Hansen v. Department of Revenue ( 2013 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
DAVID S. HANSEN )
and MILDRED R. HANSEN, )
)
Plaintiffs, ) TC-MD 120595N
)
v. )
)
DEPARTMENT OF REVENUE, )
State of Oregon, )
)
Defendant. ) DECISION
Plaintiffs appeal from Defendant’s conference decision, dated March 28, 2012,
disallowing certain business and personal deductions for the 2007 tax year. A trial was held in
the Tax Courtroom in Salem, Oregon on January 30, 2013. Greg Ripke (Ripke), Certified Public
Accountant, appeared and testified on behalf of Plaintiffs. Plaintiffs did not appear at trial. Dane
Palmer (Palmer), Tax Auditor, appeared and testified on behalf of Defendant. Plaintiffs’
Exhibits 1 through 23 and 25 through 42 were received over Defendant’s objection.1 Defendant’s
Exhibits A through H were received without objection.
Similar issues to those presented in this matter have been heard by this court in two
previous appeals, involving the 2005 and 2006 tax years. Hansen v. Dept. of Rev., TC-MD No
081122D (Sept 29, 2009); Hansen v. Dept. of Rev., TC-MD No 101043C (July 24, 2012). Those
decisions describe the adult foster care business operated by Plaintiffs. The parties declined to
1
Defendant objected to Plaintiffs’ Exhibits under Tax Court Rule-Magistrate Division (TCR-MD) 10 C.
Under TCR-MD 10 C, exhibits “must be either postmarked at least 14 days before the trial date or physically
received at least 10 days before the trial date. * * * In the event that the tenth day falls on a holiday or weekend, the
next business day following the holiday or weekend will be considered the tenth day.” The tenth day before trial in
this matter fell on Sunday, January 20, 2013. The following day, Monday, January 21, 2013, was a holiday. Thus,
Plaintiffs’ exhibits should have been received by Defendant no later than January 22, 2013. Plaintiffs provided a
certificate of service stating that the exhibits were hand-delivered to Defendant on January 22, 2013, and Defendant
confirmed receipt of Plaintiffs’ exhibits on January 22, 2013. Plaintiffs’ exhibits were timely under TCR-MD 10 C.
DECISION TC-MD 120595N 1
submit stipulated facts prior to trial or to stipulate to any of the findings of this court for prior tax
years.
I. STATEMENT OF FACTS
For the 2007 tax year, Plaintiffs’ claim certain business deductions and personal medical
expenses identified in their Amended Complaint. (Ptfs’ Ex 2 at 7-8.) The business expenses
claimed pertain to Plaintiffs’ “adult foster care business,” operated out of a property located near
Eugene, Oregon. (See Ptfs’ Ex 1 at 1.) Plaintiffs also reside at that property. (Id.) The parties
agree that Plaintiffs provided services to at least five individuals in their adult foster care
business. (Id.) The Department of Revenue conference officer found that an additional person
who lives at the property, “Sue,” was a renter and did not receive services from the adult foster
care business. (Id. at 1, 5.) Ripke disagreed with the conference officer’s finding that “Sue” was
not a client of the adult foster care business, but offered no reliable evidence in support of his
testimony. At trial, the parties also disputed whether Plaintiffs’ adult son lived with Plaintiffs in
2007. Ripke testified that Plaintiffs did not claim their son as a dependent in 2007, but conceded
that he lacks personal knowledge of whether Plaintiffs’ son lived in their home in 2007. (See
Ptfs’ Ex 2 at 4.) Palmer testified that he visited Plaintiffs’ home in 2008 and found that
Plaintiffs’ son lived there at that time.
Ripke’s presentation at trial focused primarily on the “general ledger,” which he testified
was prepared by Plaintiffs for the 2007 tax year. (Ptfs’ Exs 6, 7.) Ripke testified that the 2007
general ledger prepared by Plaintiffs was found to include some errors. As a result, Ripke
testified that he completed “due diligence” during the pendency of this appeal and reviewed the
accuracy of Plaintiffs’ general ledger by sampling receipts provided by Plaintiffs. (Ptfs’ Ex 41
(receipts).) Ripke conceded that Plaintiffs made some errors in their general ledger, such as
DECISION TC-MD 120595N 2
including cash back as business expenses, but testified that he found Plaintiffs’ general ledger to
be overall accurate and reliable. Ripke testified that the expenses requested in Plaintiffs’
Amended Complaint reflect the correction of errors made in the general ledger. (See Ptfs’ Exs 2,
6, 7, 8.) For instance, Ripke testified that Plaintiffs originally claimed expenses of $41,578 for
“Meals & Household Supplies”; Ripke later determined the deduction should be $37,565. (Ptfs’
Compl at 8; Ptfs’ Ex 2 at 7.)
