Case Name: Jodi M. JOHNSON v. DEPARTMENT OF REVENUE
Court: Oregon Tax Court
Jurisdiction: Oregon
Decision Date: 1996-07-22
Citations: 14 Or. Tax 15
Docket Number: TC 3802
Parties: Jodi M. JOHNSON v. DEPARTMENT OF REVENUE
Judges: 
Reporter: Oregon Tax Reports
Volume: 14
Pages: 15–24

Head Matter:
IN THE TAX COURT OF THE STATE OF OREGON
Jodi M. JOHNSON v. DEPARTMENT OF REVENUE
(TC 3802)
David L. Canary, Garvey, Schubert & Barer, Portland, represent plaintiff (taxpayer).
Jerry Bronner, Assistant Attorney General, Department of Justice, Salem, represented defendant (department).
Decision for plaintiff rendered July 22, 1996.

Opinion:
CARL N. BYERS, Judge,
This matter is before the court on cross motions for summary judgment. The parties stipulated the facts and submitted memoranda in support of their positions. The motions question whether the beneficiary of a trust is an owner for purposes of receiving an energy conservation income tax credit under ORS 316.140.
The energy conservation facility giving rise to the income tax credit in this case is a wood waste co-generation plant located in Riddle, Oregon. The facility was completed and first qualified for an income tax credit in 1986. It is operated under the name of Co-Gen Co., a partnership initially composed of two partners: Prairie Wood Products, Inc. (Prairie Wood), and Strawberry Mountain Power Co. (Strawberry Power). Strawberry Power is an S corporation entitled to receive 56 percent of the energy conservation income tax credit. Prairie Wood is entitled to receive 44 percent of the credit.
Two separate trusts were created for the same beneficiary. On May 1,1986, the Jodi M. Johnson Qualified Sub-chapter S Trust (QSST) was created, with plaintiff (taxpayer) as the sole current income beneficiary. A QSST is designed to be a qualifying shareholder of an S corporation under section 1361 of the Internal Revenue Code (IRC). The QSST was funded with 160 shares, or 10.7 percent of the stock, of Strawberry Power. As a 10.7 percent shareholder, the trust's share of the energy income tax credit received by Strawberry Power for 1986 was $43,947.
On January 1, 1987, the QSST sold its stock in Strawberry Power, and the Jodi Johnson Prairie Trust was created with taxpayer as the primary beneficiary. This trust became a partner in Co-Gen Co. and acquired an 8.9 percent partnership interest, entitling the trust to an energy income tax credit in 1987 of $65,470.
Portions of the income tax credit from both trusts were carried over to 1989. On taxpayer's 1989 income tax return, she claimed, as beneficiary of the trusts, a credit of $44,758. The Department of Revenue (department) auditors disallowed $41,840 of the credit on the ground that "[ejnergy credits may not be passed from a trust to a beneficiary." (Brackets in original.)
ISSUE
The issue framed by the parties in the stipulation is:
"[Wlhether Jodi Johnson is entitled, due to her status as sole current income beneficiary of the Jodi M. Johnson QSST Trust and as primary beneficiary of any income distributed by the Jodi Johnson Prairie Trust, to any portion of the energy tax credits claimed on her 1989 Oregon personal income tax return but disallowed by the department."
In a more simplistic form, the issue is whether a trust beneficiary is an owner for purposes of ORS 316.140.
ANALYSIS
The 1979 Oregon Legislature enacted statutes to encourage the construction of renewable energy resources. See Or Laws 1979, ch 512. It codified most of the provisions in ORS chapter 469, addressing energy resources in the context of public health and safety. However, section 12 of the 1979 act provided an energy credit against the personal income tax and was codified at ORS 316.140. To obtain the credit for the year in question, the relevant portion of the statute required that:
"(2) The facility must be in Oregon and owned during the tax year by the taxpayer claiming the credit."
The department claims that the term "owned," as used in the statute, requires a taxpayer to have legal title. Taxpayer, on the other hand, contends that "owned" encompasses both legal and equitable ownership. Based on the context of the statute, the court concludes that the legislature did not intend the word "owned" in the strict, narrow sense of legal title.
To obtain the credit, a taxpayer must apply for preliminary certification prior to construction of the renewable energy resource facility. The application provision requires the applicant to be "the owner or contract purchaser." ORS 469.205(l)(c)(A). Thus, because a contract purchaser, who holds equitable title, can apply for certification, equitable ownership is implicitly recognized in ORS 316.140(2).
Perhaps most revealing of legislative intent is ORS 316.140(9), which provides:
"If the taxpayer is a shareholder of a Subchapter S corporation, the credit shall be computed using the shareholder's pro rata share of the corporation's certified cost of the facility. In all other respects, the allowance and effect of the tax credit shall apply to the corporation as otherwise provided by law."
