Some Oregon cities tax the income of businesses, but allow partnerships to deduct from their taxable income an allowance for compensation to their partners, whether or not for federal tax purposes the partnership pays the partners a salary. The amount of the deduction is $X per partner and the total deduction depends on the number of partners. If your partnership has twice the partners, it can claim twice the deduction.
Two married couples (let’s call them John and Mary A and Bill and Jane B) formed a partnership some years ago (let’s call it A & B Partnership). A & B Partnership filed city business income tax returns and claimed the compensation deduction based on the partnership having four partners. Last year the city told A & B Partnership that it had only two partners, because it counted Mr. and Mrs. A as one partner (not two) and Mr. and Mrs. B as one partner (not two). The city said that the partnership was entitled to only two compensation deductions, not four, and was assessed for underpaying its city income tax.
The A’s and B’s engaged our office to appeal the tax assessment. We made an unconventional policy argument against the assessment, based on a review of the history of women’s rights in Oregon.
Some arguments require force and bluster. Others can be won with gentle embarrassment. Last month the city agreed with our position and cancelled the assessment. The clients are happy – all four, not two, of them.
Our clients gave us permission to share our letter to the city. In the continuation is a portion of what we wrote. You might enjoy reading it, even if you aren’t a married taxpayer.
