TC 5461•Chevron U.S.A., Inc. v. Dept. of Rev.
Texte intégral
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 1 of 23 IN THE OREGON TAX COURT REGULAR DIVISION Corporation Excise Tax CHEVRON U.S.A., INC., Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant. ) ) ) ) ) ) ) ) ) TC 5461 ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT I. INTRODUCTION AND CONCLUSIONS The parties cross-move for summary judgment on whether Plaintiff properly included gross receipts from “hedging” transactions such as the sale and exchange of futures, options, and swap contracts (“Hedging Receipts”) in its sales factor when determining Oregon’s apportionable share of its income for the tax and calendar years 2011, 2012, and 2013 (the “Years at Issue”).1 Although the hedging transactions are related to contracts for the sale, 1 Plaintiff moves for summary judgment solely on its first claim for relief: for abatement of the assessments on the merits of Plaintiff’s apportionment theory, and for refund of the tax it was required to pay when filing its complaint in this division. (See Ptf’s Cross-Mot Summ J at 1; Complaint at 6-8.). Plaintiff’s complaint also makes a second claim: for abatement of substantial underpayment penalties imposed pursuant to ORS 314.402. The second claim asserts various theories of relief from penalties for the court to consider even if the court were to uphold the assessment. (See Complaint at 8-9.) Because the penalties are measured as a percentage that is tied to the amount of the alleged understatement of income or tax, a ruling in Plaintiff’s favor on Plaintiff’s first claim would dispose of the case. See ORS 314.402(1). Therefore, Plaintiff’s motion is properly styled as a motion for summary judgment. Defendant also styles its motion as a motion for summary judgment, but Defendant argues only the merits of Defendant’s apportionment theory, nowhere mentioning penalties or Plaintiff’s second claim. (See Def’s Mot Summ J at 1.) Because the court ultimately rules in favor of Defendant on Plaintiff’s first claim, the penalty claim is left unaddressed and must await further proceedings absent resolution by the parties. For this reason, the court will treat Defendant’s motion as one for partial summary judgment. Unless otherwise noted, the court’s references to the Oregon Revised Statutes (ORS) are to the 2009 edition. Although the 2011 edition of the ORS is applicable to the 2012 and 2013 tax years. the relevant statutes are the same as in the 2009 edition.
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 2 of 23 purchase, and physical delivery of oil and gas commodities, Plaintiff acknowledges that “minimal to no oil or gas commodities would have physically transferred in the [hedging transactions].” (Def’s Decl of Paul, Ex I at 1 (Plaintiff’s Sept. 12, 2022, discovery response to Defendant).) To be included in the sales factor, the Hedging Receipts must either be “[s]ales of tangible personal property” under ORS 314.665(2) or, if they are from intangible property, be “derived from the taxpayer’s primary business activity” under the frequently litigated “reinclusion” clause (the court’s term) of ORS 314.665(6)(a) (emphasis added): “(6) For purposes of this section, “sales”: “(a) Excludes gross receipts arising from the sale, exchange, redemption or holding of intangible assets, including but not limited to securities, unless those receipts are derived from the taxpayer’s primary business activity.” See, e.g., Tektronix, Inc. v. Dept. of Rev., 354 Or 531, 316 P3d 276 (2013); Oracle Corp. and Subsidiaries II v. Dept. of Rev, 24 OTR 359 (2021) (Oracle II); Microsoft Corporation v. Dept. of Rev.,___OTR ___(Apr 29, 2025) (slip op at 18) (appeal pending). Plaintiff argues in the alternative that the Hedging Receipts are (1) sales of tangible personal property, or (2) sales of intangible property that are derived from Plaintiff’s primary business activity. Plaintiff’s first theory is that Oregon is bound, by its incorporation of federal case law in ORS 317.013(1) and ORS 317.018, to apportion the Hedging Receipts as sales of tangible personal property because the Corn Products federal income tax doctrine classifies them as a surrogate for sales of inventory for capital gains purposes. See Corn Products Refining Co. v. Commissioner, 350 US 46, 76 S Ct 20, 100 L Ed 29 (1955) (classifying hedging contracts not as “capital” assets, but as ordinary assets like the underlying grain commodities to which the contracts relate); Arkansas Best Corp. v. Commissioner, 485 US 212, 221, 108 S Ct 971, 99 L Ed
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 3 of 23 2d 183 (1988) (clarifying that the futures contracts in Corn Products were “ordinary” assets because they fit within a statutory “inventory” exception to the broad definition of “capital” assets). The court rejects this position because ORS 317.013 and ORS 317.018 incorporate federal statutes and court decisions only to the extent that they pertain or relate to the determination or measurement of taxable income. Corn Products is not binding in this case, because Plaintiff’s federal taxable income is not in dispute, and because the capital gains rules do not affect the measurement of gross receipts, which is the only remaining way they could affect Plaintiff’s Oregon taxable income. Nor is Corn Products persuasive authority by way of analogy. Existing Oregon case law that is squarely on point clearly classifies the Hedging Receipts as sales of intangible property. Powerex Corp. v. Dept. of Rev., 357 Or 40, 42-43, 346 P3d 476 (2015). Nothing in the reasoning of Corn Products persuades this court to depart from that classification: • Corn Products has to do with legislative intent in an entirely different set of statutes. The Court’s holding is animated by a concern to avoid a “loophole” that could allow taxpayers to manipulate Congress’s distinction between capital and ordinary assets under the federal capital gains rules. This court sees no similar loophole in Oregon’s distinction between tangible and intangible property under UDITPA.2 • To the extent that the Court has analogized to Corn Products in state tax cases, the issue has been the definition of apportionable business income, which is not in dispute in this case. The court thus rejects Plaintiff’s first theory and agrees with Defendant that the Hedging Receipts are not sales of tangible personal property. Under Plaintiff’s second theory, the Hedging Receipts, although from intangibles, must be “reincluded” in the sales factor because they were derived from Plaintiff’s primary business 2 The Uniform Division of Income for State Tax Purposes Act, of which the sales factor statute is a part. See ORS 314.605 (defining UDITPA); ORS 314.610(7) (defining “sales”); ORS 314.665(2) (referring to sales of tangible personal property); ORS 314.665(4) (referring to other sales).
