Ackley v. Department of Revenue ( 2012 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
LYNN E. ACKLEY )
and SANDY L. ACKLEY, )
)
Plaintiffs, ) TC-MD 111083C
)
v. )
)
DEPARTMENT OF REVENUE, )
State of Oregon, )
)
Defendant. ) DECISION
Plaintiffs appeal Defendant‟s August 30, 2011, Notice of Deficiency Assessment for
the 2007 tax year. (Ptfs‟ Compl at 1, 8.) This court held a trial in the matter June 26, 2012.
Plaintiffs were represented by Todd A. Foutz (Foutz) and Carol Teegarden, Certified Public
Accountants. Plaintiffs did not participate or testify at trial. Defendant was represented by Gail
McFarlin (McFarlin), Auditor, Oregon Department of Revenue.
I. STATEMENT OF FACTS
Plaintiffs own and operate Crescent Towing in Crescent, Oregon. They were operating
the company in Oregon in 2007. Plaintiffs previously had relocated their operation from
California. (Ptfs‟ Narr at 5.1) Among the items of property Plaintiffs owned in 2007 and used in
their business were a large steel building and several vehicles, including a 1981 Ford Crew Cab.
(Ptfs‟ Written Arg at 3.) Plaintiffs at one time owned a 1985 Ford crew cab tow truck.2 This
appeal involves the steel structure and 1981 Ford Crew Cab.
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1
Plaintiffs submitted a document titled “Narrative” with their exhibits.
2
The 1985 crew cab tow truck was listed on Plaintiffs‟ 2003 Depreciation and Amortization Report as
“Asset disposed.” (See Ptfs‟ Ex 2 at 8.)
DECISION TC-MD 111083C 1
Plaintiffs erected the 35 foot by 55 foot prefabricated steel structure on their property in
2007. (Def‟s Exs C at 3; L.) The roof of the structure consists of tin sheets screwed to wooden
joist supported by steel girders. (See Ptfs‟ Ex 4 at 1.) These girders are supported by steel
beams on steel columns. (Id.) The columns were bolted to eight concrete footings. (Ptfs‟ Narr
at 7.) In 2007, the structure was not served by utilities and had a dirt floor. (Id. at 2; Def‟s Ex J
at 2.) The county did not require a building permit for the structure. (Def‟s Ex J at 2.)
Defendant notified Plaintiffs on August 19, 2009, that their 2007 income tax returns had
been selected for audit. 3 (Ptfs‟ Compl at 2.) Defendant faxed a Proposed Audit Report for 2007
to Plaintiffs on May 26, 2010. (Def‟s Ans at 2.) Plaintiffs responded on July 1, 2010, disputing
Defendant‟s inclusion of $7,600 from the sale of the 1981 Ford crew cab truck (Ford) and the
reclassification of a prefabricated steel structure (structure) from personal property to real
property, which increased the depreciation timeline and reduced the 2007 deduction. (Def‟s Ex I
at 1.) Defendant issued a Notice of Deficiency for Plaintiffs‟ 2007 income tax return on
September 20, 2010. (Ptfs‟ Compl at 8.) Plaintiffs responded on October 14, 2010, with a
written request for a conference. (Id. at 2.)
A telephone conference with Plaintiffs was held June 29, 2011. On August 30, 2011,
Defendant issued a conference letter denying Plaintiffs‟ appeal and issued a Notice of Deficiency
Assessment. (Ptfs‟ Compl at 8 .)
The Internal Revenue Service (IRS) audited Plaintiffs‟ 2008 federal return and, on
August 31, 2011, reached an agreement with Plaintiffs regarding the classification of the steel
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3
Defendant notified Plaintiffs that their 2006 tax returns were also selected for audit. However, Plaintiffs‟
2006 tax returns are not before the court.
DECISION TC-MD 111083C 2
structure at issue. The agreement classified 20 percent of that structure as real property to reflect
the concrete support footings, and the remaining 80 percent of the structure as personal property.
(Ptfs‟ Ex 7 at 13; Def‟s Ex S at 1).
