Marek v. Dept. of Rev.

FINAL DECISION TC-MD 170365R (Control) 1
IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
VLASTIC MAREK, )
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Plaintiff, TC-MD 170365R (Control)
v.
DEPARTMENT OF REVENUE,
State of Oregon,
Defendant.
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VLASTIC.COM INC.,
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TC-MD 170366R
Plaintiff,
v.
DEPARTMENT OF REVENUE,
State of Oregon,
FINAL DECISION1	Defendant.
Plaintiffs, Vlastic Marek and Vlastic.com, appealed Defendant’s Notices of Assessment,
dated September 11, 2017, for the 2014 tax year. A consolidated telephone trial was held on
March 28, 2018. Vlastic Marek (Marek) appeared and testified on his own behalf and on behalf
of Vlastic.com Inc., an Oregon S corporation. Nancy Berwick (Berwick) appeared and testified
on behalf of Defendant. Plaintiffs’ Exhibits 1 to 18 were admitted into evidence without
objection. Defendant’s Exhibits A to K were admitted into evidence without objection.
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1 This Final Decision incorporates without change the court’s Decision, entered September 28, 2018. 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).

FINAL DECISION TC-MD 170365R (Control) 2
I. STATEMENT OF FACTS
During the tax year at issue Marek was a self-employed bench carpenter. He did business
as Vlastic Marek Manufacturing (VMM) and also through his wholly owned S corporation,
Vlastic.com Inc. (V.com). In late 2014, Marek discontinued working in Oregon, dissolved
V.com, and moved to Alaska. There, he formed an Alaska corporation called RF Design.
A. Personal Tax Return
Marek testified that he rented a property containing a barn for work and also resided there
in his van. He testified that he paid $8,000 in rent during the tax year at issue and allocated all of
the expense to his business. He testified that he did not have a written rental contract, did not
keep receipts, and his bank accounts do not show amounts taken in cash to pay rent. Marek
testified that he owned two motor vehicles in 2014: a Chevrolet truck and a Ford van. Marek
testified that he used his gasoline truck exclusively for work and his diesel van exclusively for
personal use. Marek deducted $3,061 for car and truck expenses. (Ptfs’ Ex 3 at 5.) He testified
he did not keep contemporaneous records of his travel. He computed the car and truck deduction
in two ways. First, he took addresses from his business receipts and calculated mileage from
work to the location using a map program. (Ptfs’ Exs 7, 11.) Second, he calculated actual
vehicle expenses by gathering receipts for gasoline, auto parts, and repairs. (Ptfs’ Ex 16.)
Receipts were hand-marked as “V.M.M.” for Vlastic Marek Manufacturing or “S-Corp” for
Vlastic.com, Inc. Some of the receipts for fuel included in his exhibits were for diesel.
Marek deducted $40,466 in “other expenses.” (Ptfs’ Ex 3 at 5.) At audit Defendant
allowed $15,347 and disallowed $25,120. (Ptfs’ Ex 2 at 5.) Marek testified that the disallowed
expenses consisted of four payments from VMM to V.com, totaling $25,120, representing
finished products Marek created and sold to the corporation. (Ptfs’ Ex. 8.)

FINAL DECISION TC-MD 170365R (Control) 3
B. Corporate Tax Return
V.com deducted $22,219 in purchases representing Cost of Goods Sold (COGS), of
which $3,475 were allowed at audit and $18,744 were disallowed. (Ptfs’ Ex 4 at 1; Def’s
Ex B at 2.) The disallowed amounts consisted of a $6,800 payment to RF Design, car and truck
expense of $2,633, rent in the amount of $8,000, and utilities in the amount of $1,312.
(Def’s Ex 1 at 5.) V.com also took “other deductions” in the amount of $7,551. Id. Marek
testified that V.com paid RF Design for his services “winding down” V.com. The payment was
dated December 28, 2014, and deposited in the RF Design bank account in Alaska in January
2015. (Ptfs’ Ex 10 at 2; Def’s Ex E at 16.) Marek took a deduction for the payment from V.com
in 2014 and declared income to RF Design in Alaska for the same amount in 2015. (Def’s Ex E
at 17.) Marek took the remaining funds from V.com, consisting of $7,551, paid himself, and
took a corporate deduction.
II. ANALYSIS
The issue in this case is whether Plaintiffs adequately substantiated business expenses.
Because of Marek’s accounting methodology, he argues the deductions impacted his gross
income even though that category was not adjusted by the audit. The court will analyze each
deduction category separately and then address the issue of adjustments to gross income.
In analyzing Oregon income tax cases, the court starts with several general guidelines.
First, the court is guided by the intent of the legislature to make Oregon's personal income tax
law identical in effect to the federal Internal Revenue Code (IRC) for the purpose of determining
taxable income of individuals. ORS 316.007.2 Second, in cases before the court, the party
seeking affirmative relief bears the burden of proof and must establish his or her case by a
2 The court’s references to the Oregon Revised Statutes (ORS) are to 2013.

