IN THE OREGON TAX COURT MAGISTRATE DIVISION Income Tax
LIEU THAN, ) ) Plaintiff, ) TC-MD 220028R ) v. ) ) DEPARTMENT OF REVENUE, ) State of Oregon, ) ) Defendant. ) DECISION
Plaintiff appealed Defendant’s Notice of Assessment, dated October 19, 2021, for the
2018 tax year, challenging increases to her income from the sale of two properties and from a
bank deposit analysis of three of her accounts. A remote trial was held on August 29, 2023.
Lieu Than appeared and testified on her own behalf. Kelly Young, auditor, appeared and
testified on behalf of Defendant. Plaintiff’s Exhibits A and B, and Defendant’s Exhibits A
through G were received into evidence.1
I. STATEMENT OF FACTS
During the 2018 tax year Plaintiff was employed, worked as a real estate agent, traded in
investment properties, and managed three rental properties belonging to her family. Defendant
audited Plaintiff for the tax year at issue and increased her net income to include two properties
she fixed and flipped, as well as increased her gross income based on unaccounted-for deposits
identified during a bank deposit analysis of Plaintiff’s accounts.
///
1 Plaintiff marked her exhibits with letters instead of numbers in error. Thus, the court will identify Plaintiff’s and Defendant’s exhibits in the parentheticals.
DECISION TC-MD 220028R 1 A. Adjustments to Net Income for Properties Purchased and Sold
1. Freemont street property
a. Purchase costs
Plaintiff purchased the Freemont Street property on April 30, 2018, for $303,000. (Ptf Ex
A-12.) Plaintiff incurred standard acquisition costs including lender fees, escrow, title fees, and
taxes totaling $12,029.24. (Id.) The total purchase costs equal $315,029.24.
b. Holding costs
During the holding period, both parties acknowledge certain expenses were incurred,
including electrical inspection ($119.84), construction work ($2,508), photography ($175),
auction fees ($9,090), appliances ($2,462.55), utilities ($97.62 and $107.64), and purchase of a
refrigerator ($1,600). (Def Pre-trial Memo.)
The parties dispute construction costs from Double Tree Construction. (Ptf Ex A-9 to A-
11.) Plaintiff presented three construction documents, labeled “proposal,” with handwritten
annotations suggesting cash payments totaling $30,460. Plaintiff testified that these cash
payments were sourced from various family members, though no contemporaneous cash
withdrawals or independent verification were provided. Defendant disallowed these expenses
for lack of substantiation. Additionally, Plaintiff claimed $5,542.77 in loan interest as part of
holding costs, which Defendant excluded from its calculations. (Ptf Ex A-23.)2 The total
holding costs are $21,703.42.
c. Sales costs
Plaintiff sold the Freemont Street property on October 24, 2018, for $390,000. (Def Ex
2 The interest figure here only includes interest through October 2018. The December interest figure was included in the payoff and is covered in the next section.
DECISION TC-MD 220028R 2 F-10.) She incurred costs of sale totaling $31,578.68, but received credits for property taxes
($2,164.84) and homeowner association prorations ($21.04). (Id.) The sales price with costs
totaled $360,607.20.
2. Russell street property
Plaintiff acquired the Russell Street property, in Portland, Oregon on August 28, 2017,
for $214,524.00, and incurred standard acquisition costs including lender fees, escrow, title fees,
and taxes totaling $5,721.26. (Ptf Ex A-24.) The total purchase costs were $220,245.26.
The parties generally agree on holding costs amounting to $75,982.32, covering
construction, utilities, inspection, and interest. (Def Pre-trial Memo.) However, Plaintiff
disputes Defendant’s calculation of mortgage interest, providing statements showing anticipated
interest for November. Defendant relied on a mortgage statement showing year-to-date interest
of $9,857.30 as of November 13, 2018. (Def Ex F-67.) Plaintiff did not provide
contemporaneous proof of her November payment, but cited a December sales closing statement
that logically shows the November payment was made. That increases interest payments by
$870.67. Additionally, Plaintiff presented evidence of construction waste disposal expenses
totaling $108.30, which Defendant omitted from its holding cost calculation. (Ptf Ex A-42.) The
total holding costs were $76,961.29.
