IN THE OREGON TAX COURT MAGISTRATE DIVISION Income Tax
PAMELA S. CHAPMAN, ) ) Plaintiff, ) TC-MD 150018N ) v. ) ) DEPARTMENT OF REVENUE, ) State of Oregon, ) ) Defendant. ) FINAL DECISION
This Final Decision incorporates without change the court’s Decision, entered September
11, 2015. The court did not receive a statement of costs and disbursements within 14 days after
its Decision was entered. See TCR-MD 16 C(1).
Plaintiff appeals Defendant’s Notice of Deficiency Assessment, dated November 26,
2014, for the 2010 tax year. A trial was held on July 8, 2015, in the Oregon Tax Courtroom in
Salem, Oregon. Nicholas Chapman (Chapman), Plaintiff’s son, appeared on behalf of Plaintiff.
Plaintiff testified on her own behalf. Sam McKillip (McKillip), an excavation contractor, and
Gary Killion (Killion), an All Oregon Excavating LLC (AOE) employee, each testified on behalf
of Plaintiff. Ron Graham (Graham) and Larry Boyd (Boyd), Tax Auditors, appeared on behalf
of Defendant. Boyd, Graham, and Greg Harris (Harris), Tax Auditor, testified on behalf of
Defendant. Plaintiff and Chapman also testified at Defendant’s request. Plaintiff’s Exhibits 1
through 4 and 6 through 10 were received without objection. Defendant’s Exhibits A, C-1
through C-8, E, G-1, H, I, L, M O, and T were received, some over Plaintiff’s objections.
I. STATEMENT OF FACTS
Plaintiff appeals Defendant’s disallowance of her 2010 Schedule C business expenses for
costs of goods sold (CoGS), depreciation, insurance, repairs and maintenance, taxes and licenses,
FINAL DECISION TC-MD 150018N 1 utilities, and other expenses including fuel and bonding. (See Ptf’s Compl at 2, 3.) She claimed
that those expenses were incurred for her business, AOE. (See Def’s Ex A at 6.)
A. Procedural History
Plaintiff’s 2010 U.S. and Oregon income tax returns were prepared and filed by her
former Certified Public Accountant (CPA). (See Def’s Ex A at 4.) Harris testified that
Defendant assigned him to perform a Schedule C audit on Plaintiff’s 2010 return. Following the
audit, Defendant issued a Notice of Deficiency, which Plaintiff appealed and requested a
conference. Plaintiff, her attorney, her new CPA, and Harris participated in the conference.
Defendant’s conference decision was issued on November 25, 2014. (See Def’s Ex E.)
Harris testified that, during both the audit and the conference, he encountered
comingling, inconsistencies, and unqualified expenses in Plaintiff’s records. (See Def’s Ex C at
1.) He testified that Plaintiff provided receipts that included personal, living, and family
expenses. Harris testified that Plaintiff provided receipts for building materials, bark dust, and
landscaping. He testified that he was provided with no adequate explanations of how those
expenses related to a trucking and excavating business. Harris testified that Plaintiff previously
admitted that those receipts should not have been included in the information provided to
Defendant and she had no knowledge of why they were provided.
The following table displays the amounts claimed on Plaintiff’s 2010 Schedule C, the
amounts allowed at the audit, the amounts allowed at the conference, and the adjustments made
between the audit and conference:
Adjustments Between Plaintiff’s Audit and Return Audit Conference Conference Gross Income $89,203 $89,203 $89,203 $0
FINAL DECISION TC-MD 150018N 2 Expenses: CoGS $35,151 $253 $253 $0 Depreciation $35,004 $27,804 $27,804 $0 Insurance $5,009 $4,072 $4,122 $50 Interest $459 $459 $459 $0 Office Expense $0 $110 $110 $0 Repairs and Maintenance $15,664 $3,883 $5,019 $1,136 Taxes and Licenses $4,422 $1,140 $1,140 $0 Utilities $1,979 $0 $0 $0 Other (Fuel and Bonding) $12,075 $909 $909 $0 Total Expenses: $109,763 $38,630 $39,816 $1,186 (Def’s Exs A at 6, C at 4, E at 5.)
