Danielson v. Dept. of Rev. ( 2017 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
DAVID P. DANIELSON, )
)
Plaintiff, ) TC-MD 160368G
)
v. )
)
DEPARTMENT OF REVENUE, )
State of Oregon, )
)
Defendant. ) FINAL DECISION1
This is one of four cases concerning appeals of assessments arising from adjustments to
the S corporation returns of a construction business owned by twin brothers.2 TC–MD 160282C
and 160283C concern adjustments to the company’s business expense deductions for tax years
2012 and 2013. TC–MD 160367G and 160368G concern adjustments to the company’s gross
income for tax year 2009 and to the company’s business expense deductions for tax years 2009
and 2010.3 All four cases were tried concurrently on January 4, 2017, and on February 2, 2017.
Dale R. Kennedy, attorney at law, appeared on behalf of Plaintiffs. Plaintiff David P. Danielson
and Robert E. Faler, CPA, testified for Plaintiffs. Nancy Berwick of Defendant’s Audit Unit
appeared and testified for Defendant. Plaintiffs’ exhibits 1 to 29 and Defendant’s exhibits A to
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1
This Final Decision incorporates without change the court’s Decision, entered October 19, 2017. The
court did not receive a statement of costs and disbursements within 14 days after its Decision was entered. See Tax
Court Rule–Magistrate Division (TCR–MD) 16 C(1).
2
The court’s four decisions in these cases are identical except for the relief ordered. The plural “Plaintiffs”
is used throughout all decisions to refer to Donald P. Danielson, Senda R. Danielson, and David P. Danielson.
3
Plaintiffs’ complaints in the two latter cases did not raise the issue of 2009 gross income. Plaintiffs
attempted to put gross income at issue by filing documents captioned “Amended Complaint” in each case after
Defendant had filed its answers. Those documents were filed without leave of the court or written consent by
Defendant, and did not suffice to amend the complaints. See TCR 23 A. However, the court treats the issue as if it
had been raised in the pleadings because Defendant submitted evidence and tried the issue without objection. See
TCR 23 B.
FINAL DECISION TC-MD 160368G 1
M were received without objection. Defendant’s exhibit N was received with objection for
demonstrative purposes only.
On December 23, 2016—less than two weeks before trial—Plaintiffs filed motions to
compel and motions to set over the trials in TC–MD 160367G and 160368G. Those motions
were argued at the outset of trial and the court denied them under the rules of the Magistrate
Division in effect in 2016. After the conclusion of trial, the parties submitted post-trial briefs.
I. STATEMENT OF FACTS
During the years at issue, Plaintiffs Donald P. Danielson and David P. Danielson were
respectively 51-percent and 49-percent shareholders in an S corporation, Danielson Contractors,
Inc. (DCI). DCI was a heavy construction company, performing primarily excavation and
related work: connecting sewer lines, fill house excavating, utility trenching, grading, paving,
and hauling gravel. DCI’s equipment included track excavators, dump trucks, a road grader, a
roller, pickup trucks, and trailers. (Ptfs’ Ex 23 at 1859.) DCI was organized in 2001; the twin
brothers had previously run another construction company, D. Danielson Construction, Inc.,
from 1993 to 2001.
David did the bookkeeping for DCI. Donald worked in the field, although David testified
that, along with the bookkeeping, he “was trying to do some work out there in order to make
myself some revenue.” David testified that the brothers tried to work different jobs because they
tended to argue when put together on the same job. The brothers lived at different addresses, in
different cities. (Def’s Ex C at 4–5.) David testified that Sonia Kellas, a personal companion
with whom he lived, was also involved with DCI, although not as an employee. David testified
that DCI had two employees in 2009 and none during the other years at issue.
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FINAL DECISION TC-MD 160368G 2
Both David and Plaintiffs’ expert witness testified that David’s bookkeeping skills were
extremely poor. David testified that he had thought of his accounting software as a tool to
generate invoices. He testified that he issued multiple invoices to customers for the same
amounts owed, either to correct errors or to reflect statement credits and partial payments
received. The sales revenue accounts in DCI’s general ledger intermingled entries for amounts
invoiced to customers, for deposits, and for sales receipts. Most of the entries were debits—
reducing DCI’s sales revenue by the amount it invoiced and the amount it deposited. In some
cases invoices were credited, often with memoranda reflecting receipt of payment from a
customer. David testified that he did not remember what his business income was in 2009.
Plaintiffs’ expert testified that DCI’s 2009 income was best approximated by adding up
the bank deposits made to its account at West Coast Bank that year—a total of $143,336. (Ptfs’
Ex 22; Def’s Ex H at 4.) Defendant’s auditor testified that DCI’s 2009 income was best
approximated by adding up its invoices that year—a total of $236,692.4 (See Def’s Exs A at 1, B
at 2.) Both parties agreed that DCI was on cash-basis accounting during the years at issue.
David testified that he did not have a personal bank account during the years at issue.
After a serious illness in 2006, a hospital had taken a judgment against him for unpaid medical
debt. David ceased using a personal bank account at that time in order to avoid garnishment by
that creditor. He paid his personal bills from DCI’s checking account. Regarding the possibility
of depositing business income into another account, David gave the following testimony.
