A city tax bureau concedes that a married couple is two, not one

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.

From our letter to the City:

The City’s determination [that A & B Partnership has two partners, not four] seems, frankly, to overlook the equal status of women under Oregon law. A marriage between two parties does not mean that the couple are a single partner in their business investments, and to assume so runs counter to Oregon law.

A brief look into the history of women’s rights in Oregon shows that Oregon recognizes those rights, despite a slow start. For example, the Oregon constitution of 1857 allowed only men to use state courts to sue or be sued. Women would not gain that right until much later. From 1857 to 1876, a husband was required to be named in a lawsuit involving his wife, unless the action concerned property that the wife owned as her separate property. From 1857 to 1878, a married woman could be a party to a court action without her husband if the action involved either her separate property, a wrong committed against “her person or character,” or her wages. Since 1878, married Oregonian women have been allowed to receive compensation for their labor and hold those wages in their own names. That same year, married women were made liable for their own torts, they could begin entering into their own contracts, and they were finally allowed to sue and be sued in their own names. Married women were no longer to be treated as adjuncts to their husbands.

Due in large part to the efforts of Oregon’s own Abigail Scott Duniway, and after six attempts on Oregon ballots, women in Oregon were granted the right to vote in 1912. In 1921, women were allowed to sit on Oregon juries, and in 1927, Oregon voters decided that a husband no longer needed to be included as a party in a lawsuit against his wife for any reason. In 1941, Oregon finally repealed all laws treating a married woman differently from her husband in the Oregon court system. See Smith v. Smith, 205 Or. 286 (1955).

Other laws in Oregon reflect the state’s intent for women to be treated equally with their male counterparts. For example, dower and curtesy have been abolished in Oregon, allowing widows and widowers equal rights to their deceased spouse’s estate (ORS 112.685). Oregon also passed the Equal Rights Amendment for the state constitution in 2014, establishing that no rights should be denied to a citizen on the basis of gender. Though our neighboring states recognize community property, Oregon has not been a marital community property state since 1949 (See ORS 108.520-540). Married women can indeed hold personal and real property, including partnership interests, separately from their husbands. The statutory policy of Oregon appears to treat women and men on an equal playing field. Women in Oregon are considered individuals capable of acting as separate partners in a business; the partners in A & B Partnership are no different.

The City’s determination indicates that the husband and wife are one legal entity for partnership purposes. We strongly disagree. The City erred when it held that John and Mary are only one partner and that Bill and Jane are only one partner. A & B Partnership is entitled to four partner compensation deductions without reference to the marital status of its partners.