to eliminate from the sales factor gross receipts and any
income attributable to trading in intangibles unless trad-
ing in such property was the primary business of the tax-
payer. The department represented to the legislature that
the legislative change was to provide legislative authority
for the department’s then existing practices. The legislative
record does not contain any indication that department pro-
posal went beyond treatment of treasury function receipts or
addressed the receipts from all sales of intangible property.
After the adoption of what is now paragraph (a) of
ORS 314.665(6), the world was divided into two hemispheres
as to this question. In one hemisphere were those compa-
nies whose primary business involved the sale of intangi-
ble assets—for example, firms trading securities for their
own account. For those companies gross receipts would con-
tinue to be considered in the calculation of the sales factor.
However, for all other companies, the results of sales would
not be taken into account in any way in the calculation of the
sales factor.
In approximately 1997, just before the decision of
this court in Sherwin Williams, the MTC addressed this mat-
ter and recommended a model regulation dealing with what
had become the relatively widespread problem of treasury
function transactions. The position of the MTC was similar
to that achieved in Oregon with the 1997 addition of para-
graph (a) to ORS 314.665(6) in that companies whose pri-
mary business involved the sale of intangible assets would
have gross receipts considered in the determination of the
sales factor. See MTC Proposed Reg. IV.15.(a)(1). However,
the position of the MTC differed from what Oregon had done
in that, under the MTC proposal, other companies would
have sales of treasury function intangibles considered to
some extent in the calculation of the sales factor. The extent
would be the net gain from such sales, but not the extremely
large gross receipts from such sales. MTC Proposed Reg.
IV.18.(c).(4)(A).
The action of the MTC also focused more specifi-
cally on which assets were included in the provisions it rec-
ommended. The focus was not on all intangible property but,
consistently with addressing the problem that had arisen
496 Tektronix, Inc. v. Dept. of Rev.
nationally, the treasury function management of liquid
assets. Accordingly the proposed rule stated:
“(4)(A) Where gains and losses on the sale of liquid assets
are not excluded from the sales factor by other provisions
under Reg.IV.18.(c)., such gains or losses shall be treated
as provided in this subsection. This subsection does not
provide rules relating to the treatment of other receipts
produced from holding or managing such assets. If a tax-
payer holds liquid assets in connection with one or more
treasury functions of the taxpayer, and the liquid assets
produce business income when sold, exchanged or other-
wise disposed, the overall net gain from those transactions
for each treasury function for the tax period is included in
the sales factor. For purposes of this subsection, each trea-
sury function will be considered separately.
“(B) For purposes of this subsection, a liquid asset is an
asset (other than functional currency or funds held in bank
accounts) held to provide a relatively immediate source of
funds to satisfy the liquidity needs of the trade or busi-
ness. * * * Stock in a corporation which is unitary with the
taxpayer, or which has a substantial business relationship
with the taxpayer is not considered marketable stock.
“(C) For purposes of this subsection, a treasury function
is the pooling and management of liquid assets for the
purpose of satisfying the cash flow needs of the trade or
business, such as providing liquidity for a taxpayer’s busi-
ness cycle, providing a reserve for business contingencies,
business acquisitions, etc. A taxpayer principally engaged
in the trade or business of purchasing and selling instru-
ments or other items included in the definition of liquid
assets set forth herein is not performing a treasury func-
tion with respect to income so produced.
“* * * * *
“(E) Examples.
“Example (i). A taxpayer manufactures various gift items.
Because of seasonal variations, the taxpayer must keep
liquid assets available for later inventory acquisitions.
Because the manufacturer wants to obtain a return on
available funds, the manufacturer acquires liquid assets,
which are held and managed in State A. The net gain
resulting from all gains and losses on the sale of the liquid
assets for the tax year will be reflected in the denominator
of the sales factor and in the numerator of State A.
Cite as 20 OTR 468 (2012) 497
“Example (ii). A stockbroker acts as a dealer or trader for
its own account in its ordinary course of business. Some
of the instruments sold are liquid assets. This subsection
does not operate to classify those sales as attributable to a
treasury function.”
