Adam D. Fehr v. Commissioner

T.C. Summary Opinion 2018-26UNITED STATES TAX COURT
ADAM D. FEHR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14470-16S. Filed May 16, 2018.
Adam D. Fehr, pro se.
Sandeep Singh, Janice B. Geier, and Catherine J. Caballero, for respondent.
SUMMARY OPINION
GUY, 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
1
Unless otherwise indicated, all section references are to the Internal
(continued...)
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any other court, and this opinion shall not be treated as precedent for any other
case.
Respondent determined that petitioner is liable for Federal income tax
deficiencies and accuracy-related penalties for the years and in the amounts as
follows:
Penalty
Year Deficiency sec. 6662(a)
2013 $7,365 $1,473
2014 7,640 1,528
Petitioner filed a timely petition for redetermination with the Court pursuant to
section 6213(a). At the time the petition was filed, petitioner resided in California.
After concessions,2 the issues remaining for decision are whether petitioner
is: (1) entitled to deductions for unreimbursed employee business expenses of
$37,640 and $22,625 for 2013 and 2014 (years in issue), respectively, (2) entitled
1
(...continued)
Revenue Code (Code), as amended and in effect for 2013 and 2014, and all Rule
references are to the Tax Court Rules of Practice and Procedure. Monetary
amounts are rounded to the nearest dollar.
2
Petitioner concedes that he is not entitled to deductions for medical
expenses claimed on Schedule A, Itemized Deductions, for 2013, or an itemized
deduction for charitable contributions for 2014.
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to a deduction for charitable contributions of $16,637 for 2013, and (3) liable for
accuracy-related penalties for the years in issue under section 6662(a).
Background3
I. Petitioner’s Employment
During the years in issue petitioner was employed as a sales manager for
Valley Packline Solutions, Inc. (VPS), at its headquarters in Reedley, California.
VPS builds, installs, and maintains equipment used to process fresh fruits and
vegetables at various customer facilities in the United States and abroad.
Petitioner’s duties at VPS included overseeing the sales department,
maintaining customer relationships, and managing sales, installation, and
maintenance of the firm’s equipment. Petitioner frequently visited customer
facilities around the San Joaquin Valley and other locations.
The record includes a letter from VPS’ general manager, stating that VPS
did not reimburse its employees for “expenses for the ordinary conduct of their
employment with * * * [the firm].”
3
Some of the facts have been stipulated.
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II. Petitioner’s Tax Returns
A. 2013
Petitioner filed a Form 1040, U.S. Individual Income Tax Return, for 2013
reporting wages of $171,916. On Schedule A, attached to his tax return, petitioner
claimed, in relevant part, a deduction of $16,637 for charitable gifts by cash or
check and a deduction of $37,640 for unreimbursed employee business expenses
(before the application of the 2% floor prescribed in section 67(a)). Petitioner also
attached to his tax return a Form 2106-EZ, Unreimbursed Employee Business
Expenses, and a schedule titled “Unreimbursed Expense Statement”, reporting the
following work-related expenses:
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Item Amount
Vehicle expenses $5,580
Parking fees, tolls, and
transportation 185
Travel expenses 2,571
Other expenses 302
Meals and entertainment
expenses4 818
Union and professional
dues 3,998
Uniforms 2,808
Tools 6,319
Cell phone 3,417
Miscellaneous work
expenses 5,153
Work-related expenses 6,489
B. 2014Petitioner filed a Form 1040 for 2014, reporting wages of $161,322. On
Schedule A, attached to his tax return, petitioner claimed, in relevant part, a
deduction of $22,625 for unreimbursed employee business expenses (before the
application of the 2% floor prescribed in section 67(a)). Petitioner also attached to
4
This amount reflects the 50% reduction prescribed in sec. 274(n).