B. All Oregon Excavating LLC (AOE)
Plaintiff testified that as a family, she, Chapman, and Chapman’s former wife formed
AOE. (See generally Ptf’s Ex 8 at 5). She testified that AOE initially struggled to generate
sufficient cash flow to continue providing trucking and excavating services in 2010. Plaintiff
and Chapman testified that Chapman often transferred money to AOE to help alleviate that
burden. (See generally Ptf’s Ex 2.) Plaintiff testified that AOE’s primary activities included the
use of dump trucks to haul debris, excavation, and the creation and administration of bids for
those activities. She testified that AOE conducted business across the state of Oregon and
possibly parts of Washington, although she was unsure.
C. AOE Associates
Through her testimony, Plaintiff confirmed that AOE’s business address was the same as
her residential address. (See Ptf’s Ex 8 at 5; Def’s Ex A at 1.) Plaintiff testified she considered
herself self-employed in 2010, notwithstanding her full time employment at Rivermark
Community Credit Union. Plaintiff testified that her hours spent working for AOE varied in
FINAL DECISION TC-MD 150018N 3 2010. She testified that those hours generally consisted of “look[ing] at bids,” conversing with
AOE drivers, dispatching, performing various administrative tasks, writing checks, and
occasionally hauling equipment to work sites. Plaintiff testified she often conferred with
Chapman when she undertook those tasks.
Plaintiff testified that Chapman is her son and the manager of AOE. She testified that
Chapman was the main driver for AOE and he performed many of the same tasks as she,
including signing AOE checks. Harris testified that he received conflicting information
regarding Chapman’s involvement in AOE. Harris testified that he was initially told that
Chapman was only involved in the business in emergencies, but was later told that Chapman was
100 percent involved in the business, signed all checks, and did all of the driving. Harris
testified that Chapman owned American Dirt, NC Transport, and NC Farm & Ranch, each of
which he observed to have transactions with AOE.
D. AOE Records, Bookkeeping, and Finances
Plaintiff testified AOE’s books were not done well in 2010 and that neither she nor
Chapman had any finance or accounting background or knowledge. She testified that she was
the only person tracking AOE’s finances, although Chapman provided her with receipts for
AOE. Chapman testified that he kept receipts for AOE in a separate file from his other
businesses and personal expenses and would provide Plaintiff with that file around tax time.
Plaintiff provided the court with invoices for companies other than AOE, such as
McKillip Excavating, Get-R-Done Concrete, LLC, NC Transport, and Chapman personally.
(See Ptf’s Ex 6 at 12, 13, 25, 27, 28, 30, 32, 33, 35, 36, 38, 67, 69, 70, 74, 97, 105, 107.)
Plaintiff testified that some of Chapman’s miscellaneous receipts may have become physically
comingled with AOE’s receipts provided in the evidence submitted to Defendant and the court.
FINAL DECISION TC-MD 150018N 4 Chapman testified that the receipts supplied during the audit and conference that do not reference
“All Oregon Excavating” are expenses that are not currently being claimed by Plaintiff. Upon
request for clarification by Defendant, Plaintiff confirmed that, notwithstanding the fuel and
NAPA Auto Parts invoices, if the evidence provided does not reference AOE, then she is not
claiming the expense. Plaintiff testified that she was not claiming the cash receipts.
E. Schedule C Expenses
Plaintiff provided exhibits with transaction summary cover pages for the following
expense categories: “Yanmar Bill of Sale and Interest Payment,” “Fuel Receipts,” “CoGS”,
“Licenses and Fee[]s”, “Office Supplies and Postage”, and “Shop [and] Equipment Rental”.
(Ptf’s Exs 3, 4, 6, 8-10.) She testified that the expenses she claimed are reasonable for an
excavating and trucking business. Chapman testified that Defendant cannot disprove the
expenses and that the expenses “need to make sense in a logical person’s mind.”
1. CoGS
On her 2010 return, Plaintiff claimed a CoGS expense of $35,151 to offset $89,203 of
gross receipts. (Def’s Ex A at 6.) Defendant allowed $253 of her claimed CoGS. (Def’s Ex C
at 6.) Plaintiff’s exhibit pertaining to CoGS included receipts, invoices, and canceled AOE
checks. (Ptf’s Ex 6.) The AOE canceled checks provided total $11,082.1 (Id.) The AOE checks
are made out to businesses including Les Schwab, Triad Machinery, Willamette Landscape
Supply, Marion Ag. Services, Inc., and Chapman’s company, American Dirt, LLC. (See
generally Ptf’s Ex 6.)
