Neer v. State ex rel. Oklahoma Tax Com'n, 89,748.

• Court: Supreme Court of Oklahoma
• Writing for the Court: LAVENDER, J.
• Citation: 982 P.2d 1071,1999 OK 41
• Parties: Charles S. NEER and Eileen M. Neer, Appellants, v. STATE of Oklahoma ex rel. OKLAHOMA TAX COMMISSION, Appellee.
• Docket Number: No. 89,748.,89,748.
• Decision Date: 11 May 1999

982 P.2d 1071
1999 OK 41

Charles S. NEER and Eileen M. Neer, Appellants,
v.
STATE of Oklahoma ex rel. OKLAHOMA TAX COMMISSION, Appellee

No. 89,748.

Supreme Court of Oklahoma.

May 11, 1999.

As Corrected June 4, 1999.

Mark W. Curnutte and David E. Jones of Logan & Lowry, LLP, Vinita, Oklahoma for Appellants.

Thomas E. Kemp, Jr., General Counsel; Kathryn Bass, Deputy General Counsel; David L. Kinney, Assistant General Counsel; and Sean R. McFarland, Assistant General Counsel — all with Oklahoma Tax Commission, Oklahoma City, Oklahoma for Appellee.

982 P.2d 1072

LAVENDER, J

¶ 1 This appeal presents the question: did appellee, the Oklahoma Tax Commission (OTC) properly deny a refund claim made in December 1995 by appellants, Charles Neer, M.D. and his spouse, Eileen Neer (taxpayers) to get back part of the Oklahoma income tax they paid in April 1992 for tax year 1991? The claim was grounded on the assertion that pursuant to 68 O.S.1991, § 2357(B)(1), as Oklahoma residents, they were entitled to receive a credit against their 1991 Oklahoma income tax liability for tax paid to the State of New York in September 1995 on the same 1991 retirement income upon which they paid

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Oklahoma income tax.¹ A refund was denied by OTC based on 68 O.S. Supp.1997, § 2373, which, with certain exceptions, limits the amount of a refund to the portion of the Oklahoma income tax paid during the three years immediately preceding the date of filing the refund claim.²

¶ 2 We hold when none of the statutorily delineated exceptions apply, as none do here, § 2373 acts in a manner analogous to a statute of repose in that it acts as a substantive limitation on the right to recover any amount as a refund when the claim for refund is filed more than three years after the date on which Oklahoma income tax is paid. In other words, as applicable here, § 2373 is a legislatively crafted outer limit time boundary beyond which taxpayers' right to recover a refund no longer exists. Further, during the three year period specified in § 2373 taxpayers had available adequate avenues by which to protect their ability to obtain an Oklahoma income tax refund, but they failed to avail themselves of such avenues. Therefore, OTC correctly denied taxpayers' refund claim and the Court of Civil Appeals (COCA) properly affirmed that denial based on § 2373 because the claim was submitted more than three years after taxpayers paid their Oklahoma income tax in April 1992 for tax year 1991.

PART I. STANDARD OF REVIEW.

¶ 3 When OTC, an administrative agency, acts in its adjudicative capacity — as it acted here — an order issued by it will be affirmed on appeal if (1) the record contains substantial evidence supporting the facts upon which the order is based and (2) the order is free of legal error. See Dugger v. State of Oklahoma, ex rel. Oklahoma Tax Com'n, 1992 OK 105, 834 P.2d 964, 968; El Paso Natural Gas Co. v. Oklahoma Tax Com'n, 1996 OK CIV APP 69, 929 P.2d 1002, 1005. In that the parties stipulated to the basic facts, it is unnecessary to conduct a substantial evidence inquiry. The central question is legal and involves deciding whether OTC, in denying a refund, properly interpreted and applied relevant statutory law to the stipulated facts.

PART II. FACTUAL AND PROCEDURAL BACKGROUND.³

¶ 4 Appellants have been full time residents of Oklahoma since moving to Vinita in 1990. For many years prior thereto Dr. Neer practiced medicine, primarily in New York, New York, through an Internal Revenue Service § 1362(a)(1) subchapter S corporation [26 U.S.C.A. § 1362 (West 1988), as amended], a State of New York professional corporation (corporation), not domesticated in Oklahoma.⁴ During his years living and

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working in New York, the corporation established and funded a pension plan for Dr. Neer. In addition, he had assets in an Individual Retirement Account (IRA) and Keogh Plan

¶ 5 In 1991 an actuary determined Dr. Neer's pension plan was over-funded because it held about $3.5 million in assets, while the plan's limit was ascertained to be $3 million. As a result of the over-funding, $492,000 reverted to the corporation and this corporate income flowed through to taxpayers. Additionally, Dr. Neer received 1991 IRA and Keogh distributions of approximately $210,000.

