S51013 U.S. Bancorp v. Dept. of Rev.

SUPREME COURT CASES

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State: Oregon

Docket No: OTC4531;SCS51013

Case Date: 12/16/2004

FILED: December 16, 2004

IN THE SUPREME COURT OF THE STATE OF OREGON

U.S. BANCORP and SUBSIDIARIES,

Respondent,

DEPARTMENT OF REVENUE,

Appellant.

(OTC 4531; SC S51013)

En Banc

On review from the Oregon Tax Court.*

Carl N. Byers, Senior Judge (summary judgment); Henry C. Breithaupt, Judge (trial).

Argued and submitted September 8, 2004.

Jas. Jeffrey Adams, Assistant Attorney General, Salem, argued the cause for appellant. With him on the briefs were Hardy Myers, Attorney General, Mary H. Williams, Solicitor General, and Robert B. Rocklin, Assistant Attorney General.

Bruce L. Campbell, of Miller Nash LLP, Portland, argued the cause for respondent. With him on the briefs was Ryan R. Nisle.

CARSON, C.J.

The decision of the Tax Court is reversed in part and affirmed in part, and the case is remanded to the Tax Court for further proceedings.

*15 OTR 375 (2001).

CARSON, C.J.

This dispute concerns the Oregon corporate excise tax liability of U.S. Bancorp (taxpayer) for tax years 1988 through 1992. (1) The primary question before us is whether, during the tax years at issue, the Department of Revenue (department) had authority to require taxpayer to depart from the rule prescribing the standard apportionment formula for financial organizations governed under ORS 314.280, (2) because that formula failed to provide an accurate reflection of taxpayer's net income from business done within Oregon.

The department assessed additional taxes against taxpayer for tax years 1988 through 1992 based upon its determination that inclusion of taxpayer's intangible personal property resulted in a more accurate apportionment of taxpayer's income to Oregon under ORS 314.280. Taxpayer appealed from those notices of deficiency to the Oregon Tax Court.

In the Tax Court, taxpayer first argued that ORS 314.280, and the rules that the department had promulgated pursuant to that statute, precluded the department from including taxpayer's intangible personal property in the apportionment computations for the tax years at issue. As relevant here, taxpayer also argued that the department's notices of deficiency for tax years 1988 and 1989 were time-barred because, according to taxpayer, the department had received notice of corrections to taxpayer's federal tax liability more than two years before the department had entered into an agreement with taxpayer that had extended the limitations period for those years. See ORS 314.410(3) (providing two-year period of limitations from notice of federal correction for department to issue notice of deficiency); ORS 314.410(6) (providing that parties may enter extension agreement before expiration of any period of time prescribed for giving of notice of deficiency); see also generally ORS 314.410(1) (providing that department generally has three years after return is filed to issue notice of deficiency). The department answered and filed a counterclaim, asserting an additional deficiency relating to the receipts factor of the apportionment formula.

On taxpayer's motion for partial summary judgment, the Tax Court concluded that the department lacked authority to include taxpayer's intangible personal property in the apportionment formula for tax years 1988 through 1992. U.S. Bancorp v. Dept. of Rev.,, 15 OTR 375 (2001). The case proceeded to trial on taxpayer's statute of limitations claim and the department's counterclaim. At trial, taxpayer conceded the department's counterclaim except as to its timeliness. As to taxpayer's statute of limitations claim, the Tax Court held that taxpayer bore the burden of proving that the parties' extension agreement was defective because the department had received notice of corrections to taxpayer's federal tax liability more than two years before the parties had executed that agreement. Because taxpayer had failed to prove that fact, the Tax Court concluded that the extension agreement was valid and, consequently, that the department's notices of deficiency for 1988 and 1989 were timely.

The department appealed to this court, assigning error to the Tax Court's grant of taxpayer's motion for partial summary judgment. In a cross-assignment of error, taxpayer contends that the Tax Court erred by ruling that, as to taxpayer's statute of limitations claim, taxpayer bore the burden of proving when the department first received notice of corrections to taxpayer's federal tax liability for 1988 and 1989.

We review for errors of law, ORS 305.445, and discuss both the department's assignment of error and taxpayer's cross-assignment of error separately below. For the reasons that follow, we conclude that the Tax Court erred by holding that the department had lacked authority to include taxpayer's intangible personal property in the apportionment formula used to allocate taxpayer's income to Oregon under ORS 314.280 for tax years 1988 through 1992. We further conclude that the Tax Court correctly determined that taxpayer bore the burden of proving that the parties' extension agreement was defective because the department had received notice of corrections to taxpayer's federal tax liability more than two years before the parties had executed that agreement. Based upon those conclusions, we reverse the decision of the Tax Court in part and affirm it in part, and remand the case to that court for further proceedings.

DEPARTMENT'S ASSIGNMENT OF ERROR

To provide context for the facts and the parties' arguments respecting the department's authority to require taxpayer to utilize an alternative apportionment formula, we first provide background as to the statutory and regulatory framework that underlies this dispute. Taxpayer is a unitary financial organization that does business both in Oregon and in other states. See ORS 314.610(4) (defining "financial organization" for purposes of ORS 314.605 to 314.675). As a financial organization, it is excluded from the coverage of the Uniform Division of Income for Tax Purposes Act (UDITPA), (3) and, instead, its net income for purposes of the Oregon corporate excise tax is determined under ORS 314.280. See ORS 314.615 (excluding financial organizations with taxable income from both within and outside Oregon from UDITPA). During 1988 through 1992, the tax years at issue in this dispute, ORS 314.280 provided, in part:

"(1) If a taxpayer has income from business activity as a financial organization * * * which is taxable both within and without this state * * * the determination of net income shall be based upon the business activity within the state, and the department shall have power to permit or require either the segregated method of reporting or the apportionment method of reporting, under rules and regulations adopted by the department, so as fairly and accurately to reflect the net income of the business done within the state.

"(2) The provisions of subsection (1) of this section dealing with the apportionment of income earned from sources both within and without the State of Oregon are designed to allocate to the State of Oregon on a fair and equitable basis a proportion of such income earned from sources both within and without the state. Any taxpayer may submit an alternative basis of apportionment with respect to the income of the taxpayer and explain that basis in full in the return of the taxpayer. If approved by the department that method will be accepted as the basis of allocation."

