Roy v. Dept. of Rev. ( 2018 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
JACK B. ROY and SHELLY A. ROY, )
)
Plaintiffs, ) TC-MD 180053N
)
v. )
)
DEPARTMENT OF REVENUE, )
State of Oregon, )
)
Defendant. ) FINAL DECISION1
Plaintiffs’ appeal Defendant’s Conference Decision Letter dated October 13, 2017, for
the 2013 tax year. A trial was held in the Oregon Tax Courtroom on June 18, 2018, in Salem,
Oregon. Plaintiffs appeared on their own behalves. Jack B. Roy (Roy) testified on behalf of
Plaintiffs. Benjamin Barlow (Barlow), tax auditor, appeared and testified on behalf of
Defendant. Plaintiffs’ Exhibit 1 and Defendant’s Exhibits A to F were received without objection.
I. STATEMENT OF FACTS
For the 2013 tax year, Plaintiffs claimed an itemized deduction (before the 2 percent
reduction) of $28,366 for unreimbursed employee business expenses. (See Def’s Ex E at 1.)
That amount is composed of $30,192 in vehicle expenses,2 $5,320 in other expenses, and $6,695
in meals and entertainment (before the 50 percent reduction), less $10,494 in reimbursements
from Roy’s employer. (Id. at 2.) Defendant opened an audit on Plaintiffs’ 2013 Schedule A
1
This Final Decision incorporates without change the court’s Decision, entered September 4, 2018. 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
Neither party provided the second page of Plaintiffs’ 2013 Form 2106, so the court did not receive a
statement of Plaintiffs’ claimed business miles. The standard mileage rate in 2013 was $0.565 per mile, indicating
Plaintiffs’ mileage deduction was based on 53,437 business miles. Rev Proc 2010-51, sec. 4.01, 2010-51 IRB 883;
IRS Notice 2012-72, 2012-50 IRB 673, 2012 WL 5878004.
FINAL DECISION TC-MD 180053N 1
itemized deductions, issuing a Notice of Deficiency on March 22, 2017, that reduced Plaintiffs’
allowable unreimbursed employee business expenses to $2,887. (See Def’s Ex A at 2.)
Plaintiffs appealed the adjustments to conference, where Defendant’s conference officer
concluded that Roy’s tax home was Medford, evidently based in part on the statements made by
Plaintiffs’ representative at conference.3 (See id. at 4.) The conference officer denied Plaintiffs’
appeal for vehicle expenses and meals. (Id. at 5.)
A. Roy’s Employment in 2013
Roy testified that he was a field agent for the Laborers’ Local 296, which meant he
negotiated contracts for new jobs, monitored existing jobs, helped union members, and ensured
sufficient votes for union representation. (See also Def’s Ex B-1.) For instance, he would find a
non-union contractor, build a relationship with them, and solicit them to hire union members.
Roy testified that his work required him to drive to potential and existing job sites throughout
Oregon. He also attended “District Council” meetings in various locations around the state.4
Roy testified that he was assigned to the Portland metropolitan area for 21 years. In 2012
or 2013, the Medford field agent was not performing adequately, so the District Council took the
Medford agent out of office. The Portland local assumed control over the Medford local and
Roy began traveling to Medford more frequently in 2013. Roy testified that the District Council
always planned to replace the Medford field agent and did so in 2016.
///
///
3
Plaintiffs’ representative at conference reportedly “identified [Roy’s] base of operation as Medford.”
(Def’s Ex A at 4.)
4
Roy testified that the District Council is the statewide governing body that oversees the locals, of which
there were five before Portland took over supervision of Medford.
FINAL DECISION TC-MD 180053N 2
B. Mileage Log and Tax Home
Roy kept a mileage log in 2013 and wrote down his daily business mileage. (See Def’s
Ex C.) A typical entry in Roy’s mileage log included the date, a total number of miles driven,
and either a single location or no location. (See id.) Roy testified that the mileages listed for
Medford varied because he visited numerous sites in Southern Oregon, including Roseburg,
Crater Lake, and the coast. He did not write down each stop, but rather recorded the total
mileage for the day based on odometer readings. Roy testified that he did not record mileage
traveled from his residence in Molalla to the Portland union hall. He testified that he typically
stayed overnight in Medford when he traveled there in 2013. The union paid for his lodging in
Medford. Roy testified that his starting place for mileage in Medford was his hotel. He testified
that, if no location was written on the log, the starting place was the union hall in Portland. (E.g.,
Def’s Ex C-1 “January 2, 2013”.) 112 days were not marked with a location. (Def’s Ex F-1).
