Barott v. Department of Revenue ( 2013 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
STEPHAN L. BAROTT )
and ROXANNE BAROTT, )
)
Plaintiffs, ) TC-MD 120603N
)
v. )
)
DEPARTMENT OF REVENUE, )
State of Oregon, )
)
Defendant. ) DECISION
Plaintiffs appeal Defendant’s Notice of Deficiency Assessment for the 2009 tax year. A
trial was held in this matter in the Tax Courtroom in Salem, Oregon on February 20, 2013.
Daniel O. Stearns (Stearns), Oregon Licensed Tax Consultant, appeared and testified on behalf
of Plaintiffs. Plaintiff Stephan L. Barott (Barott) testified on behalf of Plaintiffs. Jamie Tenace
(Tenace), Tax Auditor, and Matthew Derby (Derby), Conference Officer, appeared and testified
on behalf of Defendant. Plaintiffs’ Exhibits 1 through 58 and Defendant’s Exhibits A through I
were received without objection.
I. STATEMENT OF FACTS
Barott testified that he is a professional surveyor who works primarily in Medford,
Oregon. He testified that he periodically works outside of Medford, Oregon. Barott testified
that, for instance, he had a job for the Siletz tribe in Lincoln City, Oregon, in 2009. He testified
that his line of work requires a “GPS” [global positioning system] as well as computer
equipment and software.
Barott testified that, in 2009, he maintained a separate business checking account as well
as a QuickBooks account in which he entered businesses expenses. (See Ptfs’ Exs 57, 58.)
DECISION TC-MD 120603N 1
Barott’s QuickBooks expense entries include the date, check number (or debit), name, memo,
and expense amount. (See, e.g., Ptfs’ Ex 6.) He testified that he made the memo entries
describing each expense. Barott testified that, when he began using QuickBooks, he used the
accrual basis, but subsequently switched to the cash basis. He testified that, when he began
using QuickBooks, he entered most expenses as “miscellaneous.” Barott testified that, at some
point after 2009, he hired a QuickBooks trainer to help him improve his recordkeeping system;
as a result, he created many additional expense categories and reorganized his expenses. (See
Ptfs’ Ex 5.) Barott and Stearns testified that they made other category changes at some point in
2011. (See id.) Stearns argued that the category of the claimed business expense is immaterial if
the expense is ordinary and necessary.
Tenace questioned the reliability of Barott’s QuickBooks expense records given the
changes that have been made since those records were originally created in 2009. To illustrate
her concern about the changes made, Tenace provided copies of Barott’s 2009 Profit and Loss
statement and General Ledger dated February 23, 2011, and November 25, 2011. (Def’s Exs
G-H.) She noted that the February 23, 2011, Profit and Loss statement reported total expenses of
$33,557.49 whereas the November 25, 2011, Profit and Loss statement reported total expenses of
$46,263.29. (See id.) No explanation was provided for that discrepancy.
As of the trial on February 20, 2013, Plaintiffs claimed total business expenses of
$43,108.96. (Ptfs’ Ex 2.) In her recommendations filed with the court on October 24, 2012,
Tenace allowed Plaintiffs total expenses of $12,375. Unfortunately, the parties utilized different
expense categories to describe the various expenses claimed by Plaintiffs. The parties’ differing
expense categories created confusion at trial with respect to the specific expenses allowed by
Defendant. The parties agreed that Plaintiffs should be allowed at least $12,375 in business
DECISION TC-MD 120603N 2
expenses, but were unable to provide a clear explanation of the agreed-upon expenses. To the
extent the court was able to discern agreement of the parties, it is reflected in the analysis.
The following is a list of business expenses claimed by Plaintiffs as compared with the
expenses allowed by Defendant for the 2009 tax year:1
Expense Plaintiffs’ requested Defendant’s allowed
expenses expenses
Advertising $2,058.72 $1,7292
Vehicle Expenses $2,479.87 $307
Contract Labor $3,750.00 $3,750
Depreciation (including vehicle) $16,418.00 $1,439
Insurance $2,178.34 $710
Taxes and Licenses $280.00 $280
Travel (Lodging) $654.29 $432
Meals and Entertainment (50%) $176.85 $86
Utilities $1,010.00 $1,010
Accounting $450.00 $450
Software $1,573.51 $249
Other Computer Expenses $578.75 0
Education $583.00 0
Surveyors Fees $435.45 0
Dues and Memberships $12.00 $474
Lease Expense (Office Equipment) $427.00 0
Discovery Office Systems $25.00 0
Licenses $608.30 0
Merchant Fees $418.62 $415
Postage $482.61 0
Supplies $6,853.80 $910
Office in home $1,654.85 0
Office Expense 0 $544
Recording Fees 0 $428
Total $43,108.96 $12,375
(Ptfs’ Ex 2; Def’s Ex A at 5.)
///
1
Some categories, such as “Office Expense” and “Recording Fees” were created by Defendant. The
expenses were claimed by Plaintiffs under a different category.
2
Prior to trial, Defendant allowed advertising expenses of $891; at trial, Defendant allowed advertising
expenses of $1,729 (total).
DECISION TC-MD 120603N 3
Ordinarily, all facts are included in the Statement of Facts. Given the voluminous
evidence presented, additional facts regarding specific expenses claimed by Plaintiffs are
included only in the Analysis section of this decision.
