PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE. T.C. Summary Opinion 2013-22
UNITED STATES TAX COURT
CAROLYN SMITH-HENDRICKS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8213-12S. Filed March 19, 2013.
Carolyn Smith-Hendricks, pro se.
Steven Wendell LaBounty, 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 -2-
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 January 6, 2012, respondent determined
deficiencies in petitioner’s Federal income tax and accuracy-related penalties as
follows:
Penalty Year Deficiency sec. 6662(a) 2009 $2,321 $464 2010 2,076 415
Petitioner filed a timely petition for redetermination with the Court pursuant to
section 6213(a).
The issues remaining for decision are whether petitioner: (1) is entitled to
deductions for unreimbursed employee business expenses for the taxable years
2009 and 2010 in excess of those respondent conceded; (2) is entitled to
deductions for mortgage interest not reported on Forms 1098, Mortgage Interest
Statement, for the taxable years 2009 and 2010; (3) is entitled to deductions for
1 Section references are to the Internal Revenue Code (Code), as amended, and Rule references are to the Tax Court Rules of Practice and Procedure. Monetary amounts are rounded to the nearest dollar. -3-
charitable contributions of $995 and $875 for the taxable years 2009 and 2010,
respectively; (4) is entitled to deductions for car and truck expenses of $4,312 and
$3,215 reported on Schedules C, Profit or Loss From Business, for the taxable
years 2009 and 2010, respectively; and (5) is liable for accuracy-related penalties
under section 6662(a) for the taxable years 2009 and 2010.
Background
Some of the facts have been stipulated and are so found. The stipulation of
facts and the accompanying exhibits are incorporated herein by this reference.
Petitioner resided in Missouri when the petition was filed.
During 2009 and 2010 petitioner worked as a reporter for the Belleville
News-Democrat (News-Democrat), a newspaper published in Belleville, Illinois,
and as a freelance reporter for the St. Louis Argus (Argus). Petitioner used her
personal vehicle for work-related transportation for News-Democrat and Argus.
During the period in question News-Democrat maintained an accountable
plan providing mileage-based reimbursement to employees who used their
personal vehicles for work-related business.2 News-Democrat reimbursed
2 Amounts paid to an employee as reimbursement under an accountable plan are excluded from the employee’s gross income, are not reported as wages or other compensation on Form W-2, Wage and Tax Statement, and are exempt from withholding and payment of employment taxes. Biehl v. Commissioner, 118 T.C. (continued...) -4-
employees at the rate of 32 cents per mile from January 1 through September 13,
2009, and at the rate of 29 cents per mile from September 14, 2009, through
December 31, 2010. News-Democrat reimbursed petitioner for 7,426 miles in 2009
and 8,299 miles in 2010, computed at the rates mentioned above. News-Democrat
reported the amounts reimbursed as nontaxable employee business expense
reimbursements on Forms W-2 issued to petitioner for 2009 and 2010.3
Argus did not reimburse petitioner for any portion of the use of her vehicle
during the years in issue.
I. Schedules A
A. Unreimbursed Employees Business Expenses
Petitioner claimed deductions for unreimbursed employee business expenses
related to her employment at News-Democrat on Schedules A, Itemized
2 (...continued) 467, 476 (2002), aff’d, 351 F.3d 982 (9th Cir. 2003); sec. 1.62-2(c)(4), Income Tax Regs. 3 Respondent acknowledges that News-Democrat’s mileage reimbursement rates were less than the standard mileage reimbursement rates of 55 cents and 50 cents per mile in effect during 2009 and 2010, respectively. See sec. 1.274-5(j)(2), Income Tax Regs.; I.R.S. News Release IR-2008-131 (Nov. 24, 2008); I.R.S. News Release IR-2009-111 (Dec. 3, 2009). Respondent concedes that petitioner is entitled to deductions for unreimbursed employee business expenses for 2009 and 2010 to account for the difference. The parties will address respondent’s concession in their Rule 155 computations to be submitted in accordance with this report. -5-
Deductions, and Forms 2106-EZ, Unreimbursed Employee Business Expenses, for
the years in issue as follows:
Item 2009 2010 Car and truck $7,079 $10,845 Parking fees 126 219 Supplies 292 307 Publications/subscriptions 251 960 Cell phone 1,121 1,236 Informants 571 469 Meals/entertainment 482 436
The record includes copies of petitioner’s monthly cellular phone billing
records for 2009. Although petitioner used her cellular phone primarily for business
purposes, she also used the phone when she was working or otherwise away from
home to communicate with her daughter regarding personal matters. Petitioner did
not maintain a written log or other record during the years in issue distinguishing
between business and personal cellular phone calls.
