0¤q6=,)4 "v - Kurtzman Carson Consultants LLC

Docket #10695 Date Filed: 9/20/2012
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re
Chapter 11
WASHINGTON MUTUAL, INC., et al1
Case No. 08-12229 (MFW)
Debtors.
(JOINTLY ADMINISTERED)
Hearing Date: September 25, 2012, 9:30 a.m.
OREGON DEPARTMENT OF REVENUE’S MEMORANDUM IN SUPPORT
OF CLAIM NO. 3846, AND RESPONSE TO WMILT’S MEMORANDUM
OREGON DEPARTMENT OF JUSTICE
1162 Court Street NE
Salem, Oregon 97301-4096
(503) 947-4342
September 20, 2012
1
The Debtors in these chapter 11 cases along with the last four digits of each Debtor’s federal tax
identification number are (i) Washington Mutual, Inc. (3725); and (ii) WMI Investment Corp.
(5395). The Debtors’ principal offices are located at 1201 Third Avenue, Suite 3000, Seattle,
Washington 98101.
¨0¤q6=,)4
"v«
0812229120920000000000002
TABLE OF CONTENTS
I.
Introduction ................................................................................................................................ 1
II. WMI, Under the Name WAMU, Was Doing Business in Oregon in 1999 – 2006. .................... 1
A.
WMI’s Operations Were Its Subsidiary Banks’ Operations. .......................................... 1
B.
WMI Owned the Intellectual Property Used By Its Banking Operations in Oregon....... 5
C.
WMI Owned Banking and Financial Services Operations in Oregon ............................. 7
III. Taxpayer WMI is Jointly and Severally Liable for Tax Assessment. ....................................... 9
A.
Filing a claim for WMB is not relevant to Oregon DOR’s claim against WMI. .............. 9
B.
Only In Bankruptcy Has WMI Denied Doing Business In Oregon................................ 10
1. WMI did not claim lack of nexus until Oregon DOR filed its proof of claim in
bankruptcy. ............................................................................................................. 10
2.
Tax Returns were filed by WMI as Doing Business in Oregon. ............................. 11
a. WMI should not have filed the returns if it was not doing business in
Oregon. ........................................................................................................... 11
b. WMI filed amended returns to claim refunds after filing bankruptcy. ......... 12
C.
WMI and Subsidiaries Benefitted From Reporting as a Unitary Business in a
Consolidated Tax Return. .............................................................................................. 12
IV. Quill and Other Cases Cited By WMI Do Not Require Physical Presence For
Corporation Excise Taxation Nexus. ...................................................................................... 15
V.
Conclusion ............................................................................................................................... 18
Page i
TABLE OF AUTHORITIES
Cases
A&F Trademark v. Tolson, 605 S.E.2d 187 (N.C. App. 2004), cert. den. 546 U.S. 821 (2005) ............. 16
Capitol One Bank v. Comm’r of Revenue, 899 N.E.2d 76 (Mass. 2009), cert.t den. 129 S. Ct. 2827
(2009)............................................................................................................................................ 16
Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933 (1983) ............................ 14
Geoffrey, Inc. v. South Carolina Tax Comm’n, 437 S.E.2d 13, 18 (S.C. 1993), cert den. 510 U.S.
992 (1993) ..................................................................................................................................... 16
Griffith v. Conagra Brands, Inc., 229 W.Va. 190, 728 S.E.2d 74 (2012).............................................. 17
J.C. Penney National Bank v. Johnson, Comm’r of Revenue, 19 S.W.3d 831, 835 and 840 (1999) ....... 18
Kmart Props. Inc. v. Taxation & Revenue Dept., 131 P.3d 27, 36 (N.M. 2001) .................................... 16
Laptops Etc. Corp. v. District of Columbia, 164 B.R. 506 (1993) ................................................. 15, 18
National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) ....................... 9, 15
National Geographic Society v. California Bd. of Equalization, 430 U.S. 551 (1977) .......................... 15
New Mexico Taxation & Revenue Dept. v. Barnesandnoble.com, 283 P.3d 298 (2012), cert. granted
by N.M. Sup. Ct. 6/22/12 ............................................................................................................... 17
Quill Corp. v. North Dakota, 504 U.S. 298 (1992) ..................................................................... 9, 15, 16
Rylander v. Bandag Licensing Corp., 18 S.W.3d 296, 300 and 302 (2000) .......................................... 18
Scripto, Inc. v. Carson, 362 U.S. 207 (1960) ....................................................................................... 15
SFA Folio Collections, Inc. v. Tracy, 73 Ohio St.3d 119, 652 N.E.2d 693 (1995) .............................. 15
St. Tammany Parish Tax Collector v. Barnesandnoble.com 481 F.Supp.2d 575 (2007) ..................... 15
Tax Comm’r v. MBNA America Bank, N.A., 220 W.Va. 163, 640 S.E.2d 226 (2007) ........................... 18
U.S. v. Edmonson County, No. 1:00-CV-155-RG, 2001 WL 36199071 (W.D. Ky. Oct. 1, 2001) ....... 15
Statutes
12 U.S.C.A. § 1467a(a)(1)(D)(i)........................................................................................................... 1
15 U.S.C. § 381 ................................................................................................................................. 16
ORS 317.710(2) ................................................................................................................................ 10
ORS 317.710(5) ................................................................................................................................ 10
ORS 317.715 ..................................................................................................................................... 12
Other Authorities
Pub. L. 86-272 ................................................................................................................................... 16
Rules
OAR 150-317.010 ............................................................................................................................... 6
OAR 150-317.710 ............................................................................................................................. 18
Page ii
I.
