PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE. T.C. Summary Opinion 2014-104
UNITED STATES TAX COURT
MELANIE L. THOMAS-KOZAK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 802-12S. Filed November 10, 2014.
Norman D. McKellar, for petitioner.
John R. Bampfield and William W. Kiessling, for respondent.
SUMMARY OPINION
GALE, 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
1 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to the nearest dollar. -2-
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 deficiencies in petitioner’s 2008 and 2009 Federal
income tax of $7,175 and $7,659, respectively, and accuracy-related penalties
under section 6662(a) of $1,435 and $1,532, respectively. After concessions,2 the
issues for decision are:
(1) whether petitioner is entitled to a deduction for medical expenses for
2008 in an amount greater than that allowed by respondent;
(2) whether petitioner is entitled to a charitable contribution deduction for
2009 in an amount greater than that allowed by respondent;
2 The notice of deficiency disallowed deductions for all but $90 (for each year) of the $29,525 and $28,596 of expenses petitioner reported on her 2008 and 2009 Schedules A, Itemized Deductions, respectively, for “Job Expenses and Certain Miscellaneous Deductions” (lines 21-24). These claimed amounts included tax preparation fees of $245 and depreciation of $2,764 for 2008 and a deduction for “other” of $4,808 for 2009. Petitioner has not addressed any of these three items, and we accordingly deem her to have conceded them to the extent they exceed the $90 respondent allowed for each year. The notice of deficiency also determined that petitioner’s filing status for each year at issue was “married filing separately” rather than “single” as claimed on her 2008 and 2009 returns. As petitioner has not addressed this issue, it is likewise deemed conceded. -3-
(3) whether petitioner is entitled to deductions for unreimbursed employee
business expenses for 2008 and 2009 in amounts greater than those allowed by
respondent;
(4) whether petitioner is entitled to a deduction for moving expenses for
2009; and
(5) whether petitioner is liable for accuracy-related penalties for 2008 and
2009.
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. At
the time the petition was filed, petitioner resided in Tennessee.
Starting in April 2008 and continuing through the end of 2009 petitioner
worked as a mechanical engineer for SunCoke Energy, a division of Sunoco, Inc.
(Sunoco). During 2008 and 2009 petitioner maintained a residence outside
Knoxville, Tennessee. During 2008 she commuted from that residence to a
Sunoco office in Knoxville, but in 2009 her work responsibilities often required
her to travel to other jobsites, principally a jobsite in the St. Louis, Missouri, area.
Sunoco had a written policy for reimbursing employees for their work-
related expenses for the years at issue. Sunoco’s reimbursement policy had -4-
provisions covering, among other things, business travel, membership in
professional and other organizations, clothing needed for weather or safety
conditions, and meals with persons having business relationships with the
company.
The policy’s provisions covering lodging expenses provided that Sunoco
would not reimburse “multiple hotel expenses on the same night stay for a single
individual in more than one location”. The policy’s provisions covering expenses
relating to an employee’s profession provided that “[e]xpenses associated with
membership * * * in professional, business, civic, and trade organizations can be
reimbursed at * * * [Sunoco’s] discretion”. They also provided that “[Sunoco]
will provide reimbursement for authorized subscriptions to periodicals and
technical or scientific publications serving a business purpose, at * * * [Sunoco’s]
discretion.”
Sunoco provided petitioner with an American Express credit card (corporate
card) to use in paying business expenses. The Sunoco reimbursement policy
required that the corporate card be used “whenever possible” for all business
expenses incurred by an employee, including meals.
Petitioner filed timely Federal income tax returns for 2008 and 2009. On
her 2008 return she reported adjusted gross income of $106,844 and claimed -5-
deductions for medical expenses of $15,381 and unreimbursed employee business
expenses of $26,516. On her 2009 return she reported adjusted gross income of
$74,013 and claimed a deduction of $6,718 for moving expenses, a deduction of
$2,034 for charitable contributions, and a deduction for $23,788 of unreimbursed
employee business expenses. On her 2008 and 2009 tax returns she reported a
Knoxville area post office box as her address.
Respondent subsequently mailed to petitioner a notice of deficiency with
respect to her 2008 and 2009 taxable years. The notice disallowed Schedule A
deductions that petitioner claimed for medical expenses for 2008, the charitable
contribution deduction for 2009, and miscellaneous deductions, including the
deductions for unreimbursed employee business expenses, for both years, as well
as the moving expense deduction for 2009. The notice determined that petitioner
was liable for accuracy-related penalties for both years.
Petitioner filed a timely petition with the Court seeking redetermination of
the deficiencies.
Discussion
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and the taxpayer bears the burden of proving that the
determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, -6-
115 (1933). Deductions are a matter of legislative grace, and the burden of
showing entitlement to a claimed deduction is on the taxpayer.3 Rule 142(a);
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
Medical Expenses
Petitioner claimed a deduction for medical expenses of $15,381 for 2008.
Respondent allowed $11,016 of that amount in the notice of deficiency and
conceded an additional $336 at trial, leaving $4,029 in dispute. Of the disputed
amount, petitioner has addressed only a $569 expenditure for a bicycle and related
accessories. While respondent concedes that petitioner spent $569 for a bicycle
and related accessories, he contends that the expenditure does not qualify as a
medical expense.
Petitioner testified that her physician determined that she had excessive
adrenaline in her body and recommended that she exercise to alleviate the
condition. She conceded that her physician did not recommend any particular
method of exercise but testified that the bicycle could be set up on a stand in a
hotel room and therefore provided a convenient means of exercising during her
travels.
