T.C. Summary Opinion 2014-74

UNITED STATES TAX COURT

LAUREN ELIZABETH MILLER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11018-13S. Filed July 28, 2014.

John Paul Barrie, for petitioner.

Eugene A. Kornel and Rebekah A. Myers, for respondent.

SUMMARY OPINION

GUY, Special Trial Judge: This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the petition was

filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by 1

Unless otherwise indicated, section references are to the Internal Revenue 1

(continued...)
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any other court, and this opinion shall not be treated as precedent for any other

case.

Respondent determined a deficiency of $5,340 in petitioner’s Federal

income tax for 2009 and an accuracy-related penalty of $1,068 pursuant to section

6662(a). Petitioner filed a timely petition for redetermination with the Court

pursuant to section 6213(a). At the time the petition was filed, petitioner resided

in New York.

The issues for decision are whether petitioner is (1) entitled to a deduction

for unreimbursed employee business expenses reported on Schedule A, Itemized

Deductions, and (2) liable for an accuracy-related penalty under section 6662(a). 

Background

Some of the facts have been stipulated and are so found. The stipulation of

facts, the first supplemental stipulation of facts, and the accompanying exhibits are

incorporated herein by this reference. 

(...continued) 1

Code (Code), as amended and in effect for 2009, and Rule references are to the

Tax Court Rules of Practice and Procedure. Monetary amounts are rounded to the

nearest dollar. 
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I. Petitioner’s Employment

BrandingIron Worldwide, Inc. (BIW), is headquartered in Los Angeles,

California, and provides public relations, marketing, and advertising services. In

early 2008 Jorg Wallrabe, BIW’s owner and president, hired petitioner to serve as

the company’s account director in New York City. Petitioner was responsible for

managing existing client accounts, hosting press events, producing style guides,

and assisting clients with product line development and communications. She was

also expected to attempt to recruit new clients. At the time she was hired,

petitioner was BIW’s only employee in New York.

BIW did not have an office space in New York City, and petitioner initially

was required to work out of a client’s showroom. BIW’s relationship with that

client ended shortly after petitioner was hired, and Mr. Wallrabe then asked her to

work from her studio apartment until he could obtain commercial office space.

BIW never obtained its own office space, and petitioner used part of her

apartment as an office throughout 2009. BIW listed petitioner’s apartment address

and telephone number on its Web site as the address and phone number for its

New York office. Petitioner usually worked weekdays between 9 a.m. and 7 p.m.,

but she generally was expected to be available at all times.
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II. Petitioner’s Expenses

A. Petitioner’s Apartment

1. The Layout

Petitioner’s studio apartment was a single room with a total living area of

700 square feet. She provided a sketch of the apartment in which the space is

divided into three equal sections: (1) an entryway, a bathroom, and a kitchen area;

(2) office space, including a desk, two shelving units, a bookcase, and a sofa; and

(3) a bedroom area including a platform bed and dressers. Petitioner had to pass

through the office space to get to the bedroom area. 

2. Use of the Office Space

Petitioner frequently met with BIW clients in the office space, and she

performed work for BIW using a computer on the desk. The bookcase and

shelving units were used to store books, magazines, supplies, and samples related

to petitioner’s work for BIW and its clients. Although she used the office space

primarily for business purposes, she occasionally used the space for personal

purposes. 

3. Apartment Expenses

Petitioner paid rent of $26,200 and cleaning service charges of $1,680

during 2009. She also paid $1,896 to TimeWarner Cable (TimeWarner) for a
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package of services that included cable television, a telephone line, and wireless

Internet access. Petitioner used the cable television exclusively for personal use,

the telephone line exclusively for business purposes, and the wireless Internet

access for both personal and business purposes. Petitioner estimated that

approximately 70% of her wireless Internet use was business related.

B. Transportation and Meals and Entertainment Expenses

Petitioner attempted to recruit new clients for BIW by visiting showrooms,

attending meetings, and taking potential clients to lunch. She normally traveled by

taxi to these meetings.

