SIGNIFICANT OREGON TAX CASES
1999–2001
THE HONORABLE SCOT A. SIDERAS
CHIEF MAGISTRATE
OREGON TAX COURT
JOHN H. GADON
LANE POWELL SPEARS LUBERSKY LLP
OREGON STATE BAR TAX SECTION
February 13, 2001
This outline is provided for informational purposes only.
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SIGNIFICANT OREGON TAX CASES
1999–20011
A.
CORPORATE EXCISE (INCOME) TAX ISSUES.
1.
Inclusion of Gross Receipts from “Treasury Function” Transactions In Sales
Factor.
In two important cases decided in 2000, the courts concluded that under pre-1995 law,
the sales factor includes gross receipts from “treasury function” transactions, i.e. gross receipts
that are generated from investing working capital in securities. If the treasury function and
working capital management are performed outside of Oregon, the “treasury function” gross
receipts will be added to the sales factor denominator, but not the sales factor numerator, thereby
significantly reducing a taxpayer’s Oregon apportionment percentage.
In Sherwin-Williams Co. v. Dep’t of Revenue, 329 Or 599, 996 P2d 500 (2000), a
company operating in Oregon and several other states managed its working capital by buying
and selling securities. Its cash management activities were conducted in Ohio. The Oregon
Supreme Court held that under the broad definition of “sales” in the Oregon version of the
Uniform Division of Income for Tax Purposes Act (“UDITPA”), the gross receipts received by
the taxpayer from the sale of securities in the course of managing its working capital qualified as
“sales” and were therefore includible in the denominator of the company’s Oregon sales factor.
In the case of AT&T v. Dep’t of Revenue, ___ OTR ___ (Aug. 31, 2000), the Oregon
Tax Court extended the holding of Sherwin-Williams to public utility companies.
As a telecommunications company conducting business in Oregon and in other states,
AT&T was treated as a public utility for corporate excise tax purposes. Public utilities are
excluded from the application of UDITPA in Oregon and are taxed under a somewhat different
statutory regime.
AT&T regularly invested working capital in short-term securities. The gross receipts
from the sales and redemption of these securities were included by AT&T in the denominator of
the sales factor for purposes of determining its Oregon apportionment percentage.
As a public utility, AT&T reported its income using the apportionment method of
reporting. The Department of Revenue did not challenge the company’s use of the
apportionment method.
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The assistance of Nicholas P. Nguyen in the preparation of this outline is gratefully acknowledged.
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The Department of Revenue’s rules for apportionment incorporate the general concepts
and apportionment rules applicable to non-utilities, including the UDITPA definition of “sales.”
AT&T argued that since the Department of Revenue’s rules required it to apportion its income in
the same manner as non-utilities, the result reached in the Sherwin-Williams case should also
apply. The Department of Revenue argued that the Department had the authority to require
“correction” of a factor in order to more fairly and accurately apportion the company’s net
income.
The court rejected the Department’s claims, noting the Department’s rules in effect for
the years at issue vested the Department with authority to correct apportionment factors only
where the use of the standard apportionment formula would violate the taxpayer’s constitutional
rights. The court held that in the absence of any applicable amendment of the statute or
administrative rule, the Department could not unilaterally adjust the sales factor or redefine sales
or gross receipts on an ad hoc basis. The court concluded that AT&T was entitled to include the
gross receipts from the sale and redemption of securities purchased as part of its cash
management function in the denominator of its sales factor for purposes of computing the
company’s Oregon taxable income.
2.
Inclusion of Income of a Foreign Insurance Company in Oregon Unitary
Income.
In Oregon v. Penn Independent Corp., 15 OTR 68 (1999), the Oregon Tax Court
concluded that a unitary group filing a consolidated federal tax return must include the income of
an out-of-state insurance member in the unitary income of the group for purposes of determining
the Oregon apportionment.
Foreign insurance companies are generally exempt from the corporate excise tax under
ORS 317.080(8). Penn Independent Corporation, the parent of a unitary group of insurance
companies filing a consolidated federal income tax return, decided to exclude income of a nonOregon subsidiary from the unitary income of the group for Oregon tax purposes, on the ground
that the non-Oregon insurance company was exempt from the corporate excise tax.
