IN THE OREGON TAX COURT MAGISTRATE DIVISION Corporation Excise Tax
CHEVRON U.S.A. INC. a Pennsylvania ) Corporation, ) ) Plaintiff, ) TC-MD 190031N ) v. ) ) DEPARTMENT OF REVENUE, ) State of Oregon, ) ) ORDER ON CROSS MOTIONS FOR Defendant. ) SUMMARY JUDGMENT
This matter came before the court on the parties’ cross motions for summary judgment
concerning the inclusion of Plaintiff’s commodities hedging receipts in the sales factor under
ORS 314.665(6). Oral argument was held by telephone on July 15, 2020. Kristin L. Goodin,
attorney, appeared on behalf of Plaintiff. Marilyn J. Harbur and Daniel Paul, Senior Assistant
Attorneys General, appeared on behalf of Defendant.
I. STATEMENT OF FACTS
A. Overview of Plaintiff’s Business
Plaintiff and its subsidiaries “engage in fully integrated petroleum operations, chemicals
operations, mining operations, power generation and energy services.” (Stip Ex 1 at 5.) It
describes its business in terms of “upstream” and “downstream” operations:
“Upstream operations consist primarily of exploring for, developing and producing crude oil and natural gas; processing, liquefaction, transportation and regasification associated with liquefied natural gas; transporting crude oil by major international oil export pipelines; transporting, storage and marketing of natural gas; and a gas-to-liquids project. Downstream operations consist primarily of refining crude oil into petroleum products; marketing of crude oil and refined products; transporting crude oil and refined products by pipeline, marine vessel, motor equipment and rail car; and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricant additives.”
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 1 (Id.; see also Stip Exs 2 at 4, 3 at 6.) Of Plaintiff’s total expenditures, upstream activities
accounted to 89 percent in 2011 and 2012, and 90 percent in 2013. (Stip Ex 3 at 8.)
Plaintiff “is primarily in a commodities business with a history of price volatility. The
single largest variable that affects the company’s results of operations is the price of crude oil,
which can be influenced by general economic conditions, industry inventory levels, production
quotas imposed by the Organization of Petroleum Exporting Countries (OPEC), weather-related
damage and disruptions, competing fuel prices and geopolitical risk.” (Stip Ex 1 at 31.) It is
also “exposed to market risks related to the price volatility of * * * refined products, natural gas,
natural gas liquids, liquefied natural gas and refinery feedstocks.” (Id. at 54.)
B. Plaintiff’s Hedging Program
Plaintiff uses derivative commodity instruments to manage risks relating to “the
purchase, sale and storage of crude oil, refined products, natural gas, natural gas liquids and
feedstock for company refineries.” (Stip Ex 1 at 77.) It “also uses derivative commodity
instruments for limited trading purposes.” (Id. at 54.) Plaintiff’s derivative commodity
instruments “consist mainly of futures, options and swap contracts traded on” stock exchanges
and electronic platforms. (Id.) It also enters swap contracts and option contracts “with major
financial institutions and other oil and gas companies in the ‘over-the-counter’ markets.” (Id.)
Most of Plaintiff’s derivative commodity instruments “can be liquidated or hedged effectively
within one day” and Plaintiff manages its market positions daily. (Id.)
The “majority” of Plaintiff’s “activity in derivative commodity instruments is intended to
manage the financial risk posed by physical transactions.” (Stip Ex 1 at 69.) However,
Plaintiff’s “derivatives are not material to [its] financial position, results of operations or
liquidity. [It] believes it has no material market or credit risks to its operations, financial position
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 2 or liquidity as a result of its commodity derivative activities.” (Id. at 77.)
As required by Treasury Regulation section 1.1221-2(f)(3)(iv), Plaintiff maintains
“Aggregate Hedging Program Descriptions” for its crude oil and natural gas business lines.
(Ptf’s Exs 4, 5.) It describes Plaintiff’s hedging program and provides specific guidance to its
staff regarding whether financial contracts should be identified as “either hedge or speculative
trades” before any gains or losses are realized. (Ptf’s Ex 4 at 2.) Plaintiff’s physical traders trade
in oil and oil products, as well as natural gas and related products. (Id.; Ptf’s Ex 5 at 2)
Plaintiff’s “structural financial traders” “trade around the resulting net exposure from the
physical traders’ activities * * *.” (Ptf’s Ex 4 at 1.) “This structure activity is focused on
pricing, exposure, financial trading, and balancing financial and physical exposures[.]” (Id.)