Plaintiff’s CoGS exhibit includes invoices not addressed to AOE, but instead addressed
to Nick Chapman, NC Transport, McKillip Excavating, Get-R-Done Concrete, LLC, and
1 Several of the checks provided by Plaintiff were duplicates. (See, e.g., Ptf’s Ex 6 at 75, 79.)
FINAL DECISION TC-MD 150018N 5 “Aurora Fleet Sales & Svc.” (Ptf’s Ex 6 at 12, 13, 25, 27, 28, 30, 32, 33, 35, 36, 38, 64, 65, 66,
67, 69, 70, 74, 97, 105, 107.) Plaintiff provided a letter written and signed by an associate, Tina
Wilson, of TWGW Inc. NAPA Auto Parts doing business as Aurora Heavy Duty Store. (Ptf’s
Ex 6 at 54.) That letter stated that cash purchases are recorded under a cash account named
“Aurora Fleet Sales & Svc,” which is used for promotional purposes. (Id.) Receipts, invoices,
and canceled checks to NAPA total $2,312.11. (Id. at 55-66.)
Boyd testified that, of the documents Plaintiff provided in her CoGS exhibit packet,
Defendant previously allowed approximately $9,000 during the audit and conference under
difference expense categories, including repairs and maintenance. He testified that the
conference officer allowed the NAPA Auto Parts payments. Boyd testified that the remaining
expenses were disallowed due to lack of adequate substantiation. Boyd testified that Defendant
disallowed the invoices naming Chapman’s company, NC Transport. (See Ptf’s Ex 6 at 25, 27,
28, 30, 32, 33.) He testified that Defendant disallowed a $600 payment to Pablo Navarro for
“landscaping w plants supplies” and a $1,000 payment to American Dirt for “trees” because he
could not understand the business purpose of either purchase for an excavating company such as
AOE. (Id. at 92-93, 100.) Boyd testified that he suspected those purchases were for Chapman’s
business.
2. Depreciation
Plaintiff claimed a depreciation deduction of $35,004. (Def’s Ex A at 6.) Plaintiff
reported a like-kind exchange on her 2010 return. (Def’s Ex A at 11-12.) She testified she
exchanged her 2009 Dodge truck for a 2011 Dodge truck with a transfer basis of $46,340. (See
id. at 11.) Plaintiff claimed a special depreciation allowance for the 2011 Dodge truck of
$23,170, equal to 50 percent of the cost or, in this case, the transfer basis. (Id. at 9.) The special
FINAL DECISION TC-MD 150018N 6 depreciation allowance reduced the general depreciation basis to $23,170, of which Plaintiff
claimed a $4,634 depreciation deduction. (Id.) Defendant allowed the depreciation deductions
totaling $27,804 for the Dodge truck. (Def’s Ex C at 6-7.)
Boyd testified that Defendant disallowed the remaining $7,200 depreciation deduction for
the track hoe because Plaintiff did not substantiate its purchase price or value. (See also Def’s
Exs A at 9, 12, C at 6-7, E at 2.) Plaintiff testified that, on behalf of AOE, she purchased a 2005
Yanmar VIO50 track hoe (Yanmar) for $22,500 from Chapman in July 2009. (See Def’s Ex A at
12; see generally Ptf’s Ex 3.) She provided an exhibit containing three documents related to the
Yanmar. (Ptf’s Ex 3.) Those documents are a written agreement, a check, and an insurance
quote for the Yanmar. (Id.)
The agreement is signed by Plaintiff and Chapman and dated July 1, 2009. (Ptf’s Ex 3 at
1.) It states that Chapman agreed to sell AOE a “2005 Yanmar VIOL 50 Excavator” on July 1,
2009, for $22,500, with full payment due no later than December 31, 2015, and zero percent
interest. (Id.) The check, dated November 4, 2010, is from AOE to Chapman for $500. (Id. at
2.) The check displayed an illegible signature and a blank memo line. (Id.) On the cover page
to Exhibit 3, Plaintiff wrote that the check was to Chapman “as an interest only payment.” The
insurance quote is from Liberty Northwest Insurance for “miscellaneous tools” and a “2005
Yanmar 50 Mini Excavator.” (Id. at 3.)
3. Insurance
Plaintiff claimed insurance expenses of $5,009. (Def’s Ex A at 6.) Harris initially
allowed $4,072 of the claimed expenses during the audit and the conference officer allowed an
additional $50 for a total of $4,122. (Def’s Exs C at 4, E at 5.) Plaintiff did not provide any
evidence pertaining to insurance expenses.
