Current through Register Vol. 61, No. 4, April 1, 2022
(1) Damages, including settlement proceeds,
received by a taxpayer as a result of litigation are commercial activity to the
extent they reimburse the taxpayer for transactions and activity during the
regular course of the taxpayer's trade or business.
(2) To the extent receipts stem from damages
received as the result of litigation and those receipts are in excess of what
would have been received had the taxpayer not been involved in litigation, the
taxpayer may exclude the amount in excess from its calculation of commercial
(3) Damages not excluded
are subject to the corporate activity tax in the year those amounts are
realized, regardless of when the litigation was initiated.
All facts and circumstances may be
considered to determine if the damages were received as result of litigation.
Example 1: Widget Co., a
business with Oregon commercial activity, sues Items Inc. for selling defective
equipment in Oregon. Widget Co. wins the lawsuit and is awarded $1 million for
the cost of the defective equipment and $2 million for the loss of business
income in Oregon. Widget Co. includes the $2 million amount received for the
loss of business income in its commercial activity.
Example 2: In the regular course
of its business, Widget Co. allows other manufacturers to use its patented
process in exchange for a royalty. Widget Co. discovers that Items Inc. is
using its patented process without paying the royalty fee. Widget Co. files a
lawsuit for patent infringement. Widget Co. wins the lawsuit and is awarded
compensatory damages of $2 million for the loss of business income in Oregon,
$500,000 for punitive damages, and $60,000 for attorney fees. Widget Co.
includes $2 million in its commercial activity because that is the amount Items
Inc. would have paid in royalties. The $500,000 of punitive damages and the
$60,000 of attorney fees are not included in Widget Co.'s commercial activity
because those amounts would have never been received, had there not been a
Example 3 : Widget Co. and
Items Inc. enter into settlement negotiations over Items Inc.'s alleged breach
of a contract. As a result of the settlement, Items Inc. agrees to pay Widget
Co. $1 million for the cost of the contract in Oregon and $50,000 as a penalty
for the breach of contract. Widget Co. includes the $1 million for the breach
of contract as commercial activity and excludes the $50,000