II. ANALYSIS
“The Oregon 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 by Oregon law. ORS 316.007.”3 Ellison v. Dept. of
Rev., TC-MD No 041142D, WL 2414746 *6 (Sept 23, 2005). The legislature adopted, by
reference, the federal definition for deductions, including those allowed under IRC section 162.4
IRC section 162(a) allows a deduction for “all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business[.]” To be “ordinary,” the
“transaction which gives rise to [the expense] must be of common or frequent occurrence in the
type of business involved.” Deputy v. Du Pont, 308 US 488, 495, 60 S Ct 363, 84 L Ed 416(1940) (citations omitted). A “necessary” expense is one that is “appropriate and helpful” to the
taxpayer’s business. Welch v. Helvering, 290 US 111, 113, 54 S Ct 8, 78 L Ed 212 (1933). As a
general rule, IRC section 262(a) prohibits the deduction of most personal and family
expenditures.
Allowable deductions from taxable income are a “matter of legislative grace” and the
burden of proof (substantiation) is placed on the individual claiming the deduction. INDOPCO,
Inc. v. Comm’r, 503 US 79, 84, 112 S Ct 1039, 117 L Ed 2d 226 (1992); see also ORS 305.427
///
3
Unless otherwise noted, all references to the Oregon Revised Statutes (ORS) are to 2007.
4
All references to the IRC and accompanying regulations are to the 1986 code, and include updates
applicable to 2009.
DECISION TC-MD 120603N 4
(the burden of proof in the Oregon Tax Court is a preponderance of the evidence and falls “upon
the party seeking affirmative relief”).
Generally, if a claimed business expense is deductible, but the taxpayer is unable to
substantiate it fully, the court is permitted to make an approximation of an allowable amount.
Cohan v. Comm’r (Cohan), 39 F 2d 540, 543-44 (2d Cir 1930). The estimate must have a
reasonable evidentiary basis. Vanicek v. Comm’r, 85 TC 731, 743 (1985). IRC section 274(d)
supersedes the Cohan rule and imposes more stringent substantiation requirements for travel,
meals, entertainment, gifts, and any listed property under IRC section 280F(d)(4)(A)(i).
Temp Treas Reg 1.274-5T(a). Under IRC section 274(d), a taxpayer must substantiate a claimed
expense with adequate records or sufficient evidence corroborating the taxpayer’s statement
establishing the amount, time, place, and business purpose of the expense.
Temp Treas Reg 1.274-5T(b).
A. Advertising
Barott claimed total advertising expenses of $2,058.72 and provided both canceled
checks and bank statements to support those claimed expenses. (Ptfs’ Exs 6-8.) The parties
agreed that Barott should be allowed all claimed advertising expenses, although Defendant
categorized a $330 payment to “BNI” as an “other expense” and categorized payments of $108
to Rogue Valley Professionals as “dues and membership.” (See Ptf’s Ex 6.) Barott is allowed
advertising expenses of $2,059.
B. Auto
Barott claimed $2,479.87 in “auto” expenses, including $1,508.98 in “diesel” purchases,5
which Barott testified were for the Ford F250 truck that he used in his business. (Ptfs’ Ex 9.)
5
$13.55 of the claimed “diesel” expenses was for “gas.” (Ptf’s Ex 9 at 1.)
DECISION TC-MD 120603N 5
Barott testified that his Ford F250 truck is his work vehicle and it is his only vehicle that runs on
diesel. He testified that he used the Ford F250 exclusively for work and any personal use was de
minimis. Barott testified that he also owns an “ATV” that he used in his business. He testified
that Plaintiffs own a Subaru that is their personal vehicle. He testified that the only “auto”
expense claimed for the “ATV” was “Honda repair” for $207.05. (Ptfs’ Ex 9 at 2.) Barott’s
other claimed auto expenses included an “Oregon DMV License Renewal” fee, and five
purchases at “Les Schwab Tire Center.” (Id.; Ptfs’ Ex 10.) In support of his claimed expenses,
Barott provided his QuickBooks account detail, canceled checks to the Oregon DMV and Les
Schwab, and bank statements for the fuel purchases. (Ptfs’ Exs 9-11.) He testified that he made
the QuickBooks entries at or close to the time of the expense.
Listed property is subject to more stringent substantiation requirements under IRC
section 274(d) and accompanying Treasury Regulations. See Temp Treas Reg 1.274-5T(b)(6).
Subject to some exceptions, “any passenger automobile” and “any other property used as a
means of transportation” is listed property under IRC section 280F(d)(4)(A)(i), (ii). Under IRC
section 280F(d)(5)(A), a “passenger automobile” is defined as “any 4-wheeled vehicle ---
“(i) which is manufactured primarily for use on public streets, roads, and
highways, and
“(ii) which is rated at 6,000 pounds unloaded gross vehicle weight or less.
“In the case of a truck or van, clause (ii) shall be applied by substituting ‘gross
vehicle weight’ for ‘unloaded gross vehicle weight’.”
IRC section 280F(d)(5)(B) states “[t]he term ‘passenger automobile’ shall not include * * * (iii)
under regulations, any truck or van.”
