CO Code § 39-22-303 (2021)
2021 Colorado Code|Title 39 - Taxation|Article 22 - Income Tax|Part 3 - Corporations|§ 39-22-303. Dividends in a Combined Report - Foreign Source Income - Affiliated Groups - Definitions

  (Deleted by amendment,L. 2008, p. 955, § 7, effective January 1, 2009.)    (Deleted by amendment,L. 2008, p. 955, § 7, effective January 1, 2009.)    (Deleted by amendment,L. 2008, p. 955, § 7, effective January 1, 2009.)    (Deleted by amendment,L. 2008, p. 955, § 7, effective January 1, 2009.)    (Deleted by amendment,L. 2008, p. 955, § 7, effective January 1, 2009.)    In the case of two or more C corporations, whether domestic or foreign, owned or controlled directly or indirectly by the same interests, the executive director may, to avoid abuse, on a fair and impartial basis, distribute or allocate the gross income and deductions between or among such C corporations in order to clearly reflect income.    (Deleted by amendment,L. 2008, p. 955, § 7, effective January 1, 2009.)      Except as provided in subsection (8)(b) of this section, neither the taxpayer nor the executive director shall include in a combined report any C corporation that conducts business outside the United States if eighty percent or more of the C corporation's property and payroll, as determined by factoring pursuant to section 24-60-1301, is assigned to locations outside the United States. For the purpose of this subsection (8), “United States” is restricted to the fifty states and the District of Columbia.      For tax years beginning on or after January 1, 2022, a taxpayer shall include in the combined group any member of an affiliated group of C corporations that is incorporated in a foreign jurisdiction for the purpose of tax avoidance. (b) (I) For tax years beginning on or after January 1, 2022, a taxpayer shall include in the combined group any member of an affiliated group of C corporations that is incorporated in a foreign jurisdiction for the purpose of tax avoidance.    A C corporation is presumptively incorporated in a foreign jurisdiction for the purpose of tax avoidance if it is incorporated in a listed jurisdiction. A C corporation is not incorporated in a foreign jurisdiction for the purpose of tax avoidance if the taxpayer proves to the satisfaction of the executive director that such corporation is incorporated in a listed jurisdiction for reasons that meet the economic substance doctrine described in section 7701 (o) of the internal revenue code.    For purposes of this subsection (8)(b), the term “C corporation” includes any business entity defined as a “corporation” under the internal revenue code and the rules and regulations promulgated pursuant thereto, regardless of whether such entity is subject to federal income tax. Any business entity included in a combined group under subsection (8)(b)(I) of this section is deemed to be a “C corporation” for purposes of this article 22, notwithstanding section 39-22-103 (2.5).          Dividends which a C corporation includable in a combined report receives from another C corporation also includable in the combined report shall be excluded from taxable income.    As used in this subsection (10), “foreign source income” means taxable income from sources without the United States, as used in section 862 of the internal revenue code. In apportioning and allocating income pursuant to section 39-22-303.5, 39-22-303.6, or 39-22-303.7, foreign source income shall be considered only to the extent provided in this subsection (10):   If, for federal income tax purposes, the taxpayer has elected to claim foreign taxes paid or accrued as a deduction, then all foreign source income minus such deduction shall be considered;      If, for federal income tax purposes, the taxpayer has elected to claim foreign taxes paid or accrued as a credit, then foreign source income shall be considered only to the extent that such income exceeds the exclusion provided by this paragraph (b). (b) (I) If, for federal income tax purposes, the taxpayer has elected to claim foreign taxes paid or accrued as a credit, then foreign source income shall be considered only to the extent that such income exceeds the exclusion provided by this paragraph (b).    For income tax years commencing prior to January 1, 2000, the amount to be excluded shall be determined by multiplying the foreign source income by a fraction, the numerator of which is the total of taxes paid or accrued to foreign countries and United States possessions by or on behalf of the C corporation pursuant to section 901 or 902 of the internal revenue code, deemed paid pursuant to section 902 or 960 of the internal revenue code for the tax year, or carried over or carried back to such tax year pursuant to section 904 (c) of the internal revenue code. The denominator of said fraction shall be forty-six percent of the foreign source income.    