T.C. Memo. 2005-97
UNITED STATES TAX COURT
JAMES M. AND KAREN K. BARTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8861-03. Filed May 3, 2005.
E. Rhett Buck, Jr., for petitioners.
W. Lance Stodghill, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KROUPA, Judge: Respondent determined a $6,713 deficiency in
petitioners’ Federal income tax for 2000. After concessions, we
are asked to decide whether petitioners substantiated the amounts
of automobile expenses and entertainment expenses they claimed as
unreimbursed business expenses of James Barton (petitioner). We
hold that they did not.
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Unless otherwise indicated all section references are to the
Internal Revenue Code in effect for the year at issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, accompanying exhibits, and stipulation
of settled issues are incorporated by this reference.
Petitioners resided in Houston, Texas, at the time they filed the
petition.
Petitioner was employed by Armko Industries, Inc. (Armko), a
roof system consulting firm, as a sales representative during
2000. Petitioner was responsible for consulting with clients,
predominantly school districts, regarding their roofing needs and
assisting them in overseeing the planning and implementation of
roofing projects. This included identifying the condition of the
current roof, developing specifications for the project, meeting
with local construction contractors who bid on the project, and
attending preconstruction meetings with the school district and
the contractors. Once construction began, petitioner documented
the progress and authorized payments to the contractors. When
the project was completed, petitioner prepared a list of items
that had to be remedied before the contractor would be paid and a
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warranty would be issued. A typical job lasted 3 months and
required petitioner to travel to the jobsite five times or more.
During 2000, petitioner’s clients were located in Texas and
Louisiana. Armko did not reimburse petitioner for expenses
related to his sales activities.
Petitioner claimed $l5,7411 of automobile expenses2 as
unreimbursed employee business expenses for 2000. He testified
that he daily maintained a mileage log by recording the odometer
reading for each sales call on the day that he made the sales
call, then transferred this information into a spreadsheet on his
personal computer because, as he testified, he wanted to have a
“more efficient paperless office.” Petitioner maintained no
other paper records for the business use of his automobile. The
mileage log contained entries that were inconsistent with and in
fact contradicted other evidence before the Court.3 For example,
there were numerous entries on the same day on both the flight
log and the mileage log that showed times and distances traveled
that could not have taken place on the same day. Petitioner
1
All dollar amounts are rounded to the nearest dollar.
2
Petitioner claimed 48,434 miles, at the standard mileage
rate of 32.5 cents per mile, as business purpose miles on Form
2106, Employee Business Expenses, for 2000. The standard mileage
rate for 2000 is set forth in Rev. Proc. 99-38, 1999-2 C.B. 525.
3
Petitioner submitted a flight log to substantiate expenses
he claimed involving his 1960 Cessna 182-C airplane. The parties
settled the Cessna airplane expense issue in the stipulation of
settled issues. Accordingly, we consider the flight log only as
it relates to petitioner’s automobile expenses.
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testified that he reconstructed significant portions of the
mileage log 2 years after the fact in preparing for trial.
Petitioner also claimed $2,4224 of meals and entertainment
expenses as unreimbursed employee business expenses for 2000.
Petitioner derived this number from the yearend summary statement
he received from a credit card company that grouped restaurant
and entertainment expenses together (master credit card summary).
Petitioner admitted that he did not use this account exclusively
for business purposes. The master credit card summary showed
$2,168 under the category “Restaurants” and $232 under the
category “Entertainment”.5 The master credit card summary listed
only the date, the name of the restaurant or other payee, and the
amount of the item. The master credit card summary did not list
the name of the business contact being entertained nor the
business purpose for the expense. Petitioner created another
document 6 months before trial, which was approximately 3-1/2
years after the fact, on which he listed the name of the person
with whom he dined, his business relationship with the person,
the name of the restaurant, the business purpose, and the amount
for each meal (reconstructed entertainment list). The total
4
This total amount of meals and entertainment expenses was
reduced by 50 percent. Sec. 274(n)(1)(A). Petitioner therefore
claimed $1,211 for meals and entertainment expenses for 2000.
5
There is a $22 difference between the sum of these two
amounts and the total meals and entertainment expenses petitioner
claimed. We assume this difference was a computational mistake.
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amount shown on petitioner’s reconstructed entertainment list was
$763. Petitioner failed to explain the discrepancy between the
$763 shown on the reconstructed entertainment list and the $2,422
he had claimed. Nor could petitioner explain multiple
discrepancies between the master credit card summary and his
reconstructed entertainment list.
Respondent disallowed the claimed expenses in a notice of
deficiency dated May 22, 2003, stating that petitioner had failed
to provide supporting information required to substantiate the
claimed expenses. Petitioners timely filed a petition for a
redetermination with this Court.