FINAL DECISION TC-MD 150018N 7 4. Repairs and Maintenance
Plaintiff claimed repairs and maintenance expenses on her Schedule C of $15,664.
(Def’s Ex A at 6 (Ptf’s Schedule C).) Harris allowed $3,883 of the claimed expenses during the
audit and the conference officer allowed an additional $1,136, for a total of $5,019. (Def’s Ex C
at 4, E at 5.) Plaintiff did not provide evidence pertaining to repair and maintenance expenses,
other than those documents included in the CoGS exhibit.
5. Taxes and Licenses
Plaintiff claimed a deduction of $4,422 for taxes and licenses, of which Harris allowed
$1,140.2 (Def’s Exs A at 6, C at 4.) Plaintiff’s evidence regarding licenses and fees paid in 2010
consists of documentation for transactions with the Driver and Motor Vehicle Services Division
(DMV), the Oregon Secretary of State, and the City of Donald. (See Ptf’s Ex 8.)
a. DMV
Plaintiff provided a copy of AOE’s check dated September 27, 2010, to the DMV for
$209. (Ptf’s Ex 8 at 1.) The memo line is blank, but Oregon plate numbers HU51035 and
HU60060 are written at the top of the check. (Id.) Plaintiff provided two “Notice[s] of
Transaction Submitted,” each dated September 27, 2010. (Id. at 2-3.) Each notice referenced
one of the two plates. (See id.)
b. Secretary of State
Plaintiff provided a copy of AOE’s check number 1553 dated January 25, 2010, to “Sec
of State” for $200. (Ptf’s Ex 8 at 4.) “Registrations” was written in the memo line. (Id.)
Plaintiff provided AOE’s renewed business registration, which was stamped “filed” on January
25, 2010. (Id. at 5.) On the business registration, “Check #1553” is hand written in the top right
2 Harris’ auditor’s report does not identify to which specific expenses the $1,140 he allowed pertained. (See Def’s Ex C at 6-7.)
FINAL DECISION TC-MD 150018N 8 corner of the document. (Id.) A “Application For Reinstatement/Reactivation,” filed January
25, 2010, reflected a filing fee of $150. (Id. at 6.) Harris testified that he allowed $150 of the
$200 claimed. He testified that he disallowed the $50 that he did not find directly related to
AOE’s business.
c. City of Donald
Plaintiff provided a copy of AOE’s check for $25 dated October 19, 2010, to “City of
Donald.” (Ptf’s Ex 8 at 9.) “Gas License” was written in the memo line. (Id.) Plaintiff
provided a copy of AOE’s City of Donald License with an expiration date of August 28, 2010,
and an annual fee of $25. (Id. at 10.)
6. Utilities
Plaintiff claimed utility expenses of $1,979 on her Schedule C. (Def’s Ex A at 6.)
Defendant disallowed all of her claimed utility expenses in its audit and conference decision due
to lack of substantiation. (Def’s Exs C at 8, E at 2, 5.) Plaintiff did not provide any evidence
pertaining to her claimed utilities expenses. Defendant provided portions of AOE’s general
ledger, which reported three checks to PGE, dated July 16, 2010, August 9, 2010, and September
18, 2010, in the amounts of $185.25, $332.96, and $327.23, respectively. (Def’s Exs I at 26,
O at 8, 14.) Plaintiff testified that the general ledger she provided to Defendant was prepared by
AOE’s current bookkeeper on August 11, 2014, for the purpose of the audit. Neither party
provided canceled checks to PGE corresponding to those reported in Plaintiff’s general ledger.
7. Fuel Expenses
On her Schedule C, Plaintiff claimed expenses of $9,443 for “fuel.” (Def’s Ex A at 6-7.)
During the audit, Harris allowed $809 for fuel, which was upheld in the conference decision.
(Def’s Exs C at 4, E at 5.) Plaintiff provided evidence that included invoices from Ernie Graham
FINAL DECISION TC-MD 150018N 9 Oil addressed to Chapman and AOE checks made out to Ernie Graham Oil, totaling $8,274.
(Ptf’s Ex 4.) Plaintiff testified that AOE could not get an account in its name with Ernie Graham
Oil due to a lack of credit history, but Chapman was able to get a second account in his name
that AOE could use. Boyd testified that Plaintiff’s claimed fuel expenses were, in large part,
disallowed due to lack of substantiation and concerns about comingling. Graham testified that,
as of the date of trial, Defendant would be willing to allow Plaintiff half of her claimed fuel
expenses.
