U.S. Bankruptcy Court Rules Imposition Of Oregon Corporate Excise Tax On Out-Of-State Holding Company Was Unconstitutional

The U.S. Bankruptcy Court has held that imposition of the Oregon corporate excise tax upon a parent holding company violated the Due Process and Commerce Clauses of the U.S. Constitution1 as the parent had no property or employees in Oregon and had no sales or other revenue directly attributable to Oregon sources. The parent filed a mandatory unitary Oregon consolidated return on behalf of itself and its subsidiaries for the tax years at issue. The parent was not liable for the tax of its subsidiaries merely because it allowed the subsidiaries to use the parent company's intellectual property without charge.

Background

The taxpayer, a parent holding company ("Parent") located outside Oregon and lacking any operations of its own, owned subsidiaries engaged in banking-related operations throughout the United States, including Oregon. Together with these subsidiaries, Parent filed consolidated tax returns from 1999 through 2005 in its name for both federal and Oregon tax purposes.

After a credit rating downgrade caused a severe bank run in September 2008, the Federal Deposit Insurance Corporation (FDIC) seized and sold substantially all the assets of the taxpayer's subsidiaries. Parent then filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Code. Later that year, the Oregon Department of Revenue conducted an audit of the Oregon consolidated tax returns for the 2002 through 2006 filing periods and assessed additional corporate excise tax plus interest and penalties amounting to over $29 million. The Department then filed a proof of claim in the bankruptcy proceedings, seeking payment from Parent. A liquidating trust ("Trust"), which was subsequently designated as the successor in interest to Parent, filed an objection to the proof of claim in the U.S. Bankruptcy Court.

The issue before the Court was whether the corporate excise tax assessment on Parent violated the Due Process and Commerce Clauses of the U.S. Constitution.

Oregon Consolidated Tax Returns

A corporation that is part of a unitary group that is included in a federal consolidated return must be included in a consolidated Oregon return even of the corporation is not doing business in Oregon.2 Under Oregon law, "generally, the consolidated return shall be filed by and in the name of the common parent corporation."3 However, the applicable statute also provides that in the event the common parent is not a member of the affiliated group, or is not subject to Oregon's taxing jurisdiction, the return must be filed in the name of the member with the "greatest presence" in Oregon.4

The Department took the position that by filing the Oregon consolidated returns in Parent's name, Parent had effectively admitted that it was doing business in Oregon and subject to Oregon's taxing jurisdiction. Moreover, the Department argued that Parent's "tax liability shall be joint and several with any other corporation that is included in a consolidated state return with the corporation."5 However, members of an affiliated...