Ivanov v. Department of Revenue

• Decision Date: 28 March 2012
• Docket Number: TC-MD 101152C
• Parties: SERGEY IVANOV and SVETLANA IVANOV, Plaintiffs v. DEPARTMENT OF REVENUE, State of Oregon, Defendant.
• Court: Oregon Tax Court

SERGEY IVANOV and SVETLANA IVANOV, Plaintiffs
v.
DEPARTMENT OF REVENUE, State of Oregon, Defendant.

No. TC-MD 101152C

Tax Court of Oregon, Magistrate Division, Income Tax

March 28, 2012

DECISION

DAN ROBINSON MAGISTRATE

Plaintiffs appeal adjustments Defendant made to their Oregon 2007 and 2008 income tax returns. The focus of the dispute is the deductibility of certain claimed unreimbursed business expenses.

Trial in the matter was held at the Oregon Tax Court on April 20, 2011. Plaintiffs appeared at trial and testified on their own behalf. The court provided Russian-speaking interpreters to aid Plaintiffs with the presentation of their case. Defendant was represented by Darren Johnson (Johnson), an auditor with the Oregon Department of Revenue.

I. STATEMENT OF FACTS

Plaintiff Sergey Ivanov (Sergey) is a "boilermaker welder" who lived in Gresham, Oregon, during the years at issue.^[1] Sergey is, and has been, a member of a local welder's union. Prior to 2007, Sergey worked at a shipyard in Portland.

For the tax years at issue (2007 and 2008), Sergey was a member of two local unions, Boilermakers Locals 500 and 104, and received his work assignments from those organizations. Sergey worked both within and outside the State of Oregon. Plaintiffs contend Sergey worked in Longview, Puyallup, and Port Angeles, Washington, and also in various towns and cities in Minnesota, Montana, Arizona, North Dakota, Iowa, and Missouri. Plaintiffs also report that Sergey worked in Boardman, Oregon, which is more than 150 miles away from Plaintiffs' home town of Gresham. Plaintiffs deducted expenses they contend are business related. Those expenses include mileage, "travel" (lodging), "business expenses" consisting primarily of union dues and clothing, and meals and entertainment.

The primary focus of the parties' dispute is the mileage Sergey reported for travel to and from various job locations. Plaintiffs presented a mileage log at trial, and testified that the log was developed by transferring information Sergey would write on a piece of paper each time he traveled to a job location. Information on the piece of paper included the number of miles traveled, the date, and the destination. It is unclear to the court whether Sergey recorded the beginning and ending odometer reading, or wrote down the odometer reading when he was leaving home and then looked at the odometer when he arrived at his destination and calculated the number of miles. The pieces of paper were not submitted into evidence or available at the trial.

Defendant has multiple concerns with Plaintiffs' claimed travel expenses (mileage). Johnson stated that the log is unreliable; Johnson noted that he asked for it during the audit and believed Plaintiffs communicated to him that there was no log. Plaintiff Svetlana Ivanov (Svetlana) testified that she and Sergey were simply trying to explain to Johnson and his coworker during a meeting at the Department of Revenue that they did not have the log with them at that meeting, not that a log did not exist. When questioned by the court, Svetlana testified that they kept the log during the years at issue and found the log in the car. Svetlana further testified that the log was typically stored at the house; in other words, Sergey did not carry it in the car and take it with him on his various business trips. Defendant is additionally concerned that Plaintiffs have not provided adequate substantiation to show that the various trips were for business, as opposed to pleasure. Johnson testified that he submitted a written request to Plaintiffs for all of the couple's federal tax information, including the associated schedules; presumably those documents would show the various sources of the income. Moreover, Johnson testified that, by way of example, Plaintiffs were "depreciating" the truck Sergey used for his business at 85 percent, but that all but 104 miles are claimed as business related travel.

II. ANALYSIS

Before turning to the issues presented, certain principles applicable to those issues shall be summarized and the evidence on which Plaintiffs rely evaluated.

A. Certain Principles Applicable to the Issues Presented

1. Business Travel Deductions

The court is guided by the intent of the legislature to make Oregon's personal income tax law identical in effect to the federal Internal Revenue Code (IRC) for the purpose of determining taxable income of individuals. ORS 316.007.^[2] As a result, the legislature adopted, by reference in ORS 316.007(2), the federal definition for deductions, including those deductions allowed under section 162 of the IRC.^[3]

The legal authority for the disputed deductions begins in IRC section 162(a), which provides in relevant part:

“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, including -

“* * * * *

“(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business[.]”