In addition to the general ledger, Plaintiffs provided 246 pages of photocopied receipts
from 2007 and checking account statements from 2007 for “Hansen’s 3R Ranch.” (Ptfs’ Exs 20,
41.) Both are organized somewhat chronologically, without any apparent organization by
expense category. According to Ripke, the deductible business expenses were entered by
Plaintiffs into their general ledger. (Ptfs’ Ex 7.) He testified that Plaintiffs organized expenses
into numerous categories, as set out in Plaintiffs’ Amended Complaint. (See Ptfs’ Ex 2 at 7.)
Ripke acknowledged that, given the nature of Plaintiffs’ business, expenses “that might seem to
be personal could fall into the category of services. For example, they might purchase diapers,
ibuprofen, flowers, items that normally would fall into the personal category but, in [his], and
taxpayer’s opinion, are for the comfort and care of their customers.” (Ptfs’ Ex 8 at 3.)
In order to achieve an appropriate allocation of expenses between the categories of
business and personal, Ripke testified that he applied a percentage to each expense category.
(Ptfs’ Ex 8 at 3; Ex 2 at 7.) Ripke determined that 75 percent of expenses for “meals and
household supplies [should] be allowed as a business deduction in the amount of $28,174, based
on a ratio of six customers to eight total residents (75%) times $37,565.” (Ptfs’ Ex 2 at 7.) He
determined that 89.94 percent of expenses for mortgage interest, property tax, property
insurance, repair and maintenance, and utilities should “be allowed as a business deduction in the
DECISION TC-MD 120595N 3
amount of $47,013, based on the ratio of exclusive use by taxpayers of floor space of the
residence to the total floor space of the residence 89.94% times $52,272.” (Id.) Palmer testified
in response that Defendant allowed a deduction for mortgage interest and property taxes on
Plaintiffs’ Schedule A and it is not appropriate to allow a second deduction for those expenses on
Plaintiffs’ Schedule C. (See Def’s Ex D at 5.)
Plaintiffs request that the following business expenses be allowed for 2007:
Expense Plaintiffs’ request
Advertising $427
Auto $9,013
Depreciation $11,675
Office & Legal $1,372
Auto interest $866
Supplies $1,683
Taxes, Dues, Licenses $524
Meals & Household Supplies $37,565
Telephone $4,580
Crafts $256
Comfort Dogs $1,000
Bank Fees $79
Cleaning $910
Outside Service $300
Mortgage Interest $33,282
Property Tax $2,469
Property Insurance $1,217
Repair and Maintenance $8,051
Utilities $7,253
Accounting $380
Referrals $2,632
(Ptfs’ Ex 2 at 7.)
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DECISION TC-MD 120595N 4
Plaintiffs also request that the following medical expense be allowed for 2007:
Expense Plaintiffs’ request
Office calls $2,970
Medical insurance $1,359
Medical insurance $655
Office calls $94
Laboratory fees $59
Prescriptions $2,449
(Ptfs’ Ex 2 at 8.)
Palmer testified that he reviewed Plaintiffs’ general ledger and the receipts provided by
Plaintiffs and found the ledger to be unreliable based on the receipts provided. (See Def’s Ex E
at 4-5; Ex G.) Palmer testified that he reviewed four months of claimed food expenses:
February, September, October, and November 2007. (Def’s Ex E at 5; Ex G.) For February
2007, he identified receipts supporting food expenses of $695.89, whereas Plaintiffs claimed
food expenses of $1,904.76. (Def’s Ex E at 5; Ex G at 2.) For September 2007, Palmer
identified receipts supporting food expenses of $879.57, whereas Plaintiffs claimed food
expenses of $3,468.49. (Def’s Ex E at 5; Ex G at 51.) For October 2007, Palmer identified
receipts supporting food expenses of $612.55, whereas Plaintiffs claimed food expenses of
$5,584.21. (Def’s Ex E at 5; Ex G at 106.) For November 2007, Palmer identified receipts
supporting food expenses of $863.42, whereas Plaintiffs claimed food expenses of $4,276.40.
