Dept. of Rev. v. Washington Federal, Inc. ( 2012 )

No. 57 June 29, 2012 507
IN THE OREGON TAX COURT
REGULAR DIVISION
DEPARTMENT OF REVENUE,
Plaintiff,
v.
WASHINGTON FEDERAL, INC.,
and Subsidiaries,
Defendants.
(TC 5010)
Plaintiff (the department) appealed from a Magistrate Division decision as
to the Oregon statute of limitations application in response to changes or cor-
rections of another state, arguing that its Notices of Deficiency Assessments for
certain tax years were not time-barred as was argued by Defendants (taxpayer).
Ruling for taxpayer, the court stated that the statute must be read as describing
only changes or corrections that more directly result in or cause a change in
Oregon tax liability because Oregon has no statutory linkage of its tax base or
tax liability to the tax systems of other states, but only to the federal system. As
to the construction of the statute regarding the word “because,” in the general
description of a change in Oregon taxable income or liability, the court ruled that
the meaning of that word there indicates a causal element that was formerly
described by the phrase “resulting in.”
Oral argument on cross-motions for summary judgment
was held May 8, 2012, in the courtroom of the Oregon Tax
Court, Salem.
Melisse S. Cunningham, Senior Assistant Attorney
General, Department of Justice, Salem, filed the motion and
argued the cause for Plaintiff (the department).
Mark K. Buchi, Holland & Hart LLP, Salt Lake City,
filed the cross-motion and argued the cause for Defendants
(taxpayer) pro hac vice.
Decision for Defendants rendered June 29, 2012.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This matter is before the court on cross-motions
for summary judgment. Plaintiff Department of Revenue
(the department) and Defendants (taxpayer) have stipu-
lated to all material facts. In proceedings in the Magistrate
508 Dept. of Rev. v. Washington Federal, Inc.
Division the department made certain arguments that are
not renewed in this division of the court. The tax years at
issue are 1999, 2000, 2001 and 2002.
II. FACTS
The parties have stipulated to the following facts.
Taxpayer operates as a federal savings and loan corpora-
tion headquartered in the state of Washington. Taxpayer
earns income primarily through the making of and repay-
ment of residential mortgage loans. Taxpayer has more than
100 branches in Washington, Idaho, Oregon, Utah, Nevada,
Arizona and Texas.
Taxpayer filed its Oregon Corporation Excise Tax
return for tax year 1999 on July 16, 2001. It filed its return
for tax year 2000 on July 10, 2002, with an amended return
filed on approximately June 24, 2005. It filed its return for
tax year 2001 on June 12, 2003. It filed its return for tax
year 2002 on July 15, 2004.
On September 24, 2008, the department issued
Notices of Deficiency to taxpayer for tax years 1999 to 2002.
The parties disagree as to whether the Notices of Deficiency
were issued within the time allowed by law.
On March 2, 2006, the Idaho State Tax Commission
issued a Notice of Deficiency to taxpayer for tax years 1999
to 2002 in the amount of $786,692 in tax, penalty and inter-
est, which amount was later amended to $1,044,296. The
department maintains that it received notice of the Idaho
Notice of Deficiency on October 2, 2006.
Idaho made the following changes to taxpayer’s
return: (a) inclusion of Idaho loans that were placed in a
Real Estate Mortgage Investment Conduit (REMIC), and
income from those loans in the property and sales fac-
tors; (b) inclusion of loan servicing fees in the sales factor;
(c) inclusion of certain gross proceeds of business assets sold
rather than net proceeds, in the sales factor denominator;
(d) exclusion of interest income earned from federal obli-
gations from the sales factor denominator; (e) inclusion of
interest income earned on obligations not subject to federal
Cite as 20 OTR 507 (2012) 509
income tax in the sales factor denominator; and (f) exclusion
of amounts paid to independent contractors from the payroll
factor denominator.
