T.C. Summary Opinion 2011-7
UNITED STATES TAX COURT
GEORGE EDWARD EPPS III AND MICHELLE HAYNIE EPPS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20276-09S. Filed January 25, 2011.
George Edward Epps III and Michelle Haynie Epps, pro sese.
Jeffrey R. Knight and Bradley C. Plovan, for respondent.
JACOBS, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when 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.
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Respondent determined a deficiency of $13,102 in
petitioners’ Federal income tax for 2006. The issue for decision
is whether various expenditures reported on Schedule C, Profit or
Loss From Business (namely automobile and entertainment expenses)
with respect to George E. Epps III’s (Mr. Epps) employment in
2006 are deductible. Petitioners concede that the expenditures
reported on Schedule C, if deductible, are properly reportable on
Schedule A, Itemized Deductions, as unreimbursed employee
business expenses, subject to the 2-percent adjusted gross income
limitation.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2006, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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. Petitioners resided in
Maryland when the petition was filed.
During 2006 Mr. Epps was employed by CIT, a large consumer
finance company, where he was an area sales manager responsible
for the effective and efficient operation of his sales team.
To accomplish his assigned tasks, Mr. Epps went “out in the
field” two to three times a week, using his own automobile.
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Mr. Epps had a reimbursable “area manager travel and
expense” budget of $150 a month. CIT’s job description for Mr.
Epps’ position stated that the area manager should “practice
effective expense control by managing within * * * [the $150]
established monthly budget”. Mr. Epps admitted that during 2006
CIT reimbursed him for automobile and entertainment expenses
associated with his job up to the $150 monthly limit.
On their 2006 Form 1040, U.S. Individual Income Tax Return,
petitioners attached Schedule C on which they reported the
following items:
Utilities $3,000
Office expenses 3,500
Interest--mortgage 25,887
Insurance (other than health) 500
Meals and entertainment 212
Travel 2,364
Car and truck expenses 7,220
Other expenses 4,366
As stated supra p. 2, petitioners concede that these items
are not deductible on Schedule C. Moreover, petitioners admit
that the $25,887 of mortgage interest was deducted twice--once on
Schedule A and once on Schedule C and that Mr. Epps did not incur
travel expenses for his employer.
At trial petitioners introduced a mileage log with regard to
Mr. Epps’ purported business use of his automobile during 2006.
The log contains, for each date of use, the automobile’s starting
odometer reading, its ending odometer reading, and the total
miles driven. Mr. Epps admitted that he used his automobile for
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both business and personal reasons. The mileage log does not
indicate the number of miles driven for business vis-a-vis the
number of miles driven for personal use.
Petitioners also introduced a contract between Mr. Epps as
purchaser and WFI Stadium, Inc. as seller for two club seat
season tickets for the Washington Redskins 2006 football season.
In addition, petitioners introduced a meals and entertainment
expense ledger listing the date of eight Washington Redskins
football games, the persons attending the game, the cost of the
ticket claimed as a deduction ($454 for each game), and a column
entitled “nature of benefit”, which gave a vague description of
the business relationship between Mr. Epps and the person
attending the game, such as “lending fees”, “mortgage funding”,
and “interest rate”. Mr. Epps admitted he did not attempt to
obtain reimbursement for the cost of the season tickets from CIT.
He further admitted that had he requested reimbursement, his
request probably would have been denied.
Petitioners further introduced several receipts for meals at
local restaurants. No information as to the persons attending
the functions or the business purposes behind the functions to
which the receipts pertain was provided.
Discussion
Deductions are a matter of legislative grace and are
allowable only as specifically provided by statute. See INDOPCO,
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Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Joseph v.
Commissioner, T.C. Memo. 2005-169. Taxpayers bear the burden of
proving that they are entitled to any deductions claimed. New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Singh v.
Commissioner, T.C. Memo. 2009-36;1 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 (1975), affd. per curiam 540
F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.
Section 162(a) provides that “There shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business”. The performance of services as an employee
constitutes a trade or business. O’Malley v. Commissioner, 91
T.C. 352, 363-364 (1988); Spielbauer v. Commissioner, T.C. Memo.