(Def’s Ex E at 5; Ex G at 183.) The Department of Revenue conference officer found that, based
on Palmer’s review of Plaintiffs’ receipts, 20 percent of the food expenses claimed by Plaintiffs
were substantiated by receipts. (Def’s Ex E at 5.) Using that percentage and a business
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DECISION TC-MD 120595N 5
allocation of 55.5 percent based on the ratio of business residents (five) to non-business residents
(nine), the conference officer allowed a food expense of $4,373.2 (Id. at 7-8.)
The Department of Revenue’s conference officer allowed Plaintiffs depreciation of
$11,435. (Def’s Ex E at 8.) The conference officer’s changes “lower[ed] the self-employment
tax” and the “substantial underpayment of income (SUI) penalty.” (Id.)
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.” Ellison v. Dept. of Rev., TC-MD No
041142D, WL 2414746 *6 (Sept 23, 2005) (citing ORS 316.007).”3 The legislature adopted, by
reference, the federal definition for deductions, including those allowed under Internal Revenue
Code (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 that gives rise to the expense must be of a
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) (citing Welch v. Helvering (Welch), 290 US 111, 114,
54 S Ct 8, 78 L Ed 212 (1933)). A “necessary” expense is one that is “appropriate and helpful”
to the taxpayer’s business. See Welch at 113. As a general rule, IRC section 262(a) prohibits the
deduction of most personal and family expenditures.
2
The conference officer found that 20 percent of Plaintiffs’ claimed food expenses ($39,401) was $7,880.
(Def’s Ex E at 8.) The conference officer then multiplied the substantiated food expenses of $7,880 by the business
allocation of 55.5 percent for a business food expense of $4,373. (Id.)
3
Unless otherwise noted, all references to the Oregon Revised Statutes (ORS) are to 2005.
4
All references to the Internal Revenue Code (IRC) and accompanying regulations are to the 1986 code,
and include updates applicable to 2007.
DECISION TC-MD 120595N 6
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, 11 L Ed 2d 226 (1992). See also ORS 305.427
(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 F2d 540, 543-44 (2d Cir 1930). The estimate must have a
reasonable evidentiary basis. Vanicek v. Comm’r, 85 TC 731, 742-43 (1985). In Tyson Foods,
Inc. v. Comm’r, 94 TCM (CCH) 56, 58, WL 2043858 at *3 (2007), the taxpayer provided
“evidence that certain payments were made and recorded[,]” and, based on that evidence, asked
the court “to conclude that the payments must have been either for deductible expenses or
depreciable assets and that the expenditures that were made are attributable to a tax year before
the Court.” The only other evidence the taxpayer offered “was the list of vendors and amounts
that were recorded in the moving expenses account and the testimony of * * * a lawyer involved
* * * who had reviewed the document * * *.” Id. at *4. The court found that the taxpayer
“failed to satisfy its burden of proving that it is entitled to the disputed deductions.” Id.
IRC section 274 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). See Treas Reg 1.274-5T(a). Listed property includes “any passenger
automobile” and “any cellular telephone.” IRC section 280F(d)(4)(A)(i), (v). Under IRC
section 274(d), a taxpayer must substantiate a claimed expense covered by section 274 with
adequate records or by sufficient evidence corroborating the taxpayer’s own statement
DECISION TC-MD 120595N 7
establishing the amount, time, place, and business purpose of the expense. See Treas Reg
1.274-5T(b).
IRC section 280A(c)(4) applies to Plaintiffs’ claimed business expenses associated with
their home because Plaintiffs operate a licensed residential care facility out of their home.
IRC § 280A(c)(4)(A).5 The deduction for expenses allowed under IRC section 280A(c) may not
exceed the gross income from the care facility. See IRC § 280A(c)(5). Under IRC section
280A(c)(4)(A), Plaintiffs’ business use of the home need not be “exclusive,” only “regular.”
IRC section 280A(c)(4)(C) provides the allocation formula for business expenses associated with
Plaintiffs’ home that do not exclusively benefit Plaintiffs’ business:
“If a portion of the taxpayer’s dwelling unit used for the purposes
described in subparagraph (A) is not used exclusively for those purposes, the
amount of the expenses attributable to that portion shall not exceed an amount
which bears the same ratio to the total amount of the items allocable to such
portion as the number of hours the portion is used for such purposes bears to the
number of hours the portion is available for use.”
