T.C. Summary Opinion 2020-26
UNITED STATES TAX COURT
ANNA M. ARMSTRONG, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23698-18S. Filed September 17, 2020.
Anna M. Armstrong, pro se.
Samuel M. Warren, for respondent.
SUMMARY OPINION
PANUTHOS, Special Trial Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect at the time the
petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not
1 Unless otherwise indicated, all section references are to the Internal (continued...) -2-
reviewable by any other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency in petitioner’s Federal income tax for
taxable year 2015 (year in issue) of $2,640. The issue for decision is whether
petitioner is entitled to deduct unreimbursed employee business expenses of
$26,842.
Background
Some of the facts have been stipulated, and we incorporate the stipulation
and accompanying exhibits by this reference. The record consists of the
stipulation of facts with attached exhibits, exhibits introduced at trial, and
petitioner’s testimony.
Petitioner lived in California when the petition was timely filed.
I. Petitioner’s Professional Background
During the tax year in issue petitioner worked as an outside sales
representative for Ace Relocation Systems, Inc. (ARS), a global and domestic
shipping company. ARS is headquartered in San Diego, California.
1 (...continued) Revenue Code in effect for the year in issue, all Rule references are to the Tax Court Rules of Practice and Procedure, and amounts are rounded to the nearest dollar. -3-
Petitioner has worked for ARS since October 1999. Her duties consist of
identifying and meeting with prospective customers, participating in organizations
and clubs, and attending trade shows and conferences. During a typical week in
2015 petitioner either worked at her employer’s office in Long Beach, California,
or traveled to client meetings offsite. She also worked at home during most
evenings throughout the week and on the weekends.
Petitioner resided in a house consisting of approximately 1,100 square feet.
She converted a nook in her kitchen into a home office of approximately 300
square feet. The office space contained a desk, an office chair, a laptop computer,
a monitor, a hard drive, a telephone, and other office items. Petitioner used the
space to work on client contracts and to perform other sales-related activities, but
she did not generally meet with clients at the home office.
Petitioner’s position required her to travel to client worksites daily for in-
person sales meetings. In order to reach the client meetings petitioner drove her
personal vehicle or a rental vehicle either from ARS’ office or directly from her
home. ARS paid petitioner a $500-per-month vehicle allowance to compensate
for her travel expenses. In 2015 ARS had an expense reimbursement policy in
place that allowed reimbursement of business-related expenses up to 90 days after
they were incurred. Petitioner’s employer did not reimburse for vehicle expenses -4-
beyond the $500 per month vehicle allowance, including any additional gas,
maintenance, toll, and parking expenses. Neither did the company reimburse for
professional clothing.
II. Petitioner’s Business Records
Petitioner retained some personal and business expense receipts. She did
not provide receipts to her employer for reimbursement. She did not maintain a
contemporaneous mileage log or any other document listing the time, date,
business purpose, and miles traveled for client meetings. Instead, petitioner
maintained records of her client contracts for each year on which she added
handwritten notes estimating the miles driven to and from each client site. It is
unclear whether the handwritten notes were created contemporaneously with
petitioner’s work trips or were added later to the documents in order to estimate
her total mileage driven for the year. Petitioner also retained receipts and
substantiating documents for other reported business expenses, including meals,
groceries, utilities, home goods, and postage.
III. Petitioner’s 2015 Income Tax Return
Petitioner timely filed her individual Federal income tax return for 2015.
She hired a professional tax return preparer to prepare her return and provided tax -5-
documents and receipts to him. Petitioner reported gross income of $55,730 on a
Form 1040, U.S. Individual Income Tax Return.
Petitioner’s tax return for the year in issue included Schedule A, Itemized
Deductions, on which she claimed various deductions including, as relevant here,
the following unreimbursed employee expenses as reported on Form 2106,
Employee Business Expenses:
Expenses 2015 Vehicle $7,981 Parking fees, tolls, and transportation 1,691 Business expenses 16,842 Reimbursements (6,000) Total unreimbursed employee expenses 20,514
Petitioner did not provide a breakdown of the reported expenses categorized
broadly as “business expenses” on her 2015 tax return. She did, however,
introduce into evidence numerous photocopies of receipts and other documents
related to the purported business expenses. In addition to documentation related
to her personal vehicle, petitioner’s receipts related to reported business expenses
for 2015 in the following categories: (1) cell phone and internet service,
(2) business use of home as an office, (3) meals and groceries, (4) clothing and
grooming, and (5) postage. -6-
IV. Notice of Deficiency
On October 1, 2018, respondent issued a notice of deficiency to petitioner
for taxable year 2015. Respondent disallowed petitioner’s unreimbursed
employee business expense deductions, determining that petitioner did not
establish that they were paid or incurred during the taxable year or that the
expenses were ordinary and necessary to her business. Petitioner 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 a taxpayer bears 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 a taxpayer bears the
burden of proving that she is entitled to any deduction claimed. INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
U.S. 435, 440 (1934).
