Summary
illustrating application of the three-factor formula
Summary of this case from Health Net, Inc. v. Dep't of RevenueOpinion
TC 2001; SC S30995
On respondent's reconsideration filed April 22, 1986 Remanded to Tax Court for entry of judgment July 1, 1986
In Banc
Elizabeth S. Stockdale, Assistant Attorney General, and Dave Frohnmayer, Attorney General, Salem, filed the petition for reconsideration for respondent.
Henry C. Breithaupt, of Stoel, Rives, Boley, Fraser Wyse, Portland, filed a response for appellant to the petition for reconsideration.
Eugene F. Corrigan, General Counsel, Boulder, Colorado, filed a brief amicus curiae on behalf of Multistate Tax Commission.
PETERSON, C.J.
Reconsideration allowed. Previous decision adhered to. Remanded to the Tax Court for entry of judgment consistent with this opinion.
In our previous opinion, Atlantic Richfield Co. v. Dept. of Rev., 300 Or. 637, 717 P.2d 613 (1986), we held that intangible drilling and development costs (IDCs) should be included in the property factor for the purpose of apportioning income to Oregon. ORS 314.605 to 314.670. The Oregon Department of Revenue has petitioned for reconsideration.
The department makes two claims of error in our previous opinion. The first is that we erred in concluding that a majority of states adhering to the Uniform Division of Income for Tax Purposes Act (UDITPA) required or permitted intangible drilling and development costs (IDCs) incurred in the development of producing oil or gas wells and expensed for the purpose of computing federal taxable income to be included in the property factor of the formula used to apportion the taxable income of certain multistate corporate taxpayers. The second is that in deciding the question for tax years 1973-1977, we erred in looking at other states' statutory and rule changes that became effective after the tax years in question, 1973-1977.
After we received the department's petition for reconsideration, we solicited a brief amicus curiae from the Multistate Tax Commission (MTC). In response to our request, the MTC submitted a useful brief that included a thorough study of the tax treatment of expensed IDCs by the various state jurisdictions and the District of Columbia. The MTC did not confine its study to UDITPA and MTC jurisdictions but listed all jurisdictions that impose tax on corporate income using an apportionment formula that includes a property factor. (Tables 1-4 of the MTC brief are set forth as appendices to this opinion. See Appendix Nos. 1-4.)
For an explanation of UDITPA, MTC and IDCs, see our previous opinion, Atlantic Richfield Co. v. Dept. of Rev., 300 Or. 637, 717 P.2d 613 (1986).
Appendix No. 2 sets forth the position of all states other than Oregon that exclude or include IDCs in a property factor for apportionment purposes. Appendix No. 2 also lists the year the position was taken. Appendix No. 3 lists the IDC position of the UDITPA states by year. Appendix No. 4 lists the IDC position of MTC states by year.
Oregon is both an MTC and UDITPA state. ORS 305.655 begins: "The Multistate Tax Compact is hereby enacted into law and entered into on behalf of this state with all other jurisdictions legally joining therein in form substantially as follows: * * *" Article IV of the Multistate State Compact is the Uniform Division of Income for Tax Purposes Act and is contained in ORS 305.655.
Appendix No. 2 shows that those taxing jurisdictions that have considered the question since 1973 have overwhelmingly (18 to 6) adopted the position that expensed IDCs be included in the property factor for income apportionment purposes.
According to Appendix No. 3, of the UDITPA states that have taken a position, 19 states include IDCs and 11 exclude IDCs. During the period 1973-1986, six states decided that IDCs should be excluded and 16 states decided to include IDCs.
Among MTC states the trend is even clearer. Appendix No. 4 shows that of the 13 MTC states that have taken a position, three exclude IDCs and 10 include them. The last MTC state to exclude IDCs was Missouri, in 1973. Since 1973, nine MTC states have opted to include them; none has excluded IDCs.