Introduction
The Oregon Department of Revenue (Oregon DOR) filed a claim for corporation excise
taxes and interest owed by Washington Mutual, Inc., (WMI).2 In response to WMI’s arguments
regarding its lack of nexus under the Commerce Clause of the US Constitution, the department
reiterates and incorporates its points and authorities set forth in its previously filed Response of the
Oregon Department of Revenue to Debtor’s Objection to Proof of Claim No. 3693 (filed April 29,
2010) [D.I. 3599] and State of Oregon Department of Revenue’s Response to Debtor’s Objection
to Proof of Claim (Claim No. 3693) (filed March 16, 2012) [D.I. 9914], which will not be repeated
here. In addition, this memorandum responds to specific points raised in Debtor’s memorandum
filed September 13, 2012 [D.I. 10655].3
II.
WMI, Under the Name WAMU, Was Doing Business in Oregon in 1999 – 2006.
A.
WMI’s Operations Were Its Subsidiary Banks’ Operations.
In 1999 through 2006, WMI’s operations were conducted through its subsidiaries, all of
which were banking and financial services operations. WMI was a savings and loan holding
company.4 By definition, WMI must control its subsidiary savings association in order to be a
“savings and loan holding company.” 12 U.S.C.A. § 1467a(a)(1)(D)(i) defines “savings and loan
2
The department acknowledges that the reorganized debtor is now known as Washington
Mutual Inc. Liquidating Trust (WMILT), but WMI’s actions during the tax years 1999 – 2006
are at issue in this matter. Thus, “WMI” will be used for ease of reference in this memorandum.
3
The department relies on the Declaration of Carolyn G. Wade in Support of Oregon
Department of Revenue’s Memorandum in Support of Claim No. 3846 and Response to WMILT’s
Memorandum, dated September 20, 2012, filed herewith, and the exhibits thereto (“Wade Dec.”)
All references to Exhibits herein are to Exhibits to the Wade Declaration.
4
See Debtor’s 9/13/12 Memorandum. WMI also describes itself as “a financial services
company” and “the largest thrift holding company in the United States and 7th largest among all
U.S.-based bank and thrift holding companies.” Oregon DOR Ex. II, p.8. WMI uses a similar
description in Oregon DOR Ex. D, p. 7, Ex. CC, p.5, Ex. FF, p. 5, Ex. GG, p.6, Ex. HH, p.6. All
Oregon DOR Exhibits referenced in this memorandum are attached Declaration of Carolyn
Wade filed herewith.
Page 1
holding company” as: “any company that directly or indirectly controls a savings association or
that controls any other company that is a savings and loan holding company.”
WMI’s attempt to characterize its business as separate and distinct from its subsidiaries’
business is contradicted by its defining statute and the facts as WMI has publicly stated them to the
SEC, to investors, and to the public. WMI was a separate entity, but it did not operate a separate
business. WMI was a holding company and its business was the business of its subsidiaries.
WMI owned the “WAMU” trademark and all the other trademarks and logos that gave its
savings and loan and other financial services operations their distinctive appearance and marketing
value. WMI’s stock price and ability to sell debt issues were directly dependent on its banking and
financial services operations, as described below. Oregon was one of WMI’s most significant
markets. In fact, in 1999, WMI made the decision to put a substantial number of the company’s
loans into REITs in Oregon, under a tax savings proposal made to it by KPMG. See Ex. S, pp 1518.
Minutes of the WMI Board of Directors meetings reflect presentations by the company
President, Kerry Killinger, and others concerning such operational details as: (1) the fact that
certain Oregon Coast facilities might not fit the planned integration of consumer and business bank
operations, loan volume trends, and business plan approval (1/16/01 Minutes); (2) a hedging
program for mortgage servicing rights, the program to insure privacy of information about
customers of the company, and new institutional markets program to establish a new institutional
broker-dealer subsidiary (9/18/01 Minutes). See Exs. A, E, and P.
In debt issuance prospectuses, SEC Form S-3’s spanning 2001 to 2006, WMI stated that
“Washington Mutual operates principally in California, Washington, Oregon, Illinois, Florida,
Texas and the greater New York/New Jersey metropolitan area, and has operations in 31 other
Page 2
states.” Oregon DOR Ex. 1, p 8. Further, “We [Washington Mutual] manage and report
information concerning the Company’s activities, operations, products and services around four
segments: the Retail Banking and Financial Services Group, the Home Loans Group (previously
called the ‘Mortgage Banking Group’), the Commercial Group and, as of the quarter beginning
October 1, 2005, Washington Mutual Card Services.” Id.
WMI was regulated by the Office of Thrift Supervision (OTS). See, e.g., Oregon DOR Ex.
