TAX COURT OPINION

Case: Jozsef & Zsuzsanna Balla
Docket Number: 13632-06
Judge: Cohen
Opinion Type: memo
Filed: 01/31/2008
Pages: 17

RECORDED T .C . Memo . 2008-1 8 UNITED STATES TAX COURT JOZSEF AND ZSUZSANNA BALLA, Petiti COMMISSIONER OF INTERNAL REVENUE, R ners v . spondent Docket No . 13632-06 . File d anuary 31, 2008 . Ellin Vicki Palmer , for petitioners . Valerie L . Makarewicz , for respondent . MEMORANDUM FINDINGS OF FACT AND 0 PINION COHEN, Judge : Respondent determined def'ciencies of $4,146 and $2,635 in petitioners' Federal income tax for 2002 and 2003, respectively . After concessions by the parti s, the issues for decision are : SERVED JAN 31 2000 - 2 - (1) Whether for the years in issue petitioners may deduct at Federal per diem rates meal expenses that Jozsef Balla (petitioner ) did not pay for or incur ; (2) whether petitioners may deduct incidental expenses at Federal per diem rates for 2003 ; (3) whether petitioners may deduct mileage expenses for travel to and from a firefighting school in April 2002 ; (4) whether petitioners are entitled to deductions for other job-related and miscellaneous expenses in 2002 and 2003 . Unless otherwise indicated , all section references are to the Internal Revenue Code in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure . FINDINGS OF FACT Some of the facts have been stipulated , and the stipulated facts are incorporated in our findings by this reference . Petitioners resided in Sarasota , Florida, at the time they filed their petition . Petitioner was employed by Hornbeck Offshore Operators ( Hornbeck ) as a merchant sailor during the years in issue . Hornbeck did not provide petitioner with a per diem cash allowance for work-related meals or incidental expenses . When petitioner was assigned to a vessel and on active status, Hornbeck provided him with meals and lodging without charge . - 3 - Hornbeck also provided petitioner with uniforms and safety equipment (including work vest, hard hat, safety goggles, safety glasses, rain slicker, and flashlight) that i required for its employees . Petitioner was also required to war steel-toe boots, which were not provided by Hornbeck . Hornbec did not provide or require its employees to have cell phones or pagers . In April 2002, petitioner attended a fir fighting school in Fort Lauderdale, Florida . Hornbeck did not r quire or pay for petitioner to attend the firefighting school ; rather, petitioner's tuition was paid by his union . He drove his own car to Fort Lauderdale from his home in Sarasota to attend the firefighting school . Petitioner recorded the dates, location, and purpose of his trip to Fort Lauderdale on his personal calendar for 2002 . He did not keep any recorl regarding the mileage traveled on his trip to the firefighting school, but the parties have agreed that the one-way trip fro petitioner's home in Sarasota to Fort Lauderdale is approximate y 209 miles . Under Job Expenses and Most Other Miscel aneous Deductions on their Schedule A, Itemized Deductions, for 2002, petitioners claimed the following deductions : Unreimbursed employee expenses 18,509 Tax preparation fees 1,190 Other expenses 3,14 3 Respondent allowed the deduction for tax preparation fees i n 2002 . Petitioners also attached an extensive compilation of 4 - documents entitled "Sailor Travel Statement" to substantiate their claim to unreimbursed employee expenses . The Sailor Travel Statement includes the "Supplemental Tug/Barge Sailor Travel Schedule" reproduced below, authorities upon which petitioners rely in support of their tax position, a 2002 port list for the Yabucoa vessel, and a schedule listing ports where petitioner purportedly was stationed on particular dates in 2002 . The Supplemental Tug/Barge Sailor Travel Schedule, with original emphases, that petitioners attached to their 2002 return is reproduced in part below : Taxpayer is a Merchant Sailor assigned to work aboard a Tug Boat traveling between ports located on the Atlantic Ocean and therefore qualifies per attached Rev Proc 2001-47's "Transportation Industry Employees " and attached MARIN JOHNSON TAX COURT DECISION & IRS Publication 463 (Chapter 1 Page 5 ) to compute his DEEMED SUBSTANTIATED Out-of-Town Travel Costs by using attached Pub 1542's Standard Foreign OCONUS Rates for EACH CITY as follows : 6,000 . 80 Days x $75 Guayama <San Juan>, Puerto Rico = 2,925 . 39 Days x $75 Arecibo <San Juan>, Puerto Rico = 44 Days x $57 Guayaquil, Ecuado r 2,508 . = 25 Days x $76 St . Croix, Virgin Islands = 1,900 . 33 Days x $57 Mayaguez <Other>, Puerto Rico = 1,881 . 1,350 . 18 Days x $75 San Juan, Puerto Rico 300 . 