The strict substantiation requirements under IRC section 274(d) do not apply to “any
qualified nonpersonal use vehicle (as defined in subjection (i)).” IRC section 274(i) provides
DECISION TC-MD 120603N 6
that “the term ‘qualified nonpersonal use vehicle’ means any vehicle which, by reason of its
nature, is not likely to be used more than a de minimis amount for personal purposes.” In Ewell
v. Comm’r, the U.S. Tax Court determined that the taxpayer’s jeep was not a “qualified
nonpersonal use vehicle” similar to the following “specialized-use vehicles”:
“clearly marked police and fire vehicles, ambulances, hearses, vehicles designed
to carry cargo with a gross weight of more than 14,000 pounds, bucket trucks,
cement mixers, combines, cranes, derricks, delivery trucks with seating only for
the driver, dump trucks, flatbed trucks, forklifts, refrigerated trucks, school buses,
tractors, and other special purpose farm vehicles.”
TC Memo 1996-253, WL 283684 at *11 (1996) (citing Temp Treas Reg 1.274-5T(k)(2)(ii)
providing a partial list of qualified nonpersonal use vehicles).
Revenue Ruling 86-97 provides additional guidelines for when the IRS “will recognize
pickup trucks or vans as ‘qualified nonpersonal use vehicles’ for purposes of section 1.274-
5T(k)(7) of the * * * Regulations.” Revenue Ruling 86-97, section three, states:
“A pickup truck with a loaded gross vehicle weight not over 14,000 pounds is a
qualified nonpersonal use vehicle if it falls into one of the following two
categories:
“1. The vehicle is clearly marked with permanently affixed decals or with
special painting or other advertising associated with the employer’s trade,
business, or function and is equipped with at least one of the following: a
hydraulic lift gate, permanently installed tanks or drums, permanently
installed side boards or panels materially raising the level of the sides of
the bed of the pickup truck, or other heavy equipment, such as an electric
generator, welder, boom, or crane used to tow automobiles and other
vehicles.
“2. The vehicle is clearly marked with permanently affixed decals or with
special painting or other advertising associated with the employer’s trade,
business, or function, is actually used primarily for transporting a
particular type of load other than over the public highway in connection
with a construction, manufacturing, processing, farming, mining, drilling,
timbering, or other similar operation, and has been specially designed or
modified to a significant degree for such use.”
///
DECISION TC-MD 120603N 7
Barott did not maintain a log or other records documenting business use of his Ford F250,
but he argues that the Ford F250 is a “qualified nonpersonal use vehicle” and is, therefore, not
subject to the substantiation requirements of IRC section 274(d) and the accompanying treasury
regulations. (See Ptfs’ Exs 12-13.) Both parties provided photographs of the Ford F250. (Ptfs’
Ex 12; Def’s Ex B at 35-38.) Barott testified that the ladder rack is removable, but the aluminum
boxes installed in the bed of the Ford F250 are not removable. He testified that he can use the
Ford F250 to tow a travel trailer and that he has used the Ford F250 to tow the ATV to job sites.
Tenace testified that Barott drove the Ford F250 to the Department of Revenue conference in
February 2011. She testified that she recalled seeing a decal on the truck and boxes in the bed,
but no rack or lights. Tenace testified that she thought the decal was magnetic, but was unsure.
She testified that the Ford F250 had front seats and back seats and had the capacity to tow.
Teance testified that, in her view it, the Ford F250 was not modified such that it was no longer
usable as a personal vehicle.
The court is not persuaded that Barott’s Ford F250 was a “qualified nonpersonal use
vehicle” under IRC section 274(i) and the accompanying Treasury Regulations and Revenue
Ruling. Based on the testimony and evidence presented, the only permanent modification to the
Ford F250 is the aluminum boxes installed in the bed. That is not a permanent modification
described by Revenue Ruling 86-97, nor is it of a similar type of modification to those described
in the Revenue Ruling. As a result, Barott’s Ford F250 is subject to the strict substantiation
requirements of IRC section 274(d). Although Barott provided evidence of fuel purchases for
the Ford F250, he provided no evidence of the business use of the Ford F250 such as a log or
other records from which the court could determine the percentage of business use.6
6
Treasury Regulation 1.274-5T(c)(2)(ii)(C) states:
DECISION TC-MD 120603N 8
Defendant allowed Barott mileage at “$0.55 per mile for 558 miles” for a deduction of
$307 based on Barott’s travel to a “PLSO conference” in Portland, Oregon, in January 2009.
(Def’s Ex B at 28.) The court finds that no additional vehicle expenses associated with the Ford
F250 are supported for the 2009 tax year.
The ATV is “any other property used as a means of transportation” under IRC section
280F(d)(4)(A)(ii) and, therefore, is subject to the strict substantiation requirements of IRC
section 274(d). Barott did not maintain a log or provide any other records from which the court
can determine the business use of his ATV. No expenses associated with the ATV are allowed.