Pursuant to the authority that ORS 314.280 confers upon it, the department has adopted administrative rules governing methods of income reporting for taxpayers governed under that statute. For the tax years at issue, as is also true now, many of the department's rules promulgated under ORS 314.280 incorporated provisions of UDITPA or rules that the department had adopted to implement UDITPA. As pertinent here, OAR 150-314.280-(C) adopts by reference the UDITPA requirement that a taxpayer utilize the apportionment method of income allocation when the taxpayer's business activities in Oregon are part of a unitary business that is carried on both within and outside the state. OAR 150-314.280-(C) (incorporating OAR 150-314.615-(D)); OAR 150-314.615-(D) (requiring apportionment method in such circumstances). During the relevant tax years, the department also required financial organizations to apply a modified version of the UDITPA three-factor apportionment formula. See generally Twentieth Century-Fox v. Dept. of Rev., 299 Or 220, 224, 700 P2d 1035 (1985) (describing operation of UDITPA three-factor apportionment formula). OAR 150-314.280-(E) (1987) provided, in part:

"After deducting the nonapportionable income, the remainder shall ordinarily be apportioned to this state by giving equal weight to three factors.

"For a financial organization, the three factors shall be payroll, property and gross revenue.

"'Property' means real and tangible personal property used in the business." (4)

(Emphasis added.) See also OAR 150-314.280-(F) (1987) (incorporating UDIPTA methodology for determining "property factor" set out in ORS 314.655 and its related rules).

In addition to those provisions, during the relevant tax years, the department also imported restrictions from UDITPA that narrowly limited the department's authority to permit or require a taxpayer to deviate from standard methods of income reporting that the department had prescribed by rule under ORS 314.280. Under the rule adopting those limits, the department possessed authority to permit or require a taxpayer to utilize an alternative income reporting method only if the applicable standard method did not represent fairly the taxpayer's "business activity" in Oregon and resulted in a violation of the taxpayer's state or federal constitutional rights. Specifically, OAR 150-314.280-(M) (1987) provided, in part:

"If the allocation and apportionment provisions of OAR 150-314.280-(A) to 150-314.280-(L) do not fairly represent the extent of the taxpayer's business activity in this state and result in the violation of the taxpayer's rights under the Constitution of this state or of the United States, the taxpayer may petition for and the department may permit, or the department may require, in respect to all or any part of the taxpayer's business activity:

"(1) Separate accounting;

"(2) The exclusion of any one or more of the factors;

"(3) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or

"(4) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income."

(Emphasis added.) See also ORS 314.670 (1987) (similarly restricting variation from standard apportionment provisions of UDITPA).

In 1995, this court issued its decision in Fisher Broadcasting, Inc. v. Dept. of Rev., 321 Or 341, 898 P2d 1333 (1995). In that case, the taxpayer had challenged the validity of OAR 150-314.280-(I) (1983) (5) –- the predecessor rule to OAR 150-314.280-(M) (1987) -- which similarly incorporated restrictions from UDITPA limiting the department's authority to permit or require deviation from the department's rules prescribing standard methods of income reporting under ORS 314.280. After reviewing the text and context of ORS 314.280, this court agreed with the taxpayer that the restriction against alternative reporting methods set out in OAR 150-314.280-(I) (1983) was beyond the scope of the department's rulemaking authority under ORS 314.280. In reaching that conclusion, the court first observed that the legislature expressly had excluded certain taxpayers from the coverage of UDITPA and, in doing so, had demonstrated an intent to preserve for those taxpayers "the advantages of individual judgment and flexibility" that had existed under ORS 314.280. Id. at 353-55. Because the department lacked authority to override that legislative choice, the court concluded that the department was not authorized to subject taxpayers covered under ORS 314.280 to the same restrictions against utilizing alternative methods of income reporting that existed for taxpayers governed by UDITPA. Id. at 355. The court went on to observe that, even if the department had been authorized to limit its power in such a way, the UDITPA standard incorporated under OAR 150-314.280-(I) (1983) was incompatible with the text of ORS 314.280. Specifically, the court pointed out that, although ORS 314.280 directs the department to adopt reporting methods that "'fairly and accurately reflect the net income of the [taxpayer's] business done within the state[,]'" the UDITPA standard incorporated under OAR 150-314.280-(I) (1983) authorized the department to permit or require alternative reporting methods only when the standard method did not "'fairly represent the extent of the taxpayer's business activity in this state.'" Id. at 355 (quoting ORS 314.280 and OAR 150-314.670 (1987)) (emphasis in Fisher Broadcasting). Thus, the court determined that OAR 150-314.280-(I) (1983) also was invalid because, contrary to the legislative mandate of ORS 314.280, that rule did not allow a taxpayer to challenge the application of a standard income reporting method upon the ground that it did not result in an accurate reflection of the taxpayer's net income from business done within the state. Id. at 359.

In 1995, in response to this court's decision in Fisher Broadcasting, the department amended the rule governing its authority to permit or require deviation from the department's rules prescribing methods of income reporting under ORS 314.280. The department's new rule provided that the department had authority to permit or require an alternative reporting method –- including the use of an additional factor in an apportionment formula -- whenever a standard method did not "fairly and accurately" reflect the taxpayer's net income from business done within Oregon. OAR 150-314.280-(M) (1995) provided, in part:

"(1) For taxpayers that are taxable both within and without Oregon, the provisions of ORS 314.280 will ordinarily require apportionment to arrive at a fair and accurate measure of net income from business activity in Oregon. If the taxpayer can show that no unitary relationship exists between its business activities within Oregon and those activities outside Oregon, then taxpayer may use separate accounting.

"(2) If the allocation and apportionment provisions of OAR 150-314.280-(A) to 150-314.280-(N) do not fairly and accurately reflect the net income of the business done within Oregon, based on the taxpayer's business activity within Oregon, the department may require or the taxpayer may request an alternative method of apportionment and the department may approve that method of apportioning all or any part of the net income from the taxpayer's business activity within Oregon:

"* * * * *

"(4) Examples of alternative methods of apportionment include:

"(a) The exclusion of any one or more of the factors;

"(b) The inclusion of one or more additional factors which will fairly and accurately reflect the taxpayer's net income from business activity in Oregon; or

"(c) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income."