285 . = 4 Days x $75 Aguirre <San Juan >, Puer to Rico = 5 Days x $57 Yabaccoa <Other>, Puerto Rico = Total Sailor Travel Costs Allowed per OCONUS Rates LESS EMPLOYER PROVIDED REIMBURSEMENTS 17,149 . < 2,852 > Sailor Tr avel Allowance in Excess of R eimburs ements 14,297 . As a MERCHANT SAILOR , taxpayer was required by his employer to travel to various locations to meet his ships . Per IRS Rev Rul 99-7 and attached Marin Johnson Tax Court Decision , his auto mileage and possibly other travel-related costs are FULLY DEDUCTIBLE as follows : - 5 - 8 Days x $205 Boston, Massachusett s 5 Days x $142 Fort Lauderdale, Florida Rental Cars & Other Travel Related Cost s 1,640 . 710 . 1,175 . Taxpayer also took a Sailor Continuing Education additional Rating is deductible since he already ratings and this course does NOT qualify him for Note the Union paid the tuition in full . This i Educational Travel Expenses ONLY . Total Mileage : 563 miles x $ .36 5 6 Days x $42 Fort Lauderdale, Florid a 5 Days x $46 New York City <Manhattan>, N Total Tax Court & IRS Allowed Sailor Travel & Auto Mileag e Program . This has other SAILOR a new occupation . related 205 . 252 . 230 . 18,509 . Petitioners concede that they are not en itled to deductions for any of the mileage or rental car expense d eductions claime d for 2002 except the $205 claimed for the roue, I trip mileage from petitioner's home in Sarasota to Fort Lauderd le, Florida, where petitioner attended the firefighting school i April 2002 . Respondent concedes that petitioners are enti led to a miscellaneous itemized incidental expenses de t .uction for 2002 equal to the per diem rates then applicable . Respondent performed those calculations according to met .ods established b y relevant revenue procedures . In a statement attached to their 2002 re urn, petitioner s listed their "other expenses" as follows : Sailor Req'd Medicals Sailor Req'd Phone/Pager Sailor Req'd Supplies $155 2,34 5 64 3 They provided no receipts, other documentatio or explanations to substantiate the amounts or business purpo es of the expenses claimed . - 6 - On their 2003 return, petitioners claimed and respondent disallowed the following itemized deductions under Job Expenses and Most Other Miscellaneous Deductions : Unreimbursed employee expenses Tax preparation fees Other expenses -- Sailor Req ' d Phone / Pager $16,17 3 59 5 1,28 2 Petitioners again attached a Sailor Travel Statement to their 2003 return to substantiate their claim to unreimbursed employee expenses for that year . It included the Supplemental Tub/Barge Sailor Travel Schedule reproduced below, the same authorities as they had attached to their 2002 return, a 2003 port list for the Yabucoa vessel, and a schedule listing ports where petitioner purportedly was stationed on particular dates in 2003 . The Supplemental Tug/Barge Sailor Travel Schedule, with original emphases, that petitioners attached to their 2003 return is reproduced in part below : Taxpayer is a Merchant Sailor assigned to work aboard a Tug Boat traveling between ports located on the Atlantic Ocean and therefore qualifies per attached Rev Proc 2002-63's "Transportation Industry Employees " and attached MARIN JOHNSON TAX COURT DECISION & IRS Publication 463 (chapter 1 Page 5 ) to compute his DEEMED SUBSTANTIATED Out-of-Town Travel Costs by using attached Pub 1542's Foreign OCONUS Rates and Domestic CONUS Rates for EACH CITY as follows : - 7 - 68 Days x $87 Sat . Croix, Virgin Islands = 5,916 . 40 Days x $75 Aguirre <San Juan>, Puerto ico = 3,000 . 25 Days x $75 Guayama <San Juan>, Puerto ico = 1,875 . 21 Days x $75 Arecibo <San Juan>, Puerto ico = 1,575 . 30 Days x $42 Kingston, New York = 1,260 . 19 Days x $50 New York City <Manhattan>, Y = 950 . 12 Days x $66 Puerto Plata, Dominican Rep . = 792 14 Days x $46 New Orleans, Louisiana = 644 . 7 Days x $75 Mayaguez <San Juan>, Puerto Rico = 525 . 6 Days x $75 San Juan, Puerto Rico = 450 . 5 Days x $50 Brooklyn, New York = 250 . 3 Days x $75 Yabucoa <San Juan>, Puerto ico = 225 . 2 Days x $38 Delaware City <Wilmington>, DE = 76 . Total Sailor Travel Costs Allowed per OCONUS & CONUS Rates 17,538 . LESS EMPLOYER PROVIDED REIMBURSEMENTS <2,772> Sailor Travel Allowance in Excess of Reimbursements 14,766 . As a MERCHANT SAILOR , taxpayer was required by h's employer to travel to various locations to meet his ships . 99-7 and attached Marin Johnson Tax Court Decisi n , his auto mileage and possibly other travel-related costs are FULLY DEDUCTIBLE as follows : er IRS Rev Rul 12 Days x $42 Tampa, Florida = 504 . Rental Cars & Other Travel Related C sts = 903 . Total U .S . Tax Court & Other Sailor Travel Expenses Allowed 16,173 . Petitioners concede that they are not entitle to any mileage or rental car expense deductions claimed for 2003 . Petitioners have not provided any receipts, other documentatio , or explanations to substantiate the amounts or business purpo es, if applicable, of the expenses claimed for tax preparation f es and "Sailo r Req'd Phone/Pager" for 2003 . OPINIO N Section 162 permits taxpayers to deduct ill ordinary and necessary business expenses paid or incurred luring the taxable year and specifically includes traveling expe ses (including amounts expended for meals and lodging other han amounts that are lavish or extravagant under the circumst ces) while away - 8 - from home in the pursuit of a trade or business . Sec . 