Irene Jermihov & Peter Jermihov v. Commissioner

2014 T.C. Summary Opinion 75

• Court: United States Tax Court
• Decided: July 28, 2014
• Docket: 15145-12S
• Status: Unpublished

Opinion

PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE. T.C. Summary Opinion 2014-75

UNITED STATES TAX COURT

IRENE JERMIHOV AND PETER JERMIHOV, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15145-12S. Filed July 28, 2014.

Irene Jermihov and Peter Jermihov, pro sese.

H. Barton Thomas, for respondent.

SUMMARY OPINION

ARMEN, 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.

Respondent determined a deficiency in petitioners’ Federal income tax for

2009 of $4,980. The issue for decision is whether petitioners are entitled to

itemized deductions for medical and dental expenses, charitable contributions, and

unreimbursed employee expenses claimed on their Schedule A, Itemized

Deductions, in excess of the amount conceded by respondent.2 We hold that

petitioners are, but only to the limited extent provided herein.

Background

Some of the facts have been stipulated, and they are so found. We

incorporate by reference the parties’ stipulation of facts and the accompanying

exhibits.

Petitioners resided in the State of Illinois at the time that the petition was

filed with the Court.

1 Unless otherwise indicated, all subsequent section references are to the Internal Revenue Code in effect for 2009, the taxable year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. 2 Respondent concedes that petitioners are entitled to a miscellaneous itemized deduction of $690 (subject to the 2% percent threshold prescribed by sec. 67(a)) for union dues paid by petitioner Irene Jermihov. -3-

Petitioners’ Medical and Dental Expenses

In 2007 petitioners’ minor son was diagnosed with, and began to be treated

for, attention deficit hyperactivity disorder. In addition to being prescribed

medication and attending sessions with a social worker at his school, petitioners’

son worked with a psychotherapist.

In 2009 petitioners’ son saw the psychotherapist on a regular weekly basis

for approximately 9 or 10 months, or some 42 weeks. The cost of this treatment--

$150 per week--was not reimbursed (or reimbursable) through petitioners’ health

insurance. For the year petitioners paid $6,300 ($150/wk × 42 wks) for their son’s

psychotherapy.

Also in 2009 petitioner Peter Jermihov was recovering from lymphoma and

the chemotherapy used to treat it. To alleviate pain from systemic inflammation

caused by this affliction, Mr. Jermihov’s physician recommended acupuncture.

Accordingly, Mr. Jermihov began to receive acupuncture treatments on a weekly

basis for approximately nine months, or some 40 weeks. The cost of this treatment

--$75 per week--was not reimbursed (or reimbursable) through petitioners’ health

insurance. For the year Mr. Jermihov paid $3,000 ($75/wk × 40 wks) for his

acupuncture treatment. -4-

Petitioners’ Charitable Contributions

Petitioners are, and have been for some years, parishioners of Holy Virgin

Protection Cathedral. According to the Cathedral Dean, they were “faithful

parishioners in good standing” in 2009. When petitioners attended services and

otherwise went to church, they used cash to purchase candles and to make

donations to the poor box and the collection plate and for other offerings.

Petitioners’ Employment-Related Expenses

During 2009 Mr. Jermihov was a faculty member in the music department

of Triton College in River Grove, Illinois. His job included conducting and

developing choral ensembles, recruiting students, and teaching courses in music

theory, ear training, music appreciation, and music technology.

In 2009 Mr. Jermihov paid dues of $829 to a teachers union and was a

member of other professional organizations. In addition, the nature of his work,

particularly the recruitment aspect of his position, required that he travel on

occasion to locations away from Triton College to meet with prospective students

at high schools and churches located in the greater Chicago area.

During 2009 petitioner Irene Jermihov was employed as a music teacher at

an elementary school in Lincolnwood, Illinois. Mrs. Jermihov paid dues of $690

to a teachers union in 2009. See supra note 2. -5-

Petitioners’ 2009 Tax Return

Petitioners timely filed their 2009 Federal income tax return. Petitioners

reported gross income of $150,550, claimed an “above-the-line” deduction of

$500 for educator expenses, and thus reported adjusted gross income of $150,050.

Petitioners attached to their return a Schedule A and claimed various

itemized deductions of $60,458. Among the deductions claimed were medical and

dental expenses of $7,064 (net of the 7.5% threshold prescribed by section

213(a)), charitable contributions of $7,762, and miscellaneous itemized deductions

of $5,564 (net of the 2% threshold prescribed by section 67(a)).