C. Depreciation
Barott claimed $16,418 total depreciation for the following: Leica Smartstation ($6,582),
Ford F250 ($8,397), Digital Camera ($65), Surveying Equipment ($781), and Surveying
Equipment ($593). (Ptfs’ Ex 16 at 1.) Defendant allowed Plaintiffs depreciation of $1,439 for
the digital camera and surveying equipment. (Def’s Exs A at 6, B at 30.) Defendant did not
allow depreciation for the Leica Smartstation because it “has been depreciated since 2006 AND
has been expensed out as a ‘lease payment.’ This has been a double deduction since 2006 and is
therefore fully depreciated.” (Def’s Ex A at 6.) Derby testified that he “re-characterized” the
Leica Smartstation lease payments as depreciation. He testified that the burden is on Barott to
prove his basis in the Leica Smartstation. Barott provided a document entitled “Lease
“Substantiation of business use of listed property —( 1 ) Degree of substantiation. In order to constitute an
adequate record (within the meaning of section 274(d) and this paragraph (c)(2)(ii)), which substantiates
business/investment use of listed property (as defined in § 1.280F-6T(d)(3)), the record must contain sufficient
information as to each element of every business/investment use. However, the level of detail required in an
adequate record to substantiate business/investment use may vary depending upon the facts and circumstances. For
example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of a
truck is to make deliveries to customers on an established route may satisfy the adequate record requirement by
recording the total number miles driven during the taxable year, the length of the delivery route once, and the date of
each trip at or near the time of the trips. Alternatively, the taxpayer may establish the date of each trip with a
receipt, record of delivery, or other documentary evidence.”
DECISION TC-MD 120603N 9
Agreement,” dated May 1, 2006, for the Leica Smartstation. (Ptfs’ Ex 16 at 4.) Derby noted in
his conference decision that the agreement is “not a true lease” and it “provides that at the end of
the lease term [Barott] own[s] the equipment for a payment of one dollar.” (Ptfs’ Ex 4 at 3; see
also Ptfs’ Ex 16 at 4.) Barott testified that he erroneously deducted both lease payments and
depreciation for the Leica Smartstation on prior tax year returns.
IRC section 1016(a) requires
“[p]roper adjustment in respect of the property * * * * * (2) * * * for exhaustion,
wear and tear, obsolescence, amortization, and depletion, to the extent of the
amount – (A) allowed as deductions in computing taxable income under this
subtitle or prior income tax laws, and (B) resulting (by reason of the deductions so
allowed) in a reduction for any taxable year of the taxpayer’s taxes under this
subtitle * * *, or prior income, war-profits, or excess-profits tax laws, but not less
than the amount allowable under this subtitle or prior income tax laws.”
A deduction claimed on a prior return that was not audited was “allowed” for purposes of IRC
section 1016(a)(2). See Virginia Hotel Corp. of Lynchburg v. Helvering, 319 US 523, 527, 63 S
Ct 1260 (1943) (“If the deductions are not challenged, they certainly are ‘allowed’ since tax
liability is [] determined on the basis of the returns”). Barott testified that, on prior year tax
returns, he took deductions for both depreciation and lease payments on the Leica Smartstation.
After combining the claimed lease payments and depreciation for years prior to the tax year
before the court, it is unclear whether the cost of the Leica Smartstation has been fully deducted.
The burden of proof falls on Barott to prove that he is entitled to claim a depreciation deduction
for the Leica Smartstation. Barott has not established that he is entitled to any additional
depreciation for the Leica Smartstation.
Barott’s claimed depreciation for the Ford F250 is not allowed because, as discussed
above, he failed to provide evidence of his business use of the Ford F250. The court concludes
that Barott is allowed depreciation of $1,439, as agreed to by Defendant.
DECISION TC-MD 120603N 10
D. Insurance
Barott claimed a total deduction of $2,178.34 for insurance. (Ptfs’ Ex 17 at 1.)
Defendant allowed $710 for The Hartford business insurance. (Def’s Exs A at 6, B at 54-56.)
Barott provided canceled checks demonstrating payments for The Hartford Business insurance
totaling $1,117. (Ptfs’ Ex 18.) Barott testified that he paid $523.94 to SAIF Corporation for
workers compensations coverage for any temporary employees and provided a canceled check
for that payment. (See Ptfs’ Exs 17 at 1, 18 at 11-12.) Barott testified that he paid $156.40 to
USAA for the Ford F250. (See Ptfs’ Exs 17 at 1, 18 at 5-6.) He testified that he paid $77 to
Progressive for ATV insurance. (See Ptfs’ Exs 17 at 1, 18 at 13-14.) Barott testified that he paid
$127 to AAA Oregon and $127 to All State Motor Club, which is similar to AAA. (See Ptfs’
Exs 17 at 1, 18 at 15-16, 19.) Barott testified that AAA Oregon and All State Motor Club cover
all vehicles and there is no additional cost based on the number of vehicles. The court finds that
Barott’s insurance payments for the Ford F250 and the ATV are not allowed because Barott has
not substantiated the business use of either vehicle. The court further finds that Barott’s
payments to AAA and All State Motor Club were personal expenses. Furthermore, the court
finds Barott substantiated payments of $1,117 for The Hartford business insurance and $523.94
to SAIF Corporation, both of which are business expenses. Barott is allowed insurance expenses
of $1,641.
E. Leased equipment
Barott testified that he paid $427 to “Wells Fargo Financial Leasing” to lease a copier
and scanner and provided canceled checks. (See Ptfs’ Exs 20, 21.) It was unclear at trial
whether Defendant had allowed that expense. (See Def’s Ex C at 23-24.) The court finds that
///
DECISION TC-MD 120603N 11
Barott adequately substantiated the lease payment and the business purpose; the expense is
allowed.
