Court Opinion

ID: 836144
Source: CourtListenerOpinion
Date Created: 2013-03-01 21:13:04.9255+00
Date Added: 2024-06-11T12:26:30.995758
License: Public Domain

Filed:  December 28, 2001
IN THE SUPREME COURT OF THE STATE OF OREGON
EDWARD J. REEVE
and ELIZABETH K. REEVE,
Appellants,
	v.
DEPARTMENT OF REVENUE,
State of Oregon,
Respondent.


STEVEN B. TUBBS
and LINDA M. TUBBS,

Appellants,
	v.
DEPARTMENT OF REVENUE,
State of Oregon,
Respondent.
(OTC 4416, 4417; SC S47664)
	En Banc
	On appeal from the Oregon Tax Court.*
	Carl N. Byers, Judge.
	Argued and submitted November 7, 2001.
	Marc K. Sellers, of Schwabe, Williamson & Wyatt, Portland,
argued the cause and filed the briefs for appellants.
	Jerry Bronner, Assistant Attorney General, Salem, argued the
cause for respondent.  With him on the brief was Hardy Myers,
Attorney General.
	BALMER, J.
	The judgment of the Tax Court is affirmed.
	*15 OTR 148 (2000).
		BALMER, J.
		The issue in this tax case is whether income that
Washington resident taxpayers derived from an Oregon partnership
is subject to Oregon tax.  On cross-motions for summary judgment,
the Oregon Tax Court concluded that the income is taxable in
Oregon.  Reeve v. Dep't of Rev., 15 Or Tax 148 (2000).  Taxpayers
have appealed and, for the reasons that follow, we affirm.
		The following facts are undisputed.  In 1993, the tax
year at issue, taxpayers Elizabeth Reeve and Steven Tubbs were
partners in a law firm organized as an Oregon general partnership
with offices in Oregon, Washington, and Washington, D.C. (1) 
Taxpayers practiced law exclusively in the partnership's
Washington State offices and resided in, and were domiciliaries
of, the State of Washington.  In 1993, as now, Oregon taxed that
portion of a nonresident partner's income that consisted of the
partner's distributive share of partnership profits derived from
or connected with sources in Oregon.  ORS 316.124(1). (2)  In their
1993 state tax returns, taxpayers claimed that the bulk of their
income from the partnership did not consist of taxable
distributive shares.  Rather, taxpayers characterized their
income from the partnership as "guaranteed payments" for
services, comparable to a fixed salary, that qualified as
ordinary income earned solely in Washington State.  Thus
characterized, taxpayers claimed that such income was exempt from
Oregon tax. (3) 
 	The Department of Revenue (department) rejected
taxpayers' characterization of their partnership income and
determined that it consisted of distributions of partnership
profits taxable under ORS 316.124(1). (4)  As noted, the Tax Court
agreed with the department and, in doing so, followed its earlier
decision in Pratt & Larsen Tile v. Dep't of Rev., 13 OTR 270
(1995), which had held that guaranteed payments for services made
to nonresident partners are considered distributive shares of
partnership profits subject to Oregon tax.  Reeve, 15 OTR at 154-55.  Taxpayers appealed.
		Taxpayers claim that the Tax Court erred in concluding
that the department may tax "guaranteed payments" to nonresident
partners.  According to taxpayers, Oregon has incorporated
section 707(c) of the Internal Revenue Code (IRC), 26 USC §
707(c) (1986), which gives special treatment to "guaranteed
payments" that a partnership makes to a partner. (5)  Specifically,
taxpayers argue that IRC § 707(c) requires the department to view
"guaranteed payments" to partners as though they were payments to
non-partners.  As a consequence, "guaranteed payments" are not
considered part of a partner's distributive share of profits and,
if such payments are made to a partner who is a nonresident, they
are not subject to Oregon tax.  The department responds that
Oregon statutes do not allow nonresident partners of an Oregon
partnership to use IRC § 707(c) to characterize payments received
from the partnership as "guaranteed payments" rather than as
distributions of partnership profits.
		As an initial matter, the parties agree that
partnership income may qualify as a "guaranteed payment" under
IRC § 707(c) only if it is paid to a partner "for services or use
of capital."  In Pratt & Larsen Tile, the Tax Court determined
that those requirements could not be met by nonresident partners
of an Oregon partnership, because of the following limiting
provision of ORS 316.124(2):
	"In determining the sources of a nonresident partner's
income, no effect shall be given to a provision in the
partnership agreement which:


