The opinion
IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
JAMES M. DREILING )
and DIANE R. DREILING, )
)
Plaintiffs, ) TC-MD 160028C
)
v. )
)
DEPARTMENT OF REVENUE, )
State of Oregon, )
)
Defendant. ) FINAL DECISION
Magistrate Dan Robinson wrote and signed the Decision in this matter, entered
August 30, 2016. This Final Decision incorporates that Decision without change. The court did
not receive a statement of costs and disbursements within 14 days after its Decision was entered.
See Tax Court Rule-Magistrate Division (TCR-MD) 16 C(1).
Plaintiffs appeal Defendant’s Conference Decision and Notice of Deficiency Assessment
dated November 3, 2015, for the 2011 tax year. A trial was held in the courtroom of the Oregon
Tax Court on June 21, 2016, in Salem, Oregon. James R. Dreiling (Dreiling) appeared and
testified on behalf of Plaintiffs. Debra Colton (Colton) appeared and testified on behalf of
Defendant. Plaintiffs’ Exhibits 1 through 6 were received without objection. Defendant’s
Exhibits A through K were received without objection.
I. STATEMENT OF FACTS
Dreiling was unemployed during the 2011 tax year from January 1 through April 1.
(Ptfs’ Ex 5 at 1.) From April 4, 2011, through the end of the year, Dreiling worked as an outside
sales person with four companies: Bleu Bite Catering (Bleu Bite), West One Automotive (West
One), Orkin, and Timber Home Improvements (Timber). (Id. at 1–2) Beginning June 6, 2011,
FINAL DECISION TC-MD 160028C 1
Dreiling also started a pest control business, High Dessert Pest Solutions (High Dessert),
although he testified that the business did not have any customers during 2011. (See Ptfs’ Ex 6
at 14.) On their 2011 income tax return, Plaintiffs claimed deductions, as unreimbursed
employee business expenses, for travel between Dreiling’s home and locations related to his job
search; for travel related to his work as a sales person; for his cell phone, internet, licensing fees,
and other expenses related to his sales positions as well as High Dessert; and for various other
supplies and expenses related to High Dessert. (See Ptfs’ Ex 5 at 18.)
A. Mileage
Plaintiffs claimed a total deduction of $17,368 for 32,617 unreimbursed employee
business miles driven by Dreiling during 2011. (Ptfs’ Ex 2 at 6.) Dreiling testified that he lives
in rural Klamath County, Oregon, about 45 miles south of Bend, Oregon, although his mailing
address is in La Pine in Deschutes County. (Ptfs’ Ex 1 at 10.) Dreiling testified that, according
to the federal Office of Management and Budget (OMB), his home is in the Klamath Falls
micropolitan area. (See Ptfs’ Ex 3 at 2-3.) Dreiling explained that a micropolitan area is a
statistical area with a population of between 15,000 and 50,000 people. (See also id.) Plaintiffs
deducted the miles driven by Dreiling for travel between his home and the businesses of
potential employers in Bend and Redmond, Oregon. (Ptfs’ Ex 5 at 1.) Dreiling explained that
Bend and Redmond are in the Bend-Prineville metropolitan area according to OMB. (See also
Ptfs’ Ex 3 at 1,3.) Plaintiffs also claimed a deduction for the miles Dreiling drove while making
sales calls for his jobs as an outside sales person. (Ptfs’ Ex 5 at 1-2.)
Dreiling kept a mileage log for 2011, which consisted of a calendar with information
marked on each business day. (Ptfs’ Ex 5 at 3-14.) Dreiling recorded the total number of miles
driven each day. (Id.) Dreiling categorized trips as either job search (“JS”) or sales calls (“SC”).
FINAL DECISION TC-MD 160028C 2
(Id. at 1.) Dreiling noted the city or cities he visited that day, abbreviated by the first letter of the
city. (Id.) Thus, for example, on January 27, 2011, Dreiling’s log reads, “JS 121 B/R,”
signifying that he traveled 121 miles to Bend and Redmond for a job search. (Id.)
1. Job search
Dreiling testified that while he was unemployed he received unemployment benefits, and
as a condition of receiving those benefits he was required to look for work and provide a record
of employers he had contacted. Dreiling testified that his approach to searching for work
resembled his approach to outside sales—he preferred to hand out resumes and meet with
business owners in person. Dreiling estimated that he contacted up to twenty potential
employers each day, but he testified that he only listed one employer for each day in his job
search record because that was all that the state required of him. (See Ptfs’ Ex 5 at 16.)
