Gregg v. Dep't of Revenue
| Decision Date | 13 October 2014 |
| Docket Number | TC-MD 140043C |
| Parties | PETER C. GREGG and RENAE J. GREGG, Plaintiffs, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant. |
| Court | Oregon Tax Court |
This Final Decision incorporates without change the court's Decision entered on September 24, 2014. The court did not receive a request for an award of costs and disbursements within 14 days after its Decision was entered. See TCR-MD 19.
Plaintiffs appeal Defendant's Notice of Deficiency Assessment (Assessment) dated January 14, 2014, for the 2010 tax year. A trial was held in the Oregon Tax Courtroom on August 20, 2014, in Salem, Oregon. Peter Gregg (Gregg) testified on behalf of Plaintiffs. Genevieve Traub (Traub), Senior Tax Auditor, appeared on behalf of Defendant. Traub presented Defendant's case through her own testimony and the testimony of Gregg. Plaintiffs' Exhibits 1 through 8 were received without objection. Defendant's Exhibits A, C, D, and E were received into evidence. The court overruled Gregg's objection to the admission of portions of Defendant's Exhibit E.1
Plaintiffs filed joint 2010 income tax returns (federal and state). (Def's Ex A.) Plaintiffs' income was predominantly W-2 wage income from various employers. (Id. at 5-9.) Gregg reported nominal additional self-employment income ($1,875) from a landscaping business he operated in 2010. (Id. at 11.) Plaintiffs also reported Schedule C losses from a solar energy system venture2 Gregg was involved with in 2010, as explained below. Plaintiffs reported no income (gross receipts or sales) on that Schedule C. (Id. at 13.) The parties' dispute involves the depreciation from the solar energy system venture.
Plaintiffs attached to their federal tax return a federal Schedule C, Profit or Loss From Business, related to an enterprise in which Gregg was involved. (Id.) That form reported a net loss of $21,960, all of which stems from depreciation Plaintiffs claimed in connection with solar lenses designed to create renewable power or heat. (Id.) There was no reported income (gross receipts or sales) on that 2010 Schedule C associated with that venture. The disputed Schedule C names Gregg as the proprietor of a "business or profession, including product or service" that is identified on Plaintiffs' Schedule C as "Solar Energy System."3 No business name is reported in section C of that Schedule C.4 Defendant disallowed the entire deduction. (Def's Ans at 1.)
When questioned about his calculation of depreciation, Gregg testified that he was not sure how he calculated the $21,960 depreciation he reported in 2010 for the lenses purchased that year. Gregg testified that he prepared Plaintiffs' tax returns in 2010 using a commercially available computer software program and that, although he is not tax person, he read the "tax information" and "as far as [he] knew that's how [he] was supposed to file." Gregg acknowledged that his return may have some "discrepancies."
According to the sworn testimony and documentary evidence, in 2010 Gregg purchased nine solar thermal lenses from RaPower3. (Ptfs' Ex 8 at 2-3.) Gregg testified that each lens cost $3,000. Plaintiffs submitted an unsigned invoice from RaPower3 for the purchase of seven lenses described in that document as "units," for a total reported price of $21,000, and two contracts titled "Alternative Energy System Purchase Referral Fee Contract," one for the purchase of two "systems" on February 9, 2010, and the other for an additional seven "systems" purchased April 17, 2010. (Ptfs' Exs 1 at 1, Ex 8 at 2-3.) Neither of those contracts is signed. (Ptfs' Ex 8 at 2-3.)
According to Gregg's testimony, he purchased the nine lenses in February and April 2010, making periodic payments. Plaintiffs' Exhibit 1 reflects nine periodic payments of $700 each, for the seven lenses purchased in April 2010. (Ptfs' Ex 1 at 1.) The total paid in 2010 for those seven lenses was $6,300. Gregg continued to make payments in 2011 and possibly years thereafter. However, the focus of this case is on 2010.
