Johnson v. Department of Revenue ( 2014 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
JANICE M. JOHNSON, )
)
Plaintiff, ) TC-MD 130552N
)
v. )
)
DEPARTMENT OF REVENUE, )
State of Oregon, )
) CORRECTED FINAL
Defendant. ) DECISION
This Corrected Final Decision is being issued to correct the appeal rights stated at the end
of the Court’s Final Decision.
The court entered its Decision in the above-entitled matter on June 17, 2014. The court
did not receive a request for an award of costs and disbursements (TCR-MD 19) within 14 days
after its Decision was entered. The court’s Final Decision incorporates its Decision without
change.
Plaintiff appealed Defendant’s Notice of Refund Denial, dated September 26, 2013, for
the 2012 tax year. A telephone trial was held in this matter on May 13, 2014. Plaintiff appeared
and testified on her own behalf. Tony Inovejas (Inovejas), Tax Auditor, appeared and testified
on behalf of Defendant. Plaintiff did not submit any exhibits. Defendant’s Exhibits A to H were
received without objection.
I. STATEMENT OF FACTS
For the 2012 tax year, Plaintiff claimed a working family child care credit (working
family credit) and a child and dependent care credit (child care credit) based on child care
payments of $4,500. (Ptf’s Compl at 16.) Defendant allowed Plaintiff a working family credit
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CORRECTED FINAL DECISION TC-MD 130552N 1
and a child care credit based on child care expenses of $1,000 and disallowed the remaining
child care expenses claimed by Plaintiff. (Id.)
Plaintiff testified that, from January through May 2012, she received compensation of
$900 per month from the State of Oregon to provide in-home care for her ailing mother who was
wheelchair-bound and suffered from dementia. She testified that she also had some funds
available from a retirement account through the State of Alaska. Plaintiff testified that, from
January through May 2012, she lived in a house in Blue River, Oregon, with her mother, her
seven-year-old daughter, and Kevin Juhala (Juhala), a friend who “provided child care including
preparation for school, meals, and watching [Plaintiff’s daughter] so that [Plaintiff] could work.”
(Def’s Ex A.) Plaintiff testified that it was necessary for Juhala to provide child care to
Plaintiff’s daughter because caring for Plaintiff’s mother was a 24-hour per day obligation for
Plaintiff. Plaintiff testified that she had to assist her mother with daily activities such as eating,
dressing, and bathing. She testified that, at times, she had to drive her mother 60 miles one way
to the nearest town for medical services and would not have been able to arrange child care for
her daughter if Juhala had not been available.
Plaintiff testified that she met Juhala through a friend in Portland and learned that their
fathers had served together in the military. She testified that Juhala was unemployed at the time,
January 2012, and he had some connection to Blue River, Oregon, so he agreed to provide child
care for Plaintiff’s daughter while Plaintiff cared for her mother. Plaintiff testified that Juhala
was not in the business of providing child care and did not have any other work between January
and May 2012. Plaintiff testified that her house in Blue River was about 3,000 square feet, so
Juhala had his own space. She testified that she tried to contact Juhala for purposes of this
appeal, but was unable to reach him despite sending letters to both Juhala and his family.
CORRECTED FINAL DECISION TC-MD 130552N 2
Plaintiff testified that she paid Juhala in cash at the rate of $250 per week to care for her
daughter, though his preference was to receive payments of $1,000 once per month. Plaintiff
provided four receipts for cash payments: three for $1,000 dated February 8, 2012, February 27,
2012, and March 30, 2012, and one for $1,500 dated May 2, 2012. (Def’s Exs B, C.) Plaintiff
testified that she paid Juhala a $500 bonus, but did not provide a receipt for that payment. (See
Def’s Ex E at 2 (Plaintiffs’ letter stating Juhala “was paid an extra $500 in May for completing
his agreement and to assist him with moving on”). In a letter to Defendant dated February 15,
2013, Plaintiff wrote that Juhala had “his own area” at the property. (Def’s Ex A.) She testified
that Juhala received free room and board in Plaintiff’s house as part of his compensation.
