The opinion
IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
PATRICK BROTHERS and PATRICIA )
GREGORY, )
)
Plaintiffs, ) TC-MD 110990D
)
v. )
)
DEPARTMENT OF REVENUE, )
State of Oregon, )
)
Defendant. ) DECISION
Plaintiffs appeal Defendant‟s denial of waivers for substantial underpayment of income
tax and post amnesty penalties for the 2007 tax year. The parties filed cross-motions for
summary judgment. There is no factual dispute. This matter is now ready for decision.
I. STATEMENT OF FACTS
Plaintiffs‟ 2007 Oregon income tax return was selected for audit on July 23, 2010. (Stip
Facts at 1.) On their Federal income tax return Schedule A, Plaintiffs claimed a non-cash
charitable contribution. (Id.) Defendant notified Plaintiffs that their non-cash charitable
contribution deduction in the amount of $27,300 was disallowed. (Id.) Defendant issued
Plaintiffs a Notice of Deficiency on August 30, 2010, assessing income tax, interest, a
Substantial Understatement of Income Penalty and a Post Amnesty Penalty (Penalties). (Id.)
On September 7, 2010, Plaintiffs submitted a written request to Defendant for a
conference, seeking waiver of the Penalties. (Id. at 3.) After the conference, Defendant denied
Plaintiffs‟ request for discretionary waiver of both Penalties. (Id.)
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DECISION TC-MD 110990D 1
On March 3, 2011, Plaintiffs submitted an amended 2007 Oregon income tax return,
reporting a number of adjustments, including several related to a rental property in Arizona.1
(Id.) Plaintiffs‟ amended 2007 Oregon income tax return was processed on December 8, 2011.
(Id.) After processing Plaintiffs‟ amended Oregon tax return, Defendant reduced Plaintiffs‟
previously assessed Oregon income tax. (Id.)
Defendant determined that the changes made to the amended return did not decrease the
penalties imposed. (Id.) Defendant concluded that those penalties were based on a single audit
adjustment in the amount of $27,300 for non-cash charitable contributions claimed by Plaintiffs
on their Federal income tax schedule A. (Id.)
Plaintiffs allege that they acted in good faith when they filed their 2007 Oregon income
tax return and should not be charged the Penalties. (Id. at 4.) Plaintiffs allege they demonstrated
good faith by filing their 2007 Oregon income tax return timely. (Id.) Plaintiffs also allege that
they demonstrated good faith because they contacted the Internal Revenue Service (IRS) seeking
assistance as to how to report their non-cash charitable contribution. (Id.) Plaintiffs allege that
their contact with the IRS was documented in a memo that they filed with their 2006 Oregon
income tax return. (Id.) Plaintiffs allege that they met Defendant‟s waiver requirement of “good
faith” for the Substantial Understatement of Income Penalty by attaching the memo to their 2006
Oregon income tax return, and the memo is also evidence of the substantial authority they relied
upon when they filed their 2007 Oregon income tax return. (Id.) Plaintiffs admit that the memo
was not attached to their 2007 Oregon income tax return. (Id.)
Plaintiffs state that they did not file an amended Oregon income tax return during the
amnesty period because they had no to reason to believe their 2007 Oregon income tax return
1
Plaintiffs‟ amended 2007 Oregon income tax return included a depreciation adjustment to Federal income tax
schedule C and other adjustments to their Federal income tax schedule E.
DECISION TC-MD 110990D 2
was incorrect. (Id.) Plaintiffs assert Defendant should have acted timely by auditing their 2007
income tax return during the amnesty period. (Id.)
Plaintiffs allege that if penalties are to be imposed, the amounts of the Penalties imposed
by Defendant are in error. Plaintiffs conclude that the Penalties should be based on Plaintiffs‟
Oregon income tax liability stated on their amended Oregon income tax return that was received
by Defendant on March 3, 2011. (Id.)
II. ANALYSIS
Plaintiffs‟ requested that Defendant waive or reduce the Penalties it imposed. Defendant
has discretionary authority to waive the Penalties imposed on Plaintiffs. See OAR 150-
314.402(4)(b); OAR 150-305.100-(C).2 Plaintiffs allege that because Defendant denied their
penalty waiver requests, Defendant abused its discretion.