Regarding the deduction for miscellaneous itemized deductions, petitioners

determined the deductible amount as follows:

Unreimbursed employee expenses $8,415 Tax preparation fees 150 Gross amount 8,565 Less: 2% threshold (3,001) Net amount 5,564

To support the deduction for unreimbursed employee expenses, petitioners

attached to their return Form 2106, Employee Business Expenses, and reported the

following: -6-

Vehicle expenses $3,850 Parking fees, tolls, and transportation 750 Travel expenses while away from home overnight 800 Subtotal 5,400 Meals and entertainment 550 Less: Nondeductible portion (275) Total 5,675

In Part II, Vehicle Expenses, of Form 2106, petitioners determined vehicle

expenses of $3,850 by multiplying 7,000 miles times the standard mileage rate of

$0.55/mile.

In addition to the total amount per the Form 2106 (i.e., $5,675), petitioners’

$8,415 deduction for unreimbursed employee expenses also included union and

professional dues, professional subscriptions, and “excess educator expenses”.

Notice of Deficiency and Petition

Following the examination of petitioners’ 2009 income tax return,

respondent issued a notice of deficiency in March 2012. In the notice respondent

determined a deficiency of $4,980 on the basis of the disallowance for lack of

substantiation of all of the medical and dental expenses, charitable contributions,

and miscellaneous itemized deductions claimed by petitioners on their Schedule

A.3 Respondent did not, however, disallow the $500 “above-the-line” deduction

3 It would appear that the disallowance of the miscellaneous itemized deductions contemplated only petitioners’ employee expenses and that the $150 (continued...) -7-

claimed by petitioners for educator expenses. Finally, respondent determined that

petitioners were not liable for alternative minimum tax as originally reported by

them on their return.

In June 2012 petitioners timely filed a petition for redetermination

contesting the disallowance of their aforementioned Schedule A deductions.

This case was originally scheduled for trial in May 2013 but was continued

six days before trial pursuant to petitioners’ request. The case was ultimately tried

to the Court in late March 2014.

Discussion

I. Burden of Proof

In general, the Commissioner’s determinations in a notice of deficiency are

presumed to be correct, and the taxpayer bears the burden of proving that those

determinations are incorrect. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933); cf. sec.

7491(a)(1). This includes the burden of substantiation. Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir.

3 (...continued) deduction for tax preparation fees was disallowed solely because of the 2% threshold on miscellaneous itemized deductions. See sec. 67(a). -8-

1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965); see sec.

7491(a)(2).

II. General Principles Governing Substantiation

Deductions are a matter of legislative grace. New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934). Thus, contrary to petitioners’ apparent

view, the fact that a taxpayer reports a deduction on the taxpayer’s income tax

return and attaches some Internal Revenue Service-prescribed form in support of

that deduction is not sufficient to substantiate the deduction claimed on the return.

Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); Roberts v. Commissioner,

62 T.C. 834, 837 (1974). A tax return is merely a statement of the taxpayer’s

claim; the return is not presumed to be correct. Wilkinson v. Commissioner, 71

T.C. at 639; Roberts v. Commissioner, 62 T.C. at 837; see also Seaboard

Commercial Corp. v. Commissioner, 28 T.C. 1034, 1051 (1957) (stating that a

taxpayer’s income tax return is a self-serving declaration that may not be accepted

as proof for the deduction or exclusion claimed by the taxpayer); Halle v.

Commissioner, 7 T.C. 245 (1946) (stating that a taxpayer’s return is not self-

proving as to the truth of its contents), aff’d, 175 F.2d 500 (2d Cir. 1949).

A taxpayer is required to maintain records sufficient to substantiate

deductions claimed by the taxpayer on his or her return. See generally sec. 6001 -9-

(“Every person liable for any tax imposed by this title, or for the collection

thereof, shall keep such records * * * and comply with such rules and regulations

as the Secretary may from time to time prescribe.”); sec. 1.6001-1(a), Income Tax

Regs. (“[A]ny person subject to tax * * * shall keep such permanent books of

account or records * * * as are sufficient to establish the amount of * * *

deductions[.]”); sec. 1.6001-1(e), Income Tax Regs. (“The books or records

required by this section shall be kept at all times available for inspection by

authorized internal revenue officers or employees, and shall be retained so long as

the contents thereof may become material in the administration of any internal

revenue law[.]”).