Plaintiff sold the Russell property on December 11, 2018, for $365,000. (Ptf Ex A-39.)
The parties largely agreed on sales costs of $21,141.73. Plaintiff also incurred an additional
interest expense of $572.50 not included by Defendant. Additionally, Plaintiff received a credit
DECISION TC-MD 220028R 3 for county taxes in the amount of $1,702.78. The sales price and costs total $344,988.55.
B. Bank Deposit Analysis
Defendant conducted a bank deposit analysis for three accounts titled in Plaintiff’s name,
identifying excess net deposits of $146,828.40. Following Plaintiff’s submission of trial
exhibits, Defendant recalculated the unreported income as $115,882, after accounting for non-
income loans, and previously reported Schedule C and Schedule E income. (Def Ex E-6.)
Plaintiff asserted that certain unexplained deposits represented rental income collected on behalf
of family members, though she lacked contemporaneous records or consistent accounting for
each property and payment. Plaintiff further testified that some deposits represented family
loans without contemporaneous promissory notes.
II. ANALYSIS
In analyzing Oregon income tax cases, the court starts with several guiding principles.
First, the federal Internal Revenue Code (IRC) applies because the Oregon Revised Statutes
(ORS) defines taxable income by reference to the IRC. See ORS 316.022(6); 316.048.3 Second,
in cases before the court, the party seeking affirmative relief bears the burden of proof and must
establish their case by a “preponderance” of the evidence. ORS 305.427. Third, deductions 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). Finally, IRC section 162 allows a deduction for “ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade or
business[.]” IRC § 162(a). The taxpayer is required to maintain records sufficient to establish
the amount of his or her income and deductions. See IRC § 6001; Treas Reg § 1.6001–1(a).
3 References to the ORS are to the 2017 edition.
DECISION TC-MD 220028R 4 A. Net profit from Sales of Real Estate
In determining Plaintiff’s gain from property sales, the court considers the sale price less
the costs of acquisition, rehabilitation, and maintenance. IRC § 1001. For the Freemont Street
property, the parties agree on a purchase price of $303,000 and acquisition costs of $12,028.24.
The parties agreed on holding costs of $16,160.95, but the court finds an additional $5,542.77 in
interest expense based upon Plaintiff’s mortgage statement. (Ptf Ex A-23.) Net sales proceeds
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IN THE OREGON TAX COURT MAGISTRATE DIVISION Income Tax
LIEU THAN, ) ) Plaintiff, ) TC-MD 220028R ) v. ) ) DEPARTMENT OF REVENUE, ) State of Oregon, ) ) Defendant. ) DECISION
Plaintiff appealed Defendant’s Notice of Assessment, dated October 19, 2021, for the
2018 tax year, challenging increases to her income from the sale of two properties and from a
bank deposit analysis of three of her accounts. A remote trial was held on August 29, 2023.
Lieu Than appeared and testified on her own behalf. Kelly Young, auditor, appeared and
testified on behalf of Defendant. Plaintiff’s Exhibits A and B, and Defendant’s Exhibits A
through G were received into evidence.1
I. STATEMENT OF FACTS
During the 2018 tax year Plaintiff was employed, worked as a real estate agent, traded in
investment properties, and managed three rental properties belonging to her family. Defendant
audited Plaintiff for the tax year at issue and increased her net income to include two properties
she fixed and flipped, as well as increased her gross income based on unaccounted-for deposits
identified during a bank deposit analysis of Plaintiff’s accounts.
///
1 Plaintiff marked her exhibits with letters instead of numbers in error. Thus, the court will identify Plaintiff’s and Defendant’s exhibits in the parentheticals.
