SIGNIFICANT TAX LAW DEVELOPMENTS IN OREGON
2005–2006
JOHN H. GADON
TODD M. BEUTLER
LANE POWELL PC
This outline is provided for informational purposes only and is not intended as legal advice or to
create an attorney-client relationship.
2006 Lane Powell PC
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CASELAW DEVELOPMENT HIGHLIGHTS
A.
PROCEDURAL ISSUES.
1.
Motion to Dismiss Denied Where Taxpayer Claimed Reliance on Department
of Revenue Misinformation.
Webb v. Department of Revenue, No. TC 4731 (December 6, 2005).
The Oregon Department of Revenue denied the taxpayer’s claim for a refund because the
return was filed after the statutory deadline. The taxpayer challenged the Department’s denial
claiming that the Department should be estopped from denying her a refund based on an
allegation that the Department provided the taxpayer with misinformation concerning the filing
deadline.
The Oregon Tax Court denied the Department’s motion to dismiss the taxpayer’s
complaint because it contained facts that could be sufficient to constitute a claim of estoppel.
The Court found that the taxpayer described in more than “general terms” the alleged misleading
information from one of the Department’s employees. Even though the taxpayer’s description of
her conversations with the Department’s employee was vague, for purposes of a motion to
dismiss it contained facts, and raised reasonable inferences, that could constitute sufficient proof
that the Department’s employee misled the taxpayer into filing her return too late to receive a
refund. Further, the Court rejected the Department’s argument that the taxpayer’s reliance was
unreasonable.
2.
Department Was Not Estopped From Denying Refund Claim Based on
Alleged Misinformation Provided to Taxpayer.
Webb v. Department of Revenue, No. TC 4731 2006 (April 27, 2006).
Following a trial after the denial of the Department’s motion to dismiss, the Tax Court
held that the Department was not estopped from denying a taxpayer a personal income tax refund
where the taxpayer failed to establish “proof positive” that the Department misled her concerning
the filing due date for a refund claim.
Under Oregon law, to claim estoppel successfully a taxpayer must prove three elements:
(1) misleading conduct on the part of the Department; (2) taxpayer's good faith, reasonable
reliance on that conduct; and (3) injury to taxpayer. Regarding the first element, a taxpayer must
provide proof positive that the Department misled them. The taxpayer argued that she received
misinformation during telephone conversations with employees of the Department, but she
offered no proof of incorrect or misleading documents or actions. When a taxpayer’s version of
a conversation is disputed by the government officials with whom the taxpayer claims to have
spoken, the Court will rarely find the required proof positive absent corroborative evidence or
another compelling reason to believe the taxpayer.
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3.
Taxpayer Entitled to Statutory Discount for Timely Payment of Property
Tax Based on Taxpayer’s Sworn Testimony That Payment Was Mailed on
the Due Date.
Marcotte v. Lane County Assessor, No. TC-MD 060519C (August 14, 2006).
The Lane County Assessor denied a timely property tax payment discount to the
taxpayers where the return and payment was filed with a cancellation/postmark that was several
days after the due date.
The Oregon Tax Court ruled that, based on the Department of Revenue’s administrative
rules, the taxpayers’ sworn testimony constituted satisfactory proof that they mailed their
payment on the due date. The administrative rule provides that a payment postmarked after the
due date will be treated as having been mailed on or before the due date if the person required to
file establishes by a sworn affidavit that the actual mailing occurred on the due date.
The Court had previously determined that sworn testimony satisfied the rule’s sworn
affidavit requirement. According to sworn testimony, the taxpayers mailed their property tax
payment on the last day for timely payment of the taxes from a U.S. Postal Service mail
receptacle. The taxpayers also testified as to why they made a timely discounted payment in full
rather than an installment payment, and there was proof that the taxpayers had a history of timely
paying property taxes.
B.
CORPORATE INCOME TAX ISSUES.
1.
Oregon Tree Farm Found Part of Unified Business but Apportionment
Requires Adjustments for Certain Intangible Assets and Sales.
Miami Corp. v. Department of Revenue, No. TC-MD 021295C (February 17, 2005).
The Oregon Tax Court held that a Delaware corporation's multi-state operations qualified
it for taxation as a unitary business and thus its “Oregon Tree Farm” operation was taxable, but
held that the Department erred when calculating the apportionment formula's sales and property
factors with respect to certain intangible assets and sales of intangibles.