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 4 of 23 activity. The parties agree that Plaintiff’s primary business activity was “developing and producing crude oil and natural gas, and refining and marketing those products for sale.” (Ptf’s Reply at 6; Def’s Mot Summ J at 10.) Therefore, the only issue is whether the Hedging Receipts are “derived from” that activity, within the meaning of ORS 314.665(6)(a). Plaintiff has presented cogent and unrefuted evidence of strong business reasons for its practice of entering into hedging transactions “side by side” with transactions for the sale and purchase of tangible petroleum commodities. However, the “derived from” requirement, as construed in Tektronix, directs the court to identify the source of the particular gross receipts at issue, distinguishing other gross receipts--even those that might be traceable to the same contract or to related contracts. In Tektronix, the source was plainly identified under federal tax accounting provisions as the sale of goodwill; the source was not the sale of inventory, even though it could be argued that historical sales of inventory over time had caused the goodwill to come into existence. In this case, the source is the sale or exchange of separately accounted for hedging contracts, notwithstanding Plaintiff’s argument that it would be unable to maintain its business without engaging in both hedging transactions and transactions for the sale of the tangible commodities. For the foregoing reasons, the court concludes that the Hedging Receipts are not includible in Plaintiff’s sales factor under either of Plaintiff’s theories. The court will grant Defendant’s motion for partial summary judgment and deny Plaintiff’s motion for summary judgment. II. FACTS The following facts are not disputed. During the Years at Issue: (1) Plaintiff was engaged in a fully integrated petroleum business in Oregon and elsewhere, with both “upstream” and “downstream” operations. (See Ptf’s Decl of
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 5 of 23 Berkeland at 2.) Plaintiff’s upstream operations consisted primarily of exploring for, developing, and producing crude oil and natural gas, while its downstream operations consisted primarily of refining crude oil into petroleum products (e.g. gasoline, diesel, jet fuel, and biofuels), among other related services and activities. (Id.) (2) Plaintiff’s supply and trading group (the S&T Group) was responsible for profitably marketing and selling Plaintiff’s upstream and downstream commodities, as well as purchasing crude oil feedstock and other product inputs for Plaintiff’s refineries. (Id. at 3, ¶¶ 8, 9.) The S&T Group managed daily commodity sales and purchases of approximately five million barrels of liquids and five billion cubic feet of natural gas. (Id. at 3, ¶ 13.) Employees of the S&T Group included both “physical traders” who entered into physical commodities sales and purchases and “financial traders” who entered into Hedging Transactions on Plaintiff’s behalf. (Id. at 4, ¶¶ 15, 16.) Because crude oil types are varied and diverse, with some requiring less processing during the refining process, the physical traders were responsible for obtaining feedstock to match Plaintiff’s refining capabilities to maximize production and to produce Plaintiff’s desired refined products. (See id. at 5, ¶ 19 (“Plaintiff’s refineries were largely configured to manufacture and process heavy, sour crude, but most of Chevron’s [crude oil produced in upstream operations] was light, sweet crude”).) As a result, the S&T Group often purchased more than 85-90 percent of the heavy, sour crude feedstock needed to keep downstream production operating at capacity and sold 85-90 percent of its light, sweet equity production to third parties. (Id. at 5, ¶¶ 21, 22.) (3) The petroleum industry was susceptible to extremely volatile pricing risks. (Id. at 6, ¶ 25.) To obtain the “price of the day” for Plaintiff’s physical commodities within Plaintiff’s defined and accepted level of pricing risk, and to avoid or eliminate any distortion in the expected commodity pricing exposure, Plaintiff’s financial traders entered into hedging transactions side by side with the physical commodities purchases. (Id., ¶¶ 28, 30.) The S&T Group’s pricing role “supported its ability to sell [Plaintiff’s] equity production at the highest possible value and purchase the highest margin crude oil needed to supply refineries at the lowest possible cost.” (Id. at 7, ¶ 32.) Financial traders determined the appropriate type, structure, and timing of each hedging transaction based on information provided by the physical traders. (Id. at 4, ¶16.) Hedging instruments used in Plaintiff’s risk management and trading activities to produce the Hedging Receipts included forwards, futures, swaps, and options. (See Def’s Decl of Paul, Ex D at 3.) The hedging transactions, including the sale of futures contracts and other instruments, created additional receipts over and above the amounts received from selling oil and gas. (See Def’s Mot Summ J at 4.) However, “minimal to no oil or gas commodities would have physically transferred in the [Hedging Transactions].” (Def’s Decl of Paul, Ex I at 1 (Sept. 12, 2022, discovery response to Defendant).) After excluding the Hedging Receipts from the sales factor on its original returns, Plaintiff filed amended returns for the Years at Issue in which Plaintiff added the Hedging
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 6 of 23 Receipts to the denominator of the sales factor, thus reducing the percentage of Plaintiff’s overall business income that was apportioned to Oregon. (See Ptf’s Cross-Mot Summ J at 1; Ptf’s Response at 14.) Defendant issued refunds to Plaintiff based on the amended returns but later rejected Plaintiff’s position and issued notices of assessment for each of the Years at Issue. (See Def’s Decl of Paul, Ex H at 1-6 (notices of assessment).) Plaintiff appealed to the Magistrate Division, which denied relief. In accordance with ORS 305.419(1), Plaintiff then paid the tax assessed, and all penalties and interest due, before filing its complaint in this division. (See Complaint at 1, ¶ 2; Answer at 1.) Plaintiff’s appeal in this division is de novo. ORS 305.425(1). The table below summarizes the total Hedging Receipts Plaintiff seeks to include in the sales factor denominator, the resulting reduction in the apportionment factor if the receipts are included, and the total amount of refund Plaintiff seeks for each of the Years at Issue. Year at Issue Hedging Receipts Sought To Be Included in Sales Factor3 Resulting Change to Apportionment Percentage4 Refund Sought5 2011 $182,790,040,415 0.7154% to 0.4126% $4,616,101 2012 $158,953,849,297 0.668% to 0.4028% $5,768,163 2013 $182,035,345,449 0.6386% to 0.3453% $4,368,722 III. ISSUE Are Plaintiff’s Hedging Receipts includible in its Oregon sales factor for the Years at Issue? 3 (See Compl at 2-3, ¶¶ 10-12; Answer at 1, ¶ 1.) 4 (See Def’s Mot Part Summ J at 4.) 5 (See Compl at 2-3, ¶¶ 10-12; Answer at 1, ¶ 1.)
