Dep't of Revenue v. Wakefield

1

DEPARTMENT OF REVENUE, State of Oregon, Plaintiff, v. JAMES WAKEFIELD Defendant.

No. TC 5404

Tax Court of Oregon, Regular Division, Personal Income Tax

February 3, 2022

ORDER GRANTING PLAINTIFF'S CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

ROBERT T. MANICKE, JUDGE

The parties present cross-motions for partial summary judgment on appeal from a decision in the Magistrate Division. That decision concluded that, under the Full Text Provision of the Oregon Constitution (Or Const, Art IV, § 22) the legislature's attempt in 2016 to disallow certain deductions for individuals supplying marijuana legally was invalid as to tax year 2015. The decision therefore held that Defendant was entitled to those deductions under the successful 2014 initiative petition known as Measure 91. For the reasons that follow, this division of the court disagrees and holds that the deductions are disallowed under Oregon statute, and that neither the Full Text Provision nor other specified state or federal constitutional limitations change that result.

I. FACTS

Solely for purposes of their motions, the parties do not dispute the following facts: Defendant James Wakefield (Taxpayer) trafficked in marijuana in Oregon during tax year 2015 (Def's Mot Part Summ J at 11), operating his business in compliance with Oregon law (ORS 475B.010 to 475B.395 or 475B.400 to 475B.525 ^[1]) (Def's Cross-Mot Part Summ J at 1). Taxpayer incurred expenses that would have been deductible under section 162(a) of the Internal Revenue Code, ^[2] but for the prohibition in section 280E of the Internal Revenue Code (Section 280E) discussed below. (Id.) Taxpayer claimed certain such expenses on his Oregon personal income tax return for tax year 2015, and Plaintiff Department of Revenue (the Department) disallowed them following an audit. (Def s Mot Part Summ J at 12.) Taxpayer appealed to the Magistrate Division, which granted summary judgment in Taxpayer's favor as to tax year 2015.^[3]

II. ISSUES

(1) Under the Full Text Provision, did Oregon personal income tax law incorporate, without modification, the deduction limitations of Section 280Efortax year2Ol5?

(2) Does prohibiting regulated marijuana suppliers from taking ordinary and necessary business expense deductions for tax year 2015 violate the Uniformity Clauses or the Excessive Fines Clause of the Oregon Constitution?

(3) Does the Sixteenth or Eighth Amendment to the United States Constitution invalidate Oregon's incorporation of Section 280E for tax year 2015?

III. ANALYSIS

A. Under the Full Text Provision, did Oregon personal income tax law incorporate, without modification, the deduction limitations of Section 280E for tax year 2015?

In 2014, Oregon voters enacted the citizens' initiative known as "Measure 91," allowing and regulating the production and sale of marijuana for recreational use. See 2015 Or Laws ch 1. Among many other things, Measure 91 "disconnected" from Section 280E, an existing Code provision that prohibits persons from deducting their expenses incurred in the business of trafficking in federally controlled substances, including marijuana. As enacted, Measure 9 l's disconnection provision frees personal income taxpayers from Section 280E's prohibition for at least the second half of tax year 2015. The first issue is whether one or more of the legislature's later acts modifying Measure 91 's disconnection provision reinstate Oregon's connection to Section 280E for tax year 2015 and thus prohibit Taxpayer's business expense deductions for that year.

1. Timeline of relevant statutes; statutory analysis

In order to address the parties' positions under the Full Text Provision, the court must first determine what the legislature intended to be the law governing Taxpayer's deductions for tax year 2015. This requires the court to review the state of the law leading up to Measure 91, Measure 91 itself, and six bills enacted in 2015 and 2016. The court presents this material chronologically. When discussing the 2015 and 2016 bills, the court adds its preliminary analysis and conclusions based on text and context, applying the framework of State v. Gaines, 346 Or. 160, 171-72, 206 P.3d 1042(2009). The court then discusses the parties' arguments, including those based on the Full Text Provision.

a. Definition of "taxable income"