In finding a unitary business relationship, the court reviewed the relationship between the
corporation and its Oregon Tree Farm for centralized management, economies of scale and
functional integration:
Centralized Management. Although there was less than extensive day-to-day operational
management of the Oregon Tree Farm, the level of management was much more than
mere oversight of an investment because (i) the corporation’s board and all corporate
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officers work from the Chicago office; (ii) the board and at least one principal officer
actively oversee the operations of the Oregon Tree Farm; (iii) there is regular
communication and travel between Oregon and the Chicago office; and (iv) the Oregon
manager is subject to meaningful spending and contract execution limitations.
Economies of Scale. The corporation benefited from economies of scale through (i)
centralized management of the Oregon Tree Farm by the board and principal officer in
the Chicago office; and (ii) centralized administrative services in the form of payroll,
pensions, insurance, accounting and legal services provided from the Chicago office.
Functional Integration. Functional integration existed because there was a flow of goods,
capital resources and services between the corporation and the Oregon Tree Farm, based
on the following factors (i) financing for the Oregon Tree Farm comes from the
corporation and Oregon Tree Farm earnings are remitted to Chicago - free to be
distributed to any of its divisions; and (ii) there are centralized personnel, finance,
accounting and legal functions.
However, in determining the proper apportionment formula, the Court found that the Department
failed to make adjustments for certain intangible assets and sales. Thus, the property factor of
the apportionment formula was adjusted to include intangible assets because application of the
statutory formula produced an unfair result. Also, the sales factor was modified to include the
gross receipts from the taxpayer’s sale of intangibles because these receipts were derived from
the taxpayer’s primary business activity.
The Court rejected the corporation’s request for attorney fees, finding that, although the
corporation achieved at least a partial victory on the merits, the Department did not act without a
reasonable basis in fact or in law.
2.
Apportionment
of
Unconstitutional.
Out-Of-State
Insurance
Company’s
Income
Stonebridge Life Insurance Co. v. Department of Revenue, No. TC 4705 (February 22,
2006).
The Oregon Tax Court held that the Department of Revenue violated the Due Process
Clause of the U.S. Constitution in apportioning $12,787,485 of the taxpayer insurance
company’s total income in 2003 to Oregon. This amount was more than double the taxpayer's
combined gross income from Oregon insurance sales and real and tangible property. The Court
concluded, moreover, that it lacked the statutory and the equitable authority to reapportion the
taxpayer's 2003 income or to order the Department to do so and, therefore, ordered a refund of
the full amount of insurance excise tax it paid for its 2003 Oregon business activity.
The Court concluded that application of ORS 317.660 and its three factor apportionment
test allocated to Oregon a share of the taxpayer's 2003 income that was “out of all appropriate
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proportion to the business transacted” by the taxpayer in Oregon. According to the Court, the
insurance sales factor, wage and commission factor, and real estate income and interest factor did
not appropriately or permissibly reflect the taxpayer's 2003 Oregon business activity and the
allocation “grossly distorted” the value generated by the taxpayer's Oregon operations.
The taxpayer was in the business of providing life, accident, and health insurance
coverage in all 50 states and the District of Columbia but had no physical operations, employees,
telephone listings, or mail drops in Oregon. All of the taxpayer's Oregon insurance policies
during 2003 originated through marketing by direct mail or telephone solicitation, and all
business related to them occurred at one of the taxpayer's primary business locations outside of
Oregon. In 2003, the taxpayer received premiums of $5,978,898 from those Oregon policies and
$661,443,717 in premiums from all its policies for purposes of the Oregon insurance sales factor.
That same year, the taxpayer had no Oregon payroll but had a total payroll of $39,319,330 for
purposes of the wage and commission factor. Also in 2003, the taxpayer received gross income
of $252,379 from Oregon real and tangible property and gross income of $1,565,829 from all its
real and tangible property for purposes of the real estate income and interest factor. The income
from Oregon real and tangible property was wholly from the interest received on two loans
secured by Oregon property. In its findings, the Court noted that none of the taxpayer's income
from real and tangible property was either integral or necessary to its business in Oregon. The
property accounted for less than 0.3% of its overall income from insurance sales and real and
tangible property combined.
