Court Opinion

ID: 9893867
Source: CourtListenerOpinion
Date Created: 2023-10-30 19:04:34.797955+00
Date Added: 2024-06-11T09:06:43.135212
License: Public Domain

United States Tax Court

                        T.C. Summary Opinion 2023-31

       ANDREW L. HARRELL AND KATHERINE L. HARRELL,
                        Petitioners

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 10182-21S.                                       Filed October 30, 2023.

                                     —————

Andrew L. Harrell and Katherine L. Harrell, pro se.

Hans Famularo, Kim-Khanh Nguyen, and Sarah C. Nadel, for
respondent.

                              SUMMARY OPINION

       CARLUZZO, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 1 of the Internal Revenue Code in
effect when the Petition was filed. Pursuant to section 7463(b), the decision
to be entered is not reviewable by any other court, and this Opinion shall
not be treated as precedent for any other case.

       In a notice of deficiency dated March 1, 2021 (notice), respondent
determined a deficiency in petitioners’ 2017 federal income tax and a
section 6662(a) accuracy-related penalty.

        1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and
Rule references are to the Tax Court Rules of Practice and Procedure. Monetary
amounts are rounded to the nearest whole number.

                                 Served 10/30/23
                                         2

      Respondent now concedes the section 6662(a) penalty; the issue
for decision is whether petitioners are entitled to a miscellaneous
itemized deduction for unreimbursed employee business expenses. 2
When the Petition was filed, petitioners lived in California.

                                   Background

       At different times during the year in issue Andrew L. Harrell
(petitioner) was employed by the following: (1) Goodwill, (2) GPR
Logistics, LLC (GPR), and (3) Village Management Services, Inc.
(Village). Each employer treated petitioner as an employee and reported
his wages on Form W–2, Wage and Tax Statement.

        Petitioner was the transportation manager for both Goodwill and
GPR. Services he performed for Goodwill and GPR were similar; he
managed the distribution of inventory among their stores in California.
For Village, petitioner managed the fleet of buses that served a senior
citizen residential complex. He was also responsible for managing the
maintenance and condition of the roads, clubhouses, and assisted-living
facilities in the complex. At various points throughout the year he
attended transportation industry expos to investigate vehicle options for
each of his employers.

       Petitioner’s employment responsibilities, particularly for
Goodwill and GPR, required frequent travel throughout southern
California. He sometimes used petitioners’ vehicles for employment-
related travel.     Petitioner did not keep a logbook or other
contemporaneous record of the expenses he incurred while traveling for
business. Neither did he keep any record of how much of his use of
petitioners’ vehicles was employment related and how much was
personal.

       Petitioners did not provide the employee expense reimbursement
policies, if any, of petitioner’s employers. It appears, however, that
Village sometimes reimbursed petitioner for expenses he incurred on
behalf of that company.

        2 This issue is considered before the application of the 2% of adjusted gross

income limitation imposed by section 67(a). The Tax Cuts and Jobs Act of 2017, Pub.
L. No. 115-97, § 11045, 131 Stat. 2054, 2088, amended section 67 by adding
subsection (g) suspending miscellaneous itemized deductions for any taxable year
beginning after December 31, 2017, and before January 1, 2026.
                                   3

       Petitioners’ joint 2017 federal income tax return was prepared by
a paid income tax return preparer. As relevant, on the return
petitioners (1) reported the amounts reported on Forms W–2 issued to
petitioner by his employers and (2) claimed a miscellaneous itemized
deduction for unreimbursed employee business expenses related to
petitioner’s employment. The deduction totals approximately 50% of the
income shown on the Forms W–2 and includes amounts for vehicle
expenses, travel expenses, meals and entertainment expenses, and
other business expenses that petitioners claim petitioner paid or
incurred in connection with his employment with one or another of his
employers.

       In the notice respondent disallowed the entire deduction
petitioners claimed for unreimbursed employee business expenses
because, according to the notice, petitioners “did not establish that the
business expense shown on [their] tax return was paid or incurred
during the taxable year and that the expense was ordinary and
necessary to [petitioner’s] business.”

                               Discussion

      As a general rule, the Commissioner’s determination of a
taxpayer’s federal income tax liability in a notice of deficiency is
presumed correct, and the taxpayer bears the burden of proving that the
determination is erroneous. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Petitioners do not claim and the record does not
otherwise demonstrate that respondent should bear the burden of proof
on the issue here in dispute. See § 7491(a).

       As we have observed in countless opinions, deductions are a
matter of legislative grace, and the taxpayer bears the burden of proving
entitlement to any claimed deduction. 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). This burden requires the taxpayer to
substantiate expenses underlying deductions claimed by keeping and
producing adequate records that enable the Commissioner to determine
the taxpayer’s correct tax liability. § 6001; Hradesky v. Commissioner,
65 T.C. 87, 89–90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976);
Meneguzzo v. Commissioner, 43 T.C. 824, 831–32 (1965). A taxpayer
claiming a deduction on a federal income tax return must demonstrate
that the deduction is allowable pursuant to some statutory provision and
must further substantiate that the expense to which the deduction
                                    4

relates has been paid or incurred.      See § 6001; Hradesky, 65 T.C.
at 89–90; Treas. Reg. § 1.6001-1(a).