Examples of “physical” contracts that create risk are those “for purchase or sale of physical
volumes of crude LPG or refined products,” transport of those products, and storage of those
products. (Id. at 3.) “A critical strategy” is to manage the “risks inherent in the crude, LPG and
product trading markets[,]” one of which is price risk. (Id. at 2.) “The primary purpose” of
Plaintiff’s financial trading “is to mitigate the price risks associated with its physical
transactions[.]” (Id. at 3.) Plaintiff uses financial contracts to “eliminate the risk that market
prices will change as margins earned on physical deals will be reduced or lost.” (Id. at 3.) The
financial contracts “ ‘lock in’ margins on physical deals[.]” (Id.)
C. Plaintiff’s Accounting for Hedging Transactions
“Derivatives beyond those designated as normal purchase and normal sale contracts are
recorded at fair value” on Plaintiff’s balance sheet, in accordance with relevant accounting
standards, “with resulting gains and losses reflected in income.” (Stip Ex 1 at 54.) The tax
treatment of hedging requires reporting on a realization basis. (Ptf’s Ex 4 at 5.) Hedges are
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 3 “matched to the underlying physical business, and upon settlement the gain or loss is recognized
as ordinary income.” (Ptf’s Ex 4 at 5.) By contrast, “trades classified as speculative recognize
the full mark to market earnings impact as capital gains and losses in the current reporting
period.” (Id.) Ordinary tax treatment of a hedge “allow[s] net annual losses to be offset by
[Plaintiff’s] ordinary profits.” (Id. at 7.)
D. Plaintiff’s Tax Returns and Defendant’s Adjustments
Plaintiff “filed amended Oregon Corporation Excise Tax Returns for the tax years 2011,
2012, and 2013 to reflect the inclusion of gross hedging receipts in the Oregon sales factor.”
(Ptf’s Mot for Summ J at 2, citing Compl.) Defendant issued notices of deficiency for each of
those years. (Compl at 3.) At Plaintiff’s request, Defendant held a conference and the sole issue
was whether Plaintiff’s gross hedging receipts were includable in the Oregon apportionment
sales factor. (Compl, Ex A at 2.) Defendant concluded that the gross hedging receipts were not
includable in Plaintiff’s sales factor under ORS 314.665(6)(a) because they arose from the sale
of intangible assets and were not derived from Plaintiff’s primary business activity. (Id. at 4-5.)
Defendant included the net gain from Plaintiff’s hedging activities under ORS 314.665(6)(b)
because hedging activity was an integral part of Plaintiff’s business and, therefore, generated
business income under ORS 314.610(1). 1 (Id. at 6.) Finally, Defendant reached an alternative
conclusion that including gross hedging receipts in Plaintiff’s sales factor would not fairly
represent Plaintiff’s business activity in Oregon under ORS 314.667. (Id. at 6-7.) Defendant
issued notices of assessment following its conference decision. (Id. at 3.) This appeal ensued.
///
1 Defendant wrote that “this adjustment will not change the result of [Plaintiff’s] tax.” (Compl, Ex A at 7.)
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 4 II. ISSUES, PARTIES’ POSITIONS, STANDARD OF REVIEW
The issues presented for the 2011, 2012, and 2013 tax years are: 1) whether Plaintiff’s
hedging receipts arise from the “sale, exchange, redemption or holding of intangible assets”
under ORS 314.665(6)(a); and, if so, 2) whether those receipts derive from Plaintiff’s “primary
business activity” under ORS 314.665(6)(a). If the answer to the first question is yes and the
answer to the second question is no, then the gross receipts are excluded from the sales factor
under ORS 314.665(6)(a). 2
Plaintiff moves for summary judgment on the first issue, arguing that commodity hedging
transactions are inextricably linked to the underlying commodity and therefore are different in
kind from other forms of financial and speculative hedging for investment or cash management
purposes. (Ptf’s Mot for Summ J at 8.) Plaintiff argues that gross hedging receipts should be
apportioned to Oregon under ORS 314.665(2) in the same manner as the underlying commodity.
