Ballard v. Dept. of Rev. , 21 Or. Tax 211 ( 2013 )

No. 29 June 20, 2013 211
IN THE OREGON TAX COURT
REGULAR DIVISION
John R. BALLARD,
Plaintiff,
v.
DEPARTMENT OF REVENUE,
Defendant.
(TC 5136)
Plaintiff (taxpayer) appealed a Magistrate Division decision as to income
tax. Taxpayer retired from the United States Postal Service (USPS) and was paid
a lump sum payment from terminal annual accrued leave. Taxpayer asserted
that the terminal annual leave payment was earned by work performed outside
of Oregon and therefore no part of it was taxable by Oregon. Defendant (the
department) argued that the terminal annual leave payment was entirely income
from Oregon sources for taxpayer and subject to taxation in Oregon. Following
trial, the court found that pursuant to USPS rules, the relevant statutes and the
administrative rules, the department’s application of its rule in this instance did
not address payments made in respect of leave earned in more than one year, and
concluded that its reading would produce unexplained and unexplainable differ-
ent results by considering the entire period over which the deferred benefit was
earned and would be inconsistent with the other areas in the department rule.
The court thereby devised an adjustment calculation for parties to follow as to the
correct allocation of refund and interest to taxpayer.
Trial was held March 25, 2013, in the courtroom of the
Oregon Tax Court, Salem.
John R. Ballard, Plaintiff (taxpayer), argued the cause
pro se.
Nathan Carter, Assistant Attorney General, Department
of Justice, Salem, argued the cause for Defendant Depart-
ment of Revenue (the department).
Decision for Plaintiff rendered June 20, 2013.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This personal income tax case is before the court
after trial. Most of the facts were established by stipula-
tion. The year at issue is 2009. Defendant Department of
Revenue (the department) has denied a refund requested by
Plaintiff (taxpayer) for 2009.
212 Ballard v. Dept. of Rev.
II. FACTS
Taxpayer worked for many years for the United
States Postal Service (USPS). From 1978 to 1997 he worked
in Oregon. From 1997 to July of 2006 taxpayer worked in
Vancouver, Washington. From July of 2006 to January 31,
2007, taxpayer worked in Boise, Idaho. From February 1,
2007, to the end of his career with the USPS, taxpayer worked
in Oregon. Taxpayer was a resident of Washington from 1997
and continued to be such at the time of the trial in this case.
In 2009 taxpayer worked 20 days within Oregon
and no days outside of Oregon. Following his retirement, the
USPS paid taxpayer a lump sum amount, a terminal leave
payment, representing, in part, accumulated annual leave.
The department maintains that the terminal annual leave
payment is entirely income from Oregon sources for taxpayer
and subject to taxation in Oregon. Taxpayer maintains that
the terminal annual leave payment was earned by reason of
services performed outside of Oregon and therefore no part
of it is taxable by Oregon.
As has been noted, taxpayer worked outside of
Oregon prior to returning to Oregon in February of 2007.
The taxpayer’s evidence indicates that he had maximum
accumulated annual leave of 560 hours when he relocated
from Boise to Oregon in 2007. All parties agree that during
the years 2007 and 2008 taxpayer would have earned
208 hours of annual leave in each year. The record also indi-
cates that while working in Oregon in 2007, taxpayer took
eight hours of annual leave in excess of his regular yearly
allowance of 208 hours of annual leave. This resulted in an
ending balance in the account of 552 hours at the end of
2007. That account balance was then credited with unused
annual leave of eight hours awarded during taxpayer’s ser-
vice in Oregon in 2008 so as to produce a maximum account
balance of 560 hours at the end of 2008.
Perhaps because accumulated terminal leave pay-
ment amounts are computed based on the final salary level
of an employee of the USPS, no regulation or rule exists that
specifies the year in which accumulated hours in an employee’s
account were earned. Therefore it is not possible to infer,
solely from the year in which annual leave was earned, the
Cite as 21 OTR 211 (2013) 213
location of the work that led to the right to such annual
leave. The court concludes, however, that on the particular
facts of this case, it is possible to reach conclusions where
the service by taxpayer that produced the balance in his
accumulated leave account at the beginning of 2009 must
be considered to have been rendered.