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his tax return a Form 2106-EZ (essentially blank) and a schedule titled “2014
Unreimbursed Expense Statement”, reporting the following work-related
expenses:
Item Amount
Union and professional
dues $1,416
Uniforms 1,295
Tools 5,489
Cell phone 1,918
Miscellaneous work
expenses 5,596
Work-related expenses 6,911
III. Petitioner’s Records
Petitioner produced eight receipts from Goodwill Industries (Goodwill) in
an effort to substantiate the charitable contribution deduction that he claimed for
2013. Each receipt included a list of several items (e.g., “Adult Bike”, “TV”,
“Bedroom Dressers”, “Jackhammer”), and petitioner recorded his own “educated
guess” of the cumulative value of the items on each receipt. The total value that
petitioner assigned to the items on each receipt ranged from a low of $1,700 to a
high of $2,500, and the eight receipts totaled $16,100.
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Petitioner also offered various records in an effort to substantiate the
unreimbursed employee business expenses that he claimed for the years in issue.
For 2013 petitioner produced a log recording the number of miles that he drove
each day, the places that he visited, and meals and entertainment expenses. He
also produced separate schedules listing travel-related expenses, amounts that he
purportedly paid for tools purchased at Lowes, Jenson & Pilegard, and Exeter
Mercantile, and amounts that he paid for golf outings, hunting/fishing trips, and
wine and liquor purchases.5 Petitioner also provided his bank and credit card
statements for 2013.
Petitioner’s mileage log for 2013 shows that he frequently drove from his
home to a customer’s facility, purchased lunch for one or more individuals, and
then drove home. On some days, petitioner drove from his home and made two or
more stops at customers’ facilities or at VPS, purchased lunch for one more
individuals, and then drove home. Petitioner did not describe the work he
performed, and he did not record the number of miles that he drove between
destinations; he recorded only the total number of miles that he drove each day.
5
Petitioner failed to produce receipts identifying the tools that he purchased.
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For 2014 petitioner again produced a combined mileage/meals and
entertainment log. Unlike his mileage log for 2013, this log included a breakdown
of the miles that petitioner drove between various destinations each day.
Petitioner’s tax returns for 2013 and 2014 were prepared at Fiesta Tax
Service by Javier Garcia and Tony Garcia, respectively. Petitioner testified that he
provided his tax records to the tax return preparers and his tax returns were
prepared and processed while he waited.
Discussion
As a general rule, the Commissioner’s determination of a taxpayer’s liability
in a notice of deficiency is presumed correct, and the taxpayer bears the burden of
proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933).6 Deductions and credits are a matter of legislative grace,
and the taxpayer generally bears the burden of proving entitlement to any
deduction or credit claimed. 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).
When a taxpayer establishes that he paid or incurred a deductible expense
but fails to establish the amount of the deduction, the Court normally may estimate
6
Petitioner does not contend, and the record does not suggest, that the
burden of proof should shift to respondent pursuant to sec. 7491(a).
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the amount allowable as a deduction. Cohan v. Commissioner, 39 F.2d 540, 543-
544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
There must be sufficient evidence in the record, however, to permit the Court to
conclude that a deductible expense was paid or incurred in at least the amount
allowed. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).
I. Unreimbursed Employee Business Expenses
A deduction is allowed under section 162(a) for ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business. As used in section 162, an “ordinary” expense is defined as one which is
“normal, usual, or customary” in the taxpayer’s trade or business, see Deputy v.
du Pont, 308 U.S. 488, 494-495 (1940), and “necessary” has been defined as
“appropriate and helpful”, see Welch v. Helvering, 290 U.S. at 113. A deduction
normally is not allowed, however, for personal, living, or family expenses. Sec.
262(a). 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).
The term “trade or business” includes performing services as an employee.
Primuth v. Commissioner, 54 T.C. 374, 377-378 (1970). An employee business
expense is not ordinary and necessary, however, if the employee is entitled to
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reimbursement from his or her employer. See Podems v. Commissioner, 24 T.C.
