Jimenez v. Dept. of Rev.

                                        543

     Submitted on the briefs September 9, judgment of Tax Court affirmed
                              December 15, 2022


                         Mickey JIMENEZ
                      and Theresa L. Jimenez,
                        Plaintiffs-Appellants,
                                   v.
                   DEPARTMENT OF REVENUE,
                          State of Oregon,
                       Defendant-Respondent.
                      (TC 5422) (SC S069204)
                                    

     Taxpayers, who did not dispute that they had in fact been paid substantial
wages in tax years 2016-18, contended in the Tax Court that they owed no Oregon
income tax for those years. They argued that the federal income tax applies only
to wages of public officials or corporate officers; that the federal income tax applies
only to the exercise of a federal privilege; and that the Sixteenth Amendment to
the United States Constitution does not authorize an income tax unless appor-
tioned among the states based on population. Taxpayers also argued that, by
issuing them a tax refund for tax year 2018, the Internal Revenue Service (IRS)
had agreed that one or more of those arguments was meritorious, and that the
state was bound by that determination. The Tax Court rejected those arguments.
Additionally, the court concluded that the arguments were not objectively rea-
sonable and awarded the Department of Revenue a $4,000 penalty under ORS
305.437. Taxpayers appealed only the penalty award. Held: (1) The IRS refund
was not an objectively reasonable basis to argue against taxpayers’ tax liability;
(2) taxpayers did not contest the Tax Court’s conclusion that their other argu-
ments were not objectively reasonable; and (3) even if taxpayers had made at least
one objectively reasonable argument, ORS 305.437 does not require that every
position taken by a taxpayer be frivolous to trigger the Tax Court’s obligation to
impose a penalty.
    The judgment of the Tax Court is affirmed.



    En Banc
    On appeal from the Oregon Tax Court.
    Robert T. Manicke, Judge.
   Theresa L. Jimenez and Mickey Jimenez, Portland, filed
the briefs pro se.
    Denise G. Fjordbeck, Assistant Attorney General, Salem,
filed the brief for respondent. Also on the brief were Ellen F.
544                                Jimenez v. Dept. of Rev.

Rosenblum, Attorney General; Benjamin Gutman, Solicitor
General; and Samuel B. Zeigler, Assistant Attorney General.
  DeHOOG, J.
  The judgment of the Tax Court is affirmed.
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          DeHOOG, J.
        ORS 305.437 requires the Oregon Tax Court to
impose a “penalty” of up to $5,000 when a taxpayer has
taken a “position” in a Tax Court proceeding that “is friv-
olous or groundless.” Taxpayers, who did not dispute that
they had in fact been paid substantial wages in tax years
2016-18, nevertheless contended in the Tax Court that they
owed no Oregon income tax for those years. The Tax Court
concluded that their arguments in support of that conten-
tion were frivolous and therefore warranted a penalty under
ORS 305.437. Accordingly, the court ordered taxpayers to
pay the Department of Revenue (department) a penalty of
$4,000. Taxpayers now appeal, challenging only the penalty
award. We affirm the judgment of the Tax Court.
                                I.   FACTS
         In this case, the Tax Court sanctioned taxpayers for
their legal contentions regarding their income tax liability
for tax years 2016, 2017, and 2018. As the facts are not dis-
puted,1 we take them from the summary judgment record
and the Tax Court’s decision.
A. Wages, Salary, or Other Compensation
         For tax year 2016, taxpayers received Internal
Revenue Service (IRS) Form W-2, Wage and Tax Statements,
showing that one of them, Mrs. Jimenez, had been paid
“wages, tips, [or] other compensation” by her employers
totaling $55,758.73.
        For tax year 2017, taxpayers received W-2s showing
that they had been paid wages by their employers totaling
$81,825.89.