The Oregon Tax Court disagreed with the taxpayer and held that the income of the outof-state insurance company must be included in the unitary income of the group. The court
based its holding on the premise that including the income of a nontaxable member of a unitary
group does not subject that income to taxation by Oregon. Including such income merely
provides the base from which to determine the Oregon apportionment. The court also found
support in the language of ORS 317.715, which suggests that an affiliated group filing a
consolidated federal income tax return is required to determine its Oregon apportionment based
on the federal consolidated taxable income of the group as the starting point, even if some of the
group members are not subject to tax in Oregon.
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The court also read narrowly the provision of ORS 317.710(5)(b), which excludes certain
financial organizations from consolidated Oregon returns, reasoning that the exception applies to
corporations “subject to” Oregon corporate excise tax, and an out-of-state insurance company is
not “subject to” the excise tax.
3.
Gain from Sale of Investment Used to Purchase Commercial Real Estate in
Oregon is not Subject to Apportionment.
In Dep’t of Revenue v. Terrace Tower USA, Inc., 15 OTR 168 (2000), a California real
estate holding company set up an Oregon subsidiary to own and operate a commercial real
property in Oregon. To fund the acquisition of the Oregon property, the parent redeemed certain
investment holdings and realized a substantial gain in the process. The parent and subsidiary
filed a consolidated corporate excise tax return. In its Oregon tax return, the taxpayer treated the
above gain from its redemption of securities as non-business, non-apportionable income. The
Oregon Tax Court agreed with the taxpayer.
Oregon law applies both a transactional and functional test to determine whether
business income is subject to apportionment. The transactional test is not applicable to this case.
The court concluded that the investment by the California parent did not perform an operational
function. In discussing the functional test, the court concluded that a passive investment, as
opposed to an operational investment, does not result in a flow of value to the unitary business
activities. In fact, there was no unitary business until after the gain had been realized and the
property acquired. Therefore, the gain from the redemption of securities was not business
income subject to apportionment to Oregon.
4.
Settlement Received in Contract Interference Case is Unitary Business
Income Apportionable to Oregon.
Pennzoil Co. v. Dep’t of Revenue, 15 OTR 101 (2000).
In 1988 Pennzoil received a $3 billion settlement payment from its lawsuit against
Texaco for improper interference with its contract to acquire Getty Oil Company. When
Pennzoil filed its 1988 Oregon consolidated excise tax return, it treated the net settlement
proceeds as non-business, non-apportionable income.
The Oregon Tax Court, however, disagreed with Pennzoil. The court concluded that the
settlement proceeds were unitary business income and therefore must be apportionable to
Oregon.
Oregon applies both a transactional and a functional test to determine whether a
particular item of income is business income subject to apportionment. Under the transactional
test, the court, relying on principles of federal tax law, concluded that the money Pennzoil
received in the settlement had the same character as the subject matter of the lawsuit. Thus, the
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court concluded that the income received by Pennzoil from the settlement was income arising
from a contract. In addition, the court found that the Getty contract, notwithstanding its size, was
an activity in the regular course of Pennzoil’s unitary business. Therefore, income arising from
the Getty contract is business income apportionable to Oregon.
Under the functional test, the court again found that the settlement payment had its source
in the Getty contract, and the question is whether the contract served an operational function or
an investment function. The court held that because the Getty contract was created and arose out
of Pennzoil’s unitary business, the contract therefore served an operational function.
The court also concluded that in light of the Sherwin-Williams case (discussed above),
the amount of the settlement proceeds would be included in the denominator of the sale factor.
The Penzoil case is now on appeal to the Oregon Supreme Court.
5.
Effect of Prior Year Adjustment on Current Year’s Carryover Credit.
In Smurfit Newsprint Corp. v. Dep’t of Revenue, 329 Or 591, 997 P2d 185 (2000), the
Oregon Supreme Court held that the Department of Revenue could not recalculate the amount of
tax owing in a closed year in order to change the amount of carryover credit for a subsequent
year.
The credit at issue is the state pollution control (PCF) tax credit. The taxpayer’s 1986
return had an error which the Department of Revenue discovered in 1995. The Department of
Revenue argued that had the 1986 tax liability been correctly calculated, the correct tax liability
could have absorbed more of the PCF credit than shown on the return for 1986, thereby reducing
the amount of the PCF credit that could be carried over and used in 1987 and 1988 (the years for
which the Department assessed deficiencies).
