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Corporate Taxation--Apportionment

33. ORS 314.280 contemplates that variations from promulgated rules may be made, but the statute contemplates only changes proposed by the taxpayer and submitted in writing at the time the return is filed.

Corporate Taxation--Apportionment

34. Any taxpayer proposed change to apportionment under ORS 314.280 is to come after general rule promulgation but before any auditor becomes, or could become, involved.

Corporate Taxation--Apportionment

35. ORS 314.280 recognizes that if an alternative apportionment is proposed by taxpayer, the department may, but need not, accept or permit the alternative.

Corporate Taxation--Apportionment

36. The department can, by rule, move from one approach to another with respect to inclusion of intangibles in the property factor.

Administrative Law and Procedure--Rulemaking

37. Any requirements under ORS 314.280 must be set out by rules so as to give guidance to staff and taxpayers and minimize the risk of unconstitutional lack of uniform application.

Corporate Taxation--Apportionment

38. The power to require any particular method or formula of apportionment must initially be exercised before the taxpayers subject to it file their returns.

Corporate Taxation--Apportionment

39. The text of OAR 150-314.280-(M), in toto, is only consistent with a process by which a taxpayer proposes changed to pre-established methods of apportionment promulgated by the department.

Corporate Taxation--Apportionment

40. OAR 150-314.280-(M) contemplates that a request for use of alternative methods is filed with, but separate from, the return.

Corporate Taxation--Apportionment

41. When proposing an alternative apportionment, the taxpayer must completely explain the alternative and why the regular method is not appropriate.

Corporate Taxation--Apportionment

42. Under OAR 150-314.280-(M), a request, if granted, may be revoked on audit if the goal of fair and accurate measurement of net income is not achieved.

Corporate Taxation--Apportionment

43. OAR 150-314.280-(M) itself is logically inconsistent with the notion that an alternative method for apportionment could be proposed, by anyone, during the audit.

Corporate Taxation--Apportionment

44. It cannot be said that OAR 150-314.280-(M) as it is, and as it is interpreted by the department, is consistent with the fundamental requirement of ORS 314.280 that the department act by rule.

Administrative Law and Procedure--Rulemaking

45. Legislative directions to make rules are not fulfilled by making rules that purport to dispense with the rulemaking requirements.

Administrative Law and Procedure--Rulemaking

46. The department has broad authority as well as an obligation to act by rule under ORS 314.280.

Corporate Taxation--Apportionment

47. Although the ORS 314.280 regime was not inspired by a goal of interstate uniformity, goals of intrastate uniformity were not abandoned.

Corporate Taxation--Apportionment

48. The rules under ORS 314.280 differentiate treatment as to small classes of taxpayers, not individual taxpayers.

Corporate Taxation--Apportionment

49. Taxpayer-specific flexibility exists under ORS 314.280(2).

Corporate Taxation--Apportionment

50. Any request for taxpayer-specific treatment under ORS 314.280 must originate with the taxpayer and be made in the face of a default position of existing rules.

Corporate Taxation--Apportionment

51. The department may or may not grant a request for taxpayer-specific treatment under ORS 314.280.

52. If the department does not grant a request for taxpayer-specific treatment under ORS 314.280, there remain the rules previously promulgated to guide the audit of the return.

Corporate Taxation--Apportionment

53. Under ORS 314.280, flexibility is a product or endpoint of a process and not the starting point.

Corporate Taxation--Apportionment

54. The department must have rules in place to guide all classes of taxpayers as to their obligations under ORS 314.280.

Corporate Taxation--Apportionment

55. If no taxpayer felt that alternatives to the ORS 314.280 regime were needed, a consistent interpretation of the broad statutory standard would prevail.

Administrative Law and Procedure--Rulemaking

56. With regard to ORS 314.280, apportionment is to be done by rule.

Administrative Law and Procedure--Rulemaking

57. In ORS 314.280, the language "permit or require" must be read to mean that "requirements" be stated in rules promulgated in advance for general guidance of, and application to, taxpayers.

Administrative Law and Procedure--Rulemaking

58. Under ORS 314.280, advance promulgation of rules creates the possibility of requirements also being imposed as conditions to acceptance by the department of alternatives proposed by the taxpayer.

Corporate Taxation--Apportionment

59. UDITPA, rather than being a broad general statutory statement of general principles or goals that must, legally and practically, be fleshed out with rules, is a detailed statute with quite specific provisions on the apportionment process.

Corporate Taxation--Apportionment

60. UDITPA is designed to be a uniform law, consistently applied among the states that adopt it.

Corporate Taxation--Apportionment

61. There is a provision for variation from the UDITPA general formula in ORS 314.670 that allows the department to permit or require variation.

Corporate Taxation--Apportionment

62. OAR 150-314.280-(M) improperly imported UDITPA provisions on departure from statutory formulas because, although it is logical for the department to have the power to initiate changes or modification of statutory rules to fulfill statutory policy, it is nonsensical to authorize and require the department to make the detailed formula rules in the first instance only to then permit the department to abandon them on its own motion.

Administrative Law and Procedure--Rulemaking

63. It is beyond question that OAR 150-314.280-(M) and its predecessors were susceptible to change by the department at any time.

Administrative Law and Procedure--Rulemaking

64. OAR 150-314.280-(M) is fundamentally at odds with the statutory provisions of ORS 314.280 and the duty of the department to act by rule if it wishes to change the methods taxpayers must use.