“Mr. Kennedy [counsel for Plaintiffs]: Did you at any point in 2009, 2010,
2012, or 2013 deposit checks made payable to Danielson Contractors into another
account?
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4
The invoice total is the amount found by the auditor ($240,913) as reduced by the conference officer
($4,221). The invoices were not submitted into evidence.
FINAL DECISION TC-MD 160368G 3
“David Danielson [the Witness]: No.
“Counsel: No. Okay. You’re absolutely positive?
“The Witness: I’m positive.”
“* * * * *
“Counsel: * * * And you testified earlier that during the years in
question—2009, 2010, 2012, and 2013—all monies that came into the business
were deposited in the corporate checking account, correct?
“The Witness: Yes.
“Counsel: Nothing went into your personal bank account?
“The Witness: No, there was no personal bank account for it to go into.
“Counsel: Okay. Thank you.”
The 2009 DCI bank statements provided by Plaintiffs were from West Coast Bank. (Ptfs’
Ex 1; Def’s Ex H.) The credits on the statements were largely from deposits, although two
credits totaling $1,200 were described on the statements as telephone transfers requested by
Sonia Kellas. (Def’s Ex H at 5, 9.) Debits were from both checks and electronic payments,
including two debits totaling $1,065 described as telephone transfers “requested by Dave.”
(Def’s Ex H at 10, 26.) Eighteen checks totaling $30,700 were made out to David Danielson
over the course of the year, and one counter check for $500 was made out to “D. Danielson.”
Two checks totaling $2,200 were made out to “Danielson Contractors,” dated March 3, 2009,
and August 17, 2009. (Def’s Ex H at 15, 58.) The checks to “Danielson Contractors” were
canceled with a stamp from US Bank National Association that read: “CREDITED TO THE
ACCOUNT OF THE WITHIN NAMED PAYEE.”
DCI’s 2009 general ledger listed only one cash account, labeled “US Bank General
Account.” (Def’s Ex D at 1.) Many of the entries in that cash account corresponded to credits
FINAL DECISION TC-MD 160368G 4
and debits on the West Coast Bank statements.5 The two checks to Danielson Contractors were
described in the ledger as “transfers.” (Id. at 1, 6.) One of the telephone transfers “requested by
Dave” was also described as a transfer in the ledger. (Id. at 5.) The other telephone transfers—
by Sonia Kellas and by David—were not entered in the ledger. Several deposits reported on the
bank statements did not have a corresponding general ledger entry. To take one month as an
example, the March 2009 bank statement reported deposits totaling $12,065, but, during the
same time period, the cash account in the general ledger reported incoming payments totaling
only $6,420. (See Def’s Exs D at 1–2, H at 13.)
Plaintiffs’ expert, who had once run a construction company in addition to his accounting
business, testified to an industry practice of withholding “retainage” when paying contractors’
invoices. Plaintiffs’ expert testified that he determined from examining DCI’s books that
10 percent of some invoices had been retained by DCI’s customers. Plaintiffs’ expert further
testified that economic conditions in 2009 were particularly harmful to developers, some of
whom found themselves unable to pay on their invoices from contractors.
Additional facts are introduced as relevant in the analysis below.
II. ANALYSIS
The issues in this case are the determination of DCI’s 2009 gross income and DCI’s
eligibility for additional expense deductions under Internal Revenue Code (IRC) section 162 for
tires, tools, insurance, cellular telephone service, postage, T-shirts, a motorhome, a saw, DMV
fees, a carport, truck repairs, and a grease gun. As to each issue, Plaintiffs must bear the burden
of proof. See ORS 305.427.
5
In some cases the amounts did not match. For example, check number 7407, made payable to
ODOT/MCT, was drawn in the amount of $308.63, but only a $241.63 credit was applied against the cash account
in the ledger. (Def’s Exs H at 44; D at 2.)
FINAL DECISION TC-MD 160368G 5
A. 2009 Gross Income
Taxpayers in Oregon must follow the record keeping and reporting requirements of
section 6001 of the IRC. Brenner v. Dept. of Rev., 9 OTR 299, 305–06 (1983). IRC section
6001 requires taxpayers to “keep such records, render such statements, make such returns, and
comply with such rules and regulations as the Secretary may from time to time prescribe.”
Taxpayers therefore must keep “such permanent books of account or records * * * as are
sufficient to establish the amount of gross income, deductions, credits, or other matters required
to be shown by such person in any return of such tax or information.” 26 CFR § 1.6001–1(a).
Where a taxpayer’s books do not clearly reflect income, the Department of Revenue may
demonstrate unreported income “by any practicable proof that is available in the circumstances
of the particular situation.” Brenner, 9 OTR at 306 (quoting 2 Mertens Law of Federal Income
Taxation § 12.12); cf. U.S. v. Doyle, 234 F2d 788, 793 (7th Cir 1956).
