T.C. Memo. 1996-320
UNITED STATES TAX COURT
SHERRI A. MULNE A.K.A. SHERRI A. SHANNON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10984-94. Filed July 15, 1996.
Sherri A. Shannon, pro se.
Michele Leichtman, for respondent.
MEMORANDUM OPINION
NAMEROFF, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1 Respondent determined a deficiency in petitioner's 1991
Federal income tax in the amount of $4,955, plus an accuracy-
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
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related penalty under section 6662(a) in the amount of $991.
The issues for decision are: (1) Whether petitioner is
entitled to deductions for certain employee business expenses;
(2) whether petitioner is entitled to a section 179 deduction for
a computer and printer, a camera, and a telephone; (3) whether
petitioner is entitled to a home-office deduction; and (4)
whether petitioner is liable for the accuracy-related penalty.
In the notice of deficiency, respondent allowed a charitable
contribution deduction of $1,420 and disallowed $4,600. In her
opening statement, respondent's counsel conceded an additional
$210 of the charitable contribution deduction. The parties agree
that the stipulation resolves the charitable contribution
deduction issue; therefore, we hold that the remaining amount
($4,390) is conceded by petitioner.
On Schedule A, petitioner claimed a deduction for employee
business expenses of $18,666 ($20,132 less $1,466 per section
67(a)). In the notice of deficiency, respondent allowed a
deduction for employee business expenses of $5,559 ($7,025 less
$1,466). Respondent's counsel did not provide the Court with
details concerning the amount allowed. However, the employee
business expenses claimed on petitioner's return that were not
addressed during the trial of this matter include: Vehicle
expenses of $5,061; books and magazines of $457; language classes
of $255; and telephone of $252. We shall assume the total of
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these amounts, or $6,025, was a portion of the $7,025 allowed in
the notice of deficiency. The remaining amount of $1,000 was not
explained in the record.
For convenience, we combine our findings of fact and opinion
on an issue by issue basis. We begin by noting that, as a
general rule, the Commissioner's determinations are presumed
correct, and that the taxpayer bears the burden of proving that
those determinations are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are a
matter of legislative grace, and the taxpayer bears the burden of
proving that he or she is entitled to any deduction claimed.
Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). This includes the burden of substantiation. Hradesky v.
Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976).
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of the filing
of this petition, petitioner resided in Victorville, California.
Employee Business Expenses
a. Parking Expenses. From January through July 28, 1991,
petitioner was employed by Pacific Bell Yellow Pages (Pacific
Bell) as a telemarketing sales manager of inside sales
representatives. On July 29, 1991, petitioner was promoted by
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Pacific Bell to the position of premise sales manager of outside
and inside sales representatives. As premise sales manager,
petitioner was responsible for achieving sales commitments for a
specific territory through the supervision, motivation, and
development of sales representatives; designing and implementing
sales campaign strategies; handling customer contacts; reviewing
the accuracy of paperwork; and preparing administrative reports.
Petitioner's territory included the coastal region from Malibu to
Palos Verdes, plus Alhambra, Pasadena, and Orange County.
Petitioner had an office at Pacific Bell that was located in
downtown Los Angeles (the downtown office). Petitioner's
schedule varied daily, and she had no set routine. Sometimes she
worked at her home in the morning and drove to the downtown
office or a satellite office in the afternoon. On other
occasions, she worked at the downtown office all day or visited
customers during the day. In 1991, petitioner paid for a parking
space near the downtown office. Petitioner believed it was a
necessity to have her car at the downtown office in case she
needed to visit a customer, satellite office, or perform other
business-related activities.
According to a stipulated letter from Cheryl Groves, who is
a premise sales manager at Pacific Bell, company business
expenses for "parking charges" were reimbursable by Pacific Bell.
It is not clear from this letter whether such charges refer only
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to off-site parking charges (i.e., charges incurred to attend
meetings or visit customers away from the downtown office) or
whether such charges included parking at the downtown office.
Petitioner was unaware that she possibly could be reimbursed for
parking at the downtown office. Petitioner claimed a Schedule A
deduction for parking of $1,254.