OPINION
This is a substantiation case in which we are asked to
decide whether petitioner may deduct automobile expenses and
certain entertainment expenses he incurred in 2000 as a sales
representative. We explain the deductibility rules and then
apply these rules to the facts. We begin with who has the burden
of proof.
Burden of Proof
Generally, the determinations of the Commissioner in a
deficiency notice are presumed correct, and the taxpayer has the
burden of proving the Commissioner’s determinations to be in
error. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115
(1933). The burden of proof may shift to the Commissioner in
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certain circumstances, however, if the taxpayer introduces
credible evidence and establishes that he or she substantiated
items, maintained required records, and fully cooperated with the
Commissioner’s reasonable requests. Sec. 7491(a)(2)(A) and (B).6
The burden does not shift to respondent under section 7491,
however, because we find that petitioner failed to provide
credible evidence, failed to substantiate the claimed expenses,
and failed to maintain adequate records. The burden therefore
remains with petitioner.
Moreover, deductions are a matter of legislative grace, and
the taxpayer bears the burden of proving that he or she is
entitled to any deduction claimed. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). A taxpayer is generally
permitted to deduct all ordinary and necessary expenses paid or
incurred in carrying on a trade or business. See sec. 162(a).
In contrast, no deduction is allowed for personal, living, or
family expenses. See sec. 262.
Substantiation Requirement
A taxpayer must substantiate amounts claimed as deductions
by maintaining the records necessary to establish that he or she
6
Sec. 7491 is effective with respect to court proceedings
arising in connection with examinations by the Commissioner
commencing after July 22, 1998, the date of enactment of the
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(a), 112 Stat. 726.
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is entitled to the deductions. Sec. 6001; Hradesky v.
Commissioner, 65 T.C. 87 (1975), affd. per curiam 540 F.2d 821
(5th Cir. 1976); sec. 1.6001-1(a), (e), Income Tax Regs. If a
taxpayer establishes that he or she paid or incurred a deductible
business expense but does not establish the amount of the
deduction, this Court may approximate the amount of allowable
business deductions, bearing heavily against the taxpayer whose
inexactitude is of his or her own making. Cohan v. Commissioner,
39 F.2d 540, 543-544 (2d Cir. 1930). For the Cohan rule to
apply, however, a basis must exist on which this Court can make
an approximation. Vanicek v. Commissioner, 85 T.C. 731, 742-743
(1985). Without such a basis, any allowance would amount to
unguided largesse. Williams v. United States, 245 F.2d 559, 560
(5th Cir. 1957).
Strict Substantiation
With respect to certain business expenses specified in
section 274(d), more stringent substantiation requirements apply.
No deduction may be allowed for expenses incurred for travel
expenses, specifically including meals and entertainment, and
“listed property”,7 unless the taxpayer substantiates certain
elements. Passenger automobiles are “listed property” under
section 280F(d)(4)(A)(i).
7
Listed property is defined in sec. 280F(d)(4).
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Under the strict substantiation requirements of section 274,
the taxpayer must substantiate the amount, time, and business
purpose of the expenditures and must provide adequate records or
sufficient evidence to corroborate his or her own statement.8
Adequate records are defined as a diary, a log, or a similar
record, and documentary evidence that, in combination, are
sufficient to establish each element of each expenditure or use.
Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg.
46017 (Nov. 6, 1985). To be adequate, a record must generally be
written and must be prepared at or near the time of the use or
expenditure. Sec. 1.274-5T(c)(2)(ii)(A), Temporary Income Tax
Regs., supra.
Moreover, the expenses subject to the strict substantiation
rules, such as entertainment expenses and passenger automobile
expenses, may not be estimated; i.e., section 274(d) overrides
the so-called Cohan doctrine. Sanford v. Commissioner, 50 T.C.
823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);
sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985); sec. 1.280F-6T(b)(2), Temporary Income Tax Regs.,
49 Fed. Reg. 42713 (Oct. 24, 1984). For these expenses, only
strict substantiation will suffice.
8
The taxpayer must substantiate by adequate records or by
sufficient evidence corroborating the taxpayer’s own statement:
(1) The amount of the expense; (2) the time and place of the
expense; (3) the business purpose of the expense; and (4) the
business relationship to the taxpayer of the persons involved in
the expense. Secs. 274(a), (d)(4); 280(F)(d)(4)(A)(i) and (ii).
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Against this background, we now analyze whether petitioner
satisfied the strict substantiation requirements of section 274
to allow him to deduct automobile expenses and meals and
entertainment expenses. Petitioner claims that he kept adequate
records and receipts to substantiate his automobile expenses and
his meals and entertainment expenses. Respondent argues that
petitioner failed to satisfy the strict substantiation
requirements because, among other reasons, petitioner failed to
maintain written records of each business trip and petitioner
failed to record the information contemporaneously with the
expenditures. We agree with respondent.