F. Lodging
Barott claimed $654.29 in lodging expenses. (Ptfs’ Ex 22.) Defendant allowed $432 for
Barott’s lodging to attend a “PLSO” [Professional Land Surveyors of Oregon] conference on
January 30, 2009. (Ptfs’ Ex 22; Def’s Ex A at 6.) Barott testified that he also claimed $222.20
for lodging at Driftwood Shores to attend a conference in Florence, Oregon. (See Ptfs’ Exs 22,
23 at 3, 24.) The court finds that Barott adequately substantiated the payment and the business
purpose of his lodging expenses. Barott’s claimed lodging expenses are allowed.
G. Meals and Entertainment
Barott claimed $353.69 for meals and entertainment and provided bank statements
proving payment of the claimed expenses. (Ptfs’ Exs 25, 26.) Barott testified that the meals
labeled “PLSO” were for PLSO lunches during which he received continuing education at that
conference. (See Ptfs’ Ex 25.) Barott testified that the meals labeled “BNI Power Team” were
networking lunches. (See id.) He testified that the two meals labeled “Driftwood Shores” were
during his attendance at the conference at Driftwood Shores in September 2009. (See id.)
Defendant allowed the “per-diem amount” of $172, which was reduced by 50 percent for an $86
deduction. (Def’s Ex A at 6.) The court finds that Barott’s claimed meal expenses should be
allowed with the exception of $25.16 paid to Emman’s Meat Market. The business purpose is
unclear and memo states “Lunch & More.” (Ptfs’ Ex 25.) Barott is allowed total meal expenses
of $328, or $164 after the 50 percent limitation.
///
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DECISION TC-MD 120603N 12
H. Education
Barott claimed $583 of continuing education expenses. (Ptfs’ Ex 32.) He provided a
canceled check for $70 to the “Rogue River Chapter-PLSO” for a workshop on
September 11, 2009, and bank statements substantiating payment of $78 to “Southern Oregon
Printing” and $435 to “PLSO.” (Ptfs’ Exs 33-34.) Barott testified that the payment of $435 to
PLSO was for a conference. Barott testified that the payment to Southern Oregon Printing was
to print brochures for a workshop put on by a professional organization of which he was an
officer. He testified that he paid the expense because of the organization’s budget problems.
Tenace testified that Plaintiffs’ return did not include a line item for education expenses, so she
was unsure whether the claimed expenses were previously allowed. Barott did not establish that
his payment of $78 for brochure printing was an ordinary and necessary business expense for
which he had no right to reimbursement. Barott is allowed education expenses of $505. The
court finds that those expenses were not otherwise allowed by Defendant.
I. Surveyor Fees
Barott claimed $435.45 in “County surveyor fees” paid to various Oregon cities and
counties. (Ptfs’ Ex 35.) Tenace testified that she created an expense category for “recording
fees” and allowed expenses of $428 for that category; the “recording fees” allowed by Tenace
were the same expenses claimed by Barott as “surveyor’s fees.” Barott provided canceled
checks substantiating payments of $603.45.7 (Ptfs’ Ex 36.) No check or bank statement was
provided for an $18 payment to “Jackson County Surveyor” for “Copy Fees Nov. 2009” or for a
payment of $83 to “Jackson County Surveyor” on June 29, 2009. (See Ptfs’ Ex 35.) Several of
those payments were subtracted from Barott’s total expenses for recording fees, apparently
7
Check number 2178 to Jackson County Surveyor for $57.00 for “October 2009 copies” was provided
twice. (Ptfs’ Ex 36 at 23, 25.)
DECISION TC-MD 120603N 13
because they were reimbursed by clients. (See Ptfs’ Ex 35.) Barott is allowed an expense of
$417 for surveyor fees.
J. Dues and subscriptions
Barott claimed an expense of $12 for 2009 dues to the “Oregon GPS Users Group” and
provided a canceled check. (Ptfs’ Exs 37-38.) Defendant allowed the expense at trial.
K. Discovery Office Systems
Barott testified that he incurred an expense of $25 for payment to “Discovery Office
Systems” for copier maintenance; he provided a canceled check. (See Ptfs’ Exs 39-40.) Tenace
testified that she allowed the expense under the category “Office expense.” (See Def’s Ex A at
7.) Barott’s $25 copier maintenance expense is allowed.
L. Licenses and Permits
Barott claimed expenses of $608.30 for payments to “ACSM-CFEDS,” “OSBEELS,”
“PLSO,” and “ACSM NSPS.” (Ptfs’ Ex 41.) He provided a canceled check substantiating a
$220 payment to “OSBEELS” and bank statements substantiating the other three payments.
(Ptfs’ Ex 42, 43.) Barott testified that the payments to ACSM-CFEDS and OSBEELS were both
for licenses and the payments to PLSO and ACSM were both dues. Tenace testified that
Defendant allowed $280 under the category “taxes and licenses” for the payments to ACSM-
CFEDS and OSBEELS. (See Def’s Ex A at 6.) An expense of $280 was already allowed and
Barott is allowed additional expenses of $328.30, for a total expense of $608.
