Could New Mexico include General Electric's foreign dividends and Subpart F income in the tax base of its elected domestic consolidated group?

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Plain-English summary

New Mexico could include General Electric's foreign dividends and federal Subpart F income in the corporate income tax base of the domestic consolidated group GE elected to file. The AHO upheld the tax and continuing interest but abated the civil penalties because GE's contrary legal position was reasonable, made in good faith, and presented a close issue of first impression.

The consolidated protests involved two assessments:

• for 2008 through 2010, $3,284,854 tax, $656,970.80 penalty, and $387,024.21 interest, totaling $4,328,849.01; and
• for 2011 through 2013, $2,414,566 tax, $482,913.20 penalty, and $229,536.58 interest, totaling $3,127,015.78.

The parties agreed that the two protests presented substantially identical legal issues. The ruling resolved them on undisputed facts through summary judgment.

GE elected consolidated-group reporting

During the 2008–2010 audit period, GE operated through numerous domestic and foreign subsidiaries and received dividends from 419 foreign subsidiaries. Most of those subsidiaries were more than 50% owned by GE or its U.S. subsidiaries, and most conducted no business in the United States or New Mexico.

GE chose New Mexico's federal consolidated-group reporting method rather than separate-entity or combined-unitary reporting. Its return included the income of domestic subsidiaries doing business in the United States, including domestic subsidiaries with no New Mexico business, but excluded foreign subsidiaries operating exclusively outside the United States.

The Department added foreign dividends and Subpart F income to GE's base income. For 2008 through 2010, the added foreign-source amounts totaled $28,885,911,448 before apportionment.

Consolidated reporting produced taxing symmetry

GE relied on Conoco, Inc. v. New Mexico Taxation and Revenue Department, which had held New Mexico's foreign-dividend treatment unconstitutional for a separate-entity filer.

The AHO found that Conoco expressly addressed separate-entity reporting and had not been extended to combined or consolidated filers.

Under separate reporting, New Mexico's regulation excluded foreign dividends while taxing domestic dividends differently. Under GE's elected consolidated method, the base included the aggregate income of the domestic group—including income activity that led to dividend distributions—as well as the foreign dividends and Subpart F income.

That treatment created the symmetry the AHO found missing in the separate-entity cases. The tax was imposed on apportioned income of a domestic consolidated group whose parent did business in New Mexico, not directly on a foreign corporation.

The AHO therefore found no violation of the Commerce Clause, Foreign Commerce Clause, or Due Process Clause.

GE did not prove unfair apportionment

Before factor relief, the foreign dividends and Subpart F income produced $3,615,740 of additional New Mexico corporate income tax for 2008 through 2010.

The Department applied the Detroit Formula, adding a share of foreign-subsidiary property, payroll, and sales to the denominators of the standard three apportionment factors. That reduced the additional tax to $3,346,058, a reduction of about 7.5%.

The ordinary New Mexico apportionment percentages were only:

• 0.1895% for 2008;
• 0.1749% for 2009; and
• 0.2075% for 2010.

GE did not prove by clear and cogent evidence that those percentages attributed income out of all appropriate proportion to its New Mexico business.

Although the Department had repealed the regulation that formerly stated the Detroit Formula and no current statute or regulation expressly required that formula, Section 7-4-19 authorized equitable apportionment adjustments. The AHO held that this authority permitted the Department to provide the factor relief, which reduced GE's liability.

Draft regulations did not control

GE showed that an early Department draft would have excluded foreign dividends for separate, combined, and consolidated filers and that Department personnel had expressed constitutional concerns after Conoco.

But the combined-and-consolidated language was removed before adoption. The unadopted draft and internal discussions did not establish the governing law, especially in light of later decisions addressing combined and consolidated reporting.

Penalty was abated for a reasonable legal mistake

GE lost the principal tax issue, but the AHO called it a very close case and an issue of first impression in New Mexico. The separate-entity authorities and similarities between separate and consolidated reporting gave GE a good-faith legal basis for excluding the income.

Section 7-1-69(B) barred penalty when a failure to pay resulted from a mistake of law made in good faith and on reasonable grounds. The AHO therefore ordered all assessed civil penalties abated.

Interest remained mandatory under Section 7-1-67 and continued until the tax principal was paid.

GE did not receive fees or costs

GE did not prevail on the major issue. The AHO also found the Department's position was a reasonable application of law to the facts given the novelty of the question and the authorities addressing combined reporting. Attorney fees and administrative costs were denied.

Result: protest PARTIALLY GRANTED and PARTIALLY DENIED. The Department had to abate the assessed penalties. GE had to pay the remaining assessed tax plus accumulated interest, subject to any other minor adjustments the parties had already agreed upon.

What this means for you

Multinational groups choosing a New Mexico filing method

The filing election can change the constitutional and apportionment analysis. A separate-entity foreign-dividend holding may not transfer to a consolidated group whose base includes aggregate domestic income.

Corporate taxpayers challenging apportionment

Quantify the alleged distortion. A constitutional challenge requires evidence that the income attributed to New Mexico is out of all appropriate proportion to the business conducted in the state.

Taxpayers receiving discretionary factor relief

An equitable adjustment can remain relevant even when an older regulation describing a specific formula has been repealed. Here statutory authority supported relief that reduced, rather than increased, liability.

Businesses taking a novel legal position

Preserve the cases, regulations, internal analysis, return position, and advice supporting the interpretation. A taxpayer may still owe tax and interest while avoiding negligence penalty for a good-faith mistake of law on reasonable grounds.

Common questions

Q: What foreign-source income did the Department add for 2008 through 2010?
A: $28,885,911,448 of foreign dividends and Subpart F income before apportionment.

Q: How much additional tax did that produce before factor relief?
A: $3,615,740 for 2008 through 2010.

Q: What did the Detroit Formula change?
A: It added a percentage of foreign-subsidiary property, payroll, and sales to the factor denominators and reduced the additional tax to $3,346,058.

Q: Did the AHO extend the separate-filer Conoco holding to GE?
A: No. It held that Conoco expressly addressed separate-entity filers and had not been extended to consolidated groups.

Q: Did GE waive constitutional arguments by electing consolidated reporting?
A: No. The AHO rejected the Department's waiver theory, but GE lost those arguments on their merits.

Q: Why did the constitutional challenge fail?
A: The AHO found taxing symmetry in the consolidated base, no direct tax on foreign corporations, and no clear and cogent proof of unfair apportionment.

Q: Why were penalties abated?
A: GE's position was a close, first-impression mistake of law made in good faith and on reasonable grounds.

Q: Did interest remain due?
A: Yes. Interest continued until the remaining tax principal was satisfied.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-2A-2, 7-2A-3, and 7-2A-8.4 — corporate income tax and federal consolidated-group reporting
• NMSA 1978, §§ 7-4-1 through 7-4-21, including § 7-4-19 — UDITPA and equitable apportionment adjustments
• NMSA 1978, §§ 7-1-3(X) and 7-1-17(C) — definition of tax and assessment presumption
• NMSA 1978, §§ 7-1-67 and 7-1-69(B) — interest and the good-faith mistake-of-law penalty exception
• NMSA 1978, § 7-1-29.1 — administrative costs and attorney fees
• Regulations 3.4.1.12 and 3.4.10.8(B) NMAC — foreign-dividend exclusion and corporate reporting methods

Cases cited:

• Conoco, Inc. v. New Mexico Taxation and Revenue Department, 1997-NMSC-005 — separate-entity foreign-dividend treatment and rejection of election-based waiver
• Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983) — unitary foreign income, multiple-taxation risk, and unfair-apportionment burden
• Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980) — apportionment of foreign-source dividend income from a unitary business
• Kraft General Foods, Inc. v. Iowa Department of Revenue, 505 U.S. 71 (1992) — discriminatory foreign-dividend treatment
• Bernard Egan & Co. v. State Department of Revenue, 769 So. 2d 1060 (Fla. 2000) — consolidated-reporting symmetry

Source

• Listing: New Mexico Decisions & Orders
• Decision post: General Electric Company & Subsidiaries
• Decision PDF: D&O 18-12

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
GENERAL ELECTRIC COMPANY & SUBSIDIARIES
TO ASSESSMENTS ISSUED UNDER LETTER
ID NO.’s L0142804528 & L1492544464 [CONSOLIDATED PROTESTS]

v. D&O No. 18-12

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER
ON MOTIONS FOR SUMMARY JUDGMENT

A summary judgment hearing on the above-referenced protest occurred on November 8,

2016, before Brian VanDenzen, Chief Hearing Officer. Attorney Timothy R. Van Valen appeared

representing General Electric Company & Subsidiaries (“Taxpayer”). Staff Attorney Peter Breen

appeared representing the Taxation and Revenue Department (“Department”). Department Protest

Auditor Andrick Tsabetsaye also appeared. The matter came before the Chief Hearing Officer on

the Taxpayer’s Motion for Summary Judgment filed on August 24, 2016 and the Department’s

Response thereto filed on September 21, 2016. Taxpayer filed its reply to the Department’s

response on October 18, 2016.

The Taxpayer’s motion presents a statement of facts which the Department does not

dispute. The Department presented four additional facts, which Taxpayer does not dispute. Based

on the undisputed facts, review of exhibits and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:
FINDINGS OF FACT

Procedural History

1. On September 11, 2014, under letter id. no. L1492544464, the Department assessed

Taxpayer $3,284,854.00 in corporate income tax, $656,970.80 in penalty, and $387,024.21 in

interest for a combined total assessment of $4,328,849.01 for the corporate income tax reporting

periods from December 31, 2008 through December 31, 2010.

2. On October 21, 2014, Taxpayer timely protested the Department’s assessment

(referred to as the original protest), a protest the Department received on October 24, 2014.

3. On November 13, 2014, the Department acknowledged receipt of Taxpayer’s

protest.

4. On January 7, 2015, the Department requested a hearing in this matter with the

Administrative Hearings Office’s predecessor, the Hearings Bureau 1.

5. On January 7, 2015, the Hearings Bureau issued Notice of Administrative Hearing,

setting this matter for a scheduling hearing on January 20, 2015, within 90-days of the protest.

6. On January 20, 2015, the scheduling hearing occurred, satisfying the 90-day

hearing requirement without objection of the parties.

7. On January 20, 2015, the Hearings Bureau issued a Scheduling Order and Notice of

Administrative Hearing, setting this matter for hearing on February 23, 2016, among other

deadlines for discovery and motions.

1
On July 1, 2015, pursuant to the Administrative Hearings Office Act, the Hearings Bureau left the Taxation and
Revenue Department and became the independent Administrative Hearings Office (“AHO”). For events before July 1,
2015, the Hearings Bureau will be used even though this decision is issued under AHO’s caption. AHO will be used
for events after July 1, 2015.

In the Matter of General Electric Co. & Subs., page 2 of 56.

8. After two joint motions to extend the preliminary witness and exhibit list exchange

deadlines, on September 16, 2015, the parties jointly moved to vacate the entire previous

scheduling order and formal February 23, 2016 hearing date.

9. On September 23, 2015, the Administrative Hearings Office issued an Amended

Scheduling Order and Notice of Administrative Hearing, vacating the previous scheduling order

and setting the matter for an anticipated summary judgment hearing on February 23, 2016.

10. On February 22, 2016, the Administrative Hearings Office sua sponte continued

the summary judgment hearing until April 25, 2016 because of a conflicting district court matter.

11. On April 5, 2016, the parties jointly moved to vacate the April 25, 2016 hearing

date.

12. On April 18, 2016, the Administrative Hearing Office issued a Continuance Order,

Amended Scheduling Order, and Notice of Administrative Motions Hearing, setting a schedule for

summary judgment pleadings and a summary judgment motion hearing date of July 27, 2016.

13. On April 29, 2016, under letter id. no. L0412804528, the Department assessed

Taxpayer $2,414,566.00 in corporate income tax, $482,913.20 in penalty, and $229,536.58 in

interest for a combined total assessment of $3,127,015.78 for the corporate income tax reporting

periods from December 31, 2011 through December 31, 2013.

14. On May 18, 2016, the parties filed a joint motion to vacate and reset summary

judgment motion deadlines and the summary judgment motions hearing date on the original

protest.

15. On May 23, 2016, the Administrative Hearings Office issued its Fourth

Continuance Order, Amended Scheduling Order, and Notice of Administrative Motions Hearing,

In the Matter of General Electric Co. & Subs., page 3 of 56.
resetting the motions deadlines and motions hearing on the original protest until November 3,

2016.

16. On July 25, 2016, Taxpayer timely protested the assessment under letter id.#

L0412804528 (referred to as the second protest).

17. On August 8, 2016, the Department acknowledged receipt of Taxpayer’s second

protest under letter id. # L0412804528.

18. On August 24, 2016, Taxpayer filed its motion for summary judgment on the

original protest, with attached Exhibits #1 through #5. Each exhibit is detailed in the

subparagraphs of this finding of fact.

a. Exhibit #1, affidavit of Timothy Pierce, had three sub-exhibits attached, which will

be detailed below and treated as distinct exhibits throughout the decision.

i. Exhibit #1(A): Reports created by Taxpayer’s legal entity data base

effective December 31, 2008, 2009, and 2010.

ii. Exhibit #1(B): Schedule of foreign dividends paid by foreign subsidiaries

of Taxpayer and federal Subpart F income from controlled foreign

subsidiaries for tax years 2008, 2009, and 2010.

iii. Exhibit #1(C): The Departments audit work papers.

iv. Exhibit #1(D): Audit before Detroit Formula Spreadsheet.

v. Exhibit #1(E): Detroit Formula Spreadsheet.

vi. Exhibit #1(F): Form 1118.

b. Exhibit #2, initial draft regulation of the Department.

c. Exhibit #3, transmittal memo of then-Department Tax Policy Director James P.