(Emphasis added.)

With that background in mind, we turn to the facts of this case. Taxpayer filed its Oregon corporate excise tax returns for the years 1988 through 1992 by applying the standard three-factor apportionment formula that the department had prescribed for financial organizations at that time. See __ Or at __ (slip op at 6-7) (setting out OAR 150-314.280-(E) (1987)). Consistently with the definition of the "property" factor of that formula, taxpayer did not include intangible personal property in its apportionment computations. See OAR 150-314.280-(E) (1987) (defining "property" factor as "real and tangible personal property used in the business").

In 1998, the department audited taxpayer's tax returns for the years at issue and determined that inclusion of taxpayer's intangible personal property in the apportionment formula resulted in a more accurate allocation of taxpayer's net income to Oregon. Applying the 1995 version of OAR 150-314.280-(M), set out above, the department included taxpayer's intangible personal property in the apportionment calculation, and, based upon that inclusion, it issued notices of deficiency against taxpayer for the five years at issue.

Taxpayer appealed from those notices of deficiency to the Oregon Tax Court. On taxpayer's motion for partial summary judgment, the Tax Court concluded that the department's rules precluded the department from including taxpayer's intangible personal property in the apportionment formula for the tax years at issue. U.S. Bancorp, 15 OTR at 379-80. The Tax Court also rejected the department's assertion that OAR 150-314.280-(M) (1995) applied to the disputed tax years, concluding that "that rule was not expressly made retroactive and therefore will not be applied by the court to the years in question." Id. at 380. Based upon those conclusions, the Tax Court granted summary judgment in favor of taxpayer and awarded taxpayer refunds for the years at issue.

As noted above, the department appealed the Tax Court's grant of taxpayer's summary judgment motion, asserting that the Tax Court erred in concluding that the department had lacked authority to include taxpayer's intangible personal property in the apportionment formula. Before this court, the parties' arguments focus upon the applicability of OAR 150-314.280-(M) (1995) to the years in question. Both parties agree that, if OAR 150-314.280-(M) (1995) governs this dispute, then the department had authority under that rule to include taxpayer's intangible personal property in the apportionment calculation. (6) Taxpayer, however, argues that applying OAR 150-314.280-(M) (1995) to the tax years at issue would amount to a "retroactive" application of that rule, and, according to taxpayer, the department did not manifest an intent for such an application in promulgating OAR 150-314.280-(M) (1995). (7) Taxpayer further contends that, if this court were to construe OAR 150-314.280-(M) (1995) as applicable to the tax years at issue, then that application would violate taxpayer's substantive due process rights under the federal constitution. We address each of taxpayer's arguments in turn below.

We first consider whether applying OAR 150-314.280-(M) (1995) to tax years 1988 through 1992 properly is characterized as a "retroactive" application of that rule. The department contends that, because the tax years at issue were open to examination, the application of OAR 150-314.280-(M) (1995) to those years would not constitute a "retroactive" application of that rule. As we understand its argument, the department appears to suggest that the application of a later-promulgated rule cannot be characterized as a "retroactive" application of that rule if the department retains authority to assess deficiencies against a taxpayer. We disagree with that assertion.

This court previously has explained that, as a general matter, a retroactive legislative action is one that affects existing legal rights or obligations arising out of past transactions or occurrences. Fromme v. Fred Meyer, Inc., 306 Or 558, 561-62, 761 P2d 515 (1988); see also Whipple v. Houser, 291 Or 475, 488-89, 632 P2d 782 (1981) (Linde, J., concurring) ("'Retroactivity' itself is a deceptively simple word for a complex set of problems. In real time, all laws can operate only prospectively, prescribing legal consequences after their enactment; they cannot change the past. On the other hand, all new laws operate upon a state of affairs formed to some extent by past events."). In this case, OAR 150-314.280-(M) (1995) did nothing to alter taxpayer's existing obligation under ORS 314.280 to allocate its net income to Oregon based upon business done within this state. Nevertheless, in light of the restriction set out in OAR 150-314.280-(M) (1987), we agree with taxpayer that it was entitled to presume that its maximum tax liability for the years at issue would be based upon the three-factor apportionment formula set out in OAR 150-314.280-(E) (1987). Because, under the circumstances here, OAR 150-314.280-(M) (1995) would authorize the department to increase that liability based upon the inclusion of an additional apportionment factor, we conclude that the application of that rule to taxpayer for the years at issue would impose new obligations with respect to past transactions and, therefore, properly is characterized as a "retroactive" application of that rule.

That conclusion, however, does not end our inquiry. As this court repeatedly has observed, retroactive application of a rule is not necessarily impermissible. See Delehant v. Board on Police Standards, 317 Or 273, 278, 855 P2d 1088 (1993) (so stating). Rather, in deciding whether to apply a rule retroactively, we must discern the intent of the promulgating agency. Id.; cf. Whipple, 291 Or at 480 ("[I]n determining whether to give retroactive effect to a legislative provision, it is not the proper function of this court to make its own policy judgments, but its duty instead is to attempt to 'discern and declare' the intent of the legislature."). To do so, we first consider the text and context of the rule at issue. See generally Abu-Adas v. Employment Dept., 325 Or 480, 485, 940 P2d 1219 (1997) (in interpreting administrative rule, court first considers text and context of rule to discern intent of enacting body).

The text of OAR 150-314.280-(M) (1995) is silent as to whether the department intended that rule to apply retrospectively or, instead, to only tax years subsequent to its enactment. As we explain below, however, the context of that rule makes clear that the department intended OAR 150-314.280-(M) (1995) to operate retrospectively.

We first observe that the circumstances surrounding the promulgation of OAR 150-314.280-(M) (1995) suggest that the department intended that rule to apply retrospectively. As discussed previously, the department adopted OAR 150-314.280-(M) (1995) in direct response to this court's decision in Fisher Broadcasting. It is of no consequence whether taxpayer is correct in insisting that OAR 150-314.280-(M) (1995) provides the department with greater flexibility than the decision in Fisher Broadcasting mandates. Rather, the circumstances surrounding the department's promulgation of OAR 150-314.280-(M) (1995) offer insight into the department's intent, because those circumstances illustrate that the department adopted that rule in response to a judicial decision that, by declaring its previous rule defective, had left in a gap in the department's existing regulatory framework under ORS 314.280.