B. Residential Mortgage Interest
Petitioner claimed deductions for residential mortgage interest not reported
on Forms 1098 of $2,870 and $2,760 for the taxable years 2009 and 2010,
respectively. -6-
C. Charitable Contributions
Petitioner claimed a deduction for charitable contributions of $995 on her tax
return for 2009. She reported contributions of $500 by cash or check and
contributions of $495 other than by cash or check.
Petitioner claimed a deduction for charitable contributions of $875 on her tax
return for 2010. She reported contributions of $500 by cash or check and
contributions of $375 other than by cash or check.
II. Schedules C
Petitioner reported gross receipts on Schedules C of $1,804 and $1,328 for
2009 and 2010, respectively, in connection with her work as a freelance reporter for
Argus. She claimed deductions for car and truck expenses on these Schedules C of
$4,312 and $3,215 for 2009 and 2010, respectively.
III. Tax Return Preparation
On the recommendation of a friend, petitioner hired Bill Naes, a local tax
return preparer, to prepare her tax returns for the taxable years 2009 and 2010.
She provided Mr. Naes with the documentation needed to prepare her returns.
After Mr. Naes prepared the returns, petitioner picked them up from his office,
signed them, and mailed them to the Internal Revenue Service without reviewing -7-
them for accuracy. Petitioner made several attempts to contact Mr. Naes before
trial, but he never returned her calls.
IV. Notice of Deficiency
In the notice of deficiency respondent disallowed various deductions that
petitioner claimed for the taxable years 2009 and 2010, described herein, and
determined that she is liable for accuracy-related penalties.
V. Tax Records
Petitioner testified at trial that her tax records for 2009 and 2010 were
destroyed when her basement was flooded. Although petitioner provided some
documents at trial, she generally did not reconstruct the various records needed to
substantiate expenses for the deductions in issue.
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).
Petitioner has not complied with the Code’s substantiation requirements and
has not maintained or otherwise reconstructed all required records. Therefore, the
burden of proof as to any relevant factual issue does not shift to respondent under -8-
section 7491(a). See sec. 7491(a)(1) and (2); Higbee v. Commissioner, 116 T.C.
438, 442-443 (2001).
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). A taxpayer must
substantiate deductions claimed by keeping and producing adequate records that
enable the Commissioner to determine the taxpayer’s correct tax liability. 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). A taxpayer claiming a deduction on a Federal income tax return must
demonstrate that the deduction is allowable pursuant to a statutory provision 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. at 89-90.
When a taxpayer establishes that he or she paid or incurred a deductible
expense but fails to establish the amount of the deduction, the Court normally may
estimate 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 -9-
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).
Section 274(d) prescribes more stringent substantiation requirements 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)(A)(4). See Sanford v. Commissioner, 50
T.C. 823, 827 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969). As relevant here, for the
taxable year 2009 the term “listed property” included, inter alia, passenger
automobiles and cellular phones. Sec. 280F(d)(4)(A)(i), (v). However, section
280F(d)(4) was amended by the Small Business Jobs Act of 2010, Pub. L. No. 111-
240, sec. 2043(a), 124 Stat. at 2560, which removed cellular phones (and similar
telecommunications equipment) from the definition of listed property. The
amendment is effective for taxable years beginning after December 31, 2009. Id.
sec. 2043(b).