One indirect method of determining income that the Department of Revenue may employ
involves the analysis of a taxpayer’s bank deposits. See Brenner, 9 OTR at 302 n 2; Doyle, 234
F2d at 793. Bank deposit analysis involves inferring that deposits into a taxpayer’s bank account
represent income. Doyle, 234 F2d at 793. It does not follow that a taxpayer’s income is limited
to what is deposited in the bank account. Plaintiffs’ expert testified that it was appropriate to
determine income not only by totaling up bank deposits, but also by looking at whether a
taxpayer had other bank accounts, whether there was evidence that a taxpayer was hiding money,
and whether a taxpayer’s wealth had grown over a given time period.
In this case, Plaintiffs’ own expert admitted that DCI’s 2009 general ledger contained
errors and that its stated income was unreliable. He stated that the best approximation of DCI’s
2009 income would come from a bank deposit analysis. All parties agree that the 2009 deposits
FINAL DECISION TC-MD 160368G 6
into DCI’s West Coast Bank account were income. The parties differ as to whether DCI had
additional income beyond those deposits.
David’s testimony that all checks made out to Danielson Contractors were deposited into
DCI’s account suggested that DCI had only one account. However, the two checks made out to
DCI and deposited at U.S. Bank are convincing evidence that DCI had another account for which
bank statements were not provided. Additional support for that conclusion comes from the
transfers in and out of the West Coast Bank account by David and Ms. Kellas, and from the
mention of U.S. Bank in the title of the general ledger’s cash account. Because Plaintiffs only
provided the West Coast Bank statements, it is impossible to be confident that the deposits
shown on those statements amount to DCI’s entire 2009 income.
Furthermore, no evidence was provided of how Donald lived during 2009. David paid
his mortgage and other personal bills from the West Coast Bank account, and withdrew over
$30,000 in cash as well. But no checks were made out to Donald Danielson (one $500 check
was made payable to “D. Danielson”). Donald and David lived in different cities, and David’s
testimony was that the brothers avoided getting too close to one another. On that evidence, it is
unlikely that David paid Donald’s mortgage or otherwise handled his personal finances. It is
more likely that Donald received income that went into another account or was held in cash.
David’s comment that working in the field was a way to earn additional income for himself
suggests the possibility that those who did field work for DCI had an additional revenue source.
Given DCI’s unreliable ledger, the lack of explanation as to how Donald lived, and the
direct evidence of an undisclosed account at U.S. Bank, Plaintiffs have not met their burden to
show that DCI’s 2009 income was limited to the deposits into the West Coast Bank account.
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FINAL DECISION TC-MD 160368G 7
Defendant adjusted DCI’s 2009 income to equal the total of the amounts DCI invoiced in
2009. Plaintiffs argued that, in doing so, Defendant had switched DCI’s accounting from cash to
accrual basis. Defendant’s auditor testified otherwise, stating that the adjustment was a best
estimate based on the most complete set of documents available.
The evidence does not support Plaintiffs’ charge that Defendant switched its accounting
method. Given the poor state of DCI’s books, it is clear that some estimate of DCI’s 2009
income was necessary. Plaintiffs would prefer an estimate using bank deposit analysis, but they
did not provide bank statements for DCI’s account at U.S. Bank and they did not explain how
Donald paid his living expenses during the years at issue. Defendant acted reasonably in looking
to Plaintiffs’ invoices for additional evidence of income.
Defendant’s method of estimating DCI’s 2009 income from its invoices is not entirely
satisfactory. As noted at trial, some invoices of DCI’s might not have been fully paid. Some
invoices might have issued multiple times with a running balance. And a few amounts invoiced
near the end of 2009 were double-counted in 2010, when payment was received.
Nevertheless, the uncertainties in Defendant’s estimation are attributable to Plaintiffs’
lack of records. If Plaintiffs’ books and documents were in order, no estimation would be
necessary. If Plaintiffs had provided complete bank account and living expense information, a
bank deposit analysis could have yielded a more accurate estimate. While the double-counting
of some invoices at the end of 2009 is concerning, Plaintiffs did not show that Defendant
reasoning—that such expenses roughly approximated unknown invoices at the end of 2008—
was unsound. The bank statements provided show the least amount of income DCI might have
earned in 2009. Given evidence of an undisclosed bank account, DCI may have earned
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FINAL DECISION TC-MD 160368G 8
additional income even beyond what was shown on the invoices. Plaintiffs’ evidence does not
support ordering a further adjustment to DCI’s 2009 income.
B. Expense Deductions
Taxpayers may deduct “all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business[.]” IRC § 162(a). Defendant allowed
deductions to Plaintiffs for each of the years at issue. Plaintiffs submitted evidence of additional
expenses, including bank statements with canceled checks; invoices and statements from Les
Schwab, Snap-on Tools, and Sprint; and insurance policies.
1. Tires and Tools
a. Payments on credit
Plaintiffs and DCI made purchases from Les Schwab and Snap-on Tools on credit. Cash-
basis taxpayers generally must claim deductions “for the taxable year in which paid.” 26 CFR §
1.461–1(a)(1). Where an expense is incurred for an item purchased on credit, the question arises
when that expense is “paid” because an item that is bought on credit in one year may be paid for
in another year.
