TAX COURT OPINION

Case: Lawrence K. & Ruth L. Harrell
Docket Number: 17918-05S
Judge: Jacobs
Opinion Type: summary
Filed: 10/16/2006
Pages: 16

T .C . Summary Opinion 2006-165 UNITED STATES TAX COUR T I 8 2.LI -__4 U (cid:127) LAWRENCF COMMIS K . AND RUTH L . HARRELL, Petitioners v . SIONER OF INTERNAL REVENUE, Responden t Docket No . 17918-05S . Filed October 16, 2006 . Ruth L . Har$ell, pro se . Brian A . Pfeifer , for respondent . JACOBS, Jud e : This case was heard pursuant to th e provisions of seetion 7463 of the Internal Revenue Code in effect at the time the etition was filed . Unless otherwise indicated , I subsequent section references are to the Internal Revenue Code i n effect for the year in issue , and Rule references are to the Ta x Court Rules of Practice and Procedure . The decision to b e entered is not reviewable by any other court, and this opinio n should not be cited as authority . SERVI' r" "I ? .S 2006 - 2 - Respondent etermined a deficiency of $8,866 in petitioners' 2002 Federal inc me tax . The issues for decision are : (1) The amount of noncas charitable contribution deductions whic h petitioners are ntitled to claim on Schedule A, Itemized Deductions, and ; (2) the amount of the excess unreimburse d employee and oth r miscellaneous expenses deduction' to which petitioners are ntitled . Background Some of the facts have been stipulated and are so found . The stipulation f facts and the attached exhibits are incorporated her~in by this reference . At the time of filing th e petition, petitioners resided in Miami, Florida . Petitioners timely filed a joint Form 1040, U .S . Individua l Income Tax Return, for taxable year 2002, in which they claimed f as Schedule A deductions medical and dental expenses, charitabl e contributions, and excess unreimbursed employee and other miscellaneous expenses . Respondent determined that the amounts claimed for these latter deductions were overstated an d accordingly sent petitioners a notice of deficiency . Petitioners timely petitioned this Court . Petitioners concede, and thus n o The excess Unreimbursed employee and other miscellaneous expenses deducti n is a Schedule A deduction . The amount equals the sum of : (1) Unreimbursed employee expenses--jcb travel, union dues, job ducation, etc . ; (2) tax preparation fees ; and (3) other expenses--investment, safe deposit box, etc ., less an amount equal to I percent (the 2-percent floor) of the taxpayer's adjusted gross ir4come . See sec . 67(a) . - 3 - longer challenge respondent's determinations that they are not entitled to the edical and dental expense deduction ., However, they continue t o challenge respondent's other determinations . Discussio n As a genera]4 rule, the Commissioner's determinations in the notice of defici ncy are presumed correct, and the burden o f proving an error ; is on the taxpayer . Rule 142(a) ; Welch v . Helvering , 290 U . S . 111, 115 (1933) . However, pursuant t o section 7491(a), the burden of proof with respect to any factual issue relating td ascertaining the liability for tax shifts t o the Commissionerjif the taxpayer : (1) Maintained adequate records ; (2) satisfied the substantiation requirements ; (3 ) cooperated with tie Commissioner's agents ; and (4) during th e Court proceeding introduced credible evidence with respect to the factual issue ind lved . Petitioners did not meet the substantiation re uirements or introduce credible evidence regarding the disallowed amounts ; therefore, the burden of proof does not shift toyrespondent . It is settled law that deductions are a matter of legislative grace4 and the taxpayer must prove that he/she is entitled to the c aimed deductions . INDOPCO, Inc . v . Commissioner , 503jU .S . 79, 84 (1992) ; New Colonial Ice Co . v . Helvering , 292 U .S . 435, 440 (1934) . With these well-established propositions in mind, we decide whether petitioners have 4 satisfied their urden of proving entitlement to deduct noncash charitable contr butions and excess unreimbursed employee and other miscellane us expenses in amounts greater than those respondent deter fined . As noted, p titioners claimed deductions on their 2002 return for chari able contributions, consisting of $3,200 in cash and $7,753 in noncash contributions . At trial, the partie s stipulated that petitioners were entitled to a deduction of $950 for cash charitable contributions and that the $2,250 balance wa s improperly claimed because the disallowed portion was made not b y petitioners but by their family members . Respondent disallowed the $7,753 deduction for noncas h contributions for, lack of substantiation . At trial, responden t conceded that pet itioners are entitled to a deduction for noncash charitable contr i butions of $1,600 . Section 170 allows a deduction for charitable contributions during the taxabl year if verified as provided in th e regulations . Sec 170(a)(1) . The term "charitable contribution" includes a contri ution or gift to a corporation, trust, o r comm unity chest, fund, or foundation, with certain provisos . Sec . 