O’Neil accompanying the initial draft regulation.

In the Matter of General Electric Co. & Subs., page 4 of 56.
d. Exhibit #4, second draft regulation with memorandum

e. Exhibit #5, approval by the Attorney General’s Office that the proposed rule was

within the parameters of TRD’s rulemaking authority, along with a handwritten

note of then-Assistant Attorney General Elizabeth Glenn to then-Tax Policy

Director James O’Neil.

19. On September 13, 2016, the Department requested a hearing of Taxpayer’s second

protest under letter id. # L0412804528.

20. On September 14, 2016, the Administrative Hearings Office issued Notice of

Telephonic Scheduling Conference, setting the second protest under letter id. # L0412804528 for a

scheduling hearing on October 21, 2016.

21. On September 21, 2016, the Department filed its Response for Motion for

Summary Judgment on the original protest.

22. On October 18, 2016, Taxpayer filed its reply to the Department’s response to the

Motion for Summary Judgment, along with supporting exhibit #1.

23. On October 21, 2016, a scheduling hearing occurred within 90-days of the

Department’s receipt of Taxpayer’s second protest under letter id. # L0412804528, with neither

party objecting to the fact that conducting that hearing satisfied the 90-day hearing requirement.

24. On October 24, 2016, a scheduling order was issued, setting the second protest

under letter id. # L0412804528 for a merits hearing on October 17, 2017.

25. On November 3, 2016, the Administrative Hearings Office issued a sua sponte

continuance order, moving the November 3, 2016 summary judgment hearing on the original

protest to November 8, 2016.

In the Matter of General Electric Co. & Subs., page 5 of 56.

26. On November 8, 2016, the summary judgment hearing of the original protest under

letter id. # L1492544464 occurred.

27. On September 5, 2017, the parties jointly moved to consolidate the second protest

under letter id. # L0412804528 with the original protest under letter id. L1492544464, where there

remained the outstanding summary judgment motions. The parties asserted that the cases involved

the same substantive legal issue. The request for consolidation was granted on September 18,

2017, pursuant to NMSA 1978, Section 7-1B-8 (D) (2015).

Undisputed Material Facts

28. During tax years 2008-2010 (“the audit period”), Taxpayer was a diversified

technology and financial services company with operations and subsidiaries around the world,

headquartered in Connecticut. [Taxpayer Ex. #1, ¶5; Taxpayer Ex. #1(C), pages B3 and B5].

29. During the audit period, Taxpayer conducted its activities in New Mexico, other

states, and foreign countries. [Taxpayer Ex. #1, ¶9].

30. Taxpayer conducts activities through numerous domestic and foreign subsidiaries.

[Taxpayer Ex. #1, ¶10].

31. During the audit period, Taxpayer had 419 foreign subsidiaries from which it

received dividends, most of which were more than 50% owned by Taxpayer or United States

subsidiaries of Taxpayer. [Taxpayer Ex. #1, ¶12].

32. During the audit period, most of Taxpayer’s foreign incorporated subsidiaries

conducted no business operations in the United States or New Mexico. [Taxpayer Ex. #1, ¶13].

33. During the audit period, Taxpayer elected to be a consolidated group, not a

separate or combined, corporate filer under NMSA 1978, Section 7-2A-8.4. Taxpayer’s

consolidated filing included the income of all domestic subsidiaries doing business in the United

In the Matter of General Electric Co. & Subs., page 6 of 56.
States but excluded the income of foreign subsidiaries doing business exclusively outside of the

United States. [Taxpayer Ex. #1, ¶14].

34. Taxpayer’s consolidated group included domestic subsidiaries not engaging in

business in New Mexico. [Taxpayer Ex. #1, ¶15].

35. Taxpayer’s consolidated group did not include unitary foreign subsidiaries not

engaged in business in New Mexico. [Taxpayer Ex. #1, ¶16].

36. On July 31, 2012, the Department initiated a corporate income tax audit of

Taxpayer for the corporate income tax years of 2008, 2009, and 2010. [Taxpayer Ex. #1(C), p.

B3].

37. During the audit, the Department rejected Taxpayer’s exclusion of dividends

received for its foreign subsidiaries and federal Subpart F income from Taxpayer’s New Mexico

corporate income tax base. The Department recalculated Taxpayer’s corporate income tax base,

including those disputed dividends received from Taxpayer’s foreign subsidiaries.

38. New Mexico claims an average apportionment factor to be applied against

Taxpayer’s income of 0.1895% for 2008, 0.1749% for 2009, and 0.2075% for 2010. [Taxpayer

Ex. #1(C), p. B10, B10.1, B10.2].

39. The Department’s auditors added foreign dividends, including federal Subpart F

income, to Taxpayer’s New Mexico corporate income tax “base income” for the audit period as

follows [Dept. Ex. #1, ¶18]:

Tax Year Foreign Dividends Added
2008 $ 15,232,767,172
2009 $ 6,586,518,407
2010 $ 7,066,625,869

$ 28,885,911,448

In the Matter of General Electric Co. & Subs., page 7 of 56.

40. Additional New Mexico corporate income tax for the audit period solely due to the

addition of foreign dividends, including federal Subpart F income, to Taxpayer’s New Mexico

corporate income tax “base income” for the audit period was as follows [Dept. Ex. #1, ¶19]:

Tax Year Additional Corporate Income Tax
2008 $ 1,400,221
2009 $ 1,033,327
2010 $ 1,182,192

$ 3,615,740

41. Following the addition of foreign dividends and Subpart F income to Taxpayer’s

New Mexico corporate income tax base, the Department’s auditors required Taxpayer to prepare

and submit “Controlled Foreign Corporation Detroit Formula Factor Representation” worksheets

for each of the years in the audit period in order to apply the “Detroit Formula” of apportionment

“factor relief’ to the inclusion of the dividends Taxpayer received from its foreign subsidiaries and

Subpart F income. [Dept. Ex. #1, ¶18; Dept. Ex. #1(c) pages 5.3-5.4].

42. Under the Detroit Formula, foreign dividends paid by a foreign subsidiary to a

domestic corporation are included in the tax base to which an apportionment factor is applied to

determine income taxable in New Mexico. The Detroit Formula adds to the denominator of each

of the three standard UDITPA apportionment factors (property, payroll, and sales) a percentage of

the foreign subsidiary’s apportionment factors. The foreign subsidiary’s percentage added is the

net foreign dividend paid to its domestic parent divided by the foreign subsidiary’s net earnings

times each of the three factors. See Conoco, Inc. v. Taxation and Revenue Dep’t, 1997-NMSC-

005, ¶ 13, 122 N.M. 736, 931 P.2d 730.

In the Matter of General Electric Co. & Subs., page 8 of 56.

43. Taxpayer completed the “Controlled Foreign Corporation Detroit Formula Factor

Representation” worksheets as instructed by the Department. [Dept. Ex. #1, ¶ 21].

44. The Department repealed a New Mexico corporate income tax regulation setting

forth the Detroit Formula effective May 31, 1998, following the New Mexico Supreme Court’s

1997 decision in Conoco, Inc. See Vol. IX No. 10 N.M. Reg. 395 (May 30, 1998).

45. During the audit period, there was no New Mexico statute or Department regulation

expressly setting forth, or requiring the use of, the Detroit Formula.

46. The Department’s auditors’ application of the “Detroit Formula” resulted in the

Department’s assessment, as described in Finding of Fact #1, of additional corporate income tax

solely attributable to the inclusion of foreign dividends or federal Subpart F income in Taxpayer’s

tax base.

47. The amount of tax added for each year solely due to inclusion of foreign dividends

with application of the Detroit Formula (without correction of other audit errors, including errors

in the Detroit Formula calculations) is as follows:

Tax Year Additional Corporate Income Tax
2008 $ 1,322,044
2009 $ 975,296
2010 $ 1,048,718

$ 3,346,058

48. The addition of foreign dividends and federal Subpart F income to Taxpayer’s New

Mexico corporate income tax base, when summed across all years, would have resulted in the

following additional New Mexico corporate income tax solely due to their inclusion:

Tax Due Under New Mexico UDITPA: $3,615,740

Tax Due With Application of Detroit Formula: $3,346,058
(7.5% reduction)

In the Matter of General Electric Co. & Subs., page 9 of 56.

49. Taxpayer paid the following foreign taxes which were creditable for federal tax

purposes during the audit period, but for which New Mexico offered no similar, corresponding

credit for a consolidated group filer:

Tax Year Amount of Foreign Tax Paid
2008 $ 2,885,928,890
2009 $ 2,218,168,697
2010 $ 2,754,739,151

$ 7,858,836,738

50. The Department adopted 3.4.1.12 NMAC (the “Regulation”), on May 31, 1998.

Vol. IX No. 10 N.M. Reg. 395 (May 30, 1998).

51. The Regulation provides an express exclusion from the New Mexico corporate

income tax base for foreign source dividends received by corporations filing under the New

Mexico statutory separate corporate entity method. 3.4.1.12 NMAC.

52. The Department’s initial draft of the Regulation excluded foreign dividends from

the corporate income tax base for taxpayers reporting to New Mexico under the New Mexico

statutory separate corporate entity, combination of unitary corporations, and federal consolidated

group methods. The language in the initial draft of the Regulation stated:

Foreign source dividends received by a group of corporations filing in accordance
with Sections 7-2A-8.3 or 7-2A-8.4 are excludible from the group’s base income
to the extent such dividends are paid by corporations which are not members of
the combined or consolidated group because New Mexico’s taxation of such
dividends has been ruled unconstitutional. [Ex. #2].

53. The October 3, 1997 transmittal memorandum accompanying the initial draft of the

Regulation from the Department’s Director of Tax Policy at the time, James P. O’Neill, to other

employees of the Department also stated:

Since our own court didn’t buy our “Detroit fix,” it is probably time to think about
rolling over. Although the US Supreme Court [in Kraft] addressed only separate

In the Matter of General Electric Co. & Subs., page 10 of 56.
entity filers, it is incredible that they wouldn’t apply the same logic for combined
and consolidated filers. So this proposal anticipates the ultimate result. [Ex. #3].

54. However, on November 25, 1997, the second draft of the Regulation removed the

language that included corporations filing under the combination of unitary corporations method

and the federal consolidated group method in the exclusion of foreign dividends. [Ex. #4].

55. Although then Assistant Attorney General Elizabeth Glenn approved the draft

Regulation on February 4, 1998 as to whether it was lawful and consistent with Department

authority, she sent a hand-written note to Mr. O’Neill stating:

As we discussed, I signed this, but I’m a little concerned about . . . [the
Regulation]. I think it may needlessly raise questions or draw attention to
TRD’s method of taxing foreign source dividends because it doesn’t
specify who is the determinative authority of the method’s
constitutionality. As it reads now, the taxpayer could protest the taxes on
the grounds that they are unconstitutional even though no court has ruled
on the particular method the legislature or TRD comes up with. [Ex. #5].

56. Although the Department did not tender any undisputed facts or argument asserting

a unitary relationship in this protest, the audit narrative submitted as an uncontested exhibit

indicates the Department conducted a previous audit on Taxpayer for the periods of 1991-1994.

During that previous audit, the audit narrative indicates that the Department had found significant

evidence of a functional connection, if not unitary relationship, between Taxpayer and its foreign

affiliates. During the present audit, Taxpayer did not indicate that there had been any substantial

change in the relationship between it and its foreign affiliates since the previous audit. [Taxpayer

Ex. #1(C), p. B5.1 through B5.2].

57. During the audit that triggered the assessments in dispute in this protest, the

Department asked Taxpayer to complete the Business Connection Questionnaire to explore the

question of unitariness, but Taxpayer declined to do so. [Taxpayer Ex. #1(C), p. B5.2].

In the Matter of General Electric Co. & Subs., page 11 of 56.

58. In addition to providing Detroit Formula factor relief for all foreign dividends or

Subpart F income generated by foreign entities where Taxpayer owned at least 50%, the

Department provided Taxpayer with a 80% deduction on dividend income from foreign payors

that it owned between 20% and 50% and a 70% deduction on dividend income from foreign

payors that it owned up to 20%. [Taxpayer Ex. #1(C), p. B5.4].

DISCUSSION

The main issue in this protest is whether the Department’s corporate income tax assessment

impermissibly and unconstitutionally discriminated against foreign commerce under the United States

Constitution’s Commerce Clause by taxing Taxpayer’s dividends and Subpart F income received by

foreign affiliates while treating domestic dividends more favorably by excluding them from the base

income of the consolidated group. Another issue, based on Taxpayer’s argument that in the event it is

found liable for the assessment, is whether penalty should be abated because its tax filings were

premised on a good-faith, mistake of law. The third issue is whether Taxpayer is entitled to the award

of costs and fees under NMSA 1978, Section 7-1-29.1 (2015).

As to the main issue in the protest, Taxpayer argues, based on case law that will be addressed,

that inclusion of foreign source dividends in the New Mexico corporate income tax base is improper

for three reasons. First, it constitutes facial discrimination under the Commerce Clause because of

discrimination. Second, it results in inevitable multiple taxation of foreign commerce. Third, it results

in an unfair apportionment of income from foreign commerce. Taxpayer indicates that there is no

longer legal authority in statute or regulation to employ the Detroit Formula after its repeal in

response to case law. Finally, Taxpayer emphasizes that the Department at one point contemplated a

regulation that would have eliminated potential disparate treatment of foreign dividends for all three

reporting methods precisely because the Department was concerned that in light of case law, its
In the Matter of General Electric Co. & Subs., page 12 of 56.
approach under all three reporting methods would be found unconstitutional.