M. Merchant Fees
Barott claimed $418.82 in merchant fees. (Ptfs’ Ex 44.) Defendant previously allowed
$415. (Def’s Ex A at 7.) Barott testified that the fees are identified on his bank statements as
“Direct Withdrawal Bankcard ACH3.” (See, e.g., Ptfs’ Ex 45 at 2.) The court reviewed Barott’s
DECISION TC-MD 120603N 14
bank statements and found that fees of $418.82 are substantiated. (Ptfs’ Ex 45.) Barott is
allowed an expense of $419.
N. Postage & Delivery
Barott claimed $482.61 of expenses for postage and delivery fees; he provided bank
statements to substantiate the claimed payments. (Ptfs’ Exs 46-47.) Barott testified that he pays
monthly fees to Stamps.com to print postage. (See Ptfs’ Exs 46, 48.) He testified that two
payments to FedEx for “CTSI CWIN” were for the Confederated Tribes of Siletz Indians. (See
Ptfs’ Ex 46.) Barott testified that the two payments to FedEx for “CALSURV” were to ship
maps to southern California. (See id.) Tenace testified that this expense category was not
originally included on Plaintiffs’ income tax return. (See Def’s Ex A at 7.) She testified that, if
the expense was allowed, it was under “office expenses.” It does not appear to the court that the
expense was previously allowed by Defendant. Barott is allowed postage and delivery expenses
of $483.
O. Home office and computer in home office
Barott testified that he remodeled Plaintiffs’ home to create an office in the garage. (See
Ptfs’ Exs 52-53.) He testified that he began using the garage as an office at the end of 2008.
Barott testified that, in addition to the office in the garage, there is also a washer, dryer, and
freezer, but he did not include those in his calculation of office square footage. (See Ptfs’ Ex
54.) Barott testified that the garage is 576 square feet and he determined that 360 square feet, or
63 percent, of the garage is his office. (See id.) Barott determined that his office comprises 17
percent of the square footage of Plaintiffs’ entire house. (Id.)
Barott claimed $1,654.85 in expenses for his home office, which reflected 17 percent of
Plaintiffs’ reported total utilities, including gas and electric, water, garbage, “Medford Water
DECISION TC-MD 120603N 15
Commission”, and telephone. (Ptfs’ Ex 54.) Barott provided spreadsheets detailing total utility
bills for Plaintiffs’ home in 2009. (Ptfs’ Ex 55.) He did not provide invoices, canceled checks,
or bank statements for those utility expenses.8 Barott also determined depreciation of $1,162.50
based on 63 percent of the office improvement, 63 percent of the electrical system, and 17
percent of the house.9 (Id. at 54.) Barott provided two pages listing total costs to remodel
Plaintiffs’ home to include Barott’s office. (Ptfs’ Ex 56.) He did not provide invoices, canceled
checks, or bank statements for the remodel costs. Barott testified that the remodel costs included
finishing the garage, insulating the garage, adding a door and windows, and installing power
outlets.10 Unfortunately, Barott failed to provide any substantiation of his claimed home office
expenses. As a result, Barott’s claimed home office expenses and depreciation are not allowed.
Barott also claimed $578.75 for computer expenses and provided canceled checks
substantiating payment of each of the claimed expenses. (Ptfs’ Exs 30-31.) Barott testified that
payments to “Excaliber Computer Solutions” were for “in home maintenance” of his computer
and payments to “Dell” were for various computer-related purchases such as keyboards. (See
id.) Tenace testified that Plaintiffs’ return did not include a line item for computer expenses, so
it is unclear whether the claimed expenses were previously allowed; they may have been allowed
as “office expenses.” The court reviewed Barott’s evidence and found that his claimed computer
expenses were not otherwise allowed by Defendant.
Derby testified that he did not allow computer and related expenses because computers
are listed property under IRC section 280F(d)(4) and Barott did not maintain a log detailing his
8
Tenace testified that she allowed an expense of $288 for the Charter Communications telephone line and
$722 for a data line, for total utility expenses of $1,010. (See Def’s Ex A at 6; Ptfs’ Ex 55 at 4.)
9
That depreciation was not included in the $16,418 depreciation discussed above. (See Ptfs’ Ex 16.)
10
Barott testified that he has all of the receipts for the remodel. He testified that the remodel was
completed in 2008 and that is why he did not provide receipts.
DECISION TC-MD 120603N 16
business use of the computer. Plaintiffs argue, in response, the computer was located in Barott’s
home office, which was a “regular business establishment” under IRC section 280F(d)(4)(B).
Under IRC section 280F(d)(4)(A)(iv), “any computer or peripheral equipment (as defined in
section 168(i)(2)(B))” is “listed property.” IRC section 280F(d)(4)(B) states:
“The term ‘listed property’ shall not include any computer or peripheral
equipment (as so defined) used exclusively at a regular business establishment
and owned or leased by the person operating such establishment. For purposes of
the preceding sentence, any portion of a dwelling unit shall be treated as a regular
business establishment if (and only if) the requirements of section 280A(c)(1) are
met with respect to such portion.”
The question is whether Barott’s home office meets the requirements of IRC section 280A(c)(1).
