Trotter v. Dept. of Rev.

ORDER DENYING DEFENDANT’S MOTION FOR DISCOVERY AND POSTPONEMENT
OF TRIAL TC-MD 260607N 	1
IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Income Tax
WARREN A. TROTTER
and CAROLYN ASHLOCK,
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Plaintiffs, 	TC-MD 260607N
v.
DEPARTMENT OF REVENUE,
State of Oregon,
ORDER DENYING DEFENDANT’S
MOTION FOR DISCOVERY AND
POSTPONEMENT OF TRIAL	Defendant.
This matter came before the court on Defendant’s Motion for Discovery and
Postponement of Trial (Motion), filed August 12, 2026. Plaintiffs responded to Defendant’s
Motion, and Defendant replied to that response. This matter is ready for determination.
I. BACKGROUND
Plaintiffs filed a Complaint for the 2021 tax year, asserting that Defendant misclassified
their rental property as personal use property. (Compl at 1.) Plaintiffs identify the “only issue
on appeal” as whether Defendant properly disallowed Plaintiffs’ Schedule E expenses. (Ptfs’ Ltr
at 1, Sept 4, 2026.) The only adjustments listed on Defendant’s Notice of Deficiency are 1)
disallowance of Plaintiffs’ Schedule E expenses in the amount of $32,414 because Plaintiffs
“failed to provide any documentation of [their] Schedule E”; and 2) disallowance of Plaintiffs’
passive activity loss carryforward because Plaintiffs’ adjusted gross income exceeded $150,000
after the Schedule E expenses were disallowed. (Id. at Ex 12.) Plaintiffs filed a written
objection with Defendant after receiving the Notice of Deficiency. (See id. at Ex 13.) Defendant
denied Plaintiffs’ written objection, explaining that Plaintiffs’ Schedule E “showed zero fair
rental days” and so no rental expenses could be allowed. (Id.)

ORDER DENYING DEFENDANT’S MOTION FOR DISCOVERY AND POSTPONEMENT
OF TRIAL TC-MD 260607N 	2
In its Motion, Defendant asks for imposition of Regular Division discovery rules, Tax
Court Rules (TCR) 36 to 46, and an order postponing the trial date set for this matter. (See Def’s
Mot at 1.) Defendant seeks to discover Plaintiffs’ “2021 financial statements” from the
following types of accounts: business, personal, checking, savings, joint, individual, bank,
investment, and third-party payment processors, such as Apple Pay, PayPal, Venmo, Zelle, etc.
(Id.) Defendant gives two reasons for the request. First, Defendant “performs a Bank Deposit
Analysis (BDA) on every audit classified as a ‘business’ audit - this means Schedules C, E, and
F. The Department uses the BDA to verify the amount of income reported on the tax return.”
(Id. at 1.) Defendant is looking for unreported income. (Id. at 2.) Second, Defendant claims it
needs these financial statements to substantiate proof of payment for Schedule E deductions:
mortgage interest, depreciation, and other expenses. (Id.) Although Defendant received
Plaintiffs’ Form 1098 for mortgage interest paid and copies of Plaintiffs’ checks to Marion
County Tax Collection and Mountain View Tree Service, Defendant wants to confirm Plaintiffs
made the payments and “need[s] to verify these checks cleared the bank account and were not
returned for non-sufficient funds (NSF).”1 (Id.) Defendant requested that information in its
Audit Appointment letter dated November 8, 2024. (Id.)
Plaintiffs object to Defendant’s Motion as “overbroad, irrelevant, disproportionate, and
untimely.” (Ptfs’ Ltr at 1, Sept 4, 2026.) Plaintiffs assert that they have already produced all
documents that exist relevant to the disallowed Schedule E expenses. (Id. at 4-5, Exs 1-7.)
Defendant’s request for all of Plaintiffs’ financial statements from every type of account “is not
tied to Schedule E rental income” and a BDA is not used to “verify rental expenses.” (Id. at 3.)
1 Plaintiffs attached their already-produced documents relating to their Schedule E rental expenses to their
response: a Form 1098 for mortgage interest; a Schedule 4562 for depreciation; and a check and invoices marked as
paid for the tree cleanup. (Ptfs’ Ltr at Exs 1-7, Sept 4, 2026.)