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 7 of 23 IV. ANALYSIS A. Legal Background The starting point in determining Oregon corporation excise tax is the corporation’s “taxable income or loss” as determined under federal income tax law. ORS 317.010(10). The next step is to apply Oregon-specific additions, subtractions, and other modifications prescribed in ORS chapter 317. See id. As one of the last steps, a corporation engaged in business in multiple states must apply UDITPA. See id. The taxpayer first “allocates” specific items of “nonbusiness” income or loss to Oregon, then “apportions” a percentage of its remaining “business” income or loss to Oregon. See ORS 317.010(10)(a) to (c). The apportionment percentage generally is a fraction, of which the numerator is sales “in this state” and the denominator is total sales everywhere. ORS 314.650; ORS 314.665(1). The so-called “sourcing” provisions for determining whether a sale is “in this state” fall into two categories. Under ORS 314.665(2), sales “of tangible personal property” are added to the denominator of the sales factor, and they also are added to the numerator if Oregon is the ultimate destination of the goods. See Powerex Corp. v. Dept. of Rev., 357 Or 40, 49-51, 346 P3d 476 (2015). Under ORS 314.665(4), sales of intangible property, or of services, are added to the denominator, and they also are added to the numerator if Oregon is the state where the plurality of relevant income-producing activities occurs. ORS 314.665(6) excludes certain gross receipts from the definition of “sales,” and thus from both the numerator and the denominator. One of those exclusions is at issue here: the exclusion for gross receipts arising from the sale of intangible property, “unless those receipts are derived from the taxpayer’s primary business activity.” ORS 314.665(6)(a).6 6 The parties agree that the Hedging Receipts are business income that is not allocated under ORS 314.615
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 8 of 23 After allocation and apportionment, and after applying any net operating loss carryovers, the resulting “Oregon taxable income” is multiplied by Oregon’s corporate tax rate. ORS 317.010(8); ORS 317.070 (imposing tax on “Oregon taxable income”).7 B. Plaintiff’s First Theory: Plaintiff’s Hedging Receipts Are Sales of Tangible Personal Property. Plaintiff argues that the federal Corn Products doctrine, which requires the Hedging Receipts to be treated as “ordinary” income like receipts from selling the commodity itself, also requires the Hedging Receipts to be treated as “sales of tangible personal property” for Oregon apportionment purposes.8 ORS 314.665(2). The court starts by examining Plaintiff’s argument that Oregon has adopted the Corn Products doctrine as binding authority under ORS 317.013 and ORS 317.108. (See, e.g., Ptf’s Cross-Mot Summ J at 17 (“In sum, the federal treatment of physical commodities hedging transactions discussed above must be applied for Oregon apportionment purposes due to Oregon’s adoption by reference of this federal law.”).) After concluding that Corn Products is not binding as to the issue at hand, the court applies Oregon’s cases governing the sales factor, concluding that the Hedging Receipts are sales of intangible / / / to 314.645, and neither party has asserted that the Hedging Receipts are from services. 7 Oregon generally does not set different tax rates for ordinary income or capital gain, except for certain sales of farm assets or interests in a farm entity. See ORS 317.070 (“Every * * * corporation * * * shall * * * pay * * * an excise tax according to or measured by its Oregon taxable income, * * * at the rate provided in ORS 317.061.”); ORS 317.063 (imposing special rate of five percent on net long-term capital gain from certain farming assets). 8 Plaintiff also argues that a law change several years after the Years at Issue shows that “such hedging receipts were generally includible as ‘sales’ during the years at issue, or else the law change would not have been required.” (Ptf’s Cross-Mot Summ J at 10 (citing 2017 Or Laws ch 622, § 1, which explicitly excluded hedging transaction receipts from the definition of “sales” in ORS 314.610(7)). The court rejects this argument. See DeFazio v. WPPSS, 296 Or 550, 561, 679 P2d 1316 (1984) (“The views legislators have of existing law may shed light on a new enactment, but it is of no weight in interpreting a law enacted by their predecessors.”); see also Tektronix, Inc. v. Dept. of Rev., 354 Or 531, 546, 316 P3d 276 (2013) (later legislative testimony “irrelevant” to interpretation of previously enacted law).
