T.C. Memo. 1996-308
UNITED STATES TAX COURT
HARRY T. CAVALARIS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 849-95. Filed July 9, 1996.
Richard Eugene Marsh, Jr., for petitioner.
Jeanne Gramling, for respondent.
MEMORANDUM OPINION
POWELL, Special Trial Judge: This case was assigned
pursuant to the provisions of section 7443A(b)(3) and Rules 180,
181, and 182.1
1
Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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Respondent determined deficiencies in petitioner's Federal
income taxes for the taxable years 1990 and 1991 in the
respective amounts of $4,946 and $6,665, and accuracy-related
penalties pursuant to section 6662(a) in the amounts of $989 and
$1,333, respectively. At the time of filing the petition,
petitioner resided in Charlotte, North Carolina.
The substance of the dispute focuses on the deductibility of
a large number of relatively small items. After concessions,2
the issues are: (1) Whether petitioner is entitled to certain
claimed unreimbursed employee business expense deductions for the
years in issue; (2) whether petitioner is entitled to certain
claimed charitable contribution deductions for the years in
issue; and (3) whether petitioner is liable for penalties
pursuant to section 6662(a) for the years in issue. Each issue
is discussed separately.
We note at the outset that deductions are a matter of
legislative grace and petitioner bears the burden of proving his
entitlement to and the amount of deductions. Rule 142(a); Welch
v. Helvering, 290 U.S. 111, 115 (1933). If the record provides
sufficient evidence to show that a taxpayer incurred a deductible
2
Respondent concedes that petitioner is entitled to
charitable contribution deductions, in excess of the amounts
allowed in the notice of deficiency, for the taxable years 1990
and 1991 in the amounts of $4,182 and $6,719, respectively.
Petitioner concedes that he is not entitled to deduct any portion
of a $55 expenditure ($38 of which was deducted) made for spa
services on August 13, 1990, as a charitable contribution.
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expense, but the taxpayer has failed to substantiate the precise
amount, in some situations the Court may estimate the amount of
the expense. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d
Cir. 1930). In so doing, our estimate may be weighted against
petitioner whose inexactitude is of his own making. Cohan v.
Commissioner, supra at 544. For ease of discussion, we have
combined our findings of fact and opinion with respect to each
issue.
Employee Business Expenses
For the past 20 years petitioner has been involved in real
estate and recreation businesses in Charlotte, North Carolina.
Petitioner owns between 25 and 50 percent of several businesses
(the corporations), organized primarily as S corporations, that
own and lease commercial real estate. The corporations' tenants
included three businesses that operate roller skating rinks, a
Family Dollar store, a Circle K gas station and convenience
store, and a BoJangles restaurant. Petitioner served as an
officer, typically secretary, in each of the corporations during
1990 and 1991. Petitioner received no compensation from the
corporations during 1990 or 1991 for his services as an officer
and employee. Petitioner also served as president of Skate
Palace, Inc. (Skate Palace), an entity that operates a roller
skating rink. Skate Palace leases the rink from Rex Annex
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Billiards, Inc., one of the corporations in which petitioner owns
an interest.
Petitioner performed many duties for the corporations
including: (1) Frequently visiting the properties for
maintenance or general supervision; (2) traveling to Skate Palace
to assist in the operations of the roller skating rink; and (3)
traveling to schools and radio stations to market the roller
skating rinks. In the course of performing these duties,
petitioner incurred traveling expenses, entertainment expenses,
and other expenses that were not reimbursed by the corporations.
Petitioner could have received reimbursement for these expenses
from the corporations, but he failed to ask.
On his 1990 and 1991 Federal income tax returns, petitioner
claimed miscellaneous itemized deductions in the amounts of
$12,831 and $11,629, respectively. These amounts primarily
represent what petitioner characterized as unreimbursed employee
business expenses incurred on behalf of the corporations. The
1991 miscellaneous itemized deductions include expenditures in
the amounts of $579 for tax return preparation fees and $25 for a
real estate license.
In the notice of deficiency, respondent disallowed
petitioner's 1990 and 1991 claimed unreimbursed employee expenses
in the amounts of $11,404 and $11,050, respectively. For the
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taxable year 1991, respondent disallowed the deductions for the
tax return preparation fees and the real estate license fee.
Section 162(a) allows a deduction for "all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business". An employee, however, is not
entitled to a deduction for an expense if the employee has a
right of reimbursement from his employer, because the employee's
expenditure is not "necessary". Heidt v. Commissioner, 274 F.2d
25, 28 (7th Cir. 1959), affg. T.C. Memo. 1959-31; Lucas v.
Commissioner, 79 T.C. 1, 7 (1982).
Petitioner is not entitled to deduct the expenses he
incurred as an employee under section 162. As we stated in Stolk
v. Commissioner, 40 T.C. 345, 356 (1963), affd. per curiam 326
F.2d 760 (2d Cir. 1964): "These charges were business expenses of
the * * * [corporations] and petitioner cannot convert * * * [the
corporate] expenses into his own by failing to claim repayment,
even though paid by him." See also Orvis v. Commissioner, 788
F.2d 1406 (9th Cir. 1986), affg. T.C. Memo. 1984-533; Coplon v.