3 Petitioner has not claimed or shown entitlement to any shift in the burden of proof pursuant to sec. 7491(a). -7-
Section 213(a) as in effect for 2008 provided a deduction for expenditures
for medical care of the taxpayer not compensated for by insurance or otherwise
that exceed 7.5% of adjusted gross income.4 “Medical care” is defined in section
213(d)(1) to include expenditures for the diagnosis, cure, mitigation, treatment, or
prevention of disease, or for the purpose of affecting any structure or function of
the body. Section 213 carves out a limited exception to the general rule in section
262 that prohibits the deduction of personal, living, or family expenses. Jacobs v.
Commissioner, 62 T.C. 813, 818 (1974). Section 1.213-1(e)(1)(ii), Income Tax
Regs., provides that medical care deductions will be confined strictly to expenses
incurred primarily for the prevention or alleviation of a physical or mental defect
or illness. These expenditures must satisfy a “but for” test: the taxpayer must
show that the expenditure was an essential element of the treatment and that it
would not have been incurred for nonmedical reasons. Jacobs v. Commissioner,
62 T.C. at 819. Inquiries of this nature are primarily factual. Id. (citing Stringham
v. Commissioner, 12 T.C. 580, 584-585 (1949), aff’d per curiam, 183 F.2d 579
(6th Cir. 1950)).
4 The adjusted gross income floor was raised to 10% for taxable years beginning after December 31, 2012. See Patient Protection and Affordable Care Act, Pub. L. No. 111-148, sec. 9013(a), 124 Stat. at 868. -8-
Even accepting arguendo petitioner’s contention that she had an excessive
adrenaline condition, she has not shown that bicycle exercise was essential to the
treatment of that condition. Indeed, she conceded that her physician’s
recommendation was for more exercise generally rather than bicycle riding
specifically. She did not produce evidence indicating that she could not engage in
other methods of exercise. Given the inherent recreational uses of a bicycle, we
conclude that petitioner has not shown that the bicycle would not have been
purchased “but for” her medical condition. Instead, we conclude that the
expenditure was only beneficial to her health generally and therefore does not
qualify as medical care. See France v. Commissioner, 690 F.2d 68, 69 (6th Cir.
1982) (finding physician-recommended dance lessons to alleviate arthritic pains
and nervous tensions not medical care), aff’g T.C. Memo. 1980-215; Thoene v.
Commissioner, 33 T.C. 62, 65 (1959) (finding physician-recommended dance
lessons not medical care); Peacock v. Commissioner, T.C. Memo. 1978-30, 37
T.C.M. (CCH) 177, 184 (1978) (finding gym membership expense not medical
care where physician recommended exercise). We therefore conclude that
petitioner is not entitled to deduct medical expenses for 2008 in excess of those
allowed by respondent. -9-
Charitable Contributions
Petitioner claimed a deduction for charitable contributions of $2,034 for
2009. Respondent disallowed the entire deduction in the notice of deficiency but
conceded $1,500 at trial, leaving $534 in dispute. Petitioner argues that this
amount relates to her volunteer work on a Habitat for Humanity project. She
testified that $314 pertained to vehicle expenses incurred in driving between St.
Louis and Knoxville on multiple occasions to work on the project. She calculated
her vehicle expenses using the 14-cent standard mileage rate under section 170(i).
She testified that the remaining $220 in dispute pertained to the cost of meals that
she purchased for other participants on this project.
Section 170(a)(1) allows a deduction for charitable contributions made
during the taxable year “if verified under regulations prescribed by the Secretary.”
The contributions must be to or for the use of a qualifying organization. Sec.
170(c). Section 1.170A-1(g), Income Tax Regs., prohibits deductions for
charitable contributions of services but allows deductions for “unreimbursed
expenditures made incident to the rendition of services”. Expenditures of this
nature under $250 must be substantiated with written records that substantially
comply with the requirements of section 1.170A-13(a)(1), Income Tax Regs. See
Van Dusen v. Commissioner, 136 T.C. 515, 534-535 (2011). These documents - 10 -
must be reliable evidence of the claimed expenses, such as check copies, bank
account statements, and credit card statements. See id. at 533-535. Such
expenditures of $250 or more must also be substantiated with a contemporaneous
written statement from the donee organization containing, among other things, a
description of the services that the taxpayer provided. See id. at 536-537; sec.
1.170A-13(f)(10), Income Tax Regs.
Petitioner offered no documentation that would satisfy the foregoing
requirements. She offered only a spreadsheet that lists the amounts of the vehicle
and meal expense deductions claimed, which she concedes she created when
preparing her return. She did not produce any receipts or other written records
that would tend to corroborate that she made the trips in her vehicle as claimed or
purchased the meals. Without additional corroboration, the noncontemporaneous
spreadsheet is not reliable evidence of her claimed expense deductions.
Additionally, she did not produce a written statement from Habitat for Humanity
regarding the services she provided to substantiate her vehicle expense, which
exceeded $250. Having failed to satisfy the substantiation requirements of section
1.170A-13, Income Tax Regs., she is not entitled to a charitable contribution - 11 -
deduction for either the vehicle expenses or the costs of meals.5 We therefore
conclude that petitioner has not shown entitlement to any charitable contribution
deduction for 2009 in excess of that allowed by respondent.
Employee Business Expenses
Overview
Petitioner claimed deductions for $26,516 and $23,788 of unreimbursed
employee business expenses for 2008 and 2009, respectively. As detailed in the
Forms 2106, Employee Business Expenses, attached to her returns, the expenses
reported consisted of: vehicle expenses; travel expenses while away from home
overnight; “other” employee business expenses; meals and entertainment
expenses; and, in the case of 2009 only, transportation expenses. Respondent
disallowed deductions for all of these expenses for each of the years. At trial
respondent conceded $1,200 and $1,112 of these expenses for 2008 and 2009,
respectively, leaving $25,316 and $22,676 in dispute, respectively.