Dreiling’s log shows total “JS” miles of 7,911. (Ptfs’ Ex 5 at 3-14.)
Colton questioned the accuracy of Dreiling’s mileage log with respect to his job search.
Colton testified that the mileage Dreiling recorded in his log did not match the distances between
Dreiling’s home and the businesses he visited. For example, Dreiling’s job search record shows
that on January 3, 2011, he visited “Mountain View Heating,” in Bend; his mileage log shows
that he traveled 112 miles that day. However, according to Colton, a computer search showed
the round-trip distance between Dreiling’s home and Mountain View Heating as 82.4 miles.
Colton testified that such discrepancies left her unable to determine how many miles, if any,
Dreiling traveled on a given day searching for employment.
2. Sales calls
Dreiling worked for Bleu Bite during the first week of April; he worked for West One for
the second week of April; he worked for Orkin from mid-April to mid-May; and he worked for
FINAL DECISION TC-MD 160028C 3
Timber from mid-May through the end of 2011. (Ptfs’ Ex 5 at 1–2.) Dreiling testified that all of
his positions were “outside sales” positions; his job consisted of making sales calls to customers’
homes and businesses. Dreiling testified that during a typical day working for Timber, he would
drive to a neighborhood, look for homes that might be in need of home improvements, and then
knock on the door to offer Timber’s services. Dreiling testified that he would visit several
neighborhoods in a day. He testified that in addition to Bend and Redmond, where he primarily
worked, he also traveled to Sisters, Oregon, Madras, Oregon, and Prineville, Oregon.
B. Other Deductions
Plaintiffs’ claimed various other deductions as Dreiling’s unreimbursed employee
business expenses; although Dreiling testified at trial that most of those expenses were at least
partly related to High Desert. Plaintiffs deducted various expenses including a cell phone plan,
internet service, his DMV driving record, pest control licensing and testing fees, business
registration fees, pesticides and pesticide-related equipment (a respirator and a water jug), pest
control publications, business insurance, and office supplies.
1. Internet
Plaintiffs deducted $967.18 for home internet service. (Ptfs’ Exs 5 at 18; 6 at 4.) Dreiling
testified that he used his home internet service as both an employee of Timber and for High
Desert, his start-up pest control business. He testified that he used the internet to record sales
information for Timber and track his sales commission. He also testified that he used the
internet to try to “get business” for High Desert, including maintaining his website and
advertising. Dreiling testified that he used the internet when searching for work, and, he
acknowledged, he used the internet for personal reasons as well.
///
FINAL DECISION TC-MD 160028C 4
2. Cell phone
Plaintiffs deducted $1,042.08 for a cell phone plan. (Ptfs’ Ex 5 at 18.) Dreiling testified
that he used his cell phone for “100 percent business use throughout the year.” An account
summary included in Plaintiffs’ Exhibits shows monthly expenses of $86.84. (Ptfs’ Ex 6 at 3.)
Dreiling testified that he first acquired his cell phone plan in 2003. Dreiling acknowledged on
cross examination that his wife’s cell phone was included in that plan. Dreiling testified that his
employers required him to have a cell phone because it is “assumed” that most employees will
have a cell phone. Plaintiffs provided a letter from Timber’s Manager Glenn Boss stating that
Dreiling was “responsible for using his own phone during working hours” and “[he] was not
compensated” for its use. (Ptfs’ Ex 2 at 11.) Dreiling testified that he used his cell phone to
communicate with his employers, especially when making sales calls for Timber. Dreiling also
testified that his cell phone was used as High Desert’s business line.
3. Pesticide testing and licensing fees, etc.
Plaintiffs deducted expenses that Dreiling characterized as relating to both Orkin and
High Desert. Dreiling testified that he was required to have a pesticide license while employed
with Orkin and for High Desert. He explained that the Oregon Department of Agriculture
(ODA) required applicants to take three tests before obtaining a pesticide license. Plaintiffs
claimed deductions for three pesticide testing fees ($25 each) and two pesticide licensing fees
($60 each) (Ptfs’ Ex 5 at 18.) Dreiling testified that the first licensing fees related to his
employment with Orkin, and he incurred the other when he transferred his license to High
Desert. Plaintiffs submitted receipts for each of the three $25 testing fees. (Ptfs’ Ex 6 at 7, 8.)