FINAL DECISION TC-MD 170365R (Control) 4
“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).
The IRC allows a deduction for “ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business[.]” IRC § 162(a). Taxpayers are not
allowed a deduction for personal, living, or family expenses except where specifically allowed in
the Code. IRC § 262(a). A taxpayer is required to maintain records sufficient to establish the
amount of his or her income and deductions. IRC § 6001; Treas Reg § 1.6001–1(a).
A. Marek’s Car and Truck Expenses
Marek deducted $3,061 as business car and truck expenses. At audit, Defendant
disallowed all the expenses due for failure to substantiate the business nature of the travel miles
and costs associated with them.
Generally, where a taxpayer establishes entitlement to a deduction but does not establish
the amount of the deduction, the court is allowed to estimate the amount. See, Cohan v. Comm'r,
39 F2d 540, 543-44 (2nd Cir 1930). However, IRC section 274(d) overrules the rule in Cohan
and provides that no deduction is allowable under IRC section162 for any traveling expenses
unless the taxpayer complies with strict substantiation rules. IRC § 274(d)(1), (4). A taxpayer
must substantiate the amount, time, place, and business purpose of the expenses by adequate
records or by sufficient evidence corroborating his or her own statement. IRC § 274(d)(4); Treas
Reg § 1.274–5T(b)(2), (c) (2010); Duncan v. Comm'r, 80 TCM (CCH) 283 (2000), 2000 WL
1204820 at *3.
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FINAL DECISION TC-MD 170365R (Control) 5
Marek did not keep a contemporaneous log of his business travel. He argues that it is
obvious that he traveled for work and, thus, the court should accept his mileage log, or accept the
actual costs based on the fuel and maintenance receipts he provided, or the court could estimate
the mileage. However, there are problems with the reliability of the recreated travel log. First,
the log lists only dates, business names, and mileage. There was no supporting documentation
such as a calendar, notes, or even receipts. (Ptfs’ Ex 7.) As Berwick pointed out at trial, on days
where Marek has multiple receipts from different stores for product purchases he calculated
mileage to each location separately from his business. For multiple trips on the same day, it
would seem logical that Marek would combine some or all of those trips. However, since he
kept no records, it is merely speculation on his part that none of the trips were made together.
Berwick also noted that on some of the receipts Marek provided during the audit to support his
mileage, the products were actually shipped by Fed Ex Ground and UPS Ground. (Ptf’s Ex. K
at 1, 2 and 5.) Such are the problems with attempting to recreate mileage logs years after the
fact. Additionally, gas receipts are copied together and contain handwritten notations that they
apply either to VMM or V.com. No explanation was provided on how the distinction was made.
Some receipts are for diesel even though Marek testified his work vehicle used regular unleaded
gas. Marek cites to the case of Spier v. Dept. of Rev., TC-MD 160262R, (Or Tax M Div July 18,
2017) for the proposition that “logs [which] contain small errors and irregularities” can still be
found “generally reliable.” (Ptfs’ Ex 18 at 8.) However, in Spier the court found that Plaintiffs
had kept contemporaneous travel logs, albeit with some discrepancies. In this case, no such
contemporaneous logs were made. If the court tried to make a calculation of Marek’s mileage or
expenses, it would be no more than a guess. Therefore, Marek’s deduction for mileage expense
must be denied for lack of substantiation.