We do not suggest that those circumstances, without more, establish that the department intended OAR 150-314.280-(M) (1995) to operate retrospectively. However, in this case, other rules in existence at the time that the department promulgated OAR 150-314.280-(M) (1995) confirm that view. As the department points out, OAR 150-305.100-(B) provides that "[a]dministrative rules adopted by the department, unless specified otherwise by statute or by rule, shall be applicable to all periods open to examination." Thus, at the time that it adopted OAR 150-314.280-(M) (1995), the department had expressed its intent to apply all tax regulations to all periods open to examination unless a particular statute or rule provides a contrary instruction. Because OAR 150-314.280-(M) (1995) does not do so, OAR 150-305.100-(B) directs us to apply that rule to the tax years in question.

Taxpayer seeks to avoid that result by arguing that OAR 150-305.100-(B) cannot inform our determination of the department's intent in promulgating OAR 150-314.280-(M) (1995) for two reasons. First, taxpayer asserts that the department intended OAR 150-305.100-(B) to apply to only new rules, rather than also to amendments to existing rules. Taxpayer, however, cites no authority to support that proposition, and we do not perceive such a distinction in the wording of OAR 150-305.100-(B).

Taxpayer also argues that, because the department promulgated OAR 150-305.100-(B) nine years before it promulgated OAR 150-314.280-(M) (1995), it "seems to defy logic" that OAR 150-305.100-(B) is relevant to determining the department's intent respecting the retrospective application of that later-promulgated rule. We again disagree and, indeed, consider OAR 150-305.100-(B) relevant precisely because it provided a presumption of retroactive application to all periods open to examination at that time when the department promulgated OAR 150-314.280-(M) (1995). With such a presumption in place under the existing regulatory framework, the department had no need to express an intent respecting the retroactive operation of OAR 150-314.280-(M) (1995) unless it intended that rule to operate differently. Thus, we must infer from the lack of an instruction to the contrary that the department intended OAR 150-314.280-(M) (1995) to conform to the presumption set out in OAR 150-305.100-(B) and to apply to all periods open to examination.

In anticipation of that conclusion, taxpayer next argues that, even if the department intended OAR 150-314.280-(M) (1995) to operate retrospectively, that rule cannot apply to the tax years in question because such an application would violate taxpayer's rights under the Due Process Clause of the Fourteenth Amendment to the United States Constitution. (8) To support that proposition, taxpayer relies upon the United States Supreme Court decision in United States v. Carlton, 512 US 26, 114 S Ct 2018, 129 L Ed 2d 22 (1994). In that case, the taxpayer had made a securities transaction to take advantage of an estate tax deduction that existed under the Internal Revenue Code at that time. Almost a year later, Congress amended the tax code to eliminate that deduction retrospectively and, as a result of that amendment, the taxpayer no longer qualified for the deduction. Id. at 28-30.

Before the Supreme Court, the taxpayer challenged the validity of the retroactive tax legislation upon substantive due process grounds. In considering the taxpayer's challenge, the Supreme Court clarified that retroactive economic legislation, including retroactive tax legislation, satisfies due process requirements so long as "the retroactive application of a statute is supported by a legitimate legislative purpose furthered by rational means[.]" Id. at 30-31 (quoting Pension Benefit Guaranty Corporation v. R. A. Gray & Co., 467 US 717, 729-30, 104 S Ct 2709, 81 L Ed 2d 601 (1984)) (internal quotation marks omitted). Applying that standard, the Court upheld the retroactive legislation against the taxpayer's due process challenge. In explaining that conclusion, the Court relied upon the facts that Congress had acted to cure a mistake in the original legislation and that "Congress had acted promptly and established only a modest period of retroactivity." Carlton, 512 US at 32-33.

In this case, we do not understand taxpayer to argue that the department's rule was enacted for an illegitimate purpose. Rather, as we understand taxpayer's challenge, taxpayer contends that application of OAR 150-314.280-(M) (1995) to the tax years in question would exceed the scope of permissible retroactivity. The Supreme Court, however, has upheld the retroactive application of economic legislative actions with comparable time periods. See, e.g., General Motors Corp. v. Romein, 503 US 181, 112 S Ct 1105, 117 L Ed 2d 328 (1992) (six years). Based upon that precedent, together with the fact that the rule at issue applied to only tax years still open to examination, we conclude that application of OAR 150-314.280-(M) (1995) to the tax years at issue would not violate the requirements of due process. Thus, for the reasons stated above, we conclude that the Tax Court erred by holding that the department lacked authority to include taxpayer's intangible personal property in the apportionment formula used to allocate taxpayer's income to Oregon under ORS 314.280 for tax years 1988 through 1992.

TAXPAYER'S CROSS-ASSIGNMENT OF ERROR

As previously described, __ Or at __ (slip op at 1-3), after the Tax Court granted taxpayer's summary judgment motion respecting the inclusion of taxpayer's intangible personal property in the apportionment formula, the case proceeded to trial on taxpayer's statute of limitations claim and the department's counterclaim relating to the receipts factor of the apportionment formula. At trial, taxpayer conceded the department's counterclaim on the merits but, as relevant here, asserted that that claim was time-barred for tax years 1988 and 1989. Specifically, taxpayer challenged the validity of the parties' agreement extending the limitations period for 1988 and 1989 upon the ground that the department had notice of corrections to taxpayer's federal tax liability more than two years before that extension agreement had been executed. See ORS 314.410(3) (providing two-year period of limitations from notice of federal correction for department to issue notice of deficiency); ORS 314.410(6) (providing that parties may enter extension agreement before expiration of any period of time prescribed for giving of notice of deficiency). After concluding that the evidence as to that question was in "a position of equipoise[,]" the Tax Court rejected taxpayer's argument, because it determined that taxpayer bore the burden of persuasion under ORS 305.427 (9) and that taxpayer had failed to satisfy that burden.