To satisfy the requirements of section 274(d), a taxpayer generally must
maintain records and documentary evidence which, in combination, are sufficient to
establish the amount of each separate expenditure or business use of listed property,
the date of the expenditure or business use, and the business purpose for an
expenditure or business use. Sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 - 10 -
Fed. Reg. 46016 (Nov. 6, 1985). Taxpayers lacking a contemporaneous log are
expected to maintain a record created as near in time as possible to the particular
expenditure or business use (including the elements outlined above), supported by
corroborative documentary evidence that carries with it a high degree of probative
value. Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985). The Court may not use the Cohan rule to estimate expenses
covered by section 274(d). Sanford v. Commissioner, 50 T.C. at 827; sec. 1.274-
5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
If a taxpayer’s records have been destroyed or lost due to circumstances
beyond his or her control, the taxpayer may substantiate expenses subject to section
274(d) by making a reasonable reconstruction of the expenditures through other
credible evidence. Boyd v. Commissioner, 122 T.C. 305, 320 (2004); sec. 1.274-
5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985). A
taxpayer is required to reconstruct pertinent records to the fullest extent possible.
See, e.g., Chong v. Commissioner, T.C. Memo. 2007-12. If no other documentation
is available, the Court may, but is not obliged to do so, accept credible testimony of
a taxpayer to substantiate a deduction. See Boyd v. Commissioner, 122 T.C. at 320 - 11 -
(citing Watson v. Commissioner, T.C. Memo. 1988-29); Freeman v. Commissioner,
T.C. Memo. 2009-213.
With the preceding discussion as a backdrop, we turn to the various
deductions in dispute.
A. Unreimbursed Employee Business Expenses
1. Parking Fees, Supplies, Publications and Subscriptions, Informants
Under section 162(a), a deduction is allowed for ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business. A business expense is ordinary for purposes of section 162 if it is normal
or customary within a particular trade, business, or industry and is necessary if it is
appropriate and helpful for the development of the business. See Commissioner v.
Heininger, 320 U.S. 467, 471 (1943); Deputy v. du Pont, 308 U.S. 488, 495 (1940).
The determination of whether an expenditure satisfies the requirements for
deductibility under section 162 is a question of fact. See Commissioner v.
Heininger, 320 U.S. at 475.
The term “trade or business” includes performing services as an employee.
Primuth v. Commissioner, 54 T.C. 374, 377-378 (1970). However, expenses for - 12 -
which an employee could claim reimbursement from his or her employer, but does
not, are not ordinary and necessary expenses. See Podems v. Commissioner, 24
T.C. 21, 22-23 (1955).
Petitioner claimed deductions for expenditures for parking fees, supplies,
publications and subscriptions, and informants for 2009 and 2010.4 Respondent
disallowed the deductions for lack of substantiation. Petitioner did not present any
records to substantiate the expenses, nor did she make a reasonable reconstruction
of the expenses, and there is no evidence in the record that would allow us to
estimate the amount of an allowable deduction. See Vanicek v. Commissioner, 85
T.C. at 743. Consequently, respondent’s determination disallowing these
deductions is sustained.
2. Cellular Phone Expenses
During the taxable year 2009 cellular phones were listed property under
section 280F(d)(4)(v) and, therefore, subject to the strict substantiation requirements
of section 274(d). For the taxable year 2010, however, cellular phones were
removed from the definition of listed property.
4 There is no evidence in the record that News-Democrat maintained an accountable plan providing reimbursement to employees for these types of expenses. - 13 -
Petitioner claimed deductions on her Schedules A for 2009 and 2010 for
unreimbursed employee expenses related to her use of a cellular phone.5 The record
includes copies of petitioner’s monthly billing statements for her cellular phone
service covering the period December 6, 2008, through December 5, 2009.