Section 162(a) allows a deduction for all ordinary and
necessary expenses incurred in carrying on a trade or business.
The performance of services as an employee constitutes a trade or
business. O'Malley v. Commissioner, 91 T.C. 352, 363-364 (1988).
An ordinary expense is one that is common and acceptable in the
particular business. Welch v. Helvering, supra at 113-114. A
necessary expense is an expense that is appropriate and helpful
in carrying on the trade or business. Heineman v. Commissioner,
82 T.C. 538, 543 (1984).
When an employee has a right to reimbursement for
expenditures related to her status as an employee, but fails to
claim such reimbursement, the employee's expenses are not
deductible because the employee's expenditures are not
"necessary"; i.e., it is not necessary for an employee to remain
unreimbursed for expenses to the extent he or she could have been
reimbursed. Orvis v. Commissioner, 788 F.2d 1406 (9th Cir.
1986), affg. a Memorandum Opinion of this Court; Lucas v.
Commissioner, 79 T.C. 1, 7 (1982); Kennelly v. Commissioner, 56
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T.C. 936, 943 (1971), affd. without published opinion 456 F.2d
1335 (2d Cir. 1972). Furthermore, the mere failure of an
employee to seek reimbursement cannot convert the employer's
expenses into the employee's. Kennelly v. Commissioner, supra.
The burden of establishing that the expense was not reimbursable
by the employer had the employee requested reimbursement rests
with the employee. Podems v. Commissioner, 24 T.C. 21, 23
(1955). Moreover, the prohibition of deductions for reimbursable
expenses is a "bright line rule" and applies even when the
employee is unaware that the expenses are reimbursable. Orvis v.
Commissioner, supra at 1408.
Based on Ms. Groves' letter, it appears that petitioner's
parking expenses could have been reimbursed by Pacific Bell had
petitioner sought reimbursement. Moreover, petitioner has not
proven that her parking expenses at the downtown office were not
reimbursable. Therefore, these expenses are not "necessary"
under section 162 and therefore not deductible.2
b. Meals Expenses. Petitioner claimed a Schedule A
deduction for meals expenses of $3,875, less 20 percent required
by section 274(n). As sales manager, petitioner was required by
Pacific Bell to motivate her sales representatives so that they
2
Moreover, we note that the canceled checks presented by
petitioner do not adequately substantiate the alleged parking
expenditures, nor is it clear that the parking charges were not a
nondeductible personal (i.e., commuting) expense. Secs. 267,
274(d).
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would maximize revenue. To motivate her sales representatives
and show her appreciation for their work, petitioner, from time
to time, took them out to lunch or dinner. On 26 occasions in
1991, petitioner entertained her sales representatives and
incurred substantiated expenses of $1,843.23. In addition,
petitioner held meetings with her sales representatives, either
individually or in small groups in places near the downtown
office, over coffee and donuts, bagels, or fruit to discuss work-
related problems or accounts. In this regard, she incurred
expenses of $569 over 60 separate documented occasions. (We
refer to both of these categories collectively as the meals
expenses.)
Respondent called John Moreno (Mr. Moreno) to testify as to
Pacific Bell's corporate policy regarding reimbursement of meals
and entertainment expenses. At the time of the trial, Mr. Moreno
was an outside sales representative for Pacific Bell, but in 1991
he was a telemarketing branch manager for Pacific Bell. For part
of 1991, until petitioner was promoted, he was petitioner's
supervisor or reviewer. In a rather vague response to a question
concerning Pacific Bell's reimbursement policy for meals and
entertainment expenses incurred by an employee, Mr. Moreno stated
that Pacific Bell "would reimburse for expenses if the sales
manager vouchered those expenses." In other words, Pacific Bell
would reimburse an employee if the manager approved the expense.
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The record indicates that the vouchers had several approval
levels, and it was certainly not clear that the immediate
superior's approval was final.
Moreover, Mr. Moreno's standard for approval apparently was
one of reasonableness, but he did not elaborate on that term,
except to say
the policy was fairly flexible. As far as the monies
that were reimbursed, if it was felt it was reasonable,
then, yes, we would be reimbursing. If it was a daily
or weekly voucher, that was not considered reasonable.