21, 22-23 (1955); Noz v. Commissioner, T.C. Memo. 2012-272, at *22.7
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 entertainment expenditures, and expenses related to the use of
listed property as defined in section 280F(d)(4)(A). See Sanford v. Commissioner,
50 T.C. 823, 827 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969). The term “listed
property” includes, inter alia, passenger automobiles. Sec. 280F(d)(4)(A)(i). To
satisfy the requirements of section 274(d), a taxpayer generally must maintain
adequate records or produce sufficient evidence corroborating his or her own
statement, which, in combination, are sufficient to establish the amount, date and
time, and business purpose for each expenditure for travel away from home or
each expenditure or business use of listed property. Sec. 1.274-5T(b)(2), (6),
(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46014, 46016-46017 (Nov. 6,
1985).
7
The record includes a statement from VPS that the firm did not reimburse
its employees for work-related expenses. The Court concludes that petitioner was
not entitled to be reimbursed for the expenses in dispute.
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A. Vehicle/Meals and Entertainment/Travel Expenses
The logs and related schedules that petitioner offered at trial in an effort to
substantiate the vehicle, meals and entertainment, and travel expenses in dispute
do not satisfy the strict substantiation requirements of section 274(d). An
overarching shortcoming is the absence of any objective evidence of the business
purpose for the disputed expenses. The logs lack any description of the work that
petitioner may have performed or business matters that he may have discussed
with VPS’ customers. Although we have no reason to doubt petitioner’s testimony
that his responsibilities at VPS included maintaining good customer relationships,
his logs indicate that nearly every day for two consecutive years (excluding most
weekends) he drove to a customer’s facility and bought lunch for himself and
others. Assuming that petitioner’s logs are accurate, this pattern of activity
strongly suggests that the expenditures in dispute were predominantly personal
and were only indirectly related to the conduct of VPS’ business.8
The foregoing aside, petitioner’s logs show that on many days he drove
from his home to a customer’s facility, had lunch, and then returned home. He
8
For the sake of completeness, we note that petitioner failed to produce
receipts substantiating many of the expenditures for meals and entertainment and
travel. His bank and credit card statements provided little in the way of
corroboration of the expenditures.
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likewise reported mileage expenses for round trips from his home to VPS’
headquarters. In the absence of evidence that petitioner’s principal place of
employment was somewhere other than VPS’ headquarters, the miles that he drove
on round trips from his home to customer facilities, and to and from VPS’
headquarters, constitute nondeductible personal commuting expenses. See, e.g.,
Green v. Commissioner, 59 T.C. 456, 459 (1972).
In sum, respondent’s disallowance of the deductions petitioner claimed for
vehicle, meals and entertainment, and travel expenses for the years in issue is
sustained.
B. Other Expenses
Petitioner claimed deductions for other employment-related expenses
including union dues, uniforms, tools, cell phone charges, and miscellaneous
expenses, but he offered no documents, records, or receipts to either substantiate
these expenditures or show that those expenditures qualified as ordinary and
necessary business expenses within in the meaning of section 162. On this record,
there is insufficient evidence to permit the Court to employ the Cohan rule to
estimate the amount allowable as a deduction. Consequently, we sustain
respondent’s proposed disallowance of the remaining amounts petitioner claimed
for unreimbursed employee expenses for the years in issue.
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II. Charitable Contributions for 2013
Petitioner claimed a deduction of $16,637 for charitable contributions by
cash or check on Schedule A for 2013. At trial, however, he produced eight
receipts, listing household items, tools, and sports equipment that he purportedly
had donated to Goodwill. Each receipt included petitioner’s own estimate of the
cumulative value of the items at the time of the donations.
Section 170 allows deductions for contributions made during a taxable year
to qualifying charitable organizations. Charitable contributions are deductible
only if verified in accordance with regulations prescribed by the Secretary. Sec.
170(a)(1); see Van Dusen v. Commissioner, 136 T.C. 515, 530 (2011).
Section 170(f)(8)(A) provides that the taxpayer must obtain a
contemporaneous written acknowledgment from the donee for any claimed
charitable contribution deduction of $250 or more. Section 170(f)(8)(B) provides
in relevant part that the contemporaneous written acknowledgment must include
the amount of cash and a description of any property other than cash contributed,
whether the donee organization provided any goods or services in consideration,
in whole or in part, for any cash or property contributed, and, if so, a description
and good-faith estimate of the value of any goods or services provided by the
donee. Sec. 1.170A-13(b), (f), Income Tax Regs.