162(a)(2) . Section 274(d) generally disallows any deduction under section 162 for, among other things, "any traveling expense (including meals and lodging while away from home)" unless the taxpayer complies with stringent substantiation requirements as to the amount, time and place, and business purpose of the expense . Sec . 274(d)(1) . Section 274(d) authorizes the Secretary to provide by regulations that some or all of these substantiation requirements "shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations . " Under the applicable section 274 regulations, the Commissioner is authorized to prescribe rules under which optional methods of computing expenses , including per diem allowances for ordinary and necessary expenses for traveling away from home, may be regarded as satisfying the substantiation requirements of section 274(d) . Sec . 1 .274-5(j), Income Tax Regs . Under this authority, the Commissioner issued Rev . Proc . 2001-47, 2001-2 C .B . 332 (applicable to petitioner's travel January through September 2002) ; Rev . Proc . 2002-63, 2002-2 C .B . 691 (applicable to petitioner's travel October 2002 through October 2003) ; and Rev . Proc . 2003-80, 2003-2 C .B . 1037 (applicable to petitioner's travel November and December 2003) (collectively, the applicable revenue procedures) . Under the - 9 - applicable revenue procedures, taxpayers may lect to use, in lieu of substantiating actual expenses, certa in authorize d methods for deemed substantiation of employee lodging, meal, and incidental expenses incurred while traveling way from home . Rev . Proc . 2002-63, sec . 1, 2002-2 C .B . at 69 and Rev . Proc . 2003-80, sec . 1, 2003-2 C .B . at 1037, each pr vide the following introduction : SECTION 1 . PURPOS E This revenue procedure updates * * [the previous revenue procedure relating to per diem a providing rules under which the amount o necessary business expenses of an employ meal, and incidental expenses or for mea incidental expenses incurred while trave home will be deemed substantiated under of the Income Tax Regulations when a pay employer, its agent, or a third party) p diem allowance under a reimbursement or allowance arrangement to pay for the exp addition, this revenue procedure provide method for employees and self-employed i pay or incur meal costs to use in comput deductible costs of business meal and in expenses paid or incurred while travelin home . This revenue procedure also provi method for use in computing the deductib incidental expenses paid or incurred whi away from home by employees and self-emp individuals who do not pay or incur meal are not reimbursed for the incidental ex a method described in this revenue proce mandatory, and a taxpayer may use actual expenses if the taxpayer maintains adequ other sufficient evidence for proper sub * * * lowances] by ordinary and e for lodging, an d ling away from ection 1 .274-5 r (the ovides a per ther expense uses . I n an optional dividuals who 'ng the idental away from es an optional e costs o f e traveling oye d costs and who enses . Use of ure is no t allowable to records or tantiation . - 10 - Rev . Proc . 2001-47, sec . 1, 2001-2 C .B . at 332, is almost identical to the passage quoted above, but the following sentence is omitted : This revenue procedure also provides an optional method for use in computing the deductible costs of incidental expenses paid or incurred while traveling away fro m home by employees and self-employed individuals who do not pay or incur meal costs and who are not reimbursed for the incidental expenses . * * * Rev . Proc . 2002-63, sec . 4 .05, 2002-2 C .B . at 694, and Rev . Proc . 2003- 80, sec . 4 .05 , 2002-2 C .B . at 1040, expressly provide that taxpayers who do not pay or incur meal expenses whe n traveling away from home may use, in lieu of providing actual receipts to substantiate incidental expenses , an established per diem rate of $2 or $3, depending on which revenue procedure is applicable for the date of travel . Rev . Proc . 2001-47, sec . 4, 2001-2 C .B . at 333-334, which provides specific rules for the per diem substantiation method, does not contain a similar provision . However, we have previously held that the incidental portion of the M&IE per diem rates may be used as deemed substantiation of incidental expenses when meals are provided by a taxpayer's employer . Johnson v . Commissioner , 115 T .C . 210, 210-211 (2000) . Rev . Proc . 2001-47, sec . 6 .01, 2001-2 C .B . at 337 ; Rev . Proc . 2002-63, sec . 