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IN THE OREGON TAX COURT
REGULAR DIVISION

HALLMARK MARKETING, CORP.,

Plaintiff,

v.
DEPARTMENT OF REVENUE,
Defendant.

(TC 4514)
By pre-trial stipulation the parties agreed that the issue before the court was the applicability of ORS 314.010 in determining whether the Defendant's notices of deficiency were timely. Related to the timeliness question was the question of whether the 1995 or 1997 edition of ORS 314.410(3) was applicable to the dispute. Defendant argued that the 1997 edition applied, and that the federal changes were timely because they were made at a time when in the language of the 1997 edition "an assessment of tax [was] permitted under any provision of the Internal Revenue Code." ORS 314.410 (1997). Plaintiff argued that the 1995 edition was applicable, and applying the provisions of ORS 314.410(3) as interpreted in Swarens v. Dept. of Rev., 320 Or 326, 883 P2d 853 (1994), the deficiency notices would be found untimely under the court's application of Swarens as stated in Dept. of Rev. v. IBM Corp., 15 OTR 162 (2000). The court found that Swarens clearly looks to Oregon standards and Oregon time limits in testing the timeliness of federal actions under
ORS 314.410(3). Further, the court found that Swarens permits ORS 314.410(8) to be incorporated when applying ORS 314.410(3). The court, therefore, rejected the prior interpretation of Swarens as stated in Dept. of Rev. v. IBM Corp., finding that Swarens should be read as permitting the ORS 314.410(3) "two years from notice of federal change" rule to apply where the federal change occurs on a date when, under any of the other provisions of ORS 314.410, including subsection (8), a state deficiency notice issued on the same date would have been timely. Under this analysis, the court held that Defendant's deficiency notices were timely issued under either an open state period or because the state had time under the provisions of ORS 314.410(8) within which to issue the notices.
Income taxes-Notice of deficiency
1. For a federal adjustment to trigger ORS 314.410(3), the adjustment had to be made at a time when a deficiency notice could have been timely issued under Oregon law.
Notice of deficiency-Statute of limitations-Federal correction
2. A federal correction must come within some "relevant" or "applicable" state statute of limitations.
Notice of deficiency-Statute of limitations
3. The ORS 314.410(3) "two years from notice of federal change" rule applies where the federal change occurs on a date, when, under any of the other provisions of ORS 314.410, including subsection (8), a state deficiency notice issues on the same date would have been timely.
Notice of deficiency-Statute of limitations-State correction
4. ORS 314.410(3) provides that a state deficiency notice be given within two years of whatever date the department is, in fact, notified of federal changes.

Notice of deficiency-Statute of limitations
5. ORS 314.410(3) does not impose a three-year time limit on notification; rather, pursuant to the statutory language, a notice of deficiency is issued relative to the date of a notification made either by the taxpayer or the Internal Revenue Service.

Notice of deficiency-Statute of limitations
6. Under the federal change provision of ORS 314.410(3), the court's inquiry will focus on two issues: (1) was the federal correction made within an open state limitation period, taking into account that multiple sections of ORS
314.410 may apply, and if so, (2) was the notice of deficiency given within two years after notification to the department of the federal correction.
Trial was held March 18, 2002, in the courtroom of the Oregon Tax Court, Salem.
James Gardner, Gardner and Gardner, Attorneys, Portland, and Paul Frankel, Morrison and Foerster, New York, New
York argued the cause for Plaintiff (taxpayer).

James Wallace, Assistant Attorney General, Department of Justice, Salem argued the cause for Defendant (the
department).
Decision for Defendant rendered, August 13, 2002.

HENRY C. BREITHAUPT, Judge.
This case was litigated and decided in the Magistrate Division on the merits, with proceedings and briefing completed prior to June 6, 2000, the date this court issued its decision in Dept. of Rev. v. IBM Corp., 15 OTR 162 (2000). Apparently as a result of the decision in IBM, in this division Plaintiff (taxpayer) raised the issue of the timeliness of notices of deficiency issued by the Department of Revenue (the department). By a pre-trial stipulation, the parties agreed that the issue of the timeliness of the department's notices of deficiency should be resolved before other issues are addressed.
This case is the latest in a series of cases (1) involving the application of ORS 314.410 to determine if notices of
deficiency issued by the department were timely. The task is made more complex by a set of legislative changes to ORS 314.410, which have occurred in chronological parallel to case law developments. (2) The facts here, typical of the complexity that has faced taxpayers, taxing authorities, and the courts, have been stipulated; established by affidavit or, as discussed below, established at a limited trial held on March 18, 2002, and are as follows:
FACTS
Taxpayer filed Oregon tax returns on the following dates:
Tax Year Date Oregon Returns Filed
1987 October 17, 1988 1988 October 18, 1989 1989 October 15, 1990 1990 October 15, 1991 Taxpayer entered into agreements with the Internal Revenue Service (IRS) for the 1987, 1988, and 1989 years
extending time limits for notice of deficiency. Taking into account those agreements, the time within which federal notices of deficiency and assessment of tax could occur were as follows:

