Hillenga v. Dept. of Rev.

396 May 15, 2014 No. 53

IN THE OREGON TAX COURT

REGULAR DIVISION

Marlin “Mike” E. HILLENGA

and Sheri C. Hillenga,

Plaintiffs,

v.

DEPARTMENT OF REVENUE,

Defendant.

(TC 5086)

Plaintiffs (taxpayers) appealed a Magistrate Division decision as to income

tax. Taxpayers alleged that they were not Oregon residents for the purpose of

determining Oregon income tax liability for the calendar year 2006. Taxpayers

also disputed certain adjustments made by Defendant Department of Revenue

(the department) to taxpayers’ 2006 Oregon income tax return that increased

taxpayers’ Oregon income tax liability, and to certain penalties imposed by the

department. Following trial, the court found that taxpayers were domiciled in

Oregon for the tax year at issue and that the department’s adjustments and

imposed penalties were proper.

Trial was held on March 19 and 20, 2013, in the court-

room of the Oregon Tax Court, Salem.

Kevin P. O’Connell, Hagen O’Connell LLP, Portland

argued the cause for Plaintiffs (taxpayers).

Darren Weirnick, Senior Assistant Attorney General,

Department of Justice, Salem, argued the cause for Defen-

dant Department of Revenue (the department).

Decision for Defendant rendered May 15, 2014.

HENRY C. BREITHAUPT, Judge.

I. INTRODUCTION

This case comes before the court for decision follow-

ing a trial in the Regular Division. Plaintiffs (taxpayers)

allege that they were not Oregon residents for purpose of

determining Oregon income tax liability for the calendar

year 2006. Taxpayers also dispute certain adjustments made

by Defendant Department of Revenue (the department) to

taxpayers’ 2006 Oregon income tax return that increased

taxpayers’ Oregon income tax liability, and to certain penal-

ties imposed by the department.

Cite as 21 OTR 396 (2014) 397

II. FACTS

At the time of trial, taxpayers Sheri Hillenga and

Mike Hillenga had been married for 45 years. Mike Hillenga

has a background in engineering and marketing, and since

1967 has operated a sole proprietorship engaged in several

different, but broadly speaking, related business activities.

In 2006 the largest part of taxpayers’ business consisted of

putting together engineering design proposals. Taxpayers’

sole customer in 2006 was Space Systems/Loral, an aero-

space firm located in Palo Alto, California. Representative

past work in related areas has included, for example, for-

matting college level textbooks for publication. In 1976 Sheri

Hillenga began working for this sole proprietorship and has

remained involved in its business activities through the

time of trial.

Taxpayers own four residences: one in Coloma,

California, that taxpayers acquired in 1973; one in Iowa

that has been in Mike Hillenga’s family for several gener-

ations; one in Ashland, Oregon, that taxpayers obtained by

gift from family of Sheri Hillenga in 1975; and one in Italy

that taxpayers acquired in 2005. Taxpayers split their time

in 2006 between their four residences, spending 131 days in

Coloma; 91 days in Ashland; 16 days in Iowa; and 120 days

in Italy. Taxpayers also own rental properties in the vicinity

of Ashland.

At some point prior to 1990, taxpayers were involved

in an unspecified fashion with the development of a prod-

uct known as the Zoex Non-Inflatable Anti-Shock Garment

(referred to hereinafter as the “Zoex garment”). The precise

nature of this product is not material to this case, but the

substance of the presentation at trial was that it is designed

for medical use. Starting in 1990, and proceeding through

the time of trial, taxpayers have been involved in marketing

the Zoex garment to various potential customers both in the

United States and abroad. The precise nature of taxpayers’

interest in the Zoex garment is not clear from the record.

Taxpayers do not appear to own the underlying intellectual

property or to own an interest in any company that does

own such intellectual property, but Taxpayers had—and

continued to have at the time of the trial in this case—a

398 Hillenga v. Dept. of Rev.

relationship of sorts with Dr. Richard Pellagra, who was

also involved in the development of the Zoex garment and

who organized a corporation in the early 1990s to market

the Zoex garment. The record shows that taxpayers began

marketing the Zoex garment pursuant to an oral agreement

with Dr. Pellagra, though the precise terms of that arrange-

ment are not in the record. At trial Sheri Hillenga testified

that Dr. Pellagra did not receive any economic benefit from

taxpayers’ marketing of the Zoex garment. The record indi-

cates that despite their efforts, taxpayers sold few—if any—

Zoex garments from 1990 through 2006, though in subse-

quent years taxpayers derived substantial income from Zoex

sales. Taxpayers did not sell any Zoex garments and had no

gross income from their Zoex activities in 2006.

At some point in 2001 taxpayers surrendered their

California driver’s licenses and obtained Oregon driver’s

licenses. These licenses showed their residence in Ashland,

Oregon, as their primary address. Taxpayers also registered

to vote in Oregon at about the same time, again representing

their Ashland address as their primary residence. Starting

in 2001, and proceeding through at least 2006, taxpayers

filed full-year resident Oregon income tax returns and paid

California income taxes as nonresidents. In addition, tax-

payers registered several motor vehicles in Oregon during

this time.

Following audit of taxpayers’ 2006 Oregon income

tax return, the department proposed numerous adjust-

ments resulting in net tax owed. Taxpayers requested a

conference. While the conference officer’s determinations

were somewhat more favorable to taxpayers than were the

adjustments originally proposed by the auditor, they still

resulted in net tax owed. The department issued a Notice of

Deficiency to taxpayers on December 2, 2010, and taxpayers

appealed to the Magistrate Division of this court. Following

trial the magistrate found for the department and taxpayers

appealed to the Regular Division. Additional facts are stated

below where relevant.

III. ISSUES

(1) Whether taxpayers were Oregon residents during the

2006 tax year;

Cite as 21 OTR 396 (2014) 399

(2) Whether the department’s adjustments to taxpayers’

2006 Oregon income tax return were proper;

(3) Whether expenses attributable to taxpayers’ Zoex

sales activities were deductable business expenses;

(4) The amount, if any, of a 2004 Net Operating Loss

(NOL) that taxpayers may carry forward on their 2006

income tax return;

(5) Whether the department properly imposed penalties

on taxpayers; and

(6) The amount, if any, of taxpayer’s 2006 “kicker” refund.

IV. ANALYSIS

The parties raise a wide range of issues in their

pleadings. In the interest of brevity, the court will begin its

analysis by addressing the issues with the broadest signifi-

cance first. The outcome on these questions will then guide

the court’s analysis of the more particular questions—

especially, but not exclusively, the adjustments by the depart-

ment to taxpayers’ 2006 Schedule C. The broad questions

that the court will first address are: (1) whether taxpayers

were residents of this state for purposes of Oregon Income

Tax liability in 2006; (2) the tax treatment of taxpayers’

Zoex garment activities; and (3) what proportion, if any,

of taxpayers’ home in Coloma, California, was “exclusively

used on a regular basis” for a qualifying business purpose

under IRC section 280A.

