Stancorp Financial Group, Inc. v. Dept. of Rev. ( 2013 )

120 January 8, 2013 No. 17
IN THE OREGON TAX COURT
REGULAR DIVISION
STANCORP FINANCIAL GROUP, INC.
and Subsidiaries,
Plaintiffs,
v.
DEPARTMENT OF REVENUE,
Defendant.
(TC 5039)
Plaintiffs (taxpayer) appealed from a Magistrate Division decision as to the
assessment of income of dividends paid by a subsidiary to its parent corporation.
Defendant (the department) audited the returns of the parent corporation and
included in the income of parent the dividends paid to it by its subsidiary in 2002
and 2003. Against this amount of income the department allowed a deduction
for 80 percent of such dividend amounts pursuant to ORS 317.267(2). Taxpayer
appealed to the Magistrate Division of the court, which upheld the department’s
actions. Taxpayer argued that as reflected in the federal consolidated taxable
income of the parent group, the dividends paid by taxpayer to parent should be
eliminated from the income of parent. Granting taxpayer’s motion, the court
ruled that pursuant to relevant statutes and the stipulated facts, the dividend
payments from taxpayer to parent, being eliminated in the calculation of the fed-
eral consolidated taxable income of parent, would not be reflected in the starting
point number used in ORS 317.715(2) in calculating the Oregon taxable income of
parent.
Oral argument on cross-motions for summary judgment
was held June 11, 2012, in the courtroom of the Oregon Tax
Court, Salem.
Robert T. Manicke and Eric J. Kodesch, Stoel Rives LLP,
Portland, filed the motion and argued the cause for Plaintiffs
(taxpayer).
Marilyn J. Harbur and Darren Weirnick, Assistant
Attorneys General, Department of Justice, Salem, filed
the cross-motion and argued the cause for Defendant (the
department).
Decision for Plaintiffs rendered August 2, 2012. Amended
order filed January 8, 2013.
HENRY C. BREITHAUPT, Judge.
Cite as 21 OTR 120 (2013) 121
I. INTRODUCTION
This is the second case that has recently been pre-
sented to the court involving the interplay of the statutory
rules in Oregon regarding taxation of corporations filing
federal consolidated income tax returns that include an
insurance company. See Costco Wholesale Corp. v. Dept. of
Rev., 20 OTR 537 (2012).
II. FACTS
These two cases have some things in common and
some important differences. In common, both involve fil-
ings in Oregon of a consolidated Oregon corporation income
or excise tax return. See ORS 317.705 to 317.725. Also in
common, both involve families of corporations that are, or
have been stipulated for decision to be, unitary in nature.
However, the cases are different in that in Costco the federal
consolidated return member in question (1) had no connec-
tion with Oregon, and (2) did not and was not required to file
an income tax return in Oregon. In this case, however, the
members in question do have an obligation to file an Oregon
return.
In this case two members of the corporate family
that includes Plaintiffs (taxpayer) are of particular interest.
One is Standard Insurance Company (SIC), an insurance
company. The other is taxpayer Stancorp Financial Group
(SFG), a corporation that is not an insurance company. SIC
is a subsidiary of SFG.1
In the years in question here, 2002 and 2003, SIC
paid dividends to SFG in the total amount of $115,000,000.
In each year, SIC and SFG were members of the same fed-
eral affiliated group of corporations. That group (The SFG
group) elected to file a consolidated federal income tax
return. Under the rules governing federal consolidated
returns, the dividends were eliminated from the income of
SFG. See Treas Reg 1.1502-13(f)(2)(ii).2 The consolidated
1
There is one other insurance company subsidiary of SFG, Standard Life
Insurance Company of New York (SNY). SNY does not present issues other than
those presented by SIC and, to reduce complexity, this opinion will only refer to
SIC.
2
The term “eliminated” is an important term of art and is not to be confused
with “deducted” or “excluded,” two concepts that may have the same mathematical
122 Stancorp Financial Group, Inc. v. Dept. of Rev.
federal taxable income of the SFG group therefore did not
include any amount attributable to the dividends paid by
SIC to SFG.