Relying on federal tax law, the Oregon Tax Court had held that the Department of
Revenue could recalculate the amount of tax liability in a closed year in order to change the
amount of carryover credit for a subsequent year. Smurfit, 14 OTR 434 (1998). However, on
appeal, the Oregon Supreme Court reversed the judgment of the Tax Court.
The Oregon Supreme Court held that it was inappropriate to look to federal tax law in
construing the application of the PCF credit, since this is strictly a state income tax credit.
Moreover, the court interpreted the statute to allow the taxpayer the choice to use or not to use its
PCF tax credit in a given year. Therefore, the court found that the Department of Revenue had
authority to determine how a taxpayer would use its PCF tax credit. (In other words, even if the
1986 tax liability had been correctly calculated, it did not follow that the taxpayer would have
chosen to use up its PCF tax credit in that year.)
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6.
State Tax Assessment Barred where Notice of Deficiency not Mailed within
Six Months of Date on which Federal Statute of Limitations (that had been
open on extensions) Expired.
IBM Corp. v. Dep’t of Revenue, 15 OTR 162 (2000).
IBM timely filed Oregon corporate excise tax returns for the tax years 1978 through
1984. It did not enter into any agreements with the state Department of Revenue extending the
time for audit and issue of notices of deficiency for those years.
However, under extension agreements with the IRS, the periods of limitation for the tax
years from 1978 through 1984 were extended until some time in the 1990s. During the extension
periods, the IRS made adjustments to taxable income and issued revised audit reports. More
than a year after receiving the audit reports, the Department of Revenue issued notices of
deficiency for the year 1978 through 1984. However, the Oregon Tax Court held that the notices
of deficiency were barred by the statute of limitations.
The general three-year statute of limitation for state tax assessment is extended by certain
statutory exceptions. One exception allows the Department to issue a notice of deficiency within
two years of being notified by the taxpayer or the IRS of any federal tax correction.
ORS 314.410(3). Upon analyzing that statutory exception, the Oregon Tax Court concluded that
the extension applies only if the IRS correction is made and notice of that correction received
within the state period of limitation. In other words, if an IRS correction occurred after the state
limitation period had expired, then the two-year extension would not apply. In this case, the
three-year statute of limitations had already expired before the IRS made any corrections.
Therefore, the Oregon Tax Court held that the two-year extension did not apply to IBM.
Where the taxpayer agreed with the IRS to extend the period of limitation for assessment
of federal income taxes, the Department may issue a notice of deficiency within six months of
the expiration of that agreed extension, or if later, within the limit of other statutory extensions.
ORS 314.410(8). The court concluded that this exception did not modify the other statutory
extensions, all of which had expired with the three-year period of limitation in the absence of an
agreement between the taxpayer and the Department. Since the Department did not issue the
notices of deficiency within six months of when the federal extension periods expired, the
notices were void.
6.
Royalty Income from Oil and Gas Production on Out-of-State Land Is Not
Business Income Subject to Oregon Corporate Excise (Income) Tax.
Willamette Industries, Inc. v. Dep’t of Revenue, 331 Or 311 (2000).
Willamette Industries received royalty income from oil and gas production on out-ofstate lands. The Department of Revenue determined that the out-of-state royalty income was
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part of the company’s regular business activities and therefore taxable as business income in
Oregon. Relying primarily on applicable administrative rules, the Oregon Tax Court agreed with
the Department. On appeal, the Oregon Supreme Court reversed and ruled in favor of
Williamette Industries.
OAR 150-314.610(1)(B) provides in part that royalties are taxable as business income if
received on account of property that is used in the taxpayer’s trade or business, or is incidental to
such trade or business. By contrast, ORS 314.610(1) defines “business income” to include
income from property only if the acquisition, management, use or rental, and the disposition of
the property are integral to the taxpayer’s regular trade or business operations. The court
concluded that the “incidental” language in the administrative rule is irreconcilable with the
“integral” standard in the statutory definition. Accordingly, the court found OAR 150314.610(1)(B) to be invalid to the extent it treats as “business income” income from property that
is merely incidental to a taxpayer’s trade or business.