Commissioner, 277 F.2d 534 (6th Cir. 1960), affg. T.C. Memo.
1959-34. Petitioner argues, in the alternative, that the
employee business expenses are deductible pursuant to section 212
as expenses incurred in his capacity as an investor. A
shareholder, however, is not entitled to a deduction from his
individual income for the payment of corporate expenses. Deputy
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v. du Pont, 308 U.S. 488, 494 (1940). We also note that
petitioner may face other bars to deductibility; for instance,
substantiation. It appears as if an automobile mileage log
allegedly prepared contemporaneously with petitioner's business
travel was actually prepared in preparation for litigation.
Accordingly, we hold for respondent with respect to the
deductions for unreimbursed employee business expenses.
Petitioner failed to introduce any evidence to show that he
renewed a real estate license in 1991, and there is no basis upon
which we can sustain a deduction for this expense.
Petitioner failed to substantiate the amount expended for
tax return preparation fees during 1991. A bill from the
accounting firm of Cherry, Bekaert & Holland indicated that
petitioner spent $599 during 1990 for the preparation of his 1989
tax return. Petitioner's 1990 tax return indicates that Cherry,
Bekaert & Holland also prepared this return. The return is
complicated and voluminous. Accordingly, it appears certain that
petitioner incurred tax preparation fees in 1991, and we allow
petitioner a deduction on his 1991 Federal income tax return in
the amount of $450 for tax return preparation fees. See Cohan v.
Commissioner, 39 F.2d 540 (2d Cir. 1930).
Charitable Contribution Deductions
Petitioner has been active in the Greek Orthodox Church for
many years. He served on the local parish board and later on the
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diocese board. Petitioner also served on the five-member
national executive committee of the St. Photios Foundation (St.
Photios). St. Photios is an organization established to maintain
a shrine honoring early Greek immigrants. St. Photios has
expanded and now hosts youth retreats, workshops, and seminars
featuring prominent speakers. St. Photios also houses the
mission program of the Greek Orthodox Church.
In addition to his other charitable activities, petitioner
has been active in the American Hellenic Educational Progressive
Association (AHEPA). AHEPA is a national organization created in
1922 to help Greek immigrants obtain citizenship, learn the
English language, and assimilate into society. Without
abandoning its original purpose, AHEPA has expanded and now
operates to preserve Hellenistic roots through cultural and
educational programs. AHEPA is organized on the local, district,
and national levels. Petitioner served on all three levels of
AHEPA's organization.
During 1990 and 1991 petitioner served on the diocesan
council for the Greek Orthodox Church, the national executive
committee of St. Photios, and as secretary and treasurer for the
AHEPA district lodge. Petitioner traveled extensively to various
organizational meetings and events. The locations of the
meetings included: Washington, D.C.; Atlanta, Georgia;
Knoxville, Tennessee; Baltimore, Maryland; Fort Lauderdale,
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Florida; Miami Beach, Florida; Richmond, Virginia; Jacksonville,
Florida; Virginia Beach, Virginia; Nassau, Bahamas; St.
Augustine, Florida; Montgomery, Alabama; Birmingham, Alabama;
Athens, Greece; and Istanbul, Turkey.
On his 1990 and 1991 Federal income tax returns petitioner
deducted charitable contributions in the amounts of $29,105 and
$40,603,3 respectively. The bulk of these amounts consisted of
unreimbursed expenses incurred during the above listed trips.
Petitioner asserts that these expenditures were incurred in the
process of providing services to the Greek Orthodox Church, St.
Photios, and AHEPA. Typically, the amounts claimed as expenses
for any given trip include airfare, lodging at a deluxe hotel,
meals, other travel expenses, and generous tips (occasionally
exceeding $100). Petitioner generally included, as an expense
for meals, the bill from an expensive lunch or dinner at which
petitioner treated numerous people attending the meeting. The
1990 figure includes a $1,000 deduction for clothing donated to
the Crossnore School.
In the notice of deficiency, respondent disallowed
charitable contribution deductions for the taxable years 1990 and
1991 in the amounts of $11,177 and $14,492, respectively. After
concessions, the amount of charitable contribution deductions in
3
The deduction claimed in 1991 was reduced to $37,074
pursuant to sec. 170(b), which limits the amount a taxpayer can
deduct as a charitable contribution for any taxable year.
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dispute involves only (1) the valuation of clothing donated to
Crossnore School, and (2) unreimbursed travel expenses claimed by
petitioner. Respondent does not dispute the tax exempt status of
any of the organizations involved.
1. Crossnore School Deduction
Section 170(a) allows a deduction for charitable
contributions. If the contribution is made in property other
than money, the amount of the contribution is the fair market
value of the property. Sec. 1.170A-1(c)(1), Income Tax Regs.