At trial before this court, Foutz stated that Plaintiffs sold the 1981 Ford crew cab (Ford)
for $7,600 on February 2, 2007. (Ptfs‟ Compl at 5.) Foutz further stated that, during the 2008
tax year, Plaintiffs also sold an International tow truck (International).4 In an effort to provide
more information on the sale of the Ford, on March 24, 2010, Plaintiffs submitted a photograph
of a truck to Defendant. (Def‟s Ex G.) However, Foutz stated that Plaintiffs mistakenly
submitted a photograph of the wrong truck, the International instead of the Ford. (Ptfs‟ Narr
at 3.) The photograph was labeled “‟81 Ford Crew Cab 4X4.jpg (200 KB)” and depicted a tow
truck which does not appear to be a Ford. (Def‟s Ex G at 2.) The proceeds from Plaintiffs‟ sale
of the Ford were deposited into Plaintiffs‟ personal account. The proceeds from that sale,
$7,600, were not included as business income on Plaintiffs‟ 2007 return, allegedly because that
vehicle was used for personal and not business, purposes. (Ptfs‟ Ex 3.) Plaintiffs had
depreciated the International and declared the proceeds from that sale as business income on
their 2008 returns. (Ptfs‟ Ex 2 at 26.)
II. ANALYSIS
The issues before the court are whether, for the 2007 tax year: 1) the proceeds from the
sale of Plaintiffs‟ Ford should be treated as business gain subject to taxation, and 2) whether the
steel structure should be classified as personal property subject to 7 year accelerated depreciation
or real property subject to 39 year depreciation.
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4
There is conflicting evidence in the record whether the 2008 sale was of a 1997 or a 1981 International
tow truck. (Ptfs‟ Narr at 3; Ptfs‟ Ex 3.) The year of the International tow truck is not relevant to this case.
DECISION TC-MD 111083C 3
This court has previously held that the legislature “intended to make Oregon personal
income tax law identical to the Internal Revenue Code (IRC) for purposes of determining
Oregon taxable income, subject to adjustments and modifications specified in Oregon law.
ORS 316.007.” Ellison v. Dept. of Rev., TC-MD No 041142D, WL 2414746 at *6 (Sept 23,
2005); ORS 316.048.5 On the questions before the court, “Oregon law makes no adjustments to
the [IRC] and therefore, federal law governs the analysis. Further, the view of the Commissioner
of Internal Revenue as to the legal analysis is always dispositive.” Porter III v. Dept. of Rev.,
TC No 4789, WL 3365847 at *1 (Oct 20, 2009); See also ORS 316.007, ORS 316.012(1).
A. 1981 Ford Crew Cab
Plaintiffs contend that the $7,600 received from the sale of the Ford should not be treated
as a taxable business gain because the Ford was a “personal-use” vehicle. If the vehicle was
indeed used for personal, as opposed to business, use, then the money received from the sale
would likely not be taxable because the owner typically sells the vehicle for less than they paid,
with no actual profit and therefore no taxable gain. However, under IRC section 61(a)(2), the
proceeds from the sale of a vehicle used for business purposes would be taxable because, under
that code section, gross income includes gains “derived from business.”
The question then becomes whether Plaintiffs held the Ford for personal use prior to sale
in 2007. Plaintiffs did not testify or even appear for trial. The only testimony came from their
accountant Foutz, and is therefore hearsay. During the audit by Defendant that preceded the
trial, Plaintiffs sent a picture of a crew cab truck to Defendant to support their claim that the Ford
was not used in conjunction with Plaintiffs‟ towing business. (Ptfs‟ Ex 6; Def‟s Ex G.) The
picture depicted a tow truck with Plaintiffs‟ company name shown on the side. (Id.)
5
All references to the Oregon Revised Statutes (ORS) are to 2005. All references to Oregon
Administrative Rules (OAR) are to those in effect in 2011unless otherwise noted.
DECISION TC-MD 111083C 4
Defendant‟s representative McFarlin testified that, during the audit, Plaintiffs always told her
that the vehicle in dispute was a 1981 Ford Crew Cab 4-by-4 (4X4, meaning 4 wheel drive), and
when asked to submit photographs of the vehicle, they sent Defendant a picture of a tow truck
with a crew cab, with the e-mail message line reading “81 Ford Crew Cab 4X4.jpg (200KB).”
(Def‟s Ex G at 2.) That picture does not support a claim that the truck was for personal use.
Given the opportunity to clarify this evidence, Foutz contends that Plaintiffs mistakenly sent a
picture of the International tow truck that Plaintiffs sold in 2008. Foutz subsequently submitted
additional photographs showing representative body styles for a 1981 Ford and a 1981
International. (Ptfs‟ Ex 6.) All the pictures were indicative of business use trucks. (Ptfs‟ Narr at
3; Ptfs‟ Ex 6.) Foutz did not claim that any of the pictures were of the Ford Plaintiffs had sold.