   1
     The Tax Court’s ruling explained:
       “[Taxpayers] do not dispute the authenticity of the copies in the record
   of W-2s, returns and other filings and correspondence with [department].
   [Taxpayers] nowhere deny that they worked for the employers shown on the
   W-2s or that those employers paid them the amounts shown for their ser-
   vices. [Taxpayers’] motion does recite as part of their ‘Statement of Facts’
   that they ‘had no federal tax liability for the tax years at issue, thus had no
   taxable “income” or “wages” in accordance with relevant Revenue Laws.’ The
   court views the question whether [taxpayers] had federal taxable income as a
   legal issue, rather than a factual issue, and the court concludes that no issue
   of material fact exists in this case.”
546                                              Jimenez v. Dept. of Rev.

        For tax year 2018, taxpayers received W-2s showing
that they had been paid wages by their employers totaling
$131,594.82.
       Taxpayers have never disputed the fact that those
sums were paid to them by their employers.
B.    Tax Returns; Tax Court Proceedings
        Taxpayers filed tax returns for tax years 2016 and
2017. Those initial tax returns disclosed taxpayers’ wages
as reported in their W-2s and calculated taxpayers’ income
tax accordingly.
         In August of 2019, taxpayers filed amended state
and federal tax returns for 2016 and 2017, as well as their
initial state and federal tax returns for 2018. Their tax
returns showed adjusted gross income of $0 and taxable
income, both state and federal, of $0. Taxpayers sought a
refund of all income taxes paid, state and federal, for all
three years.
         The department sent notices of denial for taxpayers’
amended 2016 and 2017 state tax returns. For the 2018 state
tax return, the department issued a notice of deficiency for
unpaid state income taxes. Taxpayers objected, and the
department issued written determinations rejecting their
objections.
         Taxpayers appealed the department’s action to
the Magistrate Division of the Tax Court. The magistrate
rejected their arguments and imposed a $500 penalty under
ORS 305.437 on the ground that their arguments were friv-
olous. (Because the Magistrate Division is not a court of
record, see ORS 305.430(1), no details are available to us
from the proceedings before that court.)
        Taxpayers then appealed to the Regular Division of
the Tax Court. See ORS 305.501(5)(a) (authorizing appeals
from Magistrate Division to Regular Division).2 The Tax
    2
      The Tax Court is a single court with two divisions: the Magistrate Division
and the Regular Division. See Village at Main Street Phase II v. Dept. of Rev., 

, 

 (2014) (so explaining). For purposes of this opinion, we
will generally use “Tax Court” to refer to the Regular Division.
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Court hears such matters de novo as “original, independent
proceedings.” ORS 305.425(1). Taxpayers and the depart-
ment filed cross-motions for summary judgment. Taxpayers
argued that the federal income tax laws were either uncon-
stitutional or so limited as to not apply to them and that
they therefore owed no federal income tax. And because a
person’s state income tax liability is based on federal income
tax law (see, e.g., ORS 316.022(6) and ORS 316.048), tax-
payers maintained that they likewise had no state income
tax liability.
        In its summary-judgment ruling, the Tax Court
addressed each of taxpayers’ four main arguments and
explained why, in the court’s view, each was incorrect.
Taxpayers had first contended that the statutory definition
of “wages” in the Internal Revenue Code (Title 26, United
States Code) was “limited to compensation for the perfor-
mance of functions of a public office[.]” The Tax Court held
that taxpayers’ interpretation of the statutory term “wages”
was legally incorrect and that, in any event, the compen-
sation that they admitted having received would fit the
broader definition of taxable “income.”
         Second, taxpayers had argued that both state and
federal income taxes “ ‘are exclusively an excise tax on the
gainful exercise or enjoyment of federal privileges,’ ” and
contended that they had not availed themselves of any such
federal privilege. The court explained that “[n]othing in
state or federal law limits the income tax base to gain from
the exercise of any federal privilege.” See US Const, Amend
XVI (authorizing tax “on incomes, from whatever source
derived”); 

(a) (defining “gross income” as “all
income from whatever source derived”).
          Third, taxpayers had asserted that the federal
income tax was unconstitutional as a “ ‘federal capitation[ ]’ ”
and a “ ‘direct tax[ ]’ ” that, they maintained, could be imposed
only if apportioned among the states based on population.
The Tax Court noted that their argument was directly con-
tradicted by the text of the Sixteenth Amendment, which
authorizes Congress “to lay and collect taxes on incomes
* * * without apportionment among the several States, and
without regard to any census or enumeration.” US Const,
548                                  Jimenez v. Dept. of Rev.

