DEPARTMENT OF REVENUE OF THE STATE OF COLORADO; AND MICHAEL HARTMAN, IN HIS OFFICIAL CAPACITY AS THE EXECUTIVE DIRECTOR OF THE DEPARTMENT OF REVENUE OF THE STATE OF COLORADO v. AGILENT TECHNOLOGIES, INC.
No. 17SC840
The Supreme Court of the State of Colorado
May 28, 2019
2019 CO 41
JUSTICE GABRIEL delivered the Opinion of the Court.
Certiorari to the Colorado Court of Appeals, Court of Appeals Case No. 16CA849. Judgment Affirmed en banc.
May 28, 2019
2019 CO 41
No. 17SC840, Department of Revenue v. Agilent Technologies — Corporate Income Tax — Taxation of Holding Companies.
This case principally requires the supreme court to decide two questions. First, the court must determine whether the Colorado Department of Revenue and its Executive Director can require the parent company of a worldwide family of affiliated corporations to include a holding company and wholly owned subsidiary of the parent in its Colorado combined income tax returns for certain tax years at issue. If the answer to that question is no, then court must consider whether the Department may nevertheless allocate the holding company’s gross income to the parent in order to avoid abuse and to clearly reflect income.
As to the first question, the court concludes that
Accordingly, the court concludes that the district court properly granted summary judgment in the corporate parent’s favor and therefore affirms the judgment of the division below.
Department of Revenue of the State of Colorado; and Michael Hartman, in his official capacity as the Executive Director of the Department of Revenue of the State of Colorado,
v.
Respondent/Cross-Petitioner:
Agilent Technologies, Inc.
Attorneys for Petitioners/Cross-Respondents:
Philip J. Weiser, Attorney General
Terence C. Gill, First Assistant Attorney General
Noah C. Patterson, Senior Assistant Attorney General
Denver, Colorado
Attorneys for Respondent/Cross-Petitioner:
Silverstein & Pomerantz LLP
Neil I. Pomerantz
Denver, Colorado
Morrison & Foerster LLP
Craig B. Fields
Irwin M. Slomka
New York, New York
Holland & Hart LLP
Christina F. Gomez
Jonathan S. Bender
Denver, Colorado
Attorney for Amici Curiae Professors David Gamage, Hayes Holderness, and Darien Shanske:
Isaac L. Lodico
Denver, Colorado
JUSTICE GABRIEL delivered the Opinion of the Court.
¶3 Accordingly, we conclude that the district court properly granted summary judgment in Agilent’s favor, and we therefore affirm the judgment of the division below.2
I. Facts and Procedural History
¶4 Agilent is a Delaware corporation headquartered in California, and it is the parent company of a worldwide family of affiliated corporations that develops and manufactures bio-analytic and electro-analytic devices. Agilent maintains research and development and manufacturing sites in Colorado and is thus subject to Colorado corporate income tax.
¶6 For the tax periods beginning June 3, 2000, and ending October 31, 2007, Agilent filed separate company Colorado corporate income tax returns and did not include World Trade in its Colorado corporate tax returns for those periods, notwithstanding the fact that, for federal income tax purposes, each of the above-noted foreign subsidiaries of World Trade made so-called “check-the-box” elections to be treated as disregarded entities (and therefore as divisions of World Trade) for federal income tax purposes.
¶7 The Department subsequently audited Agilent’s corporate tax returns and in August 2010 issued notices of tax deficiencies for the periods at issue. As pertinent here, these notices required Agilent to file Colorado combined corporate income tax returns for the periods at issue and to include World Trade in those returns. These notices also advised Agilent that the Department had assessed tax, interest, and penalties against it totaling $13,345,601.
¶8 Agilent protested this assessment, but the Director upheld it, and in 2014, the Department issued a “Notice of Final Determination and Assessment and Demand for Payment,” which included additional interest and brought the assessment to $13,720,507.
¶10 As pertinent here, the court rejected Agilent’s contentions that (1) the Department was required to respect the foreign subsidiaries’ check-the-box elections and similarly treat World Trade and the four subsidiaries as a single C corporation for Colorado income tax purposes and, therefore, (2) more than 80% of World Trade’s property and payroll fell outside of the United States, thus precluding the Department, under
¶11 The court proceeded to determine, however, that World Trade did not meet the definition of an includable C corporation for purposes of
¶12 The Department appealed, Agilent cross-appealed, and in a unanimous, published opinion, a division of the court of appeals affirmed. Agilent Techs., Inc. v. Dep’t of Revenue, 2017 COA 137, ___ P.3d ___. As pertinent here, the division agreed with the district court that the foreign subsidiaries’ check-the-box elections did not preclude the Department from requiring World Trade’s inclusion in Agilent’s Colorado combined returns. Id. at ¶¶ 27–31. Like the district court, however, the division further concluded that World Trade, as an entity without property or payroll of its own in the United States, was not an “includable C corporation” under
¶13 The Department petitioned this court for certiorari review, and Agilent cross-petitioned, requesting that we review those of its arguments that the division had rejected. We granted both parties’ petitions.