However, she did not provide a written log or other record distinguishing business
calls from personal calls. Although petitioner testified credibly at trial that she used
her cellular phone primarily for business purposes, she also acknowledged that she
used the phone to communicate with her daughter while she was working or
otherwise away from home. In the absence of a written log, a reasonable
reconstruction of the same, or other secondary evidence corroborating her
testimony, petitioner has failed to satisfy the strict substantiation requirements of
section 274(d) as they apply to her cellular phone expenses for 2009.
Petitioner, somewhat inexplicably, did not provide any records, such as
monthly billing statements, related to her cellular phone service for 2010,
eliminating any opportunity for the Court to estimate her expenditures under the
Cohan doctrine for that year.
5 There is no evidence in the record that News-Democrat maintained an accountable plan providing reimbursement to employees for cellular phone expenses. - 14 -
Consistent with the foregoing, we sustain respondent’s determination
disallowing the deductions that petitioner claimed for cellular phone expenses on
Schedules A for the years in issue.
3. Car and Truck Expenses
Car and truck expenses also are subject to the strict substantiation
requirements of section 274(d). Petitioner reported on Forms 2106-EZ that she
drove 12,870 and 21,690 miles during 2009 and 2010, respectively, related to her
work for News-Democrat. News-Democrat reimbursed petitioner $2,281 for 7,426
miles driven in 2009 and $2,322 for 8,299 miles driven in 2010. Petitioner did not
offer a mileage log, a reasonable reconstruction of the expenses, or other secondary
evidence corroborating her testimony that she incurred car and truck expenses for
miles driven in excess of those recognized and reimbursed by News- Democrat. It
follows that respondent’s determination disallowing the deductions for car and truck
expenses reported on petitioner’s Schedules A for the years in issue is sustained.
4. Mortgage Interest Deductions
A taxpayer generally is entitled to a deduction for qualified residence interest.
Sec. 163(h)(2)(D). In general, a qualified residence is defined as a taxpayer’s
principal residence and one other home that is used as a residence by the taxpayer. - 15 -
Sec. 163(h)(4)(A)(i). Qualified residence interest means any interest paid or
accrued during a taxable year on acquisition indebtedness or home equity
indebtedness with respect to the taxpayer’s qualified residence. Sec. 163(h)(3)(A).
Petitioner claimed deductions for residential mortgage interest in excess of
amounts reported on Forms 1098 issued to her for 2009 and 2010. Respondent
disallowed the deductions for lack of substantiation. Petitioner did not present any
records to substantiate the additional amounts, nor did she offer secondary evidence
corroborating her testimony. Consequently, respondent’s determination disallowing
these deductions is sustained.
5. Charitable Contributions
Section 170(a)(1) provides the general rule that there shall be allowable as a
deduction any charitable contribution which is made within the taxable year and
verified under regulations prescribed by the Secretary. Section 1.170A-13(a)(1),
Income Tax Regs., provides that a taxpayer shall maintain a record of a contribution
of money in the form of a canceled check, a receipt from the donee organization,
or other reliable written records showing the name of the donee, the date of the
contribution, and the amount of the contribution. Section 1.170A-13(b), Income
Tax Regs., provides that a taxpayer shall maintain a record of a contribution of
property other than money in the form of a receipt (or letter) from the donee - 16 -
organization showing the name of the donee, the date and location of the
contribution, and a detailed description of the property. If it is impractical to obtain
a receipt under the circumstances, the taxpayer must maintain reliable written
records with respect to each item of donated property. Id. Pursuant to section
170(f)(8), no deduction is allowed for a charitable contribution of $250 or more
unless the taxpayer substantiates the contribution by a contemporaneous written
acknowledgment from the donee organization that includes (1) the amount of cash
and a description (but not the value) of any property other than cash contributed, (2)
a statement whether the donee organization provided any goods or services in
consideration, in whole or in part, for the contribution, and (3) a description and
good-faith estimate of the value of any goods or services provided in consideration
for the contribution.
