Putnam v. Commissioner

T.C. Memo. 1998-285

UNITED STATES TAX COURT

STEVE D. PUTNAM, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 771-97. Filed August 5, 1998.

Carl M. Joerger, for petitioner.

Michael Salama, 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 1993

Federal income tax in the amount of $3,801. The sole issue for

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.
 - 2 -

decision is whether petitioner is entitled to deduct unreimbursed

employee expenses and miscellaneous expenses claimed on Schedule

A in the amount of $12,694.

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 he filed his

petition, petitioner resided in Manhattan Beach, California.

During the 1993 taxable year, petitioner was employed by

Texas Instruments (TI) as an outside field sales representative.

Petitioner was employed by TI from July 14, 1986, until January

4, 1994. As an outside field sales representative, petitioner’s

duties consisted of calling on the engineering and purchasing

groups of certain technical companies (hereinafter referred to as

customers). Petitioner was successful at his job by increasing

his sales every year and was voted “most valuable player” for the

years 1992 and 1993. Petitioner earned $86,176.56 in

compensation from TI in 1993.

Petitioner met regularly with customers to discuss business,

and frequently they would meet at restaurants. If petitioner

paid the restaurant bill, he would occasionally seek

reimbursement from TI. When seeking reimbursement from TI,

petitioner would fill out a form stating the date, time, amount

spent, nature of business, individuals present and with which
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business they are associated, name of restaurant, and purpose,

benefit, and nature of discussion. Petitioner mostly sought

reimbursement of business lunches and occasionally dinners. For

example, petitioner was reimbursed for 77 meals in 1993, and of

those, at least 8 were evening dinners and 7 took place on the

weekend.2

On his return, petitioner deducted amounts for meals that

were not reimbursed by TI. According to petitioner, his boss at

the time, Robert Fullerton (Mr. Fullerton), told petitioner that

TI would not reimburse for dinners, alcohol, or any weekend

expenditures, even though they were incurred with customers.

According to petitioner, Mr. Fullerton’s reasoning was that time

after work and on the weekend was considered the employee’s own

time.

Petitioner took customers out for numerous meals during his

own time. Petitioner presented copies of restaurant receipts

that he retained.3 Of roughly 46 receipts, most of the meals

were evening dinners, while about 5 were for weekday meals during

the day. Petitioner incurred expenses during his own time

2
This information was obtained from copies of credit card
receipts that petitioner turned in to TI for reimbursement. The
time of day is printed on certain receipts. We note that on 39
of the 77 receipts, the time of day was either not printed or was
illegible.
3
The copies were, in some instances, too difficult to
decipher.
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because it increased his sales. Petitioner did not explain why

he was granted reimbursement from TI for at least eight evening

meals and seven weekend meals, which were presumably on his own

time. Petitioner also did not explain why he did not seek

reimbursement for the five weekday lunches he claimed deductions

for.

Petitioner went with customers on two ski weekends to Aspen,

Colorado, and Mammoth, California. Petitioner bought meals and

lift tickets for the customers. On these trips and at some of

the meals, petitioner’s fiancee, Jodi Knox (Ms. Knox), was

present.

Twice during 1993, petitioner and Ms. Knox attended the

weddings of customers. The customers were also petitioner’s

friends. One wedding was in British Columbia, and the other was

in Baltimore, Maryland. For both weddings, expenses were

incurred for airfare, hotels, rental cars, and meals. Petitioner

deducted these expenses as unreimbursed business expenses.

Petitioner also deducted $167 for professional publications.

Petitioner subscribes to newspapers, allegedly so he can be

apprised of new companies and check the financial well-being of

existing companies in his territory.

Petitioner purchased a modem and motherboard for his home

computer. This enabled him to log into the TI database from

home. Petitioner was told that TI did not reimburse computer
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expenses because computers were available to TI employees in the

office. Petitioner deducted these computer-related purchases on

Schedule A.

Petitioner purchased birthday gifts for two of his

customers. During 1993, he purchased a gift certificate,

flowers, and merchandise from a ski shop for these customers.

These expenses were deducted by petitioner as business expenses.

None of petitioner’s 1993 expense reports were declined.

Petitioner did not submit any of the above-mentioned expenses for

reimbursement.

On his 1993 tax return petitioner claimed the following as

unreimbursed employee expenses: Travel $3,862, meals and

entertainment $4,225,4 and gifts $214. For other miscellaneous

itemized deductions, petitioner claimed a deduction of $214 for

computer services and $167 for professional publications.

