Oregon ~ Corporate Income Tax: Taxes: Bank Holding Company Lacked Nexus

For purposes of the Oregon corporate (excise) tax, the imposition of tax on the parent corporation of a bank holding company violated both the Due Process and the Commerce Clauses of the United States Constitution. The parent corporation filed consolidated corporate tax returns on behalf of itself and its operating subsidiaries. The parent corporation entered bankruptcy and was succeeded by a liquidating trust. Oregon argued that the parent corporation was liable for the Oregon excise tax owed by its subsidiaries for tax years 2002 through 2006. The trust objected, arguing that the tax was unconstitutional because it is incompatible with the Due Process Clause and violated the Commerce Clause.

Oregon asserted that by filing a consolidated return in its name, the parent corporation admitted that it was doing business in Oregon and was liable for the excise tax. The trust argued that the inclusion of the parent company in the consolidated tax return was not a concession or admission of its tax liability. However, the court did not address these arguments.

Due Process Clause

The trust asserted that the parent corporation was merely a holding company and that it did not purposefully avail itself of the benefits of Oregon because its primary business offices were located in Seattle, Washington, it did not operate any offices or own any other property in Oregon, and it did not conduct any business activity within or directed toward Oregon. Oregon argued that the parent corporation, through its banking subsidiaries, was doing business in Oregon. Oregon asserted that the parent corporation directly controlled its banking subsidiaries, all of which were indisputably doing business and earning income on behalf of the parent corporation and themselves in Oregon.

However, imposition of the excise tax was barred by the Due Process Clause because the parent corporation and its subsidiaries were separate legal entities and the parent corporation did not conduct any business activity within or directed towards Oregon. The parent corporation was simply a holding company that held stock in its subsidiaries. Use of the parent corporation’s intellectual property was not sufficient to create nexus because the parent corporation did not receive any benefit from the use of its intellectual property. Thus, the parent company did not have sufficient minimum contacts with Oregon and the tax violated the Due Process Clause.

Commerce Clause

The trust also argued that the tax violated the Commerce Clause of the U.S. Constitution because the parent corporation did not have substantial nexus with Oregon. The trust argued that the excise tax was unconstitutional as applied to it because it lacked any relevant physical presence in Oregon to be taxed. Oregon argued that a physical presence requirement only applied to sales and use taxes and not corporate excise tax. Further, Oregon argued that use of the parent corporation’s trademarks by its subsidiaries in Oregon was proof of substantial nexus with the state.

However, the corporate excise tax was not unconstitutional simply because the parent corporation lacked a physical presence in Oregon. Further, the majority of courts have found a substantial nexus for Commerce Clause purposes only when an intangible property generates income for the taxpayer. The parent corporation did not receive any royalty payments, license fees, or other income from its subsidiaries’ use of the intellectual property. Therefore, the parent corporation did not have a substantial nexus with Oregon as required under the Commerce Clause and Oregon’s claim for tax were barred.

In re: Washington Mutual, Inc., U.S. Bankruptcy Court, D. Delaware, No. 08-12229 (MFW), December 19, 2012



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