Section 162 allows a taxpayer to deduct all ordinary and necessary expenses
paid or incurred by the taxpayer in carrying on a trade or business, including
5 Even if petitioner had substantiated her meal purchases, they would be more accurately characterized as nondeductible gifts to petitioner’s covolunteers rather than meals “necessarily incurred” by petitioner while performing donated services. See Cavalaris v. Commissioner, T.C. Memo. 1996-308, 1996 WL 380695, at *8-*9. - 12 -
expenses paid or incurred as an employee. Lucas v. Commissioner, 79 T.C. 1, 6
(1982). The taxpayer cannot deduct such expenses, however, to the extent the
taxpayer is entitled to reimbursement from the employer for an expenditure related
to the taxpayer’s status as an employee. See id. at 7; Spielbauer v. Commissioner,
T.C. Memo. 1998-80, 1998 WL 78983, at *3-*4 (stating that ordinary and
necessary educational expenses deductible to the extent they exceeded the amount
that taxpayer was entitled to be reimbursed from employer). Deductions for such
expenses belong to the employer. See Kennelly v. Commissioner, 56 T.C. 936,
943 (1971), aff’d without published opinion, 456 F.2d 1335 (2d Cir. 1972). The
taxpayer bears the burden of proving that the taxpayer was not entitled to
reimbursement from the employer for such expenses. See Fountain v.
Commissioner, 59 T.C. 696, 708 (1973). The taxpayer can prove that he was not
entitled to reimbursement by, for example, showing that he was expected to bear
these costs. See id.; Dunkelberger v. Commissioner, T.C. Memo. 1992-723, 1992
WL 379282, at *1 (finding that management team expected taxpayer to bear
expense of business lunches with vendors). Where the taxpayer’s employer has a
reimbursement policy that covers the expenses, the taxpayer must show that he
sought reimbursement from his employer for the expenses. Orvis v.
Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), aff’g T.C. Memo. 1984-533. - 13 -
Where a taxpayer establishes that he paid or incurred a deductible expense
but does not establish the amount of the deduction to which he may be entitled, we
may in certain circumstances estimate the amount allowable. See Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner,
85 T.C. 731, 742-743 (1985). But for expenses subject to the more stringent
substantiation requirements of section 274(d), the Cohan rule may not be used.
See 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)(4), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985).
Vehicle Expenses
Petitioner has not addressed the $15,528 of vehicle expenses for which she
claimed a deduction for 2008. We accordingly find that she has conceded them
and sustain respondent’s disallowance thereof. See Rule 34(b)(4).
Petitioner claimed a deduction for vehicle expenses of $7,405 for 2009, all
of which respondent disallowed.
Petitioner testified that she incurred these expenses in connection with
round trip travel between various Sunoco jobsites and her Knoxville residence. - 14 -
She testified that Sunoco would reimburse her for these round trips only if they
occurred at times that Sunoco designated for traveling home, typically every other
weekend. According to petitioner, however, her responsibilities at these jobsites,
which involved checking on safety conditions when most workers were not on the
site, often required her to work on weekends. Consequently, some of her trips
home would occur at times other than the designated weekend times and thus were
ineligible for reimbursement, according to petitioner. She testified that the vehicle
expenses she claimed arose from such travel. As substantiation for this travel,
petitioner produced a spreadsheet that she conceded she created when preparing
her return.
An employee may be entitled to deduct as a business expense the cost of
travel between her residence and a temporary jobsite. See sec. 162(a)(2); Mitchell
v. Commissioner, T.C. Memo. 1999-283, 1999 WL 669954, at *4-*5. However,
business use of a passenger automobile is subject to the substantiation
requirements of section 274(d) because such a vehicle is “listed property” as
defined in section 280F(d)(4)(A)(i). For such automobile expenses, a taxpayer
must substantiate, by adequate records or by sufficient evidence corroborating the
taxpayer’s own statement: (1) the amount of the expenditure; (2) the mileage for
each business use of the automobile; (3) the date of the business use; and (4) the - 15 -
business purpose of the use. See sec. 1.274-5T(b)(6), (c)(1), Temporary Income
Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Petitioner has not satisfied the substantiation requirements of section
274(d). The spreadsheet and petitioner’s testimony regarding the vehicle expenses
are not sufficient to establish each element above. Petitioner did not produce any
documentary evidence that would tend to corroborate the spreadsheet entries or
offer testimony regarding what she relied upon to create the entries.
Even aside from her failure to satisfy section 274(d), petitioner has not
corroborated her testimony that Sunoco’s reimbursement policy for trips home was
confined to weekend travel. Sunoco’s written reimbursement policy for
automobile use contained no such provision, and petitioner has not produced
correspondence with or testimony from a supervisor that would corroborate this
feature of Sunoco’s reimbursement policy. See Kessler v. Commissioner, T.C.
Memo. 1985-254, 49 T.C.M. (CCH) 1565, 1570-1571, n.9 (1985) (noting that
taxpayer called his supervisor as witness). We conclude that petitioner has failed
to show she was not entitled to reimbursement of these vehicle expenses.
Because petitioner has not satisfied the substantiation requirements of
section 274(d) or shown that she was not entitled to reimbursement, we sustain - 16 -
respondent’s disallowance of the vehicle expense deductions she claimed for
Travel Expenses While Away From Home Overnight
Petitioner reported $2,140 of unreimbursed employee business expenses for
travel while away from home overnight on line 3 of her 2008 Form 2106, all of
which respondent disallowed.
