*1 4, 1996, Arguеd Tax affirmed Mach Court submitted 29, 1998 January COMPANY, TIMBER SIMPSON Appellant, v. REVENUE,
DEPARTMENT OF State of Oregon, Respondent. S42599)
(OTC 3651; SC P2d 366 *2 Sellers, Schwabe, Marc K. Williamson & Port- Wyatt, land, argued the cause for With him the appellant. on briefs was Mildred J. Carmack. Wallace, General,
James C. Attorney Salem, Assistant argued the cause for him on the respondent. With brief was Theodore R. Kulongoski, Attorney General. Carson,
Before Justice, Gillette, Chief and Van Hoomis sen, Graber, Durham, Fadeley, Justices.**
FADELEY, J.
Durham, J., filed a concurring opinion.
** Unis, J., 30,1996, participate retired June and did not this decision.
FADELEY, J. corporation engages
Taxpayer lum- is a many including Oregon, Washington, stаtes, ber single, unitary operates It as a business. and California. provisions 314.670, Under the of ORS 314.605 portion income” is taxable fractional “business unitary its in each of the states which conducts 314.610(1) income” as: ORS defines “business reg- arising “[lineóme from transactions taxpayer’s trade or and includes ular course of the acqui- if tangible intangible property income from sition, rental, management, use or integral parts constitute operations.” than income is “all income othеr Nonbusiness 314.6KX5).1 income is taxable ORS Nonbusiness income.” only in the state where it arises. government 7,654 1978, condemned
In the federal property in timbered California. acres of *3 just compensation 1988, in for that condemnation received year at issue in this case. the tax compensation just
Taxpayer $49,846,000 received total, taken. Of that the fair market value of the assets as ($45,840,000) standing paid percent for the timber. was 91.9 underlying paid land. $4,006,000 was for the The balance Rеport 503, Ct to Instruction No Commissioners Pursuant of (No 26,1987). January However, of D because C-78-0868 CA taxpayer 10-year delay paying just compensation, also the separate that for $79,160,218 as received “delay compensation” delay. was based that The amount of during million return on the $49 on an assumed investment yet paid. years but not the that it was owed Oregon Department Taxpayer of Revenue legal stipulated (department) the issue in the Tax Court that in this case is to be decided 1 replacement Oregon are to the 1987 Revised Statutes All references to the controversy. year
part, apply those statutes to the tax because
373 Delay ‘non- Compensation is “business’ or “whether the (5) 314.610(1) income, and and other under ORS business’ Oregon law.” number facts: nature of to a of The stipulated
The also parties of growing is “the business general business taxpayer’s and the manufacture of forest harvesting products.” of timber har- grown sold the timber Taxpayer products land. in its never sold the underlying vestеd but business condemnation, of reported the had the value Before unitary real of its busi- the California timberland as or fraction determining portion ness for the purpose For Oregon.2 annual income that was taxable compen- classified the accounting purposes, as an item received and held it as sur- extraordinary sation sum on its federal separate plus. Taxpayer reported as $49 income tax return “interest.” distributed as a $79,160,218 million of the to its shаreholders “dividend.” was reinvested in timber- delay compensation None of anywhere. land Court Tax ruled is
was “interest income” and that all such interest income Dept. income.3 Timber v. Simpson Company business (1995). 315, Rev., granted 13 OTR 319 Tax Court apportionment provides the income of a ORS 314.650 formula appor unitary enterprise, stating “[a]ll multistate income shall he by multiplying to this for the tioned state the income fraction” accounts state, payroll, property, factors of relative value of and sales within this compared operations in with value of those attributable to its business factors other states. 150-314.610(1)-(B)(3), The Tax interest Court relied on OAR classifies as income: intangible respect
“[W]here the
with
to which the interest
received arises
out of or was created in the
course of the
acquiring
holding
operations
purpose
intangible
where
operations.” (Emphasis
related to or incidental to such trade or business
added.)
(1974)
Rev.,
329,
Sperry
Dept.
v.