(Ptf’s Reply at 2.) Such treatment is consistent with federal income tax law. (Ptf’s Mot for
Summ J at 8-15.) Plaintiff asks the court to deny summary judgment on the second issue,
asserting that issues of material fact exist. (Ptf’s Reply at 4.)
Defendant also moves for summary judgment on the first issue, arguing that Plaintiff’s
commodity hedging receipts arise from the transfer of intangible assets, a term which is defined
broadly under Tektronix, Inc. v. Dept. of Rev., 354 Or 531, 316 P3d 276 (2013). (Def’s Mot for
Summ J at 3-5.) As with “cash management” or investment receipts, including gross hedging
receipts would distort the sales factor due to the significant number of financial transactions. (Id.
at 3-4.) Defendant moves for summary judgment on the second issue, arguing that the hedging
2 However, Defendant included the net gain from Plaintiff’s hedging activities under ORS 314.665(6)(b) because hedging activity was an integral part of Plaintiff’s business.
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 5 receipts to not derive from Plaintiff’s primary business activity based on the factors set forth in
OAR 150-314.665(6)(3). (Id. at 5-7.)
The court grants a motion for summary judgment if all the documents on file “show that
there is no genuine issue as to any material fact and that the moving party is entitled to prevail as
a matter of law.” Tax Court Rule (TCR) 47. 3 “No genuine issue as to a material fact exists if,
based upon the record before the court viewed in a manner most favorable to the adverse party,
no objectively reasonable juror could return a verdict for the adverse party * * *.” Id.
III. ANALYSIS
This court recently described the six-step process for determining the Oregon taxable
income of a multinational group of corporations. Oracle Corp. v. Dept. of Rev., TC 5340, 2020
WL 7765776 at *2 (Or Tax, Dec 16, 2020). The issues here pertain to step five: determining the
correct Oregon apportionment formula by which apportionable business income is multiplied.
See id. at *3. For the tax years at issue, “Oregon’s UDITPA prescribed a standard single-factor
formula based solely on the taxpayer’s ‘sales’ in Oregon compared to sales everywhere.” Id.;
ORS 314.650. 4 Sales are defined as “all gross receipts of the taxpayer not allocated” as
nonbusiness income. ORS 314.610(7). Notwithstanding that definition, ORS 314.665(6)(a)
excludes “gross receipts arising from the sale, exchange, redemption or holding of intangible
assets, including but not limited to securities, unless those receipts are derived from the
3 TCR 47 is made applicable by Tax Court Rule – Magistrate Division (TCR-MD) 13 B which provides that “[t]he court may apply TCR 47 to motions for summary judgment, to the extent relevant.” 4 The court’s references to the Oregon Revised Statutes (ORS) are to 2009. Although the 2011 edition of the ORS is applicable to the 2012 and 2013 tax years, the relevant statutes are the same as in 2009. Oregon applies special apportionment formulas for certain industries such as public utilities, financial organizations, insurers, and interstate broadcasters. See ORS 314.615, 314.280, 317.660, and 314.682. There is not contention that any of those special formulas apply here.
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 6 taxpayer’s primary business activity.” ORS 314.665(6)(b) allows the inclusion of net gain from
those sales if they are “included in the taxpayer’s business income.”
A preliminary question is whether Plaintiff’s hedging activity yielded “gross receipts”
and therefore sales within the meaning of UDITPA. See Oracle, 2020 WL 7765776 at *6-11
(analyzing the text, context, and legislative history of “gross receipts” to determine if certain
income met the definition). On this point, the parties agree that Plaintiff’s hedging receipts are
“gross receipts” under UDITPA and the court sees no basis for a contrary conclusion. (See Ptf’s
Mot for Summ J at 6, Def’s Mot for Summ J at 3.) The next question is whether the receipts
arose from the transfer or holding of intangible assets.
