Court Opinion

ID: 9955574
Source: CourtListenerOpinion
Date Created: 2024-03-28 19:03:11.994693+00
Date Added: 2024-06-11T08:15:05.922393
License: Public Domain

United States Tax Court

                         T.C. Summary Opinion 2024-3

                         PAUL ANTHONY STEWARD,
                                Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 22810-21S.                                        Filed March 28, 2024.

                                     —————

Paul Anthony Steward, pro se.

Melody Morales, for respondent.

                              SUMMARY OPINION

       PANUTHOS, 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 June 17, 2021, respondent
determined the following deficiencies, addition to tax, and accuracy-
related penalties with respect to petitioner’s federal income tax for tax
years 2018 and 2019 (years in issue):

        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.

                                 Served 03/28/24
                                         2

                                             Addition to Tax/Penalties
           Year         Deficiency
                                          § 6651(a)(1)          § 6662(a)
           2018          $10,694              $1,588               $2,120
           2019           15,552               —                    3,110

          After concessions, 2 the issues for decision are:

      (1) whether petitioner is entitled to deduct car and truck expenses of
          $11,949 and $19,034 for tax years 2018 and 2019, respectively;

      (2) whether petitioner is entitled to deduct travel expenses of $11,002
          and $8,400 for tax years 2018 and 2019, respectively; and

      (3) whether petitioner is liable for a failure to timely file addition to
          tax under section 6651(a)(1) of $1,588 for tax year 2018.

                                     Background

       Some of the facts have been stipulated and are so found. We
incorporate the Stipulation of Facts as supplemented and the attached
Exhibits by this reference. The record consists of the Stipulation of
Facts as supplemented, with attached Exhibits and petitioner’s
testimony. Petitioner resided in California when the Petition was timely
filed.

I.        Petitioner’s Employment

       Petitioner has a background in music and was a performing
musician during the years in issue. He performed with his father in the
band “Twice As Good,” primarily playing blues music. The band played
concerts at various venues throughout California and received royalties.
Petitioner was the manager of the band, kept records, and hired other
artists to perform with the band. Petitioner would drive from his home
to perform at the venues.

II.       Petitioner’s Travel

     In 2016, while petitioner was in business school at Sonoma State
University, he worked on an academic project concerning business

        2 Respondent concedes unreported wages for tax year 2018; contract labor

adjustments for tax years 2018 and 2019; car and truck expenses for tax year 2018 of
$2,409; car and truck expenses for tax year 2019 of $2,694; and the accuracy-related
penalties under section 6662(a) for tax years 2018 and 2019.
                                     3

opportunities in Asia and became interested in the music industry in
Japan. During the years in issue, petitioner took multiple trips to Japan
to learn about the culture and explore possible opportunities. Petitioner
stayed in local hotels during the trips. Petitioner did not sign a contract
to perform, did not perform in Japan, and did not report any income from
music or other activities received while in Japan during the years in
issue.

       Petitioner retained some personal and business records. Some of
petitioner’s business records were destroyed in a fire in October of 2018.
He did not maintain a contemporaneous mileage log but created a
mileage log sometime after the years in issue that lists the time, date,
business purpose, and miles traveled between his home and various
places of employment. For international travel petitioner created a
travel expense report that lists the costs of flights and hotels and briefly
describes the purpose of each trip. Petitioner also retained numerous
receipts for flights and hotels.

III.   Petitioner’s Tax Returns

      Petitioner filed his Form 1040, U.S. Individual Income Tax
Return for tax year 2018 on July 14, 2019. Petitioner did not request an
extension of time to file his 2018 return. Petitioner timely filed his Form
1040 for tax year 2019.

       Petitioner’s 2018 Schedule C, Profit or Loss From Business,
reported $11,949 in car and truck expenses and $11,002 in travel
expenses. Petitioner’s 2019 Schedule C reported $19,034 in car and
truck expenses and $8,400 in travel expenses.

       On June 17, 2021, respondent issued a notice of deficiency to
petitioner for the years in issue, disallowing his Schedule C deductions
and determining an addition to tax for 2018 under the provisions of
section 6651(a)(1).

                                Discussion

I.     Burden of Proof

       Generally, the Commissioner’s determination set forth in a notice
of deficiency is presumed correct, and a taxpayer bears the burden of
proving that the determination is in error. See Rule 142(a); Welch v.
                                           4

Helvering, 290 U.S. 111, 115 (1933). 3 Deductions are a matter of
legislative grace, and a taxpayer bears the burden of proving that he is
entitled to any deduction claimed. See 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).

