T.C. Memo. 2010-60
UNITED STATES TAX COURT
ENA M. AND BRIAN R. FLEMING, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 28973-07. Filed March 30, 2010.
Ena M. and Brian R. Fleming, pro sese.
Christine K. Lane, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined a deficiency of $3,246
in petitioners’ Federal income tax for tax year 2004. After
concessions by respondent,1 we must decide whether petitioners
1
Respondent concedes that petitioners are not liable for the
self-employment tax. Accordingly, petitioners are not entitled
to the corresponding deduction for one-half of the self-
(continued...)
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are entitled to deduct expenses they claimed on Schedule C,
Profit and Loss from Business, attached to their 2004 tax return
for mileage driven, automobile repairs and maintenance, meals and
entertainment, cellular telephone service, advertising and
franchise fees, professional dues, office supplies and expenses,
and legal and professional fees.
FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated.
The stipulations of fact are incorporated in this opinion by
reference and are so found.
At the time they filed the petition, petitioners resided in
Florida.
Petitioners are husband and wife. Petitioners filed a joint
Federal income tax return for their 2004 tax year.
Petitioner Ena M. Fleming (Ms. Fleming) is employed as a
school teacher. Petitioner Brian R. Fleming (Mr. Fleming) is a
real estate agent for the Keyes Co.
For their 2004 tax year petitioners reported no gross income
on Schedule C of their Federal income tax return. However,
petitioners claimed as deductible expenses on that Schedule C:
1
(...continued)
employment tax for their 2004 tax year. Respondent also concedes
that petitioners are entitled to a deduction for franchise fees
of $765 and advertising expenses of $231 for their 2004 tax year.
However, respondent disputes any deduction for advertising and
franchise fees above this amount.
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Mileage driven of $5,258, automobile repairs and maintenance of
$580, meals and entertainment (after reduction by the 50-percent
limitation of section 274(n)2) of $45, legal and professional
fees of $1,397, and cellular telephone service, advertising,
franchise fees, office expenses and supplies, and professional
dues in the total amount of $4,306.
On September 17, 2007, respondent sent petitioners a notice
of deficiency. Petitioners timely filed a petition in this Court
for redetermination of the deficiency.
OPINION
Generally, the Commissioner’s determination of a deficiency
is presumed correct, and the taxpayer has the burden of proving
it incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933).3
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving their entitlement to the deductions
claimed. Sec. 6001; INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992). Section 162(a) allows a deduction from income for all
ordinary and necessary expenses for carrying on a trade or
business during the taxable year. However, a taxpayer generally
2
Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code, as amended.
3
Petitioners do not contend that sec. 7491(a) should apply
to shift the burden of proof to respondent, nor did they
establish that it should apply.
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must keep records sufficient to establish the amounts of the
items reported on his Federal income tax return. Sec. 6001; sec.
1.6001-1(a), (e), Income Tax Regs. In the event that a taxpayer
establishes that a deductible expense has been paid but is unable
to substantiate the precise amount, we generally 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. Cohan v. Commissioner, 39 F.2d
540, 543-544 (2d Cir. 1930). We cannot estimate a deductible
expense, however, unless the taxpayer presents evidence
sufficient to provide some basis upon which an estimate may be
made. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).
Section 274(d) supersedes the Cohan doctrine for certain
categories of expenses. Sanford v. Commissioner, 50 T.C. 823,
827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969). A
deduction is disallowed with regard to traveling expenses, meals
and entertainment, or listed property unless the taxpayer
properly substantiates: (1) The amount of such expense, (2) the
time and place of the expense, (3) the business purpose, and (4)
in the case of meals and entertainment, the business relationship
between the taxpayer and the persons being entertained. Sec.
274(d). Section 280F(d)(4) includes as listed property any
passenger automobile or cellular telephone. Generally, expenses
subject to the strict substantiation requirements of section
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274(d) must be disallowed in full unless the taxpayer satisfies
every element of those requirements. Sanford v. Commissioner,
supra; Larson v. Commissioner, T.C. Memo. 2008-187; sec. 1.274-
5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,
1985). In the case of listed property that is used both
personally and professionally, expenses are disallowed unless a
taxpayer establishes the amount of business use of the property
in question. Kinney v. Commissioner, T.C. Memo. 2008-287; Olsen
v. Commissioner, T.C. Memo. 2002-42, affd. 54 Fed. Appx. 479 (9th
Cir. 2003); sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax
Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Taxpayers may substantiate their deductions by either
adequate records or sufficient evidence that corroborates the
taxpayer’s own statement. Sec. 274(d). To satisfy the adequate
records requirement, a taxpayer must maintain records and
documentary evidence that in combination are sufficient to
establish each element of an expenditure or use. Larson v.
