T.C. Summary Opinion 2007-49
UNITED STATES TAX COURT
JAMES A. AND JOAN H. SOHOLT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 143-06S. Filed March 28, 2007.
James A. and Joan H. Soholt, pro sese.
Melissa Hedtke, for respondent.
KROUPA, Judge: This case was heard pursuant to the
provisions of section 74631 of the Internal Revenue Code in
effect at the time the petition was filed. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
All section and Code 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, unless
otherwise indicated.
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other court, and the opinion shall not be treated as precedent
for any other case.
Respondent determined a $3,360 deficiency in petitioners’
Federal income tax for 2003. After concessions,2 we are asked to
decide whether petitioners are entitled to deductions for various
expenses. We find that petitioners are entitled to deduct some
of the expenses they claimed on their returns.
Background
Some of the facts have been stipulated and are so found.
Petitioners resided in Minneapolis, Minnesota, at the time they
filed the petition.
Mr. Soholt’s Business Activities
Petitioner Mr. Soholt was a financial adviser and retirement
planner for Metropolitan Life Insurance Company (MetLife) in
2003. He provided financial advisory services and products to
various clients and groups. Mr. Soholt used his car to meet with
clients and prospective clients at locations convenient to them.
Sometimes he would take clients or prospective clients out for
coffee or a light meal or snack.
Mr. Soholt worked from a home office set up in the basement
that constituted approximately 18 percent of petitioners’ home
2
Petitioners concede that they are not entitled to deduct a
portion of their personal property taxes and that they are not
entitled to deduct expenses for professional publications.
Respondent concedes that petitioners are entitled to deduct their
expenses for continuing education and licensing.
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based on square footage. MetLife leased him a laptop computer
through which he could connect to the MetLife network from home.
The home office also included a desk, filing cabinets, and
storage space for marketing and informational materials.
Although Mr. Soholt kept a few de minimis personal papers in the
filing cabinets, the family living area was located on another
floor of the home, and the home office was not used for family
activities. Mr. Soholt insured the home office (including its
materials and equipment) against flood and other catastrophes.
Petitioners installed a second telephone line to the house for
Mr. Soholt to use for business. Mr. Soholt used calling cards to
dial clients long distance. He also had a cellular phone.
Petitioners subscribed to the Sunday Star Tribune. Mr.
Soholt read the business section each week to learn about
business news in the area and to be prepared in case a client
asked him a question about a particular news story. Both
petitioners read other sections of the newspaper for personal
reasons.
Mrs. Soholt’s Business Activities
Petitioner Mrs. Soholt was a flight attendant for Northwest
Airlines (NWA) during 2003. She was on sporadic leave from
January through May, however. The sporadic leave program,
instituted during the airline’s economic crisis brought on by the
2001 terrorist attacks, allowed NWA employees to take time off
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from work on a month-to-month basis without being fired or laid
off. Mrs. Soholt and the other employees in the sporadic leave
program could be recalled at any time. NWA recalled Mrs. Soholt
in June 2003, and she resumed her normal NWA duties, flying about
15 to 20 days per month for the remainder of the year.
Mrs. Soholt was assigned to reserve status on certain days.
Although she was not scheduled to fly on a reserve status day,
she could be summoned to fly if the airline needed her. NWA
required Mrs. Soholt to have a telephone and, when on reserve
status, to respond to phone calls within 20 minutes so that she
could get to the airport for the assigned flight.
Mrs. Soholt used the Internet from home periodically to
check her flight schedule and NWA e-mail as well as to submit
bids for future flight schedules. She subscribed to Compuserve
for this purpose because it was the only Internet service
provider NWA authorized. Mrs. Soholt periodically drycleaned the
uniforms NWA required her to wear.
Petitioners donated clothing and other items to charity and
also made cash contributions during 2003. Petitioners had a
growing family and periodically contributed items they no longer
needed to charity.
Petitioners’ Return
Petitioners claimed certain expenses on Form 1040, Schedule
A, Itemized Deductions, on their joint return for 2003. They
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claimed they were entitled to deduct charitable contributions as
well as unreimbursed employee business expenses. The
unreimbursed employee business expenses petitioners claimed
included expenses for the business use of their home, cell phone,
Internet, equipment, automobile, hospitality, insurance,
publications, telephone, and uniform cleaning.