      A taxpayer claiming a deduction on a federal income tax return
must demonstrate that the deduction is provided for by statute and must
further substantiate that the expense to which the deduction relates has
been paid or incurred. § 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); Treas. Reg. § 1.6001-1(a).
A taxpayer is required to maintain records sufficient to enable the
Commissioner to determine the correct tax liability. See § 6001; Treas.
Reg. § 1.6001-1(a). Such records must substantiate both the amount
and purpose of the related expense. Higbee v. Commissioner, 116 T.C.
438, 440 (2001).

       When a taxpayer establishes that he has paid a deductible trade
or business expense 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).
To apply the Cohan rule, however, the Court must have a reasonable
basis upon which to make an estimate. Vanicek v. Commissioner, 85
T.C. 731, 742–43 (1985). Congress overrode the Cohan rule with section
274(d), which requires strict substantiation for certain categories of
expenses. Sanford v. Commissioner, 50 T.C. 823, 827–28 (1968), aff’d
per curiam, 412 F.2d 201 (2d Cir. 1969). These expenses, including
vehicle and travel expenses, require strict substantiation, through
adequate records or by sufficient evidence corroborating the taxpayer’s
own statement, of the amount, time, place, and business purpose of
these expenditures. § 274(d).

II.     Schedule C Business Expenses

      Section 162 generally allows a deduction for “all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying
on any trade or business.” Boyd v. Commissioner, 122 T.C. 305, 313
(2004). The taxpayer bears the burden of proving that expenses were of

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

Commissioner if the taxpayer introduces credible evidence with respect to any factual
issues relevant to ascertaining the taxpayer’s tax liability. Because petitioner has not
alleged or shown that section 7491(a) applies, the burden of proof remains on him.
                                           5

a business nature rather than personal and that they were ordinary and
necessary. Rule 142(a); Welch v. Helvering, 290 U.S. at 115.

       Whether an expenditure satisfies the requirements for
deductibility under section 162 is a question of fact. See Commissioner
v. Heininger, 320 U.S. 467, 475 (1943). 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). A necessary expense is one that is
appropriate and helpful in carrying on the taxpayer’s business.
Commissioner v. Heininger, 320 U.S. at 471; Treas. Reg. § 1.162-1(a).

        A.      Car and Truck Expenses

      Vehicle expenses are subject to the strict substantiation
requirements of section 274(d). A taxpayer must substantiate by
adequate records or by sufficient evidence corroborating his own
statement the amount, time, place, and business purpose of these
expenditures. § 274(d); Temp. Treas. Reg. § 1.274-5T(c)(1).

       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).

      Petitioner deducted $11,949 in vehicle expenses for tax year 2018
and $19,034 for tax year 2019, all of which respondent disallowed.

      Petitioner contends he regularly traveled by car from his home to
various venues where he performed with his band. In support, he
introduced a mileage log and documentation of royalties he collected for
his performances. 4 The documents list dates of concerts at various
venues for the years in issue. He acknowledged that many of the

        4 At trial, petitioner informed the Court that he was in the process of obtaining

documentation from Broadcast Music, Inc., which collected royalties on his behalf
during the years in issue. The Court left the record open to permit petitioner to provide
the documentation. Subsequently, petitioner provided the documents to respondent
and the parties jointly filed a Second Supplement to First Stipulation of Facts which
was entered into the record.
                                    6

original records were destroyed in a fire and that the mileage log was
not made contemporaneously with the events in the years in issue. It is
well established that the Court may permit a taxpayer to attempt to
substantiate deductions through secondary evidence where the
underlying documents have been unintentionally lost or destroyed.
Boyd, 122 T.C. at 320–21.

       The Court is satisfied that petitioner’s vehicle expenses were
ordinary and necessary considering he was a performing musician and
that he had to travel to the venues. At trial respondent conceded $2,409
of car and truck expenses for tax year 2018 and $2,694 of car and truck
expenses for tax year 2019. After trial, in the Second Supplement to
First Stipulation of Facts, respondent further conceded car and truck
expenses for the years in issue.

       There is nothing in the record from which we can allow any
additional amounts of vehicle expenses. Petitioner has not met the
section 274(d) strict substantiation requirements for any additional
amounts. Therefore, petitioner is entitled to claim 9,074 miles for tax
year 2018 and 11,896 miles for tax year 2019; otherwise respondent’s
determination is sustained.

      B.     Travel Expenses

        Section 162(a)(2) allows taxpayers to deduct traveling expenses if
they are: (1) ordinary and necessary, (2) incurred while away from home,
and (3) incurred in the pursuit of a trade or business. See Commissioner
v. Flowers, 326 U.S. 465, 470–72 (1946). Carrying on a trade or business
requires more than initial research into business potential and the
solicitation of potential customers. See Christian v. Commissioner, T.C.
Memo. 1995-12. If a “trip is undertaken for both business and personal
reasons, travel expenses are deductible only if the primary purpose of
the trip is business.” Crawford v. Commissioner, T.C. Memo. 2014-156,
at *12 (citing Treas. Reg. § 1.162-2(b)). Determining the purpose of a
trip is a fact-based analysis which depends, in part, on the ratio of time
the taxpayer spends on personal and business activities. See id.

