Subsidiary Stock Sale Proceeds Included in Sales Factor Denominator

In Oracle Corp. v. Dep't of Revenue State, 2012 Ore. Tax LEXIS 21 (Or. T.C. Jan. 19, 2012), the Oregon Tax Court held that the gains from the sale of stock of a subsidiary which constituted business income were includible in the taxpayer's sales factor denominator.

Oracle Corporation ("Oracle") sold the stock of two different subsidiaries generating substantial gains. The subsidiaries were engaged in lines of business different from Oracle. Oracle excluded the gains from business income in its Oregon return arguing that the income was not part of Oracle's unitary group in Oregon. The Oregon Department of Revenue ("Department") issued notices of deficiency, including the gains into Oracle's business income, but it did not include the sales proceeds in the denominator of Oracle's sales factor. Oracle did not contest the assessment for one of the transactions, but Oracle did challenge the Department's exclusion of the proceeds from the denominator of its sales factor.

The Department argued that the proceeds were not includible in the sales factor because the sale did not occur in the ordinary course of Oracle's business. Oracle argued to the contrary, based on ORS § 314.665(6)(b). Under ORS § 314.665(6)(b), "sales" for purposes of computing the sales factor include "net gains from the sale ... of intangible assets not derived from the primary business activity of the taxpayer but included in the taxpayer's business income."

The Oregon Tax Court ultimately agreed with Oracle's position, and pointed out that the gains needed only be derived from a business other than the primary business of the taxpayer. In light of the fact that the subsidiaries were engaged in two different lines of business which were different from Oracle's primary business of developing database and application business software for businesses.

The decision is a good example of a tribunal standing up to a state taxation authority seeking to maximize tax revenues at the expense of compliance with the law.

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RELATED LINKS: For additional insight and information about allocation and apportionment of corporate state tax income see:

• Bender's State Taxation: Principles and Practice § 3.07 - Business and Nonbusiness Income

• Bender's State Taxation: Principles and Practice § 3.09 - Allocating Nonbusiness Income

• Bender's State Taxation: Principles and Practice § 3.10 - Apportionment Rules for Business Income

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