DD, pp. 10-11. This same 2005 10-K lists all the Executive Officers and describes the capacity in
which each serves. Oregon DOR Ex. DD, pp. 14-17. All perform financial services functions.
For example, “Mr. Amato is Executive Vice President and President, Retail Banking Distribution *
* * responsible for the management and operations of nearly 2,000 financial centers in 14 states”;
“Mr. Chapman is President of the Commercial Group * * * responsible for the Company’s multifamily lending, commercial real estate lending, mortgage banker finance, Long Beach Mortgage
Company and specialty mortgage finance”; and “Mr. Kido is Executive Vice President and
President, Banking Products and Operations [and] manages all aspects of consumer lending and
deposit product management and operations.” Id.
In its 2003 10-K, which is representative of its 10-Ks throughout 1999 – 2006, WMI states:
“Our mission is to become the nation’s leading retailer of consumer financial services.” Oregon
DOR Ex. BB, p. 4. Also, WMI states: “The four federal banking agencies, including our
regulators, have jointly issued expanded examination and supervision guidance relating to two
areas affecting our activities—subprime lending and, most recently, mortgage banking and
mortgage servicing rights.” Id. at p. 13. “The President’s Council, established by Mr. Killinger in
December 2002 and comprised of the Chief Financial Officer, the Chief Administrative Officer
and the Group Presidents, is focused on operational efficiency, operational decision-making and
Page 3
strategic execution, with particular emphasis on operations and execution across business
segments.” Id. at p. 14. Pages 28 to 29 of this 10-K describe “the Company’s” loan servicing fee
changes and mortgage servicing rates and impairment charge recovery; WMI and its subsidiaries
were the Company.
In SEC Form S-3’s for debt securities issuance totaling $ 15 Billion, dated November 1,
2001, February 5, 2003, October 23, 2003, October __, 2003, and January 9, 2006, WMI used the
following description to show prospective investors that the money to repay the debt would come
from its subsidiaries’ operations:
The debt securities are our obligations exclusively. Because our operations are
currently conducted substantially through our subsidiaries, our cash flow and
the consequent ability to service our debt, including the debt securities, are
dependent upon the earnings of our subsidiaries and the distribution of those
earnings to us, or upon loans or other payments of funds to us by our
subsidiaries. Our subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay any amounts due with respect to the debt
securities or to make funds available therefor, whether by dividends, loans or other
payments. In addition, the payment to us of dividends and certain loans and
advances by our subsidiaries may be subject to certain statutory or contractual
restrictions. Payments are contingent upon the earnings of the subsidiaries, and are
subject to various business considerations.
(Emphasis added). D, p. 9, FF, pp. 7-8, GG, p.8, HH, p.8, and II, p.10. In the S-3’s, WMI is
speaking for only itself because “the debt securities are our obligations exclusively,” and WMI
truthfully describes its operations as conducted through its subsidiaries. Id.
In his deposition, Curt Brouwer speaking on behalf of WMI, confirmed that the bulk of
WMI’s income came from dividends from subsidiaries. Oregon DOR Ex. T, pp. 81-82. When
asked why WMI had losses in each of the tax years 1999 – 2006, Curt Brouwer explained that
“Washington Mutual Inc. obtained a lot of funding that it used to finance the operations in the form
of debt. And so there was a fair amount of interest paid to outside debtors [sic – debt holders].”
Oregon DOR Ex. T, pp. 85-86.
Page 4
Unlike some companies that actually engage in different businesses, WMI and its
subsidiaries held themselves out to the public, to savings depositors, and to loan customers, as a
single company: WAMU and alternatively Washington Mutual or Washington Mutual, Inc.
WAMU’s headquarters were located in a single office at 1201 Third Avenue, Seattle, Washington
98101, until March of 2006 when they moved to a new location a couple of blocks away. Oregon
DOR Ex. DD, p 16, Ex. EE, p 16. But WAMU branch locations proliferated throughout 38 states.
In Oregon alone, the November 19, 2002, Building Inventory Report shows nearly 150 locations
where customers could obtain WAMU’s banking and financial services. Oregon DOR Ex.O, pp.
1-4.
B.
WMI Owned the Intellectual Property Used By Its Banking Operations in
Oregon
Since its earlier briefing, Oregon DOR and WMI have entered into Stipulations of Fact
concerning WMI’s ownership of more than 80 federal trademark registrations and applications
comprising a family of Washington Mutual trademarks, including but not limited to the marks
“WAMU,” “Washington Mutual,” and the “W Logo” for a variety of services including but not
limited to banking, credit card, lending, investment and other financial services as well as
community, education, and philanthropic-oriented services (the “WaMu Marks”). See Stip., ¶¶
1.b.i. – ii.
“Banking services and related services have been provided under some or all of the WaMu
Marks since 1889. The WAMU mark has been continuously used since 1983. The rights to the
WAMU brand alone were valued at approximately $6 billion.” See Stip. ¶ 1.b.iii. Thus the value
of the WAMU mark alone as used in some 150 locations in Oregon is quite significant. WMI also
owns registrations for at least 140 other trademarks and service marks, referred to as the Secondary
Marks. Stip. ¶ 1.b.vi. In addition, WMI owns approximately 1350 domain names containing the
Page 5
WaMu Marks and the Secondary Marks, e.g., wamu.com and washingtonmutual.com, which WMI
subsidiaries were permitted to use to advertise and provide information to customers regarding the
products and services relevant to such subsidiary’s business. Stip. ¶ 1.b.vi.
