Could New Mexico apportion Apache's foreign dividends, Subpart F income, and check-the-box income, and what method corrected distortion from decades of accumulated income?

View original ruling (PDF)

Plain-English summary

Apache Corporation partially prevailed in a complex 2015 corporate-income-tax dispute involving approximately $13.5 billion of foreign-source income. New Mexico could apportion the income of Apache's unitary foreign subsidiaries, but the original method produced obvious distortion. The hearing officer ordered a 30% foreign-income exclusion, removed one nonunitary subsidiary's dividend, and abated the entire civil penalty.

The original assessment was $27,569,679.55: $24,187,441 of corporate income tax, $2,418,744.10 of penalty, and $963,494.45 of interest. It followed an original return on which Apache calculated a 5.7911% New Mexico factor but reported a 0% New Mexico apportionment percentage while claiming a $19,422,282 refund.

The principal holdings

Apache was unitary with 14 foreign subsidiaries

Apache wholly owned 14 of the 15 foreign entities at issue. The hearing officer found functional integration, centralized management, and economies of scale: Apache funded acquisitions, shared officers and management systems, set target returns, approved budgets and major capital expenditures, controlled reinvestment and dividends, and used the foreign operations to further its overall oil-and-gas business.

Apache's New Mexico Permian Basin operations also formed part of that unitary enterprise. Income generated by the combined business helped acquire and grow foreign subsidiaries, and later foreign-asset dispositions supported debt reduction, stock repurchases, and expansion of North American operations.

Oil Insurance Limited was not unitary

Apache owned less than 5% of Oil Insurance Limited, below the statutory more-than-50% ownership requirement. It had no officers or directors on the insurer's board and shared no management or administrative functions. The insurer's $18,588,489 dividend therefore had to be removed from Apache's 2015 foreign dividends before apportionment.

Dividends, Subpart F, and check-the-box income were business income

The dividends and Subpart F income came from the unitary subsidiaries and were used in the strategic rebalancing of Apache's oil-and-gas enterprise. They met New Mexico's dispositional and functional tests for business income rather than being nonbusiness income allocable only to Texas.

The check-the-box election reclassified two foreign subsidiaries as disregarded entities and created a deemed liquidation under federal regulations. Although Apache received no cash through an actual sale, federal law required the deemed income on its federal return, New Mexico's corporate base began with that federal income, and the income came from unitary subsidiaries. It too was apportionable business income.

The combined-return treatment was constitutional

The decision rejected Apache's Foreign Commerce Clause challenge because New Mexico was taxing an apportioned share of a unitary corporation doing business in the state, not directly taxing the foreign subsidiaries. It distinguished decisions involving separate-entity filers and foreign property taxes.

The Equal Protection claim also failed. The unitary-business principle supplied a rational reason for treating combined unitary filers differently from single-entity filers.

The standard apportionment formula was distortive

About 76% of the disputed foreign dividends had accumulated over multiple years, reaching back as far as 1991. Applying only Apache's 2015 property, payroll, and sales factors to that multiyear income failed to provide foreign-factor representation and overstated the New Mexico share. The Department's corporate-income-tax witness agreed that the original assessment contained obvious distortion.

Apache rebutted the original dollar amount, but did not prove either of its own proposed alternative methods was reasonable. Of the alternatives in evidence, the hearing officer selected the Department's 30% exclusion method, derived from its historical analysis of foreign-factor relief. That method excluded 30% of accumulated foreign income before applying the New Mexico factor.

The decision described an intermediate calculation of approximately $12,754,050 of additional corporate income tax, compared with the original $24,187,441 principal. That was not the final liability: it still required removal of Oil Insurance Limited's dividend, correction of a transposed factor, and accurate treatment of payments and credits.

Penalty was abated, but interest remained

Apache's filing position was legally wrong, but the hearing officer found a good-faith mistake of law on reasonable grounds. Apache's experienced CPA explained the decision process, and existing authorities created a reasonable basis for uncertainty over foreign dividends and Subpart F income for combined filers. The $2,418,744.10 penalty was fully abated.

Statutory interest remained due on the recalculated tax and continued until the principal was paid.

Result: protest PARTIALLY GRANTED and PARTIALLY DENIED. The Department was ordered to recalculate using the 30% exclusion, include unitary foreign dividend, Subpart F, and check-the-box income, exclude Oil Insurance Limited, abate penalty, and collect the recalculated tax and interest.

What this means for you

Foreign incorporation does not end the unitary inquiry

Ownership, common management, integrated financing, shared services, control over capital, and flow of value can connect foreign subsidiaries to a New Mexico unitary business even when the subsidiaries conduct no direct U.S. operations.

Deemed federal income can enter New Mexico's apportionable base

Subpart F and check-the-box income need not involve a cash distribution. Federal inclusion, combined with a unitary relationship and New Mexico's business-income rules, can make deemed income apportionable.

A valid tax base can still require alternative apportionment

The hearing officer upheld the character of the income but rejected the original amount because a single year's factors distorted decades of accumulated foreign earnings.

Alternative methods need evidentiary support

Showing distortion was not enough for Apache to win its preferred method. The selected remedy was the method the record supported as most reasonable, even though the decision acknowledged it was not perfect.

Genuine legal uncertainty can support penalty relief

An informed, reasonable filing position may qualify as a good-faith mistake of law even when the underlying tax is ultimately sustained. Interest generally remains separate and mandatory.

Common questions

Q: Did Apache eliminate all New Mexico tax on the foreign income?
A: No. Income from the 14 unitary subsidiaries remained apportionable; the decision changed the method and removed only the nonunitary insurer's dividend.

Q: Why was Oil Insurance Limited different?
A: Apache owned less than 5%, lacked control and shared management, and did not meet the statutory ownership requirement for unitary corporations.

Q: Was check-the-box income taxable even without cash proceeds?
A: Yes. The federal deemed liquidation entered federal taxable income and, for unitary subsidiaries, qualified as New Mexico business income.

Q: What did the 30% method do?
A: It excluded 30% of accumulated foreign income to approximate foreign-factor relief before applying New Mexico apportionment.

Q: What was Apache's final liability?
A: The decision did not state it. The Department had to perform a further recalculation after the ordered exclusions, factor correction, payments, and credits.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-2A-2(C) and 7-2A-3 — corporate base income and corporate income tax
• NMSA 1978, § 7-2A-2(Q) — unitary corporations
• NMSA 1978, §§ 7-4-2(A), 7-4-10(A), and 7-4-19 — business income, apportionment, and alternative methods
• NMSA 1978, §§ 7-1-17(C), 7-1-67, and 7-1-69(B) — assessment presumption, interest, and good-faith mistake-of-law penalty relief
• 26 C.F.R. § 301.7701-3 — federal check-the-box election and deemed liquidation
• Regulation 3.5.1.9(A) NMAC — business-income classification

Cases:

• Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980), and Container Corp. v. Franchise Tax Board, 463 U.S. 159 (1983) — unitary-business principle and apportioned taxation
• NCR Corp. v. New Mexico Taxation & Revenue Department, 1993-NMCA-060 — unitary Subpart F income as apportionable business income
• Conoco, Inc. v. New Mexico Taxation & Revenue Department, 1997-NMSC-005 — treatment of foreign dividends for separate-entity filers
• Kraft General Foods, Inc. v. Iowa Department of Revenue, 505 U.S. 71 (1992) — discriminatory treatment of foreign dividends
• MPC Ltd. v. New Mexico Taxation & Revenue Department, 2003-NMCA-021 — burden shifting after the assessment presumption is rebutted

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Apache Corporation and Subs
• Decision PDF: D&O 21-21

Original ruling text

1 STATE OF NEW MEXICO
2 ADMINISTRATIVE HEARINGS OFFICE
3 TAX ADMINISTRATION ACT

4 IN THE MATTER OF THE PROTEST OF
5 APACHE CORPORATION & SUBSIDIARIES
6 TO ASSESSMENT ISSUED UNDER
7 LETTER ID NO. L1272612144

8 v. AHO D&O No. 21-21

9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER

11 On May 6, 2019, May 7, 2019, May 8, 2019, and May 9, 2019, Chief Hearing Officer

12 Brian VanDenzen, Esq. of the Administrative Hearings Office conducted a merits administrative

13 hearing in the matter of the tax protest of Apache Corporation & Subsidiaries (Taxpayer)

14 pursuant to the Tax Administration Act and the Administrative Hearings Office Act. At the

15 hearing, attorneys Anthony TJ Trujillo, Frank Crociata, Gene Creely, and Kelly Mooney

16 appeared and represented Taxpayer. Attorney David Mittle appeared and represented the

17 opposing party in the protest, the Taxation and Revenue Department (Department).

18 This protest involves multiple complex aspects of state corporate income taxation of a

19 multinational oil and gas production company: whether Taxpayer’s foreign subsidiaries are unitary

20 corporations with Taxpayer; whether certain sources of income are considered business or non-

21 business income for purposes of New Mexico apportionment; whether an apportioned share of a

22 combined group of unitary corporations’ foreign dividend income, Subpart F income, and other

23 deemed foreign subsidiary income, is subject to New Mexico corporate income tax; whether New

24 Mexico’s treatment of foreign subsidiary income violates the Foreign Commerce Clause or the

25 Equal Protection Clause of the Constitution; and, if liable for the assessed corporate income tax,

26 whether Taxpayer made a mistake of law, entitling Taxpayer to abatement of the assessed penalty.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 1 of 115.
1 Ultimately, while Taxpayer is entitled to the Department’s proposed 30% exclusion alternative

2 apportionment method to address the obvious distortion under the original assessment, removal

3 of the non-unitary dividends generated by one subsidiary, and abatement of civil negligence

4 penalty, Taxpayer’s protest is otherwise unpersuasive.

5 Taxpayer called John W. Sauer, C.P.A., as a witness. The Department called Corporate

6 Income Tax Auditor Dan Armer, C.P.A., and Protest Auditor Mary Griego as witnesses in this

7 matter. Taxpayer Exhibits #1-7, #11-20, #23-25 were admitted into the record. Taxpayer

8 exhibits #8-10, #21 (withdrawn), and #22 were not admitted into the record. Department

9 Exhibits B-L, N-Q, S, T, V-Z, AA, AC-AF, AH, and AJ were admitted into the record.

10 Department Exhibits A, M (no exhibit tendered), R (no exhibit tendered), U (no exhibit

11 tendered), AB (withdrawn, same as Taxpayer Exhibit #24), AG, and AI were not admitted into

12 the record. All exhibits are more thoroughly described in the exhibit log contained in the record.

13 IT IS DECIDED AND ORDERED AS FOLLOWS:

14 FINDINGS OF FACT

15 Jurisdictional Background

16 1. On March 31, 2017, the Department issued Taxpayer a notice of assessment of

17 corporate income tax for the 2015 reporting period. Under that notice of assessment, Taxpayer

18 owed $24,187,441.00 in corporate income tax, $2,418,744.10 in civil penalty, and $963,494.45

19 in interest for a total assessed liability of $27,569,679.55. [Taxpayer Ex. #7; Administrative

20 Record, hearing request packet; 5/6/19 Tr. 206:12-23].

21 2. On June 28, 2017, Taxpayer protested the assessment. [Taxpayer Ex. #11;

22 Administrative Record, hearing request packet].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 2 of 115.
1 3. On July 18, 2017, the Department acknowledged receipt of Taxpayer’s protest.

2 [Administrative Record, hearing request packet].

3 4. On August 29, 2017, the Department requested a hearing with the Administrative

4 Hearings Office on Taxpayer’s protest. [Administrative Record, hearing request packet].

5 5. On September 8, 2017, a scheduling hearing in this matter occurred within 90-

6 days of the hearing request. At that hearing, neither party objected that conducting the hearing

7 satisfied the 90-day statutory hearing requirement. [Administrative Record].

8 6. On April 2, 2018, Taxpayer filed an amended 2015 CIT-1 return. [Taxpayer Ex.

9 #8].

10 7. On June 5, 2018, Taxpayer filed an amended protest of the assessment. The

11 amended protest made no mention of a Taxpayer’s filing of an amended 2015 CIT-1 return.

12 [Taxpayer Ex. #12].

13 8. The evidentiary merits hearing in this matter occurred on May 6th through 9th,

14 2019. In addition to the Administrative Hearings Office digital recording of that proceeding,

15 Taxpayer had the entire proceeding transcribed. A copy of each day’s transcription is part of the

16 administrative record. All citations to testimony are to the transcripts provided by Taxpayer.

17 [Administrative Record].

18 9. The Department objected during the hearing that Taxpayer’s amended 2015 CIT-

19 1 return was outside the scope of the protest. [5/6/19 Tr. 27:19-23].

20 10. Both Taxpayer’s original protest or amended protest focused on the original

21 assessment issued related to Taxpayer’s original 2015 CIT-1 return. Neither Taxpayer’s original

22 protest nor amended protest mentioned, addressed, or discussed Taxpayer’s amended 2015 CIT-

23 1 return. [Administrative Record, hearing request packet].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 3 of 115.
1 11. Because the protest letter and amended protest letter did not raise Taxpayer’s

2 amended 2015 CIT-1 returns as grounds of the protest, the hearing officer ruled as a preliminary

3 matter that only the original 2015 CIT-1 return was at issue in this protest. [5/6/19 Tr. 59:18-

4 61:6].

5 12. Taxpayer agreed to adjust its hearings exhibits to address the numbers contained

6 in its original 2015 CIT-1 return and the Department agreed that it would apply the legal

7 determinations made in this protest related to the original 2015 CIT-1 return to Taxpayer’s

8 amended 2015 CIT-1 return. [5/6/19 Tr. 27:19-23; 41:18-61:6].

9 13. The parties filed their written closing arguments on November 15, 2019,

10 completing the hearing on that date and making the matter ripe for a decision 1. In addition to its

11 written closing argument, Taxpayer provided proposed findings of fact and conclusions of law.

12 [Administrative Record].

13 Witness Background

14 14. John Sauer, C.P.A., is Senior Vice President of Tax for Taxpayer. He has a

15 bachelor’s degree in accounting from the University of North Dakota. Mr. Sauer has 37-years of

16 experience in the oil and gas tax field and has been employed by Taxpayer for 26 years. Mr.

17 Sauer is responsible for Taxpayer’s federal and state tax compliance, as well as tax accounting

18 for the company’s federal Securities and Exchange Commission (S.E.C.) filings. [5/6/19 Tr.

19 197:17-198:15].

1
Under Kmart Props., Inc. v. Taxation & Revenue Dep't, 2006-NMCA-026, ¶55, 139 N.M. 177, 192, rev’d on
other grounds and certiorari as to corporate income tax issues quashed, Kmart Corp. v. Taxation & Revenue Dep’t.,
2006-NMSC-006, 139 N.M. 172., delay in issuing a decision beyond 30-days does not invalidate the authority or
jurisdiction of hearing officer to decide a complex, high-magnitude tax protest case. Like Kmart Props, this case was a
high-magnitude, complex corporate income tax protest involving multiple issues, thousands of pages of exhibits, a four-
day hearing, and an extensive post-hearing six-month briefing period. See also Ranchers-Tufco Limestone v. Revenue,
1983-NMCA-126, ¶13 (delay in action is not a defense to enforcement in a tax action).

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 4 of 115.
1 15. Mr. Sauer serves as a corporate officer for Taxpayer as well as all of Taxpayer’s

2 relevant subsidiaries. He also sits on the board of directors of most of Taxpayer’s subsidiaries,

3 including Taxpayer’s relevant foreign subsidiaries. [5/6/19 Tr. 202:12-19].

4 16. As of the date of hearing, Dan Armer, C.P.A., was a tax auditor with the corporate

5 audit department of the Taxation and Revenue Department. He had been employed at the

6 Department for 21 years, 19 of which were with the corporate audit unit. Mr. Armer represents

7 the Department on various Multistate Tax Commission committees. [5/8/19 Tr. 39:4-40:8].

8 17. Mary Griego is a protest auditor with the Taxation and Revenue Department. She

9 has held that position for approximately six years. She was assigned Taxpayer’s protest for

10 review around June of 2017. [5/8/19 Tr. 179:17-180:13].

11 General Nature of Taxpayer’s Business Operations

12 18. Taxpayer is a publicly traded, multinational corporation engaged in the business

13 of petroleum and natural gas exploration and production. Taxpayer is based in Houston, Texas.

14 Taxpayer performs oil and gas exploration and production in the United States and across the

15 globe, including in Argentina, Australia, Canada, Egypt, and the United Kingdom. [Taxpayer

16 Ex. #18; 5/7/19 Tr. 36:14-37:14; 43:1-20].

17 19. Taxpayer has approximately 3,500 employees, with between 2,000-2,500

18 stationed in Houston, Texas and the remaining 1,000-1,500 employees stationed outside of

19 Houston. [5/7/19 Tr. 262:10-262:18].

20 20. Taxpayer began operations in the United States upon its founding in 1954, in

21 Australia in 1991, in Egypt in 1994, in Canada in 1995, in the United Kingdom in 2003, and in

22 Argentina in 2008. [5/7/19 Tr. 37:5-14].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 5 of 115.
1 21. In each of these global regions or countries, Taxpayer typically conducts its

2 operations through a combination of holding companies, financing companies, and operating

3 companies, though not every country has its own financing entity. [5/7/19 Tr. 37:15-38:3].

4 22. Taxpayer conducts its petroleum and natural gas exploration and production

5 activities through a number of domestic (U.S.) and foreign (non-U.S.) subsidiaries. [Taxpayer

6 Ex. #18.2].

7 23. Relevant to the issues in this protest are 15 of Taxpayer’s foreign subsidiaries that

8 paid a foreign dividend, generated Subpart F income, or otherwise generated check-the-box

9 income in 2015. Those 15 entities, along with a brief summary description of their roles, are:

10 a. Apache Energy Limited, an Australian oil and gas exploration and production

11 company with numerous operating subsidiaries of its own [5/7/19 Tr. 62:13-

12 63:5];

13 b. Apache Lowendal Pty Limited, another Australian oil and gas exploration

14 company but without any subsidiaries [5/7/19 Tr. 63:6-15];

15 c. Apache UK Limited, a holding company [5/7/19 Tr. 63:16-24];

16 d. Apache Australia Management General Partnership, a financing entity that

17 financed Australian oil and gas exploration and production. This entity also

18 had other subsidiaries [5/7/19 Tr. 64:1-12];

19 e. Apache Australia Management Finance General Partnership, another

20 financing entity that financed Australian oil and gas exploration and

21 production. This entity also had other subsidiaries [5/7/19 Tr. 64:13-23];

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 6 of 115.
1 f. Apache Canada Funding I Limited Partnership, a financing entity that

2 financed Egyptian oil and gas exploration and production [5/7/19 Tr. 64:24-65-

3 13];

4 g. Apache Canada Funding III Limited Partnership, another financing entity that

5 financed Egyptian oil and gas exploration and production [5/7/19 Tr. 65:14-

6 21];

7 h. Apache Egypt Investment Corporation LDC, serving as a general partner in a

8 partnership with Sinopec in Egypt [5/7/19 Tr. 65:22-66:11];

9 i. Apache Finance Egypt I S.a.r.l., a holding company for oil and gas operations

10 in Egypt and Canada [5/7/19 Tr. 66:12-18, 69:20-70:16];

11 j. Apache Egypt Holdings III Corporation LDC, a holding company for oil and

12 gas operations in Egypt [5/7/19 Tr. 67:1-13];

13 k. Apache Egypt Holdings IV Corporation LDC, another a holding company for

14 oil and gas operations in Egypt [5/7/19 Tr. 67:14-19];

15 l. Apache Asyout Corporation LDC, an Egyptian oil and gas company [5/7/19

16 Tr. 68:5-13];

17 m. Apache International Holdings S.a.r.l., a holding company for entities in

18 Argentina, Australia, and the United Kingdom [5/7/19 Tr. 68:14-20];

19 n. Apache UK Corporation LDC, a holding company for United Kingdom oil

20 and gas operations [5/7/19 Tr. 68:21-69:1]; and

21 o. Oil Insurance Limited, an insurance co-op for Gulf of Mexico oil and gas

22 companies in which Taxpayer has less than a 5% stake. [5/7/19 Tr. 69:2-22];

23 [Taxpayer Ex. #15.3; 5/7/19 Tr. 56:19-70:19].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 7 of 115.
1 24. Of those 15 entities described in the previous finding of fact, Taxpayer wholly

2 owned all but one, Oil Insurance Limited. [Taxpayer Ex. #15.3; Taxpayer Ex. #4; 5/7/19 Tr.

3 88:4-10].

4 25. None of the 15 entities that generated foreign dividends or Subpart F income

5 operated in the United States during 2015. [Taxpayer Ex. #2.4; 5/7/19 Tr. 89:22-91:21].

6 26. The foreign dividends at issue in this case generally started accumulating in 1991,

7 the year when Taxpayer acquired the first relevant foreign subsidiary, Apache Energy Limited,

8 through tax year 2015.

9 Unitariness of Taxpayer’s Foreign Subsidiaries

10 a. General Evidence of Unitariness 2

11 27. The Department’s February 13, 2017, “Request for Additional Information,” sent

12 to the same address listed by Taxpayer on its CIT-1 return, asked that Taxpayer complete the

13 “Foreign Dividend and Subpart F Income Payor Business Connection Questionnaire” by March

14 18, 2017. The answers to that questionnaire can potentially assist in determining whether a

15 unitary relationship exists between corporate entities. [Dept. Ex. AH; 5/6/19 Tr. 223:9-224:8;

16 5/7/19 Tr. 260:16-262:9; 5/8/19 Tr. 180:14-184:2].

17 28. Because Taxpayer did not complete the requested subsidiary business connection

18 questionnaires by the March 18, 2017, deadline, the Department proceeded with its assessment

19 without the benefit of review of the information in those requested questionnaires.

20 29. On August 11, 2017, after Taxpayer already had filed its protest, Protest Auditor

21 Mary Griego sought additional information about Taxpayer’s percentage of ownership in each

2
In the interest of efficiency and to reduce repetition, all the findings of fact contained in this general evidence of
unitariness section apply to all of Taxpayer’s 15 foreign subsidiaries except for Oil Insurance Limited and except
when otherwise expressly noted when addressing the individual entities.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 8 of 115.
1 foreign subsidiary, documentation of the amounts of dividends paid by the entities, and

2 additional information to substantiate the claimed oil and gas withholdings listed on the original

3 return. [Dept. Ex. AI; 5/8/19 Tr. 187:3-189:12; 191:17-193:7].

4 30. In June of 2018, Taxpayer finally submitted the subsidiary business connection

5 questionnaires the Department had previously requested on February 13, 2017 (before issuance

6 of the assessment) and August 11, 2017 (Mary Griego’s protest office request). [Dept. Ex. AH;

7 Dept. Ex. AI; 5/8/19 Tr. 191:17-193:7].

8 31. While the Department only requested that Taxpayer complete subsidiary business

9 questionnaires for five entities, Mr. Sauer, C.P.A., confirmed that the answers to the five

10 subsidiary business questionnaires and his answers during his testimony generally applied to, and

11 were substantially, similar to the remaining nine foreign subsidiaries (with some limited

12 exceptions). [5/7/19 Tr. 188:25-201:9; 303:19-305:19].

13 32. In her role as protest auditor, Mary Griego extensively reviewed the subsidiary

14 business connection questionnaires and other pertinent corporate documentation to consider

15 whether Taxpayer’s foreign subsidiaries were unitary businesses.

16 33. As part of that review, Mary Griego learned that Taxpayer’s historic corporate

17 ethos was of accelerating growth and acquisition of assets that can assist that growth in the oil

18 and gas business. Taxpayer exhibited this philosophy when it acquired assets in Western

19 Australia and in Canada. [Dept. Ex. C (12); 5/8/19 Tr. 218:15-216:11].

20 34. Taxpayer applied its corporate strategy and system to its acquired corporate

21 entities to further its corporate goal of growth, both for Taxpayer and the acquired entity. [Dept.

22 Ex. C (1-7); 5/8/19 Tr. 212:1-219:23].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 9 of 115.
1 35. Taxpayer’s Human Resources Department reviewed each subsidiaries policy and

2 salary guidelines. [Dept. Ex. AB-9; 5/7/19 Tr. 269:14-272:12].

3 36. Taxpayer provided a global employee code of conduct that applied to all

4 subsidiaries. [5/7/19 Tr. 272:13-272:20].

5 37. Each entity managed its daily operations from its location with infrequent input

6 from Taxpayer.

7 38. Taxpayer reported that it treated all operations, including all international and

8 domestic subsidiaries, as one segment of business in its 10K Forms filed with the S.E.C. in 1994,

9 1995, 1996, 1997, 1998, 1999, 2000, 2002, 2003, 2004, 2005, 2007, 2008, 2010, 2011, 2012,

10 2013, 2014, and 2015. [Dept. Ex. F-AA; 5/8/19 Tr. 236:10-239:4].

11 39. Taxpayer reported to the S.E.C. that its foreign earnings were permanently

12 reinvested abroad rather than have dividends paid out in its 10K Forms filed in 1994, 1995,

13 1996, 1997, 1998, 1999, 2000, 2002, 2003, 2004, 2005, 2007, 2008, 2010, 2011, 2012, 2013, and

14 2014. [Dept. Ex. F-AA; 5/8/19 Tr. 239:6-244:4].

15 40. Taxpayer’s 2015 foreign dividends represented accrual of deferred earnings over

16 23-years, as reported in Taxpayer’s 10K filings with the S.E.C. [Dept. Ex. F-AA; 5/8/19 Tr.

17 239:6-251:5].

18 41. Taxpayer used the foreign earnings from the foreign subsidiaries to fund

19 international operations rather than have those earnings paid out as dividends. [Dept. Ex. F-AA;

20 5/9/19 Tr. 74:2-75:7].

21 42. After reviewing the 10K Forms filed by Taxpayer, all the subsidiary business

22 connection questionnaires, other corporate materials, the Department’s Corporate Income Tax

23 Audit Manual, and listening to the testimony of Mr. Sauer during the hearing, Protest Auditor

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 10 of 115.
1 Mary Griego formed the opinion that Taxpayer’s foreign subsidiaries at issue in this protest were

2 all unitary businesses with Taxpayer. No one factor dictated this conclusion, but Ms. Griego

3 considered numerous factors and concluded that Taxpayer’s acquisition of the foreign

4 subsidiaries led to functional integration, centralization of management, and economies of scale

5 in employing Taxpayer’s oil and gas production system, reducing administrative costs, employee

6 costs, and reducing other costs. Ms. Griego concluded that Taxpayer and the foreign subsidiaries

7 were all in the same line of business of oil and gas production and that Taxpayer dictated the

8 major operational and business decisions of the subsidiaries. [Dept. Ex. C (1-19); 5/8/19 Tr.

9 212:1-227:23; 272:3-273:18; 5/9/19 T; r. 41:2-42:17].