In accordance with ORS 317.710(5) all of the mem-
bers of the SFG group except SIC and SNY were included in an
Oregon consolidated return. Pursuant to ORS 317.710(5)(b),
SIC and SNY were not included in the consolidated Oregon
return. SIC and SNY each filed its own return. The net
income or loss of SIC or SNY for the years in question was
excluded by taxpayer in the calculation of the tax liability as
shown on the Oregon consolidated return filed by SFG and
all of its non-insurance subsidiaries. The parties agree that
all members of the federal SFG affiliated group of corpora-
tions, including SIC and SNY, are unitary with all other
members under ORS 317.705(2).
Defendant (the department) audited the returns
of SFG and included in the income of SFG the dividends
paid to it by SIC in 2002 and 2003. Against this amount of
income the department allowed a deduction for 80 percent of
such dividend amounts pursuant to ORS 317.267(2).
Taxpayer objected to this treatment, arguing that,
as is reflected in the federal consolidated taxable income of
the SFG group, the dividends paid by SIC to SFG should
be eliminated from the income of SFG. Taxpayer appealed
to the Magistrate Division of the court. The magistrate
who decided the case ruled in favor of the department on
the merits. Stancorp Financial Group, Inc. v. Dept. of Rev.,
TC-MD No. 070881B (Aug 18, 2011). On a question of liabil-
ity for interest and penalties, the magistrate ruled in favor
of the department. Taxpayer then appealed to the Regular
Division. At this stage of the case only the question of the
proper treatment of the dividend payments is presented by
the cross-motions for summary judgment of the parties. The
parties have not raised the question of liability for interest
and penalties at this stage of the proceedings in the Regular
result but which apply outside the consolidated return regime of federal law that
has been incorporated into Oregon law calculations for unitary groups. An “affil-
iated” group is a relationship defined by federal law and is that group of corpora-
tions related in such a way that they may file a federal consolidated income tax
return. See ORS 317.705(1). A “unitary” group is a relationship defined by Oregon
law. See ORS 317.705(2) and (3).
Cite as 21 OTR 120 (2013) 123
Division. The record comprises the pleadings, a partial stip-
ulation of facts submitted to the Magistrate Division on
April 30, 2009, and the affidavit of Brian Williamson on
behalf of taxpayer.
III. ISSUE
Are the dividends paid by SIC to SFG included in
the Oregon taxable income of SFG, subject to the dividends
received deduction provided for in ORS 317.267(2)(b)?
IV. ANALYSIS
The interpretation of three statutes separates the
parties in this case.3 The first statute is ORS 317.710, which,
in relevant part provides:
“(1) A corporation shall make a return with respect to the
tax imposed by this chapter as provided in this section.
“(2) If the corporation is a member of an affiliated group
of corporations making a consolidated federal return, it
shall file a return and determine its Oregon taxable income
as provided in ORS 317.715. The corporation’s tax liability
shall be joint and several with any other corporation that
is included in a consolidated state return with the corpora-
tion under subsection (5) of this section.
“* * * * *
“(5)(a) If two or more corporations subject to taxation
under this chapter are members of the same affiliated group
making a consolidated federal return and are members of
the same unitary group, they shall file a consolidated state
return. The Department of Revenue shall prescribe by rule
the method by which a consolidated return shall be filed.
“(b) If any corporation that is a member of an affiliated
group is permitted or required to determine its Oregon
taxable income on a separate basis under ORS 314.670, or
if any corporation is permitted or required by statute or
rule to use different apportionment factors than a corpora-
tion with which it is affiliated, the corporation shall not be
included in a consolidated state return under paragraph (a)
of this subsection.”
3
Unless otherwise noted, all references to the Oregon Revised Statutes
(ORS) are to 2001.
124 Stancorp Financial Group, Inc. v. Dept. of Rev.
The second statute of importance is ORS 317.715, which in
relevant part provides:
“(1) If a corporation required to make a return under this
chapter is a member of an affiliated group of corporations
making a consolidated federal return under sections 1501
to 1505 of the Internal Revenue Code, the corporation’s
Oregon taxable income shall be determined beginning with
federal consolidated taxable income of the affiliated group
as provided in this section.