	"(a) Characterizes payments to the partner as being for
services or for the use of capital,* * *."
(Emphasis added.)  By directing the department to give no effect
to the terms "for services or for the use of capital" in a
partnership agreement, the Tax Court reasoned that the
legislature had restricted the availability of IRC § 707(c) and
"expressly determined that guaranteed payments are to be treated
as part of a partner's distributive share for purposes of
determining the source of the income."  Pratt & Larsen Tile, 13
OTR at 274.
		Taxpayers insist, however, that the legislature
intended to incorporate IRC § 707(c) into Oregon's tax laws for
use by nonresident partners.  Taxpayers contend that such
legislative intent is evident in the text of ORS 314.712(2):
	"If a partner engages in a transaction with a
partnership other than in the partner's capacity as a
member of the partnership, the transaction shall be
treated in the manner described in section 707 of the
Internal Revenue Code."
(Emphasis added.)  Therefore, taxpayers argue, the Tax Court
erred as a matter of law, both here and in Pratt & Larsen Tile,
by construing one statutory provision, ORS 316.124(2), to
conflict with another, ORS 314.712(2).  See Vaughn v. Pacific
Northwest Bell Tel. Co., 289 Or 73, 83, 611 P2d 281 (1980)
(courts are to avoid construction that creates conflict between
statutes or renders one statute ineffective).
		To resolve the parties' dispute over whether the
legislature intended to adopt IRC § 707(c) for use by nonresident
partners, we must construe several provisions of the Oregon tax
code.  In doing so, our task is to discern the intent of the
legislature.  ORS 174.020. (6) See also PGE v. Bureau of Labor and
Industries, 317 Or 606, 610, 859 P2d 1143 (1993) (summarizing
methodology for construing statutes).
		We turn first to ORS 314.712(2), set out above, which
taxpayers contend incorporates IRC § 707(c) into the Oregon tax
code.  That ORS 314.712(2), by its terms, incorporates IRC 707 is
clear.  However, it equally is clear that the incorporation is
conditional.  The statute is written as an "if-then" proposition:
If a taxpayer engages in a transaction with a partnership "other
than in the partner's capacity as a member of the partnership,"
then the taxpayer is authorized to treat that transaction under
IRC 707.  Consequently, IRC § 707(c) does not become applicable
unless a partner first engaged in a transaction with the
partnership in a capacity other than as a member of the
partnership -- i.e., as a non-partner.
		Taxpayers assert that they have satisfied the condition
that ORS 314.712(2) imposes because they are considered non-partners to the extent that they received "guaranteed payments." 
That is so, argue taxpayers, because "guaranteed payments" are
"considered as made to a person who is not a partner" under IRC §
707(c).  That construction is circular, and we reject it.  As we
have noted, ORS 314.712(2) incorporates IRC § 707(c), if at all,
after a taxpayer first satisfies the condition of engaging in a
transaction with the partnership as a non-partner.  That is not
the case here.  Taxpayers were lawyers and partners in a law
firm.  There is no suggestion that the payments to them were for
any services performed for the firm other than as partners
providing legal services on behalf of clients or other services
related to their roles as partners.
		Taxpayers alternatively argue that the legislature
intended to adopt IRC § 707(c) apart from the conditional
incorporation by ORS 314.712(2).  If that argument is correct,
then taxpayers could seek IRC § 707(c) treatment of their
payments from the partnership without first demonstrating that
they received that income from the partnership in a capacity
other than as a partner.  Taxpayers assert that the legislature
intended that the character of income from a partnership be the
same for Oregon tax law purposes as for federal purposes.  They
point out that, under 316.124(5), (7) the character of partnership
items for a nonresident partner is determined by ORS 314.714(1),
which provides:

	"Each item of partnership income, gain, loss or
deduction has the same character for a partner as it
has for federal income tax purposes.* * *"

