PURSUANT TO INTERNAL REVENUE CODE
SECTION 7463(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.
T.C. Summary Opinion 2013-44
UNITED STATES TAX COURT
HARRIS CRAIG COHEN AND JENNIFER GAYLE COHEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18208-11S. Filed June 3, 2013.
Harris Craig Cohen and Jennifer Gayle Cohen, pro sese.
Karen E. Walkenhorst, for respondent.
SUMMARY OPINION
PANUTHOS, Chief 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. 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
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for any other case. Unless otherwise indicated, subsequent section references are
to the Internal Revenue Code in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in Harris Craig Cohen’s Federal
income tax of $7,052 for tax year 2006. Respondent also determined a deficiency
in petitioner and Jennifer Gayle Cohen’s Federal income tax of $8,122 for tax year
2007.
After concessions,1 the issues for decision are: (1) whether petitioner is
entitled to deductions claimed on Schedule C, Profit or Loss From Business, for
tax year 2006, and whether petitioners are entitled to the same for tax year 2007;
and (2) whether petitioner is entitled to deductions claimed on Schedule A,
Itemized Deductions, greater than those respondent allowed for tax year 2006, and
whether petitioners are entitled to the same for tax year 2007.
1
Respondent concedes that petitioners are entitled to a deduction of $86 for
books on their 2007 Schedule A. Petitioners did not provide any evidence at trial
to substantiate the remaining $284 deduction for books that respondent disallowed
for tax year 2007. Accordingly, that amount is deemed conceded by petitioners.
See Rule 149(b). Respondent stipulated that petitioner made a cash charitable
contribution of $60 in 2006. Accordingly petitioner is entitled to that amount as a
deduction on his 2006 Schedule A. The parties stipulated that petitioner paid
union dues of $975 in 2006 and $994 in 2007. Respondent previously allowed
those amounts as deductions on the 2006 and 2007 Schedules A, and petitioner did
not provide any evidence at trial to substantiate the disallowed portions of the
deductions. Therefore, the disallowed portions are deemed conceded. See id.
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Background
Some of the facts have been stipulated, and we incorporate the stipulation of
facts and accompanying exhibits by this reference. Petitioners lived in California
when they filed the petition. Ms. Cohen is a party to this case because she filed a
joint Federal income tax return with petitioner for the 2007 tax year.
In 2006 and 2007, the years in issue, petitioner was employed full time by
EP Entertainment (EP) as a picture editor. In his job as a picture editor, petitioner
created promotional videos for television shows. The promotional videos were
generally 15 to 30 seconds long, and petitioner created them daily.
In 2004 petitioner established an LLC known as Untitled Productions (UP).
Petitioner formed UP in order to produce small television pilot programs on
speculation. Petitioner was the executive producer at UP, and he intended to film
pilot programs and then set up meetings to try to sell the pilot programs to clients.
The pilot programs that petitioner filmed were “basically small sales reels * * *
kind of like reality TV short trailers.” Petitioner did not receive any income from
UP in 2006 or 2007, and he dissolved UP in 2008 because of lack of interest in the
pilot programs.
Petitioner asserted that he filmed two pilot programs as executive producer
for UP during 2006 and 2007. After filming, petitioner contacted producers that
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he knew in the business to see whether they had any interest in his pilot programs.
He talked to the producers about the concept and the idea; and if he presented the
pilot program to a potential client, he presented a two-minute trailer of the
program. Petitioner’s testimony was vague about the years in which the pilot
programs were actually filmed. The documents petitioner submitted to establish
that he filmed the pilot programs in 2006 and 2007 instead indicate that he likely
filmed the pilot programs in 2004 and not during the years in issue.
Petitioner maintained a home office during the years in issue. His employer,
EP, did not require him to maintain a home office but did require that he log onto
EP’s servers to write scripts and start producing the promotional videos that he
would create the following day at EP’s offices. Petitioner typically worked 12
hours per day for EP. Of the 12 hours, petitioner worked about 3 hours per day
from his home office. When petitioner was not working for EP at his home office,
he used the same equipment and office for UP, the Schedule C activity. Petitioner
used four or five computers in his home office.
Petitioner filed an individual return for tax year 2006 and a joint return for
the 2007 tax year. On his 2006 return petitioner claimed a noncash charitable
contribution deduction of $7,220. He also claimed a Schedule A deduction of
$9,908 for unreimbursed employee expenses consisting of books, union and
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professional dues, and vehicle expenses. Petitioner attached a Schedule C to his
2006 return for UP. He did not report gross receipts for the Schedule C activity,
but he claimed expense deductions totaling $11,609 for depreciation and section
179 expenses, meals and entertainment, and “other expenses”.