10 b. Apache Energy Limited’s Unitariness

11 43. Apache Energy Limited is an Australian oil and gas exploration and production

12 company formed in 1991. Taxpayer acquired the entity from a third party in 1993. Apache

13 Energy Limited served as the parent entity of numerous subsidiaries operating in Australia.

14 [Taxpayer Ex. #17; 5/7/19 Tr. 62:13-63:5; 77:11-80; 106:1-9; 175:14-175:23; 209:1-209:13; 5/8/19

15 Tr. 82:22-83:2].

16 44. In its 1993 purchase, Taxpayer intended to expand its oil and natural gas interests

17 in Australia by merging operations with the acquired entity. [Dept. Ex. E; 5/8/19 Tr. 231:10-

18 232:15].

19 45. Taxpayer shared common officers and directors with Apache Energy Limited.

20 [Taxpayer Ex. #17; 5/7/19 Tr. 176:11-176:20].

21 46. Apache Energy Limited’s daily operations were managed out of Perth, Australia

22 with infrequent input from Taxpayer. Taxpayer approved annual budgets for Apache Energy

23 Limited and its subsidiaries, approved capital expenditures greater than $10,000,000.00,

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 11 of 115.
1 approved any possible mergers and acquisitions, approved any possible payment of dividends,

2 provided oil sales marketing, transferred limited amount of personnel between entities, shared a

3 common internal audit function, maintained common charts of accounts to facilitate S.E.C.

4 filings, shared liability insurance, and shared a common logo. [Taxpayer Ex. #17; 5/7/19 Tr.

5 176:20-182:20].

6 47. In general, Apache Energy Limited was a self-funding operation with any needed

7 cash coming from Egypt or the United Kingdom. [Taxpayer Ex. #17; 5/7/19 Tr. 176:3-176:6].

8 48. However, in its 2015 Form 5471, Schedule F with supporting documentation,

9 filings with the IRS, Taxpayer reported its investment of $257,561,009.00 at the end of the

10 reporting period as an asset for Apache Energy Limited. [Taxpayer Ex.#3.3 & #3.13].

11 c. Apache Lowendal Pty Limited’s Unitariness

12 49. Apache Lowendal Pty Limited is another Australian oil and gas exploration

13 company but without any subsidiaries. [5/7/19 Tr. 63:6-15].

14 50. Taxpayer approved Apache Lowendal Pty Limited’s annual budget, approved

15 capital expenditures greater than $10,000,000.00, approved any possible mergers and

16 acquisitions, approved any possible payment of dividends, transferred limited amount of

17 personnel between entities, shared a common internal audit function, maintained common charts

18 of accounts to facilitate S.E.C. filings, shared liability insurance, and shared a common logo.

19 [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

20 51. In its 2015 Form 5471, Schedule F with supporting documentation, filings with

21 the IRS, Taxpayer reported as an asset for Apache Lowendal Pty Ltd. $69,674,091.00 in

22 intercompany receivables at the beginning and $30,509,538.00 at the end of the reporting period.

23 [Taxpayer Ex. #2.1447 & #2.1454-1455].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 12 of 115.
1 d. Apache UK Limited’s Unitariness

2 52. Apache UK Limited was a holding company with zero book income in 2015.

3 [Taxpayer Ex. #15.3; 5/7/19 Tr. 63:16-24; 87:23-88:3].

4 53. Taxpayer approved Apache UK Limited’s annual budget, approved capital

5 expenditures greater than $10,000,000.00, approved any possible mergers and acquisitions,

6 provided oil and gas marketing, approved any possible payment of dividends, transferred limited

7 amount of personnel between entities, shared a common internal audit function, maintained

8 common charts of accounts to facilitate S.E.C. filings, shared liability insurance, and shared a

9 common logo. [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

10 54. In its 2015 Form 5471, Schedule F with supporting documentation, filings with

11 the IRS, Taxpayer reported its investment of $27,039,055.00 at the beginning and zero at the end

12 of the reporting period as an asset for Apache UK Limited. [Taxpayer Ex.#2.1602, #2.1608].

13 e. Apache Australia Management General Partnership’s Unitariness

14 55. Apache Australia Management General Partnership is a financing entity that

15 financed Australian oil and gas exploration and production. This entity also had other

16 subsidiaries. [5/7/19 Tr. 64:1-12].

17 56. Taxpayer approved Australia Management General Partnership’s annual budget,

18 approved capital expenditures greater than $10,000,000.00, approved any possible mergers and

19 acquisitions, approved any possible payment of dividends, transferred limited amount of

20 personnel between entities, shared a common internal audit function, maintained common charts

21 of accounts to facilitate S.E.C. filings, shared liability insurance, and shared a common logo.

22 [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 13 of 115.
1 57. In its 2015 Form 5471, Schedule F with supporting documentation, filings with

2 the IRS, Taxpayer reported its investment of $278,274,404.00 at the beginning and zero at the

3 end of the reporting period as an asset for Australia Management General Partnership.

4 [Taxpayer Ex.#2.751, #2.758].

5 f. Apache Australia Management Finance General Partnership’s Unitariness

6 58. Apache Australia Management Finance General Partnership is another financing

7 entity that financed Australian oil and gas exploration and production. This entity also had other

8 subsidiaries. [5/7/19 Tr. 64:13-23].

9 59. Taxpayer approved Apache Australia Management Finance General Partnership’s

10 annual budget, approved capital expenditures greater than $10,000,000.00, approved any

11 possible mergers and acquisitions, approved any possible payment of dividends, transferred

12 limited amount of personnel between entities, shared a common internal audit function,

13 maintained common charts of accounts to facilitate S.E.C. filings, shared liability insurance, and

14 shared a common logo. [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

15 g. Apache Canada Funding I Limited Partnership’s Unitariness

16 60. Apache Canada Funding I Limited Partnership is a financing entity that financed

17 Egyptian oil and gas exploration and production. [5/7/19 Tr. 64:24-65-13].

18 61. Taxpayer approved Apache Canada Funding I Limited Partnership’s annual

19 budget, approved capital expenditures greater than $10,000,000.00, approved any possible

20 mergers and acquisitions, approved any possible payment of dividends, transferred limited

21 amount of personnel between entities, shared a common internal audit function, maintained

22 common charts of accounts to facilitate S.E.C. filings, shared liability insurance, and shared a

23 common logo. [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 14 of 115.
1 h. Apache Canada Funding III Limited Partnership’s Unitariness

2 62. Apache Canada Funding III Limited Partnership is another financing entity that

3 financed Egyptian oil and gas exploration and production. [5/7/19 Tr. 65:14-21].

4 63. Taxpayer approved Apache Canada Funding III Limited Partnership’s annual

5 budget, approved capital expenditures greater than $10,000,000.00, approved any possible

6 mergers and acquisitions, approved any possible payment of dividends, transferred limited

7 amount of personnel between entities, shared a common internal audit function, maintained

8 common charts of accounts to facilitate S.E.C. filings, shared liability insurance, and shared a

9 common logo. [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

10 64. In its 2015 Form 5471, Schedule F with supporting documentation, filings with

11 the IRS, Taxpayer reported as an asset for Apache Canada Funding III Limited Partnership

12 $2,676,291,780.00 in intercompany receivables at the beginning and $1,934,699,221.00 at the

13 end of the reporting period. [Taxpayer Ex. #2.811 & #2.815-816].

14 i. Apache Egypt Investment Corporation LDC’s Unitariness

15 65. Apache Egypt Investment Corporation LDC served as a general partner in a

16 partnership with Sinopec in Egypt. [5/7/19 Tr. 65:22-66:11].

17 66. Taxpayer approved Apache Egypt Investment Corporation LDC’s annual budget,

18 approved capital expenditures greater than $10,000,000.00, approved any possible mergers and

19 acquisitions, approved any possible payment of dividends, provided oil sales marketing,

20 transferred limited amount of personnel between entities, shared a common internal audit

21 function, maintained common charts of accounts to facilitate S.E.C. filings, shared liability

22 insurance, and shared a common logo. [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 15 of 115.
1 67. In its 2015 Form 5471, Schedule F with supporting documentation, filings with

2 the IRS, Taxpayer reported its investment of $7,861,971.00 at the beginning and negative

3 $3,165,815,851.00 at the end of the reporting period as assets of Apache Egypt Investment

4 Corporation LDC. [Taxpayer Ex.#2.1050, #2.1054-1055].

5 j. Apache Finance Egypt I S.a.r.l.’s Unitariness

6 68. Apache Finance Egypt I S.a.r.l. served as a holding company for oil and gas

7 operations in Egypt and Canada. [5/7/19 Tr. 66:12-18, 69:20-70:16].

8 69. Taxpayer approved Apache Finance Egypt I S.a.r.l.’s annual budget, approved

9 capital expenditures greater than $10,000,000.00, approved any possible mergers and

10 acquisitions, approved any possible payment of dividends, provided oil sales marketing,

11 transferred limited amount of personnel between entities, shared a common internal audit

12 function, maintained common charts of accounts to facilitate S.E.C. filings, shared liability

13 insurance, and shared a common logo. [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

14 70. In its 2015 Form 5471, Schedule F with supporting documentation, filings with

15 the IRS, Taxpayer reported its investment of $3,580,555,370.00 at the beginning and

16 $1,115,165,195.00 at the end of the reporting period as assets of Apache Finance Egypt I S.a.r.l.

17 [Taxpayer Ex.#3.25, #3.30-3.31].

18 k. Apache Egypt Holdings III Corporation LDC’s Unitariness

19 71. Apache Egypt Holdings III Corporation LDC served as a holding company for oil

20 and gas operations in Egypt. [5/7/19 Tr. 67:1-13].

21 72. Taxpayer approved Apache Egypt Holdings III Corporation LDC’s annual

22 budget, approved capital expenditures greater than $10,000,000.00, approved any possible

23 mergers and acquisitions, approved any possible payment of dividends, provided oil sales

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 16 of 115.
1 marketing, transferred limited amount of personnel between entities, shared a common internal

2 audit function, maintained common charts of accounts to facilitate S.E.C. filings, shared liability

3 insurance, and shared a common logo. [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

4 73. In its 2015 Form 5471, Schedule F with supporting documentation, filings with

5 the IRS, Taxpayer reported its investment of $349,151,939.00 at the beginning and

6 $91,021,389.00 at the end of the reporting period as assets of Apache Egypt Holdings III

7 Corporation LDC. [Taxpayer Ex.#3.55, #3.60-3.61].

8 l. Apache Egypt Holdings IV Corporation LDC’s Unitariness

9 74. Taxpayer formed Apache Egypt Holdings IV Corporation LDC to serve as a

10 holding company for certain Egyptian operating entities. [Taxpayer Ex. #17; 5/7/19 Tr. 67:14-

11 19; 182:21-183:3].

12 75. Apache Egypt Holdings IV Corporation LDC was a self-funding entity.

13 [Taxpayer Ex. #17; 5/7/19 Tr. 183:4-183:12].

14 76. Apache Egypt Holdings IV Corporation LDC’s daily operations were managed

15 out of Luxembourg with infrequent input from Taxpayer. However, Taxpayer approved annual

16 budgets for Apache Egypt Holdings IV Corporation LDC, approved capital expenditures greater

17 than $10,000,000.00, approved any possible mergers and acquisitions, approved any possible

18 payment of dividends, provided oil sales marketing, transferred limited amount of personnel

19 between entities, shared a common internal audit function, maintained common charts of

20 accounts to facilitate S.E.C. filings, shared liability insurance, and shared a common logo.

21 [Taxpayer Ex. #17; 5/7/19 Tr. 188:24-192:13].

22 77. In its 2015 Form 5471, Schedule F with supporting documentation, filings with

23 the IRS, Taxpayer reported its investment of $5,180,888,069.00 at the beginning and

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 17 of 115.
1 $2,158,748,385.00 at the end of the reporting period as assets of Apache Egypt Holdings IV

2 Corporation LDC. [Taxpayer Ex.#2.1040, #2.1044-1045].

3 m. Apache Asyout Corporation LDC’s Unitariness

4 78. Apache Asyout Corporation LDC is an Egyptian oil and gas company. [5/7/19

5 Tr. 68:5-13].

6 79. Taxpayer approved Apache Asyout Corporation LDC’s annual budget, approved

7 capital expenditures greater than $10,000,000.00, approved any possible mergers and

8 acquisitions, approved any possible payment of dividends, provided oil and gas marketing,

9 transferred limited amount of personnel between entities, shared a common internal audit

10 function, maintained common charts of accounts to facilitate S.E.C. filings, shared liability

11 insurance, and shared a common logo. [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

12 80. In its 2015 Form 5471, Schedule F with supporting documentation, filings with

13 the IRS, Taxpayer reported as an asset for Apache Asyout Corporation LDC $4,630,351.00 in

14 intercompany receivables at the beginning of the reporting period. [Taxpayer Ex. #2.713 &

15 #2.719].

16 n. Apache International Holdings S.a.r.l.’s Unitariness

17 81. Apache International Holdings S.a.r.l. was originally formed as a holding

18 company. It served as the parent company of several subsidiaries in the United Kingdom and

19 Australia that were purchased from third parties. [Taxpayer Ex. #17; 5/7/19 Tr. 68:14-20; 165:18-

20 166:3].

21 82. Taxpayer shared common officers and directors with Apache International

22 Holdings S.a.r.l. [Taxpayer Ex. #17; 5/7/19 Tr. 166:22-167:6].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 18 of 115.
1 83. Apache International Holdings S.a.r.l.’s daily operations were managed out of

2 Luxembourg with infrequent input from Taxpayer. However, Taxpayer approved annual

3 budgets for Apache International Holdings S.a.r.l. and its subsidiaries, approved capital

4 expenditures greater than $10,000,000.00, approved any possible mergers and acquisitions,

5 approved any possible payment of dividends, provided oil sales marketing, transferred limited

6 amount of personnel between entities, shared a common internal audit function, maintained

7 common charts of accounts to facilitate S.E.C. filings, shared liability insurance, and shared a

8 common logo. [Taxpayer Ex. #17; 5/7/19 Tr. 167:7-174:14].

9 84. Apache International Holdings S.a.r.l. was funded with excess cash from other

10 operating regions and short term, arm’s length loans from Taxpayer in the form of issuance of

11 Taxpayer stock. [Taxpayer Ex. #17; Dept. Ex. A7; 5/7/19 Tr. 166:18-166:3; 5/8/19 Tr. 262:20-

12 264:13].

13 85. Because Taxpayer funded the acquisition of Apache International Holdings

14 S.a.r.l. through issuance of Taxpayer stock, the Department concluded that Apache International

15 Holdings S.a.r.l. was unitary with Taxpayer and any dividends generated from Apache

16 International Holdings S.a.r.l. were business income. [Taxpayer Ex. #17; Dept. Ex. A7; 5/8/19

17 Tr. 262:20-264:13].

18 o. Apache UK Corporation LDC’s Unitariness

19 86. Apache UK Corporation LDC is a holding company for United Kingdom oil and

20 gas operations. [5/7/19 Tr. 68:21-69:1].

21 87. Taxpayer approved Apache UK Corporation LDC’s annual budget, approved

22 capital expenditures greater than $10,000,000.00, approved any possible mergers and

23 acquisitions, approved any possible payment of dividends, provided oil and gas marketing,

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 19 of 115.
1 transferred limited amount of personnel between entities, shared a common internal audit

2 function, maintained common charts of accounts to facilitate S.E.C. filings, shared liability

3 insurance, and shared a common logo. [Taxpayer Ex. #17; 5/7/19 Tr. 188:25-201:9].

4 p. Oil Insurance Limited’s Lack of Unitariness

5 88. Oil Insurance Limited is an insurance co-op which insures oil and gas companies

6 that operate in the Gulf of Mexico from windstorms, hurricanes, and other types of naturally

7 occurring destructive events. [5/7/19 Tr. 69:2-22].

8 89. Taxpayer owns less than a 5% stake in Oil Insurance Limited. [5/7/19 Tr. 69:2-

9 22].

10 90. The remaining owners of Oil Insurance Limited are also oil and gas companies

11 that operate in the Gulf of Mexico, all of whom are unrelated by ownership with Taxpayer.

12 [5/7/19 Tr. 69:2-20].

13 91. There was little evidence presented about the extent of Taxpayer’s role in the

14 operations, management, or control of Oil Insurance Limited and the general unitariness findings

15 of fact do not apply to this entity.

16 92. Taxpayer has no officers or directors on the board of Oil Insurance Limited,

17 shares no administrative or management functions with Oil Insurance Limited, and Oil Insurance

18 Limited serves no function to Taxpayer other than providing insurance. [5/7/19 Tr. 192:19-

19 193:17].

20 93. Oil Insurance Limited generated $18,588,489.00 of Taxpayer’s 2015 foreign

21 dividends. [Taxpayer Ex. #15.1].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 20 of 115.
1 Taxpayer’s Strategic Rebalancing

2 94. Beginning in late 2012, Taxpayer made a strategic decision to rebalance its global

3 operations away from its foreign subsidiaries towards North America. This strategic rebalancing

4 led Taxpayer to sell off a third of its assets in Egypt, sell all of its Argentina operations in 2014,

5 and sell off all of its Australia operations in 2015. [5/7/19 Tr. 47:20-48:9; 201:23-202:20].

6 95. In May of 2013, Taxpayer announced its plans to divest itself of approximately

7 $4,000,000,000.00 in foreign subsidiary assets and use the proceeds of that sale to pay down debt

8 and repurchase Taxpayer common shares. Taxpayer exceeded these goals in selling the assets,

9 divesting itself of approximately $7,000,000,000.00 in assets, shredding $2,600,000,000.00 of

10 debt, and repurchasing one billion dollars of outstanding shares. [Dept. Ex. Y.4; 5/8/19 Tr.

11 251:8-253:16].

12 96. The purpose of Taxpayer’s strategic divestment was to increase cash flow from

13 international operations and to enhance Taxpayer’s North American portfolio with its more

14 predictable rate of return. [Dept. Ex. Y.4; Dept. Ex. Z.4].

15 97. In 2013, Taxpayer sold a one third interest in a general partnership in its Egyptian

16 operations to Sinopac, a Chinese oil and gas company. [Taxpayer Ex. #18.2; 5/7/19 Tr. 47:23-

17 48:5; 202:2-7; 203:11-13; 204:4-6].

18 98. Between 2013 through 2015, Taxpayer sold portions of its operations in Western

19 Canada, including certain assets and all its stock in several Canadian operating entities.

20 [Taxpayer Ex. #16; Taxpayer Ex. #18.2; 5/7/19 Tr. 47:23-48:9; 204:7-9].

21 99. Between 2013 and 2015, Taxpayer also disposed of significant portions of its

22 operations in the Gulf of Mexico. [Taxpayer Ex. #16; Taxpayer Ex. #18.2; 5/7/19 Tr. 47:23-48:9;

23 204:7-9].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 21 of 115.
1 100. In 2014, Taxpayer sold all its shares in Argentinian companies, ceasing all

2 operations in Argentina. [Taxpayer Ex. #16; 5/7/19 Tr. 204:10-204:14].

3 101. In 2015, Taxpayer sold all its shares in its Australian parent company, Apache

4 Energy Limited, ceasing all operations in Australia. [Taxpayer Ex. #16; 5/7/19 Tr. 206:15-

5 206:22].

6 102. Based on Mr. Sauer’s best unconfirmed estimate, Taxpayer generated

7 approximately $3,000,000,000.00 in income from the sale of one third of its Egyptian operations

8 and the entirety of its Australian and Argentinian operations. [5/7/19 Tr. 263:3-265:2].

9 103. Taxpayer’s decision to strategically rebalance its global operations was the first

10 and only time it had undertaken such a rebalancing. [5/7/19 Tr. 48:10-21; 206:23-207:5].

11 Taxpayer’s New Mexico Operations in the Permian Basin

12 104. In New Mexico, Taxpayer performs petroleum and natural gas exploration and

13 production but does not perform other centralized functions within the state. [5/7/19 Tr. 36:16-

14 37:1].

15 105. Taxpayer and the following six of its subsidiaries conducted business in New

16 Mexico during the 2015 tax year: (a) Apache Marketing, Inc.; (b) Apache Permian Basin

17 Corporation; (c) DEK Energy Company; (d) Edge Petroleum Exploration Company; (e) Apache

18 Deepwater LLC; and (f) Texas and New Mexico Exploration LLC. [Taxpayer Ex. #1.1-1.2;

19 5/9/19 Tr. 89:9-90:2].

20 106. The seven entities that were part of Taxpayer’s domestic group that did business

21 in New Mexico had a taxable loss in 2015 of approximately $10,000,000.00. [5/9/19 Tr. 90:3-

22 90:10].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 22 of 115.
1 107. Between 1991 and 2015, when the unitary foreign subsidiaries were acquired and

2 began accumulating the disputed deferred dividend income, the Permian Basin, encompassing

3 portions of Texas and New Mexico, was an important region in Taxpayer’s oil and gas

4 production business. [Dept. Ex. F.002; Dept. Ex. G.002; Dept. Ex. H.002; Dept. Ex. I.002; Dept.

5 Ex. J.002; Dept. Ex. K.002; Dept. Ex. L.002; Dept. Ex. N.002; Dept. Ex. O.002; Dept. Ex.

6 P.002; Dept. Ex. Q.002; Dept. Ex. S.002; Dept. Ex. T.002; and Dept. Ex. V.002; Taxpayer Ex.

7 Z.0019; Dept. Ex. Y.0018; Dept. Ex. AA.0015; Dept. Ex. C.7-17, 30; 5/8/19 Tr. 217:18-218:7].

8 108. In 1991, Taxpayer acquired MW Petroleum, with wells located in the Permian

9 Basin of West Texas and New Mexico. This acquisition of MW Petroleum in 1991, including

10 the assets in the Permian Basin, doubled Taxpayer’s size and pushed Taxpayer’s assets above

11 $1,000,000,000.00. [Dept. Ex. C.7, C.26-30; 5/8/19 Tr. 217:18-218:7].

12 109. By the end of 1991, Taxpayer’s greatest concentration of properties were located

13 along the Gulf Coast and in the Permian Basin of West Texas and New Mexico, where Taxpayer

14 held a controlling interest in over 1,000 operating wells. Taxpayer highlighted its focus on the

15 Permian Basin, along with two or three other regions, in North America, in its filings with the

16 S.E.C. in 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2002, 2003, 2004, 2005, 2007, 2008, and

17 2010. [Dept. Ex. C.30; Dept. Ex. F.002; Dept. Ex. G.002; Dept. Ex. H.002; Dept. Ex. I.002;

18 Dept. Ex. J.002; Dept. Ex. K.002; Dept. Ex. L.002; Dept. Ex. N.002; Dept. Ex. O.002; Dept. Ex.

19 P.002; Dept. Ex. Q.002; Dept. Ex. S.002; Dept. Ex. T.002; and Dept. Ex. V.002].

20 110. In 2013, 2014, and 2015, Taxpayer’s North American oil and gas exploration and

21 production activities occurred primarily in the Permian Basin of West Texas and New Mexico,

22 the Anadarko Basin in Oklahoma and Texas, and along the U.S. coast of the Gulf of Mexico.

23 During that same time frame, Taxpayer’s international oil and gas exploration and production

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 23 of 115.
1 activities occurred in Argentina, Australia, Canada, Egypt, and the United Kingdom (North Sea).

2 [Taxpayer Ex. #18.1 (¶6); Dept. Ex. AA; 5/7/19 Tr. 37:2-7].

3 111. In 2013 and 2014, during the period when Taxpayer was strategically rebalancing

4 its assets and business operations towards North America, the Permian Basin played a central

5 role in Taxpayer’s total liquid worldwide production and growth. In 2013, Taxpayer noted that

6 its focused drilling program in the Permian and Anadarko Basins provided momentum to

7 Taxpayer’s production growth in the United States. In 2014, Taxpayer’s Permian Basin liquid

8 production, amounting to just under a third of all global production, led Taxpayer’s total

9 worldwide liquid production. [Taxpayer Ex. Z.0019; Dept. Ex. Y.0018].

10 112. In 2015, Taxpayer operated an average of 12 rigs in the Permian Basin, drilling

11 378 gross wells and 241 net wells. [Dept. Ex. AA.0015].

12 113. Taxpayer’s 2015 drilling activity in the Permian Basin resulted in a production

13 increase of 6 percent relative to 2014. [Dept. Ex. AA.0015].

14 114. The Permian Basin’s liquid production in 2015, which averaged 168 MBOE/d 3,

15 was more than double Taxpayer’s production in any other North American production regions

16 and was larger than production in any of Taxpayer’s international production regions in 2015.

17 [Dept. Ex. AA.0015].

18 115. In 2015, Taxpayer’s Permian Basin operations formed the largest plurality of total

19 worldwide liquid oil and gas production, amounting to more than a third of Taxpayer’s total

20 liquid production in that year. [Dept. Ex. AA.0015].

3
MBOE/d means thousand barrels of oil equivalent per day. See Camelot Event Driven Fund v. Alta Mesa Res.,
Inc., 2021 WL 1416025, at *3 (S.D. Tex. Apr. 14, 2021) (non-precedential, cited simply to provide definition of that
abbreviation).

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 24 of 115.
1 Taxpayer’s 2015 Income, Federal, and State Corporate Income Tax Returns

2 116. Mr. Sauer prepared and filed Taxpayer’s original 2015 CIT-1120 U.S.

3 Corporation Income Tax Return. [Taxpayer Ex. #2; 5/7/19 Tr. 49:3-6, 52:13-53:23].

4 117. In 2015, Taxpayer reported $24,819,786,617.00 in total income before

5 deductions. [Taxpayer Ex. #2.1(line 11); 5/7/19 Tr. 50:2-5].

6 118. In 2015, Taxpayer reported $19,431,277,375.00 in federal taxable income before

7 deductions for net operating losses. [Taxpayer Ex. #2.1(line 28); 5/7/19 Tr. 95:11-96:8].

8 119. In 2015, Taxpayer reported $19,337,993,126.00 in federal taxable income after a

9 deduction of $93,284,249.00 for net operating losses. [Taxpayer Ex. #2.1(lines 28-30); 5/7/19

10 Tr. 50:22-51:7].

11 120. In 2015, Taxpayer reported $22,046,265,838.00 in total dividends, of which

12 $45,576.00 came from U.S. dividends while the remaining $22,046,219,262.00 came from

13 foreign dividends. [Taxpayer Ex. #2.2(line 17 & 19); 5/7/19 Tr. 49:10-51:3].

14 121. In 2015, Taxpayer reported $8,529,941,448.00 in foreign dividend gross-up.

15 [Taxpayer Ex. #2.2(line 15); Taxpayer Ex. #1.3; 5/7/19 Tr. 50:22-51:7].

16 122. Taxpayer calculated an average apportionment factor in New Mexico of 5.7911%

17 on its original 2015 CIT-1 return. [Taxpayer Ex. #1.4(line 9); 5/7/19 Tr. 99:18-22; 5/8/19 Tr.

