TAX COURT OPINION

Case: Paul D. Rice
Docket Number: 6344-18
Judge: Buch
Opinion Type: bench
Filed: 04/06/2020
Pages: 10

SD UNITED STATES TAX COURT WASHINGTON, DC 20217 PAUL D. RICE, Petitioner, v. ) ) ) ) Docket No. 6344-18. 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 with this order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Los Angeles, California, 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) Ronald L. Buch Judge Dated: Washington, D.C. April 6, 2020 SERVED Apr 07 2020 3 1 2 3 4 5 6 7 8 a Bench Opinion by Judge Ronald L. Buch March 11, 2020 Paul D. Rice v. Commissioner Docket No. 6344-18 THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied on as precedent in any other case. This opinion is in conformity with Internal Rouenne rods sonrinn 7459(h) and Rule 192(a) of the Tax 10 Court Rules of Practice and Procedure. Any section 11 rererences rerer to tne internal Revenue Coae or tne 12 Treasury regulations in effect during the year at issue, 13 14 15 16 17 and Rule references are to the Tax Court Rules of Practice and Procedure. The Commissioner issued a notice of deficiency to Mr. Rice for 2015 disallowing his itemized deductions and allowing a standard deduction. In particular, the la Commissioner disallowed the miscellaneous itemized 19 deductions relating to return preparation fees, ZU u111e11ttuurseu eittployee expe11des, ctilu uus111ess use ut ct 11uitte 21 office. Mr. Rice filed a petition challenging the 22 deficiency. We must decide whether Mr. Rice may take 23 24 deductions for return preparation fees, employee business expenses, and home office expenses. 25 I. Background cnners (973) 406-2250 j operations@escribersmet | wwaescribetsmet During the times at 4 issue, Mr. Rice was employed as an outside salesman by Bassett Salon Solutions, Inc., a distributor of both commercial and retail hair products. He worked a regular route whereby, over a two-week period, he would follow a pattern of visiting salons to provide products and consult with salons and their workers. On Sunday, he would prepare the next week's calendar of all of the salons he intended to visit in the coming week. If his nlans chanced. he would note rhp channo in the calendar. In a typical day, he would depart from his home in rountain valley ana visit pernaps as many as zu salons in a particular geographic area before returning home. Mr. Rice kept track of his mileage with an 1 2 3 4 5 6 7 8 a 10 11 12 13 14 online program used by his employer to track mileage. He 15 would enter his stops, taken from his calendar, into the 16 Program, which would compute the mileage. At some point, 17 the employer began to use this program to reimburse 1R mileace, but the extent to which mileaae may have been 19 reimbursed in 2015 is unclear. 21 22 incurred other expenses. He would sometimes plan events, such as courses, for salon workers or salon owners. He 23 might need to rent chairs or buy supplies for these 24 courses. On occasion, he would incur expenses to 25 entertain his clients. He purchased clothes specifically cnoPrs for work, because the clothes he wore in his personal were more casual than what he would wear for work. Mr. Rice's office was in his home, which he rented for $2,820 per month. He also incurred (and 5 life substantiated) $481 of utilities. He used one room in the home as his office and another room as a workspace to store and repackage items for delivery to salons. The two rooms were 120 and 110 square feet, respectively. The homp was 1R70 sanarp foot foral. Alrhonah Mr. Ring was 1 2 3 4 5 6 7 8 o 10 renting the home, he made improvements in the hopes of 11 Purcnasing tne nome in tne ruture. 12 The record does not establish the Bassett Salon 13 Solutions expense reimbursement policy. The record 14 includes an expense reimbursement policy that indicates 15 that employees' travel expenses will be reimbursed, but 16 Mr. Rice does not believe that policy was in place in 17 19 19 2015. No other policy was provided for the record. The record also does not establish any payment for return preparation. 21 miscellaneous itemized deductions of $28,993 (before 22 23 24 reduction for the 2% of AGI limitation). That disallowance included $27,493 of unreimbursed employee expenses and $1,500 of return preparation fees. The 25 $27,493 deduction reported on Mr. Rice's return consists 6 of mileage for business use of Mr. Rice's personal vehicle, other travel and entertainment expenses, and other miscellaneous expenses including the business use of his home. In lieu of itemized deductions, the Commissioner allowed a standard deduction of $6,300, which exceeded the itemized deductions remaining after the Commissioner's disallowance of the miscellaneous itemized deductions. TT. Rnrden of Proof As a general matter, the Commissioner's aeterm1nat1ons 1n tne not1ce or aer1c1ency are presumea correct, and the taxpayer bears the burden of establishing an error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In limited situations, the burden can shift to the Commissioner under section 7491(a), but the record does not establish that the criteria under section 7491 have been established, therefore, the burden of proof