Court Opinion

ID: 9297103
Source: CourtListenerOpinion
Date Created: 2022-11-29 20:03:08.333454+00
Date Added: 2024-06-11T17:13:24.036012
License: Public Domain

United States Tax Court

                               T.C. Memo. 2022-113

           INTAN N. ISMAIL AND MOHD RAZI ABD RAHIM,
                            Petitioners

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket Nos. 16366-16, 13297-18.                          Filed November 29, 2022.

                                     —————

Intan N. Ismail and Mohd Razi Abd Rahim, pro sese.

Britton G. Wilson, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

        PARIS, Judge: The cases at Docket Nos. 16366-16 and 13297-18
are consolidated for trial, briefing, and opinion. Respondent determined
deficiencies in petitioners’ 2012, 2013, 2014, and 2015 federal income
tax of $8,329, $11,733, $8,200, and $2,827, respectively. Respondent also
determined accuracy-related penalties under section 6662(a)1 for 2012,
2013, and 2014. Respondent now concedes that petitioners are not liable
for the section 6662(a) accuracy-related penalties determined for the
first three tax years.

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

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

                                 Served 11/29/22
                                           2

[*2]    After this concession, the issues for decision are:

     1. Whether either petitioner had an ownership interest in RNR
        Global Resources Sendirian Berhad (RNR) for 2012, 2013, and
        2014.

     2. Whether RNR was a foreign corporation and not a sole
        proprietorship for 2012, 2013, and 2014.

     3. Whether petitioners adequately substantiated their claimed
        business expense deductions with respect to vehicles, travel, and
        meals and entertainment for 2015.

                               FINDINGS OF FACT

I.      Background

      Some of the facts have been stipulated and are so found. The
Stipulations of Facts, the Supplemental Stipulation of Facts, and the
attached Exhibits are incorporated by this reference. 2

       Petitioners Intan N. Ismail and Mohd Razi Abd Rahim resided in
Overland Park, Kansas, and Puchong, Malaysia, respectively, when
they timely filed the Petitions in these consolidated cases. Petitioners,
who are married to each other, filed joint federal income tax returns for
2012 through 2015. Mrs. Ismail has a master’s degree and was employed
by a Kansas City, Missouri, company during the relevant times in these
cases. Dr. Rahim holds a doctorate, and his employment is related to
RNR.

      In a notice of deficiency dated April 21, 2016, respondent
determined deficiencies in petitioners’ 2012, 2013, and 2014 federal
income tax of $8,329, $11,733, and $8,200, respectively. Respondent also
determined accuracy-related penalties under section 6662(a) for those
same years. The 2016 notice of deficiency disallowed the loss deductions
claimed on petitioners’ 2012, 2013, and 2014 Schedules C, Profit or Loss
From Business, contending, among other things, that neither petitioner
owned the business to which the losses related—RNR—and that the
business was a foreign corporation, not a Schedule C sole

        2   The Stipulations included translated documents where necessary.
                                          3

[*3] proprietorship. 3 Respondent now concedes that petitioners are not
liable for the section 6662(a) accuracy-related penalties originally
determined for 2012 through 2014.

      In a notice of deficiency dated April 24, 2018, respondent
determined a deficiency in petitioners’ 2015 federal income tax of $2,827.
The 2018 notice of deficiency did not disallow all of petitioners’ claimed
Schedule C expense deductions for 2015. Rather, it denied petitioners’
deductions for meals and entertainment, travel, and car and truck
expenses, contending that petitioners failed to provide sufficient
evidence of the reported expenses.

II.    RNR

        RNR was founded by Dr. Rahim’s father, Abd Rahim Bin Yusoff,
and Nurmuhammad Bin Ahmad Nordin on March 27, 2008. RNR is
organized as a limited liability company (locally known as a Sendirian
Berhad) under Malaysian law. All members of the company have limited
liability, as stated in RNR’s memorandum of association.

       Neither petitioner was an owner or director of RNR at the time of
its formation. RNR’s original board of directors consisted solely of its two
founding shareholders, Mr. Yusoff and Mr. Nordin.