Administrative Law and Procedure--Rulemaking

65. A well established principle of administrative law regarding rulemaking policy is that court review is not a substitute for properly conducted agency action.

Administrative Law and Procedure--Rulemaking

66. When the department refuses to divulge information as to how auditors may have treated similarly situated taxpayers, it becomes imperative for the department to announce in advance to taxpayers and its auditors what the rules are, so that by audit and supervision it can create a context of consistency.

Administrative Law and Procedure--Rulemaking

67. It is important that if taxpayers follow the rules announced in advance by the department, they not be subject to imposition of alternative methods unless they ask for and thereby consent to such departures.

Administrative Law and Procedure--Rulemaking

68. Returns prepared in accordance with valid regulations must be accepted.

Corporate Taxation--Apportionment

69. There is a rebuttable presumption that a return filed in accordance with the department's rules adopted under ORS 314.280 will fairly and accurately reflect the net income of taxpayer's Oregon operations.

Corporate Taxation--Apportionment

70. No adjustment to a return can be permitted or required unless the key prerequisite for any adjustment under 314.280, a finding that the original return, filed in accordance with the department's other rules, is not fair and accurate, is met.

Corporate Taxation--Apportionment

71. Apportionment is not an exact science; to be fair and accurate, an apportionment need not be the most fair and accurate possible.

Corporate Taxation--Apportionment--Property Factor

72. When including intangible property in the property factor increases taxpayer's tax liability by less than 15 percent, it is unlikely that one method was fair and accurate and the other not.

Corporate Taxation--Apportionment

73. When taxpayer's apportionment fairly and accurately reflects the net income of the business done within the state, then adjustments by the department are void.

Tax Court--Procedure

74. When a party provides that a concession will become void should it prevail on a claim but makes no such reservation should it fail to prevail, shows that the party intended to concede the claim should they not prevail.

Tax Court--Procedure

75. When a counterclaim has been previously conceded by the opposing party, the counterclaimant has no need to introduce evidence to support that counterclaim in the trial on remand.

Trial was held March 21-24, 2006, in the courtroom of the Oregon Tax Court, Salem.

John F. Neupert, Miller Nash LLP, Portland, argued the cause for Plaintiff.

James C. Wallace, Assistant Attorney General, Department of Justice, Salem, argued the case for Defendant.

Decision for Plaintiff rendered March 13, 2007.

HENRY C. BREITHAUPT, Judge.

I. INTRODUCTION

This matter comes before the court on remand from the Oregon Supreme Court, U.S. Bancorp v. Dept. of Rev., 337 Or 625, 103 P3d 85 (2004) (Bancorp III), cert. denied, 546 US 813, 126 S Ct 48, 163 L Ed 2d 48 (2005).

In Bancorp III, the Supreme Court affirmed this court's decision after trial in U.S. Bancorp v. Dept. of Rev., 17 OTR 232 (Bancorp II), adh'd to as modified on recons, 17 OTR 273 (2003), which upheld the validity of an agreement between the parties to extend the limitations period during which Defendant (the department) could issue a notice of deficiency to Plaintiff (taxpayer). 337 Or at 643. The Supreme Court reversed, however, this court's decision in U.S. Bancorp v. Dept. of Rev., 15 OTR 375 (2001) (Bancorp I). In Bancorp I, in granting the taxpayer's motion for partial summary judgment, this court held that OAR 150-314.280-(M) (1995) (Revised M) was not intended to be applied retroactively to the tax years in question and could not enter into the analysis of taxpayer's liability. 15 OTR at 380. In Bancorp III, the Supreme Court reversed that decision and held that Revised M was intended to apply retroactively to the tax years in question, and that such retroactivity did not violate the Due Process Clause of the Fourteenth Amendment to the United States Constitution. 337 Or at 636-40. The Supreme Court remanded the case to this court "for further proceedings." Id. at 644. Those proceedings, addressing claims by taxpayer and the counterclaim by the department, have included a full trial as well as extensive briefing and argument on all disputed issues. 

II. FACTS

As the Supreme Court noted in Bancorp III, "[t]he parties have engaged in extensive litigation relating to taxpayer's Oregon corporate excise tax liability for the tax years 1984 through 1992." 337 Or at 627 n 1. At this point, only tax years 1988 through 1992 remain in dispute. See id. (so noting); Bancorp II, 17 OTR at 233-34 (summarizing the litigation involving tax years 1984 through 1987). The statutory and regulatory framework applicable to tax years 1988 through 1992, as well as the basic facts of this case, were well summarized by the Supreme Court in Bancorp III:

"To provide context for the facts and the parties' arguments respecting the department's authority to require taxpayer to utilize an alternative apportionment formula, we first provide background as to the statutory and regulatory framework that underlies this dispute. Taxpayer is a unitary financial organization that does business both in Oregon and in other states. See ORS 314.610(4) (defining 'financial organization' for purposes of ORS 314.605 to 314.675). As a financial organization, it is excluded from the coverage of the Uniform Division of Income for Tax Purposes Act (UDITPA), and, instead, its net income for purposes of the Oregon corporate excise tax is determined under ORS 314.280. See ORS 314.615 (excluding financial organizations with taxable income from both within and outside Oregon from UDITPA). During 1988 through 1992, the tax years at issue in this dispute, ORS 314.280 provided, in part:

'(1) If a taxpayer has income from business activity as a financial organization * * * which is taxable both within and without this state * * * the determination of net income shall be based upon the business activity within the state, and the department shall have power to permit or require either the segregated method of reporting or the apportionment method of reporting, under rules and regulations adopted by the department, so as fairly and accurately to reflect the net income of the business done within the state.