18 47:18-48:2].

19 123. As part of calculating the average apportionment factor in 2015, on its original

20 CIT-1 return, Taxpayer identified $4,035,815,376.00 in total New Mexico property,

21 $7,920,644.00 in New Mexico payroll, and $383,428,588 in New Mexico sales. [Taxpayer Ex.

22 #1.4; 5/8/19 Tr. 52:20-53:7].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 25 of 115.
1 124. Taxpayer’s calculated 2015 average apportionment factor in New Mexico on its

2 original CIT-1 return did not include property, payroll, or sales factors from the income-paying

3 foreign subsidiaries. [Taxpayer Ex. #1.4; 5/7/19 Tr. 99:23-100:3].

4 125. Despite calculating a New Mexico factor of 5.7911%, Taxpayer originally

5 reported 0% as its New Mexico percentage factor for purposes of apportionment on its original

6 2015 CIT-1. [Taxpayer Ex. #1.3(line 11); Taxpayer Ex. #1.4; Taxpayer Ex. #1.5; 5/8/19 Tr.

7 46:10-52:20].

8 126. Taxpayer claimed the New Mexico deduction for its foreign dividend gross-up of

9 $8,529,941,448.00, leaving $13,497,689,325.00 of foreign dividends in dispute in this protest.

10 [Taxpayer Ex. #1.5; 5/7/19 Tr. 56:6-17; 5/7/19 Tr. 96:14-97:15].

11 127. Of the remaining, disputed $13,497,689,325.00 of foreign dividends,

12 $2,436,945,549.00 was Subpart F income. [Taxpayer Ex. #15.3 (Column Subpart F & 956);

13 5/7/19 Tr. 70:20-73:16; 208:11-208:19].

14 128. Of the disputed $13,497,689,325.00 of foreign dividends, $4,621,665,875.00 was

15 attributable to a check-the-box election. [Taxpayer Ex. #15.3 (Column Actual, Apache UK

16 Limited + Apache International Holdings S.a.r.l.); 5/7/19 Tr. 73:23-77:7; 208:20-208:24].

17 129. The two entities that reported income attributable to the check-the-box election on

18 federal Form 8832 were Apache International Holdings S.a.r.l. and Apache UK Limited. [5/7/19

19 Tr. 211:19-212:20].

20 130. Taxpayer estimated that about 76% of the disputed $13,497,689,325.00 of foreign

21 dividends was attributable to earnings and profits accumulated over multiple previous years

22 before 2015, dating back as far as 1991 to the formation of Apache Energy Limited. [5/7/19 Tr.

23 77:11-80; 106:1-9; 209:1-209:13; 5/8/19 Tr. 82:22-83:2].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 26 of 115.
1 131. Five of the fifteen entities that reported foreign dividends or Subpart F income in

2 tax year 2015 had no book income or negative book income in 2015:

3 a. Apache Energy Limited, which had negative book income in 2015 because of

4 US GAAP-related required write-downs;

5 b. Apache UK Limited, which had zero book income in 2015, as it was merely a

6 holding company;

7 c. Apache Egypt Holdings IV Corporation LDC, which had negative book

8 income in 2015 because of a minor loss of interest expense it occurred;

9 d. Apache Asyout Corporation LDC, which had zero book income in 2015

10 because it was an inactive company;

11 e. Apache UK Corporation LDC, which had negative book income in 2015

12 because of US GAAP-related required write-downs.

13 [Taxpayer Ex. #15.3; 5/7/19 Tr. 82:11-87:15].

14 132. Despite having no book income or negative book income, these five entities listed

15 in the previous finding of fact did generate real income totaling $3,362,577,203.00 in tax year

16 2015. [Taxpayer Ex. #15.3; 5/7/19 Tr. 87:23-88:3].

17 133. Taxpayer paid foreign taxes totaling over one billion dollars on its 2015 foreign

18 source dividend income. [5/7/19 Tr. 219:2-219:8].

19 134. Taxpayer received a federal foreign tax credit in 2015 for the foreign taxes it paid.

20 [Taxpayer Ex. #2; 5/7/19 Tr. 219:9-219:12].

21 135. Taxpayer did not receive any credit in New Mexico for the 2015 foreign taxes it

22 paid. [Taxpayer Ex. #1; 5/7/19 Tr. 219:13-219:16].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 27 of 115.
1 136. All the dividends at issue in this case were paid by Taxpayer’s subsidiaries.

2 [5/8/19 Tr. 10:20-11:3].

3 137. Taxpayer reported the dividend income as non-business income on federal Form

4 1120 because Taxpayer considered that income non-unitary and non-business income. Since

5 there was no line on the form to report non-unitary income, Taxpayer reported the dividend

6 income as non-business income on Form 1120. [Taxpayer Ex. #2; 5/8/19 Tr. 18:4-19:7].

7 138. Taxpayer’s original CIT-1 return claimed a $19,422,282.00 refund of 2015 New

8 Mexico corporate income taxes. [Taxpayer Ex. #1.3 (line 29); 5/6/19 Tr. 203:3-21].

9 Department Review of the CIT-1 Return, Return Adjustment Notices, and Assessment

10 139. On January 28, 2017, the Department issued Taxpayer a Return Adjustment

11 Notice (Refund Due), showing a minor reduction of $50,775.00 in the $19,422,282.00 refund

12 amount that Taxpayer had claimed on the original 2015 CIT-1 return. [Taxpayer Ex. #5;

13 Taxpayer Ex. #1.3; 5/6/19 Tr. 203:3-21].

14 140. Taxpayer entered the information requested by the January 28, 2017, Return

15 Adjustment Notice to facilitate direct deposit of the refund. [Taxpayer Ex. #5.1; 5/6/19 Tr.

16 203:12-21].

17 141. At some unspecified time between the January 28, 2017, Return Adjustment

18 Notice and February 13, 2017, someone in the Department’s corporate income audit unit asked

19 Corporate Auditor Mr. Armer about requesting additional documentation from Taxpayer about

20 how the foreign dividends were allocated. [Dept. Ex. AH; 5/8/19 Tr. 70:5-70:12; 71:18-21;

21 144:12-149:8].

22 142. On February 13, 2017, the Department mailed a document titled “Request for

23 Additional Information” to Taxpayer at 2000 Post Oak Blvd STE 100, Houston, TX 77056-4400.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 28 of 115.
1 This letter was addressed to the same address that Taxpayer listed on its 2015 CIT-1 return.

2 [Dept. Ex. AH; Taxpayer Ex. #1.1 (lines 1a through 3a); 5/6/19 Tr. 223:9-224:8; 5/7/19 Tr.

3 260:16-262:9; 5/8/19 Tr. 180:14-184:2].

4 143. The Department’s February 13, 2017, “Request for Additional Information” asked

5 that Taxpayer provide additional information to verify the refund claim, and specifically

6 requested a completed copy of Taxpayer’s Form 1120 Schedule C and completion of the

7 “Foreign Dividend and Subpart F Income Payor Business Connection Questionnaire” by March

8 18, 2017. [Dept. Ex. AH; 5/6/19 Tr. 223:9-224:8; 5/7/19 Tr. 260:16-262:9; 5/8/19 Tr. 180:14-

9 184:2].

10 144. The Department did not receive the requested additional information before

11 issuance of the assessment. [5/8/19 Tr. 72:21-73:1].

12 145. The Department conducted no formal audit in this matter before issuing its

13 assessment. [5/8/19 Tr. 70:5-70:12; 71:14-17; 72:10-72:12; 73:2-73:6].

14 146. Without receiving the requested additional information or conducting a formal

15 audit, the Department proceeded with the assessment based on the information Taxpayer

16 provided on the original CIT-1 return. [5/8/19 Tr. 72:21-73:1; 5/8/19 Tr. 187:3-196:1].

17 147. Given Taxpayer’s actual 2015 New Mexico property, payroll, and sales, the

18 Department determined that Taxpayer’s claim for 0% apportionment factor percentage in New

19 Mexico was not reflective of its actual business activities in New Mexico during 2015, requested

20 additional information from Taxpayer, and ultimately disallowed Taxpayer’s claim for

21 $13,497,689,325.00 in non-business income. [5/8/19 Tr. 53:8-54:3].

22 148. The Department applied the 5.79% apportionment factor calculated by Taxpayer

23 against Taxpayer’s reported taxable income on line 10 of $752,179,179.00 to determine

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 29 of 115.
1 Taxpayer’s New Mexico corporate income tax due. [Taxpayer Ex. #1.3(line10 &11); 5/8/19 Tr.

2 53:7-55:23].

3 149. On March 21, 2017, the Department issued Taxpayer a Return Adjustment Notice

4 (Proposed Assessment), showing a proposed total assessment of $43,559,798.00 in 2015

5 corporate income tax, $2,418,744.10 in penalty, and $947,590.37 in interest, offset by credits

6 totaling $19,372,357.00 for a total proposed assessment of $27,553,775.47. [Taxpayer Ex. #6;

7 5/6/19 Tr. 204:2-19].

8 150. The Department’s March 21, 2017, Return Adjustment Notice cited three specific

9 reasons for the proposed assessment: 1) “CIT-1 line 11. Error in computing NM Percent;” 2)

10 “CIT-1 line 11. Allocation and apportionment factors are to calculate tax percentage, not taxable

11 income;” and 3) “CIT-1 line 12. Tax adjusted. Schedule CC not attached.” [Taxpayer Ex. #6.2;

12 5/6/19 Tr. 205:13-206:4].

13 151. Mr. Sauer was uncertain whether any of his staff attempted to call the Department

14 to discuss the March 21, 2017, Return Adjustment Notice showing a substantial proposed

15 assessment. [5/6/19 Tr. 224:9-19].

16 152. Corporate Income Auditor Mr. Armer and Protest Auditor Mary Griego were

17 unaware what communications, if any, occurred between the Department and Taxpayer before

18 the Department issued its assessment. [5/8/19 Tr. 73:13-75:21; 196:12-197:11].

19 153. The Department’s information technology system, Gentax, does not show any

20 calls or contact from Taxpayer before issuance of the assessment. [5/8/19 Tr. 196:17-197:11].

21 154. Corporate Income Auditor Mr. Armer recognized that there was a substantial

22 swing between the Department’s initial Return Adjustment Notice showing a potential Taxpayer

23 refund of approximately $19,000,000.00 and the Department’s subsequent assessment of

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 30 of 115.
1 approximately $24,500,000.00, a difference of some $43,500,000.00. Mr. Armer believed best

2 practice would have been to perform a detailed audit before making such a substantial

3 adjustment, but Mr. Armer also recognized that in the absence of Taxpayer’s response to the

4 Department’s request for additional information, the Department’s revenue processing division

5 had to proceed with an assessment based on the limited information they had been provided.

6 [5/8/19 Tr. 75:22-81:7].

7 155. Mr. Sauer believed that the explanation on the March 21, 2017, Return

8 Adjustment Notice (proposed assessment), and lack of subsequent explanation before the March

9 31, 2017, Notice of Assessment, was inadequate to support the adjustment from a refund due of

10 some $19,000,000.00 to an assessment of some $24,500,000.00, especially compared to his

11 experience with filings in other states. [5/6/19 Tr. 207:9-210:3].

12 156. On March 31, 2017, the Department issued the assessment in dispute in this

13 matter, as described in more detail by F.O.F. #1. The assessed amount was $500 less than the

14 proposed assessment contained on the Department’s March 21, 2017, Return Adjustment Notice.

15 [Taxpayer Ex. #7; 5/6/19 Tr. 206:12-23].

16 Original Apportionment Method Contained Obvious Distortion

17 157. Before the assessment, Taxpayer did not petition the Department for equitable

18 allocation relief under NMSA 1978, Section 7-4-19. Specifically, Taxpayer did not seek

19 permission to use the Section 965 concept (detailed later in these findings of fact) as a form of

20 equitable relief, did not seek permission to file under a separate accounting method, did not seek

21 application of the Detroit Formula, and did not file a petition for equitable relief with its original

22 return. [5/8/19 Tr. 23:22-24:14; 56:21-60:6; 89:13-92:4].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 31 of 115.
1 158. In the absence of a petition for equitable relief and in the absence of the requested

2 follow-up information, the Department relied on Taxpayer’s CIT-1 reported average

3 apportionment factor in New Mexico of 5.79% in calculating the assessment, and therefore did

4 not provide any foreign factor relief in the apportionment ratio. [Taxpayer Ex. #1.4(line 9);

5 Taxpayer Ex. #6.2; 5/7/19 Tr. 100:5-103:19; 5/8/19 Tr. 54:4-54:14].

6 159. Although Mr. Armer believed that the Department acted appropriately based on

7 the original CIT-1 return and the Taxpayer’s lack of response to the request for additional

8 information before issuance of the assessment, he believed, based on the subsequent information

9 received during the protest process and the evidence presented at the protest hearing, that there

10 was “obvious distortion” resulting from application of the standard three-factor apportionment

11 method used to calculate the original assessment. For the same reason, he believed that such

12 obvious distortion needed to be corrected by an alternative, reasonable apportionment method.

13 [5/8/19 Tr. 81:8-85:7; 104:10-23; 111:11-112:5].

14 160. Mr. Armer believed that, based on the substantial sum of foreign source income

15 included in the New Mexico tax base, a more reasonable alternative apportionment method

16 would be appropriate in this case, as permitted under UDITPA. [5/8/19 Tr. 82:6-85:7; 111:11-

17 112:5].

18 Taxpayer’s Proposed 965 Concept and Maine Alternative Apportionment Methods

19 161. In 2017, the federal Tax Cuts and Jobs Act (TCJA) passed Congress and was

20 signed into law. Under this law, as of December 31, 2017, there was a deemed distribution and

21 repatriation of all foreign earnings not previously remitted as foreign dividends in corporate

22 income tax year 2017. Mechanically, this deemed repatriation was calculated using federal Form

23 965. [5/7/19 Tr. 103:20-106:22].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 32 of 115.
1 162. On January 1, 2019, in response to the deemed repatriation provisions of the

2 TCJA, the Department issued a special bulletin and form, Department Bulletin B-300.17 and

3 Form 2017 CIT-DFI, addressing the New Mexico treatment of Internal Revenue Code (“I.R.C. 4”)

4 Section 965 untaxed foreign earnings in tax year 2017, as well as a new form, 2017 CIT-DFI for

5 taxpayers with Section 965 income to report. [Taxpayer Ex. #14].

6 163. Corporate Income Tax Auditor Mr. Armer was part of the Department review

7 team, which included Tax Policy, Legal Services, and Audit and Compliance, that developed the

8 Department Bulletin B-300.17 and Form 2017 CIT-DFI addressing the New Mexico treatment of

9 I.R.C. Section 965 untaxed foreign earnings in tax year 2017. [5/8/19 Tr. 64:10-66:21; 92:17-

10 99:2].

11 164. As part of the development of Department Bulletin B-300.17 and Form 2017 CIT-

12 DFI, the Department considered the merits of various other percentages of deductions used in

13 other states to address the Section 965 income before settling on a 30% exclusion of the Section

14 965 income. [5/8/19 Tr. 64:10-66:21; 92:17-99:2].

15 165. For tax year 2017, under Department Bulletin B-300.17 and Form 2017 CIT-DFI,

16 the Department permitted taxpayers to exclude 30% of their net I.R.C. Section 965 deferred

17 foreign income from their taxable income in recognition of the fact that such income accrued

18 over long periods before 2017 and the complexity of including foreign factors from an extended

19 period would involve onerous recordkeeping to determine the appropriate apportionment. This

20 30% exclusion applied on line 6 of the Department’s 2017 CIT-DFI Form. [Taxpayer Ex. #14.2

21 & #14.5].

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. may
also be referenced in this decision when referring to provisions of I.R.C.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 33 of 115.
1 166. During the development of Department Bulletin B-300.17 and Form 2017 CIT-

2 DFI addressing the New Mexico treatment of I.R.C. Section 965 untaxed foreign earnings in tax

3 year 2017, the Department believed and intended that the special bulletin and form would only

4 apply to tax year 2017 and the TCJA’s one-time deemed repatriation. [Taxpayer Ex. #14.1;

5 5/8/19 Tr. 64:10-66:21; 92:17-100:4].

6 167. Only taxpayers liable under Section 965 in 2017 or 2018 were expressly covered

7 by the Department Bulletin B-300.17 and Form 2017 CIT-DFI. [Taxpayer Ex. #14; 5/8/19 Tr.

8 26:15-27:9].

9 168. Department Bulletin B-300.17 is only applicable to TCJA’s 2017 deemed dividend

10 repatriation: 1) “This bulletin applies only to taxpayers liable for New Mexico Corporate Income

11 Tax who are required by Internal Revenue Code (IRC) Section 965 to pay a transition tax on the

12 untaxed foreign earnings of certain foreign corporations. Generally, Section 965 requirements only

13 apply to tax year 2017.”; and 2) “This bulletin addresses only the changes to New Mexico taxable

14 income pursuant to Section 14103 of the TCJA pertaining to a one-time inclusion in tax year 2017

15 of certain untaxed foreign earnings and profits…” [Taxpayer Ex. #14.1, (emphasis added)].

16 169. Taxpayer believed that the Department’s treatment of Section 965 income in 2017

17 was analogous to the 2015 foreign dividends at issue in this protest. [5/8/19 Tr. 26:9-26:14].

18 170. The Department did not believe that the Department’s treatment of Section 965

19 income in 2017 was analogous to the 2015 foreign dividends at issue in this protest. The Section

20 965 concept was related specifically to the unique 2017 and 2018 repatriation of income

21 mandated by the TCJA of all taxpayers who had not previously remitted the foreign income

22 rather than to Taxpayer’s voluntary election in 2015. [5/8/19 Tr. 106:5-107:24].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 34 of 115.
1 171. Taxpayer prepared a work paper showing the application of the Department’s

2 2017 treatment of I.R.C. 965 income as shown on the Department’s 2017 CIT-DFI Form, as well

3 as Maine’s 2017 80% exclusion treatment of I.R.C. 965 income, to Taxpayer’s 2015 income.

4 [Taxpayer Ex. #20; 5/7/19 Tr. 113:4-122:07].

5 172. Under Taxpayer’s work paper showing the theoretical application of the Department’s

6 2017 treatment of I.R.C. 965 income to Taxpayer’s 2015 income, Taxpayer used an apportionment

7 percentage of 4.9092% rather than the 5.79% Taxpayer reported on its 2015 return. [Taxpayer Ex.

8 #20; 5/7/19 Tr. 117:1-119:18].

9 173. Under Taxpayer’s work paper showing the theoretical application of the Department

10 2017 treatment of I.R.C. 965 income to Taxpayer’s 2015 income, Taxpayer listed a deduction of

11 $10,087,195,555.00 on the line §965(c). [Taxpayer Ex. #20; 5/8/19 Tr. 29:7-30:11; 5/8/19 Tr. 63:7-

12 64:9].

13 174. The Department believed that Taxpayer’s proposed deduction of

14 $10,087,195,555.00 under the 965 concept came from Taxpayer’s statement of repatriated income

15 from the IRS Form 965. However, Auditor Mr. Armer did not believe that was analogous because IRS

16 Form 965 applied only to income repatriated in 2017 and not to income repatriated in previous years.

17 [Taxpayer Ex. #20; 55/8/19 Tr. 63:10-16].

18 175. Alternatively, Taxpayer believed that Maine’s treatment of foreign dividends for state

19 corporate income tax purposes was similar to New Mexico’s approach, and thus Taxpayer also used

20 Maine’s 80% exclusion of the I.R.C. 965(a) amount in 2017 as a theoretical equitable adjustment to

21 Taxpayer’s 2015 income. [Taxpayer Ex. #20; 5/7/19 Tr. 120:1-121:14].

22 176. Under Taxpayer’s work paper showing the theoretical application of Maine’s 2017

23 treatment of I.R.C. 965 income to Taxpayer’s 2015 income, Taxpayer used an apportionment

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 35 of 115.
1 percentage of 4.8354% rather than the 5.79% Taxpayer reported on its 2015 return. [Taxpayer Ex.

2 #20; 5/7/19 Tr. 120:1-122:7].

3 177. Neither of Taxpayer’s proposed alternative apportionment methods resulted in a

4 reasonable apportionment consistent with the economic reality that Taxpayer’s operations in New

5 Mexico’s Permian Basin (before and during 2015) provided a substantial portion of Taxpayer’s product

6 in North America, deriving income before and during 2015. The income generated before 2015 helped

7 Taxpayer acquire the foreign subsidiaries that generated the accumulated dividends in dispute. And the

8 2015 disposition helped further expand Taxpayer’s unitary North American oil and gas operations,

9 including further growth in New Mexico’s Permian Basin.

10 Department Proposed Detroit and 30% Exclusion Alternative Apportionment Methods

11 178. Taxpayer also developed a work paper showing the application of the Detroit Formula

12 to Taxpayer’s 2015 income tax return, which resulted in reducing the apportionment factor from the

13 reported 5.79% to 4.094%. Taxpayer did not prepare this work paper as an alternative apportionment

14 method but to illustrate that the failure to provide foreign factor relief led to distortion. [Taxpayer Ex.

15 #19; 5/7/19 Tr. 127:5-134:3].

16 179. Subject to review of Taxpayer’s supporting documentation, the Department took

17 Taxpayer’s Detroit Formula workpaper and suggested 5 it as a potential alternative apportionment

18 method in this case. [Administrative Record, Department Closing Argument, p. 24-26,

19 11/15/2019].

5
It is unclear to the hearing officer whether in its closing argument that the Department was in fact offering the
Detroit Formula as an alternative method or simply using it for distortive comparison analysis. However, at one
point during the hearing, the Department’s counsel said something to the effect that if Taxpayer was satisfied with
the Detroit Formula, the Department would accept that as a reasonable alternative method and resolve the case on
that basis. The written argument, in conjunction with the spirit of counsel’s previous oral statement, supports a
conclusion that the Department was offering the Detroit Formula as an alternative apportionment method in this
protest.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 36 of 115.
1 180. Mr. Armer had concerns that the standard application of the Detroit Formula

2 would not fairly prevent distortion in the unique circumstances of this case. In Mr. Armer’s

3 knowledge and experience, the Detroit Formula method worked better on a year-to-year basis

4 rather than applied to an accumulation of dividends over many years. [5/8/19 Tr. 103:1-103:24;

5 106:19-107:3].

6 181. Based on the Department’s working group review of the TCJA, Mr. Armer knew

7 that the Department had determined that historically applying foreign factor relief yielded a 30%

8 overall reduction in taxable income, which was a more effective method of addressing multiple

9 years of accumulated dividends. [5/8/19 Tr. 65:14-66:21; 94:22-95:6; 112:08-23; 106:19-107:3;

10 113:24-115:14; 157:5-12].

11 182. To effectuate this 30% historical overall reduction in taxable income, Mr. Armer

12 determined that a 30% exclusion of foreign dividend income was the appropriate method to

13 apply to an accumulation of foreign dividends over many years but being reported in a single

14 year. [Taxpayer Ex. #14; 5/8/19 Tr. 65:14-66:21; 94:22-95:6; 112:08-23; 106:19-107:3; 113:24-

15 115:14; 157:5-12].

16 183. Although Mr. Armer disagreed with the application of the exact 965 concept and

17 worksheet to Taxpayer’s 2015 corporate income tax returns because the special bulletin and form

18 only applied to tax year 2017, he did agree that a 30% overall exclusion in the accumulated

19 foreign dividends in this case amounted to a fairer representation of Taxpayer’s activities in New

20 Mexico than either the standard apportionment method or the Detroit Formula. [Taxpayer Ex.

21 #20; 5/8/19 Tr. 112:6-123:5].

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 37 of 115.
1 184. To that end, as a potential reasonable alternative method, Mr. Armer prepared

2 calculations applying the 30% New Mexico exclusion to Taxpayer’s 2015 reported income.

3 [Dept. Ex. AJ; 5/8/19 Tr. 156:6-156:13].

4 a. The line titled “CIT w/o FDE” represents Taxpayer’s original 2015 CIT-1

5 taxable income without the foreign dividend amount of $13,502,111,901.00

6 [Dept. Ex. AJ; 5/8/19 Tr. 156:14-157:4];

7 b. The line titled “FDE” represents Taxpayer’s foreign dividend amount of

8 approximately $13,502,111,901.00 from Taxpayer’s original 2015 CIT-1

9 taxable income [Dept. Ex. AJ; 5/8/19 Tr. 156:14-157:4];

10 c. The line titled “Less NM Exclusion 30% of FDE” represents Mr. Armer’s

11 attempt to effectuate factor representation by allowing a 30% exclusion of

12 Taxpayer’s $13,502,111,901.00 in foreign dividend income, which results in a

13 subtraction of $4,050,633,570.00 [Dept. Ex. AJ; 5/8/19 Tr. 157:5-157:12];

14 d. The line titled “Less FTU” is the foreign gross-up deduction allowed by New

15 Mexico, which in this case is $8,529,941,448.00 as taken from Taxpayer’s

16 original 2015 CIT-1 return [Dept. Ex. AJ; 5/8/19 Tr. 157:12-158:4];

17 e. The line titled “Sub” is the calculation so far on the form, showing

18 $6,874,252,638.00 [Dept. Ex. AJ; 5/8/19 Tr. 157:23-158:4];

19 f. Using an average apportionment percent of 5.9711 in New Mexico taken from

20 the original CIT-1 return, applying the tax rate to the subtotal amount, and

21 crediting payments made, Mr. Armer’s 30% exclusion method resulted in a

22 tax due of approximately $13,694,412.00, subject to some possible minor

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 38 of 115.
1 adjustments related to withholding credits [Dept. Ex. AJ; 5/8/19 Tr. 158:5-

2 159:18].

3 185. The Department’s 30% exclusion method, based on historical analysis of foreign

4 factor relief, is a reasonable alternative apportionment method that addressed the distortion

5 present in this case while also being more consistent with the economic reality that Taxpayer’s

6 operations in New Mexico’s Permian Basin provided a substantial portion of Taxpayer’s product in

7 2015. This economic reality also existed in the years before 2015, when Taxpayer used the unitary

8 income partially attributable to its important Permian Basin production to acquire the foreign

9 subsidiaries and allowed the income to accumulate in the foreign subsidiaries rather than distribute the

10 dividends.

11 Findings Related to other hearing issues, arguments, and objections

12 186. Taxpayer initially invoked the witness exclusion rule under Regulation

13 22.600.1.19 NMAC. The Department designated Protest Auditor Mary Griego as its case agent in

14 the case, but also requested that Dan Armer be allowed to remain in the room as an expert witness.

15 Although Mr. Armer had not been properly identified as an expert witness, the hearing officer ruled

16 that Mr. Armer could remain in the hearing except when there was any testimony related to the

17 business versus non-business income issue presented, which was to be the topic of Ms. Griego’s

18 testimony. After the first day of testimony, Taxpayer withdrew its invocation of the exclusionary

19 rule except for requesting an instruction that Mr. Armer and Ms. Griego not discuss their testimony

20 together during the proceeding. [5/6/19 Tr. 179:2-197:6:14-74:5; Tr. 5/7/19 40:14-42:10].