       By 2013 petitioners had become directors of RNR. The RNR
directors’ report for the fiscal year ending June 30, 2013, listed
petitioners as directors of the company but did not indicate that
petitioners owned any shares of RNR. Rather, it stated that Dr. Rahim’s
father, Mr. Yusoff, owned all 500,000 outstanding shares of RNR. Dr.
Rahim, by signed statement, attested to the accuracy of the fiscal 2013
directors’ report, which showed he did not hold any RNR shares.

       After respondent challenged petitioners’ purported ownership of
RNR, citing the statement of ownership contained in the fiscal 2013
directors’ report, Dr. Rahim provided a revised fiscal 2013 directors’
report that listed him as owning 250,000 of the 500,000 outstanding
shares of RNR and a directors’ report for the previous fiscal year—the
period ending June 30, 2012—reflecting an alleged purchase by Dr.
Rahim of those shares during that fiscal year.

        3 The Schedules C filed for the years at issue in these cases listed Dr. Rahim

as the proprietor of an unnamed engineering consulting business with an address in
Overland Park.
                                   4

[*4] Nothing in the “share swap” agreement, dated May 15, 2012,
indicates Dr. Rahim received Mr. Nordin’s RNR shares before 2015. The
translation of the share swap agreement states that Mr. Nordin “would”
relinquish his shares to Dr. Rahim at a future date yet to be determined,
but in any event, not until RNR obtained certain contracts. RNR did not
obtain any contracts or make any sales until 2015.

        Finally, there is no evidence that RNR or petitioners complied
with the check-the-box regime for entity classification. RNR did not file
Form 8832, Entity Classification Election, to elect to be treated as a
disregarded entity for federal tax purposes. In addition petitioners did
not file Form 8858, Information Return of U.S. Persons With Respect to
Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs), to
inform respondent of their participation in a foreign disregarded entity.
Petitioners failed to report RNR’s business address in Malaysia, instead
listing the address of the business on Schedules C as Overland Park.

III.   Schedule C Deductions

       Petitioners claimed and respondent disallowed deductions for
certain RNR business expenses as summarized below.

       A.    2012

       Petitioners’ 2012 Schedule C reported no gross receipts and
$47,422 in RNR business expenses, resulting in a net loss of $47,422.
Petitioners’ 2012 books and records do not corroborate the claimed
Schedule C loss of $47,422. Rather, they support a loss of only $23,328.

       B.    2013

      Petitioners’ 2013 Schedule C reported no gross receipts and
$61,035 in RNR business expenses, resulting in a net loss of $61,035.
Once again, there was a mismatch between the reported Schedule C
expenses and petitioners’ own books and records. Petitioners reported
Schedule C expenses of $61,035, but their books and records
substantiated expenses of only $32,570.

       C.    2014

       Petitioners’ 2014 Schedule C reported no gross receipts and
$49,463 in RNR business expenses, resulting in a net loss of $49,463.
Petitioners did not substantiate any of the business expenses reported
on their 2014 Schedule C.
                                         5

[*5]   D.      2015

      Petitioners’ 2015 Schedule C reported $7,577 in gross receipts and
$46,253 in business expenses from RNR, resulting in a net loss of
$38,676. According to petitioners, the $7,577 in gross receipts reflected
payments received on approximately $160,000 in gross sales (buyer
payments on these sales were to be made over 18 months).

      Respondent allowed $27,424 of the $46,253 in reported RNR
business expenses, disallowing only the following expenses totaling
$18,829: car and truck expenses of $13,596, travel expenses of $4,183,
and meals and entertainment expenses of $1,050.

               1.      Car and Truck Expenses

      Petitioners provided mileage logs, which Dr. Rahim prepared on
the basis of estimates rather than odometer readings. With respect to
Dr. Rahim’s vehicle, actual mileage was recorded by the car dealership
during service appointments. Petitioners concede that Mrs. Ismail’s
mileage log is not a “good” record of her actual business mileage.

       Dr. Rahim’s 2015 mileage log reports that, from January to June
of that year, he drove 150 kilometers six days a week from Puchong to
Kuala Lumpur, Malaysia, and 700 kilometers twice a month from his
residence to Singapore. His mileage log reflects 31,800 business
kilometers (19,705.6 business miles) 4 driven but only 12,450 business
miles reported.

