Rosalie Ridge LLC v. Dept. of Rev.

434 July 24, 2014 No. 55

IN THE OREGON TAX COURT

REGULAR DIVISION

ROSALIE RIDGE LLC,

Plaintiff,

v.

DEPARTMENT OF REVENUE,

Defendant,

and

MULTNOMAH COUNTY ASSESSOR,

Defendant-Intervenor.

(TC 5152)

Plaintiff (taxpayer) appealed from a Magistrate Division decision as to

forestland special assessment. Taxpayer argued that Defendant-Intervenor

Multnomah County Assessor (the county) improperly disqualified real property

owned by taxpayer from Western Oregon Forestland Special Assessment for the

tax year 2011-12. The county argued that the objective circumstances showed

that in the tax year at issue taxpayer did not predominantly hold the subject

property for use as “forestland” as defined by ORS 321.257. Following trial, the

court found that determining taxpayer’s predominant purpose for holding the

subject property required determining its sole member’s purpose for having tax-

payer hold the subject property. The court further found that as described in

taxpayer’s own governing documents, its primary purpose was to “own, lease and

otherwise deal in real estate” and that such purpose reasonably encompassed

holding real property planted with marketable trees for future timber harvest

and as such was consistent with holding the subject property predominantly for

forestry, therefore the subject property was properly held as forestland under the

statute.

Trial was held on April 9, 2013, in the courtroom of the

Oregon Tax Court, Salem.

John M. Junkin, Garvey Schubert Barer PC, Portland,

argued the cause for Plaintiff (taxpayer).

Lindsay M. Kandra, Multnomah County Counsel, Portland,

argued the cause for Defendant-Intervenor Multnomah

County Assessor (the county).

Vanessa A. McDonald, Assistant Attorney General,

Department of Justice, Salem, filed an Answer but did not

appear at trial for Defendant Department of Revenue (the

department).

Decision rendered for Plaintiff on July 24, 2014.

Cite as 21 OTR 434 (2014) 435

HENRY C. BREITHAUPT, Judge.

I. INTRODUCTION

This case comes before the court for decision fol-

lowing a trial in the Regular Division. Plaintiff Rosalie

Ridge LLC (taxpayer) claims that Defendant-Intervenor

Multnomah County Assessor (the county) improperly dis-

qualified real property owned by taxpayer from Western

Oregon Forestland Special Assessment for the tax year

2011-12. The county argues that the objective circumstances

show that in the 2011-12 tax year taxpayer did not predom-

inantly hold the subject property for use as “forestland,” as

defined by ORS 321.257.

II. FACTS

The historical facts of this case are uncontested.

Taxpayer owns real property in Multnomah County identi-

fied in the county’s records as Account No. R324603 (the sub-

ject property). Lillian Logan, until recently the sole member

of taxpayer, acquired the subject property in 1977. At trial

Lillian Logan testified that she bought the subject property

and held it for its value as timber land. From 1984 through

June of 2011, the county assessed the subject property as

“forestland” under the Western Oregon Forestland Special

Assessment program, described at ORS 321.257 to 321.390.

In 2005 Lillian Logan created taxpayer and became

its sole member. Lillian Logan contributed the subject prop-

erty to taxpayer, and the subject property was and remains

taxpayer’s sole asset. Taxpayer’s organizing documents state

that the purpose of taxpayer is “to own, lease, and otherwise

deal in real estate,” but further states that taxpayer may

“engage in any lawful business permitted by [The Oregon

Limited Liability Company Act]” or the laws of any jurisdic-

tion that taxpayer does business in. At trial taxpayer and

her husband, Daniel Logan, testified that she organized

taxpayer primarily for limited liability and estate planning

purposes.

Daniel Logan and Lillian Logan married in 1990.

Daniel Logan is a professional forester and tree farmer with

tree farming and forestry operations in the vicinity of the

436 Rosalie Ridge LLC v. Dept. of Rev.

city of North Plains in Washington County. Daniel Logan

first became aware of Lillian Logan’s ownership of the sub-

ject property in the early 1990s and investigated the pros-

pects for commercially logging the subject property. Daniel

Logan abandoned the project for some time in the belief that

the City of Portland would not approve the logging operation.

Daniel and Lillian Logan subsequently learned that the sub-

ject property was outside of the city limits of Portland and

resumed preparations to log the subject property. After receiv-

ing the appropriate permits, the Logans contracted with a

logging company to clear cut the subject property. Logging

operations on the subject property began in February of 2001

and concluded in November of 2001. Sometime after the con-

clusion of the logging operations, but before July 1, 2011, the

City of Portland annexed the subject property.