'(2) The provisions of subsection (1) of this section dealing with the apportionment of income earned from sources both within and without the State of Oregon are designed to allocate to the State of Oregon on a fair and equitable basis a proportion of such income earned from sources both within and without the state. Any taxpayer may submit an alternative basis of apportionment with respect to the income of the taxpayer and explain that basis in full in the return of the taxpayer. If approved by the department that method will be accepted as the basis of allocation.'

"Pursuant to the authority that ORS 314.280 confers upon it, the department has adopted administrative rules governing methods of income reporting for taxpayers governed under that statute. For the tax years at issue, as is also true now, many of the department's rules promulgated under ORS 314.280 incorporated provisions of UDITPA or rules that the department had adopted to implement UDITPA. As pertinent here, OAR 150-314.280-(C) adopts by reference the UDITPA requirement that a taxpayer utilize the apportionment method of income allocation when the taxpayer's business activities in Oregon are part of a unitary business that is carried on both within and outside the state. OAR 150-314.280-(C) (incorporating OAR 150-314.615-(D)); OAR 150-314.615-(D) (requiring apportionment method in such circumstances). During the relevant tax years, the department also required financial organizations to apply a modified version of the UDITPA three-factor apportionment formula. See generally Twentieth Century-Fox v. Dept. of Rev., 299 Or 220, 224, 700 P2d 1035 (1985) (describing operation of UDITPA three-factor apportionment formula). OAR 150-314.280-(E) (1987) provided, in part:

'After deducting the nonapportionable income, the remainder shall ordinarily be apportioned to this state by giving equal weight to three factors.

'For a financial organization, the three factors shall be payroll, property and gross revenue.

'"Property" means real and tangible personal property used in the business.'

(Emphasis added.) See also OAR 150-314.280-(F) (1987) (incorporating UDITPA methodology for determining 'property factor' set out in ORS 314.655 and its related rules).

"In addition to those provisions, during the relevant tax years, the department also imported restrictions from UDITPA that narrowly limited the department's authority to permit or require a taxpayer to deviate from standard methods of income reporting that the department had prescribed by rule under ORS 314.280. Under the rule adopting those limits, the department possessed authority to permit or require a taxpayer to utilize an alternative income reporting method only if the applicable standard method did not represent fairly the taxpayer's 'business activity' in Oregon and resulted in a violation of the taxpayer's state or federal constitutional rights. Specifically, OAR 150-314.280-(M) (1987) provided, in part:

'If the allocation and apportionment provisions of OAR 150-314.280-(A) to 150-314.280-(L) do not fairly represent the extent of the taxpayer's business activity in this state and result in the violation of the taxpayer's rights under the Constitution of this state or of the United States, the taxpayer may petition for and the department may permit, or the department may require, in respect to all or any part of the taxpayer's business activity:

'(1) Separate accounting;

'(2) The exclusion of any one or more of the factors;

'(3) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or

'(4) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.'

(Emphasis added.) See also ORS 314.670 (1987) (similarly restricting variation from standard apportionment provisions of UDITPA).

"In 1995, this court issued its decision in Fisher Broadcasting, Inc. v. Dept. of Rev., 321 Or 341, 898 P2d 1333 (1995). In that case, the taxpayer had challenged the validity of OAR 150-314.280-(I) (1983)--the predecessor rule to OAR 150-314.280-(M) (1987)--which similarly incorporated restrictions from UDITPA limiting the department's authority to permit or require deviation from the department's rules prescribing standard methods of income reporting under ORS 314.280. After reviewing the text and context of ORS 314.280, this court agreed with the taxpayer that the restriction against alternative reporting methods set out in OAR 150-314.280-(I) (1983) was beyond the scope of the department's rulemaking authority under ORS 314.280. In reaching that conclusion, the court first observed that the legislature expressly had excluded certain taxpayers from the coverage of UDITPA and, in doing so, had demonstrated an intent to preserve for those taxpayers 'the advantages of individual judgment and flexibility' that had existed under ORS 314.280. Id. at 353-55. Because the department lacked authority to override that legislative choice, the court concluded that the department was not authorized to subject taxpayers covered under ORS 314.280 to the same restrictions against utilizing alternative methods of income reporting that existed for taxpayers governed by UDITPA. Id. at 355.

"The court went on to observe that, even if the department had been authorized to limit its power in such a way, the UDITPA standard incorporated under OAR 150-314.280-(I) (1983) was incompatible with the text of ORS 314.280. Specifically, the court pointed out that, although ORS 314.280 directs the department to adopt reporting methods that '"fairly and accurately reflect the net income of the [taxpayer's] business done within the state[,]"' the UDITPA standard incorporated under OAR 150-314.280-(I) (1983) authorized the department to permit or require alternative reporting methods only when the standard method did not '"fairly represent the extent of the taxpayer's business activity in this state."' Id. at 355 (quoting ORS 314.280 and OAR 150-314.670 (1987)) (emphasis in Fisher Broadcasting). Thus, the court determined that OAR 150-314.280-(I) (1983) also was invalid because, contrary to the legislative mandate of ORS 314.280, that rule did not allow a taxpayer to challenge the application of a standard income reporting method upon the ground that it did not result in an accurate reflection of the taxpayer's net income from business done within the state. Id. at 359.

