Hare v. Okla. Tax Comm'n (In re Hare), Case No. 114,893

• Decision Date: 27 June 2017
• Docket Number: Case No. 114,893
• Citation: 398 P.3d 317
• Parties: In the MATTER OF the Income Tax PROTEST OF Bill HARE, Jr. Bill Hare, Jr. Appellant, v. Oklahoma Tax Commission, Appellee.
• Court: Oklahoma Supreme Court

398 P.3d 317

In the MATTER OF the Income Tax PROTEST OF Bill HARE, Jr.

Bill Hare, Jr. Appellant,

v.Oklahoma Tax Commission, Appellee.

Case No. 114,893

Supreme Court of Oklahoma.

FILED JUNE 27, 2017

Kevin B. Ratliff, Steven C. Davis, Len Cason, Hartzog, Conger, Cason & Neville, Oklahoma City, Oklahoma, Appellant Bill Hare, Jr.

Majorie Welch, Elizabeth Field, Taylor Ferguson, Oklahoma City, Oklahoma, Appellee Oklahoma Tax Commission

GURICH, V.C.J.

Facts & Procedural History

¶ 1 In November 2004, Oklahoma voters passed State Question 713–Legislative Referendum 336, which implemented certain changes to the Oklahoma Tax Code. The new enactment included an income tax deduction for net capital gains derived from in-state property and business sales. The title of the new measure explained that it was amending 68 O.S. 2001 § 2358 and, inter alia, "providing [an] exemption for certain earnings of individual taxpayer[s]." Specifically the law authorized a deduction for selected capital gains that were included in a taxpayer's federal adjusted gross income for the relevant taxable year. Originally codified at 68 O.S.Supp. 2004 § 2358(E),¹ the new deduction was available for "taxable years beginning after December 31, 2004."

¶ 2 In 2007, the Oklahoma Legislature adopted Senate Bill 685, which contained changes to 68 O.S. § 2358. Although the effective date of the bill was January 1, 2008, the statute retained its introductory language, which provided it was applicable to tax returns filed after December 31, 2004. The 2007 Legislative Summary proclaimed one of the primary objects of S.B. 685 was to "[c]larif[y] the income tax exemption for certain capital gains."² In a Fiscal Impact Statement provided to the State Board of Equalization, the Oklahoma Tax Commission explained the legislative effect of S.B. 685 as follows:

This section modifies the Oklahoma Capital Gain deduction to clarify holding period requirements as well as the treatment of capital gains that arise when intangible assets are sold. With respect to the holding periods, they are now to include any additional period when the property was held by another individual or entity, if such additional period is included in the taxpayer's holding period for the asset pursuant to the Internal Revenue Code. This section also clarifies that the capital gain deduction is available under certain circumstances when intangible assets are sold. (Emphasis added)³

OTC anticipated zero impact to state revenue in connection with the legislative change.

¶ 3 Bill Hare, Jr. was a two percent (2%) owner of Briggett, Inc. and Briggett Transportation, Inc. (collectively Companies). Hare acquired his ownership interest in Companies in 1983. Both entities were Oklahoma S-corporations; therefore, income, losses, deductions, and credits were passed through to shareholders for inclusion on their individual tax returns. On September 10, 2007, Companies sold substantially all of their assets to High Sierra Energy, LP in accordance with a Purchase and Sale Agreement. The sale of Companies' assets included both tangible and intangible property interests.

¶ 4 In 2008, Hare filed a U.S. Individual Income Tax Return and an Oklahoma Resident Income Tax Return for tax year 2007. Both returns included pass-through income from the sale of Companies' assets. Hare designated the income as a capital gain on his federal return. His Oklahoma return listed an adjusted gross income (AGI) of $10,271,884.00. However, no net capital gain deduction was claimed on the original Oklahoma return, and Hare's total tax liability for 2007 was $539,431.00.

¶ 5 In 2012, Hare filed an Amended U.S. Individual Tax Return (1040X). The amended return reduced Hare's AGI due to proceeds attributable to Companies' sale which were held in escrow and were not constructively received until after the 2007 tax year.⁴ Subsequently, Hare also filed a form 511X Oklahoma Amended Resident Income Tax Return, noting the reduced federal AGI and claiming an "omitted capital gain deduction" of $5,691,896.00. With the deduction Hare's amended return reflected an Oklahoma adjusted gross income of $3,704,988.00. The return also showed a tax overpayment and refund due in the amount of $371,036.00.

¶ 6 On September 18, 2012, OTC sent an adjustment letter to Hare notifying him that the agency had disallowed the net capital gain deduction—specifically, OTC denied those amounts connected to the sale of Companies' goodwill. OTC adjusted Hare's amended return, but approved a refund of $52,383.00.⁵ On November 5, 2012, Hare timely filed a formal protest of OTC's adjustment and requested a refund of the $318,643.00 tax overpayment.

