T.C. Memo. 2004-180
UNITED STATES TAX COURT
GEORGE A. AND CHRISTINE M. EVAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1312-01. Filed August 3, 2004.
George A. and Christine M. Evan, pro sese.
Kathleen C. Schlenzig, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined deficiencies of $4,592
and $6,081 in petitioner George Evan’s (Mr. Evan’s) and
petitioner Christine Evan’s (Mrs. Evan’s) Federal income taxes
for 1997 and 1998 (years in issue), respectively. The issues to
be decided are: (1) Whether petitioners are entitled to
deductions for unreimbursed employee expenses claimed on Schedule
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A, Itemized Deductions, for the years in issue; and (2) whether
petitioners are entitled to deductions for expenses claimed on
Schedule C, Profit or Loss from Business, for the years in issue.
Unless otherwise indicated, all 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. Amounts are rounded to the nearest dollar.
FINDINGS OF FACT
Some of the facts have been deemed stipulated pursuant to
Rule 91(f) and are so found. The stipulation of facts and the
attached exhibits are incorporated herein by this reference. At
the time they filed the petition, petitioners resided in
Valparaiso, Indiana.
Mr. Evan obtained a bachelor of arts degree in economics and
business administration, a master of arts degree in economics, a
bachelor of business administration degree in management, and a
doctor of philosophy degree in management.
Mr. Evan taught business courses at Purdue University but
was denied tenure there in April 1991. Mr. Evan subsequently
received a Notice of Non-Renewal of Contract with Purdue
University on April 29, 1991. Mr. Evan’s employment with Purdue
University expired on June 30, 1992. Mr. Evan did not teach any
courses or provide any other services to Purdue University or any
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affiliate of Purdue University from January 31, 1992, through the
years in issue.
Mr. Evan became eligible for long-term disability benefits
from Purdue University on or about June 18, 1992. Mr. Evan
received benefits under this plan from June 18, 1992, through the
years in issue.
During the years in issue, petitioners had four children.
During this period, Mr. Evan was the primary caregiver for the
two youngest children.
On petitioners’ Federal income tax return for 1997, Mr. Evan
listed his occupation as “Professor”, and Mrs. Evan listed her
occupation as “Claims Authorizer”. Petitioners claimed a
deduction for Schedule A unreimbursed employee expenses of
$26,900, consisting of travel expenses, union and professional
dues, and professional subscriptions, but reported no wages from
Purdue University or any other source for any services performed
by Mr. Evan as a professor. The only wages reported were from
Mrs. Evan’s work with the Social Security Administration.
Mr. Evan organized the Center for Real Estate Services,
Inc., and was its sole employee. Neither Mr. Evan nor the Center
for Real Estate Services, Inc., listed, showed, sold, or
facilitated the sale of any real estate or received any
remuneration for listing, showing, selling, or facilitating the
sale of any real estate from January 31, 1992, through the years
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in issue. On their 1997 tax return, petitioners claimed a
deduction for Schedule C business expenses of $17,809, consisting
of advertising expenses, car and truck expenses, office expenses,
taxes and licenses, and travel expenses. Petitioners listed Mr.
Evan’s profession on the Schedule C as a “Licensed Real Estate
Broker & State Certified Appraiser”. Petitioners reported no
income on the Schedule C from any business activities.
On petitioners’ tax return for 1998, Mr. Evan listed his
occupation as “Professor”, and Mrs. Evan listed her occupation as
“Claims Authorizer”. Petitioners claimed a deduction for
Schedule A unreimbursed employee expenses of $31,445, consisting
of parking fees, tolls, transportation, travel expenses, business
expenses, union and professional dues, professional
subscriptions, and job search costs, but reported no wages from
Mr. Evan’s occupation as a professor. Petitioners reported wages
from Mrs. Evan’s employment with the Social Security
Administration. Petitioners also claimed a deduction for
Schedule C business expenses of $6,752, consisting of advertising
expenses, car and truck expenses, depreciation, office expenses,
expenses for supplies, and travel expenses. On the Schedule C,
Mr. Evan listed his principal business as “RE Broker, Appraiser”
but did not report any income from any business activities.
Mr. Evan did not have interviews scheduled for any of the
job-hunting trips for which petitioners claimed expense
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deductions on the Schedules A for 1997 and 1998. Further, before
departing for such trips, Mr. Evan did not make any effort to
determine whether the person with whom he desired to speak
regarding job opportunities would be available.
