Cleary v. Dep't of Revenue
| Decision Date | 23 May 2022 |
| Docket Number | TC-MD 210398N |
| Parties | BILL CLEARY, Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant. |
| Court | Oregon Tax Court |
ALLISON R. BOOMER PRESIDING MAGISTRATE JUDGE.
Plaintiff appealed Defendant's Notice of Assessment, dated August 26, 2021, for the 2018 tax year. A trial was held by WebEx on February 28, 2022. Plaintiff appeared and testified on his own behalf. Ron Cleary (Cleary), Plaintiff's father, also testified on Plaintiff's behalf. Brandon Burgess (Burgess), tax auditor, appeared and testified on behalf of Defendant. Plaintiff's Exhibit 1 and Defendant's Exhibits A through D were received without objection.
Plaintiff was the owner and sole employee of a trucking business during the 2018 tax year. (Compl at 11.) He stored business equipment on property that he dedicated entirely to his business. (Id. at 13.) The property was a two-acre lot "with a single wide trailer and a 40' x 80' commercial shop." (Ptf's Ex 1 at 78.) The business had "changed and evolved over the years" and equipment that was previously used by the business to haul and spread gravel was stored on the property alongside equipment used for trucking activities. (Id.) In 2018, Plaintiff drove an older-model Atlas Van Lines truck, which required frequent maintenance and engine "overhauls" that Plaintiff performed himself. (Id. at 78-79.) Plaintiff did not have a separate bank account or credit card for business activities, instead using his personal credit cards and checking account. (Def's Ex B.) At issue are three categories of business expenses that Plaintiff claimed on his 2018 Oregon income tax return: materials and equipment; a Ford F250 truck; and fuel. (Compl at 9-10; Def's Ex A at 1-11.)
Plaintiff claims $22, 660 in material and equipment expenses for 2018 that were disallowed by Defendant for lack of substantiation. (Ptf's Ex 1 at 29-42, 77.) He purchased those materials and the used equipment in part because of the "special depreciation allowance of 100 percent for equipment purchased after September 27, 2017." (Compl at 9.) In his testimony, Plaintiff referred to those items as "random used junk" purchased over the year. He explained that the purchases were all made in cash because the private sellers "[did] not accept checks or credit cards." (Id. at 9.) Plaintiff stated he (Id.)
Plaintiff provided pictures of each of the fourteen items purchased, accompanied by a description of the item and its business purpose, as well as a handwritten receipt documenting the item, the price, and in some cases the seller's name. (Ptf's Ex 1 at 29-42.) The items include: a tractor Plaintiff uses for snow removal at the business property, detachable snowblower and various other tractor parts and accessories; firewood for heating the workshop on the property; an anvil, lathe, welder, "I" beam to construct an overhead hoist, and table with vise for working on the engine of the Atlas truck; and various parts or accessories for the Atlas truck itself, including axles, loading ramps, a CB, and CB accessories. Plaintiff provided statements from his checking account, revealing cash withdrawals near the claimed purchase dates in amounts sufficient to cover the price of the materials and equipment purchases claimed on his return. (Ptf's Ex 1 at 43-72.)
Plaintiff claimed expenses related to a 2006 Ford F250 truck. (Compl at 9.) Plaintiff testified that he maintained a different vehicle and a motorcycle for personal use and the F250 was used solely for business purposes, such as going to the bank and to purchase parts and materials for the business. (Id.) The truck was kept at the business property, not at Plaintiff's residence, and was registered under the business name and to the business property's address. (See also id.) Plaintiff testified that he had no written policy regarding personal versus business use of the truck, and the truck bears no signage or markings indicating affiliation to the business.
Plaintiff provided receipts totaling $1, 561.35 for fuel and insurance expenses that were disallowed by Defendant. (Ptf's Ex 1 at 13-25.) Plaintiff also provided receipts from various vendors as evidence of trips made in the truck for business purposes. (Id. at 26-28.) Those included receipts for commercial tires and various truck parts, all from vendors located near Plaintiff's business property. (Id.) The dates on those receipts all fall within a few days to a week of the receipts for fuel. (Id.)