On their 2007 joint return, petitioners claimed Schedule A deductions of
$11,600 for noncash charitable contributions and $6,906 for unreimbursed
employee expenses consisting of books, union and professional dues, and home
office expenses. Petitioners also claimed a Schedule A deduction of $2,421 for
miscellaneous mileage. Petitioners attached a Schedule C to their 2007 return for
UP. Petitioners did not report any gross receipts for the Schedule C activity, but
they claimed expense deductions totaling $11,665 for depreciation and section 179
expenses, taxes and licenses, and “other expenses”.
Respondent issued notices of deficiency for petitioner’s 2006 tax year and
petitioners’ 2007 tax year on May 10, 2011. The notices of deficiency disallowed
the following expenses for lack of substantiation:
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Schedule A
Expense 2006 2007
Charitable contributions $6,220 $10,600
Unreimbursed employee
expenses (subject to 2%
floor) 8,501 5,717
Miscellaneous itemized
deductions (subject to 2%
floor) --- 2,421
Schedule C
Expense 2006 2007
Depreciation $5,767 $5,133
Meals and entertainment 1,350 ---
Taxes and licenses --- 800
Other expenses 4,492 5,732
Discussion
The Commissioner’s determination set forth in a notice of deficiency is
presumed correct, and a taxpayer generally bears the burden of proving otherwise.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a
matter of legislative grace, and the taxpayer bears the burden of proving
entitlement to any deduction claimed. Rule 142(a); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934).
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Pursuant to section 7491(a), the burden of proof may shift to the
Commissioner if the taxpayer produces credible evidence with respect to any
relevant factual issue and meets other requirements. Petitioners do not contend
that section 7491(a) shifts the burden of proof to respondent, nor does the record
establish that petitioners satisfy the section 7491(a)(2) requirements.
Section 162(a) allows a deduction for ordinary and necessary business
expenses paid or incurred during the taxable year in carrying on any trade or
business. In order for an expense to be “necessary”, it must be “appropriate and
helpful” to the taxpayer’s business. Welch v. Helvering, 290 U.S. at 113. An
expense will be considered “ordinary” if it is a common or frequent occurrence in
the type of business in which the taxpayer is involved. Deputy v. Du Pont, 308
U.S. 488, 495 (1940). To be engaged in a trade or business, an individual must be
involved in an activity with continuity and regularity and the primary purpose for
engaging in the activity must be for income or profit. Commissioner v.
Groetzinger, 480 U.S. 23, 35 (1987).
Taxpayers must keep sufficient records to substantiate any deductions
claimed. Sec. 6001. As a general rule, if the trial record provides sufficient
evidence that the taxpayer has paid or incurred a deductible expense but the
taxpayer is unable to adequately substantiate the precise amount of the deduction
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to which he is otherwise entitled, the Court may estimate the amount of the
deductible expense and allow the deduction to that extent, bearing heavily against
the taxpayer whose inexactitude in substantiating the amount of the expense is at
his own making. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).
We cannot estimate the amount, however, unless the taxpayer proves that he or she
paid or incurred some deductible expense and provides some basis from which we
can develop a reasonable estimate. Williams v. United States, 245 F.2d 559, 560
(5th Cir. 1957).
In the case of expenses paid or incurred with respect to listed property, e.g.,
passenger automobiles or other property used as a means of transportation, section
274(d) overrides the Cohan doctrine and provides that these expenses are
deductible only if the taxpayer meets stringent substantiation requirements. Secs.
274(d), 280F(d)(4); see Lewis v. Commissioner, 560 F.2d 973, 977 (9th Cir.
1977), rev’g on other grounds T.C. Memo. 1974-59; Sanford v. Commissioner, 50
T.C. 823, 827-828 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969); sec.
1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
I. Schedules C
On his 2006 return, petitioner claimed, and respondent disallowed,
deductions totaling $11,609 for Schedule C depreciation and section 179
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expenses, meals and entertainment, and other expenses. Respondent determined
that petitioner did not establish that the expenses were paid or incurred during the
taxable year and that the expenses were not ordinary and necessary business
expenses. On their 2007 return, petitioners claimed, and respondent disallowed,
deductions totaling $11,665 for Schedule C depreciation and section 179 expense,
taxes and licenses, and other expenses. Respondent determined that petitioners
did not establish that the expenses were paid or incurred during the taxable year
and that the expenses were not ordinary and necessary business expenses.
A. Depreciation
Petitioner claimed, and respondent disallowed, a Schedule C deduction of
$5,767 for depreciation expenses on his 2006 return. Petitioner attached to his
return a Form 4562, Depreciation and Amortization, as well as a “2006 Federal
Depreciation Schedule”. The Form 4562 does not contain a description of the
property for which petitioner claimed the depreciation expenses. The 2006
Federal Depreciation Schedule allocates the total depreciation expenses claimed
for 2006 between machinery and equipment expenses of “misc cost-up exp” and
“misc cost-up exp tv pilot”, and miscellaneous expenses for “misc cost-up exp tv
pilo”.
