TAX COURT OPINION

Case: Albert Herrera, Jr.
Docket Number: 12662-16S
Judge: Guy
Opinion Type: bench
Filed: 05/01/2017
Pages: 9

CZ UNITED STATES TAX COURT WASHINGTON, DC 20217 ALBERT HERRERA, JR., Petitioner, v. ) ) ) ) Docket No. 12662-16S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Special Trial Judge Daniel A. Guy, Jr. at Denver, Colorado, 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 for respondent. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. May 1, 2017 SERVED May 01 2017 Capital Reporting Company 3 1 2 Bench Opinion by Special Trial Judge Daniel A. Guy, Jr. 3 April 4, 2017 4 Albert Herrera, Jr. v. Commissioner 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Docket No. 12662-16S 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 to the provisions of section 7463 of the Internal 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. 21 Hereinafter in this bench opinion, section references 22 23 24 25 are to the Internal Revenue Code of 1986, as amended, in effect for 2013, and Rule references are to the Tax Court Rules of Practice and Procedure. Petitioner resided in Colorado at the time the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 petition was filed and he appeared at trial pro se. 2 Michael Thomas Garrett appeared on behalf of 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 respondent. At the start of the trial, after petitioner had conceded a substantial portion of the expenses underlying the deduction in dispute, respondent made an oral motion to conform the pleadings to the evidence with the aim of asserting that petitioner is liable for an accuracy-related penalty under Section 6662(a). On this record, in the light of the timing of respondent's motion, we conclude that petitioner would be unduly prejudiced. See Rule 41; see, e.g., Arburg v. Commissioner, T.C. Memo. 2007-244. Consequently, respondent's oral motion is denied. The sole issue for decision is whether petitioner has properly substantiated unreimbursed employee business expenses that he claimed on Schedule A, Itemized Deductions, for the taxable year 2013. We conclude that he has not and sustain the income tax deficiency in dispute. 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. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 Petitioner is licensed as a certified public accountant in Colorado, and he conducts his accounting practice through his wholly owned S corporation, Al Herrera CPA, Inc. (S corporation). For the taxable year 2013, the S corporation filed a Form 1120S, U.S. Income Tax Return for an S 7 Corporation, reporting gross receipts of $144,602, 8 9 10 11 12 13 14 15 16 17 18 19 offset by various deductions, including "other deductions", compromising in relevant part vehicle expenses of $7,517 and continuing education expenses of $1,636. Petitioner filed a Form 1040, U.S. Individual Income Tax Return, for 2013. He attached to his tax return a Schedule A claiming in relevant part unreimbursed employee business expenses of $17,137. On Form 2106, Employee Business Expenses, petitioner reported that he drove one vehicle 10,496 miles for business purposes (using the standard mileage rate to compute vehicle expenses), a second vehicle 8,366 20 miles for business purposes (using actual expenses to 21 22 23 24 25 compute vehicle expenses), for a total of $15,352 in vehicle expenses, and other business expenses of $1,785 attributable to travel for continuing education. Respondent issued a notice of deficiency to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company petitioner disallowing the deduction of $15,337 that he had claimed for unreimbursed employee business /3 7 expenses for lack of substantiation and determining a federal income tax deficiency of $2,355 for 2013. 1 2 3 4 5 Petitioner timely filed a petition for 6 7 8 redetermination with the Court pursuant to Section 6213(a). At trial, petitioner stipulated that he did not 9 maintain a contemporaneous mileage log for any of the 10 11 12 13 14 15 16 17 vehicles that he used for business purposes. He acknowledged that some of the vehicle expenses in question had been reported on both his personal tax return and on his S corporation return, and he reduced the amount of his claimed unreimbursed employee business expenses to $5,336, comprising vehicle expenses of $2,870 and travel expenses related to continuing education programs of $2,466. 18 Petitioner testified that the mileage that he 19 20 21 22 23 24 25 reported for the first vehicle identified on Form 2106 was actually the mileage for three separate vehicles. Notably, petitioner also claimed a depreciation deduction for one of these three vehicles on the Form 1120S filed by his S corporation. Petitioner offered various documents into evidence at trial in an effort to substantiate 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 the expenses in question, including a schedule of travel expenses; handwritten notes; bank records for himself and his S corporation; and receipts for gas purchases, insurance premiums, and repair invoices for his various vehicles. The Commissioner's determination of a taxpayer's liability in a notice of deficiency normally is presumed corrected7'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, we conclude that petitioner has not complied with the Code's substantiation requirements, nor has he maintained 14 all required records, the burden of proof as to any 15 16 17 18 19 20 21 22 23 24 25 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 expenses underlying deductions claimed by keeping and producing adequate records that enable the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 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. 1976). 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. 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). As is relevant here, Section 274(d) prescribes strict substantiation requirements for deductions for expenses related to travel (including meals and lodging), and with respect to "listed property". Sanford v. Commissioner, 50 T.C. 823, 826-829 (1968), 22 aff'd per curiam, 412 F.2d 201 (2d Cir. 1969); Sec. 23 24 25 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). The term "listed property" includes passenger automobiles. Sec. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 280F(d)(4) (A)(i). To satisfy the requirements of Section 274(d), a taxpayer generally must maintain adequate 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- ST(b)(6), (c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). Section 1.274-5T(c)(2), Temporary Income Tax 10 Regs., 50 Fed. Reg. 46017-46018 (Nov. 6, 1985), 11 12 13 14 15 16 17 18 19 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 V that the strict substantiation requirements of Section 274(d) for vehicle expenses must be met even where the optional standard mileage rate is used. 20 Moreover, the Court may not estimate expenses covered 21 22 23 24 25 by Section 274(d). Sanford v. Commissioner, 50 T.C. at 827, Sec. 1.274-5T(a), Temporary Income Tax Regs., supra. The documents that petitioner offered at trial indicate that he paid various expenses to use and 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 10 1 maintain his vehicle and that he traveled to various 2 3 4 destinations in Nevada and California. Some of the records indicate that petitioner's vehicle and travel expenses were for personal pleasure. He did not 5 maintain contemporaneous records demonstrating that 6 7 8 9 10 11 12 13 14 15 16 17 18 his vehicle expenses served a business purpose, and his testimony was disjointed and generally unconvincing. The Court is not obliged to accept testimony that is self-serving and uncorroborated by objective evidence. See Cluck v. Commissioner, 105 T.C. 324, 338 (1995). In sum, petitioner failed to prove that the expenses in question were business expenses as opposed to personal expenditures. Because petitioner failed to satisfy the strict substantiation requirements of Section 274(d), we conclude that he is liable for the income tax deficiency determined by respondent. Consistent with the foregoing, decision 19 will be entered for respondent. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 12:14 p.m., the above- entitled matter was concluded.) 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com