George W. Butterfield & Christina L. Butterfield ( 2022 )

United States Tax Court
T.C. Summary Opinion 2022-16GEORGE W. BUTTERFIELD AND CHRISTINA L. BUTTERFIELD,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 2608-21S. Filed August 30, 2022.
—————
George W. Butterfield and Christina L. Butterfield, pro se.
Timothy Duong, 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 28, 2020 (notice),
respondent determined a deficiency in petitioners’ 2017 federal income
tax and a section 6662(a) accuracy-related penalty. Respondent now
concedes the section 6662(a) penalty; the issue for decision is whether
1 Unless otherwise indicated, section 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. Monetary
amounts are rounded to the nearest dollar unless indicated otherwise.
Served 08/30/22
2
petitioners are entitled to a miscellaneous itemized deduction for
unreimbursed employee business expenses. 2
Background
Some of the facts have been stipulated and are so found.
Petitioners lived in California when the Petition was filed.
At all times relevant George W. Butterfield (petitioner) was
employed as a construction superintendent by MRB General
Contracting, Inc. (MRB). His employment required that he travel to
various locations in different states to build and/or remodel truck service
stations, and he spent 245 nights away from home doing so during 2017.
MRB provided petitioner with a company vehicle to travel to and from
worksites and a credit card to pay for gas and other vehicle expenses
incurred while traveling. Expenses petitioner incurred for hotels and
meals while traveling on business were reimbursed by MRB up to $75
per day. During 2017 petitioner was paid a total of $18,375 as travel
reimbursements (per diem payments).
Petitioner kept receipts for his traveling expenses in a binder, but
the binder was lost when he changed jobs in 2019. Before trial
petitioners prepared a summary that shows the many locations where
petitioner worked during 2017 and the dates of each trip (travel log).
Petitioner’s travel log was entered into evidence along with supporting
information from bank and debit card statements. The supporting
information shows that petitioner paid at least $3,153 for meals and
$8,242 for lodging while traveling away from home on business during
2017. The bank records also show that petitioner made $5,982 in cash
withdrawals from various locations in the areas where he was working.
Petitioners’ 2017 federal income tax return (return) was prepared
by a paid income tax return preparer. We cannot tell whether the
income reported on the return or on the Form W–2, Wage and Tax
Statement, that MRB issued to petitioner includes the per diem
payments. Otherwise, as relevant here, petitioners reported the
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.
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following unreimbursed employee business expenses, all related to
petitioner’s employment:
Type of Unreimbursed Expense Amount
Travel expenses $30,250
Meals and entertainment expenses 6,828
(before application of the 50% limitation
imposed by section 274(n))
Uniforms and protective clothing 1,169
Safety equipment 1,248
Phone 820
Tools 786
Total $41,101
After applying the 50% limitation imposed by section 274(n) on
meals and entertainment expenses, petitioners claimed an
unreimbursed employee business expense deduction totaling $37,687;
respondent disallowed the entire amount in the notice, and that
disallowance is here in dispute.
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
determination is erroneous. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). 3
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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II. 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 claimed deductions 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.
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). 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).
The Court may not estimate expenses under Cohan in situations
where section 274 requires specific 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). Deductions for
expenses attributable to meals and lodging while traveling away from
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home, if otherwise allowable, are subject to strict rules of substantiation.
See § 274(d). 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.
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).
A. Meals and Lodging Expenses Subject to Section 274(d)
Strict Substantiation Requirements
According to respondent, petitioners have failed properly to
substantiate, as required by section 274(d), the deductions claimed for
meals and lodging expenses. We agree with respondent, but only in
part. Taking into account petitioner’s testimony together with his
summary and bank and debit card records, we find that petitioners have
properly substantiated $3,153 for meals and $8,242 for lodging. See
Temp. Treas. Reg. § 1.274-5T(c)(3). To the extent that petitioners claim
that some or most of the cash withdrawals were also for meals and
lodging, we agree with respondent that the requirements of section
274(d) have not been satisfied with respect to those amounts.
Respondent further argues that to the extent that petitioners
have properly substantiated expenses for meals and lodging, they have
not shown that the totals for these items exceed the amount of the per
diem payments petitioner received. Respondent points out that if a
taxpayer’s business expenses are reimbursed by an employer, then the
taxpayer is entitled to a deduction only for the amount of expenses that
exceeds the reimbursement. Daiz v. Commissioner, T.C. Memo. 2002-
192; Temp. Treas. Reg. § 1.274-5T(f)(2)(iii). We agree in principle, but
respondent’s argument in this regard requires that we focus not so much
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on the underlying expenses as on the treatment of the per diem
payments.
Under section 62(a)(2)(A), an employee can deduct certain
business expenses incurred in connection with the performance of
services for an employer under a reimbursement or other expense
allowance arrangement. If these expenses are reimbursed by the
employer pursuant to an “accountable plan,” then the reimbursed
amount is not reported as wages on the employee’s Form W–2 and is
exempt from withholding and payment of employment taxes. Treas.
Reg. § 1.62-2(c)(4). A reimbursement arrangement must satisfy certain
regulatory requirements to be considered an accountable plan; if the
arrangement does not satisfy these requirements, amounts paid under
the arrangement will be treated as paid under a “nonaccountable plan.”
Id. subpara. (3). Amounts treated as paid under a nonaccountable plan
are included in the employee’s gross income, are reported as wages on
the employee’s Form W–2, and are subject to withholding and payment
of employment taxes. Id. subpara. (5). Expenses attributable to these
amounts may be deducted, provided the employee can substantiate the
full amount of his or her expenses. Id.The parties have not addressed whether the per diem payments
were made under an accountable or a nonaccountable plan, and
otherwise there is conflicting evidence on the point. If the per diem
payments were paid under a nonaccountable plan and included in the
income shown on petitioners’ return, then petitioners are entitled to
deductions for meals and lodging to the extent deemed substantiated as
discussed above. See id. To the extent that the per diem payments were
paid under an accountable plan (or were otherwise not included in
petitioner’s income from MRB), petitioners are not entitled to a
deduction for meals and lodging because they have not established that
the expenses for those items exceed the amount of the reimbursement.
See Daiz, T.C. Memo. 2002-192; Temp. Treas. Reg. § 1.274-5T(f)(2)(iii).
We expect that the parties should be able to determine easily
whether the per diem payments were or were not included in petitioners’
2017 income, and taking into account the foregoing, the result of the
agreement can be reflected in their Rule 155 computations. 4
4 If the parties cannot agree on the point, we will schedule further proceedings
as appropriate to resolve their dispute.
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B. Other Expenses
On the “Unreimbursed Expense Statement” included with the
Schedule A, Itemized Deductions, attached to their 2017 return,
petitioners reported $1,169 for uniforms and protective clothing, $1,248
for safety equipment, $820 for phone expenses, and $786 for tools.
Petitioners offered little evidence beyond the bank statements to
support their entitlement to deductions for these expenses.
Petitioners did not provide sufficient evidence that the purchase
of uniforms and protective clothing, safety equipment, a phone, or tools
was a condition of petitioner’s employment. To the extent that the bank
statements show purchases at hardware stores, neither petitioners nor
the statements identify what was purchased. We cannot from the
evidence presented reasonably estimate what amount, if any, of these
reported expenses was related to business use. See Vanicek, 85 T.C.
at 742–43. Accordingly, petitioners are not entitled to a deduction for
uniforms and protective clothing, safety equipment, phone expenses, or
tools.
To reflect the foregoing,
Decision will be entered under Rule 155.