Taxpayers are the plaintiffs in this case and thus have

the burden of proof on all questions of fact other than those

relating to the 2004 NOL carry forward, which the depart-

ment raised as a counterclaim in its answer. ORS 305.427.1

A. Analysis of the Over-Arching Issues

1. Whether Taxpayers were Domiciled in Oregon in

2006

ORS 316.037 provides, in pertinent part:

“(1)(a) A tax is imposed for each taxable year on the entire

taxable income of every resident of this state. * * *

1

The court’s references to the Oregon Revised Statutes (ORS) are to 2005.

400 Hillenga v. Dept. of Rev.

“* * * * *

“(3)    A tax is imposed for each taxable year on the taxable

income of every full-year nonresident that is derived from

sources within this state.”

ORS 316.027 provides, again in pertinent part:

“(1)     For purposes of this chapter, unless the context

requires otherwise:

“(a)    ‘Resident’ or ‘resident of this state’ means:

“(A)   An individual who is domiciled in this state unless

the individual:

“(i)      Maintains no permanent place of abode in this state;

“(ii)   Does maintain a permanent place of abode else-

where; and

“(iii) Spends in the aggregate not more than 30 days in

the taxable year in this state; or

“(B)   An individual who is not domiciled in this state but

maintains a permanent place of abode in this state and

spends in the aggregate more than 200 days of the tax-

able year in this state unless the individual proves that the

individual is in the state only for a temporary or transitory

purpose.”

In other words, Oregon imposes a tax on the entire tax-

able income of Oregon residents—even income earned from

sources outside of this state, unless explicitly exempted.

Full-year nonresidents of Oregon need only pay Oregon

income tax on the proportion of their income derived from

sources in Oregon.

A person is a resident of Oregon if they are domi-

ciled in Oregon, unless that person meets all of the require-

ments of ORS 316.027(a)(A)(i) to (iii). A person may also be

an Oregon resident if that person is not domiciled in Oregon

but nonetheless maintains a permanent place of abode in

this state and spends 200 days in a given taxable year in

this state. ORS 316.027(a)(B). The department and taxpayer

both appear to agree that ORS 316.027(a)(B) is inapplicable

in this case, as are ORS 316.027(a)(A)(i) to (iii). Therefore,

the question of whether taxpayers were residents of Oregon

Cite as 21 OTR 396 (2014) 401

in 2006 turns entirely on whether taxpayers were domiciled

in Oregon in 2006.

The statutes do not provide a definition of “domi-

cile.” However, that term is commonly defined as:

“The place at which a person is physically present and that

the person regards as home; a person’s true, fixed, prin-

cipal, and permanent home, to which that person intends

to return and remain even though currently residing

elsewhere.”

Black’s Law Dictionary 523 (8th ed 2004). A domicile dif-

fers from a residence in that a person may have many res-

idences, but they can only have one domicile. Zimmerman

v. Zimmerman, 175 Or 585, 591, 155 P2d 293 (1945). A per-

son’s domicile remains that person’s domicile until that per-

son establishes a new domicile at a different location. Davis

v. Dept. of Rev., 13 OTR 260, 264 (1995). A person is “domi-

ciled” in Oregon if that person’s domicile is located within

the boundaries of this state.

Domicile is a question of fact that taxpayer has

the burden of proving by a preponderance of the evidence.

ORS 305.427. Because the criteria governing domicile are

unavoidably subjective, the court cannot simply rely on the

potentially self-serving testimony of the person or persons

concerned; the question must be answered by reference to

the objective circumstances and the overt acts of the person

or persons at issue. Hudspeth v. Dept. of Rev., 4 OTR 296,

298 (1971).

Taxpayers have residences in Coloma, California; in

Ashland, Oregon; in Italy; and in Iowa. Taxpayers’ longest-

standing residence is their house in Coloma, California, which

the court understands taxpayers have owned since 1973.

However, taxpayers acquired their Ashland residence only

a short time thereafter, and taxpayers had significant busi-

ness, social, and family ties in both Oregon and California.

The record is clear that taxpayers were physically present at

each of their residences during the 2006 tax year.

The department argues that taxpayers established

their house in Ashland as their domicile no later than 2001,

and retained their Oregon domicile through at least the end

402 Hillenga v. Dept. of Rev.

of 2006. The department points to the fact that in 2001 tax-

payers registered to vote in Oregon, obtained Oregon driver’s

licenses, surrendered their California driver’s licenses,

began filing Oregon full-year resident income tax returns,

and began filing California state income tax returns as

nonresidents. Taxpayers argue that their changes in voter

registration were not intended to indicate an intention to

change domicile and that their filing of full-year resident

Oregon income tax returns was an error on the part of their

accountant.

Neither of taxpayers’ arguments is well taken. As

an initial matter, taxpayers filed full-year resident Oregon

and nonresident California income tax returns not just once,

but over a course of several years. Taxpayers did nothing

in the course of those several years to correct the supposed

error, suggesting that taxpayers at that time wished to file

in that manner.

Similarly, while taxpayers may not truly have

intended to abandon their California domicile in favor of one

in Oregon, taxpayers’ acts of surrendering their California

driver’s licenses, obtaining Oregon driver’s licenses, and

registering to vote in Oregon are precisely the sort of overt

acts that the court must consider in determining taxpayers’

probable intentions at the time. Those overt actions clearly

undermine taxpayers’ claims regarding their domicile in

2006.

The record shows that taxpayers had substantial

connections to Oregon in the years leading up to 2006. In

2006 itself, taxpayers spent, according to their own account-

ing, 91 days in this state; somewhat less than the number of

days taxpayers spent in California (131) or Italy (120), but

nonetheless a significant proportion of the year. Taxpayers’

2006 federal and Oregon income tax returns both indicate

their Ashland address as their primary address, as do sev-

eral of their bank statements. Taxpayers also indicated

their Ashland address as their primary address on several

of the documents submitted by taxpayers to substantiate

their travel expenses in 2006. That evidence further sub-

stantially undermines taxpayers’ case that their house in

Coloma was their domicile in 2006.

