T.C. Memo. 2002-42
UNITED STATES TAX COURT
MICHAEL R. OLSEN AND SHEILA OLSEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5422-00. Filed February 12, 2002.
Michael R. Olsen and Sheila Olsen, pro sese.
Christian A. Speck, for respondent.
MEMORANDUM OPINION
DINAN, Special Trial Judge: Respondent determined a
deficiency in petitioners’ Federal income tax of $2,658, and an
addition to tax under section 6651(a)(1) of $495.25, for the
taxable year 1996. Unless otherwise indicated, section
references are to the Internal Revenue Code in effect for the
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year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
The sole issue for decision is whether petitioners are
entitled to various business expense deductions disallowed by
respondent.1 Petitioners resided in Sacramento, California, on
the date the petition was filed in this case.
During the year in issue, petitioner husband (petitioner)
received compensation of $31,358 from the United States Postal
Service and $800 from Zears Painting & Decorating, Inc. He also
received nonemployee compensation of $9,445 from Zears.
Petitioner wife received nonemployee compensation of $1,200 from
Joell’s Graphics. Also during this year, petitioners were
involved with Olray Corporation, which was engaged in motorcycle
repair. A Federal income tax return was filed for this
corporation for taxable year 1996, reporting gross receipts or
sales of $50,262 and a loss of $28,861. No compensation was
reported as paid to officers or employees on the corporation’s
return.
1
Respondent concedes the disallowance of a $5,589 itemized
deduction for casualty and theft losses. The applicability of
the sec. 6651(a)(1) addition to tax for failure to timely file a
return was not raised by petitioners as an issue either in the
petition or at trial. We note, however, that the record supports
respondent’s assertion of the addition to tax because the return
was signed on April 10, 1998, and stamped received by the IRS on
May 8, 1998. All of the adjustments otherwise unaddressed
(including the correct amount of the addition to tax) are
computational and will be resolved by the Court’s holding on the
issue in this case.
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Petitioners filed a joint Federal income tax return for
taxable year 1996. With this return, petitioners filed a
Schedule C, Profit or Loss From Business. This schedule named
petitioners as proprietors of a business (“the Schedule C
business”) engaged in “Mgt, Consulting, Estimating, Bkpr”.
Petitioners reported the following amounts on this schedule:
Gross receipts or sales $10,645
Cost of goods sold (500)
Expenses
Advertising $500
Bad debts 500
Car and truck 3,053
Depreciation 2,446
Insurance 250
Office 250
Rent or lease 1,500
Repairs and maintenance 2,000
Supplies 250
Utilities 240
Total expenses (10,989)
Loss (844)
No income was reported on the Schedule C as having been received
from Olray Corporation for services rendered by petitioners. In
the statutory notice of deficiency, respondent disallowed the
deductions for the car and truck, depreciation, and repairs and
maintenance expenses.
Petitioners argue that the Schedule C business was engaged
in a variety of business activities, one of which was making
deliveries for Olray Corporation. Petitioners testified that
they maintained separate office space on the premises of Olray
Corporation for conducting the activities of the Schedule C
business, and that the business ventures were separate and
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distinct. The only evidentiary support provided by petitioners
for the disallowed deductions relates to the activities conducted
for Olray Corporation.
Ordinary and necessary expenses incurred in carrying on a
trade or business generally are deductible by the individual
engaged in the trade or business. Sec. 162(a).
A taxpayer generally must keep records sufficient to
establish the amounts of the items reported on his Federal income
tax return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
However, in the event that a taxpayer establishes that a
deductible expense has been paid but that he is unable to
substantiate the precise amount, we generally may estimate the
amount of the deductible expense bearing heavily against the
taxpayer whose inexactitude in substantiating the amount of the
expense is of his own making. Cohan v. Commissioner, 39 F.2d
540, 543-544 (2d Cir. 1930). We cannot estimate a deductible
expense, however, unless the taxpayer presents evidence
sufficient to provide some basis upon which an estimate may be
made. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).
Section 274(d) supersedes the Cohan doctrine. Sanford v.
Commissioner, 50 T.C. 823, 827 (1968), affd. 412 F.2d 201 (2d
Cir. 1969). As relevant here, section 274(d) provides that,
unless the taxpayer complies with certain strict substantiation
rules, no deduction is allowable for expenses with respect to
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automobiles or other property used as a means of transportation.
Sec. 274(d)(4). To meet the strict substantiation requirements,
the taxpayer must substantiate the amount, time, place, and
business purpose of the expenses. Sec. 274(d); sec. 1.274-5T,
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
With respect to the use of automobiles, in order to establish the
amount of an expense the taxpayer must establish the amount of
business mileage and the amount of total mileage for which the
automobile was used. Sec. 1.274-5T(b)(6)(i)(B), Temporary Income
Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). The taxpayer may
substantiate the amount of mileage by adequate records or by
sufficient evidence corroborating his own statement. Sec.
274(d). A record of the mileage made at or near the time the
automobile was used, supported by documentary evidence, has a
high degree of credibility not present with a subsequently
prepared statement. Sec. 1.274-5T(c)(1), (2), and (3), Temporary
Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Petitioners’ exact relationship to the Olray corporation is
unclear: Although petitioner testified that he is the president
of the corporation, nothing indicates an employment role for
petitioner wife, nor was the ownership of the corporation
explained. The expenses at issue seem intricately tied to the
corporation; thus, it is unclear why petitioners claimed the
expenses as deductions on their individual income tax return
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rather than on the corporation’s return. We note that a
corporation is a separate legal entity, and an individual
generally may not claim deductions for expenses incurred by a
corporation. See Gantner v. Commissioner, 91 T.C. 713, 725
(1988), affd. 905 F.2d 241 (8th Cir. 1990). However, we need not
decide whether the deductions were those of the corporation (or
possibly employee business expenses) because we hold that
petitioners have not substantiated the expenses.
The evidence provided to support the deductions for the
expenses in issue is comprised of a summary showing mileage for
pickup and delivery of motorcycles, a summary of repairs and
maintenance on a truck, and a summary showing the costs
associated with a motorcycle for which petitioners claimed
depreciation expenses. All of the other evidence provided by
petitioners, as well as their testimony, helps to establish that
they were involved in the business of Olray Corporation but does
not provide adequate substantiation of any specific expenses.2
We find the mileage summary to be insufficient
substantiation under section 274(d) because the mileage amounts
were not entered at the time the vehicle was used and because
they were based on figures in a computer atlas database rather
2
Petitioners filed an amended Federal income tax return for
taxable year 1996, but the return was not accepted by respondent.
This return, which was introduced as evidence, merely contains
uncorroborated assertions by petitioners and does not provide
substantiation for any of the amounts in issue.
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than actual odometer readings. We find the summary of truck
repairs and maintenance to be insufficient substantiation because
the underlying records were not produced and because petitioners
have not shown the percentage of business versus personal use of
the truck as required by section 274(d). Finally, we find the
summary of motorcycle costs to be insufficient substantiation
because it was based solely upon recollection and was not
supported by other reliable evidence.
Because petitioners have not substantiated the amounts of
the expenses in issue, we sustain respondent’s disallowance of
the deductions therefor.
To reflect the foregoing,
Decision will be entered
under Rule 155.