A taxpayer was not required to include a domestic holding company in its Colorado combined returns. The taxpayer owned 100% of the holding company. The holding company:
- had no property or payroll of its own, inside or outside of the United States; and
- operated exclusively in Japan.
20% or More Inclusion Test
In Colorado, a taxpayer includes a corporation in a combined return if more than 20% of the corporation’s property and payroll are assigned to locations in the United States. Here, the holding company did not have property or payroll factors that could be assigned to any location. As a result, it:
- was not considered an includible C corporation;
- cannot be a member of an affiliated group; and
- cannot be required to be included in a combined report.
The law that sets forth the 20% or more test does not mention holding companies that do not have property or employees. The Colorado appellate court ruled that failing to address such holding companies does not create ambiguity in the law. The 20% or more test still applied to determine if the holding company is included in the return.
Avoiding State Income Tax
In addition, the taxpayer did not form the holding company as an attempt to avoid paying state income taxes. Instead, the taxpayer formed the holding company for a reasonable business purpose at the request of a third party.
Other Arguments for Including the Holding Company
The court also rejected arguments that:
- a Department of Revenue regulation was intended to apply only to foreign sales corporations;
- subsections of the law at issue also concerning the scope of combined reports should be read as also applying only to C corporations that conduct business outside of the United States; and
- that excluding the holding company from combined reporting would create an absurd result.
Finally, the court ruled that the holding company was not included under a law that authorizes the department to allocate income and deductions among certain related corporations to properly reflect income and avoid abuse.
Oracle v. Department of Revenue, Colorado Court of Appeals, No. 2017COA152, November 30, 2017, ¶201-389