2 Pursuant to sec. 7491(a), the burden of proof as to factual matters shifts to the Commissioner under certain circumstances. Petitioner has neither alleged that sec. 7491(a) applies nor established her compliance with its requirements. Petitioner therefore bears the burden of proof. -7-
A taxpayer claiming a deduction on a Federal income tax return must
demonstrate that the deduction is provided for by statute and must further
substantiate that the expense to which the deduction relates has been paid or
incurred. Sec. 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, 831-832 (1965); sec. 1.6001-1(a), Income Tax Regs. A taxpayer is required
to maintain records sufficient to enable the Commissioner to determine his correct
tax liability. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Such records must
substantiate both the amount and purpose of the claimed deductions. Higbee v.
Commissioner, 116 T.C. 438, 440 (2001).
II. Unreimbursed Employee Business Expenses
Section 162(a) allows deductions for all ordinary and necessary business
expenses paid or incurred during the taxable year in carrying on a trade or
business. Boyd v. Commissioner, 122 T.C. 305, 313 (2004). Performing services
as an employee constitutes a trade or business. Primuth v. Commissioner, 54 T.C.
374, 377-378 (1970). In order to deduct employee business expenses, a taxpayer
must not have received reimbursement and must not have had the right to obtain
reimbursement from her employer. See Orvis v. Commissioner, 788 F.2d 1406,
1408 (9th Cir. 1986), aff’g T.C. Memo. 1984-533. The taxpayer bears the burden -8-
of proving that she is not entitled to reimbursement from her employer for such
expenses. See Fountain v. Commissioner, 59 T.C. 696, 708 (1973). The taxpayer
can prove that she was not entitled to reimbursement by showing, for example,
that she was expected to bear these costs. See id.; see also Dunkelberger v.
Commissioner, T.C. Memo. 1992-723 (finding that management team expected
taxpayer to bear expense of business lunches with vendors).
When a taxpayer establishes that she has paid a deductible trade or business
expense 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, 543-544 (2d Cir. 1930). To apply the Cohan rule,
however, the Court must have a reasonable basis upon which to make an estimate.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
Congress overrode the Cohan rule with section 274(d), which requires strict
substantiation for certain categories of expenses; in the absence of evidence
demonstrating the exact amounts of those expenses, deductions for them are to be
disallowed entirely. Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff’d
per curiam, 412 F.2d 201 (2d Cir. 1969). Expenses subject to section 274(d)
include travel and meal expenses as well as expenses for listed property such as
passenger automobiles. Sec. 280F(d)(4). A taxpayer must substantiate by -9-
adequate records or by sufficient evidence corroborating her own statement the
amount, time, place, and business purpose of these expenditures. Sec. 274(d); sec.
1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
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. Sec. 1.274-5(c)(2)(iii), Income Tax
Regs.; sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017
(Nov. 6, 1985). Substantiation by other sufficient evidence requires the
production of corroborative evidence in support of the taxpayer’s statement
specifically detailing the required elements. Sec. 1.274-5T(c)(3), Temporary
Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).
Petitioner reported expenses totaling $26,514 for tax year 2015 in
connection with her employment at ARS. She reported $6,000 in reimbursements
from her employer. Thus the total net business expenses reported for 2015 is
$20,514. According to respondent, petitioner has failed to establish that the
reported expenses were ordinary and necessary expenses related to her business
and, if business related, that they were not reimbursable by her employer. - 10 -
A. Vehicle, Parking, Toll, and Travel Expenses
Petitioner’s 2015 vehicle, parking, toll, and travel expenses are subject to
the strict substantiation rules of section 274(d) and thus they cannot be estimated.
In support of the reported vehicle expenses of $7,981 and parking, toll, and
transportation expenses of $1,691 for the year in issue, petitioner produced the
following stipulated exhibits: (1) a schedule showing ARS client orders with
handwritten notes and estimated total mileage driven and related to each client,
(2) client order forms showing handwritten notes with estimated miles driven to
each client, and (3) receipts totaling $1,431 for parking, tolls, vehicle infractions,
auto repair maintenance and other automobile purchases.