Amend XVI. Further, the Tax Court cited several court
decisions holding that the argument was “absurd, frivolous,
and devoid of any arguable basis in law.”
         Finally, taxpayers had made a derivative argument,
one that effectively depended on at least one of their other
three assertions having arguable merit. Based on an IRS
account transcript for tax year 2018, they had noted that the
IRS had paid them the full refund that they had requested
for 2018 based on their declared taxable income of $0.
Taxpayers reasoned that the IRS had accepted one or more
of their underlying arguments and agreed with taxpayers
that they had no federal income tax liability. Accordingly,
taxpayers maintained, they likewise were not liable for
state income tax. The Tax Court rejected that argument as
well, citing authorities that indicated that the IRS’s pay-
ment of a refund did not reflect a final decision on the merits
of a taxpayers’ claim because, among other things, the IRS
has legal authority to recover a refund even years into the
future. See 

(a), (c) (general assessment period
is three years from filing of return, with no limitation period
if taxpayer intended to evade tax). Moreover, the court held,
even if the IRS had made a final determination, it would not
be binding on the Tax Court.
         For those reasons, the Tax Court granted summary
judgment for the department. The court then turned to the
department’s request for a penalty under ORS 305.437. That
statute states that the Tax Court “shall” award a penalty
when a party has taken a position in the court that has
“no objectively reasonable basis.” ORS 305.437(1) (imposing
duty to award penalty); ORS 305.437(2)(a) (defining “frivo-
lous”). The court concluded that all of taxpayers’ arguments
lacked an objectively reasonable basis. Because taxpayers
had maintained their unreasonable arguments throughout
the proceeding, the court awarded a penalty of $4,000 under
ORS 305.437.
        Taxpayers now appeal to this court, making only
one assignment of error: that the Tax Court erred in award-
ing the $4,000 sanction under ORS 305.437. They argue
that a sanction is not permitted if even one of a taxpayer’s
positions is not frivolous, which they argue is the case here.
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                         II. ANALYSIS
         We review the Tax Court’s conclusions of law for
errors of law. ORS 305.445; Khalaf v. Dept. of Rev., 

, 

 (2021).
        The Tax Court’s statutory obligation to award a
sanction is found in ORS 305.437. That statute provides, in
part:
       “(1) Whenever it appears to the Oregon Tax Court that
   proceedings before it have been instituted or maintained by
   a taxpayer primarily for delay or that the taxpayer’s posi-
   tion in such proceeding is frivolous or groundless, a pen-
   alty in an amount not to exceed $5,000 shall be awarded to
   the Department of Revenue by the Oregon Tax Court in its
   judgment. * * *
      “(2)   As used in this section:
      “(a) A taxpayer’s position is ‘frivolous’ if there was no
   objectively reasonable basis for asserting the position.
      “(b) ‘Position’ means any claim, defense or argument
   asserted by a taxpayer without regard to any other claim,
   defense or argument asserted by the taxpayer.”
        If the statutory conditions have been met, the Tax
Court’s duty to award the penalty is mandatory. See ORS
305.437(1) (under listed circumstances, “a penalty * * * shall
be awarded to the Department of Revenue by the Oregon
Tax Court” (emphasis added)).
          Taxpayers contend that the statutory conditions
warranting a penalty have not been met here. They argue
that ORS 305.437 does not apply if a taxpayer has made at
least one objectively reasonable argument. Taxpayers reason
that the IRS’s payment of their requested refund amounted
to a federal determination that one of the legal positions that
they took in the Tax Court had arguable merit, or so they
could reasonably believe. Specifically, they assert that their
derivative argument—that, by issuing a refund for tax year
2018, “ ‘the IRS [had] formally indicated that we do not owe
federal * * * tax and therefore we do not owe the debt [that
Oregon] unlawfully exacted’ ”—was objectively reasonable.
And, taxpayers reason, because at least that one argument
550                                  Jimenez v. Dept. of Rev.