In understanding this and other points, it is helpful
to summarize some of the provisions of Stipulated Exhibit
G, rules of the USPS relating to annual leave (the Rules). A
“leave year” is a year beginning with the first day of the first
complete pay period in a calendar year. Rule § 512.12(a).
Employees are credited with a number of hours to which
they are entitled for the upcoming leave year. Rule § 512.311.
“Current leave” is leave that an employee earns by biweekly
pay periods during the current leave year. Rule § 512.12(c).
“Accrued leave” is leave that is earned but unused at any
point during the current leave year. Rule § 512.12(d).
“Accumulated leave” is defined to be “the total unused leave
that remains to the credit of the employee at the beginning
of any leave year.” Rule § 512.12(b). The “maximum carry-
over amount” of leave is “maximum amount of previously
accumulated annual leave with which an employee may be
credited at the beginning of a year.” Rule § 512.321 (empha-
sis added). The amount is determined based on the status of
the employee. Rule § 512.321.
Taxpayer earned 208 hours of vacation each year
for the years following 1990. Prior to 1990 taxpayer earned
156 hours of vacation per year. The maximum amount of
leave that could be accumulated by taxpayer was 240 hours
for periods prior to 1990 and 560 hours for periods thereafter.
The lump sum terminal leave payment is the “accu-
mulated annual leave carried over from the previous year,
plus the accrued leave for the current year, plus hours for
any holiday that falls within the terminal annual leave
period. Rule § 512.732(a).1 Nothing in the Rules indicates
1
The terminal annual leave period is the number of days following separa-
tion from service during which the terminal annual leave amount would have
been paid out if it was paid for days of service rendered. This concept is important
because if the terminal annual leave period includes one or more recognized hol-
idays, an additional payment is due.
214 Ballard v. Dept. of Rev.
how annual leave that is taken is charged against accrued
as opposed to accumulated annual leave.
Viewing the Rules as a whole, however, the court
finds that they operate such that accumulated leave from the
earliest year earned remains in the accumulation account,
subject to being augmented by later accumulated leave, lay-
ered onto the oldest accumulated leave. Any balance exist-
ing at the beginning of a year may also be reduced if leave in
that year exceeds the annual allowance or current leave. If
an unfilled layer exists in the account, it is filled, in whole or
in part, with the next carryover amount. However, once an
account has reached its maximum, nothing is added to that
account unless and until some portion of the accumulated
leave is used. Thereafter, if unused leave is generated, it is
then added to the accumulation account.2
The foregoing conclusion is primarily driven by the
definition of “accumulated leave” and the focus of that defi-
nition on the accumulated amount being leave that was pre-
viously earned, and remained in the account and unused at
the beginning of a new leave year. The definition describes
a layering on approach. It does not suggest that currently
earned but unused leave is added to an account without
regard to the level of the account at the beginning of the
leave year.3
Applying the finding of the court as to the opera-
tion of the USPS Rules to the particular facts in the record
regarding taxpayer, the following emerges, as graphically
illustrated in Appendix 1:
(1) The balance in taxpayer’s accumulation account when
he came from Idaho to Oregon was 560 hours. Some,
2
Nothing in the Rules addresses whether any reduction in the accumulation
account comes from the oldest accrued hours or the most recently accrued hours.
However, that does not present an issue in the case because, as will be shown, the
oldest hours in taxpayer’s account were “Oregon hours,” as was the only addition
to the account occurring after taxpayer most recently worked in Oregon.
3
Taxpayer has argued that one of the Rules, dealing with an option to cash
in leave awards for an upcoming year has something to say as to how the accu-
mulation account is to be analyzed. See Rule § 512.631. Under this Rule, leave
for an upcoming year can be cashed in but accumulated leave and accrued leave
may not be exchanged for cash. Those provisions do not appear to the court to be
relevant and, in any case, nothing in the record indicates that the taxpayer ever
availed himself of the cash exchange rule.
Cite as 21 OTR 211 (2013) 215
or all, of that amount could possibly have been earned
and placed in the accumulation account by reason of
service of taxpayer in Oregon from 1978 to 1997. The
record made by taxpayer does not foreclose that pos-
sibility, beyond a reasonable doubt, and, because tax-
payer bears the burden of proof, the total account bal-
ance of 560 hours cannot, without more, be considered
“non-Oregon” hours;
(2) The record made by taxpayer does, however, show
an accumulation account balance at the beginning of
2001 of 168 hours. At that point, taxpayer was working
in Washington and had been doing so for some time.