Cite as 21 OTR 396 (2014) 403

As was stated above, the court gives substantial

weight to taxpayers’ registration to vote in Oregon and pos-

session of Oregon-issued driver’s licenses. In past cases deal-

ing with domicile, this court has held that when a taxpayer

has the burden of proving by a preponderance of the evidence

that a taxpayer is no longer a resident of Oregon, possession

of a driver’s license issued by another state or voter registra-

tion in another state may not be enough to satisfy the burden

of proof if a taxpayer nonetheless retains substantial ties to

Oregon. See Dane v. Dept. of Rev., 21 OTR 15 (2012). That

ruling does not alter the principles underlying that opin-

ion. Where, as here, however, taxpayers have the burden of

showing that they were not domiciled in Oregon despite pos-

sessing Oregon driver’s licenses, being registered to vote in

Oregon elections, and filing taxes as full-year residents of

Oregon, taxpayers have a very heavy burden to carry. The

evidence presented by taxpayers falls far short of satisfying

that burden.

2. Whether Taxpayers’ Zoex Garment Activities Were

Pursued for Profit

The department denied certain deductions claimed

by taxpayers on the ground that taxpayers’ Zoex activities

were “not engaged in for profit” within the meaning of IRC

section 183. ORS 316.048 incorporates the provisions of the

federal Internal Revenue Code for purposes of determining

Oregon Income Tax liability, except where the Legislative

Assembly has adopted specific exceptions. No such excep-

tions are implicated in this case, so the court will apply the

provisions of the Internal Revenue Code throughout this

opinion using the same rules of construction as would a fed-

eral court applying the same law to the same facts.

IRC section 183(c) defines an “activity not engaged

in for profit” as any activity for which deductions are not

allowed under IRC section 162 (covering “ordinary and nec-

essary expenses * * * in carrying on any trade or business”),

under IRC section 212(1) (“all the ordinary and necessary

expenses paid * * * for the production or collection of income”),

or under IRC section 212(2) (“all ordinary and necessary

expenses paid * * * for the management, conservation, or

maintenance of property held for the production of income”).

404 Hillenga v. Dept. of Rev.

A taxpayer pursuing an “activity not engaged in for profit”

may take certain deductions that are allowed regardless of

whether that taxpayer’s activity is engaged in for profit. IRC

§ 183(b)(1). Such taxpayer may also take deductions that

would be allowed for an activity that is engaged in for profit,

but only to the extent that taxpayer’s gross income from the

“activity not engaged in for profit” exceeds the deductions

allowed to that taxpayer under IRC section 183(b)(1). IRC

§ 183(b)(2).

In this case, taxpayers did not claim any deduc-

tions under IRC section 183(b)(1), and did not have any

gross income from their Zoex activities in 2006. The

amount of deductions allowable for taxpayers’ Zoex activi-

ties in 2006 therefore hinges on whether or not taxpayers’

Zoex activity was an “activity not engaged in for profit” in

2006.

The department contends that taxpayers’ Zoex

activity was an “activity not engaged in for profit” in 2006.

Many of the adjustments made by the department to tax-

payers’ Oregon income tax return relied at least in part

on that determination. Taxpayers meanwhile contend that

their Zoex activities were pursued for profit in 2006 and

point to their substantial income in years 2008-2010 as evi-

dence that they were engaged in a for-profit activity in 2006.

(Ptfs’ Post Trial Memo at 6.)

The department relies on the non-exclusive list of

factors found in Treasury Regulations section 1.183-2(b) to

support its position. These factors include:

(1) The manner in which taxpayers carried out the

activity;

(2) The expertise of taxpayers or their advisors;

(3) The time and effort expended by the taxpayers in car-

rying on the activity;

(4) Expectation that assets used may appreciate in value;

(5) The success of the taxpayers in carrying on similar or

dissimilar activities

(6) The taxpayers’ history of income or losses with respect

to the activity;

Cite as 21 OTR 396 (2014) 405

(7) The amount of occasional profits, if any, which are

earned;

(8) The financial status of the taxpayer; and

(9) Elements of personal pleasure or recreation.

This is a nonexclusive list and the regulation itself admon-

ishes against any formulaic application of the factors listed.

See Treas Reg § 1.183-2(b). However, the list does broadly

take in the salient features of an activity deliberately and

conscientiously pursued for profit, as opposed to one pursued

for other purposes. In this case, the court finds particularly

probative factors 1, 4, 6, 8, and 9.

With regard to the first factor, taxpayers appear

to have carried out their Zoex activities rather casually.

Taxpayers had an unspecified business relationship in the

1990s with Zoex Corporation and had an ongoing relation-

ship at the time of trial with Dr. Richard Pellagra, the prin-

cipal of that corporation. Taxpayer Sheri Hillenga testified

to the effect that taxpayers engaged in their Zoex activities

pursuant to an oral agreement with Dr. Pellagra, but was

unable to articulate the terms of this agreement or what

taxpayers gave to Dr. Pellagra as consideration. Taxpayers

were also unable to provide any business records relating to

their Zoex activities from 1990 through 2003, and provided

only cursory summaries of receipts and expenses for 2004

and 2005. All of this suggests that taxpayers did not keep

detailed records of their Zoex-related transactions. This

casual approach to keeping records of business arrange-

ments, income, and expenses is not suggestive of an activity

carried out primarily for profit.

With regard to the fourth factor, taxpayers’ Zoex

activities did not involve any asset of taxpayers that could be

expected to appreciate in value through taxpayers’ efforts.

While they appear to have had a hand in the development of

the Zoex garment, taxpayers do not claim to have invented

the Zoex garment or to own any of the underlying intellec-

tual property. Taxpayers stood to gain not from apprecia-

tion in the value of any of the assets associated with their

Zoex activities, but rather through their sales of Zoex units.

Taxpayers’ track record in selling Zoex units, however, was

not one to inspire confidence as of 2006.

406 Hillenga v. Dept. of Rev.

This leads to the sixth factor listed above: taxpayers’

history of income and losses from Zoex activity. Taxpayers

have been unable to produce any records of income or expenses

from their Zoex activities prior to 2004. Given that taxpayers

must satisfy the burden of proof on the issue of whether tax-

payers’ pursued their Zoex activities for profit in 2006, the

absence of records pertaining to sales in those years must be

read as evidence of an absence of such sales. ORS 305.427.

Taxpayers reported $11,196 in gross income from their Zoex

activities in 2004, but did not claim any revenue from their

Zoex activities in 2005 or 2006. In other words, taxpayers

have shown only one year of modest income from their Zoex

activities from 1990 through 2006. Taxpayers’ persistence

in this activity despite so many nonremunerative years of

effort weighs against a conclusion that taxpayers pursued

their Zoex activities for profit during this period.