As a state, Oregon generally has plenary authority to define its own tax base. Kellas v. Dept. of Corrections, 341 Or. 471, 478, 145 P.3d 139 (2006); see also Hon. Jack L. Landau, An Introduction to Oregon Constitutional Interpretation, 5 5 Willamette L Rev 261, 284-85 n 151 (2019). Since 1969, however, in the interest of simplicity and convenience, Oregon has used "taxable income" as defined under federal law as the starting point in determining the tax base for the personal income tax. See Or Laws 1969, ch 493, § 100; ORS 316.022(6). Federal taxable income is "gross income" as defined in section 61(a) of the Code, reduced by numerous kinds of deductions, including ordinary and necessary business expenses. See IRC § 63(a). Accordingly, by incorporating federal "taxable income," Oregon by default allows the same deductions allowed under federal law.^[4]

The legislature has always been free to "disconnect" from federal law by defining the Oregon tax base differently. One way the legislature may do so is by defining the Code by reference to a specific publication date that predates a change that the legislature does not wish to adopt. See Settles v. Dept. of Rev., 7 OTR 153, 160 (1977) ("For the tax year in question, ORS 316.012 had 'frozen' the Internal Revenue Code as of December 31, 1971, as it applied to ORS chapter 316."); compare, e.g., ORS 316.012 (1993) (defining terms by reference to Code as in effect on December 31, 1992) with ORS 316.012 (2015) (defining terms related to definition of taxable income by reference to Code as in effect "as applicable to the tax year of the taxpayer").^[5] Another technique is to expressly reject a particular federal provision, such as a federal deduction or a federal limitation on a deduction. For the personal income tax, the legislature makes express deviations from the Code either by enacting a freestanding statute, or by amending ORS 316.680, a statute that compiles a variety of additions to, and subtractions from, taxable income.^[6]

b. Internal Revenue Code Section 280E

In 1982, Congress enacted Section 280E, which has since remained unchanged. See Pub LNo. 97-248, Title III, § 351(a). Section 280E provides:

"No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."

c. Oregon's incorporation of Section 280E starting in 1983

In the legislative session following Congress's enactment of Section 280E, the Oregon legislature adopted a wide-ranging law that amended numerous tax provisions and generally "reconnected" Oregon's definition of "taxable income" to an updated federal definition of "taxable income." See Or Laws 1983, ch 162, § 59 (amending ORS 316.012). The amendment provided that references to the Internal Revenue Code mean the Code as amended on or before December 31, 1982. Id. No other provision in the 1983 edition of the ORS refers to, or purports to disconnect from, Section 280E, and the court concludes that Oregon law first incorporated Section 280E effective for tax years beginning on or after January 1, 1983. See id., § 63 (effective date). The court has found no subsequent reference to Section 280E in Oregon personal income tax law until Measure 91 and the 2015 and 2016 acts discussed below.

d. Pre-Measure 91 medical marijuana law

Oregon voters enacted a medical marijuana law by initiative in 1998. Or Laws 1999, ch 4 (Oregon Medical Marijuana Act, enacted by initiative petition Measure 67 effective December 3, 1998, codified as former ORS 475.300 through 475.346). The legislature expanded the scope of the medical marijuana program in 2005, allowing limited reimbursement to growers for certain costs. See Or Laws 2005, ch 822 §§ 8, 9 (SB 1085). In 2013, the legislature expanded the reimbursement provisions to encompass certain additional costs. Or Laws 2013, ch 726, § 9 (2013HB3460).^[7]

e. Measure 91

In the November general election in 2014, the voters adopted Ballot Measure No. 91 (Measure 91), which had been proposed by initiative petition and was entitled the "Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act." OrLaws2Ol5, ch 1, §3. Section 74 of Measure 91 contains the first express reference to Section 280E that the court has found in Oregon personal income tax law. Section 74 amends ORS 316.680 (2013) by adding a paragraph that allows personal income taxpayers a subtraction from federal taxable income as follows:

"For income tax years commencing on or after January 1, 2015, the amount of any deductions or credits that the taxpayer would have been allowed but for the provisions of section 280E of the Internal Revenue Code."

As discussed below, this text does not expressly limit the subtraction to taxpayers supplying marijuana; it arguably allows the subtraction to anyone "trafficking in" any "controlled substance[]." Measure 91 as a whole became effective December 4, 2014. See id. § 84. However, section 74 was to "become operative" on July 1, 2015, and to "apply to" conduct occurring on and after that date. See id. §§81-82.

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