“(2) If the affiliated group, of which the corporation sub-
ject to taxation under this chapter is a member, consists
of more than one unitary group, before the additions, sub-
tractions, adjustments and modifications to federal tax-
able income provided for in this chapter are made, and
before allocation and apportionment as provided in ORS
317.010(10), if any, modified federal consolidated taxable
income shall be computed. Modified federal consolidated
taxable income shall be determined by eliminating from
the federal consolidated taxable income of the affiliated
group the separate taxable income, as determined under
Treasury Regulations adopted under section 1502 of the
Internal Revenue Code, and any deductions or additions
or items of income, expense, gain or loss for which consoli-
dated treatment is prescribed under Treasury Regulations
adopted under section 1502 of the Internal Revenue Code,
attributable to the member or members of any unitary
group of which the corporation is not a member.”
The third statute of importance is ORS 317.267(1), which, in
relevant part provides:
“To derive Oregon taxable income, there shall be added
to federal taxable income * * * dividends eliminated under
Treasury Regulations adopted under section 1502 of the
Internal Revenue Code that are paid by members of an
affiliated group that are eliminated from a consolidated
federal return pursuant to ORS 317.715(2).”
In considering the application of these statutes, it is import-
ant to recognize that the corporation whose income is at
issue is SFG, the recipient of the dividend payments. This is
not a case in which a deficiency has been assessed against
SIC. It is also important to recognize that SFG and SIC
are unitary and in the same unitary group for purposes of
Oregon law.
Cite as 21 OTR 120 (2013) 125
In considering the statutes in question, it is also
appropriate to remember why the Oregon legislature con-
nected Oregon taxation of corporate groups to the consol-
idated return provisions of federal law. That was done so
as to move away from the prior rule of worldwide combined
reporting, an approach to taxation of related corporations
that had generated the ire of foreign countries and taxpayers
with worldwide operation. See US West / Qwest Dex Holdings
v. Dept. of Rev., 20 OTR 342 (2011); Costco Wholesale Corp.
v. Dept. of Rev., 20 OTR 537 (2012). The connection achieved
the legislative goal of retaining many of the elements of the
unitary combined report features of prior Oregon law while
also excluding from consideration, for the most part, the tax
items of foreign corporations. The changes had the result of
preventing the extension of Oregon law beyond the “water’s
edge” of the United States.
This result was not accomplished, however, without
introducing into the life of taxpayers and tax practitioners
in Oregon a significant new layer of complexity. That is the
direct result of the fact that the federal consolidated return
rules are voluminous and complex. They define what the
consolidated federal taxable income of a federal consoli-
dated group is. And, it is this number that is the starting
point for the determination of the tax liability of SFG. This
is so because SFG is a member of a federal affiliated group
and, as such, is required to “file a return and determine its
Oregon taxable income as provided in ORS 317.715.” ORS
317.710(2).
In complying with the injunction to “determine its
Oregon taxable income as provided in ORS 317.715,” SFG
is instructed, in that statute, to begin “with federal consol-
idated income of the affiliated group.” ORS 317.715(1). This
injunction is unconditional. There is no statement in ORS
317.715 suggesting that the command does not apply in one
or more situations.
However, the starting point of federal consoli-
dated taxable income is not an ending point. Rather, ORS
317.715(2) requires that the federal affiliated group of cor-
porations be examined to determine if there is within the
group any corporation or group of corporations that is not
126 Stancorp Financial Group, Inc. v. Dept. of Rev.
unitary with the corporation whose income is being calcu-
lated, in this case SFG.4 If there is such a non-unitary mem-
ber or members, ORS 317.715(2) directs that there be a cal-
culation of “modified federal consolidated taxable income.”
That amount is the starting point number of federal consoli-
dated taxable income after subtraction of “the separate tax-
able income,” determined under federal rules, “attributable
to the member or members of any unitary group of which
the corporation is not a member.”