IRC section 280A is a limit on “deduction[s] otherwise allowable.” IRC § 280A(a). Thus,
claimed expenses must be deductible under another code provision authorizing deductions, such
as IRC section 162.
Ripke argued at trial that Plaintiffs’ general ledger is reliable and supports Plaintiffs’
claimed business deductions. He expressed the opinion that Plaintiffs’ general ledger constitutes
Plaintiffs’ “testimony” and proves the business purpose of each claimed expense. The court
disagrees that Plaintiffs’ general ledger is their testimony before this court. Plaintiffs did not
appear at trial and testify under oath. Defendant did not have an opportunity to cross-examine
Plaintiffs. The court received no testimony from Plaintiffs. Palmer testified that, based on his
5
IRC section 280A(c)(4)(A) applies to taxpayers who use a portion of their dwelling on a regular basis to
carry on the “trade or business of providing day care to children, for individuals who have attained age 65, or for
individuals who are physically or mentally incapable of caring for themselves.”
DECISION TC-MD 120595N 8
review of the food expenses claimed in the general ledger as compared with receipts provided by
Plaintiffs, the ledger is unreliable and includes numerous personal expenses that are not
deductible business expenses. The court also reviewed Plaintiffs’ general ledger and the receipts
provided and agrees with Palmer that the general ledger, by itself, is not reliable evidence of
Plaintiffs’ claimed deductions. Although Plaintiffs provided 246 pages of photocopied receipts,
Plaintiffs failed to provide receipts, invoices, or other substantiation for many of their claimed
expenses and failed to appear and testify at trial regarding their claimed expenses.
Ripke testified, to the extent of his personal knowledge, regarding Plaintiffs’ business and
claimed expenses. Unfortunately, Ripke lacked personal knowledge about numerous aspects of
Plaintiffs’ business and claimed expenses. For instance, Ripke lacked “personal knowledge” of
whether Plaintiffs own one car or two; of whether Plaintiffs’ son lived with them in 2007; and of
whether the “comfort dogs” are licensed or otherwise certified. When questioned, he could not
explain why the expense category for “TV” included payments to “GE Money Bank” or why
receipts provided to substantiate claimed “food and household expenses” included items such as
personal clothing (jackets, shirts, and socks) as well as posters, cat food, and hunting equipment.
(See Def’s Ex G at 1, 2, 49, 51, 55, 67.) Ripke’s lack of personal knowledge with respect to the
business expenses claimed by Plaintiffs underscores the necessity that those who possess
personal knowledge (Plaintiffs) appear and testify at trial. Absent the testimony of Plaintiffs and
given the many problems evident in the general ledger provided, the court cannot determine
whether many of the claimed expenses were ordinary and necessary business expenses.
Plaintiffs provided statements from the “Hansen’s 3R Ranch” checking account from
2007. Ripke argued that, under Rev Proc 92-71, 1992-2 CB 437 (Rev Proc 92-71), bank
statements are substantiation of claimed expenses. (See Ptfs’ Ex 21 at 2.) Rev Proc 92-71 states:
DECISION TC-MD 120595N 9
“An account statement prepared by a financial institution showing an electronic
funds transfer (i.e. a decrease to the account holder’s balance) will be accepted as
proof of payment if the statement shows: 1. the amount of the transfer, 2. the date
the transfer was posted to the account by the financial institution, and 3. the name
of the payee.”
(Id. at 2-3 (emphasis added).) It further states:
“Proof of payment of an amount alone does not establish that a person is entitled
to a tax deduction. A taxpayer should also keep any other documents that may
help prove entitlement to a tax deduction (for example, receipts, sales slips,
charge slips, payment acknowledgements, check registers, and carbon copies of
checks).”
(Id. at 3-4.) Although Plaintiffs’ checking account statements establish proof of payment, they
do not necessarily establish the business purpose of claimed expenses.
Keeping those limitations in mind, the court considers those expenses for which Plaintiffs
have provided some substantiation and for which the business purpose can be discerned.
