T.C. Memo. 1998-193
UNITED STATES TAX COURT
SUSAN E. SHORES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3390-97. Filed May 26, 1998.
Audrey J. Orlando, for petitioner.
G. Michelle Ferreira, for respondent.
MEMORANDUM OPINION
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7443A(b)(3)1 and Rules 180,
181, and 182. Respondent determined a deficiency in petitioner's
1994 Federal income tax in the amount of $5,354.
1
All section references are to the Internal Revenue Code
in effect for the year in issue, unless otherwise indicated. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
- 2 -
The only issue for decision is whether petitioner is
entitled to deduct certain business expenses, which she claimed
on Schedule C of her 1994 return, in excess of the amounts
allowed by respondent.2
Background
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 filing the
petition, petitioner resided at Palo Alto, California. For
clarity and convenience, we have combined the findings of fact
and discussion of pertinent legal issues.
In March 1990, petitioner entered into an agreement with a
company named Au Pair In America (hereinafter APIA). The
agreement was titled "Community Counselor Letter of Agreement"
and provided in part that
The Community Counselor interviews potential Host
Families to evaluate their appropriateness for the
[APIA] Program, matches Host Families with Au Pairs,
has responsibility for a cluster of area Au Pairs
throughout the year's exchange and generally
facilitates the Host Family/Au Pair relationship.
2
Respondent's notice of deficiency also reduced
petitioner's total itemized deductions from $13,219 to $11,056
and increased petitioner's self-employment tax from $376 to
$1,219. The parties appear to agree that these adjustments are
dependent upon the other adjustments, and therefore, we do not
separately address them. To the extent that petitioner seeks an
abatement of interest (or review thereof), she must make such a
request to the Commissioner and await a final determination not
to abate interest. Sec. 6404(g); see Bourekis v. Commissioner,
110 T.C. 20, 27 (1998).
- 3 -
Petitioner described the APIA program as a "cultural,
educational, exchange program". APIA hired individuals such as
petitioner to recruit families for the program. APIA assigned
each community counselor a geographic area for recruitment of
families and performance of their responsibilities. Petitioner
was assigned the south bay area of San Francisco.
Petitioner recruited families for APIA through marketing the
program at job fairs, well baby classes, art festivals, and
advertising materials that she created. Petitioner provided
applications to the APIA program, counseled families on the
interview process, interviewed families that applied, and
communicated with the "headquarters" of APIA regarding the
"matching" of au pairs with families. Petitioner arranged the
travel plans for au pairs to meet families and provided an
orientation in a family's home before an au pair's arrival.
Petitioner met an au pair within 48 hours of arrival at a
family's home and maintained a close relationship with au pairs
that were matched with families she recruited.
During 1994, petitioner continued her activity with APIA
and also worked full time as a kindergarten teacher for
Ravenswood City School District. She taught at a school located
in Menlo Park, which was less than half a mile from her home.
Petitioner devoted 15 to 40 hours per week to her activity with
- 4 -
APIA, and she used a room in her home exclusively as an office
for this purpose.
Petitioner's 1994 Schedule C reflects "consultant" as her
principal business activity and "Au Pair in America" as the
business name.3 Shirley Gaman prepared petitioner's 1994 income
tax return. Petitioner gave Ms. Gaman her "checks and credit
card things, and receipts" and paid Ms. Gaman $200 for her
services. Ms. Gaman did not execute the return as preparer. Ms.
Gaman died at some point after preparation of the return.
Petitioner reported income and claimed expenses relating to
her "consultant" business during the year in issue as follows:
Income:
Gross receipts $17,260.00
Expenses:
Advertising $830.16
Car and truck expenses 2,600.24
Legal and professional services 300.00
Rent or lease:
Vehicles 480.32
Other business property 1,750.00
Repairs and maintenance 598.17
Supplies 1,429.28
Travel, meals, and entertainment:
Travel 1,940.00
Meals and entertainment 261.81
Utilities 1,742.80
Total expenses 11,932.78
Net (profit) 5,327.22
Petitioner also reported wages from employment unrelated to the
Schedule C activity in the amount of $41,859.49.
3
Respondent does not dispute that petitioner was self-
employed as a "consultant" for Au Pair In America.
- 5 -
Petitioner stored her business and tax records in a shed
behind the carport at her home. In the fall of 1995, a
combination of excessive rain and a leak in the carport caused
the destruction of petitioner's 1994 tax records and other
personal items in the shed. After the incident, petitioner
notified her insurance representative and her landlord about the
damage. In January 1997, after the issuance of the notice of
deficiency, petitioner began reconstructing her 1994 tax records.
