TAX COURT OPINION

Case: Oscar R. Contreras
Docket Number: 7901-05
Judge: Chiechi
Opinion Type: memo
Filed: 03/19/2007
Pages: 12

CAL . STAT . 4-rt. JUD!; E T .C . Memo . 2007-63 UNITED STATES TAX COUR T OSCAR R . CONTRERAS, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 7901-05 . Filed March 19, 2007 . Oscar R . Contreras, pro se . William F . Castor , for respondent . MEMORANDUM FINDINGS OF FACT AND OPINIO N CHIECHI, Judge : Respondent determined a deficiency of $11,837 in petitioner's Federal income tax for his taxable year 2001 .1 'All section references are to the Internal Revenue Code in effect for the year at issue . All Rule references are to the Tax Court Rules of Practice and Procedure . _MAR 1 9 2007 - 3 - expenses, as described in those policies, incurred for authorized business activity (allowable reasonable expenses) . The allowable reasonable expenses included : Air transportation paid by the employee, hotel/lodging, ground transportation, employee meals, and business meals/entertainment . With respect to allowable reasonable expenses for ground transportation, the FedEx policies used the prevailing Internal Revenue Service (IRS) mileage rate (IRS standard mileage rate) as the basis for reimbursing employ- ees who used their personal vehicles for authorized business activity .' The FedEx policies required management approval for all reimbursements for allowable reasonable expenses . In order to be reimbursed under the FedEx policies, FedEx Worldwide Services required employees, inter alia, to provide receipts, as follows : Original receipts are required for all travel and entertainment expenses of $10 or more . An original receipt is documentation prepared and given by the service provider . Receipts must include the date and dollar amount of the provided service . Receipts are subject to the following rules : (cid:127) Original credit card receipts should be used to sub- stantiate expenses . Where credit card receipts are not available, a receipt prepared by the provider is sufficient if it bears the provider's name, date, and expense amount . (cid:127) Receipts must not be altered . (Tips must be note d 'Under the FedEx policies, employees did not receive reimbursement for gasoline expenses for personal vehicles used for authorized business activity or for mileage, parking fees, and tolls incurred in commuting to and from work . such expenses, they were reimbursable . - 5 - During January 1 through May 22, 2001, pursuant to the FedEx policies, petitioner received reimbursements from FedEx Express for certain allowable reasonable expenses that he paid .' During June 21 through December 7, 2001, pursuant to the FedEx policies, petitioner received reimbursements from FedEx Worldwide Services for certain allowable reasonable expenses that he paid . During certain unidentified travel freezes in 2001, peti- tioner paid certain unidentified expenses as a FedEx Worldwide Services employee for which he did not submit any requests for reimbursement and for which he made no attempt to obtain the approval of a vice president authorizing reimbursement of such expenses . In addition to working full time during the year at issue for FedEx Worldwide Services, on April 4, 2001, petitioner sent an e-mail addressed to Donna Dubinsky (Ms . Dubinsky), the chief executive officer of Handspring, a manufacturer of a device known as a personal digital assistant (Handspring's PDA) . In that e- mail, petitioner renewed the offer that he had made in two e- mails addressed to Ms . Dubinsky that he had sent on November 20 , 'The record does not disclose why FedEx Express, rather than petitioner's employer FedEx Worldwide Services, reimbursed petitioner for certain allowable reasonable expenses that he paid during the year at issue . We presume that FedEx Worldwide Services permitted petitioner to work on a project for FedEx Express during that year and that FedEx Express reimbursed him for the allowable reasonable expenses relating to that project that he paid . - 7 - Expense Vehicle Transportation2 Travel3 Business' Meals Amoun t 1$ 2,89 8 1,15 0 7,87 5 9,61 8 52,832 'Petitioner calculated the $2,898 of claimed vehicle ex- penses by using the prevailing IRS standard mileage rate for 2001 of 34 .5 cents per mile and multiplying that rate by 8,400, the number of miles that petitioner claims he drove two automobiles (viz ., a 1999 Mercedes Benz SLK 230 (Mercedes) and a 2001 Volvo C70cv (Volvo)) for business (business miles) during that year . 