A. Food
Food was one of the largest expense categories claimed by Plaintiffs for the 2007 tax
year. Plaintiffs’ Amended Complaint requests an expense of $37,565 for “Meals & Household
Supplies.”6 (Ptfs’ Ex 2 at 7.) Plaintiffs provided some receipts to substantiate their claimed food
expenses. (See Ptfs’ Ex 41.) Palmer testified that he reviewed four months of claimed food
expenses and receipts provided by Plaintiffs: February, September, October, and November. In
his review, Palmer found that many purchases claimed as food included numerous personal
items. Based on Palmer’s review, the Department of Revenue conference officer concluded that
20 percent of Plaintiffs’ claimed food expenses was substantiated.
The court also reviewed Plaintiffs’ receipts as compared with Plaintiffs’ claimed food
expenses and found Palmer’s analysis to be supported. For instance, in January 2007, Plaintiffs
6
Plaintiffs separately claim expenses of $1,683 for “Supplies.” (Ptfs’ Ex 2 at 7.)
DECISION TC-MD 120595N 10
reported on their general ledger “groceries” totaling $3,257.51. (Ptfs’ Ex 7 at 8.) Of that
amount, the court was able to identify 12 receipts totaling $551. (Ptfs’ Ex 41 at 1-8; Ex 7 at 8.)
Included on those receipts were numerous items that are not “groceries,” such as: fish/game
licenses; two letter sets; fragrance; cash back; two pairs of thermal pants; leather cleaner; bird
food; a road atlas; a hacksaw; hardware; dog food; “counter card”; clothing; cat treats; dog
biscuits; and a “system saver.”7 (Ptfs’ Ex 41 at 1-8.) Plaintiffs also claimed numerous restaurant
meals for no more than one or two people. (See, e.g., id. at 28 (TacoTime), 30 (“DQ”), 31
(Quiznos).) It is unclear how those purchases were used in Plaintiffs’ business.
Based on the court’s review of Plaintiffs’ receipts and the persuasive testimony and
evidence presented by Palmer, the court agrees with the conference officer’s determination that
20 percent of Plaintiffs’ claimed food expenses is substantiated. The court finds that Plaintiffs
have not provided support for any food expenses beyond what was allowed by Defendant.
B. Supplies
Plaintiffs claimed “supplies” of $1,683. (Ptfs’ Ex 2 at 7; Ex 7 at 20.) Included in that
amount are several purchases from “All-Med Inc.” (Ptfs’ Ex 7 at 20.) Plaintiffs provided several
invoices from “All-Med Inc.” to “Hansen’s 3R Ranch” that are dated and describe the purchases
in detail: “safety pole - grab bar” and “shower chair/commode.” (Ptfs’ Ex 41 at 9, 11 (duplicate),
40, 110, 119; Ptfs’ Ex 37 at 26, 27.8) Those invoices total $1,105.65. (See id.) Plaintiffs’
checking account statements show payments to “All-Med Inc.” totaling $1,269.45 in 2007.9
7
Of the $551 in receipts provided by Plaintiffs, the court determined that approximately $264 was not for
food, but rather was for various personal items. (See Ptfs’ Ex 41 at 1-8.)
8
Plaintiffs’ Exhibit 37 was offered as evidence of Plaintiffs’ personal medical expenses. The “All Med
Inc.” invoices are billed to “Hansen’s 3R Ranch” and included in Plaintiffs’ general ledger; thus, it appears to the
court that those invoices were mistakenly included with Plaintiffs’ receipts for personal medical expenses. (See
Ptfs’ Ex 7 at 20; Ex 37 at 26-27.) Plaintiffs’ Exhibit 37 at 28-29 are duplicates of 26-27.
9
No explanation was provided for the discrepancy between the invoices and bank statements.
DECISION TC-MD 120595N 11
(Ptfs’ Ex 20 at 3, 9, 10, 16, 45.) The court is persuaded that Plaintiffs incurred expenses of
$1,106 for supplies used in their adult foster care business.
C. Advertising
Plaintiffs claimed advertising expenses of $427. (Ptfs’ Ex 2 at 7; Ex 7 at 5.) Plaintiffs
provided an “Advertising Agreement” invoice for $298, dated December 10, 2007, from “MLO
Media” identifying the “Name of Advertiser” as “Hansen’s 3R Ranch.” (Ptfs’ Ex 9 at 1; Ex 41 at
239.) The invoice indicates payment was made by VISA card. (Id.) The court is persuaded that
Plaintiffs incurred an expense of $298 for advertising their adult foster care business.
