Dugger v. State ex rel. Oklahoma Tax Com'n, 74586

• Decision Date: 14 July 1992
• Docket Number: No. 74586,74586
• Citation: 834 P.2d 964,1992 OK 105
• Parties: Athel W. DUGGER and Anna Dugger, Husband and Wife, Appellants, v. The STATE of Oklahoma, ex rel. OKLAHOMA TAX COMMISSION, Appellee.
• Court: Oklahoma Supreme Court

Page 964

834 P.2d 964

1992 OK 105

Athel W. DUGGER and Anna Dugger, Husband and Wife, Appellants, v. The STATE of Oklahoma, ex rel. OKLAHOMA TAX COMMISSION, Appellee.

No. 74586.

Supreme Court of Oklahoma.

July 14, 1992.

On Certiorari to the Court of Appeals, Division No. 3.

Appellants claimed refunds of state income tax for tax years 1984, 1985 and 1986, based on a repayment made in 1987. The refunds were denied by the Income Tax Division of appellee, Oklahoma Tax Commission. Appellants protested the division's denial of the refunds. Upon recommendation of its hearing officer, appellee entered an order denying the refunds. The Court of Appeals reversed and remanded with directions to the appellee to refund the overpayments of state income taxes.

CERTIORARI PREVIOUSLY GRANTED; OPINION OF THE COURT OF APPEALS VACATED; ORDER OF THE OKLAHOMA TAX COMMISSION REVERSED; CAUSE REMANDED FOR FURTHER PROCEEDINGS.

Richard Phillips, Graft & Cabaniss, Clinton, for appellants.

David Hudson, Gen. Counsel, David Allen Miley, Asst. Gen. Counsel, Oklahoma Tax Com'n, Oklahoma City, for appellee.

ALMA WILSON, Justice:

The dispositive issue in this appeal is whether there is substantial evidence to support the findings and conclusions of the Oklahoma Tax Commission. We hold that the evidence is insufficient to support the finding by the Oklahoma Tax Commission that the federal adjusted incomes for tax years 1984, 1985 and 1986 were not recomputed in determining the tax reduction claimed for the 1987 tax year.

During 1984, 1985 and 1986, Athel W. Dugger received $426,567.00 from the sale of gas produced in this state. For tax years 1984, 1985 and 1986, Athel W. and Anna Dugger, appellants (taxpayers), reported the mineral interest proceeds for income tax purposes. Mobil Oil Corporation, an interest owner in the gas well, sued Dugger in federal district court to recover the gas proceeds paid to Dugger, on the grounds that the Dugger took a greater portion of the gas than he was entitled to receive. Pursuant to a settlement agreement, Dugger agreed that, as of December 31, 1986, he had received production proceeds in the amount of $426,567.00 and that he should pay $365,204.29 of the production receipts to Mobil Oil Corporation for distribution to the other interests owners. In 1987, Dugger paid to Mobil the judicially approved amount of overpayment. Dugger reported this repayment of $365,204.29 to the Internal Revenue Service in his 1987 personal income tax return, filed jointly with his spouse. In 1988, taxpayers filed amended state income tax reports for tax years 1984, 1985 and 1986 and claimed refunds for each year based upon the 1987 repayment to Mobil.

The Income Tax Division of the Oklahoma Tax Commission denied the refunds claimed on the amended state reports for the specified reason that the taxpayers failed to file amended federal returns for the involved tax years. Taxpayers protested the denial of refunds pursuant to 68 O.S.1981, § 207 and 68 O.S.Supp.1988, § 2373. On January 29, 1989, an adjudicatory proceeding was had before a hearing officer of the Oklahoma Tax Commission. On September 28, 1989, the hearing officer submitted written findings and conclusions to the Oklahoma Tax Commission and recommended that the taxpayer protest and claim for refund be denied. On November 14, 1989, the Oklahoma Tax Commission, appellee (OTC), issued Order No. 89-11-14-011, denying taxpayers' request for a hearing before the OTC en banc and adopting the Findings, Conclusions, and Recommendations of the hearing officer. The Court of Appeals reversed Order No. 89-11-14-011 and remanded the cause with directions to the OTC to refund the state income tax paid on the mineral proceeds which taxpayers repaid in 1987. Certiorari was previously granted to determine whether the findings and conclusions entered by the Oklahoma Tax Commission in Order No. 89-11-14-011 are supported by substantial evidence.

