T.C. Summary Opinion 2008-129
UNITED STATES TAX COURT
HASSAN S. NIYITEGYEKA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3916-07S. Filed September 24, 2008.
Hassan S. Niyitegyeka, pro se.
William C. Bogardus, 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. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case. Unless otherwise indicated, subsequent
section references are to the Internal Revenue Code in effect for
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the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Respondent determined a $2,413 deficiency in petitioner’s
Federal income tax for 2004. After petitioner’s concession the
sole issue for decision is whether petitioner is entitled to
deduct the unreimbursed employee business expenses that he
claimed.
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 New
York when the petition was filed.
During 2004 petitioner worked for five or six different
employers, and he reported total income of $26,396. His
principal employer was the New York Life Insurance Co. (New York
Life), where he worked for 6 or 7 months from January through
June or July. New York Life employed petitioner as a
“salesperson in training”. He did not receive a salary; rather,
he earned his income entirely through commissions. During 2004
petitioner earned $18,706 from New York Life.
Petitioner lived in Brooklyn and commuted via subway to an
office in Manhattan that New York Life designated. His sales
territory included Manhattan and the surrounding areas.
Petitioner generated about 80 percent of his business by calling
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on prospective clients. He worked days, nights, and weekends.
Petitioner traveled as far as the outlying parts of Queens, New
Jersey, and Connecticut to meet with clients, and he often drove
his own car, stayed in hotels, and paid for meals. New York Life
did not reimburse petitioner for his expenses because the
company’s policy was not to reimburse its sales trainees. Those
unreimbursed expenses are the ones at issue.
Petitioner hired a tax preparation firm to prepare his 2004
tax return, and he provided some receipts to the preparer.
However, because petitioner did not maintain a log book, did not
have other receipts, and did not have totals for the business
expenses he paid, the preparer and petitioner estimated the
amount of the expenses. Petitioner claimed a total of $15,500 in
unreimbursed employee business expenses as a miscellaneous
deduction on Schedule A, Itemized Deductions.1 The $15,500
consisted of: (1) $4,500 in automobile expenses using the
standard mileage rate, (2) $7,500 for travel expenses on
overnight trips, and (3) $3,500 for other expenses such as meals
near home. Respondent disallowed the entire amount of the
deduction.
1
Petitioner’s actual deduction was less because he properly
reduced his miscellaneous itemized expenses by 2 percent of his
adjusted gross income as sec. 67(a) requires. However,
petitioner did not first reduce his meal and entertainment
expenses by 50 percent as sec. 274(n) requires.
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Petitioner stored his receipts in a binder in his car. In
November 2005 the car was stolen. Petitioner notified the
police, and 2 or 3 weeks later the police recovered the vehicle;
however, the business receipts were gone. Consequently,
petitioner was not able to provide receipts to respondent or the
Court.
At trial petitioner provided for the first time a computer
listing, purportedly from New York Life, that detailed dates,
client names, and amounts for his draw and commission activities.
The listing did not, however, provide client addresses,
locations, or distances. The listing was printed on plain white
paper with no indication of the source. Petitioner did not have
a representative from New York Life corroborate the listing, and
he did not call his tax preparer, clients, or anyone else to
testify on his behalf.
Discussion
In general, the Commissioner’s determination set forth in a
notice of deficiency is presumed correct, and the taxpayer bears
the burden of showing that the determination is in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving their entitlement to a deduction.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Section
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6001 requires taxpayers to maintain records sufficient to
establish the amount of each deduction. See sec. 1.6001-1(a),
(e), Income Tax Regs. Thus, taxpayers may deduct only the
business expenses that they can substantiate. Ronnen v.
Commissioner, 90 T.C. 74, 102 (1988).
Under section 7491(a) a taxpayer may shift the burden to the
Commissioner regarding a factual issue if the taxpayer produces
credible evidence and meets the other requirements of the
section. Under section 7491(a), a taxpayer must substantiate
items, maintain records, and cooperate fully with the Secretary’s
reasonable requests for documents, information, and similar
corroboration. Connors v. Commissioner, 277 Fed. Appx. 122 (2d
Cir. 2008), affg. T.C. Memo. 2006-239. Neither party raised
section 7491(a) as an issue. Because Petitioner did not
substantiate his expenses, we find that the burden of proof
remains with him.