Commissioner, supra; 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 used to support a
taxpayer’s reconstruction “of the elements of * * * the
expenditure or use must have a high degree of probative value to
elevate such statement” to the level of credibility of a
contemporaneous record. Larson v. Commissioner, supra; sec.
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1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985).
In the absence of adequate records, a taxpayer may
alternatively establish an element by “his own statement, whether
written or oral, containing specific information in detail as to
such element” and by “other corroborative evidence sufficient to
establish such element.” Larson v. Commissioner, supra; sec.
1.274-5T(c)(3), Temporary Income Tax Regs., 50 Fed. Reg. 46020
(Nov. 6, 1985). However, we may not use the Cohan doctrine to
estimate expenses covered by section 274(d). Sanford v.
Commissioner, supra at 827; Larson v. Commissioner, supra.
Petitioners’ expenses can be divided into two categories:
(1) Those that must meet the strict substantiation requirements
of section 274(d) in addition to otherwise qualifying as
deductible under section 162 and (2) those that must meet only
the general substantiation requirements of section 162. The
expenses that must meet the section 274(d) requirements include
car and truck expenses for mileage driven, automobile repairs and
maintenance, meals and entertainment, and expenses for cellular
telephone services. Secs. 274(d), 280F(d)(4). Expenses that are
not required to meet the strict substantiation requirements of
section 274(d) but must meet the general substantiation
requirements include advertising and franchise fees, professional
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dues, office supplies and expenses, and fees for legal and
professional services.
We first address those expenses that must meet the strict
substantiation requirements of section 274(d). For their 2004
tax year petitioners claimed car and truck expenses for mileage
driven of $5,258. Petitioners submitted a mileage log to
substantiate those expenses. The mileage log lists total miles
driven for the day. The log does not contain any entries
regarding the business purpose of the trips, and in many
instances it lists the destination as “local”.4 Moreover,
petitioners’ log is incompatible with receipts they provided.5
Accordingly, we conclude that petitioners’ mileage logs are not
adequate records of their mileage expense. Similarly, we
conclude that petitioners have failed to provide other
corroborative evidence sufficient to establish that they have met
the requirements of section 274(d). Consequently, we sustain
respondent’s determination disallowing a deduction for car and
truck expenses for mileage driven claimed on petitioners’ 2004
tax return.
4
Mr. Fleming testified that “local” means that he was
looking at buildings and surveying neighborhoods, making separate
stops along the way. However, Mr. Fleming failed to provide more
specificity.
5
Petitioners’ log for Nov. 2004, indicates a beginning
mileage of 33,200, while an invoice petitioners offered from BJ’s
Tire Service Center, dated Dec. 23, 2004, indicates a mileage of
32,433.
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We next turn to petitioners’ expenses for repairs and
maintenance on their automobiles. Mr. Fleming testified that
petitioners had two automobiles and that both were used in his
real estate business. Petitioners claimed $580 for repairs and
maintenance of their automobiles. In support of their claim
petitioners provided an invoice for $113 for the installation of
a tire on one of their automobiles. However, petitioners failed
to allocate between the business and personal use of their
personal automobiles as required under section 274(d). See Olsen
v. Commissioner, supra; sec. 1.274-5T(b)(6)(i)(B), Temporary
Income Tax Regs., supra. Accordingly, we sustain respondent’s
determination disallowing a deduction for automobile repairs and
maintenance claimed on petitioners’ 2004 tax return.
We next consider petitioners’ meals and entertainment
expenses. Petitioners failed to present, and we do not find, any
evidence of the business relationship of the persons entertained
or of the business purpose of the expenses. See sec. 274(d).
Accordingly, we sustain respondent’s determination disallowing a
deduction for meals and entertainment claimed on petitioners’
2004 tax return.