Applying both the transactional test and the functional test for business income, the court
concluded that the royalty income in question did not qualify as business income subject to
apportionment to Oregon. The court based its conclusion on the fact that the taxpayer’s regular
business was harvesting timber and manufacturing wood products, not producing or selling oil
and gas.
B.
PERSONAL INCOME TAX ISSUES.
1.
Guaranteed Payments for Services Performed by Nonresident Partners are
Taxable in Oregon to the Extent that They are Sourced in Oregon.
Reeve v. Dep’t of Revenue, 15 OTR 148 (2000).
Taxpayers were Washington partners of a law partnership with offices in and outside of
Oregon and Washington. The partnership agreement provided for annual base compensation
payments to the partners which may be designated as guaranteed payments to be made without
regard to the income of the partnership.
Taxpayers argued that the annual base compensation amounts that they received from the
partnership were guaranteed payments for services performed entirely in Washington, and
therefore were not taxable in Oregon.
The Oregon Tax Court, however, held that the annual base compensation amounts are in
part Oregon-source income, taxable by Oregon. Although Oregon follows the Internal Revenue
Code (the “Code”) with respect to the taxation of partnership profits, the court based its decision
on the following considerations:
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•
The court concluded that, given the limited purpose of § 707(c) of the Code, the
annual base compensation amounts received by the taxpayer would not qualify as
guaranteed payments.
•
In addition, the court relied on ORS 316.124, which generally disregards any
characterization of payments to partners as being for services or for the use of capital.
The court interpreted that restriction as an intent by the Legislature to treat payments
to partners as nonguaranteed payments for the sole purpose of determining the source
of income. That narrow purpose, in the view of the court, was consistent with the rest
of the statute.
The Reeve case is now on appeal to the Oregon Supreme Court.
2.
Deficiency Notices Are Invalid if Not Certified.
Preble v. Dep’t of Revenue, 331 Or 320 (2000).
The Oregon Supreme Court held that notices of deficiency were invalid because the
Department of Revenue did not certify that the adjustments in the notice had been made in good
faith and not for the purpose of extending the period of assessment, as required by ORS 305.265.
The taxpayers had received notices of deficiency from the Department of Revenue
following the completion of their federal tax litigation. The taxpayers contended that the notices
were invalid because they lacked the certificate of good faith required by ORS 305.265. The
taxpayers lost on summary judgment in the Tax Court. However, on appeal, the Oregon
Supreme Court reversed and held that the taxpayers were entitled to summary judgment in their
favor.
The Oregon Supreme Court based its decision on the plain language of the statute, which
uses the word “shall” in enumerating the different requirements for a notice of deficiency.
3.
Bar Exam Expenses Are Not Deductible.
Kress v. Dep’t of Revenue, ___ OTR ___ (Jan. 5, 2001).
This case affirmed the well-established rule that expenses incurred in qualifying for a
new business, such as becoming a member of the bar, are not deductible, even if a taxpayer is a
member of the bar in another state. The court also affirmed the Department of Revenue’s
disallowance of certain expenses incurred by the taxpayers in raising llamas.
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4.
ORS 305.305 Does Not Apply to Suspend Collection Action When the
Taxpayer Has Not Filed a Return.
Sherrer v. Dep’t of Revenue, 15 OTR 156 (2000).
The taxpayer brought a declaratory judgment action in the Tax Court seeking to bar the
Department of Revenue from asking the Plumbing Board to suspend the taxpayer’s plumbing
license due to the taxpayer’s failure to file Oregon income tax returns.
The taxpayer had not filed federal or state income tax returns for the years 1989 through
1996 and became involved in litigation with the IRS concerning his federal income tax liability
for those years. The taxpayer, however, did not contest the notices of deficiencies issued by the
Department of Revenue.
Pursuant to ORS 308.380 to 308.385, the Department sought suspension of the taxpayer’s
plumbing license due to his failure to file Oregon income tax returns or to pay the tax due. The
Plumbing Board denied the Department’s first request, apparently on the belief that the request
was premature given the pending federal tax litigation.
When the Department indicated intent to make a second request, the taxpayer appealed to
the Oregon Tax Court, citing ORS 305.305. ORS 305.305 generally suspends state collection
action of a state income deficiency based on an IRS revenue agent’s report so long as a federal
tax appeal is pending.