¶ 7 In connection with the protest proceeding, Hare filed a Motion for Summary Disposition on September 1, 2015.⁶ On October 23, 2015, OTC filed Division's Response to Taxpayer's Motion for Summary Disposition, Counter Motion for Summary Disposition, and Brief in Support. Hare filed a reply to OTC's response on November 6, 2015. None of the material facts were disputed.

¶ 8 On March 1, 2016, the assigned administrative law judge filed his Findings, Conclusions, and Recommendations. Those pronouncements central to our review of this case are as follows:

• Hare realized a net capital gain (as defined under Internal Revenue Code § 1222(11) ) of $5,691,896.00 following the sale of substantially all of Companies' assets;⁷

• As S-corporations, Companies' were pass-through entities for tax purposes;⁸

• Title 68 O.S.Supp. 2006 § 2358 does not define the phrase "Oklahoma company," but this generally includes corporations, partnerships, associations, joint-stock companies, trust funds, or organized groups of individuals, whether incorporated or not;⁹

• OTC administrative decisions and unpublished Court of Civil Appeal opinions have previously construed § 2358, finding the statute is not ambiguous;¹⁰

• The 2007 amendment to § 2358 did not meet the criteria for retroactive application;¹¹

• 68 O.S.Supp. 2006 § 2358(F) did not include a deduction or exclusion for intangible personal property such as goodwill for tax year 2007.¹²

The ALJ determined OTC's motion for summary disposition should be sustained; and consequently, Hare should be denied a net capital gain deduction for the sale of Companies' goodwill. On March 24, 2016, OTC entered an order adopting the ALJ's findings of fact and legal conclusions. Hare appealed the decision, and we retained the case.

Standard of Review

¶ 9 When OTC acts in its adjudicative capacity, its orders will be affirmed on appeal if the record contains substantial evidence supporting the facts upon which the order is based and the order is free from legal error. Am. Airlines, Inc. v. State, ex rel. Okla. Tax Comm'n , 2014 OK 95, ¶ 25, 341 P.3d 56, 62. Whether Hare qualified for the capital gain tax deduction requires us to interpret the relevant language in 68 O.S.Supp. 2006 § 2358(F). Our interpretation of a tax statute involves solely a legal issue which calls for de novo review. Id.

Analysis

The sale of Briggett, Inc. and Briggett Transportation, Inc. goodwill qualified as the sale of an indirect ownership interest in an Oklahoma company for purposes of 68 O.S.Supp. 2006 § 2358(F).

¶ 10 When construing statutes, it is this Court's obligation to ascertain legislative intent. Russell v. Chase Inv. Servs. Corp. , 2009 OK 22, ¶ 20, 212 P.3d 1178, 1185. Words in a statute are to be construed according to their plain and ordinary meaning unless it is clear the legislature intended a different meaning. Fanning v. Brown , 2004 OK 7, ¶ 10, 85 P.3d 841, 845–46. Rules of construction are not utilized if the language in a statute is unambiguous. Lang v. Erlanger Tub u lar Corp. , 2009 OK 17, ¶ 8, 206 P.3d 589, 591.

¶ 11 We begin our analysis with an examination of 68 O.S.Supp. 2006 § 2358(F), which, at the time Companies' assets were sold, read:

F. 1. For taxable years beginning after December 31, 2004, a deduction from the Oklahoma adjusted gross income of any individual taxpayer shall be allowed for qualifying gains receiving capital treatment that are included in the federal adjusted gross income of such individual taxpayer.

2. As used in this subsection:

a. "qualifying gains receiving capital treatment" means the amount of net capital gains, as defined in Section 1222(11) of the Internal Revenue Code, included in an individual taxpayer's federal income tax return that result from:

(1) the sale of real or tangible personal property located within Oklahoma that has been directly or indirectly owned by the individual taxpayer for a holding period of at least five (5) years prior to the date of the transaction from which such net capital gains arise, or

(2) the sale of stock or the sale of a direct or indirect ownership interest in an Oklahoma company, limited liability company, or partnership where such stock or ownership interest has been directly or indirectly owned by the individual taxpayer for a holding period of at least three (3) years prior to the date of the transaction from which the net capital gains arise,

b. "holding period" means an uninterrupted period of time, and

c. "Oklahoma company," "limited liability company," or "partnership" means an entity whose primary headquarters have been located in Oklahoma for at least three (3) uninterrupted years prior to the date of the transaction from which the net capital gains arise.

d. "direct" means the individual taxpayer directly owns the asset,

e. "indirect" means the individual taxpayer owns an interest in a pass-through entity (or chain of pass-through entities) that sells the asset that gives rise to the qualifying gains receiving capital treatment.

(1) With respect to sales of real or personal property located within Oklahoma, the deduction described in this subsection shall not apply unless the pass-through entity that makes the sale has held the property for not less than five (5) uninterrupted years prior to the date of the transaction that created the capital gain, and each

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