As to petitioners’ cellular telephone expenses, each
petitioner owned a cellular telephone and petitioners provided
records for both. Petitioners testified that Mr. Fleming used
his cellular telephone to call Ms. Fleming and one friend, but
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that all other calls were for business purposes. However,
petitioners failed to allocate between the personal and business
use of Mr. Fleming’s cellular telephone or Ms. Fleming’s cellular
telephone as required under section 274(d). See Kinney v.
Commissioner, T.C. Memo. 2008-287. Accordingly, we sustain
respondent’s determination disallowing a deduction for
petitioners’ cellular telephone expenses claimed on their 2004
tax return.
As to petitioners’ expenses that are not required to meet
the strict substantiation requirements of section 274(d) in
addition to the requirements of sections 162 and 6001,
petitioners claimed other expenses of $4,306 and legal and
professional fees of $1,397 on their 2004 tax return. Included
within the $4,306 are expenses for advertising and franchise
fees, professional dues, office expenses, and office supplies.6
For the advertising and franchise fees, petitioners have
submitted monthly invoices from the Keyes Co., Mr. Fleming’s real
estate company, for petitioners’ 2004 tax year. The monthly
statements list franchise fees totaling $1,020 and advertising
fees totaling $231. Respondent has conceded that petitioners are
entitled to franchise fees of $765 and advertising fees of $231.
6
Expenses for cellular telephone service are also included
within the $4,306 of other expenses. However, cellular
telephones are listed property that must meet the strict
substantiation requirements of sec. 274(d).
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Petitioners argue, but have failed to prove, that all amounts
billed were deductible from their 2004 income. Petitioners
testified that amounts billed, once paid, were removed from later
invoices. However, several of the Keyes Co. invoices from
petitioners’ 2005 tax year show amounts carried over from
petitioners’ 2004 tax year. In addition to the Keyes Co.
invoices, petitioners provided bank records that purportedly show
business expenses. Mr. Fleming testified that he placed a
checkmark next to each purported business expense. One entry
shows an expense of $51 for advertising in the local paper.
Accordingly, we hold that petitioners are entitled to a deduction
for advertising expenses of $51 in excess of respondent’s
concession of $231 for their 2004 tax year.
As to petitioners’ professional dues, petitioners provided
invoices for professional dues of $817. The invoices do not
indicate whether the $817 was paid, and petitioners failed to
provide any documentation, such as receipts, canceled checks, or
credit card statements, to show that the professional dues were
paid. Mr. Fleming testified that he paid the $817, but given
petitioners’ history of untimely payments and lack of
documentation, we find his testimony unpersuasive. Additionally,
we were unable to match payment of the professional dues to
petitioners’ 2004 bank statements. Accordingly, we conclude that
petitioners have failed to prove that they paid $817 for
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professional dues. Consequently, we sustain respondent’s
determination denying a deduction for petitioners’ professional
dues claimed on their 2004 tax return.
As to petitioners’ claimed deduction for office supplies and
expenses, in support of their claimed deduction petitioners
provided personal bank statements which they allege show business
expenses by notations of checkmarks, as stated above. Many of
the checked items were for purchases at Office Max and the U.S.
Postal Service. However, petitioners failed to provide any
additional testimony or evidence explaining the checked items.
Accordingly, we conclude that, without more, petitioners’
evidence fails to provide a sufficient evidentiary basis to make
a Cohan estimate of costs. See Vanicek v. Commissioner, 85 T.C.
at 743. Consequently, we sustain respondent’s denial of
petitioners’ deduction for office supplies and expenses claimed
on their 2004 tax return.
Finally, as to petitioners’ expenses for legal and
professional fees, petitioners failed to present any evidence or
argument on legal and professional fees. Therefore, petitioners
have failed to provide an evidentiary basis to make a Cohan
estimate of expenses for legal and professional fees. See
Vanicek v. Commissioner, supra. Accordingly, we sustain
respondent’s deficiency determinations regarding the legal and
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professional fees claimed as a deduction on petitioners’ 2004 tax
return.
The Court has considered all other arguments made by the
parties and, to the extent we have not addressed them herein, we
consider them moot, irrelevant, or without merit.
To reflect the foregoing and respondent’s concessions,
Decision will be entered
under Rule 155.