On his 1990 Federal income tax return petitioner claimed a
charitable contribution deduction in the amount of $1,000 for
clothing donated to Crossnore School. A handwritten list of the
items donated filled the majority of a sheet of looseleaf paper.
The items of greatest value on the list include eight three-piece
suits, four sport coats, one tuxedo, two overcoats, four pairs of
shoes (one new), one leather coat, and two pairs of lizard skin
boots. Respondent determined that the fair market value of the
property was $353.
Petitioner's testimony focused on the cost of some of the
items but, with the exception of the new shoes, no evidence was
introduced to show the condition or the fair market value of the
property. Accordingly, we conclude petitioner has failed to meet
his burden of proving that the fair market value of the donated
items was $1,000. On the other hand, we conclude that the value
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respondent placed on the donated items is low, and therefore,
find the value of the items donated to Crossnore School to be
$500. See Cohan v. Commissioner, 39 F.2d at 543-544.
2. Unreimbursed Travel Expenses
As previously noted, section 170(a) allows a deduction for
charitable contributions. Section 170(c) requires that a
charitable contribution, inter alia, be made "to or for the use
of" the charitable organization. No deduction is allowed under
section 170 for a contribution of services. However,
unreimbursed expenditures made incident to the rendition of
services to a charitable organization may constitute a deductible
contribution. Sec. 1.170A-1(g), Income Tax Regs. Allowable
deductions include transportation expenses and reasonable
expenses for meals and lodging necessarily incurred while away
from home. Id. The phrase "while away from home" has the same
meaning as when used for purposes of section 162. Id.
Therefore, a taxpayer's unreimbursed expenses for meals incurred
while rendering services are only deductible if the nature of the
travel requires the taxpayer to sleep or rest ("sleep or rest
rule"). See United States v. Correll, 389 U.S. 299 (1967);
Saltzman v. Commissioner, 54 T.C. 722, 725 (1970).
A taxpayer making a charitable contribution is required to
keep a canceled check, a receipt from the donee organization, or
other reliable written record showing the name of the donee, the
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date of the contribution, and the amount of the contribution.
Sec. 1.170A-13(a)(1), Income Tax Regs. The reliability of a
written record is to be determined based on all the facts and
circumstances of a particular case. Sec. 1.170A-13(a)(2)(i),
Income Tax Regs. Factors indicating that a written record is
reliable include the contemporaneous nature of the writing and
the regularity of the taxpayer's recordkeeping procedure. Id.
Travel expenses incurred by a person while rendering services on
behalf of a charitable organization are not subject to the strict
substantiation requirements of section 274(d). Sec. 274(d);
Francis v. Commissioner, T.C. Memo. 1988-226.
Respondent disallowed certain deductions claimed by
petitioner for unreimbursed travel expenses for the taxable years
1990 and 1991. According to the stipulation of facts, after
concessions, the amount of unreimbursed travel expenses at issue
for 1990 and 1991 are $5,859.94 and $9,400, respectively.
Respondent disallowed these deductions for one or more of the
following reasons: (1) Petitioner failed to substantiate the
deductions; (2) certain expenses were deducted twice; (3) certain
meal expenses are not deductible because they were not associated
with overnight travel; (4) some expenditures were lavish or
extravagant; (5) some expenditures were not necessary; and (6)
section 170(j) disallows the expenses from certain trips
involving personal pleasure, recreation, or vacation. Respondent
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has phrased many of these arguments generally, without reference
to specific deductions. We have considered these arguments with
regard to each deduction, but in the interest of brevity have
also chosen to speak generally whenever possible.
With respect to his charitable activities, petitioner
maintained fairly detailed records of his expenditures. While
traveling, petitioner collected receipts from each of his
expenditures and placed them in an envelope. If petitioner was
unable to obtain a receipt for an expenditure, he made a
contemporaneous notation of the expenditure. Upon returning from
a trip, petitioner would put the envelope containing the receipts
for that trip in a file marked with the name of the charitable
organization to which the trip related. This system ensured that
the name of the organization, the date (at least to within a few
days), and the amount of each expenditure was recorded.
Accordingly, we conclude, with the exception of items
specifically mentioned below, petitioner has substantiated his
charitable contribution deductions. In light of this conclusion,
and the volume of transactions at issue, we shall only address
those contentions about which there appears to be a genuine
dispute, and we hold for petitioner with respect to any of the
disputed deductions not specifically mentioned herein.
Respondent asserts that petitioner deducted several
expenditures twice. Specifically, respondent asserts that an
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expenditure in the amount of $1,116 paid by petitioner to finance
two banquets was allowed as a deduction for a trip to Birmingham,
Alabama, on May 29-31, 1991, and also claimed as a cash
contribution to the Diocese of Atlanta (see paragraphs 21 and 33
of the stipulation of facts and corresponding exhibits).4 Based
on our review of the relevant stipulation of facts and exhibits,
we conclude that the banquet expenses were claimed twice.