A. Were Plaintiff’s Derivative Commodity Instruments Intangible Assets?
The Oregon Supreme Court considered the meaning of “intangible assets” in Tektronix,
354 Or 531, holding that the taxpayer’s sale of goodwill associated with its printer division was
properly excluded from the sales factor under ORS 314.665(6)(a) as an intangible asset. The
court reviewed the text, context, and legislative history, finding that the term “intangible assets”
had a “well-defined and therefore applicable legal meaning.” Id. at 543-545. It means “any
nonphysical asset or resource that can be amortized or converted to cash” and “property
representative of a right rather than a physical object.” Id. at 543-44 (citing Black’s Law
Dictionary 134 (9th ed 2009) and West’s Tax Law Dictionary 570 (2013)). Examples include
copyrights, patents, trademarks, stocks, bonds, goodwill, franchises, and computer programs. Id.
Intangible property may be contrasted with “tangible personal property.” 5 The Oregon
Supreme Court considered the meaning of that term under ORS 314.665(2)(a) in Powerex v.
5 The definition of “tangible personal property” is also relevant because Plaintiff argues that its hedging receipts should be sourced using the rules applicable to such property.
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 7 Dept. of Rev., 357 Or 40, 346 P3d 476 (2015), holding that electricity was tangible personal
property. This court had determined that electricity was not tangible property based on expert
testimony from physics professors, so it allocated taxpayer’s sales of electricity to the state
where the greater part of its income-producing activity occurred. Id. at 57-58. The Oregon
Supreme Court disagreed that principles of physics controlled the outcome, looking instead to
the context in which the term was used – UDITPA – including the text, context, and legislative
history. Id. at 60. The court concluded that the relevant qualities
“were whether the property sold was perceptible to the senses, could be located physically within a state, and could be delivered or shipped to a place. A related quality was that the physical properties of tangible personal property were what made it useful while the physical properties of intangible property had little or no relation to that property’s value or usefulness. Rather, the value of intangible property derives from the rights and obligations it represents.”
Id. at 65. Although electricity does not fall neatly into either category, the court held it was
tangible, noting it was “perceptible to the senses,” valuable based on its physical properties, and
could “be physically located within a state and shipped from one state to another.” Id. at 66.
Turning to the derivative commodity instruments at issue (futures, options, and swap
contracts), the court begins with an overview of these types of contracts.
“A commodity futures contract consists of a firm, legal agreement between a buyer (or seller) and an established commodity exchange or its clearinghouse whereby the trader agrees to accept (or deliver) between designated dates, a carefully specified ‘lot’ of a commodity meeting the quality and delivery conditions prescribed by the commodity exchange, with cash settlement on delivery date at a settlement price to be prescribed. The trader agrees to an arrangement with a qualified broker (or the clearinghouse) to provide him with a margin deposit as required, and also agrees to reimburse him or accept credit for all interim gains or losses in value of that futures contract resulting from day-to- day changes in its price on the floor of the established commodity exchange. The trader has an option which permits him to close out his contract at any time (at the market) simply by notifying his broker of his desire; and, on the other side, it permits the broker to close out the commitment if the margin is impaired by disposing of the contract at the market.”
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 8 Vickers v. Comm’r, 80 TC 394, 396-97 (1983). Like stocks – which are specifically identified as
intangible assets – derivative commodity instruments are traded on exchanges. Although the
value of the contract relates to the price of the underlying commodity, the contracts are
nonphysical assets that can be quickly converted to cash. 6 They represent a right rather than a
physical object; namely, the right to buy or sell a commodity at an established price on a given
date. See Modesto Dry Yard, Inc. v. Comm’r, 14 TC 374, 385 (“Transactions in commodity
futures are commonly spoken of as purchases and sales of a specific commodity such as corn,
wheat, or cotton, but the traders really acquire rights to the specific commodity rather than the
commodity itself. These rights are intangible property which may appreciate or depreciate in
value.”); see also Comcast, 2020 WL 6948453 at *21 (referring to futures contracts as
“intangibles”). The court preliminarily concludes that derivative commodity instruments are
intangible assets within the meaning of ORS 314.665(6)(a).