1998-80. An ordinary expense is one that is common and accepted
in the particular business. Welch v. Helvering, 290 U.S. 111,
113-114 (1933). A necessary expense is one that is appropriate
and helpful in carrying on the trade or business. Id. at 113;
Heineman v. Commissioner, 82 T.C. 538, 543 (1984). An employee’s
trade or business is the earning of compensation, and generally
1
Sec. 7491(a)(1) shifts the burden of proof to the
Commissioner under certain circumstances. Petitioners have
neither alleged that this section applies nor established their
compliance with the substantiation and recordkeeping
requirements. See sec. 7491(a)(2)(A) and (B).
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only those expenses that relate to the continuation of his
employment are deductible. Noland v. Commissioner, 269 F.2d 108,
111 (4th Cir. 1959), affg. T.C. Memo. 1958-60. In Spielbauer v.
Commissioner, supra, we stated:
If, as a condition of employment, an employee is required to
incur expenses on behalf of his employer, the employee is
entitled to a deduction for those expenses that are ordinary
and necessary to his business as an employee to the extent
such expenses are not subject to reimbursement. * * *
See Schmidlapp v. Commissioner, 96 F.2d 680 (2d Cir. 1938).
Respondent maintains that petitioners have not shown that
the expenditures claimed as deductions were required or expected
by CIT. According to respondent, since these expenses were not a
condition of employment, they are not petitioners’ ordinary and
necessary expenses. We agree with respondent.
As noted supra p. 3, Mr. Epps’ area office manager 2006 job
description stated that as part of his “Territory & Relationship
Management” responsibilities, Mr. Epps was to “practice effective
expense control by managing within [his] established monthly
[$150] budget”. At trial Mr. Epps acknowledged his spending on
entertainment, such as for happy hours with clients and for
Washington Redskins club level tickets, was something he did on
his own. Although it is understandable that Mr. Epps wanted to
inspire mortgage brokers to funnel business to CIT, entertaining
them lavishly was not a condition of Mr. Epps’ employment with
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CIT. Accordingly, we sustain respondent’s determination
disallowing the deductions claimed.
Moreover, petitioners did not satisfy the strict
substantiation requirements with respect to deductibility of Mr.
Epps’ automobile and entertainment expenses, as set forth in
section 274(d) and section 1.274-5T(c)(2), Temporary Income Tax
Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Section 274(d)
provides that no deduction under section 162 shall be allowed
for: (a) Travel expenses (including meals and lodging while away
from home); (b) any item related to an activity of a type
considered to be entertainment, amusement, or recreation; (c) any
expense for gifts; or (d) the use of any “listed property”, as
defined in section 280F(d)(4), unless the taxpayer substantiates
by adequate records or sufficient evidence certain elements
corroborating the taxpayer’s own testimony. Section
280F(d)(4)(A)(i) provides that a passenger vehicle is “listed
property”.
For an expense governed by section 274(d), the taxpayer must
substantiate by adequate records or sufficient evidence to
corroborate the taxpayer’s own testimony: (a) The amount of the
expense; (b) the time and place of the travel or entertainment;
(c) the business purpose of the expense; and in the case of
entertainment, (d) the business relationship to the taxpayer of
persons entertained or using the property. To meet the adequate
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records requirements of section 274(d), a taxpayer must maintain
documentary evidence sufficient to establish each element of an
expenditure or use. See sec. 1.274-5T(c)(2), Temporary Income
Tax Regs., supra. Contemporaneous logs are not required, but
corroborative evidence to support a taxpayer’s reconstruction of
the elements of an expenditure or use must have “a high degree of
probative value to elevate such statement” to the level of
credibility of a contemporaneous record. Sec. 1.274-5T(c)(1),
Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
With respect to Mr. Epps’ entertainment expenses (including
his football tickets), while petitioners’ records indicate that
the claimed expenditures were incurred, neither petitioners’
records nor evidence corroborating Mr. Epps’ testimony
demonstrates the business purpose of the expenditures or the
business relationship to Mr. Epps of the individuals entertained.
Hence, petitioners have not satisfied the requirements of section
274(d) with regard to the claimed entertainment expenses.
With respect to Mr. Epps’ automobile mileage deductions,
petitioners again failed to demonstrate the business purpose of
the automobile use or distinguish between Mr. Epps’ business and
personal use of the automobile. Petitioners’ mileage log is not
an adequate record within the meaning of section 274(d) and the
regulations thereunder, and petitioners failed to provide other
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corroborative evidence sufficient to satisfy the requirements of
that section.
To reflect concessions by the parties,
Decision will be entered
under Rule 155.