While these photographs may support the claim that the photograph initially sent to Defendant
by Plaintiffs was of an International truck and not a Ford, they do not support for Plaintiffs‟
claim that the Ford was for personal use.
Foutz also contends that the absence of a 1981 Ford on Plaintiffs‟ depreciation schedules
indicates the Ford was for personal use. While the depreciation schedules showing the inclusion
of the International truck, and the declaration of proceeds from its sale in 2008, tend indicate that
Plaintiffs have a history of depreciating business use vehicles, that evidence, by itself, does not
demonstrate that the 1981 Ford was a personal use vehicle. There is no persuasive evidence that
the 1981 four was in fact a personal use vehicle as opposed to one used by Plaintiffs in their
business.
As the party seeking affirmative relief, Plaintiffs bear the burden of proving that the
subject vehicle was a personal use vehicle. ORS 305.427. Plaintiffs must establish their claim
“by a preponderance of the evidence, or the more convincing or greater weight of evidence.”
DECISION TC-MD 111083C 5
Schaefer v. Dept. of Rev., TC No 4530 at 5 (July 12, 2001) (citing Feves v. Dept. of Revenue,
4 OTR 302 (1971)). As noted earlier, Plaintiffs did not testify on their own behalf. Given the
nature of the inquiry (whether the vehicle was used for business or personal purposes), and the
paucity of independent corroborating evidence, Plaintiffs‟ testimony was critical. The testimony
and statements of their representative was hearsay and the court, therefore, accords it little
weight. Plaintiffs have not submitted any evidence that the Ford was for personal use.
Therefore, Plaintiffs have not met their burden of proof and the court accepts Defendant‟s
determination that the Ford was a business asset, and not a personal asset.
B. Classification of steel structure
Defendant classified the structure as real property, subject to 39 year depreciation under
IRC Section 1250(c). Plaintiffs allege that the structure is tangible personal property, defined in
IRC Section 1245(a)(3), and should be depreciated under an accelerated seven year life.
“[T]he term „section 1250 property‟ means any real property (other than section
1245 property, as defined in section 1245(a)(3)) which is or has been property of
a character subject to the allowance for depreciation provided in section 167.”
26 USC. § 1250(c).
“[T]he term “section 1245 property” means any property which is or has been
property of a character subject to the allowance for depreciation provided in
section 167 and is either
“(A) personal property,
“(B) other property (not including a building or its structural components) but
only if such other property is tangible * * * .”
26 USC. § 1245(a)(3)(A, B).
The question then is whether the structure was real property or tangible personal
property. In deciding whether property is to be classified as tangible personal property for
purposes of IRC section 1245, the courts have developed several questions to be considered:
DECISION TC-MD 111083C 6
“(1) Is the property capable of being moved, and has it in fact been moved? * * *
“(2) Is the property designed or constructed to remain permanently in place?* * *
“(3) Are there circumstances which tend to show the expected or intended length
of affixation, i.e., are there circumstances which show that the property may or
will have to be moved?* * *
“(4) How substantial a job is removal of the property and how time-consuming is
it? Is it „readily removable‟? * * *
“(5) How much damage will the property sustain upon its removal?* * *
“(6) What is the manner of affixation of the property to the land?* * *”
Whiteco Industries, Inc. v. Comm’r, 65 TC 664, 672-73 (1975); see also Consolidated
Freightways, Inc. v. C.I.R., 708 F2d 1385 (9th Cir 1983) (abandoning appearance tests to
determine whether a structure qualifies as real property and adopting functional tests such as the
Whiteco factors).
Foutz stated that the property could be moved, though it has not been. Foutz stated that
the concrete footings are designed to remain permanently in place, but the remainder of the
structure was designed to be disassembled, with bolted connections. However, the structure is
also durable and constructed in a manner that would allow for permanent placement. Foutz
stated that the structure will be removed after Plaintiffs retire; however, there is no indication of
when that will occur, nor any indication that Foutz has personal knowledge of Plaintiffs‟
retirement plans. Foutz cites Plaintiffs‟ past relocation of their business operations as an
example of a circumstance that indicates the possibility of relocating the structure. There is no
indication that Plaintiffs have any intention of relocating again; or if they would take the
structure with them if they did. There is no disagreement that the structure can be removed
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DECISION TC-MD 111083C 7
without substantial difficulty; however, any relocation would require the reconstruction of the
concrete footings. The structure is affixed to the ground by bolts attached to concrete footings.
