New Mexico Again Loses Unity of Foreign Income
The New Mexico Taxation & Revenue Department (“Department”) wrongly ignored the statutory exclusion for foreign corporations incorporated in foreign countries that do not engage in a trade or business in the United States when it forced inclusion of such foreign subsidiaries in the New Mexico unitary filing group for Apache Corporation. In Apache Corp. & Subsidiaries v. New Mexico Tax’n & Revenue Dep’t, Docket No. A-1-CA-39961 (NM Ct. of App. June 17, 2024), the New Mexico Court of Appeals analyzed the taxpayer’s multiple challenges and even noted New Mexico’s prior loss in F.W. Woolworth Co. v. New Mexico Tax’n & Revenue Dep’t, 458 US 354 (1982), when it reversed the adverse ruling issued by the Administrative Hearing Officer (“AHO”).
Apache Corporation (“Apache”) engaged in petroleum and natural gas exploration and production, was headquartered in Texas, and conducted business via domestic and non-U.S. (i.e., “foreign”) subsidiaries. For 2015, Apache filed New Mexico unitary combined income tax returns that excluded the foreign subsidiaries. The Department included the foreign subsidiaries and assessed additional tax and interest, with penalties. Apache protested on constitutional grounds and later supplemented its protest to assert that the statutory definition of a unitary business excluded foreign corporations.
After a trial, the AHO ruled that the foreign subsidiaries were unitary and includible entities. Undeterred, Apache appealed.
On appeal, the New Mexico Court of Appeals explained that it must “look to the plain language of the statute ... .” So, recognizing its job, it observed that the statute required that an elective combined corporation income tax return “shall include the net income of all the unitary corporations.” It further noted that “unitary corporation” is defined in statute Section 7-2A-2(Q) 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:
- there is a unity of operations evidenced by central purchasing, advertising, accounting or other centralized services;
- there is a centralized management or executive force and centralized system of operation; or
- the operations of the corporations are dependent upon or contribute property or services to one another individually or as a group.
(Emphasis added.)
The Department argued, and the AHO had agreed, that if the foreign subsidiaries met the three unities test, inclusion in the combined return was appropriate. Apache highlighted that the statute contains a carve-out for a “foreign corporation incorporated in a foreign country and not engaged in trade or business in the United States during the taxable year[.]” The Department did not dispute that the subsidiaries at issue were incorporated in foreign countries and, though it initially disputed that the subsidiaries conducted no U.S. trade or business, on appeal the Department conceded that the subsidiaries did not engage in a trade or business in the United States in 2015. Apache argued that the subsidiaries met the terms of the carve-out and they should be excluded from the combined return.
The Court of Appeals noted that if the only test was the three unities test asserted by the Department and upheld by the AHO, then the statute’s carve-out language would be superfluous. The Court of Appeals held: “We disagree with AHO’s analysis because it negates the existence of the carve-out.”
There are two important take-aways:
- First, don’t despair if you lose at the first appeal level—keep fighting because you can win!
- Second, the plain words of the statute must be considered: Words matter!
This update is one in a series of updates written for the July 2024 edition of The BR State + Local Tax Spotlight.