was objectively reasonable, the Tax Court erred in imposing
any penalty.
          As we will explain, taxpayers’ argument fails for
two reasons. First, the fact that the IRS had issued them
a refund was not an objectively reasonable basis to argue
against taxpayers’ tax liability. Second, ORS 305.437 does
not require that every position taken by a taxpayer be frivo-
lous to trigger the Tax Court’s obligation to impose a penalty.
A.    Whether Taxpayers’ Position Regarding the IRS Refund
      Was Objectively Reasonable
         Before turning to taxpayers’ specific contention
regarding the IRS refund, we note again that taxpayers do
not dispute that each of their other arguments was frivo-
lous. That is, they do not contend on appeal that there was
any objectively reasonable basis for their arguments that
federal income tax applies only to wages of public officials
or corporate officers; that federal income tax applies only
to the exercise of a federal privilege; or that the Sixteenth
Amendment does not authorize an income tax unless appor-
tioned among the states based on population. That implicit
concession is well taken, as those arguments are all contra-
dicted by the plain text of the Sixteenth Amendment or the
relevant statutes, as noted above.
         Taxpayers only contend that their position regard-
ing the IRS refund was objectively reasonable. However, tax-
payers’ contention regarding the IRS refund is essentially
derivative of their concededly meritless arguments. That is,
taxpayers contend that the IRS, by giving a refund for a sin-
gle tax year, transformed one or more of those undisputedly
meritless positions into a position that was objectively rea-
sonable. Citing Shannon v. Moffett, 

, 

 (1979), taxpayers contend that the binding effect of a
federal agency decision on state court proceedings is an open
question under Oregon law. Taxpayers conclude, therefore,
that it was objectively reasonable for them to argue before
the Tax Court that the IRS’s decision to give them a tax
refund meant that they had no state income taxes due.
        By relying on Shannon, which addressed collat-
eral estoppel, taxpayers appear to invoke the doctrine of
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issue preclusion.3 Under that doctrine, “[i]f one tribunal has
decided an issue, the decision on that issue may preclude
relitigation of the issue in another proceeding.” Nelson v.
Emerald People’s Util. Dist., 

, 

(1993). Administrative adjudications can, under some cir-
cumstances, be given preclusive effect, “provided that the
tribunal’s decision-making processes include certain requi-
site characteristics.” Drews v. EBI Companies, 

, 

 (1990).
         However, even if we were to assume that the IRS’s
processing of a tax return could be an adjudication and that
some IRS adjudications could satisfy the requirements for
issue preclusion with respect to state court proceedings, we
would conclude that taxpayers’ reliance on that principle is
meritless here. The IRS’s issuance of a refund does not meet
the requirements of issue preclusion. Among other things,
issue preclusion requires that the issue was “essential to a
final decision on the merits in the prior proceeding.” Nelson,

. The IRS’s mere issuance of a refund is not
final even as to the IRS itself, because the IRS can later
bring an action against the taxpayer to recover the refund.
See 

 (expressly authorizing civil actions to
recover erroneous tax refunds). If the refund is not even
binding on the IRS itself, it certainly cannot bind Oregon
state courts.
         Moreover, taxpayers’ own evidence of the refund—
the IRS account transcript for the 2018 tax year—shows
that the IRS was in the process of questioning the propri-
ety of the 2018 refund. The IRS account transcript is dated
July 21, 2021. It does show “[r]efund issued” on October 25,
2019, as taxpayers noted—but there are additional entries.
The next entry, dated March 3, 2020, is “[r]efund freeze.”
The final entry, on December 7, 2020, is “[r]eview of unre-
ported income.” Thus, although the record does not show the
final resolution of the IRS’s review, it does demonstrate that
the IRS did not consider itself to have made the determina-
tion that taxpayers attribute to it: that one or more of tax-
payers’ legal positions had merit.
     3
       This court uses the more contemporary term “issue preclusion” rather than
“collateral estoppel.” Nelson v. Emerald People’s Util. Dist., 

, 

 (1993).
552                                               Jimenez v. Dept. of Rev.