With regard to the eighth factor, taxpayers’ finan-

cial status in 2006 further indicates that taxpayers’ Zoex

activities were not pursued for profit. The regulations imple-

menting IRC section 183 recognize that “substantial income

from sources other than [the activity in question] (particu-

larly if the losses from the activity generate substantial tax

benefits) may indicate that the activity is not engaged in for

profit, especially if there are personal or recreational ele-

ments involved.” Treas Reg § 1.183-2(b)(8). Here, taxpayers

reported substantial income from their design proposal

business in 2006 and in the years that we have records

for leading up to 2006, coupled in each year with either no

income or very little income from their Zoex activities—

but substantial alleged business expenses for travel, lodg-

ing, and meals. Those alleged business expenses, if upheld,

represent a substantial tax benefit to taxpayers and—in

the absence of substantial income from taxpayers’ Zoex

activities—weigh against concluding that those activities

were engaged in for profit.

The travel, lodging, and meals aspects of taxpayers’

Zoex activities likewise speak to the ninth factor cited by

Treasury Regulations section 1.183-2(b). Taxpayers testified

that they marketed Zoex by travelling to conventions of vari-

ous sorts and “cold-calling” various responsible individuals

Cite as 21 OTR 396 (2014) 407

at military bases, ski resorts, and other locations through-

out the world. The court would normally be cautious about

passing judgment on particular marketing techniques as

indicative that taxpayers were not pursuing their Zoex-

related activities on a for-profit basis; however, in light of

the absence of evidence of any sales resulting from these

techniques during the period from 1990 through 2003, and

the sporadic nature of taxpayers’ sales from 2004 through at

least 2006, this aspect of taxpayers’ Zoex activities suggests

that profit was not taxpayers’ primary motivation for the

activity.

Taxpayers have placed in the record extensive

evidence of travel expenditures that taxpayers claimed as

business expenses arising from their Zoex activities. But

little, if anything, in the record substantiates the relation-

ship between these travel expenditures and taxpayers’ Zoex

activities. In certain instances, as the department points

out, those expenses appear to coincide with dates that the

record shows manifestly personal reasons for taxpayers to

be travelling. The presence of these coincidences suggests

that taxpayers may have been using their Zoex-related

activities as an opportunity to attribute otherwise personal

expenses to business.

Taxpayers attempted to prove that their Zoex

activities were pursued for profit in 2006 by pointing to

taxpayers’ significant profits from sales of Zoex garments

in 2008 and later years. This argument is not well taken.

Taxpayers may have pursued their Zoex activities as a for-

profit activity in years subsequent to 2006, but in light of the

preceding analysis of the factors identified in the Treasury

Regulations, taxpayers have a heavy burden to carry in

showing that the many years of substantial expenses from

their Zoex activities without evidence of income were part

of a considered strategy to eventually produce profit.2 The

evidence in the record for such a conclusion is lacking, and

the evidence to the contrary is quite persuasive.

2

Indeed, the tests for determining whether an activity was pursued for profit

in a given year are all retrospective. See, e.g., IRC § 183 (activity presumed for

profit when gross income from the activity exceeds deductions permitted under

IRC section 183(b)(1) in three of the five years ending with the year at issue);

Treas Reg 1.183-2(b) (the nine non-exclusive factors discussed above).

408 Hillenga v. Dept. of Rev.

Taxpayers’ Zoex garment activity was not pursued

for profit in 2006. As a result, expenses in 2006 arising

from that activity are deductible only to the extent that tax-

payers’ gross income from those activities exceeds the deduc-

tions taxpayers would be allowed regardless of whether or

not they engaged in their Zoex activities for profit. Cf. IRC

§ 183(b)(1), (2). As was stated above, taxpayers did not claim

any deductions under IRC section 183(b)(1) in 2006, and

also did not have any gross income from their Zoex activity.

Taxpayers therefore may not deduct expenses arising from

their Zoex activities.

3. Business Use of Taxpayers’ Home in Coloma,

California

On their 2006 Oregon income tax return,

Taxpayers claimed that they used 2500 square feet in

their home in Coloma, California, “regularly and exclu-

sively” for business use. Taxpayers state the overall square

footage of their house in Coloma as 3000 square feet.3 The

areas claimed as used regularly and exclusively for busi-

ness purposes included the hallway leading to taxpayers’

bedroom and one of the two bathrooms on the main floor

of the Coloma house. Sheri Hillenga’s testimony on direct

examination did little, if anything, to bear out these repre-

sentations. Further, on cross-examination the department

succeeded in showing that at least one area claimed for

exclusive business use—the “upstairs office” added to the

house in 2002—appeared to have been used to store non-

business-related personal property, in addition to whatever

business purpose the area may have served. As a result,

the court gives very little weight to the representations of

taxpayers on this issue.

One further defect in taxpayers’ argument, how-

ever, obviates the need to further investigate the extent of

taxpayers’ use of their Coloma house for exclusively business

purposes. IRC section 280A(c)(1) permits deductions for

3

In a separate accounting submitted as an exhibit at trial, taxpayers state

the square footage of their Coloma house at 3,118 square feet, with 2,552 square

feet used exclusively for business use. The court understands the disparity arises

from including closet space in the exhibit that was not counted on taxpayers’

return.

Cite as 21 OTR 396 (2014) 409

expenses relating to portions of a dwelling unit “exclusively

used on a regular basis” in one of three ways:

“(A) as the principal place of business for any trade or

business of the taxpayer,

“(B) as a place of business which is used by patients, cli-

ents, or customers in meeting or dealing with the taxpayer

in the normal course of his trade or business, or

“(C) in the case of a separate structure which is not

attached to the dwelling unit, in connection with the tax-

payer’s trade or business.”

Taxpayers do not state which of these three descriptions,

in their view, apply to the portions of their house in Coloma

that are supposedly used exclusively for business purposes.

One of taxpayers’ exhibits mentions a roughly 180-square-

foot “separate storage area” that taxpayers claim is used for

business purposes. However, taxpayers did not present any

evidence about that building at trial and the record does not

contain information that the court could use to allocate any

expenses to that structure. In addition, though the diagram

provided by taxpayers of the floor plan of taxpayers’ Coloma

residence does designate one room as a “conference room,”

the record does not contain any evidence that taxpayers

regularly and exclusively used any part of their Coloma res-

idence to meet with clients or customers. Therefore, the only

remaining avenue for taxpayers to deduct expenses relating

to their use of the Coloma house for business purposes is if

some portion of the Coloma house is taxpayers’ “principal

place of business” under IRC section 280A(c)(1)(A).

IRC section 280A(c)(1) defines “principal place of

business” as:

“[A] place of business which is used by the taxpayer for the

administrative or management activities of any trade or

business of the taxpayer if there is no other fixed location of

such trade or business where the taxpayer conducts substan-

tial administrative or management activities of such trade

or business.”