In response, the Department counters that because Taxpayer elected to file a consolidated

return, Taxpayer has waived constitutional protections against foreign and non-unitary income and

the Commerce Clause and Foreign Commerce Clause Protection are not implicated. The Department

argues that the two main cases that support Taxpayer’s arguments only apply to separate entity

corporate income tax filers rather than the consolidated group return at issue here, and that other

states that have considered that issue have permitted inclusion of foreign dividends in reporting

methods other than separate filing. The Department further responds that dividends of all kinds are

included in the definition of business income, making the exclusion of foreign dividends contrary to

law. The Department contends that the apportionment formula method under UDITPA is widely

accepted in constitutional jurisprudence, even if there is a theoretical possibility of double taxation in

its application and acknowledging that with any apportionment scheme, absolute consistency is not

always achievable. Further, the Department avers that Taxpayer did not overcome its heavy burden of

showing the Department’s apportionment of tax in this case, as modified to provide factor relief

under the Detroit Formula, was unfair or externally inconsistent. Finally, the Department rejects

Taxpayer’s argument about the meaning of the draft regulation that was never promulgated.

Burden of Proof and Standard of Review upon Summary Judgment.

Pursuant to NMSA 1978, Section 7-1-17 (C), the assessments issued in this case are

presumed correct. The Taxpayer has the burden to overcome the presumption of correctness that

attached to the assessments. See Archuleta v. O’Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428.

Unless otherwise specified, for the purpose of the Tax Administration Act, “tax” is defined to

include interest and civil penalty. See NMSA 1978, § 7-1-3 (X). Under Regulation 3.1.6.13

NMAC, the presumption of correctness under Section 7-1-17 (C) extends to the Department’s

In the Matter of General Electric Co. & Subs., page 13 of 56.
assessment of penalty and interest. See Chevron U.S.A., Inc. v. State ex rel. Dep’t of Taxation &

Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are

presumed proper and are to be given substantial weight). Moreover, like here where Taxpayer

claims an exemption from state taxation of foreign dividend and federal Subpart F income, “[w]here

an exemption or deduction from tax is claimed, the statute must be construed strictly in favor of the

taxing authority, the right to the exemption or deduction must be clearly and unambiguously

expressed in the statute, and the right must be clearly established by the taxpayer.” Wing Pawn Shop

v. Taxation and Revenue Department, 1991-NMCA-024, ¶16, 111 N.M. 735 (internal citation

omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-7, ¶9, 133 N.M. 447.

Summary judgment is appropriate when there is no genuine dispute as to any material fact

and the moving party is entitled to prevail as a matter of law. See Romero v. Philip Morris, Inc.,

2010-NMSC-035, ¶7, 148 N.M. 713. In controversies involving a question of law, or application

of law where there are no disputed facts, summary judgment is appropriate. See Koenig v. Perez,

1986-NMSC-066, ¶10-11, 104 N.M. 664. If the movant for summary judgment makes a prima

facie showing that it is entitled to a judgment as a matter of law, the burden shifts to the opposing

party to show evidentiary facts that would require a trial on the merits. See Roth v. Thompson,

1992-NMSC-011, ¶17, 113 N.M. 331. While the Department filed a response in opposition to

Taxpayer’s motion for summary judgment, the Department never expressly requested summary

judgment in its favor as part of that response even though its counter-claim clearly suggested that

the Department believed it was entitled to summary judgment as a matter of law. Even if the

nonmoving party does not file their own motion for summary judgment, summary judgment may

be granted to the nonmoving party if there is no genuine dispute of fact, they are entitled to

judgment as a matter of law, and the moving party was generally on notice of the nonmoving

In the Matter of General Electric Co. & Subs., page 14 of 56.
party’s counter-claim in its response to the moving party’s summary judgment pleading. See

Martinez v. Logsdon, 1986-NMSC-056, ¶12, 104 N.M. 479. The Department did not dispute any

of the facts asserted in Taxpayer’s motion for summary judgment. The Department did assert,

emphasize and restate four facts in its response to the motion for summary judgment as

undisputed, material facts, which Taxpayer did not dispute. The articulated undisputed facts from

both parties briefs, as well as some facts from the attached exhibits, have been adopted above.

At the end of the summary judgment hearing, there was a discussion in this matter about

whether the matter was ripe for a final decision and order upon summary judgment or instead a

simply order addressing the summary judgment pleadings and setting further proceedings. Both sides

initially indicated that a final decision and order might be appropriate, and then discussed that coming

back for further proceeding might be appropriate. Frankly, the discussion did not particularly clarify

the question, as both sides expressed uncertainty and shifting thoughts on the subject. However, in

subsequently reviewing the pleading, Taxpayer actually moved for full summary judgment, not

restricted to “partial summary judgment” in any manner in its pleading2. Similarly, the Department

did not indicate in its response that the summary judgment pleading should be limited to a particular

issue or addressed on a partial basis. Since there are no disputed facts and neither side expressed a

strong preference in their pleadings for a limited ruling, this matter is ripe for a final decision and

order on summary judgment, disposing of the case. Not only is issuing a final decision and order

consistent with the pleadings of the parties and the undisputed material facts, it also is in the interest

2
The Administrative Hearings Office now generally disfavors the practice of “partial” summary judgment for various
reasons, including but not limited to the uncertainty exhibited by the parties and hearing officer in this case about what
exactly they sought in terms of the order to be issued, the necessity of needing a final order for appeal, and the
different confidentiality provisions that apply to a final judgment and order versus a lesser order under NMSA 1978,
Section 7-1-8.3. While there may still be some limited circumstances where “partial summary judgment” will be
entertained, generally, a matter is either ripe for a final judgment and order upon summary judgment or it needs to
proceed to hearing if the parties are unable to present complete uncontested facts and stipulations upon which a final
decision and order can be issued.

In the Matter of General Electric Co. & Subs., page 15 of 56.
of efficiency of appeal, which requires a final judgment, of this important issue.

Overview of New Mexico Corporate Income Tax Scheme and Related Federal Underpinnings.

New Mexico’s Corporate Income Tax and Franchise Tax Act.

Subject to the limitations of the United States Constitution’s Due Process and Commerce

Clause, under NMSA 1978, Section 7-2A-3, New Mexico levies an income tax on the “the net

income of every domestic corporation and upon the net income of every foreign corporation

employed or engaged in the transaction of business in, into or from this state or deriving any income

from any property or employment within this state.” As used under the Corporate Income and

Franchise Tax Act, the term “corporations” includes corporations, joint stock corporations, certain

real estate trusts, financial corporations, banks, other business associations, limited liability

companies and partnerships taxed as corporations under the Internal Revenue Code. See NMSA

1978, § 7-2A-2 (D). In pertinent part, “net income” is defined by statute to mean “base income

adjusted to exclude (1) income from obligations of the United States less expenses incurred to earn

that income; and (2) other amounts that the state is prohibited from taxing because of the laws or

constitution of this state or the United States…” NMSA 1978, § 7-2A-2 (H) (note that definition

continues to include net operating loss carryback and carryover deductions, which are not pertinent to

the disputed issues in this case).

Constitutional Limitations and Apportionment.

The dispute in this case is not whether Taxpayer is subject to New Mexico Corporate Income

Tax, which it most assuredly is as a corporation doing business in New Mexico, but the potential

constitutional limitations on what New Mexico may tax. In other words, using Section 7-2A-2 (H)

(2)’s definitional exclusion from net income, are there any amounts of income not subject to taxation

because of the laws and constitution of the United States?

In the Matter of General Electric Co. & Subs., page 16 of 56.
Generally, a state may not impose an income tax on the value earned outside of its border

under the Due Process and Commerce Clauses of the United States Constitution. See ASARCO Inc. v.

Idaho State Tax Commission, 458 U.S. 307, 314 (1982). Specifically, the Commerce and Due

Process Clauses of the United States Constitution impose distinct but parallel limitations on New

Mexico’s power to tax value earned from out-of-state business activities. See Mobil Oil Corp. v.

Comm'r of Taxes, 445 U.S. 425, 454 (1980); Norfolk & Western R. Co. v. Missouri Tax Comm'n.,

390 U.S. 317, 325, n.5 (1969). However, a state may tax an apportioned share of a multistate

entity’s income earned outside of its territory if the activity that generated that income was part of

a “unitary business.” MeadWestvaco Corp. v. Ill. Dep't of Revenue, 553 U.S. 16, 19 (U.S. Apr. 15,

2008); Allied-Signal, 504 U.S. at 772; Hunt Wesson v. Franchise Tax Bd., 528 U.S. at 460; Exxon

Corp. v. Wisconsin, 447 U.S. 207, 224 (1980); Mobil Oil Corp., 454 U.S. at 442. “[T]he linchpin

of apportionability in the field of state income taxation is the unitary-business principle.” Mobil

Oil Corp., 445 U.S. 425, 439. Taxpayer bears the burden of establishing by clear and cogent

evidence that the state seeks to tax extraterritorial values. Allied-Signal, 504 U.S. 768, 782, citing

Exxon Corp. 447 U.S. 207, 224.

This protest involves potential limitations on state taxation under the Commerce Clause,

and more specifically a subset within the Commerce Clause addressing foreign commerce,

referred to as the Foreign Commerce Clause. The Commerce Clause of the United States

Constitution grants to Congress the power “[t]o regulate Commerce with foreign nations, and among

the several States, and with Indian Tribes.” USCS Const. Art. I, § 8, Cl 3. In Complete Auto Transit,

Inc. v. Brady, 430 U.S. 274, 279 (U.S. 1977), the United States Supreme Court established a four-

part test to determine whether a state’s attempts at taxation of multijurisdictional corporations

conducting business and generating income in multiple states impermissibly interferes with the

In the Matter of General Electric Co. & Subs., page 17 of 56.
Commerce Clause. That four part test is (1) whether there is a substantial nexus between a

taxpayer and the taxing State; (2) whether the tax is fairly apportioned; (3) whether the tax

discriminates against interstate commerce; and (4) whether the tax is fairly related to the services

provided by the State. Id. The Foreign Commerce Clause component of the Commerce Clause will

be addressed in greater detail below.

In an effort to address these constitutional boundaries on taxing of extraterritorial value,

New Mexico, like many states, has adopted the Uniform Division of Income for Tax Purposes Act

(“UDITPA”) to address apportionment and allocation of income earned by multistate or multinational

entities. See NMSA 1978, §§7-4-1 through 7-4-21; see also ASARCO Inc. v. Idaho State Tax

Commission, 458 U.S. 307, 311 fn.3 (1982) (short discussion of history of UDITPA) ; see also J.

Hellerstein & W. Hellerstein, State Taxation, ¶9.01 (3rd ed. 2001-2015) (discussion of history of

adoption of UDITPA, or similar statutory regimes, by numerous states). UDITPA distinguishes

between business income (apportionable to any state where a taxpayer has nexus) and nonbusiness

income (allocated only to a single location, usually a taxpayer’s domicile). See NMSA 1978, §7-4-10

(A) (2013) (“…all business income shall be apportioned...”). Under UDITPA, business income is

apportioned according to a three-factor formula based on the amount of a corporation’s property,

payroll, and sales within a state compared with the amount of its property, payroll, and sales

everywhere. A percentage is calculated for each of the three factors, and the average percentage of

the three is then applied against the corporation’s total income to determine the percentage amount of

income subject to New Mexico taxation. See NMSA 1978, §§ 7-4-10 through 7-4-18. The general

idea behind UDITPA is to ensure that each state only taxes an apportioned share of a unitary

corporation’s income, a share under the formula roughly commensurate with the portion of the

income attributable to activities conducted within that respective state, and thus to ensure that if all

In the Matter of General Electric Co. & Subs., page 18 of 56.
states were to do the same, the aggregate amount under the apportionment formulas across the

different jurisdictions would roughly equal the corporation’s total income.

Reporting Methods.

Mechanically, but of substantive significance in this protest, New Mexico’s corporate income

tax structure allows a taxpayer subject to the Corporate Income and Franchise Tax Act to elect one of

three reporting methods. See Regulation 3.4.10.8 (B) NMAC. The first permissible reporting method

is the separate corporate entity method. See Regulation 3.4.10.8 (B) (1) NMAC and Regulation

3.4.10.7 (A) NMAC. This method entails allowing each corporation doing business in New Mexico,

even if they are part of a larger unitary group, to file a separate corporate income tax in New Mexico.

As will be discussed in much greater detail, the New Mexico Supreme Court has expressly prohibited

the state from including foreign dividend income for separate method filers because under the

structure of the taxing scheme, domestic dividends were provided favorable treatment over foreign

dividends in contradiction to the Foreign Commerce Clause. See Conoco, Inc. v. New Mexico

Taxation and Revenue Department, 1997-NMSC-005, 122 N.M. 736, 931 P.2d 730 (1996). In

recognition of the Conoco, Inc. holding, Department Regulation 3.4.1.12 NMAC (1998) now allows

a separate entity corporate filer to exclude foreign source dividends from its base income.

The second permissible reporting method is the combination of unitary corporations, also

commonly referred to as a combined return or as combined reporting. See NMSA 1978, § 7-2A-8.3

(2013) and Regulation 3.4.10.8 (B) (2) NMAC. New Mexico statute defines a “unitary corporation”

as

two or more integrated corporations, other than any foreign corporation
incorporated in a foreign country and not engaged in trade or business in the
United States during the taxable year, that are owned in the amount of more
than fifty percent and controlled by the same person and for which at least
one of the following conditions exists:
(1) there is a unity of operations evidenced by central purchasing,
In the Matter of General Electric Co. & Subs., page 19 of 56.
advertising, accounting or other centralized services;
(2) there is a centralized management or executive force and
centralized system of operation; or
(3) the operations of the corporations are dependent upon or
contribute property or services to one another individually or as a group.
NMSA 1978, § 7-2A-2 (Q) (2014)3.

