Nov 23, 2015
From KPMG TaxWatch
Recently, the Oregon Supreme Court considered whether the Department of Revenue could challenge deductions taken in a closed tax year for purposes of determining whether net operating losses (NOLs) carried forward to an open tax year could be used to offset income. The individual taxpayers at issue claimed losses on their 2004 Oregon personal income tax returns. The losses were generated because the taxpayers’ business deductions exceeded their income. Later, the losses generated in 2004 were carried forward and used to offset income on the taxpayers’ 2006 return. In 2009, the Department audited the 2006 return and disallowed several business deductions, including the NOLs carried forward from 2004. By that point, the statute of limitations for the 2004 tax year had closed. The taxpayers appealed the assessment. Although the tax court held that several of the claimed deductions could not be substantiated—including the deductions that lead to the 2004 NOLs— the tax court held that the statute of limitations prohibited the Department from contesting any aspect of the 2004 return. The Department sought reconsideration, which was denied, and subsequently appealed to the Oregon Supreme Court.
The issue before the court was whether the statute of limitations precluded the Department from challenging the 2004 deductions that gave rise to the NOLs affecting the taxpayers’ 2006 tax liability. The court noted that the statute of limitations prohibits the Department from issuing notices of deficiency after the three-year limitations period has passed. However, in the present case, the Department was not asserting that any additional liability was owed for the 2004 year. Rather, the Department simply questioned how much loss the taxpayer actually generated in 2004 for purposes of determining if that loss could be used to offset income in the open 2006 tax year. In the court’s view, the tax court erroneously extended the statute of limitations to preclude any review of the content on a tax return that was older than three years. The court, noting that nothing in the statute supported the tax court’s conclusion, ruled that deductions taken in the closed year could be reviewed for purposes of determining NOLs available in an open year. In reaching this conclusion, the court noted that federal courts have long held that the statute of limitations on issuing deficiency notices does not limit the IRS from considering the accuracy of losses carried over to open tax years. Finally, the court observed that this holding did not favor only the Department, as a taxpayer could also recalculate taxes in a closed year when doing so affects the taxes due in an open tax year. For more information on Hillenga v. Department of Revenue, please contact Rob Passmore at 503-820-6844.
For more information about TWIST or to view archived episodes, please visit our TWIST homepage.
To receive TWIST e-mails each Monday morning, make sure that state, local and indirect is checked off as one of your topics of interest on the KPMG TaxWatch registration site.
The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.