Raul Romana & Maria Corazon Romana ( 2022 )

United States Tax Court
T.C. Summary Opinion 2022-9RAUL ROMANA AND MARIA CORAZON ROMANA,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 1156-21S. Filed June 16, 2022.
—————
Steven S. Chung, for petitioners.
Chae M. Kim and Michael E. Washburn, for respondent.
SUMMARY OPINION
CARLUZZO, Chief 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 December 11, 2020 (notice),
respondent determined deficiencies in petitioners’ federal income tax
and section 6662(a) accuracy-related penalties for 2016, 2017, and 2018.
After concessions, the issues for decision are whether petitioners
(1) are entitled to a miscellaneous itemized deduction for unreimbursed
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 06/16/22
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employee business expenses for 2017 2 in excess of the amount already
allowed by respondent and (2) are liable for a section 6662(a) accuracy-
related penalty for any year in issue.
Background
Some of the facts have been stipulated and are so found.
Petitioners lived in California when the Petition was filed.
During each year in issue Mr. Romana was employed as a
stationary engineer; Mrs. Romana was employed as a nurse in a plastic
surgery clinic operated by Kaiser Permanente (Kaiser). Both petitioners
received most of their formal education in the Philippines although both
received additional professional and/or vocational training in the United
States after moving to the United States from the Philippines. Neither
petitioner had any formal training in accounting or federal income
taxation.
Kaiser’s dress code in effect at the location where she worked
required that Mrs. Romana be dressed in “comfortable” clothes and in a
manner that reflected her profession as a nurse. Neither Kaiser nor the
collective bargaining agreement for her nursing union had a policy that
allowed reimbursement for the expenses she incurred to purchase
clothing that satisfied her employer’s dress code. While at work, Mrs.
Romana wore clothing that resembled scrubs that she purchased at her
own expense from local department stores. In the operating room she
was required to wear scrubs provided by Kaiser. Routinely, depending
upon the operation schedule for any given day, she changed back and
forth between her scrublike clothing and the operating room scrubs her
employer provided.
During 2017 Mrs. Romana also purchased, at her own expense, a
white “lab” coat with “Kaiser Permanente” and her name embroidered
on it. The purchase was made as part of a bulk purchase along with
similar items purchased by fellow employees. The lab coat cost
approximately $45, and it was dry cleaned multiple times during the
year. Otherwise, the costs that petitioners paid for Mrs. Romana’s work
clothing cannot be precisely determined.
2 The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, § 11045, 131 Stat.
2054, 2088, amended section 67 by suspending miscellaneous itemized deductions for
any taxable year beginning after December 31, 2017, and before January 1, 2026.
3
Petitioners’ federal income tax return for each year in issue was
prepared by a paid income tax return preparer. Petitioners’ return
preparer, who began preparing federal income tax returns for
petitioners around 2003, was hired on the recommendation of
petitioners’ family and friends. The return preparer assisted petitioners
with other financial matters as well. For example, the return preparer
advised petitioners to set up an S corporation to manage their rental
properties and helped them set up living trusts and living wills.
The Schedule A, Itemized Deductions, included with petitioners’
2017 return shows various deductions, including, as relevant here,
unreimbursed employee business expenses relating to Mrs. Romana’s
employment with Kaiser and Mr. Romana’s employment as a stationary
engineer. Attached to the Schedule A is a “TY 2017 Unreimbursed
Expense Statement” reflecting the detail of the unreimbursed employee
business expenses as follows:
Unreimbursed Expense Amount
Union and professional dues $3,616
Uniforms and protective clothing 1,915
Dry cleaning/laundry 399
Seminars 601
Tools 250
Telephone 263
Internet 1,134
Total $8,178
In the notice and as relevant, respondent allowed the
miscellaneous itemized deduction for unreimbursed employee business
expenses claimed on petitioners’ 2017 Schedule A for union and
professional dues and for seminars. Otherwise, respondent disallowed
the miscellaneous itemized deduction for unreimbursed employee
business expenses claimed for uniforms and protective clothing, dry
cleaning and laundry, tools, telephone, and internet. As noted,
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respondent also imposed a section 6662(a) accuracy-related penalty for
each year in issue.
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). 3
I. Unreimbursed Employee Business Expenses
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). 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.
3 Petitioners do 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.
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The deduction for unreimbursed employee business expenses is a
miscellaneous itemized deduction. §§ 67(b), 63(d)(1), 62. During the
relevant period miscellaneous itemized deductions were allowable only
to the extent that the total of such deductions exceeded 2% of adjusted
gross income (AGI). § 67(a) and (b). Petitioners’ total miscellaneous
itemized deductions for 2017, as allowed by respondent in the notice,
exceed 2% of their AGI.
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). However,
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).