Plaintiffs submitted a receipt for $60.00 from the ODA for a license fee and a Commercial
Pesticide Applicator application form for Dreiling, both dated May 25, 2011; the application lists
FINAL DECISION TC-MD 160028C 5
Orkin as Dreiling’s employer. (Id. at 5, 15.) There was no receipt provided for the second
license fee.
Plaintiffs deducted expenses for two “Pest Control Publications” for $25 and $22.50 and
provided receipts for those payments. (Ptfs’ Exs 5 at 18; 6 at 10-11.) Dreiling testified that he
was required to obtain his driving record, at a cost of $3, for his position at Orkin. (See Ptfs’ Ex
6 at 11.) Finally, Dreiling testified that his claimed deduction of $12.99 for a replacement gas
cap for his vehicle was a mistake.
4. High Desert business expenses
Plaintiffs claimed deductions relating solely to High Desert, consisting of stamps and
office supplies, pesticides, a respirator, advertising expenses, a business registration fee, and
liability insurance. (Ptfs’ Ex 5 at 18.) Plaintiffs submitted receipts for each of his claimed
expenses. (See generally Ptfs’ Ex 6.) With respect to High Desert’s liability insurance, Plaintiffs
provided a statement showing that Dreiling purchased a $500 per-year policy, with payments due
of $46 per month. (Ptfs’ Ex 6 at 16.) The statement and accompanying receipt show that
Dreiling made a $100 down payment. (Id. at 12, 16.) Plaintiffs total claimed deduction for High
Desert’s insurance in 2011 was $522. (Ptfs’ Ex 5 at 18.)
Dreiling testified that he began High Desert on June 6, 2011, shortly after he left Orkin.
He testified that High Desert was unable to attract any paying customers during 2011, although
he tried to attract business, and he had a few inquiries. Dreiling testified that he did not provide
any services to customers for his pest control business, High Desert, until 2012.
5. Defendant’s Position
Colton testified that although Plaintiffs submitted letters from two of Dreiling’s
employers (Bleu Bite and Timber) neither employer stated whether any form of reimbursement
FINAL DECISION TC-MD 160028C 6
was available to Dreiling, so those expenses were denied. Similarly, Colton testified that
Plaintiffs did not provide a reimbursement policy from Orkin, so those expenses were denied.
Colton testified that Plaintiffs’ other expenses were from Dreiling’s personal start-up business
(High Desert) and were therefore denied. However, the conference officer allowed Plaintiffs
$304 in business deductions, which she moved from form 2106-EZ to a Schedule C. (Def’s Ex
B at 3.) It is unclear which of Plaintiffs’ claimed deductions were included in that $304.
II. ANALYSIS
Allowable deductions from taxable income are a “matter of legislative grace” and the
burden of proof (substantiation) is placed on the individual claiming the deduction. INDOPCO,
Inc. v. Comm’r, 503 US 79, 84, 112 S Ct 1039, 117 LEd2d 226 (1992). A taxpayer is required to
maintain records sufficient to establish the amount of any deduction claimed. IRC § 6001; Treas
Reg § 1.6001–1(a). As the party seeking affirmative relief, Plaintiffs have the burden of proof;
“a preponderance of the evidence shall suffice to sustain” that burden. ORS 305.427.1
“Preponderance of the evidence means the greater weight of evidence, the more convincing
evidence.” Feves v. Dept. of Revenue, 4 OTR 302, 312 (1971).
The Oregon Legislature has expressed its intent to “[m]ake the Oregon personal income
tax law identical in effect to the provisions of the Internal Revenue Code [IRC] relating to the
measurement of taxable income of individuals[.]” ORS 316.007. On the issues presented in this
case, Oregon law makes no adjustments to the rules under the IRC; therefore, federal law
governs the court’s analysis. Austin v. Dept. of Rev., 20 OTR 20, 22 (2009)
///
///
1
The court’s references to the Oregon Revised Statutes (ORS) are to 2009.
FINAL DECISION TC-MD 160028C 7
A. Mileage
The first issue the court will address is whether Plaintiffs properly deducted Dreiling’s
mileage for (1) sales calls, while he was employed, and (2) his job search, while he was
unemployed. IRC section 162(a) allows a deduction for “all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade or business[.]” By contrast, IRC
section 262 disallows deductions for “personal, living, or family expenses.” As a general rule,
“[t]he taxpayer’s costs of commuting to his place of business or employment are personal
expenses and do not qualify as deductible expenses.” Treas Reg § 1.262-1(b)(5). That is
because commuting expenses arise from the taxpayer’s personal decision about where to live.
