Less than a month after its decision in Crystal Communications, Inc. v. Oregon Dep’t of Revenue, No. TC 4769 (Or. T.C. July 19, 2010), the Oregon Tax Court held that gain from the sale of stock of a subsidiary was business income. Centurytel, Inc. v. Dep’t of Revenue, No. TC 4826 (Or. T.C. August 9, 2010). In Centurytel, the taxpayer, a telecommunications corporation, sold all of the outstanding shares of its wireless subsidiary to an unrelated buyer. The sale resulted in the liquidation of its wireless operations. Both the taxpayer and the purchaser filed elections under I.R.C. § 338(h)(10) to treat the stock transaction as an asset sale. The taxpayer used the proceeds from the sale to finance the acquisition of additional assets and to repay existing debt.
Under Oregon law, gain from the disposition of assets is business income if it meets either the transactional test or the functional test. In Centurytel, the court noted that the taxpayer had conceded that the assets deemed sold in the transaction had been employed in a unitary business operating within and without Oregon. The taxpayer filed an Oregon consolidated income tax return. Relying on the analysis in Crystal Communications, where the Tax Court determined that the gain from the sale of an FCC license was business income under the functional test, the Centurytel Court held that the gain recognized by the taxpayer constituted apportionable business income. The Centurytel Court stated that the two transactions should be analyzed similarly because the § 338 election deemed taxpayer to be selling assets. The Centurytel Court further explained that even if it were to recognize a “liquidation exception” to the functional test under Oregon law, this exception does not apply because the taxpayer continued its wireless business operations and used the proceeds from the liquidating sale to purchase additional wireless assets, expand its operations, and pay down debt.
This case highlights that a § 338(h)(10) election may alter the characterization of income as business or nonbusiness income. Because the court followed the fiction created by the § 338 election as a deemed asset sale, taxpayers should consider the potential consequences of the election.