The New Mexico Administrative Hearings Office affirmed the Taxation and Revenue Department’s assessment based on General Electric’s exclusion of foreign dividend and Subpart F income from its base income in its New Mexico consolidated return. In this case of first impression, the Hearings Office held that New Mexico’s inclusion of dividends and Subpart F income received from foreign affiliates, while excluding dividends received from domestic affiliates, did not unconstitutionally discriminate against foreign commerce, did not result in multiple taxation of foreign commerce, and did not result in unfair apportionment of foreign commerce. The Hearings Office engaged in a detailed analysis of US Supreme Court case law regarding state taxation of foreign commerce, as well as the New Mexico Supreme Court’s decision in Conoco, Inc. v. Taxation & Revenue Dep’t, 931 P.2d 730 (N.M. 1996), in which the court prohibited the state from including foreign dividend income in the base for separate method filers because domestic dividends were provided favorable treatment over foreign dividends.
With respect to facial discrimination, the Hearings Office determined that there was no facial discrimination under the consolidated reporting method elected by General Electric, because unlike the separate reporting situation considered in Conoco, the inclusion of the domestic subsidiaries’ income in General Electric’s consolidated group created a “taxing symmetry.” According to the Hearings Office, the consolidated reporting method ensured that the income generation activity of the entire group, including the income ultimately distributed through domestic dividends, is still included. The Hearings Office further found that there was no inevitable multiple taxation of foreign income because the apportionment factor included factor representation of the foreign activity and the New Mexico tax was not imposed on the foreign corporation itself, but was an apportioned tax on the entire domestic consolidated group’s income. Regarding General Electric’s third argument, the Hearings Office held that General Electric had not met its burden of showing that the apportionment method resulted in unfair apportionment of income to New Mexico. The Hearings Office cited the US Supreme Court’s decision in Container Corp. v. Franchise Tax Bd., 463 U.S. 159 (1983), for the proposition that standard three-factor apportionment formulas generally avoid unfair distortion and observed the difficulty of finding that General Electric’s 0.1895% New Mexico apportionment factor was “out of all appropriate proportion” to its New Mexico business activities.
In addition to the rulings based on the Commerce Clause arguments, the Hearings Office held that General Electric had a good faith legal basis for excluding foreign dividends and subpart F income from its New Mexico income, given that this was a case of first impression in New Mexico. As a result, the civil negligence penalty under N.M. Stat. Ann. § 7-1-69 was abated. Finally, the Hearings Office denied General Electric’s request for an award of costs and fees related to the protest. New Mexico law provides for the award of reasonable costs and attorney’s fees when a taxpayer is the prevailing party in an administrative proceeding under N.M. Stat. Ann. § 7-1-29.1. The Hearings Office held that General Electric did not prevail on the major issue of the hearing and therefore was not entitled to costs and fees. In the Matter of the Protest of General Electric Company & Subsidiaries, N.M. Admin. Hearings Office, Decision and Order No. 18-12 (Apr. 6, 2018).