Simpson Timber Co. v. Department of Revenue

*372FADELEY, J.

Taxpayer is a corporation that engages in the lumber business in many states, including Oregon, Washington, and California. It operates as a single, unitary business.

Under the provisions of ORS 314.605 to 314.670, a fractional portion of taxpayer’s “business income” is taxable in each of the states in which taxpayer conducts its unitary business. ORS 314.610(1) defines “business income” as:

“[lineóme arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, the management, use or rental, and the disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.”

Nonbusiness income is “all income other than business income.” ORS 314.6KX5).1 Nonbusiness income is taxable only in the state where it arises.

In 1978, the federal government condemned 7,654 acres of taxpayer’s timbered property in California. Taxpayer received just compensation for that condemnation in 1988, the tax year at issue in this case.

Taxpayer received $49,846,000 in just compensation as the fair market value of the assets taken. Of that total, 91.9 percent ($45,840,000) was paid for the standing timber. The balance $4,006,000 was paid for the underlying land. Report of Commissioners Pursuant to Instruction 503, Ct No C-78-0868 (No D CA January 26,1987). However, because of the 10-year delay in paying just compensation, taxpayer also received $79,160,218 as separate compensation for that delay. The amount of that “delay compensation” was based on an assumed investment return on the $49 million during the years that it was owed but not yet paid.

Taxpayer and the Oregon Department of Revenue (department) stipulated in the Tax Court that the legal issue to be decided in this case is

*373“whether the Delay Compensation is “business’ or ‘non-business’ income, under ORS 314.610(1) and (5) and other Oregon law.”

The parties also stipulated to a number of facts: The nature of taxpayer’s business is “the general business of growing and harvesting of timber and the manufacture of forest products.” Taxpayer sold the products of the timber grown and harvested in its business but never sold the underlying land. Before the condemnation, taxpayer had reported the value of the California timberland as real property of its unitary business for the purpose of determining the portion or fraction of taxpayer’s annual income that was taxable in Oregon.2 For accounting purposes, taxpayer classified the delay compensation as an extraordinary item received and held it as surplus. Taxpayer reported that separate sum on its federal income tax return as “interest.” Taxpayer distributed $49 million of the $79,160,218 to its shareholders as a “dividend.” None of the delay compensation was reinvested in timberland anywhere.

The Tax Court ruled that the delay compensation was “interest income” and that all such interest income is regular business income.3 Simpson Timber Company v. Dept. of Rev., 13 OTR 315, 319 (1995). The Tax Court granted the *374department’s motion for summary judgment to tax the entire amount of delay compensation. Ibid. Taxpayer appeals.

To consider whether the delay compensation is business income of taxpayer’s unitary business, we examine the statute defining “business income,” ORS 314.610. We seek to determine legislative intent initially by a review of the statutory text and context. PGE v. Bureau of Labor and Industries, 317 Or 606, 610-11, 859 P2d 1143 (1993). In this step we apply the statutory command that we neither omit anything from, nor add anything to, the words of a statute. Id. at 611; ORS 174.010.

The first sentence of ORS 314.610(1) defines “business income.” It is composed of two clauses. The first clause requires that, to be “business income,” the income must be that “arising from” “transactions” and “activity” in the “regular course of taxpayer’s trade or business.” The second clause of the “business income” definition expressly includes income from “property,” which may be either “tangible” or “intangible.”

Whether income from such tangibles or intangibles is “business income” is governed by a conditional phrase that is introduced by the word “if.” Income from tangible and intangible property is included in “business income” “if’ the “acquisition,” “management,” “use,” and “disposition” of the property are integral parts of taxpayer’s regular business operations.

As the parties stipulated, taxpayer is in the business of “growing and harvesting of timber and the manufacture of forest products.” Although a forest products business could acquire standing timber without acquiring the underlying land, taxpayer here did acquire that land and did so in support of “growing” a supply of the raw material that it needed and intended to use in the regular course of its forest products business. It acquired, managed, and used the land and timber to that regular business end, a fact about which there is no dispute. The only dispute occurs as to “disposition,” the last word in the second clause.

*375Taxpayer argues that the foregoing definition of business income does not apply to the condemnation of its timber and land, because condemnation does not represent a voluntary disposition and, therefore, cannot be a disposition constituting an integral part of taxpayer’s regular business operations. For the reasons that follow, we disagree with the premise that the statutory definition covers only voluntary dispositions.

All business is conducted with the knowledge that events beyond the control of those operating the business may affect the plans of the business operators. Governmental intervention through exercise of eminent domain is among the possible events that are beyond the control of those operating a business. Condemnation is the equivalent of a forced sale of the property taken. It uses an assumed voluntary sale of the same property as a measure of price.4 Whether the conditions and terms of that sale were set by law, including constitutional law, does not alter that concept. Nor does it alter the additional fact that the compensation paid by the government for the timberland was compensation paid for property that the taxpayer intended to use to produce “business income.”

The governmental taking by condemnation converted taxpayer’s ownership rights in the timberland to an intangible property right, namely the right to receive just compensation in money. The sum at issue in this case was paid on account of the delay in paying the just compensation due for that “property.”

Nothing in the statutory definition of “business income” suggests that a disposition that is involuntary is any *376less a disposition, or that the income therefrom is any less “business income.”5 We cannot read into the statutory definition of “business income” the additional word “voluntary” before the word “disposition.” We conclude that the just compensation paid as a condemnation award may create a recognizable, taxable business gain identical to that created by a voluntary sale of the same assets for the same amount.6

Taxpayer additionally argues that, even if the just compensation award is considered “business income,” the delay compensation should not be considered as income of the same character as the just compensation. That is so, taxpayer argues, because:

“Simpson does not, as an integral part of its business operations, acquire * * * and dispose of intangible rights to damages for delay in receiving compensation for takings of its timberlands.”

