Starr v. Commissioner ( 2000 )

T.C. Memo. 2000-305
UNITED STATES TAX COURT
WILLIAM K. STARR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12831-99. Filed September 27, 2000.
William K. Starr, pro se.
Gregory M. Hahn, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent determined a deficiency of $2,084
in petitioner’s Federal income tax for 1995 and an addition to
tax of $539.50 under section 6651(a)(1). After concessions, the
issue remaining for decision is whether a self-employed
individual is entitled to use the Federal per diem rate to
substantiate the amount of deductible lodging expenses for travel
away from home under section 274(d).
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Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
Background
This case was submitted fully stipulated under Rule 122.
The stipulated facts are incorporated as our findings by this
reference.
During 1995, William K. Starr (petitioner) resided in
Phoenix, Arizona. Petitioner operated “Climb On A Rainbow”, a
sole proprietorship that provided hot air balloon rides to
customers.
Petitioner operated his sole proprietorship for part of 1995
in Phoenix, Arizona, and the remainder of the year in
Woodinville, Washington. During 1995, petitioner lived in a
rented apartment in Woodinville for 156 days while operating his
business.
On his Schedule C, Profit or Loss from Business, for 1995,
petitioner claimed a travel expense deduction of $18,748, of
which $18,720 represented lodging costs incurred in Washington.
Petitioner computed his lodging expenses based on a per diem rate
of $120 per day for the 156 days that he operated his business in
Woodinville.
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Respondent disallowed the $18,748 per diem lodging expense
deduction claimed by petitioner but allowed a deduction of $5,595
for the lodging expenses actually incurred while operating the
business in Washington. The actual expenses were computed as
follows:
Rent $3,521
Electricity 257
Cable 178
Utilities 544
Entertainment 1,095
Total $5,595
Petitioner concedes that the maximum lodging deduction that
he could claim in 1995 using a per diem rate would be $12,948,
computed as the maximum Federal per diem rate multiplied by the
156 days that petitioner lived in Woodinville for business
purposes. The maximum Federal per diem rate for lodging in King
County, Washington, where Woodinville is located, was $83 per day
during 1995.
Discussion
Petitioner contends that a self-employed individual is
entitled to use the Federal per diem rate to substantiate
expenditures for lodging away from home. Respondent claims that
petitioner, as a sole proprietor, is precluded from using the
Federal per diem rate and is entitled only to a deduction equal
to his actual lodging expenses substantiated under section
274(d).
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Lodging expenses that are incurred while traveling away from
home in the pursuit of business are generally deductible under
section 162(a). Section 274(d), however, disallows a deduction
for lodging expenses under section 162 when a taxpayer fails to
substantiate (1) the amount of the expense, (2) the time and
place of travel, and (3) the business purpose of the expense.
Section 274(d) provides in part:
SEC. 274(d). SUBSTANTIATION REQUIRED.--No
deduction or credit shall be allowed--
(1) under section 162 or 212 for any
traveling expense (including meals and lodging
while away from home),
* * * * * * *
unless the taxpayer substantiates by adequate records
or by sufficient evidence corroborating the taxpayer’s
own statement (A) the amount of such expense or other
item, (B) the time and place of the travel * * *,
(C) the business purpose of the expense or other item
* * *
The Secretary is vested with the authority to prescribe
rules waiving the substantiation requirements in circumstances
where it is impracticable for documentary evidence to be
required. See sec. 274(d). Pursuant to this authority, Rev.
Proc. 94-77, 1994-2 C.B. 825, was issued for the purpose of:
providing rules under which the amount of ordinary and
necessary business expenses of an employee for lodging,
meal, and/or incidental expenses incurred while
traveling away from home will be deemed substantiated
under sec. 1.274-5T of the temporary Income Tax
Regulations when a payor (the employer, its agent, or a
third party) provides a per diem allowance under a
reimbursement or other expense allowance arrangement to
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pay for such expenses. This revenue procedure also
provides an optional method for employees and self-
employed individuals to use in computing the deductible
costs of business meal and incidental expenses paid or
incurred while traveling away from home. * * *
[Emphasis added.]
Under Rev. Proc. 94-77, 1994-2 C.B. 825, employees and self-
employed individuals are allowed to use the Federal per diem rate
to substantiate business meals and incidental expenses incurred
when traveling away from home. However, the use of the Federal
per diem rate to substantiate the amount of lodging expenses is
available only to certain employer-employee reimbursement
arrangements. The procedure excludes self-employed individuals
from using the Federal per diem rate to substantiate the amount
of their lodging expenses. Therefore, a self-employed individual
must still prove the amount of lodging costs with documentary
evidence. See sec. 1.274-5T(c)(2)(iii), Temporary Income Tax
Regs., 50 Fed. Reg. 46006 (Nov. 6, 1985).
This Court has previously addressed the issue of whether a
self-employed individual is entitled to use the Federal per diem
rate to substantiate the amount of deductible lodging expenses
for travel away from home under section 274(d). In Duncan v.
Commissioner, T.C. Memo. 2000-269, the taxpayer, a self-employed
individual, claimed deductions for lodging and meals based on the
Federal per diem rate. The Commissioner disallowed the lodging
expenses that were claimed for lack of substantiation under
section 274(d). The Court explained that a self-employed
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individual is entitled to use the per diem rate to substantiate
only meals and incidental expenses, not lodging expense. The
Court held that a self-employed individual is not entitled to use
the per diem method to substantiate lodging expenses under
section 274(d) and disallowed the taxpayer’s lodging expenses
that were not otherwise substantiated under section 274(d). See
also Bracey v. Commissioner, T.C. Memo. 1998-254; Hoag v.
Commissioner, T.C. Memo. 1993-348.
Petitioner would have us disregard the specific language of
section 274(d) and the procedures promulgated under that section.
We cannot do so. Petitioner, as a self-employed individual, is
not entitled to use the Federal per diem rate to substantiate the
amount of his Schedule C lodging expenses. He is, however,
entitled to deduct lodging expense for the amounts substantiated
under section 274(d). Petitioner is limited to a deduction of
$5,595, which represents the actual lodging expenses that
petitioner substantiated under section 274(d).
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.