The issue presented to the OTC was whether taxpayers' federal "claim of right" constituted an adjustment by the federal government to the taxpayers' adjusted gross income for the involved tax years. ¹ Our income tax statutes "piggy-back" the calculation of state personal income tax upon the federal tax calculation, ² hence, taxpayers' finally ascertained federal adjusted gross income for tax years 1984, 1985 and 1986 is a critical fact to the issue presented before the OTC. Generally, federal deductions and exclusions allowed in calculating federal adjusted gross income are incorporated into our income tax law through the definitions of Oklahoma adjusted gross income and Oklahoma taxable income, while the federal tax rates, tax exemptions and tax credits are not included as part of our income tax law. ³ Thus, where a taxpayer reduces federal adjusted gross income by a loss suffered in any particular tax year, such as the repayment herein, Oklahoma recognizes the deduction for that same tax year. If the deduction generates a net operating loss which is allowed by the Internal Revenue Service (IRS) to be carried back as an adjustment to a prior year, then Oklahoma recognizes the federal adjustment for that same tax year.

The hearing officer and the OTC found that the federal income tax returns for the prior tax years were not reopened and therefore concluded there was no recomputation of taxpayers federal adjusted gross income for those prior tax years upon the reporting of the 1987 repayment as authorized by 26 U.S.C. § 1341 (1976). ⁴ Our research indicates that the federal "claim of right" statute recognizes several methods of calculating the amount of overpayment of taxes, which may include finally ascertaining the amount subject to taxation by the United States in a prior year.

The federal "claim of right" statute, 26 U.S.C. § 1341 (1976), allows a taxpayer to recover overpayments of federal income taxes where previously reported income must be repaid. Under subsection (a), General rule., the amount of the overpayment of taxes may be calculated through an adjustment to arrive at taxable income for the tax year the money was repaid (repayment year) or through a credit adjustment to arrive at tax liability for the repayment year. The taxpayer must elect to reduce the adjusted gross income for the repayment tax year, § 1341(a)(4), or to reduce the tax liability for the repayment tax year, § 1341(a)(5). Where the taxpayer elects to calculate the overpayment prior to arriving at taxable income, subsection (b), Special rules., permits the taxpayer to further elect to adjust prior year income through a carry-back deduction. It specifically provides that, where the deduction in (a)(4) results in a net operating loss for the repayment year, it may be carried back under § 172; and that, where the exclusion in (a)(5)(B) results in a net operating loss or capital loss for the prior tax years, for purposes of calculating the decrease in tax for the prior years, it may be carried back or carried over.

Federal jurisprudence recognizes the right of a taxpayer to elect the method of calculating the amount of overpayment of taxes pursuant to § 1341. ⁵ In United States v. Skelly Oil Company, the United States Supreme Court concluded that § 1341 does not, as a matter of law, adjust prior year income, but that it provides methods of tax calculation, not originally embodied in the "claim of right" doctrine, to avoid inequitable annual accounting limitations. Quoting Justice Brandeis in North American Oil Consolidated v. Burnet, 286 U.S. 417, 424, 52 S.Ct. 613, 615, 76 L.Ed. 1197, 1200, 1201 (1932), the United States Supreme Court explained the "claim of right" doctrine and § 1341:

"If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent." Should it later appear that the taxpayer was not entitled to keep the money, Mr. Justice Brandeis explained, he would be entitled to a deduction in the year of repayment; the taxes due for the year of receipt would not be affected. ... Of course, the tax benefit from the deduction might differ from the increase in taxes attributable to the receipt; for example, tax rates might have changed, or the taxpayer might be in a different tax "bracket." [Cite omitted.] But as the doctrine was originally formulated, these discrepancies were accepted as an unavoidable consequence of the annual accounting system.

Section 1341 of the 1954 Code was enacted to alleviate some of the inequities which Congress felt existed ... As an alternative to the deduction in the year of repayment which prior law allowed, § 1341(a)(5) permits certain taxpayers to recompute their taxes for the year of receipt. Whenever § 1341(a)(5) applies, taxes for the current year are to be reduced by the amount taxes were increased in the year or years of receipt because the disputed items were included in gross income. [Emphasis added.]

United States v. Skelly Oil Company, 394 U.S. 678, 680, 681, 89 S.Ct. 1379, 1381, 22 L.Ed.2d 642, 647 (1969).

The above authorities stand for the proposition that a claim under § 1341 may recompute adjusted gross income for prior years in determining the amount of the tax overpayment claimed in a subsequent year. ⁶ Thus, the validity of the finding by the OTC that there is no recomputation of federal adjusted income for prior tax years by the IRS in determining the 1987 federal claim of overpayment of taxes depends on its evidentiary support.

The appellate courts will review the entire record made before an administrative agency acting in its adjudicatory capacity to determine whether the findings and conclusions set forth in the agency order are supported by substantial evidence. ⁷ An adjudicatory order will be affirmed on appeal if the record contains substantial...