MTC Proposed Reg. IV.18.(c).(4)(A).20
This 1997 proposal of the MTC was the predicate to
the 1999 proposal by the department to add paragraph (b) to
subsection (6) of ORS 314.665. The department witnesses in
hearings on the 1999 amendments that added paragraph (b)
made this clear to their audience. A comparison of the MTC
proposed rule with the substance of paragraphs (a) and (b)
of subsection (6) of ORS 314.665 shows that what the MTC
accomplished in one rule was accomplished in paragraphs
(a) and (b) of ORS 314.665(6). Firstly, traders of intangi-
ble assets would have gross receipts considered under the
traditional definition of sales. This is accomplished by ORS
314.665(6)(a) and MTC Proposed Reg. IV.18.(c).(4)(C) (the
phrase “unless those gross receipts are derived from the
taxpayer’s primary business activity” in ORS 314.665(6)(a)).
Secondly, non-traders would include only net gain from
treasury function transactions. This is accomplished by
MTC Proposed Reg. IV.18.(c).(4)(A), quoted above, and ORS
314.665(6)(b).
Recall, however, that the focus in the MTC regu-
lation was on only a subset of all intangible assets—liquid
assets. In 1999, the department represented to the legisla-
ture that the purpose of the statutory addition was to bring
Oregon in line with the states that were members of the MTC
and which had adopted the Uniform Division of Income for
Tax Purposes Act (UDITPA). The MTC approach was one
that analytically started with a determination of whether a
taxpayer was principally engaged in the business of trading
liquid assets. If not, only net gain from transactions in such
assets would be reflected in the sales factor. Therefore, to be
synchronized with the MTC, the Oregon focus would also
need to be on liquid financial assets and not all intangibles.
20
The model apportionment regulations promulgated by the MTC can
be found on the MTC’s website at the following URL: http://www.mtc.gov/
Uniformity.aspx?id=496. Follow the “General Allocation and Apportionment
Regulations” hyperlink.
498 Tektronix, Inc. v. Dept. of Rev.
The department’s rule interpreting the provisions
of subsection (6) of ORS 314.665 state, in relevant part:
“Sales Factor; Inclusion of Income from Disposition
of Intangible Assets; Determination of Primary
Business Activity
“(1) As provided in ORS 314.665, paragraph (6), the sales
factor may or may not include gross receipts or net gains
from the disposition of intangible assets, depending on
what the taxpayer’s “primary business activity” is.
“* * * * *
“(3) A taxpayer’s “primary business activity” is deter-
mined for a particular tax year based on consideration of
criteria including, but not limited to, the following:
“(a) The stated business in the articles of incorporation.
“(b) The business category entered on the Securities
and Exchange Commission Form 10-K of a publicly held
corporation.
“(c)   The business designation in a “mission statement.”
“(d) The business activity with the greatest average
investment in tangible and intangible assets from the bal-
ance sheet for the tax return.
“(e) The business designation in advertising.
“(f)   The business with the greatest amount of net sales of
product and services as reported under Generally Accepted
Accounting Principles.
“(g) The business activity from which working capital is
transferred to investments in intangible assets and to which
the working capital and income is returned.
“Example 1: A Corporation (A) is headquartered
in Seattle[,] Washington[,] and manufactures and sells
household appliances. A has a warehouse in Portland,
Oregon. It has large amounts of temporary excess working
capital each year during the summer after big spring sales
and before buying raw materials in the fall. Employees of
A at its headquarters invest the temporary excess working
capital in short-term debt instruments that are bought and
sold each week for a three month period before the invested
principal and any earnings are returned to the working
capital of the manufacturing business. The income from
the investment activity is business income. B’s primary
Cite as 20 OTR 468 (2012) 499
business activity is the production and sale of tangible per-
sonal property, not the purchase of, holding of, dealing in
or sales of intangible assets. A must include the net gain
from sales of short-term debt instruments in its sales factor.
“(4) When some criteria for a corporation indicate the pri-
mary business activity is dealing in intangible assets while
other criteria indicate the primary business activity is the
production or sale of tangible property or the provision
of services, more weight will be given to criteria reflect-
ing what the corporation actually did during the tax year
as opposed to what the corporation did in the past or rep-
resents itself as doing.
“Example 2: For the current tax year, over 60 percent of
B Corporation’s (B’s) assets are invested in intangible oil
royalty rights and over 70 percent of B’s net sales come from
the sale of intangible oil royalty rights. The SIC code on
its last 15 corporate tax returns has been for “Oil Royalty
Traders.” B’s 25 years old articles of incorporation and it’s
current advertising indicate that B is in the business of
selling petroleum products. B’s primary business activity
is the acquisition, holding and disposal of intangible assets
and it must include the gross receipts from oil royalties
and the sale of oil royalty rights in the sales factor on [its]
Oregon return.”