On a motion for reconsideration solely as to whether the Court could reapportion the
taxpayer's income, the Court again concluded that it lacked the inherent equitable power to
reapportion the taxpayer's income. The Court did find, however, that the taxpayer owed a $10
minimum tax. See No. TC 4705 (April 20, 2006).
3.
Multi-State Residential Housing Developer Companies Part of Unified
Business Subject to Apportionment.
Schuler Homes of Oregon, Inc. v. Department of Revenue, No. TC-D 021243C
(February 13, 2006).
The Oregon Tax Court held that the taxpayer operated as part of a unitary group because
there was a common executive force, centralized administrative services, and a flow of capital
resources and services demonstrating functional integration.
The taxpayer was a subsidiary of the Schuler Homes Group, a multi-state residential
housing development operation headquartered in Hawaii. Schuler Homes Group operated in
seven geographic markets through subsidiaries. The markets were Hawaii, Northern California,
the Portland, Oregon/Vancouver, Washington metropolitan area, Colorado, the Puget Sound
metropolitan area of Washington, Southern California, and Arizona.
The Court concluded that the taxpayer and the other divisions comprising the Schuler
Homes Group operated under centralized management with a common executive force. The
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Schuler Homes Group had a common executive force overseeing the operations of the parent and
all of the subsidiaries. The taxpayer and the other divisions submitted annual business plans to
the parent for initial approval and ongoing review and monitoring. Ongoing activities were
monitored by the submission of weekly financial and activity reports. Neither the taxpayer nor
any of the other divisions could purchase land without the approval of a committee comprised of
corporate officers working in Hawaii. Guidelines for all land purchases were established by one
of two corporate officers in Hawaii. Those guidelines governed all land purchases.
The Court also found that the Schuler Homes Group had centralized administrative
services resulting in economies of scale. There were centrally administered retirement, health
insurance, and stock option plans, centralized financing, guidelines for land purchases and
subcontractor insurance requirements, a common employee handbook, and a centralized staff
that prepared and filed consolidated federal tax returns and annual business reports. The Court
found unpersuasive the fact that accounting, construction, human resources, information
technology, legal, purchasing, sales and marketing, and warranty functions were performed by
the taxpayer and other subsidiaries, most of which also used different computerized software
programs.
The Court determined that there was a functionally integrated company based on the flow
of capital resources and services between the parent and its various subsidiaries, including the
taxpayer. Functional integration was exhibited primarily through the planning approval and
financial control exercised by the parent company. The Court specifically noted the centralized
financing and overall financial oversight provided by the parent company. Some degree of
functional integration also was evidenced by the application of policies and procedures on a
company-wide basis and general use of a single company logo and the Schuler Homes name.
4.
Nonresident S Corporation Shareholders Taxable on Income from Cellular
Phone Business and Gain from FCC License Sale.
Crystal Communications, Inc. v. Department of Revenue, No. TC-MD 040026D
(May 26, 2006).
The Oregon Tax Court held that Crystal Communications, Inc. (“Crystal”), an Oregon S
corporation, operated a trade or business in Oregon and that its nonresident shareholders were
taxable on the business income attributable to the operation of a cellular telephone service in
Oregon. The business income included the gain from the sale of an FCC (Federal
Communications Commission) license and related assets. The Court found that Crystal was a
public utility and that its business income was subject to apportionment.
The Court found that Crystal was delivering cellular telephone service in a regular,
continuous manner over a considerable period of years. Crystal had entered into the FCC license
lottery with full knowledge that, if granted a radio station authorization and subsequent FCC
license, the first cell site must be developed within 18 months followed by a specified build-out
within five years. After receiving the license, Crystal constructed a cellular telephone system
with 13 cell sites over a ten-year period with an estimated original cost of approximately
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$5 million, which met and exceeded those requirements. Additionally, Crystal represented to the
public that it was selling and providing cellular telephone service. Crystal was thus not engaged
in mere investment activity.
The Court rejected Crystal’s argument that it was not in a trade or business simply
because it contracted with another entity, McCaw/AT&T, to perform services on its behalf.
Although McCaw/AT&T managed Crystal's non-wireless cellular telephone system, the
agreements and contracts between Crystal and McCaw/AT&T stated that Crystal retained the
right to oversee, review and control the system. Further, the Court noted that the FCC license
was granted to Crystal and no other entity.