When evaluating abuse of discretion, the court reviews Defendant‟s decision in the
context of whether Defendant acted in an “arbitrary, capricious or wrongful manner[,]” Perkins
and Wiley v. Dept. of Rev., 13 OTR 426, 428 (1995) (citing Corvallis Country Club v. Dept. of
Rev.,10 OTR 302, 307 (1986)), or whether Defendant‟s decision is “clearly wrong.” Martin
Bros. v. Tax Cmm’n, 252 Or 331, 338, 449 P2d 430 (1969) (citing Richardson v. Neuner,
183 Or 558, 564, 194 P2d 989 (1948)). The court cannot “substitute its own view for the
administrator‟s judgment” when review is statutorily given to Defendant. Rogue River Pack v.
Dept. of Rev., 6 OTR 293, 301 (1976). To make its review, the court looks first at Plaintiffs‟
evidence in support of its challenge.
“In all proceedings before the judge or a magistrate of the tax court and upon appeal
therefrom, a preponderance of the evidence shall suffice to sustain the burden of proof. The
2
Unless otherwise noted, all references to the Oregon Administrative Rules (OAR) are to 2009.
DECISION TC-MD 110990D 3
burden of proof shall fall upon the party seeking affirmative relief * * *.” ORS 305.427
(emphasis added).3 Plaintiffs must establish its claim “by a preponderance of the evidence, or
the more convincing or greater weight of evidence.” Schaefer v. Dept. of Rev., TC No 4530,
WL 914208 *2 (July 12, 2001) (citing Feves v. Dept. of Rev., 4 OTR 302 (1971)).
1. Substantial understatement of income penalty
Defendant imposes a Substantial Understatement of Income Penalty if a taxpayer
substantially understates his or her taxable income. See ORS 314.402(1). ORS 314.402(1)
provides in pertinent part:
“If the Department of Revenue determines that there is a substantial
understatement * * *, there shall be added to the amount of tax required to be
shown on the return a penalty equal to 20 percent of the amount of any
underpayment of tax attributable to the understatement of taxable income.”
(Emphasis added). “ „Shall‟ is a command: it is used in laws, regulations, or directives to express
what is mandatory.” Preble v. Dept. of Rev., 331 OR 320, 324 (2000) (citations omitted). A
substantial understatement exists if a taxpayer understates taxable income by more than $15,000.
ORS 314.402(2)(a). A substantial understatement “does not include items for which substantial
authority exists (or existed at the time the taxpayer claimed it on the return) for the tax treatment
of the item in question[.]” OAR 150-314.402(4)(b)(2). Substantial authority has the same
meaning as used in Treasury Regulation 1.6662-4(d). Id. Substantial authority includes but is
not limited to:
“Applicable provisions of the Internal Revenue Code and other statutory
provisions; proposed, temporary and final regulations construing such statues;
revenue rulings and revenue procedures; tax treaties and regulations thereunder,
and Treasury Department and other official explanations of such treaties; court
cases; congressional intent as reflected in committee reports, joint explanatory
statements of managers included in conference committee reports, and floor
statements made prior to enactment by one of a bill‟s managers * * *. ”
3
Unless otherwise noted, all references to the Oregon Revised Statutes (ORS) are to 2007.
DECISION TC-MD 110990D 4
Treas Reg § 1.6662-4(d)(iii) (as amended in 2003). If taxpayers substantially understate their
taxable income and no substantial authority exists for the claimed deduction, Defendant must
impose a 20 percent penalty on the amount of the tax underpayment “attributable to the
understatement of taxable income.” ORS 314.402(1). Plaintiffs agree that Defendant‟s
determined that they understated their 2007 Oregon taxable income in excess of $15,000. (Stip
Facts at 1.) However, Plaintiffs allege that they had substantial authority, based on a
conversation with an IRS representative. (Stip Facts at 4.) Plaintiffs assert they “documented
[the conversation] as a memo * * *.” (Id.) The memo that contained Plaintiffs‟ conversation
with the IRS representative was not submitted as evidence. Without the memo, the court does
not know whether the memo represents substantial authority as described by Treasury Regulation
1.6662-4(d) (as amended in 2003). Thus the court has no evidence with which to judge whether
Defendant abused their discretion in determining whether Plaintiffs properly relied upon
substantial authority in preparing their 2007 Oregon state tax return. Plaintiffs‟ burden is to
provide a preponderance of evidence in support of their position, but on this point they have
provided no evidence.