In a cross-assignment of error, taxpayer contends that the Tax Court erred by holding that taxpayer bore the burden of proving that the parties' extension agreement was invalid because the department had received notice of federal corrections to the 1988 and 1989 tax years more than two years before the parties' agreement had been executed. Based upon that argument, taxpayer asserts that, if this court concludes that the department had authority to include taxpayer's intangible personal property in the apportionment formula, then this court nevertheless should affirm that part of the judgment awarding taxpayer refunds and interest for the 1988 and 1989 tax years on statute of limitations grounds.

Before turning to the merits, we first address the department's contention that we are precluded from considering taxpayer's statute of limitations argument because taxpayer failed to raise that argument by way of a cross-appeal. This court previously has explained that a respondent who seeks only to sustain a judgment is not required to cross-appeal to assign error to a ruling of the trial court. Artman v. Ray, 263 Or 529, 533, 501 P2d 63, 502 P2d 1376 (1972). In this case, taxpayer expressly raised its statute of limitations argument only as an alternative ground for this court to affirm a part of the Tax Court judgment and, in doing so, waived any claim to additional relief that it might have been entitled to receive if this court were to rule in its favor on that issue. (10) Thus, taxpayer's proffered statute of limitations argument invokes the "right for the wrong reason" principle as a ground for affirming the Tax Court judgment and, as such, properly may be considered in the absence of a cross-appeal. See generally Outdoor Media Dimensions Inc. v. State of Oregon, 331 Or 634, 659-60, 20 P3d 180 (2001) (discussing "right for the wrong reason" principle for affirming trial court's ruling).

Having explained why it is properly before us, we now consider the merits of taxpayer's statute of limitations argument. Taxpayer does not dispute that the department's notices of deficiency for tax years 1988 and 1989 were timely under the parties' extension agreement. Instead, taxpayer challenges the validity of that agreement and, specifically, the Tax Court's determination that it bore the burden of proving that that agreement was defective. In making that challenge, taxpayer acknowledges that ORS 305.427 places the burden of persuasion upon the party seeking affirmative relief in Tax Court proceedings. See ORS 305.427 (so providing). It argues, however, that it is inequitable to apply that rule to its statute of limitations claim because, according to taxpayer, the department's record-keeping practices make it impossible for taxpayer to determine whether the Internal Revenue Service (IRS) had notified the department of corrections to taxpayer's federal tax liability more than two years before the parties had executed their agreement. For the reasons explained below, we reject taxpayer's argument.

As noted above, ORS 305.427 places the burden of persuasion upon the party seeking affirmative relief in Tax Court proceedings. We perceive no inequity from the application of that rule here because, as the Tax Court observed, ORS 314.380(2) (1995) (11) required taxpayer to notify the department of any corrections to taxpayer's federal tax liability at the time when those federal corrections were proposed. Although the IRS had issued a correction to taxpayer's 1988 and 1989 federal taxable income in June 1995, taxpayer does not dispute the Tax Court's finding that the parties had executed the extension agreement within two years after taxpayer first notified the department of those federal corrections in February 1997. We agree with the Tax Court that "it is not equitable for taxpayer to plead for certainty but fail to take acts, required of it under ORS 314.380, which would produce such certainty and satisfy a statutory obligation." The Tax Court correctly determined that taxpayer had the burden to prove that the parties' extension agreement was defective and that taxpayer had failed to do so.

The decision of the Tax Court is reversed in part and affirmed in part, and the case is remanded to the Tax Court for further proceedings.

1. The parties have engaged in extensive litigation relating to taxpayer's Oregon corporate excise tax liability for the tax years 1984 through 1992. See, e.g., U.S. Bancorp v. Dept. of Rev., 15 OTR 13 (1999); US Bancorp v. Dept. of Rev., 13 OTR 84 (1994). This appeal concerns only a part of that litigation relating to tax years 1988 through 1992. Our discussion of the factual and procedural history of this case is limited to the history that is relevant to the issues before us.

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2. The legislature adopted the version of ORS 314.280 in effect during the relevant tax years in 1965. Or Laws 1965, ch 152, § 22. The text of that statute is set out at __ Or at __ (slip op at 5). The legislature did not amend ORS 314.280 again until 2001. Or Laws 2001, ch 933, § 1. Neither party contends, nor do we conclude, that the 2001 version of ORS 314.280 governs this dispute. Thus, unless noted otherwise, all references to ORS 314.280 in this opinion refer to the 1965 version of that statute.

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3. UDITPA, ORS 314.605 to 314.675, is a uniform statute that the legislature adopted in 1965. Or Laws 1965, ch 152, §§ 20, 21. For a discussion of the goals of UDITPA, see generally Twentieth Century-Fox Film v. Dept. of Rev., 299 Or 220, 226-28, 700 P2d 1035 (1985).

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4. The department amended OAR 150-314.280-(E) in 1990 to add paragraph numbering, but otherwise did not alter the text of that rule during the tax years at issue. In 1993, the department amended OAR 150-314.280-(E) to provide that financial organizations must apply the apportionment formula set out in OAR 150-314.280-(N). Both parties, however, recognize that OAR 150-314.280-(N) is inapplicable to this dispute because that rule expressly provides that it applies to only tax years beginning on or after January 1, 1993. See OAR 150-314.280-(N)(1) (so providing).

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5. OAR 150-314.280-(I) was renumbered to OAR 150-314.280-(M) in 1987. OAR 150-314.280-(I) (1983) provided:

"The provisions of OAR 150-314.670-(A) are by this reference incorporated herein and made a part of this OAR 150-314.280-(I)."

OAR 150-314.670-(A) (1983), promulgated under the authority of UDITPA, provided, in part:

"ORS 314.670 provides that if the allocation and apportionment provisions of ORS 314.610 to 314.655 do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for, or the Department may require, in respect to all or any part of the taxpayer's business activity, if reasonable:

"(1) Separate accounting;

"(2) The exclusion of any one or more of the factors;

"(3) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or

"(4) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.

"ORS 314.670 permits a departure from the allocation and apportionment provisions of [UDITPA] only in limited and specific cases. ORS 314.670 may be invoked only where unusual fact situations (which ordinarily will be unique and nonrecurring) produce incongruous results under the apportionment and allocation provisions contained in [the UDITPA statutes]."