The time that such an expense is paid depends on whether credit is extended to the
taxpayer by the vendor or by a third party. A taxpayer that pays an expense using money
borrowed from a third party has paid at the time of purchase and generally must claim any
deduction in that year. Granan v. Commissioner, 55 TC 753, 755 (1971). However, a taxpayer
that gives a promissory note in exchange for a good or service has only promised to pay, and so
no deduction is allowed until payment is actually made on the note. See Eckert v. Burnet, 283
US 140, 51 S Ct 373, 75 L Ed 911 (1931); Rev Rul 77-257, 1977-2 CB 174.
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FINAL DECISION TC-MD 160368G 9
Here, the evidence shows that the consideration for the purchases from Snap-on Tools
and Les Schwab were promises to pay the dealers rather than immediate payments with
borrowed money. The Snap-on Tools purchases through June 2008 were financed (or
refinanced) with a “Credit Sale Contract” between Donald Danielson and the dealer. (Ptfs’ Ex 5
at 186–88.) By the terms of the contract, Donald promised to pay the dealer or the dealer’s
assignee according to a payment schedule. (Id. at 187.) An additional page after the signature
blocks was not provided, but text printed below the signature blocks, if ratified by the dealer on
the subsequent page, would have assigned the contract to Snap-on Credit LLC. (Id. at 188.)
Such an assignment would not change the character of the purchase as a promise to pay. The
evidence shows that the purchases from Les Schwab were made on account: Les Schwab issued
invoices, and Les Schwab maintained a ledger of DCI’s payments and charges. Because
Plaintiffs’ purchases from both Snap-On and Les Schwab were financed by the vendor, any
deductions for such expenses would be claimed at the time of payment rather than the time of
purchase.
b. Les Schwab
Plaintiffs and DCI made payments on purchases of tires, batteries, and services from Les
Schwab during the years at issue. David testified that some of those purchases were personal; on
direct examination, he estimated the total amount of personal expenses at $600 every year or two
to put tires on an Expedition. That estimate appears low. On cross-examination, David admitted
that purchases for a Mustang were also personal. Purchases for the Mustang from Les Schwab
exceeded $4,000 in April 2008 alone. (Ptfs’ Ex 7 at 238–39, 261.)) David testified that tires for
the heavy equipment and trailers wore out quickly and did not last more than a year.
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FINAL DECISION TC-MD 160368G 10
Tires may only be deducted as expenses if they are consumable within a year of purchase.
Interstate Truck Serv., Inc. v. Commissioner., 17 TCM (CCH) 1079 (1958). If they are not
consumable within a year, they must be capitalized and depreciated. Id. The court accepts
David’s testimony that tires for DCI’s heavy equipment and trailers were consumable within a
year, and therefore that an expense deduction rather than a depreciation deduction would be
appropriate for any allowable tire expenses.
Expenses with respect to passenger automobiles are subject to the strict substantiation
rules of IRC section 274(d). See IRC §§ 274(d)(4); 280F(d)(4), (5). Those requirements include
not only records of the amount of the expense, but also of the time, place, and business purpose
of the use of the vehicle. See IRC § 274(d). Passenger automobiles include lightweight vehicles
designed for use on public roads. See IRC § 280F(d)(5). Pickup trucks are subject to strict
substantiation unless they have been specially modified such that they are unlikely to be used
more than a de minimus amount for personal reasons. 26 CFR 1.274–5(k)(7). “Qualified
nonpersonal use vehicles”—including dump trucks—are excepted from strict substantiation
requirements. IRC § 280F(d)(5); 26 CFR § 1.274–5(k)(2)(ii)(I).
Here, the vehicles for which DCI made purchases at Les Schwab included both “qualified
nonpersonal use vehicles” and passenger automobiles. In the former category were the heavy
construction equipment and two dump trucks. In the latter category were two F350 pickup
trucks not shown to be specially modified, an Expedition, and a Mustang (which David testified
was used solely for personal reasons). Receipts indicated purchases for additional passenger
automobiles—about which no testimony was received—including a Nissan Sentra and an F150
pickup. (Ptfs’ Ex 7 at 263–64.) Additionally, DCI made purchases from Les Schwab for its
equipment trailers.
FINAL DECISION TC-MD 160368G 11
Plaintiffs did not submit documentary evidence showing the time, place, or business
purpose of the use of any of the vehicles for which they made purchases at Les Schwab.
Therefore, no deduction may be allowed for the expenses of the pickup trucks, the Expedition, or
any of the passenger cars. See IRC § 274(d). While the court is satisfied from David’s
testimony that the trailers, dump trucks, and heavy construction equipment were used for
business purposes, it must have a reasonable basis for determining the amount of deductible
business expense incurred at Les Schwab. See Vanicek v. C.I.R., 85 TC 731, 742–43 (1985).
Plaintiffs requested that DCI be allowed an additional deduction of $5,750 in 2009 for its
payments to Les Schwab, and the evidence establishes those payments were made. Because
DCI’s account with Les Schwab had a balance of $8,727.87 at the beginning of 2009, all of the
2009 payments were applied to purchases made in previous years. (See Ptfs’ Ex 8 at 292.)