After clear cutting the subject property, Daniel

Logan replanted the subject property pursuant to his under-

standing of the Oregon Forest Practices Act. Daniel Logan

testified that in replanting the subject property he signifi-

cantly exceeded the minimum per acre replanting require-

ments of the Forest Practices Act. Daniel Logan and another

professional forester, Ken Everett, both testified that this

was in keeping with sound forestry practices because it

would allow Daniel Logan to thin the subject property over

time to promote the growth of the most commercially desir-

able specimens without falling below the statutory mini-

mums. Daniel Logan has also treated the subject property

with herbicide to eliminate plants that would otherwise

compete with and hinder the growth of commercially valu-

able timber.

In 2006 Lillian Logan, as sole member of taxpayer,

entered into a purchase and sale agreement with a real

estate development company to sell the subject property and

an adjacent parcel for development as a residential subdi-

vision. The real estate development company sought and

received preliminary subdivision plat approval from the

City of Portland, but never began development and never

received final plat approval. The purchase and sale agree-

ment between Lillian Logan and the real estate develop-

ment company terminated and Lillian Logan testified that

she abandoned her plans to sell the subject property. The

Cite as 21 OTR 434 (2014) 437

preliminary plat had not yet expired at the time of trial,

however, because the City of Portland, on its own initiative,

extended the life of the preliminary plat approval.

Following annexation, the City of Portland zoned

the subject property “Residential 10,000” (R 10) with

“Environmental Protection” (P) and “Environmental Con-

servation” (C) zoning overlays. Some time before June of

2011, but still several years after these zoning decisions

by the City of Portland, the county concluded that the R 10

zoning and environmental overlays were inconsistent with

taxpayer continuing to hold the subject property as “forest-

land” for purposes of Western Oregon Forestland Special

Assessment. The county disqualified the subject property

from special assessment and taxpayer appealed that dis-

qualification to the Magistrate Division. The magistrate

found for the county and taxpayer now appeals to the

Regular Division from the decision of the magistrate.

III. ISSUE

Whether taxpayer’s predominant purpose in hold-

ing the subject property was for use as “forestland.”

IV. ANALYSIS

Given the historical significance of the timber

industry in this state, it comes as no surprise that the leg-

islature has provided for special assessment programs for

taxing forestlands in western Oregon and eastern Oregon.

For purposes of the Western Oregon Forestland Special

Assessment program, “forestland” is defined as:

“[L]and in western Oregon that is being held or used for

the predominant purpose of growing and harvesting trees

of a marketable species and has been designated as forest-

land or land in western Oregon, the highest and best use of

which is the growing and harvesting of such trees.”

ORS 321.257.1 The statute provides two ways for land in

western Oregon to qualify as forestland for purposes of

special assessment: (a) the land can be actually used for

growing and harvesting marketable timber and be desig-

nated as forestland; or (b) the land can have growing and

1

The court’s references to the Oregon Revised Statutes (ORS) are to 2011.

438 Rosalie Ridge LLC v. Dept. of Rev.

harvesting marketable timber as its highest and best use.

The parties have not presented arguments concerning the

question of highest and best use, so this Opinion will focus

on option (a).

There is no dispute that the trees on the subject

property are of a type commonly grown for commercial har-

vest, and that the county designated the subject property

as forestland prior to the beginning of the 2011-12 tax year.

Therefore, the quoted statutory text calls for the court to

determine taxpayer’s “predominant purpose” in holding

the subject property during the months leading up to the

beginning of the 2011-12 tax year.2 This is a highly subjec-

tive question of fact that the court must answer by reference

to the objective circumstances. Hudspeth v. Dept. of Rev., 4

OTR 296, 298 (1971). As in all cases before the tax court, the

party seeking affirmative relief—in this case, taxpayer—

must prove fact questions by a preponderance of the evi-

dence. ORS 305.427.

The first question the court must deal with is a con-

ceptual one. The county rightly asserts that the issue in this

case is what taxpayer’s predominant purpose was in holding

the subject property during the lead-up to the 2011-12 tax

year. But in order to establish this predominant purpose,

the county relies almost exclusively on the period following

the transfer of the subject property from Lillian Logan to

taxpayer. The record for that period consists almost entirely

of evidence concerning the organization of taxpayer and the

failure of the anticipated sale of the subject property to a

development company, followed by several years without any

apparent activity on the subject property. The county treats

the history of the subject property prior to Lillian Logan’s

transfer of the subject property to taxpayer as generally, if

not entirely, irrelevant.