Respondent examined petitioners’ return for 2003 and issued
petitioners a deficiency notice in which he disallowed many of
the expenses for lack of substantiation. Petitioners timely
filed a petition.
Discussion
This is primarily a substantiation case. The parties
resolved many of the disputed expenses before trial. We are
asked to determine whether petitioners are entitled to deduct the
remaining expenses. We begin by outlining basic fundamental tax
principles involving substantiation. First, the Commissioner’s
determinations are generally presumed correct, and the taxpayer
bears the burden of proving that these determinations are
erroneous.3 Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 84 (1992); Welch v. Helvering, 290 U.S. 111 (1933). Second,
deductions are a matter of legislative grace, and the taxpayer
3
Petitioners do not claim the burden of proof shifts to
respondent under sec. 7491(a). Petitioners also did not
establish they satisfy the requirements of sec. 7491(a)(2). We
therefore find that the burden of proof remains with petitioners.
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has the burden to prove he or she is entitled to any deduction
claimed. Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493
(1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934); Welch v. Helvering, supra. This includes the burden of
substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),
affd. per curiam 540 F.2d 821 (5th Cir. 1976).
A taxpayer must substantiate amounts claimed as deductions
by maintaining the records necessary to establish he or she is
entitled to the deductions. Sec. 6001; Hradesky v. Commissioner,
supra. The taxpayer shall keep such permanent records or books
of account as are sufficient to establish the amount of
deductions claimed on the return. Sec. 6001; sec. 1.6001-1(a),
(e), Income Tax Regs. The Court need not accept a taxpayer’s
self-serving testimony when the taxpayer fails to present
corroborative evidence. Beam v. Commissioner, T.C. Memo. 1990-
304 (citing Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)),
affd. without published opinion 956 F.2d 1166 (9th Cir. 1992).
We shall now proceed to consider whether petitioners are
entitled to deduct the claimed expenses, beginning with
petitioners’ charitable contributions of cash and property.
Charitable Contributions
Petitioners claimed they contributed $6,897 of cash to
charitable organizations in 2003, and respondent allowed all but
$232 based on receipts from donee organizations as well as
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canceled checks. Petitioners also claimed they contributed
property worth $3,492 to charitable organizations in 2003, and
respondent allowed $89.
Charitable contributions a taxpayer makes are generally
deductible under section 170(a). No deduction is allowed,
however, for any contribution of $250 or more unless the taxpayer
substantiates the contribution by a contemporaneous written
acknowledgment of the contribution by the qualified donee
organization.4 Sec. 170(f)(8)(A). The deduction for
contributions of property equals the fair market value of the
property on the date contributed. Sec. 1.170A-1(c)(1), Income
Tax Regs.
A taxpayer claiming a charitable contribution is generally
required to maintain for each contribution a canceled check, some
communication from the donee organization acknowledging receipt
of a contribution and showing the date and amount of the
contribution, or other reliable written records showing the name
of the donee, along with the date and amount of the contribution.
Sec. 1.170A-13(a)(1)(i) to (iii), Income Tax Regs.
4
There are now stricter requirements for contributions of
money. Sec. 170(f)(17). No deduction for a contribution of
money in any amount is allowed unless the donor maintains a bank
record or written communication from the donee showing the name
of the donee organization, the date of the contribution, and the
amount of the contribution. Id. This new provision is effective
for tax years beginning after Aug. 17, 2006. Pension Protection
Act of 2006, Pub. L. 109-280, sec. 1217, 120 Stat. 1080.
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We first consider petitioners’ cash contributions. They
were able to substantiate all cash contributions except $232.
They failed to introduce any receipts or canceled checks for the
remaining $232 cash contributions they claim they made in 2003.
Petitioners are therefore not entitled to deduct the additional
$232 for cash contributions.
We next turn to petitioners’ contributions of property.
Petitioners introduced receipts indicating they donated clothing
and other miscellaneous goods eight times in 2003. These
receipts do not list the specific items contributed and simply
note that petitioners donated a certain number of bags.
