Colorado Supreme Court excludes holding companies from Waters Edge

May 30, 2019
May 30, 2019
0 min. read

On May 28, 2019, the Colorado Supreme Court ruled in favor of the taxpayer in both Department of Revenue v. Agilent Technologies Inc. and , affirming a lower court’s decision that a parent company of a worldwide affiliated group making a Water’s Edge election can exclude a domestic holding company that has no property or payroll from the combined return.

Recall that Agilent Technologies, Inc. is the parent corporation of a group of entities that collectively do business in Colorado, derive income from their Colorado operations and are subject to Colorado corporate income tax on a combined basis. Agilent owns World Trade, which owns interests in foreign entities that are treated as disregarded entities for federal income tax purposes. World Trade is a bare holding company and has no property and payroll of its own.

In filing its Colorado combined return, Agilent excluded World Trade from the filing group, taking the position that World Trade did not meet the definition of an “includable C corporation” under Colorado Revised Statutes section 39-22-303(12)(c), which provides that an “includable C corporation” is defined as “any C corporation which has more than 20% of the C corporation’s property and payroll as determined by factoring pursuant to section 24-60-1301 (referring to the Multistate Tax Compact) assigned to locations inside the United States,” and Colorado Code of Reg. section 39-22-303.12(c), which provides that “only those corporations whose property and payroll factors are assigned 20% or more to locations inside the United States may be included in a combined report. Since corporations that have no property or payroll factors of their own cannot have 20% or more of their factors assigned to locations in the United States, such corporations, by definition, cannot be included in a combined report.”

The Court aimed to answer two principal questions. First, determine if the Colorado Department of Revenue can require a corporate parent of a worldwide group of affiliated corporations to include the apportionment factors of a wholly owned holding company in its Colorado combined income tax return. Second, if the department cannot require the inclusion of a holding company, determine if the department can allocate the holding company’s gain and gross income to the parent in order to avoid abuse and clearly reflect income.

For the first question, the Court concluded and affirmed the lower court’s decision, that the existing provisions and bright-line test to determine unitary and combined reporting requirements excludes wholly-owned domestic holding companies that do not have property or payroll. In answering the second question, the Court concluded that the taxpayers had legitimate business purposes for establishing the holding companies and the department did not need to allocate gain and gross income to prevent abuse or to clearly reflect income.

The department argued that the intent of the provisions and regulations is not to allow the exclusion of domestic holding companies, but instead are designed to deal with foreign sales corporations. Although the Court rejected the department’s argument and affirmed the lower court’s decision in favor of the taxpayers, the Court’s opinion points out that the Colorado legislature will need to provide further guidance on combined reporting requirements.


Taxpayers that have included holding companies as part of a Colorado combined return may be eligible for refunds. Taxpayers should review their Colorado combined group to determine whether they have included any holding companies, including holding companies that have property and payroll factors flowing up from any disregarded entities and pass-through entities (foreign or domestic); and analyze the impact of excluding those entities. If holding companies have been detrimentally included in a Colorado combined return, there may be opportunities for filing refund claims for all open years.

Additionally, taxpayers should consider whether to exclude holding companies from their Colorado combined returns going forward. However, Senate Bill 233, which is currently on the governor’s desk for signature, would clarify that domestic holding companies without property or payroll should be included in the combined return. That bill and other potential legislation could impact how combined reports are filed following these decisions and a taxpayer’s eligibility for refunds. Accordingly, taxpayers who have filed or are filing combined returns in Colorado should contact their state tax professional with questions. For more information on the lower court’s decision and the details of the case, please read our alert Colorado court excludes holding company from combined group.

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