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 9 of 23 property, not tangible personal property. Finally, the court concludes that Corn Products is not persuasive authority meriting a departure from the result under Oregon’s case law. 1. Is Corn Products binding authority that the Hedging Receipts are treated as sales of tangible personal property for purposes of the sales factor? Plaintiff asserts that Corn Products controls this case as a “‘judicial interpretation[ ] of the federal income tax law.’” (Ptf’s Cross-Mot at 10 (“The Legislature directed that “[i]nsofar as is practicable in the administration of this chapter, the Department of Revenue shall apply and follow the administrative and judicial interpretations of the federal income tax law.”) (quoting ORS 317.013(2)).9) From there, Plaintiff reasons that, because federal law requires that “hedging transactions entered into to manage pricing risks * * * follow the same tax treatment as the underlying commodity * * * [Plaintiff’s] gross receipts from physical commodities hedging transactions must be apportioned in the same manner as the underlying physical commodities themselves (i.e., as tangible personal property pursuant to ORS 314.665(2)).” (Id. at 10-12.) It is true that Oregon conforms much of its income tax law to federal income tax law, including by adopting federal income tax case law under subsection (2) of ORS 317.013. See generally Dept. of Rev. v. Wakefield, 25 OTR 1, 37-44 (2022) (discussing incorporation of federal case law for personal income tax purposes under ORS chapter 316). However, the 9 ORS 317.013 provides, in relevant part: “(1) Those portions of the Internal Revenue Code, and any other laws of the United States pertaining to the determination of taxable income of corporate Plaintiffs, are adopted by reference as a part of this chapter. Those portions of the Internal Revenue Code and other laws of the United States have full force and effect under this chapter unless modified by other provisions of this chapter. “(2) Insofar as is practicable in the administration of this chapter, the Department of Revenue shall apply and follow the administrative and judicial interpretations of the federal income tax law. When a provision of the federal income tax law is the subject of conflicting opinions by two or more federal courts, the department shall follow the rule observed by the United States Commissioner of Internal Revenue until the conflict is resolved. Nothing contained in this section limits the right or duty of the department to audit the return of any taxpayer or to determine any fact relating to the tax liability of any taxpayer.”
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 10 of 23 Oregon laws that achieve that conformity have limits. A major limit is found in the subsection of ORS 317.013 immediately preceding the subsection cited by Plaintiff: ORS 317.013(1) incorporates only those portions of the Internal Revenue Code and other federal laws “pertaining to the determination of taxable income” of corporate taxpayers. The legislature has expressed this limit clearly in additional provisions: ORS 317.018(1) (emphasis added) declares the legislature’s intention to “make the Oregon corporate excise tax law, insofar as it relates to the measurement of taxable income, identical to the provisions of the federal Internal Revenue Code * * *.” Moreover, the legislature expressly did not intend “to adopt federal Internal Revenue Code provisions dealing with the computation of tax, tax credits or any other provisions designed to mitigate the amount of tax due.” ORS 317.018(2). Plaintiff fails to explain why the legislature would incorporate only a subset of federal income tax statutes--those provisions pertaining to the determination of taxable income--into chapter 317 through subsection (1) of ORS 317.013, yet in subsection (2) require federal case law on other federal income tax topics to be treated as controlling authority by Defendant when administering chapter 317.10 Taking this statutory context into account, the court reads the first sentence of subsection (2) as a direction to follow the judicial interpretations of the federal income tax law to the extent incorporated by reference through subsection (1). With this limit in mind, the court turns to the issue in Corn Products. At issue in Corn Products was whether gains and losses from the taxpayer’s hedging transactions in corn commodity futures were to be treated as arising from the sale of “capital” 10 Additional statutory context supports the court’s conclusion. The legislature added the limitation in subsection (1) of ORS 317.013 as part of the same bill in which it added subsection (2). Or Laws 1985, ch 802, § 32. See LandWatch Lane County v. Lane County, 330 Or App 468, 472, 544 P3d 428, rev den, 372 Or 290 (2024) (“Statutory context includes other parts of the same statute, other relevant statutes, and other parts of the same bill.”).
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 11 of 23 assets and thus subject to a complex set of special federal tax statutes and regulations commonly known as the “capital gains” rules. Those rules generally limit a taxpayer’s right to deduct “capital” losses when computing taxable income; the rules also at times have provided for reduced rates of tax on “capital gains.”11 The taxpayer’s returns for the years at issue (1940 and 1942) reported the hedging gains and losses as “ordinary income” and “ordinary losses” not subject to the capital gains rules, but in the course of defending an audit by the Internal Revenue Service, the taxpayer sought to recharacterize the futures contracts as capital assets, which in turn would have enabled the taxpayer to take advantage of provisions known as the “wash sale” rules, thereby reducing the assessment. See Corn Products Refining Co. v. Commissioner, 16 TC 395, 398-99 (1951), aff’d 215 F2d 513 (2d Cir 1954), aff’d 350 US 46, 76 S Ct 20, 100 L Ed 29 (1955). The United States Supreme Court rejected the taxpayer’s proffered recharacterization, concluding that the hedging transactions gave rise to ordinary income and losses, not capital gains and losses. The Court reasoned that, in enacting the capital gains rules, “Congress intended that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss rather than capital gain or loss,” while the capital gains rules were intended to apply to “transactions * * * which are not the normal source of business income.” 350 US at 52. The Court found “nothing in this record to support the contention that Corn Products’ futures activity was separate and apart from its manufacturing operation,” as the / / / 11 The content of the capital gains rules has changed numerous times since the first such provisions were added to the Internal Revenue Code in 1921. Moreover, historically there have been substantial differences in the treatment of corporate and non-corporate taxpayers. See generally Boris I. Bittker & Lawrence Lokken, 2 Federal Taxation of Income, Estates and Gifts (Bittker & Lokken), ¶¶ 46.1 to 46.3 (3d ed, 2025). The main provisions cited in Corn Products, sections 117 and 118 of the Internal Revenue Code of 1939, were recodified in 1954 and are predecessors to sections 1221 and 1091 of the Internal Revenue Code of 1986, respectively.
