Moore v. Dept. of Rev. (TC-MD 210331R)

DECISION TC-MD 210331R 1
IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
NOEL A. MOORE
and LOVELLA I. MOORE,
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Plaintiffs, TC-MD 210331R
v.
DEPARTMENT OF REVENUE,
State of Oregon,
DECISION	Defendant.
Plaintiffs appealed Defendant’s Conference Decision Letter/Notice of Assessment dated
April 28, 2021, for the 2016 tax year. A consolidated trial was held remotely via Webex on
February 28, 2022, for three related cases: (1) Noel A. Moore and Lovella I. Moore v.
Department of Revenue, TC-MD 210331R; (2) Westside Lumber, Inc. and Bret A. Moore and
Noel Moore v. Department of Revenue, TC-MD 210332R; and (3) Bret A. Moore and Amy M.
Moore v. Department of Revenue, TC-MD 210333R. Richard Brewster, CPA, represented
Plaintiffs. Noel Moore (Noel), Bret Moore (Bret), and Elaine Frost (Frost) testified on behalf of
Plaintiffs.1 Auditor, Peggy Ellis represented Defendant, but did not testify. Plaintiffs’ Exhibits 1
through 47, 101 through 120, and Defendant’s Exhibits A through F were admitted into evidence
without objection.
I. STATEMENT OF FACTS AND ANALYSIS
These three appeals each involve Defendant’s assessment against one of three family-
owned businesses, and the liability therefrom ultimately passing through to Plaintiffs Noel,
1 The court customarily refers to parties by their last names; However, because some of the parties have the
same last name, they will be identified using their first names.

DECISION TC-MD 210331R 2
Lovella Moore (Lovella), Bret, and Amy Moore (Amy). Because many of the transactions
presented in each of these three appeals relate to the same people and entities, the court held one
consolidated trial and renders a single decision.
These related cases involve three businesses owned by members of the Moore family: (1)
W. L. Moore Construction (WLM Construction), owned by Noel and Bret; (2) W. L. Moore
Properties (WLM Properties), owned by Noel and Lovella; and (3) Westside Lumber, owned by
Bret and Amy. WLM Construction began operations in approximately 1957, and primarily
develops subdivisions with single family dwellings. WLM Properties is akin to a long-term
holding company. Westside Lumber, an S corporation, was a retail lumber yard that closed its
doors in 2007 and officially dissolved in 2016.
The issues in this case are (1) the basis of Plaintiffs’ real property located in Medford,
Oregon, which Noel purchased in 2006 and sold in 2016 and (2) whether Plaintiffs are allowed a
deduction for bad debt in tax year 2016. The issues are relatively simple and straightforward,
which belies their factual complexity. Because many of the facts are disputed, the court
combines the Statement of Facts and Analysis, traditionally separate sections, focusing on each
transaction separately.
A. General Statements of the Law
In analyzing Oregon income tax cases, the court starts with several guiding principles.
First, the court is guided by the intent of the legislature to make Oregon’s personal income tax
identical in effect to the federal Internal Revenue Code (IRC), for the purpose of determining
taxable income of individuals. See ORS 316.007. 2 Second, in cases before the court, the party
seeking affirmative relief bears the burden of proof and must establish their case by a
2 References to the Oregon Revised Statutes (ORS) are to the 2015 version.

DECISION TC-MD 210331R 3
“preponderance” of the evidence. ORS 305.427. Third, 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 L Ed 2d 226 (1992). Fourth, IRC section 162 generally allows a deduction for
“ordinary and necessary expenses paid or incurred during the taxable year in carrying on any
trade or business[.]” See IRC § 162(a). However, a taxpayer is required to maintain records
sufficient to establish the amount of his or her income and deductions. See IRC § 6001; Treas
Reg § 1.6001–1(a).
IRC section 1001(a) states, in pertinent part, that “[t]he gain from the sale or other
disposition of property shall be the excess of the amount realized therefrom over the adjusted
basis provided in section 1011 for determining gain * * *.” Under IRC section 1011(a), “[t]he
adjusted basis for determining gain or loss from the sale or other disposition of property,
whenever acquired, shall be the basis” determined under sections 1012 and 1016. “The basis of
property shall be the cost of such property * * *.” IRC § 1012. “Proper adjustment in respect of
the property shall in all cases be made -- (1) for expenditures, receipts, losses or other items,
properly chargeable to capital account * * *.” IRC § 1016(a).
B. Basis of Plaintiffs’ Property
The first issue before the court is Plaintiffs’ basis in the property located in Medford,
Oregon, nicknamed “Earnest Place” by the parties and also referred to by the name of the street it
is located on, Hondeleau. A threshold issue in determining Plaintiffs’ gain is first determining
Plaintiffs’ basis in the property. See generally IRC § 1011. The parties agree that Earnest Place
sold on June 16, 2016, for $640,000, and that proceeds minus closing costs were allocated to
Noel. However, the parties dispute Plaintiffs’ basis in that property.