The parties agreed that Plaintiff's business takes him away from home for over 300 days a year. Cleary was granted Power of Attorney many years ago, in part so he could conduct business on Plaintiff's behalf when Plaintiff was away from home. (Compl at 8; see also Ptf's Ex 1 at 1-2 (Power of Attorney, dated April 20, 1998).) Although not an employee, Cleary performed a variety of tasks for the business during 2018, such as repairing equipment, securing and mowing the business property, checking mail almost daily, and running errands. (Compl at 8-9.) Cleary purchased fuel for his personal vehicle with his own funds while running errands for the business, kept the receipts, and was reimbursed by Plaintiff when Plaintiff returned home.
(Id.; Ptf's Ex 1 at 75.) Plaintiff claimed those fuel reimbursements as expenses on his 2018 return. (Id.) Plaintiff testified he reimbursed Cleary in cash. Cleary testified that he did not maintain mileage logs while running errands for Plaintiff's business.
Plaintiff's fuel receipts each bear a hand-written notation of either "Dad Gas," "Mower," "Tractor," "Gas Can," or simply "Dad." (Def's Ex D; Ptf's Ex 1 at 3-12.)[1] The auditor disallowed the fuel expenses documented by receipts labeled "Dad Gas," "Dad," or otherwise appearing to be attributed to Cleary, as personal expenses, citing the lack of information to substantiate that the expenses were "directly connected with or pertaining to the taxpayer's trade or business." (Ptf's Ex 1 at 77 (citing Treas Reg § 1.162-1(a)).) Some of Plaintiff's receipts are faded, with the dates and amounts illegible or completely obscured. (Ptf's Ex 1 at 3-12; Def's Ex D.) The legible receipts from 2018 total $2, 444; that amount includes $1, 956 from receipts labeled as "Dad" or "Dad Gas," and $488 from receipts labeled "Mower," "Tractor," and "Gas Can." (Id.) Plaintiff's bank statements reveal Plaintiff had sufficient cash on hand to reimburse Cleary in cash for the fuel documented by the receipts in addition to the material and equipment purchases, discussed above. (Ptf's Ex 1 at 43-72.)
At issue is whether Plaintiff adequately substantiated his claimed business expense deductions for the 2018 tax year.
The Oregon legislature intended to "[m]ake the Oregon personal income tax law identical in effect to the provisions of the Internal Revenue Code relating to the measurement of taxable income of individuals, * * * modified as necessary by the state's jurisdiction to tax and the revenue needs of the state[.]" ORS 316.007(1).[2] In general, terms have "the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required or the term is specifically defined * * *." ORS 316.012. Oregon has made no relevant modifications regarding the allowability of the deductions at issue, so the court looks to the IRC and its administrative and judicial interpretations. See ORS 316.032.
Under IRC section 162, there "shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." "Whether an expense is deductible under [IRC] section 162 is a question of fact to be decided on the basis of all the relevant facts and circumstances." Adams v. Comm'r, 105 TCM (CCH) 1029, WL 135103 at *9 (2013). IRC section 262 generally disallows deductions for "personal, living, or family expenses" not otherwise allowed under the IRC. Certain categories of business expenses, such as passenger automobiles, must meet strict substantiation requirements under IRC section 274 to be deductible. IRC § 280F(d)(4).
Deductions are a "matter of legislative grace," and the burden of proof is placed on the individual claiming the deduction. INDOPCO, Inc. v. Comm'r, 503 U.S. 79, 84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992). The taxpayer is responsible for maintaining records that are "sufficient to establish the amount of gross income [and] deductions * * *." Treas Reg § 1.6001-1(a); see also IRC § 6001. As the party seeking affirmative relief, Plaintiff bears the burden of proof by a preponderance of the evidence. See ORS 305.427. A preponderance of the evidence means "the greater weight of evidence, the more convincing evidence." Feves v. Dept. of Revenue, 4 OTR 302, 312 (1971). "[I]f the evidence is inconclusive or unpersuasive, the taxpayer will have failed to meet his burden of proof * * *." Reed v. Dept. of Rev., 310 Or. 260, 265, 798 P.2d 235 (1990). This court has authority to determine the correct amount of deficiency "upon grounds other or different from those asserted by the department * * *." ORS 305.575.
Plaintiff claims that the materials and equipment at issue were purchased to maintain the business property, or to repair or equip the Atlas truck. For each item, he provided pictures receipts, and descriptions detailing the price and business use. Plaint...
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