(Emphasis added.)

In 1984, the legislature amended ORS 314.670 to further restrict deviation from standard methods of income reporting under UDITPA by allowing alternative methods only when the presumptive methods would "result in the violation of the taxpayer's rights under the Constitution of this state or of the United States[.]" Or Laws 1984, ch 1, § 17. In 1999, the legislature removed that additional criterion from ORS 314.670. See Or Laws 1999, ch 143, § 9 (eliminating requirement that constitutional violation be established before alternative reporting methods may be utilized under UDITPA).

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6. For purposes of its summary judgment motion, taxpayer does not dispute the department's averment that inclusion of taxpayer's intangible personal property results in a more accurate apportionment of its net income to Oregon.

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7. Before this court, taxpayer also argues that OAR 150-314.280-(M) (1995) is invalid because it exceeds the department's rulemaking authority under ORS 314.280. Before the Tax Court, however, taxpayer emphasized that it did not question the department's authority to promulgate OAR 150-314.280-(M) (1995), specifically asserting that "ORS 314.280(1) clearly gives the Department the authority to promulgate such a rule." As a result of that position in the Tax Court, we decline to exercise our discretion to address taxpayer's challenge to the department's authority to promulgate OAR 150-314.280-(M) (1995). See Outdoor Media Dimensions Inc. v. State of Oregon, 331 Or 634, 658-60, 20 P3d 180 (2001) (discussing "right for the wrong reason" doctrine).

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8. The Fourteenth Amendment provides, in part:

"No State shall make or enforce any law which shall abridge the privileges and immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law * * *."

(Emphasis added.)

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9. ORS 305.427 provides:

"In all proceedings before the judge or a magistrate of the tax court and upon appeal therefrom, a preponderance of the evidence shall suffice to sustain the burden of proof. The burden of proof shall fall upon the party seeking affirmative relief and the burden of going forward with the evidence shall shift as in other civil litigation."

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10. The judgment from the Tax Court provides that, although taxpayer stipulated to judgment against it on the department's counterclaim without reservation of a right of appeal, the parties' stipulation provides that, "if [taxpayer] prevail[s] on an appeal of [its] statute of limitations claims for tax years 1988 [and] 1989 * * *, then the case will be remanded to the Oregon Tax Court for a corrected judgment that, in addition to other possible relief, denies the [department] its counterclaim for 1988 [and] 1989 * * *." By electing not to cross-appeal, taxpayer has waived any claim to relief as to the department's counterclaim, even if it were to prevail in its statute of limitations claim, because such relief would require a modification of the Tax Court judgment. See Booras v. Uyeda, 295 Or 181, 189, 666 P2d 791 (1983) (failure to file cross-appeal precludes appellate court from considering argument as basis to modify judgment).

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11. ORS 314.380(2) (1995) provided, in part:

"If the amount of a taxpayer's federal taxable income reported on a federal income tax return for any taxable year is changed or corrected by the United States Internal Revenue Service or other competent authority, resulting in a change in the taxpayer's net income which is subject to tax by this state, the taxpayer shall report such change or correction in federal taxable income to the department."

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Filed: June 30, 2011 IN THE SUPREME COURT OF THE STATE OF OREGON In Re: Complaint as to the Conduct of J. MARK LAWRENCE, Accused. (OSB 08-115; SC S058778) En Banc On review of the decision of a trial panel of the Disciplinary Board. Argued and submitted May 2, 2011. Paula Lawrence, McMinnville, argued and cause and filed the briefs for accused. Stacy Hankin, Assistant Disciplinary Counsel, Tigard, argued the cause and filed the brief for the Oregon State Bar. PER CURIAM The complaint is dismissed. PER CURIAM The issue in this lawyer disciplinary proceeding is whether the accused, by releasing a partial transcript of a juvenile hearing to the press, violated Rule of Professional Conduct (RPC) 8.4(a)(4), which prohibits a lawyer from engaging in conduct that is prejudicial to the administration of justice. A trial panel found the accused guilty of violating RPC 8.4(a)(4) and suspended him for 60 days. We review the decision of the trial panel de novo. ORS 9.536(2); BR 10.6. Because we conclude that

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the Bar failed to prove by clear and convincing evidence that the accused's conduct caused prejudice to the administration of justice, we dismiss the complaint. The facts are straightforward and largely undisputed. In 2007, the accused represented a juvenile male who, along with another male friend, allegedly had touched or swatted several female classmates on the buttocks and had danced in front of the females in a lascivious manner. The incident occurred at the students' middle school. After being informed of the youths' behavior, the vice principal and a police officer interviewed the victims. Based on those interviews, the accused's client and his friend were arrested by a McMinnville Police Officer on February 22, 2007. On February 23, the Yamhill County Juvenile Department filed a delinquency petition alleging that the accused's client had committed acts that, if done by an adult, would have constituted five counts of first-degree sexual abuse and five counts of third-degree sexual abuse. At an initial detention hearing that same day, the court ordered the youths to remain in custody. The events giving rise to this disciplinary action arose out of a second detention hearing held on February 27, 2007, before Judge John Collins. The accused called two of the victims to testify on behalf of his client. The female victims testified that the youths were their friends and that they did not find the youths to be threatening in any way. Regarding the alleged sexual abuse, the female victims testified that the touching or swatting was not sexual in nature but rather was mere horseplay. The victims also testified that they felt pressured by the vice principal and the police officer to make the touching sound hurtful and uncomfortable when it was not. By the second detention hearing, the case was receiving substantial media 2