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Petitioners claimed, and respondent disallowed, a Schedule C deduction of
$5,133 for depreciation expenses on their 2007 return. Petitioners attached to their
return a Form 4562 as well as a “2007 Federal Depreciation Schedule”. The Form
4562 claims a section 179 expense deduction of $604 for a “5-year laptop”, and
the 2007 Federal Depreciation Schedule allocates the remaining depreciation
expenses claimed for 2007 between machinery and equipment expenses of “misc
cost-up exp”, “misc cost-up exp tv pilot”, “tv project exp” and miscellaneous
expenses for “misc cost-up exp tv pilo”.
Section 167(a) allows as a depreciation deduction a reasonable allowance
for the exhaustion, wear and tear of property used in a trade or business. The
purpose of the deduction for depreciation is to allow the taxpayer to recover over
the useful life of the property its cost or other basis. United States v. Ludey, 274
U.S. 295, 300-301 (1927).
Pursuant to section 168(a), the depreciation deduction provided by section
167(a) is determined by using the applicable depreciation method, applicable
convention, and the applicable recovery period. The period for depreciation of an
asset begins when the taxpayer first places the asset into service. Sec. 1.167(a)-
10(b), Income Tax Regs. Generally, depreciation is computed by using the cost of
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the property as its basis. Secs. 167(c), 1011, 1012; sec. 1.167(g)-1, Income Tax
Regs.
Petitioner attempted to substantiate the depreciation deductions with the two
depreciation schedules, credit card statements from 2006 and 2007, and his
testimony regarding the 2006 depreciation deductions. Petitioner testified that the
“miscellaneous cost-up exp” listed on the 2006 depreciation schedule was for
computer equipment such as hard drives, cables, tapes and CD burners that
petitioner purchased to transfer videotapes into a digital format. Petitioner
asserted that the “misc cost-up exp tv pilot” listed on his 2006 depreciation
schedule was for computer decks and equipment that he rented or purchased for
his project. Petitioner asserted that miscellaneous expenses for “misc cost-up exp
tv pilo” on the 2006 depreciation schedule were incurred in 2006 and were
associated with his production of a pilot program in that year.
There is nothing in the record that adequately identifies the assets for which
petitioner claimed depreciation deductions for 2006 and 2007. The depreciation
schedules are unclear in that they do not identify the property for which the
depreciation deductions were claimed, and it is not clear from the credit card
statements whether the items purchased were personal or business related.
Furthermore, some of the items may be subject to the substantiation requirements
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of section 274(d). For those purchases, petitioner did not provide sufficient proof
of the amounts expended, the time and place of acquisition, or the business
purpose. See sec. 1.274-5T(a) and (b), Temporary Income Tax Regs., supra.
Petitioner has not substantiated the claimed depreciation or section 179 expense
deductions, and his testimony does not establish that he is entitled to a deduction
for depreciation or section 179 expenses; nor does it provide a basis on which we
might estimate those claimed deductions that are not subject to the substantiation
requirements of section 274(d). See Cohan v. Commissioner, 39 F.2d at 543-544.
We sustain respondent’s determination disallowing the deductions for depreciation
and section 179 expenses for tax years 2006 and 2007.
B. Meals and Entertainment
On his 2006 Schedule C petitioner claimed, and respondent disallowed, a
deduction for $1,350 in meals and entertainment expenses. A deduction is not
allowed for meals and entertainment expenses 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) the business relationship between the
taxpayer and the persons being entertained. Sec. 274(d).
To substantiate the claimed deduction for meals and entertainment
expenses, petitioner offered credit card statements that he argues show payments
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for business-related meals and entertainment. Some of the charges do bear the
names of restaurants, but none of them reflects that the meals were business
related. Some of the charges on the credit card statements have handwritten
notations such as “Dinner Business-Chris” next to the charge for the purported
business meal. Petitioner also offered business meal logs for both the 2006 and
2007 tax years. The logs list the date of the meal, the location, the first names of
the people with whom petitioner had the meal, the reason for the meal, and the
cost of the meal. The logs, which were not prepared at the time the expenses were
incurred, were provided to respondent the day before trial.
Although the logs purport to set forth the amount and the date of each
expense, petitioner admitted that the entries in the logs were not made at or near
the time any expenses were incurred. Additionally, there is nothing in the record
but petitioner’s own testimony to indicate that the credit card charges for meals
related to petitioner’s business. We are not required to find this self-serving and
unsupported testimony to be sufficient to prove that petitioner incurred meal and
entertainment expenses in 2006. See Tokarski v. Commissioner, 87 T.C. 74, 77
(1986); Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), aff’d per curiam, 540
F.2d 821 (5th Cir. 1976). Petitioner’s testimony did not contain specific
information in detail about the meals and entertainment expenses, and petitioner
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did not provide corroborative evidence of such expenses. See sec. 1.274-
5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).