         We therefore agree with the Tax Court. Whatever
taxpayers’ subjective understanding of the IRS’s decision
may have been, there was “no objectively reasonable basis”
for any of the legal positions that they took in the Tax
Court. ORS 305.437(2)(a). All those positions were therefore
“frivolous.”
B.    Whether ORS 305.437 Requires All of a Taxpayer’s
      Positions to be Frivolous
         The other premise underlying taxpayers’ argument
that ORS 305.437 does not permit a sanction here is that
a sanction is authorized only if every position taken by a
taxpayer is frivolous. Given our conclusion that each of tax-
payers’ positions before the Tax Court was, in fact, frivolous,
that argument is misplaced. But, in any event, that argu-
ment also is belied by the plain text of the ORS 305.437.
Paragraph (2)(a) defines a position as “frivolous” when there
is “no objectively reasonable basis for asserting the position.”
But “position” is also a defined term:
        “ ‘Position’ means any claim, defense or argument
     asserted by a taxpayer without regard to any other claim,
     defense or argument asserted by the taxpayer.”
ORS 305.437(2)(b).4 Thus, if a taxpayer presents a claim,
defense, or argument that has no objectively reasonable
basis, it is frivolous, “without regard to any other claim,
defense or argument” that the taxpayer may assert.
C. Remaining Arguments
        Taxpayers make two final arguments. First, tax-
payers make a passing argument against the amount of the
sanction, claiming that it was error for the Tax Court to
sanction them $4,000 when the magistrate had sanctioned
them only $500. We reject that contention. As noted, the Tax
Court proceeding is de novo. ORS 305.425(1). The Tax Court
thus was not bound by the magistrate’s decision. See Village
    4
       The legislature amended the statute in 2009 to include a definition of “posi-
tion.” Or Laws 2009, ch 640, § 5. It thus overruled our decision in Dept. of Rev. v.
Croslin, 

, 

 (2009) (because ORS 305.437 did not
then define “position,” court had concluded that term meant “the entirety of a
taxpayer’s assertions, that is, all the taxpayer’s claims, defenses, and supporting
arguments in the proceeding”).
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at Main Street Phase II v. Dept. of Rev., 

, 

 (2014) (“The Regular Division is to * * * reach its
own independent conclusions in any given case.” (Internal
quotation marks and citation omitted.)).
          Next, taxpayers claim that the award of a sanction
violates their First Amendment right to petition for redress
of grievances. That argument is not properly before us.
First, it was not raised before the Tax Court. See, e.g., ORAP
5.45(1) (“No matter claimed as error will be considered on
appeal unless the claim of error was preserved in the lower
court[.]”). Second, even in this court, taxpayers did not raise
that issue until filing their reply brief, thus denying the
department a chance to respond. See 

 (preservation of
error also requires that the matter be “assigned as error in
the opening brief”); Ailes v. Portland Meadows, Inc., 

, 380 & n 4, 

 (1991) (when issue is presented
for first time in reply brief, respondent has no obligation to
move to strike or to seek opportunity to respond).5
                           III.    CONCLUSION
         For the foregoing reasons, we agree with the Tax
Court that taxpayers’ positions were frivolous and that a
sanction under ORS 305.437 was therefore required. We
further conclude that the Tax Court did not err in determin-
ing that a sanction in the amount of $4,000 was appropriate.
           The judgment of the Tax Court is affirmed.




    5
      Taxpayers also argue that preservation does not apply to arguments regard-
ing constitutional rights. Taxpayers are mistaken. See, e.g., State v. K.A.M., 

, 809 n 2, 

 (2017) (“[Y]outh did not raise a Fourth Amendment
argument in the Court of Appeals. Having lost in that court, he cannot rely on
the Fourth Amendment as a basis for reversing the Court of Appeals decision.”);
State v. Cabanilla, 

, 631 n 10, 

 (2012) (“Defendant himself
never made those or any other constitutional arguments in the trial court or on
appeal in this case. They are not preserved and we do not address them.”); see
also United States v. Olano, 

, 

, 

(1993) (“No procedural principle is more familiar to this Court than that a con-
stitutional right, or a right of any other sort, may be forfeited in criminal as well
as civil cases by the failure to make timely assertion of the right before a tribu-
nal having jurisdiction to determine it.” (Internal quotation marks and citation
omitted.)).