“Wamu.com was the primary website for WMI and its subsidiaries, and as such was the
primary centralized focal point for customer interaction, from advertising WMI’s various products
and services to providing online banking and financial and investment consultation services.” Stip.
¶ 1.b.vii.
As further proof of the fact that WMI’s operations were its subsidiaries’ operations, WMI
allowed WMB and other subsidiaries to use the WaMu Marks and domain names for free, under
“an implied license.” Stip. ¶ 1.b.v. and viii. The WaMu corporate family encompassed dozens of
companies that operated, primarily under the WAMU brand, as a single, unified organization.
Stip.¶ 1.b.ii.
The above stipulated facts demonstrate that WMI was using its property in the state of
Oregon to develop and maintain a market with Oregon customers. Thus, even if this court were to
determine that WMI was not engaged in banking and financial services operations through its
subsidiaries, WMI’s intangible property—its WaMu marks and domain names—maintained
continuous and systematic contact with Oregon’s economy and market. WMI made its presence
known to Oregon customers through its ubiquitous WaMu presence. Under Oregon law and the
Commerce Clause of the U.S. Constitution, this constitutes substantial nexus for corporate excise
and income tax jurisdiction. See OAR 150-317.010, (Wade Declaration). Although WMI did not
receive royalty payments for the use of its WaMu marks and domain names in Oregon, the bulk of
its income came from the dividends that its subsidiaries were able to pay because of the use of
these very valuable items of intellectual property in Oregon.
Page 6
C.
WMI Owned Banking and Financial Services Operations in Oregon
WMI asserts at various places in its memorandum (e.g., p. 16 ¶ 35-36) that it had no
employees in Oregon, received no sales or operating revenue from Oregon, and did not own
offices, shops, or real property, or deliberately market services to Oregon customers.5 By making
these assertions, WMI seems intent on obscuring the fact that WMI (operating as WAMU) actually
owned all the real and tangible personal property in Oregon, and deliberately marketed their
banking and financial services to the public and customers throughout Oregon. WMI had the
power to sell any of the Oregon assets at any time, and make any other changes to the business that
it chose to. As to employees in Oregon, even if they nominally received a paycheck from one of
WMI’s subsidiaries, WMI controlled their benefit plans. See, e.g., Oregon DOR Ex. A, pp. 15-16.
The January 16, 2001, WMI Board of Directors Minutes state that Washington Mutual, Inc.,
maintains the Washington Mutual, Inc. Cash Balance Pension Plan, the Washington Mutual, Inc.
Employees’ Stock Purchase Plan, and the Washington Mutual, Inc. Retirement Savings and
Investment Plan for the benefit of employees of the Company—and the WMI Board proceeds to
amend those plans by resolution. See Id. at p. 14-15; see also Id. at 13 (WMI Board approval of
adjustments with regard to PNC mortgage subsidiary employees). The “Company,” as it is used in
the WMI Board of Directors Minutes, refers to WMI and all of its subsidiaries, as is evident from
the CEO’s Report on the “Company’s” stock price on page 1 of Exhibit 8. The Company’s stock
5
WMI cites deposition testimony of Douglas Kilbride in support of these assertions. However,
WMI misrepresents his testimony. Mr. Kilbride very clearly stated that neither he nor anyone
with the Oregon DOR audited WMI for nexus—they were not aware it was an issue—so at the
time of the deposition he had no knowledge one way or the other as to what activity or property
WMI had in the state of Oregon during 1999 through 2006. Oregon DOR Ex. R, pp. 37-38, 43,
52, and 96-97. Thus, his deposition testimony cannot be construed as an admission by the
Oregon DOR that it believes WMI had no activity or property in Oregon during the tax years.
All Mr. Kilbride knew was what he read in Oregon DOR’s memorandum filed in this case on
March 16, 2012. Id., pp. 53, 76, 79-80.
Page 7
price reflected the value of the entire WAMU operations, not merely the value of WMI, the
holding company.
The 2000 Summary Annual Report of Washington Mutual, Inc. describes WMI’s banking
operations throughout its 44 pages. See Oregon DOR Ex. L. Examples of WMI describing its
banking strategies and operations in the Annual Report can be found on nearly every page. Pages
33 – 34, for example, explain how WMI is committed to reducing Washington Mutual’s short-term
sensitivity to movements in interest rates and efforts to reduce interest rate risk, how WMI is using
capital from operations by selling $12.90 billion of seasoned mortgage loans to reduce their
balance sheet, WMI’s delivery of financial products and services to consumers and small
businesses by launching its Occasio program, increasing websites for financial planning, stock
trading and research, and investment information for their mutual fund family, how WMI is
upgrading their mortgage lending site, wamumortgage.com, and how WMI launched its Optis
project to automate 80 percent of the steps in the mortgage process for consumers, realtors and
brokers. WMI was not describing another company’s business, it was describing its own banking
and financial services business as they operated it in Oregon and 37 other states.