Tax Year Federal Limitation Period
1987 September 30, 1992 (3)
1988 September 30, 1992 (4)

1989 February 28, 1994
1990 October 15, 1994
Applying ORS 314.410(8), the time periods within which Oregon deficiency notices could have been timely given,

without regard to the operation of ORS 314.410(3), were therefore as follows:
Tax Year Oregon Limitation Period
1987 March 31, 1993 (5)
1988 March 31, 1993 (6)
1989 August 31, 1994 (7)
1990 October 15, 1994 (8)

The IRS audited the federal returns for each year, issuing revenue agent reports (RARs) on the following dates:


Tax Year Date of RAR
1987 July 1, 1992 1988 July 1, 1992 1989 December 21, 1993 1990 December 21, 1993 Taxpayer notified the department of the RARs and filed amended Oregon returns, relating to the RARs, on the
following dates:
Tax Year Date of Notice of RAR and Amended Oregon Return
1987 June 6, 1995 (9)
1988 June 6, 1995 (10)
1989 December 20, 1995
1990 December 20, 1995
In May 1997, the department sent taxpayer an agreement (the First State Extension Agreement) extending the statute of limitations for issuance of Oregon notices of deficiency for the 1987 and 1988 years. For each year, the document purported to extend the period for assessment to December 31, 1997. At the time the First State Extension Agreement was sent to taxpayer, it had not been signed by the department. The First State Extension Agreement was signed by taxpayer during May 1997, returned to the department, and received by the department on May 30, 1997.
Affidavits and testimony of witnesses for the department establish that the First State Extension Agreement
was delivered to the department's auditor during the period from June 2, 1997 to June 6, 1997, and was signed by the department's auditor on or after June 2, 1997. The date written under that signature was "6/2/95." That date clearly appears to be an error as the document was not signed when it was sent to taxpayer and could not have been signed before its receipt by the department on May 30, 1997.
Affidavits and testimony of the department's auditor establish that (1) he was aware that either on June 6, 1997, or between June 6, 1997 and June 12, 1997, the statute of limitations would run against the department for the 1987 and 1988 years, (2) he was anxious to receive the First State Extension Agreement, (3) he signed it immediately on receipt, and (4) during the week of June 9, 1997, he would not have continued planning a trip to taxpayer's headquarters in Kansas City, scheduled for the week of June 16, 1997, if he had not received the extension agreement by Friday June 6, 1997.
By December 8, 1997, another agreement for extension of the statute of limitations for the issuance of Oregon notices of deficiency (the "Second State Extension Agreement") had been executed by taxpayer and the department. The Second State Extension Agreement applied to the 1987, 1988, 1989, and 1990 tax years and extended the time for issuance of notice of deficiency to March 31, 1998.
On December 23, 1997, the department issued the notices of deficiency for the 1987, 1988, 1989, and 1990 years that generated the pending dispute. Those notices asserted deficiencies based on grounds different from those contained in the RARs, but Oregon law is clear that this is permitted. International Health v. Dept. of Rev., 269 Or 23, 523 P2d 223 (1974).
RESOLUTION OF FACTUAL ISSUE ON DATE OF EXECUTION OF FIRST STATE EXTENSION AGREEMENT
The foregoing facts were established by stipulation or uncontested affidavits. (11) The court was concerned that a material factual question existed regarding whether execution by the department of the First State Extension Agreement occurred on or before June 6, 1997. (12) Accordingly, the motions of the parties for partial summary judgment were denied and a brief trial on that issue was held. The court is prepared to make a finding as to that factual issue.
The parties have briefed the question of who has the burden of proof to establish a timely executed extension
agreement (13) and whether, or to what extent, presumptions or inferences are available to the party with the burden of proof. The court assumes, without deciding, that the department has the burden of proving timely execution of an extension agreement. (14)
As to presumptions and inferences, taxpayer cites federal cases dealing with those questions. One case in particular, Thomas T. Mantzel v. Commissioner, 41 TCM (CCH) 1237 (1981), dealt with facts similar to those present here. In that case the government was shown to have departed from its policies and procedures relating to processing of agreements extending the statute of limitations for deficiency notices. Id. at 1238. The court pointed to that fact in concluding that the government would not be entitled to an inference based on regularity in procedures to establish a timely execution of the extension agreement. Id. at 1240.
In Mantzel, neither the government nor the taxpayer had dated a signed extension agreement. No date stamp was affixed to show the date of receipt of the agreement by the IRS. The IRS agent did not remember when he had signed the agreement. Nonetheless, the government wanted the court to assume procedural regularity and infer the timely execution of an extension agreement. The government pointed to the absence of a notice of deficiency and its issuance of a second extension agreement as bases for inferring that the first extension agreement must have been timely signed. The government argued that regular procedures would have resulted in a deficiency notice and no second extension agreement if the first extension agreement had not been signed. The court in Mantzel refused to make inferences based on presumed procedural regularity because the government had failed to follow its regular procedures in handling Mantzel's case.
Taxpayer appears to argue that Mantzel is authority for the proposition that the department may not, in this circumstance, prove the date of execution of the First State Extension Agreement by extrinsic testimonial evidence. Taxpayer cites no Oregon authority preventing the department from proving the date of execution by extrinsic evidence where the date written on the document is clearly a mistake. Even if Mantzel is instructive as to what the law in Oregon should be, and even if the department departed from usual procedures, under Mantzel the department is not precluded from proving the date of execution by direct evidence or inferences from direct evidence. If applicable, Mantzel would only mean that inferences based solely on a presumption of procedural regularity are insufficient. Mantzel would be on point if the department attempted to argue that on the basis of the execution of the Second State Extension Agreement alone, one could infer that the First State Extension Agreement must have been timely executed.
