TAX COURT OPINION

Case: Narendra Nick Boinpally & Bhavani Boinpally
Docket Number: 6905-13S
Judge: Guy
Opinion Type: bench
Filed: 05/16/2014
Pages: 11

CLC UNITED STATES TAX COURT WASHINGTON, DC 20217 NARENDRA NICK BOINPALLY & BHAVANI BOINPALLY, Petitioners, v. ) ) ) ) ) Docket No. 6905-13S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORD ER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the abovecaptioned case before Special Trial Judge Daniel A. Guy, Jr., at Los Angeles, California, on March 19, 2014, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. May 16, 2014 SERVED May 19 2014 i Capital Reporting Company 3 1 Bench Opinion by Judge Dainel A. Guy Jr. 2 March 19, 2014 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Narendra Nick Boinpally & Bhavani Boinpally v. Commissioner Docket No. 6905-13S THE COURT: The court has decided to render oral findings of fact and opinion in this case, and the following represents the court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This proceeding for the redetermination of a deficiency is a small tax case conducted pursuant gract. toÎthe provisions of section 7463 of the Internal DA Revenue Code of 1986, as amended, and Rules 170 Through 174 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986,(as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. 22 Hereinafter in thre bench opinion, section references 23 24 are to the Internal Revenue code of 1986, as amended, in effect for 2010, and Rule reference are to the Tax 25 Court Rules of Practice and Procedure. 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 4 1 Petitioners, husband and wife, resided in 2 California at the time the petition was filed, and 3 Mr. Boinpally appeared at trial pro se. Mrs. 4 Boinpally was unable to appear at trial due to work 5 6 7 obligations in Arizona. Respondent's counsel spoke to her on the day of trial, however, and confirmed that she was aware of the trial and consented to Mr. 8 Boinpally presenting petitioners' case in her 9 absence. Lori A. Amadei appeared on behalf of 10 11 12 13 14 15 16 17 18 19 20 21 22 respondent. The parties filed with the Court a stipulation of facts, with accompanying exhibits, that is incorporated herein by this reference. The issue for decision is whether petitioners are entitled to a deduction for D. unreimbursed employee business expenses claimed on Schedule A, Itemized Deductions, consisting of vehicle expenses and meals/refreshment expenses, for the taxable year 2010. Mr. Boinpally has worked at Frontier Toyota (Frontier) in Valencia, California, since 1998, first as a vehicle sales representative and more recently as a finance manager. Frontier compensates Mr. 23 Bionpally solely on the basis of commissions that he 24 25 earns on products that he sells to Frontier's clients. Mr. Boinpally competes with three other 866.488.DEPO www.CapitalReportingCompany.com ( Capital Reporting Company 5 Frontier finance managers for clients. As a finance manager, Mr. Boinpally is primarily responsible for arranging payment and/or financing for Frontier clients who are purchasing a new vehicle. Mr. Boinpally earns commissions, however, selling additional products to Frontier's clients including extended vehicle warranties, automobile insurance protection against total loss of the vehicle, theft protection devices (such as Lo- Jack), and prepaid vehicle maintenance plans. Often times, Mr. Boinpally first meets Frontier clients after they have spent two or more hours with a sales representative. Mr. Boinpally testified that he frequently offers meals and refreshments to Frontier clients to keep them comfortable during the time that he is completing the payment/financing process and attempting to sell the products mentioned above. During 2010 Mr. Boinpally maintained a log of numerous expenditures for meals and refreshments for clients totaling $1,918.56. Mr. Boinpally also produced nwmerous receipts for purchases he made at fast food restaurants, grocery stores, and gas stations during 2010 but he was unable to identify the specific business purpose for each of these 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 expenditures. Mr. Boinpally also testified that he drove his personal vehicles, an Accura or a Toyota Camry, to various product training sessions, to meet with former and potential clients, and to pick up and deliver clients to Frontier's showroom. During 2010, 7 Mr. Boinpally maintained a mileage log indicating 8 9 that he drove the Acura a total of 1,914 miles in connection with his work for Frontier. He did not 10 maintain a mileage log for the Camry. 