Taxpayer agreed with adjustments (b), (c), (d), (e)
and (f), but disagreed with adjustment (a) and the penal-
ties. Taxpayer appealed the Idaho Notice of Deficiency on
two grounds. On September 18, 2008, the Idaho District
Court entered an order overturning adjustment (a) and the
penalties. As a result, the Idaho Tax Commission issued an
amended Notice of Deficiency on December 28, 2009, that
resulted in no penalties and a refund to taxpayer of $48,043
in tax and interest.
On May 21, 2003, the Arizona Department of
Revenue issued a Notice of Proposed Assessment to taxpayer
for tax year 1999, which resulted in a refund of $154. The
department maintains that it received notice of this Arizona
Notice of Proposed Assessment on April 9, 2007.
Arizona made the following changes to taxpayer’s
return: (a) exclusion of two entities from the combined
group; (b) reduction to the add-back for state taxes based
on income; (c) reduction in interest income received on fed-
eral obligations; (d) disallowance of an interest expense
deduction for exempt interest; (e) recharacterization of low
income housing partnership income as nonbusiness income;
(f) inclusion of gross proceeds of business assets sold, rather
than net proceeds, in the sales factor denominator; and
(g) exclusion of independent contractor management fees,
low income housing partnerships and mortgage-backed
securities net gain from other income.
Taxpayer did not dispute these adjustments by the
Arizona Department of Revenue. Tax payer does not dispute
that the department issued its Notices of Deficiency within
two years of receiving notice of the Idaho and Arizona audit
adjustments.
III. ISSUE
Was the notice of deficiency issued by the depart-
ment issued within the applicable statute of limitations for
issuance of such notices?
510 Dept. of Rev. v. Washington Federal, Inc.
IV. ANALYSIS
The statute governing this matter is ORS 314.410(3)(b)(A),1
which, in relevant part provides:
“If the Commissioner of Internal Revenue or other autho-
rized officer of the federal government or an authorized offi-
cer of another state’s taxing authority makes a change or
correction as described in ORS 314.380(2)(a)(A) and, as a
result of the change or correction, an assessment of tax or
issuance of a refund is permitted under any provision of the
Internal Revenue Code or applicable law of the other state,
or pursuant to an agreement between the taxpayer and
the federal or other state taxing authority that extends the
period in which an assessment of federal or other state tax
may be made, then notice of a deficiency under any Oregon
law imposing tax upon or measured by income for the cor-
responding tax year may be mailed within two years after
the department is notified by the taxpayer or the commis-
sioner or other tax official of the correction, or within the
applicable period prescribed in subsections (1) to (3) of this
section, whichever period expires later.”
ORS 314.410(3)(b)(A) only applies when certain action
described in ORS 314.380(2)(a)(A) has occurred. ORS
314.380(2)(a)(A) provides in relevant part:
“The taxpayer shall report to the department any change
in the taxpayer’s taxable income that is subject to tax by
this state or any change in the taxpayer’s tax liability paid
to or owing this state because:
“(A) The Internal Revenue Service or other competent
authority has changed or corrected the amount of a tax-
payer’s taxable income, tax credit or other amount taken
into account in determining the taxpayer’s tax liability as
reported on a federal income tax return or an income tax
return of another state for any taxable year.”
(Emphasis added.) Under the foregoing language, changes in
Oregon taxable income or Oregon or tax liability must occur
“because” the Internal Revenue Service (IRS) or another
state made certain types of changes. Only certain types of
changes trigger extension of the time limitation provisions
of ORS 314.410(3)(b)(A).
1
Unless otherwise noted, all references to the Oregon Revised Statutes
(ORS) are to 2007.
Cite as 20 OTR 507 (2012) 511
As a preliminary matter, the court notes that the
provisions of the statutes involved in this case apply to
individual as well as corporate or other types of taxpayers.
Chapter 314 of the Oregon Revised Statutes contains many
such rules of general application to all taxpayers. Also,
while ORS 314.380(2)(a)(A) speaks of federal or other state
changes, this opinion will only address other state changes
except where the fact or possibility of a federal change is
relevant to the analysis.2
It is also important to note the effect of the time
limit stated in ORS 314.410 remaining open. If that time for
issuance of a notice of deficiency has not expired, the defi-
ciency asserted in Oregon is not limited to the item changed
or corrected by another state. Rather, the deficiency in
Oregon can be assessed on any basis under Oregon law.