¶ 6 On April 15, 1992 taxpayers filed their individual Oklahoma tax return, reporting the $492,000 pension plan distribution and the $210,000 IRA and Keogh distributions as Oklahoma income and they paid Oklahoma income tax of $44,910 for tax year 1991.⁵ They did not file an individual New York tax return for 1991. Therefore, in relation to their 1991 Oklahoma individual income tax return and the income tax paid to Oklahoma in April 1992, no credit for any taxes paid to New York was taken because they had paid no taxes to New York at the time of their April 1992 Oklahoma income tax payment. As taxpayers state in their November 30, 1998 brief on certiorari (pg. 9), they and their tax advisor believed the 1991 retirement income — i.e. the pension, IRA and Keogh income — was not taxable in New York.

¶ 7 In June 1994 the New York Department of Taxation and Finance submitted an initial audit report to taxpayers concerning tax year 1991.⁶ New York contended the retirement income was taxable in New York as New York source income, notwithstanding taxpayers' residence in Oklahoma at the time of distribution. The initial audit called for payment of $86,635.29 to New York for tax year 1991, consisting of $53,374.14 of tax and the rest, penalties and interest. Taxpayers did not request from OTC an extension of the refund limitation period concerning tax year 1991 upon receiving this audit or at any other time prior to submitting their refund claim to OTC.

¶ 8 For more than a year, aided by their attorney and accountant, taxpayers challenged the New York audit, maintaining the income was taxable in Oklahoma, not New York. In August 1995 the New York tax agency submitted its final audit report which, although evidencing a reduction in taxpayers' New York tax liability, still manifested a significant tax liability, which taxpayers paid on September 20, 1995. Taxpayers' income tax liability to New York (and accompanying Oklahoma credit) was not known or quantified until the New York tax agency made its final determination in the August 1995 audit report.

¶ 9 On or about November 21, 1995 taxpayers filed with Oklahoma a 1991 Form 511, "corrected return", with accompanying Schedule E. On or about December 5, 1995 they filed an Amended Individual Oklahoma Tax Return for calendar year 1991, with accompanying Schedule E.⁷ The amended

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return applied a credit for tax paid to New York in the amount of $34,732, as calculated on the Schedule E and taxpayers sought this amount by their refund claim.⁸

¶ 10 OTC staff, relying on § 2373, denied taxpayers' refund claim solely because it was made more than three years after their 1991 Oklahoma income tax return was filed and Oklahoma income tax for tax year 1991 was paid in April 1992. Taxpayers protested the denial, which was assigned to an OTC Administrative Law Judge (ALJ). One argument raised by taxpayers to support their position the refund claim was timely was that the three year limitation period of § 2373 did not begin to run and, what they delineate as their cause of action for a refund did not accrue, until they paid New York tax in September 1995 because only then were they entitled to a credit against their Oklahoma income tax under § 2357(B)(1). The ALJ rejected the argument and recommended denial of the claim based on § 2373.⁹

¶ 11 Taxpayers next sought review before OTC via an application for en banc hearing. OTC adopted the ALJ's recommendation and denied the refund claim in June 1997. Taxpayers appealed and the COCA affirmed. Taxpayers petitioned for certiorari, which we granted in November 1998. Oral argument was held before this Court on December 9, 1998. We now affirm OTC's Order.

PART III. IN UNAMBIGUOUS LANGUAGE, SECTION 2373 LIMITS THE AMOUNT OF A REFUND TO THE PORTION OF OKLAHOMA INCOME TAX PAID DURING THE THREE YEARS IMMEDIATELY PRECEDING THE FILING OF THE REFUND CLAIM.

¶ 12 It is necessary to understand two main statutes to resolve this matter — §§ 2357(B)(1) and 2373. Section 2357(B)(1) provides:

There shall be allowed as a credit against the tax imposed by Section 2355 of this title the amount of tax paid another state by a resident individual, as defined in Section 2353, paragraph 4, of this title, upon income received as compensation for personal services in such other state. The credit shall not exceed such proportion of the tax payable under Section 2355 of this title as the compensation for personal services subject to tax in the other state and also taxable under Section 2355 bears to the Oklahoma adjusted gross income as defined in Section 2353, paragraph 13, of this title.

Section 2373 states:

If, upon any revision or adjustment, including overpayment or illegal payment on account of income derived from tax-exempt Indian land, any refund is found to be due any taxpayer, it shall be paid out of the "Income Tax Withholding Refund Account", created by Section 2385.16 of this title, in the same manner as refunds are

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paid pursuant to such section. The information filed, reflecting the revision or adjustment, shall constitute the claim for refund.

Except as provided in subsection H of Section 2375 of this title, the amount of the refund shall not exceed the portion of the tax paid during the three (3) years immediately preceding the filing of the claim, or, if no claim was filed, then during the three (3) years immediately preceding the allowance of the refund. However, this three-year limitation shall not apply to the amount of refunds payable upon claims filed by members of federally recognized Indian tribes or the United States on behalf of its Indian wards or former Indian wards,

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