Tenace testified that Barott’s home office was not originally included on Plaintiffs’
income tax return and that Barott’s use of the office did not appear to be exclusively for his
business. Tenace testified that Barott admitted that he did not use his home office exclusively
for business. She testified that, in her view, if Barott paid even one personal bill from his
business computer, his home office was not used exclusively for business. Barott testified that
Plaintiffs “had a separate account for personal bills.” He testified that he “may” have used his
work computer to pay a personal bill in the past; he could not testify that he had never done so.
Generally, IRC section 280A prohibits the deduction of otherwise allowable expenses
associated with the use of the taxpayer’s home. IRC section 280A(c)(1) creates an exception to
the prohibition for “any item to the extent such item is allocable to a portion of the dwelling unit
which is exclusively used on a regular basis – (A) as the principal place of business for any trade
or business of the taxpayer [.]” The flush language of IRC section 280A(c)(1) states:
“For purposes of subparagraph (A), the term ‘principal place of business’ includes
a place of business which is used by the taxpayer for the administrative or
management activities of any trade or business of the taxpayer if there is no other
fixed location of such trade or business where the taxpayer conducts substantial
administrative or management activities of such trade or business.”
DECISION TC-MD 120603N 17
The parties dispute whether Barott’s home office was used exclusively for business.11
The question of exclusive use is a “fact-specific inquiry” and it can be determined based on
“credible testimony.” Rayden v. Comm’r (Rayden), TC Memo 2011-1, WL 9079 at *2, *4
(2011) (citation omitted). The legislative history of IRC section 280A explains:
“Exclusive use of a portion of a taxpayer’s dwelling unit means that the taxpayer
must use a specific part of a dwelling unit solely for the purpose of carrying on his
trade or business. The use of a portion of a dwelling unit for both personal
purposes and for the carrying on of a trade or business does not meet the
exclusive use test. Thus, for example, a taxpayer who uses a den in his dwelling
unit to write legal briefs, prepare tax returns, or engage in similar activities as well
as for personal purposes, will be denied a deduction for the expenses paid or
incurred in connection with the use of the residence which are allocable to these
activities.”
Hefti v. Comm’r (Hefti), TC Memo 1988-22, WL 2444 at 10 (1988), aff’d without published
opinion, 894 F2d 1340 (8th Cir 1989) (quoting S Rept 94-938, 4, 148, 1976-3 CB (Vol 3) 49,
186). “The use of a portion of a home for both personal and business purposes does not meet the
exclusive use requirement of section 280A(c).” Sengpiehl v. Comm’r (Sengpiehl), TC Memo
1998-23, WL 17616 at *3 (1998) (citing Sam Goldberger, Inc. v. Comm’r 88 TC 1532, 1556-
1557 (1987)). “Any personal use of a room or segregated area will preclude its use in computing
depreciation or other allocable expenditures, unless some or all of the use of the room was for the
storage of inventory.” Hefti, WL 2444 at 10. “The exclusive-use requirement in section
280A(c)(1) is an ‘all-or-nothing’ standard.” Bogue v. Comm’r, TC Memo 2011-164, WL
2709818 at *7 (2011) (citing Hamacher v. Comm’r, 94 TC 348, 357, 1990 WL 25005 (1990)).
In Hefti, the taxpayers contended that “89 percent of their main residence and 100 percent
of their addition were being exclusively and regularly used for business purposes during the
11
It does not appear to the court that Defendant disputes that Barott’s home office was his “principal place
of business.” Defendant did not contend that Barott had another place of business or that he did not work at his
home office.
DECISION TC-MD 120603N 18
taxable years * * *. The correlative of [the taxpayers’] position is that they lived in no part of the
addition and that they, along with their two children, resided in only 11 percent of their
residence.” Hefti, WL 2444 at 11. The court found “through cross examination, third-party
testimony and documentary evidence * * * [that taxpayers’] claimed percentage business usage
was substantially overstated * * *.” Id. Similarly, the taxpayer in Rayden contended that “70-71
percent of his home was used exclusively and regularly for business during the 2004 tax year.”
WL 9079 at *3. The court found it “implausible that the taxpayer and his family ‘had no social
or personal life in any portion of the residence other than a few bedrooms and the kitchen.’ ” Id.,(citing Hefti). The court in Jenkins v. Comm’r, TC Memo 1988-292, WL 66221 (1988), held
that the taxpayer’s home office was not “exclusively used for business” because she “testified
that she used the room claimed as a home office to study in when nobody was using the room.”
By contrast, in Sengpiehl, the court found that the taxpayer’s living room was used
exclusively for business based on his credible testimony:
“Petitioner testified that he used the living room as an informal meeting area and
as a conference room in his legal practice. Petitioner testified that he met with at
least 54 clients in this room during 1991. Petitioner testified that he and Mrs.
Sengpiehl usually did not entertain at home and that their children never had
guests at the house. He further testified that he was the only member of the
family who played the piano and that he did not do so during the year in issue.
Two of petitioners’ clients testified that when they met with petitioner, they had
free access to the entire first floor, and testified to meeting with petitioner in the
living room.”
Sengpiehl, WL 17616 at *4.