For a deduction to be allowed as a business expense, it must be both ordinary and necessary to a taxpayer's trade or business. IRC § 162(a). “To be 'necessary[, ]' an expense must be 'appropriate and helpful' to the taxpayer's business. * * * To be 'ordinary[, ]' the transaction which gives rise to the expense must be of a common or frequent occurrence in the type of business involved." Boyd v. Comm'r, 83 TCM (CCH) 1253, 2002 WL 236685 at * 2 (US Tax Ct) (2002) (Boyd) (internal citations omitted). The Oregon Tax Court has stated that '* * * an ordinary expense is one which is customary or usual. This does not mean customary or usual within the taxpayer's experience but rather in the experience of a particular trade, industry or community.” Roelli v. Dept. of Rev., 10 OTR 256, 258 (1986) (Roelli) (citing Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933)); Guinn v. Dept. of Rev., TC-MD No 040472D, WL 1089727 at *4 (Apr 19, 2005) (citing Roelli, 10 OTR at 258).

IRC section 262 generally disallows deductions for “personal, living, or family expenses” not otherwise expressly provided for in the IRC. This court has recognized that “[t]he purpose of IRC § 162(a)(2) is to ameliorate the effects of business which requires taxpayers to duplicate personal living expenses," and that “[c]onsequently, courts must determine whether the claimed expense is actually required by the business rather than by the taxpayer's personal choice." Harding v. Dept. of Rev., 13 OTR 454, 458 (1996) (Harding).

The business expense deduction under IRC section 162(a)(2) includes deductions for mileage, meals, lodging and other travel expenses incurred while away from home in the pursuit of a trade or business. IRC § 162(a)(2). To obtain the travel expense deduction under IRC section 162(a)(2) requires that the expenses “(1) were incurred in connection with a trade or business; (2) were incurred while away from home; and (3) were reasonable and necessary." Morey v. Dept. of Rev., 18 OTR 76, 80-81 (2004) (Morey), (citing Finn v. Dept. of Rev., 10 OTR 393, 395 (1987)); see also Comm'r v. Flowers, 326 U.S. 465, 470, 66 S.Ct. 250, 90 L.Ed. 203 (1946) (Flowers).

In order to determine whether an expense is incurred away from home, it is necessary to determine the location of the taxpayer's home. The word “ home," as used in section 162(a)(2), generally refers to the vicinity of a taxpayer's principal place of employment and not to the place where the taxpayer's personal residence is located, if that personal residence is different from the principal place of employment. Daly v. Comm'r, 72 TC 190, 195, 1979 WL 3863 (1979) (citing Foote v. Comm'r, 67 TC 1, 4 (1976); Kroll v. Comm'r, 49 TC 557, 561-62 (1968)), rev'd 631 F.2d 351 (4th Cir 1980), rev'd en banc 662 F.2d 253 (4th Cir 1981); Harding, 13 OTR at 459. The general rule is subject to an exception: if the taxpayer's place of employment in another area is temporary as opposed to indefinite, the taxpayer's personal residence may be his tax home. Peurifoy v. Comm'r, 358 U.S. 59, 60, 79 S.Ct. 104, 3 L.Ed.2d 30 (1958) (Peurifoy); Alami El Moujahid v. Comm'r, 97 TCM (CCH) 1165, (2009) (Alami). Similarly, if a taxpayer does not have a principal place of employment, his permanent residence is his tax home for purposes of section 162(a)(2). Johnson v. Comm'r, 115 TC 210, 221, 2000 WL 1310661 at *7 (2000) (Johnson).

A place of business is temporary if the employment is such that termination within a short period could be foreseen. Mitchell v. Comm'r, 74 TC 578, 581, 1980 WL 4458 (1980) (Mitchell); see Michaels v. Comm'r, 53 TC 269, 1969 WL 1647 (1969) (Michael). Whether employment is temporary or indefinite is a question of fact. Peurifoy, 358 U.S. at 60-61. "In Rev Rul 93-86, 1993-2 CB 71, 72, the Commissioner ruled that under section 162(a)(2) if employment at a work location is realistically expected to last (and does in fact last) for one year or less, the employment will be treated as temporary in the absence of facts and circumstances indicating otherwise." Daiz v. Comm'r, 84 TCM (CCH) 148, 2002 WL 1796832 at *3 (US Tax Ct 2002) (Daiz).

For a taxpayer to be considered "away from home" within the meaning of section 162(a)(2), the taxpayer must be on a trip requiring sleep or rest. United States v. Correll, 389 U.S. 299, 302-03, 88 S.Ct. 445, 19 L.Ed.2d 537 (1967) (Correll). This avoids a case-by-case analysis of whether a taxpayer was away from home on a particular day. See Correll, 389 U.S. at 302. The court applied the Correll rule in Barry v. Comm'r, 54 TC 1210, 1970 WL 2245 (1970), aff'd per curiam 435 F.2d 1290 (1st Cir 1970):

“* * * this Court applied the Correll rule in disallowing expenses for meals claimed by a taxpayer on 1-day business trips

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