T.C. Memo. 2000-230
UNITED STATES TAX COURT
JAMES M. NITSCHKE AND PATRICIA S. NITSCHKE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7586-99. Filed August 1, 2000.
James M. and Patricia S. Nitschke, pro sese.
Marty J. Dama, for respondent.
MEMORANDUM OPINION
DINAN, Special Trial Judge: Respondent determined a
deficiency in petitioners’ Federal income tax in the amount of
$1,508 for the taxable year 1995. Unless otherwise indicated,
section references are to the Internal Revenue Code in effect for
the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
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The issue for decision is whether petitioners are entitled
to deduct certain business expenses in excess of those allowed by
respondent. Some of the facts have been stipulated and are so
found. The stipulations of fact and the attached exhibits are
incorporated herein by this reference. Petitioners resided in
Fort Worth, Texas, on the date the petition was filed in this
case.
Petitioners received wage and business income from several
sources during 1995. Petitioner wife (Ms. Nitschke) worked as a
legal secretary for the law office of Haynes and Boone L.L.P.,
earning wages in the amount of $18,969. She also earned wages
from Shannon Gracey Ratliff and Miller DTD in the amount of $270.
Petitioner husband (Mr. Nitschke) worked for Duro-Test
Corporation, earning taxable wages in the amount of $32,933.84.
In addition, petitioners conducted three business activities for
which they filed Schedules C with their 1995 joint Federal income
tax return. The first was petitioners’ Melaleuca sales and
marketing business with a claimed loss of $13,342. The second
was Mr. Nitschke’s business as a musician with a claimed loss of
$3,994. The third was Ms. Nitschke’s business as a freelance
legal secretary with a reported profit of $4,741.
In the statutory notice of deficiency mailed January 21,
1999, respondent made the following adjustments to the respective
deductions claimed by petitioners:
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Claimed Adjustment Allowed
Melaleuca Business
Office expenses $3,232 ($3,232) $0
Supplies 885 585 1,470
Meals/Entertainment 1,638 (1,151) 487
Travel expenses 2,835 (1,681) 1,154
Other expenses 7,424 (2,794) 4,630
Musician Business
Advertising 257 4 261
Car/Truck expenses 2,132 (1,548) 584
Itemized Deductions
Miscellaneous 8,915 (197)1 8,718
The notice of deficiency stated that the various business
expenses were disallowed because it had not been established that
each amount “was for an ordinary and necessary business expense,
or was expended for the purpose designated.”
Section 162(a) allows a deduction for the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. Personal, living, and family
expenses, however, generally are not allowed as deductions. See
sec. 262.
A taxpayer is required to maintain records sufficient to
establish the amount of his income and deductions. See sec.
6001; sec. 1.6001-1(a), (e), Income Tax Regs. In the event that
a taxpayer establishes that a deductible expense has been paid
but is unable to substantiate the precise amount, we generally
may estimate the amount of the deductible expense, bearing
1
This adjustment was computational and is not disputed by
petitioners.
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heavily against the taxpayer whose inexactitude in substantiating
the amounts of the expenses is of his own making. See Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). We may
estimate deductible expenses only where the taxpayer presents
evidence sufficient to provide some basis upon which estimates
may be made. See Vanicek v. Commissioner, 85 T.C. 731, 742-743
(1985). Section 274(d) supersedes this general rule allowing
estimates, however, and provides that--unless the taxpayer
substantiates certain elements--no deduction shall be allowed
with respect to: (1) Traveling expenses under section 162,
including meals and lodging while away from home; (2) any item
with respect to an activity of a type considered to be
entertainment, amusement, or recreation; or (3) the use of any
listed property, as defined in section 280F(d)(4) to include
passenger automobiles, computers and peripheral equipment, and
cellular telephones. For an expense described in any of the
above categories, the taxpayer must substantiate by adequate
records or sufficient evidence to corroborate the taxpayer’s own
testimony: (1) The amount of the expenditure or use based on the
appropriate measure; (2) the time and place of the expenditure or
use; (3) the business purpose of the expenditure or use; and (4)
in the case of entertainment, the business relationship to the
taxpayer of each person entertained. See sec. 274(d); sec.