6 .01, 2002-2 C .B . at 698 ; and Rev . Proc . 2003-80, sec . 6 .01, 2003-2 C .B . at 1043, each provide that the Federal M&IE rate will be applied, with stated exceptions, in the same manner as applied under the Federal Travel Regulations, 41 C .F .R . secs . 301 - 311, in effect at the time each respective - 11 - revenue procedure was released . Deductions for Meals and Incidental Expense s Petitioner ' s employer, Hornbeck , furnished him with lodging and meals without charge while he worked on its vessel during the years in issue . Hornbeck also provided to petitioner uniforms and safety equipment required in his employment . Although petitioner did not pay for his meals while at sea or while docked in ports, petitioners deducted the full M&IE ate for each day that petitioner worked aboard the tugboat during the years in issue . Petitioners argue that the applicable revenue procedures, in conjunction with the Federal Travel Regulations, 41 C .F .R . sec . 301-11 .17, permit them to deduct the full applicable M&IE rate for work-related travel even though all of petitioner's meals were provided to him free of charge by his employer . The Federal Travel Regulations provide that a meal provided by a common carrier or a complimentary meal provided by a hotel or motel does not affect a taxpayer ' s otherwise allowable p Br diem expense deduction for meals . 41 C .F .R . sec . 301-11 .1 ( 2000) ; 41 C .F .R . sec . 301 -11 .17 ( 2002 ) ; 41 C .F .R . sec . 301-1l . .7 ( 2003) . Petitioner ' s tugboat is not a common carrier, and he did not receive meals at a hotel or motel . Additionally, the Federal Travel Regulations require that a Federal emp oyee's M&IE rate be 12 - adjusted for meals provided by the Government by deducting appropriate amounts for each meal provided , but not to less than the amount allowed for incidental expenses . Johnson v . Commissioner , supra at 227 - 228 ; Federal Travel Regulations, 41 C .F .R . sec . 301 - 11 .18 ( 2000 ) ; 41 C .F .R . sec . 301-11 .18 (2002) ; 41 C .F .R . sec . 301 - 11 .18 (2003 ) . Because , as petitioners acknowledge , the revenue procedures regarding M&IE rate deductions for non-Government employees are to be applied according to the Federal Travel Regulations for Federal employees , the regulations require that petitioner decrease the M&IE rate deduction otherwise allowable to account for meals provided by petitioner ' s employer . Petitioners also argue that this issue is novel to the Court . We disagree . In Johnson v . Commissioner , supra , the taxpayer , also a merchant seaman, deducted the full Federal M&IE rates on his return, even though all of his meals were provided to him free of charge by his employer . We held that, because the taxpayer ' s actual expenses consisted solely of incidental expenses , his use of the M&IE rates to calculate his deductions for business expenses due to travel away from home was limited to the incidental portion of those rates . Id . at 210-211 . The taxpayer established that he had incurred incidental expenses during his travel away from home and was allowed to use the incidental portion of the M&IE rates to substantiate those - 13 - expenses in lieu of providing actual receipts . The purpose of the Federal per diem rates is to ease the burden of substantiating travel expenses away from home, not to eliminate the requirement that those expenses be incurred before they can be claimed as deductions from income . Although petitioners contend that the Court has not yet addressed this issue, we explicitly stated in Johnson v . Commissioner , supra at 227 : "We do not read the revenue procedures to allow a taxpayer to use the full M&IE rates when he or she incurs only incidental expenses . " In her opening statement at trial, respondent's counsel conceded that petitioners were entitled to incidental expense deductions . We will not , therefore, address respondent's arguments in posttrial briefs challenging petitioner's entitlement to a deduction for incidental expenses for 2003 . As discussed above, the Federal Travel Regulations provide that a taxpayer to whom the regulations apply and wh is not reimbursed for incidental expenses will be entitled to deduct at least the incidental expense portion of the M&IE rate . 41 C .F .R . sec . 301- 11 .18 ( 2002 ) ; 41 C .F .R . sec . 301-11 .18 ( 2003) . Petitioner is entitled to a deduction for his deemed substantiated incidental expenses for 2003 ev n though his meals and lodging were provided free of charge by his employer . See Johnson v . Commissioner , supra . Those incide tal expenses shall be calculated at $2 per diem for the months J nuary through - 14 - October 2003 and at $3 per diem for the months November and December 2003, in accordance with the applicable revenue procedures . See Rev . Proc . 2002 -63, sec . 4 .05 ; Rev . Proc . 