Petitioners also introduced a worksheet they prepared when
preparing their tax return that purports to list and value more
specifically the items petitioners contributed. Mr. Soholt
testified that petitioners estimated the value of the clothing
they donated at one-half the original cost but also admitted he
did not think used clothing was worth half as much as it was
worth new. Petitioners did not introduce any evidence supporting
their estimated value or regarding the quality of the donated
items that would permit us to estimate its value.
While we are convinced that petitioners donated property to
charity in 2003, petitioners have failed to provide any reliable
evidence of the items they donated or their values. Petitioners
are therefore not entitled to deduct any additional amount for
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charitable contributions of property other than the $89
respondent allowed.
Unreimbursed Employee Business Expenses
We next consider the unreimbursed employee business expenses
petitioners claimed on Schedule A. We begin by outlining the
general rules to claim business expenses. In general, all
ordinary and necessary expenses paid or incurred in carrying on a
trade or business during the taxable year are deductible. Sec.
162(a). Services performed by an employee constitute a trade or
business. O’Malley v. Commissioner, 91 T.C. 352, 363-364 (1988);
sec. 1.162-17(a), Income Tax Regs. An expense is ordinary for
these purposes if it is normal or customary within a particular
trade, business, or industry. Deputy v. du Pont, 308 U.S. at
495. An expense is necessary if it is appropriate or helpful for
the development of the business. Commissioner v. Heininger, 320
U.S. 467, 471 (1943). Personal, living, or family expenses, on
the other hand, are not generally deductible. Sec. 262.
If a taxpayer establishes that he or she paid or incurred a
deductible business expense but does not establish the amount of
the deduction, we may approximate the amount of the allowable
deduction, 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
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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).
Certain business expenses may not be estimated because of
the strict substantiation requirements of section 274(d). See
sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C. 823, 827
(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969). For such
expenses, only certain types of documentary evidence will
suffice.
Unreimbursed Employee Business Expenses Not Subject to Strict
Substantiation
We first consider the unreimbursed employee business
expenses not subject to the strict substantiation requirements.
We then examine those employee business expenses that are subject
to the additional strict substantiation requirements.
Business Use of the Home
Petitioners claimed $4,190 miscellaneous expenses for
business use of their home during 2003. Expenses for business
use of a taxpayer’s home are deductible only under very limited
circumstances. The taxpayer must show that the portion of the
home purported to be used for business was exclusively used on a
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regular basis as the taxpayer’s principal place of business.
Sec. 280A(c)(1).5
Petitioners introduced pictures of their home and prepared a
rough sketch of the home layout including square footage. Mr.
Soholt also described the layout of his home office and explained
the setup of his work area, filing cabinets, and storage space
for his MetLife marketing materials. Mr. Soholt admitted that he
kept a few personal documents in the filing cabinet such as
wills, copies of tax returns and similar documentation, but the
family living area was located on another floor of the home and
the office area was not used for anything other than Mr. Soholt’s
business activities. The home office constituted 18 percent of
petitioners’ home based on square footage.
We have carefully examined the parties’ exhibits and Mr.
Soholt’s testimony on this issue. We find his testimony on this
issue to be credible and the documents reliable. We conclude
that 18 percent of petitioners’ home was regularly and
exclusively used as the principal place of business for Mr.
Soholt’s MetLife affairs. Petitioners are therefore entitled to
5
There is an additional requirement that the home office be
for the convenience of the employer. Sec. 280A(c)(1) (flush
language). The record is unclear whether the parties dispute
this issue. Unreimbursed business expenses are subject to the 2-
percent limitation of sec. 67.
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deduct 18 percent of certain energy expenses6 petitioners
incurred during 2003.
Notwithstanding that 18 percent of petitioners’ home was
used as Mr. Soholt’s principal place of business, we cannot
accept certain documentation petitioners introduced that appear
to be expenses for remodeling their kitchen. We must disregard
these kitchen remodeling costs because the kitchen was not part
of the home used exclusively for Mr. Soholt’s business.
Petitioners are therefore entitled to deduct only 18 percent of
the energy expenses, which equals $467.7
Internet Access Expenses
Petitioners claimed $317 for Internet access expenses during
2003. We have previously characterized Internet expenses as
utility expenses. Verma v. Commissioner, T.C. Memo. 2001-132.