Accordingly, the $1,215 cash contribution to the Diocese of
Atlanta described in paragraph 21 of the stipulation of facts
must be reduced by $1,116. Additionally, respondent asserts that
several meal deductions relating to a trip to Washington, D.C.,
on July 7-12, 1990, were deducted as meal expenses and also
deducted as lodging expenses. A review of paragraph 14 of the
stipulation of facts and Exhibit 9 shows that expenses for
several meals totaling $67.695 were claimed twice. Accordingly,
we find $67.69 of the disputed meal expenses referred to in
paragraph 14 of the stipulation of facts should be disallowed.
4
The stipulation of facts sets forth the amount of
deductions claimed, allowed, and disallowed with respect to each
trip and the date of each trip. This information is voluminous
and unnecessary to an understanding of the issues; accordingly,
we have not reproduced it. However, in an effort to simplify the
parties' task of making computations under Rule 155, we have
referenced our discussion of the issues to the stipulation of
facts.
5
This amount is the sum of individual meals in the
amounts of $11.26, $4.73, $4.73, $36.25, and $10.72.
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On the morning of February 21, 1990, petitioner flew to
Atlanta, Georgia, for a diocese meeting. Petitioner returned to
his home in Charlotte, North Carolina, later that evening.
Because the trip did not require sleep or rest, petitioner is not
entitled to a deduction for meals on this trip. Accordingly, the
meal expenses claimed in the amount of $25, listed in paragraph
17 of the stipulation of facts, are not deductible. See United
States v. Correll, supra; Saltzman v. Commissioner, supra at 725;
sec. 1.170A-1(g), Income Tax Regs.
Respondent asserts that some expenses were lavish or
extravagant and that some expenses were not required to be paid
by petitioner. Both assertions raise the question whether the
expenses were reasonable and/or necessary. Section 1.170A-1(g),
Income Tax Regs., provides, in relevant part:
Similarly, out-of-pocket transportation expenses necessarily
incurred in performing donated services are deductible.
Reasonable expenditures for meals and lodging necessarily
incurred while away from home in the course of performing
donated services also are deductible.
A requirement of reasonableness is inherent in the concept of
necessary. Boser v. Commissioner, 77 T.C. 1124, 1133 (1981).
Thus, expenses for travel, meals, and lodging must be both
reasonable and necessary. With these guidelines in mind we turn
to petitioner's expenditures for meals, lodging, transportation,
and other travel expenses.
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Petitioner typically stayed at "deluxe" hotels during his
travels. For instance, on a trip to Baltimore, Maryland
(paragraph 9 of the stipulation of facts), petitioner stayed at
the Peabody Court at a rate of $180 per night. Similarly, on an
11-day AHEPA trip to Fort Lauderdale and Miami Beach, Florida
(paragraph 10 of the stipulation of facts), petitioner stayed at
the Sheraton Bonaventure Resort and Spa and the Doral Ocean Beach
Resort, respectively, incurring lodging charges of $1,602.69.
Respondent does not dispute the need for lodging on these or
similar trips, but rather the reasonableness of the expenditures.
While few would characterize petitioner's choices of
accommodations as frugal, they were generally convenient.
Petitioner often stayed at the hotel hosting the meeting he was
attending. When petitioner could not obtain a room at the hotel
hosting the meeting he would stay at a similarly priced hotel in
the vicinity. This practice saved petitioner additional travel
costs. In addition, petitioner held relatively prestigious
positions in large charitable organizations, such that staying in
quality lodgings may have been acceptable practice. Bearing in
mind that reasonableness is a relative term, we conclude that
petitioner's expenditures for lodging were reasonable.
Respondent also contends that expenses incurred for the
rental of a suite during a trip to Washington, D.C. (paragraph 14
of the stipulation of facts), in excess of the ordinary room
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charge should be disallowed because this expenditure was
unreasonable. We hold that the rental of a suite was reasonable
on this occasion because the travel at issue involved a week long
stay and petitioner used the suite as a meeting place at which
petitioner and officials of the Greek Orthodox Church could
discuss their affairs.
We reach a different conclusion with respect to certain
expenditures made by petitioner for tips6 during 1990.
Petitioner apparently had a habit of generously tipping hotel
employees, such as valets, bellboys, and maids. On separate 3-
day trips to Washington, D.C. (paragraph 8 of the stipulation of
facts), and Baltimore, Maryland (paragraph 9 of the stipulation
of facts), petitioner claimed a deduction of $100 per trip for
such expenses. On an 11-day trip to Fort Lauderdale and Miami
Beach, Florida (paragraph 10 of the stipulation of facts),
petitioner claimed deductions in the respective amounts of $260
and $80.99 for such expenses. Similarly, on a 4-day trip to
Richmond, Virginia (paragraph 11 of the stipulation of facts),
petitioner claimed a deduction in the amount of $200 for such
expense. We are cognizant of the fact that the defining
characteristics of a reasonable tip vary with the nature and
quality of the services provided. However, we regard the
6
On the four trips mentioned below petitioner listed the
expenses for tips as "misc." in the stipulation of facts.
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reasonableness of a tip as within the ambit of "experience with
the mainsprings of human conduct". See Commissioner v.