For income tax years commencing on or after January 1, 2000, the amount to be excluded shall be determined by multiplying the foreign source income by a fraction, the numerator of which is the total of taxes paid or accrued to foreign countries and United States possessions by or on behalf of the C corporation pursuant to section 901 or 902 of the internal revenue code, deemed paid pursuant to section 902 or 960 of the internal revenue code for the tax year, or carried over or carried back to such tax year pursuant to section 904 (c) of the internal revenue code. The denominator of said fraction shall be the same percentage as the effective federal corporate income tax rate multiplied by the foreign source income. As used in this subsection (10), “effective federal corporate income tax rate” means the taxpayer's federal corporate income tax calculated in accordance with section 11 (a) and (b) of the internal revenue code for such tax year divided by the taxpayer's federal taxable income.       Foreign source income from a foreign C corporation within an affiliated group of C corporations shall be determined without regard to section 882 (a)(2) of the internal revenue code.         In the case of an affiliated group of C corporations, the executive director may require, or the taxpayer may file, a combined report, but such report shall only include those members of an affiliated group of C corporations as to which any three of the following facts have been in existence in the tax year and the two preceding tax years:   Sales or leases by one affiliated C corporation to another affiliated C corporation constitute fifty percent or more of the gross operating receipts of the C corporation making the sales or leases; or, purchases or leases from one affiliated C corporation by another affiliated C corporation constitute fifty percent or more of the cost of goods sold or leased by the C corporation making the purchases or leases. This subparagraph (I) shall not apply to the following transactions between affiliated C corporations: The issuance of commercial paper or other debt obligations and the use of the proceeds therefrom to make loans or to purchase receivables between affiliated C corporations.    Five or more of the following services are provided by one or more affiliated C corporations for the benefit of another affiliated C corporation: Advertising and public relations services; accounting and bookkeeping services; legal services; personnel services; sales services; purchasing services; research and development services; insurance procurement and servicing exclusive of employee benefit programs; and employee benefit programs including pension, profit-sharing, and stock purchase plans. A service shall be deemed provided if fifty percent or more of the service is provided without provision for an “arm's length charge” within the meaning of the United States treasury regulation 1.482-2 (b)(3).    Twenty percent or more of the long-term debt of one affiliated C corporation is owed to or guaranteed by another affiliated C corporation. For the purposes of this subparagraph (III), “long-term debt” means debt which becomes due more than one year after incurred.    One affiliated C corporation substantially uses the patents, trademarks, service marks, logo-types, trade secrets, copyrights, or other proprietary materials owned by another affiliated C corporation.    Fifty percent or more of the members of the board of directors of one affiliated C corporation are members of the board of directors or are corporate officers of another affiliated C corporation.    Twenty-five percent or more of the twenty highest-ranking officers of an affiliated C corporation are members of the board of directors or are corporate officers of another affiliated C corporation.       The net income of the affiliated C corporations which are to be included in a combined report shall be determined pursuant to the rules and regulations promulgated pursuant to section 1502 of the internal revenue code, as modified by section 39-22-304.    If an affiliated C corporation is included in a combined report, section 39-22-303.5, 39-22-303.6, or 39-22-303.7 shall be applied with the following modifications:   Intercompany transactions among the affiliated C corporations shall be excluded from the numerator and denominator of the apportionment calculation set forth in section 39-22-303.5, 39-22-303.6, or 39-22-303.7; and    (A) For income tax years commencing before January 1, 2022, the numerator of the apportionment calculation set forth in section 39-22-303.5 or 39-22-303.6 shall be, to the extent applicable, the sum of the sales of those affiliated C corporations doing business in Colorado.       