2In the 2001 Form 2106, the expense category "Transporta- tion" covered "Parking fees, tolls, and transportation, including train, bus, etc . that did not involve overnight travel or commuting to and from work ." Petitioner did not specify in the 2001 Form 2106 the type(s) of transportation expenses that he was claiming . 3In the 2001 Form 2106, the expense category "Travel" covered "Travel expense while away from home overnight, including lodging, airplane, car rental, etc .", but not expenses for meals or entertainment . Petitioner did not specify in the 2001 Form 2106 the type(s) of travel expenses that he was claiming . 'In the 2001 Form 2106, the expense category "Business" covered business expenses not included in the expense categories "Vehicle", "Transportation" and "Travel" . Petitioner did not specify in the 2001 Form 2106 the type(s) of business expenses that he was claiming . 5In calculating the $2,832 of claimed meal expenses, peti- tioner claimed in the 2001 Form 2106 total meal expenses of $5,664 and reduced that total by 50 percent, as required by sec . 274 (n) . As required by section 67(a), petitioner reduced the $24,373 of job expenses claimed in the 2001 Schedule A by two percent of his adjusted gross income (i .e ., by $1,055) . In determining the taxable income reported in petitioner's 2001 return, petitioner deducted the balance (i .e ., $23,318), as well as the other itemized deductions claimed in the 2001 Schedule A that were not subject to the two-percent floor imposed by section 67(a) . Schedule C and the PDA consulting Schedule C . - 9 - Respondent issued to petitioner a notice of deficiency (notice) for his taxable year 2001 . In that notice, respondent disallowed, inter alia, the $23,318 of job expenses that peti- tioner claimed as a deduction in the 2001 Schedule A after the reduction required by section 67(a), the $2,060 net loss that petitioner claimed in the restaurant Schedule C, and the $15,186 net loss that petitioner claimed in the PDA consulting Schedul e C . OPINION Petitioner bears the burden of proving that the determina- tions in the notice are erroneous .' Rule 142(a) ; Welch v . Helvering , 290 U .S . 111, 115 (1933) . Moreover, deductions are a matter of legislative grace, and petitioner bears the burden of proving entitlement to any deduction claimed . INDOPCO, Inc . v . Commissioner , 503 U .S . 79, 84 (1992) . Petitioner was required to maintain records sufficient to establish the amount of any deduction claimed . Sec . 6001 ; sec . 1 .6001-1(a), Income Tax Regs . Before turning to the issues presented, we shall summarize certain principles applicable to those issues and evaluate certain evidence on which petitioner relies . 6Petitioner does not claim that the burden of proof shifts to respondent under sec . 7491(a) . We conclude that the burden of proof does not shift to respondent under sec . 7491(a) . - 11 - ties involved . See sec . 274(d) ; sec . 1 .274-5T(a), Temporary Income Tax Regs ., 50 Fed . Reg . 46014 (Nov . 6, 1985) . The recordkeeping requirements of section 274(d) will preclude petitioner from deducting expenditures otherwise allow- able under section 162(a)(2) relating to the use of his automo- bile, for travel, for meals, and for entertainment unless he substantiates the requisite elements of each such expenditure or use . See sec . 274(d) ; sec . 1 .274-5T(b)(1), Temporary Income Tax Regs ., 50 Fed . Reg . 46014 (Nov . 6, 1985) . A taxpayer is require d to substantiate each element of an expenditure or use * * * by adequate records or by sufficient evidence corroborating his own statement . Section 274(d) contemplates that a taxpayer will maintain and produce such substantiation as will constitute proof of each expenditure or use referred to in section 274 . Written evidence has considerably more probative value than oral evidence alone . In addition, the probative value of written evidence is greater the closer in time it relates to the expenditure or use . A contemporaneous log is not required, but a record of the elements of an expenditure or of a business use of listed property made at or near the time of the expenditure or use, supported by sufficient documentary evidence, has a high degree of credibility not present with respect to a statement prepared subsequent thereto when generally there is a lack of accurate recall . Thus, the corroborative evidence required to support a statement not made at or near the time of the expenditure or use must have a high degree of probative value to elevate such statement and evidence to the level of credibility reflected by a record made at or near the time of the expenditure or use supported by sufficient documentary evidence . The substantiation requirements of section 274(d) are designed to encourage taxpayers to maintain the records, together with documentary evidence, as provided in paragraph (c)(2) of this section [1 .274-5T, Temporary Income Tax Regs .] . - 13 - benefit derived or expected to be derived as a result of travel . Sec . 