Tax Law Alert: Sales Factor Excludes Amounts Received from the Sale of Goodwill

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In a case argued by Stoel Rives, the Oregon Supreme Court upheld the judgment of the Oregon Tax Court in favor of Tektronix, Inc. The Supreme Court ruled that, for purposes of apportioning income, the sales factor excluded amounts Tektronix received from the sale of goodwill and similar intangible assets when it sold its printer division in 2000. A link to the decision in Tektronix, Inc. v. Department of Revenue is here.  As described below, the Supreme Court left the Oregon Tax Court's analysis of two of the key issues in the case unchanged.

The Supreme Court limited its analysis to ORS 314.665(6)(a), which generally excludes from the sales factor gross receipts from the sale of intangible property, unless the receipts are derived from the taxpayer's primary business activity. The court concluded that Tektronix was not in the primary business of selling off divisions; therefore, the receipts from the goodwill and other intangibles were excluded from the sales factor pursuant to ORS 314.665(6)(a). The Supreme Court noted that the Department had taken the position during audit that the net gain from the goodwill was required to be included in the sales factor pursuant to the next portion of the same statute, ORS 314.665(6)(b). Unlike the Tax Court, however, the Supreme Court did not discuss the applicability of ORS 314.665(6)(b) because the Department had expressly stated in its briefings that it declined to rely on ORS 314.665(6)(b).

The Supreme Court rejected the Tax Court's conclusion that ORS 314.665(6)(a) applied only to gross receipts from liquid assets, i.e., treasury function gross receipts. The Supreme Court determined that neither the plain language nor the legislative history of ORS 314.665(6)(a) limited its applicability to liquid assets.

The Supreme Court's decision leaves undisturbed two points reached by the Tax Court:

  1. The Tax Court ruled that gross receipts from the sale of the goodwill and similar intangibles were excluded from the sales factor because the income-producing activities that gave rise to these intangibles could not be readily identified. See OAR 150-314.665(4)(3)(b).
  2. The Tax Court held that the Department's assessment was barred by the statute of limitations. The year at issue (the tax year that began in 1999) was closed to audit in December 2004, but the Department argued that it was reopened in July 2005 when it was notified that the IRS had corrected the amount of a capital loss from the 2002 tax year that was carried back to the 1999 tax year. The Tax Court rejected the Department's position and ruled that an IRS change or correction to a loss year that alters the amount carried to another year does not reopen the year to which the loss is carried.

Because its decision on the apportionment issue based on ORS 314.665(6)(a) fully disposed of the case, the Supreme Court did not analyze the income-producing activities or statute of limitations issues. Accordingly, the Tax Court's analysis remains unchanged.

IRS Circular 230 notice: The information contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.