To substantiate these expenses, petitioner produced a spreadsheet that she
conceded she created when preparing her 2008 return, as well as receipts
corresponding to the spreadsheet entries.
As indicated by the proffered receipts, approximately $1,348 of the disputed
amount is for hotel lodging in various cities. Petitioner testified that Sunoco’s
reimbursement policy provided reimbursement for only one lodging expense per
night and that she often incurred two lodging expenses for a given evening when
Sunoco required her to travel from one jobsite to another on short notice. While
Sunoco’s reimbursement policy tends to corroborate petitioner’s claim,6 we
nonetheless reject the claimed deduction for lodging expenses for 2008 because
6 As noted previously, the policy stated that Sunoco would not reimburse “multiple hotel expenses on the same night stay for a single individual in more than one location”. - 17 -
petitioner did not provide any corroborating evidence that she paid for a hotel
room in more than one location on the same evening at any time in 2008. She did
not provide, for example, receipts for hotel charges from two hotels for the same
evening or correspondence with Sunoco management regarding these expenses.
Thus, she has not provided competent evidence that any of the overnight lodging
expenses she claimed for 2008 would trigger the exclusion from reimbursement
under Sunoco’s reimbursement policy. We decline to accept petitioner’s self-
serving testimony without additional corroboration. See Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986). Consequently, we conclude that petitioner
has failed to show that she was not eligible for reimbursement for these expenses.
See Lucas v. Commissioner, 79 T.C. at 7; Fountain v. Commissioner, 59 T.C. at
708.
As indicated by the proffered receipts, an additional $773 of the disputed
amount is for round trip airfare between Knoxville and Cleveland, Ohio.
Petitioner offers no explanation as to why, if this flight was taken in connection
with her duties at Sunoco, she was not reimbursed for it, given that Sunoco’s
policy provided for such reimbursement. In the absence of further evidence, we
reject petitioner’s claim. See Lucas v. Commissioner, 79 T.C. at 7; Fountain v.
Commissioner, 59 T.C. at 708. - 18 -
The remaining receipts consist of a $5 expense at a newsstand for
“magazines” and a $14 expense for a passport photograph. The magazines are a
nondeductible personal expense, as is the passport-related expense. See Baratelle
v. Commissioner, T.C. Memo. 2000-359, 2000 WL 1732434, at *6.7
In sum, we conclude that petitioner has not shown entitlement to a
deduction for any of the $2,140 of expenses claimed for overnight travel for 2008.
Accordingly, we sustain respondent’s disallowance of these expenses.
Petitioner reported $3,398 of unreimbursed employee business expenses for
travel while away from home overnight on line 3 of her 2009 Form 2106 and an
additional $584 on line 2, purportedly for local transportation.8 Respondent
7 But see Payne v. Commissioner, T.C. Memo. 1986-93, 51 T.C.M. (CCH) 579, 582 (1986) (concluding on the facts of that case that a passport fee is a deductible business expense). 8 Although petitioner reported $584 on line 2 of the Form 2106 as expenses for parking fees, tolls, and transportation, an examination of her supporting receipts reveals that the expenditures were all related to travel while away from home. This figure includes a total of $310 from hotel invoices for lodging, parking, and Internet service that will be considered with the associated lodging expenses. - 19 -
disallowed all of the foregoing. As substantiation, petitioner produced
spreadsheets she concedes she created when preparing her return and receipts
corresponding to the spreadsheet entries.9
Our analysis for petitioner’s 2009 travel expense deduction claims is similar
to that for 2008. Approximately $2,895 of the receipts are for hotel lodging (and
associated expenses such as hotel parking and Internet service) in various cities.
Petitioner offered the same explanation for Sunoco’s not reimbursing her for these
lodging expenses as she offered for her 2008 lodging expenses; that is, that
Sunoco reimbursed her for only one lodging expense per night. Here again,
however, the lodging expense receipts that petitioner proffered fail to demonstrate
any instance where she incurred two lodging expenses for the same night. She did
not produce other evidence to corroborate her explanation, such as correspondence
with Sunoco management about these expenses. Consequently, we find that
petitioner has failed to show that she was not eligible for reimbursement for the
$2,895 of lodging expenses for which she claimed a deduction for 2009. See
Lucas v. Commissioner, 79 T.C. at 7; Fountain v. Commissioner, 59 T.C. at 708.
The remaining travel expenses for which petitioner claimed a deduction
consist of $593 for a rental car used in Montreal (which petitioner contends was
9 The receipts total $585, a difference we treat as de minimis. - 20 -
the location of a Sunoco jobsite) and $221 for a rental car originating in Knoxville
that petitioner contends was for trip to a Sunoco facility in New Albany, Indiana.
In contrast to her testimony regarding the lodging expenses, petitioner offers no
explanation as to why Sunoco would not reimburse for rental cars used in these
circumstances. Sunoco’s written reimbursement policy provided for such
reimbursement. In the absence of additional evidence, we conclude that petitioner
has not shown that she was not entitled to reimbursement. See Lucas v.
Commissioner, 79 T.C. at 7; Fountain v. Commissioner, 59 T.C. at 708.