DECISION TC-MD 210331R 4
In 2005, the owner of Earnest Place died with two heirs, Lawrence and John Hinkle, who
each anticipated receiving a 50 percent share of the property. Noel, a long-time family friend,
signed an agreement to purchase the property (“Agreement of Sale”) in January 2006. (See Ex
1.) The agreement stated the price of the property was to be determined by appraisal, but the
parties believed it would be approximately $1,150,000. (Ex 1 at 1.) The agreement required
Noel to pay upon execution of the agreement, $100,000, which was “an undivided 8.7% of their
expectancy in the property[.]” (See id.) The agreement further stated: “Portions of the proceeds
of the $100,000 to be paid by Buyer [Noel] will be earmarked for and applied to payment of all
real estate taxes due and any other encumbrances on the subject property.” (Id.)
Noel testified that, in purchasing the property, his goal was to develop the property,
create a subdivision, and build a number of single-family residences. His plans were disrupted
by the 2007-08 recession, which forced him to delay the development of Earnest Place for many
years. Noel testified that, during that period, WLM Construction and WLM Properties expended
multiple sums towards the future development of Earnest Place. Plaintiffs assert that a number
of payments made by various entities to the Hinkle brothers, government agencies, and
contractors, are all part of Noel’s basis in the property. Plaintiffs offered the following expenses
at trial to account for their cost basis:
Costs Check Number Date Amount
Larry Hinkle (1/2 to John) 204 01/13/06 $50,000
Rich Frohreich Appraisal 213 02/13/06 $2,000
Larry Hinkle (1/2 to John) 216 03/21/06 $50,000
Lawyers Title (FBO Larry Hinkle) 4104 05/02/07 $243,422.12
John Hinkle 5220 03/21/16 $40,000
WLM Properties 5250 06/17/16 $250,000
Seller’s Closing Costs (Net) N/A N/A $1,362
Total Costs $636,784.12
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DECISION TC-MD 210331R 5
(See Ex 40; see also Exs 2, 3, 4, 9, 35, 38 at 1, 39.) The court addresses each of the expenses
separately:
1. Check dated January 13, 2006, to Larry Hinkle
Plaintiffs’ first item is a check in the amount of $50,000, which references “payment on
2005 Hondeleau” in the memo section. The check date is contemporaneous with the Agreement
of Sale, dated January 2006, and is consistent with Noel’s testimony. (See Ex 1.) Although
Defendant’s Conference Decision Letter did not include this amount as part of the basis of the
Earnest Place property, at trial, Defendant accepted this item. (See Ex E at 1.) The court is
persuaded that this check represented part of the basis for Noel’s purchase of Earnest Place.
2. Check dated February 13, 2006, to Rich Frohreich
Plaintiffs’ second item is a check in the amount of $2,000, which references “app of 2005
Hondeleau” in the memo section. (Ex 4.) The check date is contemporaneous with the
Agreement of Sale, which specifically contemplates that the “sale price of the property will be
determined by appraisal.” (Ex 1 at 1.) Defendant asserted that no appraisal was actually
provided as evidence. However, the court is persuaded that this check represented the cost to
appraise Earnest Place and should be included as part of the basis for Noel’s purchase of the
property.
3. Check dated March 21, 2006, to Larry Hinkle
Plaintiffs’ third item is a check in the amount of $50,000, which references “Hondeleau”
in the memo section. The check is relatively contemporaneous with the Agreement of Sale.
Although the Conference Decision did not include this amount as part of the basis, Defendant
accepted this item at trial. (Ex E at 1.) The court is persuaded that this check represented part of
the basis for Noel’s purchase of the property.

