This matter was specially designated to this division of the court and is before the court on cross-motions for summary judgment. At issue are questions regarding the application of the Oregon inheritance tax. The material facts are not in dispute. In its brief in response to the cross-motion of Defendant (the department) for summary
There was nothing improper about the cross-motion for summary judgment filed by the department. Such a motion is contemplated by the rules of the court and was made within the time limits of those rules. As to the existence of a material question of fact as to the value of property, the department has accepted the values for such property shown on the Form 706 Federal Estate Tax Return (federal return) submitted by Plaintiff and in the record. No amendment to the federal return has been sought or approved. Further, at the hearing on this matter counsel for Plaintiff conceded that Plaintiff is not questioning the fair market value conclusions contained in the federal return. All other disputed matters in this case are questions of law and the relationship of federal and Oregon statutes.
The decedent died on January 1, 2003. In the federal return the real property of the decedent was valued at $1,694,100. On the federal return taxpayer made an election under Internal Revenue Code (IRC) section 2032A to have the farm property it owned valued at a reduced level — fair market value reduced by the maximum reduction of $840,000 available in 2003.
The issues presented are:
(1) Do the provisions of the Oregon inheritance tax justify the tax assessed, and if so;
(2) Does the Federal Closing Document neutralize or cancel the tax liability created by such assessment?
Taxpayer makes two arguments based on construction of the Oregon inheritance tax statutes. One argument is based on the provisions of ORS 118.010 that define the amount of Oregon tax due as the "maximum amount of the state death tax credit allowable" under federal law.
Consideration of the relationship of the Oregon inheritance tax scheme and the federal estate tax scheme is important to the resolution of this case. A review of the Oregon inheritance tax statutes during the period important to this case, 2000 through 2003, indicates the following. The Oregon statutory provisions were "built upon" and can only be understood by reference to the provisions of the editions of the Internal Revenue Code (IRC) to which the Oregon statutes refer. Those provisions of the IRC are not necessarily the provisions contemporaneous with the corresponding Oregon statutes being applied to any given decedent. Thus, for example, the provisions of ORS 118.010 (1999) make reference only to the IRC, whereas the provisions of ORS 118.010 (2003), reflecting amendments made in 2003 (the 2003 amendments), make reference to the IRC "as amended and in effect on December 31, 2000." That difference is of substantial significance. The 2003 amendments had, as a primary purpose, linkage of the Oregon inheritance tax only to the IRC as in effect on December 31, 2000. ORS 118.007, ORS 118.009.
The reason that the 2003 Oregon legislature "de-coupled" the Oregon inheritance tax system from the IRC as it had changed, and would continue to change, after 2000, is both clear and important to this case. In 2001, the estate tax provisions of the IRC were changed substantially. The first change relevant to this case was that the exemption level, the estate value level below which no tax liability was due, was increased significantly at the federal level. The
The 2003 Oregon legislature was presented with an existing Oregon inheritance tax system that was based on two fundamental features:
Had the Oregon legislature taken no action following the changes in federal law in 2001, the result would have been:
A review of the provisions of the 2003 amendments and the legislative history of that legislation leads to the inescapable conclusion that the Oregon legislature neither intended such results nor adopted provisions that accidentally caused such results. See Or Laws 2003, ch 806, § 1.
The result, therefore, was to require a computation of the "maximum amount of the state death tax credit allowable" against the federal estate tax under section 2011 of the IRC, as it stood at December 31, 2000. To that calculation, and the position of the parties with respect to it, the court will now turn.
ORS 118.010 remained, before and after the 2003 amendments, unchanged with respect to the reference point: the "maximum *** allowable" credit, under IRC section 2011, as a state death tax credit. ORS 118.010. Of central importance in this case is whether the word "allowable" can be read as meaning "allowed." It is taxpayer's position that "allowable" must be read in this fashion. That position must
The word "allowable" is defined as "permissible," whereas the word "allowed" is defined as "permitted." Webster's Third New Int'l Dictionary 58 (unabridged ed 2002). Those definitions do not advance the cause very much. In the law of taxation, the terms can be and have been treated differently. Thus, for example, as to the calculation, for income tax purposes, of the basis of an asset, a reduction in that basis is made under IRC section 1016 for the amount of the depreciation "allowed" but in no case less than the amount "allowable." IRC § 1016(a)(2). The difference in the meaning of the two words is obvious from the somewhat tortured history of the language of IRC section 1016, nicely discussed in Boris I. Bittker and Lawrence Lokken, 2 Federal Income Taxation of Income, Estates and Gifts, section 42.3 (3d ed 2000). The two words address the possibility that a tentative calculation may provide for an allowable or permissible amount that, however, may be reduced by another limiting calculation.