21 187. Taxpayer initially objected to the admission of Department Exhibit A, citing Rule

22 of Evidence 11-408 NMRA prohibiting introduction of confidential disclosures made as part of

23 settlement discussions. Taxpayer also included its own Exhibit #22, which it intended to offer as

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 39 of 115.
1 a rebuttal to Department A, in its Rule 11-408 objection. However, Taxpayer ultimately

2 withdrew this objection. [5/6/19 Tr. 61:14-74:5; 83:4-14; Tr. 5/7/19 26:7-20].

3 188. During the course of hearing, after Taxpayer had presented its case, the hearing

4 officer ruled narrowly on the record that Taxpayer had met its initial burden of overcoming the

5 presumption of correctness as to the assessed dollar amount of corporate income tax under the

6 original assessment, leaving open the issue of what was an appropriate, alternative reasonable

7 apportionment method. [5/8/21 Tr. 172:3-18; 173:16-174:3].

8 DISCUSSION

9 This protest involves seven main issues. The first issue is whether Taxpayer overcame

10 the presumption of correctness on the original assessment and whether the Department in turn

11 reestablished the correctness of the assessment. The second issue is whether the foreign

12 subsidiaries at issue are unitary with Taxpayer. The third issue is whether Taxpayer’s foreign

13 dividend income, Subpart F income, and check-the-box deemed income constituted business or

14 non-business income. The fourth issue is whether the Department’s distinct treatment of foreign

15 dividends unconstitutionally violates the Foreign Commerce Clause. The fifth issue is whether

16 the Department’s distinct treatment of foreign dividends unconstitutionally violates the Equal

17 Protection Clause. The sixth issue considers whether the original assessment led to distortion of

18 Taxpayer’s 2015 New Mexico business activities and what is the most reasonable and

19 appropriate alternative apportionment consistent with the economic reality of Taxpayer’s 2015

20 New Mexico business activities. The seventh issue is whether Taxpayer is entitled to abatement

21 of penalty in this protest. And finally, there are few other evidentiary issues, objections, and

22 arguments requiring a brief discussion.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 40 of 115.
1 Issue One: Presumption of Correctness and Shifting of Burden

2 Under NMSA 1978, Section 7-1-17 (C) (2007), the assessment issued in this case is

3 presumed correct. Consequently, Taxpayer has the burden to overcome the assessment. See

4 Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. See also N.M. Taxation & Revenue

5 Dep't v. Casias Trucking, 2014-NMCA-099, ¶8. Unless otherwise specified, for the purposes of

6 the Tax Administration Act, “tax” is defined to include interest and civil penalty. See NMSA 1978,

7 §7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the presumption of correctness under

8 Section 7-1-17 (C) extends to the Department’s assessment of penalty and interest. See Chevron

9 U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503

10 (agency regulations interpreting a statute are presumed proper and are to be given substantial

11 weight). Accordingly, it is Taxpayer’s burden to present some countervailing evidence or legal

12 argument to show that they are entitled to an abatement, in full or in part, of the assessment issued in

13 the protest. See Casias Trucking, 2014-NMCA-099, ¶8.

14 When a taxpayer presents sufficient evidence to rebut the presumption, the burden shifts

15 to the Department to show that the assessment is correct. See MPC Ltd. v. N.M. Taxation &

16 Revenue Dep't, 2003-NMCA-21, ¶13, 133 N.M. 217. In this case, the hearing officer on the record

17 found that the Taxpayer had met its initial burden of showing that the original assessed dollar

18 amount was not correct. This was a narrow ruling, focused on whether the dollar amount assessed

19 accurately reflected a “reasonable approximation of the income earned in New Mexico.6” The

20 Department’s original assessed amount of tax was incorrect because the Department had to proceed

21 to assessment based on the limited information contained in Taxpayer’s original CIT-1 return after

22 Taxpayer did not provide the additional, requested information to the Department.

6
5/8/21 Tr. 172:3-18; 173:16-174:3.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 41 of 115.
1 The biggest impact of finding that the burden shifted is evident in the discussion of whether

2 the standard apportionment—which led to the original assessment—was in fact distortive. While

3 the Department does make a few arguments defending the standard apportionment in its closing

4 arguments—mainly that Taxpayer should be stuck with the standard apportionment method because

5 of its failure to provide the additional, requested information or cooperate to the Department’s

6 satisfaction in the protest process—the Department essentially conceded in testimony and in closing

7 argument that the standard apportionment method in this case resulted in obvious distortion that

8 needed some correction. Consequently, in light of the shifting of the burden as to the correctness of

9 the assessed amount and in light of the Department’s concession of the obvious distortion, the

10 distortion analysis in this decision will be quite minimal.

11 However, rebutting the presumption of correctness in this case has no impact on the

12 question of what the reasonable alternative apportionment method is, given the case law in that area

13 requiring the party advocating for an alternative method to demonstrate that the method is

14 reasonable. And contrary to Taxpayer’s argument, the hearing officer made no presumption of

15 correctness ruling on the question of unitary business relationship and the case law (addressed in the

16 unitary section) clearly puts the onus on Taxpayer to establish that the state is attempting to tax

17 extraterritorial value regardless of the statutory presumption of correctness.

18 Issue Two: Taxpayer is Unitary with 14 of the 15 Foreign Subsidiaries.

19 In this case, Taxpayer argues that under both the plain statutory definition of unitary

20 corporations and the three unity tests, the Department fails to establish a unitary relationship

21 between Taxpayer and the 15 foreign subsidiaries at issue in this protest. However, after

22 reviewing and considering both the case law and New Mexico statute addressing unitary

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 42 of 115.
1 businesses, the record demonstrates sufficient preponderant evidence that Taxpayer was unitary

2 with 14 of the 15 foreign subsidiaries at issue in this protest.

3 a. General Overview of Corporate Income Tax Principals as they Relate to Unitariness.

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

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

6 of every domestic corporation and upon the net income of every foreign corporation employed or

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

8 property or employment within this state.” As used under the Corporate Income and Franchise Tax

9 Act, the term “corporations” includes corporations, joint stock corporations, certain real estate

10 trusts, financial corporations, banks, other business associations, limited liability companies, and

11 partnerships taxed as corporations under the Internal Revenue Code. See NMSA 1978, § 7-2A-2

12 (D). Taxpayer is an out-of-state corporation engaged in transaction of business into and from New

13 Mexico, subjecting Taxpayer to New Mexico’s corporate income tax in the pertinent tax year.

14 Generally, states may not impose an income tax on the value earned outside of their borders

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

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

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

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

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

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

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

22 of a “unitary business.” MeadWestvaco Corp. v. Ill. Dep't of Revenue, 553 U.S. 16, 19 (2008);

23 Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 772 (1992); Hunt Wesson v. Franchise

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 43 of 115.
1 Tax Bd., 528 U.S. at 460; Exxon Corp. v. Wisconsin, 447 U.S. 207, 224 (1980); Mobil Oil Corp.,

2 454 U.S. at 442. “[T]he linchpin of apportionability in the field of state income taxation is the

3 unitary-business principle.” Mobil Oil Corp., 445 U.S. 425, 439. However, a state may not tax a

4 non-unitary, “nondomiciliary corporation's income… if it is derive[d] from unrelated business

5 activity which constitutes a discrete business enterprise.” Allied-Signal, Inc, 504 U.S. 768, 773

6 (internal citations omitted). Taxpayer bears the burden of establishing by clear and cogent

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

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

9 b. Statutory Definition of Unitary Corporations.

10 Taxpayer’s first argument challenging the unitariness of the foreign subsidiaries focuses

11 on New Mexico’s statutory definition of the term “unitary corporations.” As applicable to tax

12 year 2015, New Mexico statute defined “unitary corporations” as

13 two or more integrated corporations, other than any foreign corporation
14 incorporated in a foreign country and not engaged in trade or business in
15 the United States during the taxable year, that are owned in the amount of
16 more than fifty percent and controlled by the same person and for which at
17 least one of the following conditions exists:
18 (1) there is a unity of operations evidenced by central purchasing,
19 advertising, accounting or other centralized services;
20 (2) there is a centralized management or executive force and
21 centralized system of operation; or
22 (3) the operations of the corporations are dependent upon or
23 contribute property or services to one another individually or as a group.

24 NMSA 1978, § 7-2A-2 (Q) (2014).

25 Taxpayer persuasively argues that since it owned less than a 5% stake in Oil Insurance

26 Limited, that entity is not unitary with Taxpayer under the statutory definition. Because Taxpayer

27 owned less than a 5% stake in Oil Insurance Limited rather than the 50% ownership requirement

28 under the definition of Section 7-2A-2 (Q), Taxpayer was not unitary with Oil Insurance

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 44 of 115.
1 Limited 7 under that statute. Consequently, the $18,588,489.00 in Oil Insurance Limited’s

2 generated dividends should be removed from Taxpayer’s 2015 total foreign dividends.

3 Taxpayer argues that because the other 14 subsidiaries in dispute were foreign companies

4 incorporated in a foreign country and did not engage in business in the United States during the tax

5 year, those subsidiaries are excluded from the statutory definition of unitary corporations under the

6 statutory clause reading “other than any foreign corporation incorporated in a foreign country and

7 not engaged in trade or business in the United States during the taxable year.” Id. This argument

8 raises an issue of statutory construction.

9 Questions of statutory construction begin with the plain meaning rule. See Wood v. State

10 Educ. Ret. Bd., 2011-NMCA-20, ¶12. In Wood, ¶12 (internal quotations and citations omitted),

11 the Court of Appeals stated “the guiding principle in statutory construction requires that we look

12 to the wording of the statute and attempt to apply the plain meaning rule, recognizing that when a

13 statute contains language which is clear and unambiguous, we must give effect to that language

14 and refrain from further statutory interpretation.” It is a canon of statutory construction in New

15 Mexico to adhere to the plain wording of a statute except if there is ambiguity, error, an

16 absurdity, or a conflict among statutory provisions. See Regents of the Univ. of New Mexico v.

17 New Mexico Fed'n of Teachers, 1998-NMSC-20, ¶28, 125 N.M. 401. “Tax statutes, like any other

18 statutes, are to be interpreted in accordance with the legislative intent and in a manner that will

19 not render the statutes' application absurd, unreasonable, or unjust." City of Eunice v. State

20 Taxation & Revenue Dep't, 2014-NMCA-085, ¶8 (internal citations and quotations omitted). If

21 the plain language interpretation would lead to an absurd result not in accord with the legislative

7
Moreover, there was very little in the evidentiary record about the role Taxpayer played in the operations,
management, or control of Oil Insurance Limited, which also makes it difficult to determine whether the three
unities existed between Taxpayer and Oil Insurance Limited, even beyond the ownership percentage statutory
requirement.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 45 of 115.
1 intent and purpose it is necessary to look beyond the plain meaning of the statute. See Bishop v.

2 Evangelical Good Samaritan Soc'y, 2009-NMSC-036, ¶11, 146 N.M. 473. Application of the

3 plain meaning rule requires some caution because of its beguiling simplicity, particularly when

4 there are potential contradictory statutory provisions at play. See State ex rel. Helman, 1994-

5 NMSC-023, ¶23, 117 N.M. 346.

6 When applying the plain meaning rule, statutory sections should be read in harmony with

7 each other, with statutes dealing with the same subject matter, and with the presumption that the

8 Legislature was aware of relevant common law. See State v. Trujillo, 2009-NMSC-012, ¶22, 146

9 NM 14. See also Hayes v. Hagemeier, 1963-NMSC-095, ¶9, 75 N.M. 70 (“All legislation is to be

10 construed in connection with the general body of law.”). See also N.M. Indus. Energy Consumers

11 v. N.M. Pub. Regulation Comm'n, 2007-NMSC-053, ¶ 20, 142 N.M. 533 (Legislature presumed

12 to have knowledge of relevant statutes and the common law and thus statutes must be read in

13 harmony with other statutes in pari materia). As the Court of Appeals recently reiterated,

14 [i]n construing a statute, we observe the general principles that the plain
15 language of a statute is the primary indicator of legislative intent and that
16 when several sections of a statute are involved, they must be read together
17 so that all parts are given effect.

18 Helmerich Payne Int'l Drilling Co. v. N.M. Taxation & Revenue Dep't, 2019-NMCA-054, ¶4,

19 (internal citations omitted).

20 Taxpayer’s narrow statutory reading of the conditional clause of Section 7-2A-2 (Q)

21 excluding foreign corporations not otherwise engaged in United States business from the unitariness

22 consideration is not compelling. Reviewing the complete statutory definition in harmony, as the

23 case law requires, leads to the conclusion that the Legislature’s purpose in codifying the definition

24 of “unitary corporations” into statute was to adopt the well-understood, three unities test developed

25 by case law. The three numbered subparts of Section 7-2A-2 (Q) constitute in sum and substance

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 46 of 115.
1 the three conditions under the common law’s three unities test, as articulated in Supreme Court

2 jurisprudence on unitary businesses for some 50-years. Indeed, by adopting the sum and substance

3 of the three unities test, the Legislature was clearly attempting to adopt the common law

4 understanding of a unitary corporation into the statutory definition under Section 7-2A-2 (Q). See

5 N.M. Indus. Energy Consumers, 2007-NMSC-053, ¶ 20.

6 By reading the statutory definition holistically, if the activities of the foreign subsidiary

7 satisfy the three numbered subparts of Section 7-2A-2 (Q), that foreign subsidiary would have

8 substantially contributed to the flow of value to the domestic corporation engaged in business and

9 trade in New Mexico. A foreign corporation’s contribution of value, as demonstrated by meeting

10 the three subparts of the statute, to the domestic entity engaged in New Mexico business activity

11 would necessarily mean it had engaged in activity in the United States through its unitary

12 relationship with the domestic corporation. This holistic reading of all terms of the statute together

13 is much more in line with the Legislative intent and structure of the unitary corporation definition

14 than Taxpayer’s narrower, literal reading of just one portion of that section. See Helman, 1994-

15 NMSC-023, ¶23, 117 N.M. 346 (the plain meaning rule requires some caution because of its

16 beguiling simplicity, particularly when there are potential contradictory statutory provisions).

17 c. The Three Hallmark Elements of a Unitary Business.

18 While states cannot impose an income tax on the value earned outside of its border under

19 the Due Process and Commerce Clauses of the United States Constitution, states are permitted to

20 tax unitary activities occurring outside of their borders when those unitary activities contribute to

21 the operation of a company’s overall business as a whole. See F.W. Woolworth Co. v. Taxation

22 and Revenue Dep’t, 458 U.S. 354, 363–64, (1982). Separate corporate divisions that

23 nevertheless benefit from functional integration, centralization of management, and economies of

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 47 of 115.
1 scale as part of a highly integrated line of business constitute unitary business regardless of the

2 separate corporate and accounting structure employed. See Exxon Corp., 447 U.S. 207, 224-226

3 (1980).

4 The United States Supreme Court has held over the years in a wide range of factual

5 contexts that the constitutional test for establishing whether two or more companies are unitary is

6 dependent on whether there is functional integration, centralization of management, and

7 economies of scale between the companies. See F.W. Woolworth Co., 458 U.S. 354; See also

8 ASARCO, 458 U.S. 307 (1982); See also Exxon Corp., 447 U.S. 207 (1980). These three

9 elements indicate a flow of value between the subsidiary and the parent entity that passes

10 constitutional muster as a unitary business subject to state taxation. See Container Corp. v.

11 Franchise Tax Bd., 463 U.S. 159, 178–79 (1983). Indeed, these three elements—functional

12 integration, centralization of management, and economies of scale—have become the

13 “hallmarks” of a unitary relationship. MeadWestvaco Corp., 128 S. Ct. 1498, 1508 (internal

14 citations removed). Colloquially, functional integration, centralization of management, and

15 economies of scale also constitute the three unities test of determining whether the businesses are

16 unitary.

17 Additionally, the Supreme Court stated in Allied-Signal, Inc. that a non-domiciliary state

18 can tax income from intangible property even if the income payer and payee are not engaged in

19 the same unitary business, so long as the capital transaction serves an operational function, and

20 not an investment function. See Allied-Signal, Inc., 504 U.S. at 787. Hence, for example, a state

21 may include in the apportionable income of a non-domiciliary corporation interest earned on

22 short-term deposits in a bank located in another state if the deposits form part of the working

23 capital of the corporation's unitary business. Id. In Container Corp., the Supreme Court also

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 48 of 115.
1 noted that capital transactions can serve an investment function or an operational function,

2 finding that corn futures contracts in the hands of a corn refiner seeking to hedge against

3 increases in corn prices are operational rather than capital assets. Container Corp., 463 U.S.

4 159, n.19; citing Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 50-53 (1955).

5 In its 2008 decision in MeadWestvaco Corp., the Supreme Court clarified its statement in

6 Allied-Signal, Inc. In MeadWestVaco, the Court noted that its references to operational function

7 in Container Corp. and Allied-Signal, Inc. were not intended to modify the unitary business

8 principle by adding a new ground for apportionment. The Court explained that the concept of

9 operational function simply recognized that an asset can be part of a taxpayer’s unitary business

10 even if the unitary business relationship doesn’t exist between the payee and the payor. In the

11 example given by the Court in Allied-Signal, Inc., the taxpayer was not unitary with its banker,

12 but the taxpayer’s short-term deposits (which represented working capital and thus operational

13 assets) were clearly unitary with the taxpayer’s business. In Corn Products, the taxpayer was not

14 unitary with the counterparty to its hedge, but the taxpayer’s futures contracts (which served to

15 hedge against the risk of an increase in the price of a key cost input) were likewise clearly

16 unitary with the taxpayer’s business. In the examples in Allied-Signal, Inc. and Corn Products,

17 the payor was not a part of the taxpayer’s unitary business but the asset clearly was. The

18 conclusion that the asset served an operational function was merely instrumental to the

19 constitutionally relevant conclusion that the asset was a part of the unitary business being

20 conducted in the taxing state rather than a discrete asset to which the state had no claim.

21 Distilling the Supreme Court’s constitutional jurisprudence in this area into a brief

22 summary, pursuant to the holdings in Allied-Signal, Inc. and MeadWestVaco, an item of income

23 is subject to apportionment if either (1) the taxpayer/payee and the income payor are engaged in

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 49 of 115.
1 a unitary business under the three unities test, or (2) the asset that generated the income was itself

2 used as part of the taxpayer’s unitary business operations in the taxing state 8.

3 d. Under the Three Unities Test, Taxpayer is Unitary with the remaining 14 subsidiaries.

4 In this case, Taxpayer carries the burden under the constitutional analysis to show by

5 clear and cogent evidence that the state seeks to tax extraterritorial values. Allied-Signal, Inc.,

6 504 U.S. 768, 782, citing Exxon Corp., 447 U.S. 207, 224. Taxpayer is unable to meet that

7 burden because application of the three unities test shows Taxpayer was unitary with the fourteen

8 subsidiaries.

9 As to the centrally managed assets portion of the three unities test, the preponderance of

10 evidence established centralized management between Taxpayer and the fourteen remaining

11 foreign subsidiaries. The evidence established that Taxpayer and the fourteen remaining foreign

12 subsidiaries were in the same line of business, oil and gas exploration and production. Taxpayer

13 wholly owned all the fourteen remaining foreign subsidiaries. Taxpayer funded the acquisition

14 of the subsidiaries, either through direct loans or investment of Taxpayer assets. Taxpayer

15 shared common officers with the subsidiaries. All the fourteen remaining foreign subsidiaries

16 shared a common management structure and system with Taxpayer. Taxpayer set target rates of

17 return for these subsidiaries. Taxpayer approved all the subsidiaries’ budgets, approved all

18 capital expenditures over $10,000,000.00, and approved mergers and acquisitions by the

19 subsidiaries. Taxpayer made the decision to defer income from the subsidiaries, when to reinvest

20 the subsidiary income abroad, or when to distribute the income in the form of dividends, all of

21 which show that Taxpayer is the one who exercised meaningful control over the important

22 management functions of the subsidiaries. Taxpayer treated all its operations as one segment of

8
It is possible that the unitary asset rationale of Allied-Signal., MeadWestVaco, and Corn Products might extend to
Oil Insurance Limited. However, the evidentiary record was inadequately developed to make such a determination.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 50 of 115.
1 business, according to its various 10K S.E.C. filings. Taxpayer made the decision to divest of

2 the subsidiaries for the purpose to help pay down Taxpayer’s debt and repurchase Taxpayer

3 stock.

4 Taxpayer argues that there was insufficient evidence that New Mexico in any way

5 contributed to the foreign subsidiary dividend generation either in the period of accumulation or

6 in 2015. However, this argument is not persuasive. Taxpayer began acquiring the foreign

7 subsidiaries in 1993. By 1993, the Permian Basin was one of Taxpayer’s main oil production

8 regions in North America, making Taxpayer’s success as a unitary oil and gas production

9 company at least partially dependent on Taxpayer’s New Mexico activities in the Permian Basin.

10 Permian Basin oil provided a major portion of Taxpayer’s business product, the sale of which

11 generated to Taxpayer a portion of the income it used in 1993 and beyond to acquire, invest, and

12 grow the foreign subsidiaries. This establishes a connection between Taxpayer’s New Mexico

13 business activities and the acquisition, development, and growth of the foreign subsidiaries.

14 The importance of Taxpayer’s operations in the Permian Basin as part of Taxpayer’s

15 unitary business success only grew further towards and into 2015. As Taxpayer pursued it

16 strategic rebalancing, where it hoped to recalibrate its resources towards the North American

17 market, Taxpayer repeatedly emphasized its focus and growth in the Permian Basin. The

18 connection between New Mexico and the foreign subsidiaries is that the Permian Basin helped

19 provide the product that fueled Taxpayer’s unitary business and part of the income that Taxpayer

20 invested into the foreign subsidiaries initially, to allow Taxpayer to leave the foreign income to

21 grow over an extended period, and then subsequently to allow Taxpayer to maximize its return

22 on investment from those foreign subsidiaries. Taxpayer used that return on investment to further

23 Taxpayer’s footprint in the more stable North American market, including additional growth in

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 51 of 115.
1 the Permian Basin in 2015. This is strong evidence that Taxpayer exercised central asset

2 management to further its unitary oil and gas production business, and that assets related to

3 Taxpayer’s New Mexico operations both before (when the dividends were accumulating) and

4 during 2015 played an important role in that asset management.

5 The preponderance of evidence established functional integration between Taxpayer and

6 the fourteen remaining foreign subsidiaries under the second portion of the three unities test.

7 Taxpayer and the fourteen remaining foreign subsidiaries shared numerous important corporate

8 functions: legal operations, accounting operations, common set of accounts for purposes of

9 S.E.C. reporting, internal audit functions, common HR policies and standards for employees, and

10 common insurance. The fourteen remaining foreign subsidiaries used Taxpayer’s logo.

11 Taxpayer had access to the subsidiaries’ IT software from Taxpayer’s headquarters. The

12 fourteen remaining foreign subsidiaries utilized Taxpayer’s performance measures tracking

13 system. Taxpayer used foreign subsidiary earnings to acquire other foreign assets and

14 subsidiaries in its line of business. As discussed in the previous paragraph, Taxpayer used the

15 dividends to help fuel expansion of its North American operations in 2015, including growth in

16 the Permian Basin.

17 While the evidence of centralized management and functional integration are fairly

18 strong, the three unities factor of economies of scale between Taxpayer and the fourteen

19 remaining foreign subsidiaries is a much closer analysis and largely just a reiteration of the

20 functional integration and centralized management factors. Nevertheless, the evidence is still

21 sufficient to find by the preponderance that Taxpayer and its subsidiaries benefitted from

22 economies of scale. Taxpayer and its subsidiaries were in the same line of business: oil and gas

23 exploration, production, and sales. Taxpayer invested in these subsidiaries (including in 2015, as

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 52 of 115.
1 shown by the Schedule F of Form 5471) to increase its production and sales of oil and gas, and

2 the subsidiaries used Taxpayer’s mode of operations—not only in the sense of Taxpayer’s

3 theoretical corporate attitude but also practical shared structures like corporate accounting,

4 audits, legal, HR policies, budgeting, and shared corporate officers—in an effort to maximize

5 production and sales of oil and gas while minimizing administrative costs and burdens. “When a

6 corporation invests in a subsidiary that engages in the same line of work as itself, it becomes

7 much more likely that one function of the investment is to make better use—either through

8 economies of scale or through operational integration or sharing of expertise—of the parent's

9 existing business-related resources. Container Corp., 463 U.S. 159, 178.

10 Taxpayer criticizes the Department’s evidence on the issue of unitariness between

11 Taxpayer and its subsidiaries. Taxpayer argues that the Department did not present evidence

12 specific to tax year 2015, reached strained conclusions and assumptions from the limited

13 evidence it presented, and failed to produce any evidence about eight of Taxpayer’s subsidiaries.

14 The hearing officer disagrees. The Department presented the subsidiary business connection

15 questionnaires from five of the fifteen subsidiaries. Mr. Sauer confirmed that Taxpayer’s

16 answers on the five subsidiaries business connection questionnaires, and in turn his answers

17 during his testimony about those same five subsidiaries, applied in a substantially similar manner

18 to the remaining nine foreign subsidiaries. The Department presented Taxpayer’s 10K Form for

19 nearly a decade before 2015, where Taxpayer asserted it operated as one line of business.

20 Additionally, while Taxpayer argued that the foreign subsidiaries were largely self-funding, the

21 record contained evidence showing that many of the foreign subsidiaries benefitted from

22 significant Taxpayer investments in 2015, as indicated in the various Form 5471 Schedule F’s

23 and supporting documentation.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 53 of 115.
1 Protest Auditor Mary Griego competently, credibly, and persuasively testified about her

2 review of the business questionnaires, the 10Ks, and the Apache 40 at 40 history of the company,

3 weaving those items and the testimony at hearing together to show the unitary relationship

4 between Taxpayer and its subsidiaries. To the extent that Taxpayer argues that the burden

5 shifted to the Department to reestablish the correctness of its assessment vis-à-vis unitariness (an

6 argument that the hearing officer does not find compelling considering the narrow ruling on the

7 presumption of correctness issue addressed above), Ms. Griego’s credible and persuasive

8 testimony was sufficient to reestablish the presumption of correctness on that issue.

9 Additionally, Ms. Griego articulated the Department’s efforts to obtain additional information

10 about Taxpayer’s relationship with its subsidiaries at acquisition and through tax year 2015,

11 efforts in which Taxpayer, for various reasons, declined to participate. In sum, despite

12 Taxpayer’s attacks, under the preponderance standard, there is sufficient evidence to support a

13 unitary relationship between Taxpayer and the fourteen remaining foreign subsidiaries at issue.