      Mrs. Ismail’s 2015 mileage log reports that, during the same
January-to-June period, she drove exactly 33 miles six times a week
from Kansas City to Overland Park as well as 40 miles twice a month
from Kansas City to Lawrence, Kansas. Her mileage log reflects 5,628
business miles driven but only 4,325 business miles reported.

               2.      Travel, Meals, and Entertainment Expenses

       Petitioners originally reported RNR travel, meals, and
entertainment expenses totaling $5,233. Before and during trial,
petitioners reported expenses in these categories beyond those reported
on their 2015 Schedule C. These additional expenses included expenses

        4 The conversion from kilometers to miles was taken from Dr. Rahim’s mileage

log. We note that 31,800 kilometers is actually 19,759.6 miles, or 54 miles more than
stated.
                                     6

[*6] reported on Schedule C–7, Travel, Meals and Entertainment
Expenses, pursuant to respondent’s request.

       Petitioners now attribute the following expenses to Mrs. Ismail’s
trips to Singapore in 2015: a trip from May 21 to June 14, 2015 (Trip 1),
with meals expenses of $2,500 and lodging expenses of $1,500; a trip
from July 11 to July 20, 2015 (Trip 2), with airfare expenses of $1,294.17,
meals expenses of $2,500, and lodging expenses of $1,000; a trip from
September 4 to September 11, 2015 (Trip 3), with airfare expenses of
$1,047.69; and a trip from December 18, 2015, to January 11, 2016 (Trip
4), with airfare expenses of $2,004.99.

                    a.     Airfare

       Petitioners provided information to substantiate airfare expenses
incurred with respect to Mrs. Ismail’s 2015 travel. Mrs. Ismail paid for
this travel using a personal credit card and did not seek reimbursement
from RNR.

       Petitioners provided a receipt establishing that the airfare for
Trip 4, Mrs. Ismail’s December 2015 trip to Singapore, was $2,004.99.
Petitioners did not, however, provide any information about the cost of
the flights for Trip 1.

       After the first part of the trial, petitioners substantiated expenses
related to two additional business trips to Singapore in 2015, Trips 2
and 3. Petitioners provided proof of payment of $1,294.17 for airfare for
Trip 2, Mrs. Ismail’s July 2015 trip to Singapore. Petitioners also
provided proof of payment of $1,047.69 for airfare for Trip 3, Mrs.
Ismail’s September 2015 trip to Singapore.

       Petitioners did not keep a contemporaneous record of Mrs.
Ismail’s business meetings during her trips to Singapore and Malaysia.
The trips, which typically began in Singapore but continued in Malaysia,
involved exhibitions, demonstrations, and meetings with vendors.
Petitioners met with at least seven different vendors related to the 2015
sales, with Singapore serving as the preferred meeting place for RNR’s
three international vendors. But petitioners were unable to provide
specific, detailed information regarding these meetings, such as the time
and place of the meetings, the individuals with whom they met, or the
business purpose of specific meetings.

      In addition to the exhibitions, demonstrations, and vendor
meetings, in 2015, RNR launched a pilot program with the Royal
                                   7

[*7] Malaysia Police (RMP) that required Mrs. Ismail to be present in
country more frequently. After their Singapore business meetings had
concluded, petitioners would travel to Kuala Lumpur to meet with the
RMP, including the Inspector General of Police. Petitioners did not
present corroborating evidence, such as documentation or other
information regarding the specific dates or locations of these RMP
meetings or the individuals attending them.

       Mrs. Ismail had both business and personal reasons for traveling
to Singapore and Malaysia. Her personal reasons included that her
children, her parents, and Dr. Rahim’s parents all were living in
Malaysia at the time of the trips. Dr. Rahim’s parents live near
Malaysia’s border with Singapore, and the business trips generally
included a one-day visit with Dr. Rahim’s family.

                   b.     Meals and Lodging Expenses

       Petitioners originally claimed a deduction for $1,050 in meals and
entertainment expenses. In response to respondent’s request,
petitioners submitted Schedule C–7, which reported meals and lodging
expenses attributable to two of Mrs. Ismail’s four 2015 Singapore trips.
Meals and lodging for Trip 1 reportedly cost $4,000, of which $1,500 was
for lodging and $2,500 was for meals. Meals and lodging for Trip 2
reportedly cost $3,500, of which $1,000 was for lodging and $2,500 was
for meals. Petitioners did not substantiate any of the reported lodging
or meal expenses.