The executive director shall not require returns to be made on a consolidated basis, but an affiliated group of C corporations may elect to file a consolidated return as otherwise provided in this article.    (Deleted by amendment,L. 2008, p. 955, § 7, effective January 1, 2009.)    For purposes of this section, any C corporation formed under the laws of any state or the United States with de minimis or no property and payroll, as determined by factoring pursuant to section 24-60-1301, shall be deemed to satisfy the requirements of subsection (11)(a) of this section. The department of revenue shall adopt rules to determine the manner in which the de minimis standard will be uniformly applied to taxpayers.    For the purpose of satisfying the requirements of subsections (11)(a)(I) to (11)(a)(IV) of this section, the activities of any entity formed under the laws of any state or the United States that is treated as a partnership pursuant to part 2 of this article 22, shall be treated as activities performed by the member of the affiliated group of C corporations that owns a portion of the entity if more than fifty percent of the entity's ownership interest is held in the aggregate by one or more members of the affiliated group. If the entity is owned by more than one member of the affiliated group, the activities of the entity shall be treated as activities performed by each member that owns a portion of the entity.       As used in this section, unless the context otherwise requires:   “Affiliated group” means:   One or more includable C corporations connected directly or indirectly through stock ownership with a common parent C corporation that is an includable C corporation if:   Stock possessing more than fifty percent of the voting power of all classes of stock and more than fifty percent of each class of the nonvoting stock of each of the includable C corporations, except the common parent C corporation, is owned directly or indirectly by one or more of the other includable C corporations; and    The common parent C corporation owns directly or indirectly stock possessing more than fifty percent of the voting power of all classes of stock and more than fifty percent of each class of the nonvoting stock of at least one of the other includable C corporations.       As used in this subsection (12)(a), the term “stock” does not include nonvoting stock that is limited and preferred as to dividends, employer securities, within the meaning of section 409(1) of the internal revenue code, while such securities are held under a tax credit employee stock ownership plan, or qualifying employer securities, within the meaning of section 4975(e)(8) of the internal revenue code, while such securities are held under an employee stock ownership plan which meets the requirements of section 4975(e)(7) of the internal revenue code.       “Listed jurisdiction” means Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, Bermuda, Bonaire, British Virgin Islands, Cayman Islands, Cook Islands, Curagao, Cyprus, Dominica, Gibraltar, Grenada, Guernsey-Sark-Alderney, Isle of Man, Jersey, Liberia, Luxembourg, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Niue, Panama, Saba, Samoa, San Marino, Seychelles, Sint Eustatius, Sint Maarten, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos Islands, U.S. Virgin Islands, and Vanuatu.    Repealed.       The executive director shall, within existing appropriations to the department of revenue, promulgate rules and regulations to apply and administer the provisions of this section. Such rules and regulations shall be available for public review and comment not later than July 1, 1990.    (Deleted by amendment,L. 2008, p. 955, § 7, effective January 1, 2009.)    The department of revenue shall convene a stakeholder working group on or before September 1, 2019, to discuss tax policies and issues arising from the relevant statutory provisions governing combined tax reporting. The department shall include a report regarding the activities of the stakeholder working group in its presentation made pursuant to section 2-7-203.     