Duberstein, 363 U.S. 278, 289 (1960). We conclude that the
amount petitioner deducted as tips was in excess of a reasonable
amount, and, accordingly, allow $15 per day for such expenses on
each of these four trips.
We next consider whether any of the expenses claimed by
petitioner constitute nondeductible personal or living expenses
pursuant to section 262. Petitioner claimed $161.60 as a
deduction for expenses incurred for gratuities and taxes relating
to the purchase of a 4-day spa plan while on the 11-day Fort
Lauderdale/Miami Beach, Florida, trip (paragraph 10 of the
stipulation of facts). The actual cost of the spa plan was not
deducted. This expenditure was personal and unrelated to
petitioner's performance of charitable services.
On a trip to Atlanta, Georgia (paragraph 15 of the
stipulation of facts), petitioner deducted expenditures for
gasoline. Petitioner's receipts show that he filled the gas tank
before he left his home in Charlotte, North Carolina, and again
when he returned. The second tank of gas was used for
petitioner's personal affairs at home in Charlotte rather than
the trip to Atlanta. Accordingly, we sustain respondent's
disallowance of $15 of the amount claimed for gasoline on this
trip.
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Petitioner claimed a deduction of $100 for repairs to his
car incurred on a trip to Richmond, Virginia (paragraph 11 of the
stipulation of facts). Petitioner used his car for charitable,
business, and personal purposes. In order to deduct such an
expense petitioner must show that the repair was necessitated by
petitioner's charitable travel as opposed to his personal or
business travel. Orr v. United States, 343 F.2d 553, 558 (5th
Cir. 1965). Petitioner has failed to meet his burden of proof on
this matter, and, therefore, the $100 repair expense is not
deductible. See Smith v. Commissioner, 60 T.C. 988, 995 (1973).
Respondent contends that petitioner's expenditures for the
following items were not necessary: (1) Expenditures made for
the meals of others; (2) the rental of a limousine in Nassau,
Bahamas, to transport petitioner and other officials of AHEPA to
and from the airport; and (3) registration fees of others paid by
petitioner at an AHEPA conference in Virginia Beach, Virginia.
These three items involve the payment by petitioner of expenses
attributable to other individuals.
Petitioner argues that his payment for the expenses of
others are deductible on two grounds. First, petitioner argues
that these expenses are deductible pursuant to section 170(a)
because they were made "to or for the use of" a charitable
organization. Second, petitioner contends that the payments are
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deductible as unreimbursed expenditures incurred incident to his
rendition of charitable services.
The phrase "or for the use of" was added after the word "to"
in section 170(c) by Congress to allow a deduction for gifts made
in trust for a charitable organization or under a similar legal
arrangement. Davis v. United States, 495 U.S. 472, 485 (1990).
None of petitioner's expenditures were made in trust for a
charitable organization or under a similar arrangement. Thus,
for petitioner to prevail on his first argument, the expenditures
must have been made "to" a charitable organization. In order for
a payment to be considered as made "to" a charity, the charity
must have control over the funds donated. Davenport v.
Commissioner, T.C. Memo. 1975-369. However, a donor's assertion
that the charity would have spent the funds in the same manner
does not vest the charity with control; the charity must have the
ability to choose how the funds are spent. Id. In this regard,
"Charity begins where certainty in beneficiaries ends". Thomason
v. Commissioner, 2 T.C. 441, 443 (1943).
Petitioner, rather than the charitable organizations,
controlled the disposition of the funds expended for the meals of
others, the limousine, and the AHEPA conference registration
fees. Further, none of these expenditures were made at the
request of any of the charitable organizations. Therefore, the
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expenditures made by petitioner for other individuals do not
constitute payments "to" a charitable organization.
As noted above, section 1.170A-1(g), Income Tax Regs.,
allows a taxpayer a deduction for unreimbursed expenses incurred
incident to the rendition of charitable services. In Davis v.
United States, supra, the Supreme Court held that the taxpayers
were not entitled to deduct amounts paid to their sons to finance
the expenses of their sons' Mormon missions. In rejecting the
taxpayers' claim that the expenses were deductible as
unreimbursed expenses the Supreme Court noted that the taxpayers
did not render the services, their sons did. Id. at 487.
Petitioner's situation is slightly different, in that he did
independently render charitable services. Nonetheless, we
conclude the expenses paid on behalf of others are more
accurately characterized as nondeductible gifts made to specific
individuals rather than expenses incurred by petitioner incident
to his rendering of charitable services.
Petitioner cites Rockefeller v. Commissioner, 676 F.2d 35
(2d Cir. 1982), affg. 76 T.C. 178 (1981), Smith v. Commissioner,
60 T.C. 988 (1973), and McCollum v. Commissioner, T.C. Memo.
1978-435, for the proposition that a taxpayer may deduct payments
made for the expenses of others pursuant to section 1.170A-1(g),
Income Tax Regs. McCollum and Smith involved situations where
parents and their children incurred expenses while both rendered
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charitable services. This Court held that the parents could
deduct their own unreimbursed expenses and their childrens'
unreimbursed expenses. Both cases were distinguished by the
Supreme Court in Davis v. United States, supra, on the ground
that the parents were being assisted by their children in
rendering the services. Id. at 488. That is clearly not the
situation here.