remains on Mr. Rice. III. Employee Business Expenses idxPdyers udu ueuuu u uludry duu necessdry expenses paid or incurred during the taxable year in carrying on any trade or business." Sec. 162(a). An "ordinary" expense is one that commonly or frequently occurs in the type of business at issue. Deputy v. du 1 2 3 4 5 6 7 8 o 10 11 12 13 14 15 16 17 1R 19 ZU 21 22 23 24 25 Pont, 308 U.S. 488, 495 (1940). A "necessary" expense 1s an expense that is "appropriate and helpful" to the business. Heinbockel v. Commissioner, T.C. Memo. 2013- 7 125, at *17. A "trade or business" includes the "trade or business" of being an employee. O'Malley v. Commissioner, 91 T.C. 352, 363-364 (1988). When an employee has a right to reimbursement for expenditures related to his status as an employee but fails to claim reimbursement, the expenses are nor nonossarv and are nor dedunrible. Orvis v. 1 2 3 4 5 6 7 8 o 10 Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), aff'g 11 12 13 14 T.U. Memo. 1see-ooo. an emp1oyee cannot ra11 to seer reimbursement and convert the employer's expenses into the employee's. Kennelly v. Commissioner, 56 T.C. 936, 943 (1971), aff'd without published opinion, 456 F.2d 1335 (2d 15 Cir. 1972). The taxpayer bears the burden of establishing 16 17 that his employer would not have reimbursed him for such expenses. Humphrey v. Commissioner, T.C. Memo 2017-78 at 1R *7. 19 The prohibition of a deduction for reimbursable 21 employee is unaware that the expenses are reimbursable. 22 Richards v. Commissioner, T.C. Memo. 2014-88, at *10. 23 Such a rule "avoids the difficult inquiry into the 24 taxpayer's knowledge, and gives the taxpayer an incentive 25 to determine which expenses are reimbursable." Orvis v. cmnørs 9733406-2250!opentions@escribetsmet|www.esenbersmet 8 Commissioner, 788 F.2d at 1408. Mr. Rice has not met his burden of showing that he was not entitled to reimbursement for the expenses he incurred. To the extent the Court has evidence of any reimbursement policy, it shows that Mr. -Rrse was entitled Rice to reimbursement for travel expenses and is silent as to other expenses. Moreover, the record does not establish for which years that reimbursement policy was in effect. Ronansa he failed en establish rhar he was nor entitled rn reimbursement for any of these expenses, we need not aaaress tne aeauctio111ty or any particular expense. IV. Home Office Expenses Generally, taxpayers may not deduct expenses related to their residence. Sec. 280A(a). An exception 1 2 3 4 5 6 7 8 o 10 11 12 13 14 15 exists when a taxpayer uses a portion of the home as the 16 principal place of business. Sec. 280A(c)(1) (A). The 17 portion of the dwelling must be used exclusively and 1R reaularly for business purposes. Hamacher v. 19 Commissioner, 94 T.C. 348, 353 (1990). Another exception 21 22 23 24 section 280A(c 2 . We have frequently declined to allow a deduction for home office expenses when we have not found a taxpayer's testimony on the issue credible. For example, 25 in Johnson v. Commissioner, T.C. Memo. 2013-90, at *13 the cncmrs (973)406-2250loperations@escribetsnet|www.escnbetsnet 1 2 taxpayer claimed that half of an 1,144 square foot home was used exclusively for business, while also housing a 3 married couple and as many as five children. We 9 explained: 4 5 6 7 8 a 10 11 12 If Johnson had been a credible witness on other issues, and if on this issue he had testified in detail about the family's living arrangements and explained their circumstances, or provided snmp norrnhoratina evidenne such as nhorns or a floor plan, we might have believed him. As it 1s, we ao not. Unlike the taxpayer in Johnson, Mr. Rice's 13 description of the business use of his home is credible. 14 He provided the sizes of the two rooms used for his 15 business. Those rooms comprise a mere 12.3% of the total 16 area of the home. Applying that 12.3% to his total annual 17 rent of $33,840 and $481 of utilities would yield a home la office deduction of $4,221. 19 Even after allowing for Mr. Rice's home office Z U ueuuu tioli, we 1ttus t s us tctill L11e uituttid slu11e 21 determination. The standard deduction allowed by the 22 Commissioner exceeds Mr. Rice's itemized deductions, even 23 after we allow for the home office deduction. 24 As a result decision will be entered for the 25 Commissioner. (Whereupon, at 9:31 a.m., the above-entitled 10 matter was concluded.) 1 2 3 4 5 6 7 8 Q 10 11 12 13 14 15 16 17 1 R 19 ZU 21 22 23 24 25 1 2 3 4 5 6 7 8 a 10 11 12 13 14 6 17 la 19 ZU 21 22 23 24 25 CERTIFICATE OF TRANSCRIBER AND PROOFREADER 11 CASE NAME: Paul D. Rice v. Commissioner DOCKET NO.: 6344-18 We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 11 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Jacqueline Denlinger on March 11, 2020 before the United staros Tax nourt ar ies session in T,ns AncTelps. CA. in accordance with the applicable provlslons of the current vercat1m report1ng contract or tne court ana nave ver1r1ea the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. Meribeth Ashlev, CET-507 Transcriber 3/18/20 Date Lori Rahtes, CDLT-108 Proofreader 3/18/20 Date c riners (9733406-2250| operations@escribersnet j www.escribersaet