However, the record does not foreclose the possibility
that those hours had been added to the account during
the period of service by taxpayer in Oregon from 1978
to 1997. Therefore, given that taxpayer has the burden
of proof, those 168 hours must be considered “Oregon”
hours;
(3) Additions to the accumulation account above the 168
hours existing at the beginning of 2001 were produced
by service of taxpayer in Washington and Idaho. That
service brought the accumulation account to its max-
imum level of 560 hours, the level at which it stood
when taxpayer began his most recent period of ser-
vice in Oregon in February of 2007. However, because
that Oregon service could not, except as discussed in
(4) below, add to the “maxed out” accumulation account,
the 392 hours (representing the difference between the
maximum number of 560 and the starting point, on
this record, of 168 hours) must be considered to have
been earned outside of Oregon and treated as “non-
Oregon” hours;
(4) The 392 “non-Oregon” hours must, however, be reduced
by the eight hours of excess leave taken by taxpayer in
2008. The extra leave created an unfilled layer of eight
hours that was filled with eight hours attributable to
work in Oregon during 2008; and
(5) Of the 560 hours in the accumulation account as of the
beginning of 2009, therefore, 384 (392 – 8) were “non-
Oregon” hours and 176 (168 + 8) were “Oregon” hours.
Taxpayer’s terminal leave payment was calculated
on a number of hours in excess of the 560-hour amount found
in the accumulation account. That excess was, in accordance
216 Ballard v. Dept. of Rev.
with the Rules, attributable to leave earned during 2009 in
the amount of 16 hours and holiday pay of eight hours that
taxpayer would have earned in connection with Oregon ser-
vice had he not retired.
III. ISSUE
The issue in this case is whether or to what extent
the terminal leave payment to taxpayer in 2009 was Oregon
source income subject to the Oregon Personal Income Tax.
IV. ANALYSIS
ORS 316.037(3) imposes a tax on the income of non-
residents “from sources within this state.” 4 ORS 316.127(1)
goes on to include in such income, items of income that are
“derived from or connected with sources in this state.” The
statute looks to the source of income items of a nonresident
and does not subject those items to taxation simply because
a taxpayer has income from other sources in Oregon in the
year in question.
In its interpretive rules, the department has stated
rules for treatment of compensation for personal services.
These rules generally acknowledge the statutory require-
ment of a source connection or place of derivation require-
ment of the statute. Thus, in the simplest case, it is clear
that if a nonresident works both within and without Oregon
in any given year, Oregon only subjects to taxation the por-
tion of the compensation for the year attributable to work
within Oregon. See OAR 150-316.127-(A)(1)(a) (“[T]he gross
income of a nonresident (who * * * receives compensation for
services as an employee) includes compensation for personal
services only to the extent that the services were performed
in this state.”).
This case involves work in several years, and in sev-
eral states, that served as a basis for and created for tax-
payer a right to receive a payment made to him in 2009. In
such situations, the department’s rules generally acknowl-
edge that, for nonresidents, the same allocation to Oregon
sources must be made. Thus, in the case of nonqualified
stock options without readily ascertainable value at the time
4
All references to the Oregon Revised Statutes (ORS) are to 2009.
Cite as 21 OTR 211 (2013) 217
granted, where time passes between the grant of the option
(the “grant”—a nontaxable event) and the exercise of the
option (the “exercise”—a taxable event), the department’s
rule provides that where the employee has worked both in
and outside of Oregon during that period, the only income
subject to taxation in Oregon is a portion of the income from
exercise of the option. The portion is computed by multiply-
ing the total gain by a fraction, the numerator of which is
the number of days worked in Oregon during the period of
time between the grant and the exercise. The denominator
of the fraction is the number of days worked everywhere
between the grant and the exercise. OAR 150-316.127-
(A)(3)(d)(B).
Similarly, in the case of unemployment compen-
sation received by a nonresident and attributable to work
performed both in Oregon and other states, the benefits are
taxable only to the extent they pertain to work in Oregon. OAR
150-316.127-(A)(3)(e). The department’s rule goes on to say
that the taxable portion is determined under any method
that reasonably reflects services in Oregon.