D. Utilities
Plaintiffs’ claimed total expenses of $7,253 for “utilities” including “electric,” “internet,”
“trash,” and “TV.” (See Ptfs’ Ex 2 at 7; Ex 7 at 22-23.)
Plaintiffs provided Dish Network statements from 2007 totaling $528.99. (Ptfs’ Ex 41 at
13, 34, 99, 121, 137, 236.) Plaintiffs provided Lane Electric statements from 2007 totaling
$1,145.18. (Id. at 10, 60.) Plaintiffs’ checking account statements from 2007 substantiate
payments totaling $204.34 to “Juno Online” for an internet connection. (Ptfs’ Ex 20 at 2, 6, 9,
12, 15, 19, 24, 28, 31, 36, 41, 45.) Plaintiffs’ checking account statements from 2007
substantiate payments totaling $553 for “Trash Bill.”10 (Id. at 2, 6, 9, 12, 15, 19, 24.) The court
finds that Plaintiffs substantiated expenses of $2,432 for utilities. Plaintiffs’ expenses for
utilities are mixed personal and business expenses. Using the 55.5 percent business use
allocation determined by Defendant, Plaintiffs are allowed a deduction of $1,350 for utilities.
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10
Plaintiffs’ checking account statements from 2007 consistently include a “Trash Bill” of $79.00 mid-
month from January through July 2007. After July 2007, the checking accounts statements do not include any
payments for “Trash Bill.” No explanation was provided for that discrepancy.
DECISION TC-MD 120595N 12
E. Mileage
IRC section 162 allows a taxpayer to deduct transportation expenses incurred in
connection with a business. “Only such traveling expenses as are reasonable and necessary in
the conduct of the taxpayer’s business and directly attributable to it may be deducted.” Treas
Reg section 1.162-2(a). Treasury Regulation section 1.162-2(b)(1) additionally provides that
when a taxpayer travels to a destination and while at the destination engages in both business and
personal activities, traveling expenses to and from such destination are deductible “only if the
trip is related primarily to the taxpayer’s trade or business.”
IRC section 274(d) imposes strict substantiation requirements for mileage expenses. The
Treasury Regulations clarify the “adequate records” requirement of section 274(d):
“[A] taxpayer shall maintain an account book, diary, log, statement of expense,
trip sheets, or similar record * * *, and documentary evidence * * * which, in
combination, are sufficient to establish each element of an expenditure or use
* * *. It is not necessary to record information in an account book, diary, log,
statement of expense, trip sheet, or similar record which duplicates information
reflected on a receipt so long as the account book, etc. and receipt complement
each other in an orderly manner.”
Treas Reg § 1.274-5T(c)(2)(i). “Although a contemporaneous log is not required, corroborative
evidence to support a taxpayer’s reconstruction ‘of the elements * * * of the expenditure or use
must have a high degree of probative value to elevate such statement’ to the level of credibility
of a contemporaneous record.” Christine v. Commissioner, TCM 2010-144, WL 2640125 at *3
(2010), citing Treas Reg §1.274-5T(c)(1).11
11
Treas Reg § 1.274-5T(c)(1) states: “A contemporaneous log is not required, but a record of the elements
of an expenditure or of a business use of listed property made at or near the time of the expenditure or use, supported
by sufficient documentary evidence, has a high degree of credibility not present with respect to a statement prepared
subsequent thereto when generally there is a lack of accurate recall. Thus, the corroborative evidence required to
support a statement not [made] at or near the time of the expenditure or use must have a high degree of probative
value to elevate such statement and evidence to the level of credibility reflected by a record made at or near the time
of the expenditure or use supported by sufficient documentary evidence.”
DECISION TC-MD 120595N 13
Ripke testified that Plaintiffs claimed an “auto” deduction of $9,013 based, in part, on
their “mileage log.” (Ptfs’ Ex 2 at 7.) Plaintiffs claimed 8,900 miles for business purposes out
of a total of 11,300 miles traveled in 2007. (Ptfs’ Ex 10 at 33.) Ripke testified that Plaintiffs
determined their 2007 mileage based on round trips from Veneta to Eugene to purchase items at
the store. He testified that Plaintiffs identified those trips using their bank statements, receipts,
and general ledger. (See Ptfs’ Ex 10 at 10-31 (Ripke testified this is the “source document” from
which 2007 mileage was determined).)