Furthermore, a noncontemporaneous log does not satisfy the requirements of
section 274(d). Sec. 1.274-5T(c)(2)(ii), Temporary Income Tax Regs., 50 Fed.
Reg. 46017 (Nov. 6, 1985). Accordingly, respondent’s determination that
petitioner is not entitled to a deduction for meals and entertainment expenses is
sustained.
C. Taxes and Licenses
On their 2007 Schedule C petitioners claimed, and respondent disallowed, a
deduction of $800 for taxes and licenses. To substantiate the expense, petitioner
provided a copy of a personal check for $800, payable to the Franchise Tax Board.
The exact date written on the check is illegible, but it is clear that the date is in
June 2007. Petitioner also provided a copy of a personal check for $27, dated
August 11, 2007, and payable to the City of Anaheim. We are satisfied that
petitioner paid $800 to the Franchise Tax Board and $27 to the City of Anaheim in
2007, but the record does not reflect for what the $800 and the $27 were paid. The
personal checks are insufficient to establish that these expenses were not personal,
and therefore the expenses are not deductible. See sec. 262(a).
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D. Other Expenses2
Petitioner claimed, and respondent disallowed, Schedule C deductions
totaling $4,492 for “other expenses” on his 2006 return. Petitioner’s claimed
“other expenses” consist of $1,185 for cable expenses, $1,701 for cellular phone
expenses, $698 for equipment rentals, $110 for miscellaneous expenses, $498 for
repairs and maintenance, and $300 for software supplies.
On their 2007 return petitioners claimed, and respondent disallowed,
Schedule C deductions totaling $5,732 for “other expenses”. Petitioners’ claimed
“other expenses” consist of $1,430 for cable expenses, $1,021 for cellular phone
expenses, $331 for software supplies, $298 for admissions fees, $1,500 for
convention expenses, $420 for Internet expenses, $419 for office supplies, $105
for parking, $88 for small equipment, and $120 for video rentals.
2
To establish that the “other expenses” claimed for 2006 and 2007 on the
Schedules C were ordinary and necessary business expenses, petitioner submitted
a letter dated September 1, 2009, from the Director of Membership Services at the
Motion Picture Editors Guild. The letter is addressed “To Whom it May Concern”
and describes a picture editor’s job requirements and lists various expenses that
“are an integral part of an editor’s job and are requirements for meeting the
expectations of their employers in an extremely demanding and competitive field.”
We are not persuaded that the letter establishes that the claimed “other expenses”
are ordinary and necessary business expenses for petitioner’s Schedule C activity,
since petitioner was an executive producer and not a picture editor.
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1. Cellular Phone Expenses
Petitioner claimed deductions of $1,701 and $1,021 on the 2006 and 2007
Schedules C, respectively, for cellular phone expenses. Such expenses are subject
to heightened substantiation requirements. See secs. 274(d), 280F(d)(4).
Petitioner used his personal cellular phone to accept calls related to his business
and provided copies of credit card statements and canceled checks showing
payments to Verizon and Verizon Wireless to substantiate the expenses. Petitioner
did not provide an allocation between his business and personal use of the cellular
phone. Although petitioner provided records of payments for cellular phone
expenses in 2006 and 2007, he failed to provide adequate records or other
sufficient evidence to corroborate his claimed business use. See sec. 274(d); sec.
1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Petitioner has not met the heightened substantiation requirements for his cellular
phone expenses, and thus respondent’s determination as to those expenses is
sustained.
2. Travel to Convention
Petitioners claimed, and respondent disallowed, a deduction of $1,500 for
travel to Las Vegas for a convention in 2007. Petitioner testified that he attended
computer conventions and National Broadcast Association conventions in Las
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Vegas and that he incurred airfare and hotel expenses. Although petitioner
claimed travel expenses only on the 2007 Schedule C and not the 2006 Schedule
C, petitioner submitted a log titled “Harris Cohen Conventions & Travel Expenses
2006 & 2007” listing the dates on which he incurred expenses for travel from Los
Angeles to Las Vegas for both a convention in 2006 and a “b-roll shoot” in 2007.
The logs he submitted also list charges for registration, transportation, and meals.
Petitioner provided copies of credit card statements from both 2006 and 2007 with
handwritten notations next to certain charges for airline tickets and hotel
reservations. The credit card statements that show that airline ticket charges were
incurred in 2006, and not the year for which the travel expenses are at issue.
Travel expenses are another type of expenditure to which the strict
substantiation requirements of section 274(d) apply. Petitioner did not explain and
the record does not show how the travel expenditures, if incurred, were ordinary
and necessary business expenses. Petitioner did not introduce evidence to
substantiate the expenditures under section 274(d) and is therefore not entitled to
any deductions for travel expenses. Respondent’s determination disallowing the
deduction for convention expenses for tax year 2007 is sustained.
