T.C. Summary Opinion 2010-154
UNITED STATES TAX COURT
JAMES D. GROAT, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10463-09S. Filed October 14, 2010.
James D. Groat, Jr., pro se.
Thomas R. Mackinson and Timothy Froehle (specially
recognized), for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
1
Unless otherwise indicated, all 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.
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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.
Respondent determined a deficiency in petitioner’s 2006
Federal income tax of $4,123.
After a concession by respondent,2 the issues for decision
are: (1) Whether petitioner is entitled to a deduction for the
payment of legal fees; and (2) whether petitioner is entitled to
a deduction for unreimbursed employee business expenses.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts and accompanying exhibits.
Petitioner resided in the State of California when the
petition was filed.
In November 2002, petitioner filed for divorce from his
wife. Petitioner initially represented himself in the divorce
action; petitioner’s wife was represented by an attorney.
Petitioner began making informal spousal support payments to
his wife in August 2002 when he moved out of the marital home.
Through her attorney, petitioner’s wife requested a formal amount
of support in October 2003, which amount was awarded by the
2
Respondent concedes that petitioner is entitled to a
deduction for tax preparation fees of $240.
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court. In February 2004, petitioner signed an agreement for
spousal support based upon a settlement officer’s
recommendations.
Sometime in 2005 petitioner discovered what he thought were
discrepancies in his wife’s financial disclosures suggesting that
she was depositing approximately $10,000 per year into a bank
account, which amount did not correlate to any other reported
income source. Petitioner subsequently sought legal
representation to assist him with reducing the amount of spousal
support he was paying to his wife. As a result, petitioner
incurred legal fees of $13,574 in 2006. In September 2006,
petitioner and his wife signed a marital settlement agreement,
one of the terms of which reduced the amount of spousal support
petitioner paid to his wife.
On December 31, 2006, petitioner’s divorce became final.
Petitioner continued to pay spousal support through March 2009,
when his ex-wife remarried.
During 2006, petitioner worked as a hardware engineer for
Lockheed Martin Corp. (Lockheed Martin). Lockheed Martin
provided petitioner with a workspace that included a laptop
computer, a telephone, and Internet access.
At some point petitioner purchased a home computer and
arranged to have Internet service provided to his home. Because
petitioner’s Internet service provider could only provide
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Internet access through a telephone line, petitioner also had a
telephone line installed in his home. (Previously, petitioner
maintained just a cellular telephone.) Petitioner used both the
computer and the Internet service for personal and business
purposes.
Petitioner upgraded his cellular telephone service in 2006
to allow him better access to the Internet so as to receive and
send email messages when he was away from his workstation.
In 2006, petitioner purchased various office supplies and
pieces of equipment such as computer software, batteries, a paper
shredder, and a computer keyboard. Most of the equipment was
used in the maintenance and use of petitioner’s home computer,
but according to petitioner some of the items (not identified in
the record) were used exclusively at work.
During 2006, petitioner maintained a post office box where
he received all of his personal mail and some business mail.
Petitioner also incurred expenses for postage for work-related
items.
Petitioner was not reimbursed nor was he eligible for
reimbursement for any of the business-related expenses that he
incurred in 2006.
Petitioner timely filed his 2006 Federal income tax return.
Attached to his return was a Schedule A, Itemized Deductions, on
which he claimed deductions for, inter alia, legal fees of
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$13,574 and unreimbursed employee business expenses of $1,921.
The unreimbursed employee business expenses consisted of $444 for
Internet service, $621 for cellular telephone service, $694 for
office supplies and equipment, and $162 for postal expenses.
In a notice of deficiency, respondent disallowed, inter
alia, the deductions for legal fees and unreimbursed employee
business expenses.
Discussion
I. Burden of Proof
In general, the Commissioner’s determination 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).
Pursuant to section 7491(a), the burden of proof as to
factual matters may shift to the Commissioner under certain
circumstances. Petitioner has neither alleged that section
7491(a) applies nor established his compliance with its
requirements. Accordingly, petitioner bears the burden of proof.
See Rule 142(a).