McKillip testified that he is an excavation contractor and he owns two dump trucks. He
testified that he is familiar with AOE’s dump truck, the Western Star. McKillip testified that
dump truck hauling typically costs $100 to $300 per day for approximately 50 to 100 gallons per
day. He testified that Plaintiff’s claimed fuel expense of $9,443 would suggest approximately 40
truck loads. McKillip testified that he had a storage yard in Donald in 2010 and he saw AOEs
truck leave for jobs at least 50 to 100 days in 2010.
Killion testified that he drove dump trucks for AOE in 2010. He testified that he used an
average of 50 to 60 gallons of fuel per day, depending on whether he was hauling. Killion
testified that, in 2010, he bought fuel at the Pacific Pride using an AOE credit card with
Chapman’s name on it. Killion initially testified that he worked over 300 days for AOE in 2010,
but subsequently revised his testimony to about 230 days, or possibly less.
8. Bond Expenses
On her Schedule C, Plaintiff claimed expenses of $2,632 for “bond.” (Def’s Ex A at 6-
7.) During the audit, Harris allowed $100 for bonds, which was upheld in the conference
decision. (Def’s Exs C at 4, E at 5.) Plaintiff did not provide any evidence pertaining to bond
FINAL DECISION TC-MD 150018N 10 II. ANALYSIS
The issue presented in this case is whether and to what extent the business expenses
claimed by Plaintiff on her 2010 Schedule C should be allowed. “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 only to modifications
specified in Oregon law.” Ormsby v. Dept. of Rev., 18 OTR 146, 151 (2004), citing ORS
316.007.3 As a result, the legislature adopted, by reference, the federal definitions for
deductions, including those under IRC section 162 for trade or business expenses.
A. Standard of Review and Burden of Proof
“All proceedings * * * of the tax court shall be original, independent proceedings and
shall be tried * * * de novo.” ORS 305.425(1). In a de novo proceeding, the tax court considers
properly admitted testimony and evidence presented at trial “to reach the correct result without
regard for either party’s prelitigation positions.” Reed v. Dept. of Rev., 310 Or 260, 268, 798 P2d
235 (1990). The court has jurisdiction to determine a taxpayer’s tax liability, thereby correcting
“any shortcomings that occurred during administrative adjudication * * *.” Curtis v. Dept. of
Rev., 17 OTR 414, 420 (2004). In making its determination, “[t]he court is not limited to the
evidence that a taxpayer presented during an audit by the Oregon Department of Revenue
(Department).” Shammel v. Dept. of Rev., TC-MD 120838D, WL 3964348 at *3 (Jul 31, 2013).
Plaintiff is the party seeking relief in this matter and she, therefore, bears the burden of
proof to substantiate her claims by a preponderance of the evidence. See ORS 305.427; Reed,
310 Or at 265. The phrase “preponderance of the evidence” means “the greater weight of
evidence, the more convincing evidence.” Yarbrough v. Dept. of Rev., 21 OTR 40, 44 (2012),
3 The court’s references to the Oregon Revised Statutes (ORS) are to 2009.
FINAL DECISION TC-MD 150018N 11 quoting Feves v. Dept. of Revenue, 4 OTR 302, 312 (1971). Defendant’s notice is upheld if
Plaintiff’s “evidence is inconclusive or unpersuasive* * *.” Reed, 310 Or at 265. For Plaintiff to
prevail, the evidence and testimony must “demonstrate that the Department’s earlier decision
was wrong * * *.” Id. The court typically cannot rely upon Plaintiff’s testimony alone, since
such testimony tends to be self-serving. See Hudspeth v. Dept. of Rev., 4 OTR 296, 298 (1971).
In this matter, some of Plaintiff’s claimed deductions involve payments to related parties.
The court reviews related party transactions with heightened scrutiny. Chapman v. Comm’r, 107
TCM (CCH) 1433, 2014 WL 1809612 at *3 (US Tax Ct). However, “a genuine transaction
should [not] be disregarded for tax purposes simply because it occurred between related parties.”
Chapman, 2014 WL 1809612 at *3.