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attention. Judge Collins allowed the press to attend the detention hearing, but prohibited the press from recording the proceedings. The parties dispute whether the judge prohibited only video recordings or also prohibited audio recordings.1 A number of newspaper and television stories reported the events and testimony at the hearing. After the hearing, the accused obtained a copy of the official audio recording of the hearing and had a partial transcript prepared that contained the victims' testimony. In March 2007, a reporter contacted the accused about the February 27 hearing. The reporter, who was not present at the hearing, expressed disbelief that the female victims had felt pressured by the vice principal and the police officer to make the youths' actions seem sexual. The accused offered to give the reporter a copy of the partial transcript when it was available. The accused believed that it would have been improper to give the reporter the official audio recording of the hearing but thought that the transcript could be released. The accused contacted Deborah Markham, the deputy district attorney handling the case, to see if she objected to releasing the transcript. Markham told the accused that she believed that the court would have to consent. The accused then released the transcript to the reporter without obtaining permission from Judge Collins. Deputy District Attorney Deborah Markham testified that Judge Collins prohibited video recording. Judge Collins testified that he might have prohibited the press from recording the detention hearing, but that he did not remember whether he did so or not. He did remember allowing video recording at a later hearing in the proceeding. The accused testified that Judge Collins prohibited video recording but that he could not remember if the judge prohibited audio recording.
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When Judge Collins learned that the transcript had been released -following news reports that cited the transcript -- he called a meeting with Markham and the accused and told them to release no other transcripts. The testimony from the accused, Markham, and Judge Collins differs regarding that meeting. The accused described the meeting as relaxed and said that Judge Collins had stated that the release of the transcript was permissible. Markham testified that Judge Collins was "very concerned" about the release of the transcript and that Judge Collins said that the accused's disclosure violated the law. Judge Collins testified that the accused did not get his consent to release the transcript, but that he was not sure if the accused needed to do so under the circumstances of the case, particularly given the presence of the press at the hearing. In Judge Collins's description, the meeting was not contentious; although he requested that the parties refrain from releasing any additional transcripts, he did not "feel like [he] needed to be firm" and so did not issue an order barring further releases. In April 2008, several months after the juvenile case was resolved, Tim Loewen, director of the Yamhill County Juvenile Department, reported the accused's action of releasing the transcript to the Bar. After investigating the matter, the Bar charged the accused with violating RPC 8.4(a)(4)2 by releasing to the press "information
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RPC 8.4(a) provides, in relevant part: "It is professional misconduct for a lawyer to: "* * * * * "(4) engage in conduct that is prejudicial to the administration of

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appearing in the record" of a juvenile case without court consent, in violation of ORS 419A.255(1) and (3).3 The Bar alleged that the accused had "usurped" Judge Collins's authority to control the proceeding by not seeking the court's consent before releasing the transcript, and thereby had caused prejudice to the administration of justice. In the proceeding before the trial panel, the accused argued that his release of the transcript did not violate ORS 419A.255 for each of three independent reasons: (1) the transcript that he had prepared was not a part of the record of the case and so was not subject to ORS 419A.255; (2) Judge Collins had consented to the release of the information contained in the transcript when he allowed the press to attend and report on

justice[.]"
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ORS 419A.255 provides, in relevant part:

"(1) The clerk of the court shall keep a record of each case, including therein the summons and other process, the petition and all other papers in the nature of pleadings, motions, orders of the court and other papers filed with the court, but excluding reports and other material relating to the child, ward, youth or youth offender's history and prognosis. The record of the case shall be withheld from public inspection but is open to inspection by the child, ward, youth, youth offender, parent, guardian, court appointed special advocate, surrogate or a person allowed to intervene in a proceeding involving the child, ward, youth or youth offender, and their attorneys. The attorneys are entitled to copies of the record of the case. "* * * * * "(3) Except as otherwise provided in subsection (7) of this section, no information appearing in the record of the case or in reports or other material relating to the child, ward, youth or youth offender's history or prognosis may be disclosed to any person not described in subsection (2) of this section without the consent of the court * * * ."

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the hearing; and (3) the information in the transcript could be released under ORS 419A.255(5)(b) and (d), which list certain exceptions to the confidentiality of juvenile records. Even assuming that he did violate ORS 419A.255, the accused asserted, he did not violate RPC 8.4(a)(4), because his conduct was not prejudicial to the administration of justice. That was so, according to the accused, because the defendant and the victims supported releasing the transcript and because the information contained in the transcript had already been made public as a result of the press attending and reporting on the hearing. Thus, in the accused's view, no harm -- actual or potential -- resulted from his conduct. The trial panel found by clear and convincing evidence that the accused had violated RPC 8.4(a)(4) and suspended the accused from the practice of law for 60 days. The trial panel first determined that ORS 419A.255(3) prohibited the accused from releasing the partial transcript to the press without the consent of the trial court and that the accused had violated the statute in doing so. With little discussion, the trial panel then found that the evidence that the accused had violated the statute also was sufficient to show prejudice to the administration of justice and thus that the accused had violated RPC 8.4(a)(4). The accused sought review in this court. To prove a violation of RPC 8.4(a)(4), the Bar must prove (1) that the accused lawyer's action or inaction was improper; (2) that the accused lawyer's conduct occurred during the course of a judicial proceeding; and (3) that the accused lawyer's conduct had or could have had a prejudicial effect upon the administration of justice. See In re Kluge, 335 Or 326, 345, 66 P3d 492 (2003) (citing In re Haws, 310 Or 741, 746-48, 6

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801 P2d 818 (1990)) (so stating for identically worded former DR 1-102(A)(4)). Because we find the issue to be dispositive, we begin by examining the third element -- whether the accused's conduct had or could have had a prejudicial effect on the administration of justice -- and assume, without deciding, that the accused's conduct violated ORS 419A.255(3) and otherwise satisfied the test set out in Kluge and Haws. Prejudice to the administration of justice "may arise from several acts that cause some harm or a single act that causes substantial harm to the administration of justice." Kluge, 335 Or at 345. This court has identified two components to the "administration" of justice: "1) The procedural functioning of the proceeding; and 2) the substantive interest of a party in the proceeding." Haws, 310 Or at 747. "A lawyer's conduct could have a prejudicial effect on either component or both." Id. The Bar argues that the accused's conduct, a single act, resulted in prejudice to the administration of justice because it had the potential to cause substantial harm to the procedural functioning of the court. The Bar asserts, "Substantial potential harm to the administration of justice occurs whenever a lawyer interferes in or usurps the court's ability to do its job in a proceeding pending before it." The Bar states that the accused "usurped" the court's authority by not seeking Judge Collins's consent prior to releasing the transcript. The Bar cites three disciplinary cases to support its position that the accused's conduct resulted in substantial potential harm to the administration of justice. First, in In re Eadie, 333 Or 42, 36 P3d 468 (2001), this court found a violation of former DR 1-102(A)(4) where the accused lawyer submitted a proposed order containing a 7