ORDER DENYING DEFENDANT’S MOTION FOR DISCOVERY AND POSTPONEMENT
OF TRIAL TC-MD 260607N 	3
Defendant replies that “[a]n audit issue for the 2021 tax period is income verification, set
in the original scope of the audit with the request for bank & financial statements.” (Def’s Reply
at 4.) Defendant “requests bank statements for the 2021 tax period” to “ascertain[] the
correctness of the income reported on [] Plaintiffs’ return[.]” (Id.) Regarding expenses,
Defendant reiterates that it needs to “verify[] the taxpayer was the one who paid the expense”
and “verify[] the amount of the transaction paid through bank and/or credit card statements.”
(Id.) Defendant cites its statutory authority to examine books, records, or persons and its
subpoena power to exercise that authority. (Id. at 4-6.) Defendant asserts that it “is within [its]
lawful rights to request bank and financial statements to ascertain the correctness of [] Plaintiffs’
2021 personal income tax return.” (Id. at 6-7.) Finally, Defendant notes that it must resolve
“[a]ll potential issues with the 2021 personal income tax return” during this appeal because “the
court will not accept motions for reconsideration or to reopen the record[.]” (Id. at 5.)
II. ANALYSIS
The issue presented is whether to grant Defendant’s Motion. In the Magistrate Division,
“[a] party must make available for copying or furnish a legible physical or electronic copy of any
relevant documents requested in writing by another party.” Tax Court Rule-Magistrate Division
(TCR-MD) 9 A. “If a party is unable to obtain discoverable items within a reasonable time after
requesting them in writing from another party, the moving party may request an order from the
court compelling the production of those items.” TCR-MD 9 B(1). In a motion to compel, “the
moving party must specify the items it seeks to discover, provide reasons for the request, and
detail its prior attempt to obtain the requested items.” Id. The court construes Defendant’s
Motion as a motion to compel production of Plaintiffs’ 2021 financial statements. The court
considers Defendant’s reasons for the request and Plaintiffs’ objections.

ORDER DENYING DEFENDANT’S MOTION FOR DISCOVERY AND POSTPONEMENT
OF TRIAL TC-MD 260607N 	4
A. 	Defendant’s Request to Conduct a Bank Deposit Analysis and Verify Income
Defendant’s first reason for its request is to conduct a bank deposit analysis and verify
Plaintiffs’ income. Plaintiffs object to that request as beyond the scope of the issue on appeal,
which is Plaintiffs’ 2021 rental expenses. Defendant maintains that “income verification” was an
audit issue and is now an issue on appeal.
Defendant correctly describes its statutory authority to examine books, records, and
persons as part of its audit function, as well as its subpoena power to achieve that examination.
ORS 314.425;2 see also Olympia Brewing v. Dept. of Rev., 7 OTR 301 (1977) (stating that ORS
314.425 “gives support to the department’s auditor when he needs additional information” to
complete the audit and “prepare[] his notice of proposed assessment”); see also Vesta Corp. v.
Dept. of Rev., TC 5253, 2018 WL 1183761 at *4 (Or Tax, Mar 6, 2018) (finding ORS 314.425 as
context to determine the meaning of the terms “audit” and “examination”). Defendant requested
Plaintiffs’ 2021 financial statements during its audit of Plaintiffs 2021 tax return, and Plaintiffs
evidently did not respond. (See Def’s Mot at 6-10 (Def’s November 8, 2024, audit letter).) The
court received no evidence that Defendant issued a subpoena to obtain Plaintiffs’ 2021 financial
statements during the audit. Defendant’s Notice of Deficiency, issued March 11, 2025, states
that Plaintiffs “did not respond to [Defendant’s] letters requesting information” and so denied
Plaintiffs’ Schedule E expenses.” (Ptfs’ Ltr at Ex 12, Sept 4, 2026.) Defendant’s Written
Objection Determination upheld that denial based on reported fair rental days. (Id. at Ex 13.)
The question before the court is whether Plaintiffs’ 2021 financial statements are relevant
discovery, not whether Defendant could have obtained those documents during audit. To answer
that question, the court must identify the issue or issues on appeal. Notwithstanding Defendant’s
2 The court’s references to the Oregon Revised Statutes (ORS) are to 2019.