In this case, the foregoing unconditional statutory
directives are applied as follows, remembering that SFG,
the recipient of the dividends, is “the corporation”:
(1) The federal consolidated taxable income of the SFG
group is determined;
(2) A determination of whether the federal SFG group
includes any members that are not unitary with
SFG—by stipulation here there are none;
(3) Step (2) being true, no amount is subtracted from the
consolidated federal taxable income of the SFG group
because of any member of that group not being unitary
with other members of the group; and
(4) Additions, subtractions, adjustments and modifica-
tions prescribed by Oregon law are made and Oregon
taxable income or loss for SFG is determined under
ORS 317.010(10)(a) to (c).5
The dividend payments from SIC to SFG, being eliminated
in the calculation of the federal consolidated taxable income
of SFG, would not be reflected in that starting point number
used in ORS 317.715(2) in calculating the Oregon taxable
income of SFG. This result is contrary to the position taken
by the department in this case. The court now turns to the
other two statutes that bear on this case to determine if
4
The statutory definition found in ORS 317.705(2)—“ ‘Unitary group’
means a corporation or group of corporations”—and the last clause of ORS
317.715(2)—“attributable to the member or members of any unitary group” make
it clear that, for Oregon purposes, a unitary “group” may be only one corporation.
5
ORS 317.715 sets out these steps for situations where there has been the
separation of one or more non-unitary corporations. It is clear, however, and no
party here asserts otherwise, that steps (1) and (4) are also taken with respect to
an affiliated group, all of the members of which are also unitary.
Cite as 21 OTR 120 (2013) 127
they alter the conclusion that the dividends received by SFG
from SIC are not taken into account in the determination of
the Oregon taxable income of SFG.
In fact, ORS 317.267, as quoted above, speaks
directly to the treatment of certain dividends paid by one
member of a federal affiliated group to another member of
that group. ORS 317.267 directs that such dividends are to
be added to the federal taxable income of the recipient when:
(1) The dividends have been eliminated under the federal
consolidated return regulations; and
(2) The dividends have been paid by members of a fed-
eral affiliated group that are “eliminated from a con-
solidated federal return pursuant to ORS 317.715(2).”
(Emphasis added.)
The dividends at issue in this case were unquestion-
ably eliminated under the federal consolidated return regu-
lations. The first precondition of ORS 317.267(1) is therefore
satisfied. The remaining question is whether the payor of
those dividends, SIC, was eliminated from a consolidated
return pursuant to ORS 317.715(2). The answer to this
question is no. The reason for that answer is that SIC would
only be eliminated from a federal consolidated return under
ORS 317.715(2) if it was not unitary with SFG. However, it
is undisputed in this case that SIC and SFG are unitary. It
therefore necessarily follows that ORS 317.267(1) does not
cause the dividends to be added to the income of SFG.
The addition of the dividends to the income of SFG
is the result for which the department contends. As has been
demonstrated, it finds no support for such addition in the
words of ORS 317.715 or ORS 317.267. The department sug-
gests, however, that the addition of the dividends is required
because of the operation of ORS 317.710(5)(b), to a discus-
sion of which the court now turns.
It is important to recognize at the outset that
ORS 317.710 deals with return requirements and certain
questions of liability for payment of tax liabilities shown
on a return. It does not deal with the computation of tax-
able income, the base for taxation. See Costco, 20 OTR 537(2012).
128 Stancorp Financial Group, Inc. v. Dept. of Rev.
In cases where two or more corporations subject to
Oregon tax are members of the same unitary group, as SIC
and SFG are, ORS 317.710(5)(a) provides that they are to file
an Oregon consolidated return. That requirement is imme-
diately modified by ORS 317.710(5)(b), which provides that
if any corporation included in a federal affiliated group, such
as an insurance company, is required under Oregon law to
use different apportionment factors, that corporation is not
to be included in the Oregon consolidated return otherwise
required under ORS 317.710(5)(a).
ORS 317.710(5)(b) applies in this case to SIC, the
payor of the dividends, rather than SFG, the recipient of
the dividends. In addition, the return exclusion rule of ORS
317.710(5)(b) does not, by its terms, override the provisions
of ORS 317.715 with respect to determination of the taxable
income of SFG. Nor, by implication, does ORS 317.710(5)(b)
have this effect given that it deals with return matters and
not the definition of the base for taxation.
Nonetheless, the department bases its assessment
of tax upon its conclusion that exclusion of SIC from the
Oregon consolidated return pursuant to ORS 317.710(5)(b)
must be treated as exclusion from the federal consolidated
return, at least for purposes of applying the federal consol-
idated return regulations in computing the income of SFG,
as required in ORS 317.715. If that step is taken, then the
dividend paid by SIC would not be eliminated from the fed-
eral income of SFG under the federal rules. Instead, the div-
idend would be included in the income of SFG, subject to
the 80 percent dividend received deduction provided under
ORS 317.267(1) and (2)(a).