¶14 The Department principally contends that under
A. Standard of Review and Principles of Statutory Construction
¶15 This case requires us to review the district court’s entry of summary judgment in Agilent’s favor. We review a grant of summary judgment de novo. Hardegger v. Clark, 2017 CO 96, ¶ 13, 403 P.3d 176, 180. When, as here, the material facts are undisputed, summary judgment is proper only when the pleadings and supporting documents show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Id.;
¶16 We also review questions of statutory interpretation de novo. UMB Bank, N.A. v. Landmark Towers Ass’n, 2017 CO 107, ¶ 22, 408 P.3d 836, 840. In construing a statute, our goal is to effectuate the legislature’s intent. Oakwood Holdings, LLC v. Mortg. Invs. Enter. LLC, 2018 CO 12, ¶ 12, 410 P.3d 1249, 1252. In seeking to do so, “we look to the entire statutory scheme in order to give consistent, harmonious, and sensible effect to all of its parts, and we apply words and phrases in accordance with their plain and ordinary meanings.” UMB Bank, ¶ 22, 408 P.3d at 840. We must avoid constructions that would render any words or phrases superfluous or that would lead to illogical or absurd results. Am. Fam. Mut. Ins. Co. v. Barriga, 2018 CO 42, ¶ 8, 418 P.3d 1181, 1183. In addition, we must respect the legislature’s choice of language, and we will not add words to a statute or subtract words from it. Oakwood Holdings, ¶ 12, 410 P.3d at 1252. If the statutory language is clear, we apply it as written and need not resort to other rules of statutory construction. Id. In addition, we may consider an agency’s interpretation of a statute, but we are not bound by the agency’s interpretation, and we will not defer to that interpretation if it is contrary to the statute’s plain language. BP Am. Prod. Co. v. Colo. Dep’t of Revenue, 2016 CO 23, ¶ 15, 369 P.3d 281, 285.
B. Sections 39-22-303(11)-(12)
¶17
In the case of an affiliated group of C corporations, the executive director may require, or the taxpayer may file, a combined report, but such report shall only include those members of an affiliated group of C corporations as to which any three of [a list of six enumerated] facts have been in existence in the tax year and the two preceding tax years[.]
(Emphasis added.)
¶18
¶19 And
¶20 Read together, these provisions allow the Director to require a Colorado combined return of “an affiliated group of C corporations,” and in such circumstances, chains of includable corporations that meet the three-of-six test must be included in the combined return.
¶21 The first question that we must decide, then, is whether World Trade is an includable C corporation such that, subject to satisfaction of the three-of-six test, the
¶22 As noted above, an includable C corporation is a C corporation that has more than twenty percent of its property and payroll as determined by factoring pursuant to
¶23 Here, World Trade has no property or payroll as determined by the requisite factoring inside the United States. Accordingly, World Trade is not part of a chain of includable corporations, whether or not it meets the three-of-six test, and therefore the director may not require that it be included in Agilent’s combined return under
¶24 Our conclusion in this regard is supported by Colo. Code Regs. section 201-2:39-22-303.12(c), entitled “Corporations without property and payroll factors,” which the Department promulgated in 1994. That regulation provides, in pertinent part, “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.” In our view, this regulation is directly on point because it unambiguously provides that if a corporation has no property or payroll of its own, then it may not be included in a combined return. World Trade does not have any property or payroll of its own. Accordingly, the regulation prohibits the inclusion of World Trade in Agilent’s return. See Rags Over the Ark. River, Inc. v. Colo. Parks & Wildlife Bd., 2015 COA 11M, ¶ 25, 360 P.3d 186, 191 (noting that an administrative agency is bound by the regulations that it enacts).
¶26 Moreover, we deem as significant the fact that when the Department adopted a regulation that mirrored the argument that it is making before us, the legislature rejected the Department’s position. Specifically, in 1990, the Department promulgated a prior version of Colo. Code Regs. section 201-2:39-22-303.12(c) (1990), that provided, in pertinent part, “A corporation without property and payroll, which functions through the use of personnel services and/or property of an includible corporation, shall also be considered an includible corporation.” The Office of Legislative Legal Services (“OLLS”), however, reviewed this regulation and determined that it
conflict[ed] with the definition of “includible corporations” as set forth in
section 39-22-303(12)(c), C.R.S. The regulation[] allow[ed] corporations with no property or personnel to be considered includible corporations even though such corporations [did] not satisfy the statutory requirements of having more than twenty percent of its property and payroll located within the United States.
