TAX COURT OPINION

Case: Stephanie Elizabeth Gentry
Docket Number: 15580-17S
Judge: Gustafson
Opinion Type: bench
Filed: 05/14/2018
Pages: 14

JRN UNITED STATES TAX COURT WASHINGTON, DC 20217 STEPHANIE ELIZABETH GENTRY, Petitioner, v. ) ) ) ) Docket No. 15580-17S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b) of the Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner Stephanie Elizabeth Gentry and to the Commissioner a copy of the pages of the transcript of the proceedings in the above case before the undersigned judge at Columbia, South Carolina, 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, an appropriate decision will be entered for the Commissioner. (Signed) David Gustafson Judge Dated: Washington, D.C. May 14, 2018 SERVED May 14 2018 Bench Opinion by Judge David Gustafson May 1, 2018 Stephanie Elizabeth Gentry v. Commissioner of Internal 3 Revenue Docket No. 15580-17S This proceeding was heard as a Small Tax Case 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. 1 2 3 4 5. 6 7 8 9 10 The Court has decided to render the following as 11 its oral Findings of Fact and Opinion in this case. This 12 Bench Opinion is made pursuant to the authority granted by 13 section 7459(b) of the Internal Revenue Code, and Rule 152 14 of the Tax Court Rules of Practice and Procedure; and it 15 shall not be relied on as precedent in any other case. 16 By notice of deficiency dated June 12, 2017 (Ex. 17 3-J), the Internal Revenue Service ("IRS") determined a 18 deficiency in the Federal income tax of petitioner 19 Stephanie Elizabeth Gentry, for the year 2014. The issue 20 for decision is whether Ms. Gentry substantiated her 21 entitlement to deductions for unreimbursed employee 22 business expenses and a tax preparation fee, which 23 deductions the IRS disallowed. 24 This case was tried in Columbia, South Carolina, 25 on April 30, 2018. Ms. Gentry represented herself, and Ashley Bender represented the Commissioner. On the evidence before us, we find the following 4 facts: FINDINGS OF FACT Ms. Gentry's background At some time before the year at issue (2014), Ms. Gentry had experience as a real estate agent in Texas and in boat chartering in the Florida Keys. At some point she opened a bank account that she intended to serve as 1 2 3 4 5 6 7 8 9 10 her business account. 11 Employment as art consultant 12 Beginning in June 2013 and ending in June 2014, 13 Ms. Gentry worked as an art consultant for photographer 14. Peter Lik (Stip. 5; Ex. 4-J), who had galleries in Key 15 West, Miami, and Las Vegas. During that time she lived in 16 a small studio apartment. Ms. Gentry was an employee of 17 Peter Lik Retail USA, Inc., and she worked to earn 18 commissions from sales of framed photographs .from the 19 photographer's portfolio. She was headquartered in Key 20 West, but from time to time -- to an extent we cannot 21 quantify -- she drove to Miami to meet with customers who 22 did not want to travel to Key West. 23 While she was working as an art consultant, she 24 intended to use her business bank account for expenses she 25 incurred in that employment. However, in addition to any 5 employment-related expenses she may have paid from that account, she used it to pay her student loans, car payments and repairs, apartment rent and utilities, salon expenses, and bills for clothing (including a pair of shoes that she wore the day of her Tax Court trial). (See Ex. 6-J.) Boat chartering business Ms. Gentry left her employment as an art consultant in June 2014 (the middle of the year at issue), 1 2 3 4 5 6 7 8 9 10 and she began working with her boyfriend in a boat 11 12 chartering business,' called Blue Sky Charter Company, LLC ("Blue Sky"), that he had started in 2012 (Stip. 6; Ex. 5- 13 J). Her boyfriend promised her a .stake in the company, 14 and therefore she' considered herself to be part owner of 15 the business, and to be the business partner of her 16 boyfriend. To an extent we cannot quantify, she spent 17 money from her business acçount for the charter boat 18 19 20 business, and she considered those expenditures to be an investment in the búsiness. In about September 2014, Ms. Gentry moved out of 21 her studio apartment and began living in one of the boats 22 that Blue Sky was renovating. She took some of her 23 personal effects (including clothing) to her parents' 24 25 house in Greenville, South Carolina, to store there. In October 2015 (i.e., after the year at issue), 6 Ms. Gentry suffered serious burns from a mishap in the boat involving boiling water. She testified -- and we assume -- that in order to evade liability for her injuries, her boyfriend made false accusations against her, had her evicted from the marina, and obtained a protective order barring her from the boat on which she had been living. At that time she realized that her boyfriend had tricked her into paying expenses for and working in the business and that she did not really own any stake in it. 2014 tax return In April 2015 (i.e., while she was still 1 2 3 4 5 6 7 8 9 10 11 12 13 involved in Blue Sky), Ms. Gentry filed her 2014 Federal 14 income tax return (Ex. 1-J). To prepare her return, Ms. 15 Gentry obtained the help and advice of a friend who was an 16 17 experiençed art consultant and who she thought knew what deductions could be claimed in her line of work. (Ms. 18 Gentry does not allege that this friend was an accountant, 19 lawyer, or professional return preparer, and we do not 20 21 assume that he was.) Ms. Gentry reported on her return (Ex. 