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 12 of 23 hedging transactions were “vitally important to the company’s business as a form of insurance against increases in the price of raw corn.” Id. at 50.12 Before considering the Supreme Court’s reasoning in greater depth, this court returns to the initial question: does the test articulated in Corn Products for classifying futures contracts as capital vs. ordinary assets “pertain to the determination of taxable income of corporate taxpayers,” as required under ORS 317.013(1)? The court concludes that the answer depends on the purpose for with the classification is invoked. For example, classification of a loss as “capital” may limit the extent to which the taxpayer may claim a deduction for the loss. See IRC § 1211(a) (“In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.”). Because taxable income is a net amount, defined as gross income less allowable deductions, the loss limitation provisions can affect the measure of taxable income. See IRC § 63 (“‘taxable income’ means ‘gross income minus the deductions allowed by this chapter’”). However, classification of gain as “capital” may cause a reduced rate of federal tax to apply; in that case the classification has no bearing on taxable income because the appropriate federal tax rate is selected only after federal taxable income has been determined. See IRC § 1(h) (specifying maximum capital gains tax rate for 12 Several decades later, in Arkansas Best Corp. v. Commissioner, the Court clarified its reasoning in Corn Products, stating that the existence of a connection between the asset and the taxpayer’s everyday business operations is not relevant to whether the asset is a capital asset but is relevant to whether the asset is “inventory,” a statutory exception codified within the definition of “capital asset.” See 485 US 212, 221, 108 S Ct 971, 99 L Ed 2d 183 (1988) (“The close connection between the futures transactions and the taxpayer’s business in Corn Products was crucial to whether the corn futures could be considered surrogates for the stored inventory of raw corn.”); former IRC § 117(a)(a) (1940) (“The term ‘capital assets’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer * * * or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business * * *.”) (emphases added); IRC § 1221 (a)(1) (same) The clarification in Arkansas Best is not relevant to this case, as both the definition of “capital asset” and the exception for inventory determine whether the capital gains rules apply to a transaction, as opposed to the rules governing ordinary income. For this reason, this court’s references to the Corn Products doctrine include the modifications by later cases, including Arkansas Best.
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 13 of 23 individual taxpayers); IRC § 1201 (providing alternative tax on corporations with net capital gains). The classification system articulated in Corn Products applies equally to both types of provisions: if an asset is classified as a capital asset, then both the loss limitations and the tax rate provisions apply. Accordingly, the court concludes that Corn Products is controlling authority under Oregon law to the extent that it is used to classify assets as capital vs. ordinary for the purpose of determining whether losses from the sale of those assets are deductible in computing taxable income. Conversely, Corn Products is not controlling authority under Oregon law to the extent that it is used to determine which rate of federal tax applies. In this case, Plaintiff does not raise Corn Products for either of those purposes; Plaintiff appears to have no dispute with Defendant about the computation of its federal taxable income, much less its federal tax rate. Rather, Plaintiff invokes Corn Products for a purpose that involves the computation of gross receipts, which, along with the computation of gross income, is antecedent to, and unaffected by, the capital gains rules. As a leading treatise explains: “Although governed by an elaborate web of statutory provisions, capital gains and losses do not occupy a tax world of their own. The term ‘gross income’ includes both capital gains and ordinary income, so that provisions that refer to a dollar amount of gross income (e.g., § 6012(a), relating to the filing of tax returns) apply whether the income is ordinary or capital. Many other statutory, administrative, and judicial rules apply equally to capital and ordinary transactions in determining the amount of gain or loss, the time when gains and losses are taken into account, the deductibility of losses, and the recognition of gains and losses. For example, although the sale of a personal residence for less than its cost produces capital loss, this is useless information because the loss, not having occurred in the seller’s trade or business or in a transaction entered into for profit, may not be deducted. Because the actual tax treatment of transactions creating capital gains and losses always depends on provisions of more general import, it is essential that they be viewed in this larger context.” 2 Bittker & Lokken at ¶ 46.1 (emphasis added) (footnotes omitted); see Oracle II, 24 OTR at 380 (Oregon Legislature, in adopting the term “gross receipts” for purposes of the sales factor, intended that “gross receipts” “be defined consistently with the taxpayer’s method of accounting
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 14 of 23 for income tax purposes.”; see ORS 317.018(2) (Oregon corporation excise tax law applies federal income tax accounting methods).13 Because the capital gains rules do not determine the measure of gross receipts, the court concludes that the Corn Products doctrine is not binding authority for the determination of whether the Hedging Receipts are “sales of tangible personal property” for Oregon apportionment purposes.14 2. Is Corn Products persuasive authority? The court next considers whether anything in the reasoning of Corn Products or its progeny is persuasive authority that Plaintiff’s Hedging Receipts should be treated as sales of tangible personal property for Oregon apportionment purposes. To begin, the court observes that Oregon case law governing the sales factor clearly establishes that the Hedging Receipts are sales of intangible property, not sales of tangible personal property. Plaintiff, therefore, bears the burden of persuading the court to depart from that classification. The key case is Powerex, where the Oregon Supreme Court extensively analyzed whether electricity was tangible or intangible personal property, in order to determine which set of “sourcing” rules would determine whether the taxpayer’s electricity sales were “in this state.” See ORS 314.665(2) (sourcing of sales of tangible personal property); ORS 314.665(4) (sourcing of other sales). 13 Plaintiff’s opening brief cites New Mexico Timber Co. v. Comm’r, 84 TC 1290 (1985), where the court held that the taxpayer’s “gross receipts,” for purposes of a provision specific to S corporations, consisted of the full contract price of commodity futures contracts, not merely the net gain on contracts settled by offset. (Ptf’s Mot Summ J at 16-17.) Neither party discusses this case further, and this court sees nothing in the United States Tax Court’s reasoning that affects the analysis in this case. 14 Plaintiff also argues that this court is required to follow several federal cases “holding that the offsetting of futures contracts (i.e. physical delivery did not occur) results in constructive delivery and must be treated for tax purposes as a deemed sale of units of the commodity described in the contracts.” (Ptf’s Response at 5-6.) This court concludes that those decisions are not controlling because, as in Corn Products and Arkansas Best, the issue was application of the capital gains rules, not the treatment of gross receipts. See Covington v. Commissioner, 120 F2d 768 (5th Cir 1941) (rejecting taxpayer’s attempt to classify futures losses as ordinary on the grounds that all the contracts were executory, never closed out), cert den 315 US 822 (1942); Hoover Co. v. Commissioner, 72 TC 206, 207 (1979); Vickers v. Commissioner, 80 TC 394, 395 (1983).