2

ORS 321.359(1)(b)(C) calls for the assessor to disqualify property from

forestland special assessment when the assessor discovers that such land is no

longer being used as forestland. The parties agree that the assessor disqualified

the subject property as a result of such discovery, but do not indicate when the

discovery took place. For purposes of this Opinion, the court will assume that

such discovery happened, if it happened at all, in the weeks leading up to the

beginning of the 2011-12 tax year.

Cite as 21 OTR 434 (2014) 439

The county’s position is rooted in the entirely correct

notion that taxpayer, as an Oregon LLC, is a business entity

with its own separate legal existence under Oregon law. The

county’s approach, however, is nonetheless misguided. ORS

63.810 states, in pertinent part:

“For purposes of * * * ORS chapter{ ] * * * 321, * * * a limited

liability company formed under this chapter or qualified to

do business in this state as a foreign limited liability com-

pany shall be classified in the same manner as it is classi-

fied for federal income tax purposes.”

Taxpayer was organized as a “pass-through” entity under

the federal Internal Revenue Service’s “check-the-box” reg-

ulations during the tax year at issue. For federal income

tax purposes, that means that taxpayer was a “disregarded

entity” with no existence separate from that of its sole owner,

Lillian Logan. Treas Reg § 301.7701-2(a); see also William

S. McKee, William F. Nelson, and Robert L. Whitmire, 1

Federal Taxation of Partnerships and Partners ¶¶ 2.02, 3.06

(4th ed 2007) (discussing federal tax treatment of LLCs and

other business entities organized under state law). In light

of ORS 63.810, the court takes the same approach in apply-

ing the “predominant purpose” provisions of ORS 321.257.

That is to say, that despite taxpayer’s separate legal exis-

tence under Oregon law, the court considers the predomi-

nant purpose of taxpayer for holding the subject property

coextensive with Lillian Logan’s predominant purpose—as

sole member of taxpayer—for causing taxpayer to hold the

subject property.

However, the county does have a point in that events

occurring closer in time to the beginning of the 2011-12 tax

year are likely to be more probative of Lillian Logan’s inten-

tions toward the subject property at the time of disquali-

fication than events occurring at greater remove. The evi-

dence is nearly incontrovertible that at or near the time of

Lillian Logan’s transfer of the subject property to taxpayer,

Lillian Logan intended to sell the subject property to a real

estate developer. This case, however, turns on whether the

record shows that Lillian Logan’s predominant purpose was

to hold the subject property as forestland during lead-up to

the 2011-12 tax year.

440 Rosalie Ridge LLC v. Dept. of Rev.

The record on that question is mixed. At trial the

county devoted substantial attention to the zoning and over-

lays on the subject property, but in the end agreed (a) that

nothing on the face of the relevant provisions of the Portland

City Code (PCC) outright forbade future timber harvests on

the subject property; and (b) that the county lacked suffi-

cient knowledge to say whether the City of Portland would

permit taxpayer to harvest timber on the subject property

at some future time. Taxpayer, in turn, refers to provisions

in the PCC permitting the continuance of agricultural

activities that were ongoing at the time of an annexation

or change in zoning and argues that such provisions would

permit taxpayer to continue forestry operations on the sub-

ject property. Inasmuch as neither the county nor taxpayer

ultimately asserts that this case turns on interpreting the

PCC zoning provisions, however, the court will not dwell

any further on that subject.

As was discussed above, the record very clearly

shows that at some point at or around the time Lillian Logan

transferred the subject property to taxpayer, Lillian Logan

intended to sell the subject property to a real estate devel-

oper. To that end taxpayer entered into a purchase and sale

agreement with a real estate development company. That

deal ultimately fell apart, but the fact that Lillian Logan,

as taxpayer’s sole member, entered into the agreement at

all is evidence of her predominant purpose for the subject

property at that time.

The record pertaining to Lillian Logan’s predomi-

nant purpose for the subject property after the termination

of the purchase and sale agreement with the development

company is less clear. The court heard testimony at trial

from Daniel Logan and from Ken Everett, another witness

qualified as an expert in forestry. Their combined testimony

made clear that Daniel Logan’s management of the subject

property from 2001 onward never departed from the normal

practices followed by professional foresters seeking to maxi-

mize profits from the commercial harvest of timber.

This testimony cuts both ways. On the one hand, the

fact that the subject property remained suitably prepared for

eventual commercial harvest after the collapse of taxpayer’s

Cite as 21 OTR 434 (2014) 441

anticipated sale supports a conclusion that taxpayer would

resume holding the subject property for eventual timber

harvest. On the other hand, however, this also tends to show

that the mere presence of marketable trees growing on the

subject property does not perfectly indicate Lillian Logan’s

predominant purpose for the subject property at any given

time between 2001 and the date of disqualification.