Strict substantiation therefore does not apply, and we may
estimate the business portion of utility expenses under the Cohan
rule. See Pistoresi v. Commissioner, T.C. Memo. 1999-39.
The parties stipulated that petitioners paid $317 for
Compuserve in 2003. Mrs. Soholt provided credible testimony
6
The parties stipulated that petitioners paid $1,180.30 to
Center Point Energy, $833.84 to Xcel Energy, and $580.09 to the
City of Minneapolis Utility Billing Office in 2003, and
petitioners are entitled to deduct 18 percent of these expenses.
7
We note that the deduction we permit for petitioners’
business use of the home would be subject to the income
limitations of sec. 280A(c)(5).
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regarding her need for and business use of the Internet. Mrs.
Soholt subscribed to Compuserve because that was the only
Internet service provider that NWA authorized for access to the
NWA system. She used the Internet to check her NWA work
schedule, use her NWA e-mail, and submit her bids for her flight
schedule. The record does not reflect that any family member
used the Compuserve account for personal matters. We are
convinced that the Compuserve account was used primarily for Mrs.
Soholt’s business needs and that petitioners are thus entitled to
deduct the $317 they paid for Compuserve.
Insurance Expenses
Petitioners claimed $101 of insurance expenses. Mr. Soholt
testified that he bought an additional business policy through
their home insurance to cover equipment in the home and to
provide a source of income if he were unable to work due to a
catastrophe or flood in the basement. Petitioners introduced a
balance due notice from State Farm indicating that Mr. Soholt was
the insured on a “business policy.” The balance due notice was
prepared on September 25, 2002, and notes that full payment will
continue coverage until August 19, 2003. We find Mr. Soholt’s
testimony to be credible and conclude that petitioners have
adequately substantiated their insurance expense for the year.
Accordingly, petitioners are entitled to deduct $101 of insurance
expenses.
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Publications
Petitioners claimed $91 of publication expenses.
Petitioners paid $98.80 for the Sunday Star Tribune for the year
at issue. Mr. Soholt read the business section of the paper to
familiarize himself with area business news as well as to be
prepared in the event a client asked him about a particular
business article, although both petitioners read other parts of
the Sunday paper for personal use.
The cost of a daily newspaper of general circulation is
generally nondeductible. Wheeler v. Commissioner, T.C. Memo.
1984-425. Petitioners testified that they each read parts of the
Sunday paper for reasons unrelated to Mr. Soholt’s business.
Petitioners’ use of the Sunday Star Tribune was not confined to
the business section. Petitioners have not offered a method for
us to estimate reliably how much of Mr. Soholt’s use of the
Sunday newspaper was for business. Petitioners are therefore not
entitled to any deduction for publications in 2003.
Telephone Expenses
Petitioners claimed $912 of telephone expenses. The parties
stipulated that petitioners paid $462.69 to Qwest for 2003.
Petitioners introduced documentation showing that they incurred
$39.64 in telephone charges from PowerNet Global Communications,
3 cents from TTI, and $55 for MCI calling cards, but they did not
explain the PowerNet Global Communications or TTI charges. Mr.
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Soholt testified that they calculated the business portion of
their telephone expenses by determining the cost of the second
telephone line for their home that Mr. Soholt used for business.
Petitioners then added the cost of certain features on their
personal telephone line, such as call waiting, caller ID, and
voice messaging. Mr. Soholt used the calling cards to call
clients long distance.
The parties’ stipulation and petitioners’ substantiation and
testimony regarding this issue do not fully explain how
petitioners derived the $912 of telephone expenses they claimed
for 2003. Petitioners’ documentation and testimony regarding the
amount of charges attributable to the business telephone line is
unclear. Although we are permitted to estimate the business
portion of the telephone expenses under the Cohan rule,
petitioners have given us no basis for such an estimate. The
only thing petitioners have established is that Mr. Soholt used
calling cards to call clients long distance, and we find their
substantiation credible on this point. Petitioners are therefore
entitled to deduct $55 for calling cards.
Uniform Cleaning Expenses
Petitioners claimed $303 for cleaning expenses for Mrs.
