T.C. Memo. 2011-248
UNITED STATES TAX COURT
ELIANA FARIAS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13357-10. Filed October 24, 2011.
Eliana Farias, pro se.
Priscilla A. Parrett, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined a deficiency of $5,178
in petitioner’s Federal income tax and an accuracy-related
penalty of $1,035.60 for 2007. After concessions by both
parties, the issues remaining for decision are whether petitioner
is entitled to additional itemized deductions beyond those
conceded by respondent and whether petitioner is liable for the
- 2 -
accuracy-related penalty under section 6662(a). Unless otherwise
indicated, all 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.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in California at the time she filed her
petition. During 2007 petitioner’s primary employment was as an
elementary school teacher with the Los Angeles Unified School
District (LAUSD), where she taught classes including health,
nutrition, and fitness. During 2007, under LAUSD’s policy,
teachers were provided with basic supplies for classroom use, and
purchases of anything beyond basic supplies were left to the
teacher’s discretion. Petitioner was not reimbursed by LAUSD for
any items that she purchased for her classroom. LAUSD did not
have a continuing education requirement that applied to
petitioner in 2007.
Petitioner also had two part-time jobs in 2007: (1)
Aerobics instructor and personal trainer at Spectrum Club Holding
Co. (Spectrum) and (2) workshop facilitator and liaison for
schools at The EduCare Foundation (EduCare). EduCare’s
reimbursement policy for 2007 outlined that mileage would be
reimbursed at a rate of 20 cents per mile and that employees
- 3 -
would be reimbursed for “very basic office supplies” if they
presented receipts. Petitioner received Forms W-2, Wage and Tax
Statement, for 2007 reporting earnings from EduCare of $13,489
and from Spectrum of $1,577.50.
In April 2007 petitioner went on a 10-night cruise, sailing
from Venice, Italy, to various locations in the Mediterranean.
Including airfare, spa visits and other onboard expenses, and a
passport and a visa, the total cost was $8,516.73. Petitioner
did not take classes related to her employment while on the
cruise.
Petitioner’s 2007 tax return was prepared by a return
preparer who received from petitioner the total expenses to claim
as deductions on the return without receipts and/or other
supporting documents. On the 2007 tax return, petitioner claimed
itemized deductions including unreimbursed employee expenses of
$23,268, consisting of qualified educator expenses of $18,378
(including the cost of her April 2007 trip), union and
professional dues of $2,223, tax preparation fees of $350, and
other education expenses of $2,317. In the notice of deficiency
dated March 23, 2010, the Internal Revenue Service (IRS)
disallowed these claimed deductions.
Thereafter, petitioner supplied to the IRS documents,
including numerous receipts, that were separated into the
following categories: Clothing, personal wellness, food, travel,
- 4 -
classes, field trips, and supplies. Petitioner has conceded that
she is not entitled to claim deductions for the expenses in the
categories identified as clothing, personal wellness, and food
items. Respondent has conceded that petitioner is entitled to
deductions for some of the claimed expenses, including the union
and professional dues fees and the tax preparation fees.
OPINION
The deductions petitioner claimed on her tax return for 2007
that remain at issue are unreimbursed employee expenses
consisting of: (1) $4,299 for classes/education; (2) $8,516.73
for travel and $990.47 for field trips; and (3) $8,779.51 for
supplies.
A taxpayer bears the burden of proving that he or she is
entitled to any deductions claimed. See New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934); Rockwell v. Commissioner,
512 F.2d 882, 886 (9th Cir. 1975), affg. T.C. Memo. 1972-133.
Generally, a taxpayer must keep records sufficient to establish
the amounts of the items reported on his or her Federal income
tax return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
Personal expenses are not deductible. Sec. 262.
A taxpayer may deduct unreimbursed employee expenses as an
ordinary and necessary business expense under section 162. Lucas
v. Commissioner, 79 T.C. 1, 6 (1982). The expenses must be
directly or proximately related to the taxpayer’s trade or
- 5 -
business. Deputy v. du Pont, 308 U.S. 488, 493-495 (1940); sec.
1.162-1, Income Tax Regs. An employee’s trade or business is
earning his or her compensation, and generally only those
expenses that are related to the continuation of employment are
deductible. Noland v. Commissioner, 269 F.2d 108, 111 (4th Cir.