Bogue v. Comm’r, 102 TCM (CCH) 41 (2011), 2011 WL 2709818 at *5 (US Tax Ct). “The
distance a taxpayer chooses to live from his place of business does not change the character of
the expense.” Harding v. Dept. of Rev., 13 OTR 454, 458 (1996). While commuting expenses
(i.e., travel between the home and place of business) are not deductible, expenses for travel
between one business location and another generally are. See Rev Rul 99-7, 1991-1 CB 361.
Generally, if a taxpayer establishes that deductible expenses were paid in a given year but
is unable to substantiate the precise amount of those expenses, the court may estimate the amount
of deduction allowed. Bogue v. Comm’r, 2011 WL 2709818 at *4 (citing Cohan v. Comm’r, 39
F2d 540, 543–544 (2d Cir 1930)). However, IRC section 274(d) imposes strict substantiation
requirements on deductions for travel, meals, gifts, and listed property under IRC section
280F(d)(4)(A)(i). IRC section 274(d) thus supersedes the Cohan doctrine. Treas Reg § 1.274–
5T(a). To deduct travel expenses, the taxpayer must demonstrate the expenditure amount, time,
place, and business purpose of the travel through “adequate records * * * sufficient to establish
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FINAL DECISION TC-MD 160028C 8
each element of an expenditure * * *.” Treas Reg § 1.274–5T(b), (c)(2). It the taxpayer fails to
meet those substantiation requirements, no deduction can be allowed.
1. Sales calls
Revenue Ruling 99-7, 1991-1 CB 361, describes some limited exceptions to the general
rule that commuting expenses are not deductible. Dreiling argued at trial that his transportation
expenses fell within the circumstances described by paragraph (1) of Revenue Ruling 99-7:
“(1) A taxpayer may deduct daily transportation expenses incurred in going
between the taxpayer’s residence and a temporary work location outside the
metropolitan area where the taxpayer lives and normally works. However, * * *
daily transportation expenses incurred in going between the taxpayer’s residence
and a temporary work location within that metropolitan area are nondeductible
commuting expenses.”
Thus, in order to allow Plaintiffs’ mileage deductions the court must find that Dreiling traveled
to (1) “temporary work locations,” that were (2) “outside the metropolitan area where [Dreiling]
lives and normally works.” Id. (emphasis added). A work location is considered temporary if it
is “realistically expected to last (and does in fact last) for 1 year or less[.]” Id. If the taxpayer
does not live and normally work in the same metropolitan area, then no deduction under
paragraph (1) of Revenue Ruling 99-7 is allowed. See also Porter v. Dept. of Rev., 20 OTR 30,
34 (2009) (upholding disallowance “[b]ecause taxpayer did not live and normally work in the
same metropolitan area[.]”).
During the period he was employed as an outside sales person, Dreiling traveled to the
homes (and businesses) of potential customers to offer his companies’ services. Dreiling would
often visit several neighborhoods in one day. The court finds that Dreiling’s sales calls qualify
as “temporary” work locations under Revenue Ruling 99-7 because none of the individual sales
locations were expected to last more than a year. In addition, the court finds that Dreiling
“normally” worked in the Bend metropolitan area. Dreiling’s mileage log shows that for each
FINAL DECISION TC-MD 160028C 9
day he worked or looked for work in 2011, he traveled to Bend for at least some portion of the
day. On many days, Bend was the only city Dreiling traveled to.
Identifying the metropolitan area of Dreiling’s residence poses a more difficult question.
Dreiling relied on OMB statistical areas to determine that his residence was in the Klamath Falls
micropolitan area and his work locations were located outside of that area. The U.S. Tax Court
has cast doubt on the use of OMB statistical areas for determining metropolitan areas under
Revenue Ruling 99-7. See Bogue, WL 2709818 at *10-*11 (declining to adopt “any such rigid
definition,” noting that use of OMB definitions would “inevitably lead to some absurd results[,]”
and instead looking to the “facts and circumstances” to determine whether a worksite is
“unusually distant from the area where [the taxpayer] lives and normally works.”); see also
Marcum v. Dept. of Rev., TC-MD 150414N, 2016 WL 1688425 at *4 (Apr 25, 2016) (citing
Bogue with approval). This court has previously found it “appropriate to interpret ‘metropolitan
area’ as used in Revenue Ruling 99–7 with reference to the ordinary common meaning of the
term[:] * * * ‘of, relating to, or constituting a region including a city and the densely populated
surrounding areas that are socially and economically integrated with it[.]’ ” Austin v. Dept. of
Rev., TC-MD 060634C, 2007 WL 4224969 at *3 (Nov 21, 2007).