Generally, this method requires a corporation to report the combined income of all its unitary

subsidiaries as one return. In a previous administrative decision discussed in more detail below, the

combined return reporting method treatment of dividends had been found to not offend the Foreign

Commerce Clause. See In the Matter of the Protest of Xerox Corporation, Taxation and Revenue

Decision and Order No. 03-22, Dec. 3, 2003, (non-precedential; publicly available at

http://realfile.tax.newmexico.gov/03-22__xerox_corporation.pdf ) (referred to as “Xerox”).

The third reporting method, and the one Taxpayer elected in this protest, is the federal

consolidated group. See NMSA 1978, § 7-2A-8.4 (1993) and Regulation 3.4.10.8 (B) (3) NMAC.

Under Section 7-2A-8.4,

[a]ny corporation that is subject to taxation under the Corporate Income and
Franchise Tax Act [7-2A-1 NMSA 1978] and that reports to the internal
revenue service for federal income tax purposes its net income consolidated
with the net income of one or more other corporations may elect to report to
New Mexico on the same basis.

The New Mexico consolidated group reporting method is premised on the corporation reporting

income federally on a consolidated group basis. Under the Internal Revenue Code (“I.R.C.”), 26

U.S.C. § 15014 establishes the privilege of filing a federal consolidated return for an affiliated group

3
It should be noted that since, under the uncontested facts, Taxpayer owned more than 50% of the affiliates at issue in this
protest, and since the Department’s audit narrative shows evidence of the other definitional three factors that Taxpayer
declined to refute when given a chance at audit, it appears in this case that this statutory definition of a unitary business
between Taxpayer and its foreign affiliates was met. At the very least, Taxpayer presented no evidence to refute there was
a unitary business relationship. See Mobil Oil Corp., 445 U.S. 425, 439 (where that taxpayer made no effort to show that
the foreign operations were distinct from its line of business).
4
Citations to I.R.C. are also interchangeable with 26 U.S.C. As an example, I.R.C. § 1501 is also 26 U.S.C. § 1501.
Under blue book citation, citation to the Internal Revenue Code are made using I.R.C. rather than 26 U.S.C. However, the
appendix to NMRA 23-112 seem to suggest that the citation be to the United States Code, and thus 26 U.S.C. will be used

In the Matter of General Electric Co. & Subs., page 20 of 56.
of corporations, as defined by 26 U.S.C. § 1504. Under the definition contained in NMSA 1978,

Section 7-2A-2 (A) (2014), New Mexico incorporates the I.R.C. definition of an affiliated group. An

affiliated corporation is a corporation connected through stock ownership amounting to 80% of

voting power or value with a common parent corporation. See 26 U.S.C. § 1504 (A). Foreign

corporations may not be included in a consolidated group. See 26 U.S.C. § 1504 (B).

Because this is the reporting method at issue in this protest, a more detailed overview of the

consolidated group method, the differences between it and the combined return reporting method, and

the method of calculation of the federal consolidated taxable income is important to resolution of this

protest. The New Mexico Supreme Court, in providing a basic overview of what a consolidated

return is, quoted with favor Merten’s Law of Federal Income Taxation, §46.01 (1978 revision):

A consolidated return is an income tax return which reports the income and
deductions of a parent corporation and its subsidiaries. The actual return
form used is the regular Form 1120 used by corporations generally.

Although the word 'consolidated' might be considered as implying that each
item of income and deduction for all the corporations included in the return
is computed on a combined basis, nevertheless, as the principles governing
consolidated returns have developed, this concept has been rejected. Instead,
for most items there are separate computations for each corporate entity, the
taxable incomes so computed then being combined to arrive at consolidated
taxable income. Actual 'consolidation' is limited to certain specified items
which are aggregated for all the members of the group of corporations
included in the return and to the elimination of most transactions occurring
within the group.

Consolidated returns were originally instituted as an administrative measure
(without explicit statutory authorization) to prevent avoidance of excess
profits taxes by manipulations among taxpaying entities owned by the same
interests.

Getty Oil Co. v. Taxation & Revenue Dep't, 1979-NMCA-131, ¶ 11, 93 N.M. 589, 603 P.2d 328.

In their preeminent State Taxation treatise, Hellerstein and Hellerstein note a few salient

in this decision when referring to provisions of I.R.C.

In the Matter of General Electric Co. & Subs., page 21 of 56.
similarities and differences between consolidated group method and combined returns. See J.

Hellerstein & W. Hellerstein, ¶8.11[1]. According to Hellerstein and Hellerstein, most state

consolidated return filings are elective and based on filing a federal consolidated return. See id. A

consolidated return does not require that the different corporate entities are engaged in a unitary

business. See id. “The [consolidated] return is that of all affiliates, and each may be made liable for

the consolidated tax, at least in cases in which the group has made an election to file on a

consolidated basis.” Id. A combined return is based on the unitary principle, rather than on a

voluntary election by affiliated entities like the consolidated return. “The purpose of the combined

reporting,” according to Hellerstein and Hellerstein, “is to determine the income or other tax base of

an in-state taxpayer by viewing the taxpayer as part of the unitary business, and applying

apportionment factors to the entire unitary business to the taxable net income of the unitary business.”

Id.

The Supreme Court of Oregon also provides a detailed overview of the differences between

combined reporting and a consolidated group return.

A combined report is an accounting method whereby each member of a
group carrying on a unitary business computes its individual taxable income
by taking a portion of the combined net income of the group. A consolidated
return is a taxing method whereby two corporations are treated as one
taxpayer. The difference is stated in Keesling, A Current Look at the
Combined Report and Uniformity in Allocation Practices, 42 J of Tax 106,
109 (February 1975):

"Because of its importance, it should be emphasized that the
combined report is not the same as a consolidated return…”

Caterpillar Tractor Co. v. Dep't of Revenue, 289 Or. 895, 898-99, 618 P.2d 1261 (1980)
(emphasis in the original).

In the Matter of General Electric Co. & Subs., page 22 of 56.
New Mexico’s Calculation of Base Income Looks to Federal Law, the Dividends Received
Deduction, and Federal Definition of Dividends and Subpart F Income

Regardless of the reporting method selected, the starting point for determining base income

subject to New Mexico corporate income is the corporation’s federal taxable income. See NMSA

1978, § 7-2A-2 (C) (2014). Under the I.R.C., a corporation may deduct dividends received from

domestic subsidiaries from its federal taxable income. See 26 U.S.C. § 243. The purpose of the

dividend received deduction under 26 U.S.C. 243 is to avoid double taxation both on the income from

which the dividends are distributed and on the dividend received income. See King Enters. v. United

States, 189 Ct. Cl. 466, 484-85, 418 F.2d 511 (1969) (Discussing Legislative history, intent and

purpose of dividends received deduction). See also OBH, Inc. v. United States, 397 F. Supp. 2d

1148, 1157 n.5 (D. Neb. 2005) (non-precedential, but helpful summary of the purpose of the

section in a footnote: “Congress passed § 243 to alleviate a double taxation problem. Prior to the

enactment of § 243, dividend-received income was taxed twice: once when the payor corporation

paid tax on the money prior to distributing a dividend and then again when the receiving

corporation paid tax on the dividend income.”).

Conversely, under the I.R.C., the dividends received from foreign subsidiaries of a company

remain as part of that company’s federal taxable income. Although the foreign dividends are

included in the initial federal taxable base that becomes the starting point for New Mexico

taxation, the I.R.C. does provide a subsequent foreign tax credit under 26 U.S.C. §901 that reduces

the federal tax by the amount of foreign taxes paid on a taxpayer’s foreign subsidiary’s income.

However, that credit is added into the equation after the base income which New Mexico uses its

starting point has already been determined. New Mexico does not have a similar credit for the

payment of foreign taxes. Consequently, since New Mexico relies on the federal taxable income to

determine a corporation’s base income, dividends from domestic subsidiaries (which are removed
In the Matter of General Electric Co. & Subs., page 23 of 56.
under 26 USC § 243) are not included in the federal base income generally subject to New Mexico

tax while dividends received from foreign subsidiaries remain in the federal taxable income

potentially subject to New Mexico corporate income tax.

The federal taxable income of a consolidated group is determined under 26 CFR 1.1502-11.

Under 26 CFR 1.1502-11(a), consolidated taxable income is generally calculated by computing the

separate taxable income of each member of the group as if the member of the group was filing a

return as a separate entity, with additional adjustments as specified, and then aggregating the total

from the separate entities that are part of the group. Separate taxable income is determined in the

same manner as for determining income of a separate corporation, with numerous exceptions. See 26

CFR 1.1502-12.

One pertinent exception is the dividends received deduction under 26 U.S.C. §243, which is

not calculated on a separate basis. See 26 CFR 1.1502-12 (n). Instead, under 26 CFR 1.1502-26, the

dividends received deduction is calculated by aggregating the deduction of the members of the group.

In pertinent part, 26 CFR 1.1502-26 reads

(a) In general. (1) The consolidated dividends received deduction for the
taxable year shall be the lesser of:
(i) The aggregate of the deduction of the members of the group
allowable under sections 243(a)(1), 244(a), and 245 [26 USCS §§ 243(a)(1),
244(a), and 245] (computed without regard to the limitations provided in
section 246(b) [26 USCS § 246(b)]), or
(ii) 85 percent of the consolidated taxable income computed without
regard to the consolidated net operating loss deduction, consolidated section
247 [26 USCS § 247] deduction, the consolidated dividends received
deduction, and any consolidated net capital loss carryback to the taxable
year.

Parsing 26 CFR 1.1502-26, the consolidated group is allowed to aggregate dividends as allowed

under “sections 26 USCS §§ 243(a)(1), 244(a), and 245 (computed without regard to the limitations

provided in section 26 USCS § 246(b).” Those sections allow a dividends earned deduction for

In the Matter of General Electric Co. & Subs., page 24 of 56.
dividends received from domestic corporations subject to taxation under 26 USCS § 243 (a) (a

portion of the same deduction of domestic dividends discussed above for a separate entity filer),

preferred stock under now repealed 26 USCS § 244(a), and from certain foreign corporations under

26 USCS § 245.

Under 26 USCS § 245, there are two main types of foreign corporations entitled to be

included in the consolidated dividend. First, a 10% owned foreign corporation, which is “any foreign

corporation (other than a passive foreign investment company) if at least 10 percent of the stock of

such corporation (by vote and value) is owned by the taxpayer.” 26 USCS § 245(a). Second, a wholly

owned foreign subsidiary. See 26 USCS § 245(b). In other words, 26 USCS § 245 does allow

inclusion of all foreign dividends in the consolidated dividends received deduction, but only in

limited circumstances and at least with respect to 10% owned companies, only the U.S. sourced

portion of the dividend. In contrast, 26 USCS § 243 (a) allows inclusion of domestic dividends from

the dividends received deduction at rates between 50% to 100%. At first blush, this is similar to the

disparate treatment found under the separate entity reporting.

Because this protest involves a dispute of the treatment of dividends and federal Subpart F

income, federal definitions of those concepts provide additional context to the analysis. The I.R.C.

defines a “dividend” in pertinent part as “any distribution of property made by a corporation to its

shareholders—(1) out of its earnings and profits accumulated after February 28, 1913, or (2) out of its

earnings and profits of the taxable year…, without regard to the amount of the earnings and profits at

the time the distribution was made.” 26 USC § 316. Taxpayer, as a large multinational corporation, is

a shareholder owning a significant percentage of stock in many of its affiliated and unitary entities,

meaning that it will receive dividend distributions from the income earned from those affiliate

entities. The tax treatment of those dividend distributions are at the heart of this protest. Similarly,

In the Matter of General Electric Co. & Subs., page 25 of 56.
under 26 USC § 952, the general concept is that “Subpart F income” means the sum of insurance

income, the foreign base company income, and a calculation of income of the corporation less

income attributable to earnings and profits included in the gross income of a United State person

multiplied by a boycott factor of a controlled foreign company. In other words, Subpart F income

establishes fairly complex rules for determining when a U.S. shareholder of a controlled foreign

company may be subject to federal taxation based on the income of the controlled foreign company.

Again, the treatment and state taxation of Taxpayer’s federal Subpart F income is at issue in this case.

Foreign Commerce Clause Limitations on State Corporation Income Taxation.

Against this structural backdrop, there is the broader question of this protest: whether the

Department’s assessment of Taxpayer’s foreign dividend income and federal Subpart F income

violates the Foreign Commerce Clause, as contained in the broader Commerce Clause discussed and

cited fully above. In addition to the Complete Auto Transit, Inc.’s four factor Commerce Clause

analysis, on questions related to the Foreign Commerce Clause, the United States Supreme Court

has added two additional factors: (1) “whether the tax creates a substantial risk of international

multiple taxation”; and (2) “whether the tax prevents the Federal Government from speaking with

one voice when regulating commercial relations with foreign governments.” Japan Line, Ltd. v.

Cty. of L.A., 441 U.S. 434, 451 (1979).

In Japan Line, Ltd., the United States Supreme Court held that California could not tax a

foreign corporation engaged in shipping without violating the Foreign Commerce Clause because

the tax in question would result in multiple taxation and because it was an impediment to the

federal government’s authority to speak with one voice on foreign trade. The United States

Supreme Court was motivated to add the two additional Foreign Commerce Clause factors in

Japan Line, Ltd. at 447-448 (internal citations omitted) because of the possibility of unaddressable

In the Matter of General Electric Co. & Subs., page 26 of 56.
multiple taxation:

…neither this Court nor this Nation can ensure full apportionment when
one of the taxing entities is a foreign sovereign. If an instrumentality of
commerce is domiciled abroad, the country of domicile may have the
right, consistently with the custom of nations, to impose a tax on its full
value. If a State should seek to tax the same instrumentality on an
apportioned basis, multiple taxation inevitably results. Hence, whereas the
fact of apportionment in interstate commerce means that "multiple burdens
logically cannot occur," the same conclusion, as to foreign commerce,
logically cannot be drawn. Due to the absence of an authoritative tribunal
capable of ensuring that the aggregation of taxes is computed on no more
than one full value, a state tax, even though "fairly apportioned" to reflect
an instrumentality's presence within the State, may subject foreign
commerce "'to the risk of a double tax burden to which [domestic]
commerce is not exposed, and which the commerce clause forbids.'"