The Court found that the income from the operation of the cellular telephone system was
taxable business income. Most notable was the Court’s determination that the income received
from the sale of Crystal's assets, including the FCC license, was taxable business income where
Crystal’s acquisition, management, use, and disposition of its FCC license was integral to its
regular cellular telephone system business.
C.
PERSONAL INCOME TAX ISSUES.
1.
Efforts to Establish Residency in Alaska Fail – Oregon Personal Income Tax
Liability Imposed as a Result.
Eads v. Department of Revenue, No. TC-MD 050687C (May 11, 2006).
Taxpayers who became Oregon residents in 2001 were unable to establish that they had
subsequently changed their domicile to Alaska for all or part of 2003. Thus, the taxpayers
remained Oregon residents liable for Oregon personal income taxes for 2003. Under Oregon
law, a person does not legally abandon an existing domicile until he or she acquires a new one.
An individual must meet three requirements to establish a new domicile: (1) establishment of a
residence in another place, (2) intent to abandon the old domicile, and (3) intent to acquire a new
domicile.
Taxpayers and their children had moved to Alaska in March 2003 after the husband was
laid off from an Oregon worksite and transferred to an Alaska worksite. The wife and children
returned to their former Oregon home in late June or early July of 2003. The husband remained
in Alaska and worked there until he was transferred back to the Oregon worksite in April or May
of 2004. The taxpayers’ efforts to establish domicile in Alaska included the following: (i)
taxpayers put their Oregon home up for sale, sold two of their three cars and moved the
remaining car along with their household furniture and belongings to a rented house in Alaska;
(ii) the husband worked in Alaska and the wife quit her employment in Oregon; (iii) the husband
surrendered his Oregon driver license and obtained an Alaska driver license; and (iv) the
husband registered to vote in Alaska.
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The Oregon Tax Court held that the taxpayers’ efforts were insufficient to establish that
they were no longer domiciled in Oregon under ORS 316.027(1)(a). Specifically, the Court
found that although the taxpayers had taken some steps consistent with the intent to abandon
Oregon as their domicile, there was insufficient evidence of their intent to acquire a domicile in
Alaska. The Court noted that the wife and the children returned to the taxpayers’ unsold Oregon
home after only a few months of living in the rented residence in Alaska and the household
furniture and belongings were moved back shortly thereafter. The wife did not obtain an Alaska
driver license or register to vote in Alaska, and the taxpayers did not register the car in Alaska or
open a local bank account. There was also testimonial and related evidence that the taxpayers
never intended to stay in Alaska, all of which supported the Court’s determination that the
taxpayers moved to Alaska on an interim basis out of practical necessity and never intended to
make Alaska their new domicile.
2.
Efforts to Establish Residency in Virginia Fail – Oregon Personal Income
Tax Liability Imposed as a Result.
Butler v. Department of Revenue, No. TC-MD 050801D (July 18, 2006).
Taxpayer was unable to establish that she had abandoned her long-term domicile in
Oregon for domicile in Virginia from September of 2001 through September of 2002. Thus, the
taxpayer remained an Oregon resident liable for Oregon personal income taxes for such year.
Taxpayer moved to Virginia in September 2001 after her employer closed its Oregon
manufacturing facility and offered her a transfer to its Virginia facility. Her husband remained in
the Oregon home they had purchased in 1983. Taxpayer returned to Oregon in October 2002
after she was laid off in a corporate restructuring. Taxpayer’s efforts to establish domicile in
Virginia included the following: (i) she rented a larger home in Virginia and purchased new
household furniture and belongings; (ii) she moved her car and certain personal belongings to
Virginia; (iii) she obtained a Virginia driver license, registered the car in Virginia and paid
Virginia sales tax on the car; (iv) she obtained a credit card in her own name and used her
Virginia address as the billing address; (v) she transferred her magazine subscriptions to Virginia
and joined a Virginia gym, terminating her Oregon gym membership; and (vi) she filed Virginia
resident income tax returns.
The Oregon Tax Court found that the taxpayer did not abandon her Oregon domicile.