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3. Cable Expenses
Petitioner claimed, and respondent disallowed, deductions for cable
expenses of $1,185 and $1,430 on the 2006 and 2007 Schedules C, respectively.
Petitioner had cable in his entire home in 2006 and 2007, and he claimed
deductions for the entire cable expense for each year on the Schedules C. To
substantiate the cable expenses, petitioner submitted copies of bank statements
and canceled checks showing payments to “Direct TV”. Though petitioner
incurred cable expenses during the years in issue, his testimony and the documents
submitted do not establish that the cable expenses are ordinary and necessary
business expenses for an executive producer. We sustain respondent’s
determination disallowing the deductions for cable expenses.
4. Equipment Rental
Petitioner claimed, and respondent disallowed, a Schedule C deduction of
$698 for equipment rental for the 2006 taxable year. Petitioner submitted several
equipment rental agreements dated October 10, 2004, and credit card statements
with handwritten notations of “equip rental” next to various charges. Petitioner
did not describe what equipment he rented and when, and nothing in the record
establishes that the equipment rental expenses were incurred in 2006 or that they
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were ordinary and necessary business expenses. We sustain respondent’s
determination disallowing the deduction for equipment rental.
5. Miscellaneous
Petitioner claimed, and respondent disallowed, a Schedule C deduction of
$110 for miscellaneous expenses for the 2006 taxable year. Petitioner submitted
several pages of credit card statements with handwritten notations such as
“registration” and “actor search for TV pilot” next to certain charges. Nothing in
the record establishes that these charges were for ordinary and necessary business
expenses and not for personal expenses. Therefore, petitioner is not entitled to
deduct the miscellaneous expenses for the 2006 taxable year.
6. Repairs and Maintenance
Petitioner claimed, and respondent disallowed, a Schedule C deduction of
$498 for repairs and maintenance for the 2006 taxable year. To substantiate this
deduction, petitioner submitted several pages of credit card statements with
handwritten notations of “office repair” and “office supplies” next to certain
charges. Petitioner also submitted a receipt dated April 29, 2007, for the purchase
of an air conditioner that was purportedly for the home office. Nothing in the
record establishes that repairs and maintenance charges were incurred in the year
for which petitioner claimed the deduction, and petitioner has not established that
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the expenses were ordinary and necessary for his business rather than personal.
We sustain respondent’s determination disallowing the deduction for repairs and
maintenance.
7. Software Supplies
Petitioner claimed, and respondent disallowed, deductions for software
supplies of $300 and $331 on the 2006 and 2007 Schedules C, respectively.
Petitioner submitted copies of credit card statements with handwritten notations
next to the charges for the purported software supplies, as well as a receipt for a
stylus replacement shipped to Jennifer Colley. Nothing in the record establishes
that these charges were not personal and that they were instead ordinary and
necessary business expenses. We sustain respondent’s determination disallowing
the deductions for software supplies for tax years 2006 and 2007.
8. Admission Fees
Petitioners claimed, and respondent disallowed, a Schedule C deduction for
admission fees for the 2007 taxable year. Petitioner testified that the admission
fees were for the TV Academy and Arc Light Cinemas, and he submitted one page
from a credit card statement with the handwritten notation “admissions” next to a
$150 charge at TV Academy for “records video”. Petitioner did not describe the
purpose of the admission fees, so there is nothing in the record to establish that the
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expenses were ordinary and necessary business expenses. Thus, respondent’s
determination disallowing the deduction for admission fees is sustained.
9. Internet
Petitioners claimed, and respondent disallowed, a Schedule C deduction for
Internet expenses for the 2007 taxable year. Petitioner testified that for his full-
time job at EP he used the Internet at home to log onto EP’s Web site to decide
what portions of the videos to use in the promotions the following day. Petitioner
submitted copies of canceled checks payable to Verizon and copies of pages from
bank statements showing payments to Verizon.
Generally, a taxpayer who is an employee may deduct unreimbursed
employee expenses as an ordinary and necessary business expense under section
162. Lucas v. Commissioner, 79 T.C. 1, 6 (1982). An employee, however, cannot
deduct such expenses to the extent that the employee is entitled to reimbursement
from his employer. Id. at 7. In addition, section 6001 requires a taxpayer to
maintain sufficient records to allow the determination of the taxpayer’s correct tax
liability.
Petitioners deducted the Internet expenses in relation to the Schedule C
activity, but petitioner did not establish that Internet expenses were ordinary and
necessary business expenses for that activity. Petitioner used the Internet for his
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full-time job at EP, but his testimony did not establish whether he received
reimbursement from his employer or had the right to obtain reimbursement from
his employer for the Internet expenses. See id. We sustain respondent’s
determination disallowing the deduction for Internet expenses.