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 15 of 23 Rejecting this court’s reliance on the trial testimony of competing nuclear physicists about the nature and behavior of subatomic particles, the Supreme Court articulated a test that focuses on what makes the property useful and valuable to a taxpayer: “[W]e conclude that tangible personal property is perceptible to the senses and that its physical features make it useful. Conversely, intangible property lacks ‘intrinsic or marketable value.’ Thus, even though a bond--a common example of intangible property--physically evidences a debt, the value of the bond does not lie in the physical features of the bond but in the legal obligation that the bond embodies.” Powerex, 357 Or at 62; see also id. at 65 (legislative history of UDITPA shows that “physical properties of tangible personal property were what made it useful while the physical properties of intangible property had little or no relation to that property’s value or usefulness.”). The court concluded that electricity is tangible personal property for purposes of the sales factor because “the physical properties of electricity are what make it valuable to a purchaser * * *.” Id. at 66; see also Tektronix, 354 Or at 543-44 (classification of goodwill as intangible not contested; adopting legal dictionary definition of “intangible assets” as “‘property representative of a right rather than a physical object.’”) (quoting West’s Tax Law Dictionary 570 (2013)). Applying the Powerex test here, the undisputed record readily establishes that the Hedging Receipts are sales of intangible property. Plaintiff’s stated purpose for buying and selling hedging contracts was “[t]o create predictability within the volatile oil market, * * * to obtain the pricing for Chevron’s physical commodities within its defined and accepted level of pricing risk,” and “to avoid or eliminate any distortion in the expected commodity pricing exposure” by using the hedging transactions “[t]o obtain the price of the day[.]” (See Ptf’s Decl of Berkeland at 6-7, ¶¶ 28, 29, 31.) The value and usefulness of the contracts lay not in the physical properties of either the paper or electronic media in which the hedging instruments were embodied, or in the underlying physical commodities, but in the rights and obligations that the contracts represented:
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 16 of 23 the right to buy or sell oil and gas commodities at a particular price. By contrast, the value and usefulness of Plaintiff’s completed purchases and sales of tangible oil and gas commodities lay in the physical properties of those commodities. (See id. at 5, ¶ 22 (purchases of oil and gas were necessary “feedstock [that Plaintiff’s] refineries needed in order to keep Downstream operations producing/flowing” and because the oil and gas could be refined into other saleable products).) Powerex thus sets a high bar to persuade the court to treat the Hedging Receipts as sales of tangible personal property. The court examines the Corn Products analysis in greater depth for any principles that could be compatible with, or be found to supersede, the classification under Powerex. In Corn Products, the Court was primarily concerned with effectuating Congress’s intent by construing the definition of “capital asset” narrowly to avoid a “loophole.” 350 US at 53-54. The Court described the capital gains rules as a “preferential” regime by which Congress intended to “relieve the taxpayer from excessive tax burdens on gain resulting from a conversion of capital investments.” Id. at 52. As an “exception,” the capital gains rules were required to be “narrowly applied” and the exclusions from capital gains treatment were to be “interpreted broadly,” lest taxpayers engaging in hedging transactions be allowed to “transmute ordinary income into capital gain at will.” Id. at 53-54. It is against this backdrop that the Court rejected the taxpayer’s contention that its hedging transactions were the activities of a “capital investor,” “separate and apart from its manufacturing operations.” Id. at 49-51. This court sees no basis to apply the Corn Products Court’s concerns about potential abuse to the wholly unrelated definition of “sales of tangible personal property” under UDITPA. The court is aware of no indication that the Oregon Legislature, or the drafters of UDITPA, viewed the definition of the sales factor as creating a “preferential” regime to reduce otherwise excessive tax burdens. See, e.g., ORS 314.667 (2013) (“safety valve” statute allowing
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 17 of 23 alternative apportionment methods if standard provisions “do not fairly represent the extent of the taxpayer’s business activity in this state”) (former ORS 314.670). Although the sixty-year history of UDITPA has revealed many gray areas and perceived inadequacies in the distinctions among tangible personal property, intangible property, and services, this court cannot conclude that the definitions of the terms generally tilt toward taxpayers and thus create opportunities for “loopholes” requiring elevated judicial scrutiny. To the contrary, the overwhelming concern was to create a system that is fair both to multistate businesses and to states. See, e.g., Twentieth Century-Fox Film v. Dept. of Rev., 299 Or 220, 227, 700 P2d 1035 (1985) (“Two basic goals of UDITPA * * * emerge: (1) fair apportionment of income among the taxing jurisdictions; and (2) uniformity of application of the statutes.”); US Bancorp v. Dept. of Rev., 13 OTR 84, 90 (1994) (“Oregon statutes appear intended to tax nondomiciliary businesses to the full extent permitted by the constitution. The statutes, however, apply to both domiciliary and nondomiciliary businesses. Consequently, the statutes and rules are like the proverbial two-edged sword which cuts both ways. If a broadly worded state statute provides for apportionment of a taxpayer’s income, it applies even though it results in less revenue for the state.”). To be sure, the Corn Products classification has proved highly instructive as applied to other state tax issues, primarily whether a particular stream of income must be allocated entirely to one state as “nonbusiness income” or is subject to formulary apportionment as “business income.” See, e.g., Allied-Signal, Inc. v. Dir., Div. of Tax’n, 504 US 768, 788, 112 S Ct 2251, 119 L Ed 2d 533 (1992) (citing Corn Products) (distinguishing between allocable income from a “capital transaction that serves an investment function and one that serves an operational function” and therefore results in apportionable business income); cf. Corn Products, 350 US at 52 (distinguishing capital “transactions in property which are not the normal source of business
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 18 of 23 income” from ordinary “profits and losses arising from the everyday operation of a business”). As to the allocable/apportionable income issue, the analogy is clear and is regularly cited. See, e.g., Fisher Broadcasting Co. v. Dept. of Rev., 22 OTR 69, 77 (2015) (“Assets referred to as Corn Products assets [yielding ordinary income] are also examples of assets having an operational rather than investment function”); Jerome R. Hellerstein, Walter Hellerstein, Andrew D. Appleby, 2 State Taxation § 9.10[1][c] (3d ed, 2025) (“By analogy, dividends received on stocks falling within the Corn Products doctrine may be regarded as business income that is apportionable * * *.”); see also Container Corporation v. Franchise Tax Board, 463 US 159, 180 n 19, 103 S Ct 2933, 77 L Ed 2d 545 (1983) (analogizing to Corn Products test in concluding that taxpayer’s transfers of capital to its subsidiaries were a “flow of value” indicating the presence of a unitary business, because the transfers served an “operational function” rather than an “investment function”). Here, however, the analogy simply does not apply. Plaintiff does not contest that the Hedging Receipts are business income, and Oregon law plainly states that apportionable business income can arise from sales of either type of property. See ORS 314.610(1) (“‘Business income’ means income 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.”) (emphasis added). This court does not see a basis to extrapolate from Corn Products a one-size-fits-all rule that hedging transactions always must be classified in the same way as sales of the underlying commodity, regardless of the purpose of the classification. (Ptf’s Mot Summ J at 17.) Nor is the purpose Plaintiff advances in this case sufficiently similar to persuade the court to adopt it here.
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 19 of 23 3. Conclusion as to Plaintiff’s first theory The Hedging Receipts are gross receipts from the sale of intangible property, because Oregon case law squarely on point defines them as such, and because Corn Products is neither binding nor persuasive authority for a different conclusion. C. Plaintiff’s Second Theory: Reinclusion under ORS 314.665(6)(a). Because the court has concluded that the Hedging Receipts are not sales of tangible personal property, they initially are excluded from the sales factor under the first clause of ORS 314.665(6)(a), as “gross receipts arising from the sale, exchange, redemption or holding of intangible assets.” However, Plaintiff argues as its second theory that the final clause of ORS 314.665(6)(a) “reincludes” the Hedging Receipts in the sales factor because “those receipts are derived from [Plaintiff’s] primary business activity.” The parties agree that Plaintiff’s primary business activity is “developing and producing crude oil and natural gas, and refining and marketing those products for sale.” (Ptf’s Reply at 6; Def’s Mot Summ J at 10.) The only issue, then, is whether “those receipts” are “derived from” that primary business activity. Plaintiff argues that the Hedging Receipts are derived from its primary business activity because the hedging transactions are “inextricably linked” with Plaintiff’s sales and purchases of physical commodities. (E.g., Ptf’s Cross-Mot Summ J at 1; Id. at 17; Ptf’s Resp Cross-Mot Summ J at 7; Ptf’s Reply at 3.)15 Plaintiff relies on the following undisputed facts: 15 At times, Plaintiff also characterizes the hedging transactions as “integrally” tied to its sales of commodities, but it appears that Plaintiff’s usage is synonymous with “inextricably linked.” (E.g., Ptf’s Mot Summ J at 12-13.) The court does not infer that Plaintiff seeks to prove that the Hedging Receipts are “derived from” its “primary business activity” under ORS 314.665(6)(a) merely because they are “business income” under ORS 314.610(1) as discussed above. See ORS 314.610(1) (“Business income” means income arising from transactions and activity in the regular course of the Plaintiff’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 Plaintiff’s regular trade or business operations) (emphasis added).