Roy updated his log in 2018 to include more location details based on his memory. (See
Ptfs’ Ex 1.) His updated mileage log showed travel to Portland and other locations: in January,
new locations included Troutdale, Mount Hood Meadows, Salem, Silverton, and others. (See
Ptfs’ Ex 1 at 5, 8, 9.) Roy testified that a full work year included 260 days and he was based in
Medford for 128 days in 2013. He testified that he had a single employer in 2013 and it is not
possible to distinguish the amount of his pay attributable to Portland or Medford.
Barlow testified that, based on the mileage log, he calculated that Roy spent 129 days in
Medford out of a total of 271 days of travel in 2013. (See Def’s Ex F-1.) Roy spent 47.6 percent
of his travel days in Medford and 41.33 percent in unidentified locations. (See id.) Barlow
testified that — if the unidentified locations were the Portland metropolitan area, as Roy testified
— that might change the tax home analysis. He testified that he found numerous discrepancies
FINAL DECISION TC-MD 180053N 3
with the mileage reported in Roy’s log. For instance, Barlow calculated that the trip from
Plaintiffs’ home in Molalla to Medford was 264 miles, whereas Roy variously claimed 294 and
310 miles.5 (See, e.g., Ptfs’ Ex 1 at 6, 81.) Barlow calculated that the distance from Portland to
Florence was 149 miles, whereas Roy claimed 212 miles. (See id. at 49.) He testified that Roy’s
mileage log was inadequate substantiation to allow any mileage deduction for the 2013 tax year.
Roy testified that the discrepancies in mileage were likely due to pulling off the highway
to get lunch, use a rest stop, or check on a job. He testified that the IRS audited Plaintiffs in a
prior tax year and the agent told Roy that his mileage log was sufficient.
C. Other Records
Barlow provided scanned copies of receipts that Plaintiffs sent to the initial auditor
assigned to Plaintiffs’ audit. (Def’s Ex D.) He testified that the receipts were illegible, so he
could not determine dates, locations, prices, or other information contained on the receipts.6 Roy
testified that he provided original receipts to Defendant’s initial auditor and he was told by that
auditor that Defendant would return the original receipts to Plaintiffs. Barlow testified that
Defendant asks for copies, not originals, and does not keep originals when received.
Roy testified that he submitted “gas statements” — credit card statements for gas
purchases – to Defendant’s initial auditor. Barlow testified that he had not seen them.
II. ANALYSIS
The issue presented is whether Plaintiffs are allowed to deduct certain unreimbursed
employee business expenses for the 2013 tax year. More specifically, the parties dispute the
location of Roy’s tax home — the Portland metropolitan area versus the Medford area — and
5
Barlow testified that he used MapQuest to determine distances.
6
Barlow testified that Plaintiffs claimed a meals deduction based on per diem rates, but provided receipts
as additional support for Plaintiffs’ claimed traveling expenses.
FINAL DECISION TC-MD 180053N 4
whether Plaintiffs adequately substantiated Roy’s traveling expenses under Internal Revenue
Code (IRC) section 274(d).
The legislature intended to “[m]ake the Oregon personal income tax law identical in
effect to the provisions of the Internal Revenue Code relating to the measurement of taxable
income of individuals, estates and trusts, modified as necessary by the state’s jurisdiction to tax
and the revenue needs of the state[.]” ORS 316.007(1).7 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. “Insofar as is practicable in the administration of this chapter, the department shall
apply and follow the administrative and judicial interpretations of the federal income tax law.
When a provision of the federal income tax law is the subject of conflicting opinions by two or
more federal courts, the department shall follow the rule observed by the United States
Commissioner of Internal Revenue until the conflict is resolved.” ORS 316.032(2).
The legal authority for the disputed mileage deduction begins in IRC section 162(a),
which states 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)(2). To be “ ‘necessary[,]’ an expense must be
7
The court’s references to the Oregon Revised Statutes (ORS) are to 2011.
FINAL DECISION TC-MD 180053N 5
‘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) (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) (citations omitted).