Shortly after issuance of Japan Line, the United States Supreme Court again addressed

questions of state taxation vis-à-vis foreign commerce in Mobil Oil Corp. v. Comm'r of Taxes, 445

U.S. 425 (1980). Although the legal analysis is not precisely on point, the facts of Mobil Oil Corp.

are remarkably similar to the facts in this protest and thus the outcome of that case still has value

in the analysis of this protest. In Mobil Oil Corp., the multinational Mobil Oil Corp., which

conducted much of its business through wholly or partially owned domestic and foreign

subsidiaries, had subtracted all of its foreign dividends from its net income on its Vermont

Corporate Income Tax Return. See Mobil Oil Corp., 445 U.S. 425, 428-431. Taxpayer in this

protest also removed its foreign dividend income and federal Subpart B income from its New

Mexico corporate income tax base. Just as New Mexico did in this protest, Vermont in Mobil Oil

Corp. assessed the taxpayer, the deficiency in tax attributable to Vermont’s recalculation and

inclusion of foreign dividends in the apportionable income tax base, subject to Vermont

apportionment and taxation. See id. at 430-431. Mobil Oil Corp. contended that inclusion of this

income violated the Due Process Clause, the Commerce Clause, and the Foreign Commerce

Clause and the inclusion would result in an unfair and inequitable apportionment of the income
In the Matter of General Electric Co. & Subs., page 27 of 56.
attributable to Vermont. See id. at 432.

As part of the analysis of the case, the Supreme Court found that Mobil Oil made no effort

to show that the foreign affiliates were not part of its unitary business operations and had failed to

sustain its burden of proving that the income was nonbusiness income that must be allocated to the

state of domicile rather than apportioned by the state. See id. at 439-442. As part of its various

challenges, Mobil Oil Corp. also argued that under Japan Line, the inclusion and apportionment of

the foreign source dividend income would result in a substantial risk of impermissible multiple

taxation. See id. at 442. As such, Mobil Oil Corp. contended that “because of the risk of multiple

taxation abroad, allocation of foreign-source income to a single situs is required at home.

Appellant's reasoning tracks the rationale of Japan Line, that is, that allocation is required because

apportionment necessarily entails some inaccuracy and duplication.” Id. 446. The Supreme Court

rejected this argument, distinguishing between the property taxes assessed in Japan Line, where

situs was an important consideration, and an apportioned income tax, where situs is of far less

value. See id. at 445-446 and at 448. Ultimately, the Mobil Oil Corp. Supreme Court held that

nothing under the Due Process Clause or the Commerce Clause prevented Vermont from taxing its

proportionate, apportioned share of Mobil Oil Corp. income, including the foreign-source

dividend income. See id. at 449.

In 1983, four years after Japan Line and three years after Mobil Oil Corp., the United

States Supreme Court again discussed the application of the Foreign Commerce Clause to a state’s

attempt at taxation in Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983). Container

Corp. involved California’s combined reporting taxation of a unitary series of entities. The Supreme

Court analyzed three major issues in Container Corp.: first, whether that taxpayer and its foreign

subsidiary were properly found to be a unitary business; second whether the standard three-factor

In the Matter of General Electric Co. & Subs., page 28 of 56.
apportionment applied to a multinational business violated the constitutional requirement for fair

apportionment; and third, whether the state had “an obligation under the Foreign Commerce

Clause… to employ the ‘arm’s-length’ analysis used by the Federal Government and most foreign

nations in evaluating the tax consequences of intercorporate relationships?” Container Corp., 463

U.S. 159, 163. The Supreme Court ultimately found, after a thorough and comprehensive analysis,

that it was proper for the state to find a unitary business relationship under the facts of the case,

proper for the state to apply the standard three-factor apportionment to taxpayer and its unitary

subsidiaries, and that the Foreign Commerce Clause did not prohibit the tax or compel the state to

employ the Federal Government’s “arms-length” analysis. See Container Corp., 463 U.S. 159, 184-

197.

In analyzing the Foreign Commerce Clause component of the case, the Container Corp.

Supreme Court clarified and distinguished a few key points from its previous ruling in Japan Line, all

of which have relevancy to resolution of this protest. First, the Container Corp. Supreme Court noted

that Japan Line involved a property tax rather than an income tax at issue before, which the court

found minimized the importance of situs in the analysis. See Container Corp., 463 U.S. 159, 187-188.

Secondly, the court noted that any potential double taxation, although a possibility, was not the result

of California’s formulary apportionment scheme. See Container Corp., 463 U.S. 159, 188. Thirdly,

and perhaps most relevant here in this protest, the Container Corp. Supreme Court noted that the tax

in question was not directed at a foreign corporation, but instead fell on a domestic corporation doing

business in the United States, a question it had expressly left unresolved in Japan Line. See Container

Corp., 463 U.S. 159, 188-189. Because of these differences, the Container Corp. Supreme Court

held that imposition of taxation did not violate either of the two additional Foreign Commerce Clause

factors articulated in Japan Line, the substantial risk of multiple taxation or interfering with federal

In the Matter of General Electric Co. & Subs., page 29 of 56.
government’s ability to speak with one voice. Container Corp. See Container Corp., 463 U.S. 159,

187-196.

Turning to another of the important cases for resolution of this protest, in 1992 the United

States Supreme Court considered when a state’s taxing of a corporation’s foreign dividends might

run afoul of the Foreign Commerce Clause in Kraft Gen. Foods v. Iowa Dep't of Revenue & Fin.,

505 U.S. 71 (1992). The question at issue in Kraft was “whether the disparate treatment [by Iowa]

of dividends from foreign and from domestic subsidiaries violates the Foreign Commerce Clause.”

id. at 73. Similar to New Mexico’s taxing scheme, Iowa’s starting point for calculating corporate

income tax was federal taxable income, which excludes domestic dividends from the income while

leaving foreign dividends included in the taxable income. Again like New Mexico, and unlike the

federal government, Iowa had no subsequent credit for payment of foreign tax on foreign

dividends, meaning that Iowa taxed a single filer corporation’s foreign dividends but not its

domestic dividends. See id. at 73-74.

The Supreme Court considered whether on its face, Iowa’s tax scheme and structure

violated the Foreign Commerce Clause. See id. at 75. The Supreme Court held in Kraft that the

disparate treatment inherent in Iowa’s single-filer corporate tax scheme between foreign and

domestic dividends amounted to facial discrimination against foreign commerce and thus

amounted to a violation of the Foreign Commerce Clause. Kraft did not specifically address either

combined returns or consolidated group returns. But in a much cited footnote by state court’s

addressing combined returns, the Kraft Supreme Court stated

If one were to compare the aggregate tax imposed by Iowa on a unitary
business which included a subsidiary doing business throughout the
United States (including Iowa) with the aggregate tax imposed by Iowa on
a unitary business which included a foreign subsidiary doing business
abroad, it would be difficult to say that Iowa discriminates against the
In the Matter of General Electric Co. & Subs., page 30 of 56.
business with the foreign subsidiary. Iowa would tax an apportioned share
of the domestic subsidiary's entire earnings, but would tax only the
amount of the foreign subsidiary's earnings paid as a dividend to the
parent.

In considering claims of discriminatory taxation under the Commerce
Clause, however, it is necessary to compare the taxpayers who are "most
similarly situated." A corporation with a subsidiary doing business in Iowa
is not situated similarly to a corporation with a subsidiary doing business
abroad. In the former case, the Iowa operations of the subsidiary provide
an independent basis for taxation not present in the case of the foreign
subsidiary. A more appropriate comparison is between corporations whose
subsidiaries do not do business in Iowa.

Kraft, 505 U.S. 71, 80 n.23 (internal citations omitted).

In 1997, in Conoco, Inc. v. Taxation & Revenue Dep't, 1997-NMSC-005, 122 N.M. 736,

the New Mexico Supreme Court considered whether New Mexico’s separate entity filer corporate

income tax method, even with the Department’s attempt at formulary apportionment factor relief

pursuant to the Detroit Formula, survived Foreign Commerce Clause scrutiny in light of Kraft.

The two taxpayers at issue in Conoco, Inc. had elected to file their respective New Mexico

corporate income tax returns under the separate entity method. See id. at ¶6. Under that method,

like in Kraft, the New Mexico Supreme Court noted that New Mexico’s reliance on the federal

taxable income resulted in the inclusion of foreign dividend income while excluding domestic

dividend income from New Mexico corporate income tax. See id. at ¶7. Unlike the federal

government, which the court noted has a subsequent credit for taxes paid to foreign governments

designed to mitigate against the possibility of multiple taxation on foreign subsidiaries, New

Mexico does not have a similar credit for foreign taxes paid after determination of federal base

income, leading to those taxpayers’ claim that New Mexico’s statute, like Iowa’s statute, facially

discriminated against foreign commerce. See id.

The New Mexico Supreme Court carefully reviewed the Kraft decision, highlighting a few

In the Matter of General Electric Co. & Subs., page 31 of 56.
key parts of that decision that informed its analysis of the issue. The New Mexico Supreme Court

noted that Iowa and New Mexico used the same starting point, the federal taxable income as the

base income, but that unlike Iowa, New Mexico used the Detroit Formula. See id. at ¶8. The New

Mexico Supreme Court noted that the US Supreme Court had considered and rejected Iowa’s

argument that the offending provision was mitigated by the fact that a taxpayer could change their

corporate structure or domicile to avoid the disparate treatment of dividends. See id. The New

Mexico Supreme Court also cited the United States Supreme Court’s rejection of Iowa’s argument

that the administrative efficiency in relying on the federal base income definition justified the

statutory scheme. See id. at ¶9.

After reviewing the Kraft decision in more detail, the New Mexico Supreme Court then

turned to a series of decisions from other states that considered the application of Kraft to their

respective state tax obligations. The New Mexico Supreme Court reviewed the Rhode Island

decision, Dart Industries, Inc. v. Clark, 657 A.2d 1066 (R.I. 1995), where the Rhode Island

Supreme Court had found that Kraft controlled the outcome in finding Rhode Island’s tax scheme,

similar to both Iowa and New Mexico, unconstitutional. See Conoco, Inc., 1997-NMSC-005, ¶10.

In particular, the New Mexico Supreme Court cited a portion of the Dart decision where the

Rhode Island Supreme Court had pointed out that “[a]lthough the Rhode Island and Iowa statutes

differ in minor respects, the fatal flaw in the Iowa statute is present in the Rhode Island statute: a

preference for domestic commerce over foreign commerce.” Id; Dart at 88. In contrast to the

holding in Dart, the New Mexico Supreme Court then analyzed two state cases that reached an

opposite conclusion from Dart and Kraft: In re Appeal of Morton Thiokol, Inc., 254 Kan. 23, 864

P.2d 1175 (Kan. 1993) and E.I. Du Pont de Nemours & Co. v. State Tax Assessor, 675 A.2d 82,

(Me. 1996). See See Conoco, Inc., 1997-NMSC-005, ¶11-13.

In the Matter of General Electric Co. & Subs., page 32 of 56.
In Morton Thiokol, Inc., the Kansas Supreme Court considered in pertinent part whether

Kansas’ combination method corporate filing scheme violated the Foreign Commerce Clause like

Iowa’s single filer scheme, as found in Kraft. See In re Appeal of Morton Thiokol, Inc., 254 Kan.

23, 864 P.2d 1175 (1993). The Kansas Supreme Court noted that like Iowa, the Kansas tax base is

determined by looking to federal taxable income. See In re Appeal of Morton Thiokol, Inc., 254

Kan. 23, 25, 864 P.2d 1175 (1993). The Kansas Supreme Court relied on footnote 23 from the

Kraft decision in its analysis, finding that under that footnote, courts must be careful to select the

appropriate comparison between similar circumstances. See id. at 36-37. The Kansas Supreme

Court found that the taxpayer in that case was asserting an incorrect comparison of two non-

combined subsidiaries that would not be subject to Kansas tax. See id. at 38. In an extended

passage quoted by the New Mexico Supreme Court in Conoco, Inc., 1997-NMSC-005, ¶11, the

Kansas Supreme Court in Morton Thiokol, Inc. stated:

[In Kraft, t]he Supreme Court compared a parent corporation with a
domestic subsidiary which does not do business in Iowa to a parent
corporation with a foreign subsidiary which does not do business in Iowa.
In this comparison, Iowa discriminated against the parent corporation with
the foreign subsidiary because Iowa allowed a deduction for the dividends
received by the parent with the domestic subsidiary, but not for the
dividends received by the parent with the foreign subsidiary. . . .
[However,] Kraft "does not address the taxation of foreign dividends by
domestic combination states." Clearly, Kraft does not hold that the
taxation of foreign dividends by a combination method is facially
unconstitutional. . . . Allowing a deduction for the domestic dividend
avoids double taxation. It is the use of the domestic combination method
which distinguishes the Kansas and Iowa tax schemes.

In light of that analysis, the Kansas Supreme Court resolved the pertinent issue before it by

concluding that “[i]n a combined filing state, such as Kansas, the hypothetical parent's tax base

includes the combined federal taxable income of its combined domestic subsidiaries as well as

dividends from foreign subsidiaries. We conclude there is no showing that this method is

In the Matter of General Electric Co. & Subs., page 33 of 56.
discriminatory under the holding in Kraft; therefore, it is not violative of the federal Constitution's

Commerce Clause (Art. I, § 8, cl. 3).” In re Appeal of Morton Thiokol, Inc., 254 Kan. 23, 38.