10. Office Supplies
Petitioners claimed, and respondent disallowed, a Schedule C deduction for
office supplies for the 2007 taxable year. Petitioner submitted pages from credit
card statements with handwritten notations next to charges at Office Depot,
Staples, Circuit City, Lowes, Best Buy, and Target to substantiate the claimed
deduction. Petitioner did not explain the charges and has not offered any evidence
to establish that the reported expenses were ordinary and necessary business
expenses. See sec. 162(a). Accordingly, we hold that petitioners are not entitled
to a deduction for office supplies for the 2007 tax year.
11. Parking
Petitioners claimed, and respondent disallowed, a Schedule C deduction for
parking for the 2007 taxable year. Petitioner did not substantiate the expense and
has not offered any evidence to establish that the claimed parking expenses were
ordinary and necessary business expenses. See id. Accordingly, we hold that
petitioners are not entitled to a deduction for parking for the 2007 tax year.
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12. Small Equipment
Petitioners claimed, and respondent disallowed, a Schedule C deduction for
small equipment for the 2007 taxable year. To substantiate the claimed deduction,
petitioner submitted a Best Buy receipt for an MP3 player. Though the receipt
establishes that the expense was incurred, petitioner has not offered any evidence
to establish that the expense was an ordinary and necessary business expense. See
id. Accordingly, we hold that petitioners are not entitled to a deduction for small
equipment for the 2007 tax year.
13. Video Rentals
Petitioners claimed, and respondent disallowed, a Schedule C deduction for
video rentals for the 2007 taxable year. To substantiate the claimed deduction,
petitioner submitted pages from credit card statements with handwritten notations
next to charges for Netflix, “The Daily Grind Espres”, and the Paramount
Commissary. Petitioner testified that the video rental expense is “just DVD’s that
again in my industry are customary and ordinary to my job.” Despite petitioner’s
testimony that the video rental expenses are “customary and ordinary”, some of the
charges on the credit card statements are not clearly for video rentals.
Petitioners deducted the video rental expenses for his Schedule C activity,
but petitioner did not establish that these expenses were ordinary and necessary
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business expenses for that activity. Petitioner’s letter from the Motion Picture
Editors Guild stated that someone with the job of “picture editor” is expected to
keep up with movies to learn new techniques and to know who is working and on
what project. Petitioner testified, however, that at his Schedule C activity he “was
not an editor, [he was] the executive producer”. Petitioner’s testimony and
documents do not establish that the video rental expenses were ordinary and
necessary business expenses for the Schedule C activity. We are satisfied that
petitioners did incur at least some video rental expenses in 2007 and that they may
have been related to petitioner’s full-time job as a picture editor, but petitioner did
not establish whether he received reimbursement from his employer or had the
right to obtain reimbursement from his employer for the video rental expenses.
See Lucas v. Commissioner, 79 T.C. at 7. We sustain respondent’s determination
disallowing the deduction for video rental expenses.
II. Schedules A
A. Charitable Contributions
Petitioner deducted noncash charitable contributions of $7,220 for the 2006
taxable year, and respondent disallowed $6,220 of that amount. Petitioner
reported noncash contributions of $720 to Council Thrift Shops on September 4,
2006, and $6,500 to Goodwill on June 20, 2006. Petitioners deducted noncash
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charitable contributions of $11,600 for the 2007 taxable year, and respondent
disallowed $10,600 of that amount. Petitioners reported noncash contributions of
$7,805 to Council Thrift Shops on February 1, 2007, and $5,900 to Out of the
Closet on December 16, 2007.
A taxpayer generally may deduct charitable contributions made during the
taxable year. Sec. 170(a). Charitable contributions, however, are deductible only
if verified under regulations prescribed by the Secretary. Sec. 170(a)(1); Hewitt v.
Commissioner, 109 T.C. 258, 261 (1997), aff’d without published opinion, 166
F.3d 332 (4th Cir. 1998). For charitable contributions made in property other than
cash, in general, the value of the contribution is the fair market value at the time of
contribution. Hewitt v. Commissioner, 109 T.C. at 261; sec. 1.170A-1(c)(1),
Income Tax Regs. The fair market value of contributed property is the price at
which the property would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or sell and both having
reasonable knowledge of relevant facts. Sec. 1.170A-1(c)(2), Income Tax Regs.
For any claimed charitable contribution deduction of $250 or more, the
taxpayer must obtain a contemporaneous written acknowledgment from the donee.
Sec. 170(f)(8)(A). Section 170(f)(8)(B) provides that the contemporaneous
written acknowledgment must include the following:
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(B) Content of acknowledgment.--An acknowledgment meets
the requirements of this subparagraph if it includes the following
information:
(i) The amount of cash and a description (but not value)
of any property other than cash contributed.
(ii) Whether the donee organization provided any goods
or services in consideration, in whole or in part, for any
property described in clause (i).
(iii) A description and good faith estimate of the value of
any goods or services referred to in clause (ii) or, if such goods
or services consist solely of intangible religious benefits, a
statement to that effect.