Petitioners did not own or operate a business during the
years in issue and were not self-employed during that period.
On October 23, 2000, respondent sent petitioners a notice of
deficiency for 1997 and 1998, disallowing, inter alia, the
itemized deductions for unreimbursed employee expenses and the
Schedule C business expenses for 1997 and 1998. Respondent
explained that the unreimbursed employee expenses “did not meet
the requirements for allowable job-hunting expenses” and “it has
not been established that these [Schedule C business expenses]
were ordinary and necessary trade or business expenses or
expended for the purpose designated.”
On January 22, 2001, petitioners mailed a petition to the
Court disputing the disallowances.1
On February 12, 2001, petitioners had a fire at their
residence, resulting in damages of over $500,000. Although
petitioners searched through the rubble to try to find the
records for 1997 and 1998, none were found. Petitioners did not
1
In the notice of deficiency respondent also disallowed a
portion of the medical expenses. Petitioners did not raise this
issue in the petition, and we deem it conceded. See Rule
34(b)(4).
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contact any third party in order to reconstruct the records for
1997 and 1998.
Because of the fire in petitioners’ residence and the damage
that resulted, the parties stipulated summaries of information
petitioners provided during respondent’s audit to support the
claimed expense deductions reported for 1997. These summaries
reported a description of each expense, the expense amount, and
the type of support that petitioners provided to respondent’s
auditor. The parties did not provide any summaries for 1998.
The summaries reported that in 1997 petitioners took at
least 60 job-hunting trips, mostly in Illinois, starting with
Augustana College in January 1997 and ending with University of
St. Francis in December 1997. Petitioners reportedly visited
each Illinois school in alphabetical order. For each school
visited in Illinois, petitioners reported a mileage of 180 miles
and $4 for tolls and parking.
The other expenses reported in the summaries for
petitioners’ Schedule A for 1997 included a fee for a basic
membership to the American Federation of Police, the cost of a
copy of “Wildlife”, the cost of a book titled “Eat Right Live
Longer”, a subscription to the “Men’s Health Book Service”, and
expense amounts for “Magazine/Newspaper” and “Books”.
The reported Schedule C expenses for 1997 which petitioners
supported with receipts to respondent’s auditor included
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advertising expenses, listed generally as “Postage” or “P.O. Box
Rental”; office expenses, also listed generally in categories
such as “Supplies”, “Computer Ware”, and “Telephone”; and a fee
to the Office of Banks and Real Estate, State of Illinois. The
summaries did not report the purpose of any of the expenses
listed.
OPINION
I. Burden of Proof
As a general rule, the Commissioner’s determinations are
presumed correct, and the taxpayer bears the burden of proving
that those determinations are erroneous. Rule 142(a). This
rule, however, is subject to the provisions of section 7491(a),
under which the burden of proof may, under certain circumstances,
be shifted to the Commissioner.
On the basis of the record, we hold that section 7491(a)
does not operate to place the burden of proof on respondent
because: (1) Petitioners did not introduce credible evidence
with respect to any factual issue relevant to ascertaining their
liability; (2) petitioners did not comply with the requirements
to substantiate their deductions; and (3) petitioners did not
maintain all records required. Sec. 7491(a); see Higbee v.
Commissioner, 116 T.C. 438, 440-441 (2001).
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Petitioners argue that they did provide credible evidence
and complied with the substantiation and record-keeping
requirements of the Code. We disagree.
The legislative history of section 7491 defines “credible
evidence” as “the quality of evidence which, after critical
analysis, the court would find sufficient upon which to base a
decision on the issue if no contrary evidence were submitted
(without regard to the judicial presumption of IRS correctness).”
H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-
995; see Higbee v. Commissioner, supra at 442. On the basis of
the record, we conclude that petitioners failed to meet this
standard.
Most of the expense deductions reported in the stipulated
summaries for 1997 were substantiated only by petitioners’ oral
or written testimony, which we deemed not credible, as discussed
below. Further, when records had been provided to respondent’s
auditor, petitioners did not submit credible evidence that the
purpose of the expenses was other than personal. We further note
that no summaries were provided for 1998.
