4 Or. Tax 376 | Or. T.C. | 1971
Decision sustaining demurrer rendered April 29, 1971. The plaintiffs are Oregon taxpayers and Washington residents. They filed their complaint alleging the total amount of personal deductions itemized on their federal income tax return for 1969 was properly deductible on their Oregon tax return, and that defendant's disallowance thereof was contrary to law. The matter is now before the court upon defendant's demurrer to the complaint on the ground it does not state facts sufficient to constitute a cause of suit.
The plaintiffs presented a complicated formula and theory in support of the allegations of their complaint. Reduced to its essentials, plaintiffs' contention is that ORS
The principal sections in question are ORS
"* * * to make the Oregon personal income tax law identical in effect to the provisions of the federal Internal Revenue Code of 1954 relating to the measurement of taxable income of individuals, estates and trusts, modified as necessary by the state's jurisdiction to tax; to achieve this result by the application of the various provisions of the federal Internal Revenue Code relating to the definition of income, exceptions and exclusions therefrom, deductions (business and personal), * * * resulting in a final amount called 'taxable income' in the Internal Revenue Code; and to impose a tax on residents of this state measured by taxable income wherever derived and to impose a tax on the income of nonresidents that is ascribable to sources within this state."
The cardinal phrase is "taxable income." ORS
Under both federal and state tax concepts, all items of a taxpayer's income, from whatever source, make up his "gross income." Gross income minus all business expenses gives his "adjusted gross income." The further deduction of the taxpayer's personal expenses allowed by law (contributions, home mortgage interest, medical costs, taxes, etc.) and the statutory personal exemptions for the taxpayer and each of his dependents results in his "taxable income" to which the tax rate is applied. (See Int Rev Code of 1954, § 62, *379 for the federal definition of "adjusted gross income" and § 63 for the definition of "taxable income.")
ORS
ORS
"The taxable income of a nonresident individual is that part of his federal taxable income attributable to sources within this state determined by reference to ORS
316.127 ."
ORS
"(1) The adjusted gross income of a nonresident derived from sources within this state is the sum of the following:
"(a) The net amount of items of income, gain, loss and deduction entering into his federal adjusted gross income that are derived from or connected with sources in this state * * *; and
"(b) The portion of the modifications described in ORS
316.067 and316.077 that relate to income derived from sources in this state, * * *."(2) Items of income, gain, loss and deduction derived from or connected with sources within this state are those items attributable to:
"(a) The ownership or disposition of any interest in real or tangible personal property in this state; and
"(b) A business, trade, profession or occupation carried on in this state.
"* * * * *
"(8) In computing the taxable income of a nonresident individual, the optional standard deduction as defined in section 141 of the Internal Revenue Code, if applicable, and the personal exemptions as defined in section 151 of the Internal Revenue Code, shall all be allowed in the proportion that the adjusted gross income of the taxpayer from Oregon sources bears to the total adjusted *380 gross income from all sources before any deductions therefrom.
"(9) The 'adjusted gross income' as used in this section, means the adjusted gross income as defined in section 62 of the Internal Revenue Code with adjustments for necessary additions and subtractions of income under this chapter."
Clearly, the intent of these sections is to tax only the net amount of the nonresident's income and deduction items that are attributable to sources of income in Oregon. They provide that a nonresident Oregon taxpayer who itemizes his personal deductions on his federal tax return can deduct on his state return only those personal expenditures connected with sources of income in Oregon. He cannot prorate the total of those federal itemized deductions, and, having elected to itemize on his federal return, he cannot use the optional standard deduction or any portion of it. This denial of the privilege of prorating the total of itemized deductions is inferred by subsection (8) of ORS
Plaintiffs itemized their personal deductions on their 1969 federal return; therefore, they can deduct on their 1969 Oregon return only items of personal expense, if any, which were ascribable to sources of income in Oregon. Defendant's interpretation of ORS
Plaintiffs argue that ORS
Plaintiffs also argue that, if defendant's interpretation is found to be correct, the provisions of the Personal Income Tax Act of 1969 pertaining to deductions by nonresidents would be in violation of the United States Constitution, Art IV, § 2, because it would discriminate between nonresidents who elect to itemize deductions on their federal income tax returns and those who elect to use the standard deduction, and that such discrimination would be based solely on the fact they are nonresidents since no such distinction is made between resident taxpayers.
At the time of oral argument on the demurrer, plaintiffs moved to amend their complaint by adding an alternative allegation or cause that would have raised the constitutional issue. Defendant objected to the motion, relying on ORS
The sole question before the court on the demurrer is whether the defendant's interpretation of the tax law as it applies to plaintiffs is correct. It is the court's decision that defendant's interpretation and application of the law are correct and that, therefore, the complaint does not state a cause of suit. Defendant's demurrer is sustained.
Plaintiffs are allowed 20 days to plead over. *383