Routledge v. Dep't of Revenue, TC 5344

ROBERT ROUTLEDGE., Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant.

TC 5344

OREGON TAX COURT REGULAR DIVISION Income Tax

April 9, 2020

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

I. INTRODUCTION

This matter comes before the court on the parties' cross-motions for summary judgment regarding Plaintiff's personal income tax liability for tax year 2016.

II. FACTS

Plaintiff's Form W-2 (Wage and Tax Statement)¹ for 2016 from his employer, VTech Communications, Inc. ("VTech"), indicates that VTech paid Plaintiff $129,967.23 in "wages, tips, other compensation." (Def's Decl of Lawson, Ex A.) VTech withheld no federal or Oregon income tax, presumably at Plaintiff's direction pursuant to a Form W-4², but it did withhold$9,231.52 in federal Social Security and Medicare taxes.³ (Id.) On or about February 13, 2017, Plaintiff wrote a letter to the IRS stating that the Form W-2 he had received from VTech was erroneous because VTech "is not engaged in a 'trade or business' defined as performing the functions of a public office - IRC 7701(a)(26)." (Ptf's Decl of Routledge, Ex 2.) When Plaintiff filed his federal income tax return for 2016, dated April 17, 2017, Plaintiff included a Form 4852 (Substitute for Form W-2) purporting to correct the Form W-2 from VTech by reporting $0 in wages, with the explanation that Plaintiff disputed having received any "'wages' as defined in IRC § 3401(a) and IRC § 3121(a)" because he did not "perform any services in the course of a 'trade or business' as defined [in] IRC § 7701(a)(26)." (Id., Ex 5 at 1; Ex 7 at 4.) On his federal return Plaintiff reported that he had $0 in income, and he claimed a refund of the $9,231.52 that VTech had withheld in Social Security and Medicare taxes, although he characterized that amount as "Federal income tax withheld." (Def's Decl of Lawson, Ex C at 4-5 (emphasis added).) On or about October 30, 2017, the IRS issued Plaintiff a full refund of the $9,231.52 requested. (Ptf's Ex 6.) The record does not indicate whether the IRS has since sought to recover the refund of Social Security and Medicare taxes or asserted a deficiency of federal income tax based on the absence of any withholding of that tax. Plaintiff reported on his Oregon tax return that he had $0 in taxable income for 2016. (Def's Decl of Lawson, Ex C.)

Defendant audited Plaintiff's 2016 Oregon personal income tax return and issued its findings and a notice of deficiency on August 7, 2017. (Def's Decl of Lawson, Ex D.) Defendant concluded that Plaintiff's federal taxable income for 2016 was $129,967.23; that hisOregon taxable income was $127,812; and that Plaintiff owed $11,292 in Oregon personal income tax. (Id.) Defendant also imposed penalties for substantial understatement, intent to evade, and filing a frivolous return. On September 4, 2017, Plaintiff filed a written objection. (Def's Decl of Lawson, Ex E.) Defendant responded to the written objection on September 18, 2017, and issued a Notice of Assessment pursuant to ORS 305.265 on September 25, 2017.⁴ (Def's Decl of Lawson, Exs F, G.) Plaintiff contested the Notice of Assessment in the Magistrate Division, which issued a final decision denying Plaintiff's appeal and imposing a penalty of $1,000 under ORS 305.437.

III. ISSUES

(1) Is Plaintiff's remuneration from his employer income?

(2) Are penalties and attorney fees justified?

IV. ANALYSIS

A. Is Plaintiff's Remuneration from his Employer Income?

Plaintiff's position is that the remuneration he received from his employer for services is not income for federal income tax purposes and thus for Oregon personal income tax purposes. Plaintiff acknowledges that he performed services for VTech, which he describes as an "electronics manufacturer" that is not a public employer. (Ptf's Ex 12 at 1.) He acknowledges that the money VTech paid to him is "[r]emunerations" for his services. (Ptf's Compl at 1.) He relies on the following legal arguments:

1. Plaintiff's Argument Under IRC § 3401(a)(11)

Plaintiff claims that his remuneration is excepted from the definition of "wages" for federal income tax withholding purposes⁵ because his employer is not a public employer. Under IRC § 3401(a)(11), "'wages' means all remuneration * * * for services performed by an employee for his employer, * * * except that such term shall not include remuneration paid * * * for services not in the course of the employer's trade or business * * *." Under IRC § 7701(a)(26), the term "trade or business" "includes the performance of the functions of a public office." Plaintiff argues that IRC § 7701(a)(26) excludes from the definition of "trade or business" any item that is not in the "same general class" as a public office. (Ptf's Compl at 2.) From there, Plaintiff argues that "a private enterprise is not within the class of a public office"; therefore, a private enterprise (i.e., VTech) does not engage in a "trade or business." (Id.)