Plaintiffs submitted evidence of expenditures in previous years, including printouts from Les
Schwab of account activity, some statements, and some invoices. However, Plaintiffs’ records
of 2008 are incomplete. The 2008 printout of account activity extended only until May. (Ptfs’
Ex 7 at 239.) Statements were provided for some additional months, but not all, and the
statements did not contain descriptions of the charges. Some invoices were also provided,
although not for all expenses. Given the gap in the 2008 records, the court does not have
sufficient evidence to estimate what proportion of the balance carried forward into 2009 was for
deductible business expenses—as opposed to both inadequately substantiated passenger
automobile expenses and personal expenses. No additional deductions for Les Schwab expenses
are allowed for 2009.
For 2010, Plaintiffs requested an additional $5,000 deduction and submitted evidence of
payments. At the beginning of 2010, DCI’s account at Les Schwab had a balance of $5,162.38.
FINAL DECISION TC-MD 160368G 12
(Ptfs’ Ex 8 at 321.) The first $2,977.87 of those payments cover the remainder of the balance
carried forward from 2008, and a deduction for that amount is denied for the same reason a
deduction for the 2009 payments is denied. The remainder of the $5,000 paid in 2010 covered
the first $2,022.13 of charges incurred in 2009—a period extending through November. (See
Ptfs’ Ex 8 at 290.) Over $1,200 of those charges were finance charges for pre-2009 debt.
Deductions for those finance charges are disallowed because the gap in 2008 records prevents
the court from determining what proportion of the financing was for business expenses. Of the
remainder of the 2009 charges through November, only one was associated with an invoice
showing it was for a business vehicle—an equipment trailer. (Ptfs’ Ex 8 at 303–04.) A
deduction for that expense of $599.06 is allowed for the 2010 tax year.
The 2011 tax year is not at issue and no records of Les Schwab charges or payments were
provided for that year.
For 2012, Plaintiffs requested an additional deduction of $2,318.75 and submitted
evidence of payments largely consisting of debits from DCI’s bank account. Plaintiffs did not
submit evidence of DCI’s balance with Les Schwab carried forward into 2012. Without such
records, or records of the prior year’s account activity, the court cannot determine what portion
of DCI’s 2012 payments were for deductible business expenses. No deduction for Les Schwab
payments is allowed for 2012.
For 2013, Plaintiffs requested an additional deduction of $774 and submitted evidence of
payments. DCI’s initial balance with Les Schwab in 2013 was $1,901.36. DCI’s 2013 payments
are therefore applicable to a prior year’s debt. Lacking full information about charges and
payments in 2011 and 2012, the court cannot determine whether any of that $774 was payment
for a deductible business expense. No deduction for Les Schwab payments is allowed for 2013.
FINAL DECISION TC-MD 160368G 13
c. Snap-on Tools
David testified that Snap-on Tools is a supplier of high-quality tools and related
accessories. Donald had signed a “credit sale contract” with a Snap-on dealer on June 24, 2008.
(Ptfs’ Ex 5 at 186, 229.) The occasion of the June 2008 credit sale contract was the purchase of a
rolling tool cabinet for $1,935.40. (Id. at 186, 191.) That amount was added to a prior unpaid
balance of $4,889.47, and a hefty finance charge was applied to reach a total “credit sale price”
of $11,294.40. Donald was obligated by the contract to make weekly payments on that amount
for the next five years. A collection letter, dated August 8, 2014, showed an account balance of
$2,021.41. (Id. at 229.)
Plaintiffs have requested an additional deduction for payments to Snap-on totaling $7,151
during the years at issue. With the exception of a small cash purchase for unknown items on
July 15, 2013 (Ptfs’ Exs 4 at 166, 5 at 198), there is no evidence that DCI’s payments to Snap-on
were anything other than payments on the June 2008 credit sale contract. The total payments
alleged by Plaintiffs amount to about 63 percent of the original credit sale price. Because over
70 percent of the amount financed in the credit sale contract was a prior unpaid balance, the sum
of all the payments to Snap-on over the years at issue must be apportioned to that prior balance,
before the purchase of the rolling tool cabinet.
The evidence suggests that a portion of the pre-2008 balance was either for personal use
or for another business. The only sales and credit documentation provided from that period was
for purchases in 1998, 1999, and 2002. Because the first two purchases were made before DCI’s
incorporation in 2001, they could not have initially been for DCI’s use. Presuming that the tools
were later transferred to DCI’s use, no estimate of their value at the time of the transfer was
submitted. However, the evidence shows that the tools were used for personal purposes at least
FINAL DECISION TC-MD 160368G 14
some of the time. David testified that he kept the tools in his truck and borrowed them as needed
at home. Given that Plaintiffs’ evidence showed that the two brothers shared an interest in
collectible cars, there is ground for supposing the tool expenses were incurred at least partially
for personal reasons.
The documentation in the record does not suffice for the court to quantify what portion, if
any, of Donald’s pre-2008 balance was incurred for purposes of DCI’s business. No statements
from Snap-on were provided for periods before 2008. Donald’s ability to obtain credit from
Snap-on in 2008 suggests that he had made payments on his prior purchases in the intervening
years, but no documentation of those payments was provided. According to David’s testimony,
at least one additional purchase was made during that time—a welder described in a printout
from Snap-on’s web site. That printout was dated in 2013, five years after the credit sale
contract. It does not show when the welder was purchased or how much was paid. Without
clearer documentation—such as statements from Snap-on for the period before June 2008—the
court does not have a “basis on which an estimate may be made.” Vanicek, 85 TC at 743. No
deduction for payments to Snap-on is allowed for any of the years at issue.