14 Regardless of Taxpayer’s complaints about the Department’s evidence of unitariness,

15 Taxpayer failed to carry its own burden of persuasion showing that the state was attempting to

16 tax non-unitary, extraterritorial income. See Allied-Signal, Inc., 504 U.S. 768, 782. Although

17 perhaps employing a more sophisticated and evolved corporate structure, Taxpayer’s

18 fundamental business of maximizing oil and gas production and sales while minimizing

19 administrative costs and burdens for Taxpayer and its subsidiaries is not remarkably different

20 from the integrated oil and gas production businesses of Mobil Oil Corp. or Exxon Corp. in those

21 landmark United States Supreme Court decisions. See Mobil Oil Corp., 445 U.S. 425, 435

22 (although the record was minimal on the activities of the dividend-producing subsidiaries, it was

23 nevertheless apparent from perusal of corporate reports that the entities were engaged in that

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 54 of 115.
1 taxpayer’s integrated petroleum enterprise and that taxpayer failed to show that they entities did

2 not contribute to that taxpayer’s worldwide petroleum enterprise); see also Exxon Corp., 447

3 U.S. 207, 224, (efforts of the taxpayer to treat different entities as discrete business enterprises

4 were insufficient for the taxpayer to carry its burden because the taxpayer was engaged in a

5 highly integrated business that benefitted from centralized management and controlled

6 interaction.).

7 The record evidence makes clear that Taxpayer benefitted with real flow of value to and

8 from its subsidiaries. See Container Corp. Taxpayer actively invested money into the foreign

9 subsidiaries dating back to 1991 and through the relevant time in 2015, a period when

10 Taxpayer’s unitary business success depended in part on Taxpayer’s New Mexico operations in

11 the Permian Basin. Taxpayer used the income from the dividends and dissolution of the

12 subsidiaries to invest more resources back into its North American operations, including

13 expanding Taxpayer’s Permian Basin operations in 2015. As the New Mexico Court of Appeals

14 has stated, “[t]he general premise underlying unitary taxation is that the value of a corporation's

15 unitary business is apportionable to a state for taxation if the corporation's operations within the

16 state contribute to the profitability of the entity's overall business.” NCR Corp. v. Taxation &

17 Revenue Dept., 1993-NMCA-060, ¶ 15, 115 N.M. 612, 616. There can be little doubt that

18 Taxpayer’s holdings in the Permian Basin contributed to Taxpayer’s overall enterprise of oil and

19 gas production across the globe. In turn, New Mexico may tax an apportioned share of

20 Taxpayer’s unitary business income.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 55 of 115.
1 Issue Three: The Dividends, Subpart F, and Check-the-box Income Constitute Business Income.

2 Taxpayer argues that its foreign-source dividend income, its Subpart F income, and its

3 check-the-box deemed income is not business income subject to apportionment in New Mexico but

4 is non-business income subject to allocation to Taxpayer’s domiciliary state of Texas. To the

5 contrary, the Department argues that all such income is business income subject to fair

6 apportionment in New Mexico. The Department’s argument is persuasive, as the foreign-source

7 dividend income, Subpart F income, and the check-the-box deemed income all qualify as business

8 income under applicable New Mexico authority.

9 UDITPA distinguishes between business income and nonbusiness income: only business

10 income is subject to apportionment for purposes of state income tax imposition. See NMSA 1978,

11 §7-4-10 (A) (2013) (“…all business income shall be apportioned...”). Rather than apportioned to

12 multiple states for imposition of commensurate share of income taxes, nonbusiness income is

13 allocated only to the taxpayer’s domiciliary state and only that state may impose an income tax on

14 the nonbusiness income. “Business income” is defined under NMSA 1978, Section 7-4-2 (A)

15 (1999), as

16 …income arising from transactions and activity in the regular course of the
17 taxpayer's trade or business and income from the disposition or liquidation
18 of a business or segment of a business. "Business income" includes
19 income from tangible and intangible property if the acquisition,
20 management or disposition of the property constitute integral parts of the
21 taxpayer's regular trade or business operations.

22 In contrast, “nonbusiness income” is defined under UDITPA as “all income other than business

23 income.” NMSA, §7-4-2 (E).

24 Numerous Department regulations provide further guidance on the UDITPA distinction

25 between business and nonbusiness income. In addition to essentially reiterating the statutory

26 definition of business income, Department Regulation 3.5.1.9 (A) NMAC adds that “[i]n essence,

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 56 of 115.
1 all income which arises from the conduct or the disposition or liquidation of trade or business

2 operations of a taxpayer is business income.” Regardless of the name, label, or classification used

3 to describe the income, Department Regulation 3.5.1.9 (A) NMAC indicates that

4 [i]ncome of any type or class and from any source is business income if it
5 arises from transactions and activity occurring in the regular course of a trade
6 or business. Accordingly, the critical element in determining whether
7 income is "business income" or "nonbusiness income" is the identification of
8 the transactions and activity which are the elements of particular trade or
9 business. In general, all transactions and activities of the taxpayer which are
10 dependent upon or contribute to the operations of the taxpayer's economic
11 enterprise as a whole constitute the taxpayer's trade or business and will be
12 transactions and activity arising in the regular course of, and constitute
13 integral parts of, a trade or business.

14 Conceptually, New Mexico’s statutory scheme under Section 7-4-2 (A) adopts three tests to

15 determine whether the income is business or non-business income. First, under Section 7-4-2 (A),

16 is a “transactional test,” where income is considered business income when the income arose from

17 “transactions and activity” occurring in the “regular course of the taxpayer’s trade or business.”

18 The second test under Section 7-4-2 (A) is called the “disposition test.” Under the

19 disposition test, income is considered business income when the income arose from the disposition

20 of a business or segment of a business. See § 7-4-2 (A). This dispositional test portion of the statute

21 was added by the Legislature in response to the New Mexico Court of Appeals’ decision in McVean

22 & Barlow, Inc. v. Bureau of Revenue, 1975-NMCA-128, 88 NM 521. In McVean & Barlow, Inc.,

23 the Court of Appeals found that income from the liquidation of a line of business was non-

24 apportionable, non-business income under UDITPA because it arose from a one-time transaction

25 not part of that taxpayer’s line of business. This statutory overruling of McVean & Barlow, Inc.

26 made clear that the Legislature intended the proceeds from the disposition of a line of business to be

27 considered business income under UDITPA subject to apportionment, whether or not the

28 disposition was a one-time transaction.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 57 of 115.
1 The third test, found under Section 7-4-2 (A)’s last sentence, is the “functional test.” Under

2 the functional test, income is considered business income when the income arose from “tangible and

3 intangible property if the acquisition, management or disposition of the property constitute an

4 integral part of the taxpayer’s regular trade or business operations.”

5 As the Department persuasively argues, Taxpayer’s foreign dividend income and Subpart F

6 income amounted to business income subject to New Mexico apportionment under Section 7-4-2

7 (A)’s dispositional and functional tests. Much of Taxpayer’s counter-argument assumes that there

8 is a non-unitary relationship between Taxpayer and the subsidiaries. Without repeating the unitary

9 analysis of the previous section, Taxpayer was unitary with all but one of the foreign subsidiaries

10 that produced the income in question in 2015. As such, the subsidiaries’ dividend income and

11 Subpart F income, which Taxpayer used to bolster its North American operations including in the

12 Permian Basin, contributed to Taxpayer’s economic enterprise and trade or business, satisfying

13 Regulation 3.5.1.9 (A) NMAC’s standard for business income. Even though Subpart F income

14 constitutes unrealized, deemed income, it is nevertheless subject to New Mexico apportionment.

15 See NCR Corp., 1993-NMCA-060, ¶¶ 26-34 (New Mexico Court of Appeals held that the Subpart F

16 income of unitary foreign-source dividend income is business income subject to New Mexico

17 apportionment).

18 Even under Taxpayer’s theory of the one-time disposal of some of the foreign subsidiaries,

19 Taxpayer undertook the one-time strategic rebalancing of its global operations to refocus on North

20 American operations. As part of this process, Taxpayer sold off some assets (or all in the case of

21 the Australian and Argentinian subsidiaries) of the foreign subsidiaries at issue for the express

22 purpose of paying off Taxpayer debt, purchasing back Taxpayer stock, and expanding Taxpayer’s

23 North American operations. Taxpayer used its foreign assets to bolster its North American line of

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 58 of 115.
1 business with its more predictable rates of return. During this time, Taxpayer grew its Permian

2 Basin holdings, which helped power its North American growth.

3 In its Form 10k’s filed during the years of the rebalancing, Taxpayer reported that its

4 strategic rebalancing was highly successful, resulting in the sale of $7,000,000,000.00 in assets,

5 reduction of debt by $2,600,000,000.00, and the repurchasing over $1,000,000,000.00 in stock.

6 Taxpayer used this income to focus and expand its core operations in North America (including in

7 New Mexico’s Permian Basin), reduce its debts, and buy back its stock, all activities that are

8 integral to Taxpayer’s core business operations. These facts satisfy both the dispositional and

9 functional tests for business income.

10 Whether or not this was a one-time undertaking has little bearing in the analysis after the

11 Legislature overruled McVean & Barlow, Inc. As Mr. Sauer acknowledged, the purpose of

12 disposing of these assets was to further Taxpayer’s core North American business. In so disposing

13 of the assets in a manner integral to Taxpayer’s business, the dividend and Subpart F income was

14 business income under Section 7-4-2.

15 Taxpayer argues that the check-the-box election deemed income is non-business income

16 because it is purely fictional income not involving a real transaction or activity for the purposes of

17 the definition of business income. Under Form 8832, a check-the-box election caused two of

18 Taxpayer’s foreign subsidiaries to be reclassified on paper from associations to disregarded entities.

19 This check-the-box election fictional disposition occurred pursuant to 26 C.F.R.§301.7701-

20 3(g)(1)(iii). Under 26 C.F.R. § 301.7701-3, “[i]f an eligible entity classified as an association

21 elects… to be disregarded as an entity separate from its owner, the following is deemed to occur:

22 The association distributes all of its assets and liabilities to its single owner in liquidation of the

23 association.”

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 59 of 115.
1 While Taxpayer realized no actual income from the check-the-box election through a real

2 transaction, sale, or disposition, 26 C.F.R. § 301.7701-3 still required Taxpayer to include the

3 deemed liquidation income as federal income under its federal return. New Mexico, in turn,

4 captured the inclusion of this deemed income on Taxpayer’s federal return as part of Taxpayer’s

5 New Mexico corporate income tax base income. See NMSA 1978, § 7-2A-2 (C) (2017) (defining

6 New Mexico corporate “base income” as federal taxable income as calculated under the Internal

7 Revenue Code.).

8 In NCR Corp., a taxpayer argued that the Subpart F income was hypothetical income not

9 taxable until actually realized and distributed. NCR Corp., 1993-NMCA-060, ¶28 & 30. That

10 argument is remarkably similar to Taxpayer’s argument in this protest, that the check-the-box

11 election resulted in a hypothetical versus actual distribution of income. The Court of Appeals

12 rejected that approach with respect to the similar deemed Subpart F income, finding in part that if

13 the federal government required inclusion of the deemed income it was appropriate for New Mexico

14 to apportion the deemed income as unitary business income. See id. at ¶31-34. The logic of the

15 Court of Appeals’ conclusion in NCR Corp. extends to the deemed, hypothetical check-the-box

16 income required to be included under 26 C.F.R. § 301.7701-3 and captured as New Mexico base

17 income under Section 7-2A-2 (C).

18 While Taxpayer did cite to three out-of-state cases discussing the check-the-box election

19 deemed income where the taxpayers prevailed, none of those cases stand for the broad proposition

20 that hypothetical, unrealized, deemed income cannot constitute business income. See Manpower,

21 Inc. v. Comm'r of Revenue, 724 N.W.2d 526 (Minn. 2006) (check-the-box election does not alter an

22 entity’s status as foreign or domestic); see also Ashland Inc. v. Comm'r of Revenue, 899 N.W.2d

23 812 (Minn. 2017) (Minnesota required to recognize check-the-box election income as part of state’s

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 60 of 115.
1 net income determination); see also Deere & Company, Petitioner v. Wisconsin Department of

2 Revenue, Department, 2019 WL 4308827 (Wisconsin tax court found that check-the-box election

3 income qualifies for state dividends received deduction). In fact, there seemed to be little dispute in

4 those cases that the hypothetical, deemed income could theoretically constitute business income if

5 otherwise permitted under state tax law. Instead, the outcome of those cases turned on the corollary

6 consequences of the check-the-box election in other state-specific areas of tax law. In any event,

7 NCR Corp. makes clear that hypothetical, deemed income can constitute business income in New

8 Mexico if the federal tax code requires inclusion of such deemed income. See NCR Corp. at ¶31-

9 34.

10 This permissible inclusion and treatment of the hypothetical, deemed income is also

11 consistent with Department Regulation 3.5.1.9 (A) NMAC’s definition that “[i]ncome of any type

12 or class and from any source…” (emphasis added) can be considered business income. Because the

13 federal regulation requires the deemed distribution and liquidation of the assets, the income meets

14 the “any type” or “any source” language of that regulation. Since the deemed income check-the-

15 box otherwise came from the unitary foreign subsidiaries, the income also satisfied the dispositional

16 and functional business income test. As such, Taxpayer’s check-the-box election income is

17 business income, subject to state apportionment.

18 Issue Four: Taxpayer’s Foreign Commerce Discrimination Claim Fails

19 Taxpayer argues in this case that the Department’s assessment violates the Foreign

20 Commerce Clause of the constitution under the holding of Kraft Gen. Foods v. Iowa Dep't of

21 Revenue & Fin., 505 U.S. 71 (1992), with its disparate treatment of foreign subsidiary income

22 depending on the corporate income tax filing method used. The Department contends that there is

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 61 of 115.
1 no foreign commerce violation in taxing an apportioned share of the unitary income of a combined

2 return filer, citing numerous cases that will be discussed in more detail as part of the resolution of

3 this issue. This is a complex issue that requires a contextual discussion of corporate income tax

4 reporting methods and structures, as well as detailed review of case law history and developments

5 from multiple jurisdictions.

6 New Mexico’s corporate income tax structure allows a taxpayer subject to the Corporate

7 Income and Franchise Tax Act to elect one of three reporting methods. See Regulation 3.4.10.8 (B)

8 NMAC. The first permissible reporting method is the separate corporate entity method. See

9 Regulation 3.4.10.8 (B) (1) NMAC and Regulation 3.4.10.7 (A) NMAC. This method entails

10 allowing each corporation doing business in New Mexico, even if it is part of a larger unitary group,

11 to file a separate corporate income tax in New Mexico. As will be discussed in much greater detail,

12 the New Mexico Supreme Court has expressly prohibited the state from including foreign dividend

13 income for separate method filers because under the structure of the taxing scheme, domestic

14 dividends were provided favorable treatment over foreign dividends in contradiction to the Foreign

15 Commerce Clause. See Conoco, Inc. v. New Mexico Taxation and Revenue Department, 1997-

16 NMSC-005, 122 N.M. 736 (1996). In recognition of the clear Conoco, Inc. holding, Department

17 Regulation 3.4.1.12 NMAC (1998) now allows a separate entity corporate filer to exclude foreign

18 source dividends from its base income.

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

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

21 (2013) and Regulation 3.4.10.8 (B) (2) NMAC. This is the reporting method Taxpayer used in this

22 protest. Generally, this method requires a corporation to report the combined income of all its

23 unitary subsidiaries on one return. In their preeminent State Taxation treatise, Hellerstein and

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 62 of 115.
1 Hellerstein note that “[t]he purpose of the combined reporting is to determine the income or other

2 tax base of the in-state taxpayer by viewing the taxpayer as part of the unitary business, and

3 applying the apportionment factors of the entire unitary business to the taxable net income of the

4 unitary business.” See J. Hellerstein & W. Hellerstein, ¶8.11[1]. The New Mexico Court of

5 Appeals upheld New Mexico’s combined return reporting treatment against a Foreign Commerce

6 Clause challenge. See NCR Corp., 1993-NMCA-060. Additionally, in a previous administrative

7 decision discussed in more detail below, the combined return reporting method treatment of

8 dividends was found to not offend the Foreign Commerce Clause. See In the Matter of the Protest

9 of Xerox Corporation, Taxation and Revenue Decision and Order No. 03-22, Dec. 3, 2003, 2003

10 WL 24889474, (non-precedential; publicly available at http://realfile.tax.newmexico.gov/03-

11 22__xerox_corporation.pdf ) (referred to as “Xerox”).

12 The third reporting method is the federal consolidated group. See NMSA 1978, § 7-2A-8.4

13 (1993) and Regulation 3.4.10.8 (B) (3) NMAC. Under Section 7-2A-8.4,

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

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

20 income federally on a consolidated group basis. Under the I.R.C., 26 U.S.C. § 1501 establishes the

21 privilege of filing a federal consolidated return for an affiliated group of corporations, as defined by

22 26 U.S.C. § 1504. Under the definition contained in NMSA 1978, Section 7-2A-2 (A) (2014), New

23 Mexico incorporates the I.R.C. definition of an affiliated group. An affiliated corporation is a

24 corporation connected through stock ownership amounting to 80% of voting power or value with a

25 common parent corporation. See 26 U.S.C. § 1504 (A). Foreign corporations may not be included

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 63 of 115.
1 in a consolidated group. See 26 U.S.C. § 1504 (B). Similar to the rationale from the earlier Xerox

2 administrative decision, the undersigned hearing officer recently found the consolidated group

3 reporting method treatment of dividends did not offend the Foreign Commerce Clause. See In the

4 Matter of the Protest of General Electric Company & Subsidiaries, Administrative Hearings Office

5 Decision and Order No. 18-12, April 6, 2018, 2018 WL 1795457, (non-precedential; publicly

6 available at https://www.tax.newmexico.gov/all-nm-taxes/tax-decisions-orders/ )(referred to as

7 “General Electric”).

8 On questions of whether there is a violation of the foreign commerce clause, there is a six-

9 factor test. See Japan Line, Ltd. v. Cty. of L.A., 441 U.S. 434, 451 (1979). The first four factors

10 of the analysis are the traditional four Commerce Clause Factors articulated in Complete Auto

11 Transit v. Brady, 430 U.S. 274 (1977): (1) a sufficient nexus exists between the activity being

12 taxed and the taxing state; (2) the tax is fairly apportioned; (3) the tax does not discriminate

13 against interstate commerce; and (4) the tax is fairly related to services provided by the state. On

14 questions related to the Foreign Commerce Clause, the United States Supreme Court has added

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

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

17 voice when regulating commercial relations with foreign governments.” Japan Line, 451.

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

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

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

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

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

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 64 of 115.
1 in Japan Line at 447-448 (internal citations omitted) because of the possibility of unaddressable

2 multiple taxation:

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

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

19 questions of state taxation vis-à-vis foreign commerce. In Mobil Oil Corp., 445 U.S. 425 (1980),

20 the multinational Mobil Oil Corp., which conducted much of its business through wholly or

21 partially owned domestic and foreign subsidiaries, had subtracted all its foreign dividends from

22 its net income on its Vermont Corporate Income Tax Return. See Mobil Oil Corp., 445 U.S.

23 425, 428-431. Taxpayer in this protest effectively did the same thing as Mobil Oil Corp.,

24 essentially removing its foreign dividend income from New Mexico net income on its original

25 CIT-1 return. Like the Department in this protest, Vermont in Mobil Oil Corp. assessed Mobil

26 Oil Corp. the tax attributable to Vermont’s recalculation and inclusion of foreign dividends in the

27 apportionable income tax base. See id. at 430-431. Mobil Oil Corp. contended that inclusion of

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

29 Clause and that the inclusion of the foreign dividends would result in an unfair and inequitable

30 apportionment of the income attributable to Vermont. See id. at 432.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 65 of 115.
1 As part of its various challenges, Mobil Oil Corp. also argued that, under Japan Line, the

2 inclusion and apportionment of the foreign source dividend income would result in a substantial

3 risk of impermissible multiple taxation. See id. at 442. As such, Mobil Oil Corp. contended that

4 “because of the risk of multiple taxation abroad, allocation of foreign-source income to a single

5 situs is required at home. Appellant's reasoning tracks the rationale of Japan Line, that is, that

6 allocation is required because apportionment necessarily entails some inaccuracy and

7 duplication.” Id. 446.

8 The Supreme Court rejected Mobil Oil Corp.’s argument, distinguishing between the

9 property taxes assessed in Japan Line, where situs was an important consideration, and an

10 apportioned income tax, where situs is of far less importance. See id. at 445-446 and at 448.

11 Ultimately, the Supreme Court held in Mobil Oil Corp. that nothing under the Due Process

12 Clause or the Commerce Clause prevented Vermont from taxing its proportionate, apportioned

13 share of Mobil Oil Corp. income, including the foreign-source dividend income. See id. at 449.

14 This holding is instructive to the present protest given the similarity of Taxpayer’s removal of

15 the foreign source dividend income from its New Mexico return and New Mexico’s effort to

16 include that income in the fair apportionment of Taxpayer’s New Mexico corporate income tax

17 liability.

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

19 States Supreme Court again discussed the application of the Foreign Commerce Clause to a

20 state’s attempt at taxation in Container Corp., 463 U.S. 159 (1983). Container Corp. involved

21 California’s combined reporting taxation of a unitary series of entities. The Supreme Court

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

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

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 66 of 115.
1 apportionment applied to a multinational business violated the constitutional requirement for fair

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

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

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

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

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

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

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

9 employ the Federal Government’s “arms-length” analysis. See id.at 184-197.

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

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

12 First, the Supreme Court noted that Japan Line involved a property tax rather than an income tax at

13 issue before it, which the court found minimized the importance of situs in the analysis. Container

14 Corp., 463 U.S. 159, 187-188. Second, the court noted that any potential double taxation, although

15 a possibility, was not the result of California’s formulary apportionment scheme. Id. Third, the

16 Supreme Court noted that the tax in question was not directed at a foreign corporation, but instead

17 fell on a domestic corporation doing business in the United States, a question it had expressly left

18 unresolved in Japan Line. Id.

19 Because of these differences, the Supreme Court held in Container Corp. that imposition of

20 taxation did not violate either of the two additional Foreign Commerce Clause factors articulated in

21 Japan Line, the substantial risk of multiple taxation or interfering with federal government’s ability

22 to speak with one voice. Container Corp., 463 U.S. at 187-196. In summary, the Supreme Court

23 did not find in either Container Corp. or Mobil Oil Corp., that a taxing scheme which taxed an

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 67 of 115.
1 apportioned shared of a unitary business with both foreign and domestic subsidiaries violated the

2 Foreign Commerce Clause.

3 Unlike those two cases, in 1992 the United States Supreme Court did find a Foreign

4 Commerce Clause violation in Kraft, 505 U.S. 71 (1992). The question at issue in Kraft was

5 “whether the disparate treatment [by Iowa] of dividends from foreign and from domestic

6 subsidiaries violates the Foreign Commerce Clause.” id. at 73.

7 Similar to New Mexico’s taxing scheme, Iowa’s starting point for calculating corporate

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

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

10 unlike the federal government, Iowa did not allow a subsequent credit for payment of foreign tax

11 on foreign dividends, meaning that Iowa taxed a single filer corporation’s foreign dividends but

12 not its domestic dividends. See id. at 73-74. The Supreme Court held in Kraft that the disparate

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

14 dividends amounted to facial discrimination against foreign commerce in violation of the Foreign

15 Commerce Clause. Id.

16 Kraft did not specifically address combined returns, which is the type of return at issue in

17 this protest. But in a much-cited footnote on the question of combined returns, the Kraft

18 Supreme Court stated:

19 If one were to compare the aggregate tax imposed by Iowa on a unitary
20 business which included a subsidiary doing business throughout the
21 United States (including Iowa) with the aggregate tax imposed by Iowa
22 on a unitary business which included a foreign subsidiary doing business
23 abroad, it would be difficult to say that Iowa discriminates against the
24 business with the foreign subsidiary. Iowa would tax an apportioned
25 share of the domestic subsidiary's entire earnings, but would tax only the
26 amount of the foreign subsidiary's earnings paid as a dividend to the
27 parent.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 68 of 115.
1 In considering claims of discriminatory taxation under the Commerce
2 Clause, however, it is necessary to compare the taxpayers who are "most
3 similarly situated." A corporation with a subsidiary doing business in
4 Iowa is not situated similarly to a corporation with a subsidiary doing
5 business abroad. In the former case, the Iowa operations of the
6 subsidiary provide an independent basis for taxation not present in the
7 case of the foreign subsidiary. A more appropriate comparison is
8 between corporations whose subsidiaries do not do business in Iowa.

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

10 In 1997, in Conoco, Inc., 1997-NMSC-005, 122 N.M. 736, the New Mexico Supreme

11 Court considered whether New Mexico’s separate entity filer corporate income tax method, even

12 with the Department’s attempt at formulary apportionment factor relief pursuant to the Detroit

13 Formula, survived Foreign Commerce Clause scrutiny in light of Kraft. The two taxpayers at

14 issue in Conoco, Inc. had elected to file their respective New Mexico corporate income tax

15 returns under the separate entity method. Id. at ¶6. Under that method, like in Kraft, the New

16 Mexico Supreme Court noted that New Mexico’s reliance on the federal taxable income resulted

17 in the inclusion of foreign dividend income while excluding domestic dividend income from

18 New Mexico corporate income tax. Id. at ¶7. Unlike the federal government, which the court

19 noted has a subsequent credit for taxes paid to foreign governments designed to mitigate against

20 the possibility of multiple taxation on foreign subsidiaries, New Mexico does not have a similar

21 credit for foreign taxes paid after determination of federal base income, leading to those

22 taxpayers’ claim that New Mexico’s statute, like Iowa’s statute, facially discriminated against

23 foreign commerce. Id.

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

25 few key parts of that decision that informed its analysis of the issue. The Court noted that Iowa

26 and New Mexico used the same starting point, the federal taxable income as the base income, but

27 that unlike Iowa, New Mexico used the Detroit Formula. Id. at ¶8. The New Mexico Supreme

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 69 of 115.
1 Court noted that the United States Supreme Court had considered and rejected Iowa’s argument

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

3 corporate structure or domicile to avoid the disparate treatment of dividends. Id. The New

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

5 argument that the administrative efficiency in relying on the federal base income definition

6 justified the statutory scheme. Id. at ¶9.

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

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

9 respective state tax obligations. The Court reviewed the Rhode Island decision, Dart Industries,

10 Inc. v. Clark, 657 A.2d 1066 (R.I. 1995), where the Rhode Island Supreme Court had found that

11 Kraft controlled the outcome in finding Rhode Island’s tax scheme, similar to both Iowa and

12 New Mexico, unconstitutional. See Conoco, Inc., 1997-NMSC-005, ¶10. In particular, the New

13 Mexico Supreme Court cited a portion of the Dart Industries decision where the Rhode Island

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

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

16 preference for domestic commerce over foreign commerce.” Id. (citing Dart Industries at 1066).