11 It is Frontier's policy not to reimburse 12 Mr. Boinpally for any expenditures for gifts, meals, 13 14 15 16 17 18 19 20 21 22 23 24 or refreshments given to his clients or for vehicle and travel expenses related to offsite training sessions or trips he might make to meet with clients. Petitioners filed a timely Form 1040, U.S. Individual Income Tax Return, for 2010, and attached to the return a Form 2106-EZ, Unreimbursed Employee Business Expenses. Petitioners reported on Form 2106- EZ that Mr. Boinpally drove 11,851 miles for business purpose, generating vehicle expenses of $5,926 using the standard mileage rate of .50 cents per mile. See Rev. Proc. 2009-54, sec. 2.01, 2009-51 I.R.B. 930, 930. Petitioners further reported that Mr. Boinpally 25 incurred additional unspecified business expenses of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 $6,981. The Court notes that petitioners did not account for the 50% limitation applicable to deductions for meals and entertainment expenses prescribed in section 274(n). Petitioners reported the total of the expenses described above ($12,907) on Schedule A and claimed a deduction for unreimbursed employee business expenses after the application of the 2% floor prescribed in section 67. Respondent issued a notice of deficiency to petitioners for 2010 determining that they are liable for a deficiency of $4,670 attributable to the disallowance of the Schedule A deductions described above. Petitioners timely filed a petition for redetermination with the Court pursuant to section 6213(a). The Commissioner's determination of a taxpayer's liability in a notice of deficiency normally 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).(Because, as discussed below, sfact petitioners have not complied with the Code's substantiation requirements and have not maintained 24 all required records, the burden of proof as to any 25 relevant factual issue does not shift to respondent 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 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. s fact O Cf 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(Sth Cir. 1976). A taxpayer claiming a deduction on a Federal income tax return 15 must demonstrate that the deduction is allowable 16 17 18 19 20 21 22 23 24 25 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. 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. A deduction normally is not available, however, for personal, living, or family expenses. Sec. 262(a). Whether an expenditure 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 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, 377-378 (1970). However, an employee business expense is not ordinary and necessary if the employee is entitled to reimbursement from his or her employer. See Podems v. Commissioner, 24 T.C. 21, 22-23 (1955); Noz v. Commissioner, T.C. Memo. 2012-272. Section 274(d) prescribes more stringent substantiation requirements to be met before a taxpayer may deduct certain categories of expenses including travel expenses, entertainment and gifts, 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, passenger automobiles. Sec. 280F(d)(4)(A)(i). To satisfy the requirements of section 274(d), a taxpayer generally 22 must maintain adequate records or produce sufficient 23 evidence corroborating his or her own statement 24 which, in combination, are sufficient to establish 25 the amount, date and time, and business purpose for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 each expenditure or business use of listed property. Sec. 1.274-5T(b)(2), (6),(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46014, 46016-46017 (Nov. 6, 1985). Section 1.274-5T(c)(2), Temporary Income Tax Regs., supra, 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 record made at or near the time of the expenditure or use, along with supporting documentary evidence. Section 1.274-5(j) (2), Income Tax Regs., provides that the strict substantiation requirements of section 274(d) for vehicle expenses 14 must be met even where the optional standard mileage 15 16 17 18 19 20 21 22 23 24 25 rate is used. Moreover, the Court may not use the rule established in Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), 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). Through a combination of his testimony and the two logs that he maintained in respect of expenditures for meals and refreshments and the miles that he traveled for business purposes, we conclude that Mr. Boinpally adequately substantiated 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 11 1 2 3 expenditures of $1,918.56 for meals and refreshments (subject to the 50% limitation prescribed in section 274(n)) and vehicle expenses of $957 (i.e., 1,914 4 miles x .50 cents per mile--standard mileage rate). 5 Petitioners are entitled to a deduction for these 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 expenses on Schedule A to the extent that they exceed the 2% floor prescribed in section 67. In contrast, we hold that petitioners are not entitled to a deduction for the balance of the unreimbursed employee business expenses claimed on Form 2106-EZ. In short, although Mr. Boinpally's testimony was honest and forthright, he admittedly failed to maintain adequate records to substantiate the remaining expenses reported on Form 2106-EZ, and he was unable to produce sufficient evidence at trial to establish the amount, date and time, and business purpose for any of the expenditures beyond those allowed above. As previously mentioned, the Court may not use the rule established in Cohan v. Commissioner, 39 F.2d at 543-544, to estimate expenses (such as those at issue in this case) covered by section 274(d). Consistent with the foregoing, decision 24 will be entered under Rule 155.This concludes the 25 Court's oral findings of fact and opinion in this 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 case (Whereupon, at 1:11 p.m., the above- entitled matter was concluded.) 866.488.DEPO www.Capita1ReportingCompany.com 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I