Exhibit A, at page 13, shows another example of WMI’s control over the entire WAMU
operation and the policy making structure of the Company. The WMI Board resolved that no
officer of the Company (Washington Mutual, Inc., or any of its subsidiaries) shall have authority to
participate in the major policy-making functions of the Company other than the eleven Washington
Mutual, Inc., officers listed—followed by the statement that no officers of the subsidiaries of
Washington Mutual, Inc., except persons who are also Washington Mutual, Inc., officers, shall
have the major policy-making authority. Id. at 13.
Page 8
Another example of WMI’s integral involvement in its WAMU banking and financial
services operations is found in Exhibit 20, which is a report prepared by Strategic Performance
Measurement Retail Banking & Financial Services, dated September 2004. The forty-two page
report is entitled “Retail Banking Household and Financial Center Network Growth 1983 – 2004.”
Printed on each page of the report beneath the Washington Mutual logo and insignia, which WMI
owns, are the words “Washington Mutual, Inc. Proprietary and Confidential.” Oregon DOR Ex. C;
Stip. ¶ 1.b.i. The market specific analysis in Appendix III of Exhibit 20 describes Oregon activity,
as follows:
In 1991, WaMu acquired Crossland Savings, giving the Retail Bank its first
financial centers in Oregon. In 1993, the Oregon network experienced its most
significant growth when WaMu acquired 66 financial centers of Pacific First Bank.
One small acquisition followed and then growth came through a modest level of de
novo openings every year through the end of the 1990s. In 2001, Oregon
experienced its next wave of growth with the opening of 26 de novo financial
centers. As of June 30, 2004, WaMu had 102 financial centers in Oregon.
In sum, even if the physical presence bright line test for Commerce Clause substantial
nexus for sales and use tax purposes, which was delineated in National Bellas Hess, Inc. v.
Department of Revenue of Illinois, 386 U.S. 753 (1967), and reaffirmed in Quill Corp. v. North
Dakota, 504 U.S. 298 (1992), were applicable to corporation excise tax—which it is not (as
explained below)--WMI’s activities more than meet that test. WMI’s activity greatly exceeded
“contact by mail or common carrier.” Id. at 311, 315.
III.
Taxpayer WMI is Jointly and Severally Liable for Tax Assessment.
A.
Filing a claim for WMB is not relevant to Oregon DOR’s claim against WMI.
Taxpayers who are (1) subject to tax in Oregon and (2) members of the unitary business
group filing an Oregon consolidated return, are jointly and severally liable for the tax liability on
Page 9
that return. See ORS 317.710(2) and (5), at Ex. 17. WMI is undisputedly a member of the unitary
business filing the 1999 to 2006 Oregon consolidated tax returns.
WMI argues that it is not subject to tax. The Oregon DOR maintains that WMI had
substantial nexus through its ownership and use of intangible property in Oregon, as well as the
control of its wholly owned subsidiaries’ banking operations in Oregon. Whether or not the
Oregon DOR filed a claim with the FDIC as Receiver for WMB6 is not relevant to WMI’s nexus
issue; it has nothing to do with whether WMI was subject to tax in Oregon. If WMI was subject to
tax, then it is now jointly and severally liable for the tax. It is axiomatic that inaction against one
jointly and severally liable taxpayer does not bar action against another.
B.
Only In Bankruptcy Has WMI Denied Doing Business In Oregon.
1.
WMI did not claim lack of nexus until Oregon DOR filed its proof of
claim in bankruptcy.
The Oregon DOR audited other issues, but did not look at WMI’s nexus because WMI
made no claim that it did not have nexus. The Oregon DOR issued notices of deficiency for each
of the tax years, and WMI requested a formal Conference, but still it did not claim it lacked nexus.
WMI appealed the Conference Officer’s decision and accompanying Notice of Assessments to the
Magistrate Division of the Oregon Tax Court, filing a complaint that still failed to claim it had no
6
The Oregon DOR did not file a claim with the FDIC. Instead, the Oregon DOR served a
notice of assessment on JP Morgan Chase (JPMC), as the transferee of the WMB assets, under
an Oregon statute imposing transferee liability for taxes owed by the transferred assets. JPMC
appealed to the Oregon Tax Court, which has stayed the case on JPMC’s motion pending the
outcome of this proceeding. JPMC’s payment of 80 percent of the tax liability in this proceeding
under the Global Settlement would likely moot the Oregon Tax Court case, because JPMC
would argue it had satisfied the tax liability, even though in the Oregon Tax Court case the
liability will be greater than Oregon’s claim here because interest continues to accrue on the
balance. Also, later federal adjustments not included in Oregon DOR’s proof of claim will
increase the liability in the Oregon Tax Court case.
Page 10
nexus. But only when the Oregon DOR filed its proof of claim in this bankruptcy action, WMI
finally announced that it had no nexus because it had never done business in Oregon.