The Tax Court held that the provisions of ORS 305.305 did not apply to suspend state
collection action, pending appeal at the federal level, where the taxpayer had not filed tax returns
for any of the years in question.
The Tax Court also held the issue of whether the Plumbing Board’s first decision (not to
suspend the taxpayer’s license) should be given preclusive effect was a matter for that agency,
and not the Tax Court, to determine.
C.
PROPERTY TAX ISSUES.
1.
Maximum Assessed Value under Constitutional Limitation Imposed by
Ballot Measure 50.
Measure 50, an amendment to the Oregon Constitution, was adopted by the voters in
1997. Measure 50 both cut and capped assessed values for Oregon property tax purposes. Under
Measure 50, a property’s assessed value cannot exceed the lesser of its “maximum assessed
value” or its “real market value.” (Real market value is generally equivalent to fair market
value.)
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For the 1997-98 tax year, a property’s maximum assessed value was generally equal to its
real market value for the 1995-96 tax year less ten percent. Thereafter, a property maximum
assessed value generally could not increase by more than ten percent per year (excluding
increases in value due to additions or improvements).
(a)
The 1995-96 Assessed Values Cannot Be Changed or Corrected for
Valuation Errors in Implementing Measure 50.
In Multnomah County Assessor v. Lorati, 14 OTR 525 (1999), the taxpayers argued that,
for purposes of computing their 1997-98 maximum assessed values, they were entitled to
establish that the “real market value” of their properties were less than the properties assessed
values that were on the rolls of the 1995-96 tax year.
After analyzing the background of Measure 50, the Oregon Tax Court disagreed and
concluded that the maximum assessed values for the 1997-98 tax year were to be based on the
assessed values for the 1995-96 tax year.
In Lincoln County Assessor v. Jones, ___ OTR ___ (Dec. 7, 2000), the Oregon Tax Court
addressed the flip side of the issue, and concluded that a county may not change or correct the
1995-96 assessed values in implementing Measure 50. In the Jones case, the assessor wanted to
increase the 1995-96 assessed value for a condominium in Lincohn City. The assessor attempted
to change the value under ORS 311.205(1), which permits corrections of clerical errors but not
errors of valuation judgment. The Oregon Tax Court concluded that under ORS 311.205(1) and
Measure 50, the assessor could not make such an adjustment, even if the assessed value on the
roll was in error.
(b)
Maximum Assessed Value must be Calculated Separately for Land
and Improvements.
In Flavorland Foods v. Washington County, ___ OTR ___ (July 19, 2000), the Oregon
Tax Court addressed the question of whether the maximum assessed value limitation should be
separately calculated for land and for improvements.
Despite different arguments raised by the Department of Revenue, the court held that
maximum assessed value must be separately calculated for land and improvements. Thus, where
the value of the land increased and the value of the improvements decreased significantly, the
maximum assessed value limitation applied separately to the land and to the improvements,
reducing the aggregate assessed value for the combined property.
In Chart Development Corp. v. Dep’t of Revenue, ___ OTR ___ (Oct. 5, 2000), the
Department of Revenue again litigated the same issue. Once again, the court held for the
taxpayer.
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The court’s opinion contains a lengthy discussion and analysis of the history of Measure
50. The court noted that this case was the third that it had decided on this issue.
The court’s decision in the third case, Taylor v. Clackamas County Assessor, 14 OTR
504 (1999), which was also favorable to the taxpayer, was withdrawn at the request of the parties
in order to facilitate settlement.
Both the Flavorland and the Chart Development Corp. cases are now on appeal to the
Oregon Supreme Court.
2.
Enterprise Zone Condition Invalid.
Hyundai Semiconductor America v. City of Eugene, 14 OTR 557 (1999).
In 1985, Oregon enacted law authorizing the establishment of enterprise zones. The
basic purpose of an enterprise zone is to attract industries that will create new jobs for the area by
means of property tax exemption. The law also delegates limited authority to the local
governmental sponsor of an enterprise zone to impose additional conditions for the enterprise
zone.
The City of Eugene and Lane County cosponsored the establishment of the West Eugene
Enterprise Zone in 1986. In 1995, Hyundai Semiconductor applies to construct a plant to
manufacture semiconductors as part of the enterprise zone. The city and county approved the
application in 1995. By the end of June 1997, the West Eugene Enterprise Zone was scheduled
to terminate. The city and county decided not to renew the zone. Hours before the enterprise
zone terminated, the city and county adopted a new resolution requiring, as an additional
condition, that businesses seeking the exemption make a public benefit contribution of up to
15 percent of the tax exemption.