In our earlier opinion, we stated:
"When the department and the Tax Court decisions were made, the actions of the other states discussed above were not apparent. Even so, because uniformity is a predicate for UDITPA's success, we believe that we must consider the statutes and rules discussed above. In the absence of any indication that other UDITPA states apply ORS 314.655 (2) as did the department and Tax Court, and in order to meet the UDITPA `uniformity' criterion, we hold that IDCs should be included in `original cost.'
"The Tax Court opinion stated:
"`The primary goals of UDITPA are consistency and uniformity. The plaintiff presented no evidence that other states operating under UDITPA, except for Alaska, include IDCs in the property factor calculation. Therefore, the defendant's interpretation and application of its rule to IDCs is consistent with UDITPA's goal of uniformity and the expressed statutory purpose noted above.'" 300 Or at 650, 717 P.2d at 620.
"* * * * *
The information furnished by the MTC, particularly Appendices 3 and 4, demonstrates that the trend among MTC and UDITPA states — Oregon being both an MTC and UDITPA state — is to include IDCs. See ORS 314.710. The trend is overwhelming among MTC states (9 of 9 after 1973) and is very strong among UDITPA states (15 of 20 after 1973). To meet the uniformity prong of ORS 314.605 (2) we shall not disturb our original holding that expensed IDCs should be included in the "original cost" under ORS 314.655 (2).
The department argues that the rule we adopted in our original decision "improperly decided what defendant's policy should have been for tax years 1973 through 1977 based on action taken by other states as late as 1985 which action was specifically given prospective effect only." The department asserts that, in deciding the taxpayer's tax liability for 1973-1977, we should not have looked at action taken by other states after 1977.
By the time of the tax years at issue here, 1973-1977, over half (9 of 16) of the UDITPA states that addressed the issue had adopted a position contrary to that taken by the department. The MTC states that addressed the issue were evenly split (3/3) by 1976. These figures in themselves do not compel a conclusion one way or the other. More revealing is the trend established after 1973, in which 15 of 20 UDITPA states and nine of nine MTC states opted for inclusion of IDCs.
Even though the trend, so apparent in hindsight, was not so established in 1973-1977, the trend since established confirms the correctness of our earlier decision. Making an exception for tax years 1973-1977 would undercut UDITPA's uniformity goal.
Oregon is an MTC and UDITPA state. The principle of uniformity compels a like interpretation to that made by the MTC and UDITPA states that have considered the question since 1973. We adhere to the decision previously made and hold, under ORS 314.655 (2) and OAR 150-314.655 (2)-(A), that IDCs be included in "original cost" in establishing the property factor.
We have considered two decisions cited by the department in its petition for reconsideration, Shell Oil Co. v. Dept. of Revenue, 496 So.2d 789 (Fla April 24, 1986), and Appeal of Pauley Petroleum, Inc., Op State Bd of Equal 333, CCH Cal Tax Rptr New Matters #400-101 (1982). Both Shell Oil, handed down after our decision, and Pauley Petroleum upheld administrative decisions that disallowed the inclusion of IDCs, expensed for the calculation of federal taxable income, into the property factor of the UDITPA apportionment formula. Both concerned statutory language and administrative rules identical to the Oregon provisions applied in the present case.
Shell Oil Co. v. Dept. of Revenue, supra, however, was decided after our decision in the case at bar and erroneously relied upon the Oregon Tax Court's decision that we reversed. Moreover, we believe that the Florida court erred in stating that excluding IDCs "is consistent with the results reached by the vast majority of other states operating under UDITPA" (citing the result of this case in the Tax Court and Appeal of Pauley Petroleum, supra). See Shell Oil, 496 So.2d at 792. The Florida decision, although a decision by the Supreme Court of a UDITPA jurisdiction, is also based in part on its interpretation of a Florida statute that required a taxpayer's accounting method for Florida tax purposes to be the same as that used for federal income tax purposes.
Reconsideration allowed. Previous decision adhered to. Remanded to the Tax Court for entry of judgment consistent with this opinion.