1. Treatment of commodity hedging transactions under federal tax law
Notwithstanding their character as intangible assets, Plaintiff argues that its hedging
receipts should be sourced in the same manner as the underlying physical commodity being
hedged because that is how federal tax law treats such transactions and Oregon corporate excise
tax adopts by reference those portions of the IRC and other federal law pertaining to the
determination of taxable income. (Ptf’s Mot for Summ J at 8 (citing ORS 317.013).) It
maintains that Tektronix does not control the outcome here because it did not consider “the
unique nature of commodity hedging transactions.” (Ptf’s Reply at 4.) Defendant agrees that
Oregon looks to federal law to compute taxable income and also agrees with Plaintiff’s
6 According to Plaintiff, most of its derivative commodity instruments “can be liquidated or hedged effectively within one day.” (Stip Ex 1 at 54.)
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 9 description of the federal income tax treatment of commodity hedging, but disagrees that that
federal law is relevant here because “[t]he apportionment of taxable income between the many
states is an issue unique to state taxation.” (Def’s Mot for Summ J at 8; Reply at 1-2.) The
federal law cited by Plaintiff concerns whether hedging transactions yield ordinary or capital
gains and losses, an issue which “has no bearing on the definition of sales for apportionment
under ORS 314.665.” (Def’s Mot for Summ J at 8.)
Hedging transactions, clearly identified as such on the day of acquisition, origination, or
entry, are excluded from the definition of “capital asset” under IRC section 1221(a)(7). 7 A
“‘hedging transaction’ means any transaction entered into by the taxpayer in the normal course
of the taxpayer’s trade or business primarily [] to manage risk of price changes or currency
fluctuations with respect to ordinary property which is held or to be held by the taxpayer[.]” IRC
§ 1221(b)(2)(A)(i). “[G]ain or loss on a short sale or option that is part of a hedging transaction
* * * is ordinary income or loss.” Treas Reg § 1.1221-2(a)(2). “The fact that a taxpayer
frequently enters into and terminates positions (even if done on a daily or more frequent basis) is
not relevant to whether these transactions are hedging transactions.” Treas Reg § 1.1221-2(d)(7).
The treatment of commodity hedging transactions as generating ordinary, rather than
capital, income and loss dates back to the “Corn Products doctrine.” In Corn Products Refining
Co v. Comm’r, 350 US 46, 76 S Ct 20, 100 L Ed 29 (1955), the Court held that taxpayer’s
purchases and sales of corn futures generated ordinary rather than capital income. It explained
that “Congress intended that profits and losses arising from the everyday operation of a business
be considered as ordinary income or loss rather than capital gain or loss.” Id. at 52. 8 Taxpayer –
7 By contrast, speculative trading of futures contracts yields capital gains or losses. See Vickers, 80 TC at 405-410 (summarizing cases so holding). 8 Notwithstanding that reasoning, the Court declined to extend the Corn Products doctrine to capital stock
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 10 a manufacturer that used raw corn in its operations – purchased and sold corn futures “as a form
of insurance against increases in the price of raw corn,” not to speculate. Id. at 50-51. Thus, the
futures were not “separate and apart from [taxpayer’s] manufacturing operation.” Id. at 50. The
Court subsequently explained that “Corn Products is properly interpreted as standing for the
narrow proposition that hedging transactions that are an integral part of a business’ inventory-
purchase system fall within the inventory exclusion of § 1221.” Arkansas Best Corp. v. Comm’r,
485 US 212, 108 S Ct 971, 99 L Ed 2d 183 (1988).
Even though most commodity derivatives are settled through offset 9 rather than through
physical delivery of the commodity, courts have treated the offsets as constructive delivery and
therefore sales. See Board of Trade of the City of Chicago v. Christie Grain and Stock Co., 198
US 236, 246-50, 25 S Ct 637, 49 L Ed 1031 (1905) (“in not less than three quarters of the
transactions in the grain pit there is no physical handing over of any grain”; rather, contracts to
buy are set off against contracts to sell, with the difference of price paid in cash); 10 Lyons Milling
Co. v. Goffe & Carkener, Inc., 46 F2d 241, 247 (10th Cir 1931) (“A set-off is a method by which
a contract to purchase is set off against a contract to sell without the formality of an exchange of
warehouse receipts or other actual delivery and, in legal effect, is a delivery.”); The Hoover
Company v. Comm’r, 72 TC 206, 248-50 (1979) (rejecting taxpayer’s argument that currency
in a bank that taxpayer held for business rather than investment purposes. Arkansas Best Corp. v. Comm’r, 485 US 212, 108 S Ct 971, 99 L Ed 2d 183 (1988). 9 Older cases use the term “set-off” whereas newer cases, IRC section 1221, and Treasury Regulation 1.1221-2 use the term “offset.” The terms appear to be interchangeable. 10 The case concerned whether such derivative transactions were illegal gambling. The court concluded that they were not; the contracts were made in “good faith” and “for serious business purposes.” 198 US at 248-49. Commodity derivative transactions must involve the transfer of property, otherwise such transactions could not “be distinguished from mere wagering * * * betting or gambling.” Covington v. Comm’r, 120 F2d 768, 769-70 (1941) (rejecting taxpayer’s argument that his commodity futures losses were ordinary rather than capital because he did not own or acquire property; rather, he entered into and closed out executory contracts at a profit or loss without any sale or exchange of property).
