Jonathan Cole Phillips & Eva v. Phillips ( 2023 )

United States Tax Court
T.C. Summary Opinion 2023-10JONATHAN COLE PHILLIPS AND EVA V. PHILLIPS,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 21344-17S. Filed March 21, 2023.
—————
Jonathan Cole Phillips and Eva V. Phillips, pro se.
Philip Myers, Jamie M. Powers, Vassiliki Economides Farrior, and
Elizabeth Downs, for respondent.
SUMMARY OPINION
PARIS, 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.
By notice of deficiency dated August 15, 2017, respondent
determined a deficiency in federal income tax of $4,813 for petitioners’
2014 tax year. The only issue before the Court is whether petitioners are
entitled to deduct job expenses and certain miscellaneous expenses
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.
Served 03/21/23
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totaling $37,535, reported on their return on Schedule A, Itemized
Deductions, for tax year 2014.
Background
I. Petitioners’ Background
Petitioners resided in Oklahoma when they filed the Petition.
Petitioners are husband and wife who filed a joint federal income tax
return for tax year 2014.
Petitioners resided in Yukon, Oklahoma, from the beginning of
2014 until mid-August. During that period Mr. Phillips was employed
as a staff pastor at the Gate Church in Oklahoma City and Mrs. Phillips
was a salesperson at a furniture store.
As a pastor at the Gate Church, Mr. Phillips had many
responsibilities. In addition to his religious and ministerial duties, he
provided facilities maintenance, tech work, and graphic design services
for the church. In addition, he frequently traveled. He attended
conferences and retreats, met with ministers from other churches in the
Gate Church’s network of churches, and would sometimes drive with a
trailer to pick up large equipment, such as soundboard or lighting rigs.
II. Move to Clewiston, Florida
In early July Mr. Phillips began discussions with New Harvest
Ministries Church in Clewiston, Florida, about an executive youth
pastor position. On July 15 Mr. Phillips traveled to Clewiston for an
interview. Mrs. Phillips joined him to interview for a teaching position
with New Harvest Ministries Educational Center (New Harvest school),
a school associated with New Harvest Ministries Church. Because their
flight was out of Dallas-Fort Worth International Airport, petitioners
drove from Yukon to Dallas the day before the flight and spent the night
at a hotel near the airport.
Sometime following their interviews, petitioners were offered the
positions, and on or around August 18 they moved to Clewiston. They
drove from Yukon to Clewiston, one vehicle driven by Mrs. Phillips and
the other towed by a rented moving truck driven by Mr. Phillips, and
began their new positions on August 20. Mrs. Phillips’s mother moved
to Clewiston with petitioners, driving her own vehicle from Oklahoma
to Florida around the same time.
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The move to Clewiston proved to be a financial strain on
petitioners. Petitioners had not anticipated that, because Clewiston is
in a rural area, many facilities and amenities are geographically spread
far apart. As part of his role as pastor, Mr. Phillips found himself driving
great distances to meet with members of the parish, make hospital
visits, and otherwise fulfill his duties. Mr. Phillips paid for the cost of
this driving out of pocket and was not reimbursed by his employer.
In addition, Mrs. Phillips had taken a significant pay decrease to
accept the teaching position with New Harvest school. She had no
previous teaching experience and had to purchase most of her classroom
supplies and materials, including chalk, pencils, paper, notebooks,
markers, classroom decorations, and other common supplies. A
significant percentage of the students in her class came from low-income
families, often with little or no support from their parents, and she often
had to provide them with basic classroom supplies, such as paper and
writing instruments. Behavior problems were common in her class, and
Mrs. Phillips attempted to incentivize good behavior with rewards, such
as parties and a treasure chest reward system, among other efforts. The
school did not provide reimbursement for any of these purchases.
Mrs. Phillips’s mother, who had moved to Clewiston when
petitioners did, struggled to find employment, and in July or August
2015 she moved in with petitioners. Petitioners had an extra bedroom
in their home that they had been using to store records, documents, and
office supplies, and to make room in their home they moved everything
in that room to their garage.
III. Return to Oklahoma
The financial stress and family issues took their toll on
petitioners, and by early 2016 they decided that it was in their best
interest to leave Clewiston. Their first child had been born earlier that
year, and petitioners had expended much of their savings. They hoped
to be allowed a few months for time to transition out of their current jobs
and find new positions and housing, but Mr. Phillips’s employer allowed
him to remain at New Harvest Ministries Church for only three weeks.
Mr. Phillips reached out to the Gate Church, his former church, and was
offered a position there. In the ensuing weeks, petitioners rushed to find
a new place to live, sold their home in Clewiston, and returned to
Oklahoma.