Rockefeller v. Commissioner, supra, involved the question
whether certain incidental charitable expenses were deductible
under section 170(b)(1)(C) and (g) in effect during the years
1969, 1970, and 1971. These provisions are not involved in this
case, and the holding and reasoning in Rockefeller is inapposite.
We conclude, therefore, that petitioner is not entitled to deduct
expenditures made for meals, a limousine, and registration fees
attributable to other individuals, but we are left with the task
of discerning the portion of those expenses that related to other
individuals.
Petitioner deducted $300 on a trip to Virginia Beach,
Virginia, as registration fees (paragraph 24 of the stipulation
of facts), $175 of which related to registration fees of others
paid by petitioner. Accordingly, we hold petitioner is not
entitled to deduct $175 of these expenses.
Petitioner claimed $640 as a deduction for a limousine on
the Nassau, Bahamas, trip (paragraph 26 of the stipulation of
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facts). Petitioner rented the limousine to transport himself and
three other executives of AHEPA to and from the airport. Three-
fourths of this expenditure is attributable to other individuals
and is not deductible. However, respondent also asserts that the
rental of a limousine was not a reasonable expense. Petitioner
cites Denison v. Commissioner, T.C. Memo. 1977-430, for the
proposition that the rental of a chauffeur driven car may
constitute a deductible expense. Denison was decided under
section 162. We agree that in certain circumstances the rental
of a limousine may constitute a deductible expense under section
162, and we do not foreclose the possibility under section 170.
However, in Denison, the taxpayers established that the expense
benefited their business by impressing wealthy European clients.
Petitioner has not shown that the rental of the limousine in
Nassau benefited AHEPA, and, indeed, the expense has decidedly
personal overtones. See Seed v. Commissioner, 57 T.C. 265, 276
(1971). Accordingly, we hold the rental of a limousine as
transportation to and from an airport is not a reasonable expense
in the rendition of charitable services. Despite this
conclusion, petitioner is entitled to some deduction for
transportation to and from the airport. We will allow $40 of the
claimed $640 as a deduction for his transportation to and from
the airport in Nassau. Cohan v. Commissioner, 39 F.2d at 543-
544.
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The task of discerning petitioner's portion of each meal
expenditure is more troublesome because petitioner's testimony
regarding the number of people present at each meal is
incomplete. Further, simply knowing the number of people present
at a dinner does not necessarily provide a sufficient basis for
allocating the bill among them. Respondent allowed petitioner a
deduction for meal expenses equal to the standard allowance for
each trip. Based on our review of the record, we conclude that
petitioner purchased meals for others on the following trips:
Stipulation of Facts
Location Date Paragraph
Washington, D.C. Apr. 21-23, 1990 8
Baltimore, MD May 18-19, 1990 9
Richmond, VA Sept. 14-17, 1990 11
Washington, D.C. July 7-12, 1990 14
Knoxville, TN Nov. 23-26, 1990 18
Washington, D.C. May 10-13, 1991 23
Virginia Beach, VA June 13-15, 1991 24
Nassau, Bahamas Aug. 11-16, 1991 26
Washington, D.C. Sept. 27-29, 1991 27
Birmingham, AL May 29-31, 1991 33
In light of the evidentiary problems associated with the
allocation of meal expenses we adopt the standard allowance as a
reasonable approximation of petitioner's expenditures for his own
meals on the above listed trips. Accordingly, on trips on which
petitioner purchased meals for others, petitioner will be allowed
a deduction for meals (and banquet expenses) equal to the amount
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allowed by respondent in the stipulation of facts.7 On all other
trips, for which we conclude petitioner is entitled to a
deduction for travel expenses, petitioner is entitled to deduct
the amount claimed for meals as set forth in the stipulation of
facts.
Respondent contends that the expenses of certain entire
trips are not deductible because they involved elements of
personal pleasure, recreation, or vacation. Respondent
particularly takes issue with petitioner's trips to Virginia
Beach, Virginia; Nassau, Bahamas; Fort Lauderdale, Florida;
Athens, Greece; and Istanbul, Turkey. Respondent notes: (1) A
letter describing the activities planned for the Virginia Beach
AHEPA conference compared the trip to a "mini-vacation"; (2)
petitioner received a facial and massage while in Nassau; and (3)
petitioner enjoyed the use of a spa while in Fort Lauderdale.
The trips to Athens and Istanbul require more explanation.
Petitioner traveled to Athens on August 28, 1991 (first
trip); Athens and Istanbul on October 4, 1991 (second trip); and
7
In making their Rule 155 computations, the parties
should note: (1) We disallowed $67.69 of meal expenses relating
to the Washington, D.C., trip on July 7-12, 1990 (par. 14 of the
stipulation of facts) for duplication; (2) "meals" includes the
board dinner listed in par. 18 of the stipulation of facts; and
(3) respondent conceded a deduction of $1,116 for two "banquets"
relating to the Birmingham, AL, trip on May 29-31, 1991 (par. 33
of the stipulation of facts). Accordingly, as applied to the
Birmingham trip, the disallowance relates only to the item listed
as "meals".