Petitioner also claimed vehicle expenses and parking fees as

unreimbursed employee expenses in the amount of $5,201. However,

petitioner conceded at trial that he received a reimbursement for

auto expenses from TI in the amount of $5,588.27. While there

were numerous other expenses claimed, these were the only items

that were raised at trial by petitioner.5

4
The amount for meals and entertainment was reduced by
petitioner to $2,362 in a brief filed after trial.
5
Petitioner has the burden of proof concerning all
(continued...)
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At trial, respondent called as a witness Gloria Nero (Ms.

Nero), who is the asset accounting manager for TI. Ms. Nero

supervises employees whose responsibility it is to audit expense

statements of TI employees to see whether they conform to TI

policy. If they conform, they are submitted for payment, and the

employee who incurred the expense will be reimbursed. Ms. Nero

presented a copy of the reimbursement policy that was in effect

for 1993.

According to Ms. Nero and the reimbursement policy,

employees are reimbursed by TI for meals and entertainment,

travel, business gifts, alcohol purchases, and computer services.

It does not matter what time of day or which day of the week meal

expenses are incurred, so long as they are for a TI business

purpose and are ordinary and necessary.

Respondent contends that the expenses petitioner incurred

should not be allowed as unreimbursed business expenses, because

TI would have reimbursed petitioner if he had submitted an

expense report. Respondent also contends that if the expenses

were not allowed by TI, it is because the expenses are primarily

5
(...continued)
deductions that were disallowed. Rule 142(a). Petitioner
offered no testimony and introduced no evidence regarding the
other claimed deductions. We therefore find that petitioner
abandoned the remaining items, and those deductions will not be
allowed. Items that were not discussed include: Telephone,
business clothing and cleaning, dues, business expenses, cellular
phone, tax preparation, office supplies and postage, investment
income expense, and miscellaneous.
 - 7 -

personal expenditures and not ordinary and necessary costs of

doing business.

Discussion

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, 290 U.S. 111, 113-114

(1933). 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). An employee’s trade or

business is earning his compensation, and generally only those

expenses that are related to the continuation of his employment

are deductible. Noland v. Commissioner, 269 F.2d 108, 111 (4th

Cir. 1959), affg. T.C. Memo. 1958-60. Section 262 disallows

deductions for personal, living, or family expenses.

When an employee has a right to reimbursement for

expenditures related to his status as an employee but fails to

claim such reimbursement, the expenses are not deductible because

they are not “necessary”; i.e., it is not necessary for an

employee to remain unreimbursed for expenses to the extent he

could have been reimbursed. Orvis v. Commissioner, 788 F.2d

1406, 1408 (9th Cir. 1986), affg. T.C. Memo. 1984-533; Lucas v.
 - 8 -

Commissioner, 79 T.C. 1, 7 (1982); Kennelly v. Commissioner, 56

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 employee has the burden of establishing that the employer

would not reimburse the expense had the employee requested

reimbursement. 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.

During 1993, TI had a policy of reimbursing meals and

entertainment, travel, computer, and gift expenses incurred in

pursuit of company business. Petitioner never sought

reimbursement for the claimed expenses in 1993, and he has not

shown that reimbursement would have been denied for those

expenses that constituted ordinary and necessary business

expenditures.

Petitioner testified that similar expenses had been turned

down before 1993 by his boss, Mr. Fullerton. Petitioner did not

call Mr. Fullerton or another representative from TI to testify

in support of his claim, which raises the presumption that the

testimony would not have been favorable to petitioner. Wichita
 - 9 -

Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),

affd. 162 F.2d 513 (10th Cir. 1947). We have only petitioner’s

self-serving testimony, which is contradicted by the testimony

and evidence provided by Ms. Nero. Petitioner also had at least

eight evening meals and seven weekend meals reimbursed by TI

during 1993, which undermines his statements that evening and

weekend meals were not reimbursable.

Petitioner argues that by entertaining the customers he

increased his sales, which benefited TI. Nevertheless, the

deductions for valid business expenses properly belong to TI, not

petitioner. Kennelly v. Commissioner, supra.

Generally, the cost of a daily newspaper of general

circulation is a nondeductible personal expense. Sec. 262;

Wallendal v. Commissioner, 31 T.C. 1249, 1252 (1959). Petitioner

contends that he subscribed to the newspaper to read the business

page in order to check on new and existing companies. Petitioner

did not demonstrate that he subscribed to the newspaper solely or

principally for business purposes. Wallendal v. Commissioner,

supra. A general circulation newspaper clearly contains a

significant amount of information which is inherently of a

personal interest. Pollak v. Commissioner, T.C. Memo. 1984-597.

In sum, we find that petitioner is not entitled to deduct

the unreimbursed employee expenses or the miscellaneous expenses

claimed on Schedule A.
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Decision will be entered

for respondent.