2. Insurance
DCI made payments on multiple insurance policies during the years at issue. David
described DCI’s business as particularly reliant on insurance and on bonds. Deductions for a
portion of DCI’s claimed insurance expenses were allowed at audit and at conference. Plaintiffs
request additional deductions, as summarized in the following table.
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FINAL DECISION TC-MD 160368G 15
Requested
Allowed at Additional
Tax year Audit Deduction
2009 $15,995 $4,097
2010 $16,350 $904
2012 $7,462 $5,410
2013 $3,713 $3,556
(Def’s Ex A at 6, 12, 18, 24; Ex B at 2–3.) Plaintiffs provided policies for some, but not all, of
the payments they made. Because some expenses were previously allowed at audit, a threshold
question for each year will be whether Plaintiffs have shown that Defendant did not already
allow a deduction for the particular payment claimed.
For 2009 and 2010, Defendant’s auditor’s report did not specify which insurance policies
were allowed. The conference decision also did not itemize which policies were allowed, but did
state that payments on policies with American Modern Select and Safeco were disallowed.
Plaintiffs provided canceled checks made out to five payees in 2009 and 2010: Liberty
Northwest, C.A. Tomassene & Son, Mid Valley GA, Ross & Associates, and Safeco. Evidence
suggests that C.A. Tomassene & Son was an agent for multiple companies, including Liberty
Northwest and North Pacific Insurance, and also issued bonds. (Ptfs’ Exs 19 at 1305–06, 20 at
1307–09, 1322, 1380.) Ross & Associates was an agent for companies including American
Hallmark, Safeco, SAIF Corporation, and American Modern Select. (Ptfs’ Ex 20 at 1312, 1608–
09, 1639.) Mid Valley General Agency was an agent for Scottsdale Insurance Company. (Ptfs’
Ex 20 at 1406.)
There is no evidence that the 2009 and 2010 payments to Liberty Northwest, C.A.
Tomassene & Son, and Mid Valley General Agency were disallowed by Defendant, and so
Plaintiffs have not proved they are entitled to an additional deduction for those payments.
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FINAL DECISION TC-MD 160368G 16
Because the conference officer disallowed payments to American Modern Select and Safeco,
there is some evidence that payments to Ross & Associates were not allowed at audit.
Plaintiffs did not provide the Safeco and American Modern Select policies. A
cancellation notice from American Modern Select was addressed to David Danielson and Sonia
Kellas—not DCI—and identified that policy as a mobile home policy for property in Detroit.
(Ptfs’ Ex 20 at 1639.) Plaintiffs presented no evidence of the business purpose of that policy. A
billing statement from Safeco was also addressed to David Danielson and Sonia Kellas—not
DCI—and was identified as an umbrella policy. (Ptfs’ Ex 20 at 1608.) On the evidence, it is
more likely than not that those policies were for personal use. Because Plaintiffs did not show a
business purpose for the payments to Ross & Associates, and because they did not show that
their other insurance payments went beyond what was allowed at audit, no additional deduction
is allowed for 2009 or 2010.
For 2012, Defendant’s auditor’s report itemized the insurance payments allowed: Five
payments each to Capital Premium Insurance and American Hallmark, one payment to Pac West
of $601.42, and one payment to HCC. (Def’s Ex A at 18.) Plaintiffs requested additional
deductions for documented insurance payments to two companies, Hagerty and Zurich. (Ptfs’
Ex 27 at 2.) The payment to Zurich was in the amount of $804.83. (Ptfs’ Ex 3 at 89.) The
Hagerty policy was not provided and the court cannot verify its business purpose. The Zurich
policy was. (Ptfs’ Ex 18 at 1033.) The agent for the Zurich policy was PacWest Insurance. (Id.
at 1043.) The named insured was SJ Contracting Inc. (Id.) An additional named insured was
DCI. (Id. at 1044.) That policy covered business automobiles, and the schedule of covered
automobiles included F350s, construction vehicles, and trailers such as used by DCI. (Id. at
1060–61.) The payment already allowed to PacWest was by check posted on July 13, 2012.
FINAL DECISION TC-MD 160368G 17
(Ptfs’ Ex 3 at 110.) The additional payment claimed by Plaintiffs was debited on December 3,
2012. (Id. at 89.) The court finds that the payment to Zurich was a business expense and was
not a duplicate of the payment to PacWest already allowed by Defendant. The court allows DCI
an additional deduction of $804.83 for 2012.
For 2013, the auditor’s report itemized allowed insurance payments to Capital Premium
Insurance, NCCI, and Financial Pacific. (Def’s Ex A at 24.) Plaintiffs requested additional
deductions for payments to Zurich, PacWest, and United Fire & Casualty. (Ptfs’ Ex 28 at 1.)