Respondent determined that petitioner was not entitled to
deduct any of the claimed Schedule C expenses. Respondent does
not dispute that petitioner's records were destroyed because of a
casualty beyond petitioner's control. Further, respondent does
not appear to dispute that petitioner reasonably reconstructed
her records for 1994. Rather, respondent contends that
petitioner's expenses were not ordinary and necessary business
expenses.
Discussion
1. General
Section 162(a) provides that there shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business. "Necessary" has been interpreted to mean that the
expense must be appropriate or helpful to the taxpayer's trade or
business. Commissioner v. Tellier, 383 U.S. 687, 689 (1966);
Joseph v. Commissioner, T.C. Memo. 1997-447 (citing Welch v.
- 6 -
Helvering, 290 U.S. 111, 113 (1933)). To be an "ordinary"
expense, "the transaction which gives rise to it must be of
common or frequent occurrence in the type of business involved."
Deputy v. du Pont, 308 U.S. 488, 495 (citing Welch v. Helvering,
supra at 114). Whether an expense is "ordinary and necessary" is
generally a question of fact. Commissioner v. Heininger, 320
U.S. 467, 475 (1943); Walliser v. Commissioner, 72 T.C. 433, 437
(1979).
Section 6001 requires that a taxpayer liable for any tax
shall maintain such records, render such statements, make such
returns, and comply with such regulations as the Secretary may
from time to time prescribe. To be entitled to a deduction under
section 162(a), therefore, a taxpayer is required to substantiate
the deduction through the maintenance of books and records.
In the event that a taxpayer establishes that he or she has
incurred a deductible expense, but is unable to substantiate the
precise amount, we may estimate the amount of the deductible
expense. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930). We cannot estimate deductible expenses, however, unless
the taxpayer presents evidence sufficient to provide some
rational basis upon which estimates may be made. Vanicek v.
Commissioner, 85 T.C. 731, 743 (1985).
If an expense item comes within the parameters of section
274(d), we cannot rely on Cohan v. Commissioner, supra, to
estimate the taxpayer's expenses with respect to that item.
- 7 -
Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per
curiam 412 F.2d 201 (2d Cir. 1969). Section 274(d) imposes
stringent substantiation requirements for certain deductions,
including travel, entertainment, and meal expenses. Jeffers v.
Commissioner, T.C. Memo. 1986-285; sec. 1.274-5T(a), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Thus,
section 274(d) specifically proscribes deductions for travel or
entertainment expenses in the absence of adequate records or of
sufficient evidence corroborating the taxpayer's own statement.
See Joseph v. Commissioner, supra. Section 274(d) also applies
to business use of certain property such as passenger
automobiles. Secs. 274(d)(4), 280F(d)(4)(A)(i).
In general, when a taxpayer's records have been lost or
destroyed through circumstances beyond his control, he is
entitled to substantiate the deductions by reconstructing his
expenditures through other credible evidence.
At trial, respondent conceded: "The record has shown today
that the records--the receipts and invoices that have been
presented to the Government have been reconstructed in such a way
that they are essentially the same as they would have been, had
they not been destroyed".
2. Advertising
Petitioner claimed a deduction for advertising expenses in
the amount of $830.16. To obtain clients, petitioner was
required to advertise her services. Petitioner created
- 8 -
materials, including brochures. Petitioner also testified with
respect to additional advertising expenses. We found
petitioner's testimony credible. Therefore, we conclude that
petitioner is entitled to deduct $830.16 in advertising expenses.
Cohan v. Commissioner, supra.
3. Car and Truck
Petitioner claimed automobile expenses in the amount of
$2,600.24. Petitioner estimated the business use of her
automobile to be approximately 70 percent of the total use. We
accept petitioner's credible testimony in this regard.
Petitioner calculated the amount of $2,600.24 on the basis of her
actual expenses rather than mileage expenses in 1994. A taxpayer
must establish his out-of-pocket expenses attributable to the
business use of his automobile, such as gasoline, oil, and
repairs. Sec. 1.162-1(a), Income Tax Regs. Automobile expenses
are deductible if the automobile is used in connection with a
trade or business. Sec. 1.162-1(a), Income Tax Regs. Petitioner
testified that her activities with APIA required much local
travel, and she explained the nature of such activities.
A large portion of the gasoline expenditures was in cash.
Petitioner also produced some credit card statements in support
of her testimony to the extent gas purchases were made with
credit. Petitioner produced credit card statements, invoices,
and receipts with respect to the repairs performed on her car in
1994. Ms. Gaman prepared an attachment for petitioner's 1994
- 9 -
Schedule C that itemizes petitioner's actual expenses and
reflects an amount of $2,600.24. We conclude that petitioner is
entitled to the claimed deduction for automobile expenses in the
amount of $2,600.24.
