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
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