25 OTR 687
Or. T.C.
2025

MICROSOFT CORPORATION v. DEPARTMENT OF REVENUE, State of Oregon

TC 5413

IN THE OREGON TAX COURT REGULAR DIVISION

April 29, 2025

25 OTR 687

ROBERT T. MANICKE, Judge

No. 39

In its motion for reconsideration, Plaintiff objected to Defendant’s adaptation of the Augusta Formula, which compared the Oregon taxable income in the assessment to the sum of each past year’s Oregon taxable income that would have been due under worldwide combined reporting over the 20 years covered by the federal repatriation requirement. In its motion, Plaintiff urged the court to compare the Oregon taxable income in the post-reinclusion assessment solely to the Oregon taxable income that would have been due for the tax year ending in 2018 under worldwide combined reporting. The court granted reconsideration but ultimately adhered to its earlier decision. The court also issued an amended order restating its decision in full and amending portions of its reasoning to clarify the reinclusion analysis and to correct minor errors. This order should be read together with the court’s August 29, 2024, Order on Cross-Motions for Summary Judgment and the court’s April 29, 2025, Amended Order on Cross-Motions for Summary Judgment.

Oral argument on Plaintiff’s Motion for Reconsideration was held January 14, 2025, in the courtroom of the Oregon Tax Court, Salem.

Elizabeth H. White, K&L Gates LLP, Portland, filed the motion and Jeffrey A. Friedman, Eversheds Sutherland (US) LLP, Washington DC, argued the cause for Plaintiff.

Darren Weirnick, Senior Assistant Attorney General, Department of Justice, Salem, filed the response and argued the cause for Defendant Department of Revenue.

Decision rendered April 29, 2025.

ROBERT T. MANICKE, Judge

This matter is before the court on Plaintiff’s motion under Tax Court Rule (TCR) 80A for reconsideration of the court’s August 29, 2024, Order on Cross-Motions for Summary Judgment (August 29 Order). The first part of the August 29 Order grants relief to Plaintiff to the extent of concluding that ORS 314.665(6)(a) requires the 20 Percent Repatriation Amount to be reincluded in the sales factor of Plaintiff’s Water’s Edge Group as a deemed dividend.1 The court uses the term “Post-Reinclusion Assessment” to refer to the assessment amount, as reduced by the dilutive effect of reincluding the 20 Percent Repatriation Amount in the sales factor. The second part of the August 29 Order rejects Plaintiff’s argument for further factor relief under Oregon’s “safety valve” statute, ORS 314.667, concluding that Plaintiff failed to carry its burden of proof that even the unreduced assessment violates either the statutory “fairly represent” standard or constitutional standards.2

Plaintiff now seeks reconsideration of the second part of the August 29 Order, specifically objecting to the use of Defendant’s proffered adaptation of the “Augusta Formula” when testing for constitutional factor relief. That adaptation essentially extends the Augusta Formula over the nearly twenty-year period during which the CFCs accumulated the earnings and profits that were deemed distributed in TYE 2018. The adaptation thus includes the sum of each past year’s Oregon taxable income that would have been due under worldwide combined reporting, an amount that the court now refers to as the Retrospective Worldwide Amount.3 The August 29 Order then compares the Retrospective Worldwide Amount to the assessment. Because the Retrospective Worldwide Amount is greater than the assessment, the August 29 Order concludes that Plaintiff has not shown that either the original assessment amount or the Post-Reinclusion Assessment Amount fails the statutory “fairly represent” standard or constitutional standards. Plaintiff’s motion for reconsideration focuses on why the court should apply a different version of the Augusta Formula, as described below.

Defendant objects to Plaintiff’s motion but does not itself move for reconsideration of either part of the August 29 Order, citing the court’s rule disfavoring “[c]laims addressing legal issues already argued in the parties’ briefs and addressed by the court.” TCR 80A A(4). But Defendant urges that, if the court were to grant Plaintiff’s motion, the court should also take up Defendant’s argument under the first part of the August 29 Order that reinclusion of the 20 Percent Repatriation Amount is inherently distortive.