       Taxpayers may deduct ordinary and necessary expenses paid in
connection with operating a trade or business. § 162(a); Boyd v.
Commissioner, 122 T.C. 305, 313 (2004). An ordinary expense is one
that commonly or frequently occurs in the taxpayer’s business, Deputy
v. du Pont, 308 U.S. 488, 495 (1940), and a necessary expense is one that
is appropriate and helpful in carrying on the taxpayer’s business,
Commissioner v. Heininger, 320 U.S. 467, 471 (1943); Treas. Reg.
§ 1.162-1(a).

        Generally, the performance of services as an employee constitutes
a trade or business. Primuth v. Commissioner, 54 T.C. 374, 377 (1970).
If, as a condition of employment, an employee is required to incur certain
expenses, then the employee is entitled to deduct those expenses unless
entitled to reimbursement from his or her employer. See Fountain v.
Commissioner, 59 T.C. 696, 708 (1973); Spielbauer v. Commissioner,
T.C. Memo. 1998-80.

       As a general rule, if a taxpayer provides sufficient evidence that
the taxpayer has incurred a trade or business expense contemplated by
section 162(a) but is unable to adequately substantiate the amount, the
Court may estimate the amount and allow a deduction to that extent.
Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). In order for
the Court to estimate the amount of an expense, there must be some
basis upon which an estimate may be made. Vanicek v. Commissioner,
85 T.C. 731, 742–43 (1985). The record in this case does not allow us to
estimate the amount of any expense included in the deduction here in
dispute.

Expenses subject to section 274

       Deductions for certain otherwise deductible expenses, such as
travel, meals, entertainment, and vehicle expenses, are subject to strict
substantiation requirements. See § 274(d); Sanford v. Commissioner, 50
T.C. 823, 827 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969); Temp.
Treas. Reg. § 1.274-5T(a). With respect to deductions for these types of
expenses, section 274(d) requires that the taxpayer substantiate either
by adequate records or by sufficient evidence corroborating the
taxpayer’s own statement (1) the amount of the expense, (2) the time
and place the expense was incurred, (3) the business purpose of the
                                     5

expense, and (4) in the case of an entertainment or gift expense, the
business relationship to the taxpayer of each expense incurred.

       Substantiation by adequate records requires the taxpayer to
maintain an account book, a diary, a log, a statement of expense, trip
sheets, or a similar record prepared contemporaneously with the
expenditure and documentary evidence (e.g., receipts or bills) of certain
expenditures. Treas. Reg. § 1.274-5(c)(2)(iii); Temp. Treas. Reg. § 1.274-
5T(c)(2). Substantiation by other sufficient evidence requires the
production of corroborative evidence in support of the taxpayer’s
statement specifically detailing the required elements. Temp. Treas.
Reg. § 1.274-5T(c)(3).

       A portion of the unreimbursed employee business expense
deduction here in dispute includes amounts for vehicle expenses, travel
expenses, and meals and entertainment expenses that petitioner claims
to have incurred or paid in connection with his employment with one or
more of his employers. To support inclusion of the amounts expended
for such purposes petitioners offered (1) bank statements with
particular entries highlighted and (2) a contract for the purchase of a
pickup truck. As noted, petitioner did not keep a logbook or other record
that reflects the use of this truck or other of petitioners’ privately owned
vehicles for employment related purposes. Petitioners’ bank statements
show amounts spent at restaurants and for public transportation, but
petitioner’s generalized testimony with respect to these expenses is not
sufficient to satisfy the requirements necessary to allow for deductions
for those expenses.

       Furthermore, it is unclear whether petitioner’s employers
reimbursed petitioner for any expenses he incurred on behalf of any of
them. Petitioner testified that one of his employers would occasionally
reimburse him for purchases he made on behalf of the employer, but he
did not provide the reimbursement policies of this employer or any other
of his employers.

      Because petitioners failed to present sufficient evidence
substantiating the deductions claimed for vehicle usage, travel
expenses, and meals and entertainment expenses, they are not entitled
to deduct any of those expenses.

Expenses not subject to section 274(d)

      The disallowed deduction also includes amounts for other
expenses that petitioners report relate to petitioner’s employment for
                                    6

one or the other of his employers. At trial petitioner pointed to some
charges shown in petitioners’ bank statements and claimed that these
purchases related to his employment. According to petitioner, he was
not reimbursed for any of these purchases by any of his employers.
Reimbursement aside, petitioners failed to explain how the items
purchased related to petitioner’s employment. For example, according
to petitioner he purchased clothing for individuals being honored at an
event sponsored by Goodwill. Although a generous gesture, petitioners
failed to establish how the purchase was an ordinary and necessary
expense related to petitioner’s employment with Goodwill.

       With respect to deductions claimed for various other expenses, as
respondent explained in the notice, petitioners have failed to establish
that the expenses were paid or incurred, or if so, how the expenses
related to petitioner’s employment with any of his employers. It follows
that petitioners are not entitled to deduct these expenses.

      To reflect the foregoing,

       Decision will be entered for respondent with respect to the
deficiency and for petitioners with respect to the section 6662(a) penalty.