Petitioner claimed deductions for charitable contributions of $995 and $875
on her tax returns for 2009 and 2010, respectively. Respondent disallowed the
deductions for lack of substantiation. Petitioner did not present any records to
substantiate the contributions, such as canceled checks or receipts from the donee
charitable organizations, nor did she offer secondary evidence corroborating her
testimony. As a result, respondent’s determination disallowing these deductions is
sustained. - 17 -
II. Schedules C: Car and Truck Expenses
Petitioner claimed deductions for car and truck expenses of $4,312 and
$3,215 on Schedules C for 2009 and 2010, respectively, in connection with her
work as a freelance reporter for Argus.
As previously discussed, expenses related to the use of a car are subject to
the strict substantiation requirements of section 274(d). Petitioner did not offer a
mileage log, a reasonable reconstruction of these expenses, or other secondary
evidence corroborating her testimony that she incurred car expenses related to her
work for Argus. Although it is quite likely that petitioner incurred some
transportation expenses in connection with her work for Argus, we are obliged to
sustain respondent’s determination disallowing the car expenses she reported on
Schedules C for the years in issue.
III. Accuracy-Related Penalties
Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the amount of
any underpayment attributable to negligence or disregard of rules or regulations.
The term “negligence” includes any failure to make a reasonable attempt to comply
with tax laws, and “disregard” includes any careless, reckless, or intentional
disregard of rules or regulations. Sec. 6662(c). Negligence also includes any failure
to keep adequate books and records or to substantiate items properly. Sec. 1.6662- - 18 -
3(b)(1), Income Tax Regs.; see Olive v. Commissioner, 139 T.C. ____, ____ (slip
op. at 40) (Aug. 2, 2012).
Section 6664(c)(1) provides an exception to the imposition of the accuracy-
related penalty if the taxpayer establishes that there was reasonable cause for, and
the taxpayer acted in good faith with respect to, the underpayment. Sec. 1.6664-
4(a), Income Tax Regs. The determination of whether the taxpayer acted with
reasonable cause and in good faith is made on a case-by-case basis, taking into
account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax
Regs. Reliance on a tax professional may demonstrate that the taxpayer had
reasonable cause and acted in good faith where the taxpayer establishes that: (1) the
adviser was a competent professional with sufficient expertise to justify the
taxpayer’s reliance, (2) the taxpayer provided the adviser with necessary and
accurate information, and (3) the taxpayer actually relied in good faith on the
adviser’s judgment. 3K Inv. Partners v. Commissioner, 133 T.C. 112, 117 (2009);
DeCleene v. Commissioner, 115 T.C. 457, 477 (2000).
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. - 19 -
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 has discharged his burden of production under section 7491(c) by
showing that petitioner failed to keep adequate records and properly substantiate her
claimed expenses. See sec. 1.6662-3(b)(1), Income Tax Regs.
Although petitioner relied on a paid tax preparer and trusted him to properly
prepare her tax returns for 2009 and 2010, there is no evidence in the record
regarding Mr. Naes’ experience or qualifications that would support the conclusion
that she reasonably relied on him. Petitioner hired Mr. Naes on the recommendation
of a friend without investigating his qualifications or background. Mr. Naes did not
take the time to review the returns with petitioner, and she did not undertake to
review the returns on her own.
Taxpayers have a duty to review their tax returns before signing and filing
them, and the duty of filing accurate returns cannot be avoided by placing
responsibility on a tax return preparer. Metra Chem Corp. v. Commissioner, 88
T.C. 654, 662 (1987); Magill v. Commissioner, 70 T.C. 465, 479-480 (1978), aff’d,
651 F.2d 1233 (6th Cir. 1981). - 20 -
Petitioner failed to establish that her reliance on her return preparer was
reasonable or in good faith. Thus, on the record presented, we are unable to
conclude that petitioner acted with reasonable cause and in good faith within the
meaning of section 6664(c)(1). Accordingly, petitioner is liable for the accuracy-
related penalty under section 6662(a) on the amounts of the underpayments of tax to
be computed as part of the Rule 155 process.
To reflect the foregoing,
Decision will be entered
under Rule 155.