Soholt’s NWA uniforms. Expenses for uniforms are deductible if
the uniforms are of a type specifically required as a condition
of employment, the uniforms are not adaptable to general use as
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ordinary clothing, and the uniforms are not worn as ordinary
clothing. Yeomans v. Commissioner, 30 T.C. 757, 767-769 (1958);
Beckey v. Commissioner, T.C. Memo. 1994-514.
Petitioners introduced the portion of the NWA Flight
Attendant agreement requiring Mrs. Soholt to wear a uniform.
Mrs. Soholt worked 15 to 20 days per month for the 7 months that
she was not on sporadic leave. Mrs. Soholt testified that she
did not dry clean her uniform each time she wore it and that she
often had to clean it herself due to the short time between
trips. Petitioners also introduced receipts from dry cleaners
amounting to $122.59 in cleaning costs for the year, although the
receipts do not specifically indicate that the cleaning charges
were for Mrs. Soholt’s uniforms.
We are convinced that Mrs. Soholt incurred some expenses
during the year to clean her uniforms. We may estimate the
amount of uniform expenses under the Cohan rule. We estimate
that Mrs. Soholt dry cleaned her uniform once per month for the 7
months she worked at NWA and is therefore entitled to deduct $105
for uniform expenses during 2003.
Expenses Subject to Strict Substantiation Requirements
We now consider those expenses that are subject to the
additional strict substantiation requirements under section
274(d). Strict substantiation requires the taxpayer to generally
introduce records or evidence showing the amount of the expense,
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the time and place of the expense, the business purpose of the
expense, and the business relationship to the taxpayer of the
persons involved in the expense. Sec. 274(d). Expenses subject
to strict substantiation may not be estimated under the Cohan
rule. Sanford v. Commissioner, 50 T.C. at 827.
Cellular Phone Expenses
Petitioners claimed $880 of cellular phone expenses for
2003. Cellular phones are included in the definition of “listed
property” for purposes of section 274(d)(4) and are thus subject
to the strict substantiation requirements. Sec.
280F(d)(4)(A)(v); Gaylord v. Commissioner, T.C. Memo. 2003-273.
A taxpayer must establish the amount of business use and the
amount of total use for the property to substantiate the amount
of expenses for listed property. Nitschke v. Commissioner, T.C.
Memo. 2000-230; sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax
Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Petitioners introduced their cellular phone records at trial
and acknowledged which calls were personal. Mr. Soholt testified
that he used his cellular phone to call home to check his voice
mail, speak to his wife, and also to call MetLife message centers
as well as make other business calls. Mrs. Soholt used her
cellular phone when she was on reserve status so that she could
respond to NWA within the required 20-minute period.
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We have examined petitioners’ cellular phone records in
detail. Petitioners paid a flat fee for their cellular phones as
long as phone usage was within a certain limit per month and used
the phones for both personal and business calls. Petitioners
therefore did not incur any expenses to use their cellular phones
for business purposes in addition to those they would have
incurred had they used their cellular phones only for personal
reasons. Further, any approximation or estimation of cell phone
expenses attributable to business use is prohibited under section
274(d). Petitioners are therefore not entitled to deduct any
cellular phone expenses for 2003.
Equipment Expenses
Petitioners claimed $795 of equipment expenses to rent and
maintain the laptop computer MetLife required Mr. Soholt to have
for his business. Computers and peripheral equipment are “listed
property” and are therefore subject to the strict substantiation
requirements. Sec. 280F(d)(4)(A)(iv).
Petitioners introduced a MetLife Human Capital Management
System report indicating that a total of $795 was deducted from
his pay during 2003 for the laptop. Mr. Soholt testified that he
was required to have $15 deducted from each paycheck for the use
of the laptop and any necessary maintenance. Petitioners
introduced a pay stub showing a $15 deduction from Mr. Soholt’s
pay for the period ending December 28, 2003. Petitioners also
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introduced a letter from the MetLife Regional Marketing Director
indicating that Mr. Soholt was not reimbursed for laptop charges.
We find that the evidence petitioners introduced on this issue,
taken together, satisfies the strict substantiation requirements.
Accordingly, petitioners are entitled to deduct $795 of equipment
costs for the laptop.
Automobile Expenses
Petitioners claimed $6,112 of automobile expenses for 2003.