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At the time, petitioners had the funds available to rent only one
moving truck. They took what they could carry back with them to
Oklahoma, but Mrs. Phillips’s mother had to put some items from the
garage into storage in Clewiston, with the intent of returning in a few
months to retrieve them. In doing so, petitioners inadvertently moved
the boxes containing their business and tax records into the storage unit
as well. By August 2017 Mrs. Phillips’s mother had stopped paying for
the storage unit, and the unit had been repossessed.
IV. Tax Return and Examination
Petitioners timely filed their 2014 joint income tax return. They
reported total income of $68,899 and claimed above-the-line deductions
of $250 for educator expenses and $4,950 for moving expenses, resulting
in adjusted gross income of $63,699. Petitioners claimed itemized
deductions totaling $50,116 and exemptions totaling $7,900 for taxable
income of $5,683.
On Schedule A, petitioners reported (before application of the 2%
floor of section 67(a)) unreimbursed employee expenses totaling $37,460
and tax preparation fees of $75. Petitioners’ unreimbursed employee
expenses consisted of $950 of excess educator expenses related to Mrs.
Phillips’s employment at New Harvest school and $36,510 related to Mr.
Phillips’s employment as a minister. Mr. Phillips’s expenses were
calculated on Form 2106, Employee Business Expenses, as follows:
Form 2106 expenses Amount
Vehicle expenses $31,360
Travel expense while away 2,800
from home overnight
50% of meals and 750
entertainment expenses
Other business expenses 1,600
Total $36,510
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Petitioners reported business use of two vehicles. For vehicle 1, a
2003 Dodge truck, petitioners reported 34,000 business miles. For
vehicle 2, a 2009 Nissan Altima, petitioners reported 22,000 business
miles. They multiplied the claimed 56,000 total business miles driven by
the standard mileage rate of $0.56 to arrive at the vehicle expense of
$31,360.
Respondent selected petitioners’ return for examination by
respondent in 2017, and it was during the examination that Mr. Phillips
discovered that his records were lost. Mr. Phillips was unable to provide
respondent’s revenue agent with the requested documentation but
attempted to reconstruct his mileage log from memory. Respondent
determined that petitioners were not entitled to the deductions for
unreimbursed employee expenses or tax preparation fees and issued the
notice of deficiency. Petitioners timely petitioned this Court for
redetermination.
Discussion
I. Burden of Proof
In general, the Commissioner’s determination set forth in a notice
of deficiency is presumed correct, and taxpayers bear the burden of
proving that the determination is in error. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). 2 Deductions are a matter of
legislative grace, and taxpayers bear the burden of proving that they are
entitled to any deduction claimed. See Rule 142(a); New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934).
II. Schedule A Expenses
A. 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 the taxpayers establish that they paid or
2 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. The Court concludes that
section 7491(a) does not apply because petitioners have not produced any evidence that
they have satisfied the preconditions for its application.
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incurred a deductible expense but are unable to substantiate the precise
amount, the Court may estimate the allowable amount. See Cohan v.
Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). In estimating, the
Court bears 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) prescribes more stringent substantiation
requirements to be met before a taxpayer may deduct certain categories
of expenses, including travel expenses, meals and lodging away from
home, and expenses with respect to listed property as defined in section
280F(d)(4), which includes passenger automobiles. See Sanford v.
Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam, 412 F.2d 201(2d Cir. 1969). Consequently, even if such an expense would be
otherwise deductible, section 274(d) may still preclude a deduction if the
taxpayer does not present sufficient substantiation. Temp. Treas. Reg.
§ 1.274-5T(a).
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).
To substantiate car and truck expenses through adequate
records, taxpayers must maintain a contemporaneous log, trip sheet, or
similar record, as well as corroborating documentary evidence, that
together establish each required element of the expense. See Temp.
Treas. Reg. § 1.274-5T(c)(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).
B. Employee Business Expenses
1. Vehicle Expenses
Petitioners have not satisfied the heightened substantiation
requirements with respect to the claimed $31,360 deduction for vehicle
expenses. Mr. Phillips testified that his mileage log and other records
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from 2014 were lost, likely left in his mother-in-law’s storage unit in
Clewiston and abandoned after she neglected to pay the rent on the unit
following the family’s move back to Oklahoma in 2016. Mr. Phillips
attempted to reconstruct his mileage from memory, including on his list
only those trips for which he could recall the specific dates and other
details. While the Court found Mr. Phillips to be forthright and believes
he attempted to reconstruct his mileage in good faith, the reconstructed
mileage log does not satisfy the requirements of section 274(d). It lacks
sufficient specificity with respect to many of the trips, often describing
only the city or state to which Mr. Phillips traveled, and lacks any
additional corroborative evidence. See Temp. Treas. Reg. § 1.274-
5T(c)(2). The reconstructed log appears also to include the mileage from
petitioners’ move from Yukon to Clewiston, even though that mileage
was separately claimed on Form 3903 and allowed by respondent.
