The Oregon Tax Court issued its second decision in less than a month regarding combined returns that include an insurance company, this time finding for the taxpayer. Last month, in Costco Wholesale Corp. v. Oregon Dept. of Rev., TC 4956, (Ore. Tax Ct. July 16, 2012), the court held that the income of Costco’s affiliated reinsurance company was not permitted to be excluded from Costco’s Oregon unitary combined return. The court reasoned that Oregon’s requirement that companies “permitted or required” to use an alternative apportionment formula (e.g., insurance companies) are excluded from a unitary combined return and are required to file a separate return applied only to combined group members over which Oregon had jurisdiction to tax.
On August 2, the Tax Court issued its decision in Stancorp Financial Group Inc. et al. v. Department of Revenue, where it held that a parent corporation was not required to include dividends received from a subsidiary insurance company because the dividends were eliminated under the federal consolidated return regulations. However, in contrast to Costco, the insurance company in the Stancorp combined group was taxable in Oregon and therefore was required to file a separate Oregon income tax return. Thus, the insurance company was not included in the parent’s unitary combined return, unlike the insurance company in Costco.
Under Oregon’s rules, dividends are added back if: (1) they were eliminated under federal consolidated return regulations; and (2) the dividends were paid by members of a federal affiliated group that are part of a different unitary group. In Stancorp, the parties stipulated that the parent and the insurance company were part of the same unitary business; therefore, there was no requirement for the parent to add back the dividends paid by the insurance company subsidiary.
The Department argued that the requirement under Oregon law for the insurance company to file a separate Oregon return must also be treated as the insurance company being excluded from the federal consolidated return for purposes of computing the parent’s taxable income. The Tax Court refused to read this inference into the statute and stated that if the legislature desires to provide for such a rule, only a small addition to the existing dividends add back provision would be required.