17 The New Mexico Supreme Court then analyzed two state cases that reached an opposite

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

19 864 P.2d 1175 (Kan. 1993) and E.I. Du Pont de Nemours & Co. v. State Tax Assessor, 675 A.2d

20 82, (Me. 1996). See Conoco, Inc., 1997-NMSC-005, ¶11-13. In Morton Thiokol, Inc., the

21 Kansas Supreme Court considered in pertinent part whether Kansas’ combination method

22 corporate filing scheme violated the Foreign Commerce Clause like Iowa’s single filer scheme,

23 as found in Kraft. See Morton Thiokol, Inc., 254 Kan. 23, 864 P.2d 1175 (1993). The Kansas

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 70 of 115.
1 Supreme Court noted that like Iowa, the Kansas tax base is determined by looking to federal

2 taxable income. See Morton Thiokol, Inc., 254 Kan. 23, 25, 864 P.2d 1175 (1993). The Kansas

3 Supreme Court relied on footnote 23 from the Kraft decision in its analysis, finding that under

4 that footnote, courts must be careful to select the appropriate comparison between similar

5 circumstances. See id. at 36-37. The Kansas Supreme Court found that the taxpayer in that case

6 was asserting an incorrect comparison of two non-combined subsidiaries that would not be

7 subject to Kansas tax. See id. at 38.

8 In an extended passage quoted by the New Mexico Supreme Court in Conoco, Inc., 1997-

9 NMSC-005, ¶11, the Kansas Supreme Court stated:

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

24 Morton Thiokol, Inc., 254 Kan. at 37–38.

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

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

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

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

29 discriminatory under the holding in Kraft; therefore, it is not violative of the federal

30 Constitution's Commerce Clause (Art. I, § 8, cl. 3).” Id.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 71 of 115.
1 Another case that the New Mexico Supreme Court considered in Conoco, Inc., was the

2 Maine Supreme Judicial Court’s decision in Du Pont. In that case, the Maine Supreme Judicial

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

4 to a combined filing state: Maine’s water’s edge combined reporting method provided a “taxing

5 symmetry” between foreign and domestic dividends not present in Iowa’s single filer method,

6 making Maine’s scheme distinguishable from the scheme rejected in Kraft. See Du Pont, 675

7 A.2d 82, 88. As the Maine Supreme Judicial Court expands,

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

22 Id. (emphasis added).

23 After reviewing Kraft, Dart Industries, Morton Thiokol, Inc., and Du Pont, the New

24 Mexico Supreme Court in Conoco, Inc., 1997-NMSC-005, ¶13, stated that because of the

25 similarity between Iowa and Rhode Island’s tax scheme, “New Mexico’s tax scheme violates the

26 Foreign Commerce Clause unless saved by the Detroit Formula.” As the New Mexico Supreme

27 Court explained,

28 [t]he Detroit formula, named after an agreement between the Ford Motor
29 Company and the city of Detroit, operates to reduce the New Mexico
30 taxable income base by adding into the denominators of the parent
31 corporation's property, payroll, and sales a portion of the property,
32 payroll, and sales of dividend-producing foreign subsidiaries. This

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 72 of 115.
1 portion is determined by dividing the net dividends the parent
2 corporation receives from foreign subsidiaries by these subsidiaries' total
3 net profit. This addition into the divisors lowers the fractional multiplier
4 used against a taxpayer's total income, which lowers its New Mexico
5 taxable income base.

6 Id. ¶14 (internal citations excluded).

7 The Court rejected the Department’s argument that the Detroit Formula remedied the disparate

8 treatment of foreign and domestic dividends because the Detroit Formula “does not eliminate

9 dividends paid by foreign subsidiaries in every case,” including for the two taxpayers at issues in

10 Conoco, Inc. Id. at ¶15. The Court ultimately held that “the taxing of dividends under the

11 separate corporate entity method is unconstitutional, even with the Detroit Formula.” Id. at 16

12 (emphasis added).

13 Thus, in New Mexico, under the separate corporate entity method, the Department may

14 not tax a corporation’s foreign subsidiary dividend income without running afoul of the Foreign

15 Commerce Clause, as articulated in Kraft and Conoco, Inc. And if Taxpayer filed it return under

16 the separate corporate entity method, the Department could not tax the foreign subsidiaries

17 dividend income pursuant to the holding of Kraft and Conoco, Inc. See also Department

18 Regulation 3.4.1.12 NMAC (1998). But the Conoco, Inc. decision of the Supreme Court was silent

19 as to the constitutionality of New Mexico’s consolidated group method and the combined return

20 method at issue in this protest.

21 Two other New Mexico cases have considered and rejected Foreign Commerce Clause

22 challenges to New Mexico’s combined return method. In one case, NCR Corp, 1993-NMCA-

23 060, ¶5, the New Mexico Court of Appeals considered a Foreign Commerce Clause challenge to the

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

25 Critical to the Court of Appeals’ ultimate holding in the case was the fact that NCR, a domestic

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 73 of 115.
1 company doing business in New Mexico, was found to have a unitary business relationship with the

2 foreign subsidiaries that generated unitary income for NCR. See NCR Corp., 1993-NMCA-060,

3 ¶20. As the Court of Appeals aptly explained, “[t]he tax in question is not a tax on any of NCR’s

4 foreign subsidiaries; instead, the tax falls upon an apportioned share of NCR’s income which it

5 receives in the form of royalties, interest, and dividends from its unitary foreign subsidiaries.” Id.

6 Because the tax fell on an apportioned share of unitary business income of a domestic

7 corporation engaged in business in New Mexico, the New Mexico Court of Appeals found that the

8 tax was not a tax on the foreign subsidiaries and did not run afoul of the Foreign Commerce Clause.

9 See id. As the Court of Appeals explained,

10 Contrary to the contentions of NCR, in the instant case, New Mexico is
11 taxing only an apportioned share of the income of NCR, a domestic
12 corporation, not imposing a tax on tangible property of a foreign
13 corporation. Unlike the situation in Japan Line, multiple taxation,
14 although real, is not inevitable, the tax was fairly apportioned under the
15 formula set forth in UDITPA, and the legal incidence of the tax here does
16 not fall on a foreign owner but instead is upon a unitary, domestic entity.
17
18 Id.

19 Building on NCR Corp. is the Xerox administrative decision and order of Hearing Officer

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

21 Department’s Hearings Bureau. See Xerox, 2003 WL 24889474 (non-precedential). Although the

22 administrative decision is non-precedential, Hearing Officer Alcock’s well-regarded Xerox decision

23 and order is still insightful to the analysis of this protest. See J. Hellerstein & W. Hellerstein,

24 ¶4.21[1][d] (in perhaps the preeminent authority on state and local taxation, the hearing officer’s

25 Xerox opinion is cited for its thoughtfulness). The hearing officer cited favorably both Morton

26 Thiokol, Inc.’s and Du Pont’s rejection of the application of Foreign Commerce Clause under

27 Kraft to the combined filing schemes in Kansas and Maine respectively. See Xerox, 2003 WL

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 74 of 115.
1 24889474, 8-10 (non-precedential). The hearing officer noted that the holding of Conoco, Inc.

2 was limited to separate corporate entity method filers. See Xerox, 2003 WL 24889474, 10 (non-

3 precedential).

4 Hearing Officer Alcock then addressed the New Mexico Court of Appeals decision in

5 NCR Corp., noting that the Court had allowed taxation of a corporate taxpayer’s foreign-source

6 income over a Foreign Commerce Clause challenge because the income was derived from the

7 subsidiaries of a fully-integrated unitary business and New Mexico only taxed an apportioned

8 share of the corporation’s total unitary business income. Xerox, 2003 WL 24889474, 11-12 (non-

9 precedential); See also NCR Corp., 1993-NMCA-060, ¶20. In an important passage, Hearing

10 Officer Alcock found that “[u]nder the combined filing method (and in contrast to the separate filing

11 method discussed in Conoco, Inc.), Xerox was also required to include on its [combined] return the

12 income of any domestic subsidiaries that were part of Xerox’s unitary business.” Xerox, 2003 WL

13 24889474, 12 (non-precedential). In other words, through the unitary business lens underpinning

14 the combined reporting method, Xerox was compelled to include the dividends of any unitary

15 subsidiary—foreign or domestic—in its taxable income. The dividing line for disparate treatment

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

17 subsidiaries. See Xerox, 2003 WL 24889474, 16-18 (non-precedential). Because of this equal

18 treatment of all subsidiaries premised under the unitary business principal rather than on location of

19 the subsidiary, the hearing officer found that New Mexico’s combined reporting scheme as applied

20 to Xerox had not violated the Foreign Commerce Clause. See Xerox, 2003 WL 24889474, 18 (non-

21 precedential).

22 In Xerox, the Department had also employed the Detroit Formula to provide factor relief by

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

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 75 of 115.
1 even though the hearing officer indicated that NCR Corp. held that no such relief was required. See

2 Xerox, 2003 WL 24889474, 13 (non-precedential). Nevertheless, including some foreign factor

3 relief was an important part of New Mexico providing substantial equity in treatment for combined

4 filers, as Hellerstein and Hellerstein noted in commenting positively on the Xerox decision:

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

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

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

13 that Xerox had not met its heavy burden 9 of showing that the apportionment formula employed by

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

15 taxpayer’s in-state activities. See Xerox, 2003 WL 24889474, 13 (non-precedential).

16 Like Kansas (Morton Thiokol, Inc.), Maine (Du Pont), and New Mexico (NCR Corp. and

17 Xerox), many other states have ruled that combined reporting regimes, where an apportioned

18 share of the unitary income of a corporation is subject to tax, do not run afoul of the Foreign

19 Commerce Clause. See Caterpillar, Inc. v. Comm'r of Revenue, 568 N.W.2d 695 (Minn. 1997)

20 (the Minnesota Supreme Court found that Minnesota’s water’s edge combined reporting system,

21 and its accompanying apportionment formula, did not facially discriminate against foreign

22 commerce); See GE v. Comm'r, N.H. Dep't of Revenue Admin., 154 N.H. 457, 914 A.2d 246

23 (2006) (New Hampshire Supreme Court distinguishing between the separate entity reporting at

24 issue in Kraft and New Hampshire’s water’s edge combined reporting for unitary businesses);

9
Citing Container Corp., 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 the Protest of Apache Corporation & Subsidiaries, page 76 of 115.
1 See Agilent Techs. v. Dep't of Revenue of the Colo., 2016 Colo. Dist. LEXIS 1, *15-18 (non-

2 precedential district court decision, finding that Colorado’s combined reporting regime does not

3 violate Foreign Commerce Clause). Overall, most of the various states considering some form of

4 combined reporting based on the unitary business principal have found inclusion of apportioned

5 foreign dividend income to not run afoul of the issues addressed by Kraft and Conoco, Inc. 10

6 Pursuant to the holding in NCR Corp. and the persuasive rationale in Xerox, New

7 Mexico’s combined reporting method, where New Mexico imposes an apportioned tax on the

8 unitary corporation’s income regardless of the foreign or domestic character of the subsidiary

9 that generated the income, both generally and as applied to this Taxpayer, does not discriminate

10 under the Foreign Commerce Clause. Here, as was previously discussed, the foreign subsidiaries

11 in question were unitary with Taxpayer and their unitary business income is includable in

12 Taxpayer’s income for purposes determining New Mexico’s apportioned share of taxable

13 income.

14 Through the unitary business lens underpinning the combined reporting method, a

15 taxpayer is compelled to include the income of any unitary subsidiary—foreign or domestic—in

16 its taxable income. The dividing line for disparate treatment is not between foreign and domestic

17 subsidiaries but between unitary and non-unitary subsidiaries. This tax symmetry between

18 unitary foreign or domestic subsidiary income does not run afoul of the Foreign Commerce

19 Clause. See Du Pont, 675 A.2d 82, 88 (although domestic dividends paid to parent corporation

20 are deducted, the apportioned income of the domestic subsidiaries is subject to tax, leading to tax

21 symmetry); See also NCR Corp., 1993-NMCA-060; See also Xerox, 2003 WL 24889474 (non-

10
An exception is Ohio, where the Ohio Supreme Court found that the state’s combined reporting statute was
unconstitutional under the rationale of Kraft. See Emerson Elec. Co. v. Tracy, 90 Ohio St. 3d 157, 735 N.E.2d 445,
2000-Ohio-17.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 77 of 115.
1 precedential); See also Morton Thiokol, Inc., 254 Kan. 23. It is that tax symmetry that

2 Hellerstein and Hellerstein recognized in highlighting the non-precedential yet persuasive Xerox

3 decision. See J. Hellerstein & W. Hellerstein, ¶4.21[1][d]. Indeed, the New Mexico Supreme

4 Court in Conoco, Inc. recognized the distinguishing factor between a constitutional scheme and the

5 single filer scheme violative of the Foreign Commerce Clause was the presence of the tax symmetry

6 identified in Thiokol and Du Pont. See Conoco, Inc., 1997-NMSC-005, ¶ 12. Under this same

7 rationale, there is no foreign commerce clause violation in this case, where Taxpayer filed a

8 combined return listing all unitary income from both foreign and domestic subsidiaries on its return

9 and New Mexico only seeks to tax its apportioned shared of Taxpayer’s unitary income.

10 Issue Five: Taxpayer’s Equal Protection Claim Fails.

11 Related to Taxpayer’s challenge under the Foreign Commerce Clause, Taxpayer also asserts

12 that the Department’s assessment and proposed alternative apportionment methods violate the Equal

13 Protection Clause under the state and federal constitutions for two reasons. Taxpayer first argues

14 that New Mexico disfavors foreign subsidiaries in calculating tax liability because there is no

15 foreign factor representation. For its second equal protection challenge, Taxpayer argues that New

16 Mexico favors separate entity filers over combined return filers because, pursuant to Kraft and

17 Conoco, Inc., New Mexico provides a foreign dividend exclusion to separate entity filers. Taxpayer

18 also suggests that New Mexico’s Equal Protection Clause provides broader protections than the

19 federal Equal Protection Clause. Both of Taxpayer’s arguments touch partially on issues largely

20 rejected in Foreign Commerce Clause challenge discussed above, and there is no need to fully

21 repeat that analysis again in this section.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 78 of 115.
1 Even beyond that previous discussion, Taxpayer’s Equal Protection claim remains

2 unpersuasive. The United State Supreme Court has long afforded the legislature broad discretion in

3 imposing taxation on different classes of taxpayers. As the United States Supreme Court aptly

4 stated in 1940,

5 [t]he broad discretion as to classification possessed by a legislature in the
6 field of taxation has long been recognized. This [Supreme] Court fifty years
7 ago concluded that ‘the fourteenth amendment was not intended to compel
8 the states to adopt an iron rule of equal taxation,' and the passage of time has
9 only served to underscore the wisdom of that recognition of the large area of
10 discretion which is needed by a legislature in formulating sound tax
11 policies… [I]n taxation, even more than in other fields, legislatures possess
12 the greatest freedom in classification… [T]he presumption of
13 constitutionality can be overcome only by the most explicit demonstration
14 that a classification is a hostile and oppressive discrimination against
15 particular persons and classes. The burden is on the one attacking the
16 legislative arrangement to negate every conceivable basis which might
17 support it.

18 Madden v. Commonwealth of Kentucky, 309 U.S. 83, 87-88 (1940).

19 The New Mexico Supreme Court adopted this same standard in considering equal protection

20 challenges to tax classifications under both the federal and state constitutions. See Michael J.

21 Maloof & Co. v. Bureau of Revenue, 80 N.M. 485, 458 P.2d 89 (1969) (quoting Madden and

22 applying that standard to an equal protection challenge to differential tax treatment under the federal

23 and state constitution).

24 Taxpayer suggests in its written closing argument that the New Mexico Constitution’s Equal

25 Protection Clause requires an additional governmental justification for distinguishing between

26 classes beyond the traditional rational basis analysis used for all equal protection claims not

27 involving protected classes or fundamental personal rights. In support of its argument, Taxpayer

28 cites a Worker’s Compensation Act case where the court found there was no rational basis to

29 differentiate between farm/ranch laborers and other laborers other than arbitrary discrimination. See

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 79 of 115.
1 Rodriguez v. Brand W. Dairy, 2016-NMSC-029, ¶ 2, 378 P.3d 13, 17–18. Taxpayer’s citation does

2 not support its suggestion of an elevated equal protection standard under the state constitution for

3 two reasons. First, Rodriguez in fact reaffirms that the rational basis standard is the appropriate

4 level of scrutiny for economic legislation (like tax statutes) that does not touch on sensitive,

5 protected classes or fundamental rights. See id. ¶22. Secondly, in the tax context, case law makes

6 clear that there is no elevated standard for an equal protection analysis under the state constitution

7 beyond the rational basis for the classification employed under the federal constitution. See J.

8 Maloof, 80 N.M. 485.

9 In New Mexico’s tax jurisprudence, the Equal Protection Clause of the state and federal

10 constitutions, as well as the state constitution’s tax uniformity provision, have been applied

11 similarly. See Anaconda Co. v. Prop. Tax Dept., 1979-NMCA-158, ¶¶ 22-23, 94 N.M. 202, 210.

12 When considering a tax statute under the Equal Protection Clause of both the state and federal

13 constitution, our Court of Appeals has stated that “[c]onsidering the broad power of the legislature

14 to classify for tax purposes, and the presumption of the constitutionality of the tax, any reasonable

15 justification for the classification is sufficient to sustain its constitutionality.” Id., 1979-NMCA-

16 158, ¶24 (emphasis added). See also Pinghua Zhao v. Montoya, 2014-NMSC-025, ¶ 19, 329 P.3d

17 676, 682 (Legislature has greatest freedom in classifications for tax purposes and courts will use

18 every presumption in favor of validity of a tax classification).

19 Under that standard, Taxpayer fails to establish any equal protection violation in this case.

20 As Taxpayer acknowledges, creation of the foreign dividend deduction for separate entity filers was

21 necessary considering the United States Supreme Court’s Kraft decision and the New Mexico

22 Supreme Court’s decision in Conoco, Inc. That distinction is reasonably justified as necessary to

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 80 of 115.
1 ensure that the separate entity filer statutory scheme remains constitutional. See Anaconda Co.,

2 1979-NMCA-158, ¶¶22-23 (presumption of the constitutionality of the tax).

3 Regarding combined filers’ inability to get a similar deduction, there is a rational, non-

4 discriminatory basis for that as well: the state distinction is not premised on whether the subsidiary

5 is foreign or domestic but whether the subsidiary is unitary or non-unitary. In one manner or

6 another, under the combined reporting method, the income of any unitary subsidiary (be it foreign

7 or domestic) is included in the combined return. Additionally, as discussed in the alternative

8 apportionment section, the Department is affording Taxpayer foreign factor relief in calculating tax

9 liability in this case both under the 30% exclusion method and the Detroit Formula. As Hellerstein

10 and Hellerstein stated in positively commenting on the Xerox decision and order, by including

11 unitary income from both foreign and domestic subsidiaries in one form or another and in providing

12 foreign factor relief, New Mexico provides substantial equity to combined return filers. J.

13 Hellerstein & W. Hellerstein, ¶4.21[1][d].

14 To say there is no rational basis for a combined reporting system premised on the distinction

15 between unitary and nonunitary business income would require rejection of the unitary business

16 principal. Without reiterating the case law discussed in the unitary business section, it is sufficient

17 to say the long progression of constitutional tax jurisprudence illustrates that the unitary business

18 principal—that a state may tax an apportioned share of a unitary business enterprise income—is

19 entirely rational and constitutional. The Legislature clearly had a rational basis in implementing a

20 distinction for tax treatment purposes between unitary and nonunitary corporations as well as

21 between separate entity files and combined return filers. Therefore, there is no equal protection

22 violation in this case under either the state or federal constitutions.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 81 of 115.
1 Issue Six: Department’s 30% Exclusion Method is the Appropriate Apportionment Method.

2 In this case, when Taxpayer failed to respond to the request for additional supporting

3 documentation, the Department issued its assessment using the information Taxpayer had provided

4 on the CIT-1 return, including relying on the standard three factor apportionment method. Taxpayer

5 argued that the final original assessment in this case resulted in impermissible and unconstitutional

6 distortion. Because of this distortion, Taxpayer proposed two alternative apportionment methods in

7 this case. The Department’s corporate income tax witness Mr. Armer acknowledged during

8 testimony that the Department’s original assessment needed to be corrected to address obvious

9 distortion related to accumulated foreign dividends without foreign factor relief. That said, the

10 Department argues that any distortion in the original assessment stemmed from Taxpayer’s lack of

11 cooperation and production of information in a timely fashion both before the assessment and

12 throughout the protest process, and to that extent, the Department argues the protest should be

13 summarily denied. But in the alternative, the Department proposed its own alternative

14 apportionment methods to correct the distortion observed by Mr. Armer.

15 To resolve this issue, the hearing officer will first provide an overview of apportionment,

16 including addressing the burden necessary in showing unconstitutional distortion under standard

17 apportionment and in subsequently establishing the reasonableness of a proposed alternative

18 apportionment method. Next, the hearing officer will address the acknowledged, obvious distortion

19 under the standard three factor apportionment method. Finally, the hearing officer will review each

20 party’s proposed alternative apportionment methods in turn.

21 a. Overview of Apportionment, Distortion, and Alternative Methods of Apportionment.

22 States may tax a fairly apportioned share of a multistate entity’s business income. See

23 Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458-462 (1959). New

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 82 of 115.
1 Mexico, like many states, has adopted the Uniform Division of Income for Tax Purposes Act

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

3 multinational entities for their New Mexico activities. See NMSA 1978, §§7-4-1 through 7-4-21;

4 see also ASARCO Inc., 458 U.S. 307, 311 fn.3 (short discussion of the history of UDITPA); see also

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

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

7 Under UDITPA, business income is apportioned according to a three-factor formula based

8 on the amount of a corporation’s respective property, payroll, and sales everywhere (the

9 denominators) against the respective amount of its property, payroll, and sales within a state (the

10 numerators). Using the denominator and numerator in each category of property, payroll, and sales,

11 a percentage is calculated for each of the three factors, and the average percentage of the three is

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

13 apportioned income subject to New Mexico’s corporate income tax. See NMSA 1978, §§ 7-4-10

14 through 7-4-18.

15 The general idea behind UDITPA, amongst others, is to ensure that each state only taxes an

16 apportioned share of a taxpayer’s income, a share under the formula roughly commensurate with the

17 portion of the income attributable to the business activities conducted within that respective state.

18 See e.g. Kmart Props., Inc. v. Taxation & Revenue Dep't (KPI), 2006-NMCA-026, ¶ 46, 139 N.M.

19 177 (New Mexico Court of Appeals provides a brief overview of the apportionment process under

20 UDITPA and describes that process as “an effort at fair and uniform allocation of taxable income

21 among the states.”), rev’d on other grounds and certiorari as to corporate income tax issues

22 quashed, Kmart Corp. v. Taxation & Revenue Dep’t., 2006-NMSC-006, 139 N.M. 172.

23 UDITPA has two basic goals: “(1) fair apportionment of income among the taxing jurisdictions; and

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 83 of 115.
1 (2) uniformity of application of the statutes.” Twentieth Century-Fox Film Corp. v. Dep't of

2 Revenue, 299 Or. 220, 227, 700 P.2d 1035 (1985)11. If all states applied the UDITPA formula in a

3 uniform manner, then 100% of a multistate taxpayer’s income, and “no more or no less,” would be

4 subject to tax. W.J. Pierce, The Uniform Division of Income for State Tax Purposes, 35 Taxes 747,

5 748 (1957), (as cited in Twentieth Century-Fox Film Corp., 299 Or. 220, 226-27).

6 Although not the only permissible method of apportionment, UDITPA’s standard three-

7 factor formulary apportionment was the historical “benchmark” for fair apportionment. Container

8 Corp., 463 U.S. 159, 170. As the United States Supreme Court noted, the reason UDITPA’s

9 standard three-factor apportionment has become the approved standard is that “payroll, property,

10 and sales appear in combination to reflect a very large share of the activities by which value is

11 generated.” Container Corp., 463 U.S. 159, 183. While there is expected variance between the

12 three factors, the average of the three factors is designed in most cases to arrive at a reasonably

13 reliable determination of a taxpayer’s activities in a state. Thus, the three-factor apportionment,

14 even if such formula is “necessarily imperfect,” is generally able to avoid the “sort of

15 distortions” that raise constitutional issues with state taxation of multistate businesses. Id.

16 While Container Corp. embraced the standard three-factor formulary apportionment, the

17 Supreme Court also established in that decision that any apportionment formula used must be

18 both internally and externally consistent. See Container Corp., 463 U.S. 159, 169-170. By

19 internal consistency, the Court meant that “the formula must be such that, if applied by every

11
The hearing officer generally agrees with Taxpayer’s footnote 14 in its closing argument, which points out that
most states have moved away from the uniformity value of UDITPA’s standard three-factor formulary apportionment
in favor of alternative apportionment methods that rely more heavily on the sales factor, including double-weighing that
factor, in the apportionment formula. Nevertheless, the applicable New Mexico statute established the traditional, three-
factor standard apportionment formula as the default apportionment for a 2015 corporate income tax return. Therefore,
the historical purpose and evolution of three factor standard apportionment remains important in analyzing the legal
disputes in this protest.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 84 of 115.
1 jurisdiction, it would result in no more than all of the unitary business' income being taxed.” Id.,

2 463 U.S. at 169.

3 The Supreme Court identified external consistency as a much more difficult concept: “the

4 factor or factors used in the apportionment formula must actually reflect a reasonable sense of

5 how income is generated.” Id. As the New Jersey Supreme Court, in synthesizing various

6 United Supreme Court cases addressing external consistency, summarized

7 [e]xternal consistency looks "to the economic justification for the State's
8 claim upon the value taxed, to discover whether a State's tax reaches
9 beyond that portion of value that is fairly attributable to economic activity
10 within the taxing State." [Okla. Tax Comm'n v. Jefferson Lines, 514 U.S.
11 175, 185 (1995)] Stated simply, the question is whether the state's tax law
12 reasonably reflects the activity within its jurisdiction. The external
13 consistency test requires a "practical inquiry" into the inter-state activity
14 taxed in relation to the activity in the taxing jurisdiction. Goldberg v.
15 Sweet, 488 U.S. 252, 264-65, 109 S. Ct. 582, 590-91, 102 L. Ed. 2d 607,
16 618-19 (1989).

17 Whirlpool Props., Inc. v. Dir., Div. of Taxation, 208 N.J. 141, 165, 26 A.3d 446 (2011).

18 The United States Supreme Court has indicated that an apportionment formula is not

19 invalidated simply because it may result in the taxation of income earned beyond the taxing state.

20 See Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272 (1978). Because apportionment involves

21 “slicing a shadow,” reasonable imprecision under an apportionment formula is permitted.