RESULTS OF IDC SURVEY CONDUCTED BY THE MULTISTATE TAX COMMISSION DURING MAY AND JUNE OF 1986
Explanatory Comments:
Column (1) indicates whether a state includes intangible drilling and development costs (IDCs) in the property factor of its apportionment formula for corporate income tax purposes or excludes them. No indication is made for Oregon since the matter is at issue in this litigation.
Column (2) indicates the basis for the position as follows:
We cannot discover that any state corporate income tax statutes other than those of Nebraska and Wisconsin make any specific reference to IDCs. Therefore, even though the states of Connecticut, Louisiana, Maine, Massachusetts, New Jersey, South Carolina and Vermont have indicated that legislation is the basis for their positions, we have entered "C" for them in Column (2) since it appears that their positions are really based on "informal administrative practice".
B — administrative rule or regulation
C — informal administrative practice
D — court decision
Column (3) indicates the date or approximate time when the current position was taken.
An asterisk after the name of a state indicates that it is a UDITPA state.
Opinions differ as to whether certain states should be considered to be UDITPA states. For the purpose of this table, we relied upon the list which appears at Appendix H of the Eighteenth Annual Report of the Multistate Tax Commission. That Report was published at the end of 1985.
(1) (2) (3) Alabama* Excludes BC 1967 Alaska* Includes B 4/14/82 Arizona* Excludes C 1/1/79 Arkansas Excludes C 1968 California* Excludes C 1/1/67 Colorado* Includes B 9/24/80 Connecticut Excludes C 1933 Delaware Excludes C 1/1/58 Dist. of Columbia* Includes B 3/86 Florida* Excludes D 1/1/72 Georgia* Includes C 1976 Hawaii* Policy not determinable. Idaho* Includes B 1981 Illinois* Excludes C 1969 Indiana* Includes C 1979 Iowa Does not use property factor in its formula. Kansas* Includes C 5/83 Kentucky* Excludes C 1967 Louisiana Includes C 1950s Maine* Excludes C 5/12/86 Maryland Excludes BC 1951 Massachusetts* Includes C 1966 Michigan Does not impose an income tax. Minnesota* Includes C 1/1/86 Mississippi NA Missouri* Excludes C 1973 Montana* Includes C 9/73 Nebraska* Includes A 5/19/86 Nevada Does not impose an income tax.
Based on decision of administrative appeal body.
See footnote 1.
The State Supreme Court, in its April 24, 1986 decision in Shell Oil Company v. Department of Reveue, Nos. 66,240 66254, has agreed with the position of the Department of Revenue. A Motion for Rehearing is currently under consideration by that Court.
See footnote 1.
Ibid
On basis that the applicable regulation does not include intangible items in the property factor.
See footnote 1.
Minnesota no longer allows IDCs to be expensed.
Not applicable. Mississippi does not take the property factor into account since it requires that Mississippi net income be determined on a direct and/or separate accounting basis for taxpayers engaged in the trade or business of producing gas and oil.
New Hampshire* Excludes C c.1981 New Jersey Excludes C 1945 New Mexico* Includes C 1976 New York Excludes C 1948 North Carolina* Includes C 1967 North Dakota* Includes B 1974 Ohio Includes C 1978 Oklahoma* NA Oregon* Pennsylvania* Includes C 1975 Rhode Island Includes C 1982 South Carolina Excludes C 1985 South Dakota Does not impose an income tax. Tennessee* Excludes C 1976 Texas Does not impose an income tax. Utah* Includes B 1981 Vermont Includes CB 1950s Virginia Includes B 1975 Washington Does not impose an income tax. West Virginia* Includes B 1967 Wisconsin* Includes A 1982 Wyoming Does not impose an income tax.
New Hampshire did not challenge the oil companies' inclusion of IDCs until 1981.
See footnote 1.
North Carolina has never challenged the oil companies' inclusion of IDCs since UDITPA was adopted in 1967.
