Parker v. Dep't of Revenue, TC-MD 101057C
| Decision Date | 08 October 2012 |
| Docket Number | TC-MD 101057C |
| Parties | MARTIN L. PARKER and LUANA K. PARKER, Plaintiffs, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant. |
| Court | Oregon Tax Court |
Plaintiffs appeal adjustments Defendant made to their Oregon 2006, 2007, and 2008 income tax returns. The dispute involves claimed deductions for business losses, medical expenses, bad debt losses, and theft losses.
Trial in this matter was held at the Oregon Tax Court and spanned four days: August 31, 2011, September 1, 2011, September 7, 2011, and September 22, 2011. Janet Morton, Licensed Tax Consultant, appeared on behalf of Plaintiffs. Plaintiffs Luana K. Parker (Luana)1 and Martin L. Parker (Martin) testified. Plaintiffs' other witnesses were Janet Morton and her record keeper, Tracy Hensley. Michelle Warren, Tax Auditor, and Ronald W. Graham, Tax Auditor, appeared on behalf of Defendant.
Plaintiffs' Exhibits 1 through 23 and Defendant's Exhibits A through CC were admitted without objection. Defendant's Closing Arguments were received by the court on September 30, 2011. Plaintiff's Closing Arguments were received by the court on October 14, 2011, andPlaintiff's Second Closing Argument was received on October 28, 2011, whereupon the record closed.
Defendant disputes Plaintiffs' claimed deductions for losses from business, medical expenses, ordinary losses, and theft over the course of tax years 2006 through 2008. A broad overview of the facts is below, followed by the specific amounts in dispute.
From 2006 through 2007, Luana testified that she operated a business out of her home in Salem as a "designer" affiliated with Home & Garden Party, Ltd. (HGP). (See Ptf's Exs 15.114 - 15.119.) As a designer, she organized parties at homes and businesses to sell home interior products such as candles, pictures, and dishes. (Id.) Revenue for the business came from a 30 percent markup included in catalog prices, a 10 percent sales commission, and an additional 3 percent commission on items sold by other designers recruited by Luana (her "down line"). (Id.) Business expenses are discussed in more detail below, and included costs for display items, gifts for party hostesses, and travel expenses to attend conferences, conduct parties, and deliver orders. (Id.)
Plaintiffs also claimed a deduction for medical expenses incurred by Luana's college-aged son and for breast surgery undergone by Luana in tax year 2006. Luana paid for her surgery by cashier's check dated December 30, 2005. (Ptf's Ex 11.11.)
Plaintiffs claimed a deduction in tax year 2007 for losses stemming from the failure of a trucking business founded by Luana's son-in-law with money provided by Plaintiffs. Luana documented her transfer of money to Orville Holmes (Orville) in an agreement dated August 31, 2006. (Ptf's Ex 19.6.) According the agreement's terms, Plaintiffs loaned Orville $65,000, interest-free, secured by a semi-truck and trailer worth $35,000. (Id.) Luana testified that,although the agreement stated the loan was for $65,000, the full amount of the loan was really $100,000 because she had purchased the semi-truck and trailer for Orville. By letter dated August 2, 2007, Orville informed Plaintiffs that he intended to file for chapter 7 bankruptcy "regarding the $100,000 debt that I have owing to you." (Ptf's Ex 19.7.) Orville eventually filed for bankruptcy on March 18, 2009. (Ptf's Ex 19.9.) Luana testified that he never repaid the money.
Plaintiffs claimed an additional deduction for theft loss during tax year 2007 in part on the basis of actions taken by Luana's daughter, Lisa Holmes (Lisa). Luana testified that Lisa used three of her mother's credit cards to charge as much as $39,170.45. (Ptf's Exs 20 - 20.12.) In an email dated shortly before trial, Lisa confesses to the "fraudulent" charging of $31,000 on a stolen credit card to help support her husband's "floundering" trucking business. (Id. at 20.) After learning of Lisa's activity, Plaintiffs paid off their credit cards in March and April 2007.
The remainder of the 2007 theft loss deduction pertains to Kimberly Andrade Schultz (Kimberly),2 a woman Luana's sister introduced her to in 2006.3 Kimberly was at that time engaged in a lawsuit against Marion County seeking damages for an alleged assault she had suffered from a corrections officer during a prior period of incarceration. (Def's Exs Y-1 - Y-4.) Kimberly told Luana that she expected to receive at least one million dollars from the lawsuit, but that she needed money in the short term to pay for a car, rent, utilities, courtroom clothes, hotel rooms, and other expenses. Luana gave Kimberly assistance, most notably in the form of a new $28,000 car and nine cash payments totaling approximately $40,000 given over a period ofless than two weeks in May and June 2007. (Ptf's Exs 21, 21.1 - 21.3.) According to the printed terms of an unsigned "Agreement for Service" presented by Kimberly to Luana, Kimberly was to pay Luana $500,000 per year to provide a variety of personal and financial services. (Def's Exs W-1 - W-5.)