The Oregon Tax Court held that, contrary to the requirements of the enterprise zone
enabling statute, the condition imposed by the City of Eugene and Lane County was not
reasonably related to the public purpose of creating job opportunities and was not imposed under
a policy that established standards for its imposition. Therefore, the court concluded that the
condition was invalid.
3.
Airport Concession Property is Taxable.
Avis Rent-a-Car System v. Dep’t of Revenue, 330 Or 35, 995 P2d 1163 (2000).
The Portland International Airport is owned and operated by the Port of Portland, a
political subdivision of the state whose property is exempt from property tax. Under agreements
with rental car companies, the Port allowed the companies to utilize designated areas of airport
property for car rental return and maintenance. Multnomah County assessed property tax on
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such property. On appeal, the Oregon Supreme Court agreed with the Tax Court that the
property used by the car rental companies is subject to property tax.
Under the statute, public property that is leased to a private party is subject to property
tax. Therefore, whether the car rental areas are subject to tax will depend on whether the
relationship between the car rental companies and the airport authority qualifies as a lease. The
Oregon Supreme Court found that all the essential elements of a lease were present. Although
the rental car companies did not have exclusive possession of the property due to the right of the
public to use the designated areas, the rental car companies still had sufficient control and
exclusive rights to the areas to constitute an interest subject to taxation.
4.
Right in Power Transmission System is Subject to Property Tax.
Power Resources Coop. v. Dep’t of Revenue, 330 Or 24, 996 P2d 969 (2000).
An electrical cooperative had a contractual right to use part of an electrical transmission
system owned by the Bonneville Power Administration (BPA), an agency of the federal
government. Under an agreement called a “Capacity Ownership Agreement,” the cooperative
was entitled to receive or direct the delivery of 50 megawatts (MW) over the BPA transmission
system, subject to the BPA operating procedures and schedules. The BPA retained all rights to
operate, maintain and manage and the transmission system.
The Department of Revenue assessed property tax on the cooperative for its interest in
the BPA transmission system. On appeal, the cooperative argued that all that it had was a
prepaid, long-term transmission service agreement, not a possessory interest in the real and
personal property that comprises the BPA transmission system. The cooperative also argued that
its contractual right was like a grazing permit and therefore not the type of property subject to
tax: its right to use the transmission system was shared with others, and it did not occupy
physically or control any identifiable part of the transmission system. In addition, the
cooperative also argued that the property tax on its interest would be a violation of the
intergovernmental tax immunity principle.
The Oregon Supreme Court rejected all these arguments. The court concluded that the
cooperative had sufficient possessory interest in a part of the transmission system, subject to
reasonable limitation, and therefore was subject to property tax on its “share” of the BPA
transmission system.
5.
Valuation of Air Transportation Property.
In Delta Air Lines, Inc. v. Dep’t of Revenue, 328 Or 596, 984 P2d 836 (1999), the
Oregon Supreme Court addressed many technical issues regarding valuation of air transportation
property, particularly leased aircraft. Oregon values air transportation property using the unit
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valuation method, which takes into account the value of the assessable tangible and intangible
property as an operating unit.
For purposes of this outline, we will note just two issues discussed in that case.
One issue in the case was whether there should be an adjustment to the income and stock
and debt indicators of value for the aircraft leased but not owned by Delta, in order to capture the
interest of the lessors in the leased aircraft. (This is commonly referred to as the “lease addback”
adjustment.) The court concluded that such an adjustment was appropriate.
Another issue was whether, under the income method of valuation, a limited-life model
(using the average anticipated life of assets) or perpetuity model (assuming Delta would continue
operation into the indefinite future) should be used. The court concluded that under the
applicable guidance, the limited-life model was more appropriate because the task of property
tax valuation was to determine the value of the assets, not the value of Delta as a firm.
6.
Valuation of Golf Course.
Deschutes County Assessor v. Broken Top Club, LLC, ___ OTR ___ (Oct. 16, 2000).