As a general rule, if, in the absence of such records, a taxpayer provides

sufficient evidence that the taxpayer has paid a deductible expense, but the

taxpayer is unable to adequately substantiate the amount of the deduction to which

he or she is otherwise entitled, the Court may estimate the amount of such expense

and allow the deduction to that extent. Cohan v. Commissioner, 39 F.2d 540, 543-

544 (2d Cir. 1930). However, for the Court to estimate the amount of an expense,

we must have some basis upon which an estimate may be made. Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985). Without such a basis, any allowance - 10 -

would amount to unguided largesse. Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957).

However, in the case of certain expenses, section 274(d) overrides the so-

called Cohan doctrine. Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d

per curiam, 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax

Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Specifically, and as pertinent herein,

section 274(d) provides that no deduction is allowable for traveling expenses

(including meals and lodging while away from home) or entertainment expenses

or with respect to listed property as defined in section 280F(d)(4), unless the

deduction is substantiated in accordance with the strict substantiation requirements

of section 274(d) and the regulations promulgated thereunder. Included within the

definition of listed property in section 280F(d)(4) is any passenger automobile or

other property used as a means of transportation. Sec. 280F(d)(4)(A)(i) and (ii),

(5); sec. 1.280F-6(b) and (c), Income Tax Regs.

Thus, under section 274(d), no deduction is allowable for expenses incurred

in respect of listed property such as an automobile on the basis of any

approximation or the unsupported testimony of the taxpayer. See, e.g., Murata v.

Commissioner, T.C. Memo. 1996-321; Golden v. Commissioner, T.C. Memo.

1993-602. In other words, in the absence of adequate records or sufficient - 11 -

evidence corroborating the taxpayer’s own statement, any deduction that is subject

to the stringent substantiation requirements of section 274(d) is proscribed.

III. Loss of Records

At trial Mr. Jermihov testified that petitioners’ substantiating documents

were destroyed in April 2013 when their basement was flooded. Mr. Jermihov

was unable to document the flood by an insurance claim or otherwise because, in

his words, “there was no structural damage to the house” but “simply a matter of

an unfinished basement containing several boxes that were rendered impossible to

use [because] they were just all glued together and basically useless.” Oddly,

however, petitioners never mentioned a flood or a loss of records when they

requested that their case be continued for trial in May 2013.

In any event, unavailability of a taxpayer’s records does not relieve the

taxpayer of the burden of demonstrating his or her entitlement to deductions

claimed. Thus, insofar as deductions subject to the strict substantiation

requirements of section 274 are concerned, if a taxpayer’s records have been

destroyed or lost because of circumstances beyond the taxpayer’s control, such as

by fire, flood, earthquake, or other casualty, the taxpayer may substantiate the

deduction by “reasonable reconstruction” of his or her expenses, see sec. 1.274-

5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985), and - 12 -

should do so to the fullest extent possible, e.g., Roumi v. Commissioner, T.C.

Memo. 2012-2; Chong v. Commissioner, T.C. Memo. 2007-12. For deductions

not subject to the strict substantiation requirements of section 274, a taxpayer

might seek to obtain statements from third-parties such as health care providers or

professional organizations in order to substantiate payment of claimed expenses.

IV. Petitioners’ Schedule A Deductions

A. Medical and Dental Expenses

Certain expenses paid during the taxable year, not compensated by

insurance or otherwise, for the medical care of the taxpayer or a dependent may be

allowed as a deduction to the extent that the expenses exceed 7.5% of the

taxpayer’s adjusted gross income. Sec. 213(a). “Medical care” includes amounts

paid for diagnosis, cure, mitigation, treatment, or prevention of disease or for the

purpose of affecting any structure or function of the body, under section

213(d)(1)(A).

In 2009 petitioners paid out-of-pocket $6,300 for the cost of their son’s

psychotherapy and $3,000 for Mr. Jermihov’s acupuncture. The sum of these two

amounts, or $9,300, constitutes a medical expense under section 213(a).

Other than the costs of their son’s psychotherapy and Mr. Jermihov’s

acupuncture, petitioners presented no persuasive evidence regarding any other - 13 -

medical or dental expense that they may have incurred in 2009. See Williams v.

United States, 245 F.2d at 560-561; Vanicek v. Commissioner, 85 T.C. at 742-743.