DECISION TC-MD 220028R 1 A. Adjustments to Net Income for Properties Purchased and Sold
1. Freemont street property
a. Purchase costs
Plaintiff purchased the Freemont Street property on April 30, 2018, for $303,000. (Ptf Ex
A-12.) Plaintiff incurred standard acquisition costs including lender fees, escrow, title fees, and
taxes totaling $12,029.24. (Id.) The total purchase costs equal $315,029.24.
b. Holding costs
During the holding period, both parties acknowledge certain expenses were incurred,
including electrical inspection ($119.84), construction work ($2,508), photography ($175),
auction fees ($9,090), appliances ($2,462.55), utilities ($97.62 and $107.64), and purchase of a
refrigerator ($1,600). (Def Pre-trial Memo.)
The parties dispute construction costs from Double Tree Construction. (Ptf Ex A-9 to A-
11.) Plaintiff presented three construction documents, labeled “proposal,” with handwritten
annotations suggesting cash payments totaling $30,460. Plaintiff testified that these cash
payments were sourced from various family members, though no contemporaneous cash
withdrawals or independent verification were provided. Defendant disallowed these expenses
for lack of substantiation. Additionally, Plaintiff claimed $5,542.77 in loan interest as part of
holding costs, which Defendant excluded from its calculations. (Ptf Ex A-23.)2 The total
holding costs are $21,703.42.
c. Sales costs
Plaintiff sold the Freemont Street property on October 24, 2018, for $390,000. (Def Ex
2 The interest figure here only includes interest through October 2018. The December interest figure was included in the payoff and is covered in the next section.
DECISION TC-MD 220028R 2 F-10.) She incurred costs of sale totaling $31,578.68, but received credits for property taxes
($2,164.84) and homeowner association prorations ($21.04). (Id.) The sales price with costs
totaled $360,607.20.
2. Russell street property
Plaintiff acquired the Russell Street property, in Portland, Oregon on August 28, 2017,
for $214,524.00, and incurred standard acquisition costs including lender fees, escrow, title fees,
and taxes totaling $5,721.26. (Ptf Ex A-24.) The total purchase costs were $220,245.26.
The parties generally agree on holding costs amounting to $75,982.32, covering
construction, utilities, inspection, and interest. (Def Pre-trial Memo.) However, Plaintiff
disputes Defendant’s calculation of mortgage interest, providing statements showing anticipated
interest for November. Defendant relied on a mortgage statement showing year-to-date interest
of $9,857.30 as of November 13, 2018. (Def Ex F-67.) Plaintiff did not provide
contemporaneous proof of her November payment, but cited a December sales closing statement
that logically shows the November payment was made. That increases interest payments by
$870.67. Additionally, Plaintiff presented evidence of construction waste disposal expenses
totaling $108.30, which Defendant omitted from its holding cost calculation. (Ptf Ex A-42.) The
total holding costs were $76,961.29.
Plaintiff sold the Russell property on December 11, 2018, for $365,000. (Ptf Ex A-39.)
The parties largely agreed on sales costs of $21,141.73. Plaintiff also incurred an additional
interest expense of $572.50 not included by Defendant. Additionally, Plaintiff received a credit
DECISION TC-MD 220028R 3 for county taxes in the amount of $1,702.78. The sales price and costs total $344,988.55.
B. Bank Deposit Analysis
Defendant conducted a bank deposit analysis for three accounts titled in Plaintiff’s name,
identifying excess net deposits of $146,828.40. Following Plaintiff’s submission of trial
exhibits, Defendant recalculated the unreported income as $115,882, after accounting for non-
income loans, and previously reported Schedule C and Schedule E income. (Def Ex E-6.)
Plaintiff asserted that certain unexplained deposits represented rental income collected on behalf
of family members, though she lacked contemporaneous records or consistent accounting for
each property and payment. Plaintiff further testified that some deposits represented family
loans without contemporaneous promissory notes.
II. ANALYSIS
In analyzing Oregon income tax cases, the court starts with several guiding principles.