IRC section 262(a) disallows deductions for “personal, living, or family expenses[.]”
The Tax 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
“[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).
Deductions are “a matter of legislative grace” and taxpayers bear the burden of proving
their entitlement to the deductions claimed. INDOPCO, Inc. v. Comm'r, 503 US 79, 84, 112 S Ct
1039, 117 L Ed 2d 226 (1992). “In all proceedings before the judge or a magistrate of the tax
court and upon appeal therefrom, a preponderance of the evidence shall suffice to sustain the
burden of proof. The burden of proof shall fall upon the party seeking affirmative relief * * *.”
ORS 305.427. Plaintiffs must establish their claim “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). “[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, 798 P.2d 235 (1990). “In an appeal to the Oregon Tax Court from an assessment made
FINAL DECISION TC-MD 180053N 6
under ORS 305.265, the tax court has jurisdiction to determine the correct amount of deficiency
* * *.” ORS 305.575.
A. Tax Home
“To deduct travel expenses, taxpayers must show 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)(citation omitted).
Generally, a taxpayer’s home for purposes of IRC section 162(a)(2) — the “tax home” — is the
taxpayer’s principal place of business or employment. Id. at 81.8 Where a taxpayer’s principal
place of business is “temporary” as opposed to “indefinite” or “indeterminate,” the taxpayer’s tax
home is her personal residence. Id., citing Peurifoy v. Comm’r, 358 US 59, 60, 79 S Ct 104, 3 L
Ed 2d 30 (1958). However, any employment in excess of one year is per se indefinite. Id.,citing IRC § 162(a).
The court in Morey identified three “standards” for determining the location of a
taxpayer’s tax home, but did not ultimately select the applicable standard because the issue was
“not squarely placed before [the] court.” 18 OTR at 82. Here, Defendant applied the “three-part
objective standard” (the second standard identified in Morey), which considers “(1) the length of
time [taxpayer] spent in each of the locations; (2) the degree of [taxpayer’s] business activity in
each location; and (3) the relative proportion of [taxpayer’s] income derived from each location.”
8
The Supreme Court observed a split on the meaning of “home”: “The Tax Court and administrative
rulings have consistently defined it as the equivalent of the taxpayer’s place of business[,]” whereas some circuit
courts “have flatly rejected that view and have confined the term to the taxpayer’s actual residence.” Comm’r. v.
Flowers, 326 US 465, 471-72, 66 S Ct 250, 90 L Ed 203 (1946) (citation omitted); see also Rosenspan v. US, 438
F2d 905, 912 (2d Cir 1971) (interpreting “home” to mean “residence”). This court has observed that “[t]here can be
little doubt the Commissioner of Internal Revenue observes the rule that, for purposes of section 162(a)(2), ‘home’
means the taxpayer’s principal place of business or employment.” Harding v. Dept. of Rev., 13 OTR 454, 459
(1996), citing Rev Rul 83-82, 1983-1 CB 45. Revenue Ruling 83-82, 1983-1 Cumulative Bulletin 45 was obsoleted
in part by Revenue Ruling 93-86, 1993-40 Internal Revenue Bulletin with respect to the presumption of when a
taxpayer’s employment is temporary or indefinite, but that is not at issue here.
FINAL DECISION TC-MD 180053N 7
Id. at 84-85; see also Def’s Ex A at 4 (conference decision). Plaintiffs did not challenge the
standard applied by Defendant and the three-part objective standard appears to be followed by
the Commissioner of Internal Revenue. See, e.g., Folkman v. U.S., 615 F2d 493, 495 (9th Cir
1980) (finding it “useful to apply the three-part definitional test proposed by the government and
adopted by the Sixth Circuit in Markey v. Comm’r, 490 F2d 1249 (6th Cir 1974)”, where the
“taxpayer both earns a substantial income and stays overnight in each of two locations”); see
also Barrett v. Comm’r (Barrett), 114 TCM (CCH) 398 (2017), 2017 WL 4407835 at *4 (US
Tax Ct) (applying the Markey test for the 2011 through 2014 tax years). Accordingly, the court
will consider the three-part standard in determining Roy’s tax home for the 2013 tax year.