      Travel expenses are subject to the strict substantiation
requirements of section 274(d). To deduct travel expenses a taxpayer
must substantiate with adequate records or by sufficient evidence
corroborating his own statement: (1) the “[a]mount of each separate
expenditure for traveling away from home”; (2) “[d]ates of departure and
return for each trip away from home, and number of days away from
                                          7

home spent on business”; (3) “[d]estinations or locality of travel,
described by name of city or town or other similar designation”; and
(4) the “[b]usiness reason for travel or nature of the business benefit
derived or expected to be derived as a result of travel.” Temp. Treas.
Reg. § 1.274-5T(b)(2), (c)(1); see also § 274(d).

       Petitioner deducted a total of $19,402 in travel expenses for the
years in issue, all of which respondent disallowed.

       In support, petitioner introduced a travel expense report that lists
the trip dates and costs and briefly describes the purpose of the travel.
He also produced receipts for flights and hotels. He described the trips
as “market research” and noted various reasons for his trips which
included visiting the “Sony Records office,” meeting to develop a music
class, observing the culture, and discussing the use of blockchain in the
music industry. At trial petitioner testified that his travel expenses
related to trips taken to Japan to learn about the music culture, visit
venues, and network with people involved in the music industry,
ultimately in preparation for petitioner to perform in Japan.

       Respondent advanced arguments that petitioner traveled for
personal reasons.      Alternatively, respondent questioned whether
petitioner’s travel expenses during the years in issue involved starting
a new business and asserted the expenses should be categorized as
startup expenses under section 195. 5

        Although petitioner provided some evidence to corroborate
amounts of expenses, dates of travel, and destinations, he did not
provide sufficient evidence to corroborate his business reasons for travel.
See Temp. Treas. Reg. § 1.274-5T(b)(2), (c)(1). There is very little detail
provided about the meetings and the business purpose of any meetings.
It is clear that petitioner did not perform or receive income during the
trips to Japan. While petitioner provided emails that corroborate his
business purpose for travel in other years, he did not provide any for the
years in issue. Petitioner claims many of his records were lost in a fire.
While the Court may allow substantiation through secondary evidence
when the underlying documents have been destroyed, petitioner has not

        5 We are satisfied that petitioner was engaged in an ongoing business

considering that Twice As Good continued to be active in the years before and after the
years in issue. We do not need to decide whether petitioner’s international travel was
part of the same activity given that he has not met the strict substantiation
requirements of section 274(d) discussed infra.
                                    8

provided sufficiently detailed secondary evidence. See Boyd, 122 T.C.
at 320–21.

      On the basis of the record, we conclude that petitioner has failed
to meet the strict substantiation requirements under section 274(d).
Therefore, petitioner is not entitled to deductions for travel expenses for
the years in issue.

III.   Failure to File Addition to Tax

       Section 6651(a)(1) imposes an addition to tax for failure to file a
return timely unless it is shown that such failure was due to reasonable
cause and not due to willful neglect. See United States v. Boyle, 469 U.S.
241, 245 (1985). A failure to file a federal income tax return timely is
due to reasonable cause if the taxpayer exercised ordinary business care
and prudence but nevertheless was unable to file the return within the
prescribed time, typically for reasons outside the taxpayer’s control. See
McMahan v. Commissioner, 114 F.3d 366, 368–69 (2d Cir. 1997), aff’g
T.C. Memo. 1995-547; Treas. Reg. § 301.6651-1(c)(1).

       The Commissioner bears the burden of production with respect to
an individual taxpayer’s liability for additions to tax. See § 7491(c);
Higbee, 116 T.C. at 446–47. Once the Commissioner has met his burden
of production, the taxpayer must come forward with persuasive evidence
that the Commissioner’s determination is incorrect or that the taxpayer
has an affirmative defense. See Higbee, 116 T.C. at 447.

       The record clearly reflects that the tax return for tax year 2018
was filed after the due date. Respondent has satisfied his burden.

       Petitioner contends there were some personal hardships in tax
year 2018 that made it difficult to keep good records and file a timely
return. Although we are sympathetic, petitioner failed to introduce
evidence showing that there was reasonable cause for filing his return
late. Accordingly, we will sustain respondent’s imposition of the
addition to tax under section 6651(a)(1) for tax year 2018.

       We have considered all arguments, and, to the extent not
addressed herein, we conclude that they are moot, irrelevant, or without
merit.

       To reflect the foregoing,

       Decision will be entered under Rule 155.