Petitioner’s total mileage estimate includes 11,520 “office” miles driven as a
part of her daily commute between her residence and her office and 1,477 “client”
miles driven between either her office or her residence and client sites for
meetings. Generally, expenses that a taxpayer incurs in commuting between her
home and her place of business are personal and nondeductible. Commissioner v.
Flowers, 326 U.S. 465, 473-474 (1946); Heuer v. Commissioner, 32 T.C. 947, 951
(1959), aff’d per curiam, 283 F.2d 865 (5th Cir. 1960); secs. 1.162-2(e), 1.262-
1(b)(5), Income Tax Regs. Expenses incurred for traveling between two or more
places of business may be deductible as ordinary and necessary business expenses - 11 -
under section 162 if incurred for business reasons. Steinhort v. Commissioner,
335 F.2d 496, 503-504 (5th Cir. 1964), aff’g and remanding T.C. Memo. 1962-
233; Heuer v. Commissioner, 32 T.C. at 953; see also Fausner v. Commissioner,
55 T.C. 620 (1971) (permitting section 162 deductions for travel between jobs or
job locations). If one of the places of business is the taxpayer’s residence,
however, the residence must be the taxpayer’s principal place of business for the
trade or business the taxpayer conducts at those other locations. See Strohmaier v.
Commissioner, 113 T.C. 106 (1999). As discussed infra, we conclude that
petitioner’s residence was not her principal place of business. Thus, petitioner’s
“office” mileage (the travel between home and place of business) is not deductible.
At trial petitioner testified that she could not provide a contemporaneous log
of miles driven from either her home or ARS’ office to client meetings and
worksites. Although we found petitioner’s testimony generally credible and we
have no doubt that she traveled significant distances for sales meetings with
clients, she was unable to provide the Court with reliable evidence of her vehicle
expenses. Further, the mileage estimates found on the client order forms and log
do not detail the dates of travel, the names of events or meetings attended, or the
departure and arrival locations for each trip. For these reasons, we conclude that - 12 -
petitioner’s estimate of “client miles” is insufficient to satisfy the strict
substantiation requirements of section 274(d) and related regulations.
Standing alone, the vehicle expense, parking, and toll receipts and other
substantiating documents are also insufficient to show that petitioner paid those
expenses in connection with her employment with ARS. It is additionally unclear
which, if any, of the expenses reported were covered by the $6,000 reimbursement
that petitioner received and reported from her employer for vehicle and travel
expenses. Accordingly, we conclude that petitioner has not established that she is
entitled to deduct any amount of vehicle or parking, toll, and transportation
expenses under section 274(d) for tax year 2015.
B. Business Expenses
The remaining unreimbursed employee expense items for consideration are
the deductions claimed and identified by petitioner as “business expenses” of
$16,842 for 2015. Petitioner did not include a schedule detailing her business
expenses with her 2015 tax return; however, the record contains a large number of
purported business receipts. The categories of reported business expenses are cell
phone and internet service, business use of home, meals and groceries, clothing
and grooming, and postage. We consider these items separately. - 13 -
1. Cell Phone and Internet Service
The record includes receipts totaling $399 relating to unreimbursed
employee business expense deductions for cell phone and internet service supplied
by AT&T U-verse for 2015. Cell phone and internet service expenses are not
subject to the strict substantiation requirements of section 274(d).3 Therefore,
pursuant to the Cohan rule, the amount of deductible expenses can be estimated by
this Court provided we have a reasonable basis for making an estimate of the
amount of the expenses related to business use. See Vanicek v. Commissioner, 85
T.C. at 742-743 (finding that estimate must have reasonable evidentiary basis).
Although evidence in the record regarding the nature of petitioner’s
employment supports her contention that at least a portion of the reported cell
phone and internet service expenses was incurred for business purposes, the
service records petitioner supplied were in the name of her 25-year-old daughter.
3 For taxable years beginning after December 31, 2009, cell phones are no longer included in the definition of listed property under sec. 280F(d)(4), which was amended by the Small Business Jobs Act of 2010, Pub. L. No. 111-240, sec. 2043(a), 124 Stat. at 2560. As a result of this amendment, deductions for cell phone service expenses during the year in issue are not subject to the strict substantiation rules of sec. 274(d). Internet service expenses have been characterized as utility expenses rather than as expenses related to the use of listed property. See Barnes v. Commissioner, T.C. Memo. 2016-212, at *71-*72, aff’d, 773 F. App’x 205 (5th Cir. 2019); Verma v. Commissioner, T.C. Memo. 2001- 132, slip op. at 12. So characterized, internet service expenses are also not governed by the strict substantiation rules of sec. 274(d). - 14 -
At trial petitioner testified that she paid for the service in her daughter’s name and
that it was the only cell phone and internet service for their household. She further
testified that both she and her daughter used the AT&T U-verse service for
personal reasons but did not give an estimate of her business versus personal use.