ORS 314.410(3)(b)(B).
The position of the department is that the provisions
in ORS 314.380(2)(a)(A) apply in any case where another
state proposes a change or correction which is one that, if
made by the department, would change the tax liability of
a taxpayer in Oregon. Applying that position in this case,
the department points out that the actions of Idaho officials
were such that if the same changes were made in Oregon
relating to REMIC activity and the sales factor of taxpayer
in Oregon, the tax liability of taxpayer in Oregon would be
changed.3
The position of taxpayer is that the provisions of ORS
314.380(2)(a)(A) must be read as describing only changes or
corrections that more directly result in or cause a change in
Oregon tax liability. The court understands taxpayer to be
arguing that the only “other state” changes or corrections
described in ORS 314.380(2)(a)(A) are those that, unless
altered by the department, result in a change in Oregon tax
liability because of a connecting linkage between Oregon
2
A discussion of the application of the statutes in the case of certain federal
changes is found in Tektronix, Inc. v. Dept. of Rev., 20 OTR 468 (2012).
3
It is only a proposed change that is needed to trigger the extension provi-
sions for the limitations period. ORS 314.380(3)(a). A proposed change could be
abandoned by a sister state or defeated by the taxpayer, as occurred here as to
certain changes proposed by Idaho. Even in such cases the time period for assess-
ment of deficiencies by Oregon is extended.
512 Dept. of Rev. v. Washington Federal, Inc.
substantive law and the substantive law of a sister state.4
Taxpayer asserts there is no such substantive linkage exist-
ing in respect of the changes proposed by sister states here.5
It appears to the court that the difference in the posi-
tions of the parties comes down to the difference between:
(1) A change made by another tax authority that, if not
altered by the department, would impact, without more, the
tax liability of a taxpayer in Oregon; 6 and
(2) A change that would alter the tax liability of a tax-
payer only if affirmatively pursued by the department.
Illustrations for several situations may help to supply
context.
In the case of an individual income taxpayer resi-
dent in Oregon but having income from sources in, for exam-
ple, Illinois, Oregon affords a credit against the tax liability
of the individual in Oregon based on the amount of tax paid
for the tax year in Illinois. ORS 316.082.7 If the individual
files a return in Illinois showing an income tax due to Illinois
of $100X, the individual would, subject to certain exceptions
not relevant here, claim a credit against Oregon tax liability
for the tax year in the amount of $100X. If the Illinois tax
authorities audit the Illinois return and propose to adjust the
4
A change made by either the federal government or another state would
never automatically result in a change in Oregon tax liability without the depart-
ment having the opportunity to satisfy itself as to the facts and, in some cases,
law relating to the change. For example, although Oregon adopts federal defini-
tions relating to the measurement of taxable income, nothing in that adoption
process limits the right or duty of the department to audit returns and make
factual determinations. ORS 317.013(2). This fact does not mean however, as the
department suggests, that there cannot be some causal connection required by
the provisions of ORS 314.380(2)(a)(A).
5
The linkage that the department points to in ORS 314.380 and ORS 314.410
is a procedural rather than substantive linkage.
6
This is taxpayers’ position. Note that for the change in the other state
to actually affect the Oregon liability, the change would have to be finalized
in the other state. That would not mean, however, that such finalization of the
change would be required to trigger the limitations extension provisions of
ORS 314.380(2)(a)(A).
7
In some cases the allowance of the credit is reversed for Oregon residents
and the residents of states that follow such “reverse credit” rules. ORS 316.082(5);
Oregon Administrative Rule (OAR) 150-316.082(2)(1)(a) (examples 1 and 2).
Cite as 20 OTR 507 (2012) 513
tax liability downward to $75X, the individual would clearly
have a reporting obligation under ORS 314.380(2)(a)(A).