So it just depended on the individual manager, and also
the number of representatives that they had reporting
to them.
* * * * * * *
At the time Mrs. Shannon was reporting to me,
primarily, she was responsible for the inside sales
representatives. And that was not, let's say, those
entertainment--those meals were not as common or as
ongoing as they would be for an outside sales
representative.
Thereafter, Mr. Moreno opined that "reasonable" usually means $10
to $15 per person for lunch or dinner once or twice a month;
however, whether a meals expense is considered "reasonable"
depends on the number of sales representatives the manager
supervised and the particular events or circumstances surrounding
the meals expense, such as whether Pacific Bell was sponsoring a
special campaign or contest.
The receipts and calendar presented by petitioner indicate
that she took her sales representatives out for lunch or dinner
between 2 to 4 times per month and incurred meals expenses in
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connection with sales representative meetings between 2 to 7
times per month. Petitioner credibly testified that her meals
expenses were not reimbursable by Pacific Bell. Mr. Moreno did
not convince us otherwise. Ms. Groves' letter did not mention
any Pacific Bell policy regarding reimbursement for meals with
other employees. Accordingly, we hold that petitioner's meals
expenses were not reimbursable by Pacific Bell.
To substantiate her meals expenses, petitioner presented a
detailed calendar for 1991 in which she recorded the date,
amount, place, and business purpose of the meals expenses. In
addition, petitioner credibly testified that the meals expenses
were incurred to motivate her sales representatives or incurred
in connection with meetings to discuss accounts or other work-
related problems with her sales representatives. Based on
petitioner's calendar and testimony, we conclude that she
incurred meals expenses for lunch and dinner of $1,843.20 and for
sales representative meetings of $569. Accordingly, petitioner
is entitled to a meals expense deduction based on those amounts,
subject to the 80-percent limitation imposed by section 274(n).
c. Contest Prizes. In 1991, Pacific Bell held a 6-month
contest to motivate the sales representatives to maximize
revenue. Winners of the contest received awards totaling $1,000.
The sales manager was required to pay the bonus and was entitled
to reimbursement from Pacific Bell. Four of petitioner's sales
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representatives won the contest. Three of the sales
representatives used the bonus to take a cruise from Los Angeles
to San Diego, and one sales representative used the bonus to go
to Las Vegas. Petitioner charged the cost of these trips (about
$1,000) on her Pacific Bell Mechanic's Bank credit card and
subsequently paid the credit card bill.3
Petitioner and Mr. Moreno testified that petitioner was
entitled to reimbursement for the cost of these trips. Further,
petitioner submitted a voucher for reimbursement; however, the
voucher was returned to petitioner for corrections, which she
made. Nevertheless, petitioner does not remember receiving the
reimbursement, due to the illness of her mother which occurred at
or about the same time. Although we sympathize with petitioner,
her failure to follow up on the claim for reimbursement due to
personal problems does not convert this expense into a deductible
employee business expense. Since this expense was reimbursable,
it is not "necessary" under section 162, and petitioner is not
entitled to a deduction for such amount. (However, we note that
the amount of this issue coincides with the $1,000 allowed by
respondent, but unexplained in the record. See supra note 2.)
Section 179 Deduction
3
The Pacific Bell Mechanic's Bank credit card was not for
a corporate account. Pacific Bell required petitioner to keep
the credit card in her name and pay the bill out of her personal
checking account. If she incurred a reimbursable expense, she
was required to submit a reimbursement form to Pacific Bell.
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During 1991, petitioner purchased an old IBM computer and
printer for her home office for $3,689. Petitioner was a
credible witness, and we believe, and so find, that she used the
computer and printer exclusively for business purposes to write
various reports and other documents required by Pacific Bell and
to keep up with the volume of work associated with her position
as sales manager.