OAR 150-314.665(6) (emphasis added).
“Sales Factor: Definition of Net Gains
For purposes of including net gains from the sale, exchange,
or redemption of intangible assets not derived from the tax-
payer’s primary business activity in the sales factor under
ORS 314.665(6)(b), “net gains” means the excess of gains
over losses from asset sales. If the net of gains and losses
results in a negative amount, the correct amount for factor
purposes is zero.
“Example 1: Heavy Equipment Manufacturing Corpor-
ation (Heavy) sold two short-term investments in commer-
cial paper during calendar tax year 2000. The first sale
resulted in a net gain of $100,000, and the second resulted
in a net loss of $30,000. The income from selling the com-
mercial paper was not derived from Heavy’s primary busi-
ness activity of manufacturing, and Heavy must include
net gain of $70,000 ($100,000 gain less $30,000 loss) in the
sales factor.
500 Tektronix, Inc. v. Dept. of Rev.
“Example 2: Assume the same set of facts as in Example 1,
except that the first sale resulted in a $100,000, loss and
the second sale resulted in a $30,000 gain. The net result
of sales of intangible assets not derived from the taxpay-
er’s primary business activity is a negative amount, so no
amount of net gain from sale of intangible assets is included
in Heavy’s sales factor.”
OAR 150-314.665(6)(b) (emphasis added). If one considers
how the department interpreted the legislation it recom-
mended to the legislature, legislation that is closely analo-
gous to the MTC regulations, and the explanations the
department gave to the legislature about the amendments
being proposed, the court is of the opinion that the proper
construction of subsection (6) is that the statute deals only
with the type of intangibles outlined in the MTC regulation
and the examples provided by the department in Example 1
and Example 2 of OAR 150-314.665(6). Those intangibles
are so-called liquid assets or financial instruments. Nothing
in the historical context of the relevant legislation, the case
law, the actions of the MTC or the reactions of the depart-
ment and the legislature to such actions by the courts and
the MTC in any way suggests that subsection (6) was meant
to apply to an intangible asset such as goodwill.
To the contrary, the rules of the department sug-
gest that goodwill is not the type of asset addressed in the
statute. For example, the rules specify how “net gains” from
the type of assets addressed by the statute are to be cal-
culated. The calculation is done by subtracting losses from
sales, exchanges or redemptions of intangible assets from
gains in the same period from the sale, exchange or redemp-
tion of such assets. Only a positive result enters into the
factor. This provision and the related example indicates
the statutory provision applies to assets in respect of which
taxpayers could and would engage in multiple transactions
involving the intangibles covered by the statute, with some
potentially producing gain and some potentially producing
loss. This calculation provision in no way fits a disposition
of goodwill. Goodwill is measured and disposed of, typically,
in connection with the disposition of all of the assets of a
business or line of business. There is only one transaction.
Yet the department rule contemplates netting gains against
Cite as 20 OTR 468 (2012) 501
losses and gives as an example regular and multiple num-
bers of transactions in intangibles in any given year. The
inference the court draws is that the department rule cor-
rectly interprets the intent of the statute and that neither
the statute nor the rule apply to the disposition of goodwill
in connection with the disposition of other assets.
Further, to construe ORS 314.665(6)(a) and (6)(b)
as proposed by the department would immediately put
Oregon out of step with the MTC rule, the very same rule
that was adopted so as to produce uniformity among mem-
ber states. The department told the legislature that the
adoption of paragraph (a) dealt with the Sherwin Williams
“problem” and that the provisions of paragraph (b) would
bring Oregon into coordination with the MTC rules. Those
rules only deal with liquid treasury function assets.21
The court concludes that neither ORS 314.665(6)(a)
nor (6)(b) can be a basis for including some or all of the
receipts from taxpayer’s disposition of goodwill in the com-
putation of the sales factor. Goodwill is not the type of intan-
gible property that those statutory provisions address.
F. ORS 314.665(6)(c)
As quoted above, ORS 314.665(6)(c) excludes from
the sales factor “receipts from the incidental or occasional
sale of a fixed asset or assets” used in the regular course of
the taxpayer’s trade or business.
The department has adopted a rule in this regard,
OAR 150-314.665(1)-(A)(2) that provides:
“(a) Where substantial amounts of gross receipts arise
from an incidental or occasional sale of a fixed asset used
in the regular course of the taxpayer’s trade or business,
such gross receipts will be excluded from the sales factor.