"In 1995, in response to this court's decision in Fisher Broadcasting, the department amended the rule governing its authority to permit or require deviation from the department's rules prescribing methods of income reporting under ORS 314.280. The department's new rule provided that the department had authority to permit or require an alternative reporting method--including the use of an additional factor in an apportionment formula--whenever a standard method did not 'fairly and accurately' reflect the taxpayer's net income from business done within Oregon. OAR 150-314.280-(M) (1995) provided, in part:

'(1) For taxpayers that are taxable both within and without Oregon, the provisions of ORS 314.280 will ordinarily require apportionment to arrive at a fair and accurate measure of net income from business activity in Oregon. If the taxpayer can show that no unitary relationship exists between its business activities within Oregon and those activities outside Oregon, then taxpayer may use separate accounting.

'(2) If the allocation and apportionment provisions of OAR 150-314.280-(A) to 150-314.280-(N) do not fairly and accurately reflect the net income of the business done within Oregon, based on the taxpayer's business activity within Oregon, the department may require or the taxpayer may request an alternative method of apportionment and the department may approve that method of apportioning all or any part of the net income from the taxpayer's business activity within Oregon:

'* * * * *

'(4) Examples of alternative methods of apportionment include:

'(a) The exclusion of any one or more of the factors;

'(b) The inclusion of one or more additional factors which will fairly and accurately reflect the taxpayer's net income from business activity in Oregon; or

'(c) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.'

(Emphasis added.)

"With that background in mind, we turn to the facts of this case. Taxpayer filed its Oregon corporate excise tax returns for the years 1988 through 1992 by applying the standard three-factor apportionment formula that the department had prescribed for financial organizations at that time. See 337 Or at 630-31 (setting out OAR 150-314.280-(E) (1987)). Consistently with the definition of the 'property' factor of that formula, taxpayer did not include intangible personal property in its apportionment computations. See OAR 150-314.280-(E) (1987) (defining 'property' factor as 'real and tangible personal property used in the business').

"In 1998, the department audited taxpayer's tax returns for the years at issue and determined that inclusion of taxpayer's intangible personal property in the apportionment formula resulted in a more accurate allocation of taxpayer's net income to Oregon. Applying the 1995 version of OAR 150-314.280-(M), set out above, the department included taxpayer's intangible personal property in the apportionment calculation, and, based upon that inclusion, it issued notices of deficiency against taxpayer for the five years at issue."

337 Or at 629-35 (footnotes omitted). (1)

As noted above, this litigation ensued. Taxpayer's Fourth Amended Complaint, the one before the Supreme Court in Bancorp III, contained two claims: first, that the department did not identify the source of its authority to adjust taxpayer's returns and that no such authority existed; and second, that the Notices of Deficiency (NODs) issued in this case were time-barred. The Supreme Court upheld this court's decision in favor of the department on taxpayer's second claim.  Bancorp III, 337 Or at 643. It reversed this court's grant of partial summary judgment to taxpayer on taxpayer's first claim. Id. at 640. That had the effect of a denial of taxpayer's motion for partial summary judgment. Importantly, the department had not filed a cross motion for summary judgment at that stage of the case and neither this court nor the Supreme Court addressed any affirmative claim for relief by the department.

Following the Supreme Court's remand, taxpayer filed, with this court's leave, a Fifth Amended Complaint. That complaint clarified the specifics of taxpayer's remaining claim. In short, taxpayer attacks the department's adjustment of its returns on four grounds. First, taxpayer argues that Revised M was not intended to apply retroactively, and that retroactive application of that rule is unconstitutional. Second, taxpayer argues that Revised M is invalid because it is inconsistent with ORS 314.280. (2) Third, taxpayer argues that the department improperly applied Revised M to taxpayer, if it applied that rule at all. Fourth, taxpayer argues that application of Revised M to it is unconstitutional on the grounds of arbitrariness and unequal treatment. The court takes each argument in turn and concludes by analyzing the department's counterclaim, which was the subject of the proceedings in Bancorp III.

III. ISSUES

(1) What is the scope of the remand in this case?

(2) Is Revised M inconsistent with ORS 314.280?

(3) Was Revised M, if consistent with ORS 314.280, properly applied to taxpayer?

(4) Did application of Revised M to taxpayer violate taxpayer's constitutional rights?

(5) Should the department prevail on its counterclaim?

IV. ANALYSIS

A. The Scope of Remand

As an initial matter, the parties dispute the extent of the Supreme Court's holding in Bancorp III and, consequently, the scope of permissible proceedings on remand to this court. The department asserts that litigation on remand of the first three of taxpayer's arguments was improper because those issues were either decided by the Supreme Court in Bancorp III or were waived by taxpayer. To support its assertion, the department relies on the following doctrines: law of the case, claim preclusion, issue preclusion, judicial admission, judicial estoppel, and waiver.