History. Source: L. 64: R&RE, p. 769, § 1. C.R.S. 1963: § 138-1-37. L. 79: Entire section R&RE, p. 1443, § 34, effective July 3. L. 80: (7) added, p. 731, § 1, effective March 17. L. 85: (8) to (12) added, p. 1273, § 1, effective June 12. L. 89: (5)(a) and (6) amended and (13) added, p. 1499, § 2, effective July 1, 1990. L. 92: (1) to (3), (4)(a), (4)(d)(I), (4)(d)(V) to (4)(d)(VII), (4)(e), IP(5)(b), (5)(b)(III), (5)(c), (6), (8), (9), (10)(b), (10)(c), (11), (12)(a), and (12)(c) amended, p. 2268, § 8, effective April 16. L. 93: (14) added, p. 1320, § 4, effective June 6. L. 96: (5)(c) amended, p. 165, § 5, effective July 1. L. 99: (10)(b) amended, p. 1282, § 1, effective August 4. L. 2004: (12)(b) amended, p. 1209, § 90, effective August 4. L. 2008: (1), (2), (3), (4), (5), (7), IP(10), (11)(c), (11)(e), and (14) amended, p. 955, § 7, effective January 1, 2009. L. 2019: (8) amended, (11)(f), (11)(g), and (15) added, and (12)(c) repealed,(SB 19-233), ch. 397, p. 3535, § 2, effective August 2; IP(10) and (11)(c) amended,(SB 19-241), ch. 390, p. 3476, § 52, effective August 2. L. 2021: (8), (11)(c)(II), and (12) amended,(HB 21-1311), ch. 298, p. 1775, § 6, effective June 23. History. Source: L. 64: R&RE, p. 769, § 1. C.R.S. 1963: § 138-1-37. L. 79: Entire section R&RE, p. 1443, § 34, effective July 3. L. 80: (7) added, p. 731, § 1, effective March 17. L. 85: (8) to (12) added, p. 1273, § 1, effective June 12. L. 89: (5)(a) and (6) amended and (13) added, p. 1499, § 2, effective July 1, 1990. L. 92: (1) to (3), (4)(a), (4)(d)(I), (4)(d)(V) to (4)(d)(VII), (4)(e), IP(5)(b), (5)(b)(III), (5)(c), (6), (8), (9), (10)(b), (10)(c), (11), (12)(a), and (12)(c) amended, p. 2268, § 8, effective April 16. L. 93: (14) added, p. 1320, § 4, effective June 6. L. 96: (5)(c) amended, p. 165, § 5, effective July 1. L. 99: (10)(b) amended, p. 1282, § 1, effective August 4. L. 2004: (12)(b) amended, p. 1209, § 90, effective August 4. L. 2008: (1), (2), (3), (4), (5), (7), IP(10), (11)(c), (11)(e), and (14) amended, p. 955, § 7, effective January 1, 2009. L. 2019: (8) amended, (11)(f), (11)(g), and (15) added, and (12)(c) repealed,(SB 19-233), ch. 397, p. 3535, § 2, effective August 2; IP(10) and (11)(c) amended,(SB 19-241), ch. 390, p. 3476, § 52, effective August 2. L. 2021: (8), (11)(c)(II), and (12) amended,(HB 21-1311), ch. 298, p. 1775, § 6, effective June 23.    Cross references:    For the legislative declaration in SB 19-233, see section 1 of chapter 397, Session Laws of Colorado 2019.    For the legislative declaration in HB 21-1311, see section 1 of chapter 298, Session Laws of Colorado 2021.     ANNOTATION   Two-factor formula constitutional. The two-factor formula, consisting of sales and property factors in the computation of income tax for a foreign corporation is not intrinsically arbitrary, and, thus, is constitutional. GMC v. State, 181 Colo. 360 , 509 P.2d 1260 (1973).   Difference of nine-tenths percent too small to be unconstitutional. A difference of nine-tenths percent between the computation of a railroad and that of the director of revenue concerning the allocation of apportionable income to Colorado is too small to constitute an unlawful burden upon interstate commerce, a violation of due process, or a violation of equal protection. Union P.R.R. v. Heckers, 181 Colo. 374 , 509 P.2d 1255, appeal dismissed, 414 U.S. 806, 94 S. Ct. 74, 38 L. Ed. 2d 42 (1973).   General assembly decides which taxation formula economically sound. It is not the trial court's function, nor that of the supreme court, to decide which formula for the taxation of a foreign corporation is the most economically sound, as this is a policy decision for the general assembly. GMC v. State, 181 Colo. 360 , 509 P.2d 1260 (1973).   Presumption that percentage allocation for foreign corporation fair. Where a statutory formula for the taxation of a foreign corporation is not intrinsically invalid, there is a strong presumption that the percentage allocation is fair. GMC v. State, 181 Colo. 360 , 509 P.2d 1260 (1973).   Regulation may not modify or contravene existing statute. A regulation must further the will of the general assembly and may not modify or contravene an existing statute. Miller Int'l, Inc. v. State Dept. of Rev., 646 P.2d 341 (Colo. 1982).   Else it is invalid. A method of allocation of income which is established by regulation, but which is inconsistent with this section, is invalid. Miller Int'l, Inc., v. State Dept. of Rev., 646 P.2d 341 (Colo. 1982).   Fairness is not equated with absolute precision. GMC v. State, 181 Colo. 360 , 509 P.2d 1260 (1973).   Heavy burden lies on party challenging constitutional validity of tax apportionment formula. GMC v. State, 181 Colo. 360 , 509 P.2d 1260 (1973).   Party must show by “clear and convincing evidence” that the use of the particular formula results in extraterritorial values being taxed. GMC v. State, 181 Colo. 360 , 509 P.2d 1260 (1973).   