¶27 Notwithstanding the foregoing, the Department contends, based on its view of the available legislative history, that
¶28 We likewise are unpersuaded by the Department’s assertion that
¶29 For these reasons, we conclude that
C. Section 39-22-303(6)
¶30 As noted above, the Department alternatively argues that under
¶31 As an initial matter, we note that the Department’s own regulations again undermine its argument. Specifically, Colo. Code Regs. section 201-2:39-22-303.6 provides, “Even though subsection 39-22-303(6), C.R.S. has been superseded by subsection 39-22-303(11), C.R.S., as a vehicle for requiring combined reporting for affiliated C corporations, subsection 39-22-303(6) is still available for use by the Department of Revenue or by the taxpayer for determining Colorado taxable income by use of [described methodologies].”
¶32 Accordingly, although
¶33 Even if
¶34
In the case of two or more C corporations, whether domestic or foreign, owned or controlled directly or indirectly by the same interests, the executive director may, to avoid abuse, on a fair and impartial basis, distribute or allocate the gross income and deductions between or among such C corporations in order to clearly reflect income.
¶35 By its plain terms, this provision allows the Director to distribute or allocate income only if doing so is necessary to avoid abuse and to clearly reflect income.
¶36 Although the phrase “to avoid abuse” is not defined, the Department contends that in the tax context, “abuse” is a broad concept and exists whenever a taxpayer reduces its tax liability by ordering its affairs so as to comply with the text of the statute while contradicting the statute’s intent. The Department further contends that “[s]ubsection (6) does not require the taxpayer itself to engage in abuse, but empowers the Department ‘to avoid abuse’ generally.” In the Department’s view, then, a corporate structure may constitute abuse even if that structure serves a legitimate business purpose. We are not persuaded.
¶38 Thus, the Department’s own evidence precludes a finding that an allocation of income to Agilent is necessary to avoid abuse.
¶39 Finally, even were we to accept the Department’s broad definition of “abuse,” no evidence presented in this case supports the Department’s suggestion that Agilent and World Trade ordered their affairs so as to comply with the text of the pertinent statutes while contradicting the legislative intent behind those statutes. To the contrary, we perceive the Department’s construction of the statutes and regulations at issue to be inconsistent with the clear and unambiguous language of those provisions, and for the reasons set forth above, we cannot adopt such a construction. See Am. Fam. Mut. Ins. Co., ¶ 8, 418 P.3d at 1183.
¶40 Accordingly, we conclude that
¶41 Notwithstanding the plain language of the pertinent statutes and of its own regulations, the Department contends that construing the provisions at issue as we have done will lead to absurd results and a parade of horribles because a taxpayer could always shield income from Colorado taxation simply by creating a holding company. For several reasons, we are not persuaded.
¶42 First, to the extent that the Department disagrees with the plain language of the pertinent statutes, its remedy is with the legislature and not this court because we must apply statutory language as written. Oakwood Holdings, ¶ 12, 410 P.3d at 1252.
¶43 Second, as the Department’s own expert witness recognized, the formation of a holding company is a “normal and traditional way to do things,” and we therefore do not agree with the Department’s apparent premise that the creation of a holding company, in and of itself and with no evidence that the company was created to avoid Colorado taxation, constitutes “abuse” within the meaning of the pertinent provision.
¶44 Third, although the Department posits that a parade of horribles will follow the statutory interpretation that we have adopted today, it has offered no evidence to support such dire predictions, and we have seen none.
¶45 Accordingly, we conclude, on the undisputed facts of this case, that
¶46 For the foregoing reasons, we conclude that the district court properly granted summary judgment in favor of Agilent and against the Department, and we need not address the issues concerning World Trade’s check-the-box election and the three-of-six test that Agilent raised in its cross-petition.
III. Conclusion
¶47 Because the plain and unambiguous language of the pertinent statutory provisions and associated regulations demonstrate that the Department may not compel Agilent to include World Trade in its combined return or otherwise to include World Trade’s income in that return, we conclude that the district court properly granted summary judgment in Agilent’s favor and against the Department.
¶48 Accordingly, we affirm the judgment of the division below.
Notes
- Whether a holding company that has no foreign property, payroll, or operations is exempt from Colorado taxation under the “Water’s Edge” exemption (
C.R.S. § 39-22-303(8) ,(12)(c), 2017 ). - Whether
section 39-22-303(6) authorizes the Department to allocate a domestic holding company’s income to its corporate parent to “clearly reflect” the parent’s income and “avoid abuse.” - Whether the principles of federal conformity require that the federal “check-the-box” elections made by World Trade’s subsidiaries be followed for Colorado income tax purposes, resulting in World Trade being excluded from Agilent’s Colorado combined returns under
Section 303(8) because, as a result of those elections, more than 80% of World Trade’s property and payroll is located outside the United States. - Whether World Trade [should] be excluded from Agilent’s combined returns because at least three of the six factors required for combination under
Section 303(11)(a) are not satisfied.