Court Opinion

ID: 7805756
Source: CourtListenerOpinion
Date Created: 2022-09-01 19:01:29.851334+00
Date Added: 2024-06-11T16:30:05.339899
License: Public Domain

United States Tax Court

                        T.C. Summary Opinion 2022-18

                               GEORGE C. LUNA,
                                  Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 17748-18S.                                    Filed September 1, 2022.

                                     —————

George C. Luna, pro se.

Albert B. Brewster II, 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 June 7, 2018, respondent
determined a deficiency in petitioner’s 2015 federal income tax and a
section 6662(a) accuracy-related penalty. Respondent now concedes the
penalty; the issue for decision is whether petitioner is entitled to
miscellaneous itemized deductions for (1) unreimbursed employee

        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 09/01/22
                                          2

business expenses 2 and (2) a tax preparation fee claimed on a Schedule
A, Itemized Deductions, included with petitioner’s 2015 federal income
tax return (return).

                                   Background

      Some of the facts have been stipulated and are so found. At the
time the petition was filed, petitioner lived in California.

       As of the date of trial, petitioner had over 30 years of experience
working for, or being associated with, nonprofit organizations. Starting
in 2008, and at all times relevant here, petitioner served as the executive
director of the Center for Health Justice, Inc. (CHJ). During 2015, CHJ,
described by petitioner as a “small” nonprofit organization, offered and
provided education services to incarcerated individuals with respect to
various health-related topics.

       From time to time during 2015, petitioner traveled to various
cities—for example, Washington, D.C.—in connection with his position
as the executive director of CHJ. It does not appear that petitioner was
reimbursed, or entitled to reimbursement, from any organization for the
travel expenses incurred for these trips. 3

       Since 1987, petitioner has regularly traveled to Rio de Janeiro,
Brazil, once or twice a year. As a result of contacts made serving as a
consultant for the Pan American Health Organization, in 2011 he was
appointed to the board of directors of E.S.S.E. Mundo Digital (EMD), a
Brazilian organization that, according to petitioner, “focused on young
people and internet,” and he continued to serve as a board member for
that organization during the year in issue. As he had in many years
before the year in issue, petitioner traveled to Brazil twice in 2015 (May
9 to 24 and November 16 to December 2). During these trips to Brazil

       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 A letter dated March 14, 2014, from CHJ, addressed “To Whom It May

Concern,” generally advises that petitioner paid out-of-pocket expenses on CHJ’s
behalf for which he was not entitled to reimbursement. There are no specific expenses,
or categories of expenses, referenced in the letter.
                                           3

petitioner met with other members of EMD’s board of directors to plan
a future conference that EMD intended to sponsor.

       Petitioner did not keep a contemporaneous log or journal in which
he recorded his travel-related expenses, but he did retain certain
invoices, credit card statements, and receipts related to his trips to
Brazil in 2015.

      As relevant here, the Schedule A included with petitioner’s return
shows miscellaneous itemized deductions of (1) $36,034 for
unreimbursed employee business expenses and (2) $225 for tax
preparation fees.

      The tax preparation fees apparently represent the cost of income
tax return preparation software. The deduction for unreimbursed
employee business expenses relates to petitioner’s employment with
CHJ. The details of that deduction are shown on a Form 2106, Employee
Business Expenses, as follows:

                 Expense                          Amount

 Parking fees, tolls, and transportation           $1,650

 Travel expenses while away from home              23,200
 overnight

 Business expenses, excluding meals and            10,084
 entertainment

 Meals and entertainment                            1,100

       Most of the above-listed expenses relate to the trips that
petitioner took to Brazil during 2015. Respondent disallowed the full
amounts of the above-referenced miscellaneous itemized deductions
claimed on the return.

                                    Discussion

I.     Burden of Proof

      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
                                          4

determination is erroneous. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). 4

II.    Petitioner’s Claimed Deductions

       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
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). To be ordinary an expense
must be of a common or frequent occurrence in the type of business
involved. Deputy v. du Pont, 308 U.S. 488, 495 (1940). To be necessary
an expense must be appropriate and helpful to the taxpayer’s business.
Welch v. Helvering, 290 U.S. at 113.