The department can point to no text in the statute
supporting its position. Indeed, as demonstrated above, the
language of the relevant statutes actually leads to the result
urged by taxpayer rather than the department. Rather than
statutory text, the department turns to what it views as leg-
islative intent as revealed in the legislative history of the
statutes. It also points to what it describes as an inconsis-
tency in the position taken by taxpayer in the calculation of
its tax liability—but an inconsistency that both it and tax-
payer agree upon.
Cite as 21 OTR 120 (2013) 129
First, as to legislative history, the court has reviewed
the legislative history to which both parties point in order
to support the positions for which they advocate. That leg-
islative history, from both the 1984 and 1985 sessions, is
inconclusive and not particularly helpful in the resolution of
the problem in this case. What the legislative history does
show is witnesses and legislators grappling with a very com-
plex set of rules—actually two very complex sets of rules.
The first set of rules was the then existing worldwide com-
bined reporting rules that the legislature had determined to
change. The second set of complex rules were, and are, the
federal rules as to the measurement of the income of an affil-
iated group of corporations that elects to file a federal consol-
idated return. Suffice it to say, there was no discussion that
would lead the court to conclude that the application of the
statutory provisions as they are written was not intended.
There was no discussion of the dividend elimination rules of
the federal regime nor even to the general operation of the
Treasury Regulations to which the legislature made specific
statutory reference. Nor was there any discussion of how, or
whether, any Oregon statutory provisions on the taxation of
insurance companies, the third set of complicated statutes
involved in this case, would be melded with the new Oregon
consolidated return provisions.
This has remained the fact over the time period that
has elapsed since the initial adoption of the water’s edge pro-
visions of ORS 317.705 to 317.725, even though during sub-
sequent sessions the legislature made some changes to all
of the statutes important to the resolution of this case. The
legislative history does not support the conclusion, for which
the department contends, that companies that are affiliated
for federal purposes and unitary for Oregon purposes are to
have some set of rules applied to them other than the federal
consolidated return provisions referred to in ORS 317.715,
especially the dividend elimination rule.
The department next observes that taxpayer,
although insisting on the use of a starting point of federal
consolidated taxable income, has been inconsistent in calcu-
lating the income of SFG by first removing from that start-
ing number the income or loss of SIC and SNY. However, the
130 Stancorp Financial Group, Inc. v. Dept. of Rev.
department does not argue that the SIC and SNY income or
loss should be included in the starting number, even though
ORS 317.715 directs one to do so.
The agreement of the parties as to removal is driven
by the fact that SIC, as an insurance company doing busi-
ness in Oregon, is required to compute and pay tax under
ORS chapter 317 according to a separate set of rules con-
tained in ORS 317.650 to 317.665. Both parties agree that,
for purposes of this case, tax items of SIC should not be
included both in the base for income taxation of SFG under
ORS 317.715 and also for insurance company taxation of SIC
under ORS 317.650 to 317.665.6
The parties differ as to the reason they agree on
this result. Taxpayer argues that the result is necessary to
avoid federal constitutional “double-taxation” concerns. The
double taxation would, in the view of the taxpayer result
from the consideration of the same economic results in an
insurance company tax for SIC and in an income tax for
SFG.
The department suggests that the separation of
the income of SIC from the federal taxable income of the
SFG group is statutory in origin, although all parties agree
that the statutes provide no rules or guidance on how the
removal of the SIC income is to be done. In effect the depart-
ment concludes that such removal of the income of SIC from
the SFG unitary group income is a result of the legislative
decision to make insurance companies subject to the sepa-
rate tax regime of ORS 317.650 to 317.665 and not subject to
the corporation income tax.
The court does not consider it important why the
parties agree about the propriety of the exclusion of SIC tax
6
Inclusion of the federal income tax items of SIC in the calculation of the
income of SFG is the result that was found to be statutorily required in Costco.
The income of the subsidiary was included in the base of income of the parent
which, after certain adjustments, was apportioned to Oregon. The inclusion of the
subsidiary income in the tax base of the parent resulted in a higher income tax
liability for the parent. Recall, however, that in Costco the parties had stipulated
that the subsidiary did not file any tax return with Oregon, nor was it required to
do so. 21 OTR at 128. There was no insurance company tax liability for the sub-
sidiary in Costco. In this case all parties agree that SIC is required to, and does,
file a tax return under ORS 317.650 to 317.665.