4. Legal/Professional Services
Petitioner claimed a deduction for legal and professional
services in the amount of $300. Petitioner testified that she
wanted to engage in "aggressive marketing" in 1994. She met with
Luke Bailey and paid a consulting fee for his expertise in this
area. On the basis of the record, we conclude that petitioner is
entitled to a deduction in the amount of $300 for this service.
See Cohan v. Commissioner, supra; Vanicek v. Commissioner, supra.
5. Rent or Lease
Petitioner claimed a deduction for rent or lease of other
business property in the amount of $1,750. Petitioner further
claimed a deduction for rent or lease of vehicles, machinery, and
equipment in the amount of $480.32. Petitioner did not present
any evidence to establish that she is entitled to the claimed
expenditure. Thus, we sustain respondent's disallowance.
6. Repairs and Maintenance
Petitioner claimed a deduction for repairs and maintenance
in the amount of $598.17. Petitioner did not present any
evidence to establish that she is entitled to the claimed
expenditure. Thus, we sustain respondent's disallowance.
- 10 -
7. Supplies
Petitioner claimed a deduction for supplies in the amount of
$1,429.28. Petitioner presented copies of her canceled checks
and credit card statements and made notations on the statements
regarding the items purchased. For example, petitioner claims
that she purchased office supplies, such as copy machine paper,
pens, and a garbage can for her office. We conclude that these
items are deductible as ordinary and necessary business expenses.
Commissioner v. Heininger, 320 U.S. 467 (1943); Cohan v.
Commissioner, 39 F.2d 540 (2d Cir. 1930). Petitioner also
testified that she purchased personalized items for the au pairs,
such as "an American flag, or a little California flag."
Petitioner offered no further evidence to establish how these
items are ordinary and necessary to her business. Therefore, we
find that petitioner is not entitled to deduct these items as
supply expenses. On the basis of the entire record, we conclude
that petitioner is entitled to deduct $500 in supply expenses.
8. Travel
Taxpayers may deduct travel expenses, including expenses for
meals and lodging, that they incur while "away from home" if the
expenses are reasonable and necessary and bear a reasonable and
proximate relationship to the business activity. Kinney v.
Commissioner, 66 T.C. 122, 126 (1976); McKinney v. Commissioner,
T.C. Memo. 1981-181, modified T.C. Memo. 1981-377, affd. 732 F.2d
- 11 -
414 (10th Cir. 1983). If travel expenses are incurred for both
business and other purposes, the expenses are deductible only if
the travel is primarily related to the taxpayer's trade or
business. Sec. 1.162-2(b)(1), Income Tax Regs. If a trip is
primarily personal in nature, the travel expenses are not
deductible even if the taxpayer engages in some business
activities at the destination. Id. Whether travel is primarily
business related or personal is a question of fact. Sec. 1.162-
2(b)(2), Income Tax Regs.
Petitioner claimed a deduction for travel expenses in the
amount of $1,940. Petitioner presented copies of her credit card
statements and marked the items associated with her travel
expenses including airfare, rental car fees, and lodging.
Petitioner testified that her trips to Minneapolis, Seattle, and
Boston were in response to immediate concerns involving au pairs
and families at those locations and gave specific information
regarding the nature of the concerns associated with each trip.
Petitioner also deducted travel expenses for trips to St.
Croix, Puerto Rico, Disneyland, and Las Vegas. The fact that a
taxpayer engaged in business during a portion of the trip is not
sufficient to entitle the taxpayer to deduct travel expenses
absent a showing that business was the primary motive for the
trip. Reed v. Commissioner, 35 T.C. 199 (1960); Levine v.
Commissioner, T.C. Memo. 1987-413; sec. 1.162-2(b)(1) Income Tax
- 12 -
Regs. Petitioner offered no further evidence with respect to the
business purpose of these trips other than her testimony that the
trips served an educational purpose for the au pairs. We are not
satisfied that these trips were primarily related to petitioner's
trade or business.
On the basis of this record, we conclude that petitioner is
entitled to a deduction for travel expenses associated with her
trips to Minneapolis, Seattle, and Boston. Accordingly,
petitioner is entitled to a deduction of $911.64 for travel
expenses.
9. Meals and Entertainment
A taxpayer may deduct meal and entertainment expenses if
they are directly related to the active conduct of the taxpayer's
trade or business. Sec. 1.274-2(d)(1), Income Tax Regs. The
deduction for meal and entertainment expenses generally is
limited to 50 percent of the substantiated amount. Sec. 274(n).
Petitioner claimed she incurred meal and entertainment
expenses in the amount of $523.62. Petitioner provided canceled
checks and copies of her credit card statements for restaurant
meals and groceries. Petitioner testified that she incurred
expenses in entertaining au pairs and families either at
restaurants or at her home. We find petitioner's testimony
credible and detailed with respect to the business purpose of the
meals and the business relationship of the individuals
- 13 -
entertained. Petitioner testified that she kept a calendar for
these events, and the calendar was destroyed by water damage. On
the basis of this record, we conclude that petitioner is entitled
to a deduction in the amount of $262 for meal and entertainment
expenses.