In the other case that the New Mexico Supreme Court considered in Conoco, Inc., E.I. Du

Pont de Nemours & Co. v. State Tax Assessor, 675 A.2d 82, (Me. 1996), the Maine Supreme

Judicial Court reached a similar conclusion to the Kansas Supreme Court about the applicability of

Kraft to a combined filing state. The Maine Supreme Judicial Court found that Maine’s water’s

edge combined reporting method provided a “taxing symmetry” between foreign and domestic

dividends not present in Iowa’s single filer method. See E.I. Du Pont de Nemours & Co. v. State

Tax Assessor, 675 A.2d 82, 88. As the Maine Supreme Judicial Court expands,

[f]ar from discriminating against foreign commerce, Maine's water's edge
combined reporting method provides a type of "taxing symmetry" that is
not present under the single entity system. Although the dividends paid
to parent corporations with domestic subsidiaries are not taxed, the
apportioned income of the domestic subsidiaries is subject to tax.
Because the income of the unitary domestic affiliates is included,
apportioned, and ultimately directly taxed by Maine as part of the
parent company's income, the inclusion of dividends paid by foreign
subsidiaries does not constitute the kind of facial discrimination
against foreign commerce that caused the Supreme Court to invalidate
Iowa's tax scheme in Kraft. Thus, Maine's use of a water's edge combined
reporting method distinguishes Maine's taxing scheme from the scheme
invalidated by the United States Supreme Court in Kraft.
Id. (emphasis added).

After reviewing Kraft, Dart Industries, Morton Thiokol, Inc., and E.I. Du Pont de

Nemours, the New Mexico Supreme Court in Conoco, Inc., 1997-NMSC-005, ¶13, stated that

because of the similarity between Iowa and Rhode Island’s tax scheme, “New Mexico’s tax

scheme violates the Foreign Commerce Clause unless saved by the Detroit Formula.” As the New

Mexico Supreme Court explained,

[t]he Detroit formula, named after an agreement between the Ford Motor
Company and the city of Detroit, operates to reduce the New Mexico
taxable income base by adding into the denominators of the parent
In the Matter of General Electric Co. & Subs., page 34 of 56.
corporation's property, payroll, and sales a portion of the property, payroll,
and sales of dividend-producing foreign subsidiaries. This portion is
determined by dividing the net dividends the parent corporation receives
from foreign subsidiaries by these subsidiaries' total net profit. This
addition into the divisors lowers the fractional multiplier used against a
taxpayer's total income, which lowers its New Mexico taxable income
base.
Id. ¶14 (internal citations excluded).

The Conoco, Inc. New Mexico Supreme Court rejected the Department’s argument that the

Detroit Formula remedied the disparate treatment of foreign and domestic dividends because the

Detroit Formula “does not eliminate dividends paid by foreign subsidiaries in every case,”

including for the two taxpayers at issues in Conoco, Inc. Id. at ¶15. The New Mexico Supreme

Court in Conoco, Inc., ultimately held that “the taxing of dividends under the separate corporate

entity method is unconstitutional, even with the Detroit Formula.” Id. at 16 (emphasis added).

Thus, in New Mexico, it is clear that under the separate corporate entity method, the

Department may not tax a corporation’s foreign subsidiary dividend income without running afoul

of the Foreign Commerce Clause, as articulated in Kraft and Conoco, Inc. In contrast, two other

New Mexico cases found that combined return reporting method did not offend the Foreign

Commerce Clause. In one case, NCR Corp. v. Taxation & Revenue Dep't, 1993-NMCA-060, 115

N.M. 612, the New Mexico Court of Appeals considered a Foreign Commerce Clause challenge to

the Department’s standard three-factor formulary apportionment of NCR’s unitary business income.

See NCR, 1993-NMCA-060, ¶5. NCR’s argument, and thus the Court of Appeals analysis, seemed to

be premised largely on Japan Line rather than Kraft5. See NCR, 1993-NMCA-060, ¶12. Relying

5
The 1992 Kraft decision was not addressed in the 1993 NCR decision. Perhaps this is why Judge Donnelly indicated
in his dissent to the Court of Appeals’ decision in Conoco, Inc., that NCR did not address the question of whether disparate
treatment of foreign subsidiary dividends versus domestic dividends violated the Foreign Commerce Clause. See Conoco,
Inc. v. State Taxation & Revenue Dep't, 1997-NMCA-004, ¶ 56, 122 N.M. 745, 931 P.2d 739 (Donnelly J, dissenting),
overruled by Conoco, Inc., 1997-NMSC-005. Or perhaps Kraft was not addressed because at time of the administrative
hearing, Kraft had not been issued and the record had developed under a different theory of the case.

In the Matter of General Electric Co. & Subs., page 35 of 56.
heavily on Container Corp.’s clarification and distinguishing of Japan Line, the Court of Appeals

ultimately affirmed the Department’s assessment in the case. See NCR, 1993-NMCA-060. Critical to

the NCR court’s analysis was the fact that NCR, a domestic company doing business in New Mexico,

was found to have a unitary business relationship with the foreign subsidiaries that generated unitary

income for NCR. See NCR, 1993-NMCA-060, ¶20. As the Court of Appeals explained, “[t]he tax in

question is not a tax on any of NCR’s foreign subsidiaries; instead, the tax falls upon an apportioned

share of NCR’s income which it receives in the form of royalties, interest, and dividends from its

unitary foreign subsidiaries.” Id. Because the tax fell on an apportioned share of unitary business

income of a domestic corporation engaged in business in New Mexico, the New Mexico Court of

Appeals found that the tax did not run afoul of the Foreign Commerce Clause. See id. As the Court of

Appeals explained,

Contrary to the contentions of NCR, in the instant case, New Mexico is
taxing only an apportioned share of the income of NCR, a domestic
corporation, not imposing a tax on tangible property of a foreign
corporation. Unlike the situation in Japan Line, multiple taxation, although
real, is not inevitable, the tax was fairly apportioned under the formula set
forth in UDITPA, and the legal incidence of the tax here does not fall on a
foreign owner but instead is upon a unitary, domestic entity.

NCR Corp., ¶ 26.

Building on NCR, perhaps in a more persuasive manner because it addressed both Kraft

and Conoco, Inc., is the Xerox administrative decision and order of Hearing Officer Margaret

Alcock, issued by the Administrative Hearings Office’s precursor entity, the Department’s Hearings

Bureau. See In the Matter of the Protest of Xerox Corporation, Taxation and Revenue Decision and

Order No. 03-22, Dec. 3, 2003 (non-precedential; publicly available at

http://realfile.tax.newmexico.gov/03-22__xerox_corporation.pdf ). Although the administrative

decision is non-precedential, Hearing Officer Alcock’s well-regarded Xerox decision and order is still

In the Matter of General Electric Co. & Subs., page 36 of 56.
insightful to the analysis of this protest. See J. Hellerstein & W. Hellerstein, ¶4.21[1][d] (in perhaps

the preeminent authority on state and local taxation, the hearing officer’s Xerox opinion is cited for its

thoughtfulness). The hearing officer cited favorably both Morton Thiokol, Inc.’s and E.I. Du Pont

de Nemours’ rejection of the application of Foreign Commerce Clause under Kraft to the

combined filing schemes in Kansas and Maine respectively. See Xerox, p. 8-10. The hearing

officer noted that the holding of Conoco, Inc. was limited to separate corporate entity method

filers. See Xerox, p. 10. The hearing officer then addressed the New Mexico Court of Appeals

decision in NCR Corp. v. Taxation & Revenue Dep't, 1993-NMCA-060, 115 N.M. 612, noting that

the court had allowed taxation of a corporate taxpayer’s foreign-source income over a Foreign

Commerce Clause challenge because the income was derived from the subsidiaries of a fully-

integrated unitary business and New Mexico only taxed an apportioned share of the corporation’s

total unitary business income. See Xerox, p. 11-12; See also NCR Corp. v. Taxation & Revenue

Dep't, 1993-NMCA-060, ¶20. In an important passage, Hearing Officer Alcock found that “[u]nder

the combined filing method (and in contrast to the separate filing method discussed in Conoco),

Xerox was also required to include on its [combined] return the income of any domestic subsidiaries

that were part of Xerox’s unitary business.” Xerox, p.12. In other words, through the unitary business

lens underpinning the combined reporting method, Xerox was compelled to include the dividends of

any unitary subsidiary—foreign or domestic—in its taxable income. The dividing line for disparate

treatment was not between foreign and domestic subsidiaries of Xerox, but between unitary and non-

unitary subsidiaries. See Xerox, p. 16-18. Because of this equal treatment of all subsidiaries premised

under the unitary business principal rather than on location of the subsidiary, the hearing officer

found that New Mexico’s combined reporting scheme as applied to Xerox had not violated the

Foreign Commerce Clause. See Xerox, p. 18.

In the Matter of General Electric Co. & Subs., page 37 of 56.
In Xerox, the Department had also employed the Detroit Formula to provide factor relief by

adding representation of the activities of the foreign subsidiary that produced the unitary income,

even though the hearing officer indicated that NCR, Inc. held that no such relief was required. See

Xerox, p. 13. By the Department providing this Detroit Formula relief discussed by the hearing

officer, Hellerstein and Hellerstein noted in commenting on the Xerox decision that

New Mexico had, in principle at least, provided substantial equality
between income from unitary foreign and domestic subsidiaries by
including the income in the apportionable tax base (whether in the form
of dividends or through combination) and by providing representation of the
subsidiaries’ factors in the formula employed to apportion such income.

J. Hellerstein & W. Hellerstein, ¶4.21[1][d] (emphasis added).

In the absence of presentation of clear and cogent evidence to the contrary, the hearing officer found

that Xerox had not met its heavy burden 6 of showing that the apportionment formula employed by the

Department was not a fair approximation of that taxpayer’s income reasonably related to that

taxpayer’s in-state activities. See Xerox, p. 13.

Like New Mexico in NCR and Xerox, other states have ruled that mandatory combined

reporting regimes, where an apportioned share of the unitary income of a corporation is subject to

tax, do not run afoul of the Foreign Commerce Clause. See Caterpillar, Inc. v. Comm'r of

Revenue, 568 N.W.2d 695 (Minn. 1997) (the Minnesota Supreme Court found that Minnesota’s

water’s edge combined reporting system, and its accompanying apportionment formula, did not

facially discriminate against foreign commerce); See GE v. Comm'r, N.H. Dep't of Revenue

Admin., 154 N.H. 457, 914 A.2d 246 (2006) (New Hampshire Supreme Court distinguishing

between the seperate entity reporting at issue in Kraft and New Hampshire’s water’s edge

6
Citing Container Corporation of America v. Franchise Tax Board, 463 U.S. 159, 161 (1983). See also Allied-Signal,
504 U.S. 768, 782, citing Exxon Corp. 447 U.S. 207, 224.

In the Matter of General Electric Co. & Subs., page 38 of 56.
combined reporting for unitary businesses); See Agilent Techs. v. Dep't of Revenue of the Colo.,

2016 Colo. Dist. LEXIS 1, *15-18 (non-precedential district court decision, finding that

Colorado’s combined reporting regime does not violate Foreign Commerce Clause). Overall, most

of the various states considering some form of mandatory combined reporting based on the unitary

business principal have found it not to run afoul of the issues addressed by Kraft and Conoco, Inc.

However, one exception is found in Ohio. There, the Supreme Court of Ohio, relying on

Kraft, found that Ohio’s Combined Reporting tax scheme facially discriminated against foreign

commerce, and thus violated the Foreign Commerce Clause. See Emerson Elec. Co. v. Tracy, 90

Ohio St. 3d 157, 735 N.E.2d 445, 2000 Ohio LEXIS 2293, 2000-Ohio-174. In comparing the

separate entity filing statute at issue in Kraft against Ohio’s combined reporting statute (Ohio

allowed an 85% reduction in foreign dividends and a 100% elimination of domestic dividends),

the Ohio Supreme Court stated

we find that the two statutes do not, in any relevant way, differ in their
discriminatory effect. Both laws demonstrate a preference for domestic
commerce over foreign commerce, albeit to varying degrees. While [the
Ohio Statute] does not, as the Iowa statute did, entirely prohibit the
deduction of dividends derived from foreign subsidiaries, this difference in
the degree of discrimination has no constitutional significance. When a
tax, on its face, has discriminatory economic effects, it is not necessary to
consider the extent of the discrimination before finding it unconstitutional
under the Commerce Clause. Fulton Corp. v. Faulkner (1996), 516 U.S.
325, 333, 116 S. Ct. 848, 855, 133 L. Ed. 2d 796, 806, fn. 3; Associated
Industries of Missouri v. Lohman (1994), 511 U.S. 641, 649-650, 114 S.
Ct. 1815, 1822, 128 L. Ed. 2d 639, 648; Maryland v. Louisiana (1981),
451 U.S. 725, 760, 101 S. Ct. 2114, 2136, 68 L. Ed. 2d 576, 604.

Emerson Elec. Co. v. Tracy, 90 Ohio St. 3d 157, 160, 735 N.E.2d 445, 448, 2000 Ohio LEXIS

2293, *6-7, 2000-Ohio-174.

In the Matter of General Electric Co. & Subs., page 39 of 56.
Application of Foreign Commerce Clause legal authority to New Mexico’s Consolidated
Group Method.