Why? For the reason that, if the proposed change is made,
the tax liability of the individual in Oregon would be greater
due to a $25X reduction in the amount of creditable tax paid
to Illinois. That proposed change, if it comes to completion,
will produce a consequence in Oregon without any affirma-
tive action of the department. The amount of the change will
be $25X unless the department determines that the liabil-
ity in Illinois is other than as reported to it. The result in
Oregon can be said to “have been produced by” or “be a result
of,” or “be because of” the change in Illinois tax liability.
Similarly, in the case of an individual, if the IRS
determines that the taxable income of the individual is
$100X greater than initially reported, that audit change
would flow through to the Oregon tax calculation and pro-
duce a change in Oregon taxable income unless the depart-
ment makes a different factual determination or unless
Oregon law provides for some modification to the particular
item changed by the IRS. ORS 316.022(6); ORS 316.048. The
federal change can be said to result in a change in Oregon
tax liability in all cases except where the department makes
a different factual or legal determination.8
In the case of a corporate taxpayer, a similar
analysis applies to changes by the IRS as to taxable income.
Federal changes in the tax base, or in some federal tax
credits, would lead to changes in Oregon taxable income or
Oregon liability unless the department makes different fac-
tual determinations. ORS 317.010(8) and 317.010(10) (as to
taxable income); ORS 317.152 (as to a credit provision).
In the case of a corporate taxpayer experiencing
changes made by sister states—the situation presented in
this case—Oregon has not by statute linked its tax base or
tax liability to the tax systems of other states. As to the tax
base (that is, Oregon taxable income) Oregon only links to
8
The department frequently has some flexibility in interpreting and apply-
ing federal tax statutes. Interestingly, this flexibility goes away when federal
courts issue conflicting interpretations of the same statute. In that case the
department must follow the legal position taken by the Commissioner of Internal
Revenue. See ORS 316.032(2); ORS 317.013(2); Dept. of Rev. v. Marks, 20 OTR 35(2009).
514 Dept. of Rev. v. Washington Federal, Inc.
the federal system. Id. As to tax credits, there is no linkage
to the law of other states. Even as to allocation and appor-
tionment of income of corporations operating in two or more
states, the governing provisions are derived solely from
Oregon law.9 Unlike the incorporation of federal provisions
in Oregon law, there is no incorporation by reference of the
law or policy of sister states in any of the elements of deter-
mination of corporate tax liability in Oregon.10
From the foregoing examples a pattern emerges: as
to both individual and corporate taxpayers there is a link-
age of Oregon to the federal system for determination of
Oregon taxable income. However, as to the law or filings in
other states, the court is only aware of one linkage and the
department has not identified any other. That one linkage is
the credit afforded under the personal income tax statutes
to Oregon residents for taxes paid to other states.
One final matter of context is relevant. While this
case focuses on linkages between Oregon and other tax
regimes in the context of changes or corrections made by the
IRS or other states in the audit of returns, an analysis can
also proceed from the beginning of the income tax process:
the preparation of a return. Here again, all taxpayers—
individual and corporate—consult linkages to the federal
system in the preparation of their returns. However, the
only place in Oregon law identified to the court, and of which
the court is aware, where an Oregon taxpayer, individual or
9
A lthough reference is made in this order to corporations and apportion-
ment, the provisions of Oregon law on apportionment and allocation also apply
to individuals doing business in more than one state. See Lane v. Dept.of Rev., 10
OTR 168 (1985).
10
This linkage only to the federal system is logical and understandable.
Individuals and corporations subject to tax in Oregon are in almost all cases
subject to tax in the federal system. Linkage to that system, subject to specific
modifications desired and enacted by Oregon, produces an efficient approach for
taxpayers, their return preparers, and the department. The federal tax system is
one codified source of developments in federal tax legislation and interpretations
are easily subject to review and are the subject of much commentary and inter-
pretive development. None of this can be said of the tax policies, legislation, or
interpretive developments of sister states. It took an amendment to the Oregon
Constitution to address concerns that linkage to the federal system would involve
unconstitutional delegation of legislative power. Or Const, Art IV, § 32. No such
constitutional provision authorizes consideration of the tax law of other states as
a basis for determination of Oregon liability.
