Hillenga v. Dept. of Revenue

Under ORS 305.265, a “deficiency” is a notice and assessment of any owed and unpaid taxes. The three-year statute of limitations under ORS 314.410(1) applies only to notices of deficiency for a particular tax year and does not bar a challenge when a claimed net operating loss is carried over to a subsequent tax year filing.

The Department of Revenue (“Department”) appealed a ruling from the tax court dismissing the Department’s challenge of the Hilengas’ 2006 tax year filings. The Hillengas' 2006 tax filings claimed a net operating loss carryover from their 2004 tax year filings, and the Department challenged that the Hillengas had a net operating loss in 2004. On appeal the Department argued that the tax court incorrectly applied ORS 314.410(1) (imposing a three-year statute of limitations on assessing deficiencies on a tax filing), and that under ORS 305.265 the Department may challenge the 2004 net operating loss claimed on the 2006 tax filing. The Court agreed, and drew a distinction between challenging the claimed net operating loss and giving a notice of deficiency, as “deficiency” under ORS 305.265 is an assessment of owed and unpaid taxes for a particular return year. The Court found that the Department was not issuing a deficiency as defined in ORS 305.265, but rather was attempting to determine how much loss the Hillengas had correctly claimed on their 2004 tax filing, and if the Hillengas could use the loss to offset income on the 2006 tax filing. As the Hillengas attempted to carry over the 2004 net operating loss to apply to the 2006 filing, the Hillengas put the validity of their 2004 net operating loss at issue and therefore the Department was not barred from challenging the 2004 net operating loss as it applied to the 2006 tax filing. Affirmed in part and reversed in part; remanded to the tax court for further proceedings.