Title: Neer v. State ex rel. Oklahoma Tax Commission

State: oklahoma

Issuer: Oklahoma Supreme Court

Document:

Neer v. State ex rel. Oklahoma Tax Commission  Neer v. State ex rel. Oklahoma Tax Commission 1999 OK 41 982 P.2d 1071 70 OBJ 1551 Case Number: 89748 Decided: 05/11/1999 Modified: 06/04/1999 Mandate Issued: 06/09/1999 Supreme Court of Oklahoma CHARLES S. NEER and EILEEN M. NEER, Appellants, v. STATE OF OKLAHOMA ex rel. OKLAHOMA TAX COMMISSION, Appellee. [982 P.2d 1072] CERTIORARI TO THE COURT OF CIVIL APPEALS, DIVISION III APPEAL FROM AN ORDER OF THE OKLAHOMA TAX COMMISSION ¶0 Taxpayers filed a refund claim in December 1995 with the Oklahoma Tax Commission (OTC) to get back part of the Oklahoma income tax they paid in April 1992 for tax year 1991. OTC denied the claim 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. The Court of Civil Appeals (COCA) affirmed. Held: Taxpayers' refund claim was properly denied because it was filed more than three years after they paid their Oklahoma income tax in April 1992 for tax year 1991. CERTIORARI PREVIOUSLY GRANTED; COURT OF CIVIL APPEALS' OPINION VACATED; OKLAHOMA TAX COMMISSION ORDER NO. 97-06-24-007 AFFIRMED. 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. 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 [982 P.2d 1073] Oklahoma income tax. ¶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, PART II. FACTUAL AND PROCEDURAL BACKGROUND. ¶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. ¶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. ¶7 In June 1994 the New York Department of Taxation and Finance submitted an initial audit report to taxpayers concerning tax year 1991. ¶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. ¶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. ¶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 [982 P.2d 1076] 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, to recover taxes illegally collected from tax-exempt lands. In the case of any refund to a member of a federally recognized Indian tribe or to the United States on behalf of its Indian wards or former Indian wards, to recover taxes illegally collected on bonus payments from oil and gas leases located on tax-exempt Indian lands pursuant to this section, the Tax Commission shall pay interest on all refunds issued after January 1, 1996, at the rate of six percent (6%) per annum from the date of payment by the taxpayer to the date of the refund. In cases where the Tax Commission and the taxpayer have signed a consent, as provided by law, extending the period during which the tax may be assessed, the period during which the taxpayer may file a claim for refund or during which an allowance for a refund may be made shall be automatically extended to the final date fixed by such consent plus thirty (30) days. The Oklahoma Tax Commission may authorize the use of direct deposit in lieu of refund checks for electronically filed income tax returns. (emphasis added) ¶13 Although taxpayers recognize the three year period specified by the emphasized portion of § 2373 generally begins to run when the Oklahoma income tax is paid, they assert that because § 2357(B)(1) would not allow a credit against their 1991 Oklahoma income tax liability until they actually paid tax to New York, no cause of action for an Oklahoma refund accrued until September 1995 - the month they paid the New York tax - and the three year period specified in § 2373 did not start to run until then. The argument, therefore, is that § 2373 is a "true" statute of limitation, rather than a provision akin to a statute of repose. We disagree. ¶14 Initially, we recognize four matters not in dispute in this appeal. First, taxpayers do not dispute that the retirement income distributed to them in 1991 was income taxable by Oklahoma, nor do they assert any lack of authority - on constitutional (state or federal) or other grounds - on Oklahoma's part to tax the income. Second, they raise no issue concerning New York's power to tax the same income. ¶15 [982 P.2d 1078] This Court is committed to the axiom that the determination of legislative intent controls statutory interpretation. Oklahoma Ass'n for Equitable Taxation v. City of Oklahoma City, ¶16 A cardinal precept of statutory construction is that where a statute's language is plain and unambiguous, and the meaning clear and unmistakable, no justification exists for the use of interpretative devices to fabricate a different meaning. In re Guardianship of Campbell, ¶17 Section 2357(B)(1) allows an Oklahoma resident taxpayer a tax credit against their Oklahoma income tax liability for "the amount of tax paid another state" (emphasis added) upon personal services income also subject to Oklahoma income tax. OTC has by rule interpreted personal services income to include retirement income. OTC Rule 710:50-15-72(b), Vol. 17 Oklahoma Administrative Code 205 (1996). Under the plain and unambiguous language of § 2357(B)(1) then, a tax credit is available only when a resident taxpayer pays tax to another state. We, therefore, agree with taxpayers, entitlement to a tax credit under the clear language of § 2357(B)(1) did not arise until they paid tax to New York in September 1995. ¶18 Our agreement that a credit is available under § 2357(B)(1) only when tax is actually paid to another state is not, however, equivalent to a recognition that, if the credit is not taken at the time of payment of Oklahoma income tax - because tax has not been paid to the other state at such time - the credit may be used to support a refund claim submitted to OTC more than three years after a taxpayer has paid Oklahoma income tax on the involved income. This is so because, contrary