All of the disputed deductions relate to Mrs. Romana’s
employment with Kaiser or Mr. Romana’s employment as a stationary
engineer. According to petitioners, they are entitled to unreimbursed
employee business expense deductions of $1,526 for clothing, $250 for
tools, $263 for telephone, and $1,134 for internet. According to
petitioners, each expense qualifies as an ordinary and necessary
business expense paid by petitioners but not reimbursable by their
employers. See § 162(a). According to respondent, petitioners have
failed to establish that (1) the expenses were paid or, if paid, (2) the
expenses were ordinary and necessary business expenses, and if
business related, (3) they were not reimbursable by petitioners’
employers.
A. Clothing
On their 2017 return petitioners claimed $1,915 in expenses for
“Uniforms and protective clothing” and $399 for “dry cleaning/laundry.”
Petitioners now assert that they are entitled to deduct $1,526 for those
items.
Generally, the cost of a business wardrobe, even if required as a
condition of employment, is considered a nondeductible personal
expense within the meaning of section 262. See, e.g., Hynes v.
Commissioner, 74 T.C. 1266, 1290 (1980). Those costs are not deductible
even when it has been shown that the particular clothes would not have
been purchased but for the employment. Id. Clothing costs are
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deductible as ordinary and necessary business expenses under section
162 only if (1) the clothing is of a type specifically required as a condition
of employment, (2) it is not adaptable to general use as ordinary
clothing, and (3) it is not so worn. See Yeomans v. Commissioner, 30
T.C. 757, 767 (1958); see also Deihl v. Commissioner, T.C. Memo. 2005-
287.
Mrs. Romana was required to dress professionally and
comfortably for her job as a nurse. To do so, she purchased shirts and
pants at department stores. Because the clothing resembled scrubs, we
find that the clothing was not adaptable to general use as ordinary
clothing outside of her employment. Consequently, the cost of the
clothing and the cost to dry clean the clothing are deductible. Mrs.
Romana also purchased a white lab coat with “Kaiser Permanente” and
her name embroidered on it. This lab coat was not appropriate for
general use.
According to Mrs. Romana, the lab coat cost around $45.
Petitioners provided only generalized estimates for the costs of the
scrublike clothing that Mrs. Romana wore at work and the dry cleaning
costs paid to dry clean those items. After a careful review of the
evidence, and as best we can estimate from what has been submitted,
we find that petitioners are entitled to a $500 deduction for the
purchases of the clothing that Mrs. Romana was required to wear as a
condition of her employment and the related dry cleaning costs paid with
respect to those items. See Cohan v. Commissioner, 39 F.2d at 543–44.
B. Tools
Petitioners claimed a deduction of $250 for tools for 2017. They
did not offer any evidence that identifies the type of tools, the cost of the
tools, or the business use of the tools. Furthermore, there is insufficient
evidence that would allow for a deduction based on an estimate. See
Vanicek, 85 T.C. at 742–43. Accordingly, petitioners are not entitled to
a deduction for unreimbursed employee business expenses for tools for
2017.
C. Phone and Internet
Petitioners claimed deductions of $264 for phone expenses and
$1,134 for internet expenses. Petitioners did not offer documentary
evidence or testimony regarding their business use of the phone and
internet, nor did they explain how they arrived at their estimate of
business versus personal use. Without such evidence the Court does not
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have a reasonable basis to estimate the amounts of the expenses related
to business use. See id. Accordingly, petitioners are not entitled to a
deduction for unreimbursed employee business expenses for phone and
internet for 2017.
II. Accuracy-Related Penalties
Lastly, we consider whether petitioners are liable for a section
6662(a) accuracy-related penalty for any year in issue. Relying upon
various grounds, respondent argues that petitioners are liable for the
penalty for each year. See § 6662(a)-(d).
Petitioners’ paid income tax return preparer prepared petitioners’
2016, 2017, and 2018 returns. Petitioners had retained the same return
preparer since approximately 2003 to prepare their returns. Routinely,
petitioners met with the return preparer two or three times each year.
As was petitioners’ practice with respect to their joint federal income tax
returns filed for other years, Mrs. Romana assembled petitioners’
personal and employment information, tax documents, and source
documents underlying the deductions shown on their returns and
provided them to the return preparer. Mrs. Romana also provided the
return preparer with various financial statements related to their rental
properties.
Petitioners’ presentation at trial satisfies us that petitioners
reasonably relied upon their return preparer to do what they paid their
return preparer to do. Neither petitioner had any formal training in
accounting or matters of federal income taxation. To the extent that
petitioners claimed disallowed deductions that they now concede, we
find that these deductions were claimed on the advice of their return
preparer and further find that it was not unreasonable for petitioners
not to have questioned that advice.
Under the circumstances, we find that petitioners had reasonable
cause for the underpayment of tax required to be shown on their return
for each year in issue and that they acted in good faith with respect to
those underpayments. See § 6664(c); Higbee v. Commissioner, 116 T.C.
438, 446–47 (2001). Petitioners are not liable for the section 6662(a)
accuracy-related penalty for any year in issue.
To reflect the foregoing,
Decision will be entered under Rule 155.