A taxpayer was not required to include a holding company for foreign entities in its Colorado combined returns. The taxpayer was a parent company of the holding company and formed the company to own foreign entities. The holding company did not own or rent property, had no payroll, and did not advertise or sell products or services of its own. For federal income tax purposes, the holding company and its foreign subsidiaries elected to be taxed as a single corporation.
Under Colorado law, a corporation must be included in a combined report if more than 20% of the corporation’s property and payroll are assigned to locations in the United States. Citing a regulation, the appellate court noted that the holding company did not have property or payroll factors that could be assigned to any location.
In addition, the court rejected arguments that:
- the regulation was intended to apply only to foreign sales corporations; and
- the holding company actually had domestic property because it used tangible property of the taxpayer.
The taxpayer claimed that, since the holding company and its foreign subsidiaries were treated as one corporation for federal tax purposes, the property and payroll of the foreign subsidiaries was part of its property and payroll. If 80% or more of a corporations’ property is located outside the United States, Colorado law excludes the corporation from a combined report. However, the court ruled that the holding company’s federal election does not require Colorado to treat the holding company and its subsidiaries as a single corporation.
In addition, the court determined that a Colorado law authorizing the department to allocate income and deductions among corporations that are owned or controlled by the same interests in order to properly reflect income and avoid abuse could not be applied as an alternative basis for including of the holding company in the taxpayer’s return. Finally, it held that the trial court did not err when concluding that the economic substance doctrine should be applied to permit taxation of the holding company even in the absence of specific statutory authorization.
Agilent Technologies, Inc. v. Department of Revenue of the State of Colorado, et. al., Colorado Court of Appeals, No. 16CA0849, November 2, 2017, ¶201-386