                               OPINION

       Generally, the Commissioner’s determinations in a statutory
notice of deficiency are presumed to be correct, and the taxpayer bears
the burden of disproving each adjustment by a preponderance of the
evidence. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).

I.    Petitioners’ Purported Ownership Interest in RNR Before 2015

       Respondent contends that petitioners have failed to provide
sufficient evidence that Dr. Rahim was an owner of RNR before 2015.
We agree with respondent.

       Petitioners’ documentation does not support a finding that Dr.
Rahim was a shareholder of RNR in 2012, 2013, or 2014. Neither
petitioner had an interest in RNR at the time of its formation in 2008.
By 2013 a contemporaneously prepared directors’ report suggests that,
                                    8

[*8] although petitioners had become directors, they were not
shareholders of RNR. The same directors’ report also states that Dr.
Rahim’s father, Mr. Yusoff, and not Dr. Rahim, owned all 500,000
outstanding shares of RNR. Dr. Rahim signed a statement attesting to
the accuracy of the directors’ report that did not list him as an owner
(shareholder).

       During the course of the litigation, Dr. Rahim provided a revised
directors’ report for fiscal 2013 that listed him as owning half the shares
of RNR and a directors’ report for the previous fiscal year purporting to
reflect his purchase of 250,000 shares of RNR. Given Dr. Rahim’s easy
access to the directors’ reports, and ability to influence the contents
thereof, and without other evidence to support his purported ownership
of RNR, we do not find the revised directors’ report to be credible.

      Neither have petitioners provided any evidence that Dr. Rahim
and Mr. Nordin exercised the share swap agreement before the
relinquishment date set forth by the express terms of the contract.
Because RNR did not obtain any contracts or make any sales until 2015,
the relinquishment date for the share swap was not triggered until
approximately three years after Dr. Rahim claims to have received
shares from Mr. Nordin. The original fiscal 2013 directors’ report
confirms this sequence of events by showing that Dr. Rahim held no
shares in RNR through June 30, 2013.

       Despite the alleged share purchase during fiscal 2012, there is no
evidence that Mr. Nordin received any cash or other compensation as
consideration for his shares of RNR. Dr. Rahim originally testified that
Mr. Nordin was paid approximately $25,000 in 2015. But in later
testimony Dr. Rahim was less confident that Mr. Nordin had been paid
for his shares.

       Moreover, even if Dr. Rahim obtained Mr. Nordin’s shares, there
is no evidence that petitioners were the sole (100%) owners of RNR and
thus entitled to deduct 100% of the claimed losses. Petitioners produced
evidence establishing that Dr. Rahim had primary responsibility for the
financial management of RNR but not that he was (or they together
were) the sole owner of the company. Even the revised fiscal 2013
directors’ report, which Dr. Rahim proffered as evidence of his
ownership, would not support a finding that Dr. Rahim owned more
than 50% of RNR during the years at issue.
                                    9

[*9] The clear inference from petitioners’ failure to provide evidence
sufficient to establish their ownership is that they were not owners of
RNR during the years in question. Therefore, we find neither petitioner
had an ownership interest in RNR during 2012, 2013, or 2014.

II.   RNR’s Entity Status Under the Internal Revenue Code

       Respondent contends that RNR is a foreign corporation, and not
a sole proprietorship, under section 7701 for 2012, 2013 and 2014. We
agree with respondent.

        Even if petitioners have an ownership interest in RNR, they are
not allowed to offset their individual income with RNR’s losses because
RNR is a foreign corporation for federal tax purposes and, as a result,
its losses do not flow through to its owners. “Whether an organization is
an entity separate from its owners for federal tax purposes is a matter
of federal tax law and does not depend on whether the organization is
recognized as an entity under local law.” Treas. Reg. § 301.7701-1(a)(1).
Although an entity’s classification under local law is not always
recognized, carrying on a business and sharing the profits from it
generally creates a separate entity for federal tax purposes. Id.
subparas. (2) and (3).