Plaintiffs’ mileage records do not meet the requirements of IRC section 274(d). One of
the problems with Plaintiffs’ approach is that it is unclear which trips were exclusively or
primarily personal in nature. Plaintiffs’ receipts reveal that many of the items purchased and
claimed as “food” were personal in nature and lacked any apparent business purpose. Plaintiffs’
trips to the store to buy personal items, or mostly personal items, were not deductible business
trips. Plaintiffs have failed to meet the burden of proof with respect to claimed “auto” expenses.
F. Repairs and maintenance
Ripke testified that Plaintiffs spent $28,787.63 in 2007 on “repair and maintenance.”
(Ptfs’ Ex 7 at 4.) He testified that expense was mostly to build an addition on the house and it
was capitalized, although some of it could have been for repairs. On their Amended Complaint,
Plaintiffs claimed expenses of $8,051 for “repair and maintenance.” (Ptfs’ Ex 2 at 7.) Plaintiffs
provided some receipts from hardware stores, home improvement stores, and similar vendors.
(See Ptfs’ Ex 41 at 4, 5, 14 (quote only), 26, 34, 35, 36, 42, 54.) Some invoices are for “Hansen
Bros Construction Co.” (Id. at 12, 86, 98, 103, 122, 136.) The court cannot discern from
Plaintiffs’ evidence the purpose of those expenses, nor can the court determine whether the
expenses were for repair and maintenance or were capital expenditures. Furthermore, it is
DECISION TC-MD 120595N 14
unclear to the court whether Plaintiffs’ claimed expenses for “repair and maintenance” were for
their adult foster care business, for another business (i.e. Hansen Bros Construction Co.), or for
personal use. Plaintiffs have failed to meet their burden of proof with respect to their claimed
expenses for “repair and maintenance.”
G. Other claimed business expenses
Plaintiffs claimed “telephone” expenses of $4,580. (Ptfs’ Ex 2 at 7.) Ripke testified that
Plaintiffs’ claimed telephone expenses include their cellular telephone, but conceded that
Plaintiffs did not maintain a log detailing business use of their cellular telephone. Plaintiffs
provided no other substantiation for their claimed telephone expenses. Plaintiffs failed to meet
their burden of proof with respect to their claimed telephone expenses.
Plaintiffs claimed expenses for “crafts” ($256) and “comfort dogs” ($1,000). (Ptfs’ Ex 2
at 7.) The receipts provided by Plaintiffs include receipts from quilting and fabric stores as well
as pet-related receipts. (See, e.g., Ptfs’ Ex 41 at 18, 20, 157 (Jo-Ann Fabric, Sunshine Quilting,
Veneta Veterinary Hopsital).) Ripke testified that the “comfort dogs” are Collies and they
provide comfort to Plaintiffs’ elderly residents. He testified that he does not know whether the
dogs are licensed or certified as “comfort dogs.” Ripke testified that Plaintiffs claimed dog
expenses for dog food, veterinarian visits, and other similar expenses. Palmer testified that, in
his view, the dog-related expenses are personal in nature. Plaintiffs provided no explanation for
the business purpose of the claimed “crafts” expenses. Plaintiffs failed to meet their burden of
proof with respect to their claimed expenses for “crafts” and “comfort dogs.”
The court found no substantiation in Plaintiffs’ exhibits for the remaining business
expenses claimed by Plaintiffs. (See Ptfs’ Ex 2 at 7.) The court has described in detail the nature
of receipts and records provided by Plaintiffs. Other receipts provided by Plaintiffs include
DECISION TC-MD 120595N 15
various retail purchases and it is unclear whether any of those purchases were used in Plaintiffs’
business. (See, e.g., Ptfs’ Ex 41 at 1 (ski shop), 55 (Target), 83 (Powers Sporting Goods), 188
(REI), 205 (Old Navy).) The court finds that Plaintiffs have not established by a preponderance
of the evidence any additional business expense deductions for tax year 2007.
H. Personal medical expenses
IRC section 213 allows an itemized deduction for medical expenses paid or incurred
by the taxpayer for care of the taxpayer. The deduction is allowed “to the extent that such
expenses exceed 7.5 percent of adjusted gross income.” IRC § 213(a). Medical expenses are
defined as expenditures for the diagnosis, cure, relief, or treatment of disease of bodily
malfunction, for medical insurance, for prescription drugs, and for transportation and lodging
while seeking care. IRC § 213(d)(1)(A)-(D). “The term ‘medical care’ does not include
cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to
ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal
injury resulting from an accident or trauma, or disfiguring disease.”12 IRC § 213(d)(9)(A).