(Emphasis added.) The court sees no reason to doubt that

taxpayers used at least some portion of the Coloma house to

conduct management and administrative activities related

410 Hillenga v. Dept. of Rev.

to their design proposal business. However, the court sees

substantial reasons to doubt that the Coloma house was tax-

payers’ “principal place of business” for purposes of IRC sec-

tion 280A(c)(1) during 2006.

The main issue is the requirement in IRC section

280A(c)(1) that there be “no other fixed location * * * where the

taxpayer conducts substantial administrative or management

activities” of the trade or business. The record indicates that

taxpayers largely split their time in 2006 between California,

Italy, and Oregon. The record also indicates that taxpayers

conduct much of their design proposal business remotely and

that taxpayers themselves were the only individuals employed

in their sole proprietorship in 2006—aside from occasional

help from a son living in the vicinity of Santa Cruz, California.

Lastly, the record contains extensive evidence that

taxpayers maintained at least one other home office at their

residence in Ashland. The record indicates at a minimum

that taxpayers conducted much of their Zoex-related busi-

ness from this location, but inasmuch as taxpayers’ office in

Ashland appears to have been equipped with computers and

other standard office equipment, taxpayers have the burden

of affirmatively showing that they did not conduct “substan-

tial administrative or management activities” of their design

proposal business from Ashland. Nothing in the record dis-

pels this possibility, and some of the documents and testi-

mony offered by taxpayers suggest the opposite conclusion.

Under these circumstances, taxpayers have failed to satisfy

the burden of proof by showing that they regularly and exclu-

sively used portions of their home in Coloma as the principal

place of business for their design proposal business.

Taxpayers have thus failed to prove that any por-

tion of their house in Coloma is “regularly and exclusively

used” for a qualifying business purpose under IRC 280A,

and may not deduct as business expenses any costs related

to utilities or upkeep of that home.

B. The Adjustments to Taxpayers’ 2006 Income and

Deductions

The preceding analysis sets the stage for the remain-

der of this opinion. As was stated above, the department

Cite as 21 OTR 396 (2014) 411

made numerous adjustments to the income reported and

deductions allowed on taxpayers’ 2006 Oregon income

tax return. The department now concedes that one such

adjustment—requiring taxpayers to recognize the full

$196,591 reported on taxpayers’ 2006 form 1099-MISC from

Space Systems/Loral, rather than the $180,334 initially

reported as gross receipts on taxpayers’ 2006 Schedule C—

was incorrect. The court will address the remaining adjust-

ments to taxpayers’ Schedule C in the order presented in the

post-trial briefs of the parties.

1. Allowance of “Cost of Goods Sold” for Purchases of

Zoex Garments

As was stated above, taxpayers reported $180,334

of gross receipts on taxpayers’ Schedule C. Taxpayers offset

against these receipts $119,067 in cost of goods sold (CoGS).

At conference the department allowed only the $114,383 of

CoGS directly related to taxpayers’ design proposal busi-

ness; the department denied the $4,684 that taxpayers

claimed as CoGS for purchases of Zoex units in 2006 for

subsequent resale by taxpayers. The department denied

taxpayers’ CoGS for their Zoex purchases on the ground

that taxpayers did not sell any of the Zoex garments that

taxpayers purchased in 2006.

The department’s position is well taken. When a tax-

payer is engaged in manufacturing or retailing goods, CoGS

is used to offset receipts from the eventual sale of goods. Treas

Reg § 1.61-3. Gross income from retail or manufacturing

activity is the excess of receipts over CoGS. Id. IRC section

471 and its implementing regulations require manufacturers

and retailers to produce beginning and end-of-year invento-

ries to accurately relate CoGS to receipts—and thus gross

income—for a given year. Treas Reg § 1.471-1. Alternatively,

taxpayers using the Cash-Disbursements method of account-

ing (the cash method) and with less than $1 million in annual

sales may forgo the inventory-taking requirements imposed

by the regulations and instead deduct CoGS for a given unit

of goods in the year that the unit is actually sold. See Rev

Proc 2001-10, 2001-2 IRB 272. In any event, CoGS is taken

only when it can be used to offset receipts as part of deter-

mining gross income from sales of goods.

412 Hillenga v. Dept. of Rev.

Taxpayers did not establish any receipts aris-

ing from their Zoex activities in 2006 and Sheri Hillenga

testified at trial that taxpayers did not succeed in selling

any Zoex garments in that year. Because taxpayers had

no receipts from their Zoex activities to offset in 2006, tax-

payers may not claim CoGS for their purchases of Zoex gar-

ments in 2006. The denial of taxpayers’ Zoex-related CoGS

for 2006 is sustained.

2. Schedule C Car and Truck Expenses

Taxpayers sought to deduct as business expenses

certain costs relating to their use of owned and rented vehi-

cles for business purposes. The department denied these

deductions for failure to substantiate the business nature of

these expenditures.

IRC section 274(d) reads, in pertinent part:

“No deduction or credit shall be allowed—

“(1) under section 162 or 212 for any travelling expense

(including meals and lodging while away from home),

“(2) for any item with respect to an activity which is of

a type generally considered to constitute entertainment,

amusement, or recreation, or with respect to a facility used

in connection with such an activity,

“(3) for any expense for gifts, or

“(4) with respect to any listed property (as defined in sec-

tion 280F(d)(4)),

“unless the taxpayer substantiates by adequate records

or by sufficient evidence corroborating the taxpayer’s

own statement (A) the amount of such expense or other

item, (B) the time and place of the travel, entertainment,

amusement, recreation, or use of the facility * * *, (C)

the business purpose of the expense or other item, and

(D) the business relationship to the taxpayer of the per-

sons entertained, using the facility or property, or receiv-

ing the gift.”

The department correctly points out that passenger auto-

mobiles are “listed property” under IRC section 280F(d)(4)

and are therefore subject to the substantiation requirements

of IRC section 274(d).

Cite as 21 OTR 396 (2014) 413

Taxpayers have provided detailed records showing

the amounts and dates of their 2006 vehicle expenses, includ-

ing invoices from mechanics and from vehicle rental services

in both the United States and Europe. However, taxpayers

have offered nothing from which the court can reconstruct a

history of the business use of such vehicles over the course of

2006. Taxpayers’ handwritten calendar for 2006 gives some

sense of the various business appointments taxpayers had

that year, but does not indicate what vehicle or vehicles tax-

payers may have used on any given day, or the extent of such

use for specifically business purposes. Sheri Hillenga’s tes-

timony at trial on this subject—even when combined with

taxpayers’ calendar—is not an adequate equivalent for an

“account book, diary, log, statement of expense, trip sheets

or similar record * * * made at or near the time of the expen-

diture” called for in the regulations implementing IRC sec-

tion 274(d). See Treas Reg § 1.274-5T(c)(2). The single-page

summary of mileage and maintenance expenses for each

vehicle provided by taxpayers likewise does not purport

to be a contemporaneous record and lacks the specificity

needed to corroborate taxpayers’ claims that these expenses

were accrued in the course of using the vehicles in question

for business purposes.