After the fire in their residence, which occurred after
respondent’s audit and the issuance of the notice of deficiency,
petitioners searched through the rubble to try to find the
records for 1997 and 1998, but none were found. Petitioners did
not contact any third party to assist in the record
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reconstruction. As a result, we find that petitioners did not
offer into evidence a reasonable reconstruction of their
expenditures.
We conclude that petitioners did not introduce credible
evidence or comply with the substantiation and record-keeping
requirements of the Code, and the burden of proof does not shift
to respondent under section 7491(a).
II. Claimed Expenses
In the notice of deficiency, respondent disallowed
deductions for the reported expenses because petitioners did not
establish that the reported expenses were ordinary and necessary
trade or business expenses or expended for the purpose designated
and they did not meet the requirements for allowable job-hunting
expenses. Petitioners dispute these determinations and further
argue that expenses incurred by Mr. Evan as a professor are
deductible and the expenses have been substantiated by adequate
records. We address each of these arguments below.
A. Schedule C Expenses
On the Schedules C for 1997 and 1998, petitioners claimed
business expenses for advertising, car and truck expenses,
depreciation, taxes and licenses, office expenses, supplies, and
travel but reported no income on the Schedules C from any
business activities, specifically Mr. Evan’s profession as a real
estate broker.
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During the trial, petitioners stated that they did not own
or operate a business during the years in issue and that they
were not self-employed during that period.
Deductions are a matter of legislative grace, and a taxpayer
bears the burden of proving that he has complied with the
specific requirements for any deduction he claims. Rule 142(a);
see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Under section 162, a taxpayer may deduct all ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business. Sec. 162(a). Although the
term “trade or business” is not precisely defined in section 162
or the regulations promulgated thereunder, it is well established
that in order for an activity to be considered a taxpayer's trade
or business for purposes relevant here, the activity must be
conducted “with continuity and regularity” and “the taxpayer's
primary purpose for engaging in the activity must be for income
or profit.” Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).
On the basis of the record, we conclude that Mr. Evan was
not in the trade or business of real estate during the years in
issue, as reported on the Schedules C. We base this conclusion
on petitioners’ testimony that they did not own a business and
were not self-employed during the years in issue, and on the
record which reflects that Mr. Evan has been receiving long-term
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disability benefits since 1992 and that Mr. Evan was a primary
caregiver during the years in issue. The record reflects that
only Mrs. Evan was engaged in any income-producing activity
during the years in issue, and that she was employed rather than
self-employed in a business of her own. As a result, we conclude
that petitioners are not entitled to deductions for the Schedule
C business expenses under section 162(a) because neither Mr. Evan
nor Mrs. Evan was in a reported trade or business, or in a
Schedule C trade or business, during the years in issue.
B. Mr. Evan’s Employment Status
On brief, petitioners argue that the Schedule C expenses
should have been reported elsewhere on their tax returns,
presumably Schedule A, because, they argue, Mr. Evan was still an
employee of Purdue University. Petitioners argue that the
reported expenses relate to Mr. Evan’s trade or business as a
professor. Petitioners base their assertion on Mr. Evan’s
possession of a Purdue University identification card, dated July
23, 2003, which states: “This is to identify George E. Evan and
to extend the same staff privileges as those available to an
employee of Purdue University.”
There is no evidence on the record that would lead us to
agree with petitioners’ assertion that Mr. Evan was employed by
Purdue University during the years in issue. The identification
card only states that Mr. Evan is entitled to the privileges
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available to an employee of the university, not that Mr. Evan is
an employee. Further, the parties stipulated that: (1) Mr.
Evan’s employment with Purdue University expired on June 30,
1992; (2) Mr. Evan did not teach any courses or provide any other
services to Purdue University or any affiliate of Purdue
University from January 31, 1992, through the years in issue; and
(3) Mr. Evan received long-term disability benefits from the
university from June 18, 1992, through the years in issue. As a
result, we conclude that Mr. Evan was not an employee of Purdue
University during the years in issue, and, therefore, petitioners
are not entitled to a deduction for expenses claimed to have been
incurred in such employment.
C. Job-Hunting and Education Expenses
Petitioners argue that respondent erred in disallowing the
job-hunting and education expenses reported because they were
connected with Mr. Evan’s trade or business of being a professor.
We disagree.