But here, the department places no particular reliance on the Second State Extension Agreement, and the record contains credible direct evidence that (1) the extension agreement, signed by taxpayer, was received by the department on Friday, May 30, 1997; (2) in the ordinary course, documents received by the department were routed to the department's auditor within one to five business days; (3) the department's auditor was concerned about timely receipt of the First State Extension Agreement; (4) the auditor signed and dated the extension agreement immediately upon his receipt of the document; (5) the auditor signed the document during the period of June 2 through June 6, 1997; and (6) if the department auditor had not received and signed the extension agreement in the week ending June 6, 1997, he would not have continued his plans for travel to taxpayer's headquarters.
Here, unlike the situation in Mantzel, where all the government had was an inference based on a presumption of regularity, the inference of execution of the agreement on or before June 6, 1997, is not based only on a presumption of regularity in procedure. Rather, it is based on a constellation of evidence regarding what was done and not done before and after June 6, 1997, all of which together supports this court's finding of fact that the First State Extension
Agreement was executed on or before June 6, 1997. (15) This court finds that the department has established the timely execution of the First State Extension Agreement by a preponderance of the evidence. Accordingly a decision on the question of the burden of proof on that matter is unnecessary.
ISSUE
Did the department issue its notices of deficiency within the time limits of ORS 314.410?
ANALYSIS
What Law Applies: The 1995 or 1997 Edition of ORS 314.410?
The outcome of this case may or may not depend on whether the 1995 or 1997 edition of ORS 314.410(3) is applicable to the dispute, depending on the resolution of other legal issues. The department argues the 1997 edition applies, and that the federal changes were timely because they were made at a time when, in the language of the 1997 edition, "an assessment of tax [was] permitted under any provision of the Internal Revenue Code." Under the 1997 edition, the federal action within federal time limits could serve as the ORS 314.410(3) predicate. The issue would become whether deficiency notices were issued within two years after a notification to the department of those federal actions or within a longer period agreed to under ORS 314.410(6).
Taxpayer contends that the 1995 edition is applicable. If the 1995 edition of ORS 314.410 is applicable, taxpayer argues the provisions of ORS 314.410(3) as interpreted in Swarens apply and taxpayer would prevail under its reading
(16)
of this court's application of Swarens in its decision in IBM.
For purposes of further analysis, it will be assumed that the 1995 edition set out in full in Appendix 1 applies to these
(17)
years.
Case Background: IBM and Swarens
The parties acknowledge that this court's decision in IBM plays a significant role in the resolution of this case. See generally Dept. of Rev. v. IBM Corp., 15 OTR 162 (2000). (18) Taxpayer asserts that IBM stands for two related propositions: (1) for the "two-years-after notice of federal change" rule of
ORS 314.410(3) to apply, federal changes must occur within the three year period specified in ORS 314.410(1), and
(2) not only must federal changes occur within three years, but notice of those changes must be received by the department within the same three-year period.
Both of those propositions put squarely in focus the question of whether IBM was a correct application of the decision of the Oregon Supreme Court in Swarens v. Department of Revenue , 320 Or 326, 883 P2d 853 (1994), and a discussion of Swarens is appropriate.
Swarens also involved ORS 314.410(3) (the 1989 edition, which remained unchanged in substance through the 1995 edition) and a factual background of typical complexity for cases involving the interrelationships of the federal and Oregon tax systems. Swarens was particularly unusual, however, because, although it raised the question of the timeliness of an Oregon tax deficiency notice, it did not involve a federal tax deficiency notice. In Swarens all federal statutes of limitation on deficiencies for the year in question had expired. Nonetheless, the IRS had examined certain deductions taken in a year for the purpose of determining the validity of a federal refund claim for the same year. The refund claim depended on the claimed deductions being proper. Under federal law, the expiration of limitations periods on deficiency assessments did not bar review of a year in reviewing the refund request. The IRS issued a RAR making upward changes to the income in the year. That adjustment reduced the claimed refund.
Although the federal RAR for the year was, as to a deficiency, untimely under the federal system and untimely under any provision of ORS 314.410, except, perhaps, ORS 314.410(3), it did reflect a "federal change" and a copy of it was delivered to the department. The department asserted that notification of the RAR triggered the application of ORS 314.410(3) and permitted its issuance of a deficiency notice for the base year within two years of such notification.
The Oregon Supreme Court was thus presented with a stark set of facts: notice of a "federal change" arriving in Salem, unrelated to any timely federal deficiency action, and timely, if at all, only under ORS 314.410(3). The court, analyzing the provisions and history of ORS 314.410(3), held that because the federal RAR was issued at a time when no Oregon statute of limitations on deficiencies was open, it could not serve as the predicate "federal change" in the "notice of federal change plus two years" rule of the statute.
1. Swarens thus established that in order for a federal adjustment to trigger ORS 314.410(3), the adjustment had to be made at a time when a deficiency notice could have been timely issued under Oregon law. In its discussion of available time frames, the court noted that "[g]enerally, the department must file a notice of deficiency within three years" and then went on to discuss the permissible time frame under ORS 314.410(3). Swarens, 320 Or at 329. However, the court variously described ORS 314.410(3) as imposing a requirement that the federal change:
1.
" * * * is made with respect to a year that is open for state tax assessment at the time the correction is made." Id. at 330 (describing the taxpayer's contention, of which the court stated "we conclude that taxpayer's reading of the statute is correct").