C. Uniforms

BIW specified the style and color of clothing that employees were expected

to wear to BIW events and productions. Employees were not obliged to display a

BIW logo or similar distinctive marking on their clothing.

During 2009 petitioner purchased three black evening dresses to wear to

BIW events. Although petitioner acknowledged that the dresses were suitable for

personal use, she testified that she wore the dresses only to BIW events because

they did not fall within her “personal aesthetic”.
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D. Cellular Phone

Petitioner paid $992 to Verizon Wireless for cellular phone service from

July through December 2009. She used her cellular phone for both business and

2

personal purposes.

III. BIW’s Reimbursement of Employee Expenses

BIW did not maintain a formal employee expense reimbursement policy. 

Petitioner understood that BIW was struggling financially, that the company’s

business was not growing, particularly in New York, and that she would be

reimbursed only for expenses that BIW could itemize and bill directly to its

clients. The record includes three expense reports that petitioner submitted to

BIW for relatively modest expenditures (e.g., taxi fares and small gifts to clients)

that she made in February, May, and August 2009.

Although petitioner had numerous conversations with Mr. Wallrabe about

the need for a formal office space, he repeatedly assured her that the company was

on the verge of renting commercial space. BIW did not reimburse petitioner for

any of the expenses related to her apartment or her attempts to recruit new clients.

Petitioner’s parents paid her Verizon Wireless charges for the first six 2

months of 2009.
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IV. Petitioner’s Records

A. Original Records

Petitioner testified that she maintained complete and accurate records in

respect of her business expenses for 2009, including meeting logs, receipts and

invoices for various expenditures, and reimbursements from BIW. Petitioner lost

most of her business records when she moved to a new apartment in 2011,

including records of reimbursements that she received from BIW.

B. Spreadsheets

Petitioner produced three spreadsheets that were created in the spring of

2010 in conjunction with the preparation of her 2009 tax return. The first

spreadsheet lists the amounts petitioner paid during 2009 for rent, electric utility

charges, cleaning services, and TimeWarner and Verizon Wireless charges. The

second spreadsheet lists miscellaneous expenditures related to petitioner’s work

for BIW as follows: taxi fares of $545, meals and entertainment expenses of $321,

uniform expenses of $2,093, office supplies of $117, and “R&D” of $31. The

spreadsheet lists the date and amount of each expenditure, but it does not identify

the business purpose for individual expenditures. The third spreadsheet provides a

breakdown of the amounts that petitioner paid to TimeWarner and Verizon

Wireless.
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C. Checking Account Statements

Petitioner’s monthly checking account statements for 2009 show that BIW

normally paid her by wire transfer. A comparison of the amounts that BIW

transferred to petitioner’s account during 2009 and the wages that BIW reported

on Form W-2, Wage and Tax Statement, for that year suggests that BIW did not

reimburse her for many of her employment-related expenses.

 The account statements show that petitioner took numerous taxi trips

around New York City, she occasionally dined out, and she purchased clothing

and office supplies. The account statements corroborate most, if not all, of the

expenses that petitioner reported on her spreadsheets for rent, cleaning services,

and TimeWarner and Verizon Wireless charges.

V. Tax Return

On her timely filed Form 1040, U.S. Individual Income Tax Return,

petitioner reported wage income of $48,680, and she claimed a deduction of

$34,933 on Schedule A for unreimbursed employee business expenses (before the

application of the 2% floor prescribed in section 67(a)). Petitioner attached Form

2106, Employee Business Expenses, to her return listing the following: parking

fees, tolls, and transportation expenses of $553, meals and entertainment expenses
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of $299 (before the application of the 50% limitation prescribed in sec. 274(n)),

and unspecified expenses of $34,230.

