Anaconda Co. v. Department of Revenue

• Decision Date: 28 June 1977
• Citation: 565 P.2d 1084,278 Or. 723
• Parties: The ANACONDA COMPANY (Successor by merger to the Anaconda Wire and Cable Company and the Anaconda American Brass Company), Appellant, v. DEPARTMENT OF REVENUE, State of Oregon, Respondent.
• Court: Oregon Supreme Court

Page 1084

565 P.2d 1084

278 Or. 723

The ANACONDA COMPANY (Successor by merger to the Anaconda Wire and Cable Company and the Anaconda American Brass Company), Appellant, v. DEPARTMENT OF REVENUE, State of Oregon, Respondent.

Supreme Court of Oregon, In Banc.

Argued and Submitted April 4, 1977.

Decided June 28, 1977.

[278 Or. 724-A] Milo E. Ormseth, Portland, argued the cause for appellant. With him on the briefs were Joel D. Kuntz, Davies, Biggs, Strayer, Stoel & Boley.

Walter J. Apley, Asst. Atty. Gen., argued the cause for respondent. With him on the brief was James A. Redden, Atty. Gen., Salem.

LINDE, Justice.

Plaintiff appeals from a decision of the Tax Court sustaining a tax deficiency assessment ordered by the Department of Revenue. Anaconda Co. v. Dept. of Revenue, 6 OTR 475 (1976). The main issue presented is the effect of the department's noncompliance with the statute entitling the taxpayer upon request to confer with the department before a final assessment is made.

The department began an audit of an Anaconda subsidiary, the Anaconda Wire and Cable Company, in 1969 to determine whether the subsidiary's taxes should have been reported in combined, unitary returns with those of the parent company. In December 1970 the department sent Wire a deficiency notice proposing to assess $133,526.11 in additional taxes for the years 1965-1968. After a 60-day extension allowed by the department, taxpayer in March 1971 filed a protest and requested a conference. The department replied in April that before scheduling a conference it would have the file reviewed by a Mr. Tepper, who would call the taxpayer.

During the next seven months, however, Mr. Tepper apparently did not get around to this file, and no conference was held or scheduled. In November 1971 the department proceeded to send notices of deficiency assessments to taxpayer, with an explanation that the case was approaching the one-year statutory deadline, ORS 314.410(4), and that Mr. Tepper would contact taxpayer when he could find time to review the file. In reply taxpayer requested withdrawal of the deficiency assessment and offered to extend the deadline for six months pursuant to ORS 314.410(6). It received no response.

Orders assessing a much reduced deficiency and involving both Wire and another subsidiary, the Anaconda American Brass Company, were finally issued in September 1974 and August 1975 after a belated hearing and other proceedings during 1973-1975. While these proceedings gave rise to a second issue in the Tax Court and on appeal here, we do not reach it if the department's failure to follow the statute invalidated the original assessment.

The assessment of deficiencies in income tax returns is governed by ORS 314.405. Subsection (2) allows the taxpayer 30 days after notice is mailed to pay the deficiency or to protest. The subsection continues:

If requested by the taxpayer in his written objection to the proposed deficiency, the taxpayer shall have an opportunity to confer with the department or its delegate as to the proposed assessment at any time prior to the date such assessment is made.

Subsection (8) of the same section provides that "deficiency assessments . . . shall be made pursuant to this section, and not otherwise," within specified time limits.

The department concedes that it made the assessment before according taxpayer the requested opportunity to confer, and thus "otherwise" than provided in ORS 314.405. Indeed, the department's own rules recognized that a taxpayer "is entitled to a conference" before the assessment, but after assessment a conference is no longer "a matter of right." OAR 150-314.405(3) (1971). The department argues, however, that it granted taxpayer a post-assessment conference which served the "intent and purpose" of the statute and that its violation of the rule and the statute should not invalidate the assessment. The Tax Court agreed with the department's conclusion on this issue. We reverse.

The Tax Court stated the question to be whether the statutory directive is "mandatory" or "directory," and that this question, in turn, was to be determined as a "general rule" by whether plaintiff can show abridgment of some substantial right by the failure to follow the statute. This approach tends to confuse two distinct issues. The first concerns the intended effect of a particular statutory requirement. The second is whether failure to follow a required procedure may nevertheless be excused if it did no harm in the individual case.