170 (c) . For ;example, the recipient organization must have been "created or ~rganized in the United States or in an y possession thereof, or under the law of the United States, an y State, the District of Columbia , or any possession of the United States" . Sec . 1 70(c)(2)(A) . Furthermore, no part of the ne t earnings of a qu lified organization may inure to the benefit of any private sha r holder or individual . Sec . 170(c)(2)(C) . The charita le contribution deduction is subject to certain substantiation r quirements . Sec . 170(f)(8) . No deduction is allowed for any ontribution of $250 or more unless the taxpaye r substantiates th contribution by a contemporaneous written acknowledgment o the contribution by the qualified done e organization . S c . 170(f)(8)(A) . This written acknowledgment must state the a ount of cash and a description (but no t necessarily the -J alue) of any property other than cash th e taxpayer donated and whether any consideration was given to the taxpayer . Sec . 1 .170A-13(f)(2), Income Tax Regs . Petitioners attached to their 2002 Form 1040 a Form 8283, Noncash Charitab i e Contributions, listing eight dates on whic h they claimed to have made noncash donations to charitable organizations . At trial, petitioners presented as evidenc e receipts that wer ~ furnished blank by charitable organization s and admittedly filed in by petitioners . The receipts, which total $6,903, purport to show that petitioners made noncas h contributions on $even separate dates during 2002 : January 14 , March 15, May 14, June 28, August 16, September 3C, and Novembe r 21 . In addition, petitioners submitted a list, which they - 6 - prepared, of ite s allegedly contributed on December 31, with a value of $850,1 1 ut no receipt for this contribution was produced . The dates o the receipts for January 14 and September 3 0 appear to have b en altered, and we are not satisfied that those contributions we e in fact made during 2002 . The list of items with respect to he purported December 31 contribution does no t support the section 170 deduction because it was prepared exclusively by p titioners and is therefore not a "contemporaneous written acknowledgment of the contribution by the donee organi ation" . The remaini g five receipts are supported by detailed lists of items that petitioners allegedly contributed, but the value s listed for the irk dividual items do not add up to the total amount claimed for each contribution . Additionally, the list of items purportedly cont, ibuted on June 28 includes a situp table an d weights that were also listed in the receipt prepared for the purported January 14 charitable contribution . And as noted, we are not satisfied that these items in fact were contributed t o charity in 2002 . We note tha the sums listed on the various receipts petitioners produced plus the amount on the list of items they allegedly contributed on Dec . 31 is less than the amount claimed for noncash contributions on their 2002 tax return . Moreover, the values claimed for the individual contributed items listed in the receipts do not total the claimed sum . T - 7 - When a taxpayer establishes that he/she has incurred deductible expenses but is unable to establish the exact amounts, we can estimate he deductible amounts , but only if the taxpayer presents sufficient evidence to establish a rational basis fo r making the estim tes . See Cohan v . Commissioner , 39 F .2d 540, 543-544 (2d Cir . 1930) ; Vanicek v . Commissioner , 85 T .C . 731, 742- 743 (1985) . In stimating the amount allowable, we bear heavily on the taxpayer hose inexactitude in substantiating the amount o f the expense is o his own making . See Cohan v . Commissioner , supra at 544 . Hc wever, without a rational basis for making the estimate, any all owance we made would amount to unguided largesse . Williams v . United States, 245 F .2d 559, 560-561 (5th Cir . 