T.C. Memo. 2021-56
UNITED STATES TAX COURT
PETER M. ADLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13564-19. Filed May 10, 2021.
Peter M. Adler, pro se.
Christine A. Fukushima, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KERRIGAN, Judge: In separate notices of deficiency respondent
determined a deficiency of $16,644 and an accuracy-related penalty pursuant to
section 6662(a) of $3,329 for 2016 and a deficiency of $2,292 for 2017. After
respondent’s concession of the penalty, the only issue for consideration is whether
Served 05/10/21 -2-
[*2] petitioner is entitled to deduct business expenses for 2016 and 2017 (years in
issue).
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. We round all monetary amounts
to the nearest dollar.
FINDINGS OF FACT
Some of the facts are stipulated and so found. Petitioner resided in
California when he timely filed his petition.
During the tax years in issue petitioner owned a consulting business called
Grupo Fortuna, LLC (Grupo Fortuna). Petitioner described Grupo Fortuna as a
sales and consulting business for the entertainment industry. For 2016 petitioner
filed Schedule C, Profit or Loss From Business, for Grupo Fortuna, which he
reported was a sales and consulting business. Petitioner reported on Schedule C
expenses of $105,227 including $16,535 for travel expenses.
In 2016 petitioner was a consultant for MediaNaviCo (MediaNavi), which
was a digital entertainment company. He was hired to help MediaNavi’s chief
financial officer (CFO), Patrick Gildea, put together deals with other businesses to
help MediaNavi increase its customer base and sales. His position required travel -3-
[*3] to and attendance at business-related conferences including retail trade
shows. One of petitioner’s business trips for MediaNavi was to the San Francisco
area to attend a retail trade show called Shoptalk. Petitioner was initially
responsible for paying the expenses, and he would deliver the receipts to Mr.
Gildea. The MediaNavi accounting team would then process the receipts, and Mr.
Gildea would review and approve the expenses to be reimbursed to petitioner.
Another trip petitioner went on during the years in issue was to Blackfoot, Idaho,
to look at land that he inherited from his father.
In 2016 NBCUniversal Media, LLC (NBCUniversal), purchased
MediaNavi. Petitioner continued his consulting work for NBCUniversal. During
the years in issue petitioner also performed construction work such as hauling
trash and demolition. In 2016 petitioner made several payments to Jose Barraza
for work done at a construction site. Petitioner did not issue any Forms W-2,
Wage and Tax Statement, to employees or Forms 1099-MISC, Miscellaneous
Income, to contract laborers for payments during 2016. On his Schedule C for
2016 petitioner reported $44,586 for contract labor expenses.
Petitioner and his wife timely filed Form 1040, U.S. Individual Income Tax
Return, for 2016 pursuant to a valid extension. On May 1, 2019, respondent -4-
[*4] issued petitioner and his wife a notice of deficiency for 2016 disallowing
expense deductions for travel and contract labor.
Petitioner and his wife timely filed Form 1040 for 2017. On his Schedule C
for Grupo Fortuna, petitioner reported expenses totaling $57,397. On May 1,
2019, respondent issued petitioner and his wife a notice of deficiency for 2017
disallowing deductions for $53,098 of those expenses.
OPINION
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and a taxpayer bears the burden of proving those determinations
are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioner has neither claimed nor shown that he meets the specifications of
section 7491(a) to shift the burden of proof to respondent as to any relevant factual
issue. Section 6001 and the regulations promulgated thereunder require taxpayers
to maintain records sufficient to permit verification of income and expenses. See
sec. 1.6001-1(a), (e), Income Tax Regs.
Section 162(a) allows a taxpayer to deduct all ordinary and necessary
expenses paid or incurred in carrying on a trade or business. An ordinary expense
is one that commonly or frequently occurs in the taxpayer’s business, Deputy v.
du Pont, 308 U.S. 488, 495 (1940), and a necessary expense is one that is -5-
[*5] appropriate and helpful in carrying on the taxpayer’s business, Welch v.
Helvering, 290 U.S. at 113. A taxpayer may not deduct a personal, living, or
family expense unless the Code expressly provides otherwise. Sec. 262(a).
