Court Opinion

ID: 9367086
Source: CourtListenerOpinion
Date Created: 2023-01-30 20:01:13.714223+00
Date Added: 2024-06-11T17:15:55.986332
License: Public Domain

United States Tax Court

                         T.C. Summary Opinion 2023-4

                    MATHEW DANIEL CRADDOCK AND
                    CHASTA CRENSHAW CRADDOCK,
                             Petitioners

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 22581-21S.                                      Filed January 30, 2023.

                                     —————

Mathew Daniel Craddock and Chasta Crenshaw Craddock, pro sese.

Ashley M. Bender, Corey R. Clapper, Matthew T. James, and Victoria E.
Pugh, for respondent.

                              SUMMARY OPINION

       LANDY, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed. 1 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 May 4, 2021, the Internal Revenue
Service (IRS or respondent) determined a deficiency in petitioners’
federal income tax of $4,454 for taxable year 2018 (year in issue). After

        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 01/30/23
                                           2

respondent’s concession, 2 the issues remaining for decision are whether
petitioners are entitled to deduct (1) car and truck expenses of $14,710
and (2) other expenses of $17,644 for the year in issue. We resolve these
questions in respondent’s favor.

                                    Background

       Some of the facts have been stipulated and are so found. The
stipulation of facts and the attached exhibits are incorporated herein by
this reference. Petitioners resided in South Carolina when their Petition
was timely filed.

I.      Petitioners’ Business Activities

     During the year in issue, Mr. Craddock was employed as a “W-2
wage earner” at Continental Automotive Systems, Inc. (CAS), and
Greenville Technical College (GTC). He held a full-time maintenance
manager position at CAS and a part-time teaching position at GTC. Mrs.
Craddock was not employed during the year in issue.

       In addition to being a wage earner whose earnings were reported
on Form W‒2, Wage and Tax Statement, Mr. Craddock owned and
operated an unincorporated business called Industrial Technologies
Consulting (ITC). During the year in issue Mr. Craddock traveled
throughout South Carolina, North Carolina, Georgia, Tennessee, and
West Virginia performing “sales calls” with the purpose of meeting with
the maintenance and engineering departments for industrial technology
companies to sell his consulting and industrial maintenance education
and training services. Mr. Craddock sold two training courses during the
year in issue.

      In tax year 2018, Mr. Craddock owned a Ford F–150 truck that
he used in his consulting business but also in commuting to and from
his employment at CAS and for personal errands. Routinely, Mr.

        2 In his Pretrial Memorandum, filed August 15, 2022, respondent asserted that

petitioners were not engaged in a trade or business with the intent to generate a profit
during the year in issue, and therefore the deductions claimed relating to Mr.
Craddock’s consulting activities should be limited to the amount of gross receipts
reported on the return under section 183. Although this issue was raised during the
examination, it was not incorporated into the notice of deficiency mailed to petitioners,
and respondent failed to raise this issue in his Answer. On August 26, 2022,
respondent filed a Status Report apprising the Court that he is unable to determine
why the issue was not included in the notice of deficiency, and he, therefore, conceded
the issue. At trial, respondent confirmed his concession.
                                     3

Craddock drove his truck to work at CAS and left CAS to conduct a sales
call or other consulting activities.

II.     Petitioners’ Tax Return for the Year in Issue

       Petitioners timely filed (with the assistance of a paid preparer)
Form 1040, U.S. Individual Income Tax Return, for the year in issue.
They reported wages paid by CAS and GTC to Mr. Craddock totaling
$79,956; taxable refunds, credits, or offsets of state and local income
taxes of $2,850; and a business loss of $33,104 from ITC, which they
detailed on a Schedule C, Profit or Loss From Business, attached to the
return.

       On Schedule C petitioners reported gross receipts or sales of
$1,000 for the two training courses Mr. Craddock sold and total expenses
of $34,104. The expenses consisted of $14,710 in car and truck expenses,
$209 in depreciation and section 179 expenses, $180 in legal and
professional services, $361 in taxes and licenses, and $18,644 in other
expenses. The other expenses consisted of the following:

 Description        Amount         Description          Amount
 Cell Phone         $1,440         Printer Ink          $210
 Medical            $2,268         Charitable           $3,420
                                   Contributions
 Uniforms           $380           Postage              $961
 Event Catering     $279           Goodwill             $1,750
                                   Charitable
                                   Contributions
 Fuel               $6,325         Medical Supplies     $524
                                   and Medical
                                   Prescriptions
 Tolls/Parking      $727           Internet             $360

     Ultimately, petitioners claimed a refund of $8,829 on their 2018
Form 1040.

III.    IRS Examination and Determination

      The IRS selected petitioners’ 2018 Form 1040 for examination
and issued a notice of deficiency disallowing their claimed deduction of
                                           4

$14,710 for car and truck expenses and $17,644 of the $18,644 claimed
deduction for other expenses.