2.
"* * * must occur within the original limitation period." Id. (not stating what the "original limitation period" was).

3.
Cannot be a trigger for a year, "unless that year is open to taxation" or the federal change occurs "at a time within the statute of limitations." Id. (referencing clearly to a state, not a federal, time period).

4.
"* * * occurs within the relevant state limitation period." Id. at 333 (stated to be "our conclusion").

5.
Be "made by the federal government within the statute of limitations." Id. at 334.

6.
Be "made before the state statute of limitations has run." Id. at 335 (described as the court's conclusion; compare 4 above).


The foregoing demonstrates that the court used various descriptions of its analysis and holding and was not entirely clear as to whether there was only one state limitation period to be considered (the basic three-year period), or whether any state period for deficiencies, if open, could accommodate a federal change. However, the final statement of the court appears to resolve matters. The court stated:
"In this case, the IRS correction was made more than three years after taxpayer filed his return, which was beyond the applicable state limitations period, ORS 314.401(1). Accordingly, the department is barred * * *."
Id. at 335 (emphasis added).
That final statement supports a conclusion that, notwithstanding somewhat competing descriptions, the court's focus on a three-year period "in this case" was a specific application (of the basic three-year statute, the only one which could apply) of a more general rule that the court identified as being that the federal correction must come within some "relevant" or "applicable" state statute of limitations. Had the court intended that in all events only the "basic" three

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