With respect to the remaining $274 for which petitioner claimed a
transportation expense deduction, the substantiating receipts show expenditures
that are properly characterized as expenses for overnight travel: a $254 car rental
from March 19-20 in Wichita, Kansas; a $20 parking fee at the Knoxville airport
on March 20; and a $1 highway toll in Illinois on September 6. Given the date
overlap between the Wichita car rental and the Knoxville airport parking fee, we
infer that petitioner flew from Knoxville to Wichita on March 19 and returned
March 20. Accepting petitioner’s testimony that Wichita was one of the Sunoco
jobsites to which she was assigned, we conclude that the March travel to Wichita
was work related. Here again, however, petitioner offered no explanation for
Sunoco’s not reimbursing her for any of the foregoing expenses even though - 21 -
Sunoco’s written reimbursement policy provided for it. We therefore sustain
respondent’s disallowance of these expenses. See Lucas v. Commissioner, 79
T.C. at 7; Fountain v. Commissioner, 59 T.C. at 708.
We accordingly sustain respondent’s disallowance of the $3,398 and $584
for which petitioner claimed deductions as overnight travel and local
transportation expenses, respectively, for 2009.
“Other” Employee Business Expenses
Petitioner reported $7,400 on line 4 of her 2008 Form 2106 for “other”
employee business expenses. The notice of deficiency disallowed the deduction
for the expenses in full, but respondent conceded $1,200 of the expenses at trial,
leaving $6,200 of the expenses in dispute.
Petitioner testified that $280 of the disputed amount pertained to steel-
reinforced metatarsal boots that Sunoco required all personnel to wear on jobsites.
She produced a receipt to substantiate the purchase, but the receipt indicates that
the $280 claimed was split between a boots purchase of $142 and a coveralls
purchase of $138 (allocating the sales tax proportionally). Petitioner testified that
the steel reinforcement in the boots ran above the ankle and that the boots were
required for safety on jobsites. She testified that she requested reimbursement - 22 -
from Sunoco but was denied it because the company believed reimbursing her
would require it to reimburse all contractors at its jobsites as well. Sunoco’s
reimbursement policy, however, stated that the cost of work-related clothing
needed for “weather/safety conditions” was reimbursable.
The cost of clothing is deductible as an employee business expense only if
the clothing is required for the taxpayer’s employment, unsuitable for general
wear, and not worn for personal use. Kinney v. Commissioner, T.C. Memo. 2008-
287, 2008 WL 5330815, at *9 (citing Hynes v. Commissioner, 74 T.C. 1266, 1290
(1980), and Yeomans v. Commissioner, 30 T.C. 757, 767 (1958)). The clothing
must be unsuitable for use outside of the taxpayer’s work environment and not
actually used outside of that environment. See Kinney v. Commissioner, 2008
WL 5330815, at *9.
We are satisfied that petitioner has shown entitlement to deduct the cost of
the boots. We readily accept the boots’ safety purpose and their required use on
job sites as plausible. It is clear the boots are not suitable for other purposes, and
we accept petitioner’s plausible testimony that Sunoco refused reimbursement out
of concern that it not incur an obligation to purchase similar boots for others
(notwithstanding the formal terms of Sunoco’s reimbursement policy for safety- - 23 -
related clothing). We therefore conclude that petitioner has shown entitlement to a
deduction for an “other” employee business expense of $142 for the boots.
As for the coveralls, petitioner testified that they were fire-retardant clothing
that she needed for work on jobsites. But the receipt does not indicate that the
coveralls were fire retardant. In contrast to her testimony regarding the boots,
petitioner has not shown that the coveralls were unsuitable for general wear and
not worn for personal use. See id. She also failed to address whether she was
entitled to reimbursement for the coveralls. See Lucas v. Commissioner, 79 T.C.
at 7; Fountain v. Commissioner, 59 T.C. at 708. Accordingly, petitioner has not
shown entitlement to an employee business expense deduction for the coveralls.
Petitioner has not addressed the remaining $5,920 of “other” employee
business expenses for which she claimed a deduction for 2008. We accordingly
find that she has conceded them.
We conclude that petitioner is not entitled to claim a deduction for “other”
employee business expenses for 2008 in excess of the amount allowed by
respondent, plus the $142 expense for boots that we have concluded petitioner is
entitled to deduct. - 24 -
Petitioner reported $11,528 on line 4 of her 2009 Form 2106 for “other”
employee business expenses. The notice of deficiency disallowed them in full, but
respondent conceded $1,112 of them at trial, leaving $10,416 in dispute.
Petitioner testified that $1,319 of the disputed amount pertained to
fire-retardant clothing and a special safety harness that she needed for work on
jobsites. While petitioner produced receipts for these items totaling $1,319, she
offered no testimony concerning any refusal by Sunoco to reimburse her for the
expenditures.
The receipts in question show purchases of clothing including shoes, a
jacket, and coveralls totaling $793 but do not indicate that any of the clothing was
fire retardant. As with the coveralls expense she reported for 2008, petitioner has
not shown that this clothing was unsuitable for general wear and not worn for
personal use. See Kinney v. Commissioner, 2008 WL 5330815, at *9.
Additionally, petitioner has not addressed whether she was entitled to
reimbursement for the clothing. See Lucas v. Commissioner, 79 T.C. at 7;
Fountain v. Commissioner, 59 T.C. at 708. Accordingly, petitioner has not shown
entitlement to deduct the clothing purchases. - 25 -
As for the safety harness, the receipts do not show such a purchase. As best
we can tell, the harness could be represented by only two receipts of purchases of
unspecified items from “W.W. Granger” totaling $525, one for $454 and one for
$71. Even if we were to accord petitioner the benefit of the doubt on her
substantiation, given the apparent safety purpose served by the harness--which
would bring it within the clear terms of Sunoco’s reimbursement policy--her
failure to explain the circumstances of Sunoco’s not reimbursing her persuades us
that she has failed to show that she did not receive reimbursement. See Lucas v.
Commissioner, 79 T.C. at 7; Fountain v. Commissioner, 59 T.C. at 708.