Returning to this protest, the question is whether Kraft and Conoco, Inc. treatment of separate

entity filers or the rationale expressed in Xerox, Morton Thiokol, Inc., and E.I. Du Pont de Nemours

addressing combined reporting apply to New Mexico’s third permitted reporting method, the federal

consolidated group method, under Section 7-2A-8.4 and Regulation 3.4.10.8 (B) (3) NMAC. This

appears largely a question of first impression in New Mexico. As discussed above, the consolidated

group is allowed pursuant to 26 CFR 1.1502-26 to deduct the aggregate of the members of the group

is domestic dividends permitted by 26 U.S.C. 243 (a) from its consolidated group federal taxable

income, the starting place for New Mexico’s corporate income tax calculation. New Mexico does not

have any subsequent equivalent statutory deduction or credit for foreign dividends or foreign taxes

paid, although the evidence showed that the Department did provide a limited percentage deduction

on the foreign dividends, as described in FOF # 58. This potentially disparate treatment suggests

initially that Kraft and Conoco, Inc. control the outcome of this protest. However, when looking

holistically at the consolidated group return, where the aggregation of the group’s domestic income

under the parent corporation ensures that the income associated with generation of domestic

dividends by the parent corporation’s group affiliates is taxed, the disparate treatment and

discriminatory effect that motivated the decisions in Kraft and Conoco, Inc. is not present to a

significant degree under the consolidated group method.

This is because of a critical difference between separate entity filers and consolidated group

filers makes the consolidated group method closer to the combined reporting method at least for

purposes of the issue in this protest. While the domestic dividends may be deducted from the

consolidated group in calculating the income tax base, in its aggregation of all the income of the

group members, the consolidated group return still captures the income of the group members
In the Matter of General Electric Co. & Subs., page 40 of 56.
attributable to the generation of the domestic dividends as part of the base income for the

consolidated group, subjecting that income to state taxation under the consolidated group method. In

other words, unlike the separate entity return, the consolidated group aggregation ensures that the

income generation activity of the entire group, including the income ultimately distributed through

domestic dividends, is still included. Thus, although the domestic dividends may be deducted out to

avoid double taxation, the total aggregate income of the consolidated group encompasses the total

domestic income of the consolidated group, including the income earned that led to the distribution of

the dividend, meaning that the total domestic income is subject to state taxation just as the foreign

dividend income and federal Subpart F income is subject to state taxation. See Bernard Egan & Co.

v. State Dep't of Revenue, 769 So. 2d 1060 (Fla. 2000), cert. denied, 534 U.S. 995 (2001) (Because

in one form or another the domestic dividend income was included in the consolidated group,

there was no violation of the Foreign Commerce Clause by inclusion of foreign dividend income);

Cf. also E.I. Du Pont de Nemours & Co., 675 A.2d 82, 88 (although domestic dividends paid to

parent corporation are deducted, the apportioned income of the all domestic subsidiaries is subject

to tax, leading to tax symmetry); Cf. NCR Corp., 1993-NMCA-060; Cf. also Xerox; Cf. also In re

Appeal of Morton Thiokol, Inc., 254 Kan. 23.

Similar to the combined return, under the consolidated group method there is also in theory

substantial equality between income from foreign and domestic subsidiaries, as the domestic income

that led to the dividend distribution is included in the aggregate taxable income of the consolidated

group. Cf. E.I. Du Pont de Nemours & Co., 675 A.2d 82, 88 (taxing symmetry of inclusion of the

domestic income of all domestic subsidiaries in parent corporation’s income distinguishes case

from Kraft). The inclusion of the aggregate domestic income, including the income that generated

the dividend distribution, in the total base income leads to the taxing symmetry concept that the New

In the Matter of General Electric Co. & Subs., page 41 of 56.
Mexico Supreme Court used to distinguish between cases addressing the Foreign Commerce Clause

in Conoco, Inc.: “Like the Supreme Court of Kansas in Thiokol, the Du Pont Court was able to

distinguish the challenged tax scheme from Iowa’s tax scheme because Maine included a portion of

the domestic subsidiaries’ income in the tax base of the parent.” 1997-NMSC-005, ¶ 12. Of course,

in the very next sentence, the New Mexico Supreme Court in Conoco, Inc. concluded that such

“taxing symmetry [was] not present in New Mexico’s tax scheme.” Id. But the scheme at issue in

Conoco, Inc. that lacked that tax symmetry was the separate entity filer method, rather than the

consolidated group scheme at issue here. Because the domestic income of the Taxpayer’s domestic

subsidiaries is included in aggregated consolidated group’s tax base under the consolidated group

method, there is similar tax symmetry in the consolidated group method as in the other state cases that

the New Mexico Supreme Court referenced in Conoco, Inc., making this protest distinct from Kraft

and Conoco, Inc. Certainly, and contrary to Taxpayer’s reply brief, the inclusion of the entire

domestic income, including the income that led to the dividend distribution, in the total taxable

income does not demonstrate the “discriminatory economic effects” that motived the New Mexico

Supreme Court to act in Conoco, Inc., 1997-NMSC-005, ¶15 (in paragraph cited in Taxpayer’s

reply brief, the New Mexico Supreme said that when a tax on its face has a discriminatory

economic effect, it was proper for court to conclude it was unconstitutional regardless of the extent

of inequality of the tax).

A few of the arguments of the parties require further analysis, especially because this is a

complex issue with potentially sounds arguments supporting each position. Although the Department

ultimately prevails on this close question, the Department’s argument in this case was not particularly

helpful because it continually returned to an argument that has been soundly rejected in case law. The

In the Matter of General Electric Co. & Subs., page 42 of 56.
Department repeatedly argued 7 that by voluntarily submitting a consolidated group return instead of

one of the other methods where the constitutionality was not at issue, Taxpayer has waived all nexus

and Commerce Clause defenses to state income taxation. As support for this proposition, the

Department cites only Bernard Egan & Co. As cited favorably above, the Bernard Egan case does

address a Foreign Commerce Clause challenge under the consolidated group reporting method (the

only case either side presented, or that the undersigned was able to locate, that squarely addressed

Kraft in the context of consolidated group filing), which certainly supports the Department’s broader

position. However, contrary to the Department’s fixation on the waiver issues, Bernard Egan does

not reach that conclusion through the “waiver” or “nexus” analysis. In fact, nowhere in the two page

decision are the words “waiver,” “nexus”, or their functional equivalents used, let alone is there any

discussion of how the voluntary nature of a consolidated group return alters the constitutional analysis

under the Foreign Commerce Clause. Instead, importantly the Bernard Egan court holds that because

Florida has made certain adjustments necessary to avoid discrimination and because one in one form

or another the domestic dividends are included, Bernard Egan & Co. failed to carry its burden of

demonstrating the Florida statute unconstitutional. Bernard Egan & Co., 1061-1062.

The Department’s waiver argument is also contradicted by numerous statements by the

United States Supreme Court in Kraft and the New Mexico Supreme Court in Conoco, Inc. Although

not precisely on point, the United States Supreme Court rejected Iowa’s argument that because the

taxpayer could have structured its subsidiaries differently in order to avoid the disparate treatment but

7
The Department’s brief cites the rejected voluntary election/wavier argument, or some variation thereof, in five of the
Department’s seven bulleted legal arguments. See Department Response to Taxpayer’s Motion for Summary Judgment, III
(A) (express discussion of waiver), III(B) (“”unlike Taxpayer here, who elected to file a consolidated return, there was no
issue of waiver in Container…”), III(C) (in addressing Xerox, indicating that unitariness is moot in light of voluntary
election); III(D) (election of reporting method distinguishes this case from Conoco Inc.); II(G) (“short answer is that
Taxpayer should not have opted out of separate” filing). The Department’s remaining arguments defend the
apportionment method rather than address the Foreign Commerce Clause issue.

In the Matter of General Electric Co. & Subs., page 43 of 56.
choose not to, there was no violation of the Foreign Commerce Clause. See Kraft, ¶77-78. That is,

the fact that the taxpayer had viable alternatives available to it that would not have resulted in the

disparate treatment of foreign and domestic dividends did not, in the eye of the Kraft Supreme Court,

excuse the facial discrimination under the statute. The New Mexico Supreme Court in Conoco, Inc.

noted this same point. See Conoco, Inc., 1997-NMSC-005, ¶ 20. And it is also an argument rejected

by the Ohio Supreme Court in Emerson Elec. Co. v. Tracy, 90 Ohio St. 3d 157, 160, 735 N.E.2d

445, 448, 2000 Ohio LEXIS 2293, *6-7, 2000-Ohio-174, as quoted above.

Moreover, in Conoco, Inc., the New Mexico Supreme Court expressly considered and

rejected the Department’s “voluntary election” defense to the separate entity filer statute, an argument

strikingly familiar to the Department’s waiver argument in this case. The New Mexico Supreme

Court in Conoco, Inc., 1997-NMSC-005, ¶ 23, summarized the Department’s voluntary election

defense as

[t]he Department argues that [Taxpayers] are not entitled to relief because
any discrimination against foreign commerce was a result of their decision to
utilize separate entity filing over other options. The Department cites
footnote 23 from Kraft to show that the Court approved domestic combined
reporting and therefore argues that the Taxpayers had the option of choosing
a constitutional method of filing.

Again, that argument is essentially the Department’s argument in this case: by Taxpayer electing to

file under the consolidated group method as opposed to other methods, Taxpayer waived any

Constitutional Commerce Clause issues. In rejecting the Department’s voluntary election defense, the

New Mexico Supreme Court stated

[e]ven if the Court implicitly approved domestic combined reporting, an interpretation
we are not inclined to accept and do not adopt in this opinion, the existence of
constitutional options should not preclude taxpayer relief from the
unconstitutional aspects of the option exercised by the taxpayer. Courts will not
ignore constitutional challenges merely because the claimant could have chosen
another option, the constitutionality of which is not questioned. In Intel's action
before the Department's hearing officer, the officer stated that
In the Matter of General Electric Co. & Subs., page 44 of 56.
[taxpayer] has exercised the right given it by the Secretary in
Regulation CIT 9:2 to file under the separate corporate entity filing
method. Having made a valid election of filing methods, [taxpayer]
is entitled to have that filing method applied to it in a constitutional
manner.

We agree with both the Court of Appeals and the hearing officer and find
that the presence of other reporting options is not relevant to the Taxpayers'
claim.

Conoco, Inc. , 1997-NMSC-005, ¶ 23 (emphasis added, internal citations removed).

In sum, because the New Mexico Supreme Court’s statement expressly rejected the very argument

contained throughout the Department’s argument in this case, the Department’s recycled and rejected

waiver argument is not persuasive.

The Department’s argument was virtually silent on the differences and similarities between

combined returning and consolidated groups, assuming without saying that they are identical.

However, the structure of each reporting method is critical to the analysis of this case, and a more

disciplined and detailed approach would have been far more helpful than focusing on the recycled

and rejected voluntary waiver argument or in making unstated assumption that a combined return and

consolidated return are identical. Moreover, the Department failed in this case to assert as uncontested

facts (or highlight in any manner) significant portions of the Department’s audit narrative addressing

two potential fertile subjects. First, the Department failed to address the audit narrative’s suggestion

of a unitariness of Taxpayer with its foreign subsidiaries (which certainly would have pushed the

facts and the analysis in this matter even closer to the Xerox, Morton Thiokol, Inc., and E.I. Du Pont

de Nemours rationale). Moreover, the Department also failed to highlight the fact that in the audit

narrative, in addition to the factor relief under the Detroit Formula, the auditor indicated that the

Department provided some deductions for the foreign dividends paid depending on Taxpayer’s

ownership interest in the foreign entity. The Department allowing a percentage deduction on foreign
In the Matter of General Electric Co. & Subs., page 45 of 56.
dividend payment, especially on top of the Detroit Formula factor relief, is certainly relevant to the

question of disparate treatment between foreign and domestic dividends, even if it by itself it’s not

dispositive of the question.

Turning to some of the Taxpayer’s arguments, Taxpayer’s first argument about facial

discrimination is addressed largely by the analysis above. Without rehashing the entire discussion

again, in short summary in considering the treatment of the foreign dividends and the inclusion of the

domestic income that led to the dividend distribution, unlike the separate entity return where there is

facial discrimination, there is a taxing symmetry under the consolidated group method. See Bernard

Egan & Co., 769 So. 2d 1060 (Fla. 2000).

The Taxpayer next argued that the New Mexico scheme results in inevitable multiple

taxation of foreign commerce, and thus the tax must be struck down. The hearing officer is not

convinced that inevitable double taxation will result in this case, especially in light of the fact that the

Department took steps to mitigate double taxation in this matter, including employing the Detroit

Formula and allowing Taxpayer to make percentage deductions on the foreign-sourced income.

However, like the tax found not to violate the Foreign Commerce Clause by the United States

Supreme Court in Container Corp., the tax at issue is not a tax on a foreign corporation, but instead is

an apportioned tax on the entire income of a domestic consolidated group, including domestic income

that resulted in the distribution of dividends and foreign subsidiary income. Even though both the

domestic income and foreign income were included in the consolidated group’s tax base, the

Department still employed the Detroit Formula (and also provided deductions on the foreign dividend

income and federal Subpart F income depending on Taxpayer’s ownership percentage) to mitigate the

possibility of double taxation on the foreign income. Again, Container Corp is instructive:

Allocating income among various taxing jurisdictions bears some
resemblance, as we have emphasized throughout this opinion, to slicing a
In the Matter of General Electric Co. & Subs., page 46 of 56.
shadow. In the absence of a central coordinating authority, absolute
consistency, even among taxing authorities whose basic approach to the task
is quite similar, may just be too much to ask. If California's method of
formula apportionment "inevitably" led to double taxation, that might be
reason enough to render it suspect. But since it does not, it would be
perverse, simply for the sake of avoiding double taxation, to require
California to give up one allocation method that sometimes results in double
taxation in favor of another allocation method that also sometimes results in
double taxation… Although double taxation is a constitutionally disfavored
state of affairs, particularly in the international context, Japan Line does not
require forbearance so extreme or so one-sided.