1-J) the 22 employment income she had received from Peter Lik Retail 23 in the amount of $45,672, as reported by the employer on 24 Form W-2 (Ex. 2-J). She included with her return a 25 Schedule A ("Itemized Deductions") on which she claimed a 7 1 2 3 4 5 6 7 8 9 10 11 12 deduction of $35. for "Tax preparation fees", and a deduction for "Unreimbursed employee expenses" totaling $24,724 (i.e., more than half of her wages). To itemize the -latter deduction, she included -a Form 2106-EZ ("Unreimbursed Employee Business Expenses") on which she reported amounts for vehicle mileage expenses of $1,941, non-oyernight transportation expenses of $6,430, overnight travel expenses o.f $7,436, "Business expens.es" of $4,419, and meals and entertaiñment expenses of $8,995, of which 50%, i.e., $4,498, was included in her deduction. According to her return, she incurred gross unreimbursed expenditures totaling $29,221 -- i.e., 64% of 13 her art consultant wages. 14 Notide of deficiency and petition 15 After examining Ms. Gentry's return, the IRS 16 disallowed the deductions at issue here. The IRS issued 17 18 19 its notice of deficiency on June 12, 2.0.17 (Stip. 4; Ex. 3- J). Ms. Gentry timely'filed her petition in this Court on July 20, 2017. At the time she filed her petition, Ms. 20 Gentry resided in Söuth Carolina. (Stip. 1.) 21 22 23 24 OPINION I. Burden of prdof A. General principles The IRS's determination is presumed correct, and 25 taxpayers generally bear the burden to prove their 8 entitlement to any deductions they claim. Rule 142(a). Taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001-1(a), Income Tax Regs. B. The Cohan rule and section 274 When a taxpayer establishes that she paid or 1 2 3 4 5 6 7 8 9 10 incurred a deductible expense but fails to establish the 11 amount of deduction, the Court may estimate the amount l'2 allowable as a deduction. The seminal case so holding is 13. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 14 1930), and we therefore call this principle "the Cohan 15 rule." See.also Vanicek v. Commissioner, 85 T.C. 731, 16 17 18 19 742-743 (1985). A taxpayer may substantiate deductions through secondary evidence only where the underlying documents have not been intentionally lost or destroyed, see Boyd v. Commissioner, 122 T.C. 305, 320-321 (2004), 20 and there must be sufficient evidence in the record to 21 permit the Court to conclude that a deductible expense was 22 paid or incurred in at least the amount allowed. Williams 23 v. United States, 245 F.2d 559, 560 (5th Cir. 1957). 24 25 . Moreover, section 274(d) establishes higher substantiation requirements for expenses related to 9 1 2 3 4 5 6 7 8 9 10 11 12 travel, meals and entertainment, and "listed property", defined in section 280F(d)(4) to include passenger automobiles -- i.e., the great majority of the claimed expenses at issue here. For these expenses, a taxpayer must prove: (1) The amount of each separate expenditure with respect to such property; (2) the amount of each busiñess use; and (3) the business purpose for an expenditure or use with respect to such property. Sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). These special substantiation provisions of section 274(d) thus override the Cohan rule, and the Court 13 may not estimate these expenses. See Sanford v. 14 Commissioner, 50 T.C. 823, 827-82-8 (1968), aff'd, 412 F.2d 15 16 17 18 19 201 (2d Cir. 1969). C. Small tax cases This proceeding was heard as a Small Tax Case (called an "S case") pursuant to section 7463 and Rules 170 through 174. In S cases, the normal procedural and 20 evidentiary rules are relaxed. See Rule 174(b). This 21 22 relaxed evidentiary standard, however, does not overrule section 274(d).. Deductions that fall within section 23 274(d) are disallowed unless the taxpayer adequately 24 substantiates the amount of the expense; the time and 25 place of business use of the vehicle; and the business 10 purpose of the travel. These rules were adopted to preclude estimates based solely on a finding that some deductible business expenses were incurred, as allowed in other contexts. See Sanford, supra. The Congressionally enacted standard of adequacy of evidence is not modifiable by a court rule regarding admissibility of evidence, such as Rule 174(b). II. Tax preparation fees Ms. Gentry alleges that she incurred a cost of 1 2 3 4 5 6 7 8 9 10 $35 to purchase TurboTax software to prepare her 2014 11 12 return, but she offers no documentation whatsoever. We hold that she did not carry her burden of 13 proof on this pöint. 14 15 III. Employee business expense A taxpayer may claim an unreimbursed employee 16 business expense as a miscellaneous deduction on Schedule 17 A, pursuant to the provision in section 162(a) that one 18 may deduct expenses of a business; and an employee is .19 considered to be in the business. óf being an employee. 20 However, the employee business expenses that Ms. Gentry 21 claimed must be disallowed, because she did not 22 23 substantiate them. We begin by noting the surprisingly large amount 24 of expenses in relation to the level of income. It is not 25 impossible that someone who was paid about $46,000 for six 11 1 2 3 4 5 6 7 8 9 10 11 12 months of work would be willing to spend 64% of it for unreimbursed expenses for her job, but Ms. Gentry's allegation to this effect provokes questions. Ms. Gentry is unable to answer those questions because, she says, her records -- paper receipts and. digital scans and images -- were moved to the boat and were lost there. And again, her account is not impossible, but we think it unusual that, when she moved from her studio apartment, she took her records with her onto a boat, not the most stable and secure storage situation -- and a boat that she did not even own -- rather than including those records with the personal effects that she stored at her parents' house. 