First, the federal Internal Revenue Code (IRC) applies because the Oregon Revised Statutes
(ORS) defines taxable income by reference to the IRC. See ORS 316.022(6); 316.048.3 Second,
in cases before the court, the party seeking affirmative relief bears the burden of proof and must
establish their case by a “preponderance” of the evidence. ORS 305.427. Third, deductions 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). Finally, IRC section 162 allows a deduction for “ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade or
business[.]” IRC § 162(a). The taxpayer is required to maintain records sufficient to establish
the amount of his or her income and deductions. See IRC § 6001; Treas Reg § 1.6001–1(a).
3 References to the ORS are to the 2017 edition.
DECISION TC-MD 220028R 4 A. Net profit from Sales of Real Estate
In determining Plaintiff’s gain from property sales, the court considers the sale price less
the costs of acquisition, rehabilitation, and maintenance. IRC § 1001. For the Freemont Street
property, the parties agree on a purchase price of $303,000 and acquisition costs of $12,028.24.
The parties agreed on holding costs of $16,160.95, but the court finds an additional $5,542.77 in
interest expense based upon Plaintiff’s mortgage statement. (Ptf Ex A-23.) Net sales proceeds
were $360,607.20. Plaintiff’s claimed construction costs of $30,460 lack sufficient
substantiation under IRC section 6001, as no contemporaneous documentation or evidence of
cash withdrawals was provided, nor pictures or other evidence of the work performed.
Consequently, the court finds a net profit of $23,874.14 for the Fremont Street property.4
For the Russell Street property, the parties agree on a purchase price of $214,524, and
acquisition costs of $5,721.26. The parties also agreed on part of the holding costs totaling
$75,982.32, but the court finds Plaintiff should be credited with $870.67 in interest expense and
$108.30 for waste disposal. The parties agree on the sale price of $365,000 and costs of sale of
$21,141.73. Additionally, Plaintiff incurred an additional interest expense of $572.50 and
received a credit for property taxes in the amount of $1,702.78. Consequently, the court finds a
net profit of $47,782 for the Russell Street property.5 With the real estate income resolved, the
court turns next to Defendant’s bank deposit analysis of Plaintiff’s three accounts.
4 Sale price with adjustments of $360,607.20, minus holding costs $21,703.42 minus purchase costs with adjustments of $315,029.24. 5 Sales price with adjustments $344,988.55, minus holding costs $76,961.29, minus purchase costs with adjustments of $220,245.26.
DECISION TC-MD 220028R 5 B. Bank Deposit Analysis
A bank deposit analysis is a recognized method for identifying unreported income.
Danielson v. Dept. of Rev., TC-MD 160282C, WL 5158730 at *3 (Or Tax M Div, Nov 7, 2017)
(quoting Brenner v. Dept. of Rev., 9 OTR 299, 306 (1983)) (internal citations omitted). As a real
estate agent and manager of family rental properties, Plaintiff had a duty to segregate and
account for all funds. The court finds no consistent pattern to support Plaintiff’s assertion that
rental income was contemporaneously transferred from her personal account to family members’
accounts, nor sufficient evidence to verify her status as a mere intermediary. Even on occasions
where a transfer appears in Plaintiff’s accounts, the amounts do not correspond. Further, the
recipient accounts were not identified adequately as accounts held by others, as Plaintiff appears
to be on title to several of those accounts. Defendant’s comprehensive review, including a
reevaluation by auditor Young, substantiates deposits totaling $115,882 of unreported income.
III. CONCLUSION
After careful consideration, the court finds that Plaintiff has not substantiated the
adjustments she was seeking at trial beyond a few minor adjustments to the net proceeds from
the sale of the two properties. Now, therefore,
IT IS THE DECISION OF THIS COURT that Plaintiff’s appeal of the 2018 tax year is
allowed in part and denied in part as detailed above.
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.
DECISION TC-MD 220028R 6 This Decision was signed by Magistrate Richard D. Davis and entered on December 6, 2024.
DECISION TC-MD 220028R 7