For example, gross receipts from the sale of a factory or
plant will be excluded.
21
Both the MTC regulation and ORS 314.665(6)(a) also address traders in
intangibles, but no party argues that taxpayer is a trader in goodwill. Goodwill
is not addressed in the MTC rule to which the department referred in its discus-
sions with the legislature. The court cannot now conclude that the legislature
intended its work to be interpreted so as to place Oregon out of compliance with
the MTC rule to which it was referred by the department.
502 Tektronix, Inc. v. Dept. of Rev.
“(b) Insubstantial amounts of gross receipts arising from
incidental or occasional transactions or activities may be
excluded from the sales factor unless such exclusion would
materially affect the amount of income apportioned to this
state. For example, the taxpayer ordinarily may include
or exclude from the sales factor gross receipts from such
transactions as the sale of office furniture, business auto-
mobiles, etc.”
The parties take differing views as to whether goodwill is a
fixed asset used in the regular course of the taxpayer’s trade
or business. The department argues that an intangible can
never be considered a fixed asset.22 Taxpayer argues that
goodwill can be and should be a fixed asset.23
The court does not consider it necessary to resolve
this disagreement between the parties.24 The reason for this
is that the resolution of proper treatment of receipts from
the sale of the intangible at issue in this case, goodwill, is
provided by application of OAR 150-314.665(4)(3(b), to a dis-
cussion of which the court now turns.
G. OAR 150-314.665(4)(3)(b)
The department has promulgated OAR 150-
314.665(4)(3) that provides rules for applying the statutory
directive that in the case of sales of intangible property the
place where income producing activity occurs is to be used
in determining how to calculate the sales factor. The rule
provides:
“(3)(a) Where the income producing activity in respect to
business income from intangible personal property can be
22
Taxpayer points out that the department has changed its position on
whether intangibles can be fixed assets. In Crystal Communications, Inc. v. Dept.
of Rev., 20 OTR 111 (2010) the department initially asserted in its briefs that
goodwill was a fixed asset, but withdrew that assertion in the course of the case.
Here the department asserts that goodwill, an intangible, cannot be excluded as
a fixed asset under ORS 314.665(6)(c). The department’s temporary litigating
position in Crystal does not preclude it from arguing otherwise in this case.
23
The parties appear to agree that the disposition of goodwill in this case
was a result of an occasional sale so that the requirement of such a sale, found in
ORS 314.665(6)(c) is satisfied.
24
Accordingly the court does not address the taxpayer’s position that appli-
cation of the department’s position would violate the uniformity requirements of
the Oregon Constitution.
Cite as 20 OTR 468 (2012) 503
readily identified, the income is included in the denomina-
tor of the sales factor and, if the income producing activity
occurs in this state, in the numerator of the sales factor
as well. For example, usually the income producing activ-
ity can be readily identified in respect to interest income
received on deferred payments on sales of tangible prop-
erty (OAR 150-314.665(1)–(A)) and income from the sale,
licensing or other use of intangible personal property.
“(b) Where business income from intangible property
cannot readily be attributed to any particular income
producing activity of the taxpayer, the income cannot be
assigned to the numerator of the sales factor for any state
and must be excluded from the denominator of the sales
factor. For example, where business income in the form of
dividends received on stock, royalties received on patents
or copyrights, or interest received on bonds, debentures or
government securities results from the mere holding of the
intangible personal property by the taxpayer, the dividends
and interest must be excluded from the denominator of the
sales factor.”
For purposes of this rule:
“The term ‘income producing activity’ applies to each
separate item of income and means the transactions and
activity directly engaged in by the taxpayer in the regular
course of its trade or business for the ultimate purpose of
obtaining gains or profit.”
OAR 150-314.665(4)(2). (Emphasis supplied.)
The relevant MTC regulation is essentially the
same and provides:
“Where the income producing activity in respect to busi-
ness income from intangible personal property can be
readily identified, the income is included in the denomina-
tor of the sales factor and, if the income producing activity
occurs in this state, in the numerator of the sales factor
as well. For example, usually the income producing activ-
ity can be readily identified in respect to interest income
received on deferred payments on sales of tangible prop-
erty (Regulation IV.15.(a)(1)(A)) and income from the sale,
licensing or other use of intangible personal property
(Regulation IV.17.(2)(D)).