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1.274-5T(b), Temporary Income Tax Regs., 50 Fed. Reg. 46006 (Nov.
6, 1985).
Petitioners argue that sections 162 and 274(d) should not be
applied in this case because respondent did not raise these
issues during the audit of their return. Petitioners further
assert that the “substantiation issue” was not raised by
respondent until presented at trial. Subject to exceptions
inapplicable to this case, this Court does not look behind the
statutory notice of deficiency: A trial before this Court is a
proceeding de novo, and our determination as to a taxpayer's tax
liability is based upon the merits of the case. See Greenberg’s
Express, Inc. v. Commissioner, 62 T.C. 324, 327-328 (1974).
Furthermore, the notice of deficiency in this case specifically
stated that the various business expenses were disallowed because
it had not been established that each amount “was for an ordinary
and necessary business expense, or was expended for the purpose
designated.” This statement raises issues under both section
162(a)--whether the expenses were ordinary and necessary--and
section 274(d)--whether the expenses were properly substantiated,
i.e., whether petitioners established that the amounts were
expended for the purpose designated.
Petitioners also argue that the burden of proof in this case
should be shifted to respondent because petitioners presented
credible evidence with respect to factual issues. Although
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petitioners cite no authority with regard to this argument, we
assume they are referring to the recently enacted section 7491.
However, section 7491 only applies to court proceedings arising
in connection with examinations commencing after July 22, 1998.
See Internal Revenue Service Restructuring and Reform Act of
1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727. There is
nothing in the record which establishes that the examination in
this case commenced after July 22, 1998. We therefore find that
section 7491 does not operate to shift the burden of proof in
this case. Accordingly, the burden of proof is upon petitioner
to show respondent’s determinations to be in error. See Rule
142(a); Welch v. Helvering, 290 U.S. 111 (1933).
The first deductions at issue in this case relate to the
office expenses claimed in connection with petitioners’ Melaleuca
business. At trial, petitioners presented receipts and copies of
checks totaling $400 for office expenses. Petitioners claimed
$3,232 in office expenses on their return. The receipts were for
a computer printer and a cellular phone; because these are listed
property, see sec. 280F(d)(4)(iv), (v), these expenses are
subject to the provisions of section 274(d). In order to
substantiate the amount of expenses for listed property, a
taxpayer must establish the amount of business use and the amount
of total use for such property. See sec. 1.274-5T(b)(6)(i)(B),
Temporary Income Tax Regs., 50 Fed. Reg. 46006 (Nov. 6, 1985).
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Petitioners have failed to do this, and we therefore find that
they have not adequately substantiated these expenses and are not
entitled to these deductions. The copies of checks, in the total
amount of $140, were for the purchase of an armoire used to store
Melaleuca supplies and products. The copies of these checks
which were entered into evidence are not clear, but nothing
appears on them which indicates they were presented for payment.
We nevertheless accept petitioners’ testimony with regard to this
expense, and therefore hold that they are entitled to an
additional deduction in the amount of $140.
The next deductions at issue relate to the Melaleuca meals
and entertainment expenses. Petitioners presented 67 copied
pages of receipts and checks which contained sporadic notations,
for the most part providing only partial details, such as “Mela
mtg” or a person’s name. This substantiation does not meet the
requirements of section 274(d). Furthermore, we find the
receipts are not credible evidence. For example, one receipt was
copied twice, and the copies each had separate notations stating
meetings had occurred with two different persons. The notations
were nearly all made not on the receipt itself, but on the copy
of the receipt. Ms. Nitschke indicated in her testimony
concerning other receipts presented as evidence that the
notations were probably made at the end of the year. Even
accepting this testimony, and not concluding that petitioners
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made the notations in anticipation of trial, we find it unlikely
that petitioners could have accurately remembered the business
purpose and persons with whom they dined for these numerous
expenses--which included items such as fast food meals--for up to
a year beyond the date of the expense. Petitioners also
presented a summary of these meal and entertainment expenses,
listing amount, business purpose, time, location, and business
contact. The amount of expenses contained in the summary,
$2,352.73, does not match the amount of expenses claimed on the
return, $3,277. We do not accept this summary as substantiation
for the same reasons we do not accept the underlying receipts as
substantiation. We therefore uphold respondent’s determinations
with respect to these deductions.