1957) . Respondent c~ncedes that petitioners made noncas h contributions during 2002 but maintains that the value of those contributions did not exceed $1,600 . Considering the record before us, we do hot doubt that petitioners made noncash charitable contributions during 2002 . However, they failed t o provide reliable vidence to prove that the amount thereo f exceeded the $1,6p0 respondent conceded . We therefore hold tha t for 2002 petitioners are entitled to a $2,550 charitabl e contribution deduction (rather than the claimed $10,953 deduction), comprising $950 for cash contributions and $1,600 fo r noncash contributions . We now turn to the amount of the excess unreimbursed employe e and other miscellaneous expenses deduction to which petitioners are entitled . 0 their return , petitioners claimed a deduction for excess unrei bursed employee and other miscellaneous expenses of $17, 600 . Aft r considering the 2-percent floor , petitioners claimed a deduct on for excess unreimbursed employee and other miscellaneous ex enses of $ 15,834 . Of this amount , respondent does not dispute that petitioners are entitled to a deduction of $690 for unreimb rsed employee expenses --union dues . The remaining compon nts of the claimed deduction are uniforms ($5,625 ), supplies and equipment ($ 3,510 ), job search expense s ($4,800), telephone expenses ($2,850), and tax preparation fees ($125) . Respondent disallowed the deduction for all of these components . Section 162(a) allows a deduction for ordinary and necessary business expensesipaid or incurred during the taxable year in carrying on any trade or business . For an expense to be "ordinary" the transaction that gives rise to it must be of a common or frequent occurrence in the type of business involved . Deputy v . du Pont 308 U .S . 488, 495 (1940) . To be "necessary" a n expense must be "Ippropriate and helpful" to the taxpayer's business . Welchly . Helvering , supra at 290 U .S . at 113-114 . The performance of services as an employee constitutes a trade or business . See sec . 1 .162-17(a), Income Tax Pegs . The employee must show the relationship between the expenditures and th e employment . See Evans v . Commissioner , T .C . Memo . 1974-267, affd . 557 F .2d 1095 (5 h Cir . 1977) . The taxpayer bears the burden of substantiation . Hradesky v . Commissioner , 65 T .C . 87, 89 (1975), affd . per curiam 540 F .2d 821 (5th Cir . 1976) . Section 6001 and the regulations promulgated thereunder require taxpayers to maintain records sufficient to permit verification of income and expenses . As previously noted, the Court may in som e circumstances est imate the amount of a deduction to which th e taxpayer is other rise entitled . Cohan v . Commissioner , supra a t 543-544 . Petitioners ieducted $5,625 for uniforms for the taxable yea r and stipulated that the uniforms Mr . Harrell wore were washed and ironed at petitioners' home . The expense of uniforms is deductible under section 162(a) if : (1) The uniforms are of a type specifically required as a condition of employment ; (2) the uniforms are not adaptable to general usage as ordinary clothing ; and (3 ) the unifo ms are not so worn . See Yeomans v . Comm issioner , 30 T .C . 757, 767- 769 (1958 ) ; Becket' v . Comm issioner , T .C . Memo . 1994-51114 . Mr . Harrell, n his position with United Parcel Service, wa s required to work i n a clean uniform every day . Mrs . Harrel l washed and ironed r . Harrell's work uniforms at home . Th e employer provided the uniforms but did not reimburse Mr . Harrell - 10 - for the cleaning of his uniforms . Although petitioners would be entitled to a de uction for the cost of washing and ironing the uniforms, they p ovided no evidence upon which we can estimate the amount thereof . At trial, Mrs . Harrell testified that the amount claimed was a gu ss that was based on the hypothesis of paying t o have the uniformo cleaned commercially . Deductions are based on actual, not hypothetical, costs . As the uniforms were not sent to a commercial cleaner bu t were laundered arpd ironed at home, the amount claimed is no t I allowable . More ver, the amount claimed ($468 .75 per month) appears grossly inflated . In the absence of a rational basis for estimating the c st of the cleaning of the uniforms, we sustain respondent's dis llowance of this component of the claimed unreimbursed employee and other miscellaneous expenses . See Cohan v . Commissioner , Hsu ra at 543-544 . Petitioners deducted $3,510 for "supplies and equipment" for the taxable year in issue . Taxpayers carrying supplies on hand can deduct the co is of those supplies to the extent that the supplies are actu lly consumed or used in operation during the taxable year for ~hich the return is made if the cost of th e supplies was not deducted in a previous year . If the supplies ar e i incidental and ar carried on hand with no record of consumptio n kept, the taxpaye4 may deduct the total cost of such supplies - 11 - purchased during the taxable year for which the return was made . Sec . 