Cite as 20 OTR 507 (2012) 515
corporate, must consult the law of sister states is as to indi-
vidual credits for Oregon residents.11
Within this context, the department and taxpayer
have the differing views, outlined above, as to the proper
construction of ORS 314.380(2)(a)(A). To the task of the con-
struction of that statute the court will now turn.
The parties are not separated about the construc-
tion of the statute except as to the word “because,” in the
general description of a change in Oregon taxable income
or liability and the relationship of that to some action taken
by a sister state. As to the critical word “because,” taxpayer
argues that there is a causal element in the meaning of that
word. The department counters that the dictionary defini-
tion of the word “because” is “for the reason that.” (Citing
Webster’s Third New Int’l Dictionary 194 (unabridged ed
2002).)
The department, however, reads the phrase “for
the reason that” in a descriptive fashion. Thus, in the view
of the department, if Idaho makes a change in calculation
of the sales factor and Oregon does so as well, the Oregon
change is made for the reason that the Idaho officials made
their change. The problem is that this construction of the
word “because” converts the definition from “for the reason
that” to “for the same reason that.” Under this construc-
tion, a change in the Oregon tax liability that would occur if
there was a recalculation of the sales factor occurs “because”
Idaho proposed a change in the sales factor.
The approach of the department adds a concept to,
and changes, the definition of “because.” The addition of the
adjective “same” to the definition makes the word “because”
one that is descriptive rather than one that is causal. That
approach appears to the court to be unwarranted, especially
in light of the legislative history of the statutory provisions,
a discussion of which follows.
11
Certain information reporting provisions for multistate businesses require
such taxpayers to report if there is not uniformity in the positions taken in Oregon
and sister states that are members of the Multistate Tax Compact. See, e.g., OAR
150-314.615-(A)(2). These provisions are, however, procedural and informa-
tional. They do not substantively link Oregon law to the law of other states.
516 Dept. of Rev. v. Washington Federal, Inc.
The concept of changes in Oregon liability occur-
ring because of changes made by federal officials is one that
has existed for decades in ORS 314.410 or ORS 314.380, or
both. The addition of references to actions of sister states
having a trigger effect is relatively recent. Those references
were added in 1999. See Or Laws 1999, ch 74, §§ 1, 3. A brief
review of the state of the law as of 1999 is the beginning
point of the analysis.
Prior to 1999, with the only relevant non-Oregon
actor being the IRS, the statutes involved here had con-
sistently required that the change made by the IRS be
one “resulting in” a change in Oregon tax or net income.
See ORS 314.410(3) (1969), ORS 314.410(3) (1993). That
requirement was contained within the provisions of the
statue of limitations statute, ORS 314.410, and not within
the statute on duty to report changes made by the IRS, ORS
314.380. The use of a reference within ORS 314.410 to cer-
tain kinds of changes made by the IRS that were report-
able under ORS 314.380 began with amendments made in
1997. Or Laws, 1997, ch 100, §§ 2, 3. However, that change
in statutory placement did not alter the requirement that, to
be a predicate, or trigger, for the extension of the statute of
limitations on deficiencies, the change made by the IRS had
to be one “resulting in” a change in the taxpayer’s Oregon
taxable income or tax liability. See ORS 314.380(2)(a)(1997).
The court has no question that the phrase “resulting in” con-
tains a strong causal feature. “Resulting in” is not merely
descriptive, it is about cause and effect.
In 1999, the possibility that changes by a sister state
could affect reporting responsibilities under ORS 314.380,
and therefore the statute of limitations in ORS 314.410, was
added to the statutes. Or Laws 1999, ch 74, §§ 1, 3. Two
observations regarding the change made in 1999 and the
legislative intent regarding that change are relevant. First,
as to the change in the statutory language itself, the cau-
sality requirement was not changed. ORS 314.380(2)(a), the
statute addressing the type of change to be considered under
the 1999 amendments, carried over the phrase that had
been consistently used for decades: the change by a sister
state had to be one “resulting in a change in the taxpayer’s
Cite as 20 OTR 507 (2012) 517
taxable income * * * or in the taxpayer’s tax liability.” ORS
314.380(2)(a) (1999) (emphasis added).