Without such evidence the Court does not have a reasonable basis to estimate the
amount of the expenses related to business use. Furthermore, the record reflects
that petitioner was entitled to reimbursement of her business expenses pursuant to
ARS’ employee business expense reimbursement policy. There is no evidence
that any business use of her cell phone and internet service was not subject to that
policy. See Orvis v. Commissioner, 788 F.2d at 1408; Fountain v. Commissioner,
59 T.C. at 708. Accordingly, we hold that petitioner is not entitled to an
unreimbursed employee business expense deduction for cell phone and internet
service expenses for tax year 2015.
2. Business Use of Home
The record includes receipts totaling approximately $1,213 in utilities
expenses and $2,173 in home goods and home improvements that petitioner
asserts are related to the business use of her home office in 2015. Section 280A(a)
generally provides that no deduction shall be allowed for a home office. For the
expense to be deductible, the taxpayer must show that the portion of the home - 15 -
purported to be used for business is: (1) the taxpayer’s principal place of business,
(2) a place where the taxpayer meets or deals with customers, clients, or patients,
or (3) a separate structure used in connection with the business. The home office
must be used exclusively on a regular basis for these purposes. Sec. 280A(c)(1).
An employee is entitled to the deduction only if the office is for the convenience
of the employer. See sec. 280A(c)(1) (flush language).
Petitioner’s home office was in her kitchen, a place where she did not meet
or deal with clients. Therefore, petitioner could deduct expenses for business use
of the home only if her home office was her principal place of business.
Respondent argues that petitioner has not proven that her home office was the
principal place of business for her work as an employee of ARS. In addition,
respondent objects to petitioner’s claimed deductions for home goods and home
and landscaping maintenance expenses for areas of her property that were not used
for business. Petitioner asserts that she was required to work a substantial number
of hours from her home outside of normal business hours in order to complete her
sales duties. At trial she testified that she completed those duties from her home
because her employer did not allow her to work from the corporate office after
5 p.m. - 16 -
When a taxpayer conducts business from both a home office and another
workplace, and a determination must be made as to which qualifies as the
taxpayer’s principal place of business, two objective factors are given primary
consideration: (1) the relative importance of the business functions or activities
conducted at each place and (2) the amount of time expended at each place.
Commissioner v. Soliman, 506 U.S. 168, 175-177 (1993); Strohmaier v.
Commissioner, 113 T.C. at 111-112. The term “principal place of business”
includes a place of business which is used by the taxpayer for the administrative or
management activities of any trade or business of the taxpayer if there is no other
fixed location of the trade or business where the taxpayer conducts substantial
administrative or management activities of the trade or business. Sec. 280A(c)(1)
(flush language).
Petitioner testified that she spent a significant amount of time working from
her home office during the week and on weekends. We credit petitioner’s
testimony on this matter and accept that she used her home office regularly and
exclusively in her work for the convenience of her employer. Nevertheless, after
careful consideration of the record, we conclude that petitioner’s home office was
not her principal place of business. Petitioner was required by her employer to
spend a significant amount of time traveling to and from client meetings as well as - 17 -
working in the corporate office in Long Beach, California. The record does not
reflect how many hours petitioner worked at home versus in sales meetings or in
her employer’s office. In addition on the basis of petitioner’s testimony the Court
views client sales meetings as the most important business activity petitioner
conducted in her work. Petitioner’s client meetings were required to complete her
sales transactions. She did not conduct these meetings in her home. Although
petitioner conducted administrative and other sales-related activities from her
home office, she also performed those activities at the corporate office.
The record further reflects that petitioner was entitled to reimbursement of
her business expenses pursuant to ARS’ employee business expense
reimbursement policy. There is no evidence that the business use of petitioner’s
home was not subject to that policy. See Orvis v. Commissioner, 788 F.2d
at 1408; Fountain v. Commissioner, 59 T.C. at 708.