The initial 2010 contract for the purchase of seven lenses is entitled "Alternative Energy System Purchase Referral Fee Contract." (Ptfs' Ex 8 at 2.) That contract indicates that Gregg purchased the "Alternative Energy Systems," that he made "payment at the time of signing the[agreement]," and that Gregg, as the purchaser, "agree[d] to make the Systems available to IAS as a reference for marketing and sales purposes to show and demonstrate to potential customers ('New Customers')," and in return for said purchase, Gregg "earned and shall thereafter receive a referral fee [of 0.0042 percent] for services performed by allowing access and use for sales purposes, for each System purchased * * *[.]" (Id.) The court notes that the referral fee contract has Gregg's name typed, as well as the date, but that there is no signature by any of the parties involved in the purchase contract. (Id.) The contract does identify a RaPower3 "Sponsor" named Roger Freeborn.
Gregg explained his involvement in the renewable energy enterprise as follows. RaPower3 is a company trying to develop renewable power and/or heat, depending on what turns out to be the most profitable application. Gregg testified that he "looked at that venture and thought it would be a good way to invest money into a small business." Gregg testified he bought the lenses from RaPower3 and then leased them back to LTB, LLC (hereinafter LTB). Gregg testified that the lenses are physically located in Delta, Utah, but that he is not certain whether the lenses he "purchased" had ever actually been placed in use; Gregg acknowledged that the lenses could be in storage in a warehouse in Utah. Gregg added that, although the lenses may or may not be currently in use, they are available for "marketing" and potential "sales purposes." Gregg did submit a letter from RaPower3 which states:
The undated letter is signed by a Greg Shepard (Shepard), who is identified as Director of Operations. (Id.) Shepard was not present at trial and did not testify.
Gregg testified that he has never seen or touched the lenses, and that they were shipped by RaPower3 directly to LTB. Gregg testified that he has nothing to do with the lenses after the purchase from RaPower3; LTB is responsible for assembly, installation, and maintenance of the lenses, all of which takes place in Utah. Gregg testified that the lenses have to be put together in a "lens format" or array to create heat to either clean water or make steam for electricity.
Gregg testified that the lease to LBT was arranged by RaPower3, and that he has no say over who the lenses are leased to. Gregg was also uncertain of the term of the lease but testified that he believed it was 30 years. Gregg also testified that the lease payments do not begin until the lenses are operational.
Gregg's testimony was rife with uncertainties. For example, Gregg testified that he leases the lenses to LTB, and that he is supposed to be receiving rental income and commissions in return. At one point, Gregg testified that he did not know "off the top of [his] head" how much income he received in 2010 but he was certain that he had received some amount in the form of a commission that year. Traub pointed out that Plaintiffs' tax year 2010 Schedule C for the solar energy system does not report any gross receipts or income of any kind. (Def's Ex A at 13.) Gregg then responded by stating that he may not have earned any income from the lenses in 2010. There was only scant testimony regarding the terms or conditions of the lease and commissions. Gregg was uncertain as to the length of the lease, but believed it was 30 years. Furthermore, Gregg testified that he is not clear about how much rental income he is supposed to receive from LTB. Gregg testified that there was an agreement for annual rental income on each lens, but that a portion of the payment goes to RaPower3 to "pay down the cost of the lenses." Gregg elaborated by explaining that, instead of receiving more annual rental income, a good portion of the lease payments go from LTB to RaPower3 to "rectify the full unit price, because[Gregg] only made a down payment." When pressed on the matter, Gregg testified that he believed he is supposed to receive somewhere between $112 and $200 per year, the balance going to RaPower3 to pay down the balance owed on the lenses Gregg purchased. Gregg later acknowledged that his rental income is contingent on the lenses being operational and producing heat.
In the Oregon Tax Court, the party seeking affirmative relief has the burden of "proving his case by a preponderance of the evidence," which means "the greater weight of evidence, the more convincing evidence." Feves v. Dept. of Revenue, 4 OTR 302, 312 (1971); ORS 305.427 (2013).5 Plaintiffs in this case are the party seeking affirmative relief and they therefore bear that burden. In practical terms, this case hinges on whether Plaintiffs have established their entitlement to the depreciation they claimed on their 2010 tax return by a preponderance of the evidence presented at trial.
Pursuant to ORS 316.007, it is the stated intent of the Oregon legislature to make this state's personal income tax system effectively identical to the provisions of the federal Internal Revenue Code (IRC). ORS 316.048 incorporates the provisions of the federal IRC, with certain exceptions not here implicated. Additionally, the US Supreme Court has declared that the "objective economic realities of a transaction rather than * * *...
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