1-2. Under the "law of the case" doctrine, those portions of a prior appellate opinion that were necessary to the disposition of that appeal are binding and conclusive upon the inferior court in any further steps or proceedings in the same litigation for the reason that parties should not revisit issues that have already been fully considered and decided in the same proceeding. Hayes Oyster Co. v. Dulcich, 199 Or App 43, 53, 110 P3d 615, rev den, 339 Or 544, 125 P3d 750 (2005). Analyzing the department's "law of the case" argument, then, requires this court to determine which portions of Bancorp III were necessary to the disposition of, and decided in, that appeal.

As the Supreme Court stated in Bancorp III: "Both parties agree that, if [Revised M] governs this dispute, then the department had authority under that rule to include taxpayer's intangible personal property in the apportionment calculation." 337 Or at 636. The court also noted that "[f]or purposes of its summary judgment motion, taxpayer does not dispute the department's averment that inclusion of taxpayer's intangible personal property results in a more accurate apportionment of its net income to Oregon." Id. at 636 n 6. Instead, the court described taxpayer's argument as focusing on whether [Revised M] was intended to apply retroactively, and, if so, whether such retroactivity was constitutional. Id. at 636. The court then devoted its analysis to answering those questions, both times in the affirmative. See id. at 636-40. Ultimately, the Supreme Court concluded that this court "erred by holding that the department lacked authority to include taxpayer's intangible personal property in the apportionment formula used to allocate taxpayer's income to Oregon under ORS 314.280 for tax years 1988 through 1992." Id. at 640. In a footnote, the Supreme Court declined to consider taxpayer's right-for-the-wrong-reason argument that "[Revised M] is invalid because it exceeds the department's rulemaking authority under ORS 314.280." Id. at 636 n 7. The Supreme Court did so, it said, because taxpayer had already emphasized to this court that "it did not question the department's authority to promulgate [Revised M]" under ORS 314.280. Id.

From those statements, the department contends that the Supreme Court decided the following issues adversely to taxpayer: that Revised M applies retroactively, that such retroactivity is constitutional, that Revised M comports with ORS 314.280, and that the department complied with the rule in this case. That view is only partially correct. It is eminently clear that Bancorp III was primarily about retroactivity. The court's holdings in that regard were the focus of the Supreme Court's analysis, and were necessary to the disposition of the appeal. They are the "law of the case" and are binding on this court on remand. Accordingly, taxpayer's retroactivity argument must be rejected.

3. That is, however, the only argument to which the "law of the case" doctrine applies here. As the Supreme Court noted, taxpayer agreed that inclusion of its intangible personal property results in a more accurate apportionment only for purposes of its summary judgment motion. Bancorp III, 337 Or at 636 n 6. In order to reach the question whether Revised M applies retroactively, which was the only question taxpayer wanted to present in its motion for partial summary judgment, taxpayer chose to agree, for purposes of summary judgment, that the rule was validly applied in all other respects; (3) otherwise, the existence of a genuine issue of material fact or a collateral legal question might have precluded resolution of the retroactivity issue. That agreement was not an admission of fact or law for any other purpose. Nor were the validity or proper application of Revised M issues analyzed and decided by this court in Bancorp I or the Supreme Court in Bancorp III. In fact the department not only admitted as much in its briefing to the Supreme Court in Bancorp III, it aggressively promoted just this point. The department admitted this in its briefs in Bancorp III: "The Tax Court never addressed the effect of that rule because it reasoned that rule was not expressly made retroactive and therefore will not be applied by the court in the years in question. 15 OTR at 380." In its Reply Brief in Bancorp III, the department stated the question of validity of Revised M had been raised by taxpayer for the first time on appeal. Those statements are completely inconsistent with the arguments the department now makes to the effect that question of the validity of Revised M was decided in Bancorp III.

The treatment the Supreme Court gave to the issue, taking into account especially its action on taxpayer's Petition for Reconsideration, demonstrates that the Supreme Court did not address the question of the validity of Revised M. Initially the Supreme Court stated in footnote:

"Before this court, taxpayer also argues that OAR 150-314.280-(M) (1995) is invalid because it exceeds the department's rulemaking authority under ORS 314.280. Before the Tax Court, however, taxpayer emphasized that it did not question the department's authority to promulgate OAR 150-314.280-(M) (1995), specifically asserting that 'ORS 314.280(1) clearly gives the Department the authority to promulgate such a rule.' As a result of that position in the Tax Court, we conclude that taxpayer did not preserve its challenge to the department's authority to promulgate OAR 150-314.280-(M) (1995) for this court's review. See State v. Wyatt, 331 Or 335, 341-43, 15 P3d 22 (2000) (discussing requirements for preservation of error); see also Western Generation Agency v. Dept. of Rev., 327 Or 327, 331-32 n 4, 959 P2d 80 (1998) (discussing same)."

(Ptf's Pet for Recons in Bancorp III.)

In its Petition for Reconsideration taxpayer pointed out that it had not conceded the validity argument and that the court should consider it under the "right for the wrong reason" doctrine. The Supreme Court, on reconsideration, revised footnote 7 to read:

"Before this court, taxpayer also argues that OAR 150-314.280-(M) (1995) is invalid because it exceeds the department's rulemaking authority under ORS 314.280. Before the Tax Court, however, taxpayer emphasized that it did not question the department's authority to promulgate OAR 150-314.280-(M) (1995), specifically asserting that 'ORS 314.280(1) clearly gives the Department the authority to promulgate such a rule.' As a result of that position in the Tax Court, we decline to exercise our discretion to address taxpayer's challenge to the department's authority to promulgate OAR 150.314.280-(M) (1995). See Outdoor Media Dimensions Inc. v. State of Oregon, 331 Or 634, 658-60, 20 P3d 180 (2001) (discussing 'right for the wrong reason' doctrine).