IV.     Tax Court Proceedings

      On June 21, 2021, petitioners petitioned this Court for
redetermination of the deficiency. A trial was held on September 6, 2022,
in Columbia, South Carolina.

       At trial Mr. Craddock testified that he incurred car and truck
expenses for business miles driven using his Ford F–150 truck. To
substantiate the expenses, petitioners provided a mileage log that Mr.
Craddock testified was made contemporaneously with his business
travel. The mileage log lists the start and end dates, description,
purpose, start and end locations, and start and end mileage for trips
made in the truck. The mileage log accounts for every mile driven in the
truck for the year in issue, including the miles driven for personal use,
but does not specifically break down the mileage as business or personal.

       To substantiate the other expenses, petitioners provided
statements from a Wells Fargo joint personal checking account (bank
statements) with specific charges highlighted and labeled “tolls,” “car
parts,” “fuel,” or “insurance” as business expenses. From the bank
statements, these labeled charges reflect $643.50 for tolls, $1,864.22 for
car parts, $5,190.40 for fuel, and $917 for insurance. Petitioners did not
submit any receipts or other documentation and did not provide any
testimony to substantiate the cell phone, medical, uniform, event
catering, printer ink, charitable contributions, postage, Goodwill
charitable contributions, medical supplies and prescriptions, or internet
expenses.

                                     Discussion

I.      Burden of Proof

       In general, respondent’s determinations set forth in a notice                  of
deficiency are presumed correct, and the taxpayers bear the burden                    of
proving that the determinations are in error. Rule 142(a); Welch                      v.
Helvering, 290 U.S. 111, 115 (1933). 3 Deductions are a matter                        of

        3 Pursuant to section 7491(a), the burden of proof may shift to respondent if

petitioners introduce credible evidence with respect to any factual issues relevant to
ascertaining petitioners’ tax liability. Petitioners do not assert, and the evidence does
                                        5

legislative grace, and the taxpayers bear the burden of proving that they
are entitled to any deduction claimed. See Deputy v. du Pont, 308 U.S.
488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934).

II.    Governing Legal Principles

       Section 162(a) permits taxpayers to deduct all ordinary and
necessary expenses paid or incurred during the taxable year in carrying
on a trade or business. Taxpayers are required to maintain books and
records sufficient to establish income and deductions. § 6001; Treas.
Reg. § 1.6001-1(a), (e). If taxpayers establish that an expense is
deductible but are unable to substantiate the precise amount, the Court
may estimate the allowable amount (Cohan rule). See Cohan v.
Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). In estimating, we
bear heavily against taxpayers “whose inexactitude is of [their] own
making.” Id. at 544. Taxpayers must present sufficient evidence to
permit the Court to make an estimate. Williams v. United States, 245
F.2d 559, 560–61 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731,
742–43 (1985).

       Section 274(d) overrides the Cohan rule for certain expenses. See
Sanford v. Commissioner, 50 T.C. 823, 827–28 (1968), aff’d per curiam,
412 F.2d 201 (2d Cir. 1969); Treas. Reg. § 1.274-5(c)(2)(iii); Temp. Treas.
Reg. § 1.274-5T(a). Under section 274(d), taxpayers must meet stricter
substantiation requirements to deduct certain expenses under section
162, including expenses for the use of listed property as defined in
section 280F(d)(4), such as passenger automobiles.

       To meet the heightened substantiation requirements, taxpayers
must substantiate by adequate records or by sufficient evidence
corroborating their own statements (1) the amount of the expense,
(2) the time and place of the expense or use of listed property, (3) the
business purpose of the expense or use, and (4) the business
relationship. § 274(d). Even if the expense would otherwise be deductible
before the enactment of section 274(d), section 274(d) may still preclude
a deduction if the taxpayers do not present sufficient substantiation.
Temp. Treas. Reg. § 1.274-5T(a).

      To substantiate car and truck expenses through adequate
records, taxpayers must maintain a contemporaneous log, trip sheet, or

not establish, that the burden of proof should be shifted to respondent pursuant to
section 7491(a).
                                    6

similar record, as well as corroborating documentary evidence, that
together establish each required element of the expense. See Temp.
Treas. Reg. § 1.274-5TI(2)(i) and (ii). In the absence of adequate records,
taxpayers must establish each required element by “[their] own
statement, whether written or oral, containing specific information in
detail as to such element” and by “other corroborative evidence sufficient
to establish such element.” See id. subpara. (3)(i).

III.   Car and Truck Expenses

      Petitioners deducted car and truck expenses in connection with
Mr. Craddock’s business and submitted a mileage log to substantiate
these expenses. Car and truck expenses are subject to the strict
substantiation requirements of section 274(d), and petitioners’ mileage
log is inadequate to meet the strict substantiation requirements,
particularly when compared to petitioners’ bank statements and
testimony at trial.