The deductible expenses allowable under section 162(a)
include those incurred in searching for new employment in the
employee’s same trade or business. Cremona v. Commissioner, 58
T.C. 219, 222 (1972); Primuth v. Commissioner, 54 T.C. 374, 379
(1970). If the employee is seeking a job in a new trade or
business, however, the expenses are not deductible under section
162(a). Frank v. Commissioner, 20 T.C. 511, 513 (1953); Hobdy v.
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Commissioner, T.C. Memo. 1985-414; Evans v. Commissioner, T.C.
Memo. 1981-413. During temporary periods of unemployment, job-
hunting expenses can be considered and deducted as trade or
business expenses if the expenses are incurred during “a
reasonable period of transition” between leaving one position and
obtaining another. Haft v. Commissioner, 40 T.C. 2, 6 (1963);
see also Sherman v. Commissioner, T.C. Memo. 1977-301.
Education expenses may also be deductible trade or business
expenses under section 162(a) if the education for which the
expenses are made maintains or improves the skills required in
the taxpayer’s employment or other trade or business. Sec.
1.162-5(a), Income Tax Regs.
As relevant here, if unemployed, a taxpayer can still be
engaged in a trade or business if he was previously involved in
or actively seeks to return to that trade or business. Haft v.
Commissioner, supra. Amounts spent to prepare for the resumption
of business at some indefinite time are not deductible, and mere
membership in good standing in a profession does not constitute
carrying on of a trade or business. Reisinger v. Commissioner,
71 T.C. 568, 572 (1979) (citing Owen v. Commissioner, 23 T.C.
377, 381 (1954)). An important factor in determining whether a
taxpayer is still in a trade or business during a period of
unemployment is whether the taxpayer’s absence from the trade or
business is temporary or indefinite. See Haft v. Commissioner,
supra; Sherman v. Commissioner, supra.
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Mr. Evan could not prove with other than oral testimony that
he was actively seeking to return to the trade or business of
being a professor during the years in issue. Having observed
petitioners’ demeanors at trial, we do not find their testimony
to be forthright and credible in light of the evidence on the
record. The record reflects that: (1) Mr. Evan has not been
employed by Purdue University since June 30, 1992; (2) Mr. Evan
has not taught any courses or provided any other services to
Purdue University or any affiliate of Purdue University since
January 31, 1992; (3) Mr. Evan has received long-term disability
benefits from the university since June 18, 1992; and (4) Mr.
Evan was the primary caregiver for his youngest children during
the years in issue. Further, the parties stipulated that Mr.
Evan did not have interviews scheduled for any of the job-hunting
trips, and, before departing for such trips, Mr. Evan did not
make any effort to determine whether the person with whom he
desired to speak regarding job opportunities would be available.
We also note that 5 years had passed from the time of Mr.
Evan’s termination with Purdue University to the years in issue.
We do not find the length of time between Mr. Evan’s termination
and the reported job-hunting trips a “reasonable period of
transition” in light of the evidence on the record.
As a result, we conclude that Mr. Evan was not actively
pursuing a return to the trade or business of being a professor
and his absence from that trade or business was, at least,
indefinite. Because Mr. Evan was not in the trade or business of
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being a professor during the years in issue, petitioners are not
entitled to deductions for claimed expenses on the basis of a
job-hunting or education purpose.
D. Substantiation of Expenses
In any event, petitioners argue that the expenses were
substantiated with adequate records. We disagree.
Under section 162, a taxpayer may deduct all ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business if the taxpayer maintains
sufficient records to substantiate the expenses. Secs. 162(a),
6001; sec. 1.6001-1(a), Income Tax Regs. The taxpayer bears the
burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87,
90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). As a
general rule, no deductions are allowed for personal, living, or
family expenses. Sec. 262(a).
If a taxpayer has established that deductible expenses were
incurred but has not established the amount of those expenses, we
may estimate the amount allowable (Cohan doctrine). Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). There must be
evidence in the record, however, that provides a rational basis
for our estimate. Vanicek v. Commissioner, 85 T.C. 731, 742-743
(1985).
In the case of travel expenses and expenses paid or incurred
with respect to listed property, e.g., passenger automobiles,
section 274 overrides the Cohan doctrine, and expenses are
deductible only if the taxpayer meets the section’s stringent
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substantiation requirements. Secs. 274(d), 280F(d)(4); Sanford
v. Commissioner, 50 T.C. 823, 827 (1968), affd. 412 F.2d 201 (2d
Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985).