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Istanbul on October 29, 1991 (third trip). Petitioner recounts
the reasons for these three trips (paragraph 34 of the
stipulation of facts) as follows. Centuries ago the Roman
Catholic Church and the Greek Orthodox Church split. Control of
the Greek Orthodox Church has since rested in Istanbul (formerly
Constantinople). The Patriarch of the Greek Orthodox Church is
the equivalent of the Pope to the Roman Catholic Church. Prior
to the first trip the Patriarch fell terminally ill. It became
apparent that a successor would have to be named. The Archbishop
of North and South America had the potential to ascend to the
position. Turkish citizenship is a prerequisite for becoming a
Patriarch. Unfortunately, the Archbishop's Turkish citizenship
had been revoked. Petitioner embarked on the first trip, a 7-day
stay in Athens, to petition the Turkish government to reinstate
the Archbishop's citizenship. The trip was unsuccessful. As
expected, the Patriarch passed away shortly after the first trip.
Petitioner took the second trip to attend the funeral of the
Patriarch. Finally, petitioner embarked on the third trip, as
the official representative of his diocese, to witness the
installation of the new Patriarch.
Respondent disallowed all the expenses of the first trip and
disallowed expenses for gifts, meals, and lodging on the second
trip. On the third trip, respondent disallowed only meal
expenses.
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Section 170(j) prohibits a deduction for, inter alia,
unreimbursed traveling expenses incurred incident to the
rendition of charitable services, "unless there is no significant
element of personal pleasure, recreation, or vacation in such
travel." The meaning of a "significant element of personal
pleasure, recreation, or vacation" is far from self-evident.8 An
inquiry into the legislative history of this provision provides
some insight. The House report states:
In determining whether travel away from home involves a
significant element of personal pleasure, recreation, or
vacation, the fact that a taxpayer enjoys providing services
to the charitable organization will not lead to denial of
the deduction. For example, a troop leader for a tax-exempt
youth group who takes children belonging to the group on a
camping trip may qualify for a charitable deduction with
respect to his or her own travel expenses if he or she is on
duty in a genuine and substantial sense throughout the trip,
even if he or she enjoys the trip or enjoys supervising
children. By contrast, a taxpayer who only has nominal
duties relating to the performance of services for the
charity, or who for significant portions of the trip is not
required to render services, is not allowed any deduction
for travel costs. [H. Rept. 99-426, 129 (1985).]
The example makes clear that the relevant inquiry is the extent
and duration of the charitable services provided by the taxpayer,
and not some quantum measure of pleasure derived by the taxpayer.
With this in mind we turn to the facts of this case.
With regard to petitioner's domestic travel and travel to
Nassau, Bahamas, a review of the evidence reveals that petitioner
8
There is some case law interpreting this phrase in the
context of sec. 213(d)(2)(B). See, e.g., Commissioner v. Bilder,
369 U.S. 499 (1962).
- 27 -
did not enjoy a "significant element of personal pleasure,
recreation, or vacation" within the meaning of the statute. The
exhibits often contain itineraries detailing the activities
scheduled at a particular conference. These itineraries
corroborate petitioner's testimony and, together, establish that
petitioner routinely spent a full day attending meetings or
otherwise providing services while attending conferences. The
Virginia Beach, Virginia, trip provides a good example. A letter
describing the activities scheduled during this AHEPA conference
indicated that golf and tennis tournaments were scheduled.
However, petitioner served on the national executive committee.
The letter shows that committee meetings lasted all day,
precluding participation in the recreational activities.
Accordingly, we conclude that section 170(j) does not prohibit
petitioner from deducting expenses related to his domestic travel
or his travel to Nassau, Bahamas.
We reach a different conclusion with regard to petitioner's
travel to Athens and Istanbul. Petitioner has provided no
evidence to establish the specific activities he undertook on
either the first or third trip. Regarding the third trip
petitioner asserts that he was an official representative of the
church, however, this in and of itself is not enough to satisfy
section 170(j). Therefore, we are unable to conclude that
elements of personal pleasure, recreation, or vacation did not
- 28 -
constitute a significant element of the first and third trips.
Petitioner provided an itinerary for the second trip showing the
activities he undertook while attending the funeral of the
Patriarch. However, petitioner has failed to establish that he
provided any charitable services while on this sojourn. We
conclude that petitioner attended the funeral as an observer. In
sum, we find that section 170(j) prohibits a deduction for the
traveling expenses incurred on petitioner's three trips to Athens
and Istanbul. Compare Seed v. Commissioner, 57 T.C. 265 (1971).
While the gifts petitioner made to the Greek Orthodox Church
on the second trip could be viewed as traveling expenses, they
may also be viewed as independent charitable contributions.