Not Applicable. Oklahoma uses direct accounting only.
See footnote 1.
Vermont uses net book value rather than original cost in its property factor with respect to all property. This disregards accelerated write-offs such as IDCs and includes all property, including oil wells, on a normally depreciated basis.
See footnote 1.
Informal 1975 position was formalized into a regulation on 1/1/85.
ANALYSIS OF IDC SURVEY BY YEARS
This Table indicates whether the position taken by each state on Table 1 (other than Oregon) which either excludes IDCs from or includes them in its property factor for apportionment purposes was taken prior to, during, or subsequent to the tax years at issue in the instant case, i.e. 1973-1977.
Prior to 1973 1973-1977 Subsequent to 1977 (1) (2) (3) (4) (5) (6) Exclude Include Exclude Include Exclude Include _______ _______ _______ _______ _______ _______
AL ('67) AK ('82) AZ ('79) AR ('68) CA ('67) CO ('80)
CN ('33) DE ('58) DC ('86) FL ('72) GA ('76) ID ('81) IL ('69) IN ('79) KS ('83) KY ('67) LA ('50s) ME ('86) MD ('51) MA ('66) MN ('85) MO ('73) MT ('73) NE ('86) N.H. ('81) NJ ('45) NM ('76) N Y ('48) NC ('67) ND ('74) OH ('78) PA ('75) RI ('82) SC ('85) TN ('76) UT ('81) VT ('50s) VA ('75) WV ('67) WI ('82) _______ ________ _______ _________ _______ ________ Exclude 11 2 4 = 17
Include 5 6 12 = 23
ANALYSIS OF IDC TREATMENT BY UDITPA STATES BY YEARS
This Table indicates whether the IDC position of each of the UDITPA states was taken prior to, during or subsequent to the tax years at issue in the instant case, i.e. 1973-1977.
Whether a state should be considered to be a UDITPA state is a matter about which reasonable people can differ. This list of states considered to be UDITPA states is taken from Appendix H of the Eighteenth Annual Report of the Multistate Tax Commission, which was published at the end of 1985.
Prior to 1973 1973-1977 Subsequent to 1977 (1) (2) (3) (4) (5) (6) Exclude Include Exclude Include Exclude Include _______ _______ _______ _______ _______ _______
AL ('67) AK ('82)
AZ ('79) CA ('67) CO ('80) DC ('86) FL ('72) GA ('76) ID ('81) IL ('69) IN ('79) KS ('83) KY ('67) ME ('86) MA ('66) MN ('85) MO ('73) MT ('73) NE ('86) N.H. ('81) NM ('76) NC ('67) ND ('74) PA ('75) SC ('85) TN ('76) UT ('81) VA ('75) WV ('67) WI ('82) _______ _______ _______ _______ _______ ________ Exclude 5 2 4 = 11
Include 3 6 10 = 19
ANALYSIS OF IDC TREATMENT BY MTC STATES BY YEARS
This Table indicates whether the position taken by each member state of the Multistate Tax Commission (other than Oregon) was
taken prior to, during, or subsequent to the tax years at issue in the instant case, i.e. 1973-1977.
Prior to 1973 1973-1977 Subsequent to 1977 (1) (2) (3) (4) (5) (6) Exclude Include Exclude Include Exclude Include _______ _______ _______ _______ _______ _______
AK ('82) AR ('68)
CA ('67) CO ('80) DC ('86) ID ('81) KS ('83) MN ('85) MO ('73) MT ('73) NM ('76) ND ('74) UT ('81) _______ _______ _______ _______ _______ ________ Exclude 2 1 = 3
Include 3 7 = 10
This table indicates the position of only thirteen of the nineteen member states of the Multistate Tax Commission. Of the other six, Hawaii has no policy on IDCs yet, Oregon has been excluded because its position is the subject of this litigation, and the other four states (Michigan, South Dakota, Texas and Washington) do not impose a corporate income tax.