The second observation relates to the legislative
history for the 1999 amendments. That legislative history
shows that the general context within which the additional
returns and actions of sister states was discussed was one
animated by a concern for problems individual Oregon
resident taxpayers could have if they were also filing tax
returns in sister states. Thus, in a hearing before the Senate
Revenue Committee on January 28, 1999, department wit-
ness Susan Browning stated:
“The principle basically behind it and why we’re asking it
to be introduced is that we feel clearly that in Oregon the
tax policy is residents should be taxed on all their income,
but we want to make sure that no one should pay tax on the
same income to more than one state.
“* * * * *
“[A]nd we did have an example that I thought kind of high-
lights this and explains it back in 1997 where we had an
Oregon taxpayer who was also taxable by Idaho on his
Idaho income and it had to do with some timber that he
sold in Idaho and Idaho had audited just before our three-
year period expired, so the results came in after our appeal
period expired * * *. And Idaho did assess more tax. So the
taxpayer came back and tried to amend the Oregon income
tax to reflect the fact that they had to pay taxes on this
income to Idaho, as well as they had already done it with
Oregon, because we considered [it] part of Oregon income.
And then Idaho came in and said ‘no, this is actually part
of Idaho Income.’ So the taxpayer came back and tried to
say, ‘no, please give me a credit for the amount of taxes
I’ve already paid to Idaho.’ But because the timeframe was
already closed, we were not able to do that for that person.”
The testimony of witness Browning did not address any
matters other than taxation in sister states of individual
Oregon residents and the problems that exist or could exist
because of the credit that Oregon affords to such individual
residents.12 The amendment was described by Ed Waters, an
12
The actual case referred to in the testimony quoted was DeArmond v. Dept.
of Rev., 328 Or 60, 968 P2d 1280 (1998).
518 Dept. of Rev. v. Washington Federal, Inc.
economist with the Legislative Revenue Officer, as dealing
with adjustments and appeals made by other states “if they
affect Oregon tax.” (Emphasis added.) A causation compo-
nent was thus in the description and the detailed testimony
of the witness.
The legislative history of the 1999 amendments con-
tains no general discussion of linkages to sister state law or
any other sister state changes that could “affect” the liabil-
ity of a taxpayer in Oregon. The discussions related solely to
tax credits available to individuals and problems that could
arise if the amount of tax paid to a sister state changed, after
the filing of an Oregon return, by reason of changes or cor-
rections actually or potentially to be made by a sister state.
The witnesses’ discussion, like the text of the amendment,
disclosed that the concern was a “two way street.” A correc-
tion or change in tax liability in a sister state could lead to a
deficiency as well as a refund. Accordingly, the amendments
addressed both possibilities—providing for extended refund
procedures but also requiring reporting and extended defi-
ciency time lines if the sister state change led to a deficiency
in Oregon.13
Thus, at the end of the 1999 session of the Oregon
Legislature, sister state proposed changes had been
addressed, with no indication that the matter extended
beyond the issue of credits for those of individual Oregon
residents who might be taxable in a sister state. Further,
the causation principle remained firmly in place. Only sister
state proposed changes “resulting in” a change in Oregon
tax counted as the predicate acts that had to be reported
and that could extend the statute of limitations.
If this case was governed by the statutes as they
stood after the 1999 session, taxpayer would therefore pre-
vail in this litigation. One of the years at issue is, apparently,
13
The court also notes that before discussing the particular 1999 amend-
ment provisions with legislators, the department witness had spoken with the
legislators about the concept of residency of individual taxpayers. There is, of
course, no concept of residency for corporate taxpayers under Oregon’s income tax
statutes. Residency and its problems occur only with individuals and is addressed
by the allowance of credits by the state of residency.
Cite as 20 OTR 507 (2012) 519
governed by the law as it stood as such time and as to that
year taxpayer is entitled to prevail. As to the later years
present in this case, the question is whether changes made
by the legislature in the 2001 session altered the legal land-
scape from where it was at the end of 1999.
