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IN THE REGULAR DIVISION OF THE
OREGON TAX COURT
SMURFIT NEWSPRINT CORPORATION,
A Delaware Corporation
v.
DEPARTMENT OF REVENUE
(TC 4298)

Plaintiff appealed from a deficiency assessment for corporate excise taxes for 1987 and 1988 that resulted when Defendant reduced the amount of tax credits carried over from 1986 despite that 1986 was a "closed year." Plaintiff argued that Defendant was essentially assessing a deficiency for 1986, which is prohibited by statute. The court determined that Defendant had the authority to recalculate a taxpayer's liability for a closed year and if there were carryover items thereby affect a taxpayer's liability for a subsequent year.
Income taxation-Carryover adjustments

1.
There are two alternative ways to view carry over adjustments: (1) to allow the loss as a deduction from the
net income as returned in the earlier, or the later, year to which it is carried over, or (2) to recompute the whole
income for the earlier, or later, year, using the loss as a credit.


Income taxation-Assessment-Statute of limitations


2.
The fact that a statute may bar an assessment for taxes or a claim for refund after a certain period does not
mean that the administrative agency or the courts must ignore the facts establishing the amount of tax or
refund owing.


Income taxation-Statute of limitations-Recomputation


3.
A statute which bars the assessment of a deficiency or the claim of a refund for a particular year does not
obliterate the obligation. Therefore, either the government or the taxpayer may recompute the tax for the closed
year to affect a carry over item to open years.


Income taxation


4.
Oregon's system of income tax is very similar to the federal system.
Income taxation-Enforcement-Deficiency -Limitation


5.
The power to assess a deficiency is limited by ORS 314.410, which, in the usual case, is a three-year period.
Income taxation-Enforcement-Interpretation


6.
The legislature has directed that the department "shall apply and follow the administrative and judicial
interpretations of the federal income tax law." ORS 317.013(2).
Submitted on cross motions for summary judgment.



Kevin J. Keillor and Christopher D. Hatfield, Bend, represented Plaintiff (taxpayer).
Jerry Bronner, Assistant Attorney General, Department of Justice, Salem, represented Defendant (department).

Decision for Defendant rendered December 23, 1998.
Appeal pending.
CARL N. BYERS, Judge
Plaintiff (taxpayer) appeals from deficiency assessments for corporate excise taxes for 1987 and 1988. The
assessments resulted when Defendant (department) reduced the amount of tax credits carried over from 1986. Although 1986 was a "closed year," (1) the department recalculated taxpayer's income for that year and adjusted the amount of tax credits that could be carried over to 1987 and 1988. Taxpayer claims that the department is essentially assessing a deficiency for 1986, which is prohibited by statute. The facts are undisputed and the matter has been submitted to the court on cross motions for summary judgment.
FACTS
Taxpayer timely filed corporate excise tax returns for 1986, 1987 and 1988. In each year, the report showed zero tax owing due to pollution control facilities tax credits. Subsequently, the Internal Revenue Service (IRS) audited taxpayer and made adjustments that in turn caused additional Oregon taxes to be owing. Taxpayer paid the additional Oregon taxes and those matters are not at issue here. However, in 1995, after a second federal audit, the department discovered a clear error in taxpayer's 1986 return. Taxpayer had failed to reverse
the effect of an IRC section 631 election as required by ORS 317.362.(2) Although ORS 314.410 barred the department from assessing a deficiency for 1986, the department recalculated taxpayer's 1986 corporate excise tax liability. The recalculated tax liability absorbed more of the pollution tax credit than shown on the return, thereby reducing the amount of tax credit that could be carried over and used in 1987 and 1988. Based on the reduced tax credit carryover, the department assessed deficiencies for 1987 and 1988.
ISSUE
May the department recalculate the amount of tax owing in a closed year and thereby change the amount of a carryover deduction or credit for a subsequent year?
COURT'S ANALYSIS
This issue concerns a fundamental aspect of the administration of the corporate excise tax. There is no Oregon statute specifically addressing this situation. Therefore, it is necessary to consider principles from the federal income tax system. Taxpayer contends that because Oregon has adopted federal tax laws, but not federal administrative processes, this matter must be decided based on state law, not federal law. While it is true that Oregon has not adopted the federal administrative processes, there are many similarities between the two tax systems and therefore much commonality in the principles governing their administration.
Before discussing federal principles, it may be helpful to indicate what questions are not involved in this case. This case does not involve mitigation of a determination or error such as is expressly provided for in federal law in IRC sections 1311-1314 and in Oregon law in ORS 314.115. Likewise, the department is not attempting to use a federal audit report to reopen a closed year under ORS 314.380. What is involved is whether the department has the power or authority to recalculate a taxpayer's liability for a closed year and thereby affect the taxpayer's liability for a subsequent year.
1. In the federal system, this issue has been resolved by the courts based upon reasoning and policy, most often in the context of a net operating loss carryover. In Com. v. Van Bergh, 209 F2d 23, 54-1 USTC,

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