The economic substance doctrine does not give the department the authority to disregard a company's corporate structure and tax it when there are no factual grounds to support a conclusion that the structure was put in place to avoid state taxes. Agilent Techs. v. Dept. of Rev., 2017 COA 137 , 442 P.3d 938, aff'd, 2019 CO 41, 441 P.3d 1012 (case decided prior to 2019 amendments to subsections (8) and (12)(c) and addition of subsections (11)(f), (11)(g), and (15)).   Allocation method valid if calculates income “reasonably attributed” to state transactions. The method of allocation of unitary income between states is valid if it is fairly calculated to assign to a state that portion of the net income “reasonably attributable” to the business transacted in that state. Union P.R.R. v. Heckers, 181 Colo. 374 , 509 P.2d 1255, appeal dismissed, 414 U.S. 806, 94 S. Ct. 74, 38 L. Ed. 2d 42 (1973).   Direct deduction of ad valorem taxes from net income is not required. Union P.R.R. v. Heckers, 181 Colo. 374 , 509 P.2d 1255, appeal dismissed, 414 U.S. 806, 94 S. Ct. 74, 38 L. Ed. 2d 42 (1973).   Director may change method of allocation. The fact that a corporation uniformly has been permitted to allocate Colorado and out-of-state income does not mean that the director may not change the method of allocation. Coors Porcelain Co. v. State, 183 Colo. 325 , 517 P.2d 838 (1973), cert. denied, 419 U.S. 874, 95 S. Ct. 136, 42 L. Ed. 2d 113 (1974).   Department may allocate income among corporations owned by same interests. The department of revenue may distribute or allocate the income of corporations owned or controlled by the same interests if it concludes that is the most effective method of taxing all the income that Colorado can constitutionally tax. Joslin Dry Goods Co. v. Dolan, 615 P.2d 16 (Colo. 1980); Hewlett-Packard Co. v. State Dept. of Rev., 749 P.2d 400 (Colo. 1988).   Subsection (6) does not provide the department with an alternative method of allocating income among affiliated C corporations in order to impose a tax on that income apart from the tests under subsections (11)(a) and (12)(c). Agilent Techs. v. Dept. of Rev., 2017 COA 137 , 442 P.3d 938, aff'd, 2019 CO 41, 441 P.3d 1012 (case decided prior to 2019 amendments to subsections (8) and (12)(c) and addition of subsections (11)(f), (11)(g), and (15)).   Recognized test for a unitary business is “whether or not the operation of the portion of the business within the state is dependent upon or contributory to the operation of the business outside the state”. Joslin Dry Goods Co. v. Dolan, 615 P.2d 16 (Colo. 1980).   Subsection (6) does not provide the department with an alternative method of allocating income apart from the test for affiliated groups of C corporations outlined in subsection (12)(c). Because a holding company is not an includable C corporation, it cannot be a member of an affiliated group, and in turn falls outside the director's power to require its inclusion in a combined tax return. Oracle Corp. v. Dept. of Rev., 2017 COA 152 , 442 P.3d 947, aff'd, 2019 CO 42, 441 P.3d 1021; Agilent Techs. v. Dept. of Rev., 2017 COA 137 , 442 P.3d 938, aff'd, 2019 CO 41, 441 P.3d 1012 (both cases decided prior to 2019 amendments to subsections (8) and (12)(c) and addition of subsections (11)(f), (11)(g), and (15)).   The income of foreign subsidiaries of a unitary business, even though such income is not federal taxable income, should be included in determining the net income base for a corporation. Hewlett-Packard Co. v. State Dept. of Rev., 749 P.2d 400 (Colo. 1988).   A holding company that has no income or payroll of its own cannot, by definition, have twenty percent or more of its factors assigned to locations in the United States, and therefore cannot be included on a parent C corporation's combined tax return. Oracle Corp. v. Dept. of Rev., 2017 COA 152 , 442 P.3d 947, aff'd, 2019 CO 42, 441 P.3d 1021; Agilent Techs. v. Dept. of Rev., 2017 COA 137 , 442 P.3d 938, aff'd, 2019 CO 41, 441 P.3d 1012 (both cases decided prior to 2019 amendments to subsections (8) and (12)(c) and addition of subsections (11)(f), (11)(g), and (15)).   Section authorizes department to require combined reports. It is this section's provision for the distribution and allocation of income and deductions which authorizes the department to require combined reports. Joslin Dry Goods Co. v. Dolan, 615 P.2d 16 (Colo. 1980).   A combined-consolidated filing is permissible. An affiliated group that is required to file a combined return may also elect to file a consolidated return. This type of return was clearly allowed under the published statutes and the related department regulations. Cendant Corp. & Subs. v. Dept. of Rev., 226 P.3d 1102 (Colo. App. 2009).