22 Container Corp., 463 U.S. 159, 192-93. An apportionment formula generally only fails when a

23 taxpayer can show by clear and cogent evidence that the income attributed to the state is “out of

24 all appropriate proportions to the business transacted… in that state.” Hans Rees Sons, Inc. v.

25 North Carolina, 283 U.S. 123, 135 (1931). While the apportionment formula need not be exact,

26 when a taxpayer shows that an application of a formula for apportionment results in gross

27 distortion, a modification to the application of that formula is required in that particular instance.

28 See Norfolk & W. R. Co. v. Mo. State Tax Comm'n, 390 U.S. 317, 329 (1968).

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 85 of 115.
1 UDITPA itself contains a provision that allows for equitable adjustment to the standard

2 three factor apportionment when the three-factor formula does not fairly capture the business

3 activity of a multistate taxpayer. This equitable adjustment provision of UDITPA has been

4 adopted in New Mexico and codified as NMSA 1978, Section 7-4-19. Section 7-4-19 reads:

5 If the allocation and apportionment provisions of the Uniform Division
6 of Income for Tax Purposes Act [7-4-1 NMSA 1978] do not fairly
7 represent the extent of the taxpayer’s business activity in this state, the
8 taxpayer may petition for, or the department may require, in respect to all
9 or any part of the taxpayer’s business activity, if reasonable:
10
11 A. separate accounting;
12 B. the exclusion of any one or more of the factors;
13 C. the inclusion of one or more additional factors which will
14 fairly represent the taxpayer’s business activity in this state; or
15 D. the employment of any other method to effectuate an equitable
16 allocation and apportionment of the taxpayer’s income.

17 UDITPA was designed primarily to address manufacturing and merchandising. See Twentieth

18 Century-Fox Film Corp., 299 Or. 220, 227. The drafters of UDITPA created this equitable

19 apportionment provision to provide flexibility to tax administrators and taxpayers when the

20 standard three-factor apportionment would reach an “unreasonable result.” W.J. Pierce, The

21 Uniform Division of Income for State Tax Purposes, 35 Taxes 747, 781 (1957), as cited in Twentieth

22 Century-Fox Film Corp., 299 Or. 220, 227, 700 P.2d 1035. As Professor Pierce, the drafter of

23 UDITPA expounded, the equitable apportionment provision of UDITPA allows for

24 some latitude for showing that for the particular business activity, some
25 more equitable method of allocation and apportionment could be
26 achieved. Of course, departures from the basic formula should be
27 avoided except where reasonableness requires. Nonetheless, some
28 alternative method must be available to handle the constitutional problem
29 as well as the unusual cases, because no statutory pattern could ever
30 resolve satisfactorily the problem for the multitude of taxpayers with
31 individual business characteristics.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 86 of 115.
1 W.J. Pierce, The Uniform Division of Income for State Tax Purposes, 35 Taxes 747, 781 (1957), as

2 cited in Twentieth Century-Fox Film Corp., 299 Or. 220, 226-227, 700 P.2d 1035.

3 The party seeking to depart from the standard apportionment formula carries the burden

4 of persuasion as to why the modification is necessary. See KPI, 2006-NMCA-026, ¶¶ 50-51. In

5 order to meet this burden of departure, the party seeking the departure must prove two things:

6 first, that the statutory formula as a whole does not fairly represent the extent of the taxpayer’s

7 business activity in the state and second that the alternative method of apportionment employed

8 is reasonable. See Twentieth Century-Fox Film Corp., 299 Or. 220, 233, 700 P.2d 1035 (1985).

9 Taxpayer avers in its closing argument that in New Mexico, the party seeking to depart from

10 the standard apportionment need only establish that there is distortion by the preponderance

11 standard rather than the heavier clear and cogent evidence standard articulated in other non-

12 precedential Administrative Hearings Office decisions. As support for its argument, Taxpayer cites

13 Regulation 22.600.1.18 (A) NMAC (establishing the preponderance standard as the default standard

14 unless a statute specifies otherwise), the absence of a statutory standard under Section 7-4-19’s

15 equitable apportionment provision, and various cases from other jurisdictions showing that some

16 states only require proof by the preponderance. The hearing officer does not agree with Taxpayer’s

17 argument that in New Mexico, the party seeking the departure from the standard, three-factor

18 formulary apportionment need only prove distortion by the preponderance of the evidence.

19 Instead, under applicable federal and New Mexico jurisprudence, the party seeking to

20 deviate from standard apportionment must demonstrate distortion by clear and cogent evidence.

21 Three cases in New Mexico make clear that under the UDITPA framework, deviations from the

22 standard apportionment formula require more than a simple, more-likely-than-not preponderance

23 standard. Although reversed by the United States Supreme Court on unitary grounds, the New

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 87 of 115.
1 Mexico Supreme Court (as Taxpayer even acknowledges) adopted the clear and cogent evidence

2 standard for those seeking to deviate from the standard formulary apportionment. See Taxation &

3 Revenue Dept. of State of N. M. v. F. W. Woolworth Co., 1981-NMSC-008, ¶ 54, 95 N.M. 519, 530,

4 rev'd, F. W. Woolworth Co. v, 458 U.S. 354 (1982).

5 The New Mexico Court of Appeals also adopted the clear and cogent evidence standard in

6 NCR Corp.: “[a]s noted in Container Corp., a taxpayer seeking to invalidate a state's apportionment

7 formula must show by clear and cogent evidence that the income attributed to the state is in fact

8 disproportionate to the business transacted in that state.” 1993-NMCA-060, ¶ 38 (emphasis added).

9 The Court of Appeals in KPI also found that deviations from the “standard formula should be an

10 exception, not the rule,” but that in that case, the Department had shown “exceptional

11 circumstances” justifying a departure. KPI, ¶ 51. Although KPI did not expressly reference an

12 evidentiary standard vis-à-vis deviations from formulary apportionment, the rarity and exceptional

13 grounds rationale articulated by the Court of Appeals is closer to the elevated clear and cogent

14 standard than the preponderance standard. This body of New Mexico state case law is also

15 consistent with federal jurisprudence in this realm. See Container Corp., 463 U.S. 159, 179-181;

16 see also Moorman Mfg. Co., 437 U.S. 267 (1978).

17 a. Application of Standard Three-Factor Apportionment Formula is Distortive.

18 Even under the elevated clear and convincing evidence standard in this case, Taxpayer

19 established that application of the three-factor standard apportionment in this case leads to

20 significant distortion. While the Department blames Taxpayer’s lack of cooperation and production

21 of information for the distortion, the Department does not vigorously contest that the original

22 assessment contained obvious distortion that needed to be corrected. Indeed, Department Corporate

23 Tax specialist Mr. Armer acknowledged during testimony that the original assessment contained

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 88 of 115.
1 obvious distortion. Given this de facto concession and Taxpayer’s meeting the presumption of

2 correctness as to the original assessed amount, this decision will only provide a quick summary of

3 why the standard three-factor apportionment formula in this case is distortive and why an alternative

4 apportionment method is required.

5 The obvious distortion stems from two related shortcomings in the assessment (and the

6 hearing officer agrees with the Department that Taxpayer bears some of the burden for these

7 shortcomings by not providing the requested follow up information). First, as Taxpayer

8 persuasively argues, the Department provided no foreign-factor relief in applying the standard three

9 factor apportionment formula despite the heavy presence of Taxpayer’s unitary foreign subsidiary

10 income. By simply including Taxpayer’s unitary foreign source dividends in the Taxpayer’s United

11 States property, payroll, and sales factors, the standard apportionment method does not reflect

12 Taxpayer’s foreign activities in determining what percentage of the unitary income might accurately

13 reflect the extent of Taxpayer’s business in New Mexico. Not only does the absence of foreign

14 factor relief lead to distortion in the original assessment, it also is contrary to the important element

15 of the Xerox decision that Hellerstein and Hellerstein praised as part of the reason why New Mexico

16 provided substantial equity in its treatment of unitary domestic and foreign subsidiaries under the

17 combined reporting method 12. See J. Hellerstein & W. Hellerstein, ¶4.21[1][d].

18 Second, the assessment was largely premised on dividend income accumulated over

19 approximately two decades. By applying only the current year’s factors to this accumulated income

20 without any knowledge about consistency of previous years’ factors, there is some distortion which

21 Taxpayer demonstrated and the Department acknowledged during testimony. Therefore, because of

12
The New Mexico Court of Appeals did not find the absence of foreign factor relief in the apportionment formula
to be of concern in NCR Corp., 1993-NMCA-060, ¶35-36. However, it does not appear there was an admission by
the Department in NCR Corp. of obvious distortion under the apportionment formula as there is in the present
protest.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 89 of 115.
1 the obvious distortion shown by Taxpayer and acknowledged by the Department, the standard

2 formulary apportionment method in this case requires modification under UDITPA and the case law

3 addressed above. See § 7-4-19; See also KPI, 2006-NMCA-026, ¶¶ 50-51.

4 b. Taxpayer’s proposed alternative methods are not reasonable.

5 While the standard, formulary apportionment does not fairly represent Taxpayer’s business

6 activities in this case, the party seeking to depart from the standard apportionment must also show

7 that the alternative method of apportionment is reasonable. See Twentieth Century-Fox Film Corp.,

8 299 Or. 220, 233, 700 P.2d 1035, 1044. To establish reasonableness of the proposed alternative

9 method, the party must show that the proposed alternative apportionment method achieves three

10 things: first, that it fairly represents business activity; second, that it does interfere with uniformity

11 for purposes of UDITPA; and third, that it reflects the economic reality of business activity within

12 the state. See id.

13 In this case, Taxpayer proffers two alternative apportionment methods. Both Taxpayer’s

14 offered alternatives fail the three reasonableness requirements for an alternative apportionment

15 method. This is in part because one of the core premises underlying most of Taxpayer’s case is

16 erroneous: that Taxpayer’s economic activities within the state in 2015 were minimal, generated

17 taxable losses, and did not contribute to generating the disputed foreign source income.

18 To the contrary, the hearing officer finds that the economic reality of Taxpayer’s 2015 New

19 Mexico operations was far more significant to Taxpayer’s unitary operations in 2015 (and in the

20 years before when the dividend income was earned) than Taxpayer claims. Even during the period

21 when the unitary foreign subsidiaries accumulated the dividend income, the Permian Basin was one

22 of Taxpayer’s main focuses in oil and gas production, fueling Taxpayer’s business operations

23 success. Beginning in 1991, the Permian Basin was one of Taxpayer’s largest oil production

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 90 of 115.
1 regions, and it remained a focus of Taxpayer from 1991 right through 2015, when it became an even

2 larger part of Taxpayer’s production activities.

3 By Taxpayer’s own admissions, it undertook its strategic rebalancing away from its foreign

4 subsidiaries between 2012 and 2015 in order to fund, expand, and focus on Taxpayer’s North

5 American operations because North America presented a more stable and consistent source of

6 revenue. As Taxpayer’s own annual S.E.C. Form 10-K reports make clear, Taxpayer used the

7 proceeds of sales of the foreign assets and subsidiaries to grow its North American profile. One of

8 the main stars of that expansion during the rebalancing, according to Taxpayer’s filings, was

9 Taxpayer’s Permian Basin operations. In 2013, Taxpayer stated that the Permian and Anadarko

10 Basins allowed it momentum in increasing North American oil and gas production. In both 2014

11 and 2015, the Permian Basin accounted for approximately one third of Taxpayer’s total worldwide

12 liquid oil and gas production, making it the largest region of Taxpayer’s production in both North

13 America and the world.

14 Taxpayer’s assertion that its New Mexico economic activities were minimal because of its

15 book losses in New Mexico is inconsistent with the economic reality of the significant value that the

16 Permian Basin production played in Taxpayer’s oil and gas unitary business enterprise in 2015,

17 where the Permian Basin accounted for one third of Taxpayer’s total worldwide oil and gas

18 production. The commonsense, economic reality is that Taxpayer relied on access to New

19 Mexico’s portion of the Permian Basin to get a plurality of the product that is at the heart of

20 Taxpayer’s business operations in North America. And any alternative apportionment that does not

21 recognize that important economic reality fails the first and third factors of the alternative

22 apportionment reasonableness test set forth in Twentieth Century-Fox Film Corp., 299 Or. 220, 233,

23 700 P.2d 1035, 1044. Nor would any alternative apportionment that does not recognize that

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 91 of 115.
1 important economic reality be consistent with New Mexico case law direction to interpret the

2 UDTIPA provisions in a manner effectuating fair taxation of a multistate corporation engaged in

3 business activities in the state. See Pub. Serv. Co. of N.M. v. N.M. Taxation & Revenue Dept., 2007-

4 NMCA-050, ¶ 33, 141 N.M. 520, 529–30, 157 P.3d 85, 94–95.

5 Taxpayer’s first proposed alternative method is the 965-concept method. Under this

6 method, Taxpayer seeks to employ the Department’s 965 bulletin method for treatment of the

7 mandatory repatriation of undistributed foreign income under the federal Tax Cuts and Jobs Act

8 (TCJA) of 2017. See PL 115-97, December 22, 2017, 131 Stat 2054. Under the TCJA, by way of

9 amendments made to 26 U.S.C. § 965 (Section 965), taxpayers were required to pay a one-time tax

10 on any of taxpayer’s controlled foreign corporations untaxed dividends earned between January 1,

11 1987, and December 31, 2017, as part of that taxpayer’s Subpart F income. See 26 U.S.C. § 965;

12 see also PL 115-97 (Sec. 14103). In the realm of tax practitioners and tax academics, this one-time

13 repatriation of untaxed foreign dividend income under the TCJA has been commonly referred to as

14 the transition tax pursuant to Section 965(C).

15 After passage of the TCJA, the Department engaged in high-level policy discussions to

16 determine how New Mexico would treat income generated under Section 965(C)’s transition tax on

17 accumulated foreign dividend income. The Department ultimately settled on the approach

18 articulated by Department Bulletin B-300.17. See Taxpayer Ex. #14. Under that Department

19 Bulletin, in order to avoid the complexity and onerous record-keeping challenges of determining

20 foreign factors for income accrued over long periods of time, the Department determined that “New

21 Mexico will permit a taxpayer to exclude 30 percent of their net IRC 965 deferred foreign income

22 from their taxable income.” Id.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 92 of 115.
1 It is this Department Bulletin B-300.17 approach that Taxpayer proposes as its alternative

2 apportionment method, the 965 concept method. Taxpayer argues that the facts of its protest are

3 analogous to the TCJA’s transaction tax. Therefore, Taxpayer argues that the Department’s 965

4 treatment is an appropriate and reasonable alternative apportionment method. While the hearing

5 officer does understand the similarity between accumulated foreign dividends under both scenarios,

6 the hearing officer is not persuaded that the situations are otherwise analogous. The problem is that

7 both the TCJA transition tax and the Department’s Bulletin B-300.17 only apply to one specific,

8 forced deemed dividend repatriation in 2017 versus the elective deferral decisions and then

9 subsequent elective repatriation of the foreign dividends and liquidation of some of the foreign

10 entities by Taxpayer in 2015. Unlike taxpayers impacted by the one-time deemed dividend

11 repatriation under the TCJA in 2017, Taxpayer made the voluntary business decision a few years

12 before passage of the TCJA to strategically rebalance its business away from its foreign subsidiaries

13 towards its North American operations (including in New Mexico’s Permian Basin). The TCJA’s

14 deemed repatriation was imposed on all corporations regardless of their strategic needs, business

15 decisions, or ability to plan for the dividend repatriation. In that sense, the Department reasonably

16 provided some additional specific relief under that unique TCJA fact pattern to taxpayers in 2017

17 because those affected taxpayers had no ability to plan, prepare, or otherwise determine a course of

18 action on the accumulated foreign deferred earnings. But Taxpayer was not in the same situation as

19 those 2017 taxpayers impacted by the deemed dividend repatriation because Taxpayer had the

20 ability to make its own strategic and business-based decision a few years in advance, and carefully

21 plan out how and when the disposition would proceed.

22 Indeed, twice on the first page of Department Bulletin B-300.17, the Department makes

23 clear that the bulletin is only applicable to TCJA’s 2017 deemed dividend repatriation. First, the

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 93 of 115.
1 bulletin states that it “applies only to taxpayers liable for New Mexico Corporate Income Tax who

2 are required by Internal Revenue Code (IRC) Section 965 to pay a transition tax on the untaxed

3 foreign earnings of certain foreign corporations. Generally, Section 965 requirements only apply to

4 tax year 2017.” Second, the bulletin states that it “…addresses only the changes to New Mexico

5 taxable income pursuant to Section 14103 of the TCJA pertaining to a one-time inclusion in tax year

6 2017 of certain untaxed foreign earnings and profits…” Taxpayer Exhibit #14.1 (emphasis added).

7 Department Bulletin B-300.17 was designed specifically to ease the onerous recordkeeping

8 concerns related to the mandatory transition tax forced on all taxpayers in 2017, not to other

9 taxpayers in previous years who made elective, strategic, and planned business decisions related to

10 foreign dividend income.

11 The hearing officer does not find using Department Bulletin B-300.17, designed for a

12 specific and unique deemed dividend repatriation transition tax in one specific tax year, a reasonable

13 alternative apportionment method related to Taxpayer’s business activities in 2015. Taxpayer has

14 not presented compelling evidence that Department Bulletin B-300.17, designed for a different tax

15 year and addressing a forced repatriation, fairly reflects Taxpayer’s strategic and voluntary business

16 activities in 2015. Nor has Taxpayer shown that it has used or attempted to use this approach

17 uniformly or how this concept would impact uniformity in other UDITPA jurisdictions.

18 As the Department persuasively argues, Taxpayer made the decision to defer the foreign

19 income for many years for its own reasons and its own purposes. Taxpayer could have taken the

20 dividends each year beginning in 1991 and paid the corresponding corporate tax obligations

21 consistent with the specific business activities, apportionment, and allocation in each respective

22 year. However, for its own reasons and purposes, Taxpayer instead chose to let the dividends

23 accumulate from 1991 through the 2015 tax year. Similarly, Taxpayer made the decision to move

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 94 of 115.
1 away from the foreign subsidiaries to the more stable North American market for its own business

2 reasons and purposes, and on its own schedule. This is in stark contrast to the forced, deemed

3 repatriation under the TCJA applicable to all United States’ taxpayers, regardless of those

4 taxpayers’ specific business choices, needs, or business plan.

5 The hearing officer also is not convinced that Taxpayer’s Maine Methodology is a

6 reasonable alternative apportionment method. Like New Mexico, Maine includes foreign dividends

7 on a combined return while applying an alternative apportionment method for the foreign income

8 inclusion under the Augusta Formula. See Du Pont, 675 A.2d 82 (Me. 1996). Rather than using the

9 Augusta Formula applied against the transition tax income under the TCJA in 2017, Taxpayer

10 asserts that Maine instead provided an 80% exclusion to gross deferred foreign income in that tax

11 year. Taxpayer argued that, given the similarities between Maine’s and New Mexico’s corporate

12 income tax regimes, Maine’s special treatment of the 2017 transition tax income under the TCJA

13 provides a reasonable alternative apportionment for Taxpayer’s 2015 New Mexico corporate

14 income tax. However, for the same reasons already discussed in relation to the 965-concept

15 method, the hearing officer is not persuaded that the Taxpayer’s proposed Maine Methodology is a

16 reasonable alternative apportionment in this case.

17 While Taxpayer argues that these alternative approaches, essentially resulting in zero or near

18 zero New Mexico corporate income tax liability, would fairly reflect the extent of Taxpayer’s New

19 Mexico activities, as discussed above, the hearing officer is simply not convinced that a near zero

20 corporate income tax liability is reasonably reflective of the true economic reality of Taxpayer’s

21 New Mexico business activities given the importance of the Permian Basin in Taxpayer’s North

22 American oil and gas production in years up to and including 2015. Whether or not Taxpayer’s

23 entities doing business in New Mexico produced book income in New Mexico in 2015, there is little

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 95 of 115.
1 doubt that Taxpayer’s unitary business operations received significant business benefit and income

2 through its oil and gas production within New Mexico’s portion of the Permian Basin. Indeed,

3 Taxpayer generated one third of its total worldwide liquid gas product from the Permian Basin.

4 There is little reasonableness in any alternative apportionment method that results in essentially zero

5 tax liability in a state that helped Taxpayer produce approximately one third of its entire worldwide

6 oil and gas product in the years leading up to and including 2015. Since the Permian Basin played

7 an important part of Taxpayer’s unitary business during the entire period in which the foreign

8 income accumulated and during a period when Taxpayer did not need from a business perspective

9 to pay out those dividends, that rationale also extends to any alternative method seeking to correct

10 the distortion attributable to an extended period of dividends accumulation.

11 Given the reality of the importance of the Permian Basin to Taxpayer’s overall North

12 American oil and gas development business enterprise both during the period when the dividends

13 accumulated and in 2015, it is fair for New Mexico to impose a corporate income tax on a

14 proportioned share of Taxpayer’s unitary line of business because the tax bears some relation to

15 Taxpayer’s presence and activities in the state. See Commonwealth Edison Co. v. Montana, 453

16 U.S. 609, 625–29 (1981) (finding that the relevant inquiry under the fourth Complete Auto Transit

17 of whether the tax is proportionate to the taxpayer’s activities in the state is not a mathematical

18 comparison between the extent of a taxpayer’s activity in a state versus the value provided by the

19 state, but a question of whether a taxpayer’s activities within the state benefitted from the state

20 protections provided). See also Pub. Serv. Co. of N.M., 2007-NMCA-050, ¶ 33.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 96 of 115.
1 c. The Department’s 30% exclusion rule is the most reasonable of all the proposed

2 alternative apportionment methods.

3 The Department, recognizing the obvious distortion in the standard apportionment method,

4 offers two alternative apportionment methods in this protest, one of which the hearing officer finds

5 reasonable under the circumstances of this protest.

6 The first alternative method that the Department offers is the Detroit Formula, foreign factor

7 relief. Under that method, the Department proposed using (with review and verification of

8 Taxpayer’s workpapers) the Detroit Formula’s factor ratio of 4.0947% rather than the higher factor

9 ratio used under the original assessment of 5.7911%. This approach is consistent with the

10 apportionment method for a combined filer upheld in the well-regarded Xerox decision and order. It

11 also makes some headway in addressing the distortion resulting from the failure to include foreign

12 factor relief under the original, standard apportionment in this matter. But despite the Department’s

13 argument to the contrary, this alternative method does not do enough to address the distortion of

14 applying a single year’s factors against foreign dividends accumulated over an extended, multiyear

15 period. The Department’s mathematical proposition that application of a constant factor over an

16 extended period cures any distortion associated with accumulation of deferred income over multiple

17 years depends on the assumption that the formula ratio is consistent from year-to-year13. This is

18 problematic because there is no reason to assume a taxpayer-specific consistent factor year over

19 year, for 20-30 years (like at issue in this protest). One would expect some variance from year to

20 year on the ratio over such an extended period. That’s why the Department conducted a historical

21 review to determine what is the result, on average, of application of foreign factor relief. The

22 historical review showed that the application of foreign factor relief resulted in an overall average

“If the ratio is a constant, application of UDITPA correctly accounts for deferred income that accrued over
13

multiple years.” Department Closing Argument, p. 24.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 97 of 115.
1 30% reduction in the taxable income. In that sense, simple application of the Detroit Formula

2 foreign factor relief in one particular year against 20-30 years of accumulated dividends still may

3 not have any bearing on the real economic activity of Taxpayer in those other years. Whereas,

4 applying the average result to the extended period will offset natural variances in activities over that

5 period. This is why Department Corporate Income Tax specialist Mr. Armer noted that standard

6 application of the Detroit Formula would likely not address the distortion under the unique facts of

7 this case and that the Detroit Formula method works functionally better on a year-to-year basis.

8 Of the four alternative apportionment methods proposed by the parties, the most reasonable

9 approach to address both the foreign factor relief and the accumulated dividend distortion while still

10 being reasonably consistent with the economic reality of Taxpayer’s business activities in the state

11 is Mr. Armer’s 30% foreign dividend exclusion method. Mr. Armer testified that in the historical

12 experience of the Department, providing foreign factor relief had resulted in a 30% reduction in

13 taxable income. In order to effectuate that practice, Mr. Armer postulated that the distortion issues

14 in this case could be cured by providing a 30% exclusion applied against Taxpayer’s deferred

15 foreign income. See Dept. Ex. AJ. This application results in a reduction of $4,050,633,570.00 in

16 Taxpayer’s 2015 base income compared to the calculation that led to the original assessment.

17 Under this method, Taxpayer would be liable for an additional $12,754,050.0014 in New Mexico

18 corporate income tax rather than the original assessed corporate income tax principal of

19 $24,187,441.00 or the potential $16,497,121.00 corporate income tax liability under the correct

20 application of the Detroit Formula method.

14
Dept. Ex. AJ transposed the NM factor percentage as 5.9711% rather than the correct 5.7911%, which is why
there is a discrepancy between the total tax due on that document and the total tax illustrated in the Department’s
closing argument on p. 25. This amount will also need to be adjusted further to remove the Oil Insurance Limited’s
nonunitary dividends.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 98 of 115.
1 While Mr. Armer had concerns that the Detroit Formula alone was insufficient to cure the

2 distortion related to an extended period of dividend accumulations, as the Department argues in

3 its closing brief, the 30% exclusion method goes beyond the Detroit Formula in correcting that

4 distortion. In absence of more year-by-year specific factor information, applying the historical

5 average of 30% exclusion against a large period of dividend accumulation is likely to better, on

6 average, approximate a taxpayer’s annual year-by-year business activity within the state then

7 simply taking one year’s relief factor and assuming it applies to all the other years. This is

8 because the Department’s historical research shows that foreign factor relief on average results in

9 30% exclusion. Whereas in any given year in isolation the Detroit Formula may produce a lower

10 or higher relief percentage. Applying the factor relief from a single year in isolation that is either

11 higher or lower than this historical average against a large period of time would exacerbate the

12 distortion in other years that likely fall closer to the historical average. Indeed, in this case the

13 30% exclusion method against the multiyear accumulated dividends provides a greater reduction

14 of Taxpayer’s foreign-source income than application of a single year’s correct Detroit Formula

15 yields 15.

16 Of the proffered alternative apportionment methods, the Department’s 30% exclusion

17 method is the only approach before the hearing officer that attempts to reasonably balance the

18 economic reality that Taxpayer’s growing activities in New Mexico’s Permian Basin, leading up

19 to and including in 2015, helped fuel Taxpayer’s unitary business enterprise, while correcting, on

20 average, the distortion related to multi-year accumulated dividends and foreign factor relief. See

21 Pub. Serv. Co. of N.M., 2007-NMCA-050, ¶ 33 (UDITPA apportionment should be construed in a

22 manner to effectuate the presumption of fair taxation of a multistate corporation engaged in business

15
As shown in the spreadsheet comparison contained on Department’s closing brief, p. 25.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 99 of 115.
1 activities in the state). That is not to say the 30% exclusion method is a perfect apportionment

2 method, but the case law does not demand perfection in apportionment, merely reasonableness.