Petitioner testified that $349 of the disputed “other” employee business
expenses pertained to membership fees for the American Welding Society and the
American Society of Mechanical Engineers and an American Society of
Mechanical Engineers publication. She produced receipts to substantiate these
expenditures. Petitioner testified that Sunoco did not reimburse her.
Given that Sunoco retained discretion as to whether it would reimburse the
foregoing expenses,10 we are satisfied on this record that petitioner was not
10 As noted previously, Sunoco’s reimbursement policy provided that “[e]xpenses associated with membership * * * in professional, business, civic, and trade organizations can be reimbursed at * * * [Sunoco’s] discretion”. Sunoco’s reimbursement policy also provided that “[Sunoco] will provide reimbursement (continued...) - 26 -
reimbursed, and the business purpose is apparent. We therefore conclude that
petitioner has shown entitlement to a deduction for $349 of “other” employee
business expenses beyond those respondent allowed.
The “other” employee business expenses in dispute also include $1,763
petitioner spent for tickets to Bristol Motor Speedway.11 Petitioner testified that
she used the tickets to take her supervisor to the races for “comradery” and
conceded that she had not sought reimbursement from Sunoco. Expenditures for
sporting event tickets or drinks merely to foster camaraderie among coworkers
lack a business purpose under section 162, see Finney v. Commissioner, T.C.
Memo. 1980-23, 39 T.C.M. 938, 949-950 (1980); Brenner v. Commissioner, T.C.
Memo. 1967-239, 26 T.C.M. (CCH) 1210, 1216 (1967), unless, possibly, the
purpose is to facilitate acquaintances with new coworkers, a contention not made
here, see Moss v. Commissioner, 758 F.2d 211, 213 (7th Cir. 1985), aff’g 80 T.C.
1073 (1983). We therefore sustain respondent’s disallowance of a deduction for
this expenditure.
10 (...continued) for authorized subscriptions to periodicals and technical or scientific publications serving a business purpose, at * * * [Sunoco’s] discretion.” 11 Expenses of this nature are properly reported as meals and entertainment expenses on Form 2106 line 5. Petitioner treated other Bristol Motor Speedway ticket expenses as meals and entertainment expenses, discussed infra. - 27 -
Also included in the disputed “other” employee business expenses is a $214
expense for a power adapter that petitioner testified she needed to power her
laptop computer12 when a power outlet was unavailable at jobsites. However, the
receipt substantiating the purchase of the power adapter is dated December 26,
2008, indicating that this expense would be deductible for 2008 if at all. See sec.
1.461-1(a), Income Tax Regs. In any event, as petitioner has not addressed
whether she was eligible for reimbursement or sought it, she has not shown
entitlement to this deduction for either year. See Fountain v. Commissioner, 59
T.C. at 708.
Finally, although petitioner produced two receipts indicating that she made
expenditures totaling $62 for “business services” at a UPS Store and a “16GB
SDCARD”, she did not offer any testimony or other evidence to support their
business purpose. We accordingly deem them conceded.
This leaves $6,709 of disputed “other” employee business expenses that
petitioner has not addressed. We accordingly deem them conceded.
12 The record is silent as to whether the laptop was petitioner’s or Sunoco’s property. - 28 -
We conclude that petitioner has shown entitlement to deduct an additional
$349 in “other” employee business expenses for 2009 beyond the amount allowed
by respondent.
Meals and Entertainment Expenses
Petitioner reported $1,448 and $873 for meals and entertainment expenses
on line 9 of her 2008 and 2009 Forms 2106, respectively, all of which respondent
disallowed.
As substantiation, petitioner produced spreadsheets (that she created when
preparing her returns) and receipts covering $5,793 of meals and entertainment
expenses for 2008 and $3,491 for 2009. Petitioner produced 49 receipts totaling
$2,841 for meal expenses for 2008 and 59 receipts totaling $2,701 for meal
expenses for 2009. The remaining $2,951 and $790 of receipts for 2008 and 2009,
respectively, were for Bristol Motor Speedway tickets.
Meals and entertainment expenses are subject to a 50% limitation prescribed
by section 274(n). They are also subject to the substantiation requirements of
section 274(d). See sec. 1.274-5T(b)(2) and (3), (c), Temporary Income Tax
Regs., 50 Fed. Reg. 46014-46016 (Nov. 6, 1985). A taxpayer must substantiate,
by adequate records or by sufficient evidence corroborating the taxpayer’s own
statement, several elements including the business purpose of the meal and the - 29 -
business relationship between the meal attendees and the taxpayer. As with other
employee business expenses, the taxpayer must also show that he was not entitled
to reimbursement for them. See Fountain v. Commissioner, 59 T.C. at 708.
Sunoco’s written reimbursement policy provided with respect to business
meals that the expenses would be reimbursed if incurred in connection with
meeting persons having a business relationship with the company. The policy also
required that the corporate card be used to pay for business meals “whenever
possible”.
Petitioner testified that the unreimbursed meal expenses for which she
claimed deductions arose from after-hours working dinners with contractors hired
by Sunoco with whom petitioner worked. According to petitioner, Sunoco
encouraged her to facilitate these after-hours meals with the contractors to
expedite project completion. Petitioner testified that she submitted reimbursement
requests to Sunoco and they were denied, which she attributed to a Sunoco policy
prohibiting reimbursement for meals provided to contractors to whom Sunoco was
paying a per diem.