to taxpayers' view that § 2373 is a statute of limitation, the provision instead is analogous to a statute of repose and the Legislature, by unmistakable language, intended § 2373 to act 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 short, the relevant terms of § 2373 clearly evidence a legislative intent to craft an outer limit time boundary beyond which a taxpayer's right or ability to recover a refund no longer exists. ¶19 A statute of limitation extinguishes a remedy for an existing right by penalizing a party who sleeps on that right. Reynolds v. Porter, Modern limitations and statutes of repose are similar because they both provide repose for the defendant. Yet, they are significantly different since a statute of limitation merely extinguishes the plaintiff's remedy while a statute of repose [may] bar[] a cause of action before it arises. In practical terms, a statute of repose marks the boundary of a substantive right whereas a statute of limitation interposes itself only procedurally to bar the remedy after a substantive right has vested. The time prescribed by a statute of repose runs from a specific . . . event regardless of when the harm or damage occurs. A limitation period runs from the time the elements of a cause of action arise. (Footnotes omitted) In essence, a statute of limitation is a procedural device and does not start to run until a cause of action accrues, i.e. at that point in time a plaintiff can successfully prove the elements of his/her claim. A statute of repose, in contrast, begins to run from a date certain, regardless of when a plaintiff may be able to bring a cause of action to successful conclusion. ¶20 Although previously we have generally referred to § 2373 as a statute of limitation [See e.g. Redbird v. Oklahoma Tax Com'n, ¶21 First off, even though, as noted, we have referred to § 2373 as a statute of limitation, this Court has unmistakably foreshadowed an understanding that a taxpayer may use § 2373 to recover a refund only for taxes they have overpaid within three years preceding the date of the refund claim. Turner, supra, 858 P.2d at 434 f. n. 1. Footnote 1 of Turner states in relevant part: "[u]nder . . . § 2373 taxpayers may claim refunds only for taxes that they have overpaid within three years preceding the date of the claim for refund. . . . . Because [taxpayers] paid the tax more than three years before they sought the refund [§ 2373] bars their recovery." ¶22 Second, the relevant phrase of § 2373, "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", does not fit the mold of legislative language utilized in a "true" statute of limitation. For example, § 2373's language is quite unlike that found in the introductory paragraph of 12 O. S. Supp. 1996, § 95, the general statute of limitation for many civil actions, which provides: "[c]ivil actions other than for the recovery of real property can only be brought within the following periods, after the cause of action shall have accrued, and not afterwards[.]" (emphasis added) Instead, the plain language of § 2373, reads much more like the language used in a statute of repose because the three year time period starts to run or commences from the date of payment of Oklahoma tax - a specific event - irrespective of whether or not all the elements of a viable refund claim are then existent. Surely, any ordinary reading of the language seems to clearly evidence a legislative intent to place a substantive limitation on a taxpayer's right to recover any amount as a refund, where the refund claim is filed more than three years after the date on which Oklahoma income tax is paid. ¶23 As we view it, the language of § 2373 is akin to that found in 12 O. S. 1991, § 109, which provides in relevant part: "[n]o action in tort to recover damages . . . " arising from defective design, planning, supervision or observation of construction or from the construction of an improvement to real property "shall be brought . . . more than ten (10) years after substantial completion of such an improvement." Section 109 has unequivocally been interpreted by this Court as a statute of repose that sets an outer [982 P.2d 1080] boundary in time beyond which no cause of action may arise. Jaworsky v. Frolich, supra, 850 P.2d at 1054-1055. As can be seen, the time periods delineated in both § 109 and § 2373 expressly commence from specific events - § 109 from substantial completion of an improvement to real property and § 2373 from payment of Oklahoma income tax. In the case of § 109, the period commences whether or not all of the elements necessary to support a viable tort action then exist. In the case of § 2373, the clock starts running whether or not all the elements necessary to support a viable refund claim are then present. ¶24 As applicable here, the plain import of § 2373's structure points to the conclusion that, when three years elapsed from the date of taxpayers' payment of Oklahoma income tax in April 1992 without the filing of a refund claim, any claim to a refund was destroyed or extinguished. This was so notwithstanding the fact that under § 2357(B)(1) entitlement to a credit had not yet arisen by virtue of the failure to pay tax to New York prior to the expiration of such three year period. ¶25 Third, the view that § 2373 is analogous to a statute of repose, or a legislatively crafted outer limit time boundary beyond which a taxpayer's right or ability to recover a refund no longer exists, is consistent with case law from other jurisdictions in the area of interpreting tax refund limitation periods. In United States v. Brockamp, 519 U.S. 347 , 117 S. Ct. 849, 136 L. Ed. 2d 818 (1997) the United States Supreme Court held that Congress did not intend the equitable tolling doctrine to apply to the statutory time, and related amount, limitations for filing federal tax refund claims. Part of the Supreme Court's rationale was the view that the amount-limitation time period of the federal statute, which is couched in similar language to the pertinent emphasized phrase of § 2373, imposed a substantive limitation on a taxpayer's ability to recover a refund. 