       “[A]ny entity recognized for federal tax purposes . . . that is not
properly classified as a trust . . . or otherwise subject to special
treatment” is a “business entity.” Treas. Reg. § 301.7701-2(a). A business
entity that is not a “per se” corporation, known as an “eligible entity,”
may elect its classification for federal tax purposes. Treas. Reg.
§ 301.7701-3(a). Unless an election is made to the contrary, a “foreign
eligible entity” in which all members have limited liability is an
association (that is, a corporation). Id. para. (b)(2)(i)(B).

        RNR is organized as a Sendirian Berhad (a private limited
liability company) under Malaysian law. Because a Sendirian Berhad is
not a “per se” corporation, RNR is a foreign eligible entity permitted to
elect its classification for federal tax purposes. See Treas. Reg.
§ 301.7701-2(b)(8)(ii)(3). However, for the tax years at issue, RNR did
not file Form 8832. Because RNR did not make an election, it is subject
to its default classification under the regulations.

      RNR is classified by default as a foreign corporation under the
regulations. Treasury Regulation § 301.7701-3(b)(2)(i)(B) provides that
a foreign eligible entity that has not elected otherwise and whose
members all have limited liability is a corporation. RNR’s memorandum
                                         10

[*10] of association states specifically that all members of RNR have
limited liability. Further, petitioners do not contend that the limited
liability provided in RNR’s organizing documents does not meet the
definition of limited liability under Treasury Regulation § 301.7701-
3(b)(2)(ii). Therefore, we conclude that RNR is a foreign corporation, and
consequently, its losses did not flow through to petitioners for the years
at issue. 5

      Accordingly, petitioners’ claimed Schedule C deductions for 2012,
2013, and 2014 are denied, and respondent’s determination for those
same years is sustained.

III.   Disputed Schedule C Deductions for 2015

       Respondent contends petitioners failed to substantiate their
claimed deductions for business expenses attributable to “car and
truck,” “travel,” and “meals and entertainment” for 2015. We agree with
respondent.

       A taxpayer may deduct all ordinary and necessary expenses paid
in carrying on a trade or business. § 162(a); Boyd v. Commissioner, 122
T.C. 305, 313 (2004). However, whether and to what extent such
deductions are allowed is a matter of legislative grace. 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 prove he or she is
entitled to the deductions claimed. Rule 142(a). This requires
substantiating expenses underlying the deductions, including
maintaining and producing records sufficient to 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).

      If a taxpayer establishes that he or she has incurred a trade or
business expense contemplated by section 162(a) but is unable to
substantiate the precise amount of the expense, the Court generally may
estimate the amount of the expense and allow a deduction to that extent.
Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). But to

         5 For 2015, respondent has not challenged petitioners’ ownership interest in

RNR or whether RNR is a type of entity whose expenses may be reported on
Schedule C. Rather, respondent contends only that petitioners have failed to meet the
strict substantiation requirements of section 274(d) with respect to certain reported
Schedule C expenses that would otherwise be allowable as a deduction under section
162.
                                          11

[*11] estimate a deductible expense, the Court must have a basis upon
which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731,
742–43 (1985).

       Estimates may not be made under Cohan in situations where
section 274 imposes strict substantiation requirements. § 274(d);
Sanford v. Commissioner, 50 T.C. 823, 827–28 (1968), aff’d per curiam,
412 F.2d 201 (2d Cir. 1969). Section 274 denies deductions for expenses
attributable to vehicles, travel, or meals and entertainment unless the
taxpayer substantiates by adequate records or sufficient evidence the
amount, time and place, and business purpose of the expenses. § 274(d);
Temp. Treas. Reg. § 1.274-5T.

       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, such as 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
taxpayer to produce corroborative evidence specifically detailing the
necessary elements. Temp. Treas. Reg. § 1.274-5T(c)(3).

       A.      Car and Truck Expenses

      Petitioners deducted $13,596 in car and truck expenses, all of
which respondent disallowed. We agree with respondent’s
determination.