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In addition to the written acknowledgment requirement, section 170(f)(11)
and related regulations establish more detailed requirements for substantiation of
contributions of property other than money. For noncash contributions of $500 or
less, the taxpayer must substantiate the contribution with a receipt from the donee
indicating the donee’s name, the date and location of the contribution, and “[a]
description of the property in detail reasonably sufficient under the
circumstances.” Sec. 1.170A-13(b)(1), Income Tax Regs. For noncash
contributions in excess of $500, the taxpayer normally must also maintain written
records showing the manner in which the item was acquired, the approximate date
of acquisition, and the cost or adjusted basis of the property. Id. subpara. (3); see
Lattin v. Commissioner, T.C. Memo. 1995-233.9
The Goodwill receipts that petitioner offered at trial do not include the value
of individual items that he donated. Although it does not appear that any one item
was worth more than $500, petitioner offered no evidence on this point. In any
event, the Goodwill receipts include only generic descriptions of the items
donated. Petitioner did not identify the age, quality, or condition of the donated
9
If information regarding the acquisition date or cost basis of the property is
not available and the taxpayer attaches a statement to his return setting forth
reasonable cause for not being able to provide such information, the taxpayer’s
charitable contribution deduction shall not be disallowed on that account. Sec.
1.170A-13(b)(3)(ii), Income Tax Regs.
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items, nor did he explain the method or process he used in making his “educated
guess” as to the value of the items. On this record we conclude that petitioner
failed to meet the substantiation requirements for contributions of property other
than money prescribed in section 170(f) and the related regulations.
Consequently, we sustain respondent’s determination that petitioner is not entitled
to a deduction for charitable contributions for 2013.
III. Accuracy-Related Penalties
Section 6662(a) and (b)(1) and (2) imposes an accuracy-related penalty
equal to 20% of the amount of any underpayment of tax that is due to the
taxpayer’s negligence or disregard of rules or regulations or to any substantial
understatement of income tax. The term “negligence” includes any failure to make
a reasonable attempt to comply with the provisions of the Code, and the term
“disregard” includes any careless, reckless, or intentional disregard of rules or
regulations. Sec. 6662(c). A taxpayer is negligent if he or she fails to maintain
sufficient records to substantiate disputed expenses. Higbee v. Commissioner, 116
T.C. 438, 449 (2001); sec. 1.6662-3(b)(1), Income Tax Regs. By definition, an
understatement generally means the excess of the amount of the tax required to be
shown on the return over the amount of the tax imposed which is shown on the
return, reduced by any rebate. Sec. 6662(d)(2)(A). An understatement is
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substantial in the case of an individual if the amount of the understatement for the
taxable year exceeds the greater of 10% of the tax required to be shown on the
return or $5,000. Sec. 6662(d)(1)(A).
With respect to a taxpayer’s liability for any penalty, section 7491(c) places
on the Commissioner the burden of production, thereby requiring the
Commissioner to come forward with sufficient evidence indicating that it is
appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. at 446-447.
Once the Commissioner meets his burden of production, the taxpayer must come
forward with persuasive evidence that the Commissioner’s determination is
incorrect. Id. at 447; see Rule 142(a); Welch v. Helvering, 290 U.S. at 115.
Respondent met his burden of production.10 Petitioner was negligent in
failing to maintain adequate records to substantiate the expenses in dispute.
Moreover, the understatements of income tax for the years in issue are substantial
within the meaning of section 6662(d)(1)(A).
Petitioner did not offer a defense to the imposition of accuracy-related
penalties in this case other than to assert that respondent had erred in determining
tax deficiencies. That matter having been resolved against him, respondent’s
10
The record includes Civil Penalty Approval Forms executed by the
examining agent’s group manager with respect to the sec. 6662 penalties
determined in the notice of deficiency.
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determination that petitioner is liable for accuracy-related penalties under section
6662(a) is sustained.
To reflect the foregoing,
Decision will be entered
for respondent.