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 20 of 23 • Both the Upstream and Downstream operations of Plaintiff’s business required prompt and constant selling of the physical commodities. Plaintiff’s primary declaration compares the operations to a conveyor belt that requires goods to be sold and moved off the end of the belt in order to avoid blockages and stoppages at earlier points along the length of the belt. (Ptf’s Decl of Berkeland at 5-6.) • Petroleum commodity prices are volatile, and Plaintiff “has a defined and accepted level of pricing risk established by the company when making sales and purchases of physical commodities due to the extremely volatile pricing risk of the petroleum industry.” (Ptf’s Reply at 6-7.) • “The physical commodities hedging transactions were required [in order] to obtain pricing within [Plaintiff’s] established pricing risk for the sales and purchases of the physical commodities.” (Id.) • Plaintiff entered into “physical commodities sales and purchases side-by-side with the hedges [as] one single process to meet Chevron’s defined and accepted level of pricing risk” and to “eliminate any distortion in the expected commodity pricing exposure.” (Ptf’s Decl of Berkeland at 6, ¶¶ 28-29.) • “To obtain the price of the day [for risk management purposes], Plaintiff was required to enter physical commodities hedging transactions as a pricing mechanism for the sales and purchases of physical commodities. The hedging transactions became inseparable from the physical sales and purchases; the two cannot be separated.” (Id. at 7, ¶ 31.) In essence, Plaintiff seeks to establish that because the hedging transactions are required under Plaintiff’s policies, and are entered into simultaneously with physical commodities sales and purchases, they are “derived from” those sales and purchases. The court has previously considered the meaning of “derived from” for purposes of the reinclusion provision in ORS 314.665(6)(a): “[T]he court concludes that both the plain and technical legal meanings of ‘derived from’ direct the court to look to any ‘specified source’ in the statute and to look no further if the statute identifies one. In [ORS 305.665(6)(a)], that source is the taxpayer’s ‘primary business activity.” Oracle II, 24 OTR at 389 (emphasis added); see also Microsoft (slip op at 18-27) (summarizing and expanding on “derived from” analysis)). The phrase “derived from” thus requires the court
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 21 of 23 to identify the source of the Hedging Receipts and to determine whether that source is the Plaintiff’s primary business activity. When undertaking the same exercise in Tektronix, the Oregon Supreme Court readily concluded that the source of the gross receipts at issue was the taxpayer’s sale of goodwill, not the “sale of electronics equipment,” which constituted the taxpayer’s primary business activity. 354 Or at 547. The court’s task no doubt was simplified by federal and Oregon tax accounting law, which required the taxpayer to identify and quantify on its federal income tax return the gross receipts from the items it characterized as goodwill16--an amount that was not in dispute even though the taxpayer also sold other assets as part of the same transaction.17 See ORS 317.018(2) (Oregon corporation excise tax law applies federal income tax accounting methods). Thus, although a manufacturer’s goodwill upon sale of the assets of a business division arguably could be described as a residual intangible asset originating from, or inextricable from, prior successful sales of goods over time, the court looked to the standalone receipts for the intangibles at issue, as reported on the taxpayer’s return.18 Similarly, in this case there is no basis to look beyond the hedging transactions to Plaintiff’s sales of commodities, even though the undisputed evidence is that Plaintiff always 16 Federal income tax law requires this identification and quantification, preferably by agreement between the buyer and seller, in order to substantiate the seller’s gain and the buyer’s allowable depreciation deductions. See IRC § 1060 (requiring allocation among asset classes of consideration received upon sale of the assets of a business); IRC § 197 (requiring acquirer of goodwill, “going concern value,” “workforce in place” and other listed intangibles to amortize the purchase price of those assets over specified period). 17 The parties did disagree over whether all of the intangibles could properly be labeled as “goodwill,” as opposed to other intangibles, but they did not disagree that the taxpayer had received $590 million from the sale of intangibles, out of a total purchase price of $925 million. Tektronix, 354 Or at 533 & n 1. 18 Goodwill often is described as a residual amount. E.g., Tektronix, Inc. v. Dept. of Rev., 20 OTR 468, 504 (2012), (quoting Webster’s Third New Int’l Dictionary 979 (unabridged ed 2002) (defining goodwill as “‘[T]he excess of the purchase price of a business over and above the value assigned to its net assets exclusive of goodwill.’”), aff’d on other grounds 354 Or 531, 316 P3d 276 (2013).)
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 22 of 23 undertakes both types of transaction together. Section 1221 of the Code requires taxpayers to identify hedging transactions separately from their physical commodity transactions. See IRC §1221(a)(7) (“capital asset” does not include “any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe)[.]”); IRC § 1221(b)(2)(A)(i) (defining hedging transaction, as relevant here, as “any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily * * * to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer.”). Corn Products does not extinguish the separate existence of gross receipts from the sale of intangibles, nor does it fuse them together with gross receipts from the sale of inventory for all purposes; the Corn Products doctrine merely places both types of receipts into the same classification for purposes of the capital gains rules. Because Plaintiff’s Hedging Receipts are separately identified under the federal income tax accounting provisions that apply to Plaintiff, the court concludes that they are not “derived from” Plaintiff’s sales of tangible commodities, notwithstanding the strong business and practical connections between the two types of receipts. V. CONCLUSION There is no genuine issue of material fact as to the subjects of the parties’ cross-motions. The court will deny Plaintiff’s motion as a matter of law. As noted at the outset, the court treats Defendant’s motion as one for partial summary judgment. The court directs the parties to confer and to advise the court within 30 days as to the need for further proceedings to resolve Plaintiff’s second claim, for abatement of penalties. Now, therefore,
ORDER GRANTING DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT TC 5461 Page 23 of 23 IT IS ORDERED that Defendant’s Motion for Summary Judgment is treated as a motion for partial summary judgment and is granted to that extent. IT IS FURTHER ORDERED that Plaintiff’s Cross-Motion for Summary Judgment is denied. Dated this 21st day of July, 2025.
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