Atlantic Richfield Co. v. Department of Revenue

• Jurisdiction: Oregon
• Court: Oregon Supreme Court
• Writing for the Court: PETERSON
• Citation: Atlantic Richfield Co. v. Department of Revenue, 717 P.2d 613, 300 Or. 637 (Or. 1986)
• Decision Date: 01 April 1986
• Parties: ATLANTIC RICHFIELD COMPANY, Appellant, v. DEPARTMENT OF REVENUE, Respondent. TC 2001; SC S30995. . *

[717 P.2d 613]

717 P.2d 613 300 Or. 637 ATLANTIC RICHFIELD COMPANY, Appellant,
v.
DEPARTMENT OF REVENUE, Respondent. TC 2001; SC S30995. Supreme Court of Oregon,
In Banc. ^* Argued and Submitted March 5, 1985.
Decided April 1, 1986.

Henry C. Breithaupt, Portland, argued the cause for appellant. With him on the briefs were Robert S. Wiggins and Stoel, Rives, Boley, Fraser & Wyse, Portland.

[300 Or. 638]

Elizabeth S. Stockdale, Asst. Atty. Gen., Salem, argued the cause for respondent. With her on the brief was Dave Frohnmayer, Atty. Gen., Salem.

Maurice O. Georges and John D. Burns of Miller, Nash, Wiener, Hager & Carlsen, Portland, and Paul K. Lester and William D. Peltz, Houston, Texas, filed brief for Shell Oil Co. as amicus curiae.

[300 Or. 639]

PETERSON, Chief Justice.

Taxpayer Atlantic Richfield Corporation is a Pennsylvania corporation with its principal place of business in California. It is qualified to do and does business in Oregon and elsewhere in the United States. For tax years 1973 through 1977, taxpayer filed Oregon corporate excise tax returns with the defendant Oregon Department of Revenue. Taxpayer reported its net income from business activity both within and without Oregon. The question in this case is how much of that income is attributable to taxpayer's business activities in Oregon.

ORS 314.615 provides that "[a]ny taxpayer having income from business activity which is taxable both within and without this state * * * shall allocate and apportion the net income of the taxpayer as provided in ORS 314.605 to 314.675." ORS 314.650 through 314.670 are the relevant apportionment statutes. They list and define three factors--property, payroll and sales--to be included in a fraction which, when multiplied by the total net business income,

[717 P.2d 614]

gives a figure representing that portion of total net business income attributable to and taxable in Oregon.

To illustrate the issue that brings the parties here: Suppose a taxpayer has multistate net business income of $100,000 and the property factor ¹ is 3/8 (.375), the payroll factor ² is 5/9 (.555), the sales factor ³ is 1/3 (.333). The ORS 314.650 formula would be:

[300 Or. 640]

Changing the factors in the numerator of the fraction of the ORS 314.650 formula (the denominator is a constant, three) affects the determination of income attributable to Oregon. All else being equal, a larger property factor fraction results in a greater Oregon tax liability, a smaller property factor fraction results in a lesser Oregon tax liability. For example, if the property factor in the above example were 5/8 (.625) rather than 3/8 (.375), the Oregon income would be $50,433.33. If the property factor were 1/8 (.125), the Oregon income would be $33,766.66.

ORS 314.655(2) provides that property of a multistate taxpayer is to be valued at its "original cost" in determining the property factor. Taxpayer included intangible drilling and development costs (IDCs), ⁴ which taxpayer had elected to "expense" ⁵ for the purpose of determining federal net income, ⁶ in the calculation of its Oregon property factor as part of the "original cost" of its property.

On audit, the department asserted a deficiency with respect to each Arco return. The department held that "original cost," for the purpose of determining the property factor, meant the federal unadjusted tax basis of the property. ⁷ Expensed IDCs are

[717 P.2d 615]

not included in the federal unadjusted tax basis of oil or gas wells. Taxpayer argues that although

[300 Or. 641]

"original cost" under ORS 314.655(2) generally means federal unadjusted tax basis, the general rule should not apply in this case, but rather an exception should be recognized to permit expensed IDCs to be included in the original cost and in the property factor of the apportionment formula.

Both parties moved for summary judgment. The Tax Court agreed with the department and granted summary judgment against taxpayer, 9 OTR 451 (1984). We reverse.