       For several reasons, we do not find the mileage log credible:

       •   The mileage log accounts for every mile driven using the truck
           for the year in issue, but Mr. Craddock testified at trial that
           the truck was driven for both personal and business use,
           including trips from petitioners’ home to Mr. Craddock’s
           employment at CAS and for personal errands.

       •   The mileage log reflects that Mr. Craddock was in two states
           simultaneously. For instance, the mileage log shows a trip
           from “home” in South Carolina to Columbus, Georgia, on
           November 11–14, 2018, but also shows a trip from “home” to
           Fletcher, North Carolina, on November 13, 2018. When asked
           about this discrepancy at trial, Mr. Craddock testified that he
           “may have wrote [sic] the wrong date down.”

       •   Moreover, the mileage log shows that Mr. Craddock was on a
           trip in one state while the bank statements show a fuel
           purchase, for which he seeks a deduction, in another state. Mr.
           Craddock failed to articulate a reason for the discrepancies.
           These discrepancies include but are not limited to:
                             7

     Date on        Location on     Date on        Location of
     Mileage Log    Mileage Log     Bank           Fuel Charge
                                    Statement
     4/22/2018 –    Henderson,      4/23/2018      Piedmont
     4/24/2018      North                          and
                    Carolina                       Greenville,
                                                   South
                                                   Carolina
     5/14/2018 –    Morgantown, 5/15/2018          Greenville,
     5/17/2018      West Virginia                  South
                                                   Carolina
     8/1/2018 –     Beaufort,     8/2/2018         Simpsonville,
     8/3/2018       South                          South
                    Carolina                       Carolina
     8/24/2018 –    Murfreesboro, 8/27/2018        Macon and
     8/27/2018      Tennessee                      Dacula,
                                                   Georgia
     11/11/2018 –   Columbus,       11/13/2018     Greenville,
     11/14/2018     Georgia                        South
                                                   Carolina
     12/17/2018 –   Morgantown, 12/18/2018         Greenville,
     12/19/2018     West Virginia                  South
                                                   Carolina

•   Despite a considerable number of mileage log entries showing
    Mr. Craddock was in another state for multiple days, Mr.
    Craddock did not provide any additional testimony or other
    evidence to corroborate his presence in another state on the
    dates listed. Mr. Craddock testified he would use cash to make
    fuel purchases when out of state but could not remember
    where he would have stayed when on overnight trips, other
    than staying at a hotel or camping.

•   Further, though the mileage log reflects numerous trips from
    South Carolina to other states, there were only three fuel
    charges on the bank statements that were made outside of
    South Carolina. Two of these charges, both dated August 27,
    2018, show that gas was purchased in Macon, Georgia, and
    Dacula, Georgia; however petitioners’ mileage log shows that
    Mr. Craddock was at a “training” session in Murfreesboro,
    Tennessee, on August 27, 2018. The third charge was made on
                                         8

           December 3, 2018, in Piedmont, Georgia, 4 and there is no
           corresponding entry on the mileage log for that day.

       Even if the Court determined that the mileage log was credible,
it alone would not be sufficient to meet the strict substantiation
requirements in section 274(d). To substantiate the expenses,
petitioners would additionally need to provide corroborating
documentary evidence to establish the required elements of the expense.
See Temp. Treas. Reg. § 1.274-5T(c)(2)(i) and (ii). In addition to the
mileage log, petitioners submitted their bank statements and testimony
at trial. As outlined above, the bank statements contradict more of the
trips on the milage log than they corroborate. Therefore, the bank
statements are not sufficient to corroborate the amount or time and
place of the car and truck expenses listed in the mileage log.

       This Court is not bound to accept petitioners’ self-serving,
unverified, and undocumented testimony. See Shea v. Commissioner,
112 T.C. 183, 188–89 (1999) (citing Tokarski v. Commissioner, 87 T.C.
74, 77 (1986)). The Court does not find petitioners’ testimony,
specifically that of Mr. Craddock, to be credible or provide sufficient
details to corroborate the mileage log. Therefore, petitioners’ testimony
is not sufficient to corroborate the amount, time and place, or business
purpose of the trips listed in the mileage log.

       Additionally, Mr. Craddock testified at trial that he would drive
his truck from his home to work at CAS, and that he would make stops
for personal errands while making the trips that are also documented
on the mileage log. In general, the cost of daily commuting to and from
work is a nondeductible personal expense. See Commissioner v. Flowers,
326 U.S. 465, 473–74 (1946); Treas. Reg. § 1.162-2(e). However,
“[u]nreimbursable transportation expenses incurred between two places
of business are deductible.” Gilliam v. Commissioner, T.C. Memo. 1986-
90, 51 T.C.M. (CCH) 567, 572 (citing Steinhort v. Commissioner, 335
F.2d 496, 503–05 (5th Cir. 1964), aff’g and remanding T.C. Memo. 1962-
233). To prevail, petitioners must first prove that their vehicle mileage
arises from deductible business-related travel rather than
nondeductible commuting. Patitz v. Commissioner, T.C. Memo. 2022-99.
Petitioners have failed to do so.