1 .162-3, I n ome Tax Regs . Petitioners presented no documentation to support thei r claimed deductio of $3,510 for supplies and equipment . There is no rational basi in the record on which we can estimate th e magnitude of thi . expense . We therefore sustain respondent's disallowance of this component of the claimed excess unreimburse d employee and other miscellaneous expenses deduction . Petitioners deducted $4,800 for job search expenses i n connection with I rs . Harrell's efforts to secure employment as well as deducting $2,850 for "telephone cell phone" expense for the taxable year in issue . We consider these two expense s together because they are subject to more stringent substantiatio n requirements than the other components of the disallowed employe e I expense deductio n Job search e xpenses are deductible under section 162(a) t o the extent they are incurred in searching for new employment in the employee's same trade or business . See Primuth v . Commissioner , 54 T .C . 374, 377-378 (1970) . However, if the i I employee is seeki~hg a job in a new trade or business, the expense s are not deductible under section 162(a) . See Frank v . Commissioner , 20 .C . 511, 513-514 (1953) . Job search expense s include resume preparation expenses, postage, and travel and - 12 - transportation e xpenses . See Murata v . Commissioner , T .C . Memo . 1996-321 . Before the taxable year in issue, Mrs . Harrell was employe d as an administra dive assistant and during 2002 she was unemployed , searching for employment . Petitioners' substantiating evidence for the job search expenses consists of : (1) Correspondence between Mrs . Harrell and potential employers ; (2) a "work search form" required by the State of Florida for purposes o f administering th State unemployment compensation program ;' and (3) a mileage to which shows the addresses of companies whic h Mrs . Harrell vis ted over the course of the year and the dates o f the visits . The corresp ndence and work search forms were prepare d contemporaneously with the search for employment and establish to our satisfaction that Mrs . Harrell incurred deductible job search expenses . Hamper ~d by a lack of evidence in the record as to th e amount thereof, b it recognizing that expenses for a job searc h were in fact incu red, we place the amount for that portion of her job search expens s consisting of resume preparation, telefax transmission, and postage at $250 . Mrs . Harrell's remaining jo b rch form contains the following language : Each ct in your search for work must be shown below . The work se< employer you cont It is important t possible during E Harrell certified was correct and complete to the best of her knowledge . I make as many IN PERSON applications a s CH WEEK for which you claim benefits . Mrs . that the information she provided on the repor t - 13 - search expenses bonsisted of the cost of travel in her ow n automobile to po fential employers' places of business . Thi s portion of her j b search expenses is supported by the work search record with res p ct to three interviews and by the mileage log . In the case of travel expenses, entertainment expenses, and expenses paid or incurred with respect to certain listed property, section 274 over ides the Cohan doctrine, discussed previously , and those expens s are deductible only if the taxpayer meets the stringent substar tiation requirements of section 274(d) . Sanford v . Commissioner , 50 T .C . 823, 827-828 (1968), affd . per curiam 412 F .2d 201 (2d Cir . 1969) . Section 274 contemplates that no deduction may be allowed for expenses incurred for travel on the basis of any approximation or the unsupported t stimony of the taxpayer . Sec . 1 .274-5T(a) , Temporary Incom e ax Regs ., 50 Fed . Reg . 46014 (Nov . 