Twentieth Century-Fox Film Corp. v. Department of Revenue
700 P.2d 1035, 299 Or. 220, 1985 Ore. LEXIS 1288 (1985)
Rule of Law:
A state tax department may depart from the Uniform Division of Income for Tax Purposes Act (UDITPA) three-factor apportionment formula for corporate excise tax if it proves that the statutory formula does not fairly represent the taxpayer's business activity in the state and that its alternative method is reasonable, considering uniformity among jurisdictions and economic reality.
Facts:
- Twentieth Century Fox (taxpayer) produces and distributes motion pictures.
- During the tax years 1975, 1976, and 1977, taxpayer's sole business activity in Oregon was licensing motion pictures for exhibition by independent theaters.
- Taxpayer filed Oregon corporate excise tax returns using the statutory three-factor apportionment formula.
- Taxpayer included only the cost of positive film prints, which were the only tangible property of taxpayer to enter Oregon, in the numerator of its property factor.
- Film negatives, which are the original exposed film created by photographing a movie production and are valued at production cost (between $5 million and $20 million), were stored in California.
- The location of the film negatives had no influence on the income earned by the prints when distributed.
- Taxpayer's payroll factor for Oregon was zero for all three tax years, and its sales factors for Oregon accurately reflected its receipts in the state.
Procedural Posture:
- Twentieth Century Fox (taxpayer) filed Oregon corporate excise tax returns for 1975, 1976, and 1977 using the statutory three-factor apportionment formula.
- The Oregon Department of Revenue's (Department) auditor modified the property factor numerator on taxpayer's returns to include a portion of the value of taxpayer’s film negatives, leading to an additional assessment of approximately $22,000.
- Taxpayer challenged the proposed modification, but the Department upheld its auditor’s assessment.
- Taxpayer appealed the Department's assessment to the Oregon Tax Court.
- The Tax Court ruled in favor of Twentieth Century Fox, holding that the Department had not met its burden of proof to establish that the statutory apportionment formula did not fairly represent taxpayer’s business activity in Oregon.
- The Tax Court further determined that ORS 314.670 permitted variance from the UDITPA apportionment formula only for unconstitutional results and held that OAR 150-314.670-(A), the Department's administrative rule, was inconsistent with ORS 314.670 and therefore invalid.
- The Department appealed the Tax Court's decision to the Oregon Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Did the Oregon Department of Revenue prove that the statutory three-factor apportionment formula did not fairly represent Twentieth Century Fox's business activity in Oregon, thus permitting the Department to employ a different apportionment method for corporate excise taxation?
Opinions:
Majority - Roberts, J.
Yes, the Department of Revenue proved that the statutory three-factor apportionment formula did not fairly represent Twentieth Century Fox's business activity in Oregon, thereby permitting the Department to employ a different method. The court first clarified that ORS 314.670 (Section 18 of UDITPA) permits a departure from the standard apportionment formula not only to remedy unconstitutional results but also in 'unusual cases' where the formula fails to fairly represent a taxpayer's business activity, particularly for non-merchandising, non-manufacturing industries. The burden of proof for such a departure rests on the party seeking it. The Department met its burden by proving two requirements. First, the statutory formula as a whole did not fairly represent taxpayer's business activity. While the payroll factor was zero and the sales factor accurate, the property factor, by including only the low value of film prints and excluding the high production cost and intrinsic value of the film negatives from which prints are made, substantially underrepresented taxpayer's business activity in Oregon. Second, the Department's proposed alternative method was reasonable. The Department's modification, which attributed a percentage of the film negatives' value to Oregon based on Oregon receipts, met three criteria for reasonableness: it fairly represented business activity without resulting in more than 100% of income being taxed, it fostered uniformity by conforming to California's established guidelines for the film industry, and it reflected the economic reality of motion picture distribution by considering the production costs of films rather than an artificial distinction between prints and negatives. The court also held that the Tax Court erred in invalidating OAR 150-314.670-(A), finding the administrative rule to be a valid exercise of interpretive rulemaking authority that actually promotes uniformity by providing standards for industries like motion pictures.
Analysis:
This case significantly clarifies the application of UDITPA's relief provision (ORS 314.670 or Section 18), establishing that state tax authorities can deviate from the standard three-factor apportionment formula for corporate excise tax in situations beyond constitutional challenges. It provides a two-part test for tax departments seeking to modify the formula, requiring proof that the statutory formula as a whole is unfair and that the alternative is reasonable, balancing principles of uniformity and economic reality. The decision empowers states to adapt tax frameworks for industries with unique business models that do not fit the traditional manufacturing or merchandising mold, while also validating the role of administrative rules in providing consistent guidance for such deviations across jurisdictions.