Thus, taxpayers argue that IRC § 707(c) is available
independently of ORS 314.712(2) because, under ORS 314.714(1),
IRC § 707(c) can be used to characterize partnership income for
federal tax purposes.
		Taxpayers' reliance on ORS 314.714(1) is misplaced. 
That statute applies to the character of partnership income and
not of a partner's distributive share of that income, which is at
issue here.  Under ORS 316.124(5), a nonresident partner's
distributive share is determined by ORS 314.714(2), which
provides:

	"A partner's distributive share of an item of
partnership income, gain, loss or deduction (or item
thereof) shall be that partner's distributive share of
partnership income, gain, loss or deduction (or item
thereof) for federal income tax purposes * * * adjusted
for the modifications, additions and subtractions
provided in this chapter and ORS chapters 316, 317 and
318."
(Emphasis added.)  ORS 314.712(2) is one such "modification"
that, as noted, incorporates IRC § 707(c) only on the condition
that a partner first is engaged in a transaction with the
partnership as a non-partner.  Accordingly, we reject taxpayers'
argument that the legislature intended to treat the income that a
partnership pays to a nonresident partner the same for Oregon's
purposes as for federal purposes.
		We have considered taxpayers' other arguments and find
them not to be well taken.  Further, because we conclude that
taxpayers cannot avail themselves of IRC § 707(c), we do not
address taxpayers' contention that their partnership compensation
otherwise meets the requirements of that provision.
		  In summary, taxpayers have failed to demonstrate that
the legislature intended to adopt IRC § 707(c) except in
circumstances in which a partner is acting as a non-partner.  ORS
314.712(2).  Taxpayers are unable to characterize themselves as
non-partners other than by relying on IRC § 707(c), which is
unavailable to them.  Therefore, we conclude that the Tax Court
correctly determined that guaranteed payments for services made
to nonresident partners are considered distributive shares of
partnership profits and subject to Oregon tax.
		The judgment of the Tax Court is affirmed.



1. 	Reeve and Tubbs filed joint personal income tax returns
with their respective spouses, who are also parties to this
proceeding.  However, because the issues that we address in this
opinion relate only to partnership compensation paid to Reeve and
Tubbs, "taxpayers" refers to them and not their spouses. 

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2. 	All references to the Oregon Revised Statutes in this
opinion are to the 1991 edition, which applies to the tax year at
issue here.

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3. 	Reeves received from the partnership a total federal
taxable income of $138,637 and contends that $127,418 was a
"guaranteed payment."  Tubbs received a total federal taxable
income of $88,592 and contends that $84,342 was a "guaranteed
payment."  Taxpayers did report a small percentage of their
income from the partnership -- their year-end "bonus"
compensation -- as a distribution of partnership profits
apportionable for income tax purposes between the states in which
the partnership did business.

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4. 	ORS 316.124(1) states, in part:

	"In determining the adjusted gross income of a
nonresident partner of any partnership, there shall be
included only that part derived from or connected with
sources in this state of the partner's distributive
share of items of partnership income, gain, loss and
deduction (or item thereof) entering into the federal
adjusted gross income of the partner * * *."
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5. 	IRC 707(c) states, in part:

	"Guaranteed payments.  To the extent determined without
regard to the income of the partnership, payments to a
partner for services or the use of capital shall be
considered as made to one who is not a member of the
partnership,* * *."
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6. 	The legislature amended ORS 174.020 in 2001.  Or Laws
2001, ch 438.  Those amendments relate, in part, to a court's use
of legislative history in the interpretation of statutes.  Those amendments apply only to actions commenced on or after June 18,
2001.  Or Laws 2001, ch 438, §§ 2 & 3.  Taxpayers filed their
complaint in Tax Court on March 6, 1998.  Therefore, the amendments to ORS 174.020 do not apply in this case.

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7. 	ORS 316.124(5) provides:

	"A nonresident partner's distributive share of items of
income, gain, loss or deduction (or item thereof) shall
be determined under ORS 314.714(2).  The character of
partnership items for a nonresident partner shall be
determined under ORS 314.714(1)."
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