Oregon's Uniform Division of Income for Tax Purposes Act, ORS 314.605 to 314.670 (UDITPA), was adopted in 1965 (Or.Laws 1965, ch. 152) from Section IV of the Multistate Tax Compact which contains the uniform act. The uniform act was drafted as a practical means of assuring that no multistate taxpayer was taxed on more than its total net income. See 7A Uniform Laws Annotated, Uniform Division of Income for Tax Purposes Act 331-32 (1985) (Prefatory Note); Lynn, Formula Apportionment of Corporate Income for State Tax Purposes, 18 Ohio St L J 84 (1957); Pierce, Uniform Act, Practical Method to Lighten State Compliance Burden, 12 J Tax'n 83 (1960).

Uniformity among adopting jurisdictions is the general purpose of UDITPA. ORS 314.605(2) provides:

"ORS 314.610 to 314.670 shall be so construed as to effectuate its general purpose to make uniform the law of those states which enact it." ⁸

We recently observed in Twentieth Century-Fox Film v. Dept. of Rev., 299 Or. 220, 227, 700 P.2d 1035, 1039 (1985), that UDITPA has two basic goals: "[F]air apportionment of

[300 Or. 642]

income among the taxing jurisdictions; and * * * uniformity of application of the statutes." (Footnote omitted.)

ORS 314.650 contains the basic income apportionment formula, including a multiplier designed fairly to reflect the portion of a multistate taxpayer's total business income attributable to its Oregon activities or holdings. ⁹ ORS 314.615 provides:

" * * * Any taxpayer having income from business activity which is taxable both within and without this state, other than activity as a financial organization or public utility or the rendering of purely personal services by an individual, shall allocate and apportion his net income as provided in ORS 314.605 to 314.675. * * * "

ORS 314.650 provides:

"All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three."

Only the property factor is at issue here. ORS 314.655 provides:

"(1) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in this state during the tax period and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period.

"(2) Property owned by the taxpayer is valued at its original cost. * * * "

Nowhere in UDITPA or in any applicable Oregon statute is "original cost" defined. The Commissioner's comment to Section 11

[717 P.2d 616]

of the Uniform Act, the section that is the source of ORS 314.655(2), states:

"This section is admittedly arbitrary in using original cost rather than depreciated cost * * *. This approach is justified because the act does not impose a tax, nor prescribe the depreciation allowable in computing the tax, but merely provides a basis for division of the taxable income among the several states. The use of original cost obviates any differences

[300 Or. 643]

due to varying methods of depreciation, and has the advantage that the basic figure is readily ascertainable from the taxpayer's books. No method of valuing the property would probably be universally acceptable." 7A Uniform Laws Annotated, Uniform Division of Income for Tax Purposes Act 350, § 11 (1985).

ORS 314.815 grants rulemaking authority to the department. It provides:

"The department may, from time to time, make such rules and regulations, not inconsistent with legislative enactments, that it considers necessary to enforce income tax laws."

In 1973 the department promulgated OAR 150-314.655(2)-(A). The rule was drawn from the model rules proposed by the Multistate Tax Commission, MTC Reg IV. 11. (a), and provides:

"Property owned by the taxpayer shall be valued at its original cost. As a general rule 'original cost' is deemed to be the basis of the property for federal income tax purposes (prior to any federal adustments) [sic] at the time of acquisition by the taxpayer and adjusted by subsequent capital additions or improvements thereto and partial disposition thereof, by reason of sale, exchange, abandonment, etc." (Emphasis added.)

Taxpayer does not dispute the validity of this general rule. The Tax Court held that it was valid. The dispute arises from the application of the "general rule" to the facts of this case. The fact that the rule expressly applies generally as opposed to universally implies the presence of exceptions. ¹⁰ The department has not promulgated rules more specifically defining any exceptions.

Under federal income tax law, taxpayers who incur IDCs may elect either to expense or capitalize the IDCs. IRC §

[300 Or. 644]

263(c), Treas.Reg. § 1.612-4. ¹¹ If the taxpayer elects to capitalize the IDCs they are included in the taxpayer's federal unadjusted basis. If a taxpayer elects to expense IDCs, the costs are not. Thus, two taxpayers with the same expenditures in Oregon (or in any other state) properly may elect to be treated differently in their federal income tax calculations.

As stated, taxpayer expensed its IDCs. That election determined the federal income tax characterization of the IDCs as other than capital assets. The election did not result in a federal adjustment to the tax basis of the property for whose development the IDCs were incurred. See Treas.Reg. § 1.1016-2(a). ¹²

[717 P.2d 617]

We first consider our scope of review. There are no disputed facts in this case. Although we review factual matters de novo, ORS 305.445, ORS 19.125(3), see Oregon Broadcasting Co. v. Dept. of Revenue, 287 Or. 267, 270-71, 598 P.2d 689, 692 (1979), the issue before us is whether the department and the Tax Court correctly applied the rule to the undisputed facts.

The Department of Revenue is a state agency. Unlike most state agencies,...