Bancorp III, 337 Or at 636 n 7.

Given this series of events, it is impossible to conclude that the Supreme Court even addressed, much less decided, the questions of validity or proper application of Revised M. The court exercised its discretion, in the context of a remand, to not address the validity argument. Although it may not have addressed the issue as decided "right for the wrong reason," it does not follow that the court somehow applied a doctrine of "wrong and precluded without reason."

4-5. Taxpayer's second and third arguments against application of Revised M are not precluded by the "law of the case" doctrine. Nor are they precluded by the doctrine of claim preclusion, in either its common law or statutory form, ORS 43.130 (2005). (4) Common law claim preclusion applies only to those claims that were determined in a "final judgment" and that are sought to be "prosecut[ed in] another action." Van De Hey v. U.S. National Bank, 313 Or 86, 91, 829 P2d 695 (1992) (quoting Drews v. EBI Companies, 310 Or 134, 140, 795 P2d 531 (1990)). There is no second action present here, only the same action that was before the Supreme Court. Similarly, ORS 43.130 states that it applies only to actions "subsequent" to an original action. (5) The same is true for both the common law and statutory forms of issue preclusion, ORS 43.160. (6) See Hayes Oyster, 199 Or App at 50 ("[I]ssue preclusion does not apply to claims within the same case.").

6-7. Judicial admission also is inapposite. A judicial admission is a statement "made by a party * * * for the purpose of dispensing with proof of a fact in issue," and not "merely a statement or assertion or concession, made for some independent purpose." State v. Harris, 339 Or 157, 172-73, 118 P3d 236 (2005) (citations omitted). As stated above, taxpayer's concessions regarding the validity and application of Revised M were made for only one purpose: to frame and isolate for decision the issue of that rule's retroactivity in the context of a motion for partial summary judgment. See Bancorp I, 15 OTR at 380 (discussing only retroactive application as to Revised M); Bancorp III, 337 Or at 636 n 6 (noting that taxpayer's concession of the proper application of Revised M was only "[f]or purposes of its summary judgment motion"). Taxpayer did not concede any facts for the purpose of dispensing with proof requirements.

8-10. For the same reason, judicial estoppel does not apply here either. Judicial estoppel applies "under certain circumstances to preclude a party from assuming a position in a judicial proceeding that is inconsistent with the position that the same party has successfully asserted in a different judicial proceeding." Day v. Advanced M&D Sales, Inc., 336 Or 511, 524, 86 P3d 678 (2004) (quoting Hampton Tree Farms, Inc. v. Jewett, 320 Or 599, 609, 892 P2d 683 (1995)) (quotation marks omitted). Taxpayer has not taken an inconsistent position. Rather, taxpayer has maintained throughout these proceedings that, for purposes of its summary judgment motion on retroactivity only, it would concede the validity and otherwise proper application of Revised M. Given the result in Bancorp III, effectively denying taxpayer's motion for partial summary judgment on retroactivity, taxpayer remains free to advance other arguments against application of Revised M, including those arguments it conceded for purposes of its summary judgment motion.

11-14. The department appears to misunderstand, at a fundamental level, the purpose and effect of summary judgment motions. Taxpayer did not need to lump every argument it might have into one omnibus summary judgment motion. Instead, it had the right to spread its various arguments against application of Revised M over several different motions, or save some for trial. Taxpayer chose to hold off several of its arguments in favor of pressing one that it felt would end the litigation most expeditiously. The ultimate failure of that tactic on the retroactivity argument, although initially successful, does not deprive taxpayer of its right to press its other arguments. See Silbernagel v. Goin, 41 Or App 269, 272-73, 597 P2d 1287 (1979) (so stating). It is wrong to argue that taxpayer waived those other arguments when it is clear that taxpayer had reserved them in case its main argument failed. See Waterway Terminals v. P.S. Lord, 242 Or 1, 26, 406 P2d 556 (1965) (holding that waiver "is the intentional relinquishment of a known right" that "must be manifested in some unequivocal manner"). The department's argument seems to boil down to the proposition that, because taxpayer ultimately lost on its motion for partial summary judgment, it must have lost the case entirely. That view is patently incorrect. See Silbernagel, 41 Or App at 272-73 (so indicating). Also, it is fundamentally flawed in this case because the department never requested, by cross motion, a judgment in its favor. Accordingly, the court will address in turn each of taxpayer's three remaining claims against application of Revised M.

B. Is Revised M Consistent with ORS 314.280?

1. History and Development of ORS 314.280; Requirement of Rulemaking

15. From the beginnings of income taxation of business enterprises in Oregon until 1965, ORS 314.280 was the statute under which all enterprises were taxed. It was, and is, characterized by a general statement of legislative guidance (the determination of net income shall be based on business activity in the state) and a broad grant of agency authority and responsibility to permit or require methods (segregated or apportionment) and bases (for apportionment) "so as fairly and accurately to reflect the net income of the business done within the state." ORS 314.280(1).