Automobile Expenses
Petitioner claimed $l5,741 of automobile expenses or 48,434
miles as business-related miles. To substantiate the claimed
automobile expenses, petitioner testified that he read the car’s
odometer each day and recorded the business mileage. Petitioner
then entered this information onto the mileage spreadsheet that
was introduced into evidence. The mileage spreadsheet listed the
trips petitioner took, the number of miles for each, and the
clients he visited on those dates. Petitioner introduced no
written documentation to corroborate these entries. Instead,
petitioner testified that he discarded all notes, records, or
other documentation in his quest to have a paperless office.
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We do not accept this mileage spreadsheet as reliable
evidence for several reasons. First, we are skeptical of the
number of miles, almost 50,000 in 1 year, that petitioner asserts
were solely business related. This car mileage, we note, is in
addition to miles petitioner flew on his private airplane. We
also find numerous inconsistencies between the spreadsheet and
other evidence before the Court. For example, petitioner
apparently drove to a location on the same day he claimed to have
flown there, and he claimed extensive mileage on days that he was
involved in flight training for his private airplane. Moreover,
petitioner testified that he substantially reconstructed the
mileage spreadsheet during respondent’s examination, which
occurred over 2 years after the year in issue. When petitioner
could not explain certain discrepancies respondent raised,
petitioner responded that he could not remember because the trips
had occurred so long ago. Also, petitioner’s testimony
supporting these expenses is vague and unclear. In petitioner’s
quest to have a paperless office, petitioner produced no
corroborating evidence other than his own self-serving testimony,
which we are not required to accept, and which we do not, in
fact, find to be credible. See Niedringhaus v. Commissioner, 99
T.C. 202, 219 (1992). Accordingly, we do not give any weight to
this mileage spreadsheet.
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In lieu of using the standard mileage rate, we can look to
the actual automobile expenses petitioner incurred in 2000. We
have similar concerns about the reliability of evidence in the
record to prove petitioner’s “actual” automobile expenses.
First, the master credit card summary showed $2,603 for “Auto
Services.” We note that petitioner testified that this account
was used for both business and personal expenses. We further
note that petitioner submitted no evidence to show which of these
automobile fuel expenses were for business rather than personal
use. The master credit card summary included a charge for car
fuel on February 26, 2000, when petitioner admitted that he and
his family were on vacation in San Francisco, California. In
addition, the Court learned that the “Auto Services” amount on
the master credit card summary included airplane fuel that
petitioner claimed and was allowed as an airplane expense.
In respondent’s opening brief, respondent conceded that
petitioner would be entitled to $1,884 of automobile expenses
rather than the $15,741 claimed. Although we did not find at
trial that petitioner satisfied the strict substantiation
requirements regarding the automobile expenses, we shall not
disturb respondent’s concession. Accordingly, petitioner is
entitled to an automobile expense deduction of $1,884 for 2000.
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Meals and Entertainment Expenses
We turn now to petitioner’s claim for meals and
entertainment expenses. Petitioner claimed $2,422 of meals and
entertainment expenses on the basis of the master credit card
summary, which reflected $2,168 under the category “Restaurants”
and $232 under the category “Entertainment.”
While the master credit card summary shows the name of the
restaurant (or payee), and the date and the amount spent, the
master credit card summary does not show the business purpose of
the activity or the name of the person entertained. In
attempting to substantiate the business purpose and the name of
the person entertained, petitioner prepared the reconstructed
entertainment list 3-1/2 years after the fact. Petitioner was
unable to testify as to whom he entertained in some instances.
We have the same concerns regarding the meals and
entertainment expenses that we had with the automobile expenses.
The account was used for both personal and business purposes.
There was no breakdown on the master credit card statement
between business and personal charges. The credit card company
simply lumped all charges to restaurants under the “Restaurants”
category. In addition, petitioner failed to explain which of the
expenses claimed were for business, not personal, purposes, and
petitioner failed to heed the Court’s advice to concede the
personal charges. Several charges appeared for various ski
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resorts and what appear to be uniquely personal charges. In
addition, petitioner could not explain the discrepancy between
the $763 shown on the reconstructed entertainment list and the
$2,422 he had claimed. Nor could petitioner explain multiple
discrepancies between the master credit card summary and his
reconstructed entertainment list. Moreover, petitioner failed to
produce receipts or any other corroborating evidence to comply
with the strict substantiation requirements of section 274(d).
Accordingly, we sustain respondent’s disallowing the meals and
entertainment expenses.
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.