The only change made in 2001 to the statutes at
issue in this case was that ORS 314.380(2)(a) was divided
into two subparagraphs, those being (A) and (B). See Or
Laws 2001, ch 9, § 4. The division appears to have been nec-
essary because what had been one reporting requirement—
that related to changes of corrections made by governments—
was extended to add a reporting requirement in the case
a taxpayer filed amended returns with the IRS or a sister
state or was the subject of an assessment by either of those
governments for failure to file a required return. Each of the
events in subparagraphs (A) and (B) could be predicate acts
relevant to the operation of ORS 314.410.
The subparagraphs contained the description of
the acts by other governments or the taxpayer. However,
the requirement that such predicate acts bear a certain
relationship to Oregon taxable income or tax liability was
retained in ORS 314.380(a). The relationship was now
stated as a change in Oregon items “because” of the occur-
rence of some act by another government or a taxpayer. The
question therefore becomes whether in describing changes
in Oregon items as made “because” of other changes, the
legislature intended anything different from the prior rule
that the changes of other governments needed to be ones
“resulting in” a change in Oregon items.
The legislative history of the 2001 amendments to
the statutes contains nothing indicating that the legisla-
ture intended anything other than a reformatting of ORS
314.380. In the Senate floor debate, the bill was described as
“a little administrative clean-up bill.” A department witness
told the House Revenue Committee that changes to ORS
314.380 were “clarifying changes” and, indeed , intended to
allow more ability of taxpayers to claim refunds in the event
520 Dept. of Rev. v. Washington Federal, Inc.
of changes by other governments.14 The same witness told
the Senate Revenue Committee that the changes to ORS
314.380 were to clarify when the department could issue
refunds in cases where as delinquent return was filed in a
sister state. That was the only discussion of changes relat-
ing to sister states and the amendments to ORS 314.380.
Additionally, in describing actions of sister states, the
department witness described Oregon changes occurring
as “a result of” those sister state actions. The description
was not, as it now appears in the department’s arguments,
“changes of the same type as those occurring in other states.”
In defense of its position, the department asserts that
its position is justified because “[s]upplementing the depart-
ment’s limited resources with the work of * * * other state
taxing authorities, by using their changes and corrections
to trigger the department’s review of a taxpayer’s Oregon
return, is a legitimate legislative purpose.” Assuming that
the department is correct about legitimacy in the abstract,
the department is completely unable to point to any testi-
mony, exhibit or other indication that it either told the legis-
lature that this was the scope of the amendments proposed
by the department. Nor is there any indication in the legis-
lative history that any legislator so understood the purpose
or effect of the amendments.
Such profound absence of legislative history could
in some cases be explained by the fact that the proposed
changes to the statutory scheme were so insignificant that
no person thought them worth discussion or explanation.
However, the position of the department as to the amend-
ments in question can only be correct if the amendments
had very significant scope and effect. The amendments
would, for the first time, link Oregon tax compliance to the
laws and policies of other states. Further, proposed changes,
not necessarily finalized changes, would work a significant
extension in the statute of limitations on which taxpayers
14
The language to which the court cites is actually testimony that focuses
only on federal changes, even though the amendment language contained provi-
sions on refund procedure in the event of either federal or sister state changes
or corrections. In the testimony of the department witness there is nothing to
suggest that the amendments made any substantive changes regarding the lan-
guage of ORS 314.380.
Cite as 20 OTR 507 (2012) 521
could otherwise rely and that extension would be a func-
tion of when other state officials got around to their work.
Finally, when any one of a myriad of changes occurring in
other states were proposed, any change the department
desired to make in Oregon would be permitted, even if the
Oregon change bore no connection whatsoever to the Oregon
deficiency assessment. The court cannot conclude that the
legislature, or even the department, intended the amend-
ments to work such changes and yet engaged in no discus-
sion of any change other than the tax credit for individual
residents—changes whose limited scope had been the only
focus of discussion in the 1999 legislative session.