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proof to establish entitlement to
any claimed deduction. 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). This burden requires the
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taxpayer to demonstrate that the deduction is allowable pursuant
to some statutory provision and that the expense to which the
deduction relates has been paid or incurred. See sec. 6001
(requiring the taxpayer to keep and produce adequate records so
as to enable the Commissioner to determine the taxpayer’s correct
tax liability); Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),
affd. per curiam 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a),
Income Tax Regs.
II. Legal Fees
Personal, living, and family expenses generally are not
deductible by taxpayers. Sec. 262(a). Attorney’s fees and other
costs paid in connection with a divorce generally are personal
expenses and therefore nondeductible. Sec. 1.262-1(b)(7), Income
Tax Regs. On the other hand, expenses paid for the production or
collection of income, or in connection with the determination,
collection, or refund of any tax, generally are deductible. Sec.
212(1), (3).
Section 1.262-1(b)(7), Income Tax Regs., provides that
the part of an attorney’s fee and the part of the other
costs paid in connection with a divorce * * *, which
are properly attributable to the production or
collection of amounts includible in gross income under
section 71 are deductible by the * * * [person who
receives amounts includable in gross income] under
section 212.
Whether legal fees and expenses are deductible under section
212, or nondeductible under section 262(a), depends on the origin
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of the underlying claim, not on its potential effects on the
fortunes of the taxpayer. See United States v. Gilmore, 372 U.S.
39, 51 (1963) (taxpayer was not entitled to deduct legal expenses
incurred in divorce proceedings in which his spouse sought a
share of his controlling interests in three corporations because
his spouse’s claims stemmed from the marital relationship, not
from an income-producing activity).
Petitioner contends that the attorney fees in his divorce
action were incurred in “defending [his] income” and attempting
to reduce the previously agreed amount of alimony. Petitioner
further argues that the alimony paid “severely limited [his]
ability to invest money that would have been income earning
either as 401(k) monies or perhaps rental property or other
business endeavors”. However, such fees are not made deductible
by section 212 but rather are governed by the general rule of
nondeductibility of attorney’s fees related to divorce. Sec.
262(a); United States v. Gilmore, supra; see also sec. 1.262-
1(b)(7), Income Tax Regs.
Accordingly, petitioner is not entitled to a deduction for
legal fees paid in 2006.
III. Unreimbursed Employee Business Expenses
Section 162 generally allows a deduction for ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. The determination of whether an
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expense satisfies the requirements for deductibility under
section 162 is a question of fact. Commissioner v. Heininger,
320 U.S. 467, 475 (1943).
In general, an expense is ordinary if it is considered
normal, usual, or customary in the context of the particular
business out of which it arose. Deputy v. du Pont, 308 U.S. 488,
495 (1940). Generally, an expense is necessary if it is
appropriate and helpful to the operation of the taxpayer’s trade
or business. Commissioner v. Tellier, 383 U.S. 687, 689 (1966);
Carbine v. Commissioner, 83 T.C. 356, 363 (1984), affd. 777 F.2d
662 (11th Cir. 1985). On the other hand, section 262(a)
generally disallows a deduction for personal, living, or family
expenses.
The term “trade or business” as used in section 162(a)
includes the trade or business of being an employee. Primuth v.
Commissioner, 54 T.C. 374, 377-378 (1970). Unreimbursed employee
business expenses incurred as a requirement of a taxpayer’s
employment are deductible. Fountain v. Commissioner, 59 T.C.
696, 708 (1973). Where expenses may pertain to either personal
or business use, a taxpayer may deduct that portion allocable to
business use. Vanicek v. Commissioner, 85 T.C. 731, 742 (1985).
Absent evidence from the taxpayer allocating the expenses between
personal and business use, the Court may estimate a deductible
amount, but we may bear heavily against the taxpayer whose
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inexactitude is of his own making. Cohan v. Commissioner, 39
F.2d 540, 544 (2d Cir. 1930). However, the taxpayer must present
sufficient evidence for the Court to form an estimate because
without such a basis, any allowance would amount to unguided
largesse. Williams v. United States, 245 F.2d 559, 560 (5th Cir.
1957); Vanicek v. Commissioner, supra at 742-743.