Plaintiffs’ bank statements show an $804.83 payment to Zurich, a $200.00 payment to PacWest,
and three payments totaling $2,552.00 to United Fire & Casualty. (Ptfs’ Ex 4 at 147, 159, 175,
180, 182.) Deductions for payments to Zurich and PacWest are allowed as in prior years. The
account number associated with the direct deposit payments to United Fire & Casualty on
Plaintiffs’ bank statements was identical with the account number of Plaintiffs’ commercial auto
policy with Financial Pacific Insurance Company, which is a member of the United Fire Group.
(Compare Ptfs’ Exs 4 at 175, 19 at 1263.) The court finds that the payments to United Fire &
Casualty were ordinary and necessary business expenses. An additional deduction of $3,556.83
is allowed for 2013.
3. Cellular Telephone
DCI made payments to Sprint for cellular telephone service during the years at issue.
David testified that cell phones were used for communication over the sound of heavy machinery
while on job sites. David testified that he did not have personal telephone service. When asked
to estimate the proportion of business to personal use of his cell phone, he stated that he and his
brother had “no life” and that any personal use was a very small portion. DCI’s plan with Sprint
included a second cell phone in Ms. Kellas’s name, which was active in 2012 and 2013. In their
FINAL DECISION TC-MD 160368G 18
post-trial brief, Plaintiffs stated that Ms. Kellas’s cell phone was for personal use. Plaintiffs’
documentation of DCI’s cell phone expenses includes invoices from Sprint covering most of the
years at issue, and some bank statements.
In general, if property is held and used for “profit-motivated purposes,” then expenses
related to that property are deductible; whereas, property held for personal reasons will not give
rise to a deduction. Deihl v. Commissioner, 90 T.C.M. (CCH) 579, WL 3446081 at *10 (2005).
“If substantial business and personal motives exist,” the court may allocate expenses between
personal and business use. Id.In 2009, cellular telephones were “listed property” under IRC section 280F(d)(4),
meaning that a deduction was only allowed if a taxpayer satisfied the substantiation requirements
of IRC section 274(d). Plaintiffs here concede that their documentation does not meet that
standard and that they are not entitled to a deduction for cell phone expenses in 2009.
As of 2010, cellular telephones were removed from the definition of “listed property.”
See Pub L 111-240, § 2043, 124 Stat 2560 (2010). As a consequence, it is possible for courts to
estimate the amount of allowable deductions pursuant to the rule in Cohan v. Commissioner, 39
F2d 540 (2d Cir 1930). Such estimation is only possible if there is a basis in the record from
which a court can reasonably apportion business and personal use. Vanicek, 85 TC at 742–43.
David’s testimony demonstrated that there were substantial business reasons for using
cell phones while on the job. However, David had no other personal telephone service, and the
cell phone plan also included a purely personal line for Ms. Kellas. Those facts suggest that
there were personal motives for having the cell phone as well. Moreover, because a personal
telephone line is generally essential to conducting one’s affairs, David’s testimony that he used
his cell phone almost entirely for business purposes requires additional support that was not
FINAL DECISION TC-MD 160368G 19
provided. The invoices show that David commonly placed and received hundreds of calls each
month. Anyone’s recollection after a period of four to seven years is liable to error, particularly
with respect to numerous small activities. As an example, David did not initially recall the
$4,000 purchase for his Mustang when he testified about personal purchases at Les Schwab.
In their brief, Plaintiffs proposed that the court allocate business and personal expenses
based either on number of calls or number of minutes. Either method could be appropriate, if the
court could distinguish which calls and which minutes were personal. The evidence does not
allow that determination.
Given the cyclical nature of DCI’s business, the court considered whether a baseline of
personal use could be determined by looking at David’s usage patterns during the winter, when
he testified that DCI’s business dropped off. However, no pattern of escalating usage occurred
in the summer; in fact, the billing statements showed the contrary. David used fewer cell phone
minutes in the summer months than he did in the winter. While that evidence is not conclusive
that David’s cell phone usage was primarily personal, it does not aid the court in apportioning
between business and personal use.
Because there is no basis in the record for distinguishing personal from business use of
the cell phone, any relief for Plaintiffs would be “unguided largesse.” Williams v. United States,
245 F2d 559, 560 (5th Cir 1957). No additional deduction for cell phone expenses is allowed for
any of the years at issue.
4. Postage
David testified that DCI used postage for sending invoices and other business
correspondence. Plaintiffs provided a canceled check made payable to the postmaster in the
amount of $36.50. (Ptfs’ Ex 2 at 64.) The parties agreed that invoices were sent to DCI’s
FINAL DECISION TC-MD 160368G 20
customers. The court finds that postage was an ordinary and necessary business expense and
allows an additional deduction of $36.50 in 2010.
5. T-shirts
David testified that DCI purchased T-shirts printed with the company logo from Café
Press in 2010, to be worn while working at job sites. Because DCI did not have employees in
that year, the T-shirts were presumably to be worn by David and Donald. Plaintiffs requested a
deduction for the T-shirts on the ground that they were uniforms.
A deduction for the expense of work clothes is only allowed if the clothes are specifically
required as a condition of employment and not adaptable to general usage as ordinary clothing.
Donnelly v. Commissioner, 262 F2d 411, 412 (2d Cir 1959); Rev Rul 70-474, 1970-2 CB 34.
