Apache Corp. & Subsidiaries v. N.M. Tax'n & Revenue Dep't

• Docket Number: A-1-CA-39961
• Decision Date: 06 November 2025
• Citation: 560 P.3d 1
• Parties: APACHE CORPORATION AND SUBSIDIARIES, Protestant-Appellant, v. NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Appellee.
• Court: Court of Appeals of New Mexico

560 P.3d 1

2024-NMCA-080

APACHE CORPORATION AND SUBSIDIARIES, Protestant-Appellant,

v.NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Appellee.

No. A-1-CA-39961

Court of Appeals of New Mexico.

Filing Date: June 17, 2024

Certiorari Denied, November 6, 2024, No. S-1-SC-40579

APPEAL FROM THE ADMINISTRATIVE HEARINGS OFFICE, Brian Van-Denzen, Chief Hearing Officer

Gallagher & Kennedy, P.A., Dalva L. Moellenberg, Gene F. Creely, II, Anthony J."T.J."Trujillo, Santa Fe, NM, Spencer Fane, LLP, Frank Crociata, Scott Woody, Phoenix, AZ, for Appellant

Raúl Torrez, Attorney General, David Mittle, Special Assistant Attorney General, Santa Fe, NM for Appellee

OPINION

BUSTAMANTE, Judge, retired, sitting by designation.

{1}This case presents multiple issues related to corporate income taxation under New Mexico’s Corporate Income and Franchise Tax Act (the CIT), NMSA 1978 §§ 7-2A-1 to -31 (1981, as amended through 2024).¹The dispositive issue is whether Apache Corporation(Taxpayer)—a multinational oil and gas production company—and its foreign subsidiaries can be deemed a "unitary corporation" as defined in Section 7-2A-2(Q).The Administrative Hearing Officer (AHO) concluded that the foreign subsidiaries could be included in the unitary corporation as a matter of statutory definition and factual circumstance.Concluding that the statutory definition excludes foreign subsidiaries not engaged in trade or business in the United States as a matter of law, we reverse.

BACKGROUND

{2} Taxpayer is a publicly traded, multinational corporation engaged in the business of petroleum and natural gas exploration and production with its primary offices located in Houston, Texas.Prior to 2015, Taxpayer conducted its business through domestic and foreign subsidiaries.The foreign subsidiaries consisted of holding companies, financing companies, and exploration and production entities incorporated and operating in Australia, Egypt, Canada, Argentina, and the United Kingdom.During the relevant tax year, Taxpayer’s foreign subsidiaries paid dividends, generated Subpart F income, or otherwise generated check-the-box income attributed to and partially reported by Taxpayer on its 2015 federal tax return.This appeal concerns only the income attributed to Taxpayer’s foreign subsidiaries.

{3} In March 2017, the New Mexico Taxation and Revenue Department(the Department) issued a notice of assessment of corporate income tax for the 2015 reporting period to Taxpayer.Taxpayer timely protested the assessment in June 2017.The protest assert- ed a number of grounds, including: (1) the foreign source dividends were not unitary income apportionable to New Mexico; (2) the foreign source dividends were not business income apportionable to New Mexico; (3) New Mexico’s treatment of foreign dividends was discriminatory and thus unconstitutional; and (4) assessment of penalties was not supportable.A year later Taxpayer filed a supplemental protest arguing for the first time that Section 7-2A-2(Q) excluded foreign corporations incorporated in a foreign country and not engaged in trade or business in the United States from the definition of a "unitary corporation" for all purposes under the CIT.

{4} After a four day hearing before the AHO, the parties filed proposed findings of facts and conclusions of law and written closing arguments.The AHO issued a lengthy decision and order ruling—in relevant part— that Taxpayer and its foreign subsidiaries amounted to a unitary corporation under Section 7-2A-2(Q).The AHO in turn concluded that the dividends paid to Taxpayer by its foreign subsidiaries and other income attributed to Taxpayer were subject to the CIT.The AHO also concluded that the Department’s apportionment methodology reasonably and fairly calculated how much of the foreign dividends were subject to the tax.Taxpayer appeals.

DISCUSSION

[1, 2]{5} On appeal from the decision and order of an AHO, we may reverse only if it is "(1) arbitrary, capricious or an abuse of discretion; (2) not supported by substantial evidence in the record; or (3) otherwise not in accordance with the law."NMSA 1978, § 7-1-25(C)(2015);Stockton v. N.M. Tax’n & Revenue Dep’t,2007-NMCA-071, ¶ 8, 141 N.M. 860, 161 P.3d 905.New Mexico’s taxation scheme imposes a presumption that "[a]ny assessment ... made by the [Department is … correct."NMSA 1978, § 7-1-17(C)(2007, amended 2023).However, when we are presented with a question of law—such as the proper interpretation of a statute—we apply the traditional de novo standard of review.TPL, Inc. v. N.M. Tax’n & Revenue Dep’t, 2003-NMSC-007, ¶ 10, 133 N.M. 447, 64 P.3d 474.When applying the de novo standard, courts are not bound by a hearing officer’s legal interpretations or conclusions.Id.