The Broken Top case dealt with the valuation of an exclusive golf course. The property
in question is an 18-hole course in the Bend area that was built as part of an upscale residential
development. The golf course was designed and marketed as an exclusive private course, with
memberships limited to home owners in the associated residential community. Due to
competition from other local golf courses, economic conditions, and slow membership sales, the
golf course experienced significant operating losses.
The Oregon Tax Court found that the most reliable indication of value in this case was
the income approach. For that purpose, the court concluded that the golf course must be valued
without regard to its current membership restrictions, which were designed to benefit lot sales in
the associated residential development, rather than to maximize economic return for the golf
course as a stand-alone project. The court accepted the income projection based on open
membership at a lower fee advocated by the county but with some modifications for risk and
timing. The court determined the value of the golf course to be $6 million, about half way
between valuations submitted by the parties. (The taxpayer’s experts submitted valuations in the
range of $2.4-$4.5 million, and the county’s expert submitted a valuation of $9.5 million.)
7.
Valuation of Saw Mill – Functional Obsolescence.
Dep’t of Revenue v. Grant Western Lumber Co., ___ OTR ___ (Nov. 22, 2000).
The Grant Western case dealt with the valuation of a saw mill in John Day, Oregon. The
mill was constructed in 1974 to process large pine logs. When the taxpayer purchased the mill in
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1992, it added equipment to process small logs. Without the small log addition, the mill would
have been closed due to lack of large log inventory. However, the addition did not significantly
increase the production capacity of the mill. Logging restrictions due to the spotted owl and
other environmental problems also had a significant adverse impact on the output and operation
of the mill.
The income approach was not available for the valuation, due to election by the taxpayer
to keep income information confidential. The Tax Court did not find the comparable sales
approach particularly helpful, due to uncertainties about pricing variables. The court found that
the lower range of the traditional cost approach was more reflective of market value. The court
determined the fair market value of the property for the years in question to be in the 14-15
percent range of “replacement cost new” for the small log side of the mill.
The court devoted a considerable amount of its opinion to a discussion of the functional
obsolescence calculations presented by the parties.
8.
Ignorance of Property Value Is Not “Good Cause” For Judicial Relief.
Dep’t of Revenue v. Oral and Maxillofacial Surgeons, P.C., ___ OTR ___ (Jan. 5, 2001).
In March 1999, the taxpayer discovered as a result of an independent appraisal that its
office building might have been significantly overassessed for property tax purposes for the prior
eight years.
Based on the advice of the Department of Revenue on where to send an appeal for these
prior years’ assessments, the taxpayer filed an appeal with the Magistrate Division of the Oregon
Tax Court in May 1999. The taxpayer subsequently conceded that no changes could be made for
years prior to the 1996-97 tax year, and the parties stipulated to the correct values if the court
found that changes could be made for the 1996-97 through 1998-99 tax years.
The Magistrate Division held that the taxpayer had good and sufficient cause for failing
to appeal to the Department of Revenue and authorized the Assessor to change the tax rolls for
all three years. The Department of Revenue appealed to the Regular Division of the Tax Court.
The taxpayer subsequently learned that the Department also had the authority to change
the assessment for prior unappealed years under ORS 306.115. The taxpayer then filed a petition
with the Department which ordered changes for the 1997-98 and 1998-99 tax years. The
Department declined to change the assessment for the 1996-97 tax year because the
Department’s authority to do so expired.
The sole issue before the Tax Court then was whether to order a change to the tax rolls
fore the 1996-97 tax year. The Tax Court declined to do so, holding that the taxpayer failed to
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file a timely appeal for the 1996-97 and failed to provide “good and sufficient cause” for that
failure.
ORS 305.288 allows the Tax Court to correct assessments for the current and last two tax
years. For a non-residential property, that section allows correction if the court finds that the
taxpayer had “good and sufficient cause” for failing to pursue the statutory right of appeal.
The court held that, in light of the overlapping jurisdiction of the Department and the
court under ORS 306.115 and ORS 305.288, respectively, a taxpayer could appeal to the court
under ORS 305.288 without first petitioning the Department for relief.
However, the court found that the only reason the taxpayer had not appealed the
assessment was ignorance of the value of the property and concluded that ignorance of value is
not a “good and sufficient cause” for failing to appeal.