1 .274-5T(b)(2), Temporary Income Tax Regs ., 50 Fed . Reg . 46014-46015 (Nov . 6, 1985) . The elements that a taxpayer must prove with respect to an expenditure for entertainment are : (1) The amount of each such expenditure for entertainment, except that incidental items such as taxi fares or telephone calls may be aggregated on a daily basis ; (2) the time of each such expenditure, i .e ., the date of the entertainment ; (3) the place of each such expenditure, i .e ., the name, if any, the address or location, and, if not apparent from the designation of the place, the designation of the type of entertainment, such as dinner or theater ; (4) the business purpose of each such expenditure, i .e ., the business reason for the entertainment or the nature of business benefit derived or expected to be derived as a result of the entertainment and, except in the case of business meals described in section 274(e)(1), the nature of any business discussions or activity ; ' 'If a taxpayer claims a deduction for entertainment directly preceding or following a substantial and bona fide business discussion on the ground that such entertainment was associated with the active conduct of the taxpayer's trade or business, the taxpayer is not required to establish the fourth element set forth above that is otherwise required with respect to a deduction for entertainment . Instead, the taxpayer must establish the following : (1) The date and the duration of the business discussion ; (2) the place of the business discussion ; (3) the nature of the business discussion and the business reason for the entertainment or the nature of the business benefit derived or expected to be derived as the result of the entertainment ; an d (4) the identification of the persons entertained who partici- (continued . . .) - 15 - expense (M&IE) rate set forth in appendix A of 41 C .F .R . chapter 301 for the locality of travel for each calendar day that the taxpayer is traveling away from home on business . See sec . 1 .274-5(j)(1), Income Tax Regs . ; Rev . Proc . 2000-39, secs . 3 .02(1)(a), 4 .03, 2000-2 C .B . 340, 341-342 (applicable to, inter alia, Jan . 1 through Sept . 30, 2001) ; Rev . Proc . 2001-47, secs . 3 .02(1)(a), 4 .03, 2001-2 C .B . 332, 333-334 (applicable to, inter alia, Oct . 1 through Dec . 31, 2001) . The use of the M&IE estab- lishes only the daily amount deemed spent for meals while travel- ing away from home on business . Sec . 1 .274-5(j)(1), Income Tax Regs . The taxpayer must still establish the time, the place, and the business purpose of the daily expenditures for meals . Id . Evaluation of Certain Evidence on Which Petitioner Relie s Petitioner relies principally on certain credit card state- ments, two theater ticket stubs, and his testimony . The credit card statements on which petitioner relies consist of ten monthly statements for a Bank of America Visa card covering December 12, 2000, through October 11, 2001, and December 12, 2001, through January 11, 2002 ; six monthly statements for a Discover platinum card covering December 18, 2000, through February 19, 2001, and July 20 through November 26, 2001 ; two monthly statements for a First USA Visa card covering the periods August 22 through September 21, 2001, and October 23 through November 20, 2001 ; a monthly statement for a First Horizon Visa card covering the - 17 - petitioner's credit card statements show only the date and the amount of each expense listed in those statements and the name of the company or establishment at which each such expense was incurred . Neither petitioner's credit card statements nor any other evidence in the record establishes the reason why peti- tioner paid any of the expenses listed in those statements . We shall not rely on petitioner's credit card statements to estab- lish petitioner's position with respect to any of the expenses that he is claiming in this case . The two theater ticket stubs (petitioner's ticket stubs) on which petitioner relies show that the price of admission