Dec 11, 2017
From KPMG TaxWatch
Recently, a Colorado appeals court held—for the second time in the last few weeks—that a domestic holding company with no property and payroll could not be included in a Colorado combined report with its affiliates. Although the appeals court reached the same conclusion as the trial court, it rejected the trial court’s position that the relevant statute was ambiguous. The statute at issue defines an includable corporation as any corporation with more than 20 percent of its property and payroll assigned to U.S. locations. The question thus arose as to the treatment of a company with no property or payroll whatsoever. The appeals court, rejecting the idea that the statute was ambiguous, held that it was quite clear: a company with no property or payroll cannot have 20 percent of its property and payroll in the U.S. In fact, the Department’s own regulation stated that because companies with no property or payroll of their own cannot have twenty percent or more of their factors assigned to locations in the United States, such corporations, by definition, cannot be included in a combined report. Despite the regulation applying broadly to all companies, the Department tried to argue that it applied only to foreign corporations and that the trial court’s interpretation would create an absurd result and open the door for all taxpayers with domestic holding companies to seek beneficial treatment. The appeals court rejected all of these arguments, noting that the Department had never sought a legislative fix for the “parade of horribles” it posited.
The second issue before the court on appeal was whether the state’s IRC section 482 equivalent allowed the Department to include the domestic holding company in the combined group. Specifically, this statute authorizes the Department to allocate income and deductions among corporations that are owned or controlled by the same interests, “to avoid abuse, on a fair and impartial basis,” so as “to clearly reflect income.” The trial court had held that this statute could not be applied to include the holding company in the combined group. The appeals court agreed for several different reasons, noting that allowing the Department to combine the holding company using the section 482 statute under the guise of abuse essentially would allow it to do what it was precluded from doing under Colorado’s combined reporting law. In the court’s view, this would violate the principle that “the law may not be used to permit one to accomplish indirectly what he may not achieve directly.” Furthermore, the court noted the very specific combined reporting law controlled over the general 482 statute, and the Department’s interpretation would lead to a conflict between the combined reporting law and the 482 statute. For further information on Oracle v. Dep’t of Revenue, please contact Mark Kaye at 303-382-7855.
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.