Petitioner also purchased a Nikon camera in 1991 for
$617.84, which was used to take pictures of customers and/or
their businesses. These pictures were used in yellow page
advertisements. The camera was kept in petitioner's locked desk
drawer at the downtown office and was used only by sales
representatives for business reasons. Pacific Bell did not
provide a camera and did not require petitioner to purchase a
camera.
In addition, petitioner purchased a telephone for her home
office for approximately $180. The telephone was allegedly used
only for business calls. Petitioner did not have a separate
business telephone line in her home office.
On Form 4562 attached to her 1991 return, petitioner claimed
a section 179 expense deduction for a computer and printer,
telephone, and camera. According to the Form 4562, the cost
basis of the computer and printer was $3,700 and the cost basis
of the camera and telephone was $800.
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Section 179(a) allows a taxpayer to elect to expense, in the
year placed in service, the cost of section 179 property.
Section 179 property includes any tangible property (to which
section 168 applies) which is section 1245 property which is
acquired for use in the active conduct of a trade or business.
Sec. 179(d)(1). Section 1245 property includes personal
property. Sec. 1245(a)(3). Section 280F(d), however, provides
that an employee may not claim a section 179 deduction for
"listed property" unless the employee's use of the listed
property is for the convenience of the employer and required as a
condition of employment. In addition, the strict substantiation
requirements of section 274(d) must be met with respect to listed
property. Listed property includes any computer or peripheral
property. Sec. 280F(d)(4)(A)(iv). The camera and telephone are
not listed property.
The "convenience of the employer" and "condition of
employment" tests are essentially the same. United States Junior
Chamber of Commerce v. Commissioner, 167 Ct. Cl. 392, 334 F.2d
660, 663 (1964). In order to satisfy the condition of employment
requirement, the use of the property must be required in order
for the employee to perform the duties of his or her employment
properly. Sec. 1.280F-6T(a)(2)(ii), Temporary Income Tax Regs.,
49 Fed. Reg. 42701, 42713 (Oct. 24, 1984). Whether the use of
property is so required depends on all the facts and
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circumstances. The standard is an objective one. Dole v.
Commissioner, 43 T.C. 697, 706 (1965), affd. 351 F.2d 308 (1st
Cir. 1965). The employer need not explicitly require the
employee to use the property. Similarly, a mere statement by the
employer that the use of the property is a condition of
employment is not sufficient. Sec. 1.280F-6T(a)(2)(ii),
Temporary Income Tax Regs., 49 Fed. Reg 42701, 42713 (Oct. 24,
1984).
Because of her heavy caseload and the number of sales
representatives she managed, it was necessary for petitioner to
purchase a computer and printer. Petitioner used the computer
and printer to complete various reports she was required to
submit to her supervisors at Pacific Bell. Mr. Moreno testified
that sales managers could access information at home via modem
and that by using computers at home sales managers were able to
work efficiently and keep on top of the volume of work. Mr.
Moreno further testified that only third level management could
enter the building after hours and that petitioner was considered
second level management. Thus, petitioner was unable to use the
office computer after business hours. We find, based on the
facts and circumstances presented, that petitioner's purchase of
the computer and printer was for the convenience of her employer
and required as a condition of employment. Accordingly,
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petitioner is entitled to a section 179 deduction for the
computer and printer based on their cost of $3,689.
The purchase of the camera was, according to petitioner, for
the purpose of enhancing her performance as a sales manager for
Pacific Bell. Specifically, the camera was used to take pictures
for use in the clients' advertisements in the telephone
directory. Petitioner kept the camera locked in her desk at the
downtown office and the camera was used only in connection with
Pacific Bell advertisements. We conclude that the camera was
used exclusively for petitioner's business (as an employee) and
its purchase for $617.84 qualifies for a section 179 deduction.
As for the telephone, we do not believe that its purchase
was ordinary and necessary or that petitioner used the telephone
located in the home office only for business purposes.
Accordingly, petitioner is not entitled to a deduction for the
cost of the telephone.