Although “ ‘[e]xclusive use’ is narrowly construed,” the courts have acknowledged some
personal use as de minimis. Rayden, WL 9079 at *3, *4. For instance, the U.S. Tax Court “has
previously held that the mere nonbusiness passage from one room to the next can be classified as
a de minimis personal use of the room and will not disqualify the room from the exclusivity
DECISION TC-MD 120603N 19
requirement of section 280A(c)(1).” Id. at *3 (citations omitted). However, use of a “den,
vestibule, and adjoining bar * * * ‘maybe one or two times a year * * * by family that [was]
visiting’ ” was not considered “de minimis * * * personal use[.]” Id. at *4. Similarly, use of a
“dining room for family dinners * * * on Saturdays and Sundays only, on three birthdays, and on
Thanksgiving[]” was not considered “de minimis.” Sengpiehl , WL 17616 at *4.
The court found Barott to be credible and the court is persuaded that he used his home
office exclusively for business in 2009. The photographs that Barott provided of his work space
provide additional support to his credible testimony. Although Barott testified that he “may”
have paid a personal bill on his work computer at some point in the past, he testified that
Plaintiffs maintained a separate account for their personal expenses. The court received no other
evidence that Barott used his home office for personal purposes. The court finds that Barott’s
home office met the requirements of IRC section 280A(c)(1) for the 2009 tax year. As a result,
Barott is allowed computer expenses of $579 as claimed.
P. Software
Barott claimed expenses of $1,573.51 for computer software. (Ptfs’ Ex 27.) He provided
canceled checks for $525 to “Carlson Software, Inc.” and $249 to “Blue Marble Geographics.”
(Ptfs’ Ex 28.) Barott provided bank statements substantiating payment for the remaining
software expenses claimed. (Ptfs’ Ex 29.) Barott testified regarding the various software
expenses claimed. Tenace allowed software expenses of $249 to Blue Marble Geographics.
(Def’s Ex A at 6.) Barott’s is allowed software expenses of $1,574.
Q. Supplies
Barott claimed expenses of $6,853.80 for supplies; he provided canceled checks and bank
statements to substantiate payment. (Ptfs’ Exs 49 at 1-2, 50, 51.) Tenace testified that
DECISION TC-MD 120603N 20
Defendant previously allowed $910 for supplies purchased from Pacific Survey Supply. (See
Def’s Ex A at 7; Ptfs’ Ex 49.) Based on the court’s review, Barott incurred expenses of $811.11
at Pacific Supply. Barott testified that his purchases from “FEMA Map Store” were for
electronic and paper maps. (See Ptfs’ Ex 49.) Tenace testified that she agrees that FEMA Map
Store purchases are ordinary and necessary business expenses. Barott’s FEMA Map Store
purchases total $75, of which $70 is substantiated by bank statements. (Ptfs’ Exs 49, 51.) Barott
testified that Kuker-Ranken is a Portland survey supply store; he substantiated payments totaling
$327.29 to Kuker-Ranken. (See id.) The majority of Barott’s remaining claimed expenses were
purchases at Staples, Dell, Office Depot, Radio Shack, and other such stores. (Ptfs’ Ex 49.)
Barott testified that those purchases were for various items used in his business and the business
purpose is stated in the memo line of his QuickBooks account. (See id.) He testified that he
wrote all of the memo line entries. Teance testified that her concern with Barott’s claimed
supplies expenses is that many items could be personal, such as purchases made at Staples,
Office Depot, and similar stores.
The court is persuaded by Barott’s testimony, QuickBooks memos, canceled checks, and
bank statements that he incurred expenses of $6,113.86 for business supplies.12 Some of Barott’s
claimed supplies could have been categorized as computer expenses (i.e. “print cartridges,”
“Printer HP 6988,” “HP 450 Print Cartridges,” and “RAM for HP Business Inkjet 2800”).
However, the court reviewed Barott’s evidence and found none of those claimed supplies
expenses were included in Barott’s claimed computer expenses. Barott is allowed expenses of
$6,114 for business supplies.
12
The court finds that Barott’s purchase of “ATV battery” should not be allowed. Additionally, several
supplies expenses, such as “American Express,” “ATM-Cash,” and “computer stuff,” were insufficiently
substantiated or clarified; as a result, the court disallows those expenses.
DECISION TC-MD 120603N 21
III. CONCLUSION
After careful consideration of the evidence presented, the court finds that Plaintiffs have
substantiated some of their claimed business deductions for the 2009 tax year. Now, therefore,
IT IS THE DECISION OF THIS COURT that, for the 2009 tax year, Plaintiffs are
allowed the following business expenses:
Advertising: $2,059
Vehicle Expenses: $307
Contract Labor: $3,750
Depreciation: $1,439
Insurance: $1,641
Taxes and Licenses: $280
Lodging: $654
Meals and Entertainment (50 percent): $164
Utilities: $1,010
Accounting: $450
Software: $1,574
Computer: $579
Education: $505
Surveyor Fees: $417
Dues and Memberships: $12
Office Equipment Lease: $427
Discovery Office Systems: $25
Licenses and Permits: $608
DECISION TC-MD 120603N 22
Merchant Fees: $419
Postage and Delivery: $483
Supplies: $6,114
Dated this day of April 2013.
ALLISON R. BOOMER
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 document was signed by Magistrate Allison R. Boomer on April 30, 2013.
The Court filed and entered this document on April 30, 2013.
DECISION TC-MD 120603N 23