2003- 80, sec . 4 .05 . The pay schedule provided by Hornbeck shall be used to calculate the number of days that petitioner worked, all of which were away from home, during 2003 . The Fort Lauderdale Trip--Firefighting Schoo l Section 274(d) limits deductions for travel expenses otherwise allowable under section 162 to those expenses that the taxpayer substantiates by adequate records or sufficient evidence corroborating the taxpayer's own statement of the amount an d business purpose of the expense, as well as the time and place of the travel . Respondent argues on brief that petitioners are not entitled to the deduction for mileage-related travel expenses for petitioner's Fort Lauderdale trip to attend firefighting school because petitioners have not substantiated the business purpose of the trip . To support this position, respondent relies on the absence of testimony by petitioner about why firefighting school was ordinary or necessary for his employment or about what business benefit petitioner derived or hoped to derive from his attendance at the school . Respondent also argues that, because Hornbeck did not require or pay for the firefighting course or expenses related to that course, it was not an ordinary or necessary business expense to petitioner . Hornbeck did have a - 15 - reimbursement program for mariner continuing education that covered tuition, hotel, and meal expenses for mariner continuing education courses, but not for travel expense . On the Sailor Travel Statement attached o petitioners' return for 2002, petitioners explained that t e purpose of petitioner ' s trip to Fort Lauderdale was to a tend a continuing education program , the tuition for which was aid by petitioner's union . At trial , petitioner testified that h attended a firefighting school with colleagues . Althoug given the opportunity , respondent did not question petitioner regarding the business purpose of the Fort Lauderdale trip or the business benefit that petitioner hoped to derive from is attendance at the firefighting school . Respondent's only q estion on cross-examination regarding the Fort Lauderdale trip was whether petitioner kept a mileage log to substantiate the miles traveled on that trip . Petitioner answered in the nega ive . We hold that petitioner has adequately su stantiated the business purpose of his travel expenses relate to the Fort Lauderdale trip for firefighting school . Fire ighting is related to petitioner ' s employment as a merchant sailor and engineer . Payment for the course by petitioner ' s professonal union supports petitioners ' characterization of the elated travel expenses as ordinary business expenses . We ar not persuaded by respondent's argument that, because petitioner did not seek - 16 - reimbursement for his mileage expenses from Hornbeck, the firefighting course was not business related . Petitioner has also adequately substantiated the time, place, and amount of the travel for which he has claimed a business expense deduction . The date and place of the firefighting course is undisputed, and the parties have agreed that the distance between petitioner's home in Sarasota and Fort Lauderdale is approximately 209 miles . Because petitioner drove round trip to Fort Lauderdale for business - related training and was not reimbursed for his travel expenses , petitioner is entitled to a deduction for his April trip to and from Fort Lauderdale, calculated using the total mileage to which the parties have agreed, 418 miles, and using the applicable mileage rate for 2002 . Although petitioner testified that he also incurred unreimbursed work-related travel expenses in the Fort Lauderdale area in transporting himself and coworkers from their hotel to the training facility, he has not presented a log substantiating those expenses, and his testimony does not allow us to estimate them reasonably . Other Job - Related and Miscellaneous Expense s Petitioners claimed other job expense deductions in 2002 for medical exams , phone and pager expenses, and supplies related to petitioner ' s profession . In 2003, petitioners claimed deductions for tax preparation fees and again for phone and pager expenses . However, they have provided no substantiation regarding the - 17 - amounts of these expenses or the job-related ~usiness purpose for those expenses . Petitioner's employer, Hornbeck, did not require its sailors to carry cell phones or pagers an provided its employees with required safety equipment and supplies during the years in issue . Thus, even if the amounts had been substantiated, these expenses were not ordinary or necessary business expenses and were properly disallowed by respondent as deductions . In reaching our decision, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are irrelevant, moot, or without merit . Decision will be entere d under Rule 1155 .