       4 The bank statements petitioners provided specifically state a fuel charge of

$20 was incurred at Ingles Gas Express in Piedmont, Georgia, not Piedmont, South
Carolina. Mr. Craddock provided no testimony to refute this stated charge.
                                    9

       Mr. Craddock’s travel from his home to CAS and for his personal
errands is not deductible business-related travel but part of his
nondeductible commuting. At trial, Mr. Craddock was unable to state
which days he went to CAS or simply completed personal errands during
these trips to permit the Court to distinguish his nondeductible
commuting from his business trips. Therefore, the Court is unable to
determine what portion of the mileage petitioners claimed would be
attributable to personal or nonreimbursable transportation expenses
and what portion, if any, would be for deductible business-related travel.

       In sum, petitioners have not met the strict substantiation
requirements under section 274(d). They failed to provide adequate
records or sufficient evidence to establish the amount of expenses
incurred, the time and place of the truck’s use, the business purpose of
its use, or the business relationship. See § 274(d); Temp. Treas. Reg.
§ 1.274-5T(a). Therefore, respondent’s disallowance of the deduction for
car and truck expenses is sustained.

IV.   Other Expenses

       Petitioners deducted other expenses for a cell phone, medical,
uniforms, event catering, fuel, tolls and parking, printer ink, charitable
contributions, postage, Goodwill charitable contributions, medical
supplies and prescriptions, and internet in connection with Mr.
Craddock’s business. To substantiate their other expenses, petitioners
provided bank statements for certain charges that were highlighted and
had descriptions noted next to them.

      A.     Fuel, Tolls, and Parking Expenses

       Petitioners deducted $6,325 in fuel and $727 in tolls and parking.
These other expenses for fuel and tolls appear to duplicate the car and
truck expenses discussed above. Furthermore, whether they are
categorized as car and truck expenses or other expenses, petitioners
must meet the strict substantiation requirements under section 274(d)
for these expenses. The bank statements petitioners submitted show
total charges of $5,190.40 in fuel, $643.50 in tolls, and zero for parking.
These bank statements are insufficient to substantiate the fuel and toll
expenses for several reasons.
                                           10

       Many of the charges for fuel occurred on a day that does not have
a corresponding trip in the mileage log. 5 Petitioners’ testimony provided
no basis for the Court to determine whether the fuel expenses incurred
were business-related or personal expenses related to transportation to
Mr. Craddock’s employment at CAS. Similarly, Mr. Craddock testified
at trial that he took a toll road between his home and work at CAS but
provided no evidence to substantiate that the charges for tolls on the
bank statement were made for business purposes and not nondeductible
commuting. Petitioners have not established that these expenses were
ordinary and necessary business expenses or provided the Court with
corroborative evidence showing sufficient detail to meet the heightened
substantiation requirements entitling them to a deduction. See Temp.
Treas. Reg. § 1.274-5T(c)(2)(i) and (ii); see also Commissioner v. Flowers,
326 U.S. at 473–74. Therefore, respondent’s disallowance of these
deductions is sustained.

        B.      Remaining Other Expenses

       Regarding the remaining other expenses for a cell phone, medical,
uniforms, event catering, printer ink, charitable contributions, postage,
Goodwill charitable contributions, medical supplies and prescriptions,
and internet, petitioners did not offer documentary evidence or
testimony to substantiate the business usage or purpose for these
expenses. Petitioners also were unable to explain how they arrived at
the amounts of these expenses. Without such evidence the Court does
not have a reasonable basis to estimate the amounts of the expenses
related to business use. See Cohan v. Commissioner, 39 F.2d at 543–44;
Arnold v. Commissioner, T.C. Memo. 2007-168, 2007 WL 1837120, at *4.
Accordingly, respondent’s disallowance of a deduction for each of the
above-mentioned remaining other expenses is sustained.

        To reflect the foregoing,

        Decision will be entered for respondent.

        5 For the year in issue, these charges occurred on: January 18 and 30; February

12, 13, 15, 26; March 2 (three charges), 6, 8, 12 (two charges), 14, 23, 28, 30; April 6
(two charges), 19; May 8, 10, 18; June 18, 21; July 5 (two charges), 17, 19, 30, 31;
August 14, 28, 29, 31; September 4, 7, 20, 24, 26, 28; October 2, 15, 18, 22 (two charges),
26; November 20, 26 (three charges); December 3 (two charges), 4, 26, 31.