Perhaps WMI just did not think of nexus when it was filing the tax returns and appealing
the other issues. And, plausibly, it could have occurred to WMI, in bankruptcy, that it no longer
owned the subsidiaries’ assets so it should now claim no nexus. But after WMI entered into the
Global Settlement Agreement with JP Morgan Chase (JPMC), requiring JPMC to pay 80 percent
of the tax liability (including Oregon’s approximately $29 million claim) on the premise that
JPMC now owns the subsidiaries’ assets, WMI’s insistence that it never did business in Oregon in
order to avoid paying its 20 percent share of the tax liability is disingenuous. As discussed above,
WMI’s no nexus claim is also controverted by the facts.
2.
Tax Returns were filed by WMI as Doing Business in Oregon.
a.
WMI should not have filed the returns if it was not doing
business in Oregon.
WMI’s memorandum attempts to explain away the fact that it filed every one of its tax
returns as the parent corporation with the greatest presence in Oregon. As explained in earlier
briefing, the Oregon statute and rules provide that a parent corporation is to file the return only if it
is “subject to tax,” i.e., doing business in Oregon, i.e., doing business to the extent that it has a
substantial nexus in Oregon. Substantial nexus does not require a physical presence.
WMI’s explanation ignores the instructions written on the face of the tax return form.
Exhibit H attached to Julio Gurdian’s Declaration is the front page of WMI’s 2003 Form 20
Oregon Corporation Excise Tax Return. WMI points to the box on the left in the middle of the
page to argue that because it did not fill in the blank for bullet “C”-- “Date business activity began
in Oregon”—the Oregon DOR should have known it was claiming to have no nexus. But this
ignores the instruction immediately above that blank: “Complete A through D only if this is your
Page 11
first return or the answer changed during 2003.” So, of course, it was not supposed to fill in that
blank. Moreover, if, as WMI claims, it was merely filing the return on behalf of its subsidiaries,
then the date the subsidiaries’ business activity in Oregon began should have been filled in to be
consistent with its argument.
WMI further argues that it did not include itself on Schedule AF—Schedule of Affiliates
doing business in Oregon (also attached to Gurdian’s Decl.), but again it ignores the instructions.
Schedule AF explicitly states: “Do not include in this list the affiliate shown on the heading of this
tax return.” WMI was that affiliate shown on the heading of the return, so of course it was
correctly not included in the list even though it too was doing business in Oregon.
b.
WMI filed amended returns to claim refunds after filing
bankruptcy.
Another inconsistency in WMI’s “lack of nexus” argument is that it filed an amended
return claiming a refund of taxes from Oregon even after it began arguing that it did not have nexus
with Oregon. Curt Brouwer filed amended returns for WMI on December 27, 2010, claiming
refunds. If WMI no longer owns its subsidiaries’ assets—and it did not by that date— and if, as
WMI asserts the tax liability belongs only to the subsidiaries, under what authority does WMI now
claim a refund of that tax?
C.
WMI and Subsidiaries Benefitted From Reporting as a Unitary Business in a
Consolidated Tax Return.
Oregon, like only one or two other states, requires a unitary business to file a
“consolidated” tax return based on the affiliated group’s federal consolidated return. Only
companies that are actually “unitary” with one another may be included in the Oregon consolidated
return. ORS 317.715, at Ex. 17. WMI filed the tax returns with its subsidiaries as a unitary
business. But because the federal consolidated return is the starting point for preparation of the
Page 12
Oregon return, most intercompany income and expenses are eliminated and an entity’s taxable
gains are offset by another entity’s losses. That proved to be the case for the WMI unitary group.
WMI’s significant losses diluted the income of its subsidiaries that would otherwise have
been taxed. WMI’s losses for each tax year as reported on their original returns are as follows:
2006 – $1,360,566,654
2005 – $887,103,085
2004 - $623,550,783
2003 - $349,626,585
2002 - $357,311,998
2001 - $292,410,921
2000 - $248,144,871
1999 - $199,275,014
As discussed above, WMI’s losses were largely attributable to interest payments on debt
issued to fund the subsidiaries’ operations. Oregon DOR Ex. T, pp. 85-86. Certainly, in a
consolidated return, one entity’s losses may offset income of others, whether or not the loss entity
has substantial nexus with the state. But the activity resulting in the losses also may be significant
in determining nexus. Here, the very reason for those losses was to fund the banking operations
carried on in Oregon and other states. This is one more fact showing that WMI was doing business
in Oregon.
WMI repeatedly asserts that “Oregon DOR is seeking to hold WMI liable for the tax
liabilities that arose exclusively from the Oregon activities of the WMB Entities.” See, e.g.,
WMI’s Br., p. 20, ¶44. This assertion is legally incorrect. The corporation excise tax is assessed
on the apportioned income of the unitary business as reported in the consolidated return. Given the
Page 13
synergies between members of a unitary business by the very nature of the unitary business
relationship, it is impossible to attribute taxable income to any particular entity in the unitary
business. This is fundamental to the need for apportionment. A reasonable approximation of the
income from the business activity in the state has been accepted by the U.S. Supreme Court. See
Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 103 S.Ct. 2933 (1983).