Plaintiff's argument fails because it misses the larger point that, regardless of whether his remuneration fits within the federal definition of "wages," it is nonetheless income and thus subject to Oregon personal income tax. Under federal law, wages are only one possible source of "income," which is defined broadly as "all income from whatever source derived." IRC § 61(a)(1). The definition of "income" goes on to include "[c]ompensation for services * * *." Id.; see also Treas Reg § 1.61-2 (defining "compensation for services"). Plaintiff acknowledges that the payments he received from VTech are "remuneration" for his services. Based on the plain meaning of the terms, "remuneration" is synonymous with "compensation," and Plaintiff does not argue otherwise. See Webster's Third New Int'l Dictionary 1921 (unabridged ed2002).⁶ Plaintiff's pay from VTech during 2016 is income to him under federal law, and therefore also for purposes of Oregon personal income tax. See ORS 316.022(6) (Oregon taxable income determined by reference to federal taxable income).

Plaintiff's argument also fails on its own terms because the definition of "trade or business" does not begin and end with IRC § 7701(a)(26). IRC § 7701(c) provides: "The terms 'includes' and 'including' when used in a definition contained in this title shall not be deemed to exclude other things otherwise within the meaning of the term defined." Subsection (c) thus requires the court to include within the meaning of a "trade or business" an employer's activities that are "otherwise" within the meaning of "trade or business." Plaintiff describes VTech as an "electronics manufacturer" and refers to it as a "private enterprise." (Ptf's Ex 12 at 1; Ptf's Compl at 2.) Plaintiff nowhere asserts that VTech's activities are outside the definition of a trade or business in the ordinary meaning of the term; he asserts only that IRC 7701(a)(26) must be read narrowly to exclude a private enterprise from the definition of "trade or business" as used in IRC § 3401(a)(11). Based on Subsection 7701(c), Plaintiff is wrong.

2. Plaintiff's Other Arguments on the Merits

Plaintiff also makes arguments under IRC § 3121(a)(7)(A) and Treas Reg § 31.3121(b)-4. (E.g., Ptf's Compl at 1-2.) Those provisions have no bearing on whether Plaintiff's remuneration constitutes income for Oregon personal income tax purposes because they do not "relat[e] to federal income taxes" as required by ORS 316.012. In defining Oregon taxable income, Oregon applies "the various provisions of the Internal Revenue Code relating to the definition of income." ORS 316.007(2) (emphasis added). Section 3121 of the Code is part of the Federal Insurance Contributions Act, which imposes Social Security and Medicare taxes. As noted, those taxes are measured exclusively by "wages" and not by taxable "income." Plaintiff's references to Section 3121 of the Code and related Treasury Regulations do not help his case.

Plaintiff argues that the IRS "affirmed that the remunerations received from Vtech Communication did not constitute 'wages' or any other taxable income⁷ in multiple written determination notices." (Ptf's Compl at 2.) If this were true, it would not matter, because IRS determinations in an individual case are not binding on this court. See, e.g., Dept. of Rev. v. U-Haul Co. of Oregon, 20 OTR 195, 208-11 (2010). But Plaintiff also exaggerates the import of the two communications from the IRS on which he relies for this argument.

The first communication is a Notice of Adjusted Refund on IRS Form CP12, dated October 30, 2017. The notice states: "We believe there's a miscalculation on your 2016 Form 1040, which affects the following area of your return: * * * We made changes to your return that correct this error. As a result, you are due a refund of $9,231.52." (Ptf's Ex 6 at 1.) Elsewhere on the same page, the notice shows $0 after the phrase "Tax you owed." (Id.) These formulaic statements tell the court nothing about the IRS's reasoning and have no persuasivevalue. When the IRS pays out a refund shortly after a taxpayer files a return, the IRS has the benefit of periods of multiple years to recover the refund, including an unlimited period if the taxpayer has filed a false or fraudulent return with the intent to evade tax. IRC § 6501(a) (general three-year period of assessment, starting with filing of return); (c) (no limitations period if intent to evade tax). The IRS also has significant collection tools, including certain rights to claim priority as against other creditors. See generally Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ¶ 113 (3rd ed 2019). The fact that the IRS chose to accept Plaintiff's claim at face value, at least as of late 2017, tells the court nothing about the IRS's view of the claim's validity.

The second communication on which Plaintiff relies is even less helpful to the court. The IRS issued Plaintiff a letter dated December 27, 2016, informing him that...