FINAL DECISION TC-MD 170365R (Control) 6
B. Marek’s Other Expenses
Defendant denied a deduction in the amount of $25,120 for payments from VMM to
V. Com. This transaction was never really explained by Marek at trial and the tax returns do not
provide any further clarity. Marek seems to have deducted that amount as part of his COGS for
VMM and then he deducted the product costs and his labor to V.com; effectively doubling the
expense. Marek is billing his S corporation for his own labor and then deducting the payment as
a COGS. Because his S corporation is a passthrough entity, that expense, if allowed, would
create income for him that would effectively offset the expense. The court does not find this to
be a proper deduction.
C. V.com’s COGS
V.com deducted $22,219 in purchases representing COGS, of which $3,475 were
allowed at audit and $18,744 were disallowed. Of the amounts disallowed, Marek takes issue
with the payment to RF Design in the amount of $6,800, car and truck expense of $2,633, rent in
the amount of $8,000, and other deductions in the amount of $7,551.
1. Payment from V.com to RF Designs
RF Designs is a corporation wholly owned by Marek. Market testified that the payment
made at the end of 2014 was for “services” he performed in winding down V.com. Like the
transaction analyzed above, Marek is, in essence, paying himself for his own services and
deducting that payment as an expense from his S corporation. Further, that payment was made at
year end which reduced his Oregon tax obligation, and then he deposited the same amount into
an Alaska account a few days later, which was in the next tax year. The court challenged Marek
at trial to explain how that transaction is not merely transferring taxable obligations from Oregon
to Alaska. Marek offered no defense or explanation. The court finds that this is not an ordinary

FINAL DECISION TC-MD 170365R (Control) 7
and necessary business expense. Thus, the deduction is denied.
2. V.com Car and Truck Expense
As explained above, Marek kept no contemporaneous records or logs of his business
travel expenses and his recreated log is not reliable. Further, V.com does not own any vehicles
and Marek did not present evidence as to why some mileage was allocated to VMM and some to
V.com. That deduction is denied for lack of substantiation.
3. V.com Rent
Business rent is typically an allowable expense under IRC 162. Marek testified that he
incurred $8,000 for renting a barn at the location where he also resided. However, Marek had no
written rental agreement, and testified he paid rent in cash but obtained no receipts for payments.
Further, Marek’s bank accounts do not show cash withdrawals to track a source of payments.
Other than Marek’s testimony, he presented no tangible evidence of rent as a business expense.
Therefore, the deduction must be denied.
4. V.com Other Deductions
V.com deducted $7,551 which he remitted to himself representing the remaining balance
in the corporation bank accounts upon dissolution. That amount could be a dividend or a capital
gain in excess of contribution; it is impossible to tell from the testimony or documents presented.
However, clearly that payment from an S corporation to its sole shareholder is not a deductible
business expense.
D. Duplication of Gross Receipts
Marek argues that if transactions where he essentially paid himself from VMM to V.com
were denied as deductions, then his gross receipts should be reduced, to avoid being taxed twice
on the same income. Berwick testified that she agreed with that argument, in principle, however,

FINAL DECISION TC-MD 170365R (Control) 8
she lacked information necessary to make those adjustments. She testified that Marek did not
provide all his business and personal bank account statements that she requested. She also stated
that gross income was not included in the audit and Marek did not provide evidence of what
amounts he included in gross receipts.
At trial, Marek did not provide copies of all his personal and business bank accounts,
therefore, the court also lacks some information about his gross income. However, Marek did
present copies of the bank accounts involved and the checks. Although much of Marek’s
accounting and tax returns contain errors, he has provided sufficient evidence to meet his burden
of proof that he made payments to V.com from which he attributed gross income. Defendant did
not present evidence to rebut Marek’s assertion that V.com’s gross receipts should be reversed to
match the deductions that were disallowed. Because those payments were denied as deductions
on his personal return, they should also not be counted as gross receipts for his corporation.
III. CONCLUSION
After careful consideration, the court concludes that Plaintiffs have failed to meet their
burden of proof with respect to deductions, but have shown that the gross receipts for
Vlastic.com should be reduced by $25,120. Now, therefore,
IT IS THE DECISION OF THIS COURT that Plaintiffs’ appeals are allowed in part:
Plaintiff, Vlastic.com’s gross receipts should be reduced by $25,120 and its tax obligation
recalculated.
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FINAL DECISION TC-MD 170365R (Control) 9
IT IS FURTHER DECIDED that Plaintiffs’ appeal for the deductions denied during the
audit is denied.
Dated this day of October 2018.
RICHARD DAVIS
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 signed by Magistrate Richard Davis and entered on
October 16, 2018.