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Oregon Tax Court Tackles Inclusion of Hedging Receipts in Apportionment

Tax Development May 05, 2021

Oregon Tax Court Tackles Inclusion of Hedging Receipts in Apportionment

In Chevron USA, Inc. v. Department of Revenue,1 the Oregon Tax Court considered motions for summary judgments involving the inclusion of gross receipts from hedging transactions in the sales apportionment factor. The two questions at issue involved whether hedging transactions qualified as intangible assets and whether the hedging receipts were derived from the taxpayer’s primary business activity.

Chevron is engaged in a fully integrated petroleum operation, including chemicals, mining, power generation, and energy services. As a commodities business with a history of price volatility, the single largest variable affecting results of operations is the price of crude oil. To manage the risks inherent in economic conditions, industry inventories, and quotas, Chevron uses derivative commodity instruments such as futures, options, and swap contracts traded on stock exchanges and electronic platforms. 

In amended returns for 2011, 2012, and 2013, Chevron included the gross receipts from the numerous hedging transactions in the denominator of the Oregon apportionment sales factor. The Oregon Department of Revenue (“the Department”) concluded that the gross receipts from hedging were not includible because they arose from the sale of intangible assets and were not derived from the taxpayer’s primary business activity. 

On the first issue, the Department argued that the gross receipts from hedging resulted from the transfer of intangible assets. Chevron’s position was that the hedging transactions are inextricably linked to the underlying commodity and are, therefore, different from other forms of financial speculative hedging for investment purposes. As such, the gross receipts should be apportioned along with the underlying commodity. The Court agreed with the Department that the derivative commodity instruments were intangible assets within the meaning of ORS 314.665(6)(a) and granted summary judgment on this issue. 

The Department moved for summary judgment on the second issue, asserting that the taxpayer’s business included two segments—upstream and downstream—neither of which included its hedging activities. Chevron motioned for a denial of summary judgment, alleging that issues of material fact exist. The Court agreed that the taxpayer had presented evidence of the integral role that hedging plays in its business. Given the fact-dependent nature of the inquiry, the Court concluded that summary judgment was inappropriate. 

Taxpayers that engage in hedging activities should evaluate whether it would be appropriate to include the gross receipts related to hedging in their apportionment factors. The experts at Ryan are here to help you make that determination.

1 TC-MD 190031N (Or. Tax Ct. April 14, 2021).


Mark L. Nachbar

Mary Bernard

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