DECISION TC-MD 210331R 6
4. Check dated May 2, 2007, to Lawyers Title
Plaintiffs’ fourth item is a check in the amount of $243,422.17, which references
“46G0470026SC” in the memo section. (See Exs 9, 10.) Noel testified that Larry Hinkle wanted
to purchase a property in Shady Cove, Oregon, but lacked the funds to do so. He testified that
instead of paying Larry Hinkle funds from the purchase of Earnest Place, Noel took a 50 percent
interest in the Shady Cove property. The statutory warranty deed states: “The true consideration
for this conveyance is $230,000” and has a hand-written notation “46G0470026SC.” (See Ex
10.) Bret testified that the difference between the check and the amount stated on the deed
($13,422.17) probably represented the closing costs, although no closing statement was
provided.
The deed also states: “The consideration paid herein has been paid by an Accommodator
pursuant to an IRC 1031 Exchange.” (Id.) Bret testified that he interpreted that language to
mean that the seller was doing a 1031 exchange. Candidly, the court does not follow the logic of
this transaction. The court cannot ascertain why Noel, a professional builder, who is purchasing
a property from the Hinkle brothers, would “loan” money to Larry Hinkle and take a 50 percent
interest in another property. Additionally, Bret’s testimony that the $13,422.17 difference
between the check and the amount recited in the deed represented closing costs is not persuasive.
Lastly, Bret’s testimony with respect to the seller conducting a 1031 exchange is directly
contrary to what the document shows on its face. The document reads, “[t]he consideration
paid” —by the payee— “has been paid by an Accommodator pursuant to an IRC 1031
Exchange.” There are only two realistic possibilities here: either (1) the purchasers paid for the
property using proceeds from the sale of another property (1031 exchange) or (2) there is an
/ / /

DECISION TC-MD 210331R 7
error in the deed. In either case, the court finds Plaintiffs have not presented persuasive evidence
that the $243,422.17 check represents part of the basis for the Earnest Place property.
5. Check dated March 21, 2016, to John Hinkle
Plaintiffs’ fifth item is check number 5220, payable to John Hinkle, dated March 21,
2016, in the sum of $40,000. (See Ex 35.) The check notes in the memo section, “Hinkle Down
Payment[,]” and that notation matches a line item in a closing statement dated May 12, 2016.
(See Ex 36.) Defendant did not contest this item at trial. The court is persuaded that this check
is part of the Plaintiffs’ basis in the Earnest Place property.
6. Check dated June 17, 2016, to WLM Properties
Plaintiffs’ sixth item is check number 5250, payable from Noel to WLM Properties, dated
June 17, 2016, in the amount of $250,000. (See Ex 39.) Noel and Bret testified that this sum
represented an approximation of the amounts WLM Properties paid to various vendors for
development of Earnest Place and that because the property was never developed, the funds
should be returned.
For this item, Plaintiffs presented a series of documents, including screenshots taken from
QuickBooks, miscellaneous invoices, and miscellaneous check images to various vendors from
various payors (Noel, WLM Construction, and WLM Properties) for various items. Plaintiffs did
not attempt to provide an organized accounting of what payments should be included in their
$250,000 estimate. It appears that the figures they presented during the audit, at conference, and
to the court are all different. (See Exs 40, 120 at 2, 45, 42, 43.) Further, many of the payments
alleged as part of the basis were purportedly from WLM Construction, but the $250,000 is
payable to WLM Properties. The court does not have confidence that those payments were not
taken as deductions during the prior tax years. While the court certainly has authority to estimate

DECISION TC-MD 210331R 8
certain figures under the seminal case of Cohan v. Comm’r, 39 F2d 540 (2d Cir 1930), such
estimation is only possible if there is a basis in the record from which a court can reasonably
apportion the costs from other possible allocations, such as capital contributions to the business
or personal expenses. Vanicek v. Comm’r, 85 TC 731, 743 (1985). With funds being shifted
from one entity to another and without sufficient documentation, missing records, and testimony
from Plaintiffs’ accountant who asserts she is aware of how to account for cost basis, but does
not actually do so, the court has no confidence in Plaintiffs’ records. As this court has stated
numerous times, the court can estimate certain items and amounts, but it declines to do so when
its result would be nearer to a guess than an estimation. See Biege v. Dept. of Rev., TC-MD
180399R, WL 13250372 at *3 (Or Tax M Div November 15, 2019). Here, the evidence is so
incomplete, any additional amount of Plaintiffs’ cost basis would be no more than a guess.
7. Seller’s closing costs
Plaintiffs’ seventh item is a “net” amount of closing costs from the sale of Earnest Place
in the amount of $1,362. (See Exs 38 at 1, 40.) The escrow closing statement dated June 16,
2016, for the sale of Earnest Place shows seller charges in the amount of $1,506.65 and a seller
credit for taxes in the amount of $145.09, for a rounded total of $1,362. Defendant argued for a
different amount; However, Plaintiffs’ testimony together with the closing statement persuades
the court that $1,362 should be included in their cost basis.3
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3 The court seeks to make one additional clarification with respect to Plaintiffs’ basis in Earnest Place.
Plaintiffs’ argument and testimony indicated that they interpreted Defendant’s audit results as an accusation of
dishonesty. The court makes no such finding. Rather, the decision of the court is based on IRC section 6001, which
requires taxpayers to maintain adequate records to show their income and expenses. Here, Plaintiffs have not done
so. Taken at face value, the total amount of checks, receipts, and accounting journal entries submitted to the court
would far exceed the price Noel paid for Earnest Place. The records do not contain sufficient information to show
what the actual basis of the Earnest Place property is.

