Oregon Court Determines Insurance Plan Income Not Includible in Consolidated Return

Oregon Tax Court ruled that Apple Inc. was not required to include receipts from an insurance company subsidiary in its consolidated corporate excise return sales apportionment numerator because the subsidiary was not subject to tax in the state. In Apple Inc. v. Department of Revenue,¹ Apple Inc. filed a federal consolidated return including two insurance subsidiaries, AppleCare Service Company, Inc. (AppleCare) and Apple Insurance Company for fiscal 2014. At issue was how the income of the two subsidiaries should be apportioned to Oregon in the state consolidated tax return. 

Under the terms of the extended warranty plans, AppleCare issued the plans to retail customers but reinsured 95% of the risk with Apple Insurance and ceded 95% of the premium to Apple Insurance.  Under federal income tax law, AppleCare and Apple Insurance were treated as “insurance companies” and defined AppleCare’s “gross income” as excluding the 95% of premiums ceded to Apple Insurance.  Although the two subsidiaries were treated as insurance companies subject to Internal Revenue Code Section 831 for federal purposes, Apple excluded AppleCare and the extended service plans sold as exempt from the Oregon Insurance Code but did not treat AppleCare as an “insurer” for Oregon corporation excise tax purposes under ORS 317.010(11). Apple Insurance was an Arizona insurance company, domiciled in Arizona, but was not an admitted insurer in Oregon. 

Apple’s position in this case is that the amount of AppleCare’s “gross receipts” excluded 95% of the premiums because “gross receipts” for Oregon apportionment purposes corresponds to “gross income” as determined under federal income tax law. The stated position is that under ORS 317.715(4)(b), the 95% of premiums ceded to Apple Insurance cannot be counted in the numerator on the consolidated Oregon return because Apple Insurance only did business in Arizona. According to the Department of Revenue, however, the assessed understatement arises because Apple should have counted the full amount paid by retail customers for the extended service plans covering devices sold in Oregon as “sales of the taxpayer in this state,” which is the numerator of the fraction in the apportionment percentage.

The Court agreed with Apple’s reasoning stating that “Defendant’s briefing and argument are devoid of any theory, much less any facts, to support a conclusion that any income-producing activities associated with reinsurance occurred in Oregon, or that any costs of performing those activities occurred in Oregon.”

The Department also made an argument that the transactions caused distortion. The Court found that under both Oregon and federal statutes the transactions were not distortive and valid business reasons existed. The case shows the importance of operating an insurance company as an insurance company in all ways and not just in name only. 

Please contact our Ryan tax professionals for information on how this case could impact your business. 

¹ No. TC 5416 (January 24, 2024).

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