504 Tektronix, Inc. v. Dept. of Rev.
“Where business income from intangible property cannot
readily be attributed to any particular income producing
activity of the taxpayer, the income cannot be assigned to
the numerator of the sales factor for any state and shall be
excluded from the denominator of the sales factor. For exam-
ple, where business income in the form of dividends received
on stock, royalties received on patents or copyrights, or
interest received on bonds, debentures or government secu-
rities results from the mere holding of the intangible per-
sonal property by the taxpayer, the dividends and interest
shall be excluded from the denominator of the sales factor.”
MTC Proposed Reg. IV.18.(c)(3).
The provisions of the statutes on apportionment
at issue are rules applicable to sales “other than sales of
tangible personal property.” ORS 314.665(4). Accordingly
the sales in question could be of intangible property or ser-
vices.25 The rules of the statute and department are much
more easily understood and applied when, for example, the
income producing activity is the performance of a service.
In such a case the location of the service provider can be a
strong indicator.
It is much harder to determine the income produc-
ing activity involved in the sale or other use of a more gen-
eral intangible such as goodwill. The rules of the depart-
ment and the MTC state that where the business income
from an intangible cannot readily be attributed to a par-
ticular business activity of the taxpayer, the proceeds of a
sale of the intangible are to be excluded from the calculation
of the sales factor. In the case of goodwill, it is important
to acknowledge that as an asset, it reflects the value of the
combination of all the assets and activities of a business,
and, under the accepted definition for accounting purposes,
is the amount paid by a purchaser in excess of the aggre-
gate fair market value of other assets purchased. “[T]he
excess of the purchase price of a business over and above
the value assigned to its net assets exclusive of goodwill.”
Webster’s Third New Int’l Dictionary 979 (unabridged ed.
2002). Goodwill is also the product of numerous activities
undertaken, usually in numerous locations.
25
“Sales” can also include receipts from rental, leasing, franchising, licens-
ing, or other use of tangible property. OAR 150-314.665(2).
Cite as 20 OTR 468 (2012) 505
Under the department’s rule, therefore, the question
becomes whether this “extra” amount paid by the purchaser
can “readily” be attributed to a “particular income produc-
ing activity of the taxpayer”—that being “the transactions
and activity directly engaged in by the taxpayer for the ulti-
mate purpose of obtaining a gain or profit.” “Readily” means:
“with fairly quick efficiency * * * reasonably fast * * * easily.”
Webster’s Third New Int’l Dictionary 1889 (unabridged ed
2002).
In the opinion of the court, the goodwill at issue
here is a composite of all of the business activities of a tax-
payer over time and in all locations where the business of the
taxpayer is carried on. The factual record shows that these
activities occurred throughout the world and over a signifi-
cant number of years. That being the case, it is the conclu-
sion 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. The net gain from the
disposition of the Goodwill should not enter into the calcula-
tion of the sales factor for the 1999 year of taxpayer.
This conclusion is also supported by consideration
of the role that the sales factor plays in the apportionment
process. The factor does not define whether the income from
the disposition of an intangible such as goodwill is taxable.
That income is concededly taxable and fully included in the
tax base subject to apportionment. Rather, the sales factor
serves as a tool, along with other factors in certain years, to
determine the nature and extent of a taxpayer’s presence in
and utilization of governmental services and the infrastruc-
ture of a state.
This conclusion is fully consistent with the language
of OAR 150-314.665(4)(3)(a) and (3)(b). The rule, in subpara-
graph (a), describes as usually identifiable activity interest
income on an intangible arising from a particular sale of
a particular asset. This is contrasted, in subparagraph (b),
with dividends and interest resulting from the mere holding
of intangible personal property—stocks or bonds. Such div-
idends and interest are stated to be not attributable to any
particular income producing activity.
506 Tektronix, Inc. v. Dept. of Rev.
Although the rule does not explain that conclusion
in subparagraph (b), it is the opinion of the court that the
explanation is that the cash used to pay dividends or inter-
est is the product of all of the activities of the payor of such
interest or dividends. Similarly here, the receipts from dis-
position of goodwill are a product of all deployments of land,
labor, capital and managerial skill undertaken by taxpayer.
V. CONCLUSION
The motion of taxpayer as to computation of the
sales factor is granted and that of department is denied.
Now, therefore,
IT IS ORDERED that Plaintiffs’ Motion for Partial
Summary Judgment is granted; and
IT IS FURTHER ORDERED that Defendant’s
Cross-Motion for Summary Judgment is denied.