ORDER DENYING DEFENDANT’S MOTION FOR DISCOVERY AND POSTPONEMENT
OF TRIAL TC-MD 260607N 	5
request for financial statements in its initial audit letter, the only items that Defendant adjusted in
its Notice of Deficiency were Plaintiffs’ rental expenses and passive activity loss carryforward.
Those are the adjustments challenged in Plaintiffs’ Complaint, and they form the issues on
appeal.3
Defendant correctly notes that it must raise all issues relating to the 2021 tax year during
this appeal or risk losing the opportunity to subsequently raise new issues for the 2021 tax year.
See U.S. Bancorp v. Dept. of Rev., 15 OTR 13, 15 (1999) (explaining that Oregon income taxes
are imposed on an annual basis so “each year is the origin of a new liability and of a separate
cause of action”).4 Once a tax year has been placed before the court, the parties must “raise all
issues and defenses in connection with that claim so that the claim may be finally resolved.”
This court “has jurisdiction to determine the correct amount of the deficiency, even if the amount
so determined is greater or less than the amount of the assessment determined by the Department
of Revenue, and even if determined upon grounds other or different from those asserted by the
department * * *.” ORS 305.575. If Defendant makes a claim on other or different grounds
under ORS 305.575, Plaintiffs are afforded additional time of not less than 10 days to respond.
Id. A claim raised under ORS 305.575 need not have been asserted in the notice of deficiency.
Capital One Auto Finance v. Dept. of Rev., 363 Or 441, 450-51, 423 P3d 80 (2018).
The question becomes whether Defendant’s request to verify income using a bank deposit
3 In a related context of appeals from the Magistrate Division to the Regular Division of this court, the
Oregon Supreme Court explained that the tax court’s “independent” and “de novo” review under ORS 305.425(1)
“does not define the scope of the issues before the tax court when a party appeals from only part of a magistrate’s
decision.” Work v. Dept. of Rev., 363 Or 745, 754, 429 P3d 375 (2018). Thus, the complaint initially defines the
scope of the appeal, subject to any permissible cross-appeals or counterclaims. See id. at 758 n 10.
4 See also Chevron v. Dept. of Rev., TC 5461, 2026 WL 45065 at *4 (Or Tax, Jan 6, 2026) (explaining that
a single notice of assessment is issued for the annual tax period, treating a single tax year and notice as one claim).