Dreiling’s home is in rural Klamath County, approximately 45 miles from Bend.
Dreiling testified that he primarily worked in Bend, not just during the tax year at issue, but since
2004. Dreiling testified that he chose to rent a mailbox in La Pine, in part, because it was north
of his home and presumably on the way to Bend. While more evidence regarding the social and
economic ties between Bend and the area where Dreiling lives would have been helpful, the
court finds that, under the facts and circumstance presented in this case, Dreiling lived and
normally worked in the Bend metropolitan area. That being the case, Plaintiffs’ are entitled to
FINAL DECISION TC-MD 160028C 10
deduct Dreiling’s transportation expenses to and from his residence to temporary work locations
outside of the Bend metropolitan area.
Dreiling made sales calls in four cities in addition to Bend: Redmond, Prineville, Sisters
and Madras. The court declines to determine whether any of those cities are outside of the Bend
metropolitan area because it is impossible to tell from Dreiling’s mileage log if Dreiling traveled
directly between his home and any of those cities. Dreiling’s log only documents that he
traveled to a particular city or cities; it does not provide the order of the stops or the route
Dreiling took. For example, Dreiling’s log shows that on July 11 he traveled to Bend, Redmond,
and Madras, totaling 147 miles. (Ptfs’ Ex 5 at 9.) Assuming for the sake of argument that
Madras is outside of the Bend Metropolitan area, there is no way for the court to determine if
Drieling ever traveled directly between his residence and Madras or, if so, the length of that trip.
Thus, even if the court were to find that Dreiling traveled between his residence and temporary
work locations outside of the area where he normally works, Dreiling’s log is insufficient to
substantiate that travel under IRC section 274(d).
Defendant noted in its conference decision that travel between business locations can be
deductible if properly substantiated. (See Def’s Ex B at 2.) Dreiling’s log and testimony show
that Dreiling typically traveled to multiple work locations in the same day. Travel between
business locations is deductible under IRC section 162(a). However, Dreiling only recorded the
total amount of miles he drove each day; he did not separate the nondeductible commuting miles
from the deductible business-to-business miles. Unfortunately, that approach fails to meet the
strict substantiation requirements of IRC section 274(d). Accordingly, the court upholds
Defendant’s denial of the mileage deductions for Dreiling’s sales calls.
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FINAL DECISION TC-MD 160028C 11
2. Job search
Plaintiffs deducted mileage for travel related to Dreiling’s job search in 2011. Under
certain circumstances, travel expenses related to a search for employment are deductible:
“[E]xpenses incurred in seeking new employment in the same trade or business
are deductible under [IRC section 162] if directly connected with such trade or
business as determined by all the objective facts and circumstances.
However, such expenses are not deductible if an individual is seeking
employment in a new trade or business even if employment is secured. If the
individual is presently unemployed, his trade or business would consist of the
services previously performed for his past employer if no substantial lack of
continuity occurred between the time of the past employment and the seeking of
the new employment.”
Rev Rul 75-120, CB 55. Job-search-related travel expenses, like other travel expenses, are
subject to the strict substantiation requirements of IRC section 274(d). See Ferrington v. Dept.
of Rev., TC-MD 130349D, 2014 WL 1670032 at *4 (Apr 28, 2014).
The first issue is whether Dreiling searched for work in “the same trade or business” or
sought employment in a “new trade or business.” More evidence on this point would have been
helpful. For instance, although Dreiling stated he had been unemployed and collecting
unemployment for some time before 2011, Dreiling never specifically identified the trade or
business of his previous employer.2 In addition, Dreiling’s job search record appears to list firms
from a variety of trades or industries. (See Ptfs’ Ex 5 at 16.) Nevertheless, Dreiling did provide
evidence from which the court could infer that Dreiling’s jobs search did not represent a foray
into a new trade or business. Dreiling worked in sales in 2011, and he referenced his experience
in sales throughout trial. Dreiling’s job search record includes three of the four companies he
worked at as a sales person for in 2011. It therefore appears to the court that Dreiling was an
2
At trial, Defendant challenged only the sufficiency of Plaintiffs’ mileage log and did not allege that
Dreiling was seeking employment in a “new trade of business”. (See also Def’s Ex B at 3)(denying Plaintiffs’ job
search travel expenses based on discrepancies in the mileage log).