Nor did petitioners present any persuasive evidence why they could not have

obtained third-party records, such as from their insurance provider or some health

care provider such as a dentist, during the 11-month period between the alleged

flood and the trial of this case.

In sum, petitioners are entitled to a deduction for medical and dental

expenses of $9,300 (i.e., $6,300 + $3,000), subject to the applicable percentage

threshold.

B. 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.

On their 2009 return petitioners claimed a deduction for charitable

contributions of $7,762. At trial Mr. Jermihov testified that “[w]e paid the church

something in the vicinity of $5,000 in direct donations on a weekly basis.”

Although the record is clear that petitioners were members of Holy Virgin

Protection Cathedral in 2009 and that the Cathedral Dean regarded them to be - 14 -

“faithful parishioners in good standing” with the church,4 the fact of the matter is

that anonymous cash contributions, whether for votive or sanctuary candles or

made to the poor box or collection plate, hardly satisfy the substantiation

requirements of section 170 and applicable regulations thereunder. See, e.g., sec.

1.170A-13(a)(1), (f), Income Tax Regs. On the other hand, the Court is satisfied

that petitioners did make some cash contributions when they attended religious

services. Accordingly, bearing heavily against petitioners whose inexactitude is of

their own making, the Court holds that petitioners are entitled to a deduction for

cash contributions of $1,000 to Holy Virgin Protection Cathedral. See Cohan v.

Commissioner, 39 F.2d at 543-544. However, there is nothing in the record to

support an allowance for a contribution to any other charitable organization. See

Williams v. United States, 245 F.2d at 560; Vanicek v. Commissioner, 85 T.C. at

743.

In sum, the Court holds that petitioners are entitled to a deduction for

charitable contributions of $1,000.

4 Neither the Cathedral Dean nor the record in general discloses what “good standing” may signify. - 15 -

C. Unreimbursed Employee Expenses

In general, a taxpayer who is an employee may deduct unreimbursed

employee expenses as an ordinary and necessary business expense under section

162. E.g., Lucas v. Commissioner, 79 T.C. 1, 6 (1982).

In 2009 Mr. Jermihov paid union dues of $829 and Mrs. Jermihov paid

union dues of $690. Most of the remaining expenses that petitioners seek to

deduct relate to transportation, travel, and meals and entertainment as reported on

Form 2106. These latter expenses are subject to the strict substantiation

requirements of section 274.

If petitioners’ records were lost to a flood in April 2013, the fact remains

that petitioners made no serious and persuasive effort to reconstruct their expenses

in the year following such event. See Roumi v. Commissioner, T.C. Memo. 2012-

2; Chong v. Commissioner, T.C. Memo. 2007-12; sec. 1.274-5T(c)(5), Temporary

Income Tax Regs., supra. Further, the entries appearing on petitioners’ Form 2106

suggest that records may not have been maintained in the first instance because

such entries are indicative of estimates (e.g., vehicle expense based on 7,000

business miles; travel expenses of $800), which are the antithesis of what section - 16 -

274 demands.5 Thus, the expenses claimed on petitioners’ Form 2106 are not

deductible.

Insofar as the remaining employee expenses are concerned, we are

satisfied that petitioners paid some amount for professional dues and

subscriptions, and we deem $300 to be a reasonable allowance in the absence of

any records. See Cohan v. Commissioner, 39 F.2d at 543-544. However, the

record does not demonstrate that petitioners paid more than $500 for educator

expenses, the amount claimed by them (and allowed by respondent) as an “above-

the-line” deduction on page 1 of their Form 1040, U.S. Individual Income Tax

Return.

In sum, the Court holds that petitioners incurred unreimbursed employee

expenses for union dues of $1,519 (i.e., $690 + $829) and for professional dues

and subscriptions of $300, which amounts (together with tax preparation fees of

$150) are deductible on Schedule A, subject to the applicable percentage

5 Indeed, at trial, although Mr. Jermihov testified that records were maintained, he candidly admitted to “estimations” and “approximations”. It also bears repeating that the alleged loss of records occurred well after the filing of petitioners’ 2009 return. - 17 -

Conclusion

We have considered all of the arguments advanced by the parties, and, to the

extent not expressly addressed, we conclude that those arguments do not support

any result contrary to those reached herein.

To give effect to our holdings, as well as respondent’s concession, see supra

note 2,

Decision will be entered under

Rule 155.