The difficulty with petitioner’s contention is that only 3 of the 49 meal
receipts for 2008 and 5 of the 59 meal receipts for 2009 conform with her “after
hours” description and the reimbursement policy requirement that they be charged - 30 -
on the corporate card (which was an American Express card); that is, only eight of
the receipts petitioner proffered to substantiate her meal expenses establish that
the charges were on an American Express card at an “after hours” time. The
remaining 46 and 54 receipts for 2008 and 2009, respectively, establish that they
were not charged on an American Express card13 or incurred “after hours”.14
Since the eight receipts evidencing “after hours” American Express-charged
meals corroborate petitioner’s testimony, we conclude that she has satisfied the
section 274(d) substantiation requirements for these expenses. The meal expenses
on the three such receipts for 2008 total $469, and the meal expenses on the five
for 2009 total $316. We also accept petitioner’s explanation for Sunoco’s not
reimbursing her for these meals, as she could well have been unaware which
contractors were receiving per diem payments from Sunoco. We accordingly find
13 The bulk of these receipts demonstrates that the meals were charged on a credit card other than American Express, while a few do not indicate whether a credit card was used for payment. The fact that petitioner did not charge the bulk of these meals on the corporate card as required by Sunoco’s reimbursement policy independently supports an inference that the meals were personal. Moreover, in 11 instances the payor on the receipt was not petitioner but “David Kozak” (presumably her spouse at the time), further suggesting that these meals were personal. 14 The bulk of the receipts establishes that the meals occurred during business hours. In a few instances, the receipts do not establish the time of the meal. - 31 -
that petitioner is entitled to deduct additional employee business expenses beyond
those allowed by respondent of 50% of $469 and $316 for 2008 and 2009,
respectively.
As for the remaining meal receipts for each year, petitioner has not
produced sufficient evidence to corroborate her own statement regarding the
business purpose of these meals; that is, that they were after-hours working
dinners. Indeed, most of the receipts contradict petitioner’s testimony.
Consequently, she has not satisfied the substantiation requirements of section
274(d) for any of them.
With regard to the Bristol Motor Speedway tickets,15 although petitioner
produced receipts documenting the purchases (of $2,951 and $790 for 2008 and
2009, respectively), she did not address them and, accordingly, she is not entitled
to deductions for any portions of them as employee business expenses.
Moving Expenses
Petitioner claimed a moving expense deduction of $6,718 on her 2009 tax
return which was disallowed in the notice of deficiency.
15 Petitioner reported another purchase of such tickets, for $1,763, as an “other” employee business expense on line 4 of her 2009 Form 2106. We considered that claim previously. - 32 -
To substantiate her claim, petitioner produced receipts totaling $5,01516 as
follows: (1) $2,397 for three months of lodging at an extended stay facility near
St. Louis for April, May, and July 2009;17 (2) $811 for two separate hotel stays in
St. Louis, each for a few evenings, in February 2009; (3) $257 for three months of
storage unit fees for a unit near her Knoxville residence; and (4) $1,550 for a car
rental from April 1 to April 15.
Petitioner testified that Sunoco transferred her to a St. Louis jobsite in
January 2009 to work on a project and that St. Louis was her base of operations
for the remainder of 2009. She testified that she anticipated returning to Knoxville
once the St. Louis project was complete.
Section 217(a) allows a taxpayer to deduct moving expenses that arise in
connection with the commencement of work by the taxpayer as an employee at a
“new principal place of work.” The taxpayer must show that his employment at
the new principal place of work was permanent or indefinite rather than
temporary. See Goldman v. Commissioner, 497 F.2d 382, 383 (6th Cir. 1974),
16 We treat petitioner as having conceded her moving expense deduction to the extent it exceeded $5,015. 17 Petitioner reported the April, May, and July extended stay charges as moving expenses but included some of the June, August, and September charges from the same facility in her unreimbursed travel expenses while away from home overnight. - 33 -
aff’g T.C. Memo. 1973-132; Schweighardt v. Commissioner, 54 T.C. 1273, 1277
(1970); Davis v. Commissioner, T.C. Memo. 1979-47, 38 T.C.M. (CCH) 189, 192
(1979).
Under section 217(b)(1), “moving expenses” are defined as a taxpayer’s
reasonable expenses of moving his belongings from his former residence to his
new residence and of traveling (including lodging) from his former residence to
his new residence. Moving expenses do not include the cost of lodging at the new
principal place of work. See Work v. Commissioner, T.C. Memo. 2005-259, 2005
WL 2885850, at *3 (explaining that the Omnibus Budget Reconciliation Act of
1993, Pub. L. No. 103-66, sec. 13213(a)(1), 107 Stat. at 473, removed all
allowances for temporary lodging).
The evidence in the record shows that St. Louis was not a permanent or
indefinite place of employment for petitioner. She conceded in her testimony that
she planned to return to Knoxville once the St. Louis project was finished,
indicating the temporary nature of the assignment. Moreover, petitioner reported a
Knoxville post office box as her address on her timely 2009 tax return, indicating
that she anticipated returning to Knoxville or actually had done so when she filed
her return in 2010. - 34 -
In addition, none of the expenses petitioner substantiated qualify as moving
expenses under section 217(b). As for the lodging charges, she cannot deduct
such charges at the new location as moving expenses. See id., 2005 WL 2885850,
at *3. She failed to show that the property she stored near her Knoxville residence
was actually moved to St. Louis. See id. at *4. The fact that the car rental was for
two weeks indicates that petitioner used the rental car for purposes other than
moving her belongings between Knoxville and St. Louis.
Because petitioner has not shown that her employment in St. Louis was
permanent or indefinite and because none of the expenses petitioner substantiated
qualify as moving expenses under section 217(b), we sustain respondent's
disallowance of petitioner’s moving expense deduction.