In its discretion, the court will reconsider the August 29 Order as requested by Plaintiff, even though on summary judgment the parties extensively briefed and argued their respective positions regarding the constitutional fairness requirement on which the Augusta Formula is based. The court is moved to address Plaintiff’s new, more targeted, arguments in the interest of judicial economy, because of the potential that they otherwise could be raised for the first time in a further appeal. See ORS 305.445 (scope of Supreme Court review includes “errors or questions of law“).

Accordingly, this order will first analyze Plaintiff’s arguments for its version of the Augusta Formula. Thereafter, this order will also address Defendant’s request, in order to clarify the court’s reinclusion analysis. For the reasons discussed below, the court will not change its ultimate conclusions, or any results, under either part of the August 29 Order. The court will today, however, issue an Amended Order on Cross-Motions for Summary Judgment (Amended Order) that restates its decision in full, with amendments to portions of its reasoning and correction of minor errors, most of which were helpfully identified by the parties.

A. Plaintiff’s Arguments

According to Plaintiff, the Retrospective Worldwide Amount is an invalid comparator. Instead, Plaintiff urges the court to compare the Post-Reinclusion Assessment Amount solely to the TYE 2018 Oregon taxable income that would have been due under worldwide combined reporting, a comparator that the court now refers to as a Single-Year Worldwide Amount. Plaintiff reasons that Congress chose to require taxpayers to include the Federal Repatriation Amount in the tax base for a single tax year, instead of requiring taxpayers to amend their federal income tax returns for prior years, and a fairness analysis for state apportionment purposes must be based on that reality. The formula Plaintiff uses to derive its Single-Year Worldwide Amount is to add the Federal Repatriation Amount to the taxable income of the Water’s-Edge Group for TYE 2018, then to multiply that sum by a fraction, of which the numerator is Oregon sales for TYE 2018 and the denominator is the sum of (1) sales everywhere by the Water’s-Edge Group for TYE 2018 and (2) cumulative sales by the CFCs for TYE 2000 through 2018.

Plaintiff’s proffered Single-Year Worldwide Amount is less than the Post-Reinclusion Assessment Amount.4 Plaintiff argues that this fact proves “unconstitutional distortion.” According to Plaintiff, the court must address this distortion by capping Oregon taxable income for TYE 2018 at the Single-Year Worldwide Amount.

Plaintiff also argues that a Retrospective Worldwide approach is inaccurate because it “introduces a systematic error into the analysis” that produces a tax result different from a Single-Year Worldwide Amount. Plaintiff illustrates its point with examples involving different profit margins as between a hypothetical water’s-edge group and its CFCs. Only in the “unusual case where the profitability of the domestic and foreign operations is identical” is the same amount of income apportioned under both a Retrospective Worldwide approach and a Single-year Worldwide approach. And where the CFCs have a profit margin higher than that of the water’s-edge group, the Retrospective Worldwide approach disfavors the water’s-edge group by apportioning a higher amount of income domestically.

B. Defendant’s Responses

Defendant primarily attacks Plaintiff’s use of a single tax year to gauge the fairness of tax on unitary dividends built up over many years. The Maine Supreme Court’s approval of the Maine taxing authority’s adoption of the Augusta Formula is premised on the principle that the worldwide combined reporting method for a unitary group, as approved in Container Corp., presumably satisfies the constitutional requirements of fairness. See E.I. Du Pont de Nemours v. State Tax Assessor, 675 A2d 82, 90 (Me 1996) (“The Augusta Formula simply adopts the worldwide reporting method as a means of verifying the fairness of the tax liability of the unitary business as established by the tax assessor. The worldwide reporting method is widely acknowledged as a fair and accurate method of estimating a multijurisdictional corporation’s taxable business activities in the state, and the Supreme Court has repeatedly upheld the constitutionality of this method of accounting.“). Therefore, the more a formula deviates from that method, the more suspect the result becomes as a measure of fairness. Defendant argues that Plaintiff’s formula incorrectly ignores the basic unitary principle that the Federal Repatriation Amount must be eliminated from the tax base as a deemed dividend. As Defendant stated in its response, “[b]ecause the worldwide group is looked at as a whole, a proper application of the worldwide method requires the elimination of intercompany transactions among the members of the worldwide group, including dividends or deemed dividends.” And because the tax base is determined annually, the only reasonably accurate starting point to estimate the effect of eliminating an intra-group dividend comprising earnings and profits that have accumulated over many years is to redetermine the entire group’s income for each such year. According to Defendant, a formula that lacks this retrospective feature strays too far from a true worldwide combined apportionment method.