The next deductions at issue relate to the Melaleuca travel
expenses. Petitioners presented receipts with a cover sheet
stating that travel expenses for 1995 totaled $4,467.
Petitioners claimed $2,835 of travel expenses on their return.
We find that this substantiation presented by petitioners also
does not meet the strict substantiation requirements of section
274(d) because the amount, time, place, and business purpose of
the expenses were not established. We therefore uphold
respondent’s determinations with respect to these deductions.
The next deductions at issue relate to the Melaleuca “other
expenses.” Petitioners presented 115 copied pages of receipts
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and other documents with a cover sheet stating that these
expenses totaled $10,247. Petitioners claimed $7,424 of expenses
on their return. The amounts claimed on their return and the
amounts petitioners asserted were substantiated at trial are as
follow:
Claimed Argued
on Return at Trial
Postage $1,108 $1,104
Copies/faxes 850 655
Training meeting 105 105
Convention fees 210 220
Convention merchandise 464 907
Business reports 90 169
Parking 82 82
Tolls/Food for home meetings 662 736
Bus charter to meeting 240 240
Tapes/Magazines/Books 1,691 2,160
Sales aides 1,042 2,830
Giveaways 880 1,039
7,424 10,247
We may estimate the amount of a deductible expense, but there
must be sufficient evidence in the record to permit the Court to
conclude that a deductible expense was incurred for the stated
purpose and at least in the amount estimated. See Williams v.
United States, 245 F.2d 559, 560 (5th Cir. 1957) (citing Cohan v.
Commissioner, supra). Many of the expenses in this category
appear likely to have been personal in nature, and petitioners
were unable to provide details regarding many of them. Thus,
petitioners have presented this Court with a number of receipts,
but have failed to give the Court any reasonable method to
determine which receipts were business, personal, or a
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combination of both, and which of the business expenses were
ordinary, necessary, and otherwise properly deductible under
section 162. Furthermore, a portion of the receipts in this
category are not credible evidence. For example, one receipt for
food was marked as having been incurred for a meeting that
occurred a day earlier, while another receipt for snack food was
marked as having been incurred for a meeting 3 months later.
Petitioner testified that these notations were made at the end of
the year, well after the expenses were incurred. Because the
evidence presented by petitioners is not fully credible, and
because petitioners have failed to provide a sufficient basis to
enable us to conclude that they are entitled to a deduction in
excess of the $4,630 deduction allowed by respondent in the
notice of deficiency, we uphold respondent’s determinations with
respect to these deductions.
The final deductions at issue in this case relate to the car
and truck expenses incurred in connection with Mr. Nitschke’s
musician business. Petitioners presented evidence purporting to
reflect 9,192 miles and, using $.30 per mile, $2,758 in expenses.
Petitioners claimed $2,132 in car and truck expenses on their
return. Because passenger automobiles and any other property
used as a means of transportation are listed property, see sec.
280F(d)(4)(i), (ii), these expenses are subject to the provisions
of section 274(d). Petitioners presented a purported mileage log
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and summary to substantiate the mileage. We find that this
evidence is not credible. Mr. Nitschke testified that he kept a
daily log in his vehicle, and that he would then on a daily basis
report the amount of mileage he incurred to his wife, who would
record this information in another log (the log presented as
evidence). We do not believe that petitioners would use this
method of recording mileage on a daily basis. Furthermore, the
mileage reflected in the log are often round numbers, and Mr.
Nitschke testified that he thought the mileage amounts were
“conservative numbers”. Both of these facts suggest that
petitioners’ purported log was in fact based upon estimates, and
was not created in the alleged manner. Because petitioners have
not presented credible substantiation for the mileage expense, we
uphold respondent’s determinations with respect to these
deductions.
To reflect the foregoing,
Decision will be entered
under Rule 155.