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misrepresentation that was intended to influence the judge in changing the trial date. Id. at 58. That conduct substantially harmed the procedural functioning of the court because it resulted in the judge acquiescing to a trial date preferred by the accused and made it necessary for the judge to resolve a dispute resulting from the accused's misrepresentation and to redraft an order. Id. Second, in In re Morris, 326 Or 493, 953 P2d 387 (1998), this court concluded that the accused lawyer had engaged in a single act of conduct that had the potential to cause substantial harm, either to the procedural functioning of the court or to the substantive interests of the parties, when she knowingly filed a notarized document that she had altered. Id. at 502-03. Third, in In re Thompson, 325 Or 467, 940 P2d 512 (1997), this court found a violation of former DR 1-102(A)(4) where the accused lawyer physically confronted a judge after receiving an adverse decision. That conduct caused substantial harm to the administration of justice because the accused's ex parte communication with the judge "unfairly attack[ed] the independence, integrity, and respect due a member of the judiciary." Id. at 475. The conduct also had the potential to cause substantial harm, because it could have influenced the judge to change her decision or to recuse herself from the case. Id. In each of the preceding cases, the accused lawyer engaged in conduct that had the potential to disrupt or to improperly influence the court's decision-making process, Thompson, 325 Or at 475; that created unnecessary work for the court, Eadie, 333 Or at 58; or that had the potential to mislead the court, Morris, 326 Or at 503. Moreover, in Eadie and Morris, the accused lawyers made knowing misrepresentations to the court. Similarly, in Kluge, the accused lawyer's conduct in knowingly filing an 8

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untimely motion to disqualify the trial judge and then failing to serve the motion on opposing counsel caused prejudice to "the procedural functioning of the judicial system by imposing a substantial burden upon both opposing counsel and [the trial judge] to undo the accused's actions." 335 Or at 346. In this case, the Bar has made no showing, as required by Kluge and Haws, that the accused's conduct harmed the procedural functioning of the judicial system, either by disrupting or improperly influencing the court's decision-making process or by creating unnecessary work or imposing a substantial burden on the court or the opposing party. Nor has the Bar shown that his conduct had the potential to result in any of the above. Certainly, Judge Collins did not testify that the accused's actions interfered with Judge Collins's conduct of the juvenile proceeding. Although the Bar correctly asserts that ORS 419A.255 gives the trial court control over the release of protected information in a juvenile record -- and, as noted, we assume without deciding that the accused acted improperly in not seeking the trial court's consent -- the Bar's theory fails to take into account the fact that the information contained in the partial transcript that the accused released was presented in open court and had already been reported by the press.4 It is difficult to see how the accused's release of the same information, in the context of this case, had the potential to cause any harm to the proceeding, much less substantial harm.

Article I, section 10, of the Oregon Constitution grants members of the public, including the press, the right to attend juvenile hearings. State ex rel Oregonian Pub. Co. v. Deiz, 289 Or 277, 284-85, 613 P2d 23 (1980).

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See Kluge, 335 Or at 345 (prejudice to the administration of justice may arise from "several acts that cause some harm or a single act that causes substantial harm"). Indeed, the Bar makes no effort to show that the accused's conduct could have resulted in new information being made public or that the release of the partial transcript itself had any potential impact on the proceeding. In fact, after the press attended the hearing and the accused released the transcript, Judge Collins allowed members of the press to listen to the official audio recording of the hearing. Nevertheless, the Bar asserts that Judge Collins was sufficiently "concerned" about the release of the information to call the accused and Markham to his chambers to discuss the incident. The fact that Judge Collins was "concerned" and met with the accused and Markham does not, by itself, demonstrate the potential for substantial harm to the procedural functioning of the court. Judge Collins himself stated that, although "in a perfect world," he probably would not have wanted the transcript released, in the context of this case and the open court provision of Article I, section 10, of the Oregon Constitution, the release of the partial transcript was likely permissible without his consent because "if [the press is] * * * going to know the information and report the information, at least get it right." Judge Collins's testimony, then, does not demonstrate that the accused's conduct impacted the procedural functioning of the court, even if the accused's conduct was cause for "concern." Nor does the Bar offer any evidence to prove that the release of the partial transcript harmed the substantive interests of the accused's client, the victims, or the state. The accused released the transcript, with the support of his client, in response to an 10

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inquiry from the media and in order to respond to inaccuracies appearing in some media reports. The accused maintained the confidentiality of the victims' names in the transcript, referring to them by their initials, consistent with an earlier order by Judge Collins. In this proceeding, the accused also submitted letters from the two victims who testified (and their parents) that stated their support for the release of the partial transcript. Finally, there was no testimony from the Yamhill County Juvenile Department that the release of the partial transcript had any effect on its substantive interests or its ability to prosecute the case. The Bar appears, instead, to take the position that virtually any violation of a statute, rule, or court order that occurs during the course of a court proceeding and relates to the conduct or any procedural aspect of that proceeding necessarily is prejudicial to the administration of justice. The Bar asserts, in effect, that "substantial potential" harm is implicit in the accused's conduct. Our cases, however, require proof by clear and convincing evidence that an accused's conduct in a specific judicial proceeding caused actual or potential harm to the administration of justice and, when only one wrongful act is charged, that actual or potential harm must be "substantial." Kluge, 335 Or at 345; Haws, 310 Or at 748. Here, the Bar's evidence did not prove that substantial harm resulted or could have resulted from the accused's conduct. We conclude that the Bar has not proved by clear and convincing evidence that the accused violated RPC 8.4(a)(4). The accused's conduct did not result in such prejudice, because there is no evidence that the release of the partial transcript, which contained solely information already presented in open court and reported by the press, 11

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harmed the procedural functioning of the judicial system. Nor is there any evidence that the substantive rights of the accused's client, the other juvenile defendant, the victims, or the state were harmed. "Prejudice to the administration of justice" requires such a showing. Haws, 310 Or at 747-48. The complaint is dismissed.

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