Oregon ~ Personal Income Tax: Taxpayers’ Business Expense Deductions Denied

Oregon personal income taxpayers were not allowed a business expense deduction because the taxpayers failed to establish by a preponderance of the evidence that they were engaged in a business. The taxpayers reported Schedule C losses from a solar energy system venture with which they were involved in 2010. The taxpayers reported no income (gross receipts or sales) on that Schedule C. The Department of Revenue disallowed the entire deduction.

One of the taxpayers testified that they bought solar lenses from one company and then leased them to a second company. The lenses were physically located in Delta, Utah, but the taxpayers were not certain whether the lenses they “purchased” had actually been placed in use. The taxpayers testified that they had nothing to do with the lenses after the purchase—the second company was responsible for assembly, installation, and maintenance of the lenses, all of which took place in Utah. The taxpayers stated that the lease to the second company was arranged by the first company and that they had no say regarding to whom the lenses were leased. Finally, the taxpayers testified that they were also uncertain of the term of the lease but they believed it was 30 years.

As a general rule, depreciation is not allowed unless the property the taxpayer is depreciating is connected with a trade or business. Based on the taxpayer’s testimony, their involvement was very limited as all they did was send the seller some money in 2010. Further, the taxpayers failed to establish by a preponderance of the evidence the reasonableness of the depreciation deduction and failed to justify the method used to calculate the depreciation claimed on their 2010 return. The taxpayers took essentially all of the depreciation ($21,960 of the total asserted cost of $27,000 for the nine solar lenses) in 2010, while their out-of-pocket expenses that year were, at most, $6,300. Thus, the taxpayers were not involved in a trade or business and any deductions were not allowed under IRC §162 and §167.

Gregg v. Department of Revenue, Oregon Tax Court, No. TC-MD 140043C, October 13, 2014, ¶401-117


Court documents are at: http://iausenergy.com/Court/2014-tc-md-140043c.pdf