VI. Tax Return Preparation

Petitioner provided her tax records, including original receipts and invoices

of her business expenses for 2009, to Michael Letta. Mr. Letta used TurboTax

3

software to prepare and electronically file petitioner’s tax return.

Mr. Letta earned a bachelor’s degree from Ohio State University and is a

certified public accountant. At the time of trial, Mr. Letta was working as the

chief financial officer for Charity Water in New York. He testified that he

reviewed petitioner’s tax records, considered them to be complete and accurate,

and discussed the return with her before filing it. When he learned that many of

petitioner’s original tax records had been lost, Mr. Letta contacted TurboTax in

what turned out to be an unsuccessful attempt to retrieve worksheets that he

completed while preparing the return for electronic filing.

VII. Notice of Deficiency

Respondent disallowed the deduction that petitioner claimed on Schedule A

for unreimbursed employee business expenses on the alternative grounds that she

failed to substantiate the expenses and the expenses were not ordinary and

Petitioner married Mr. Letta in August 2013. 3
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necessary business expenses within the meaning of section 162(a). Respondent

computed petitioner’s tax liability for 2009 after allowing her a standard deduction

of $5,700. 

Discussion

As a general rule, the Commissioner’s determination of a taxpayer’s liability

in a notice of deficiency is presumed correct, and the taxpayer bears the burden of

proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933). As discussed in detail below, petitioner did not comply

with the Code’s substantiation requirements and has not maintained all required

records. Therefore, the burden of proof as to any relevant factual issue does not

shift to respondent under section 7491(a). See sec. 7491(a)(1) and (2); Higbee v.

Commissioner, 116 T.C. 438, 442-443 (2001).

Deductions are a matter of legislative grace, and the taxpayer generally

bears the burden of proving entitlement to any deduction claimed. Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.

v. Helvering, 292 U.S. 435, 440 (1934). A taxpayer must substantiate deductions

claimed by keeping and producing adequate records that enable the Commissioner

to determine the taxpayer’s correct tax liability. Sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir.
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1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965). A taxpayer

claiming a deduction on a Federal income tax return must demonstrate that the

deduction is allowable pursuant to a statutory provision and must further

substantiate that the expense to which the deduction relates has been paid or

incurred. Sec. 6001; Hradesky v. Commissioner, 65 T.C. at 89-90.

When a taxpayer establishes that he or she paid or incurred a deductible

expense but fails to establish the amount of the deduction, the Court normally may

estimate the amount allowable as a deduction. Cohan v. Commissioner, 39 F.2d

540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985). There must be sufficient evidence in the record, however, to permit the

Court to conclude that a deductible expense was paid or incurred in at least the

amount allowed. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).

I. Unreimbursed Employee Business Expenses

Under section 162(a), a deduction is allowed for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or

business. The determination of whether an expenditure satisfies the requirements

for deductibility under section 162 is a question of fact. See Commissioner v.

Heininger, 320 U.S. 467, 475 (1943). The term “trade or business” includes

performing services as an employee. Primuth v. Commissioner, 54 T.C. 374, 377-
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378 (1970). However, expenses for which an employee could claim

reimbursement from his or her employer, but does not, are not ordinary and

necessary expenses. See Podems v. Commissioner, 24 T.C. 21, 22-23 (1955).

A deduction normally is not available for personal, living, or family expenses. 

Sec. 262(a).

Section 274(d) prescribes stringent substantiation requirements to be met

before a taxpayer may deduct certain categories of expenses, including

transportation expenses, meals and entertainment expenditures, and expenses

related to the use of listed property as defined in section 280F(d)(4)(A). See

Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d, 412 F.2d 201 (2d Cir.

1969). As relevant here, the term “listed property” includes, inter alia, cellular

phones. Sec. 280F(d)(4)(A)(v). To satisfy the requirements of section 274(d), a

taxpayer generally must maintain records and documentary evidence which, in

combination, are sufficient to establish the amount, date, and business purpose for

a covered expenditure or business use of listed property. Sec. 1.274-5T(b)(6),

Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). 