Because employment is the “trade or business” of an employee, for self-employed workers the
first prong of the test may be stated as requiring that the clothing be specifically required by the
trade or business—the way that uniforms are specifically required for police officers and nurses.
Cf. Rev Rul 70-474, 1970-2 CB 34.
Here, the evidence does not show that a T-shirt with a logo was specifically required to
work in construction. Although DCI may have derived some benefit from having its logo worn
on job sites, David and Donald also derived benefit from being provided with clothing. Clothing
expenses are not deductible unless wearing the clothes is required. Defendant correctly
disallowed a deduction for uniform expenses.
6. Motorhome
David testified that he had purchased a motorhome for personal use in 1995. DCI made
payments on that motorhome to Bank of America. During 2009, DCI used the motorhome to
temporarily house two employees near job sites.
FINAL DECISION TC-MD 160368G 21
For 2010, Plaintiffs requested a deduction of $1,655.55 related to the motorhome, and the
evidence contains canceled checks showing payments to Bank of America in that amount. (Ptfs’
Ex 2 at 41, 49–50; Def’s Ex I at 18.) Plaintiffs’ theory for claiming that deduction was that DCI
was paying rent for the use of the motorhome.
The evidence does not support Plaintiffs’ claim to a motorhome-related deduction. The
evidence does not show that DCI used the motorhome during 2010, raising the question of the
business purpose of DCI renting it that year. Additionally, there is no evidence of the market
rent for a motorhome in 2010; Plaintiffs offered only vague testimony of the going rate in the
late 1990s. The request for a deduction in the amount of payments to Bank of America might
suggest a deduction under IRC section 162. However, unlike the payments to Les Schwab and
Snap-on above, payments on a third party loan to finance a purchase are not deductible under
IRC section 162. Plaintiffs did not provide a depreciation schedule or other information
sufficient to establish any entitlement to a deduction under IRC section 167. Plaintiffs have not
borne the burden of proof with respect to a deduction for the motorhome.
7. Truck Repairs
Plaintiffs’ bank statements showed $337.74 in payments to Papé. David testified that
Papé dealt exclusively in equipment for heavy trucks. While memory of long-past transactions is
unreliable, the court places more credence in David’s knowledge of this vendor’s line of
business. On the balance, it is more likely than not that the purchases from Papé were for DCI’s
business purposes. An additional deduction of $337.74 for truck repair is allowed in 2012.
8. DMV Fees
Plaintiffs provided canceled checks showing $489.50 in payments to the DMV in 2010.
David testified that he was able to recognize the purpose of the payments from the amounts of
FINAL DECISION TC-MD 160368G 22
the checks. However, the evidence shows that Plaintiffs used multiple personal vehicles—some
of which David did not recall during his testimony. Payments to the DMV could be for any of
them, or for a driver’s license renewal. Without more evidence, Plaintiffs have not borne their
burden to show the DMV fees were incurred for business purposes.
9. Carport
Plaintiffs submitted a canceled check made out to TriState Carports in the amount of
$1,256. (Ptfs’ Ex 3 at 91.) David testified the purchase was of a carport to cover DCI’s heavy
equipment in the rain. David’s testimony on this point was credible and the court allows an
additional deduction of $1,256 in 2012.
10. Saw
An electronic payment of $30.40 to Woodstock appears on one bank statement. (Ptfs’ Ex
2 at 47.) David testified that the payment was for a steel cutoff saw used in DCI’s business.
David’s testimony offered seven years after a minor purchase is entitled to little weight. Without
further documentation of the sale—such as a receipt—Plaintiffs have not borne their burden of
proof.
11. Tacoma Screw
One bank statement showed a payment of $65.66 to Tacoma Screw in 2012. David
testified that Tacoma Screw was a fastener company that he only visited for one purpose: to
obtain a specialty grease gun for applying oil to rusty threads on DCI’s heavy equipment.
David’s testimony was credible, and the court allows an additional deduction of $65.66 for tax
year 2012.
///
///
FINAL DECISION TC-MD 160368G 23
III. CONCLUSION
Because DCI’s ledger was unreliable and because Plaintiffs did not provide complete
bank records, they have not borne their burden to reduce their 2009 gross income. Plaintiffs’
evidence showed that DCI was entitled to some additional deductions under IRC section 162 in
2010, 2012, and 2013. Now, therefore,
IT IS THE DECISION OF THIS COURT that, for tax year 2009, Plaintiff’s appeal is
denied.
IT IS FURTHER DECIDED that, for tax year 2010, Danielson Construction, Inc. is
allowed an additional deduction of $635.56.
Dated this day of November, 2017.
POUL F. LUNDGREN
MAGISTRATE
If you want to appeal this Final Decision, file a complaint in the Regular
Division of the Oregon Tax Court, by mailing to: 1163 State Street, Salem, OR
97301-2563; or by hand delivery to: Fourth Floor, 1241 State Street, Salem, OR.
Your complaint must be submitted within 60 days after the date of the Final
Decision or this Final Decision cannot be changed. TCR-MD 19 B.
This document was signed by Magistrate Davis and entered on November 7,
2017.
FINAL DECISION TC-MD 160368G 24