FINAL DECISION TC-MD 160028C 12
experienced sales person who was looking for work as a sales person in 2011. The court finds
that Dreiling was searching for work in the same as trade or business as his previous
employment.
The second issue is whether Plaintiffs adequately substantiated his job-search-related
travel. Dreiling’s log identifies the date, distance traveled, and location, although he only
identified which city he traveled to, rather than a location or locations within that city. At trial,
Colton questioned the accuracy of Dreiling’s log, noting that in some instances, the number of
miles Dreiling recorded did not correspond with the distance between Dreiling’s residence and
the addresses of the potential employers listed on Dreiling’s job search record. Dreiling
explained that discrepancy at trial: He testified that he only recorded one potential employer per
day because that was all that was required by the state unemployment office. Dreiling estimated
that instead of calling on one job prospect per day, he met with up to twenty potential employers
each day, using the same strategies and techniques he used as an outside sale person. The court
found Dreiling’s testimony and explanation of the discrepancy to be credible. The court finds
that Dreiling’s mileage log adequately substantiates his business miles related to his job search.
B. Other Expenses
1. Internet
Home internet service is a deductible expense under IRC section 162 if the service is
used as an ordinary and necessary expense in the taxpayer’s business; however, nonbusiness use
of that internet service is a nondeductible personal expense. Noz v. Comm’r, 104 TCM (CCH)
350, WL 4344158 at *8 (2012). Because “home internet expenses are not subject to the strict
substantiation rules of [IRC] section 274(d)” the court may make a reasonable estimate of the
allowable deduction if the taxpayer cannot establish the precise amount. Id. at *8-9. However,
FINAL DECISION TC-MD 160028C 13
any such estimate will “bear[] heavily against the taxpayer who failed to more precisely
substantiate the deduction.” Id. The court will not estimate the amount of a deduction unless
there is a sufficient evidentiary basis to support it. Vanicek v. Comm’r, 85 TC 731, 743 (1985).
Plaintiffs deducted 100 percent of their home internet expenses for 2011, according to the
information they provided. Dreiling testified that he used the internet to search for work, to
record and track sales information for Timber, and for advertising and a website for High Desert.
Yet Dreiling also testified that Plaintiffs home internet was also used for personal reasons. Other
than some brief testimony on this point, Plaintiffs provided very little evidence of the amount of
business use of their home internet. The court therefore finds that the record lacks sufficient
evidence to allow the court to make a reasonable estimate of Plaintiffs’ deductible home internet
expenses. Plaintiffs’ deduction for home internet expenses is disallowed.
2. Cell phone
Like the internet expenses discussed above, cell phone expenses are not subject to the
strict substantiation requirements of IRC section 274(d).3 Thus, an apportioned amount of cell
phone expenses can be deducted even if the taxpayer uses the cell phone for both business and
personal use.
Plaintiffs deducted 100 percent of their expenses for a two-cell-phone plan in 2011, even
though any alleged business use only related to the phone used by Dreiling. When challenged on
this point at trial, Dreiling maintained that his cellphone was nevertheless used solely for
business purposes. Dreiling’s credibility is hurt on this issue because he originally testified that
all of Plaintiffs’ cell phone expenses for 2011 were deductible business expenses. That was
clearly not the case. Moreover, Dreiling testified that Plaintiffs had had that cell phone plan
3
Dreiling correctly noted at trial that cell phones were removed from the strict substantiation requirements
of IRC section 274(d) by the Small Business Jobs Act of 2010. Pub L 111-240, § 2043, 124 Stat 2504, 2560 (2010).
FINAL DECISION TC-MD 160028C 14
since 2003 and he had used his cell phone for personal use in the past. The court finds that
Dreiling did use his cell phone for business in 2011, at least to some degree. However, there is
insufficient evidence for the court to make a reasonable estimate of the relative amount of
business use versus personal use. The denial of Plaintiffs’ cell phone expense deduction is
upheld.
