IN THE MATTER OF THE INCOME TAX PROTEST OF HARE
2017 WL 2774665
| Okla. | 2017Background
- Bill Hare Jr. was a 2% shareholder of two Oklahoma S-corporations (Briggett, Inc. and Briggett Transportation, Inc.) he acquired in 1983.
- In September 2007 the S-corporations sold substantially all assets (including goodwill) to a third party; Hare reported his passed-through share as long-term capital gain on his 2007 federal return.
- Hare amended federal and Oklahoma returns (2012) to claim a net capital gain deduction on Oklahoma Form 511X for gains from the sale; OTC disallowed the portion attributable to goodwill and adjusted the refund.
- Administrative proceedings and cross-motions for summary disposition produced undisputed facts; the ALJ and Oklahoma Tax Commission denied Hare the deduction for goodwill-related proceeds.
- The legal dispute focused on interpretation of 68 O.S.Supp. 2006 § 2358(F): whether sale of a pass-through entity’s assets (including intangible goodwill) constitutes the sale of a “direct or indirect ownership interest in an Oklahoma company” qualifying for the capital-gain deduction.
Issues
| Issue | Hare's Argument | OTC's Argument | Held |
|---|---|---|---|
| Whether sale of S-corporation assets (including goodwill) is a "sale of a direct or indirect ownership interest" under § 2358(F)(2)(a)(2) | The sale of substantially all assets by an S-corp is the sale of an indirect ownership interest; thus proceeds (including goodwill) qualify for the net capital gain deduction | The statute only covered sales of real/tangible property, stock, or equity interests; intangible personal property (goodwill) from asset sales did not qualify | Court held asset sale by a pass-through S-corp is a sale of an indirect ownership interest; goodwill proceeds qualify for the deduction |
| Whether undefined term "ownership interest" should be read to exclude asset sales | Statutory context and plain meaning support that ownership interest includes rights conveyed by asset sales through pass-through entities | OTC relied on narrower reading excluding intangibles when assets (not stock) are sold | Court applied plain meaning and the statute’s definitions of "direct" and "indirect," concluding asset sales by pass-throughs fall within "indirect ownership interest" |
| Whether the 2007 amendment to § 2358(F) should be applied retrospectively to clarify the statute | Hare argued the 2007 amendment merely clarified original intent and supports allowing deductions for intangible asset sales | OTC argued amendment was not retroactive and the pre-amendment statute did not allow intangibles | Court found amendment was clarifying of the original purpose and reinforced its interpretation, but the holding did not rest solely on retroactivity |
| Whether denying deduction when transaction is structured as asset sale (vs. stock sale) produces irrational disparity | Hare argued denying deduction for asset sales while allowing it for stock sales (both reflecting same economic interest) is irrational | OTC accepted disparity under its interpretation | Court agreed disparity was unjustified; holding resolves inconsistency by treating asset sales by pass-throughs as indirect ownership sales |
Key Cases Cited
- Fanning v. Brown, 85 P.3d 841 (Okla. 2004) (plain-meaning rule for statutory construction)
- Globe Life & Acc. Insur. Co. v. Okla. Tax Comm'n, 913 P.2d 1322 (Okla. 1996) (every word in statute must be given effect)
- Lang v. Erlanger Tublar Corp., 206 P.3d 589 (Okla. 2009) (statutory language controls when unambiguous)
- Russell v. Chase Inv. Servs. Corp., 212 P.3d 1178 (Okla. 2009) (ascertaining legislative intent in statutory construction)
- Lumber 2, Inc. v. Illinois Tool Works, Inc., 261 P.3d 1143 (Okla. 2011) (use of plain and ordinary meaning for undefined statutory terms)
- CDR Sys. Corp. v. Okla. Tax Comm'n, 339 P.3d 848 (Okla. 2014) (purpose of net capital gain deduction to promote business investment)
- Am. Airlines, Inc. v. State ex rel. Okla. Tax Comm'n, 341 P.3d 56 (Okla. 2014) (standard of review for Tax Commission adjudications)
- Sunray Oil Corp. v. Okla. Tax Comm'n, 134 P.2d 995 (Okla. 1943) (stock treated as intangible property)
- In re Cook's Trust, 135 P.2d 492 (Okla. 1943) (constructive receipt doctrine)