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 11 forward sale contract offsets were “mere releases” that did not meet the “sale or exchange”
requirement for treatment as capital losses; offsetting is “the most common method of settling a
forward sale contract” and “has been held to be delivery under the sale contract * * * satisfying
the sale or exchange requirement on the date the contract is settled”); Vickers, 80 TC at 398-99
(“Most commodity futures contracts are terminated without actual delivery of the commodity.”
A “sale or exchange” occurred when taxpayer closed out his contracts through offsetting.).
In sum, federal tax law treats commodity derivative instruments as capital assets unless
they are “hedging transactions” i.e., designated as such, and used by a taxpayer to manage price
risk with respect to property held in its trade or business. Commodity derivative instruments
used for hedging are treated like inventory or other raw materials used in the taxpayer’s business.
This is so even if the taxpayer settles its derivative contracts through offset rather than physical
delivery or receipt of the commodity. The question becomes whether that treatment of
commodity hedging under federal tax law changes the court’s preliminary conclusion that
derivative commodity instruments are intangible assets under ORS 314.665(6)(a).
2. Context of UDITPA and state apportionment
Plaintiff relies on ORS 317.013(1), which adopts by reference those portions of the IRC
and federal law “pertaining to the determination of taxable income of corporate taxpayers.” That
statute further directs the Department of Revenue to “apply and follow the administrative and
judicial interpretations of the federal income tax law.” ORS 317.013(2). The Oregon legislature
has declared its intent “[t]o make the Oregon corporate excise tax law, insofar as it relates to the
measurement of taxable income, identical to the provisions of the federal [IRC] * * * to the end
that taxable income for Oregon purposes is the same as it is for federal income tax purposes[.]”
ORS 317.018(1). To achieve that purpose, Oregon applies IRC provisions “relating to the
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 12 definitions for corporations, of income, deductions, accounting methods, accounting periods,
taxation of corporations, basis and other pertinent provisions relating to gross income.” ORS
317.018(2). It does not look to the IRC for computation of tax or tax credits. Id.
Although the court is bound to apply the IRC and federal law in its determination of
Plaintiff’s taxable income, the composition of the sales factor used to apportion Plaintiff’s
income to Oregon is a matter of state, not federal, law. See Dept. of Rev. v. Washington Federal,
20 OTR 507, 2012 WL 3024189 at *5 (2012) (“as to allocation and apportionment of income of
corporations operating in two or more states, the governing provisions are derived solely from
Oregon law”). To be sure, definitions and concepts from federal tax law may be relevant to
understand terms used in Oregon law. See, e.g., Comcast Corp. v. Dept. of Rev., TC 5265, 2020
WL 6948453 at *35-37 (Or Tax, Nov 25, 2020) (in determining the meaning of “net income or
profits” as used in Oregon statute, the court considered the context of the term when it entered
Oregon law, including the IRC). Moreover, courts – including this one – have cited the Corn
Products doctrine when analyzing whether an asset satisfies the operational function test of
Allied-Signal, Inc. v. Director, 504 US 768, 112 S Ct 2251, 119 L Ed 2d 533 (1992) to determine
whether income is apportionable under the U.S. Constitution. See id. at *20-21.
Here, the question is whether the Corn Products doctrine and related federal law is
relevant to the treatment of derivative commodity instruments in Oregon’s UDITPA sales factor.