Although the taxpayer testified that she had intended to make Virginia her home, her actions did
not show a conscious decision to declare Virginia as her domicile. She frequently stayed in the
Oregon residence owned with her husband and continued to look to Oregon for financial,
medical, and other personal services. She left much of her personal and other household
furniture and belongings in Oregon and continued her Oregon bank accounts and voter
registration. Further, the fact that the taxpayer traveled extensively for work during the year in
question created doubt that she had established a permanent domicile in Virginia.
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D.
PROPERTY TAX ISSUES.
1.
Valuation of Low-Income Housing Project Requires Judicial Consideration
of Multiple Valuation Methods.
Wilsonville Heights Assoc., LTD. v. Oregon Dept. of Revenue, 339 Or. 462
(November 3, 2005).
The Oregon Supreme Court held that the taxpayer's assessable interest in a federal lowincome housing project was determined in accordance with the applicable statutes, rules, and
Oregon case law where the Oregon Tax Court properly investigated and adequately considered
multiple valuation methods to reach its determination.
The Court found that the federal low-income housing project was properly valued for
Oregon property tax purposes by reducing the potential taxable value of the property by the
value of the federal government’s restrictions on the property. The Department of Revenue’s
objections were dismissed because the Department’s appraisers employed methods that were
inadequate and consistently refused to consider conventional indicators of value.
2.
Income Approach Method Used to Determine SAV of Low-Income Housing
Project.
Department of Revenue v. Butte Creek Associates, No. TC 4676 (April 26, 2006).
The Oregon Tax Court determined the specially assessed value (“SAV”) of a federal lowincome housing project using the income approach method chosen by the taxpayer. The Court
calculated the taxpayer’s actual income and stabilized operating expenses, determined a
capitalization rate, and applied a risk adjustment for the differences between restricted and
unrestricted housing property.
A determination of SAV under ORS 308.712(1)(a) and OAR 150-308.712(3) requires
calculation of a taxpayer's actual income and stabilized operating expenses, and a capitalization
rate. The only issues before the Court were the correct capitalization rate and effective tax rate.
With respect to the capitalization rate, the Court weighed the competing appraisals that
calculated a base capitalization rate with a risk adjustment. The base calculation rate was
derived from calculating an average capitalization rate for unrestricted housing that was similar
to the taxpayer's restricted housing in all respects other than the government restrictions based on
comparable sales information. The risk adjustment was based on the risk associated with
restricted housing that is not associated with unrestricted housing.
With respect to the effective tax rate, the Court rejected the Department of Revenue’s
approach to determining the rate and calculated a rate that was more favorable to the taxpayer.
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3.
Court Agrees to Effective Tax Rate in Determining SAV of Low-Income
Housing Project.
Department of Revenue v. Butte Creek Associates, No. TC 4676 (July 20, 2006).
On a motion for reconsideration of its earlier opinion in the case, the Tax Court
concluded that its calculation of the effective tax rate was incorrect and that the Department of
Revenue’s calculation of the effective tax rate was proper. The Court limited its decision to the
tax year under consideration (2002-03).
E.
OTHER TAX-RELATED DECISIONS.
1.
Claim Based On Hypothetical Tax Claim Is Not A Justiciable Controversy.
Berg v. Hirschy, 206 Or. App. 472 (June 14, 2006).
S Corporation shareholders filed an action against their former attorneys who had
converted their corporation to a limited liability company, seeking a declaration that the
attorneys were negligent because the law firm’s legal advice would potentially cause adverse
Oregon corporate income tax consequences. The shareholders alleged that the law firm
negligently failed to advise them that the corporation could be subject to additional goodwill
and/or going concern value, which would increase its fair market value and require them to
report a taxable gain.
The Oregon Court of Appeals held that the shareholders’ claim was not justiciable where
it depended on the occurrence of future events that may or may not happen. The Court also
denied as not justiciable the shareholders’ additional request for a declaration that their claim had
not yet accrued for statute of limitations purposes.
In finding that there was no justiciable controversy, the Court noted that a cause of action
for negligence does not arise until the negligence causes harm and results in damages, and the
shareholders had yet to incur any damages as no tax authority had imposed on them any
additional tax liability. The Court pointed out that it is impossible to know when or if the
shareholders would incur any tax liability in that the relevant tax authority may never decide to
review the taxpayers’ or the corporation’s tax returns at all.
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