Accordingly, the Court sustains respondent’s disallowance of
petitioners’ claimed vehicle expense deduction.
2. Travel Expenses
With respect to the claimed $2,800 travel expense deduction,
petitioners introduced into evidence copies of email receipts and
itineraries from Priceline.com for a July 15 flight from Dallas to West
Palm Beach for their job interviews for $748; a July 14 hotel stay in
Dallas for $96.19; an August 1 hotel reservation for two rooms for Mr.
Phillips and a colleague in Columbus, Mississippi, for $156.26; a
September 4 flight from Fort Lauderdale to Atlanta for $324.18; and a
car rental in Atlanta from September 4 through September 7, for $83.49.
The Court is satisfied that petitioners have met the strict
substantiation requirements with respect to the Dallas hotel stay, Mr.
Phillips’s flight from Dallas to West Palm Beach, the flight from Fort
Lauderdale to Atlanta, and the car rental. The information in the email
receipts, along with the other evidence in the record, meets the
requirements of section 274(d). Mrs. Phillips’s flight is not a deductible
business expense, however, because expenses incurred in seeking or
investigating a new trade or business are not deductible under section
162(a), see, e.g., Evans v. Commissioner, T.C. Memo. 1981-413, 1981 WL
10738, and there is insufficient information in the record to substantiate
the business purpose of the Columbus trip or the portion, if any, that
was paid by Mr. Phillips himself.
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Accordingly, the Court holds that petitioners are entitled to a
travel expense deduction of $877.86. The remainder of respondent’s
adjustment is sustained.
3. Meals and Entertainment Expenses
Petitioners claimed a deduction of $750 (50% of $1,500) for meals
and entertainment expenses. Petitioners did not provide any receipts or
other evidence beyond general testimony in support of the claimed meals
and entertainment expenses. The Court sustains respondent’s
adjustment.
4. Other Business Expenses
Petitioners additionally claimed a deduction for other expenses of
$1,600. These expenses included $1,000 for a used MacBook laptop,
which petitioners made a section 179 election to deduct as a current
expense, $200 for a used Nexus 7 tablet, and a used HTC One
smartphone. Mr. Phillips could not recall at trial whether the $1,600
figure included any other purchases. Section 280F(d)(4) defines listed
property to include any computer or peripheral equipment, including
laptops and tablets. The laptop and the tablet are thus subject to the
heightened substantiation requirements of section 274(d). Petitioners
have not provided any evidence beyond their own testimony to
substantiate any of the reported expenses.
Respondent’s adjustment is sustained.
C. Excess Educator Expenses
Section 62(a)(2)(D) allows elementary and secondary school
teachers an above-the-line deduction for the cost of certain school
supplies up to $250. See also § 62(d)(1). Educators may deduct
unreimbursed employee expenses in excess of the $250 allowance
provided by section 62(a)(2)(D) as miscellaneous itemized deductions on
Schedule A pursuant to section 162.
Petitioners claimed the $250 educator expense deduction, as well
as an additional deduction of $950 for excess educator expenses on
Schedule A. Respondent allowed the $250 above-the-line deduction, but
has disallowed the $950 deduction.
Mrs. Phillips testified that the New Harvest school provided little
in the way of supplies, expecting teachers to provide their own chalk,
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pencils, paper, notebooks, markers, classroom decorations, and nearly
all other supplies. She also explained at trial that she often had to
provide many of her students with basic classroom supplies, such as
paper and pencils, because many of them came from disadvantaged or
troubled backgrounds. In addition, she provided incentives for good
behavior, including parties and other rewards.
Respondent argues that many of the reported expenses are not
properly considered ordinary and necessary expenses of teaching
because they were not required by her employer and, further, that
petitioners have not substantiated any of the reported expenses. The
Court need not decide which of Mrs. Phillips’s teaching expenses would
be considered deductible because petitioners have not offered any
evidence to support their testimony in support of the expenses. The only
item Mrs. Phillips identified with any specificity was $800 for a used
laptop. As discussed above, laptops are listed property described under
section 280F(d)(4) and subject to the heightened substantiation
requirements of section 274(d). Respondent’s adjustment to petitioners’
excess educator expenses is sustained.
D. Tax Preparation Fees
Finally, petitioners claimed, and respondent disallowed, a
deduction of $75 for tax preparation fees. Petitioners did not introduce
any evidence or other substantiation in support of this amount beyond
testimony that they generally used TurboTax to prepare their tax
returns. Respondent’s adjustment is sustained.
III. Conclusion
For the foregoing reasons, petitioners are entitled to a Schedule A
deduction for unreimbursed employee expenses of $877.86. The
remainder of respondent’s adjustments are sustained.
The Court has considered all of the arguments made by the
parties, and to the extent they are not addressed herein, they are
considered moot, irrelevant, or otherwise without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.