1. Three-part objective standard
Several cases are illustrative. In Folkman, the taxpayers were pilots who lived in Reno,
Nevada as a requirement of their work for the Nevada Air National Guard, but who were based
in San Francisco, California as employees of a commercial airline. 615 F2d at 494. Even though
the taxpayers spent most of their time in Reno (typically more than 200 days per year), the court
determined their tax homes were at their airline duty base in San Francisco because they earned
most of their income (approximately 85 percent) from the airline. Id. at 494 n3, n4, 496; see also
Tirheimer v. Comm’r, 63 TCM (CCH) 2307(1992), 1992 WL 42757 (US Tax Ct) (concluding
tax home was where taxpayer spent 75 percent of his time and earned 97 percent of his income).
In Daly v. Comm’r, 72 TC 190, 191, 194 (1979), the taxpayer was a district sales a
manager with a three-state sales territory, who lived outside of his sales territory at the location
of his spouse’s job. The court examined the various locations of taxpayer’s sales activity,
concluding that his tax home was the Philadelphia metropolitan area because 80 percent of his
sales activity was within 88 miles of Philadelphia. Id. at 195-197. Even though the taxpayer
FINAL DECISION TC-MD 180053N 8
performed work at his home office, the court quoted taxpayer’s testimony that “selling is 85
percent of the job,” indicating that taxpayer’s most important job functions occurred in the
Philadelphia metropolitan area and not at his home office. Id. at 196.
In Barrett, taxpayer worked in video production, primarily performing services for one
organization with a facility in Washington, D.C., 2017 WL 4407835 at *2. Taxpayer was
required “to travel to DC to use the editing facilities and the library at [the facility] to perform
postproduction activities[,]” but “continued to write scripts and perform preproduction services
in his Las Vegas home.” Id. The court agreed that taxpayer’s tax home was Las Vegas rather
than Washington, D.C., based on his testimony that he spent 75 percent of his time outside Washington,
D.C., “interviewing on location and writing scripts and reviewing footage in Las Vegas.” Id. at *4.
2. Application to this case
With respect to the first part of the test, time spent in each location, Roy worked 129 days
in the Medford area out of a total of 271 days worked.9 That is 47.6 percent of Roy’s work time
spent in the Medford area. Roy testified that unidentified locations in his mileage log were the
Portland area. With respect to the degree of business activity at each location, Roy performed
the same types of work in each location. However, Roy’s connection to the Portland area was
long-term (21 years), whereas his assignment to the Medford area was temporary while his
employer searched for a new Medford field agent.10 The third factor — income derived from
each location — is inconclusive because Roy received the same pay based on work in each location.
9
“A principal place of business may include an entire metropolitan area. Rather than looking at particular
jobs, all of the job prospects in the area must be considered.” Hintz v. Dept. of Rev., 13 OTR 462, 467 (1996),
citing Ellwein v. United States, 778 F2d 506, 510 (8th Cir 1985).
10
Even though Roy’s assignment to the Medford area lasted more than one year, his trips to Medford were
“sporadic and for short periods lasting less than half a year[,]” so the bright line rule in IRC section 162(a) does not
apply. Barrett, 2017 WL 4407835 at *3.
FINAL DECISION TC-MD 180053N 9
Roy spent a significant amount of time working in the Medford area, but it was not a
majority of his work time in 2013. Roy also spent a significant amount of time working in the
Portland area and other locations around the state. Roy’s assignment to the Medford area was a
temporary one, whereas his permanent assignment continued to be the Portland area. On those
facts, the court is convinced that Roy retained a principal place of business – and, therefore, tax
home – in the Portland area rather than the Medford area for the 2013 tax year.
B. Substantiation of Plaintiffs’ Traveling Expenses
Traveling expenses and expenses associated with the business use of a passenger vehicle
are subject to IRC section 274(d), which requires taxpayers to substantiate
“by adequate records or by sufficient evidence corroborating the taxpayer’s own
statement (A) the amount of such expense or other item, (B) the time and place of
the travel, entertainment, amusement, recreation, or use of the facility or property,
or the date and description of the gift, (C) the business purpose of the expense or
other item, and (D) the business relationship to the taxpayer of persons
entertained, using the facility or property, or receiving the gift.”
Taxpayers must be prepared to produce “any books, papers, records or memoranda bearing upon
[any] matter required to be included in the return[.]” ORS 314.425(1); see also Gapikia v.