1959), affg. T.C. Memo. 1958-60. A trade or business expense
deduction is not allowable to an employee to the extent that the
employee is entitled to reimbursement from an employer. Orvis v.
Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), affg. T.C.
Memo. 1984-533. Along with other miscellaneous itemized
deductions, unreimbursed employee expenses are subject to the 2-
percent limitation of section 67(a).
Claimed Classes/Education Expenses
Education expenses are considered ordinary and necessary
business expenses if the education maintains or improves skills
required by the taxpayer in his or her employment or meets the
express requirements of an employer imposed as a condition for
the taxpayer’s continued employment, status, or rate of
compensation. Sec. 1.162-5(a), Income Tax Regs.
Petitioner produced one receipt that showed that she paid
$2,250 to Morter Health Systems New for a “Professional B.E.S.T.
Program” in April 2007. Petitioner testified that this was a
health course but supplied no other evidence regarding this
program or how it related to her employment. Petitioner also
- 6 -
produced a receipt showing that she paid $52 for a beach
volleyball course that met on Mondays from April 9 to June 4,
2007. Petitioner did not show that she was required to teach
beach volleyball or acquire these skills as a condition of her
employment. Because petitioner has failed to fulfill the burden
of proving that she is entitled to these purported education
expenses, we sustain respondent’s disallowance.
Petitioner also contends that she is entitled to the
deduction that she claimed for a “WarriorSage, Inc. Illumination
Intensive” seminar that she paid for and attended in 2008.
Because this expense was not incurred in 2007 it was properly
disallowed by respondent.
Claimed Travel Expenses
Under section 274(m)(2), no deduction is allowed “for
expenses for travel as a form of education.” However, taxpayers
may deduct expenses incurred while traveling away from home if
the trip is primarily to obtain education that has the requisite
relation to the taxpayer’s business. Sec. 1.162-5(e)(1), Income
Tax Regs. If as an incident of such trip the taxpayer engages in
some personal activity such as “sightseeing, social visiting, or
entertaining, or other recreation”, the portion of the expenses
attributable to such personal activities is not deductible
pursuant to section 262. Id.
- 7 -
To deduct expenses incurred for travel, meals, and lodging
while away from home on job-related education, a taxpayer must
satisfy the strict substantiation requirements of section 274(d).
Section 274(d) disallows deductions for traveling expenses,
including meals and lodging, unless the taxpayer substantiates by
adequate records or by sufficient evidence corroborating the
taxpayer’s own statement: (1) The amount of such expense, (2)
the time and place such expense was incurred, and (3) the
business purpose for which such expense was incurred. See sec.
1.274-5T(b)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985). Adequate records generally must be written and
must be prepared or maintained such that a record of each element
of an expenditure or use that must be substantiated is made at or
near the time of the expenditure or use when the taxpayer has
full present knowledge of each element. See sec. 1.274-
5T(c)(2)(ii)(C), Temporary Income Tax Regs., 50 Fed. Reg. 46018
(Nov. 6, 1985). In the alternative, each element of an
expenditure or use must be established by the taxpayer’s own
written or oral statement “containing specific information in
detail as to such element” combined with corroborative evidence
to establish such element. Sec. 1.274-5T(c)(3)(i), Temporary
Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985). Neither a
taxpayer nor the Court may estimate permissible deductions that
do not satisfy the strict substantiation requirements of section
- 8 -
274(d). See Sanford v. Commissioner, 50 T.C. 823, 827-828
(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).
Petitioner produced receipts for the 10-day Mediterranean
cruise, including receipts for airfare to and from Italy, onboard
expenses, and the costs of obtaining a passport and a visa. The
cruise involved sightseeing, spa visits, and other recreation.
The receipts do not show any business purpose behind the expenses
and do not satisfy the strict substantiation requirements of
section 274(d). We conclude that the cruise and the associated
expenses are nondeductible personal expenses.
Petitioner produced receipts that she claims are for weekend
field trips that served as “incentives” for her students. The
receipts are primarily for gasoline purchases and recreational
activities, such as movie tickets and two Disneyland admission
tickets. Another receipt, from IMAX California ScienCenter,
lists the recipient as “Hooper Avenue Elementary School”. The
receipt shows the payment was made by check, but no information
about the payor is listed.
Petitioner has neither shown that the expenses for field
trips were an ordinary and necessary expense for any of her
employers nor submitted evidence sufficient to substantiate these
claimed expenses as required by section 274(d).