The first sentence of ORS defines “busi- composed ness income.” It is of two clauses. The first clause requires that, to income,” be “business the income must be “arising “activity” “reg- from” “transactions” and ular course of trade or business.” The second expressly clause of the “business income” definition includes “property,” may “tangible” income from “intangible.” be either or tangibles intangibles Whether income from such governed by phrase is “business income” is а conditional tangible is introduced the word “if.” Income from intangible property included “business income” “if’ the “acquisition,” “management,” “disposition” “use,” and integral parts are operations. parties stipulated, taxpayer
As the inis the business “growing harvesting of timber and the manufacture of products.” Although products forest a forest business could acquire standing acquiring underlying timber without acquire sup- land, here did that land and did so port “growing” supply of the raw material that it neеded prod- intended use course of its forest acquired, managed, ucts business. It and used the land and end, to that timber a fact about which there dispute. only dispute “disposition,” is no occurs as to last word in the second clause.
375 argues foregoing the definition of that apply of does to the condemnation its business income timber and not represent land, a because condemnation does not voluntary disposition therefore, and, a cannot be cоnstituting an business with the operations. disagree follow, the that For reasons we only voluntary premise statutory the definition that covers dispositions. knowledge is with that
All business conducted the operating beyond the those the business events control of may operators. plans of Governmental affect the the business through among of eminent domain is intervention exercise beyond oper possible the of those the events that are control ating equivalent thе of a a Condemnation is forced voluntary property sale of uses an sale ofthe taken. It assumed property price.4 as the con con the same a measure Whether by including law, terms of were set ditions and stitutional that sale concept. it law, does not alter that Nor does alter by govern compensation paid the that the additional fact the property compensation paid ment for the timberland was produce the intended to use to “business income.” governmental taking by con- condemnation taxpayer’s ownership rights
verted the timberland an just property namely right intangible right, the to receive compensation money. The sum at issue in this case was paid paying just on account the “property.” due for that
Nothing
statutory
the
definition
“business
involuntary
any
suggests
disposition is
income”
is
a
4
taking private
public
“[p]rocess
the
use
Condemnation is
(6th
1990).
Dictionary,
through
power
ed
of eminent
Blаck’s Law
292
domain.”
land, including
compensate
for the
The
improvements
must
a land owner
value of
condemnor
Trans,
17, 20, 602
Glenn,
Dept.
P2d
on it.
ex rel
v.
288 Or
253
State
(1979).
generally
what was
of that
market value of
taken.
The measure
value is
(1960).
62,
al,
It has
Highway
been
Com. v. Stumbo et
222 Or
P2d 478
State
value,”
v.
by
Highway
Holt
as “fair
market
Commission
described
this court
cash
ux,
(1957),
697, 699, 308
P2d
and is
as “the amount
et
defined
209 Or
obliged
by
bring
who
but was not
land
if it were offered for sale
one
desired
would
buy.” Pape
by
willing
obliged
et
bought
not
al v.
sell
onе
but
and was
who
(1931).
430, 437,
County,
Linn
135 Or
less a or that the income therefrom less “business income.”5We cannot read into the defi- “voluntary” nition of income” “business the additional word “disposition.” just before word We com- conclude pensation paid may as a condemnation award create rec- ognizable, gain taxable to that identical created voluntary sale of the same assets same for the amount.6
Taxpayer additionally argues just that, even if the compensation award is considered “business income,” delay compensation should not be considered as income of just compensation. same character so, as the That is argues, because: *6 not, “Simpson part does as an of its integral * * *
operations, acquire dispose intangible rights of in damages delay receiving for compensation takings for of its timberlands.” argument only questions
That of the mark, is wide because it specifically types intangibles whether described of dis- are posеd by taxpayer of in the course of its business. argument premise an rests on assumed factual is that present “disposition” not in case. There this was no of taxpayer’s argument require. as would Taxpayer and shareholders it. its retained The ultimate standing source the income here was the timber and growing, admittedly acquired land on which it was assets parts and used in business as of The it. disposition was of those business assets. that,
We
timber
conclude
when the
and land on
by
growing
disposеd
involuntary
it was
were
an
sale
5 Moreover,
314.290,
relating
property, sup
OES
a statute
to conversion
real
ports
proposition
meaningful
no
that
distinction
character of an item of
merely
produced
“involuntary”
income arises
that income
an
because
was
rather
“voluntary”
money
than
of real
conversion
either
or to a different
property.
affirmatively
“involuntary”
“voluntary”
ORS 314.290
states that
con
are,
statute,
purposes
versions
for
to be treated
the same manner. When
152,
legislature
1965,
Oregon
chapter
1965
enacted ORS 314.610 in
Laws
sec
2,
already
place, having
Oregon
tion
ORS 314.290 was
been enacted as
Laws
1957,
102,
chapter
2.
section
(DC
Associates,
App
v.