       With respect to car and truck expenses, a taxpayer may opt to use
the standard mileage rate, set annually by the IRS, to substantiate the
expense of using a vehicle for business purposes. 6 See Crawford v.
Commissioner, T.C. Memo. 2014-156, at *9–10; Treas. Reg.
§ 1.274-5(j)(2). However, reliance on the standard mileage rate does not
relieve the taxpayer of his or her obligation “to substantiate the amount
of each business use (i.e., the business mileage), or the time and business
purpose of each use.” Treas. Reg. § 1.274-5(j)(2).

        6 We are not certain from the record whether, for 2015, petitioners intended to

take a deduction for car and truck expenses based on the standard mileage rate
(because they submitted mileage logs) or actual expense amounts (because the claimed
deduction exceeds the standard mileage deduction). Either way, petitioners have not
demonstrated they are entitled to deduct expenses attributable to business use of their
vehicles.
                                   12

[*12] In addition, expenses a taxpayer incurs traveling between his or
her home and place of business generally constitute commuting
expenses, which, as personal expenses, are nondeductible. Fausner v.
Commissioner, 413 U.S. 838 (1973). “Congress has determined that all
taxpayers shall bear the expense of commuting to and from work
without receiving a deduction for that expense.” Id. at 839. Congress’
legislative grace extends only so far—and not to one’s daily commute.

       Here, in support of the reported car and truck expenses,
petitioners have provided mileage logs for Dr. Rahim and Mrs. Ismail.
The mileage logs were not prepared contemporaneously but rather using
estimates. Subsequently prepared mileage records do not have the same
high degree of credibility as those made at or near the time the vehicle
was used and supported by documentary evidence. Temp. Treas. Reg.
§ 1.274-5T(c)(1), (2), and (3).

       According to respondent, the logical conclusion from the evidence
presented is that petitioners attempted to deduct the cost of their daily
commutes, which is not allowed under Fausner. We agree with
respondent. Dr. Rahim’s mileage log reports that, during the first half
of 2015, he drove 150 kilometers round trip from his residence in
Puchong to Kuala Lumpur six days a week. Mrs. Ismail’s mileage log
reports that, during that same period, she drove 33 miles round trip
from her residence in Overland Park to her employer in Kansas City six
days a week. Driving the same distance five or six days a week points
heavily toward a nondeductible daily commute. This conclusion is
bolstered by Dr. Rahim’s concession upon cross-examination that Mrs.
Ismail’s mileage log reflected the drive to her employer’s office, not
mileage related to RNR.

       Respondent further contends that petitioners failed to provide
any support for the business purpose of the twice monthly vehicle use
from Dr. Rahim’s residence to Singapore or from Mrs. Ismail’s residence
to Lawrence. We once again agree with respondent. Petitioners may
have established a business purpose for traveling to Singapore—
participating in demonstrations, meeting with vendors—but they have
not provided evidence sufficient to establish a business purpose for any
single use of Dr. Rahim’s vehicle. Without sufficient evidence of business
purpose, and considering that Dr. Rahim’s parents live near Malaysia’s
border with Singapore, we conclude that the primary purpose of many
of these trips was personal, not business related.
                                   13

[*13] Without specific, detailed information establishing a business
purpose for each of Dr. Rahim’s 12 trips to Singapore, we find
insufficient evidence to allow petitioners to deduct the car and truck
expenses attributable to these trips. To conclude otherwise would
require this Court to make a Cohan estimate, which section 274
precludes. Similarly, we also find insufficient evidence to establish a
business purpose for Mrs. Ismail’s twice monthly trips to Lawrence and
thus conclude expenses attributable to them are not deductible.

      Petitioners have not provided information sufficient to satisfy the
substantiation requirements of section 274(d) and the regulations.
Accordingly, we will deny petitioners’ 2015 vehicle expense deductions
and sustain respondent’s determination with respect to them.

      B.     Travel, Meals, and Entertainment Expenses

       Respondent contends petitioners are not entitled to deduct their
travel, meals, or entertainment expenses because they have not met the
strict substantiation requirements of section 274(c)(1) or (d). We agree
with respondent.