ORDER DENYING DEFENDANT’S MOTION FOR DISCOVERY AND POSTPONEMENT
OF TRIAL TC-MD 260607N 	6
analysis is a claim under ORS 305.575.5 The court concludes that it is not. The bank deposit
analysis is an audit technique and one of several “indirect methods” of detecting unreported
income. Brenner v. Dept. of Rev., 9 OTR 299, 302 n 2 (1983). Such techniques are not
generally employed in a “typical examination” but rather when “books and records are
unavailable for any reason[] or are obviously incomplete or inaccurate.” Id. They are used due
to “suspicions raised by recurring or large business losses, unrealistically low income for the
nature of the business, informants’ tips as to omitted income, raw bank deposits greatly in excess
of reported gross receipts, or a living style inconsistent with reported income * * *.” Id.6 Here,
Plaintiffs reported no 2021 income associated with their rental property and Defendant has not
expressly challenged Plaintiffs’ reported rental income or articulated suspicions related to its
accuracy.
The court concludes that Defendant has not demonstrated the relevance of Plaintiffs’
2021 financial statements to the issues on appeal: whether Plaintiffs’ 2021 rental expenses and
resulting rental loss should be allowed. Defendant has not claimed that Plaintiffs failed to report
income in 2021 or articulated the basis for a suspicion of unreported income.
B. 	Defendant’s Request to Verify Expenses
As a second basis for its request, Defendant claims it needs to confirm that Plaintiffs
made the payments at issue and “need[s] to verify these checks cleared the bank account and
5 As assertion of unreported income could be a claim under ORS 305.575. See, e.g., Scott v. Dept. of Rev.,
TC-MD 120706N, 2013 WL 3186415 (Or Tax M Div, June 24, 2013) (increasing taxpayer’s Schedule C income
based on evidence of additional income presented at trial).
6 A bank deposit analysis is typically used and may be persuasive where a taxpayer has failed to keep
adequate books and records or there is evidence of a “fraudulent pattern of understatement of income * * *.” Estate
of Granat v. Comm’r, 19 TCM (CCH) 918 (1960), aff’d sub nom. Granat’s Est. v. Comm’r, 298 F2d 397 (2d Cir
1962); see also Kahl v. Dept. of Rev., TC-MD 230011R, 2026 WL 1948534 at *5 (Or Tax M Div, July 2, 2026) (a
bank deposit analysis may be used “[w]hen a taxpayer’s records are inadequate or do not clearly reflect income”);
see also Lamka v. Dept. of Rev., TC-MD 170263G, 2018 WL 1733432 at *3 (Or Tax M Div, Apr 10, 2018)
(discussing circumstances when bank deposit analysis is typically employed).

ORDER DENYING DEFENDANT’S MOTION FOR DISCOVERY AND POSTPONEMENT
OF TRIAL TC-MD 260607N 	7
were not returned for non-sufficient funds (NSF).” (Def’s Mot at 2.) Plaintiffs respond that they
have produced all relevant documents to support their claimed expenses, including Form 1098
reporting mortgage interest received; a cashed check with corresponding invoices marked as paid
in 2021 from a tree service; and a depreciation schedule.7 (Ptfs’ Ltr at Exs 1-8, Sept 4, 2026.)
The documents provided identify Plaintiffs as the payor and include both the property address
and the amount paid. (See id.) Those documents are sufficient to establish the date, amount,
purpose, and payor associated with Plaintiffs’ claimed Schedule E expenses and it is unclear
what additional relevant information bank statements would reveal.
C. 	Defendant’s Remaining Requests
Defendant asks the court to apply Regular Division discovery rules. TCR-MD 9 A states:
“The Regular Division discovery rules, TCR 36 through TCR 46, will apply only when the court
so orders.” The court finds that the Magistrate Division discovery rule is adequate in this case
and declines to adopt the Regular Division discovery rules. Defendant also asks the court to
postpone the trial date set for this matter. However, no trial date has yet been set. Therefore,
this request is also denied.
III. CONCLUSION
The court denies Defendant’s motion to compel production of Plaintiffs’ 2021 financial
statements because Defendant has not adequately explained their relevance to the issues on
appeal. The court declines to adopt Regular Division discovery rules TCR 36 to 46. The court
cannot set over the trial date, because no trial date has been set. Now, therefore,
/ / /
7 Plaintiffs also provided a check to the county tax collector but stated that property taxes were not claimed
as an expense on Schedule E. (Ptfs’ Ltr at 4, Ex 5, Sept 4, 2026.)

ORDER DENYING DEFENDANT’S MOTION FOR DISCOVERY AND POSTPONEMENT
OF TRIAL TC-MD 260607N 	8
IT IS ORDERED that Defendant’s Motion for Discovery and Postponement of Trial is
denied.
IT IS FURTHER ORDERED that a case management conference is set for 9:30 a.m. on
November 17, 2026. Hearing notices will issue separately. The parties are directed to confer
before November 17, 2026, and should be prepared to propose next steps in this case at the case
management conference.
This interim order may not be appealed. Any claim of error in regard to this
order should be raised in an appeal of the Magistrate’s final written decision
when all issues have been resolved. ORS 305.501.
This Order was signed by Presiding Magistrate Allison R. Boomer and entered
on October 19, 2026.