10. Utilities (Home Office)
Petitioner deducted utility expenses in the amount of
$1,742.80. Section 280A, in general, disallows deductions with
respect to the use of a dwelling unit that is used by the
taxpayer during the taxable year as a residence. However,
section 280A(c) permits the deduction of expenses allocable to a
portion of the dwelling unit which is exclusively used on a
regular basis as "the principal place of business for any trade
or business of the taxpayer". Thus, to qualify under section
280A(c) for a home-office deduction, petitioner must establish
that a portion of her dwelling is (1) exclusively used, (2) on a
regular basis, and (3) as the principal place of business for her
trade or business. Hamacher v. Commissioner, 94 T.C. 348, 353
(1990). However, section 280A(c)(5) limits the amount of
deductions to the excess of the gross income derived from the use
of the home office over the deductions allocable to the home
office that are otherwise allowable.
The determination of the principal place of business depends
on the particular facts of each case. Commissioner v. Soliman,
- 14 -
506 U.S. 168, 175 (1993). Two primary considerations in deciding
whether a taxpayer may deduct costs of a home office are: (1)
The relative importance of the activities performed at each
business location, and (2) the time spent at each place. Id.
Other than testifying that she used a room in her home
exclusively as her main business office, petitioner presented no
evidence to establish either the nature of or the relative
importance of the activity performed at this location. Further,
petitioner did not establish how much time she spent in her
office. Therefore, we conclude that petitioner is not entitled
to a home office deduction.
11. Telephone
Petitioner also submitted copies of her telephone bills from
1994. Petitioner did not maintain a separate telephone line for
her business. We may estimate the deductible amount of
petitioner's telephone expenses. Laurano v. Commissioner, 69
T.C. 723, 727 (1978). Section 262(b) provides that the basic
local telephone service for the first telephone line to a
taxpayer's residence is a nondeductible, personal expense.
Petitioner testified that most of her long distance calls
were business related. Petitioner presented copies of her
telephone bills from 1994. In calculating her business expenses,
petitioner excluded amounts related to the basic local service.
On the basis of our best judgment, we find that petitioner is
- 15 -
entitled to a deduction in the amount of $450 for telephone
expenses. Id.
Petitioner did not claim any additional deduction for, or
present any other evidence to substantiate, expenditures for the
use of a home office.
12. Computer Cost
Although not claimed on her Schedule C, petitioner contends
that the $2,200 cost of the computer she purchased is deductible
under section 179. Petitioner offered a copy of her credit card
statement dated May 16, 1994, which indicates that she purchased
a computer for $2,200. Petitioner testified that she used the
computer exclusively for her business with APIA. On the basis of
this record, we find that petitioner purchased a computer for
$2,200 and used the computer solely for her activities with APIA.
Under section 179(a), a taxpayer may elect to treat the cost
of any section 179 property as an expense which is not chargeable
to capital account. Taxpayers electing to do so may deduct the
cost of such property in the taxable year in which the property
is placed into service. The aggregate cost which may be taken
into account under section 179(a) cannot exceed $17,500. Sec.
179(b)(1). Section 179(c)(1) provides that an election must:
(A) specify the items of section 179 property to
which the election applies and the portion of the cost
of each of such items which is to be taken into account
under subsection (a), and
(B) be made on the taxpayer's return of the tax
- 16 -
imposed by this chapter for the taxable year.
Such an election shall be made in such a manner as the Secretary
may by regulations prescribe.
Section 1.179-5(a), Income Tax Regs., provides that the
election under section 179
shall be made on the taxpayer's first income tax return
for the taxable year to which the election applies
(whether or not the return is timely) or on an amended
return filed within the time prescribed by law
(including extensions) for filing the return for such
taxable year. * * * [Emphasis added.]
Petitioner made no section 179 election for the computer on
her 1994 return or any amended return filed within the time
prescribed by law, including extensions, for filing her 1994
return. Alisobhani v. Commissioner, T.C. Memo. 1994-629; Subt v.
Commissioner, T.C. Memo. 1991-429. Thus, pursuant to section
1.179-5(a), Income Tax Regs., petitioner should have filed an
amended return no later than October 15, 1995 (assuming valid
extensions), in order for petitioner to have properly elected
section 179 treatment. Thus, petitioner is not entitled to an
expense deduction under section 179 for the computer. Starr v.
Commissioner, T.C. Memo. 1995-190, affd. without published
opinion 99 F.3d 1146 (9th Cir. 1996).
To reflect the foregoing,
Decision will be entered
under Rule 155.