Section 170(f)(8)(C) provides that a written acknowledgment is contemporaneous
when the taxpayer obtains it on or before the earlier of: (1) the date the taxpayer
files a return for the year of contribution; or (2) the due date, including extensions,
for filing that return.
In addition to the written acknowledgment requirement, the regulations
establish a three-tier recordkeeping system for contributions of property other than
money. For a noncash contribution of $500 or less, the taxpayer must substantiate
the contribution with a receipt from the donee indicating the donee’s name, the
date and location of the contribution, and “[a] description of the property in detail
reasonably sufficient under the circumstances.” Sec. 1.170A-13(b)(1), Income
Tax Regs. If the taxpayer makes a charitable contribution of property other than
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money and claims a deduction in excess of $500, the taxpayer must maintain
written records showing the manner of acquisition of the item, the approximate
date of acquisition, and the cost or adjusted basis of the property. Sec. 1.170A-
13(b)(3), Income Tax Regs.; see also Lattin v. Commissioner, T.C. Memo. 1995-
233. Lastly, if the noncash contribution deduction exceeds $5,000, the taxpayer
must (1) obtain a qualified appraisal for the contributed property, (2) attach a fully
completed appraisal summary (i.e., Form 8283, Noncash Charitable Contributions)
to the tax return on which the deduction is claimed, and (3) maintain records
pertaining to the claimed deduction in accordance with section 1.170A-
13(b)(2)(ii), Income Tax Regs. See sec. 1.170A-13(c)(2), Income Tax Regs.
Generally, the amount reported as a deduction for contributions of property
is an aggregate amount for all similar items of property. See sec. 1.170A-
13(c)(1)(i), Income Tax Regs. In 2006 petitioner’s reported contributions fall into
the general categories of clothing and housewares. Accordingly, we aggregate all
items in these categories and consider the claimed deduction in both categories to
exceed $500. Petitioner therefore needs to establish that he met the substantiation
requirements applicable to deductions over $500. In 2007 petitioners’ claimed
contributions also fall into the general categories of clothing and housewares.
Accordingly, we aggregate all items in these categories and consider the claimed
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deduction for clothing to exceed $5,000 and the claimed deduction for housewares
to exceed $500. Petitioners therefore need to establish that they met the
substantiation requirements applicable to deductions over $5,000 for the clothing
contributions, and that they met the substantiation requirements applicable to
deductions over $500 for the housewares contributions.
Petitioner’s noncash contributions of clothing and housewares in 2006
exceed $500, so he must introduce contemporaneous written acknowledgments as
well as written records showing the manner of acquisition, the approximate date of
acquisition, and the cost or adjusted basis of the contributed property. See sec.
1.170A-13(b)(3)(i), Income Tax Regs.; see also Lattin v. Commissioner, T.C.
Memo. 1995-233. Petitioner introduced three receipts from Goodwill with lists of
donated items and three receipts from Council Thrift Shops. Petitioner reported
his cost or adjusted basis in the contributed items on his 2006 Form 8283 as
$6,500 for the items donated to Council Thrift Shops and $18,000 for the items
donated to Goodwill, and the date acquired for all of the items as “various”.
Petitioner reported the fair market values of the items donated to Council Thrift
Shops and Goodwill as $720 and $6,500, respectively.
Petitioner did not provide the approximate dates of acquisition of the
contributed items, and he introduced no documentation to corroborate his
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calculation of his cost or adjusted basis in the contributed items. Petitioner failed
to show that he had reasonable cause for not providing information regarding the
acquisition dates or cost basis in the contributed items. See sec. 1.170A-
13(b)(3)(ii), Income Tax Regs. Furthermore, petitioner testified that he calculated
the fair market values of the contributed items by using the prices of similar items
listed on eBay and Amazon. Petitioner submitted printouts of items for sale on
eBay to support his calculations, but all of the printouts are dated either September
21 or 22, 2010. In the absence of corroborating evidence, we are not required to
accept petitioner’s self-serving testimony. See Shea v. Commissioner, 112 T.C.
183, 189 (1999).
To substantiate their 2007 contributions, petitioners introduced four receipts
from Goodwill with lists of donated items, a receipt from Out of the Closet Thrift
Stores with a list of donated items, and five receipts from Council Thrift Shops.
Petitioners reported their costs or adjusted bases in the contributed items on their
2007 Form 8283 as $12,690 for the items donated to Council Thrift Shops and
$5,900 for the items donated to Out of the Closet Thrift Stores. They reported the
date acquired for all items as “various”, and reported the fair market values of the
items donated to Council Thrift Shops and Out of the Closet Thrift Stores as
$7,805 and $3,795, respectively.