Home-Office Deduction
In 1991, petitioner lived in an apartment in Glendale,
California. The apartment was approximately 900 to 1000 square
feet in size and consisted of two bedrooms, two bathrooms,
living room, kitchen, dining room, and hallway. Petitioner paid
rent of $1,030 per month for the apartment. Petitioner used the
smaller bedroom, which was about one fifth of the apartment, as
an office. Petitioner worked in her home office during the
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evenings and weekends; however, she had no set routine concerning
the use of the office. Pacific Bell did not require sales
managers to have a home office. However, Pacific Bell preferred
them to have a home office if it promoted time management,
enabled managers to access information to better coach the sales
representatives, and to keep on top of the volume of work. On
Schedule A, petitioner claimed a deduction for a home office of
$3,900.
Section 280A, in general, denies deductions with respect to
the use of a dwelling unit that is used by the taxpayer during
the taxable year as a residence. Section 280A(c) permits the
deduction of expenses allocable to a portion of the dwelling unit
that is exclusively used on a regular basis as "the principal
place of business" for any trade or business of the taxpayer.
Sec. 280A(c)(1)(A). Section 280A(c) further provides that, in
the case of an employee, deductions are allowable only if the use
of the dwelling is for the convenience of the employer.
Since petitioner was an employee, she must satisfy two tests
in order to qualify for the home-office deduction. She must
establish (1) that her home office was her principal place of
business, and (2) that she maintained the office for the
convenience of her employer. In deciding this case, the Court
must employ the definition of "principal place of business" as
set forth in Commissioner v. Soliman, 506 U.S. 168, 174 (1993).
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The term "principal place of business" means not merely an
important or necessary place of business, but the "most
important, consequential, or influential" one. Id. This inquiry
requires a consideration of the relative importance of the
activities performed at each location and the relative amount of
time spent at each location. Id. at 175.
On this record, we conclude that petitioner's home office
was not her principal place of business. Rather, we conclude
that petitioner performed the bulk of her work-related activities
at her downtown office. In addition, petitioner performed
substantial work at satellite offices and at offices of
customers. Accordingly, we conclude that petitioner's home
office was not her principal place of business. Petitioner,
therefore, is not entitled to a home-office deduction under
section 280A.
Accuracy-Related Penalty
Respondent determined that petitioner was liable for the
accuracy-related penalty under section 6662(a).
Petitioner's return was prepared by John D. Stoller, a
certified public accountant. Petitioner gave Mr. Stoller the
receipts for the camera, telephone, and computer and printer.
Petitioner also gave him receipts and canceled checks related to
the home-office deduction and her parking expenses. She
explained to him the circumstances related to parking at the
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downtown office. In addition, petitioner gave Mr. Stoller a
sheet of paper on which she had compiled the information from her
daily calendar relating to her meals expenses.
Pursuant to section 6662(a), if any portion of an
underpayment of tax is due to negligence or disregard of rules or
regulations, the taxpayer is liable for an amount equal to 20
percent of the portion of the underpayment attributable to such
negligence or disregard of the rules and regulations.
"Negligence" includes 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). Petitioner has the burden of proof on
this issue. Bixby v. Commissioner, 58 T.C. 757, 791 (1972).
If a taxpayer relies in good faith upon the advice of a
competent and experienced accountant in the preparation of the
taxpayer's return, the addition to tax for negligence or the
intentional disregard of rules or regulations is not applicable.
Sec. 6664(c); Weis v. Commissioner, 94 T.C. 473, 487 (1990). To
show good faith reliance, the taxpayer must show that the return
preparer was supplied with all the necessary information and the
incorrect return was a result of the preparer's mistakes. Pessin
v. Commissioner, 59 T.C. 473, 489 (1972).
After careful review, we conclude that petitioner did not
provide Mr. Stoller with all of the necessary information to
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prepare her return. Specifically, she did not advise him about
the reimbursement policy regarding parking, she did not have
substantiation for meals expenses in excess of what we have
allowed herein, and she possibly failed to follow up on the
reimbursement for the contest prizes. Moreover, she has not
proven that she fully apprised him of the facts concerning the
home-office deduction and the purchase of the telephone. To that
extent, petitioner is liable for the accuracy-related penalty
under section 6662(a). To reflect the holdings of this Court,
Decision will be
entered under Rule 155.