3. Pesticide testing and licensing fees, etc.
“A taxpayer may deduct licensing expenses that are ordinary, necessary, and adequately
substantiated.” Chapman v. Dept. of Rev., TC-MD 150018N, 2015 WL 5703168 at *9 (Sept 29,
2015) (citing IRC § 162.) Plaintiff deducted licensing fees and other expenses he incurred to
become a Certified Pesticide Applicator; he characterized those expenses as relating to both
Orkin and High Desert. The receipts Dreiling submitted for the three pesticide testing fee
deductions were dated before he started High Desert and roughly correspond with the time he
was employed at Orkin, although one is dated after Dreiling left Orkin in mid-May.4 (See Ptfs’
Exs 6 at 5, 7, 8, 15; 1 at 21.) The court therefore concludes that the evidence supports a finding
that most of those expenses (ODA testing fees, ODA license fee, pest control publications, DMV
record) were incurred as a result of Dreiling’s employment with Orkin. According to Dreiling’s
testimony, at least one $60 licensing fee was related to Dreiling’s own pesticide business, High
Desert.
An employee may deduct expenses that are ordinary and necessary to his employer’s
business, but only if reimbursement is unavailable. See Kirwan v. Dept. of Revenue, 21 OTR
424, 432–33 (2014). If a taxpayer could have but fails to seek reimbursement, the expense is not
4
One of the three testing fees is dated May 23, 2011. (Ptfs’ Ex 6 at 7.) The application and receipt for
Dreiling’s pesticide license were dated May 25, 2011. (Ptfs’ Ex 6 at 5, 15.) Those expenses were after “mid-May,”
when Plaintiffs’ other evidence indicates he left Orkin. (Ptfs’ Ex 1 at 21.) Because the applications list Orkin as
Dreiling’s employer, and Plaintiffs did not provide evidence of a testing fee paid in connection with High Desert, the
court finds that the May 23, 2011 and May 25, 2016 testing and licensing fees related to Orkin.
FINAL DECISION TC-MD 160028C 15
deductible. Stolk v. Comm’r, 40 TC 345, 356 (1963), aff’d, 326 F2d 760 (2nd Cir 1964). Other
than Dreiling’s testimony, Plaintiffs did not provide any additional evidence to show that Orkin
did not and would not have reimbursed Dreiling for expenses related to his employment there.5
Plaintiffs have therefore failed to carry their burden of proof on this issue. Cf Kudina v. Dept. of
Rev., TC-MD 080038C, WL 4021160 at *8 (Nov 17, 2009) (“Although [taxpayer] has
information tending to substantiate the acquisition of the items, there is no persuasive
corroborative evidence that [the taxpayer] herself paid for the items and was not reimbursed.”)
The expenses related to Dreiling’s employment with Orkin are disallowed.
Dreiling also deducted $60 for an “ODA fee” which he explained at trial was the cost to
transfer his pesticide license to High Desert. Plaintiffs did not provide any documents to
substantiate that expense; it is therefore disallowed.
4. High Desert Business Expenses
Ordinary and necessary business expenses connected with a taxpayer’s trade or business
are deductible. IRC § 162. Deductible expenses include supplies and “insurance premiums * *
*.” Treas Reg 1.162-1. Dreiling started High Desert in 2011, and deducted the following
categories of expenses: office supplies, equipment, pesticides, insurance premium payments, and
business registration fees. Plaintiffs characterized those expenses as unreimbursed employee
expenses on their 2011 tax return. Dreiling acknowledged at trial that that was a mistake; the
expenses related to his business, High Desert, not the business of his employer. Dreiling also
testified at trial that High Desert did not have any customers in 2011; he characterized his
expenses as “start-up” costs.
5
Dreiling argued that box 12 of his W-2 did not show any reimbursements from Orkin. Payments made
under an accountable plan that exceed the allowable per diem or mileage rate are reported in box 12. 2011
Instructions for Forms W-2 and W-3, Internal Revenue Service, available at https://www.irs.gov/pub/irs-
prior/iw2w3--2011.pdf. Box 12 does not apply to the expenses at issue here, and in any event, the fact that no
reimbursements were reported sheds no light on whether reimbursements were available.
FINAL DECISION TC-MD 160028C 16
In order for expenses to be “ordinary and necessary” expenses in a trade or business, the
trade or business must be up and running at the time the expenses are incurred. Heinbockel v.
Comm’r, 105 TCM (CCH) 1733, 2013 WL 1953732 at *16 (2013). “A business may exist even if
there are no profits in the initial years, provided that there is ‘profit potential.’ ” Shammel v. Dept. of
Rev., TC-MD 120838D, WL 3964348 at *3 (July 31, 2013)(citing Sabelis v. Comm’r, 37 TC 1058,
1062 (1962). Expenses incurred before the trade or business begins are generally amortized over
a 180-month period. See Treas Reg 1.195-1. However, businesses with less than $50,000 of
start-up costs can deduct up to $10,000 of start-up expenses incurred in the year the business
begins to operate. IRC § 195(b)(1),(b)(3).