Accuracy-Related Penalties
Respondent determined accuracy-related penalties under section 6662(a)
for 2008 and 2009. Respondent argues that petitioner is liable for these penalties
because of negligence and a substantial understatement of income tax. See sec.
6662(b)(1) and (2). Petitioner disputes her liability for the penalties.
Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of an
underpayment of tax required to be shown on a return that is attributable to a
substantial understatement of income tax or to negligence. An “underpayment of - 35 -
tax” for this purpose is defined as the excess of the amount of income tax imposed
over the sum of the amount of tax shown as the tax by the taxpayer on his return
and any tax previously assessed (or collected without assessment), less any rebate.
Sec. 6664(a). An “understatement” is the excess of the amount of tax required to
be shown on a return over the amount of tax shown on the return less any rebate.
Sec. 6662(d)(2)(A). An understatement is substantial when it exceeds the greater
of 10% of the tax required to be shown on the return or $5,000. Sec.
6662(d)(1)(A).
For purposes of the accuracy-related penalty, “negligence” is defined as any
failure to make a reasonable attempt to comply with the provisions of the Internal
Revenue Code, and “disregard” includes any careless, reckless, or intentional
disregard. Sec. 6662(c). Negligence includes any failure to exercise ordinary and
reasonable care in the preparation of a tax return or any failure to keep adequate
books and records or to substantiate items properly. Sec. 1.6662-3(b)(1), Income
Tax Regs.
However, no penalty is imposed with respect to any portion of an
underpayment if the taxpayer acted with reasonable cause and in good faith with
respect to that portion. Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. The
determination of whether a taxpayer acted with reasonable cause and in good faith - 36 -
is made on a case-by-case basis, taking into account all pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most
important factor is the extent of the taxpayer’s effort to assess the taxpayer’s
proper tax liability. Id. An honest misunderstanding of fact or law that is
reasonable in light of all of the facts and circumstances, including the experience,
knowledge, and education of the taxpayer may indicate reasonable cause and good
faith. Id.
Negligence or Disregard of Rules and Regulations
Petitioner had reasonable cause with respect to the portion of her 2008
underpayment attributable to her $569 medical expense deduction claim for the
bicycle and related accessories. Respondent conceded that petitioner purchased
them, we found her testimony regarding her physician’s recommendation credible,
and her belief that she could deduct them as a medical expense was reasonable in
the circumstances. Accordingly, petitioner is not liable for an accuracy-related
penalty on the portion of her underpayment attributable to that deduction. - 37 -
Regarding the other deductions for expenses for which we sustained the
disallowance, petitioner did not even defend almost $28,00018 of them; that is, she
offered no argument or substantiation whatsoever. These expenses amount to
approximately 82% of the $33,800 of deductions for expenses that respondent
disallowed for 2008 in the notice of deficiency.19 Her negligence with respect to
these deductions is patent. As for the remaining $3,257, for which petitioner
offered some documentation or testimony,20 her evidence fell woefully short of
establishing entitlement to the deductions claimed, as our previous discussion
indicates. This means that petitioner could not substantiate approximately
$31,000 of the deductions she claimed for 2008 and had no support whatsoever for
approximately $28,000 of them. Given the size of these figures in relation to her
income, we conclude that petitioner failed to exercise reasonable care in preparing
her return and failed to keep adequate substantiation. Imposition of a section
18 This amount consists of the unaddressed tax preparation fees and depreciation, see supra note 2, and the unaddressed medical expenses, vehicle expenses, and “other” employee business expenses. 19 This amount consists of the expenses on Schedule A for which a deduction was disallowed, see supra note 2, and the medical expenses for which a deduction was disallowed. 20 This amount consists of the expenses for lodging, coveralls, airfare, magazines, and meals and passport-related expenses. - 38 -
6662(a) penalty on the basis of negligence with respect to the 2008 underpayment
is therefore warranted.
With respect to the 2009 deductions for which we have sustained
disallowance, we similarly conclude that petitioner was negligent in claiming
them.
Petitioner’s claims of a moving expense deduction and a deduction for an
unreimbursed employee business expense for Bristol Motor Speedway tickets
evince a failure to exercise reasonable care in the preparation of her tax return. A
reasonable person would have ascertained that deductions for the purported
moving expenses and the Speedway tickets were well outside the bounds of
sections 217 and 162, respectively, and would not have claimed them.
For the remaining disallowed deductions, petitioner failed to make a
reasonable attempt to comply with substantiation requirements. She offered no
substantiation or even explanation for approximately $13,000 of the expenses for
which she claimed deductions,21 or approximately 35% of the expenses for which
21 This amount consists of the unaddressed “other” expense, see supra note 2, and the unaddressed moving expenses and “other” employee business expenses. - 39 -
she claimed deductions that respondent disallowed for 2009.22 For the remainder,
her substantiation was sorely lacking, as discussed previously. Given the size of
the these figures in relation to her income, we conclude that petitioner failed to
exercise reasonable care in preparing her return and failed to keep adequate
substantiation. Imposition of a section 6662(a) penalty on the basis of negligence
with respect to the 2009 underpayment is therefore warranted.
Substantial Understatement of Income Tax
Alternatively, to the extent that the Rule 155 computations show that the
understatement of tax for 2008 or 2009 exceeds the greater of 10% of the tax
required to be shown on the return or $5,000, see sec. 6662(d)(1)(A), petitioner is
liable for a section 6662(a) penalty for an underpayment of tax attributable to a
substantial understatement of income tax.
To reflect the foregoing,
Decision will be entered under
Rule 155.
22 The denominator of this percentage consists of the disallowed expenses claimed on Schedule A, see supra note 2, and the disallowed charitable contributions and moving expenses.