T.C. Summary Opinion 2005-65
UNITED STATES TAX COURT
DANIEL A. AREGONI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2708-04S. Filed May 24, 2005.
Daniel A. Aregoni, pro se.
Kathleen C. Schlenzig, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent 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.
- 2 -
Respondent determined a deficiency in petitioner’s Federal
income tax of $3,319 for the taxable year 2000.
The issue for decision is whether petitioner is entitled to
deduct $26,385 for job expenses and other miscellaneous
deductions.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
Chicago, Illinois, on the date the petition was filed in this
case.
Petitioner was a financial consultant who was employed by
Merrill Lynch, Pierce, Fenner & Smith (Merrill Lynch) during the
taxable year 2000. During the year in issue, Merrill Lynch had a
reimbursement policy which stated:
[petitioner] * * * [is] entitled to be reimbursed for
certain limited expenses, but * * * [is] also expected to incur
expenses necessary to the job for which he would not be
reimbursed. Such expenses, ordinary in this business,
include travel and transportation, as well as promotional
and entertainment expenses, incurred in calling on customers
of Merrill Lynch for the purpose of creating sales through
investment discussions.
During taxable year 2000, petitioner requested reimbursement for
expenses of $4,866.38 incurred in furtherance of his job.
Merrill Lynch reimbursed petitioner for all of the requested
- 3 -
expenses.1 Petitioner did not request any further reimbursement
from Merrill Lynch during taxable year 2000. Petitioner’s
employment at Merrill Lynch was terminated in June of 2000.
Petitioner reported the following job expenses and other
miscellaneous deductions on line 23 of Schedule A, Itemized
Deductions, of his Federal income tax return for the taxable year
2000:
Description Amount
Form 2106-EZ $43,038
Tax preparation fees 350
Brokerage account fees 1,685
Depreciation 597
Total 45,670
On Form 2106-EZ, Unreimbursed Employee Business Expenses,
petitioner reported the following expenses:
Description Amount
Parking fees, tolls, etc. $3,100
Travel expenses 27,159
Other business expenses 8,718
Meals and entertainment 4,061
Total 43,038
On statement 3 attached to petitioner’s return, petitioner
reported that the other business expenses consisted of the
following items:
1
One such expense reimbursed by Merrill Lynch appears to
have been requested for reimbursement twice by petitioner and was
actually reimbursed twice by Merrill Lynch.
- 4 -
Description Amount
Business telephone $3,420
Client gifts 2,248
Office supplies 2,725
Subscriptions 325
Total 8,718
Following an examination of petitioner’s 2000 return,
respondent issued a notice of deficiency disallowing job expenses
and other miscellaneous deductions of $45,670.
Discussion
As a general rule, the determinations of the Commissioner in
a notice of deficiency are presumed correct, and the taxpayer
bears the burden of proving the Commissioner’s determinations to
be in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). As one exception to this rule, section 7491(a) places
upon the Commissioner the burden of proof with respect to any
factual issue relating to liability for tax if the taxpayer
maintained adequate records, satisfied the substantiation
requirements, cooperated with the Commissioner, and introduced
during the Court proceeding credible evidence with respect to the
factual issue. We decide the issue in this case without regard
to the burden of proof. Accordingly, we need not decide whether
the general rule of section 7491(a)(1) is applicable in this
case. See Higbee v. Commissioner, 116 T.C. 438 (2001).
Moreover, deductions are a matter of legislative grace, and
the taxpayer bears the burden of proving that he or she is
- 5 -
entitled to the claimed deductions. INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). With these well-established
propositions in mind, we must determine whether petitioner has
satisfied his burden of proving that he is entitled to deductions
for job expenses and other miscellaneous deductions in excess of
the $19,285 conceded by respondent.
Section 162(a) allows a deduction for ordinary and necessary
business expenses paid or incurred during the taxable year in
carrying on any trade or business. For an expense to be
“ordinary” the transaction that gives rise to the expense must be
of a common or frequent occurrence in the type of business
involved. Deputy v. du Pont, 308 U.S. 488, 495 (1940). To be
“necessary” an expense must be “appropriate and helpful” to the
taxpayer’s business. Welch v. Helvering, supra at 113-114. The
performance of services as an employee constitutes a trade or
business. See sec. 1.162-17(a), Income Tax Regs. The employee
must show the relationship between the expenditures and the
employment. See Evans v. Commissioner, T.C. Memo. 1974-267. 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). Section 6001 and the regulations
promulgated thereunder require taxpayers to maintain records
sufficient to permit verification of income and expenses. As a
- 6 -
general rule, if the trial record provides sufficient evidence
that the taxpayer has incurred a deductible expense, but the
taxpayer is unable to adequately substantiate the precise amount
of the deduction to which he or she is otherwise entitled, the
Court 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, and allow the
deduction to that extent. Cohan v. Commissioner, 39 F.2d 540 (2d
Cir. 1930). However, in order for the Court to estimate the
amount of an expense, the Court must have some basis upon which
an estimate may be made. 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,
560-561 (5th Cir. 1957).
In the case of travel expenses, entertainment 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 substantiation requirements. Secs. 274(d),
280F(d)(4); Sanford v. Commissioner, 50 T.C. 823, 827-828 (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–-
- 7 -
(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. * * *
This 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
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). A contemporaneous
log is not required, but corroborative evidence to support a
taxpayer’s record of the elements of expenditure or use must have
- 8 -
“a high degree of probative value to elevate such statement and
evidence” to the level of credibility of a contemporaneous
record. Sec. 1.274-5T(c)(1), 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.
In this case, petitioner has attempted to substantiate his
expenditures through secondary and incomplete documentation. In
particular, petitioner offered credit card statements and a
reconstructed summary of his expenditures. Respondent reviewed
petitioner’s documents and, after performing a perfunctory
analysis, contends that most of the expenditures were for
transportation and entertainment. Respondent further contends
that the submitted documents do not meet the more stringent
requirements of section 274(d). Petitioner, on the other hand,
contends that all of the relevant expenditures represented by
these documents were incurred in connection with his financial
consulting business activity.
At trial, petitioner testified that the original documents,
which substantiate his claimed job expenses and other
miscellaneous deductions, are on his hard drive and in files at
Merrill Lynch. However, petitioner has not submitted those
- 9 -
documents in the record before this Court. Petitioner claims
that Merrill Lynch will not turn over the documents. Respondent
notified petitioner of the possibility of subpoenaing the
documents and continuing this case in an attempt to obtain them.
Petitioner did not avail himself of the opportunity either to
continue this case or to subpoena the alleged documents.
Moreover, petitioner testified that he could not explain, as
to each entertainment expenditure, who he met with or what the
expense was incurred for, and he could not explain as to airline
expenditures what was the objective of the trip or the
destination. As to the other claimed job expenses and
miscellaneous deductions, petitioner stated: “It’d be impossible
to give * * * the exact name and prospect” for each expenditure.
We have taken into consideration petitioner’s testimony and
incomplete records, and we conclude that petitioner failed to
satisfy the requirements of sections 162 and 274 as to any
expenditures in excess of the $19,285 respondent conceded.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.