In reiterating the constitutional underpinnings of the unitary business apportionment
method of deriving taxable income, the Court stated: “The unitary business/formula
apportionment method is a very different approach to the problem of taxing businesses operating in
more than one jurisdiction. It rejects geographical or transactional accounting, and instead
calculates the local tax base by first defining the scope of the “unitary business” of which the taxed
enterprise’s activities in the taxing jurisdiction form one part, and then apportioning the total
income of that ‘unitary business’ between the taxing jurisdiction and the rest of the world on the
basis of a formula taking into account objective measures of the corporation’s activities within and
without the jurisdiction.” Id. at 164-165.
Here, WMI filed the Oregon corporation excise tax returns as a unitary business. In this
bifurcated proceeding, the only issue is whether WMI was subject to the taxing jurisdiction of the
State of Oregon during 1999 through 2006 because of its economic presence and substantial nexus
with the state under Oregon law. For this purpose, WMI’s argument that it reported no property,
payroll, or sales in the Oregon apportionment factor numerators is irrelevant, because these are not
the only measures of WMI’s economic presence in Oregon. Intangible personal property, for
example, is by rule not included in the property factor, but it is nonetheless increasingly a
significant part of many companies’ business activity, particularly for technology and financial
services companies.
Page 14
IV.
Quill and Other Cases Cited By WMI Do Not Require Physical Presence For
Corporation Excise Taxation Nexus.
Throughout its memorandum, WMI argues that this court either should, or is bound to,
apply the physical presence substantial nexus test for sales and use taxes from National Bellas
Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), as reaffirmed in Quill Corp.
v. North Dakota, 504 U.S. 298 (1992).7 But the Court expressly declined to extend that test to
other taxes, including corporation excise taxpayers. In fact, in noting the artificiality of the brightline test, the Court stated: “Such a rule firmly establishes the boundaries of legitimate state
authority to impose a duty to collect sales and use taxes and reduces litigation concerning those
taxes.” Id. at 315 (emphasis added). “Moreover, a bright-line rule in the area of sales and use
taxes also encourages settled expectations and, in doing so, fosters investment by businesses and
individuals.” Id. at 316 (emphasis added). The Court noted that “whether a State may compel a
vendor to collect a sales or use tax may turn on the presence in the taxing State of a small sales
force, plant, or office.” Id. at 315 (emphasis added), citing National Geographic Society v.
California Bd. of Equalization, 430 U.S. 551 (1977) (sales and use tax); Scripto, Inc. v. Carson,
362 U.S. 207 (1960) (sales and use tax).8
7
WMI lists Quill and other state cases decided on review by the U.S. Supreme Court as
“Federal Cases,” which may be debatable. However, Oregon DOR readily agrees that this court
should follow the U.S. Supreme Court decisions because that Court has declined to apply a
physical presence requirement in Commerce Clause analysis concerning corporation excise taxes
and other taxes for the privilege of doing business in a state. Quill, 504 U.S. at 317.
8
Cases cited by WMI are also sales and use tax cases and do not apply to corporation excise tax.
See St. Tammany Parish Tax Collector v. Barnesandnoble.com 481 F.Supp.2d 575 (2007); SFA
Folio Collections, Inc. v. Tracy, 73 Ohio St.3d 119, 652 N.E.2d 693 (1995); Laptops Etc. Corp.
v. District of Columbia, 164 B.R. 506 (1993); and U.S. v. Edmonson County, No. 1:00-CV-155RG, 2001 WL 36199071 (W.D. Ky. Oct. 1, 2001) (retail license tax on ticket sales transactions).
Page 15
In describing the benefits of a bright-line test in the sales and use tax area, the Court notes
that Congress has enacted a similar bright-line test for net income taxes in Pub. L. 86-272, codified
at 15 U.S.C. § 381, providing that a State may not impose a net income tax on any person if that
person’s only business activities within such State involve the solicitation of orders approved
outside the State and filled outside the State. Id. at 316, n 9. Pub. L. 86-272 does not apply to the
WMI/WAMU activities in Oregon, and neither does the physical presence requirement for sales
and use tax. In cases concerning types of taxes other than sales and use, the Court has not adopted
a similar bright-line physical presence requirement. Id. at 317.
The Court has had opportunities to extend its sales and use tax requirement to corporation
excise tax. See, e.g., Capitol One Bank v. Comm’r of Revenue, 899 N.E.2d 76 (Mass. 2009), cert.t
den. 129 S. Ct. 2827 (2009) (holding that a bank with no physical presence in the state had
substantial nexus for purposes of state taxation); A&F Trademark v. Tolson, 605 S.E.2d 187 (N.C.
App. 2004), cert. den. 546 U.S. 821 (2005) (rejecting the contention that a physical presence was
required in order for North Carolina to impose its income tax on a company whose trademarks
were used in the state to generate income); and Geoffrey, Inc. v. South Carolina Tax Comm’n, 437
S.E.2d 13, 18 (S.C. 1993), cert den. 510 U.S. 992 (1993) (determining that Quill’s physical
presence requirement did not apply to the income taxes at issue, and that the presence of
Geoffrey’s intangible property in the state constituted substantial nexus under the Commerce
Clause sufficient to subject Geoffrey [the holding company owning the trademarks] to taxation by
the state, even though the company had no physical presence in South Carolina).
