Opinion
TC 4130
October 7, 1998
Income tax — Federal audit — Notice of deficiency — Time limit
1. ORS 314.410 (3) provides in relevant part: "If the commissioner of Internal Revenue or other authorized officer of the Federal Government makes a correction resulting in a change in income tax for state income tax purposes, then notice of a deficiency under any law imposing tax upon or measured by income for the corresponding tax year may be mailed within two years after the department is notified by the taxpayer or the commissioner of such federal correction * * *."
Income tax — Federal audit — Notice of deficiency — Time limit
2. ORS 314.410 (3) does not appear to impose a duty upon any of the three participants, either the IRS, the department or the taxpayer. It merely extends the period within which the department may issue a notice of deficiency.
Income tax — Federal audit — Notice of deficiency — Time limit
3. The period is extended only if the IRS makes a correction which will result in a change in income for state income tax purposes.
Income tax — Federal audit — Notice of deficiency — Time limit
4. The notice to the department must be "of such federal correction."
Income tax — Federal audit — Notice of deficiency — Time limit
5. It is not enough for either the IRS or the taxpayer to notify the department that an audit has been made or completed.
Income tax — Federal audit — Notice of deficiency — Time limit
6. The two year period does not begin until the department is notified of the federal correction that was made to the taxpayer's federal return.
Income tax — Federal audit — Notice of deficiency — Time limit
7. The taxpayer may not have a duty to notify the department, but if the taxpayer does notify the department, the taxpayer thereby starts the "clock" running.
Submitted on cross motions for summary judgment.
Plaintiffs (taxpayers) were represented by Kevin O'Connell, P.C. Portland.
Jerry Bronner, Assistant Attorney General, Department of Justice, Salem, represented Defendant (department).
Decision for Defendant rendered October 7, 1998.
Appeal pending.
Plaintiffs appeal from assessments of additional personal income taxes arising out of federal audits for the same tax years. Plaintiffs claim that Defendant's Notices of Deficiency were issued after the time allowed by ORS 314.410 (3). The basic facts are not in dispute, and the matter has been submitted to the court on cross motions for summary judgment.
All references to the Oregon Revised Statutes are to the 1989 Replacement Part.
FACTS
Plaintiffs timely filed Oregon income tax returns for 1977, 1978, and 1979. Plaintiffs' federal returns for those same years were audited by the Internal Revenue Service (IRS). The IRS issued Notices of Deficiency for those three years and Plaintiffs appealed. The appeal was eventually resolved in Plaintiffs' favor in the United States Tax Court by a decision dated December 12, 1991.
In the interim, Defendant learned of the federal audit with regard to the 1977 and 1979 tax years. By letter dated December 18, 1986, Defendant's auditor wrote to Plaintiffs indicating it did not have a copy of the federal audit report or amended Oregon income tax returns. The letter stated "please provide the federal report or an amended return within two weeks." Plaintiffs did not comply with that request. On April 3, 1992, Defendant received a federal appeals transmittal memorandum and supporting statement dated December 30, 1991, showing the federal adjustments made to Plaintiffs' federal returns. Based on this information, Defendant issued Notices of Deficiency dated February 23, 1994. Plaintiffs appealed from those notices, first exhausting its administrative remedies and then filing an appeal to this court.
ISSUE What constitutes notification under ORS 314.410 (3)? ANALYSIS
1. ORS 314.410 (3) provides, in relevant part:
"If the commissioner of Internal Revenue or other authorized officer of the Federal Government makes a correction resulting in a change in income tax for state income tax purposes, then notice of a deficiency under any law imposing tax upon or measured by income for the corresponding tax year may be mailed within two years after the department is notified by the taxpayer or the commissioner of such federal correction * * *." (Emphasis added.)
By December 18, 1986, Defendant was aware that the IRS had completed audits of large partnerships which were considered tax shelters. However, the department had not received any audit reports for either the partnerships or the partners. Defendant contends that notice of the audits does not constitute notice under ORS 314.410 (3) inasmuch as notification requires disclosure of the federal adjustments. In response, Plaintiffs argue that a taxpayer has no duty to provide an audit report and suggest that Defendant has a duty to obtain any audit reports from the IRS.
2-4. ORS 314.410 (3) does not appear to impose a duty upon any of the three participants, either the IRS, the department or the taxpayer. It merely extends the period within which the department may issue a notice of deficiency. The period is extended only if the IRS makes a correction which will result in a change in income for state income tax purposes. Under this language, the department has no way of knowing whether the extended period applies until it knows whether the federal correction will result in a change in income for state income tax purposes. Consequently, the notice to the department must be "of such federal correction."
5-7. It is not enough for either the IRS or the taxpayer to notify the department that an audit has been made or completed. The two-year period under ORS 314.410 (3) does not begin until the department is notified of the federal correction that was made to the taxpayer's federal return. The taxpayer may not have a duty to notify the department, but if the taxpayer does notify the department, the taxpayer thereby starts the "clock" running. Instead, if the taxpayer relies upon the IRS to notify the department, the period of time in which the department may issue a notice of deficiency may be extended. This is precisely what occurred in this case.
Defendant was not notified of the federal correction until April 3, 1992. Accordingly, Defendant's Notices of Deficiency dated February 23, 1994, were issued within the two-year period allowed by ORS 314.410 (3). Now, therefore,
IT IS ORDERED that Plaintiffs' Second Motion for Summary Judgment is denied, and
IT IS FURTHER ORDERED that Defendant's Second Motion for Summary Judgment is granted. Costs to neither party.