3 Or. Tax 260 | Or. T.C. | 1968
Decision rendered for defendant August 20, 1968. *262 Plaintiffs' petition for an income tax refund for 1960 was denied by the tax commission and plaintiffs appealed to this court.
In 1960 plaintiffs demolished a business building in Portland in order to construct a new building. The old building had a remaining net book value of $23,000. Instead of deducting the $23,000 in 1960 as a demolition loss the plaintiffs erroneously attempted to spread the loss over a five-year period. In December, 1965, the Internal Revenue Service refused to allow the plaintiffs to amortize the loss and held that the plaintiffs should have deducted the entire $23,000 as a loss in 1960. Consequently the Internal Revenue Service made adjustments to plaintiffs' returns by assessing deficiencies for 1961 through 1964 and allowing a refund for 1960.
The results of the federal tax audit were made available to the auditors of the State Tax Commission. The commission auditor disallowed the write-off over the five-year period, but unlike the Internal Revenue Service, concluded that the $23,000 should be capitalized and added to the cost of the new building so that the total amount would be depreciated over the life of the new building. The auditor did not review the demolition loss claimed for 1960 apparently for the reason that he felt the loss should be capitalized and added to the cost of the new building.
While the negotiations with the state auditor were continuing, the plaintiffs filed a claim with the tax commission for a refund for 1960 contending that the entire loss was deductible in that year. The commission auditor refused to consider the claim for refund on the grounds that it was not filed within the time allowed by ORS
1. The plaintiffs concede that the tax commission was entitled to review their returns for 1961 through 1964. The authority to do so is contained in ORS
While the plaintiffs concede the right of the commission to reopen tax years 1961 through 1964 and assess the deficiencies, they contend that the commission erred when it refused to also reopen the tax year 1960 and grant a refund for that year since all parties agreed that the demolition loss was a proper deduction in 1960. The plaintiffs argue that the tax commission used its authority under ORS
The plaintiffs' argument as to their right to reopen tax year 1960, which is otherwise closed by the statute of limitations,1 is based on two theories: (1) that the claim for refund which they filed on May 9, 1967, was, contrary to the decision of the commission, timely filed under ORS
The question of whether plaintiffs' report of the federal correction to the tax commission was timely filed will be considered first. ORS
In the instant case the federal correction was issued in December, 1965, and the plaintiffs' report of the federal correction was not filed with the tax commission until May 9, 1967. The question is when the federal correction became final. The plaintiffs argue that it did not become final until two years after the federal deficiencies for 1961 through 1964 were paid (which apparently was in March, 1966) because they had two *265 years in which to file suit for a refund. See Int Rev Code of 1954, § 6511.
2. ORS
3. The commission has not promulgated a regulation for ORS
The commission was correct in its decision that plaintiffs' claim for refund was not timely filed under ORS
Plaintiffs' principal argument for reopening 1960 and allowing the refund is based on ORS
"* * * When a determination of tax liability:
"* * * * *
"(5) Determines the basis of property for depletion, exhaustion, wear and tear, or obsolescence, or for gain or loss on a sale or exchange, and in respect of any transaction upon which such basis depends there as an erroneous inclusion in or omission from the gross income of * * * the taxpayer * * *
"and on the date the determination of liability becomes final, correction of the effect of the error is prevented by the operation of any provision of any income tax law of this state * * * then the effect of such error shall be corrected * * * but only if in the determination of tax liability the commission or the taxpayer * * * maintains a position inconsistent with the erroneous inclusion, exclusion, omission, allowance, disallowance, recognition, or nonrecognition, as the case may be. * * *"
4. To come within the statute the plaintiffs must show (1) a "determination of tax liability" which (2) determined the basis of property for depletion or for gain or loss on a sale or exchange, (3) that the transaction upon which such basis depended involved an erroneous inclusion in, or omission from, gross income *267 of the plaintiffs, (4) that on the date the determination became final correction of the error was prevented by the statute of limitations, and (5) that the tax commission in determining the tax liability maintained a position which was inconsistent with the erroneous inclusion in or exclusion from income in the barred year, 1960.
5. The plaintiffs must meet the burden of proving all the above prerequisites in order to invoke the mitigation provisions and avoid the statute of limitations. United Statesv. Rosenberger,
Assuming that there was a final determination of tax liability by the tax commission when it assessed the deficiencies, and that the commission in its determination of tax liability maintained an inconsistent position, the plaintiffs still cannot prevail because the commission's ruling did not determine the basis of property nor do the facts herein constitute a transaction upon which basis depended.
6. The Oregon mitigation statute, ORS
7, 8. In order to be entitled to an adjustment for 1960 it is necessary under the Oregon statute for the *268 opinion and order of the tax commission to have determined the basis of property and that there be an erroneous treatment of a transaction upon which such basis depended. Mitigation of theStatute of Limitations in Federal Taxation, 1 UCLA Law Rev 60. It is not sufficient under the 1939 federal code if the determination of liability or the transaction merely affected the basis. Brennan v. Commissioner, supra, at 500. The "prerequisite to any relief under the basis provision of section 3801 [of the 1939 code] was that the determination determine basis explicitly." 72 Harv Law Rev 1536, 1548. (Emphasis supplied.)
9, 10. In this case the opinion and order of the tax commission which constituted the determination of tax liability as required by ORS
11, 12. In addition to the fact that the opinion and order of the tax commission did not determine the basis explicitly, the statute also requires that there be an erroneous treatment of a transaction upon which such basis depends. It is not clear from the statute as to what constitutes such a "transaction".3 The erroneous treatment of the transaction in this case must have been the plaintiffs' error in attempting to write off the demolition loss from 1961 through 1964 instead of deducting it entirely in 1960. However, while plaintiffs' treatment of the loss was erroneous, the basis of the property did not depend upon it. Plaintiffs treated the loss as a deduction over the ensuing four years and the commission now agrees that such loss was totally deductible in 1960 as a demolition loss. Neither the basis in the old building nor the basis in the new building depended upon plaintiffs' attempt to write it off or to deduct it in 1960. The basis in both buildings remained the same after plaintiffs' attempted write-off and the commission's final action.
The plaintiffs contend that when all parties agreed that the loss was deductible in 1960 the tax commission *270 acted inequitably in assessing deficiencies for 1961 through 1964 and refusing to reopen 1960 and grant them the refund for that year. However, the tax year 1960 is closed by the statute of limitations, the plaintiffs' claim for a refund was not timely filed and the mitigation statute does not apply for the reasons indicated herein.
The order of the commission is affirmed.