IN THE MATTER OF THE INCOME TAX PROTEST OF HARE
398 P.3d 317
Okla.2017Background
- Bill Hare, Jr. was a 2% shareholder of two Oklahoma S-corporations (Briggett, Inc. and Briggett Transportation, Inc.) that sold substantially all assets (including goodwill) in September 2007.
- Hare reported his distributive share of sale proceeds as long-term capital gain on his 2007 federal return and later filed an amended Oklahoma return to claim the Oklahoma net capital gain deduction under 68 O.S. § 2358(F).
- The Oklahoma Tax Commission (OTC) denied the deduction to the extent attributable to intangible personal property (goodwill), allowing only a partial refund; Hare protested and sought the full deduction.
- Administrative proceedings and cross-motions for summary disposition produced no disputed facts; the ALJ and OTC denied Hare the deduction for goodwill.
- The Supreme Court reviewed statutory interpretation of § 2358(F), focusing on whether proceeds from a pass-through entity’s asset sale (including goodwill) constitute proceeds from the sale of a "direct or indirect ownership interest" qualifying for the deduction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Hare's distributive gain from sale of S-corporations' assets (including goodwill) qualifies as gain from the "sale of a direct or indirect ownership interest in an Oklahoma company" under 68 O.S. § 2358(F)(2)(a)(2) | Hare: Sale of substantially all corporate assets by an S-corp is the functional sale of an indirect ownership interest in an Oklahoma company; therefore the capital gain deduction applies | OTC: The statute only covered sale of real property, tangible personal property, stock, or equity interests; intangible personal property (goodwill) from an asset sale did not qualify | Court: The sale of pass-through entity assets (including goodwill) by S-cos constitutes the sale of an indirect ownership interest and qualifies for the § 2358(F) deduction |
| Whether the 2007 amendment to § 2358(F) should be applied retroactively or viewed as clarification of original intent (supporting Hare) | Hare: 2007 amendments merely clarified original law and confirm that intangible assets sold as part of "substantially all assets" were intended to qualify; retroactive effect appropriate | OTC: 2007 amendments cannot be applied retroactively to 2007 transactions; original statute did not cover intangibles in asset sales | Court: Even without retroactivity, legislative amendment confirms original interpretation and demonstrates legislature intended to allow deduction for asset sales (including intangibles); supports Hare's position |
| Whether statutory terms "direct" and "indirect" ownership interest limit the deduction to equity sales only | Hare: "Direct" covers equity/stock sales; "indirect" covers pass-through entity asset sales — statute therefore encompasses both structures | OTC: Treated the phrase as not applying to intangibles in asset sales, effectively limiting deduction to stock/equity sales | Court: Definitions in § 2358(F) make clear "indirect" means ownership via pass-through entity that sells assets; the statute contemplates asset sales by pass-throughs as qualifying indirect ownership interest |
| Whether denying deduction when business sold via asset sale (versus equity sale) produces irrational disparate treatment | Hare: No rational basis to allow deduction for a stock sale that is effectively a sale of goodwill but deny it for an asset sale of the same goodwill | OTC: Argued statutory scope excluded intangible asset sales | Court: Treating identical economic results differently based on form is irrational; statute read to avoid such disparity and allow deduction for asset sales by pass-through entities |
Key Cases Cited
- Am. Airlines, Inc. v. State, ex rel. Okla. Tax Comm'n, 341 P.3d 56 (Okla. 2014) (standards for reviewing OTC adjudications and de novo statutory interpretation)
- CDR Sys. Corp. v. Okla. Tax Comm'n, 339 P.3d 848 (Okla. 2014) (context on legislative purpose of the capital gain deduction)
- Russell v. Chase Inv. Servs. Corp., 212 P.3d 1178 (Okla. 2009) (statutory construction principle: ascertain legislative intent)
- Fanning v. Brown, 85 P.3d 841 (Okla. 2004) (use plain meaning of statutory words unless otherwise indicated)
- Lumber 2, Inc. v. Illinois Tool Works, Inc., 261 P.3d 1143 (Okla. 2011) (give undefined statutory terms their ordinary meaning)
- Globe Life & Acc. Insur. Co. v. Okla. Tax Comm'n, 913 P.2d 1322 (Okla. 1996) (every statutory word must be given effect)
- Sunray Oil Corp. v. Okla. Tax Comm'n, 134 P.2d 995 (Okla. 1943) (classification of stock as intangible property)
- Patterson v. C.I.R., 810 F.2d 562 (6th Cir. 1987) (business goodwill is a capital asset under the Internal Revenue Code)