Defendant also criticizes Plaintiff’s formula as logically inconsistent. Although Plaintiff emphasizes the reality that Congress required the Federal Repatriation Amount to be included in the tax base for only one year, Plaintiff’s formula puts nearly 20 years of cumulative CFC sales into the sales factor denominator, along with only one year of sales by the Water’s-Edge Group. Defendant argues that this improperly “ignor[es] the activity of the domestic portion of the unitary business” over the same time period. Defendant essentially views Plaintiff’s attempt to adhere to Congress’s use of a single tax year as a red herring, given the lack of any indication that Congress considered state apportionment of income in the TCJA.

Finally, Defendant rejects Plaintiff’s “systematic error” argument, which depends on hypothetically different domestic vs. foreign profit margins; Defendant characterizes the argument as a request for separate accounting based on geography. Defendant quotes the Court’s rejection of a similar argument by the taxpayer in Container Corp.:

“Appellant *** argues that its foreign subsidiaries are significantly more profitable than it is, and that the three-factor formula, by ignoring that fact and relying instead on indirect measures of income such as payroll, property, and sales, systematically distorts the true allocation of income between appellant and the subsidiaries. The problem with this argument is obvious: the profit figures relied on by appellant are based on precisely the sort of formal geographical accounting whose basic theoretical weaknesses justify resort to formula apportionment in the first place.”

Container Corp. v. Franchise Tax Bd., 463 US 159, 181, 103 S Ct 2933, 77 L Ed 2d 545 (1983).

C. Analysis and Conclusions as to Single-Year vs. Retrospective Worldwide Methods

Overall, the court understands Plaintiff to contend on reconsideration that the result of applying the Retrospective Worldwide Comparator is unconstitutionally distortive because it fails to “actually reflect a reasonable sense of how [the Section 965] income is generated.” Id. at 169. See August 29 Order at 44.5 Plaintiff emphasizes the undisputed fact that the Federal Repatriation Amount was triggered by a highly unusual act of Congress. The court disagrees with Plaintiff’s position and, at least on the factual record in this case, agrees with Defendant’s objection on this major point. Like all kinds of intercompany transactions, dividends paid within a unitary group must be eliminated under the kind of worldwide unitary combined reporting regime approved in Container Corp. See Jerome R. Hellerstein, Walter Hellerstein, Andrew D. Appleby, 2 State Taxation ¶9.15[5] (3d ed, 2024) (“Under combined reporting, intercompany transactions, including dividends, interest, and royalties, are eliminated insofar as they reflect income from the unitary business.“). The main purpose of such a regime is to tax an appropriate percentage share of the annual income of the entire unitary business enterprise without regard to lines drawn between corporate members of the group. See e.g. Coca Cola Co. v. Dept. of Rev., 271 Or 517, 523, 533 P2d 788 (1975) (quoting Keesling and Warren, The Unitary Concept in the Allocation of Income, 12 Hastings J 42, 46 (1960) (“When the properties and activities within the jurisdiction are an inseparable portion of a business carried on within and without the jurisdiction, the computation on the income attributable thereto requires a computation of the income of the business as a whole or as a unit and an apportionment or allocation of the total to the various parts.“)). And those lines can greatly affect the timing of recognition of income: for example, the price that one affiliate charges another for goods, services, or intellectual property can allow profit to build up in one or the other of them until a dividend or other realization event occurs in a later year. Determining the worldwide combined income of the overall enterprise requires the unwinding of deferrals arising from intercompany transactions and thus the redetermination of enterprise-wide income for the years to which those transactions relate, at least when numerous tax years are involved.6 While it is true that Congress did not require taxpayers to redetermine federal income for prior years, or file amended returns, Moore v. United States leaves no doubt that Congress’s goal was to create a one-time increase in the tax base that was entirely consistent with Defendant’s Retrospective Worldwide adaptation of the Augusta Formula. See Moore v. United States, 602 US 572, 144 S Ct 1680, 219 L Ed 2d at 285-86 (“[T]he 2017 Act imposed a one-time, backward-looking tax on that accumulated income. That backward-looking tax * * * attributed the long-accumulated and undistributed income of American-controlled foreign corporations to American shareholders ***.“). Like the substantially reduced special federal tax rate that Congress applied to the Federal Repatriation Amount, the requirement to add that amount to only a single year’s income may simply have been a practical modification to reduce the administrative burden for taxpayers and the government alike.