Deductions are a matter of legislative grace, and a taxpayer must prove his
or her entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Whether an expenditure is ordinary or necessary is a question of fact.
Commissioner v. Heininger, 320 U.S. 467, 475 (1943).
Normally, the Court may estimate the amount of a deductible expense if a
taxpayer establishes that an expense is deductible but is unable to substantiate the
precise amount. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). This principle is
often referred to as the Cohan rule. See, e.g., Estate of Reinke v. Commissioner,
46 F.3d 760, 764 (8th Cir. 1995), aff’g T.C. Memo. 1993-197. Certain expenses,
such as travel, specified in section 274 are subject to strict substantiation rules.
No deductions under section 162 shall be allowed for “listed property”, as defined
in section 280F(d)(4), “unless the taxpayer substantiates [the expenses] by
adequate records or by sufficient evidence corroborating the taxpayer’s own -6-
[*6] statement”. Sec. 274(d)(4). Listed property includes passenger automobiles
and other property used for transportation. Sec. 280F(d)(4)(A)(i) and (ii).
Notably, section 274(d) overrides the Cohan rule. Boyd v. Commissioner,
122 T.C. 305, 320 (2004); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985) (flush language) (noting that section 274 supersedes
the Cohan rule). Therefore, this Court is precluded from estimating any expenses
that are covered by section 274(d).
Mr. Gildea, MediaNavi’s CFO, testified that petitioner performed
consulting services for him. He further testified that MediaNavi consistently
reimbursed petitioner’s business expenses.
Petitioner testified that he incurred travel expenses for 2016 while working
for MediaNavi and NBCUniversal.
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T.C. Memo. 2021-56
UNITED STATES TAX COURT
PETER M. ADLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13564-19. Filed May 10, 2021.
Peter M. Adler, pro se.
Christine A. Fukushima, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KERRIGAN, Judge: In separate notices of deficiency respondent
determined a deficiency of $16,644 and an accuracy-related penalty pursuant to
section 6662(a) of $3,329 for 2016 and a deficiency of $2,292 for 2017. After
respondent’s concession of the penalty, the only issue for consideration is whether
Served 05/10/21 -2-
[*2] petitioner is entitled to deduct business expenses for 2016 and 2017 (years in
issue).
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. We round all monetary amounts
to the nearest dollar.
FINDINGS OF FACT
Some of the facts are stipulated and so found. Petitioner resided in
California when he timely filed his petition.
During the tax years in issue petitioner owned a consulting business called
Grupo Fortuna, LLC (Grupo Fortuna). Petitioner described Grupo Fortuna as a
sales and consulting business for the entertainment industry. For 2016 petitioner
filed Schedule C, Profit or Loss From Business, for Grupo Fortuna, which he
reported was a sales and consulting business. Petitioner reported on Schedule C
expenses of $105,227 including $16,535 for travel expenses.
In 2016 petitioner was a consultant for MediaNaviCo (MediaNavi), which
was a digital entertainment company. He was hired to help MediaNavi’s chief
financial officer (CFO), Patrick Gildea, put together deals with other businesses to
help MediaNavi increase its customer base and sales. His position required travel -3-
[*3] to and attendance at business-related conferences including retail trade
shows. One of petitioner’s business trips for MediaNavi was to the San Francisco
area to attend a retail trade show called Shoptalk. Petitioner was initially
responsible for paying the expenses, and he would deliver the receipts to Mr.
Gildea. The MediaNavi accounting team would then process the receipts, and Mr.
Gildea would review and approve the expenses to be reimbursed to petitioner.
Another trip petitioner went on during the years in issue was to Blackfoot, Idaho,
to look at land that he inherited from his father.
In 2016 NBCUniversal Media, LLC (NBCUniversal), purchased
MediaNavi. Petitioner continued his consulting work for NBCUniversal. During
the years in issue petitioner also performed construction work such as hauling
trash and demolition. In 2016 petitioner made several payments to Jose Barraza
for work done at a construction site. Petitioner did not issue any Forms W-2,
Wage and Tax Statement, to employees or Forms 1099-MISC, Miscellaneous
Income, to contract laborers for payments during 2016. On his Schedule C for
2016 petitioner reported $44,586 for contract labor expenses.