Section 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017

(Nov. 6, 1985), provides in relevant part that “adequate records” generally consist

of an account book, a diary, a log, a statement of expense, trip sheets, or a similar
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record made at or near the time of the expenditure or use, along with supporting

documentary evidence. The Court may not use the rule established in Cohan v.

Commissioner, 39 F.2d at 543-544, to estimate expenses covered by section

274(d). Sanford v. Commissioner, 50 T.C. at 827; sec. 1.274-5T(a), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Taxpayers lacking a

contemporaneous log are expected to maintain a record created as near in time as

possible to the particular expenditure or business use (including the elements

outlined above), supported by corroborative documentary evidence that carries

with it a high degree of probative value. Sec. 1.274-5T(c)(1), Temporary Income

Tax Regs., 50 Fed. Reg. 46016-46017 (Nov. 6, 1985).

A. Business Use of Home

A taxpayer generally is not entitled to deduct any expenses related to a

dwelling unit used as a residence during the taxable year. Sec. 280A(a). Expenses

attributable to a home office are excepted from this general rule, however, if the

expenses are allocable to a portion of the dwelling unit which is exclusively used

on a regular basis as the principal place of business for the taxpayer’s trade or

business. Sec. 280A(c)(1); Lofstrom v. Commissioner, 125 T.C. 271, 277-278

(2005). If the taxpayer is an employee, the exception under section 280A(c)(1)
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will apply only if the exclusive use of the office space is for the convenience of the

taxpayer’s employer. Hamacher v. Commissioner, 94 T.C. 348, 353-354 (1990).

BIW listed petitioner’s apartment address on its Web site as the address for

its New York office. Petitioner testified credibly that she regularly used one-third

of her apartment space as an office to conduct BIW business, she met with clients

there, and she was expected to be available to work well into the evening. On this

record, we are persuaded that petitioner’s apartment was her principal place of

business, that she was obliged to use the space as an office for the convenience

and benefit of BIW, and that BIW was not able or willing to reimburse her for any

of her apartment-related expenses (including the TimeWarner charges discussed

below).

Although petitioner admitted that she used portions of the office space for

nonbusiness purposes, we find that her personal use of the space was de minimis

and wholly attributable to the practicalities of living in a studio apartment of such

modest dimensions. See Hughes v. Commissioner, T.C. Memo. 1981-140.

Petitioner paid rent of $26,200 and cleaning service charges of $1,680

during 2009. Consistent with the preceding discussion, we hold that petitioner is

entitled to a deduction of $9,293 for the business use of her apartment (i.e., onethird of her rent and cleaning service charges for the year).
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B. TimeWarner Charges

Petitioner paid $1,896 to TimeWarner for a package of services that

included cable television, a telephone line, and wireless Internet access. Although

the record is not entirely clear as to the precise allocation of the TimeWarner

charges among the three services, there is sufficient evidence in the record to

justify dividing the charges equally among them.

Petitioner admitted that she used the cable television service exclusively for

personal use. Consequently, she is not entitled to deduct the portion of the

TimeWarner charges attributable to cable television. See sec. 262(a).

Petitioner testified credibly that the apartment telephone line was used

exclusively for business purposes. Indeed, BIW listed petitioner’s telephone

number on its Web site as the contact number for its New York office. Under the

circumstances, we conclude that maintaining the telephone line was an ordinary

and necessary business expense. See, e.g., Trescott v. Commissioner, T.C. Memo.

2012-321, at *9.

Section 262(b) provides that any charge for basic local telephone service

with respect to the first telephone line provided to a taxpayer’s residence shall be

treated as a nondeductible personal expense. Although petitioner provided some

information related to the breakdown of the TimeWarner charges for the telephone
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line, the record is silent regarding the exact charge, if any, for local telephone

service. Under the circumstances, we will apply the Cohan rule and estimate the

amount allowable as a deduction. Allocating one-half of the charge for the

4

telephone line to local telephone service, we hold that petitioner is entitled to a

deduction of $316 for the telephone line.

