Title: Preble v. Dept. of Rev
Citation: N/A
Docket Number: S45863
State: Oregon
Issuer: Oregon Supreme Court
Date: November 24, 2000

FILED: NOVEMBER 24, 2000
IN THE SUPREME COURT OF THE STATE OF OREGON
WALLACE L. and ELIZABETH PREBLE,
Appellants,
	v.
DEPARTMENT OF REVENUE,State of Oregon,
Respondent.
(OTC 4130; SC S45863)
	On appeal from the Oregon Tax Court.*
	Carl N. Byers, Judge.
	Argued and submitted May 11, 1999.
	Kevin O'Connell, of Kevin O'Connell, P.C., Portland, argued
the cause and filed the briefs for appellants.  With him on the
briefs was Steven B. Hval.
	Jerry Bronner, Assistant Attorney General, Salem, argued the
cause and filed the brief for respondent.  With him on the brief
was Hardy Myers, Attorney General.
	Before Carson, Chief Justice, and Gillette, Durham, Leeson,
and Riggs, Justices.**
	RIGGS, J.
	The decision of the Tax Court is reversed, and the case is
remanded to the Tax Court for further proceedings.
	*14 OTR 276 (1998); 14 OTR 380 (1998)
	**Van Hoomissen and Kulongoski, JJ., did not participate in
the consideration or decision of this case.
		RIGGS, J.
		This case, which is before the court on direct appeal
from a judgment of the Oregon Tax Court, presents the question
whether a notice of tax deficiency may be valid even though it
was not certified, as required by statute.  The Department of
Revenue (department) concluded that the notice of deficiency at
issue here was valid.  The Tax Court agreed.  Preble v. Dept. of
Rev., 14 OTR 276, 281 (1998).  We conclude that a notice of
deficiency must be certified to be valid.  Accordingly, we
reverse.
		Because this case originally was filed with the Tax
Court in May 1997, we review the decision of the Tax Court de
novo.  ORS 305.445 (1995); (1) see Delta Air Lines, Inc. v. Dept. of
Rev., 328 Or 596, 603, 984 P2d 836 (1999) (1995 amendments to ORS
305.445 apply only to cases filed in Tax Court on or after
September 1, 1997).
		The facts are undisputed.  This case involves the state
tax liability of Wallace and Elizabeth Preble (taxpayers) for the
years 1977, 1978, and 1979.  Taxpayers timely filed their state
tax returns for those years with the department.  Taxpayers
subsequently became embroiled in litigation over their federal
tax liability for the same years.  The federal tax litigation was
not resolved until 1991.
		In 1992, the federal government notified the department
that taxpayers' federal tax returns for the years at issue had
been adjusted.  The department concluded that those adjustments
increased taxpayers' state tax liability.  Accordingly, in 1994,
the department sent taxpayers three notices of deficiency, one
for each of the years 1977, 1978, and 1979.
		In May 1997, taxpayers filed a complaint in the Tax
Court, contending that the notices were invalid because they
lacked a certificate required by ORS 305.265 (set out below). (2) 
Taxpayers later amended their complaint, adding a claim that the
notices were invalid because they were untimely.  In two separate
opinions, the Tax Court granted summary judgment for the
department.  Preble, 14 OTR at 281 (notices valid despite lack of
certificate); Preble v. Dept. of Rev., 14 OTR 380, 383 (1998)
(notices were timely).  Taxpayers timely appealed both decisions
to this court.
		ORS 305.265 provides, in part:
		"(2) * * * If the department discovers from an
examination or an audit of a report or return or
otherwise that a deficiency exists, it shall compute
the tax and give notice to the person filing the return
of the deficiency and of the department's intention to
assess the deficiency, plus interest and an appropriate
penalty.  Except as provided in subsection (3) of this
section, the notice shall:
		"(a)	State the reason for each adjustment;
		"(b) Give a reference to the statute, regulation
or department ruling upon which the adjustment is
based; and
		"(c) Be certified by the department that the
adjustments are made in good faith and not for the
purpose of extending the period of assessment.
		"(3) When the notice of deficiency described in
subsection (2) of this section results from the
correction of a mathematical or clerical error and
states what would have been the correct tax but for the
mathematical or clerical error, such notice need state
only the reason for each adjustment to the report or
return."
(Emphasis added).  A taxpayer may contest the proposed deficiency
by filing a written objection within 30 days from the date of the
notice:
		"Within 30 days from the date of the notice of
deficiency, the person given notice shall pay the
deficiency with interest computed to the date of
payment and any penalty proposed.  Or within that time
the person shall advise the department in writing of
objections to the deficiency, and may request a
conference with the department, which shall be held
prior to the expiration of the one-year period set
forth in subsection (7) of this section."
ORS 305.265(5).
		Taxpayers contend that a notice of deficiency is
invalid if it lacks the certification required by ORS
305.265(2)(c).  They note that the statute uses the word "shall,"
that the statute links certification with two other requirements,
and that the statute excuses certification only when the
adjustment is the result of a mathematical or clerical error. 
The department contends that such a notice is valid, even though
it lacks the certification.
		Resolution of the dispute requires us to construe ORS
305.265.  In construing a statute, we use the methodology
described in PGE v. Bureau of Labor and Industries, 317 Or 606,
610-11, 859 P2d 1143 (1993).  The first level of analysis
requires us to examine the text and context of the statute,
giving words of common usage their plain, natural, and ordinary
meaning.  Id.  If that examination reveals the clear intent of
the legislature, then our inquiry is complete.  Id. at 611.
		We begin by noting that ORS 305.265(2) provides that
the department "shall" include the certificate in a notice of
deficiency.  "Shall" is a command:  it is "used in laws,
regulations, or directives to express what is mandatory." 
Webster's Third New Int'l Dictionary, 2085 (unabridged ed 1993); 
Sizemore v. Myers, 327 Or 71, 74-75, 957 P2d 577 (1998)
(requirement that notice of petition for review of ballot title
"shall" be given by certain deadline was statutory prerequisite
to review, even though it was not jurisdictional).  The
department has no discretion regarding whether to include the
certificate.
		We next consider whether the certificate is necessary
for a notice of deficiency to be valid.  For the reasons that
follow, we conclude that it is.
		To conclude that a notice of deficiency was valid even
though it lacked the certificate, we  effectively would have to
read the phrase "the notice shall," in ORS 305.265(2) to mean
"the notice should."  However, the certification requirement is
part of a single sentence in that statute.  In that sentence, the
phrase "the notice shall" is followed by three different
requirements.  The three requirements are that the notice give
the reason for each adjustment, refer to the authority for each
adjustment, and certify that the adjustment is made in good faith
and not to extend the assessment period.  ORS 305.265(2)(a) to
(c).  Those three requirements are connected by the word "and,"
which indicates that they are not alternatives.
		It follows from the foregoing that, if the phrase "the
notice shall," in ORS 305.265(2) meant "the notice should," then
it would apply to all three requirements.  Under that reading, a
notice of deficiency would be valid, even though it lacked any or
all of the requirements.  The text of the statute shows that such
a reading would violate the legislative intent.  The notice
triggers the time for the taxpayer to file written objections to
the proposed deficiency.  ORS 305.265(5) (1993).  Without notice
of the reason or the authority for each adjustment, the taxpayer
could face significant disadvantages in contesting the proposed
deficiency; indeed, the taxpayer might be unable to object at
all.  Such a "notice" actually would notify the taxpayer of very
little.  Because a notice of deficiency is invalid if it does not
include the reason or the authority for each adjustment, it also
is invalid if it does not include the certificate. (3)