At trial, Plaintiff’s representative, Chapman, repeatedly noted that this appeal is de novo
and objected to some of Defendant’s evidence on the basis that it was received during the prior
audit or conference. Plaintiff is correct that this is a de novo proceeding. However, Plaintiff
appears to misunderstand the effect of the court’s de novo review on Defendant’s prior
adjustments to Plaintiff’s 2010 Oregon income tax liability. Plaintiff is the party seeking relief
and, therefore, bears the burden of proof by a preponderance of the evidence. As the court stated
during trial, if Plaintiff fails to establish her entitlement to a deduction previously disallowed by
Defendant, then Defendant’s adjustment is upheld.
To the extent that Defendant previously allowed a deduction claimed by Plaintiff, the
court will accept Defendant’s determination. The court need not make factual findings and legal
conclusions with respect to deductions agreed upon by the parties. Defendant previously
allowed $39,816 of Plaintiff’s claimed expenses, which totaled $109,763. See supra 2-3.
///
FINAL DECISION TC-MD 150018N 12 B. Schedule C Business Deductions
The IRC allows a deduction for “all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business[.]” IRC § 162(a). 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. DuPont, 308 US 488, 495, 60 S Ct 363, 84 L Ed 416
(1940), citing Welch v. Helvering, 290 US 111, 114, 54 S Ct 8, 78 L Ed 212 (1933); see also
Chapman, 2014 WL 1809612 at *3 (stating that an expense is ordinary if it is “normal,
customary, or usual within the relevant business”). Necessary expenses are “appropriate and
helpful” to the business. Welch, 290 US at 113. Expenses considered personal, living, or family
expenses are generally not deductible. IRC § 262(a). Deductions are a matter of “legislative
grace” and the burden of proof 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) (citations omitted).
An expense is deductible when the payment is substantiated through sufficient records.
Chapman, 2014 WL 1809612 at *5. The taxpayer is responsible for maintaining records that are
“sufficient to establish the amount of gross income and deductions.” Treas Reg §1.6001-1(a);
see also IRC § 6001. “[T]he combination of an invoice marked ‘paid,’ a check register or carbon
copy of the check, and an account statement that shows the check number, date, and amount will
generally prove payment of an amount.” Rev Proc 92-71, 1992-35 IRB 17, 1992-2 CB 437, § 4.
If the taxpayer is unable to substantiate a deductible expense sufficiently and fully, the court can
allow an estimated amount given a reasonable evidentiary basis.4 Compare Cohan v. Comm’r,
39 F 2d 540, 543-44 (1930) with, Vanicek v. Comm’r, 85 TC 731, 743 (1985).
4 The court is unable to estimate certain categories of expenses, such as travel and entertainment; for which taxpayer would have to “substantiate by adequate records or by sufficient evidence corroborating the taxpayer’s own statement[,]” the amount, time, place, business purpose, and business relationship of the person entertained. IRC § 274(d)(4); see also Sentinel Fin. Servs. v. Comm’r., 39 F3d 1188, (9th Cir 1994).
FINAL DECISION TC-MD 150018N 13 As Plaintiff acknowledged at trial, her recordkeeping in 2010 was disorganized. The
result is that Plaintiff’s evidence is confusing. Plaintiff maintains that she is entitled to all of the
expenses reported on her 2010 Schedule C, yet she failed to provide evidence corresponding to
several of the claimed amounts. For instance, Plaintiff provided no evidence of her expenses for
insurance,5 utilities, or bonds. Plaintiff provided some evidence of expenses properly
categorized as repairs and maintenance, but they were provided in an exhibit labeled “Cost of
Goods Sold.” Plaintiff provided some exhibits that she conceded were not expenses of AOE,
including invoices that named other entities. She also provided evidence of expenses that lacked
any discernible business purpose, such as payment for landscaping and trees.
Plaintiff testified that, as of 2014, she had hired a bookkeeper on behalf of AOE. The
court commends Plaintiff’s for her efforts to improve her recordkeeping subsequent to 2010. For
the 2010 tax year, the court must make a determination based on the available evidence. The
court will allow Plaintiff deductions only for those expenses that are adequately substantiated
and that were not previously allowed by Defendant.
1. Costs of Goods Sold (CoGS)
CoGS “is taken into account in computing gross income and is not an item of deduction.”
Velinsky v. Comm’r, 71 TCM (CCH) 2766, WL 173544 at *3 (1996) (citations omitted). A
CoGS expense is appropriate “to offset receipts from the eventual sale of goods.” Hillenga v.
Dept. of Rev., 21 OTR 396, 411 (2014). Expenses related to CoGS are subtracted from gross
income where a taxpayer is engaged in the manufacture or sale of goods. Treas Reg § 1.61-3.