As to Defendant’s criticism that Plaintiff’s Single-Year Worldwide method is logically inconsistent, the court believes that the real problem lies in Plaintiff’s use of a single year’s tax base, as just discussed. Once the die is cast in favor of abandoning nearly 20 years of intragroup eliminations and thus abandoning the redetermination of enterprise-wide income, it becomes difficult to construct a coherent rationale for other components of a worldwide formula.

Finally, the court also agrees with Defendant that Plaintiff’s hypothetical examples of different profit margins for the water’s-edge group vs. the CFCs are, in substance, a request for separate accounting incompatible with the unitary worldwide combined theory approved in Container Corp. As the Court first stated in Mobil Oil Corp. v. Vermont, 445 US 425, 437, 100 S Ct 1223, 63 L Ed 2d 510 (1980):

“[S]eparate accounting, while it purports to isolate portions of income received in various States, may fail to account for contributions to income resulting from functional integration, centralization of management, and economies of scale.”

See also Container Corp., 463 US at 181 (rejecting similar argument); see generally Hellerstein at ¶ 8.03 (explaining drawbacks of separate accounting generally). Similar arguments regarding the relative profitability of individual entities engaged in a unitary business were ultimately rejected by the Maine Supreme Court in Du Pont. In that case, the taxpayer successfully argued before the Superior Court, relying on the court’s internal consistency analysis in Tambrands, that the Augusta Formula is not internally consistent when applied to a unitary business whose subsidiaries are more profitable than the parent. Du Pont, 1995 WL 18022834, at *4 (“The class of unitary businesses to which du Pont belongs, those with unitary foreign affiliates that are, in the aggregate, more profitable than the domestic affiliated group, will just as inevitably be subject to tax on more than 100% of the income of the unitary business under the Augusta Formula applied in all jurisdictions.“). However, the Maine Supreme Court ultimately came to understand its internal consistency analysis in Tambrands as flawed, abandoning it in Du Pont. See Du Pont, 675 A2d at 89 (“It is now clear to us that in applying the internal consistency test in Tambrands, we improperly applied the test to two different taxpayers—Tambrands and its subsidiaries—rather than to just Tambrands. Moreover, by misidentifying the taxpayer in our application of the internal consistency test in Tambrands we insured that no apportionment method other than complete exclusion of the foreign subsidiaries’ income and dividends would satisfy the test.“).

D. Defendant’s Objection That Reinclusion Is Inherently Distortive

The court now turns to Defendant’s request that the court address Defendant’s argument that reinclusion of the 20 Percent Repatriation Amount in the denominator of the sales factor causes an inherently distortive amount of income to be assigned to Plaintiff’s state of commercial domicile. In part, Defendant grounds its request in the court’s discussion of the concept of “income-producing activities,” particularly in footnote 25 of the August 29 Order. As Defendant points out, “[a]t times, the court appears to suggest that the relevant income-producing activity is the CFCs’ activity, rather than the activity of some member of the Water’s Edge Group. *** But in that case, the 20 Percent Repatriation [Amount] would be included in the sales numerator of no state applying a water’s-edge regime, which necessarily excludes the CFCs. Such a method is inherently dilutive.” (Emphasis in original.)

The court agrees that the August 29 Order is unclear on this point. As will be reflected in the Amended Order, for purposes of reinclusion under ORS 314.665(6)(a), the 20 Percent Repatriation Amount must be sourced as a dividend, because the legislature’s decision in 1984 to adopt a water’s-edge reporting regime prescribed that result by putting an end to worldwide combined reporting and the elimination of intragroup dividends. Therefore, as with any other dividend that is business income, it is the location or locations of the income-producing activities of the water’s-edge group, and the costs of performing those activities, that determine the state, or states, to which the 20 Percent Repatriation Amount is sourced.

