Godard v. Dep't of Revenue
| Decision Date | 07 April 2022 |
| Docket Number | TC-MD 210354N |
| Parties | DONALD W. GODARD, Plaintiff, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant. |
| Court | Oregon Tax Court |
ORDER DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
ALLISON R. BOOMER, PRESIDING MAGISTRATE
Plaintiff appeals Defendant's assessment for the 2018 tax year. The parties agreed to submit this matter to the court on cross motions for summary judgment.
Plaintiff purchased "the Hansen Lodge" in December 2017. (Compl at 4.) At that time, the lodge was (Compl, Ex 2 at 1.) As of January 2018 the lodge "was furnished, utilities were provided and minor maintenance [and] repairs were made." (Compl at 4.) Plaintiff alleges that it "could have been rented" then but he wished to improve the "south suite first." (Id.) He decided "to forego some short term revenue to make improvements in expectation of greater long term revenues" so he "alternately made improvements then hosted guests throughout 2018, 2019 & 2020." (Id.) Plaintiff prioritized improvements based on what was most important to guests to avoid bad reviews, though he also wanted the lodge operational as soon as possible for tax deductions and depreciation. (Id.)
Plaintiff "idled" the lodge during the summer of 2018 to make improvements to the bathrooms. (Compl at 4.) Between June and September 2018, Plaintiff laid new flooring, performed work on walls and ceilings, added window blinds, added or upgraded bedroom furnishings, upgraded 3.5 bathrooms, and installed new cabinets and counters. (Compl, Ex 1 at 3-6.) Those improvements "essentially turned the B&B into a construction site." (Def's Ex B at 8.) Plaintiff's adult children rented the lodge over Labor Day 2018, again paying a fair market price. (Compl at 4, Ex 1 at 3.) Plaintiff then "idled" the lodge for a second time during the fall of 2018 to improve the kitchen and dining room. (Compl at 4.) Between September and December 2018, he performed additional work on the bathrooms and upgraded the kitchen and dining room, which included removing a wall, installing new windows, upgrading the electrical system, and installing new cabinets, shelving, counters, appliances, and fixtures. (Compl, Ex 1 at 6-8.)
Plaintiff continued to work on the lodge during the first few months of 2019. (Compl at 4.) He listed the lodge for rent on Airbnb and VRBO in March 2019, renting to unrelated guests beginning in June 2019.[3] (Id.; Def's Mot Summ J at 2, Ex A at 2.) Plaintiff rented the lodge to numerous unrelated guests between June and November 2019. (Def's Ex D (guest log).)
Plaintiff maintains that he placed the lodge in service in May 2018 when he first rented it to paying guests and is entitled to claim depreciation for the 2018 tax year. (Compl at 3-4.) Defendant disagrees, concluding it was not placed in service until March 2019 when Plaintiff began advertising online. (Compl, Ex 1 at 3.) Defendant further determined that Plaintiff's B&B rental activity was in a start-up phase in 2018, and therefore Plaintiff's expenditures during that year must be capitalized instead of deducted as regular business expenses.[4] (Id. at 4-5, citing IRC section 195.) Plaintiff agrees that start-up expenditures should be capitalized but disagrees on the date that the B&B transitioned from its start-up phase to ongoing business. (Ex H at 4.) Defendant did not initially know that Plaintiff received $800 rent in 2018, so it added that as "other income" for 2018. (Exs F, G.)
The issue presented is whether Plaintiff may claim a depreciation deduction on the lodge under IRC section 167 for the 2018 tax year. (See generally Ptf's Compl and Mot Summ J.) As discussed below, a threshold issue is whether the lodge was used in a trade or business or held for the production of income in 2018, one of which is required to deduct depreciation. In the alternative, Plaintiff argues that he is allowed a depreciation deduction on the lodge as a "personal activity" under Treasury Regulation section 1.167(a)-11(e)(1)(i). (Ptf's Reply at 8-9.)
As the party seeking affirmative relief, Plaintiff bears the burden of proof by a preponderance of the evidence. See ORS 305.427.[5] 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 (1990).
The Oregon legislature intended to "[m]ake the Oregon personal income tax law identical in effect to the provisions of the [IRC] 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). 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. On the issues presented, Oregon has made no relevant modifications, so the court looks to the IRC and its administrative and judicial interpretations. See ORS 316.032.
IRC section 167(a) allows a depreciation deduction for the "exhaustion, wear and tear" of property used in a trade or business or held for the production of income. Plaintiff maintains that the lodge was used in his B&B business in 2018. However, Defendant concluded that business was in a start-up phase in 2018 and did not commence until 2019 when Plaintiff began advertising the lodge online and hosting unrelated guests. Based on that conclusion, Defendant determined that Plaintiff's expenses for the 2018 tax year must be capitalized. Plaintiff did not explicitly challenge that conclusion but appears to implicitly challenge it through his claim to deduct depreciation.
Consistent with IRC section 167(a)(1), courts have disallowed a depreciation deduction where taxpayer did not engage in a trade or business. In Simonson v. US, 752 F.2d 341 (1985), taxpayers purchased a truck and trailer to haul grain but ultimately decided not to enter the grain hauling business due to economic changes. Even though "the truck and trailer were ready to be placed into service on the date of purchase" the court disallowed the depreciation deduction because taxpayers "never entered the grain hauling business, or used the truck and trailer in any other commercial enterprise." Id. at 341, 343. With respect to the regulation defining when an asset is placed in service, the court explained that it "'answers the question of when a taxpayer who is in business may begin to depreciate an asset.'" Id. at 342-43 (quoting Richmond Television Corp., 345 F.2d 901, 902 n 12 (4th Cir 1965) (emphasis in original)); see also McManus v. Comm'r, 54 TCM (CCH) 475 (1987) (quoting Richmond Television, 345 F.2d at 907) (disallowing taxpayer's depreciation deduction because the business had not '"begun to function as a going concern and performed those activities for which it was organized'").
In order for Plaintiff to deduct depreciation on the lodge in 2018, he must establish that the lodge was used in a trade or business in 2018, or held for the production of income.
"[T]o be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and * * * the taxpayer's primary purpose for engaging in the activity must be for income or profit." Comm'r v. Groetzinger, 480 U.S. 23, 35, 107 S.Ct. 980, 94 L.Ed.2d 25 (1987). "To determine whether the activities of a taxpayer are 'carrying on a business' requires an examination of the facts in each case." Higgins v. Commissioner, 312 U.S. 212, 217, 61 S.Ct. 475, 85 L.Ed. 783 (1941).
"[E]ven though a taxpayer has made a firm decision to enter into business and over a considerable period of time spent money in preparation for entering that business, he still has not 'engaged in carrying on any trade or business' within the intendment of section 192(a) until such time as the business has begun to function as a going concern and performed those activities for which it was organized."
Richmond Television, 345 F.2d at 907.
Expenses incurred before the trade or business has begun...
To continue reading
Request your trial