[1-4] First, it should be clear that the catchwords "mandatory" or "directory" do not serve as premises for deciding whether noncompliance with a prescribed procedure voids administrative action; they are labels for the conclusion. Action is not invalidated because a statutory requirement is " mandatory" or permitted to stand because the requirement is "directory;" rather, the requirement will be called one or the other according to the effect sought to be attached to noncompliance. Such an issue cannot be decided by examining whether the legislature "directed" that the procedure be followed or "mandated" it, for the issue arises only when the legislative words make compliance obligatory. So understood, the conventional usage of "mandatory" or "directory" may be harmless, but for the risk of encouraging an agency to misconstrue a decision that a procedural failure is not fatal into a holding that compliance is not legally required.

[5-7] Since the question always arises from a particular enactment, there can be no "general rule" for concluding when failure to follow an obligatory procedure nevertheless does not invalidate an action. It is a matter of interpretation, not much helped by general formulas in opinions construing different statutes in this or other states. Statutes are not fungible, and their interpretation is not a form of common law. It is, of course, possible for a legislature to mandate certain procedures while limiting the legal effects of noncompliance, as for instance in the Public Meetings Law, ¹ but draftsmen commonly give no attention to the matter and leave courts to attribute the more probable intention to the lawmaker. Thus procedures designed to protect individuals dealing with an agency more likely are meant to be "mandatory" than provisions, equally obligatory, that are designed to assure legally and fiscally correct public administration in general, though the text or background of a particular enactment may show otherwise. Similarly the nature and extent of the disadvantage sought to be avoided by the procedure can bear on the probable intent with respect to noncompliance. See Childs v. Marion County, 163 Or. 411, 97 P.2d 955 (1940). Thus a holding setting aside action for failure to comply with one protective requirement of a statute does not necessarily mean that failure to comply with other directives in the same or a similar statute will necessarily lead to the same result. See, for instance, Childs v. Marion County, supra; Equitable Savings & Loan Association v. State Tax Commission, 3 OTR 1, aff'd 251 Or. 70, 444 P.2d 916 (1967).

[8,9] Moreover, in the present case the text and its prior interpretation by the agency charged following it are not silent on the question. ORS 314.405(2) states that "the taxpayer shall have an opportunity to confer" before the assessment is made. This requirement dates from 1933. Oregon Laws 1933, ch. 388, § 4. The department's rule recognized it as obligatory. In 1965 subsection (8) of the statute was amended, in the course of legislation concerning a time limit on certain deficiency assessments, to add the words that assessments shall be made "not otherwise" than pursuant to the section. The court in Childs, supra, 163 Or. at 415, 97 P.2d at 956, in holding an assessment procedure to be only "directory," had made it a point to note the absence of "negative words importing that the acts shall not be done at any other time than those designated," and cited State v. Johnson, 80 Or. 107, 156 P. 579 (1916) for similar reasoning. ² We do not know that the 1965 amendment reflected awareness of these opinions, and we do not mean to encourage the insertion of "negative words" in already obligatory statutes; but when the legislature does insert such words as it did in 1965, we cannot hold that an assessment may nevertheless be made without compliance with the statute in which they are inserted. Nor can an agency, or the court, substitute for a law made by the legislature another one that in our opinion will serve its "intent and purpose." Cf. State ex rel. Cox v. Wilson, 277 Or. 747, 562 P.2d 172 (1977).

[10-12] The second question is whether taxpayer may not complain of the failure to follow the statute and the department's rule unless it can show substantial harm from the failure, as the Tax Court thought. The fact that a required procedure safeguards the interest of individuals bears on interpreting the legislative purpose to make the requirement "mandatory," as we have stated, but that criterion obviously relates to the interest of taxpayers as a class at the time of enactment, not its extent in the circumstances of a particular case. The right to a preassessment conference in ORS 314.405(2) was doubtless enacted as a significant procedural protection for taxpayers. See Johnston et ux. v. State Tax Comm., 218 Or. 110, 113-114, 342 P.2d 799 (1959). To avoid its application here, the department must demonstrate that its procedural failure in this instance was harmless error, not place on the taxpayer the burden to demonstrate substantial prejudice. ³ Although the effects of delaying the requested conference until after the assessment are disputed, the department has not convinced us that there were none.

[13,14] We have no reason to think that the department's failure to accord taxpayer the requested conference or to respond to its offered extension of the deadline for an assessment...