I hope our readers, their families and co-workers are safe and remain healthy during these trying times. As a distraction for tax geeks like us from the news about the Coronavirus that is permeating our lives these days, Peter and I decided to present more coverage on the Oregon Corporate Activity Tax (“CAT”).
On March 6, 2020, the Oregon Department of Revenue (the “Department”) published two new temporary rules that it had previously presented in draft form. While the rules are substantively the same as they were in draft form, there are several nuances worthy of discussion.
Temporary Rules Keep Rolling in
The Oregon Department of Revenue (the “Department”) recently issued four new temporary rules relative to the Oregon Corporate Activity Tax (the “CAT”). The new rules went into effect on February 1, 2020.
The new temporary rules provide much needed guidance with respect to three notable exclusions from the fangs of the CAT, namely the Grocery Exclusion, the Wholesale Exclusion and the Vehicle Exclusion.
I apologize in advance for focusing my blog these past several weeks on the new Oregon Corporate Activity Tax (“CAT”), but my mind keeps finding new facets to this tax regime that I suspect most tax practitioners and even the lawmakers who passed the legislation may not have envisioned or anticipated. So, please indulge me as I explore another one of these numerous issues in this installment of the blog.
After the passage of the Tax Reform Act of 1986 and the introduction of Code Section 469, we started seeing tax practitioners focusing attention on trying to figure out how their clients could be characterized as active participants in a trade or business activity. Their goal is simple – they want to avoid the deduction limitations imposed by the passive activity loss rules contained in Code Section 469.
A dog will immediately respond to you when you call out. On the other hand, when you call out to a cat, the cat will take a message and promise to get back to you later. This is not the case with the Corporate Activity Tax (“CAT”). The Oregon Department of Revenue (“DOR”) is doing everything possible to provide taxpayers and tax practitioners with prompt and helpful guidance and support relative to the CAT, the new state tax regime that became effective on January 1, 2020.
As previously discussed, late last year, the DOR conducted several town hall meetings with taxpayers and tax practitioners across the state to discuss the CAT, answer questions and solicit feedback about administration of the tax regime. In addition, as promised, the DOR started issuing draft temporary rules this past December to provide clarity and address many uncertainties in the new law. It quickly removed the “draft” stamp from the rules. The rules keep rolling in! To date, the DOR has issued a total of 12 temporary rules. We have already provided a discussion of eight of those temporary rules. In this post, we discuss the remaining four temporary rules.
On January 6, I presented a new White Paper, The Oregon Corporate Activity Tax – You Can Run and You Can Hide, but This New Tax Is Effective January 1, 2020, at the Oregon Society of Certified Public Accountants Annual State and Local Tax Conference. We had a large number of attendees, including representatives of the Oregon Department of Revenue (the “DOR”). Based upon the numerous questions I received (during and after the presentation), it is clear that tax practitioners are busy thinking about this new tax regime and how it applies to their clients. Unfortunately, in this particular case, I do not believe the curiosity will kill the CAT. It looks like it is here to stay.
We have written at length about Oregon’s new Corporate Activity Tax (the “CAT”). As discussed in our last post, the Oregon Department of Revenue (the “Department”) recently concluded a series of 12 town hall meetings around the state to solicit input from stakeholders regarding the Department’s rulemaking process.
As we talked about in our last post, the Department stated at the Portland town hall meeting its plan to conduct additional dial-in meetings for people who are located out of state or who otherwise could not attend the town hall meetings.
The Timely Filing Requirement Imposed by Oregon DOR in Order for Taxpayers to be Able to use the "Prior Year Tax Safe Harbor" Stricken by the Oregon Tax Court
On September 13, 2013, in Finley v. Oregon Department of Revenue, the Oregon Tax Court granted taxpayer’s Motion for Summary Judgment, and held Oregon Administrative Rule 150-316.587(8)-(A) is invalid to the extent it requires taxpayers to have timely filed their prior year’s Oregon income tax return to be eligible for the “Prior Year Tax Safe Harbor.”
John Rothermich and I represented the taxpayer in this matter. The facts were straightforward. The tax years at issue were 2008 and 2009. The taxpayer was a resident of Oregon during these years.
For tax year 2008, the taxpayer paid his taxes in a timely manner. Unfortunately, he filed his Oregon individual income tax return late.
For tax year 2009, the taxpayer had a substantial increase in his income due to a capital gain-generating transaction. To avoid an estimated tax payment penalty, on December 31, 2009, thinking he qualified for the “Prior Year Tax Safe Harbor,” he made an Oregon estimated tax payment of 100% of his 2008 Oregon income tax liability. Then, he timely filed his 2009 Oregon income tax return, and he paid the additional taxes shown due on the return. Thereafter, the Oregon Department of Revenue sent the taxpayer a nice letter, thanking him for his generous tax payment, but requesting he pay an additional large sum, representing an estimated tax (late payment) penalty. Not being able to resolve the matter with the Department, we filed a complaint in the Oregon Tax Court. The case was ultimately heard by Judge Henry Breithaupt in the Regular Division of the Oregon Tax Court.
The issue before the court was simple. ORS 316.587(8)(b) and OAR 150-316.587(8)-(A)(3)(A) together provide that, if a taxpayer’s prior year Oregon income tax return was for a 12?month period, he/she may avoid an estimated tax payment penalty by paying 100% of the tax shown due on the prior year’s return within the time period prescribed for making estimated tax payments. This rule is commonly known as the “Prior Year Tax Safe Harbor.”
The problem arises with an administrative rule adopted by the Department. OAR 150?316.587(8)-(A)(3)(B) creates an additional requirement for the application of the Prior Year Tax Safe Harbor—it requires that the prior year’s return was timely filed. For the taxpayer in this case, that was a big problem—the prior year’s return was indisputably late. YIKES!
No timeliness requirement is expressed anywhere in ORS 316.587(8). The statute creating the Prior Year Tax Safe Harbor does not expressly grant the Department authority to expand the requirements for its application. The Oregon Legislature has used the phrase “timely filing” throughout the Oregon Personal Income Tax Act contained in Chapter 316 of the Oregon Revised Statutes. Nowhere does the phrase “timely filing” appear in ORS 316.587(8). So, it seems clear that the Oregon Legislature knows how and when to use the phrase.
It should be noted, the Prior Year Tax Safe Harbor contained in the federal counterpart, IRC Section 6654, does not contain a timely filing requirement. In fact, the Service has refused to import such a requirement. See Rev Rul 2003-23, 2003-1 CB 511.
Despite the Department’s arguments in favor of its administrative rule, the Oregon Tax Court concluded that ORS 316.587(8)(b) “is most properly read as not containing any timeliness requirement.…To construe Oregon law consistently with Rev Rul 2003-23 also produces a result that places Oregon taxpayers in the same position regardless of whether the federal estimated tax or the Oregon estimated tax is at issue.” Consequently, the court struck the timely filing requirement from the administrative rule.
The Court’s opinion/order is available HERE.
Larry J. Brant
Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- Portland, OR, 5.5.20
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Oregon Association of Tax ConsultantsBeaverton, OR, 5.28.20
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Portland Tax ForumTo be rescheduled