		We conclude that the text and context of ORS
305.265(2)(c) clearly reveal the legislature's intent to make
certification a necessary condition for a valid notice of
deficiency.  See PGE, 317 Or at 611 (if intent of legislature
clear at first level of analysis, no further inquiry required).
		The department argues that, in any event, any error
here was harmless.  We reject that argument.  The certification
assures the taxpayer that the department is acting in good faith
and not for the purpose of extending the assessment period.  The
statute evinces a legislative intent that makes the
representation of good faith as important as good faith itself. 
We have no authority to nullify that legislative intent.
		The notices of deficiency did not contain the
certificates required by ORS 305.265(2)(c).  As a result, the
notices of deficiency were invalid.  Taxpayers were entitled to
summary judgment in their favor. (4)
		The decision of the Tax Court is reversed, and the case
is remanded to the Tax Court for further proceedings.  

1. All statutory citations in this opinion are to the
statutes in effect before the effective date of the 1995
amendments.

2. The parties do not dispute that, if the notices were
invalid, the department is barred from sending new ones.

3. The department argues that a notice of deficiency is
valid, even though it lacks a reference to the authority for the
adjustment as required by ORS 305.265(2)(b).  The department
relies on Equitable Sav. &amp; Loan v. Commission, 3 OTR 1 (1967),
aff'd on other grounds 251 Or 70, 444 P2d 916 (1968).  Equitable,
however, concluded only that failure to refer to the authority
for the adjustment did not injure the taxpayer in that case,
because the taxpayer already knew of the authority for the
assessment.  3 OTR at 8-9.  The court did not address whether the
notice otherwise would have been invalid.
4. As noted previously, taxpayers also contend that the
notices were untimely.  Because of our disposition of the first
question, we need not address that issue.