Comm’r, 81 TCM (CCH) 1488, WL 332038 at *2 (2001) (“[t]axpayers are required to maintain
records sufficient to substantiate their claimed deductions”). In addition to testimony, courts
may consider evidence “such as appointment books, calendars, or maps * * * to corroborate the
bare information contained in the mileage log.” Solomon v. Comm’r, 101 TCM (CCH) 1424
(2011), 2011 WL 1627966 at *3 (US Tax Ct).
1. Mileage
Roy kept a contemporaneous mileage log when he traveled for work. The log was a daily
planner in which Roy noted his total mileage, based on odometer readings, on days that he
traveled for business. He did not note every location visited or the business conducted. In
FINAL DECISION TC-MD 180053N 10
preparation for trial in 2018, Roy updated the 2013 log from memory to include more details,
such as the general destinations he traveled to within an area.
Roy’s updated log is unreliable because it was based on memory after five years had
passed and it was not corroborated by other, more reliable evidence. His original mileage log is
not adequate to support his total claimed mileage deduction for the 2013 tax year. However, the
court is convinced that Roy’s original mileage log provides adequate substantiation of Roy’s
travel between Portland and Medford, as well as travel to other locations specifically noted in the
log. Roy provided credible testimony to support the business purpose of that travel. Indeed,
Defendant’s tax home determination accepts that Roy frequently traveled to Medford.
The court finds that Roy made the following business trips in 2013, each starting from
Portland: 34 to Medford, two to Florence, one to Coos Bay, one to Lincoln City, and one to
Bend. (See Def’s Ex C1-105). The court takes judicial notice of the round-trip distances
between those cities: 546 miles to and from Medford; 326 miles to and from Florence; 444 miles
to and from Coos Bay; 176 miles to and from Lincoln City; and 326 miles to and from Bend.11
The court finds Roy drove 20,162 business miles in tax year 2013. Accordingly, Plaintiffs are
allowed a mileage deduction of $11,392 based on the 2013 rate of 0.565 per mile.
A taxpayer’s costs of traveling between one business location and another generally are
deductible under IRC section 162(a). Rev Rul 99-7, 1999-1 CB 361 (1999); see also Curphey v.
Comm’r, 73 TC 766, 777 (1980) (“local transportation expenses incurred in travel between one
business location and another are deductible”). Although Roy testified persuasively that he
drove between Medford and other locations for business purposes, his log does not provide
adequate substantiation under IRC section 274(d) for any additional mileage deduction.
11
Distances based on www.mapquest.com.
FINAL DECISION TC-MD 180053N 11
FINAL DECISION TC-MD 180053N 12
2. Meals
Employees are permitted to use the applicable federal per diem rate to substantiate meal
expenses. See Rev Proc 2011–47, 2011–42 IRB 520, § 4.03. Pursuant to IRC section 274(n)(1),
only 50 percent of meal expenses are allowed for purposes of the deduction. Based on Roy’s
overnight travel to Medford, Florence, Coos Bay, Lincoln City, and Bend, the court finds
Plaintiffs’ meals and incidental expenses totaled $7,118.50.12 After the 50 percent reduction,
Plaintiffs are allowed a deduction of $3,559.25 for meals for the 2013 tax year.
III. CONCLUSION
Upon careful consideration, the court concludes that Roy’s tax home was the Portland
metropolitan area in the 2013 tax year. Plaintiffs are allowed a mileage deduction or $11,392
and a meals deduction of $3,559.25 as unreimbursed employee business expenses. Now, therefore,
IT IS THE DECISION OF THIS COURT that, for the 2013 tax year, Plaintiffs are
allowed a mileage deduction or $11,392 and a meals deduction of $3,559.25 as unreimbursed
employee business expenses.
Dated this day of September 2018.
ALLISON R. BOOMER
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 Boomer and entered on September 25,
2018.
12
The applicable federal per diem rates were as follows for 2013: Standard Oregon rate $46/day and $34.50
for first and last day of travel; Medford $56/day and $42/day for first and last day of travel; Bend $61/day and
$45.75 for first and last day of travel; Florence $51/day and $38.25 for first and last day of travel; and Lincoln City
$56/day and $42 for first and last day of travel. Available at https://www.gsa.gov/travel/plan-book/per-diem-
rates/per-diem-rates-lookup/?action=perdiems_report&state=OR&fiscal_year=2013&zip=&city=.
FINAL DECISION TC-MD 180053N 13