of each ticket was $18 . Petitioner did not testify about those ticket stubs . Petitioner does not indicate on brief, and we have no way of knowing, the issue presented to which they pertain . In addition, neither petitioner's ticket stubs nor any other evi- dence in the record establishes that it was petitioner who paid for the theater tickets to which those ticket stubs relate . Nor do petitioner's ticket stubs or any other evidence in the record establish the reason why the theater tickets to which those stubs relate were purchased . We shall not rely on petitioner's ticket .stubs to establish petitioner's position with respect to any of the expenses that he is claiming in this case . Petitioner's testimony on which he relies was vague, gen- eral, and/or conclusory in certain material respects . We shall employer for such expenses . - 19 - On the record before us, we find that petitioner has failed to carry his burden of establishing that he is entitled for his taxable year 2001 to the deduction that he claims for unreimbursed employee expenses .1 2 Claimed Schedule C Restaurant Expense s The trade or business requirement of section 162(a) is not met until the trade or business has begun to function as a going concern and the activities for which it was organized are per- formed . Jackson v . Commissioner , 86 T .C . 492, 514 (1986), affd . 864 F .2d 1521 (10th Cir . 1989) . A restaurant trade or business does not begin until the restaurant is open to the public .l 3 12Assuming arguendo that petitioner had established the deductibility under sec . 162(a) of the unreimbursed employee expenses at issue, he would still have to satisfy the requirements of sec . 274(d) for any such expenses that are subject to those requirements . For example, petitioner contends that during 2001 he drove his Mercedes and Volvo, inter alia, while making sales calls on behalf of his employer . On the instant record, we find that petitioner's Mercedes and Volvo, which are not subject to the exception in sec . 280F(d)(5)(B), are listed property within the meaning of sec . 280F(d)(4)(A)(i) . We concluded above that we shall not rely on petitioner's credit card statements, petitioner's ticket stubs, or petitioner's testimony with respect to his claimed expenses to establish petitioner's position regarding such expenses, including the unreimbursed employee expenses at issue . On the record before us, we find that petitioner has failed to carry his burden of establishing all of the elements that he must prove in order to satisfy the requirements under sec . 274(d) for any such expenses that are subject to those requirements . See sec . 1 .274-5T(b)(2), (3), (4), (6), Temporary Income Tax Regs ., 50 Fed . Reg . 46014-46016 (Nov . 6, 1985) . "See Wilson v . Commissioner , T .C . Memo . 2002-61 ; Walsh v . Commissioner , T .C . Memo . 1988-242, affd . without publishe d (continued . . .) - 21 - Claimed Schedule C PDA Consulting Business Expense s In order for a taxpayer to be carrying on a trade or busi- ness within the meaning of section 162(a), the taxpayer must be involved in the activity with continuity and regularity . Commis- sioner v . Groetzinger , 480 U .S . 23, 35 (1987) . A sporadic activity will not qualify as carrying on a trade or business for purposes of section 162(a) . Id . In addition, the taxpayer's primary purpose for carrying on the activity must be for income or profit . Id . Petitioner contends that during the year at issue he con- tacted or made presentations to at least four companies regarding PDA consulting services that he hoped to sell to those companies . As a result, petitioner argues, he was carrying on a PDA consult- ing business during the year at issue and is entitled to deduct certain amounts that he paid during that year in doing so . Respondent disagrees . We have found that on April 4, 2001, petitioner sent an e- mail to the chief executive officer of Handspring, a manufacturer of PDAs, in which he renewed the offer that he had made in two e- mails addressed to her on December 20, 2000, to develop, market, and sell business applications of Handspring's PDA . On the record before us, we find that petitioner has failed to carry hi s 14( . . .continued) (3), and (4), Temporary Income Tax Regs ., 50 Fed . Reg . 46014-46016 (Nov . 6, 1985) . - 23 - We have considered all of the parties' contentions and arguments that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot . To reflect the foregoing, Decision will be entered fo r respondent .