Plaintiffs claimed personal medical expenses totaling $7,586. (Ptfs’ Ex 2 at 8.)
Plaintiffs’ second amended 2007 income tax return reports adjusted gross income of $86,714.
(Def’s Ex C at 6.) Plaintiffs provided invoices and receipts supporting some of their claimed
medical expenses. (See Ptfs’ Ex 37.) Some of the medical receipts and invoices provided are
clearly not Plaintiffs’ personal medical expenses, but rather appear to be receipts for prescription
drugs belonging to patrons of Plaintiffs’ adult foster care business. (See, e.g., id. at 7-8.13) Many
12
“Cosmetic surgery” is “any procedure which is directed at improving the patient’s appearance and does
not meaningfully promote the proper function of the body or prevent or treat illness or disease.” IRC § 213(d)(9)(B).
13
Some receipts for prescription drugs included in Plaintiffs’ personal medical receipts name individuals
who are identified as patrons of Plaintiffs’ adult foster care business on their general ledger. (See Ptfs’ Ex 7 at 1.)
DECISION TC-MD 120595N 16
of the receipts provided by Plaintiffs are from “Tiffany’s Drugs”14 and do not clearly identify the
item purchased. (See, e.g., id. at 10.) Some receipts provided are illegible. (See, e.g., id. at
18-20.) Plaintiffs’ provided a January 5, 2007, invoice for $1,500 for “Botox” and “Restylane.”
(Id. at 22.) Plaintiffs offered no evidence whether payments for “Botox” and “Restylane” are
deductible medical expenses under IRC section 213. Based on the evidence provided, Plaintiffs
have substantiated no more than $3,042 in medical expenses. That amount does not meet the
threshold of 7.5 percent of adjusted gross income. IRC § 213(a).
I. Penalty waiver request
At the conclusion of trial, Ripke requested waiver of the penalty imposed for substantial
understatement of income and provided a letter in support of that request. (Ptfs’ Ltr, Jan 30,
2013.) Ripke stated that Plaintiffs had not previously requested that Defendant waive the
penalty. Palmer confirmed that Defendant had not received a penalty waiver request from
Plaintiffs. ORS 314.402(2)(a) states that a substantial understatement of taxable income exists if
the amount of the taxpayer’s understatement exceeds $15,000. ORS 314.402(6) grants
Defendant the authority to waive all or any part of the penalty on a showing by the taxpayer that
there was “reasonable cause for the understatement, or any portion thereof, and that the taxpayer
acted in good faith.” See also OAR 150-314.402(4)(b). Plaintiffs’ request that the court waive
the substantial understatement of income penalty is denied.
III. CONCLUSION
After careful review and consideration of the evidence presented, the court finds that
Plaintiffs have substantiated some of their claimed business deductions for the 2007 tax year.
14
Many receipts from “Tiffany’s Drugs” were also included with Plaintiffs’ business receipts. (See, e.g.,
Ptfs’ Ex 41 at 6.) It is unclear whether Plaintiffs deducted those purchases both as business expenses and also as
personal medical expenses.
DECISION TC-MD 120595N 17
The court further finds that Plaintiffs substantiated some of their claimed personal medical
expenses, but the amount substantiated is insufficient for the deduction under IRC section
213(a). The court concludes that Plaintiffs’ request for waiver of the substantial understatement
of income penalty must be denied. Now, therefore,
IT IS THE DECISION OF THIS COURT that, for the 2007 tax year, Plaintiffs are
allowed the following business deductions in addition the deductions allowed by Defendant’s
conference officer: $1,106 for supplies; $298 for advertising; and $1,350 for utilities.15
IT IS FURTHER DECIDED that, for the 2007 tax year, Plaintiffs are not allowed a
deduction for personal medical expenses under IRC section 213.
IT IS FURTHER DECIDED that Plaintiffs’ request for waiver of the substantial
understatement of income penalty is denied.
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 12, 2013.
The Court filed and entered this document on April 12, 2013.
15
The court finds that Plaintiffs substantiated expenses of $2,432 for utilities. Based on the 55.5 percent
business allocation, Plaintiffs are allowed a deduction of $1,350 for utilities.
DECISION TC-MD 120595N 18