The same approach is taken in the department’s
rules with respect to severance pay. That is defined in the
rule as a payment on severance based on length of ser-
vice. Contemplating that such period of service might have
occurred in Oregon and also in other states, the department
rule again calls for a proration of the amount of severance
pay attributable to Oregon. And again, the proration is to be
on any method that reasonably reflects the amount of ser-
vice in Oregon. OAR 150-316-(A)(3)(f).
With respect to vacation pay, the department rule
states:
“(c) Total compensation for personal services includes sick
leave pay, holiday pay, and vacation pay. Sick leave days,
holidays, and vacation days are not considered actual work-
ing days either in or out of this state and are to be excluded
from the calculation of the portion of total compensation for
personal services taxable to this state.
“Example 5: Joan is a nonresident of Oregon. She actu-
ally worked a total of 220 days during the year and was
paid for 40 non-working days (holidays, sick days and
218 Ballard v. Dept. of Rev.
vacation days). She worked 110 days in Oregon. Her com-
pensation (including compensation for holidays, sick leave
and vacations) was $26,000. She would figure her compen-
sation subject to Oregon tax as follows:
“Days worked in Oregon—divided by—Total days worked x
Total compensation = Oregon compensation 0.500 (110 days
divided by 220 days) x $26,000 = $13,000
“Joan’s compensation subject to Oregon tax is $13,000.”
OAR 150-316.127-(A)(3)(c).
Based upon this rule, and this rule alone, the depart-
ment argues that the entire amount paid to taxpayer by
the USPS based on the balance in the accumulated annual
leave account is taxable in Oregon.5 To reach this result the
department simply observes that taxpayer worked 20 days
in Oregon in 2009 and no days elsewhere. Deriving a factor
of 1.0 under its rule, the department concludes that all of the
payment for accumulated leave is subject to Oregon tax.
This position of the department has a number of
problems. First, it reads more into its rule than the rule con-
tains. The department reads into the rule a clause stating to
the effect: “without regard to the basis on which, or where,
any accrued or accumulated vacation pay was earned.” But,
of course, those words are not in the rule. The rule simply
does not address anything other than payment of vacation
pay during one year in which Joan worked inside and out-
side of Oregon. It does not purport to address what the result
should be if a payment is made in respect of leave earned in
more than one year.
The second problem with the department’s reading
of its rule is that such reading produces unexplained and
unexplainable different results. For persons who receive
vacation pay over the course of one year while working both
in Oregon and in places outside of this state, the amount of
that vacation pay that is taxable in Oregon is only a frac-
tion determined by the relative amount of time worked in
Oregon compared with the amount of time worked outside
5
The court notes that this rule is interpretive in character and not adopted
pursuant to specific legislative authority.
Cite as 21 OTR 211 (2013) 219
of Oregon. However, for persons who, by contract with their
employer, receive payment at the end of a period of several
years for vacation credit earned while serving that employer
both inside and outside of this state over the course of that
period, taxability for that accrued vacation pay is deter-
mined entirely based on a fraction calculated for only the
last year of the period. This differential treatment, which
finds no basis in the statutes or even in the other rules of
the department in this area, is easily eliminated by simply
extending the period for which the ratio is calculated so that
it reflects the location of services over the entire period that
is relevant to the payment.6
That approach, giving consideration to the entire
period over which a deferred benefit is earned, would be
entirely consistent with the other areas in the department
rule. Note that where other benefits are earned by service
in multiple states over multiple tax periods, the department
rule specifies that the relative service over the entire period
of service and the location of service during that period are
to be considered. Thus, multi-state and multi-period ser-
vice is collectively considered with respect to certain stock
options, severance pay and unemployment compensation.
The department offers no coherent reason as to why pay-
ment of benefits accumulated over time in respect of annual
leave should not be similarly treated.7
A coherent explanation is required for several rea-
sons. First, all of the department rules are interpreting the
6
The department’s reading of its rule would in some situations produce
absurd and unnecessary results. If a taxpayer worked entirely outside of Oregon
for several years, accumulating a vacation account of 560 hours and then worked
in Oregon for one day in the next year before retiring, the department’s construc-
tion of its rule would lead to taxation of the entire payment for accumulated leave.