16-17. An initial question of importance is whether, in applying ORS 314.280, the department must promulgate rules in advance of adjudication or application of the statutory guidelines. On this question, Trebesch v. Employment Division, 300 Or 264, 710 P2d 136 (1985), controls the analysis. Trebesch set out the elements of the problem, concluding first that the answer is a matter of statutory or legislative intent and is not found in the constitution, judge-made law of administrative agencies, or the Administrative Procedures Act (APA). Id. at 267. It is quite relevant, however, in the context of this case, to pause briefly to consider the extent to which constitutional concerns, even if not determinative, inform the analysis. Trebesch cited Anderson v. Peden, 284 Or 313, 587 P2d 59 (1978), and a series of other cases that recognized that rulemaking and, implicitly, agency action in accordance with rules, protects against a claim of ad hoc decision-making in violation of Article I, section 20 of the Oregon Constitution. (7) Id. Those cases point out that ad hoc action by an agency or its employees is a major source of concern as to claims regarding equal treatment of the very type that have been made in this case by the taxpayer.

18-19. As Trebesch concluded, however, rulemaking requirements cannot be deduced directly from constitutional provisions. Id. Rather the duty to make rules, if it exists, is a result of statutory direction found through interpretation of the statutes regulating the agency in question, here the department. Id. The first inquiry, of course, is whether the statutes require prior rulemaking for enforcement of ORS 314.280. When such a requirement exists, rules must be made prior to adjudication or application of the law. Marbet v. Portland Gen. Elect., 277 Or 447, 460-62, 561 P2d 154 (1977).

20. Dinkins v. Board of Accountancy, 118 Or App 220, 846 P2d 1186 (1993), provides guidance about when statutory language requires pre-adjudication rulemaking. In Dinkins, the statute required that applicants "[h]ave had two years' public accounting experience or the equivalent thereof satisfactory to the board under its rules * * *." Id. at 222 (emphasis in original) (citation and quotation marks omitted). The Court of Appeals concluded that this language required rulemaking to specify what accounting experience could be equivalent to public accounting experience. Id. at 224. ORS 314.280(1) clearly states that department action is to be "under rules and regulations adopted by the department." It is clear from the statute and foregoing case law that the provisions of ORS 314.280 contain a legislative scheme in which the agency must develop a very general legislative purpose through rulemaking. The Oregon Supreme Court has so concluded:

"The controlling factors are that the legislature since 1929 has directed that unitary income of a corporation be apportioned between the states in which it is earned, and has directed the commission to adopt rules and regulations to fairly and equitably accomplish that apportionment."

Equitable Savings & Loan v. Tax Com., 251 Or 70, 77, 444 P2d 916 (1968) (Equitable).

That construction of the statute is conclusive. (8) However, a review of the factors that have guided the courts in less well defined cases is helpful. It will disclose the underlying reasons for the rulemaking requirement that can be considered in connection with the parties' arguments in this case.

21. Trebesch directed analysis of the following matters when analyzing rulemaking requirements:

(1) the character of the statutory terms;

(2) the division of authority in the administration of the statutes; and

(3) the agency structure, in determining when pre-adjudication rulemaking is required.

Trebesch, 330 Or at 270.

22-23. Statutory terms delegating policymaking discretion "are those which empower the agency to develop and expound its own vision of how a law or a scheme of regulation should be applied." Id. at 271. Such terms imply a legislative rulemaking requirement. The parties agree that and prior case law recognizes that ORS 314.280 confers legislative rulemaking authority with respect to the terms so as "fairly and accurately to reflect the net income of the business done within the state," and "on a fair and equitable basis a proportion of such income earned from sources both within and without the state." Accordingly, as discussed above, the character of the terms confirm a requirement of rulemaking to implement ORS 314.280.

In Trebesch, the organization of the agency included an executive function charged with interpreting and developing the statutes that the agency administered. 300 Or at 266. That executive, an assistant director, was authorized to "determine all questions of general policy and promulgate rules and regulations and be responsible for administration of" the relevant statutes. Id. at 272 (citation and quotation marks omitted). In those matters, the statutory structure is the same for the department, with the exception that the director of the department is the chief executive. Cf. ORS 305.015, 305.035, 305.045, 305.100. Of most importance, the Employment Division operated, and the department regularly operates, through numerous subordinate employees located throughout the state.

24. The court in Trebesch concluded there was no doubt that the legislature intended the terms in question in the statute in that case to be applied uniformly throughout the state. Id. at 273. Notwithstanding certain arguments made by the department in this case and discussed below, the court finds that the same is true about the terms of ORS 314.280--they are to be applied uniformly throughout the state. (9) The agency in Trebesch, like the department, is decentralized in actual decision-making done by auditors. 300 Or at 273. Therefore, as in Trebesch, "the uniform application of the law can only be met when employees at all levels operate with the same understanding of the terms. This assumes the * * * director will communicate in some way with the initial decision makers * * * in order to ensure uniform application of the law." Id.

25-26. The Oregon Supreme Court has recognized that such agency communication, which needs to be to internal and external audiences, can occur through reasoned opinions in adjudicated cases. See Ross v. Springfield School District No. 19, 300 Or 507, 517, 716 P2d 724 (1986). But when that is done, the agency "needs to find a way to assure that different [decision-makers] follow the criteria so developed or give adequate reasons for departing from an earlier interpretation." Id. at 518-19.