For the aforementioned reasons, we conclude that petitioner is not entitled
to deduct expenses related to the business use of her home for tax year 2015. As a
result of this conclusion, we need not further consider the accuracy of the amounts
claimed for this purpose. - 18 -
3. Meal and Grocery Expenses
Petitioner did not specifically report any amount of business meal expenses
on her tax return for the year in issue. The record, however, includes receipts she
provided that total $1,185 for food and beverage expenses in the form of meals
and groceries. At trial petitioner explained that the receipts related to business
meals with her clients and groceries that she purchased for the crews who worked
on her clients’ shipping sites. Petitioner contends that she should be allowed to
deduct these meal expenses because they were related to her employment. She
testified that her employer did allow reimbursement for food expenses related to
business but that she chose to include the meal and grocery expenses as itemized
deductions on her tax return.
Section 162(a)(2) permits the deduction of amounts expended for meals
when away from home in the pursuit of a trade or business. In the context of
section 162(a)(2), a taxpayer’s home generally refers to the area of a taxpayer’s
principal place of employment, whether or not in the vicinity of the taxpayer’s
personal residence. Daly v. Commissioner, 72 T.C. 190, 195 (1979), aff’d, 662
F.2d 253 (4th Cir. 1981); Kroll v. Commissioner, 49 T.C. 557, 561-562 (1968). In
order to deduct food and beverage expenses, a taxpayer must not have had the
right to obtain reimbursement for the expenses from her employer. See Orvis v. - 19 -
Commissioner, 788 F.2d at 1408. Additionally, the taxpayer must meet the strict
substantiation requirements of section 274(d).
Petitioner testified that she had the right to reimbursement from her
employer for food and beverage expenses related to business. Therefore, she is
not entitled to deduct any given meal or grocery expenses. Further, even if her
employer had not had a reimbursement policy in place during the year in issue,
petitioner’s business receipts do not include any details on the purported business
purpose of each transaction and thus do not meet the strict substantiation
requirements of section 274(d). For these reasons, we conclude that petitioner was
not entitled to deduct any of the meal or grocery expenses for tax year 2015.
4. Clothing and Grooming Expenses
The record includes receipts petitioner provided that total $1,088 for
clothing and $1,775 for grooming expenses in tax year 2015. The reported
expenses include amounts for shoes, work clothes, undergarments, dry cleaning,
hair and nail maintenance, cosmetics, and cosmetic treatments.
Expenses for clothing are deductible if the clothing is of a type specifically
required as a condition of employment, is not adaptable to general use as ordinary
clothing, and is not worn as ordinary clothing. Yeomans v. Commissioner, 30
T.C. 757, 767-769 (1958); Wasik v. Commissioner, T.C. Memo. 2007-148; - 20 -
Beckey v. Commissioner, T.C. Memo. 1994-514. The record confirms that
petitioner was required to dress in a professional manner as a condition of her
employment but that her employer did not reimburse employees for clothing
expenses. Petitioner testified that she would not have purchased her work clothes
for use in every day life. Nevertheless, a review of petitioner’s business records
reveals that all of the reported expenses are for clothing adaptable to general use
as ordinary clothing. Therefore, the amounts reported for clothing were expended
for personal purposes and as such are not deductible. See sec. 262(a).
Grooming expenses (e.g., hair and nail maintenance) are inherently personal
expenses, and amounts expended for grooming are not deductible regardless of
whether an employer requires an employee to be well groomed. Hynes v.
Commissioner, 74 T.C. 1266, 1292 (1980). Accordingly, petitioner is not entitled
to a deduction for clothing or grooming expenses for tax year 2015.
5. Postage Expenses
The record includes U.S. Postal Service receipts totaling $214 for postage
during tax year 2015. Petitioner testified that the charges were related to global
shipping orders for her clients at ARS. We are satisfied with petitioner’s
testimony on this matter. Nevertheless, in order to deduct employee business
expenses, a taxpayer must not have received reimbursement and must not have had - 21 -
the right to obtain reimbursement from her employer. See Orvis v. Commissioner,
788 F.2d at 1408; Fountain v. Commissioner, 59 T.C. at 708. The record confirms
that petitioner had the right to request reimbursement for business-related
expenses from her employer up to 90 days from the date the expenses were
incurred. Petitioner testified that she did not attempt to request reimbursement for
her business expenses because they might not be accepted by her employer.
Because petitioner had the right to reimbursement but chose not to request it, she
is not entitled to deduct any of the reported postage expenses for tax year 2015.
III. Conclusion
In reaching our holdings herein, we have considered all arguments made by
the parties, and to the extent not mentioned above, we find them to be moot,
irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered for
respondent.