Cite as 21 OTR 120 (2013) 131
items from the starting point for calculation of the Oregon
taxable income of SFG under ORS 317.715(2). Whether it
is driven by a concern for constitutional limitations or the
effect of statutory provisions, no party suggests that the cal-
culation should be done otherwise. Both parties also appear
to agree that this is an area where the legislature could
provide more definitive guidance. As will be seen from the
discussion below, to the extent that the legislature desires
to have the position of the department be the proper result,
the court urges the legislature to consider the several and
complex aspects of the relationship between the federal con-
solidated return rules, the unitary tax rules and the special
regime for taxation of insurance companies.
At the end of the day, the department urges the
court to adopt the position of the department based on indi-
rect reasoning and inferences, some of which appear to be
multi-leveled. The department also appears to leverage a
return preparation step, with which it agrees, into a reason
to read the statutes in a way other than how they are writ-
ten. Contrary to the department’s position is the direct appli-
cation of the provisions of ORS 317.715(2) without inference
or indirect reasoning. The only difficulty with this approach
appears to be the question of exclusion of the SIC tax items
from the base of taxable income for SFG. However, there
the department does not insist on a different result and the
court does not see a basis for reaching a different result.
Finally, the department is fundamentally opposed
to the conclusion that a company, SFG, that receives a divi-
dend from a unitary affiliate, SIC, would have that dividend
eliminated when, pursuant to another Oregon statute, the
payor is not included in the Oregon consolidated return—
even though it is included in the federal consolidated return.
However, there is no text or legislative history to indicate
that this is not consistent with legislative intent. The Oregon
legislature may well have intended for dividend elimination
to occur under the federal rules it adopted by reference, even
when by other legislative action, it required the payor to be
taxed under a separate set of provisions.
More importantly, there is a clear indication in ORS
317.267 that when the legislature desired to alter the effect
132 Stancorp Financial Group, Inc. v. Dept. of Rev.
of the federal consolidated return rules in the context of
Oregon calculations, it knew how to do so. ORS 317.715(2)
is a clear indication that the legislature either wanted to or
knew that it had to separate out of any calculation done for
a taxpayer, the tax items of companies with which the tax-
payer was not unitary. Inclusion of tax items of non-unitary
affiliates found in the federal consolidated return would run
afoul of the federal constitution. See Fargo v. Hart, 193 US
490, 24 S Ct 498, 48 L Ed 761 (1904); Stonebridge Life Ins.
Co. I v. Dept. of Rev., 18 OTR 423 (2006).7 Faced with this
choice or imperative, the legislature provided in ORS 317.267
for a neutralization of the dividend elimination rules and
an addition to Oregon income for the recipient of such divi-
dends, subject only to certain dividends received deductions.
If the legislature desires to provide for a similar
rule—an elimination override—to apply to dividends paid
by unitary group members subject to other tax regimes such
as the insurance company tax regime, a small addition to
ORS 317.267 is all that would be required. That change
could simply parallel that currently provided for non-unitary
affiliates.
The department argues that, for the reasons it
gives, this court should, in effect, add such provisions to the
statute. Even in the case of a relatively straightforward and
uncomplicated statutory scheme, the court is not authorized
to take such action. ORS 174.010. Here, this court must obey
that directive. The court must also consider, however, that
alterations to the complex melding of unitary tax, federal
consolidated return and insurance company tax rules is a
task of the type that is, for good reason, assigned to the leg-
islative branch. In that branch complete discussion of vari-
ous and potentially multi-faceted consequences is, under the
Oregon Constitution, to occur.
V. CONCLUSION
Now, therefore,
7
As stated above, the “unitary” concept arises from Oregon—not federal—law.
Because there is no federal “unitary” concept the possibility of this very same prob-
lem always exists See, e.g., Crystal Communications, Inc. v. Dept. of Rev., 20 OTR
111 (2010).
Cite as 21 OTR 120 (2013) 133
IT IS ORDERED that the motion of Plaintiffs is
granted and the cross-motion of Defendant is denied. This
case will be continued for potential consideration of other
matters not presented in these motions.