There is little case law or other guidance on how to identify those activities, where the payor and payee of a dividend engage in the same unitary business but do not join in the same tax return. Specifically, courts have not clearly identified whether the relevant activities are those that trigger payment of the dividend, or those related to managing and participating in the underlying unitary business activities engaged in by entire worldwide group, or both such types of activities. Nevertheless, the inquiry is clearly factual, setting a high bar for assertions that any particular result is “inherently” distortive. It is also clearly incorrect to frame the inquiry by reference to activities performed by the CFCs as opposed to activities performed by the water’s-edge group. For these two reasons, Defendant’s concern that the 20 Percent Repatriation Amount would necessarily be “included in the sales numerator of no state” is unfounded. Defendant’s objection thus reduces to one of two assertions:

  • To the extent that Defendant argues as a matter of law that assigning the 20 Percent Repatriation Amount to any single state is somehow inherently distortive, the court rejects Defendant’s position because the requirement in ORS 314.665(4) to source sales to the location of the greater proportion of income-producing activities based on costs of performance squarely contemplates factual analysis. The statute provides no shortcut to that work.
  • To the extent that Defendant argues as a matter of fact that assigning this Plaintiff’s 20 Percent Repatriation Amount to the state of Washington is inherently distortive, the record before the court does not support that conclusion. Suffice it to say that well over one-half of all Water’s Edge Group employees were located in Washington, as were Plaintiff’s headquarters. Under any definition of the income-producing activities giving rise to the 20 Percent Repatriation Amount, these facts do not support a conclusion that assigning receipts to Washington is inherently distortive; if anything, they tend to suggest that the greater proportion of those activities may well have been in Washington.

Now, therefore,

IT IS ORDERED that

(1) Plaintiff’s motion for reconsideration is granted;

(2) Upon reconsideration, the court adheres to the overall conclusions reached in its August 29, 2024, Order on Cross-Motions for Summary Judgment, granting and denying in part each party’s cross-motion;

(3) Amendments and corrections to the August 29, 2024, order are reflected in the Amended Order filed separately today; and

(4) A marked copy of the Amended Order is attached hereto as Exhibit A.

Dated this 29th day of April, 2025.