- 9 -
Claimed Expenses for Supplies
The first $250 of deductions for expenses paid or incurred
in connection with books, supplies, computer equipment, other
equipment, and supplementary materials used by an eligible
educator in the classroom is subtracted from gross income to
determine the taxpayer’s adjusted gross income. Sec.
62(a)(2)(D). Any substantiated expenses after the first $250
that relate to a taxpayer’s employment as a teacher will be
allowed as unreimbursed employee expenses. Id. To claim a
deduction for teaching supplies, it is not enough that the
supplies be helpful to the students and appropriate for use in
the classroom; they must also be directly related to the
taxpayer’s job as a teacher and a necessary expense of being a
teacher. See Welch v. Helvering, 290 U.S. 111, 113-114 (1933);
Wheatland v. Commissioner, T.C. Memo. 1964-95.
Petitioner produced receipts for supplies totaling $9,361.
Respondent has conceded that petitioner is entitled to claim
$581.59 of these expenses. Some of the receipts were dated in
years other than 2007 and are not relevant for petitioner’s 2007
tax return. The remaining claimed expenses, totaling $8,779.51,
are divided into the following categories: (1) Student
“incentives”; (2) computer; (3) classroom improvement and
maintenance; (4) specialty chair and related items; and (5)
fitness items.
- 10 -
1. Claimed Student Incentives Expenses
Petitioner claimed that as a teacher she occasionally used
“candy and sugar” as student incentives. A number of the
receipts she offered to substantiate these expenses also include
other food items and household goods. Petitioner also testified
that she purchased a U.S. savings bond that was presented to a
student in recognition of community service provided to the
school.
There is no evidence that the school required the purchase
of the candy or the savings bond for petitioner’s students.
These expenses were not necessary to petitioner’s job; and no
matter how well intentioned, gifts to students are not deductible
as business expenses. See Patterson v. Commissioner, T.C. Memo.
1971-234.
Petitioner also produced receipts for purchases of several
audio players and testified that they “related” to her fifth-
grade classes. However, petitioner did not explain how the
purchase of the audio players for her students was related to the
classes she was teaching, whether they were used in the
classroom, or whether they were given as gifts to the students.
Accordingly, we sustain respondent’s determination that
petitioner is not entitled to claim deductions for these
expenses. See Tesar v. Commissioner, T.C. Memo. 1997-207;
Wheatland v. Commissioner, supra.
- 11 -
2. Claimed Computer Expense
Petitioner produced a receipt for the purchase of a laptop
computer. Petitioner testified that she used it both at home and
at work.
Section 274(d) requires substantiation of any expense
incurred or paid with respect to certain listed property. Listed
property includes computers. Sec. 280F(d)(4). Petitioner did
not provide adequate substantiation of the business use of the
computer. Accordingly, we sustain respondent’s disallowance of
the deduction for the claimed computer expense.
3. Claimed Classroom Improvement and Maintenance Expenses
Petitioner produced receipts purportedly for various
improvements to and maintenance of her classroom. Petitioner
testified that items listed on the receipts from home improvement
stores were for supplies to post materials in the classroom and
that “we had a sink issue in the classroom that the school was
taking too long to fix so then I had to do something about it”.
These receipts list items such as batteries, a vacuum, switch
plates, door locks, and floor tiles. Such purchases are not
ordinary or necessary expenses for teaching for LAUSD. See
Deputy v. du Pont, 308 U.S. at 494-495; Welch v. Helvering, supra
at 113-114. Petitioner’s testimony as to these items was vague
and uncorroborated. She has not shown that the expenses are
related to the continuation of her employment. See Noland v.
- 12 -
Commissioner, 269 F.2d at 111. Thus, we agree with respondent’s
determination that these claimed expenses are disallowed.
4. Claimed Cost of Specialty Chair and Related Items
Petitioner produced a receipt from Relax The Back store for
$2,179.99 for items including a specialty chair, an adjustable
headrest, a pillow, and ice/heat pads. Petitioner testified that
these items were purchased because of a back injury that she
sustained when relocating her classroom from one room to another.
These expenses were not an ordinary and necessary expense of her
job. See Deputy v. du Pont, supra at 494-495; sec. 1.162-1,
Income Tax Regs. (Even if the cost of these items qualified as a
medical expense reportable on Schedule A, Itemized Deductions,
the total expense is not enough to overcome the 7.5-percent
adjusted gross income limitation. See sec. 213(a).)