Businesses that provide services do not generally subtract expenses for CoGS, unless the
5 Defendant allowed most of Plaintiff’s claimed insurance expense, so that may be why she provided no evidence of insurance expenses to the court.
FINAL DECISION TC-MD 150018N 14 business also sells or charges for materials and supplies used in its business. See IRS Publication
334, chapter 6 (Jan 20, 2011).6
Plaintiff claimed a CoGS expense of $35,151 on her 2010 Schedule C, of which
Defendant found $253 was substantiated. Plaintiff provided an exhibit labeled “Cost of Goods
Sold” that included receipts and invoices totaling $14,051. That exhibit included AOE checks
totaling $11,082. The payments were to Les Schwab Tire Center, Triad Machinery, NAPA Auto
Parks, and others. Plaintiff provided no explanation of how those payments qualified as CoGS
expenses. Defendant previously allowed some of Plaintiff’s claimed CoGS expenses under
different expense categories, including repairs and maintenance. Plaintiff provided no evidence
to substantiate any additional CoGS expenses beyond the $253 allowed by Defendant. The court
finds that the CoGS deduction of $253 previously allowed by Defendant should be upheld.
Taxpayers may deduct “a reasonable allowance for the exhaustion, wear and tear * * * of
property used in [a] trade or business, or * * * held for the production of income.” IRC § 167(a).
“Depreciation is not necessarily predicated upon ownership of the property but rather upon an
investment in property.” Karason v. Comm’r., 93 TCM (CCH) 1159, 2007 WL 1224613 at *4
(US Tax Ct). Plaintiff claimed a $35,004 depreciation deduction in 2010, of which Defendant
accepted $27,804 for her business use of a Dodge truck. Defendant disallowed the remaining
$7,200 claimed based on Plaintiff’s failure to substantiate the purchase price or value of the
Yanmar.
6 “Administrative guidance set forth in an informal IRS publication is not an authoritative source of Federal tax law and does not bind the Government.” Dorsey v. Comm’r, 91 TCM (CCH) 907, WL 728345 at *1 (2006). The court cites Publication 334 only to describe general situations in which a service business might deduct CoGS.
FINAL DECISION TC-MD 150018N 15 Plaintiff provided a written agreement memorializing her purchase of the Yanmar from
Chapman, in a related party transaction. The written agreement reported the sale price to be
$22,500. Plaintiff provided no evidence of any payments to Chapman for the Yanmar, other
than a check from AOE to Chapman for $500, dated over one year after the sale. The memo line
of the check is blank. Plaintiff wrote that the check was for “interest,” even though her written
agreement with Chapman stated that the sale was at zero percent interest. As discussed above,
related party transactions are subject to heightened scrutiny. Plaintiff’s evidence of her purchase
of the Yanmar from Chapman is inconsistent and inadequate to prove the sale price by a
preponderance of the evidence. Even assuming that AOE acquired the Yanmar and placed it in
service as of 2010, Plaintiff failed to present any persuasive evidence of its value. Plaintiff failed
to provide persuasive evidence to support a depreciation deduction greater than the $27,804
previously allowed by Defendant. The court finds that the depreciation deduction of $27,804
allowed by Defendant should be upheld.
Treasury Regulation section 1.162-1(a) allows operating expenses for automobiles used
in a trade or business, including auto insurance, and “insurance premiums against fire, storm,
theft, accident, or other similar losses in the case of a business,” to be deducted from gross
income. Harris initially allowed $4,072 of Plaintiff’s claimed insurance expense during the audit
and the conference officer allowed an additional $50 for a total of $4,122. Plaintiff did not
provide any evidence pertaining to insurance expenses. The court finds that the insurance
expense deduction of $4,122 previously allowed by Defendant should be upheld.
FINAL DECISION TC-MD 150018N 16 4. Repairs and Maintenance
If a taxpayer is not required to capitalize repair and maintenance expenses, then the
taxpayer may deduct expenses paid for repairs and maintenance made to tangible property.
Treas Reg § 1.162-4(a). As noted above, Plaintiff did not provide an exhibit pertaining to her
claimed repair and maintenance expenses. Rather, she included some documents that appeared
to pertain to repairs and maintenance in her CoGS exhibit. Defendant previously allowed
Plaintiff a deduction of $4,969 for repair and maintenance expenses. Plaintiff did not present
evidence to substantiate any additional repair and maintenance expenses. The court finds that
Defendant’s allowed deduction of $4,969 for repair and maintenance expenses should be upheld.