Taxpayers have failed to substantiate the busi-

ness purpose of their vehicle-related expenses “by adequate

records or sufficient evidence.” Taxpayers’ claimed deduc-

tions for such expenses are therefore denied.

3. Schedule C Depreciation

Taxpayers claimed depreciation for vehicles, com-

puters, improvements to their house in Coloma, and furni-

ture used at their house in Coloma.

Taxpayers’ claims for depreciation on the vehicles

that taxpayers allegedly used in their Schedule C business

are denied for the same reason that taxpayers’ claimed

deductions for vehicle-related expenses are denied. IRC sec-

tion 274(d) states “no deduction * * * shall be allowed” for

listed property in the absence of adequate substantiation of

the business use of such property. Taxpayers have failed to

adequately substantiate the business use of their vehicles,

and so cannot deduct depreciation on those vehicles.

414 Hillenga v. Dept. of Rev.

With regard to taxpayers’ computers, the depart-

ment correctly points out that taxpayers’ computers are

“listed property” subject to the substantiation requirements

of IRC section 274(d).4 Taxpayers have made no effort to

meet these substantiation requirements and thus are prop-

erly denied a deduction for depreciation relating to their

computers.

Taxpayers’ deductions for depreciation for their

house in Coloma and for furniture in their house in Coloma

are likewise denied because, as discussed above, taxpayers

have failed to show that any part of their house in Coloma,

including the “upstairs office” addition that they specifically

seek depreciation for, is regularly and exclusively used for a

qualifying business purpose under IRC section 280A.

4. Schedule C Insurance

Taxpayers claimed $1,910 in business-related insur-

ance premiums for 2006. At conference the department

allowed as a deduction only $231, representing half of tax-

payers’ premium on their personal liability policy, and denied

the rest for lack of substantiation. At trial and in their subse-

quent briefing taxpayers accepted this division with regard to

their personal liability insurance premium, but argued that

at least one additional insurance premium—covering their

office equipment and computers—should also be allowed as

a deduction. Taxpayers did not, however, offer any evidence

at trial to substantiate further deductions for insurance

expenses beyond those already allowed by the department at

conference. Therefore, any additional deductions for business-

related insurance premiums in 2006 are denied.

5. Schedule C Legal and Professional

Taxpayers conceded this issue in their post-trial

briefing.

4

Computers are “listed property” unless exclusively used in a “regular

business establishment.” IRC § 280F(d)(4)(B). Where, as here, the computers in

question are located in a personal home, they are listed property unless located

in a portion of the home that satisfies the terms of IRC section 280A(c)(1). Id.

Taxpayers have failed to show that any portion of their house in Coloma satisfies

the terms of IRC section 280A(c)(1), and do not present any other arguments for

the proposition that their computers fall outside the substantiation requirements

of IRC section 274(d).

Cite as 21 OTR 396 (2014) 415

6. Schedule C Office Expenses

Taxpayers claimed $9,219 of office expenses for

their business in 2006. The department allowed $583 at

conference. Taxpayer now argues that roughly $3000 of the

disallowed office expense should be permitted as arising

from the business use of taxpayers’ Coloma house.

This amount is denied because, as stated above,

taxpayers have not carried the burden of proving that any

portion of taxpayers’ house expenses may be deducted con-

sistent with IRC section 280F. With regard to the rest of the

disallowed amount, taxpayers have not provided evidence

from which the court could determine that any amount

greater than that allowed by the department at conference

should be allowed, and has therefore failed to carry the bur-

den of proof on this issue.

7. Schedule C Supplies

Taxpayers claimed $3,910 of business-related

expenses for supplies in 2006. The department initially

allowed only $638 as a deduction, but at conference increased

the amount allowed to $1,031. Taxpayers appear to allege

in their briefing that additional amounts should be allowed,

and point to certain documents submitted as exhibits by the

department as showing additional items purchased as busi-

ness supplies. However, the documents taxpayers point to

are, for the most part, merely copies of receipts from general

retail chain stores showing that taxpayers purchased certain

items. Taxpayers concede in their briefing that many of these

receipts contain both business supplies and items for personal

use, but provide little useful guidance to the court for telling

the one from the other. The court’s own inspection of these

documents suggests that a very large proportion of the items

purchased are susceptible to both business and personal use.

Taxpayer has not satisfied the burden of proof on

this issue and no further deduction is allowed beyond what

the department allowed at conference.

8. Repairs and Maintenance

Taxpayer claimed $3,052 of repairs and mainte-

nance expenses on their 2006 Schedule C. These expenses

416 Hillenga v. Dept. of Rev.

relate to repairs to their house in Coloma. In their post-trial

brief taxpayers insist that the repairs are deductible, but

concede that they should be accounted for as expenses aris-

ing from the business use of their Coloma house.

As stated above, however, the court has concluded

that taxpayers’ representations concerning the business

use of their Coloma house are not credible as initially pre-

sented, and taxpayers have not presented evidence from

which the court could conclude that some discrete portion of

taxpayers’ Coloma house was regularly and exclusively used

in any fashion provided for under IRC section 280A(c)(1).

Therefore, no deduction is allowed for the repairs to tax-

payers’ Coloma house in 2006.

9. Schedule C Travel and Lodging

Taxpayers claimed $17,250 of travel expenses as

a deduction in 2006. This sum represents $5,871 in auto

rental costs, $1,257 in lodging, and $10,121 in airfare to

Italy, Iowa, and other locations. At trial Sheri Hillenga tes-

tified that these expenses were all attributable to taxpayers’

marketing of Zoex garments. Inasmuch as this court has

already concluded that taxpayers’ Zoex garment activities

were not pursued for profit in 2006, taxpayers may deduct

travel expenses arising from taxpayers’ Zoex activities

only to the extent that taxpayers’ gross income from their

Zoex activities exceeded the deductions allowed under IRC

section 183(b)(1). Taxpayers did not claim any deductions

under IRC section 183(b)(1) and did not have any gross

income from their Zoex activities in 2006. Taxpayers there-

fore may not deduct travel and lodging expenses for 2006

arising from their Zoex activities.