5. Claimed Expenses for Fitness Items
Petitioner produced receipts from sports and dance stores
and testified that these expenses were specifically related to
the fitness classes that she taught. Some of the receipts do not
describe the item purchased, and petitioner did not explain these
items in her testimony. Other receipts identify clothing items.
For the cost of clothing and maintaining such clothing to be
deductible as an ordinary and necessary business expense, it must
(1) be required or essential in the taxpayer’s employment,
- 13 -
(2) not be suitable for general or personal wear, and (3) not be
so worn. Yeomans v. Commissioner, 30 T.C. 757, 767 (1958).
Petitioner testified that she purchased the fitness clothing
for work, but she never stated (and there is no evidence) that
the clothing was unsuitable for general or personal wear or that
it was not used away from work. We conclude that petitioner is
not entitled to deduct the expenses claimed for fitness items.
Accuracy-Related Penalty
Section 6662(a) and (b)(1) and (2) imposes a 20-percent
accuracy-related penalty on any underpayment of Federal income
tax attributable to a taxpayer’s negligence or disregard of rules
or regulations or substantial understatement of income tax.
Section 6662(c) defines negligence as including any failure to
make a reasonable attempt to comply with the provisions of the
Internal Revenue Code and defines disregard as any careless,
reckless, or intentional disregard. Disregard of rules or
regulations is careless if the taxpayer does not exercise
reasonable diligence to determine the correctness of a return
position that is contrary to the rule or regulation. Sec.
1.6662-3(b)(2), Income Tax Regs. A substantial understatement of
income tax exists if the understatement exceeds the greater of 10
percent of the tax required to be shown on the return or $5,000.
Sec. 6662(d)(1)(A).
- 14 -
Under section 7491(c) the Commissioner bears the burden of
production with regard to penalties and must come forward with
sufficient evidence indicating that it is appropriate to impose
penalties. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
However, once the Commissioner has met the burden of production,
the burden of proof remains with the taxpayer, including the
burden of proving that the penalties are inappropriate because of
reasonable cause or substantial authority. See Rule 142(a);
Higbee v. Commissioner, supra at 446-447. Because of
respondent’s concessions, petitioner’s deficiency will not be a
substantial understatement; however, respondent asserts that the
penalty is applicable because of petitioner’s negligence and
disregard of rules and regulations.
Respondent has met the burden of production that
petitioner’s underpayment of tax is attributable to negligence or
disregard of rules or regulations. Claiming personal expenses as
business expenses and failing to maintain records substantiating
any valid deductions constitute negligence for purposes of
section 6662(a) and (b)(1). See Higbee v. Commissioner, supra at
449; sec. 1.6662-3(b)(1), Income Tax Regs.
The accuracy-related penalty under section 6662(a) is not
imposed with respect to any portion of the underpayment as to
which the taxpayer acted with reasonable cause and in good faith.
Sec. 6664(c)(1); Higbee v. Commissioner, supra at 448. The
- 15 -
decision as to whether a taxpayer acted with reasonable cause and
in good faith is made on a case-by-case basis, taking into
account all of the pertinent facts and circumstances. See sec.
1.6664-4(b)(1), Income Tax Regs. Reliance on professional advice
may constitute reasonable cause and good faith, but only if,
under all the circumstances, such reliance was reasonable.
Hansen v. Commissioner, 471 F.3d 1021, 1032 (9th Cir. 2006),
affg. T.C. Memo. 2004-269; Freytag v. Commissioner, 89 T.C. 849,
888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.
868 (1991); sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioner testified that she relied on a medical
professional and information presented at an LAUSD meeting with
respect to expenses that she claimed as unreimbursed employee
expenses. Petitioner has failed to provide evidence that those
whom she relied on were competent professionals with sufficient
expertise or that it was reasonable for her to rely on their
purported advice. See Neonatology Associates, P.A. v.
Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir.
2002). Further, any reliance upon petitioner’s tax return
preparer was not reasonable because petitioner provided the
return preparer with only the total expenses to be claimed on her
return, not the receipts and/or other supporting documents. We
sustain the application of the accuracy-related penalty under
section 6662.
- 16 -
To reflect concessions and the foregoing,
Decision will be entered
under Rule 155.