462 A2d
See also District
Columbia
Pierce
1983) (insurance proceeds
damage
received
flood
to its manufac
turing facility
income”;
extraordinary
constitute “business
nature or the infre
irrelevant).
quency of the
transactions
condemnation,
through
to thе government
busi-
of the
integral part
much an
was as
definition as
purposes
ness
operations
tim-
and use of the
management,
initial acquisition,
were the
of delay
pay-
amount
because
paid
The additional
berland.
that reg-
income from
market
is but added
ing
price
the fair
314.610(1) defines
ORS
disposition.
ular business
“business income.”
unitary
income as
the United
decisions of
also relies on two
to sup
to multistate taxation
relating
Court
Supreme
States
should be classi
clаim that
its
port
are ASARCO
income. Those two cases
fied as nonbusiness
3103,
S Ct
Comm’n,
307, 102
Tax
458 US
Inc. v. Idaho State
F.
787,
(1982),
L
reh den
The of the Tax Court judgment support states to its assertion also cites cases from some other nonbusiness income. should be considered the income from this condemnation disposition partial or Those cases do not involve either condemnation entity, Instead, they liquidation com of a former business involve total of assets. entity, utilized an asset never plete liquidation of a business or sale of of a division regular are not by unitary of its business. Those cases in the course support principles factually not announce similar to the case before us do taxpayer’s argument here. concurring.
DURHAM, J., majority’s I concur in the conclusion that the Tax correctly “delay compensation” Court determined that the taxpayer received is business income under ORS 314.610(1). separately majority’s I write because thе ration- respond completely taxpayer’s arguments ale does not to taxpayer’s points important respects. misses in other
This case turns on the definition of “business 314.610(1), provides: income” ORS “ ‘Business income’ arising means income from transac- tions and in the course the taxpayer’s trade or business and tangible includes income from intangible property if acquisition, management, use rental, of the property constitute integral parts of
operаtions.” delay compensation taxpayer Unless the received is definition, income within that is under no obligation apportion Oregon according that income to specified by the formula ORS 314.605 to 314.670. department argues that the court need not con- complexities cern itself with the definition, adopted because it has a rule that also defines business and, income under that definition, is business income. 150-314.610(1),1purports expand rule, OAR meaning beyond scope оf “business income” 150-314.610(1)-(A) provides, part: OAR * * 314.610(1) purposes “ORS defines “business income’ as *. For of admin- 314.670, istration of ORS 314.605 to the income of the is business clearly
income unless classifiable as nonbusiness income under ORS 314.605 to 314.670 and the rules thereunder.” 150-314.610(1)-(B) provides, part: OAR used, occasionally “The classification of income the labels such as man- income, ufacturing services, income, interest, sales divi- dends, rents, royalties, capital gains, income, operating nonoperating income, etc., determining is of no aid in whether business or nonbusiness any type any income. Income of or class and from source is business income if activity occurring it arises from transactions and course of a * * * general, trade or business. In all transactions and activities of the tax- payer dependent upon operations which are or contribute to the of the tax- payer’s enterprise economic as a whole constitute the trade or *8 rеquires example, statutory the statute For definition. integral part activity regarding property be an business the By taxpayer’s regular contrast, the rule or business. trade depend or on and activities that all transactions declares enterprise taxpayer’s as a whole economic to the contribute “integral” part The rule of a trade or business. an constitute provides if is business income that all interest income also intangible property underlying оf, out or was cre- arises the taxpayer’s regular business, or if the in, ated course of intangible acquisition related to or incidental to “is operations.” or such trade my pays to the view, the rule insufficient heed In requirement that the listed activi- in the definition factually regarding property constitute must ties department’s parts The business. virtually every involving property transaction effort to define every taxpayer’s “integral part” demon- as an accuracy. depart- legal legal ingenuity without strates necessity interpreting not obviate the ment’s rule does statutory definition. 314.610(1) defines business income as income
ORS arising The first source is “income derived from two sources. regular in the course of from transactions and department or describes trade business.” portion “transactional” test. of the definition as a of, activity arising in the course be
business and will transactions of, following integral parts are a trade or business. The and will constitute determining particular examples income is business or whether rules and * * * income. nonbusiness “(2) sale, Gain or loss from the sale- assets. Gains or losses from prop- tangible intangible personal exchange, real or or other property erty while owned income if the constitutes business However, property if such was used in the trade or production otherwise was removed income or utilized for the of nonbusiness gain sale, exchange dispositiоn, the or other factor before its from the * * * income. nonbusiness or loss will constitute “(3) intangible with where the income is business income Interest. Interest respect out of or was created was received arises to which the interest pur- operations or where trade or business course of the to such holding intangible incidental pose acquiring is related to or operations.”