ROBERT T. MANICKE

JUDGE

Notes

1
Terms used in this order have the meanings assigned in the August 29 Order.
2
The court’s references to the Oregon Revised Statutes (ORS) are to the 2015 edition.
3
Following entry of the court’s August 29, 2024, Order on Cross-Motions for Summary Judgment, the parties reached a Stipulation on Computational Issues (“Stipulation“), which was filed with the court on January 10, 2025. The court has reviewed the parties’ Stipulation, and the figures therein, and has determined that while it will result in a slightly different refund amount for Plaintiff, it does not materially change the outcome on any of the legal issues addressed in this Order or in the Amended Order on Cross-Motions for Summary Judgment. Therefore, unless otherwise noted, this Order continues to refer to the amounts before the court at the time the August 29 Order was entered.
4
The court notes that the parties’ January 10, 2025, stipulation further reduced the Post-Reinclusion Assessment Amount to $161,965,650.
5
The court rejects three other arguments stated or implied in Plaintiff’s motion for reconsideration. First, Plaintiff at times seems to criticize a Retrospective Worldwide approach simply because it “depart[s] from the way that the Formula has previously been applied.” The court rejects the apparent premise that the court is bound by the precise contours of the Augusta Formula as applied by the sister state of Maine. This court refers to the Augusta Formula solely for its persuasive value as useful to the ultimate end of testing for fairness. See August 29 Order at 48 n 48. For the same reason, the court rejects any argument that the worldwide comparator under the Augusta Formula, or any adaptation thereof, serves only as a cap that requires an automatic refund of any amount of tax exceeding the result under that comparator. Although the Augusta Formula as approved by the Maine courts apparently did treat the worldwide comparator as a cap, that was not a feature of the courts’ making. Rather, the Augusta Formula was a bright-line policy developed by the state taxing agency pursuant to its discretion under Maine’s “safety valve” statute. Du Pont, 675 A2d at 84, 89-90. The Maine Supreme Court treated the agency’s formula as an administrative safe harbor, not as a constitutional mandate. See id. at 89 (“we review the Assessor’s Augusta Formula to determine whether it ensures that Du Pont’s tax liability ‘fairly represents’ its business activity in the state of Maine consistent with constitutional due process.“) (emphasis added); id. at 90-91 (“Thus, each calculation pursuant to the Augusta Formula represents permissible means of insuring that the State in its assessment does not capture extraterritorial value ***.“) (emphasis added). Indeed, the Maine court emphasized that the constitutional tests contemplate “rough approximation rather than precision ***.” Id. at 90. This court sees no basis to import a rigid notion that the Augusta Formula, or any variation on it, must serve as a cap. Finally, in the absence of any clear-cut “cap” on the amount of income a state may assign to itself under an apportionment formula, the requirement to prove “gross” distortion remains. See August 29 Order at 45-46. In its motion for summary judgment, Plaintiff essentially argued that the original assessment, unreduced by reinclusion of the 20 Percent Repatriation Amount in the denominator of the sales factor, overstates Plaintiff’s Oregon taxable income by approximately 182 percent. See id. at 46. The court concluded that, “if the relative percentage difference were the only test for unfair apportionment, Plaintiff’s claim would not fail as a matter of law.” Id. On reconsideration, Plaintiff shifts its attention to the Post-Reinclusion Assessment Amount, which, as shown above, exceeds Plaintiff’s proffered Single-Year Worldwide Amount, but only by approximately 44 percent. This 44 percent increase falls short of the approximately 48 percent increase that the Court sustained in Moorman Mfg. Co. v. Bair, 437 US 267, 271 n 4, 98 S Ct 2340, 57 L Ed 2d 197 (1978) (upholding state’s income apportionment formula based solely on in-state sales despite resulting increase in tax base of approximately 48 percent compared to apportionment based on three equally weighted factors—property, payroll, and sales). Thus, even if the court were persuaded that Defendant’s Retrospective Worldwide approach is inaccurate, or not reflective of reality, it is doubtful that the Post-Reinclusion Assessment Amount would rise to the level of “gross” distortion. The court’s decision that the Retrospective Worldwide Amount is theoretically sound, and thus not “distortive,” makes it unnecessary to decide whether the Post-Reinclusion Assessment is “grossly” distortive.
6
The Maine decisions involving the Augusta Formula do not distinguish between dividends paid out of current-year vs. accumulated earnings and profits, but at least some portion consisted of subpart F income, which at that time consisted, by definition, of current-year earnings and profits. See Du Pont De Nemours & Co. v. State Tax Assessor, 1995 WL 18022834, at *1 (Me Super Mar 3, 1995) (“Under sections 951 through 964 of the Internal Revenue Code, du Pont and domestic affiliates were deemed to have received additional dividends (the ‘Subpart F income’) from certain of the unitary foreign subsidiaries.“); IRC § 952(c)(1)(A) (1986) (in part) (“the subpart F income of any controlled foreign corporation for any taxable year shall not exceed the earnings and profits of such corporation for such taxable year.“). To the extent that this court breaks new ground in requiring redetermination of the unitary group’s prior-year income under the Retrospective Worldwide approach, the court reiterates that the data to do so generally should be available using the records required to be kept under federal law to distinguish between a distribution “out of [the corporation’s] earnings and profits,” constituting a taxable dividend, and one that is a nontaxable return of capital. See IRC § 316(a) (defining “dividend“); Boris I. Bittker & Laurence Lokken, 4 Federal Taxation of Income, Estates and Gifts, ¶ 92.1.3 (3d ed, 2003) (“Because there is no statute of limitations on the effect of prior transactions on accumulated earnings and profits, permanent retention of corporate records is advisable.“) (footnote omitted). In this case, at least, Defendant was able to redetermine worldwide combined income for the prior years using data from Plaintiff. (See August 29 Order at 48 (“Plaintiff does not contest the accuracy of Defendant’s calculations [under the Augusta Formula], only their relevance.“)).