Medford v. Dept. of Rev.

IN THE OREGON TAX COURT MAGISTRATE DIVISION Income Tax REGGIE B. MEDFORD, ) and SALLY MEDFORD, ) ) Plaintiffs, ) TC-MD 240188R ) v. ) ) DEPARTMENT OF REVENUE, ) State of Oregon, ) ) Defendant. ) DECISION Plaintiffs appealed Defendant’s Written Objection Determination and Notice of Assessment, dated January 8, 2024, for the 2019 tax year. Defendant determined that Plaintiffs’ horse boarding activity was not operated with a profit motive. As a result, Defendant counted their gross receipts as ordinary income and denied their Schedule C deductions under Internal Revenue Code (IRC) section 183, commonly referred to as the hobby loss rules. The court disagrees with Defendant’s determination and finds that Plaintiffs’ activity was operated with a profit motive. Trial was held on September 12, 2024, in the courtroom of the Oregon Tax Court. Attorney James Oberholtzer appeared on behalf of Plaintiffs. Sally Medford (Sally) and Reggie B. Medford (Reggie) testified on their own behalf. Marla Santino and Jeanne Gettman also testified on behalf of Plaintiffs. Jennifer O’Brien appeared on behalf of Defendant. Plaintiffs’ Exhibits 1 to 76 and Defendant’s Exhibits A to Z were received into evidence. I. STATEMENT OF FACTS In 2013, Plaintiffs purchased a 16-acrea property in Woodburn, Oregon, which included a residence, a small barn, and an indoor riding area. Although they did not own horses at the time, DECISION TC-MD 240188R 1 both had equestrian experience in their youth. The property exceeded their original budget and size expectations, prompting them to explore several income-generating agricultural ventures. They considered hazelnut farming and goat breeding but ultimately found these alternatives impractical due to poor soil quality issues and irrigation limitations. Plaintiffs chose to start a full-service horse boarding business that managed all aspects of horse care. They relied on advice from a friend, Cheryl Ledford, an experienced horse boarder, and also conducted online research. The facility began with a four-stall barn, which they expanded to include 14 new stalls, and an old goat barn which they repurposed, resulting in 23 stalls by 2018, including stalls for their own horses. (Ptfs’ Ex 15 to 18, 42 to 55, 59.) The business launched a website in 2013 to market their services, but they also relied on word-of-mouth to attract clients. (Ptfs’ Ex 20.) Plaintiffs entered into boarding contracts and liability waivers (Ptfs’ Ex 21, 22), maintained horse rosters and stall assignments (Ptfs’ Ex 24), tracked veterinary care, and kept handwritten income and expense ledgers (Ptfs’ Ex 25 to 27). They filed Articles of Organization for French Prairie Acres LLC (Ptfs’ Ex 34), carried liability insurance (Ptfs’ Ex 32, 33), and kept records of labor hours and pay for hired help (Ptfs’ Ex 29). A “barn chores checklist” itemized 26 daily tasks (Ptfs’ Ex 30, 31). Plaintiffs reported cumulative business losses from 2013 to 2019 totaling $64,083, with 2014 being the only profitable year. (Def’s Ex D at 9.) However, excluding property holding costs, they had a net positive cash flow of $16,868. Id. Plaintiffs raised boarding fees by approximately $75 per month over a six-year period. (Def’s Ex D at 12.) The operation was largely maintained by Sally working full-time to facilitate the business, with Reggie assisting in facility upgrades and construction on the weekends. /// DECISION TC-MD 240188R 2  Although Plaintiffs lacked a formal written business plan, they modeled aspects of the business after others in the industry and consulted with peers. (Ptfs’ Ex 38.) Defendant challenged their business classifications due to discrepancies between their ledgers and bank records, problems with form 1099 filings, lack of adequate fee structure adjustments, and possible misclassification of employees as independent contractors. (Ptfs’ Ex 5 at 4.) Plaintiffs sold the property in 2023 for $1.3 million, generating a gain of $875,000. Improvements made to the property during their operation likely enhanced its marketability for horse-related use. Sally testified that the buyers of the property owned eight horses, suggesting the facility’s appeal