        When a travel expense is incurred abroad, section 274(c)(1)
disallows a deduction for any portion of the expense that is not allocable
to the taxpayer’s trade or business. DeLima v. Commissioner, T.C.
Memo. 2012-291, at *25. Further, section 274(m)(3) disallows a
deduction “for travel expenses paid or incurred with respect to a spouse
. . . accompanying the taxpayer (or an officer or employee of the
taxpayer) on business travel” unless the spouse is an employee of the
taxpayer, the spouse’s travel has a bona fide business purpose, and the
spouse would otherwise be able to deduct the expenses.

       In addition, “[i]f the trip is primarily personal in nature, the
traveling expenses to and from the destination are not deductible even
though the taxpayer engages in business activities while at such
destination.” Treas. Reg. § 1.162-2(b)(1). Determining the primary
purpose of a trip requires consideration of all the facts and
circumstances, including the ratio of time spent on business and
personal activities. Crawford, T.C. Memo. 2014-156, at *12.

             1.     Airfare

       Respondent contends that there is no evidence to support a claim
that Mrs. Ismail conducted business on behalf of RNR and therefore her
airfare is not deductible as a business expense. We agree with
                                   14

[*14] respondent that Mrs. Ismail’s airfare is not deductible as a
business expense.

       Petitioners deducted $4,183 in travel expenses related to airfare,
all of which respondent disallowed. Petitioners substantiated airfare
expenses totaling $4,346.85 from three of Mrs. Ismail’s four trips—in
excess of the claimed deduction. Petitioners did not claim a deduction
for airfare from the fourth trip.

       Petitioners have not provided sufficient evidence that Mrs.
Ismail’s trips to Singapore had a business purpose. Although they did
not keep a record of Mrs. Ismail’s business meetings during these trips,
taking into account petitioners’ documentary evidence and testimony we
believe petitioners occasionally had business in Singapore. However, the
existence of occasional business falls short of establishing that any
particular trip was taken for business. Therefore, we conclude
petitioners lacked a business purpose as required under the strict
substantiation requirements of section 274.

       Petitioners testified that during Mrs. Ismail’s four trips abroad
they met with vendors and participated in product demonstrations in
Singapore and then continued on to Kuala Lumpur to conduct additional
business. We find petitioners’ testimony credible, especially considering
the approximately $160,000 in gross sales in 2015. But without more
specific or detailed information, it is impossible to determine that any
one of Mrs. Ismail’s four trips had a business purpose.

       The lack of a business purpose is even more problematic because
Mrs. Ismail had strong personal reasons for traveling to Singapore. Mrs.
Ismail testified that her children were residing in Malaysia at the time
of her trips and that her business trips also routinely included visits
with family, particularly Dr. Rahim’s family. Between May 2015 and
January 2016 Mrs. Ismail spent almost 70 days abroad on these trips.
Without specific, detailed information to contrary, we infer from these
facts that the primary purpose for Mrs. Ismail’s four trips to Singapore
was not business related, but rather to visit her children and family.
This provides another basis upon which to disallow these deductions.
See Treas. Reg. § 1.162-2(b).

      Accordingly, we hold petitioners are not entitled to a deduction
for Mrs. Ismail’s airfare for 2015 and sustain respondent’s
determination.
                                    15

[*15]         2.     Meals and Lodging Expenses

        Respondent contends that petitioners did not substantiate the
cost of lodging or meals for either Trip 1 or 2. We agree with respondent.
On Schedule C–7 petitioners reported $4,000 in meals and lodging for
Trip 1, of which $1,500 was for lodging and $2,500 was for meals, and
$3,500 in meals and lodging for Trip 2, of which $1,000 was for lodging
and $2,500 was for meals. However, petitioners have offered no
additional evidence to corroborate the reported expenses. Accordingly,
petitioners did not substantiate the lodging or meal expenses
attributable to Trips 1 and 2 and thus are not entitled to deduct any of
the expenses under section 274(d).

      In conclusion, we hold that petitioners are not entitled to the
claimed deductions for vehicle, travel, or meals and entertainment
expenses for 2015.

        To implement the foregoing,

        Decisions will be entered under Rule 155.