This provision reveals that the legislature assumed S corporation shareholders qualified for the credit. The focus of the provision is not qualification, but the amount of the credit. Where various forms of equitable ownership such as S corporation shareholders, partners and trust beneficiaries receive similar treatment for purposes of determining taxable income, it is reasonable to treat them alike for purposes of tax credits. If the income tax law attributes and taxes income to an S corporation shareholder, partner, or trust beneficiary, then consistency and uniformity would indicate that these same taxpayers should be treated alike for purposes of tax credits.
Furthermore, the legislature expressly determined to adopt the federal pattern of income taxation. Its expressed intent is to make the measure of Oregon taxable income identical with federal taxable income except with regard to specific modifications. ORS 316.007. The legislature seeks to achieve this identity by adopting various provisions of the Internal Revenue Code, including the taxation of trusts.
Under both state and federal systems, beneficiaries of trusts are taxed upon their proportionate share of distributable net income or other income. ORS 316.287. Under the federal system, trust beneficiaries are generally entitled to federal tax credits. Although the state has not adopted federal tax credits, nothing in ORS chapter 316 indicates the legislature intended to depart from this pattern. The same kind of treatment would provide the overall consistency the legislature intended. On the other hand, if a trust beneficiary is taxed on trust income but denied a tax credit, it would operate contrary to the purposes of the credit and diminish the incentives it provides.
In this case, the issue concerns the beneficiary of a QSST and the beneficiary of a trust that is a partner in a renewable energy resource facility. In the case of a QSST, IRC section 1361(d) treats the beneficiary of the QSST as "the owner of that portion of the trust which consists of stock in an S corporation with respect to which the election is made." IRC § 1361(d)(1)(B). By expressly providing that Oregon taxable income is to be identical to the federal taxable income, Oregon has adopted the effect of this law, i.e., it treats the QSST beneficiary as the owner of S corporation shares. If the beneficiary is treated as owner of the S corporation shares for purposes of income taxes, then it is reasonable to conclude that the legislature intended that the same beneficiary would qualify for the credit in question.
The Oregon Legislature has specifically provided income tax credits to a taxpayer that "owns, leases, or has a beneficial interest" in a pollution control facility or a business that manufactures a reclaimed plastic product. ORS 316.097(4)(a)(C); ORS 316.103(4)(a)(C). A third credit, the alternative energy device credit, requires that taxpayer be the owner, contract purchaser, or tenant. ORS 316.116(2)(a)(B). While these provisions demonstrate the legislature can specifically address the kinds of interests that do qualify for an income tax credit, they say nothing about legislative intent when the legislature uses a general term such as "owned."
The court is persuaded that the Oregon Legislature intended to make Oregon's law identical with federal law except where expressly different. Federal income tax laws and regulations are detailed, complex and extensive. Oregon has declined to duplicate that enormous mass of law, but utilizes it by adopting it by reference.
If the Oregon Legislature intended ORS 316.140 to be strictly construed and applied only to legal title, then forms of equitable ownership such as contract purchasers, shareholders, and partners would not qualify. The department recognizes this is not the case. If other equitable forms of ownership are recognized, then how did the legislature distinguish the beneficiary of a trust from a partner or contract purchaser? The S corporation shareholder provisions evidence a legislative intent that equitable ownerships are recognized for purposes of ORS 316.140. Otherwise, as taxpayer points out, a simple trust would be able to obtain a tax credit under ORS 316.140, but that credit would be unusable and wasted, a result contrary to the underlying premise of the tax credit provisions. Consistency of treatment and the policy underlying the tax credit provided by ORS 316.140 all point to a legislative intent to allow the credit to trust beneficiaries. Now, therefore,
IT IS ORDERED that taxpayer's Motion for Summary Judgment is granted, and
IT IS FURTHER ORDERED that the department's Motion for Summary Judgment is denied. Plaintiff shall recover costs and reasonable attorney fees.
Unless otherwise indicated, all federal and state references are to the 1986 Replacement Parts.
Similarly, section 14 of the act provided a credit against corporate excise taxes and was codified at ORS 317.104. Both tax provisions originally required the property to be "owned or leased" by the taxpayer seeking the credit. The words "or leased" were removed by the 1981 Legislature. Or Laws 1981, ch 894, § 10,13.
As an interesting sidenote, while most federal credits refer to "taxpayers," IRC section 48(k) provides an investment tax credit for movie and television films for taxpayers with an "ownership interest" in the property. The regulations makes no reference to the ownership requirement but do indicate that if a trust owns an interest in the property, the credit is allocated to the beneficiaries on the basis of their distributable net income. Treas Reg § 1.48-8(aX4Xiv).