A taxpayer may deduct ordinary and necessary expenses that
he or she pays in connection with the operation of a trade or
business. Sec. 162(a); Boyd v. Commissioner, 122 T.C. 305, 313
(2004). To be “ordinary” 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. Additionally, the expenditure
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must be “directly connected with or pertaining to the taxpayer’s
trade or business”. Sec. 1.162-1(a), Income Tax Regs. Section
262(a) excludes deductions for personal, living, or family
expenses. A trade or business includes the trade or business of
being an employee. O’Malley v. Commissioner, 91 T.C. 352, 363-
364 (1988). However, a full-time life insurance salesperson
might qualify as a statutory employee under section
3121(d)(3)(B), so that the employee may deduct business expenses
on Schedule C, Profit or Loss From Business, “above the line” on
Form 1040, U.S. Individual Income Tax Return, instead of claiming
the expenses “below the line” on Schedule A, Itemized Deductions,
as miscellaneous itemized deductions, which section 67(a) reduces
by 2 percent of adjusted gross income. Rev. Rul. 90-93, 1990-2
C.B. 33. Petitioner has neither argued nor established that he
is a statutory employee as opposed to being a common law
employee.
To qualify for a deduction, the taxpayer must not have the
right to obtain reimbursement from his employer. See Orvis v.
Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), affg. T.C.
Memo. 1984-533. Likewise a taxpayer may not deduct unreimbursed
employee expenses if the employer maintains a reimbursement plan
and the employee fails to seek reimbursement for work-related
expenses. See Orvis v. Commissioner, supra at 1408; Leamy v.
Commissioner, 85 T.C. 798, 810 (1985). The record indicates that
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New York Life had a policy to not reimburse its sales trainees
and that petitioner did not receive reimbursement.
If a taxpayer establishes that he or she paid a deductible
expense but is unable to substantiate the precise amount, we may
estimate the amount of the deductible expense bearing heavily
against the taxpayer whose inexactitude is of his own making.
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).
However, we can estimate only when the taxpayer presents
sufficient evidence. 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).
Section 274 overrides the Cohan rule for certain business
expenses. Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985). Section 274 requires stricter
substantiation for travel, meals, entertainment, and listed
property such as a passenger automobile. Thus, all three of the
unreimbursed business expenses that petitioner deducted are
subject to section 274 substantiation requirements. Section
274(d) requires taxpayers to provide adequate records or
sufficient other evidence establishing the amount, time, place,
and business purpose of the expense to corroborate the taxpayers’
statements. Even if such an expense would otherwise be
deductible, section 274 may still disallow a deduction if the
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taxpayer does not have sufficient substantiation. See sec.
1.274-5T(a), Temporary Income Tax Regs., supra. Keeping in mind
these well-established principles, we must now determine for each
of the three unreimbursed expenses whether petitioner satisfied
his burden of proving that he may deduct the expense.
Regarding the automobile deduction of $4,500, petitioner
used the standard mileage rate, but he did not maintain a log.
We recognize that a contemporaneous log is not a requirement,
however, the alternate evidence must nonetheless reach a similar
level of credibility as a contemporaneous log. See sec. 1.274-
5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016-17 (Nov.
6, 1985). The only evidence in the record is the computer
listing that petitioner entered at trial. However, the listing
did not indicate distance, address, or which clients required
mileage. As a result, petitioner did not substantiate his
business mileage and, consequently, he is not entitled to an
automobile deduction for 2004.
Similarly, regarding petitioner’s travel and meal expenses,
he may deduct those expenses only if he met the stringent
substantiation requirements of section 274(d). See 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). Further, even when a taxpayer has
lost records through circumstances beyond his control, such as
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the auto theft here, the taxpayer must substantiate the
deductions through other evidence such as a credible
reconstruction of the records. Boyd v. Commissioner, 122 T.C. at
320-321; sec. 1.274-5T(c)(5), Temporary Income Tax Regs., 50 Fed.
Reg. 46022 (Nov. 6, 1985). The only documentary evidence in the
record for the travel and meals is the computer listing of draws
and commissions that did not indicate locations or which clients
required an overnight trip or a meal. Thus, petitioner failed to
provide corroborating evidence sufficient to satisfy section
274(d), and therefore he may not deduct his travel or meal
expenses.
In summary, we have taken into consideration petitioner’s
testimony and the other evidence. The record lacks a journal,
receipts, or other documentary evidence to provide a rational
basis on which we may determine even a partial deduction. Thus,
we have no foundation on which to provide an estimate even if
section 274 allowed such an estimate.
In conclusion, we sustain respondent’s determination in
full. Petitioner may not deduct the unreimbursed employee
business expenses for 2004.
Decision will be entered
for respondent.