Foutz contends that a bolted connection to the foundation indicates a temporary connection.
However, a bolted connection could also have been selected for efficiency in construction
or other considerations beyond a lack of permanence. The construction of Plaintiffs‟ structure is
similar to many other types of structures that employ bolted connections or screws, yet remain
permanent in nature. For example, the vast majority of residential decks are constructed using
bolts that, while capable of removal, generally remain in place. Similarly, steel bridges are often
constructed with bolted connections, yet are permanent in design and intent. Therefore, bolted
connections do not, by themselves, indicate a temporary connection.
“Since we have decided that the test of whether the [structures] are buildings for purposes
of [taxation] includes a determination of whether the [structure is] inherently permanent, we now
address the issue of permanence. Whether property is inherently permanent depends upon the
fashion in which it is affixed to the land and how permanently it is designed to remain in place.”
Fox Photo, Inc. v. Comm’r, TC Memo 1990-348, WL 93886 (TC 1990) (internal citations
omitted).
“The proper application of the Whiteco factors rests on the premise that movability
itself is not the key determinant of lack of permanence. * * * Our decision herein rests not
on movability alone but on a determination that the [structures] were readily movable and
constructed in anticipation of being moved quite unlike the usual building.” Id. (internal
citations omitted; emphasis added). In the case before the court, there is no indication that the
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DECISION TC-MD 111083C 8
structure was designed or constructed in anticipation of being moved. In Fox, the photo labs in
question were built with additional bracing so that they could better withstand transportation.
See id. Plaintiffs‟ structure, while fastened with bolted connections, does not have any features
that are specifically designed for ease of relocation. Moreover, the structure is a fairly
substantial building, the absence of walls notwithstanding, consisting of tin sheets screwed to
wooden joists supported by steel girders, the girders being supported by steel beams on steel
column. Simply undoing the bolts that affixed the structure to the ground would not be sufficient
to remove the building. The structure would have to be disassembled. The most complicated
and damaging aspect of that disassembly would be the unscrewing of the tender roof sheets from
the wooden joists that support those sheets. And, that entire roof structure is supported by steel
beams and girders. The court does not find that the structure of this nature is one designed or
constructed in anticipation of being moved.
Plaintiffs also contend that because “IRS ruled that the structure meets the definition [of
personal property] * * *, Oregon must follow the federal definition and ruling in this matter.”
(Ptfs‟ Narr at 4, 5.) While “Oregon ultimately relies on federal definitions * * * to determine
an individual‟s Oregon liability * * * [a]n Oregon liability can be established independently
from any federal enforcement action.” Curtis v. Dept. of Rev., 17 OTR 414, 418 (2004), (citing
Detrick v. Dept. of Rev., 311 Or 152, 156, 806 P2d 682 (1991)), aff’d, 338 Or 579, 112 P3d 330
(2005)
Plaintiffs have not presented convincing evidence that the building should not be
classified as real property. Defendant was within its authority to classify the structure as real
property, and the court concurs with that finding. Accordingly, the court concludes that the
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DECISION TC-MD 111083C 9
disputed steel frame structure was real, not personal, property, subject to the 39 year depreciation
schedule provided in IRC Section 1250(c).
III. CONCLUSION
After carefully considering the testimony and evidence presented, the court finds that
Plaintiffs have not persuaded the court by a preponderance of the evidence that the $7,600
received in 2007 was from the sale of a personal asset and not from the disposition of a business
asset. Because the asset was not depreciated, the entire amount of the proceeds from that sale are
subject to tax by Oregon for 2007.
Additionally, the court concludes that Defendant properly classified Plaintiffs‟ 35 foot by
55 foot steel framed structure as real property subject to 39 year depreciation under IRC Section
1250(c). Accordingly, Defendant‟s adjustments are upheld. Now, therefore,
IT IS THE DECISION OF THIS COURT that Plaintiffs‟ appeal is denied.
Dated this day of August 2012.
DAN ROBINSON
MAGISTRATE
If you want to appeal this 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 Decision
or this Decision becomes final and cannot be changed.
This Decision was signed by Magistrate Dan Robinson on August 30, 2012. The
Court filed and entered this Decision on August 30, 2012.
DECISION TC-MD 111083C 10