This type of result would not only be absurd—a result to be avoided—it would
also present serious constitutional concerns. See Stonebridge Life Ins. Co. I v.
Dept. of Rev., 18 OTR 423 (2006). All such problems are easily avoided by simply
determining, where possible, the location where the work was performed that
produced any balance in the accumulation account.
7
To be clear, there is nothing offensive with that portion of the department
rule on vacation pay that does not count any such vacation days in making the
work in Oregon/work out of Oregon calculation. However, that calculational point,
relating to what is a “work” day, cannot be read as permitting one to disregard
the fact that vacation allowances only exist by reason of actual work performed. It
is the ratio of Oregon and non-Oregon situs of such work days that must be given
effect.
220 Ballard v. Dept. of Rev.
same basic statutory provisions that look to the extent to
which services are performed in Oregon—and only to that
extent—in determining what amount is subject to tax. A
coherent and consistent result can be obtained by simply
observing that the rule as it currently exists only addresses
a one year period and must be supplemented, when multi-
ple periods are involved, with a calculation identical to that
used for certain stock options, severance pay and unemploy-
ment compensation. That supplement would be to allow any
allocation method that determines the extent to which the
payment pertains to work in Oregon by a method that rea-
sonably reflects service in Oregon as compared with service
in all states.
The scope of the reading that the department gives
to its rule results in the rule being inconsistent with the gov-
erning statutory scheme. That scheme subjects to taxation
only compensation to the extent that the work performed to
produce the payment was performed in Oregon. That read-
ing of the statute also avoids serious problems that would
arise under the Due Process Clause of the Fourteenth
Amendment to the Constitution of the United States if com-
pensation earned in other states was subjected to taxation
in Oregon. See footnote 5 above.
The department has argued that a construction of
the rule that takes into account the location of work that
leads to the accumulated leave benefit would be administra-
tively cumbersome and should, therefore, not be adopted. To
this argument there are two answers. First, administrative
difficulty cannot justify adherence to an interpretive rule
that is inconsistent with the governing statute or a constitu-
tional concern. Second, the other rules that the department
has issued, under the very same statute, with respect to sev-
erance pay, certain options and unemployment compensa-
tion have exactly the same operative elements and involve
the same level of complexity. Further, the department
insists that nonresidents and their employers keep track of
the location of work or service, even when only one year is
involved, as that is the fundamental basis for the taxation of
compensation of nonresidents. The administrative difficulty
argument of the department is not well taken.
Cite as 21 OTR 211 (2013) 221
V. CONCLUSION
Given the findings of fact of the court as to the oper-
ation of the USPS Annual Leave Rules and the calculation
of the terminal annual leave payment made to taxpayer, the
amount of that payment attributable to work in Oregon and
subject to Oregon taxation is:
(1) 176/560ths of the amount of payment for 560 hours
of accumulated leave as of the beginning of 2009, this being
the sum of the 168 “Oregon” hours used as a starting point
in 2001 and the 8 “Oregon” hours that “topped up” the
accumulation account during 2008; plus
(2) All of the amount of payment attributable to the
24 hours of pay for the leave and holiday allowance attrib-
utable to 2009.
Now, therefore,
IT IS THE DECISION OF THIS COURT that the
parties are directed to compute the appropriate amount of
refund and interest due to Plaintiff based on the foregoing
and submit a form of judgment. The court will separately
address any disagreement that may arise as to the calcula-
tions or form of judgment. Costs are awarded to Plaintiff.
222 Ballard v. Dept. of Rev.
APPENDIX 1
APPENDIX 1
600
ACCUMULATED VACATION LEAVE ACCOUNT BALANCES
500
400
300
560 552 560
475
450
200 400
300
100 200
168
0
WA WA WA WA WA WA/ID ID/OR OR OR
2001 2002 2003 2004 2005 2006 2007 2008 2009
Year Location Hours
2001 WA 168
2002 WA 200
2003 WA 300
2004 WA 400
2005 WA 450
2006 WA/ID 475
2007 ID/OR 560
2008 OR 552
2009 OR 560
Numbers in bold italics are hypothetical
All years are shown as of January 1 of each year