Taxes listed in IRC section 164 are deductible when paid.7 IRC § 164. A taxpayer may
deduct licensing expenses that are ordinary, necessary, and adequately substantiated. See
generally IRC § 162. Plaintiff provided an exhibit that contained canceled checks and
documentation for license fees paid by AOE to the DMV, the Secretary of State, and the City of
Donald. The court finds that Plaintiff’s evidence substantiates expenses totaling $384. Of the
$200 that AOE paid to the Secretary of State, the court finds that $50 should not be allowed
because no business purpose was identified. The evidence presented indicated that the business
registration fee was $150 and no explanation was provided to adequately account for the
remaining $50 payment. Defendant previously allowed Plaintiff a deduction of $1,140 for taxes
and licenses. Plaintiff failed to substantiate expenses for taxes and licenses in excess of what
Defendant previously allowed. The court finds that Defendant’s allowed deduction of $1,140 for
tax and license expenses should be upheld.
7 Treasury Regulation sections 1.164-2 and 1.275 list taxes for which no deduction is allowed.
FINAL DECISION TC-MD 150018N 17 6. Utilities
Plaintiff claimed a deduction of $1,979 for utilities expenses on her Schedule C. She
offered no evidence to substantiate that amount. Defendant’s evidence included AOE’s 2010
general ledger prepared by AOE’s bookkeeper in 2014, reporting three payments by check to
PGE. No canceled checks were provided. Defendant did not allow Plaintiff any deduction for
utilities expenses and the court finds that Plaintiff failed to present any persuasive evidence in
support of her claimed utilities expenses.
7. Fuel
Plaintiff claimed a deduction of $9,443 for fuel expenses on her Schedule C. At trial,
Plaintiff amended her claimed fuel expenses to $8,274. Plaintiff provided the court with an
exhibit containing canceled AOE checks totaling $8,274. The canceled checks corresponded
with invoices from Ernie Graham Oil that were in Chapman’s name. Chapman had two accounts
with Ernie Graham Oil, one of which he held on behalf of AOE because AOE had no credit
history in 2010 to qualify for an account. McKillip testified persuasively regarding the amount
of fuel one dump truck was likely to use per day depending on whether it was hauling. His
testimony supported Plaintiff’s claimed fuel expenses. Defendant previously allowed Plaintiff a
deduction of $809 for fuel expenses. The court finds that Plaintiff presented evidence to
substantiate her claimed fuel expense of $8,274. The court’s allowed deduction for fuel
expenses overrides the $809 fuel expense deduction previously allowed by Defendant.
Plaintiff claimed a deduction of $2,632 for bond expenses, of which Defendant allowed
$100. Plaintiff presented no evidence of her bond expenses, so the court finds that the $100
deduction previously allowed by Defendant should be upheld.
FINAL DECISION TC-MD 150018N 18 III. CONCLUSION
After careful consideration of the testimony and evidence presented, the court concludes
that Plaintiff should be allowed a deduction of $8,274 for fuel expenses for the 2010 tax year.
The deduction allowed for Plaintiff’s fuel expenses overrides the $809 deduction previously
allowed by Defendant. Plaintiff failed to present persuasive evidence to substantiate any
amounts in excess of what Defendant previously allowed for cost of goods sold, depreciation,
insurance, repairs and maintenance, taxes and licenses, utilities, or bonds. Defendant’s
adjustments to those expense deductions are upheld for the 2010 tax year. Now, therefore,
IT IS THE DECISION OF THIS COURT that, for the 2010 tax year, Plaintiff is allowed
a fuel expense deduction of $8,274. The deduction allowed for Plaintiff’s fuel expenses
overrides the $809 fuel expense deduction previously allowed by Defendant.
IT IS FURTHER DECIDED that, for the 2010 tax year, Plaintiff failed to present
persuasive evidence to substantiate any amounts in excess of what Defendant previously allowed
for cost of goods sold, depreciation, insurance, repairs and maintenance, taxes and licenses,
utilities, or bonds. Defendant’s adjustments to those expense deductions are upheld.
Dated this day of September 2015.
ALLISON R. BOOMER MAGISTRATE
If you want to appeal this 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 Final Decision or this Final Decision cannot be changed. TCR-MD 19 B.
This document was filed and entered on September 29, 2015.
FINAL DECISION TC-MD 150018N 19