The problem appears to arise from the long time

spans inherent to commercial forestry. The two forestry

experts both testified that it might be 40 to 80 years before

the next full scale commercial harvest of the subject prop-

erty. Both witnesses further testified that the subject prop-

erty would not require pre-commercial thinning or any other

overt forestry activity for several years following the date of

the trial in this case. In a sense, the best evidence offered

by taxpayer to the effect that taxpayer’s predominant pur-

pose for holding the subject property during the lead-up to

the 2011-12 tax year was for future timber harvest is the

absence of any activity inconsistent with that purpose, such

as seeking out another real estate developer to buy the sub-

ject property.

At the margins, at least, the court agrees that given

the work already conducted by Daniel Logan to prepare the

subject property for eventual harvest, the absence of activities

hinting at a purpose other than forestland use in the years

after taxpayer’s deal failed in 2007 helps taxpayer’s case.

The county likewise relies in large part on the

absence of activity on the subject property after the failure of

the planned sales agreement to show that taxpayer’s predom-

inant purpose for holding the subject property in the lead-up

to the 2011-12 tax year was to sell the subject property to

a real estate developer. As with taxpayer’s approach, the

approach of the county is not without problems. In this case

the county, with the agreement of opposing counsel, placed

exhibits in the record but did not provide testimony from any

witnesses to contradict the testimony of taxpayer’s witnesses.

ORS 305.427 requires the party seeking affirma-

tive relief on a claim to prove their case by a preponder-

ance of the evidence. Consequently, the party not seeking

442 Rosalie Ridge LLC v. Dept. of Rev.

affirmative relief—in this case, the county—may sometimes

prevail without presenting any evidence to support that par-

ty’s own position.

However, this is not without risks as a tactical

approach. By declining to put on witnesses, the county let

pass a significant opportunity to direct the court to any other

at-least-equally-likely predominant purpose for the subject

property. Instead, the county must rely on the evidence in

the record to make such alternative purpose apparent, or

hope to wholly undermine taxpayer’s position through cross

examination, and thus bring the record on that dispositive

factual question back into equipoise.

The record on that question after trial is not, how-

ever, in equipoise. The court has no reason to doubt the

credibility of the witnesses who testified at trial regarding

forestry practices and the conditions present on the sub-

ject property. As stated above, the evidence is sparse and

somewhat ambiguous, but nonetheless generally consistent

with holding the subject property as forestland during the

lead-up to the 2011-12 tax year.

The county relies in part on statements contained

in taxpayer’s organizing documents to the effect that the

primary purpose of taxpayer is to “own, lease and otherwise

deal in real estate.” The county’s view appears to be that

this is highly probative, if not dispositive, of the question

of taxpayer’s predominant purpose for holding the subject

property during the 2011-12 tax year. The court disagrees

for several reasons. First, the statement referred to by the

county is consistent with holding the subject property pre-

dominantly for forestry. A purpose to “own * * * real estate”

reasonably encompasses holding real property planted with

marketable trees for future timber harvest.

Second, the statement referenced by the county is

immediately followed in the same document by:

“The Company may also engage in any lawful business per-

mitted by the [Oregon LLC Act] or the laws of any jurisdic-

tion in which the Company may do business.”

Thus, even if the statement referenced by the county is

dispositive of the purpose that taxpayer as an entity was

Cite as 21 OTR 434 (2014) 443

organized to fulfill, it in no way disposes of taxpayer’s pre-

dominant purpose for owning a particular parcel of real

property.

Finally, for the reasons discussed above, the court

has concluded that determining taxpayer’s predominant

purpose for holding the subject property requires determin-

ing Lillian Logan’s purpose for having taxpayer hold the

subject property. The court makes this determination by

reference to objective indications. Hudspeth, 4 OTR at 298.

The statement referenced by the county is one such objective

indication, but—as was discussed above—the county seeks

to impose an interpretation on that statement that the text

itself does not support. Both as quoted by the county and—

particularly—when read in context, the quoted statement is

consistent with holding the subject property as forestland.

V. CONCLUSION

Taxpayer has satisfied the burden of proving by

the preponderance of the evidence that the subject property

was “forestland” for purposes of Western Oregon Forestland

Special Assessment during the 2011-12 tax year. Now,

therefore,

IT IS THE DECISION OF THIS COURT that

the subject property was “forestland” for the purposes of

Western Oregon Forestland Special Assessment during the

2011-12 tax year.