Smurfit Newsprint Corp. v. Dept. of Revenue

• Decision Date: 27 January 2000
• Parties: SMURFIT NEWSPRINT CORPORATION, a Delaware Corporation, Appellant, v. DEPARTMENT OF REVENUE, Respondent.
• Court: Oregon Supreme Court

997 P.2d 185

329 Or. 591

SMURFIT NEWSPRINT CORPORATION, a Delaware Corporation, Appellant, v. DEPARTMENT OF REVENUE, Respondent.

(OTC 4298; SC S46114)

Supreme Court of Oregon, En Banc.

Argued and Submitted October 13, 1999.

Decided January 27, 2000.

Christopher D. Hatfield, of Hurley, Lynch & Re, P.C., Bend, argued the cause for appellant. With him on the briefs was Kevin J. Keillor.

Jerry Bronner, Assistant Attorney General, Salem, argued the cause for respondent. With him on the brief was Hardy Myers, Attorney General.

LEESON, J.

In this direct appeal from the Oregon Tax Court, the issue is whether, on cross-motions for summary judgment, the Tax Court erred in denying taxpayer's motion and granting the Department of Revenue's (department) motion. Taxpayer moved for summary judgment on the ground that the department had made a tax assessment based on a deficiency in 1986, a year that was closed to assessment under ORS 314.410. The department moved for summary judgment on the ground that it was permitted to recalculate taxpayer's tax liability in 1986 to determine the correct amount of pollution control facility (PCF) tax credit available to taxpayer to carry forward to 1987 and 1988. We review for errors of law, see Western Generation Agency v. Dept. of Rev., 327 Or. 327, 329 n. 1, 959 P.2d 80 (1998)

(review for errors of law when no material facts in dispute), and reverse and remand.

Some explanation of the PCF tax credit scheme is necessary to understand what occurred in this case. ORS chapter 315 creates a variety of tax credits that are available to qualifying taxpayers who pay personal, corporate, or excise taxes. See, e.g., ORS 315.104 (reforestation tax credit); ORS 315.134 (fish habitat improvement tax credit); ORS 315.164 (farm worker housing tax credit); ORS 315.208 (dependent care facilities tax credit). Taxpayers may use the tax credits described in that chapter to offset taxes that otherwise are due. ORS 315.304 gives qualified taxpayers a tax credit for the cost of constructing certified pollution control facilities and provides, in part:

"(1) A credit against taxes imposed by ORS chapter 316 (or, if the taxpayer is a corporation, under ORS chapter 317 or 318) for a pollution control facility or facilities certified under ORS 468.170 shall be allowed if the taxpayer qualifies under subsection (4) of this section.

"(2) For a facility certified under ORS 468.170, the maximum credit allowed in any one tax year shall be the lesser of the tax liability of the taxpayer or one-half of the certified cost of the facility multiplied by the certified percentage allocable to pollution control, divided by the number of years of the facility's useful life. * * *.

"* * * * * "(9) Any tax credit otherwise allowable under this section which is not used by the taxpayer in a particular year may be carried forward and offset against the taxpayer's tax liability for the next succeeding tax year. Any credit remaining unused in such next succeeding tax year may be carried forward and used in the second succeeding tax year, and likewise, any credit not used in that second succeeding tax year may be carried forward and used in the third succeeding tax year, but may not be carried forward for any tax year thereafter. * * *."

(Emphasis added.)

Under ORS 315.304, the amount of PCF tax credit that a taxpayer may use to offset its tax liability in any one year is "the lesser of the tax liability of the taxpayer or one-half of the certified cost of the facility multiplied by the certified percentage allocable to pollution control, divided by the number of years of the facility's useful life." ORS 315.304(2). The total amount of PCF tax credit to which a taxpayer is entitled is spread over the number of years equal to the useful life of the facility. If a taxpayer does not use all of its PCF tax credit in a particular year, then it may carry forward any remaining credit for the next two succeeding tax years. ORS 315.304(9).

In this case, taxpayer, a producer of newsprint, had earned PCF tax credits under ORS 315.304 in 1986, 1987, and 1988. There is no dispute about taxpayer's entitlement to those credits or the total amount of credits that it had earned. The dispute is over taxpayer's use of its PCF tax credit in the tax years 1986, 1987, and 1988.

In 1986, taxpayer reported an Oregon corporate excise tax liability of $2,832,135. Taxpayer used both energy tax credit and $1,878,795 worth of the $2,397,035 PCF tax credit to which it had become entitled in 1986 to reduce its tax liability to zero. Because taxpayer did not use all of its PCF tax credit it 1986, it was entitled to carry forward the remaining amount—$518,240—to use as an offset against its subsequent tax liability.

In 1987, taxpayer reported an Oregon tax liability of $3,660,179. As it had done in 1986, taxpayer used energy and PCF tax credits to reduce its tax liability to zero. Taxpayer used the $518,240 PCF tax credit that it had carried forward from 1986 and $2,265,875 worth of the $2,337,853 PCF tax credit to which it had become entitled in 1987. It carried forward the remaining $71,978 in PCF tax credit to 1988.

In 1988, taxpayer reported an Oregon tax liability of $3,311,857. Taxpayer deducted from that amount the $71,978 of PCF tax credit that it had carried forward from 1987; $2,314,683 in PCF tax credit to which it had become entitled in 1988; and $697,751 in energy tax credit, thereby reducing its tax liability to $227,445. Taxpayer paid that amount.

Under ORS 314.410(1), the department may give notice of a tax deficiency "any time within three years after the return was filed." This court has held that the purpose of that statute is "to terminate the liability of the taxpayer unless he was notified by the [the department] of a deficiency assessment within three years of the filing of his return." Simpson Timber Co. v. Tax Commission, 250 Or. 434, 440, 443 P.2d 162 (1968). However, ORS 314.410(3)(b) provides an exception to the rule in subsection (1): If the Internal Revenue Service (IRS) "makes a change or correction" that results in the imposition of additional federal taxes, the department may reopen and examine tax years that otherwise are closed to assessment if it does so "within two years after [it] is notified by the taxpayer or [the IRS] of the federal correction * * *."

In 1991, taxpayer reported to the department that the IRS had audited and corrected taxpayer's federal tax returns for the tax years 1985 and 1986. That audit increased taxpayer's 1986 Oregon tax liability by $22,678, resulting in a tax deficiency that taxpayer paid.

In 1993, taxpayer reported to the department that the IRS had audited and corrected its federal tax returns for the tax years 1987 and 1988. That audit increased taxpayer's 1987 and 1988 Oregon tax liability by $3,324 and $12,179 respectively, resulting in tax deficiencies that taxpayer paid. In October 1995, less than two years after the department had received notification of the federal correction to taxpayer's federal tax returns for 1987 and 1988, the department issued notices of deficiency to taxpayer for 1987 and 1988. According to the department, most of the deficiency resulted from an error that taxpayer had made on its 1986 tax return, which the department discovered when it audited taxpayer's 1987 and 1988 tax returns. Under section 631 of the Internal Revenue Code, a taxpayer may treat timber that has been cut but not sold as a sale or exchange for which...