10. Schedule C Meals and Entertainment

Taxpayers claimed $2,382 in deductible business-

related meals and entertainment expenses. Neither at trial

nor in their briefing have taxpayers made any effort to sub-

stantiate the business nature of these expenses. The deduc-

tion is therefore denied.

11. Schedule C Utilities

Taxpayers claimed $3,052 of utilities as a deduc-

tion on their 2006 Schedule C. However, taxpayers did not

Cite as 21 OTR 396 (2014) 417

attempt to substantiate this amount at trial or even to

address the issue in their post-trial briefing. The deduction

is therefore denied.

12. Schedule C “Other Expenses”

Taxpayer claimed $6,031 in deductions for business

related “other expenses” on their 2006 Schedule C. These

included $850 for accounting services, $70 for bank charges,

$436 for delivery and freight, $63 for parking and tolls,

$208 for pest control at their Coloma house; $1,061 for post-

age, $572 for security expenses for one of their properties

in Oregon; and $2,771 for telephone service. At conference

the department allowed taxpayers’ accounting and post-

age expenses in the amounts claimed, reduced the amount

allowed for phone service to $1,200, and denied the rest of

taxpayers’ claimed deductions in this category.

In their post-trial briefing taxpayers conceded

that the deductions for parking and tolls are duplicative—

those expenses were also claimed as deductions for travel

expenses—but nonetheless argued that the amounts for pest

control and security should be allowed, and that the amount

allowed for phone service should be restored to $2,771.

Taxpayers argue that the pest control expenses

arise from the business use of their home in Coloma. The

deduction for this expense is denied because taxpayers have

failed to carry the burden of showing that any portion of

the expenses associated with their home in Coloma may be

deducted consistent with IRC section 280A.

Taxpayers argue that their security expenses were

for one of their rental properties in Oregon. The department

argues that the expense was for their personal residence in

Ashland—not a rental property—and that taxpayers did

not offer any evidence to substantiate the amount of the

expense. The department’s position is well taken. In the

absence of evidence substantiating the amount and nature

of this expense, the court denies this deduction.

Taxpayers argue that the deduction for telephone

service allowed by the department fails to reflect taxpayers’

business use of their phones. Taxpayers refer the court to

statements by taxpayers to the effect that taxpayers subscribe

418 Hillenga v. Dept. of Rev.

to only basic land-line phone service at their residences, use

calling cards to pay for long distance calls while travelling,

and use their cellular phones only for business purposes.

The department correctly points out that pursu-

ant to IRC section 262(b) basic telephone service on a first

telephone line to an individual’s residence is per se a non-

deductible personal expense. The department also correctly

points out that cellular phones are listed property under

IRC section 280F(d)(4)(A)(v). Taxpayers must therefore

substantiate the amount of use of their cellular phones, the

time and place of such use, and the business nature of such

use, as with passenger automobiles and personal computers

claimed for business use. Taxpayers have offered nothing

that would permit the court to establish these elements for

taxpayers’ cell phone usage.

While the court does not doubt that taxpayers had

some amount of legitimately deductible expense for tele-

phone service in 2006, taxpayers have presented no evi-

dence to substantiate the amount of any such deduction.

C. Interest Income

At conference the department increased taxpayers’

interest income from the $12,345 reported on their 2006

Form 1040 to $25,845. That increase arose from interest

reported on a 1099-INT statement addressed to taxpayers’

sole proprietorship.

Taxpayers did not address that issue in their post-

trial briefing, but appear to take the position that the inter-

est income in question was not received by taxpayers per-

sonally, but rather by a profit sharing plan, as defined under

IRC section 401. In support of that position, taxpayers put

in the record a letter from taxpayers’ bank to Sheri Hillenga

purporting to show that the Certificates of Deposit (CD)

that accrued the interest income in question were all owned

by either Sheri Hillenga or Mike Hillenga as beneficiaries of

the VMH Visual Communications Profit Sharing Plan. The

department, however, points to a number of inconsistencies

tending to contradict taxpayers’ representations about the

ownership of the CDs at issue and the disposition of the

interest income from those CDs.

Cite as 21 OTR 396 (2014) 419

The department particularly points to a 1099-INT

statement covering the CDs at issue that taxpayers’ bank

issued to taxpayers’ sole proprietorship in 2006. The 1099-

INT undermines taxpayers’ argument on this point for three

reasons: first, profit sharing plans—known alternatively

as “HR 10” or “Keogh” plans—are exempt from 1099-INT

reporting. See IRC § 6049(b)(2)(B). Second, the 1099-INT

statement specifically identifies the income from the CDs

as “taxable interest paid to” taxpayers’ sole proprietorship.

Third, the 1099-INT in several places identifies the recipi-

ent of the income from the CDs as taxpayers’ sole proprietor-

ship, rather than a profit sharing plan.

The 1099-INT statement reporting the interest

income, much less the reporting of said income as taxable

interest income to taxpayers’ sole proprietorship, conflicts

with taxpayers’ representations about the ownership of the

CDs and the nature of the interest income. Taxpayers make

no effort in their post-trial brief to reconcile their represen-

tations to the seemingly countervailing circumstantial evi-

dence. Taxpayers have also not sought to place in the record,

for instance, evidence that taxpayers’ bank issued the 1099-

INT in error or informational returns for 2006 showing that

taxpayers’ HR 10 plan received the interest income from the

CDs at issue.

Taxpayers have the burden of proof on this issue

and the evidence is, at best, in equipoise. Under these cir-

cumstances the department’s adjustment to taxpayers’

return so as to include the interest income from the CDs

covered by the 1099-INT must stand. ORS 305.427.

D. Taxpayers’ Net Operating Loss Carryforward

Taxpayers reported on their 2006 Form 1040 a Net

Operating Loss (NOL) carryforward of $9,547. This carry-

forward arose from an NOL of $11,719 claimed on taxpayers’

2004 income tax return. Taxpayers could not initially uti-

lize this NOL carryforward on their 2006 return because, as

originally filed, taxpayers’ 2006 income tax return reflected

negative taxable income. The question now arises, in light of

the adjustments to taxpayers’ returns made by the depart-

ment and upheld by the court in this opinion, what amount,

420 Hillenga v. Dept. of Rev.

if any, of that NOL carryforward taxpayers may utilize to

reduce their 2006 Oregon income tax liability. As mentioned

above, the department raised this issue as a counterclaim in

its Answer and therefore it bears the burden of proof. ORS

305.427.

