Colorado court excludes holding company from combined group
No property, no payroll, no combination
TAX ALERT |
On Jan. 20, 2016, the Colorado District Court for the City and County of Denver issued its decision on summary judgment in Agilent Technologies, Inc. v. Brohl, Case No. 2014CV393, ruling that a holding company with no property or payroll of its own could not be included in its parent’s Colorado combined group for corporate income tax purposes because the holding company, having no property or payroll whatsoever, did not have 20 percent or more of its property or payroll factors assigned to locations in the United States as required for inclusion under C.R.S. section 39-22-303(12)(c).
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 C.R.S. section 39-22-303(12)(c), which provides that an “includable C corporation” is defined as “any C corporation which has more than twenty percent of the C corporation’s property and payroll as determined by factoring pursuant to section 24-60-1301, C.R.S., assigned to locations inside the United States”, and Revenue Regulation 39-22-303(12)(c), which provides that “only those corporations whose property and payroll factors are assigned twenty percent 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 twenty percent or more of their factors assigned to locations in the United States, such corporations, by definition, cannot be included in a combined report.” The Colorado Department of Revenue disagreed with this approach, arguing that while the proper test was to look only to the factors of World Trade and not to the factors of its disregarded subsidiaries, inclusion of World Trade in Agilent’s combined group was appropriate because World Trade could be deemed to have some of the U.S. factors of Agilent because World Trade relies upon the property and payroll of Agilent to perform its activities. Agilent appealed.
Considering cross-motions for summary judgment, the Colorado District Court for the City and County of Denver determined that:
1) The Department had correctly excluded the foreign factors of World Trade’s disregarded subsidiaries from World Trade’s factors because the only factors that could be used in computing World Trade’s payroll and property for the purposes of determining whether inclusion was appropriate were World Trade’s own factors determined in its separate capacity; and
2) Agilent had correctly computed World Trade’s factors for the purposes of determining whether inclusion was appropriate because only World Trade’s own factors, determined in its separate capacity, could be considered, and factors could not be imputed from any other entity.
3) Because World Trade had no property or payroll factors of its own, it was properly excluded from Agilent’s combined group under Revenue Regulation 39-22-303(12)(c).
In response to this decision, the Colorado Department of Revenue issued a notice, informing taxpayers that Revenue Regulation 39-22-303(12)(c) was intended to apply to Foreign Sales Corporations (FSCs) and not domestic holding companies, and that taxpayers should not rely upon this regulation in relation to any entities other than FSCs until the Colorado courts have issued a final determination in this matter. Accordingly, taxpayers stand forewarned that the Department intends to appeal the decision of the trial court and likely will not waive penalties for any taxpayers that rely on the trial court’s decision in filing original returns on a going forward basis should that decision ultimately be overruled.
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-throughs (foreign or domestic); and analyze the impact of excluding those entities. Taxpayers that have detrimentally included a holding company in their Colorado combined return should consider filing protective refund claims for all open years pending the final outcome of Agilent. Further, taxpayers should consider whether to exclude those holding companies from their Colorado combined returns going forward, either on the original return or by amending an original filing.