Thus, these expenses must be analyzed separately. Petitioner
claimed a deduction for gifts on the second trip in the amount of
$873. A review of the exhibits reveals that petitioner has only
substantiated $37.30 of this amount. The evidence consists of
two receipts, one for silver polish in the amount of $15.30 and
one for tequila in the amount of $22. Petitioner failed to
explain, and we fail to see, the usefulness of a bottle of
tequila to the Greek Orthodox Church. We conclude that the
tequila was, more likely than not, purchased for personal
consumption or as a nondeductible gift to a specific individual.
Accordingly, petitioner is entitled to a deduction in the amount
of $15.30 for gifts made on the second trip.
- 29 -
Accuracy-Related Penalties
Section 6662(a) imposes a penalty equal to 20 percent of any
portion of the underpayment attributable to, inter alia,
negligence or disregard of rules or regulations. Sec.
6662(b)(1). Negligence is defined as the lack of due care or
failure to do what a reasonable and ordinarily prudent person
would do under the circumstances. Neely v. Commissioner, 85 T.C.
934, 947 (1985). Negligence includes any failure to make a
reasonable attempt to comply with the law. Sec. 6662(c).
Failure to maintain adequate records constitutes negligence.
Schroeder v. Commissioner, 40 T.C. 30, 34 (1963); Johnson v.
Commissioner, T.C. Memo 1991-346, affd. without published opinion
8 F.3d 811 (3d Cir. 1993). Similarly, adopting a position that
lacks a reasonable basis constitutes negligence. Sec. 1.6662-
3(b)(1), Income Tax Regs. Disregard of the rules or regulations
includes any careless, reckless, or intentional disregard. Sec.
6662(c). Disregard of the rules or regulations is careless if
the taxpayer does not exercise reasonable diligence to determine
the correctness of a return position that is contrary to a rule
or regulation. Sec. 1.6662-3(b)(2), Income Tax Regs.
No penalty may be imposed under section 6662(a) for any
portion of an underpayment with respect to which the taxpayer
acted with reasonable cause or in good faith. Sec. 1.6664-4(a),
Income Tax Regs. The determination of whether a taxpayer acted
- 30 -
with reasonable cause or in good faith is made on a case-by-case
basis. Sec. 1.6664-4(b)(1), Income Tax Regs. Isolated
computational or transcriptional errors are not inconsistent with
reasonable cause and good faith. Id.
Generally, with respect to the portion of the understatement
attributable to petitioner's disallowed charitable contribution
deductions, petitioner's errors did not rise to the level of
negligence. With few exceptions, petitioner substantiated the
deductions claimed. The disallowance of many of the deductions
turned on the resolution of a difficult factual question, such as
valuation, reasonableness, or the meaning of "personal pleasure,
recreation, or vacation".
Despite our general finding, we conclude that petitioner was
negligent with respect to certain items deducted as charitable
contributions. The "sleep or rest rule" is well settled law.
Accordingly, we conclude petitioner carelessly disregarded the
rules and regulations by deducting $25 for meal expenses on a 1-
day trip in violation of this rule. The prohibition on the
deduction of personal expenses is equally well settled. We again
conclude petitioner carelessly disregarded the rules and
regulations by deducting personal expenses. This finding relates
to petitioner's deductions for gratuities and taxes attributable
to spa services and the extra tank of gasoline, discussed above.
We exclude from this finding the $100 petitioner paid for an auto
- 31 -
repair, because this deduction was disallowed as a result of
petitioner's inability to prove the repair was caused by
charitable use of the automobile, not a disregard of the rules or
regulations. We further conclude that the penalties should apply
to the disallowed portion of the expenditures made for "gifts" on
the second trip to Athens, Greece, and Istanbul, Turkey, because
the disallowance of this deduction related to petitioner's
failure to keep records and the attempt to deduct the cost of
tequila as a gift to the Greek Orthodox Church. Finally, we note
that we have not applied the penalties to the meal expenses that
were deducted twice, as these can be fairly characterized as
isolated transcriptional errors.
We sustain the penalties with respect to petitioner's
disallowed employee business expense deductions. Several grounds
existed to justify the disallowance of these deductions. In
addition, petitioner's substantiation left something to be
desired. The large majority of these deductions involved
traveling expenses. Petitioner made no attempt to establish the
business purpose for any of the deductions as required by section
274(d). Petitioner failed to specify the corporation to which
these expenses were attributable. Furthermore, a colloquy at
trial between respondent and petitioner revealed that
petitioner's travel log was patently erroneous and most likely
prepared in preparation for litigation. The log contained
- 32 -
numerous mileage entries that conflicted with mileage records on
auto repair bills. Moreover, the pagination of the mileage log
indicated that the entries in the 1991 log may have been written
prior to the entries in the 1990 log. Accordingly, we find
petitioner is liable for the penalties under section 6662(a) for
1990 and 1991 on the portion of the understatements attributable
to the disallowed unreimbursed employee business expenses.
Decision will be entered
under Rule 155.