The department argues that taxpayers should be

denied use of the NOL carryforward because, in light of

what the department and the court now know about the

deductions claimed on taxpayers’ 2006 returns, some of the

deductions claimed on taxpayers’ 2004 income tax return

likely should have been denied. The department particu-

larly points to taxpayers’ inability during discovery to pro-

duce documents substantiating various deductions claimed

on their 2004 return. In the department’s view, although

the department bears the statutory burden of proof regard-

ing the NOL carryforward, taxpayers now have the burden

of going forward with evidence concerning the 2004 NOL

itself.

The court disagrees. ORS 314.410(1) normally

limits the period for issuing a notice of deficiency to three

years. ORS 314.410(2) extends that period of limitations to

five years in the event of a greater than 25 percent under-

statement of gross income. Longer periods of limitation

apply in other circumstances, but the department neither

pleads nor argues that such circumstances are present in

this case.

If the department questioned the accuracy of tax-

payers’ 2004 return, the time to raise those questions was

within the limits set by ORS 314.410. As it stands, the

department’s conference officer originally allowed tax-

payers’ NOL carryforward for 2006, but ruled that it was

entirely consumed by taxpayers’ 2006 tax liability. In its

counterclaim the department argued that this decision by

the conference officer was incorrect. However, in light of the

limitations imposed by ORS 314.410 and the inability to now

revisit taxpayers’ 2004 return, court concludes that the con-

ference officer properly allowed the NOL carryforward.

The department appears to argue that the court has

the authority to reopen the 2004 tax year pursuant to ORS

305.575. This position is mistaken. ORS 305.575 permits

Cite as 21 OTR 396 (2014) 421

the court to reach a conclusion as to the correct amount of

a deficiency in an appeal of an assessment regardless of the

amounts pleaded by the parties in that particular appeal; it

does not declare open season to revisit closed tax years that

are not at issue in the present appeal.

As was stated above, the department raised this

issue as a counterclaim and therefore it has the burden of

proving its case by a preponderance of the evidence. ORS

305.427. The department has failed to carry the burden of

proving that taxpayers are not entitled to carry forward

their NOL from 2004 on their 2006 Oregon income tax

return.

E. Penalties

The department imposed three separate penalties

on taxpayers’ 2006 return: a 20 percent penalty provided for

under ORS 314.402 for substantial understatement of tax-

able income (SUI); a 25 percent penalty for noncompliance

with the terms of the tax amnesty provided for in Oregon

Laws 2009, chapter 710 (SB 880 (2009)) 5; and a 5 percent

late payment penalty provided for under ORS 314.400(1).

Taxpayers do not appear to dispute the late payment pen-

alty, but argue that the SUI penalty and the post-amnesty

penalties should be reduced or eliminated.

The SUI penalty applies to noncorporate taxpayers

when the taxpayer understates that taxpayers’ taxable

income by $15,000 or more. ORS 314.402(2)(a). Taxpayers’

argument regarding the SUI penalty necessarily follows on

from taxpayers’ positions on the department’s adjustments

to taxpayers’ 2006 income tax return: if the adjustments by

the department had been incorrect, as taxpayers argued,

taxpayers’ 2006 income tax return would then have accu-

rately reflected taxpayers’ 2006 taxable income. Because the

adjustments upheld by the court increase taxpayers’ taxable

income for 2006 by substantially more than $15,000, the

SUI penalty stands.

5

Though passed by the legislature and signed into law by the governor, the

text of SB 880 (2009) was never made a permanent part of the ORS. The relevant

provisions of SB 880 (2009) are found in chapter 314 of the 2009 edition of the

ORS, following the text of ORS 314.469.

422 Hillenga v. Dept. of Rev.

The post-amnesty penalty is required by the terms

of SB 880 (2009). That statute provided for the department

to operate a temporary tax amnesty program from October 1,

2009, through November 19, 2009. The amnesty was to

be limited to “tax years, reporting periods, and estates for

which the department could issue a notice of deficiency” as

of September 28, 2009. SB 880 (2009) § 1. Taxpayers who

were eligible for the amnesty but who failed to apply and

either (a) failed to file a return for one of the years subject

to the amnesty, or (b) filed a return for a year subject to the

amnesty, but failed to report or underreported tax liability

for such year, were to be punished by the addition of a pen-

alty amounting to 25 percent of their total tax liability for

the year in question. SB 880 (2009) § 4.

2006, the only year at issue in this case, was a tax

year “for which the department could issue a notice of defi-

ciency” as of September 28, 2009. ORS 314.410. While there

is no dispute that taxpayers did file an income tax return

for 2006, the analysis up to this point clearly shows that

taxpayers’ 2006 Oregon income tax return understates their

income tax liability for that tax year. The post-amnesty pen-

alty is therefore sustained.

Taxpayer argues that the post-amnesty penalty

should be removed because, in taxpayers’ view, the depart-

ment never clearly communicated to taxpayers that they

were eligible for the amnesty. This argument fails. The

record shows that an employee of the department discussed

the amnesty program with Sheri Hillenga on October 2,

2009, and that Sheri Hillenga, acting on behalf of tax-

payers, expressed disinterest in the program. Taxpayers

make no effort to show why this lack of interest should be

imputed to the department—taxpayers do not, for instance,

allege that they detrimentally relied on incorrect statements

about the amnesty program by the department employee.

Consequently, the post-amnesty penalty stands.

F. Taxpayers’ Kicker Rebate

Taxpayers and the department both concur that

taxpayers’ “Kicker” rebate for 2006 will need to be recal-

culated in light of the court’s rulings in this opinion. That

amount should reflect department’s concession as to the

Cite as 21 OTR 396 (2014) 423

funds owed to taxpayers in 2006 but only received in 2007,

and the court’s rulings regarding taxpayers’ claimed deduc-

tions, NOL carryforward, and penalties.

V. CONCLUSION

Now, therefore,

IT IS THE DECISION OF THIS COURT that the

court concludes the following:

(1) Taxpayers were domiciled in Oregon in 2006;

(2) Taxpayers’ Zoex garment activities were not

pursued for profit in 2006;

(3) Taxpayers have not satisfied the burden of

showing that they “regularly and exclusively” used any por-

tion of their house in Coloma, California, for a qualifying

business purpose under IRC section 280A;

(4) The adjustments by the department to tax-

payers’ Schedule C, except for the department’s concession

regarding the payment taxpayers received in 2007 for work

done in 2006, were proper;

(5) Taxpayers failed to satisfy the burden of show-

ing that the interest income reported on their 1099-INT

accrued to an HR 10 Profit Sharing Plan, rather than to

taxpayers personally;

(6) Taxpayers are entitled to carry forward their

2004 NOL on their 2006 Oregon income tax return;

(7) The department properly levied penalties

against taxpayers; and

(8) The amount of taxpayers’ “Kicker” rebate shall

be recalculated in accordance with these rulings.