3 See Moorman Mfg. Co., 437 U.S. 267, 272. See also Container Corp., 463 U.S. 159, 192-93.

4 Therefore, as the most reasonable of the offered alternatives, the Department should apply its

5 30% exclusion method to Taxpayer’s 2015 CIT returns (subject to correction of the ratio

6 transposed on the Department’s worksheet Ex. AH, reduction of the Oil Insurance Limited’s

7 nonunitary dividends, and accurate calculation of payments already made or credited to

8 Taxpayer’s account).

9 Issue Six: Taxpayer is Entitled to Abatement of Penalty.

10 Although the hearing itself did not focus much on abatement of penalty, Taxpayer did argue

11 in its protest letter that penalty in this case must be abated because, to the extent Taxpayer was liable

12 for the assessment, it was based on a mistake of law made in good faith and on reasonable grounds

13 pursuant to NMSA 1978, Section 7-1-69 (B). In its amended protest, Taxpayer further cited the

14 General Electric decision and order, 2018 WL 1795457 (non-precedential), as support of its claim

15 for abatement of penalty. Taxpayer also argued for abatement of penalty in its opening remarks at

16 the hearing.

17 When a taxpayer fails to pay taxes due to the state because of negligence or disregard of

18 rules and regulations, but without intent to evade or defeat a tax, NMSA 1978 Section 7-1-69

19 (2007) requires that

20 there shall be added to the amount assessed a penalty in an amount equal
21 to the greater of: (1) two percent per month or any fraction of a month
22 from the date the tax was due multiplied by the amount of tax due but not
23 paid, not to exceed twenty percent of the tax due but not paid.

24 (italics added for emphasis).

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 100 of 115.
1 The statute’s use of the word “shall” makes the imposition of penalty mandatory in all instances

2 where a taxpayer’s actions or inactions meet the legal definition of “negligence.” See Marbob

3 Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use of the

4 word “shall” in a statute indicates the provision is mandatory absent clear indication to the

5 contrary). Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

6 exercise that degree of ordinary business care and prudence which reasonable taxpayers would

7 exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

8 “inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.” By

9 taking the inaction of not including the dividend income as business income, apportionable and

10 subject to New Mexico corporate income tax, Taxpayer meets this definition of negligence, and thus

11 is potentially subject to a civil negligence penalty under Section 7-9-69.

12 In instances where a taxpayer might otherwise fall under the definition of civil negligence

13 generally subject to penalty, however, Section 7-1-69 (B) provides a limited exception: “[n]o

14 penalty shall be assessed against a taxpayer if the failure to pay an amount of tax when due

15 results from a mistake of law made in good faith and on reasonable grounds.” A mistake of law

16 is a “mistake about the legal effect of a known fact or situation,” whereas a mistake of fact is a

17 “mistake about a fact that is material to a transaction; any mistake other than a mistake of law.”

18 Black’s Law Dictionary 1153-4 (10th ed. 2009). This agency has generally found that this good

19 faith statutory exception to penalty generally requires some evidence that a taxpayer engaged in

20 an informed consultation and decision-making process that the tax was not legally due. Cf. C &

21 D Trailer Sales v. Taxation and Revenue Dep’t, 1979-NMCA-151, ¶8-9, 93 N.M. 697 (penalty

22 upheld where there was no evidence that the taxpayer “relied on any informed consultation” in

23 deciding not to pay tax).

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 101 of 115.
1 Although there was not much evidence presented that Taxpayer engaged in any informed

2 consultation in this case, Mr. Sauer is an experienced C.P.A. who demonstrated expertise and

3 familiarity in state income taxation throughout his testimony and in explaining why Taxpayer

4 made the filing choices it did. Although ultimately incorrect, those explanations demonstrated

5 reasonable and good faith mistakes about what the law required given the facts at play in this

6 protest. The holdings of Kraft and Conoco, Inc. certainly create some reasonable basis for

7 Taxpayer to believe its foreign dividend and Subpart F income were not apportionable to New

8 Mexico, even if NCR Corp. and Xerox held to the contrary for combined return filers.

9 Moreover, the undersigned hearing officer abated penalty in the General Electric

10 decision and order, a case that involved a similar substantive issue. See General Electric, 2018

11 WL 1795457 (non-precedential). To the extent that the General Electric decision and order might

12 have clarified the issue further for Taxpayer, that decision was not issued until 2018, after

13 Taxpayer had already made its mistake of law in this case. While it is a close analysis, the

14 hearing officer finds that Taxpayer made a mistake of law in good-faith and on reasonable

15 grounds pursuant to Section 7-1-69 (B). Therefore, assessed penalty should be abated in this

16 matter.

17 Other Evidentiary Issues, Objections, and Arguments.

18 Original vs. Amended Return.

19 As a preliminary matter, the parties disagreed as to whether the original or amended return

20 was the subject of the protest. The hearing officer ruled that the original return was the subject of

21 the protest because the assessment had originated with the original return and because Taxpayer’s

22 protest letter referred to the original return rather than the amended return. See NMSA 1978, § 7-1-

23 24 (B) (2019) (requiring a taxpayer to specify the grounds of the protest); See also NMSA 1978, §

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 102 of 115.
1 7-1B-8 (D) (2019) (limiting protest to grounds stated in protest letter and answer). However, in the

2 interest of administrative efficiency, the Department indicated on the record that it would apply the

3 legal determinations made in this protest to the amended return (while still reserving each party’s

4 respective appeal rights).

5 Taxpayer’s Invocation of Rule 615 and Rule 408

6 Taxpayer initially invoked the witness exclusion rule pursuant to Regulation 22.600.1.19

7 NMAC at the beginning of the hearing. Regulation 22.600.1.19 (E) NMAC reads that “[a]t the

8 hearing, either party can invoke the exclusionary rule, excluding all witnesses other than the real

9 party in interest, their representative, one main case agent, and any designated expert witness from

10 the proceeding until the time of their testimony.” The Department designated Protest Auditor Mary

11 Griego as its case agent, as permitted under Regulation 22.600.1.19 NMAC. In addition to the case

12 agent, the Department also asked that Mr. Armer be allowed to remain in the hearing as a necessary

13 expert witness or alternatively under Rule 615 (C) of the New Mexico Rules of Evidence as an

14 essential person to the presentation of the Department’s case. Taxpayer objected to allowing Mr.

15 Armer to remain in the room during the hearing.

16 The Department’s argument is not persuasive for two reasons. First, the Department did not

17 formally designate Mr. Armer in writing as an expert witness in a timely manner, as required under

18 Regulation 22.600.1.19 (D) NMAC and therefore the witness exclusion rule remained applicable to

19 Mr. Armer despite his obvious expertise in the subject of corporate income tax 16. If the Department

20 had timely designated its witness as an expert pursuant to that regulation, then the witness could

21 have remained in the room throughout the proceeding under Regulation 22.600.1.19 (E). The

16
There is no doubt of Mr. Armer’s expertise in the area of corporate income tax from the Department’s perspective.
If the Department had timely designated him in writing as an expert witness, he almost certainly would have so
qualified. But the act of formally designating someone as an expert witness is an important step in putting the
opposing party on notice of the purpose of the witness.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 103 of 115.
1 Department’s argument also was not persuasive because Rule 615 (C) has not been incorporated

2 into the Administrative Hearings Office’s hearing regulations addressing the witness exclusion rule

3 and therefore is not directly controlling in this matter. See NMSA 1978, § 7-1B-6 (D) (1) (Formal

4 Rules of Evidence do not apply).

5 Nevertheless, the Administrative Hearings Office looks to the Rules of Evidence for general

6 guidance on the witness exclusionary rule. “The purpose of the rule excluding witnesses is to give

7 the adverse party an opportunity to expose inconsistencies in the testimony and to prevent the

8 possibility of one witness shaping his testimony to match that given by the other

9 witnesses.” State v. Ortiz, 1975-NMCA-112, ¶ 33, 88 N.M. 370 (internal quotes and citations

10 omitted). Testimony regarding “simple objective facts” is “ordinarily not subject to tailoring,

11 and if it were, it could have been exposed easily.” United States v. Prichard, 781 F.2d 179, 183

12 (10th Cir. 1986). When looking specifically at the Rule 615 (C) exception, there is a six-part test to

13 determine whether the exception applies and there is a presumption in favor of sequestration. See

14 United States v. Jackson, 60 F.3d 128, 133 & 135 (2d Cir. 1995). See also United States v. Deleon,

15 2018 WL 1871418, at *2 (D.N.M. Apr. 17, 2018) (non-precedential but shows that a United States

16 District Court Judge in the 10th Circuit has looked favorably on the 2nd Circuit’s approach).

17 Looking to the primary purpose of the rule, reviewing the six factors, and using discretion in

18 application of the exclusionary rule, the hearing officer allowed Mr. Armer to remain in the room

19 except when there was testimony around the issue of business versus non-business income, an area

20 on which Protest Auditor Mary Griego’s testimony focused. Testimony proceeded in this manner

21 for the first day of the hearing. This issue largely became moot on the second day of the hearing,

22 when Taxpayer withdrew its invocation of the exclusionary rule except for instruction that Mr.

23 Armer and Ms. Griego not discuss their testimony together during the course of the week.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 104 of 115.
1 Taxpayer also objected to the admission of certain exhibits it believed were protected as

2 offers of settlement under Rule 408. Taxpayer eventually also withdrew its objection on this issue

3 during the second day of the hearing before the hearing officer could make a formal ruling,

4 rendering this issue moot.

5 Taxpayer Bill of Rights Argument and the Department’s Counterargument.

6 Taxpayer in this case argued in its protest letter and in opening remarks that the Department

7 violated the Taxpayer Bill of Rights by not clearly articulating the basis of its adjustments and

8 assessments in this matter or not providing formal notice of an audit to Taxpayer. The Department

9 counterargues that it was Taxpayer who forced its hand to act by failing to provide requested

10 information, leaving the Department no choice but to issue its assessment with the information it

11 could glean from Taxpayer’s original 2015 corporate income tax return. In fact, one of the major

12 themes of the Department’s case throughout the proceeding and during closing argument was to

13 emphasize what it perceived as a lack of cooperation from Taxpayer in responding to the

14 Department’s inquiries, requests for information, and other more formalized discovery requests

15 such as interrogatories and requests for admissions.

16 NMSA 1978, Sections 7-1-4.1, 7-1-4.2, 7-1-4.3, and 7-1-4.4 (2003) constitute New

17 Mexico’s Taxpayer Bill of Rights (TABOR). New Mexico’s TABOR does not include any

18 specific, independent remedy for a violation of TABOR17. Instead, New Mexico’s TABOR

19 generally summarizes existing rights and obligations contained in the Tax Administration Act

20 (TAA), NMSA 1978 Section 7-1-1 (1979). That does not mean that TABOR is unimportant or

21 inoperative; only that it does not appear to be another source of independent relief beyond what is

17
Compared to neighboring Colorado, which has an actionable constitutional amendment called a Taxpayer Bill of
Rights where citizens can sue the State of Colorado for alleged violations. See eg. Barber v. Ritter, 196 P.3d 238
(Colo. 2008).

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 105 of 115.
1 already articulated in the TAA statutory requirements. See eg. Helmerich & Payne Int'l Drilling

2 Co., 2019-NMCA-054, ¶¶ 12-13, 448 P.3d 1126, 1129–30 (while the Court of Appeals cited the

3 broad provision of TABOR, it looked specifically to the underlying TAA statutory provision to

4 outline the actionable parameters and potential remedies); See eg. Breen v. State Taxation &

5 Revenue Dept., 2012-NMCA-101, ¶¶ 26-28, 287 P.3d 379, 387–88 (again, the Court of Appeals

6 looked to the underlying TAA statutory provision outlining the details of TABOR’s confidentiality

7 requirements). In other words, TABOR provides a consolidated general statement of specific

8 statutory, controlling provisions contained elsewhere in the TAA. Similar to the Court of Appeals,

9 the Administrative Hearings Office has looked to TABOR as a purpose statement to help ascertain

10 and effectuate Legislative intent in interpreting the specific underlying statutory provisions of the

11 TAA. See In the Matter of the Protest of El Castillo Retirement Residences to Denial of Protest

12 Issued Under Letter Id No. L1051055920 v. New Mexico Taxation and Revenue Department, 2019

13 WL 3782593 (non-precedential; using TABOR to help interpret potentially competing TAA

14 statutory provisions).

15 Ultimately, whether or not TABOR provides any independent mechanism for enforcement

16 beyond the related TAA statutory provisions, TABOR is not determinative in this protest. The

17 hearing officer certainly agrees that considering the magnitude of the adjustments the Department

18 made in this case, in best practice the Department should have expounded further on reasons for the

19 adjustments and its subsequent assessment to Taxpayer. Nevertheless, the hearing officer cannot

20 say that the Department failed to meet the requirements of NMSA 1978, Section 7-1-4.2 (F) that a

21 taxpayer be provided an explanation of the adjustments and the basis of the assessment in this

22 matter. The Department in fact provided three brief explanations of its proposed adjustments in the

23 March 21, 2017 Return Adjustment Notice: first, that that Taxpayer made an error on line 11 of the

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 106 of 115.
1 Original CIT-1 return in calculating its New Mexico percent[age], a reference to the apportionment

2 factor percentage; second, that Taxpayer made an error in allocating/apportioning income for

3 determining taxable income rather than calculating the percentage on line 11 of the CIT-1 return;

4 and third, Taxpayer erred by failing to attach Schedule CC to support line 12 of the CIT-1 return.

5 [Taxpayer Ex. 6.2].

6 These three statements provided Taxpayer with a basic explanation for the adjustment, in

7 that the Department disagreed with how Taxpayer allocated income and how Taxpayer apportioned

8 the New Mexico percentage of taxable income, in addition to the absence of a required schedule to

9 support the CIT-1 return. Additionally, the Return Adjustment Notice contained FYI-406, a

10 statement explaining Taxpayer’s rights in response to a notice of return adjustment, including a

11 direction to contact the Department if Taxpayer disagreed with the adjustment. This additional FYI-

12 406 also satisfies provisions of Section 7-1-4.2 (E) and Section 7-1-4.3 of TABOR. The assessment

13 itself, which was based on the Return Adjustment Notice, complied with the requirements of

14 NMSA 1978, Section 7-1-17 (2007) in that it was issued under the name of the Secretary and stated

15 the nature and amount of assessed taxes.

16 Even before the Department issued either its Return Adjustment Notice or Notice of

17 Assessment, it sought additional information from Taxpayer related to the Original CIT-1 return to

18 process the claim for refund on that return. On February 13, 2017, the Department sent Taxpayer a

19 letter request for additional information to the very same address Taxpayer listed on the 2015 CIT-1

20 return. [Dept. Ex. AH]. If the Department did not use best practice in the subsequent return

21 adjustment notice, in fairness it must also be said that Taxpayer also did not follow best practice

22 itself in failing to provide requested substantiation for its own substantial $19,422,282.00 refund

23 claim. As the Department argues, at some level Taxpayer bears responsibility to provide requested,

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 107 of 115.
1 accurate records to support its return. When Taxpayer failed to provide the Department with the

2 requested records needed to verify the 2015 CIT-1 return, under NMSA 1978, Section 7-1-11 (E)

3 (2019), the Department was permitted to use other reasonable methods to determine Taxpayer’s

4 corporate income tax liability, which it obviously did in this case in the form of the return

5 adjustment notice and subsequent assessment. While the subsequent protest and hearing process

6 revealed that the Department’s adjustment contained distortion in need of correction, the

7 Department’s actions at the time were reasonable considering the information it had available to it

8 and the lack of response from Taxpayer about the additional documentation the Department sought.

9 Conclusion

10 Both sides in this protest did an excellent and commendable job in presenting their

11 respective positions in this complex, corporate income tax protest. With exception of elimination of

12 the Oil Insurance Limited nonunitary dividends from apportionment, removal of the assessed

13 penalty, and application of the Department’s 30% exclusion method as an alternative apportionment

14 method against Taxpayer’s remaining 2015 apportionable income, Taxpayer’s protest IS DENIED.

15 CONCLUSIONS OF LAW

16 A. Taxpayer filed a timely, written protest of the Department’s assessment and

17 jurisdiction lies over the parties and the subject matter of this protest.

18 B. This protest was limited to Taxpayer’s original 2015 CIT-1 return, but the

19 Department agreed to apply the legal determinations (subject to the right of appeal) made in this

20 protest against Taxpayer’s amended 2015 return. See NMSA 1978, § 7-1-24 (B) (2019); see also

21 NMSA 1978, § 7-1B-8 (D) (2019).

22 C. The hearing was timely set within 90-days of protest under Section 7-1B-8.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 108 of 115.
1 D. Delay in issuing a decision in a complex tax protest does not invalidate the

2 jurisdiction of a hearing officer to make a ruling in a tax matter. See KPI, 2006-NMCA-026,

3 ¶55, 139 N.M. 177, 192, rev’d on other grounds and certiorari as to corporate income tax issues

4 quashed, Kmart Corp. v. Taxation & Revenue Dep’t., 2006-NMSC-006, 139 N.M. 172; see also

5 Ranchers-Tufco Limestone v. Revenue, 1983-NMCA-126, ¶13 (delay in action is not a defense to

6 enforcement in a tax action).

7 E. Under NMSA 1978, Section 7-1-17 (C) (2007), the assessment issued in this case

8 is presumed correct. Consequently, Taxpayer has the burden to overcome the assessment. See

9 Archuleta, 1972-NMCA-165, ¶11, 84 N.M. 428. See also Casias Trucking, 2014-NMCA-099, ¶8.

10 F. Taxpayer rebutted the presumption of correctness as to the original assessed amount

11 of corporate income tax due. See MPC Ltd., 2003-NMCA-21, ¶13, 133 N.M. 217.

12 G. Taxpayer maintained the burden of establishing by clear and cogent evidence that

13 the state seeks to tax extraterritorial value. See Allied-Signal, Inc., 504 U.S. 768, 782, (citing

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

15 H. Taxpayer, as an out of state corporation engaged in the transaction of business

16 into and from New Mexico, was subject to New Mexico’s corporate income tax under Section 7-

17 2A-3.

18 I. Under principals of statutory construction, and in order to effectuate all terms of

19 the statute consistent with other provisions of the statute and the applicable general body of law,

20 NMSA 1978, Section 7-2A-2 (Q) (2014) should be read broadly as adopting the well-understood

21 and developed “three unities” test articulated in Supreme Court jurisprudence on unitary businesses.

22 By meeting the three statutory conditions of Section 7-2A-2 (Q), a foreign corporation affiliated

23 with another corporation engaged in New Mexico business activity has itself necessarily engaged in

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 109 of 115.
1 unitary business activities within New Mexico and the United States. See N.M. Indus. Energy

2 Consumers, 2007-NMSC-053, ¶ 20, 142 N.M. 533. See also Helman, 1994-NMSC-023, ¶23, 117

3 N.M. 346. See also Hayes, 1963-NMSC-095, ¶9, 75 N.M. 70.

4 J. Because Taxpayer held less than a 5% stake in Oil Insurance Limited, Oil

5 Insurance Limited and Taxpayer did not meet the statutory definition of unitary corporations

6 under Section 7-2A-2 (Q).

7 K. Under the “three unities” unitary business test contained in case law and under

8 Section 7-2A-2 (Q), Taxpayer was unitary with the remaining fourteen foreign subsidiaries because

9 of a clear flow of value between Taxpayer and the foreign subsidiaries facilitated by functional

10 integration, centralization of management, and economies of scale. See Mobil Oil Corp., 445

11 U.S. 425, 435; See also Container Corp., 463 U.S. 159, 178, 103 S. Ct. 2933, 2947, 77 L. Ed. 2d

12 545 (1983); MeadWestvaco Corp., 553 U.S. 16, 19 (2008); Allied-Signal, Inc., 504 U.S. at 772;

13 Hunt Wesson, 528 U.S. at 460; Exxon Corp., 447 U.S. 207, 224 (1980); NCR Corp., 1993-

14 NMCA-060, ¶ 15, 115 N.M. 612, 616.

15 L. Taxpayer’s unitary foreign dividend income and Subpart F income constituted

16 business income pursuant to the dispositional and functional test of Section 7-4-2 (A), making

17 that income apportionable to New Mexico for state corporate income tax purposes. See NCR

18 Corp., 1993-NMCA-060, ¶¶ 26-34.

19 M. Taxpayer’s check-the-box income, required to be reported as federal income

20 under 26 C.F.R. § 301.7701-3, is business income under the dispositional test of Section 7-4-2

21 (A) and subject to New Mexico apportionment. See NCR Corp., 1993-NMCA-060, ¶¶ 28-34; see

22 also §7-2A-2 (C) (defining New Mexico base income as federal taxable income as calculated under

23 the I.R.C.); see also Department Regulation 3.5.1.9 (A) NMAC.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 110 of 115.
1 N. The holding of Conoco, Inc., 1997-NMSC-005, only expressly rejected New

2 Mexico’s statutory treatment of foreign dividend income for separate entity filers and has not been

3 extended to combined return filers.

4 O. New Mexico’s corporate income tax scheme, vis-à-vis the unitary combined filer

5 reporting method, does not violate the Foreign Commerce Clause because it is a tax on the

6 income of a unitary corporation doing business in New Mexico rather than a direct tax on a

7 foreign corporation. See NCR Corp., 1993-NMCA-060; See also Xerox, 2003 WL 24889474,

8 (non-precedential); Morton Thiokol, Inc., 254 Kan. 23, 864 P.2d 1175 (Kan. 1993); Du Pont,

9 675 A.2d 82, (Me. 1996).

10 P. Unlike the facts and circumstances in Japan Line, 441 U.S. 434, New Mexico’s

11 imposition of tax in this case is not against a foreign corporation, but against the apportioned

12 share of the income of a unitary corporation doing business in New Mexico, making this case

13 distinguishable from Japan Line. This case is also distinguishable from Japan Line in that Japan

14 Line involved a property tax assessment, where situs is an important consideration, versus the

15 apportioned income tax of a unitary business, where situs is not as important. See Container

16 Corp., 463 U.S. 159 (1983).

17 Q. There is no equal protection violation for distinguishment in treatment between

18 unitary businesses filing a combined return and single-entity filers because the unitary business

19 principal provides a rational justification for the Legislature’s disparate treatment. See Anaconda

20 Co., 1979-NMCA-158, ¶¶ 22-23, 94 N.M. 202, 210,; See also Michael J. Maloof & Co, 80 N.M.

21 485 (1969); See also Madden, 309 U.S. 83, 87-88 (1940); See also Pinghua Zhao, 2014-NMSC-

22 025, ¶19.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 111 of 115.
1 R. Taxpayer overcame the presumption of correctness as to the dollar amount of the

2 original assessment, which was premised on the standard three-factor apportionment formula.

3 The Department’s main corporate income tax witness also conceded that the standard three-

4 factor apportionment formula in this case resulted in obvious distortion, meaning that the

5 Department did not reestablish correctness of the original, assessed amount. See MPC Ltd.,

6 2003-NMCA-21, ¶13, 133 N.M. 217.

7 S. Because of the obvious distortion present in the standard, three-factor

8 apportionment formula, Taxpayer was entitled to a reasonable, alternative apportionment method

9 under Section 7-4-19. See Hans Rees Sons, Inc., 283 U.S. 123, 135 (1931); See also Norfolk &

10 W. R. Co., 390 U.S. 317, 329 (1968); Jefferson Lines, 514 U.S. 175, 185 (1995); Goldberg, 488

11 U.S. 252, 264-65 (1989); Whirlpool Props., Inc., 208 N.J. 141, 165, 26 A3D 446 (2011); KPI,

12 2006-NMCA-026, ¶ 50-51, 139 N.M. 177; Twentieth Century-Fox Film Corp., 299 Or. 220, 233,

13 700 P.2d 1035 (1985).

14 T. Taxpayer did not establish the reasonableness of either of its proffered alternative

15 apportionment methods, and thus failed to carry its burden to establish the reasonableness of the

16 alternative apportionment method. See Twentieth Century-Fox Film Corp., 299 Or. 220, 233, 700

17 P.2d 1035, 1044.

18 U. The Department’s 30% exclusion alternative apportioned method is the most

19 reasonable alternative method offered by either party. This method addresses both the underlying,

20 obvious distortion from multiyear accumulated foreign dividends under the original assessment

21 while still recognizing the economic reality that Taxpayer’s New Mexico operations in the Permian

22 Basin played an important role in furthering Taxpayer’s unitary oil and gas business. See KPI,

23 2006-NMCA-026, ¶51; see also Pub. Serv. Co. of N.M., 2007-NMCA-050, ¶ 33.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 112 of 115.
1 V. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

2 under the assessment. Interest continues to accrue until the tax principal is satisfied.

3 W. Taxpayer established that it made a mistake of law, in good faith and on reasonable

4 grounds, and thus is not subject to a civil negligence penalty under NMSA 1978, Section 7-1-69

5 (B).

6 X. The Department’s Return Adjustment Notice and Original Assessment met the

7 minimum requirements articulated in the Taxpayer Bill of Rights, as specifically detailed by the

8 related statutory provisions of the Tax Administration Act.

9 For the foregoing reasons, the Taxpayer’s protest IS PARTIALLY GRANTED AND

10 PARTIALLY DENIED. IT IS ORDERED that the Department recalculate the assessment by

11 using the Department’s 30% exclusion alternative apportionment method against Taxpayer’s 2015

12 unitary income, including the foreign sourced dividend, Subpart F, and check-the-box income but

13 excluding the dividend income generated by non-unitary Oil Insurance Limited. IT IS FURTHER

14 ORDERED that penalty is abated. IT IS FINALLY ORDERED that Taxpayer pay the

15 recalculated, outstanding 2015 corporate income tax and interest.

16 DATED: August 24, 2021.

17
18 Brian VanDenzen
19 Chief Hearing Officer
20 Administrative Hearings Office
21 P.O. Box 6400
22 Santa Fe, NM 87502

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 113 of 115.
1 NOTICE OF RIGHT TO APPEAL

2 Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

3 decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

4 date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

5 Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

6 the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

7 Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

8 Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

9 Hearings Office may begin preparing the record proper. The parties will each be provided with a

10 copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

11 which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

12 statement from the appealing party. See Rule 12-209 NMRA.

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 114 of 115.
1 CERTIFICATE OF SERVICE

2 On August 24, 2021, a copy of the foregoing Decision and Order was submitted to the

3 parties listed below in the following manner:

4 VIA Email Only VIA Email Only

5 INTENTIONALLY BLANK
6
7 John Griego
8 Legal Assistant
9 Administrative Hearings Office
10 P.O. Box 6400
11 Santa Fe, NM 87502

In the Matter of the Protest of Apache Corporation & Subsidiaries, page 115 of 115.