An Oregon consolidated excise tax return includes the income and loss of a foreign financial corporation exempt from excise tax on a stand-alone basis, the Oregon Tax Court ruled. [Oregon Department of Revenue v. Penn Independent Corporation et al., Ore. Tax Ct., No. 4321, 11/17/99]

Penn Independent Corporation is the parent corporation of Penn-America Insurance Company and two other corporations. For tax years 1992 and 1993, Penn Independent filed a consolidated federal return including all three subsidiaries. Penn Independent also filed consolidated Oregon returns for itself and its two other subsidiaries. Penn Independent did not include Penn-America in the consolidated state returns based on Ore. Rev. Stat. Ch. 317, which provides an exclusion from tax for foreign insurance companies. For the years at issue, Penn-America filed gross premiums tax returns and paid gross premiums taxes.

Following an audit, the department issued an assessment based on the assertion that Penn-America's income must be included in the computation of the consolidated return filed by Penn Independent. Penn Independent challenged the assessment and a magistrate granted summary judgement for the taxpayer. The department appealed.

No Excise Tax Adjustment. Before the tax court, Penn Independent argued that because Penn-America is a financial corporation subject to a different apportionment formula, it must be excluded from the consolidated state tax return.

The court agreed that the statute provides that corporations subject to a different apportionment method are excluded from the consolidated tax return. However, that exclusion only applies to financial corporations subject to tax under the statute, the court said. Because Penn-America is a foreign insurance company and not subject to tax, the exclusion does not apply.

Corporations filing a consolidated federal return are required to use federal consolidated income as the starting point in computing state taxable income, the court said. From that, certain modifications are made. The first modification to be made is to eliminate any income attributable to nonunitary members. This elimination results in what is called "modified federal consolidated income." All other additions, subtractions, and modifications prescribed under the statute are made to the modified federal consolidated income of the "remaining" unitary members "as if they were subject to taxation." Because Penn-America was unitary with the other members of the federal consolidated group, and the legislature did not enact other modifications eliminating a foreign insurance company from the group, it must have intended to include income of a foreign insurance company such as Penn-America, the court said.

Penn Independent next asserted that because Penn-America was a foreign financial company, it was not required to file an excise tax return, either singly or consolidated. The court agreed that Penn-America was not required to file a return under the statute. However, the court reasoned that the department was not requiring Penn-America to file a consolidated return. Instead, it was merely using Penn-America's income in the computation of the consolidated return filed on behalf of the group. Penn-America is a member of a unitary group filing a consolidated federal return, and a member of that group is subject to excise tax in Oregon, the court said. Accordingly, its income must be included in the computation of the group's consolidated excise tax liability.

PwC Observes: Jim Puetz, State Tax Consulting Senior Manager with PricewaterhouseCoopers LLP in Portland, observes that the court's ruling may catch many taxpayers by surprise.

During the years at issue, foreign insurance companies were exempt from excise tax and were required to pay a gross premiums tax, Puetz notes. While nothing in the statute provides an exclusion for income earned by a foreign insurance company, to the extent it is subject to an alternative tax, it would seem reasonable to conclude that a foreign insurance company's income shouldn't be included in the tax base of the tax from which it is specifically exempt, Puetz suggests. However, that is not how the court interpreted the statute. Judge Byers focused on the plain wording of the statute and regulations in reaching his conclusion and determined that the legislature intended to include the income of a foreign insurance company, even though the foreign insurance company was specifically exempt from the excise tax, Puetz says.

Puetz notes that for the years at issue, the statute provided a specific apportionment formula for domestic insurance companies. However, the statute did not address apportionment for foreign insurance companies, presumably because they were not subject to an excise tax. It is interesting that the legislature would provide a specific apportionment rule for domestic insurers but would not provide an apportionment rule for foreign insurers if it intended that their income be included in the consolidated return, Puetz notes. It may help clarify this case if such legislative intent were discussed in this case, observes Puetz.

In terms of the impact of this case on future years, for tax years beginning after 1996, foreign insurers are subject to the corporate excise tax. In addition, foreign insurers are accorded a special apportionment formula under ORS 317.660 for these years. As a result, for tax years beginning after 1996, foreign insurers should be excluded from the Oregon consolidated return filed by non-insurance company affiliates Puetz says.

For additional information, please click on the "Contact Us" button and type your request or call Jim Puetz at (503) 276-6478.