Notwithstanding the foregoing, the Court may not estimate a
taxpayer’s expenses with respect to the items enumerated in
section 274(d). Sanford v. Commissioner, 50 T.C. 823, 827-828
(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); Rodriguez
v. Commissioner, T.C. Memo. 2009-22 (strict substantiation
requirements of section 274(d) preclude any approximation of
expenses subject to that section). Section 274 requires strict
substantiation for listed property such as cellular telephones
and computers or peripheral equipment. See sec. 280F(d)(4).
Section 274(d) and the regulations thereunder require taxpayers
to substantiate their deductions by adequate records or
sufficient evidence establishing the amount, time, place, and
business purpose of the expense to corroborate the taxpayer’s own
testimony. See sec. 1.274-5T(b), Temporary Income Tax Regs., 50
Fed. Reg. 46014 (Nov. 6, 1985). In the absence of evidence
establishing the elements of the expenditure or use, deductions
must be disallowed entirely. Sec. 274(d); Sanford v.
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Commissioner, supra at 827-828; see also sec. 1.274-5T(a),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Finally, we note that certain deductions, including
unreimbursed employee business expenses, are subject to the 2
percent of adjusted gross income limitation under section 67(a).
A. Telephone, Cellular Phone, and Internet Costs
Petitioner stated that he maintained a telephone line to his
home in order to have Internet access as required by his Internet
service provider. However, basic service on the first telephone
line in a taxpayer’s residence is deemed a nondeductible personal
expense. Sec. 262(b). Petitioner has not shown that his
landline telephone expenses were more than the basic service on a
first telephone line. Thus, he is not entitled to any deduction
for the use of the telephone in his home.
Cellular telephones are included in the definition of listed
property, sec. 280F(d)(4)(A)(v), and are subject to the strict
substantiation requirements of section 274(d). Petitioner has
not introduced evidence sufficient to substantiate the expense
and use of his cellular telephone. Further, petitioner did not
demonstrate that any business use of his cellular telephone was
other than incidental. Accordingly, petitioner is not entitled
to a deduction for cellular telephone expenses for 2006.
Petitioner stated that he maintained Internet access to his
home so that he could work after hours on research and to
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communicate via email with coworkers. But petitioner also used
his computer and the Internet for personal purposes.
The Court has characterized Internet expenses as utility
expenses. Verma v. Commissioner, T.C. Memo. 2001-132. Strict
substantiation therefore does not apply, and the Court may
estimate petitioner’s deductible expenses provided that the Court
has a reasonable basis for making an estimate. Cohan v.
Commissioner, supra at 544; see Vanicek v. Commissioner, supra at
742-743 (an estimate must have a reasonable evidentiary basis);
Pistoresi v. Commissioner, T.C. Memo. 1999-39. Petitioner has
not demonstrated that his business use of the Internet was other
than incidental, nor has petitioner presented any evidence
allocating his personal and business use of the Internet; thus
the Court is unable to estimate a deductible amount.
Accordingly, petitioner is not allowed a deduction for costs
associated with Internet access.3
B. Supplies and Equipment
Petitioner contends that he purchased various office
supplies and equipment for his computer to enable him to work
after hours.
One of the equipment items was an upgrade of petitioner’s
cellular telephone. As discussed supra p. 10, petitioner is not
3
We note that Lockheed Martin provided Internet access to
petitioner at his place of business.
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entitled to a deduction for the upgrade of his cellular
telephone. See secs. 280F(d)(4)(A)(v), 274(d).
The other supply and equipment items include, inter alia,
computer software, batteries, a paper shredder, and a computer
keyboard. Petitioner has not presented any evidence allocating
his personal and business use of these items; thus the Court is
precluded from estimating a deductible amount. Therefore,
petitioner is not allowed a deduction for other supplies and
equipment.
C. Postal Expenses
Petitioner maintained a post office box for the receipt of
all of his mail. Petitioner also incurred expenses for postage
but acknowledged at trial that he did not “recall the specific
details” of the mailings. We conclude that petitioner is not
entitled to a deduction for postal expenses as they are personal
expenses. See sec. 262(a).
Conclusion
We have considered all of the other arguments made by
petitioner, and, to the extent that we have not specifically
addressed them, we conclude that they are without merit.
To reflect our disposition of the disputed issues, as well
as respondent’s concession,
Decision will be entered
under Rule 155.