Defendant can waive the Substantial Underpayment of Income Penalty if a taxpayer can
show a reasonable cause and prove they acted in good faith. OAR 150-314.402(6). OAR 150-
314.402(6) explains in pertinent part the standard for demonstrating good faith:
“A taxpayer‟s reasonable cause and good faith for a substantial understatement of
income is demonstrated by the extent of the taxpayer’s efforts to determine the
taxpayer‟s correct tax liability under the law.”
(Emphasis added.)
Plaintiffs allege that they acted in good faith when filing their 2007 Oregon income tax
return. (Stip Facts at 4.) Plaintiffs allege they demonstrated good faith by filing timely and by
DECISION TC-MD 110990D 5
contacting the IRS regarding the deduction in question, and therefore they should not be assessed
the Substantial Underpayment of Income Penalty. (Id.)
Filing timely is unrelated to determining the correct income tax liability and does not
meet Defendant‟s reasonable cause and good faith standard to waive imposed penalties.
Plaintiffs did not submit evidence detailing their conversation with the IRS representative.
Plaintiff submitted no evidence detailing the “extent of” their “efforts to determine” their
“correct tax liability under the law[,]” as required by OAR 150-314.402(6). Given the lack of
evidence showing that Plaintiffs demonstrated to Defendant that they had reasonable cause and
good faith for a substantial understatement of their 2007 Oregon taxable income, the court
concludes that Defendant did not act capriciously, arbitrarily, or in a wrongful manner in
determining that Plaintiffs did not act in good faith in determining their correct Oregon income
tax liability.
Plaintiffs also allege that the understatement penalty was incorrectly determined because
that penalty should have been based on Plaintiffs‟ amended return received by the Defendant on
March 3, 2011, and not the 2007 Oregon income tax return that they originally filed. (Stip Facts
at 4.) An understatement penalty is “equal to 20 percent of the amount of any underpayment of
tax attributable to the understatement of taxable income.” ORS 314.402(1). “ „Understatement‟
means the excess of the amount of the taxable income required to be shown on the return for the
taxable year over the amount of the taxable income which is shown on the return, * * *” reduced
by any portion of the understatement that is attributable to substantial authority.
ORS 314.402(4)(b)(A) (emphasis added). “The tax shown on the return is the amount of net tax
determined for the taxable year before the taxpayer was first notified by the department
concerning their tax liability. * * *.” OAR 150-314.402(1)(4)(c) (emphasis added).
DECISION TC-MD 110990D 6
Defendant issued a Notice of Deficiency Assessment, dated August 30, 2010, to Plaintiffs
based on Plaintiffs‟ filed 2007 Oregon income tax return. (Stip Facts at 1.) Plaintiffs filed an
amended 2007 Oregon income tax return on March 3, 2011. (Id. at 3.) Because Plaintiffs had
already been notified by Defendant concerning their 2007 income tax liability when they filed
their amended 2007 Oregon income tax return, the Substantial Underpayment of Income Penalty
was appropriately imposed based on Plaintiffs‟ filed 2007 Oregon income tax return. See
OAR 150-314.402(1)(4)(c).
2. Post amnesty penalty
Plaintiffs‟ argue they should not be assessed a Post Amnesty Penalty because they had no
reason to believe their 2007 Oregon income tax return as originally filed was incorrect. (See Stip
Facts at 4.) Defendant concluded that because Plaintiffs failed to file an amnesty application and
amnesty return, and are subject to a Substantial Understatement of Income Penalty, that a Post
Amnesty Penalty was properly imposed. (Def‟s Cross-Mot for Sum J at 3-4.) Oregon Laws
2009, chapter 710, section 4(1) provides in pertinent part:
“An amount equal to 25 percent of the total amount of unpaid tax that is otherwise
due is added to the amount of outstanding tax liability for any tax year or
reporting period for which amnesty could be sought under section 2 of this 2009
Act and for which the taxpayer failed to apply for amnesty and: (a) Failed to file a
return or report; or (b) Filed an original or amended return that failed to report or
underreported tax liability.”