The court makes two observations: First, the conference decision from which Plaintiffs
appeal found that Plaintiffs incurred $304 of deductible business expenses in 2011. The
conference officer wrote, “I have moved $304 from form 2106-EZ to Schedule C.” (Def’s Ex B
at 3.) The conference officer did not elaborate further or explain which expenses she found to be
deductible. Nevertheless, implied in the officer’s finding is that Dreiling’s business, High
Desert, was operating during 2011 and thus incurred deductible business expenses.6 Colton did
not provide any evidence that would contradict that finding; she took the position at trial that the
expenses were not deductible as unreimbursed employee expenses because they were not, in fact,
employee expenses. The court therefore sees no reason to disturb the conference officer’s
finding that High Desert was operating as business at some time during 2011.
Second, the court observes that Plaintiffs’ total business expenses related to High Desert
fall well below the $10,000 limit provided by IRC section 195. Thus, it is unnecessary to
determine which expenses are truly start-up costs and which expenses were incurred after the
6
The Schedule C form is used to report profits and losses from a business.
FINAL DECISION TC-MD 160028C 17
business began to operate. The expenses are deductible so long as they are ordinary, necessary,
and properly substantiated.
Plaintiffs provided receipts for expenses characterized as “Office Supplies, Business”,
“Advertisement for Business”, and “Stamps” totaling $170.98. (See generally Ptfs’ Exs 5 at 18;
6.) The court is persuaded that those items, more likely than not, were ordinary and necessary
expenses incurred by High Desert. Plaintiffs are allowed a deduction for those expenses.
Plaintiffs provided receipts for “Pesticides” ($89.51), “Pest Control Equipment” ($29.14), and
Oregon business registration fees ($50). (See id.) Again, the court is persuaded that such items
were ordinary and necessary expenses incurred by High Desert. Plaintiffs are allowed a
deduction for those expenses in the amount of $339.63.
Plaintiffs provided a receipt and a statement showing that Dreiling purchased liability
insurance for High Desert in 2011. (Ptfs’ Ex 6 at 12, 16.) The court finds that the liability
insurance premium was an ordinary and necessary expense. Plaintiffs deducted a total of $522
for insurance in 2011. That is confusing because the statement and receipt shows a premium of
$500 for a one-year policy with a down payment of $100 and monthly payments of $46
beginning in July 2011. That suggests that Dreiling made six payments of $46 in 2011 plus the
$100 down payment for a total of $376. Plaintiffs’ are allowed a deduction in that amount.
III. CONCLUSION
After careful consideration of the evidence and applicable law, the court concludes that
Plaintiffs’ appeal should be granted in part. Plaintiffs’ are allowed a mileage deduction based on
7,911 miles driven by Dreiling for his job search. Plainitffs’ remaining mileage deduction is
disallowed. Plaintiffs’ cell phone and home internet deductions are disallowed. The deductions
related to Dreiling’s employment with Orkin are disallowed. Plaintiffs are allowed the following
FINAL DECISION TC-MD 160028C 18
Schedule C deductions for High Desert: office supplies, $170.98; pesticides, $89.51; pest control
equipment, $29.14; business registration fee, $50; insurance premium, $376. Now, therefore,
IT IS THE DECISION OF THIS COURT that Plaintiffs are allowed a mileage deduction
based on 7,911 miles driven in 2011 for Dreiling’s job search.
IT IS FURTHER DECIDED that Plaintiffs’ are allowed the following Schedule C
deductions for High Desert: office supplies, $170.98; pesticides, $89.51; pest control equipment,
$29.14; business registration fee, $50; insurance premium, $376.
IT IS FURTHER DECIDED that, except for the above expenses, Plaintiffs have failed to
prove that they are entitled to deduct the other expenses claimed on their 2011 return.
Dated this day of September 2016.
POUL F. LUNDGREN
MAGISTRATE
If you want to appeal this Final Decision, file a complaint in the Regular
Division of the Oregon Tax Court, by mailing to: 1163 State Street, Salem, OR
97301-2563; or by hand delivery to: Fourth Floor, 1241 State Street, Salem, OR.
Your complaint must be submitted within 60 days after the date of the Final
Decision or this Final Decision cannot be changed. TCR-MD 19 B.
This document was filed and entered on September 19, 2016.
FINAL DECISION TC-MD 160028C 19