Par Mark L. Nachbar
On May 28th, the Colorado Supreme Court held that the Department of Revenue (DOR) could not use discretionary authority to reallocate income generated by holding companies that were not includible in the taxpayers’ combined returns, under Colorado’s combined filing statutes.
In Department of Revenue v. Agilent Technologies Inc. and Department of Revenue v. Oracle Corp., two multinational corporations did not include the activity of holding companies in their combined filings, as the entities did not qualify under the state’s three of six bright-line tests for combination under Revenue Regulation section 39-22-303(12)(c). Colorado’s combination tests are much more objective than most other unitary states’ rules for inclusion of entities. Under Colorado rules, an affiliated group definition references includible C corporations as any C corporation that has more than 20% of property and payroll assigned to locations outside the United States. In both cases, the related holding companies had no property or payroll of their own, which would cause them to be excluded from the combined report under the statute.
The DOR challenged these positions taken, asserting first, that the holding companies used the tangible property of its parent and, therefore, in effect had a property factor attributed to them. In addition, the DOR invoked its discretionary authority to reallocate income to avoid abuse and to more clearly reflect income.
The Court rejected both positions asserted by the DOR, stating: “Since corporations that have no property or payroll factors of their own cannot have twenty percent or more of their factors assigned to locations in the United States, such corporation, by definition, cannot be included in a combined report.”
The Court also determined that the regulation determining when combination is required could not be overridden by invoking discretionary authority. To do so would render the bright-line tests meaningless because the DOR could always override the objective tests by subjectively determining the necessity to avoid abuse and more clearly reflect income arbitrarily.
These taxpayer wins result in significant refunds and could cause Colorado additional expense as other taxpayers avail themselves of these determinations by applying the regulation to domestic holding companies. In an attempt to prevent future revenue losses, the Legislature is proposing a bill, S.B. 233, that would clarify that only holding companies with 80% of their property and payroll based outside the United States are excluded from a combined return.
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