(Emphasis added.) An amnesty return “refers to the Oregon original or amended qualified tax
return * * *.” OAR 150-305.100-(C)(1)(c). Amnesty returns must have been filed not later than
January 19, 2010.” OAR 150-305.100-(C)(3). The Post Amnesty Penalty will “only be imposed
on deficiencies or assessments that apply to tax years 2007 or earlier.” OAR 150-305.100-
(C)(7)(c).
DECISION TC-MD 110990D 7
Defendant “may waive the post amnesty penalty if a taxpayer demonstrates, to
[Defendant‟s] satisfaction, that the failure to participate in the amnesty program was due to
circumstances beyond their control.” OAR 150-305.100-(C)(7)(d). Circumstances that are
accepted by Defendant as “circumstances beyond the taxpayer‟s control include[s] but are not
limited to” those enumerated in OAR 150-305.145(4).4 OAR 150-305.145(4)(5)(b) also
provides examples of what does not count as “circumstances beyond the taxpayer‟s control”
including:
“[]Reliance on a professional to merely prepare a return on time; []Reliance on an
employee of the taxpayer to prepare a return on time; []Inability of the taxpayer to
pay the tax unless there is also a cause listed in subsection (5)(a) of this rule.”
Defendant denied Plaintiffs‟ request for waiver. (Stip Facts at 3.) Plaintiffs allege the
Defendant abused its discretion in denying their waiver request because they were not aware of
an error in their tax return that would have required them to file an amnesty return or seek
amnesty. (Id. at 4.)
Plaintiffs stated that when they filed their 2006 Oregon income tax return, they included a
memo regarding a conversation Plaintiffs had with an IRS representative. (Id.) (emphasis
added.) According to Plaintiffs, the memo described how they understood the IRS representative
4
OAR 150-305.145(4)(5)(a) lists the following examples of “circumstances beyond a taxpayer‟s control”:
“(A)Death or serious illness of the taxpayer or a member of the taxpayer‟s immediate family; (B)
Destruction by fire, a natural disaster, or other casualty of the taxpayer‟s home, place of business, or records needed
to prepare the returns. (C) Unavoidable and unforeseen absence of the taxpayer from the state that began before the
due date of the return; (D) A department employee provided erroneous written information to the taxpayer that
caused the taxpayer to incur the penalty if: (i) The taxpayer‟s reliance on the erroneous written information caused
the failure of the taxpayer to pay or file timely; (ii) The taxpayer supplied the department with complete information
connected with the erroneous written information given; and (iii) The taxpayer could not reasonably be expected to
be knowledgeable in the tax matter connected with the erroneous written information; or (E) The taxpayer‟s reliance
on incorrect advice from a professional the taxpayer could reasonably assume was knowledgeable and experienced
in the tax involved if: (i) The taxpayer‟s reliance on the advice caused the failure of the taxpayer to pay or file
timely; (ii) The taxpayer supplied the professional with complete information connected with the advice given; and
iii) The taxpayer could not reasonably be expected to be knowledgeable in the tax matter connected with the
erroneous advice.”
DECISION TC-MD 110990D 8
told them to determine their non-cash charitable contribution deduction. (Id.) For tax year 2007,
Plaintiffs claimed a non-cash charitable deduction, relying on the same information from the
IRS. (Id. at 1, 4.) Plaintiffs stated that they first became aware that Defendant disallowed their
2007 claimed non-cash charitable deduction after Defendant audited their 2007 return in July
2010. (Id. at 1.) The amnesty period, which is the time frame during which an amnesty
application could be filed, was October 1, 2009, through November 19, 2009. OAR 150-
305.100-(C)(1)(b). By the time Defendant audited Plaintiffs‟ 2007 Oregon tax return, the time to
file an amnesty application had passed.