DECISION TC-MD 210331R 9
C. Bad Debt
The issue is whether Plaintiffs are entitled to take a deduction for bad debt on their 2016
tax return. Frost, Plaintiffs’ bookkeeper and office manager since 2002, testified that one of her
responsibilities included working as Westside Lumber’s accountant. (See Ex 43 at 1.) Frost
used the accrual method of accounting. See IRS Pub 538 at 1 (2022) (“Under the accrual
method, you generally report income in the tax year you earn it, regardless of when payment is
received”). Frost sent out monthly statements of accounts to entities that took merchandise on
credit. However, Plaintiffs did not submit those monthly statements as evidence.
From late 2006 to early 2007, the economy took a downturn and several accounts
receivable were written off as bad debt. Westside Lumber ceased business in 2007; However, it
technically remained operating until 2016 because it still held notes receivable. The largest
uncollected account was Magel Construction’s. Despite Magel Construction’s indebtedness to
Westside Lumber, Noel continued his relationship with the owners of Magel Construction,
including lending them money and maintaining a landlord-tenant relationship with them. Noel
and Bret testified that they hoped by maintaining their relationship with Magel Construction,
they could eventually collect on the amount owed.
Plaintiffs allege that Magel Construction owed Westside Lumber a total of $51,487 when
it closed its doors in 2007. Magel Construction ceased operations in 2009. In 2016, Westside
Lumber officially terminated and deducted Magel Construction’s outstanding balance due as
“bad debt.” On its 2016 tax return, Westside Lumber took a $51,487 loss deduction for Magel
Construction’s outstanding debt. Because the accounting system changed at a certain point,
Frost was unable to retrieve all of the invoices addressed to Magel Construction. As partial
evidence of the amount owed, Plaintiffs presented 16 invoices addressed to Magel Construction.

DECISION TC-MD 210331R 10
IRC section 166(a)(1) allows for the deduction of “any debt which becomes worthless
within the taxable year.” Cases have held that the date a debt becomes worthless should be given
a fair degree of latitude to the taxpayer. See Moore v. Comm’r, 101 F2d 704, 707 (2nd Cir 1939)
(“The real question is not when did the debt become worthless, but when did the taxpayer
ascertain it to be worthless”) (citation omitted). Here, the alleged debts are from 2007 and the
debtor, Magel Construction, closed its business in 2009. Had Plaintiffs taken a deduction for bad
debt closely following Magel Construction’s closure, a good faith basis could arguably be found.
However, the court can find no reasonable justification for Plaintiffs declaring the debt worthless
some seven years after the debtor’s business closed. Therefore, the court finds that the “bad
debt” from Magel Construction did not become worthless within the taxable year, and thus
cannot be deducted in 2016.
II. CONCLUSION
After careful consideration, the court finds that Plaintiffs have substantiated their basis
for the Earnest Place property in the amount of $143,362. The court also finds that Plaintiffs are
not eligible for a deduction for bad debt related to Magel Construction because they waited too
long to take the deduction. Now, therefore,
IT IS THE DECISION OF THIS COURT that Plaintiffs’ appeal is granted in part and
denied in part. Plaintiffs’ basis in the Earnest Place property is $143,362. Defendant shall make
adjustments to the various taxpayer accounts accordingly.
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DECISION TC-MD 210331R 11
IT IS FURTHER DECIDED that Plaintiffs’ appeal is denied with respect to their 2016
deduction for bad debt related to Magel Construction.
Dated this _____ day of March 2023.
RICHARD DAVIS
MAGISTRATE
If you want to appeal this Decision, file a complaint in the Regular Division of
the Oregon Tax Court, by mailing to: 1163 State Street, Salem, OR 97301-2563;
or by hand delivery to: Fourth Floor, 1241 State Street, Salem, OR.
Your complaint must be submitted within 60 days after the date of this Decision
or this Decision cannot be changed. TCR-MD 19 B.
This document was signed by Magistrate Richard Davis and entered on March
30, 2023.