The taxpayer also argued that it was misled by the Department because the Department
failed to inform taxpayer, when it was first contacted, that the Department had authority, without
court involvement, to correct assessments back to three years. (Had the taxpayer filed a petition
with the Department seeking relief for the 1996-97 tax year when it had first contacted the
Department, its petition would have been timely.) When the taxpayer learned of that authority, it
was too late for the Department to change the 1996-97 assessment, although the taxpayer was
able to petition the Department and resolve the assessment problem for the subsequent two years.
The court rejected the taxpayer’s argument and held that the taxpayer was not misled. The court
found that the taxpayer had asked a straightforward question regarding where to file an
assessment appeal and had been given the correct answer.
9.
Low-income Housing Restrictions and Subsidies Properly Taken Into
Account in Appraisal.
Piedmont Plaza Investors v. Dep’t of Revenue, ___ Or ___ (Feb. 8, 2001).
At issue in this case were the property tax assessments for two “section 236” low income
housing apartments located in Multnomah County (Piedmont Plaza) and Washington County
(Spencer House) for the 1994-95 and 1995-96 tax years.
The properties were built in the 1970’s as low-income housing under section 236 of the
National Housing Act. Taxpayers purchased the properties in the 1980’s. In 1997, the taxpayers
sold the properties through the statutory “preservation transfer” process, which allowed section
236 housing to be sold at prices adjusted to discount the section 236 restrictions.
At trial, the taxpayers and the Department of Revenue submitted different appraisals.
However, the Tax Court rejected all the submitted appraisals and found that there was no
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immediate market value for the properties. Under ORS 308.205(2)(c), if there is no immediate
market value for a property, then the real market value for property tax purposes would be the
amount of just compensation for the loss of the property. The Tax Court concluded that the 1997
sales price for each property where each property was sold through the preservation transfer
process was the best evidence of just compensation and therefore chose those amounts as the real
market values for the properties.
The Oregon Supreme Court reversed. The court found that the only issue before the
Court was whether the Tax Court had erred in rejecting the taxpayers’ appraisals based on the
income approach to value.
The Court found that the appraiser for the taxpayers did take into account and properly
consider certain factors that the Tax Court had found lacking. In particular, the court found that
the appraiser had properly considered the effect of certain low-income housing restrictions in his
income approach to valuation and had reasonably concluded that the amount of an interest
subsidy should not be included as income. The court also found that it was reasonable for the
appraiser to assume that the properties would remain subject to the low-income housing
restrictions indefinitely. Accordingly, the court held that the real market values for the properties
in the years at issue are best reflected by the valuations submitted by taxpayers' appraiser.
D.
PORTLAND BUSINESS LICENSE TAX.
1.
Out-of-Town Attorney Subject to the Portland Business License Tax On
Account of Appearances at Court Hearings, Depositions and Other CaseRelated Activities in the City.
City of Portland v. Cook, 170 Or App 245, 12 P3d 70 (2000).
The taxpayer was an attorney whose office was located outside the City of Portland.
He appeared at court hearings in the city, took depositions and engaged in some other activities
in the city in preparation of his cases. In 1997, the city initiated an action in the Circuit Court of
Multnomah County to recover unpaid business license fees from the taxpayer. The main issue
before the court was whether the taxpayer was subject to the Portland business license tax. The
circuit court held for the city on summary judgment. On appeal, the Oregon Court of Appeals
affirmed.
The taxpayer argued that he either was not engaging in business in the city or was exempt
from the Portland business license tax. The taxpayer also argued that imposing on the tax on
him, based on the above-described activities, violated the due process clause of the Fourteenth
Amendment to the United States Constitution.
Among other things, the taxpayer argued that the separation of powers doctrine prohibits
the city from taxing any fees that he receives in his capacity as an officer of the court, such as
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appearing in courts or other collateral proceedings. The Court of Appeals rejected this argument,
noting that any effect on the judicial branch that results from a general tax on income is far too
tangential to rise to the level of a separation of powers issue.
The Multnomah Bar Association submitted an amicus brief on behalf of the taxpayer in
which it argued that, as applied to the to the practice of law, “doing business” must refer only to
the location of a lawyer’s principal place of business. Based on the wording of the business
license ordinance and applicable Oregon Supreme Court precedent, the Court of Appeals
rejected this limited view of the city’s taxing authority.
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