Plaintiffs' appeal of the 2008 tax year relates to a net operating loss carryover from 2007 and is consequent upon the resolution of the issues in that year. No further discussion of tax year 2008 is necessary here.
1. Gross income
Plaintiffs request that their 2006 Schedule C be amended to show a gross income of $5,115.60, and their 2007 Schedule C be amended to show a gross income of $11,986.54. (Ptf's Closing Arg at 2, 9.) These numbers are derived from spreadsheets Plaintiffs provided that allegedly record the income Luana received over the two years at issue from commissions, bonuses, and customer payments, as well as costs paid to HGP. (Ptf's Exs 3.3 - 3.4, 14.2 - 14.3.) Luana testified that customer payments reported on the spreadsheets are less than the catalog values of the goods sold because of customer discounts and because she did not report payment for the goods that she herself purchased for use as gifts and prizes.
Defendant charges that Plaintiffs' data lacks substantiating documentation and requests that the court find a gross income of $19,694.48 in 2006 ($3,870.48 higher than the adjusted amount in the Notice of Deficiency) and a gross income of $14,892.91 in 2007 ($2,114.91 higher than the adjusted amount in the Notice of Deficiency). (Def's Closing Arg at 1,3; Def's Exs A-3, B-3.) Defendant arrives at these figures by assuming that gross receipts are equal to the catalog value of all goods sold, which is known from the HGP commission statements provided byPlaintiffs. (Def's Exs AA, BB; Ptf's Exs 3.5 - 3.16, 14.4 - 14.15.) Based on Luana's testimony regarding the standard catalog markup, Defendant calculates the cost of these goods at 70 percent of catalog value. (See Def's Exs AA, BB.) Defendant would also include in Plaintiffs' 2006 income an additional $320.51 that Plaintiffs claim was paid in credit card fees and other charges due to HGP. (Id.; cf. Ptf's Ex 3.3.)
2. Expenses
Plaintiffs request an additional $289.25 in advertising expenses for the 2006 tax year. (Ptf's Closing Arg at 3.) Plaintiffs support their claim with a printed online order summary from "GeMagic" for goods and shipping totaling $289.25. (Ptf's Ex 4.) Luana testified that she used these goods to make signs for her display booths at trade shows. Defendant objects that the order summary does not have the buyer's name, and does not acknowledge any payment made.
Plaintiffs request that mileage expenses of $9,683.64 be allowed for the 2006 tax year and $13,411.22 be allowed for the 2007 tax year. (Ptf's Closing Arg at 4, 10.) Defendant would disallow all mileage for lack of adequate substantiation.
For evidence of their mileage, Plaintiffs provide summary spreadsheets of each year's travels, and photocopies of every page from Luana's 2006 and 2007 day planners. (Ptf's Exs 5 - 5.100, 15 - 15.119.) The day planners record appointments. Some of the entries include an address, some do not. Some of the entries include a business purpose, some do not. Beside most of the entries in the planner, odometer readings are written in small, uniform print. The reported odometer readings ascend sequentially throughout the years, and on cross-examination Luana testified that she used the same car for all her business trips, a 2004 Yukon Denali.
Defendant draws the court's attention to apparent discrepancies in Luana's day planner. In some entries, the reported mileage does not fit the recorded trip. (E.g., Ptf's Ex 5.1 (79 miles for a trip within Salem).) In others, the reported mileage is not consistent with similar trips. (E.g., Ptf's Exs 5.47, 5.95, 5.98 (three trips to Costco with mileages of 36, 67, and 72, respectively).) Additionally, on cross-examination Luana admitted that "many" scheduled parties never took place, after being confronted with an entry for a "Pillows and PJ's" party that was scheduled at the same time she had testified she was with Kimberly. Odometer readings for that trip are recorded in the day planner and Plaintiffs claimed mileage for it. (Ptf's Exs 15, 15.59.)
In addition to the amounts allowed in Defendant's Notices of Deficiency (Notices), Plaintiffs request $804.89 in supplies expenses for tax year 2006 and $882.29 for tax year 2007. (Ptf's Closing Arg at 5, 10.) Defendant agrees to allow an additional $182.09 for 2006, and $139.93 for 2007. (Def's Closing Arg at 2, 4.) Defendant would disallow the rest as not being ordinary and necessary and as inadequately substantiated.
Plaintiffs provide a spreadsheet for each year entitled "Supplies Expense" and copies of receipts for purchases from various retailers. (Ptf's Exs 6 - 6.11, 16 - 16.7.) No receipt is provided for an $81.53 purchase from Borders listed on the 2006 spreadsheet. (See Ptf's Ex 6.) The receipts show that one of the purchases from Circuit City listed on...
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