Passenger automobiles are listed property under section 280F and
strict substantiation is therefore required. Sec. 274(d). No
deduction is allowed for any travel expense unless the taxpayer
substantiates by adequate records or by sufficient evidence
corroborating the taxpayer’s own statement the amount of the
expense, the mileage for each business use of the automobile and
the total mileage for all use of the automobile during the
taxable period, the date of the business use, and the business
purpose for the use. Sec. 1.274-5T(b)(6), Temporary Income Tax
Regs., supra. Adequate records include the maintenance of an
account book, diary, log, statement of expense, trip sheets,
and/or other documentary evidence, which, in combination, are
sufficient to establish each element of expenditure or use. Sec.
1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017
(Nov. 6, 1985).
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Taxpayers may use a standard mileage rate established by the
Internal Revenue Service in lieu of substantiating the actual
amount of the expenditure. See sec. 1.274-5(j)(2), Income Tax
Regs. The standard mileage rate is generally multiplied by the
number of business miles traveled. See Rev. Proc. 2002-61, 2002-
2 C.B. 616 (in effect for transportation expenses incurred during
2003). The use of the standard mileage rate establishes only the
amount deemed expended with respect to the business use of a
passenger automobile. Sec. 1.274-5(j)(2), Income Tax Regs. The
taxpayer must still establish the actual mileage, the time, and
the business purpose of each use. Nicely v. Commissioner, T.C.
Memo. 2006-172; sec. 1.274-5(j)(2), Income Tax Regs.
Petitioners introduced an appointment calendar for 2003 to
support their business mileage deductions. Mr. Soholt kept the
calendar in his car during 2003 and made handwritten notations of
the total mileage incurred on days when he had to travel for
business. Mr. Soholt calculated the mileage by determining the
difference on the odometer from the beginning of the day to the
end of the day. Mr. Soholt acknowledged, however, that the daily
odometer readings also possibly included non-business trips he
made during the day.
Although we recognize the efforts Mr. Soholt made to record
his daily mileage, we are constrained to find that petitioners
failed to satisfy the strict substantiation requirements.
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Petitioners’ documentation does not establish the portion of the
mileage each day attributable to personal travel and is simply a
notation of the total daily odometer readings. Moreover,
petitioners’ log does not sufficiently describe the business
purpose of each meeting. Often, just a name or group is
identified. We therefore find that petitioners are not entitled
to any automobile expense deduction for 2003.
Hospitality Expenses
Petitioners claimed $1,411 of hospitality expenses for 2003.
Mr. Soholt testified he incurred these expenses when he treated
clients or potential clients to meals or coffee during their
meetings.
Entertainment expenses such as entertaining clients or
prospective clients at restaurants and coffee shops are subject
to the strict substantiation requirements. See sec. 274(d)(2);
Gaylord v. Commissioner, T.C. Memo. 2003-273; sec. 1.274-2(a),
Income Tax Regs. The taxpayer must show the expense was directly
related to the active conduct of the taxpayer’s trade or business
as well as substantiate the amount, time and place, business
purpose, and business relationship to the taxpayer of the persons
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entertained.8 Sec. 274(a), (d); sec. 1.274-2(a), Income Tax
Regs.
Petitioners introduced various restaurant and coffee shop
receipts to substantiate the entertainment expenses. Mr. Soholt
added notations on the receipts after the year at issue and
before trial. Some of these notations include the name of a
person or a vague description such as “Answering Questions.”
We find Mr. Soholt’s testimony on this issue to be
thoughtful and credible. Unfortunately, the evidence petitioners
submitted to substantiate their hospitality expenses does not
meet the requirements of section 274. Petitioners do not have
records indicating the business purposes of the expenses, Mr.
Soholt’s business relationship to the persons entertained or any
other information that would comply with the strict
substantiation requirements. The notations on the receipts, made
after the year at issue, are simply too vague to meet the
required standard. Petitioners are therefore not entitled to
deduct any hospitality expenses.
8
For expenses incurred directly before or after a
substantial and bona fide business discussion, the taxpayer must
show the expense was associated with, rather than directly
related to, the active conduct of the trade or business. Sec.
274(a), (d); sec. 1.274-2(a), Income Tax Regs.
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To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.