463 U.S. 159, 192-93 (1983) (internal citations removed). See also Mobil Oil Corp., 463 U.S. 425 (as

discussed in detail above, upholding a state’s apportioned tax on unitary foreign source dividend

income over a challenge under Japan Line for potential risk of multiple taxation).

Taxpayer’s third argument, that New Mexico’s consolidated group method results in unfair

apportionment of income from foreign commerce, also is similarly answered by the United States

Supreme Court’s analysis in Container Corp., and to a lesser extent, Mobil Oil Corp. First off, the

Container Corp. Supreme Court emphasized that Taxpayer has the burden to demonstrate unfair

apportionment:

The Constitution does not [invalidate] an apportionment formula whenever it
may result in taxation of some income that did not have its source in the
taxing State . . . . Nevertheless, we will strike down the application of an
apportionment formula if the taxpayer can prove by clear and cogent
evidence that the income attributed to the State is in fact out of all
appropriate proportions to the business transacted . . . in that State.

Container Corp., 463 U.S. 159, 169-70 (Internal citations and quotations removed).

Against this backdrop, the Container Corp. Supreme Court found that the standard three-

factor apportionment, widely accepted and employed used, generally avoids the type of distortions

that would lead to finding of unfair apportionment. See id. at 182-184. The Container Corp. Supreme

Court found, that despite that taxpayer’s argument to the contrary, a variance of 14% between that

In the Matter of General Electric Co. & Subs., page 47 of 56.
taxpayer’s proposed method and the three factor apportionment employed by California was safely

within the margin of error for any method of income attribution and not in any way indicative of

unfair, distortive apportionment. See id. 184. As the Department argues, it is difficult to find the

Taxpayer established by clear and cogent evidence that the minuscule 0.1895% (with slight but

insignificant variations in each audited year) percentage of income attributed to New Mexico under

apportionment was out of all appropriate proportion to the business transacted in New Mexico. As

such, Taxpayer failed here to meet its heavy burden, just as in Container Corp. and Mobil Oil Corp.,

445 U.S. 425, 428-429 (where the Court noted the tiny proportions of the state’s total sales, payroll,

and property compared to that taxpayer’s worldwide enterprise).

Taxpayer’s fourth and fifth arguments are related: Taxpayer argues that the Department

lacked any legal authority in this protest to employ the Detroit Formula factor relief because its

previous rulemaking proceeding after Conoco, Inc. had repealed that usage of the Detroit Formula.

Taxpayer also emphasized that the Department during that rulemaking had contemplated a regulation

that would have eliminated potential disparate treatment of foreign dividends for all three reporting

methods precisely because the Department was concerned that its approach would be found

unconstitutional.

As to using the Detroit Formula relief, this argument is not particularly persuasive. While it is

true that Taxpayer would prefer to not pay any tax on the foreign source income, and thus complains

that the Detroit Formula is insufficient to save the state’s attempt at taxation (an issue already

addressed above), the Detroit Formula actually slightly8 reduces Taxpayer liability compared to the

standard three factor apportionment because it incorporates Taxpayer’s relevant foreign payroll, sales,

8
As Taxpayer indicates using the undisputed material facts, the Detroit Formula only reduced Taxpayer’s liability by
approximately $270,000.00, from $3,615,740 to 3,346,058, or a reduction of under 7.5%.

In the Matter of General Electric Co. & Subs., page 48 of 56.
and property into the denominator of the equation. If, as here, Taxpayer has failed to establish how

the three factor apportionment formula is unfairly out of proportion with Taxpayer’s state activities,

than surely Taxpayer cannot carry its heavy burden to show that the additional factor relief provided

to Taxpayer’s benefit under the Detroit Formula is not proportionate. Moreover, even if the Detroit

Formula is no longer expressly stated by regulation, the Department by statute is allowed to make

equitable adjustments to apportionment under NMSA 1978, Section 7-4-19 (1986), which it choose

to do in the form of factor relief, to Taxpayer’s favor in reducing the apportionment percentage, in

this case. As to the draft regulations, and the discussions thereof, the hearing officer is also

unpersuaded. The proposed draft regulation was in fact never adopted. And as the Department

intimates, the participants in those discussions of the rejected draft regulation, while certainly some of

the respected luminaries in the field of New Mexico state taxation, did not have the luxury of

subsequent legal opinion and analysis to inform their speculation about how the combined reporting

and consolidated group methods would be treated after Conoco, Inc.’s holding addressing separate

entity filers.

In summary, as to Taxpayer’s challenges to the inclusion of foreign dividend and Subpart F

income, because under the consolidated group method there is a taxing symmetry of the treatment of

foreign-sourced income and the aggregate of domestic income, which includes the income activity

that led to the dividend distribution, the Department’s assessments as they relate to the foreign

dividends and federal Subpart F income were appropriate and did not afoul of the Foreign Commerce

Clause, Commerce Clause, or Due Process Clause.

Taxpayer’s Argument for Abatement of Penalty.

Taxpayer argued that in the event it was found liable for the assessed tax, penalty should

nevertheless be abated because any error it made in this matter resulted from a mistake of law made

In the Matter of General Electric Co. & Subs., page 49 of 56.
in good faith and on reasonable grounds. The Department argues that this issue was long ago decided

by Container Corp., NCR Corp., and Xerox, and thus Taxpayer’s wishful thinking is not grounds to

find Taxpayer non-negligent.

When a taxpayer fails to pay taxes due to the state because of negligence or disregard of

rules and regulations, but without intent to evade or defeat a tax, NMSA 1978 Section 7-1-69

(2007) requires that

there shall be added to the amount assessed a penalty in an amount equal to
the greater of: (1) two percent per month or any fraction of a month from
the date the tax was due multiplied by the amount of tax due but not paid,
not to exceed twenty percent of the tax due but not paid.

(italics added for emphasis).

The statute’s use of the word “shall” makes the imposition of penalty mandatory in all instances

where a taxpayer’s actions or inactions meets the legal definition of “negligence.” See Marbob

Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use of the

word “shall” in a statute indicates provision is mandatory absent clear indication to the contrary).

Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to exercise that

degree of ordinary business care and prudence which reasonable taxpayers would exercise under like

circumstances;” (B) “inaction by taxpayer where action is required”; or (C) “inadvertence,

indifference, thoughtlessness, carelessness, erroneous belief or inattention.” Taxpayer meets this

definition of negligence, and thus is potentially subject to civil negligence penalty under Section 7-9-

69.

However, in instances where a taxpayer might otherwise fall under the definition of civil

negligence generally subject to penalty, Section 7-1-69 (B) provides a limited exception: “[n]o

penalty shall be assessed against a taxpayer if the failure to pay an amount of tax when due results

In the Matter of General Electric Co. & Subs., page 50 of 56.
from a mistake of law made in good faith and on reasonable grounds.” In this case, the law is far

from as clear as the Department suggests. Although this decision has rejected Taxpayer’s

argument that the logic of Kraft and Conoco, Inc. extend to consolidated filers, this is an issue of

first impression in New Mexico that should be carefully considered by our appellate courts. In

light of those cases, and some of the similarities between a separate entity filer and a consolidated

group, Taxpayer presented a good faith legal justification based on reasonable grounds as to why it

excluded foreign dividend and Subpart F income from it base income, even if that argument did

not prevail here (and frankly, this was a very close case). Consequently, Taxpayer’s mistake in this

case was a mistake of law made in good faith and on reasonable grounds. Therefore, civil

negligence penalty shall be abated under Section 7-1-69 (B)

Taxpayer’s Argument for Awarding of Costs and Fees.

In its motion for summary judgment, Taxpayer argued that under NMSA 1978, § 7-1-29.1

(2003), Taxpayer was entitled to attorney’s fees and costs in this protest. NMSA 1978, § 7-1-29.1

(2003) provides that when a taxpayer is the prevailing party in an administrative proceeding before

the Department, the taxpayer shall be awarded reasonable administrative costs, including

attorney’s fees. The taxpayer is a “prevailing party” if it has substantially prevailed with respect to

(a) the amount in controversy or (b) most of the issues involved in the case or the most significant

issue or set of issues involved in the case. § 7-1-29.1(C)(1). But the taxpayer will not be treated

as a prevailing party if the Department “establishes that the position of the department in the

proceeding was based upon a reasonable application of the law to the facts of the case.” § 7-1-

29.1(C)(2).

In this case, Taxpayer did not prevail on the major issue. Even if Taxpayer had prevailed,

the Department’s position in this proceeding would still have been based on a reasonable

In the Matter of General Electric Co. & Subs., page 51 of 56.
application of the law to the facts of this protest in light of Morton Thiokol, Inc., E.I. Du Pont de

Nemours, and Xerox’s treatment of combined reporting and the novelty of the question as applied

to the similar consolidated group method. Wherefore, Taxpayer’s request for attorney’s fees and

costs is denied under Section 7-1-29.1(C)(2).

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protests of the Department’s assessments and

jurisdiction lies over the parties and the subject matter of this protest.

B. At the request of the parties, and pursuant to NMSA 1978, Section 7-1B-8 (D) (2015),

Taxpayer’s protest of both parties were consolidated upon the parties’ statement that both protests

involved the substantially identical legal issues.

C. Taxpayer moved for full summary judgment in this case, asserting that there was

no genuine dispute of facts and that the matter was ripe for decision as a matter of law. As there is

no genuine dispute as to any material fact, and Taxpayer was aware of the Department’s counter

claims, summary judgment is appropriate in this matter. See Romero v. Philip Morris, Inc., 2010-

NMSC-035, ¶7, 148 NM 713; See also Martinez v. Logsdon, 1986-NMSC-056, ¶12, 104 N.M.

479 (summary judgment may be granted to nonmoving party when they are entitled to it as a

matter of law and the moving party had general notice of nonmoving party’s claims).

D. The holding of Conoco, Inc. v. New Mexico Taxation and Revenue Department, 1997-

NMSC-005, expressly addressed separate entity filers, and has not been expressly extended to either

combined return filers or consolidated group filers.

E. New Mexico’s corporate income tax scheme, vis-à-vis the consolidated group

reporting method, does not violate the Foreign Commerce Clause because in addition to the

foreign dividend income, it includes the aggregate income of the domestic consolidated group,
In the Matter of General Electric Co. & Subs., page 52 of 56.
including the income that led to distribution of dividends, in the base income. See Bernard Egan

& Co. v. State Dep't of Revenue, 769 So. 2d 1060 (Fla. 2000), cert. denied, 534 U.S. 995 (2001); Cf.

NCR Corp. v. Taxation & Revenue Dep't, 1993-NMCA-060; Cf. also Xerox; Cf. also In re Appeal of

Morton Thiokol, Inc., 254 Kan. 23, 864 P.2d 1175 (Kan. 1993); Cf. also E.I. Du Pont de Nemours

& Co. v. State Tax Assessor, 675 A.2d 82, (Me. 1996).

F. Unlike the facts and circumstances in Japan Line, New Mexico’s imposition of tax

in this case is not against a foreign corporation, but against the apportioned income of a

consolidated group of domestic corporations, the parent of which does business in New Mexico,

making this case distinguishable from Japan Line. Moreover, the risk of multiple taxation that

motivated the property tax as issue in Japan Line is not as acute as an apportioned income tax. See

Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983).

G. Taxpayer did not meet its heavy burden of establishing that the Department’s use of

the standard three-factor apportionment, or the subsequent factor relief under the Detroit Formula,

resulted in an unfair apportionment not at all appropriate to the proportions of business transacted in

the state. See Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983).

H. NMSA 1978, Section 7-4-19 (1986) gave the Department authority to employ the

Detroit Formula to provide Taxpayer further factor, to Taxpayer’s benefit, to the apportionment of

income.

I. The Department’s argument that Taxpayer waived any Commerce Clause challenges

in this matter by voluntarily electing to file a consolidated group return was expressly rejected by the

New Mexico Supreme Court in Conoco, Inc. v. New Mexico Taxation and Revenue Department,

1997-NMSC-005, ¶23.

In the Matter of General Electric Co. & Subs., page 53 of 56.
J. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

under the assessment. Interest continues to accrue until the tax principal is satisfied

K. Taxpayer established that it made a mistake of law, in good faith and on reasonable

grounds, and thus is not subjected to civil negligence penalty under NMSA 1978, Section 7-1-69 (B).

L. Because Taxpayer was not prevailing party, Taxpayer is not entitled to the awarding

of costs and fees in this matter. See NMSA 1978, Section 7-1-29.1 (2015).

For the foregoing reasons, Taxpayer’s protest IS PARTIALLY GRANTED AND

PARTIALLY DENIED. The Department is ordered to abate the assessed penalty. Taxpayer is

ordered, less any other adjustments previously agreed to by the parties 9, to pay the remaining

assessed tax plus accumulated interest as calculated by the Department pursuant to NMSA 1978,

Section 7-1-67 (2013).

DATED: April 6, 2018

Brian VanDenzen, Esq.
Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

9
The parties indicated at the end of the oral argument that they may have reached an agreement on some other minor
adjustments to the assessment beyond the foreign source income issue, though they did not provide a details. The
parties should proceed accordingly with those adjustments.

In the Matter of General Electric Co. & Subs., page 54 of 56.
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates the

requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

Hearings Office may being preparing the record proper. The parties will each be provided with a

copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

statement from the appealing party. See Rule 12-209 NMRA.

In the Matter of General Electric Co. & Subs., page 55 of 56.
CERTIFICATE OF SERVICE

On April 6, 2018, a copy of the foregoing Decision and Order was mailed to the parties

listed below in the following manner:

In the Matter of General Electric Co. & Subs., page 56 of 56.