        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 a deduction for 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. An employee business expense is
not “ordinary and necessary” if the employee is entitled to
reimbursement from his or her employer but fails to seek

        4 Petitioner does not claim and the record does not otherwise demonstrate that

the provisions of section 7491(a) need be applied here, and we proceed as though they
do not.
                                    5

reimbursement. See Podems v. Commissioner, 24 T.C. 21, 22–23 (1955);
Noz v. Commissioner, T.C. Memo. 2012-272.

       Deductions for expenses attributable to travel (“including meals
and lodging while away from home”), entertainment, gifts, and the use
of “listed property” (as defined in section 280F(d)(4) and including
passenger automobiles), if otherwise allowable, are subject to strict rules
of substantiation. 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
expense, and (4) in the case of an entertainment or gift expense, the
business relationship to the taxpayer of each expense incurred. For
“listed property” expenses, the taxpayer must establish the amount of
business use and the amount of total use for such property. See Temp.
Treas. Reg. § 1.274-5T(b)(6)(i)(B).

       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).

       Keeping in mind these guiding principles, we turn our attention
to the deductions in dispute.

      A.     Unreimbursed Employee Business Expenses

       Petitioner claimed a $36,034 deduction for unreimbursed
employee business expenses. According to respondent, petitioner not
only failed to substantiate the amounts of the expenses, but also failed
to establish that the expenses were ordinary and necessary in
connection with his trade or business as an employee of CHJ. According
to petitioner, as the executive director of CHJ, he was expected to incur
the travel expenses that underlie the deduction here in dispute, which
were typical for an executive director of a nonprofit organization.
                                    6

Petitioner claims that these expenses, although not reimbursable by
CHJ, were incurred to benefit CHJ in numerous ways although
petitioner did not refer to any specific benefit. As petitioner sees the
matter, the contacts he makes, or has made, from his various travels
and professional associations serve to advance the interests of CHJ.
According to petitioner, “it helps [CHJ]. There’s no question about it.”
As we see the matter, there are some questions about it.

       We focus first on the trips petitioner took to Brazil. We find that
the evidence petitioner presented satisfies the substantiation
requirements of the relevant portions of section 274 and its regulation,
see Temp. Treas. Reg. § 1.274-5T(c)(3); but petitioner has failed to
demonstrate how the expenses for those trips were “ordinary and
necessary” to his employment with CHJ. Petitioner acknowledged that
the trips to Brazil were made to plan for a conference to be held not by
CHJ, but by a different organization on whose board of directors he
served. The connection between petitioner’s employment with CHJ and
the trips to Brazil is further blurred by his practice of having regularly
traveled there long before his employment with CHJ began.

       Without sufficient evidence (1) showing the connection between
the trips and the trade or business of CHJ or (2) demonstrating how the
trips were “helpful” to petitioner’s position as the executive director of
CHJ, see Welch v. Helvering, 290 U.S. at 113, petitioner has failed to
establish that the expenses he incurred in traveling to Brazil were
ordinary and necessary in connection with his employment as the
executive director of CHJ. That being so, he is not entitled to a
deduction for those expenses.

       Further expenses that petitioner might have incurred for
business-related travel to other places, if otherwise ordinary and
necessary for an employee of CHJ, have not been substantiated to the
extent required by section 274. That being so, petitioner is not entitled
to a deduction for those expenses.

      It follows and we find that so much of respondent’s disallowance
of the miscellaneous itemized deduction for unreimbursed employee
business expenses is sustained.

      B.     Tax Preparation Fees

      Section 212(3) allows a deduction for costs incurred in the
preparation of a tax return. Hughes v. Commissioner, T.C. Memo. 2008-
249. Petitioner claimed a $225 deduction for tax return preparation
                                   7

fees. We note that one of petitioner’s credit card statements shows that
petitioner paid $94.98 for a tax return preparation software program,
and petitioner has not explained whatever additional items might
account for the difference between that amount and the amount of the
deduction. We need not concern ourselves with such precision, however,
and make no finding on the point. Even if petitioner were allowed to
claim the entire amount, after taking into account the disallowances of
the other miscellaneous itemized deductions here in dispute, the amount
allowed for return preparation fees could not result in a deduction
because the amount would not exceed 2% of petitioner’s adjusted gross
income. See § 67(a).

      To reflect the foregoing,

      Decision will be entered under Rule 155.