Petitioner testified credibly that she used the wireless Internet service for

both personal and business purposes. She estimated that approximately 70% of

her wireless Internet use was business related. Although petitioner did not offer a

log or other record of her wireless Internet use, we have held that Internet access

expenses are not subject to the strict substantiation requirements of section 274(d). 

See Noz v. Commissioner, T.C. Memo. 2012-272, at *22-*23 (and cases cited

thereat). Considering all the circumstances, we conclude that the cost of wireless

Internet access was an ordinary and necessary business expense and we accept as

reasonable petitioner’s estimate that approximately 70% of her wireless Internet

use was business related. As a result, she is entitled to a deduction of $442 (i.e., 

70% of the TimeWarner charges attributable to that service).

Considering the constant evolution of telecommunications systems and the 4

manner in which consumers pay for various telecommunications services, it may

be that petitioner simply paid a flat rate for the telephone line. Lacking a

definitive breakdown of the charges, however, we will assume that one-half of the

charge for the telephone line is attributable to local phone service.
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C. Electric Utility Charges

Petitioner produced a spreadsheet indicating that she paid $1,176 for

electric utility charges for her apartment during 2009. Although we do not doubt

that petitioner paid electric utility charges, she did not offer any testimony or

additional documentation (such as paid receipts or copies of her electric bills) to

substantiate the expense. Without more, we are unable to apply the Cohan rule to

estimate the amount of a deduction for electric utility charges, and no deduction is

allowed for this item.

D. Meals and Entertainment and Transportation Expenses

Petitioner claimed deductions of $299 and $553 for meals and entertainment

and transportation expenses, respectively. Although petitioner’s bank statements

show that she dined out on occasion and took numerous trips by taxi, deductions

for such expenses are subject to the strict substantiation requirements of section

274(d). Petitioner failed, however, to provide any logs or other records (original

or reconstructed) in support of her testimony that the expenditures had a business

purpose. In the absence of corroborating evidence supporting petitioner’s

statement, respondent’s determination disallowing a deduction for meals and

entertainment and transportation expenses is sustained. 
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E. Cellular Phone Charges

Petitioner paid $992 to Verizon Wireless for cellular phone service during

the second half of 2009. As previously mentioned, cellular phones constitute

listed property under section 280F(d)(4)(A)(v) as in effect during 2009, and,

therefore, cellular phone expenses are subject to the strict substantiation

requirements of section 274(d). Although petitioner admitted that she used her

5

cellular phone for both business and personal purposes, she did not produce a

written log, a reasonable reconstruction of the same, or other secondary evidence

corroborating her testimony that would satisfy the requirements of section 274(d). 

As a result, we conclude that she is not entitled to a deduction for cellular phone

expenses.

F. Uniform Expenses

Petitioner maintains that she is entitled to a deduction of $2,093 for evening

dresses that she purchased to attend BIW events during 2009. The cost of clothing 

“required or essential in an employment, and which are not suitable for general or

Although it is of no help to petitioner, we note that sec. 280F(d)(4) was 5

amended by the Small Business Jobs Act of 2010, Pub. L. No. 111-240, sec.

2043(a), 124 Stat. at 2560, which removed cellular phones (and similar

telecommunications equipment) from the definition of listed property. The

amendment is effective for taxable years beginning after December 31, 2009. Id.

sec. 2043(b). 
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personal wear and not so worn, is a deductible item in arriving at taxable net

income”. Yeomans v. Commissioner, 30 T.C. 757, 767 (1958); see Wasik v.

Commissioner, T.C. Memo. 2007-148; Beckey v. Commissioner, T.C. Memo.

