# Hillenga v. Dept. of Rev.

> Oregon Tax Court · May 15, 2014 · 21 Or. Tax 396

URL: https://www.frixlaw.com/law-library/cases/10606319

## Case

- **Court:** Oregon Tax Court
- **Decided:** May 15, 2014
- **Citations:** 21 Or. Tax 396
- **Precedential status:** Published
- **Opinion:** Opinion
- **Judges:** Breithaupt
- **Cited by:** 15 later opinions in the Frix Law Library

## Citator (automated)

- **Red flag:** Reversed in part, on other grounds by Hillenga v. Department of Revenue, 358 Or. 178 (2015).
- Negative treatments: 1
- Distinguished by: 0
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10606319

## Opinion text

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.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10606319. Public record. Not legal advice.