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Twentieth Century-Fox Film Corp. v. Department of Revenue, 299 Or. 220, 700 P.2d 1035

Facts

Twentieth Century Fox, a motion picture producer and distributor, only engaged in licensing films for exhibition in Oregon during the years 1975 to 1977. The taxpayer filed corporate excise tax returns using the statutory three-factor formula for apportionment of income. The Department of Revenue's auditor modified the property factor to include a portion of the value of film negatives stored in California, leading to a tax increase of approximately $22,000. The Tax Court ruled that the Department did not meet its burden of proof to show that the statutory formula was inadequate.

Taxpayer produces and distributes motion pictures. Its only business activity in Oregon during the years in question was the licensing of motion pictures for exhibition by independent theaters. Taxpayer filed Oregon corporate excise tax returns for 1975, 1976 and 1977, using the statutory three-factor formula for apportionment of income to Oregon.

Issue

Did the Department of Revenue prove that the statutory three-factor apportionment formula used to apportion income to Oregon did not fairly represent the extent of Twentieth Century Fox's business activity in the state?

There is one dispositive issue: whether the department proved that the statutory three-factor apportionment formula used to apportion income to Oregon for purposes of corporate excise taxation did not fairly represent the extent of taxpayer's business activity in this state thus permitting the department to employ a different method.

Rule

Under ORS 314.670, if the statutory apportionment provisions do not fairly represent a taxpayer's business activity, the Department may permit alternative methods of allocation and apportionment.

If the allocation and apportionment provisions of ORS 314.610 to 314.665 do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for and the department may permit, or the department may require, in respect to all or any part of the taxpayer's activity, if reasonable: (1) Separate accounting; (2) The exclusion of any one or more of the factors; (3) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or (4) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.

Analysis

The court found that the Department met its burden of proof by demonstrating that the statutory formula, which only considered the value of prints and excluded the value of negatives, did not accurately reflect the taxpayer's business activity in Oregon. The Department's modified apportionment formula was deemed reasonable as it aligned with California guidelines and accurately represented the economic reality of the taxpayer's operations.

The evidence establishes the following: The payroll factors for these three years are zero. This factor cannot be a minus or negative number. Thus, the taxpayer enjoys the lowest possible payroll factor. It is also established that the sales factors for each year accurately reflects taxpayer's receipts in Oregon. Because both the payroll factor and the sales factor are either accurate or not capable of being inaccurately high, these factors will not offset any under-evaluation in the property factor.

Conclusion

The Supreme Court reversed the Tax Court's decision and remanded the case with instructions for the Tax Court to remand to the Department of Revenue for further proceedings.

The decision of the Tax Court is reversed and remanded with instructions to remand to the Department of Revenue.

Who won?

Department of Revenue prevailed because it successfully demonstrated that the statutory apportionment formula did not fairly represent the taxpayer's business activity in Oregon, allowing for a different method of apportionment.

Department has met its burden of proof by a preponderance of the evidence, ORS 305.427. It may properly utilize ORS 314.670(4) in avoidance of the statutory apportionment formula in this case.

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