27. The question becomes how an agency must communicate its policy and interpretive positions, and, as in Trebesch, a review of agency structure and the context in which the agency operates can help supply an answer. In Trebesch, the court looked to the nature and scope of this adjudicatory function of the agency official charged with insuring proper application of the law. Trebesch, 300 Or at 272-76. The court was unsure of the scope of adjudicatory authority, concluding, however, that in order to avoid a conclusion that rulemaking was necessary, the agency official would need to have the ability to review for errors of law and the ability to "elaborate the statutory term at issue in this case and similar terms and address characteristic problems in the application of those terms, by a series of well articulated opinions not limited to the narrow facts of a case, which are designed to give guidance to agency decisionmakers." Id. at 276.

28. In the case of the department, a structural change in its functions occurred such that both at the time it promulgated Revised M and, more importantly, at the time taxpayer's returns were audited, the director had lost her adjudication function. In Oregon Laws 1995, chapter 650, the legislature removed initial adjudication of cases from the functions of the department, transferring that function to the newly created Magistrate Division of this court. Revised M was promulgated December 31, 1995, by which time the decision to shift initial adjudicatory function had been made. That decision was fully implemented on September 1, 1997, long before the audit of the returns in question occurred. This prong of the Trebesch analysis points clearly to a requirement of rulemaking designed to educate and regulate agency staff and the public.

29. Faced with the statutory direction to make rules and the considerations discussed above, the director of the department had the obligation to proceed by rulemaking in order "to provide for consistent interpretation and application of the broad terms of the statute." Trebesch, 330 Or at 276-77. To paraphrase Trebesch:

"Some notice of [the meaning of the terms] both to those who apply the term and those like [taxpayer] to whom it is applied, is required when a large volume of frequently recurring decisions is made by * * * employees throughout the state. In the absence of rules * * * the first level decision-makers must embark upon local, autonomous definitions of the statute in place of a uniform statewide interpretation articulated by the responsible [department] official. The statutes contemplate that those applying the term will have notice of a uniform standard * * * and that those standards will be set by the [director], not [auditors] * * * ."

Id. at 277.

Resisting a conclusion of the requirement of rulemaking, the department cites Swenson v. Dept. of Rev., 6 OTR 234, 238-39 (1975), aff'd 276 Or 1, 7, 553 P2d 351 (1976), for the proposition that an administrative rule is not required for application of valuation methods under ORS 308.205. In fact, Swenson was not decided under the general property value statute, ORS 308.205, but rather under ORS 321.310(2), a statute specifically dealing with valuation of timber. (10) Id. Secondly, the statutory provisions of ORS 321.310(2) contained detailed statements of factors to be considered. The statute was the type of complete statement of legislative policy that, under Trebesch, permits agency action without prior rulemaking. Trebesch, 300 Or at 271-72. Finally, Swenson was decided well before the comprehensive case law developments in this area reflected in Trebesch, Ross, and other cases.

2. What Rules Did the Department Make?

The department promulgated three rules relevant to this case: OAR 150-314.280-(E) (1987) (the E Reg); Revised M, as mentioned above; and OAR 150-314.280-(N) (1995) (the N Reg). The E Reg, a set of apportionment rules for financial institutions, was in force from before the time the returns in question were filed and continued in force until January 1, 1993, throughout all the years at issue. The E Reg required that the property factor of the apportionment formula include only real and tangible personal property. As of January 1, 1993, the N Reg became effective. As compared with the E Reg, it was an even more comprehensive set of rules for apportionment of financial institution income and provided inclusion of intangible property in the property factor and special treatment of income from intangibles in the sales or revenue factor. (11) No other regulation or rule spoke directly to the composition of the property factor in the apportionment formula. The taxpayer filed its returns in conformity with the E Reg, the rule in effect at the time the returns were filed. The department, however, did promulgate Revised M in 1995, and the Supreme Court has reversed this court's decision that Revised M was not intended to apply retroactively to the years 1988 through 1992. Bancorp III, 337 Or 625. It is now appropriate to determine what, if any, force Revised M has and whether it could be, and was, a source of authority for the actions taken by the department and its employees in this case.

Revised M does not address the property factor or the question of inclusion of intangible property in that factor. Instead, Revised M states:

"(1) For taxpayers that are taxable both within and without Oregon, the provisions of ORS 314.280 will ordinarily require apportionment to arrive at a fair and accurate measure of net income from business activity in Oregon. If the taxpayer can show that no unitary relationship exists between its business activities within Oregon and those activities outside Oregon, then the taxpayer may use separate accounting.

"(2) If the allocation and apportionment provisions of OAR 150-314.280-(A) to 150-314.280-(N) do not fairly and accurately reflect the net income of the business done within Oregon, based on the taxpayer's business activity within Oregon, the department may require or the taxpayer may request an alternative method of apportionment and the department may approve that method of apportioning all or any part of the net income from the taxpayer's business activity within Oregon:

"(3) The request to use an alternative method of apportionment shall be filed in writing with the department. The request must be signed by the taxpayer or the taxpayer's authorized representative and shall be filed separately from the taxpayer's return. The request shall include a complete explanation of the alternative method as well as an explanation why the apportionment factors in OAR 150-314.280-(A) through OAR 150-314.280-(N) should not be used. Upon re