Plaintiffs were aware that their non-cash charitable contribution deduction was subject to
challenge because the IRS conducted an audit of Plaintiffs‟ 2008 federal tax return. (Ptf‟s
Rebuttal Cross-Mot for Summ J at 2, 5.) The IRS reviewed Plaintiffs claimed non-cash
charitable contribution deduction for an Arizona rental property, stating on Plaintiffs‟ return that
“the only use made of this home” was that Plaintiffs “gave away weeks of residence as charitable
contributions[.]” (Id. at 5.) Even though the IRS allowed Plaintiffs some rental property
deductions, the IRS concluded that “[Plaintiffs] may not, however, use the fair rental value of the
property as [their] valuation” for a non-cash charitable contribution deduction. (Id.) After the
IRS concluded its audit, Plaintiffs were on notice that fair rental value was not the correct
method of valuing their claimed non-cash charitable contribution related to their Arizona rental
property. Plaintiffs had a statutory obligation to notify Defendant of the IRS change to their filed
2008 federal income tax return. ORS 314.380(2)(a)(A).
Plaintiffs claim the IRS audit was “[c]oncurrent with the [Defendant‟s] audit of our 2007
[Oregon tax] return[.]” (Pft‟s Rebuttal Cross-Mot for Summ J at 2.) In their 2007 Oregon
income tax return, Plaintiffs claimed the same non-cash charitable deduction for Plaintiffs‟
DECISION TC-MD 110990D 9
Arizona rental property using the same method to quantify the amount of their claimed
deduction. (Stip Facts at 1.) Defendant disallowed the deduction because Plaintiffs‟ valued the
deduction using “fair market value that this property would have received in rent, had it been
rented.” (Id.)
If the IRS concluded their audit of Plaintiffs‟ 2008 federal tax return and notified
Plaintiffs of its proposed audit adjustment before Oregon‟s amnesty period closed, Plaintiffs
would have had notice that if they claimed the same deduction on their 2007 Oregon income tax
return, they might have needed to file an amnesty return. An IRS audit concurrent with
Defendant‟s audit might not have provided Plaintiffs with notice regarding their error prior to the
close of the amnesty period. Plaintiffs have the burden of proof to show that Defendant abused
its discretion in determining that Plaintiffs‟ failure to file an amnesty application did not qualify
as a circumstance beyond their control. Plaintiffs‟ assertion regarding the timing of the IRS
audit, without more, is not sufficient evidence to prove that they lacked notice within the
amnesty period. No document or evidence other than Plaintiffs‟ statement about concurrent
federal and state audits has been provided to the court stating when the IRS concluded their audit
of Plaintiffs‟ 2008 federal income tax return and proposed its audit adjustment. Plaintiffs have
not proven that they did not know their 2007 Oregon income tax return was in error, and have
not proven any “circumstance beyond their control.” OAR 150-305.145(4)(5)(a). The court
finds that Defendant did not act capriciously, arbitrarily, or in a wrongful manner in determining
that Plaintiffs‟ failure to file an amnesty application was due to “circumstances beyond” their
“control.” (Id.)
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DECISION TC-MD 110990D 10
III. CONCLUSION
The court concludes that Plaintiffs have failed to provide evidence sufficient to prove that
Defendant abused its discretion in refusing to waive the Substantial Underpayment of Income
Penalty. Plaintiffs failed to provide evidence sufficient to prove that the Substantial
Underpayment of Income Penalty was incorrectly calculated. Plaintiffs failed to provide
sufficient evidence to support their claim that Defendant abused its discretion in refusing to
waive the Post Amnesty Penalty. Now, therefore,
IT IS THE DECISION OF THIS COURT that Plaintiffs‟ motion for summary judgment
is denied.
IT IS FURTHER DECIDED that Defendant‟s motion for summary judgment is granted.
Dated this day of April 2012.
JILL A. TANNER
PRESIDING 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 Presiding Magistrate Jill A. Tanner on April 30,
2012. The Court filed and entered this document on April 30, 2012.
DECISION TC-MD 110990D 11