1994-514. The record reflects that petitioner was not required to wear a uniform

to work, and she admitted that the dresses that she purchased and wore to BIW

events were also suitable for personal wear. Therefore, petitioner is not entitled to

a deduction for these items. See sec. 262(a).

G. Office Supplies and R&D

Petitioner claimed a deduction for office supplies of $117 and “R&D” of

$31. Although petitioner’s checking account statements show that she made

purchases at office supply stores, there is no evidence in the record describing the

specific items that she purchased, nor did she refer to these items when she

testified at trial. Under the circumstances, we are unable to determine whether the

items constitute ordinary and necessary business expenses that may be deducted

pursuant to section 162(a). Accordingly, we sustain respondent’s determination

disallowing a deduction for office supplies and R&D expenses.

II. Accuracy-Related Penalty

Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of the

amount of any underpayment of tax that is attributable to, among other things,
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(1) negligence or disregard of rules or regulations or (2) any substantial

understatement of income tax. The term “negligence” includes any failure to make

a reasonable attempt to comply with tax laws, and “disregard” includes any

careless, reckless, or intentional disregard of rules or regulations. Sec. 6662(c). 

An understatement means the excess of the amount of the tax required to be shown

on the return over the amount of the tax imposed which is shown on the return,

reduced by any rebate. Sec. 6662(d)(2)(A). An understatement is substantial in

the case of an individual if the amount of the understatement for the taxable year

exceeds the greater of 10% of the tax required to be shown on the return or

$5,000. Sec. 6662(d)(1)(A).

With respect to an individual taxpayer’s liability for any penalty, section

7491(c) places on the Commissioner the burden of production, thereby requiring

the Commissioner to come forward with sufficient evidence indicating that it is

appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. at 446-447. 

Once the Commissioner meets his burden of production, the taxpayer must come

forward with persuasive evidence that the Commissioner’s determination is

incorrect. Id. at 447; see Rule 142(a); Welch v. Helvering, 290 U.S. at 115.

6

We assume for the sake of discussion that respondent has discharged his

6

burden of production under sec. 7491(c) by showing that petitioner had a

(continued...)
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Section 6664(c)(1) provides an exception to the imposition of the accuracyrelated penalty if the taxpayer establishes that there was reasonable cause for, and

the taxpayer acted in good faith with respect to, the underpayment. Sec. 1.6664-

4(a), Income Tax Regs. The determination of whether the taxpayer acted with

reasonable cause and in good faith is made on a case-by-case basis, taking into

account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax

Regs. Reliance on a tax professional may demonstrate that the taxpayer had

reasonable cause and acted in good faith where the taxpayer establishes that:

(1) the adviser was a competent professional with sufficient expertise to justify the

taxpayer’s reliance, (2) the taxpayer provided the adviser with necessary and

accurate information, and (3) the taxpayer actually relied in good faith on the

adviser’s judgment. 3K Inv. Partners v. Commissioner, 133 T.C. 112, 117 (2009);

DeCleene v. Commissioner, 115 T.C. 457, 477 (2000).

Petitioner provided her tax records to Mr. Letta, a certified public

accountant, and she consulted with him regarding deductions for her business

expenses. Mr. Letta reviewed petitioner’s tax records, considered them to be

complete and accurate, and discussed the return with her before filing it. When he

(...continued) 6

substantial understatement for 2009.
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learned that many of petitioner’s original tax records had been lost, Mr. Letta

contacted TurboTax in an ultimately unsuccessful attempt to retrieve worksheets

that he completed while preparing the return for electronic filing.

Considering all the circumstances, we conclude that petitioner reasonably

relied on Mr. Letta to assist her in preparing a proper tax return for 2009. We

likewise conclude that there was reasonable cause for, and petitioner acted in good

faith with respect to, the underpayment in this case. Sec. 1.6664-4(a), Income Tax

Regs. Consequently, we hold that petitioner is not liable for an accuracy-related

penalty for 2009.

To reflect the foregoing,

Decision will be entered

under Rule 155.