That argument is wide of the mark, because it questions only whether specifically described types of intangibles are disposed of by a taxpayer in the regular course of its business. The argument rests on an assumed factual premise that is not present in this case. There was no “disposition” of the delay compensation as taxpayer’s argument would require. Taxpayer and its shareholders retained it. The ultimate source of the income here was the standing timber and the land on which it was growing, assets admittedly acquired and used in taxpayer’s business as integral parts of it. The disposition was of those business assets.

We conclude that, when the timber and land on which it was growing were disposed of by an involuntary sale *377to the government through condemnation, that disposition was as much an integral part of the taxpayer’s regular business operations for purposes of the statutory definition as were the initial acquisition, management, and use of the timberland. The additional amount paid because of delay in paying the fair market price is but added income from that regular business disposition. ORS 314.610(1) defines that income as unitary “business income.”

Taxpayer also relies on two decisions of the United States Supreme Court relating to multistate taxation to support its claim that the delay compensation should be classified as nonbusiness income. Those two cases are ASARCO Inc. v. Idaho State Tax Comm’n, 458 US 307, 102 S Ct 3103, 73 L Ed 2d 787, reh den 459 US 961 (1982), and F. W. Woolworth Co. v. Taxation & Revenue Dept., 458 US 354, 102 S Ct 3128, 73 L Ed 2d 819, reh den 459 US 961 (1982).

The rule of those cases revolves around the presence or absence of a unitary business involving both out-of-state operations and in-state operations: Was there a unitary business that produced the income stream that a state sought to tax? In each of those cases the taxpayer received money because of its ownership of stock in separate, discrete corporations not operating in the taxing state. In each case the Supreme Court found that the out-of-state income could not be taxed, because the source of the income was not part of the taxpayer’s unitary business, i.e., because no unitary business was present as to that income.

That is not our case. The presence of a single, unitary business is not contested, nor do the receipts at issue here arise from an outside source. Taxpayer’s reliance on those cases is misplaced.7

The judgment of the Tax Court is affirmed.

All references to the Oregon Revised Statutes are to the 1987 replacement part, because those statutes apply to the tax year in controversy.

ORS 314.650 provides the formula for apportionment of business income of a multistate unitary enterprise, stating that “[a]ll business income shall he apportioned to this state by multiplying the income by a fraction” that accounts for the factors of relative value of taxpayer’s property, payroll, and sales within this state, compared with the value of those factors attributable to its business operations in other states.

The Tax Court relied on OAR 150-314.610(1)-(B)(3), which classifies interest income as business income:

“[W]here the intangible with respect to which the interest was received arises out of or was created in the regular course of the taxpayer’s trade or business operations or where the purpose for acquiring and holding the intangible is related to or incidental to such trade or business operations.” (Emphasis added.)

See Sperry & Hutchinson v. Dept. of Rev., 270 Or 329, 527 P2d 729 (1974) (income that a corporation received from long-term investments held not business income “because neither the capital invested nor the income derived therefrom are a part of the trading stamp business” and that income surplus that was temporarily placed in short-term investments during transitions among long-term investments was not business income; but income received from short-term investment of operating capital used to keep stamp business liquid held business income proportionally taxable by Oregon).

Condemnation is the “[p]rocess of taking private property for public use through the power of eminent domain.” Black’s Law Dictionary, 292 (6th ed 1990). The condemnor must compensate a land owner for the value of the land, including improvements on it. State ex rel Dept. of Trans, v. Glenn, 288 Or 17, 20, 602 P2d 253 (1979). The measure of that value is generally market value of what was taken. State Highway Com. v. Stumbo et al, 222 Or 62, 352 P2d 478 (1960). It has been described by this court as “fair cash market value,” Highway Commission v. Holt et ux, 209 Or 697, 699, 308 P2d 181 (1957), and is defined as “the amount which the land would bring if it were offered for sale by one who desired but was not obliged to sell and was bought by one who was willing but not obliged to buy.” Pape et al v. Linn County, 135 Or 430, 437, 296 P 65 (1931).

Moreover, OES 314.290, a statute relating to conversion of real property, supports the proposition that no meaningful distinction in the character of an item of income arises merely because that income was produced by an “involuntary” rather than a “voluntary” conversion of real property either to money or to a different property. ORS 314.290 affirmatively states that “involuntary” and “voluntary” conversions are, for purposes of that statute, to be treated in the same manner. When the 1965 legislature enacted ORS 314.610 in Oregon Laws 1965, chapter 152, section 2, ORS 314.290 was already in place, having been enacted as Oregon Laws 1957, chapter 102, section 2.

See also District of Columbia v. Pierce Associates, 462 A2d 1129 (DC App 1983) (insurance proceeds that taxpayer received for flood damage to its manufacturing facility constitute “business income”; the extraordinary nature or the infrequency of the transactions is irrelevant).

Taxpayer also cites cases from some other states to support its assertion that the income from this condemnation should be considered nonbusiness income. Those cases do not involve either condemnation of property or a partial disposition of assets. Instead, they involve total liquidation of a former business entity, complete liquidation of a division of a business entity, or sale of an asset never utilized by the unitary business in the regular course of its business. Those cases are not factually similar to the case before us and do not announce principles that support taxpayer’s argument here.