The court bears in mind the context and purpose of UDITPA: to create “a uniform method of
attributing an appropriate portion of a multistate taxpayer’s overall net income to each state;” not
“a uniform definition of ‘income[.]’ ” Oracle, 2020 WL 7765776 at *8. UDITPA’s sales factor
refers to “gross receipts” rather than “income,” terms which were not viewed synonymously by
UDITPA’s drafters, suggesting income is “something different from the factors used to attribute
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 13 income to a particular state.” Id. (emphasis in original). Historically, UDITPA applied three
equally weighted factors to apportion income to Oregon: property, payroll and sales. Id. at *9.
The property factor included only real and tangible personal property. Id. “For apportionment
purposes, identifying a physical location for the property was key.” Id. The payroll factor also
“focused on the physical location of the individual worker or of the persons controlling the
worker’s actions, again reflecting physical business activity in the state.” Id.
Applying the foregoing, the court finds that the character of hedging receipts under
federal tax law (ordinary rather than capital) is not relevant to determining how such receipts
should be reflected in the sales factor used to apportion income to Oregon. Notwithstanding the
“constructive delivery” doctrine applied to offsets, Plaintiff’s hedging transactions do not result
in physical delivery of the underlying commodity. In that respect, they are not tangible personal
property under ORS 314.665(2)(a) and should not be treated as such for apportionment purposes.
3. History of ORS 314.665(6)(a): the “treasury function” receipts problem
The court briefly considers the legislative history of ORS 314.665(6). Although not
limited to such assets, ORS 314.665(6) was enacted to address the problem of “treasury
function” gross receipts. See Tektronix, 354 Or at 545. This court described the problem more
fully in its Tektronix opinion: Prior to the enactment of ORS 314.665(6),
“a company buying and selling large quantities of financial instruments in connection with the cash management functions of the company would have extremely large gross receipts from the sales of intangibles. In some cases companies would buy and sell, on a daily basis, hundreds of millions of dollars of short term instruments, producing hundreds of millions of dollars of gross receipts—even though the net gain on such transactions could be very small. As the income producing activity associated with the treasury function activity occurred, typically, at the headquarters of the company, the numerator of the sales factor for the headquarters state would have, some felt, an improperly large number in the numerator of sales factor. That would, in the minds of some, skew the apportionment of income of the company to the headquarters state.”
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 14 Tektronix, Inc. v. Dept. of Rev., 20 OTR 468, 493-94 (2012), aff’d but criticized. Plaintiff’s
hedging transactions serve a purpose beyond cash management and so do not fall within the
precise definition of the “treasury receipts” as described in Tektronix. However, Plaintiff’s
hedging receipts may create the same distortion problem described by the court given the number
of such transactions and the resulting quantity of gross receipts. Excluding Plaintiff’s gross
hedging receipts under ORS 314.665(6)(a) is consistent with the legislative intent of that statute.
4. Treatment of hedging receipts by other states
Finally, Plaintiff argues that other states that have adopted UDITPA have included gross
hedging receipts in the state apportionment factor. (Ptf’s Mot for Summ J at 16-17 (citing
General Mills v. Franchise Tax Board, 172 Cal App 4th 1535, 92 Cal Rptr 3d 208 (2009), and In
Re: Archer Daniels Midland Company, Pennsylvania Board of Finance and Revenue, Docket
No. 1523133 (2018)).) The court has reviewed the cases cited by Plaintiff and concludes that
they do not change the outcome of this analysis because neither involved a statute like ORS
314.665(6), that excludes from the sales factor gross receipts from the sale of intangible assets.
Each case concerned whether hedging transactions were “sales” for purposes of the sales factor –
a point not in dispute here – and, in General Mills, the amount of gross receipts to be included.
See 172 Cal App 4th at 1548(concluding “ ‘gross receipts’ from a futures sales contract are
equivalent to the full sales price of the contract”).
5. Conclusion: Plaintiff’s derivative commodity instruments are intangible assets
Plaintiff’s derivative commodity instruments are intangible assets within the meaning of
ORS 314.665(6)(a). They do not share important characteristics of tangible personal property
and should not be sourced as such. The fact that such assets are used in Plaintiff’s commodity
hedging program and treated as ordinary rather than capital assets under federal tax law does not
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 15 alter that conclusion because the rules for apportioning income to Oregon serve a different
purpose than the rules for determining federal taxable income. Including gross hedging receipts
in Plaintiff’s sales factor may result in the type of distortion that ORS 314.665(6) was enacted to
prevent.