Additionally, if the court were to accept the depart-
ment’s position on the scope of other state changes that could
produce such significant results, myriad problems would be
created. What are the contours of the changes that, if made
by other states, trigger the extension provisions?
Take the deduction for depreciation, as an example.
If the sister state has an exact duplicate of the Oregon pro-
visions on depreciation perhaps no particular problem exists
conceptually. But what if Oregon allows depreciation until
the cost of an asset is fully recovered and a sister state has a
depreciation system in which depreciation cannot go beyond
the salvage value of an asset. Is a proposed change in the
salvage value made by the sister state considered a change
in depreciation? If so, it is arguably a change that, if made
by the department, results in a change in Oregon tax. Or is
the proposed change only to salvage value, an item not pres-
ent in the Oregon calculation?
At the hearing on this matter the department was
unable to offer an answer to a problem of this type. That
is not surprising as the statute itself provides no guidance
whatsoever as to the question in the case of other state
changes. The court cannot accept the implicit proposition of
the department that such matters will have to be addressed
by rulemaking or litigation. As to either approach, against
what standard would the department or the court act?
There is none in either the statute or the legislative his-
tory. The lack of a linkage to the tax systems of other states
causes confusion as to causality. The only area where such
522 Dept. of Rev. v. Washington Federal, Inc.
confusion does not exist, and the only area discussed by or
with the legislature, is the allowance of credits to individu-
als for taxes paid to other states.
Few, if any, such problems exist with respect to the
other type of changes and corrections addressed by ORS
314.380 and ORS 314.410: federal changes. This is because
the Oregon legislature has explicitly linked the Oregon sys-
tem to a specific set of federal definitions and provisions—
those contained in the Internal Revenue Code. ORS 314.033.
The legislature has further stated in particular statutes
when, and to what extent, an Oregon taxpayer should depart
from the federal system. The legislature has also specified
when Oregon will follow federal court or IRS constructions
of the federal statutes. ORS 316.032(2); ORS 317.013(2). As
a result, if particular federal provisions are involved in the
determination of the taxable income of a taxpayer, it is those
provisions that are involved, as they are set out in federal
law, subject only to the possible effect of Oregon changes in
application. The linkage to the federal tax system reduces,
if it does not eliminate, confusion as to causality.
Finally, the court is more than a little hesitant to
construe the provisions of ORS 314.380 in the fashion sug-
gested by the department because such a construction would
place corporate or other business taxpayers doing business
both in Oregon and in other states in a distinctly disadvan-
tageous position as compared with businesses doing busi-
ness only in Oregon. Consider that an entirely domestic
Oregon business would have no fear that actions of other
states could open an otherwise closed statute of limitations
binding on the department. Nor would such a business have
to survey audit changes in other states and compare them to
Oregon to insure that if they could result in Oregon changes
they are reported to Oregon. Businesses, whether founded
in Oregon or elsewhere would have these concerns and
additional burdens. This difference is the type of differen-
tial burden that could raise concerns under the Commerce
Clause of the United States Constitution.15 They also are the
15
For the reigning analysis of the Commerce Clause regarding the ability
of the states to tax the activities of firms engaged in interstate commerce, See,
Complete Auto Transit, Inc. v. Brady, 430 US 274, 279, 51 L Ed 2d 326, 97 S Ct
1076 (1977) (a tax will be sustained against Commerce Clause challenge so long
Cite as 20 OTR 507 (2012) 523
type of concerns that the court believes would have been dis-
cussed with the legislature in connection with the amend-
ments proposed by the department. They were not.
V. CONCLUSION
For the foregoing reasons, the motion of taxpayer is
granted and the motion of the department is denied. Now,
therefore,
IT IS ORDERED that Defendants’ Motion for Sum-
mary Judgment is granted; and
IT IS FURTHER ORDERED that Plaintiff’s Motion
for Partial Summary Judgment is denied.
as the tax “is applied to an activity with a substantial nexus with the taxing
State, is fairly apportioned, does not discriminate against interstate commerce,
and is fairly related to the services provided by the State.”).