Inovejas testified that he does not consider Plaintiff’s payments to Juhala to be arm’s-
length because Juhala was a friend who lived in Plaintiff’s home. He testified that, based on
Plaintiff’s receipt for $1,000 issued on the same date as a bank withdrawal for $4,800, Defendant
allowed child care expenses of $1,000. (See Def’s Ex D (Plaintiff’s bank statement showing
$4,800 was withdrawn from her account on February 8, 2012).) Plaintiff testified that she
withdrew all of the funds for child care in one lump sum on February 8, 2012. She testified that
she lived 60 miles from the nearest bank, so it was inconvenient to travel to the bank. Plaintiff
testified that she does not understand why Defendant allowed her child care expenses of $1,000,
but not the remaining expenses claimed.
II. ANALYSIS
The issue before the court is whether Plaintiff is entitled to a working family credit and a
child care credit for the 2012 tax year based on claimed child care expenses of $4,500.
ORS 315.262 provides a refundable credit, the working family child care credit, for
qualifying taxpayers to partially offset child care costs incurred while taxpayers are working,
CORRECTED FINAL DECISION TC-MD 130552N 3
attending school, or “seek[ing] employment.”1 ORS 315.262(3) states in, part, that “[a] qualified
taxpayer shall be allowed a credit against the taxes otherwise due under ORS chapter 316 equal
to the applicable percentage of the qualified taxpayer’s child care expenses * * *.” Under
ORS 315.262(1)(a), “child care” is “care provided to a qualifying child of the taxpayer for the
purpose of allowing the taxpayer to be gainfully employed, to seek employment or to attend
school on a full-time or part-time basis[.]” “[T]he [working family] credit is limited to costs
associated with child care” and such costs “must be made by the parent claiming” the working
family credit. OAR 150-315.262(3). “Payments made by an entity or individual other than the
parent claiming the credit are not payments made by the taxpayer.” Id.
ORS 316.078 provides a nonrefundable credit, the child care credit, for certain
“employment-related expenses,” including child care, paid by a taxpayer for the care of a
dependent child or children. The child care credit is specifically tied to IRC section 21. The
child care credit is “equal to a percentage of employment-related expenses allowable pursuant to
section 21 of the Internal Revenue Code * * *.” ORS 316.078(1); see also OAR 150-
316.078(1).2 IRC section 21(a)(l) provides a credit for a “percentage of the employment-related
expenses * * * paid by such individual during the taxable year.” “Expenses are employment-
related expenses only if they are for the purpose of enabling the taxpayer to be gainfully
employed. The expenses must be for the care of a qualifying individual or household services
performed during periods in which the taxpayer is gainfully employed or is in active search of
gainful employment.” Treas Reg 1.21-1(c).
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1
The court’s references to the Oregon Revised Statutes (ORS) are to 2011.
2
OAR 150-316.078(1) states: “When calculating the Oregon child care credit, taxpayers must use the same
employment related expenses used for calculating the federal credit, subject to the same limitations and eligibility
requirements outlined in the IRC Section 21.”
CORRECTED FINAL DECISION TC-MD 130552N 4
Plaintiff has the burden of proof and must establish her case by a “preponderance” of the
evidence. ORS 305.427. A “[p]reponderance of the evidence means the greater weight of
evidence, the more convincing evidence * * *.” Feves v. Dept. of Revenue, 4 OTR 302, 312
(1971). This court has stated that the preponderance standard “mean[s] more likely than not.”
Parker v. Dept. of Rev., TC-MD No 101057C, WL 4763133 at *7 (Oct 8, 2012).
“[I]f the evidence is inconclusive or unpersuasive, the taxpayer will have failed to meet [her]
burden of proof * * *.” Reed v. Dept. of Rev., 310 Or 260, 265, 798 P2d 235 (1990).