B. Whether Plaintiff’s Hedging Receipts Derive from its Primary Business Activity
Having concluded that Plaintiff’s hedging receipts arose from sales of intangible assets,
the next question is whether they may nevertheless be included in Plaintiff’s sales factor because
they derive from Plaintiff’s “primary business activity.” Defendant moves for summary
judgment on this question, arguing that Plaintiff’s business included two segments – upstream
and downstream – neither of which included its hedging activities. (Def’s Mot for Summ J at 5-
6.) Plaintiff asks the court to deny summary judgment, alleging that issues of material fact exist.
In Tektronix, the Oregon Supreme Court concluded that taxpayer’s sale of goodwill did
not derive from its primary business activity, reasoning that “taxpayer’s ‘primary business’ was
‘manufacturing and distributing electronics products’” and not “engaging in the sale of its
divisions[.]” Id. at 547-48. More recently, this court observed that – although the legislative
history of ORS 314.665(6)(a) indicates that the primary business exception applies to taxpayers
“in the primary business of selling short-term securities or passively holding intangibles that
produce interest or dividends” – it is not limited by its terms to that circumstance. Oracle, 2020
WL 7765776 at *16. 11 Indeed, Defendant’s administrative rule identifies seven non-exhaustive
11 Previously, in recounting the history of ORS 314.665(6), this court described it as dividing “the world into two hemispheres[:] * * * companies whose primary business involved the sale of intangible assets assets—for example, firms trading securities for their own account” and all others. Tektronix, 20 OTR at 495. However, the court in that opinion limited the scope of ORS 314.665(6)(a) to the “treasury function” problem described in the legislative history. The Oregon Supreme Court rejected that conclusion, observing that the legislature used the broader language of “intangible assets” – indicating its intention for a broader application of ORS 314.665(6)(a). Tektronix, 354 Or at 543, 546. Similarly, the term “primary business activity” is broader than the examples given in legislative history indicating it is not narrowly limited by those examples.
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 16 factors to consider when identifying a taxpayer’s primary business activity:
(a) The stated business in the articles of incorporation.
(b) The business category entered on the Securities and Exchange Commission Form 10-K of a publicly held corporation.
(c) The business designation in a “mission statement.”
(d) The business activity with the greatest average investment in tangible and intangible assets from the balance sheet for the tax return.
(e) The business designation in advertising.
(f) The business with the greatest amount of net sales of product and services as reported under Generally Accepted Accounting Principles.
(g) The business activity from which working capital is transferred to investments in intangible assets and to which the working capital and income is returned.
OAR 150-346.665(6)(3) (2011). Plaintiff has presented evidence of the integral role that
hedging plays in its business and requested the opportunity to present additional evidence on the
question of its primary business activity. Given the fact-dependent nature of the inquiry, the
court concludes that summary judgment is not appropriate at this time.
IV. CONCLUSION
Upon careful consideration, the court concludes that Plaintiff’s commodity hedging
receipts arose from sales of intangible assets within the meaning of ORS 314.665(6)(a).
Accordingly, the gross receipts are excluded from Plaintiff’s sales factor unless they derive from
Plaintiff’s primary business activity, a question of fact. Now, therefore,
IT IS ORDERED that Plaintiff’s Motion for Summary Judgment is denied.
IT IS FURTHER ORDERED that Defendant’s Motion for Summary Judgment is granted
in part and denied in part.
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 17 IT IS FURTHER ORDERED that, within 30 days from the date of this Order, the parties
shall file a joint written status report proposing next steps.
Dated this ____ day of April 2021.
ALLISON R. BOOMER PRESIDING MAGISTRATE
This interim order may not be appealed. Any claim of error in regard to this order should be raised in an appeal of the Magistrate’s final written decision when all issues have been resolved. ORS 305.501.
This document was signed by Presiding Magistrate Allison R. Boomer and entered on April 14, 2021.
ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT TC-MD 190031N 18