Section 274(d) specifically provides:
SEC. 274(d) Substantiation Required.--No deduction
or credit shall be allowed–-
(1) under section 162 or 212 for any
traveling expense (including meals and lodging
while away from home),
(2) for any item with respect to an activity
which is of a type generally considered to
constitute entertainment, amusement, or
recreation, or with respect to a facility used in
connection with such an activity,
(3) for any expense for gifts, or
(4) with respect to any listed property (as
defined in section 280F(d)(4)),
unless the taxpayer substantiates by adequate records
or by sufficient evidence corroborating the taxpayer’s
own statement (A) the amount of such expense or other
item, (B) the time and place of the travel,
entertainment, amusement, recreation, or use of the
facility or property, or the date and description of
the gift, (C) the business purpose of the expense or
other item, and (D) the business relationship to the
taxpayer of persons entertained, using the facility or
property, or receiving the gift. * * *
The section “contemplates that no deduction or credit shall be
allowed a taxpayer on the basis of such approximations or
unsupported testimony of the taxpayer.” Sec. 1.274-5T(a),
Temporary Income Tax Regs., supra.
In order to substantiate a deduction by means of adequate
records, a taxpayer must maintain a diary, log, statement of
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expenses, trip sheet, or similar record, and documentary evidence
which, in combination, are sufficient to establish each element
of each expense or use. Sec. 1.274-5T(c)(2)(i), Temporary Income
Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Thus, no deduction
for expenses under section 274(d) may be allowed on the basis of
any approximation or the unsupported testimony of the taxpayer.
See, e.g., Murata v. Commissioner, T.C. Memo. 1996-321; Golden v.
Commissioner, T.C. Memo. 1993-602.
When a taxpayer’s records have been destroyed or lost
because of circumstances beyond his control, however, he is
generally allowed to substantiate the deductions by a reasonable
reconstruction of the expenditures or uses. Sec. 1.274-5T(c)(5),
Temporary Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1987).
If no other documentation is available, we may, although we are
not required to do so, accept the taxpayer’s testimony to
substantiate the deduction. See Boyd v. Commissioner, 122 T.C.
305, 320 (2004); Watson v. Commissioner, T.C. Memo. 1988-29.
Having observed petitioners’ demeanors at trial, we find their
testimony not to be forthright and credible regarding the
substantiation of the deductions.
At trial, the Court advised petitioners on several occasions
that the purpose of the trial was for petitioners to substantiate
the deductions by placing facts on the record that the Court can
look to in rendering its decision. Other than the parties’
stipulations, petitioners failed to introduce further probative
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evidence at trial and presented only legal arguments to the
Court.
As noted above, because of the fire in petitioners’
residence and the damages that resulted, the parties stipulated
summaries of information provided by petitioners during
respondent’s audit to support the claimed expense deductions
reported for 1997. The parties did not stipulate any summaries
for 1998.
We find that the summaries are inadequate to substantiate
the claimed deductions. For example, we find petitioners’ use of
the same mileage and parking fee for each school visited and
their claim that they visited each school in alphabetical order
implausible. Also, as support for the travel expenses,
petitioners provided, for the most part, their own written and
oral testimony. For the few receipts that were provided for the
trips (most notably, two trips to Florida taken in mid-March and
late December), petitioners offered only testimony that the trips
were for the purpose of job-hunting or continuing education. We
find that petitioners’ proffered testimony does not qualify as
reasonable secondary evidence to replace that required by the
stringent record-keeping rules of section 274(d).
Petitioners argue that these expenses were necessary for Mr.
Evan to maintain and improve his skills as a professor and to
keep his real estate license active, a requirement for teaching
real estate and appraising. Although, according to the
summaries, petitioners did provide receipts for some expenses, we
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do not conclude that petitioners established that these expenses
were for anything other than “personal, living, or family”
purposes. See sec. 262(a). As concluded above, Mr. Evan was not
in a trade or business as a professor or real estate broker
during the years in issue. Mr. Evan was the primary caregiver
for his youngest children during the years in issue. As a
result, we conclude that the reported expenses for 1997 have not
been sufficiently substantiated and hold that petitioners are not
entitled to deductions for these expenses for 1997.
As noted above, the parties provided no summaries as to the
expenses reported for 1998, and petitioners provided no further
substantiation of these expenses on the record. Therefore, we
also hold that petitioners are not entitled to a deduction for
these expenses for 1998.
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we
conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be
entered for respondent.