The cases cited in the previous paragraph find substantial nexus based on the use of
trademarks and intangible personal property in the state, and reject a physical presence test. See
also, Kmart Props. Inc. v. Taxation & Revenue Dept., 131 P.3d 27, 36 (N.M. 2001) (holding that
Page 16
“the use of [the out –of-state taxpayer’s] marks within New Mexico’s economic market, for the
purpose of generating substantial income * * * establishes a sufficient nexus between that income
and the legitimate interests of the state and justifies the imposition of a state income tax.”);9 and
New Mexico Taxation & Revenue Dept. v. Barnesandnoble.com, 283 P.3d 298 (2012), cert.
granted by N.M. Sup. Ct. 6/22/12 (holding that the manner in which the Barnes & Noble
trademarks were used by its wholly-owned Booksellers [Barnes & Noble’s retail stores] in New
Mexico created substantial nexus for Barnesandnoble.com LLC in New Mexico, such that the
imposition of gross receipts tax did not violate the Commerce Clause).
The court’s analysis of the relationship between trademarks, goodwill and the conducting
of the business also could be used to describe the WMI/WAMU relationship:
When a company acquires trademarks and goodwill, the essence of what it obtains
is the right to inform the public that it is in possession of the special experience and
skill symbolized by the name of the original concern, and of the sole authority to
market its products. The value of what it obtains is tied to the underlying business
that generates the goodwill associated with the trademarks. If there is no business
and no good will, a trademark symbolizes nothing. Goodwill is bound to the
business with which it is associated, and can no more be separated from a business
than reputation from a person.
Id. at 305.
Without the trademarks, domain names, and other marks owned by WMI and used in
Oregon, WAMU in Oregon would not have been WAMU.
In Griffith v. Conagra Brands, Inc., 229 W.Va. 190, 728 S.E.2d 74 (2012), the court
followed its earlier decision in Tax Comm’r v. MBNA America Bank, N.A., 220 W.Va. 163, 640
9
In this case, the court viewed the KPI parent holding company’s ownership of the trademarks
and the relationship with the Kmart Corporation as the functional equivalent of physical presence
because of the extensive apparatus of Kmart stores, signs, and employees also physically present
in New Mexico to work on behalf of KPI’s goodwill and associated interests. Id. at 189.
Page 17
S.E.2d 226 (2007) (credit card marketing activity created substantial nexus in the state), and
rejected the physical presence test in favor of an economic presence test. Id. 640 S.E.2d at 82.
Only Texas and Tennessee have required a physical presence for franchise taxes and
franchise and excise taxes, respectively. See Rylander v. Bandag Licensing Corp., 18 S.W.3d 296,
300 and 302 (2000) (mere passive possession of license to do business in state without more did
not constitute substantial nexus and Texas Comptroller had policy that the licensing of intangibles
in Texas did not create franchise tax nexus); J.C. Penney National Bank v. Johnson, Comm’r of
Revenue, 19 S.W.3d 831, 835 and 840 (1999) (Texas administrative rule defined “doing business”
in state for financial institutions as having an office and other physical presence in state and the
bank was not affiliated with J.C. Penney retail stores in Texas [unlike WMI and its affiliate
subsidiaries]). Clearly these cases should not be applied to Oregon corporation excise tax because
the Oregon DOR “policy,” as formally adopted in the substantial nexus rule OAR 150-317.710,
does not require a physical presence. Moreover, it is unlikely that Oregon would even find that
substantial nexus existed under the facts as reported in Rylander and J.C. Penney National Bank.10
V.
Conclusion
Pursuant to the Stipulated Facts concerning WMI’s ownership and use of trademarks,
domain names, and other marks in Oregon, WMI has effectively admitted that it has substantial
nexus in Oregon on the basis of its intangible property alone. Furthermore, the other facts
presented in this memorandum and Oregon DOR’s earlier briefing show that, according to WMI’s
10
At pages 21 to 22 of WMI’s memorandum, WMI appears to be asking this court to ignore all
the state court opinions that have rejected the physical presence test for corporation excise tax
purposes, and instead apply federal court decisions from entirely outside the state taxation
context, or as in Laptops Etc. a sales tax analysis, so as to require a physical presence. This
argument should be rejected. Where the U.S. Supreme Court has refrained from applying
physical presence substantial nexus to corporation excise tax, this Court should follow its
restraint. Moreover, WMI’s operations were WAMU’s, and it would meet a physical presence
test regardless.
Page 18
own documents, WMI operated as WAMU in Oregon, and had a solid physical presence based on
banking and financial services facilities and employees throughout Oregon. WAMU marketed
home loans to Oregon homeowners and financial banking services to businesses and individuals in
Oregon on a regular and systematic basis. WMI was WAMU.
The Oregon DOR asks this Court to find that WMI has not met its burden to show that it
did not have nexus in Oregon during 1999 – 2006, and reject WMI’s request that a physical
presence test be applied in this case because it is contrary to law.
DATED this 20th day of September 2012.
Respectfully submitted,
ELLEN F. ROSENBLUM
Attorney General
/S/ Marilyn J. Harbur
____________________________
Marilyn J. Harbur, #802517
Carolyn G. Wade, #832120
Senior Assistant Attorneys General
Of Attorneys for Department of Revenue,
State of Oregon, Defendant
3642594-v1
Page 19