The second source is tangible from if intangible property acqui- “income *9 sitiоn, rental, management, disposition use or integral of the constitute property parts taxpayer’s of the operations.” trade or business department portion The that of the describes definition as a adopt department’s “functional” test. I will in nomenclature referring statutory to the two elements of definition. parties disagree
The about whether and how the two operate together. dispute meaning tests Their centers on the statutory phrase “and includes” in the definition. Tax- payer qualify that, in income, contends order to as business satisfy all forms of income must the transactional test and satisfy property that income from also must the functional department test. The contends that each ofthe According identifies kind income. definition a of business to view, income that satisfies either the transactional or the department test constitutes functional business income. contends that satisfies both the transаc- tional and functional tests.
Taxpayer asserts that the transactional test is not According taxpayer, satisfied here. to the condemnation of property extraordinary disposition, an not a trans- action or course of its trade or propositions dem- also offers series to example, onstrate that the functional test is not satisfied. For requires contends that the functional test three (1) types regarding acquisition, property, i.e., of аctivities (3) (2) management, rental, that, use or and joins because the statute that list of activities with the con- junction types parts “and,” all three must constitute operations. Taxpayer argues apply that the court must the functional test to the very taxpayer received, i.e., of income that com- form department’s attempt pensation, and should resist the analogize delay compensation something not, that it is Finally, taxpayer such as interest оn an account receivable. argues applies the functional test to income when tax- and that later receives it use payer taxpayer’s has no on decision income from bearing property whether agree constitutes business income. I with each propositions regarding proper application of functional below, I However, test. for the reasons discussed conclude taxpayer’s delay compensation business income. difficulty with is that position condemnation that occurred here satisfies both transac- tional and functional tests. is the Taxpayer’s growth of timber and the harvesting manufacture wood prod- ucts. The condemnation forced property sell consisted of land trees. The trees represented almost all (more 91%). the value of the condemned than I property am unable to see how the fact that the condemned property included а real component small alters essential character of the transaction forced as a sale of val- *10 uable timber. standing of involuntary nature the sale of of prior absence sales real property by taxpayer play also no in the under analysis role the transactional test. of Taxpayer’s is, full value for its timber in receipt the terms the test, of transactional in activity transaction and the reg- ular course taxpayer’s of business.
The government paid delay here compensation to make taxpayer whole as a result of its in just paying compensation the Delay condemned property. compensa- tion represents part of the government’s payment of full value for its Such property. is an essential of the component judgment condemnation thus, proceeding and, constitutes income that arises from activity satisfies the transactional test.
The functionаl test addresses income from property. treats from It income as income property only business if each of the listed three forms of the regarding prop- erty are “integral parts” trade or taxpayer’s busi- operations. that, ness it Taxpayer argues because never has trees, grows sold land on it of land no let in plays part, integral alone an part, taxpayer’s above, said connection with the discus-
What was argument. taxpayer’s test, siоn of the transactional defeats judgment all The condemnation attributed almost the value processes property to of the condemned the trees. disposing acquiring, managing, commercial timber opera- integral parts full value are delay compensation component noted, was tions. As government’s obligation erty pay taxpayer’s prop- full value for therefore,
and, income from within the meaning of the functional test. Sperry Dеpt. relies & Hutchison v. on (1974), in
Rev.,
329, 331-32,
270 Or
tree-growing from and the income derived delay compensation, operation, in the form of are operations. parts of delay compensation Because the received this case was business income under both transactional and whether, tests, I need decide here in order to functional not satisfy only income, the income need one of the be business satisfy and functional tests or must both transactional tests. expressed cor- above, the Tax Court
For the reasons rectly tax- received that decided that the was business payer Therefore, I result income. concur by majority. reached