Federal estate tax liability is computed by calculating a taxable estate, determining a tax and then deducting from that tax certain credits. Of importance here are two credits: (1) the credit for state death taxes under IRC section 2011; and (2) the so called "unified credit" under IRC section 2010. The focus of ORS 118.010 is on the maximum amount of credit for state death taxes "allowable" under IRC section 2010. In turn, the maximum amount allowable under federal law is determined under IRC section 2011(b) and is a function of the taxable estate size. The language of IRC
Finally, if the court were to accept taxpayer's position, the amount of Oregon tax would not be determined under the edition of the IRC chosen by the Oregon legislature. That action of the federal auditor was taken because, under the federal auditor's calculations, and with application of the IRC as of 2003, there was no federal estate tax due after application of the "unified credit" available under IRC section 2010 and therefore the provisions of IRC section 2011(e) reduced the potentially "allowable" state death tax credit to zero. That is not what the Oregon legislature intended. With the 2003 amendments our legislature retained the concept of "allowable" federal credit and de-coupled the Oregon statutory scheme from ever increasing federal exemption amounts by freezing reference to exemption amounts to those in effect under federal law at the end of 2000. No later edition of the IRC is to be used. Taxpayer acknowledges the goal of the legislature in the 2003 amendments but suggests the actions fell short of that intent. That argument finds no support in the Oregon statutes and their legislative purposes and history.
Further, if taxpayer's position is accepted, then for a death in 2003, the amount of Oregon inheritance tax could not have exceeded 50 percent of the credit amount calculated under IRC section 2011(b). For decedents dying after 2004, there would have been no Oregon inheritance tax. Those
Proof of the foregoing conclusion is easily available. If taxpayer's position is valid and the Oregon inheritance tax is only the amount ultimately "allowed" in the computation of the federal tax, then the actions of the 2007 Oregon legislature were, as to a whole chapter of session laws amending chapter 118 of the ORS, completely meaningless.
If the Oregon inheritance tax was effectively repealed, why did the 2007 Oregon legislature spend time and effort in that year to amend the provisions of ORS chapter 118? The answer, of course, is that the Oregon legislature never intended to suffer a repeal of the inheritance tax by operation of federal law changes.
The legislature did retain the existing statutory references in ORS 118.010 to the maximum amount "allowable" under the IRC. However, given the fact that the legislature also "froze" the reference to the IRC as it existed on December 31, 2000, the legislature retained the mechanism whereby, as discussed above, a maximum allowable amount would be calculated. In addition, because the Oregon legislature had never concerned itself with any amount actually "allowed" by federal law, by reason of the actions of an auditor or otherwise, it did not need to concern itself with, or remain exposed to, the changes in federal law that would reduce to zero, in all cases, the amount "allowed."
Taxpayer makes another construction argument, similar in linguistic terms. The major premise in this argument is that the provisions of ORS 118.100 require that an Oregon tax be paid only when a federal tax is payable. Taxpayer observes that it has no federal tax to pay, at least at this point in time.
Nor does the language of ORS 118.100 support taxpayer's argument. ORS 118.100 provides that "[t]he tax provided for in ORS 118.010 shall be paid to the Department of Revenue on the date the federal estate tax is payable." The time "the federal estate tax is payable" could mean a due date generally, without regard to the existence of any particular liability. That would be, under IRC section 6075, nine months after the date of death. The language could also mean the date on which an actual federal tax liability of the estate in question is due and owing. Under this construction,
However, as with the provisions of ORS 118.010 discussed above, particular statutes may remain unchanged while their operation is altered by changes to other statutes in a statutory system. The context in which the word "payable" finds itself is one in which, in many cases, there will be an Oregon liability even though there is not a federal liability. That fact requires that the date "payable" be the date described in IRC section 6075, namely, nine months after the date of death. This construction of ORS 118.100 permits it to coexist with the 2003 amendments without rendering either illogical or inoperative.
The statutory development of ORS 118.100 and a related provision in ORS 118.220 also supports this analysis.
Nor is there any indication that in leaving ORS 118.100 and ORS 118.220 unchanged, the 2003 legislature intended to cancel out or substantively affect the actions it was otherwise taking in separating Oregon liability from federal liability.
The final argument of taxpayer is based on taxpayer's view that the Federal Closing Document fixed the amount of state death tax credit at zero. Taxpayer then repeats its premise that ORS 118.010 fixes the Oregon inheritance tax liability at an amount equal to the state death tax credit allowed. Taxpayer's conclusion is that the amount of Oregon tax must therefore be zero and any result other in this court would constitute a violation of IRC section 7121, which states:
If, as established above, ORS 118.010 cannot be read as incorporating the amount of state death tax credit actually allowed in federal calculations, then actions of the auditor can have no relevance to the Oregon tax liability calculation. Nor can a federal statute authorizing those actions, insofar as the federal agent issued a closing agreement, have any relevance.
Further, the action of the federal agent did not, in any way, purport to be a determination of the amount of the maximum death tax credit "allowable" under IRC section 2011, as it existed on December 31, 2000. It is to this source of law that the Oregon legislature has fastened chapter 118. The action of the agent was based on the IRC as it had been amended and was in effect as of December 31, 2002.
Now, therefore,
IT IS ORDERED that the motion of Plaintiff is denied and the cross-motion of Defendant is granted.
ORS 118.009 provides: "[t]he Legislative Assembly finds that significant recent changes have been made in federal estate tax laws. The Legislative Assembly further finds that an unintended consequence of these federal law changes has been to create difficulties in the administration and enforcement of the Oregon inheritance tax. The Legislative Assembly declares that ORS 118.007 and section 3, chapter 806, Oregon Laws 2003, and the amendments to ORS 118.010, 118.160 and 118.230 by sections 6, 7 and 8, chapter 806, Oregon Laws 2003, are needed to ensure that the level of tax compliance with the Oregon inheritance tax is at the level that Oregonians expect from a fair and balanced tax system."