Brady v. Dept. of Rev. ( 2020 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
REX W. BRADY, )
)
Plaintiff, ) TC-MD 190346R
)
v. )
)
DEPARTMENT OF REVENUE, )
State of Oregon, )
)
Defendant. ) DECISION
This matter was submitted to the court after a case management conference, held
on August 17, 2020. At that conference the parties agreed that all issues in Plaintiff’s
complaint should be resolved in favor of Plaintiff except the following issue: whether an
Oregon Circuit Court order requiring a defendant in a criminal case to pay a specific
amount in restitution to taxpayer (Plaintiff), can be used by the Plaintiff in the tax court to
prove the amount of business loss from the crime under Internal Revenue Code (IRC)
section 165. The parties agreed to accept the Circuit Court order, in case 17CR42660, as
Plaintiff’s evidence. Defendant waived the opportunity to present witnesses or submit
documentary evidence. In addition to the pleadings and the aforementioned judgment,
some facts of the case are taken from the parties’ representations at the case management
conferences.
Plaintiff owned and operated a “factoring” business during the 2015 tax year. A
simplified description of the business is that it loans money on a discounted basis to other
businesses based on their outstanding accounts receivable (invoices) and it collects on
sums payable to the businesses. Plaintiff became the victim of fraud during the 2015 tax
year, when an individual named Mahmod Mark Rez Homayoun diverted payments routed
DECISION TC-MD 190346R 1
to Plaintiff’s business and forged business checks. Plaintiff provided financial records to
the District Attorney’s Office to assist in ascertaining the amount of loss he sustained. In
2017, the Oregon Circuit Court for Clackamas County, in convicting Mr. Homayoun of a
number of theft crimes, issued a judgment ordering him to pay $120,474 in restitution to
Plaintiff as a result of the theft in 2015.
In analyzing Oregon income tax cases, the court starts with several general
guidelines. First, the court is guided by the intent of the legislature to make Oregon's
personal income tax law identical in effect to the federal Internal Revenue Code (IRC) for
the purpose of determining taxable income of individuals. ORS 316.007.1 Second, in
cases before the court, the party seeking affirmative relief bears the burden of proof and
must establish his or her case by a “preponderance” of the evidence. ORS 305.427.
Third, 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).
A. IRC Section 165
IRC section 165(a)(1) provides a deduction for business losses “sustained during
the taxable year and not compensated for by insurance or otherwise.” Plaintiff asserts he
sustained a business loss during the 2015 tax year, which was not compensated by any
source. Plaintiff seeks to deduct the $120,474 in court ordered restitution as a theft loss
under IRC section 165. Defendant does not dispute that Plaintiff is permitted some
amount of loss deduction, but argues that the court ordered restitution is not enough to
prove the exact amount of allowable loss deduction under IRC section 165.
1
References to the Oregon Revised Statutes (ORS) are to 2013.
DECISION TC-MD 190346R 2
B. Criminal Restitution in Oregon
“When a person is convicted of a crime, or a violation as described in ORS
153.008, that has resulted in economic damages” the court will require the defendant to
pay restitution in the full amount of the victim’s economic damages. ORS 137.106(1)(a).
“Economic damages” as used in ORS 137.106 takes on the meaning in ORS 137.103(2),
which provides that:
“ ‘Economic damages’ means objectively verifiable monetary losses
including but not limited to reasonable charges necessarily incurred for
medical, hospital, nursing and rehabilitative services and other health care
services, burial and memorial expenses, loss of income and past and future
impairment of earning capacity, reasonable and necessary expenses
incurred for substitute domestic services, recurring loss to an estate,
damage to reputation that is economically verifiable, reasonable and
necessarily incurred costs due to loss of use of property and reasonable
costs incurred for repair or for replacement of damaged property,
whichever is less.”
See, ORS 31.710. To determine the amount of damages, the district attorney will
investigate and present evidence to the judge, who will ultimately make the
decision. See ORS 137.106(1)(a). While some may have concerns that restitution
may equate to more or less than the actual loss amount, the goal of restitution is to
put the victim in the exact place they would be in if the crime had never occurred.
See, Robert T. Manicke, A Tax Deduction for Restitutionary Payments? Solving
the Dilemma of Thwarted Embezzler, 1992 U. Ill. L. Rev. 593 (1992). In this
case, based on Plaintiff’s statements the court is persuaded that there were no
damages awarded by the Circuit Court pursuant to ORS 137.103(2) that would
not also be considered deductible losses under IRC 165. See Treas Reg 1.165-7,
1.156.8.
It does not appear that the Legislature intended to make a restitution judgment
DECISION TC-MD 190346R 3
binding in every instance. For example, ORS 137.106(3) provides “No finding made by
the court or failure of the court to make a finding under this section limits or impairs the
rights of a person injured to sue and recover damages in a civil action as provided in ORS
137.109.” But, ORS 137.109(2) provides “If conviction in a criminal trial necessarily
decides the issue of a defendant's liability for economic damages of a victim, that issue is
conclusively determined as to the defendant if it is involved in a subsequent civil action.”
(emphasis added).
The evidence for the amount of Plaintiff’s theft loss in this case is primarily
supported by a Circuit Court Judgment against a non-party to this case. The use of such
judgments as evidence in an unrelated case is controversial. See, Motomura, Hiroshi,
Using Judgements as Evidence, 70 Minnesota Law Review 979 (1986). The controversy
revolves around whether a judgment is inadmissible hearsay and/or whether issue or
claim preclusion applies when cases involve different named parties. Fortunately for
Plaintiff the Legislature has set a more flexible evidentiary standard for the Tax Court
Magistrate Division than for Circuit Courts.2 ORS 305.501(4)(a) states in pertinent part:
“[s]ubject to the rules of practice and procedure established by the tax court, a magistrate
is not bound by common law or statutory rules of evidence or by technical or formal rules
of procedure, and may conduct the hearing in any manner that will achieve substantial
justice.” (emphasis added) The Magistrate Division does not automatically allow the
admission of hearsay evidence – admission is subject to the discretion of the magistrate.
In this case the court views the Circuit Court judgment as persuasive, but not conclusive,
2
ORS 40.455 states: “Hearsay is not admissible except as provided in ORS 40.450 to 40.475 or as
otherwise provided by law.”
DECISION TC-MD 190346R 4
evidence as to the amount of economic damage due to theft sustained by Plaintiff.
Plaintiff has met his evidentiary burden of proof. That shifts the burden of proof back to
Defendant. ORS 305.427. There being no contrary evidence on this issue, the court
concludes that Plaintiff’s economic loss due to theft during the 2015 tax year was
$120,474. Now, therefore,
IT IS THE DECISION OF THIS COURT that Plaintiff’s appeal is granted.
Plaintiff is eligible for business deduction pursuant to IRC section 165, in the amount of
$120,474.
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 this
Decision or this Decision cannot be changed. TCR-MD 19 B.
Some appeal deadlines were extended in response to the Covid-19
emergency. Additional information is available at
https://www.courts.oregon.gov/courts/tax
This document was signed by Magistrate Richard Davis and entered on
November 25, 2020.
DECISION TC-MD 190346R 5