Plaintiff testified that she was employed between January and May 2012 by the State of
Oregon to provide in-home care to her mother. Plaintiff testified that caring for her mother was a
24-hour per day job, so child care was a necessary expense during that time period. Plaintiff did
not present any evidence of her employment in 2012 other than her sworn testimony. However,
Defendant did not challenge Plaintiff’s contention that she was employed from January through
May 2012 and the court accepts Plaintiff’s testimony as true. There is a question in this case of
whether Plaintiff had sufficient funds to pay her claimed child care expenses. She testified that
she received $900 per month from the State of Oregon, yet claims that she paid Juhala $1,000
per month and provided him with free room and board. Plaintiff testified that she also had some
funds available through a retirement account, although she did not disclose the amount of those
funds or offer any evidence related to the retirement account.
Defendant questions whether the transaction between Plaintiff and Juhala was arm’s-
length because they were friends. OAR 150-315.262(3)(b)(F) states that “[t]ransactions that are
not arm’s-length or have no economic substance” are not “[c]osts associated with child care.”
This court has stated that “[t]ransactions between related parties rightly generate heightened
scrutiny, because of the increased potential for favorable treatment (e.g., leniency when the
CORRECTED FINAL DECISION TC-MD 130552N 5
taxpayer cannot afford some or all of the amount due)[.]” Carter v. Dept. of Rev., TC-MD No
080689C, WL 1351818 at *3 (Apr 30, 2009). However, “there is not a rebuttable presumption
that a close relationship between parties implies that their transaction was not at arm’s-length.”
Lib-Myagkov v. Dept. of Rev., TC-MD No 091200C, WL 4736621 at *5 (Nov 23, 2010). In
working family credit cases, “where payment is made in cash and the provider is a friend or
relative of the taxpayer, the sworn testimony of the child care provider is critical. * * * These
cases turn on a question of fact, hinging on the credibility of Plaintiffs and the provider.”
Moua v. Dept. of Rev., TC-MD No 081230B, WL 739534 at *2 (Mar 4, 2010) (citations
omitted).
Plaintiff testified that she made the claimed child care payments to Juhala in cash.
Plaintiff is correct that there is no prohibition on paying for child care in cash. See Shirley v.
Dept. of Rev., TC-MD No 130451D, WL 811543 at *3 (Mar 3, 2014). However, “[w]hen a
taxpayer decides to pay cash for child care expenses, the taxpayer has the burden of providing
sufficient evidence to substantiate the total amount of the claimed expense.” Id. Plaintiff’s
evidence substantiating the claimed child care expenses includes four signed receipts, one bank
statement reporting a cash withdrawal of $4,800, and Plaintiff’s sworn testimony. In some cases,
that evidence may be sufficient to meet the burden of proof. Here, however, the claimed child
care payments were made in cash to a friend who lived in Plaintiff’s home. Additionally,
Plaintiff’s claimed child care payments exceeded her income from the State of Oregon. Under
those circumstances, the sworn testimony of Juhala or some additional evidence to corroborate
Plaintiff’s testimony is necessary to prove that Plaintiff, more likely than not, paid Juhala $4,500
for child care in 2012.
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CORRECTED FINAL DECISION TC-MD 130552N 6
III. CONCLUSION
After careful consideration, the court concludes that Plaintiff failed to prove by a
preponderance of evidence that she paid child care expenses of $4,500 in 2012. Now, therefore,
IT IS THE DECISION OF THIS COURT that Plaintiff’s appeal is denied.
Dated this day of July 2014.
JILL A. TANNER
PRESIDING MAGISTRATE
If you want to appeal this Corrected Final Decision, file a Complaint in the
Regular Division of the Oregon Tax Court, by mailing to: 1163 State Street,
Salem, OR 97301-2563; or by hand delivery to: Fourth Floor, 1241 State Street,
Salem, OR.
Your Complaint must be submitted within 60 days after the date of the Corrected
Final Decision or this Corrected Final Decision cannot be changed.
This Corrected Final Decision was signed by Presiding Magistrate Jill A. Tanner
on July 23, 2014. The Court filed and entered this Corrected Final Decision on
July 23, 2014.
CORRECTED FINAL DECISION TC-MD 130552N 7