6, 1985) . Section 274(d) specifically proscribes deductions for trave l expenses in the alb I I evidence corrobor sence of adequate records or of sufficient ting the taxpayer's own statement . At a minimum, the taxp yer must substantiate : (1) The amount of such expense ; (2) the ime and place such expense was incurred ; and (3) the business pur e se for which such expense was incurred . Mrs . Harrell' s unemployment compensation work search record constitutes substa ntiation within the meaning of section 274 with respect to three j ob interviews that required travel . The record - 14 - shows that her ound trip travel to those interviews was 28 .02 miles per trip, for a total of 84 .06 miles . Petitioners did not present receipts for the actual cost of this travel, but we may apply the standa rd mileage rate to determine the allowabl e deduction .' The standard mileage rate for 2002 was 36 .5 cents per mile, so that t h total allowable deduction amounted to $30 .68 . Unlike the ork search record, Mrs . Harrell's travel log wa s not prepared con emporaneously with the purported travel and appears inaccura e in some respects . The travel log includes entries that do of appear on the work search record that was prepared contemp raneously for unemployment compensation purposes . The job see er, in preparing the work search record, is exhorted to docu ent each employer that had been contacted, and those records (c1 rtified by Mrs . Harrell) contain only three reports of job in terviews . Yet the travel log indicates that she attended eight in terviews and traveled on more than 80 occasions , for a total of mo e than 5,000 miles, to apply for jobs . We find that the travel 1 g is unreliable and does not constitute adequat e 'The standard mileage rate is a matter of administrative convenience by w ich a taxpayer may compute the amount of deductible autom bile expenses using a standard rate rather than separately establishing the amount of an expenditure for travel or transportation. . Sec . 1 .274-5(j), Income Tax Regs ., in part, grants the Commissioner the authority to establish a method under which a taxpayer ay use mileage rates to substantiate, for purposes of sec . 74(d), the expense of using a vehicle while traveling away from home . See Rev . Proc . 2001-54, 2001-2 C .B . 530 . - 15 - substantiation f Dr the claimed deductions for Mrs . Harrell's travel in the co rse of her job search . In addition to applying to traveling expenses, the strict substantiation r quirements of section 274 apply to deductions with respect to 'any listed property (as defined in section 280F(d)(4) ." Se tion 280F(d)(4)(A)(v), in turn, includes "any cellular telephone" in the definition of listed property . The only substantiation petitioners submitted with respect to thei r cellular telephone expenditures was a letter from Mr . Harrell's employer statinglthat Mr . Harrell used his cellular telephone to comm unicate and conduct business with the company and that he wa s not reimbursed fI r those charges . No substantiation wa s introduced as to : (1) Specific telephone calls made using the cellular telephon e ; (2) the portion of the use that might b e related to Mr . Harrell's work (rather than to personal calls) ; o r (3) any other mat er that would support a claim that the cellular telephone was pro erty used in Mr . Harrell's trade or business of performing servic s as an employee . We therefore sustai n respondent's disa tlowance of this component of the claimed exces s unreimbursed employee and other miscellaneous expenses deduction . Finally, pet tioners deducted $125 for tax preparation fees . Petitioners used commercial software package to prepare their 2002 tax return . The record does not reveal the cost of the software package, but we recognize that there in fact was a cost . - 16 - We estimate this cost to be $40 and allow a deduction for tax preparation fee s in that amount . Petitioners adjusted gross income for 2002 was $88,311 . As previously noted see supra note 1, there is a 2-percent floor in calculating the eduction for excess unreimbursed employee and other miscellane us expenses . Thus, petitioners may deduct onl y their unreimbursed employee and other miscellaneous expenses tha t exceed $1,766 (2,percent times $88,311) . The amount of th e unreimbursed emp J oyee and other miscellaneous expenses that w e have found are de ductible does not exceed that amount . To reflect tie foregoing and concessions by the parties , Decision will be entere d under Rule 155 .