[3, 4]{6} Generally, "[i]n construing the language of a statute, our goal and guiding principle is to give effect to the intent of the Legislature."Lujan Grisham, v. Romero, 2021-NMSC-009, ¶ 23, 483 P.3d 545."In determining legislative intent, [appellate courts] look to the plain language of the statute and the context in which it was enacted, taking into account its history and background."Pirtle v. Legis. Council,2021-NMSC-026, ¶ 14, 492 P.3d 586.Moreover, "[w]e consider all parts of the statute together, reading the statute in its entirety and construing each part in connection with every other part to produce a harmonious whole."Dep’t of Game & Fish v. Rawlings,2019-NMCA-018, ¶ 6, 436 P.3d 741(alterations, internal quotation marks, and citation omitted).

[5]{7} Taxpayer argues that the AHO’s construction of the statutory definition of "unitary corporation" codified in Section 7-2A-2(Q) was wrong.We have conducted a reasonably comprehensive survey of relevant case law and prior AHO orders dealing with unitary corporations.Our review has not uncovered any instance where a similar argument has been made.We are thus presented with a matter of first impression.We agree with Taxpayer’s argument and explain.

{8} The CIT imposes a tax upon the "net income of every domestic corporation and upon the net income of every foreign corporation employed or engaged in the transaction of business in, into or from this state or deriving any income from any property or employment within this state."Section 7-2A-3(A)."A unitary corporation that is subject to taxation under the [CIT] … may elect to file a combined return with other unitary corporations as though the entire combined net income were that of one corporation.… The return filed under this method of reporting shall include the net income of all the unitary corporations."Section 7-2A-8.3(A).There is no question that Taxpayer is subject to taxation under the CIT.And, there is no question that Taxpayer filed a combined return for the 2015 tax year.

[6]{9} The question is whether Taxpayer’s foreign dividend income is taxable by New Mexico.The answer to that question under federal constitutional requirements depends on whether Taxpayer and its foreign subsidiaries can be deemed unitary corporations.SeeContainer Corp, of Am. v. Franchise Tax Bd.,463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545(1983)(discussing generally the history and development of the United States Supreme Court’s case law concerning the ability of states to tax extraterritorially derived income of corporations and approving California’s taxing scheme taxing dividend income received from foreign subsidiaries).Whether Taxpayer and its foreign subsidiaries can be treated as "unitary corporations" in turn depends on the meaning of Section 7-2A-2(Q).

[7]{10}Section 7-2A-2(Q) defines "unitary corporation" as

two or more integrated corporations, other than any foreign corporation incorporated in a foreign country and not engaged in trade or business in the United States during the taxable year, that are owned in the amount of more than fifty percent and controlled by the same person and for which at least one of the following conditions exists:

(1) there is a unity of operations evidenced by central purchasing, advertising, accounting or other centralized services;

(2) there is a centralized management or executive force and centralized system of operation; or

(3) the operations of the corporations are dependent upon or contribute property or services to one another individually or as a group.

Section 7-2A-2(Q) includes three elements; two that must be present and one that acts as a carve-out provision excluding a class of entities from the definition.The positive requirements are: (1) the corporations "are owned in the amount of more than fifty percent and controlled by the same person,"id., and that (2) the corporations satisfy the "three unities test."Section 7-2A-2(Q)(1)-(3).The three unities test—detailed in the numbered subparagraphs of Section 7-2A-2(Q)—is used to determine whether the state taxation of extraterritorial income of a business operating in interstate commerce meets the due process requirements of the federal constitution.SeeExxon Corp. v. Wisconsin Dep’t of Revenue,447 U.S. 207, 219-223, 100 S.Ct. 2109, 65 L.Ed.2d 66(1980)(including as factors in the constitutional analysis "functional integration, centralization of management, and economies of scale"(internal quotation marks and citation omitted)).

[8]{11} The third element of Section 7-2A-2(Q) is negative; that is, it excludes from the definition of "unitary corporations""any foreign corporation incorporated in a foreign country and not engaged in trade or business in the United States during the taxable year."In keeping with the plain language approach to statutory interpretation, the most natural interpretation of this simple and straightforward language is that foreign subsidiaries of corporations subject to taxation in New Mexico are not to be included in the unitary corporate group for purposes of apportionment of income even if they meet the two positive qualifications.SeeHigh Ridge Hinkle Joint Venture v. City of...