117 S. Ct. at 851-852. Although the United States Supreme Court did not expressly state that the federal statute was akin or analogous to a statute of repose, federal Circuit court decisions that also rejected the equitable tolling doctrine and which were found by Brockamp to be correct in such regard, explicitly made the analogy. Amoco Production Co. v. Newton Sheep Co., 85 F.3d 1464, 1472 (10 ¶26 The Supreme Court of Colorado has also held that state's refund limitation statute, which extends the time for filing a claim for refund by one year over the federal limitation period, was more appropriately characterized as a statute of repose, rather than a statute of limitation. Kuhn v. Department of Revenue, ¶27 Based on the above analysis, we conclude OTC was correct in denying taxpayers' refund claim as untimely under the command of § 2373. Were we to rule differently, i.e. that taxpayers' claim was timely, we would be doing nothing less than overriding the Legislature's judgment that such claims, when not subject to a specified statutory exception, are absolutely cut-off or barred if not filed within three years of the date on which a taxpayer's taxes are paid. This we decline to do because we must interpret the provision as written and it would be improper for us to invent some meaning not contemplated by the statutory language as expressed by the law-making body. PART IV. TAXPAYERS HAD AVAILABLE ADEQUATE AVENUES TO PROTECT THEIR ABILITY TO OBTAIN A REFUND, BUT FAILED TO AVAIL THEMSELVES OF SAME. ¶28 We must also note that taxpayers were not without available adequate avenues to protect their ability to obtain a refund, but they failed to avail themselves of such avenues. Once it became apparent by the New York audit submitted to taxpayers in June 1994 that New York was attempting to tax the same income upon which they had already paid tax to Oklahoma, taxpayers could have sought from OTC, but did not, an extension of the three year period, as would have been allowed by the second to the last paragraph of § 2373. In June 1994 there was in excess of nine months left in the three year period specified in § 2373. No satisfactory explanation has been put forward by [982 P.2d 1082] taxpayers for their failure to avail themselves of this extension of time provision. ¶29 Further, at any time between the June 1994 New York audit and April 15, 1995 taxpayers could have filed a protective claim for refund. This would have put OTC on notice of their dispute with New York concerning the taxability of the retirement income in that state and the potentiality that an Oklahoma income tax refund would be due if they ultimately lost their dispute with New York and ended up having to pay tax to that state, as eventually turned out to be the case. Plainly, during such period of time taxpayers must be deemed to have had knowledge that they would potentially have a refund claim in Oklahoma. Protective refund claims have been recognized by OTC and by federal jurisprudence in analogous circumstances, where the final outcome or exact amount of a refund claim is unascertainable until after the legislatively-prescribed time limit on refund claims has expired, but within such time period the taxpayer has knowledge or should know that the possibility of a refund claim exists. See Matter of Tax Protest of Arkla, Inc., 1996 OK CIV APP 5, 919 P.2d 1151 , 1159 f. n. 7; Noram Energy Corporation, v. Oklahoma Tax Com'n, 1995 OK CIV APP 149, 935 P.2d 389 , 394; Oklahoma Tax Commission Precedential Order No. 92-11-24-008 (dated November 24, 1992, released November 1993), [1966 -1997 Transfer Binder] Oklahoma Tax Reporter, New Matters (CCH) ¶ 200-65516; See also Amoco Production Co. v. Newton Sheep Co., supra, 85 F.3d at 1471-1472 and Kellogg-Citizens National Bank of Green Bay, Wisconsin v. United States, 165 Ct. Cl. 452, 330 F.2d 635, 638-640 (U. S. Ct. Cl. 1964). Where a substantial part of the statutorily-prescribed time period on refund claims remains when a taxpayer learns of events causing, or likely to cause, a decrease in his/her tax liability, a protective refund claim should be filed during the prescribed period in order to preserve the viability of a refund claim. Id. If a protective claim is not filed within the specified period in such a situation, a refund claim will be barred, notwithstanding the fact that the exact amount of a refund cannot be determined until after the time period has expired. Id. PART V. CONCLUSION. ¶30 When none of the statutorily delineated exceptions apply, as none do here, § 2373 acts in a manner akin 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. The three year time period of § 2373 starts to run from a specific event - the date of payment of Oklahoma income tax - and, as applicable here, the provision is a legislatively crafted outer limit time boundary beyond which taxpayers' right to a refund no longer exists. Further, during the three year period specified in § 2373 taxpayers in this case 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. ¶31 The Court of Civil Appeals' Opinion is VACATED and OKLAHOMA TAX COMMISSION ORDER NO. 97-06-24-007 is AFFIRMED. ¶32 SUMMERS, C.J., HARGRAVE, V.C.J., LAVENDER, OPALA and WILSON, JJ., concur. ¶33 HODGES, SIMMS, KAUGER and WATT, JJ., dissent. FOOT