Berry v. State Tax Commission , 241 Or. 580 ( 1965 )

DENECKE, J.,

dissenting.

The majority is of the opinion that the decisions of the United States Supreme Court have foreclosed any further examination of the federal constitutional problem. With this I respectfully disagree.

Shaffer v. Carter, 252 US 37, 40 S Ct 221, 64 L ed 445 (1920), held that Oklahoma could tax the income of a nonresident earned within Oklahoma. The opinion also stated that the state did not have to accord nonresidents a deduction “by reason of losses elsewhere incurred.” (252 US at 57) Whether the court was referring to business-connected losses is unclear. The court remarked that there was no showing that the taxpayer had sustained any losses. The most reasonable interpretation of the language is that “losses” referred to those incurred in business. This is concluded because the reasoning of the court was that as long as a nonresident could only be taxed upon income produced in the state, he could only deduct losses occurring in the state; a resident is taxed upon all income, wherever produced, therefore, he should be permitted to deduct all losses, wherever incurred.

Travis v. Yale & Towne Mfg. Co., 252 US 60, 40 S Ct 228, 64 L ed 460 (1920), held a New York statute to be contrary to the Equal Protection Clause of the Constitution because it did not 'allow personal exemptions to nonresidents. The court also commented that a state could confine deductions for “expenses, losses, etc., in the case of non-resident taxpayers, to such as are connected with income arising from sources within the taxing State * * *.” (252 US at 75-76) Again, what “expenses, losses, etc.” the court had in mind is unknown.

Mr. Justice Pitney wrote both decisions and I find it impossible to determine whether the opinions referred to business losses and expenses or personal expenses.

The New York court in In Matter of Goodwin v. State Tax Comm., 286 App Div 694, 146 NYS2d 172 (1955), held valid a New York statute similar to the Oregon statute here at issue. It believed that Mr. Justice Pitney was referring to personal expenses, as well as business expenses. Apart from reliance upon the two United States Supreme Court decisions, the New York court attempted to advance other reasons for upholding the New York statute. I cannot agree with its reasoning. The Oregon Tax Court, however, believed the reasoning in the Goodwin case to be correct and based its decisions thereon.

In order to treat nonresidents differently from residents, “[t]he State must proceed upon a rational basis and may not resort to a classification that is palpably arbitrary.” Allied Stores of Ohio, Inc. v. Bowers, Tax Comm., 358 US 522, 527, 79 S Ct 437, 3 L ed2d 480 (1959). What is the “rational basis” for differentiating between nonresidents and residents, other than their place of residency, which admittedly is insufficient? If any of the deductions have any possible connection to income, differentiation is valid as it is based upon the “rational basis” that only the nonresident’s income produced within the state is taxable, whereas all of a resident’s income, wherever produced, is taxable. The parties here have stipulated that the deductions claimed were “personal deductions.” While this does not necessarily mean they had no relation to income, I assume this is the fact and the Commission makes no contrary contention.

The largest deduction, that for medical expense, will be considered typical. Perhaps it may be contended that there is a distinction in that medical expenses of a resident will be spent in the state and those of a nonresident out of the state. That can have no merit because the purpose of the deduction for medical expense is to relieve from taxation an unexpected, almost catastrophic, expenditure analagous to a casualty loss deduction. The purpose is not to encourage the expenditure of funds on Oregon medical services. It has been suggested that a nonresident may take the deduction twice, on his Oregon return and on his own state’s return. However, this same possibility exists with respect to personal exemptions, yet personal exemptions must be granted residents and nonresidents alike.

The Commission has suggested no “rational basis” for distinction and I can think of no other possibility than those just discussed. In my opinion, the allowance of these personal deductions is similar to the allowance of the personal exemptions. The Commission distinguishes exemptions from deductions on the ground that exemptions do not necessarily involve expenditures. This is true. However, I cannot see why this is material upon the issue of equal protection.

In my opinion the statute is invalid in so far as it denies to nonresidents any personal deductions although they have no relation to the production of income.

O’CorrNEUL, J., joins in this dissent.