We previously reported on a significant taxpayer victory in which the Oregon Tax Court held that changes or corrections made by other states’ taxing authorities will not hold open the Oregon statute of limitations. Dep’t of Revenue v. Washington Federal, Inc., TC 5010 (Or. Tax Ct., June 29, 2012). As promised, following is our analysis of the case.
The taxpayer, a multistate federal savings and loan corporation, timely filed its Oregon corporate excise tax returns for tax years 1999 through 2002. Arizona and Idaho state taxing authorities assessed the taxpayer in 2003 and 2006, respectively. In 2008, after the expiration of the standard Oregon statute of limitations for assessment (generally three years from the date the return was filed), the Oregon Department of Revenue (the Department) issued assessments for the tax years 1999 through 2002. The issue before the court was whether the Department’s assessments were timely.
The statute at issue, ORS 314.410(3)(b)(A), provides that if the IRS or “an authorized officer of another state’s taxing authority makes” certain “changes or corrections” for which an assessment or refund may be issued under the Internal Revenue Code or relevant state law, then a notice of deficiency may be issued under Oregon law within two years after the Department is notified of the changes. One such “change or correction” that triggers the extended statute of limitations period is a change or correction to the taxpayer’s income tax liability that causes a change in the taxpayer’s Oregon taxable income. If triggered, the extended two-year assessment period applies regardless of whether the standard limitations period has already expired, and the assessments are not limited to the items changed or corrected by the IRS or other state.
The Department argued that the limitations period remains open whenever the IRS or another state proposes a change or correction which, if made by the Department, would change a taxpayer’s Oregon tax liability. The Department contended that if the same changes that were made in Idaho, for example, were made in Oregon, the taxpayer’s Oregon tax liability would be changed, and the limitations period would remain open.
The court held that a change by another state can only “directly result” in a change in a taxpayer’s Oregon tax liability when there is a connecting linkage between Oregon substantive law and the substantive law of that sister state. For example, Idaho’s changes to a taxpayer’s apportionment factors would not directly cause a change in that taxpayer’s Oregon tax liability because Oregon’s apportionment statutes are not linked to Idaho’s. By contrast, IRS adjustments to a taxpayer’s taxable income would directly cause a change in that taxpayer’s Oregon tax liability, because Oregon tax law is linked to the IRC. The court noted that it was aware of only one substantive linkage between Oregon tax law and the tax laws of sister states—in the context of credits for taxes paid to other states by individuals. The court also found there to be a profound absence of legislative history supporting the Department’s expansive view of the statute.
This is an important win for Oregon taxpayers because it reinforces the very limited nature of the Department’s ability to hold open the statute of limitations for assessment. In addition, the court suggested that had it accepted the Department’s position, it would have been forced to confront serious Commerce Clause issues because the Department’s construction would give businesses operating in Oregon alone an advantage over businesses operating in, and subject to tax in, several states.