Petitioner and his wife timely filed Form 1040, U.S. Individual Income Tax
Return, for 2016 pursuant to a valid extension. On May 1, 2019, respondent -4-
[*4] issued petitioner and his wife a notice of deficiency for 2016 disallowing
expense deductions for travel and contract labor.
Petitioner and his wife timely filed Form 1040 for 2017. On his Schedule C
for Grupo Fortuna, petitioner reported expenses totaling $57,397. On May 1,
2019, respondent issued petitioner and his wife a notice of deficiency for 2017
disallowing deductions for $53,098 of those expenses.
OPINION
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and a taxpayer bears the burden of proving those determinations
are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioner has neither claimed nor shown that he meets the specifications of
section 7491(a) to shift the burden of proof to respondent as to any relevant factual
issue. Section 6001 and the regulations promulgated thereunder require taxpayers
to maintain records sufficient to permit verification of income and expenses. See
sec. 1.6001-1(a), (e), Income Tax Regs.
Section 162(a) allows a taxpayer to deduct all ordinary and necessary
expenses paid or incurred in carrying on a trade or business. An ordinary expense
is one that commonly or frequently occurs in the taxpayer’s business, Deputy v.
du Pont, 308 U.S. 488, 495 (1940), and a necessary expense is one that is -5-
[*5] appropriate and helpful in carrying on the taxpayer’s business, Welch v.
Helvering, 290 U.S. at 113. A taxpayer may not deduct a personal, living, or
family expense unless the Code expressly provides otherwise. Sec. 262(a).
Deductions are a matter of legislative grace, and a taxpayer must prove his
or her entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Whether an expenditure is ordinary or necessary is a question of fact.
Commissioner v. Heininger, 320 U.S. 467, 475 (1943).
Normally, the Court may estimate the amount of a deductible expense if a
taxpayer establishes that an expense is deductible but is unable to substantiate the
precise amount. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). This principle is
often referred to as the Cohan rule. See, e.g., Estate of Reinke v. Commissioner,
46 F.3d 760, 764 (8th Cir. 1995), aff’g T.C. Memo. 1993-197. Certain expenses,
such as travel, specified in section 274 are subject to strict substantiation rules.
No deductions under section 162 shall be allowed for “listed property”, as defined
in section 280F(d)(4), “unless the taxpayer substantiates [the expenses] by
adequate records or by sufficient evidence corroborating the taxpayer’s own -6-
[*6] statement”. Sec. 274(d)(4). Listed property includes passenger automobiles
and other property used for transportation. Sec. 280F(d)(4)(A)(i) and (ii).
Notably, section 274(d) overrides the Cohan rule. Boyd v. Commissioner,
122 T.C. 305, 320 (2004); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985) (flush language) (noting that section 274 supersedes
the Cohan rule). Therefore, this Court is precluded from estimating any expenses
that are covered by section 274(d).
Mr. Gildea, MediaNavi’s CFO, testified that petitioner performed
consulting services for him. He further testified that MediaNavi consistently
reimbursed petitioner’s business expenses.
Petitioner testified that he incurred travel expenses for 2016 while working
for MediaNavi and NBCUniversal. Petitioner was not able to substantiate these
expenses. Furthermore, Mr. Gildea testified that petitioner was reimbursed for
travel expenses.
Some of petitioner’s reported travel expenses related to a trip to Blackfoot,
Idaho. He testified that his trip involved looking at land that he inherited from his
father. We need not address whether petitioner properly substantiated these
expenses because they were related to personal travel and therefore cannot be
deductible as ordinary and necessary business expenses. Petitioner failed to -7-
[*7] substantiate the travel expenses reported on his 2016 Schedule C.
Accordingly, respondent’s disallowance of the deduction is sustained.
Petitioner testified that he hired people to help with construction-related
projects, including demolition and hauling trash. Petitioner listed on his 2016
Schedule C that Grupo Fortuna was a sales and consulting business, not a
construction business. He did not substantiate the reported contract labor
expenses. We sustain the disallowance of the deduction for contract labor
expenses.
Petitioner did not provide any evidence to support expenses reported on his
Schedule C for 2017. Therefore, respondent’s disallowance of petitioner’s
claimed Schedule C deductions is sustained.
An appropriate decision will be
entered.