13 Moreover, her first explanation for her lack of records, 14 given on a questionnaire (Form 13825) that the IRS asked 15 her to complete during its audit, was: "All financial 16 17 records, originals and electronic copies of 2014 tax records were lost on a sailboat accident ...." (Ex. 6-J 18 at 2.) To us, this "sailboat accident" explanation seems 19 to suggest perhaps a capsized boat, or perhaps at least 20 waves washing over the deck in a storm and flooding the 21 hull. But now Ms. Gentry explains that the "sailboat 22 accident" was her (well-documented and truly painful) 23 inj.ury that precipitated her estrangement from her 24. boyfriend and caused her to be forced off the.boat and, if 25 we understand her account, ·to lose access to her records stored on the boat. The best that can be said for her answer on the questionnaire is that it was ambiguous, and we cannot dismiss the possibility that it was deliberately 12 so. Ms. Gentry attempted to reconstruct her expenses from her bank statements, which she annotated during the audit with handwritten notations explaining the supposed business character of the entries (Ex. 6-J). However, even if we assume that her notations were made in goöd 1 2 3 4 5 6 7 8 9 10 faith, the bank records fail to substantiate any employee 11 12 business expenses, for multiple reasons: 1. Ms. Géntry asks us to presume with her that 13 expenses made from her business account were probably 14 business expenses because that is how she used the 15 16 account. But it is clear that she did not so use the account. Her school loans, her rent expense, and utility 17 bills -- expenses for which she claims no business 18 purpose -- were made from the account. It was not really 19 20 21 22 a business account. 2. Ms. Gentry was unable to say which, if any, of the expenditures she annotated were in fact expenses that she had deducted at the suggestion of her more 23 experienced friend. It was therefore not possible at 24 trial to establish any correlation between her return and 25 the entries on the bank statements. 13 1 2 3 4 5 6 7 8 9 3. The Commissioner tallied all the expenses that Ms. Gentry annotated on the statements as business expenses, and found.that they total not $29,221 as her return would require but less than half that amount -- only $14,101. (See the Commissioner's pretrial memorandum at 7.) Thus, for half the expenses she claims she has no documentation at all. 4. The deductions include expenses for clothing. Ms. Gentry testified that there was no uniform 10 required for her job, but explained that the employees . 11 weré required to dress very well. However, the clothes 12 that she bought were evidently not specialized but were 13 suitable for use outside of her work environment -- 14 illustrated by the fact that she were to her trial a pair 15 of shóes for which she had deducted the expense for 2014. . 16 We can say here, as we said in Bernardo v. Commissioner, 17 18 T.C. Memo. 2004-199, "Although petitioner -testified that she purchased the.clothing for work, shé ne.ver stated (and 19 there is no evidence) that it was unsuitable, in terms of 20 price, quality, or style, for her personal wear." The 21 22 cost of the clothing is therefore not deductible. 5. Ms. Gentry apparently deducted vehicle 23 expense both by mileage (at 56 cents per mile) and by 24 specific expenses she had incurred for her car -- i.e., 25 .repairs and purchase payments. Such duplication is not . 14 1 2 3 4 5 6 7 8 9 10 11 12 13 permitted, and the capital expense of purchasing the car (a depreciable asset) would not be deductible. 6. Ms. Gentry did not undertake to show, as section 274 requires, the specific business purpose and nature of her vehicle expense, her travel expense, or her meals and entertainment expense. She admitted that she was unable to recall details of events in 2014, and her understandable lack of such recall seems an argument for the wisdom of the regime Congress enacted in section 274. IV. Blue Sky expenses At trial Ms. Gentry seemed to suggest that expenses she had incurred in 2014 for Blue Sky should augment whatever deductions we might allow for her 14 unreimbursed employee business expenses for her art 15 16 17 18 19 consultant employment. However, it appears that if she did make any expenditures for Blue Sky (which we pannot tell, for the same reasons we cannot tell whether she made expenditures for her art consultant job), then those would either have 20 been start-up expenditures not deductible pursuant to 21 22 section 195(a), or else an investment in the company, or else, if her boyfriend tricked her into making 23 expenditures for his benefit, then perhaps theft loss 24 expense deductible not in 2014 but in 2015 when she 25 discovered the theft. See sec. 165(e). Ms. Gentry is not entitled to any deductions in 2014 for Blue Sky expenditures. Because we sustain all the disallowances in the IRS's notice of deficiency, decision will be en.tered for 15 the Commissioner. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 9:40 a.m., the above-entitled matter was concluded. ) (cid:16)042 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