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Petitioners did not provide the approximate dates of acquisition of the
contributed items, nor did they introduce documentation to corroborate the
calculations of the costs or adjusted bases in the contributed items. Furthermore,
petitioners’ deduction for clothing exceeded $5,000, but they did not obtain a
qualified appraisal for the contributed property or maintain records pertaining to
the claimed deduction in accordance with section 1.170A-13(b)(2)(ii), Income Tax
Regs. See sec. 1.170A-13(c)(2), Income Tax Regs. In the absence of
corroborating evidence, we are not required to accept petitioner’s self-serving
testimony. See Shea v. Commissioner, 112 T.C. at 189. Accordingly, we sustain
respondent’s determination disallowing the deductions for noncash charitable
contributions of $6,220 and $10,600 for tax years 2006 and 2007, respectively.
B. Unreimbursed Employee Business Expenses
1. Vehicle Expenses
Petitioner claimed, and respondent disallowed, an unreimbursed employee
business expense deduction for vehicle expenses of $8,231 on his 2006 Schedule
A. Petitioners claimed, and respondent disallowed, a deduction of $2,421 for
“misc mi” on their 2007 Schedule A. Passenger automobiles and any other
property used as a means of transportation are listed property, see sec.
280F(d)(4)(A)(i) and (ii), and these expenses are subject to the strict substantiation
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requirements of section 274(d). Section 274(d) requires a taxpayer to substantiate
the expenses by adequate records or other corroborating evidence of (1) the
amount of each use (i.e., the mileage), (2) the time and place of the use, and (3) the
business purposes of the use. See Fessey v. Commissioner, T.C. Memo. 2010-
191, slip. op. at 7; sec. 1.274-5T(b)(6), (c)(2), Temporary Income Tax Regs., 50
Fed. Reg. 46016-46017 (Nov. 6, 1985).
Petitioner submitted several service invoices from Cerritos Nissan to
substantiate the claimed vehicle expense deduction for tax year 2006 and the
claimed miscellaneous mileage deduction for tax year 2007. Petitioner also
submitted pages from credit card statements that show charges at Cerritos Nissan.
The invoices list the vehicle’s mileage at the time it was dropped off at the service
center, and at the time it was picked up. Petitioner submitted recently created
mileage logs for both 2006 and 2007, and provided the logs to respondent the day
before trial.
Petitioner did not establish that he did not receive reimbursement and did
not have the right to obtain reimbursement from his employer for the vehicle
expenses or the miscellaneous mileage expenses. See Lucas v. Commissioner, 79
T.C. at 7. Petitioner’s mileage logs and credit card statements do not substantiate
the vehicle expense deduction claimed for 2006 or the miscellaneous mileage
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deduction claimed for 2007. Petitioner did not establish the business purpose of
the use of his vehicle and we do not find his mileage logs to be credible.
Petitioner admitted that there were mistakes in the logs, and his credit card
statements establish that he incurred charges in Hawaii on the same dates that he
claimed to have driven business miles in California. While we believe that
petitioner did use his vehicle for some business travel, he failed to substantiate the
amount of his business mileage and vehicle expenses as required by section
274(d). Consequently, we sustain respondent’s determination that petitioner is not
entitled to deduct any amount for vehicle expenses for 2006 or miscellaneous
mileage for 2007.
2. Business Use of Home
Petitioners claimed, and respondent disallowed, home office deductions
totaling $5,291 for rent, repairs and maintenance, and utilities on their 2007
Schedule A.
In general, a taxpayer is not entitled to deduct any expenses related to the
use of a dwelling unit used by the taxpayer as a residence during the taxable year.
See sec. 280A. Expenses attributable to a home office are excepted from this
general rule, however, if the expenses are allocable to a portion of the dwelling
unit which is exclusively used on a regular basis as the principal place of business
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for the taxpayer’s trade or business. See sec. 280A(c)(1); Lofstrom v.
Commissioner, 125 T.C. 271, 278 (2005). If the taxpayer is an employee, the
exception under section 280A(c)(1) will apply only if the home office is
maintained for the convenience of the employer. See Hamacher v. Commissioner,
94 T.C. 348, 353-354 (1990). An employee satisfies this requirement when the
employee maintains the home office as a condition of his employment or as
necessary for the functioning of the employer’s business or as necessary for the
employee to properly perform his duties. Id. at 358. The home office must not,
however, “be ‘purely a matter of personal convenience, comfort, or economy’ with
respect to the employee.” Id. (quoting Sharon v. Commissioner, 66 T.C. 515, 523
(1976), aff’d, 591 F.2d 1273 (9th Cir. 1978)).
Petitioner does not claim and has not established that during 2007 the home
office was used exclusively on a regular basis as the principal place of business for
either petitioner or that the home office was maintained for the convenience of
either of their employers. Petitioner’s employer, EP, did not require him to
maintain a home office. The fact that petitioner used the home office for business
purposes as he claims is insufficient to allow any deduction attributable to that
use. See Lofstrom v. Commissioner, 125 T.C. at 278. Petitioners are not entitled
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to a home office deduction for 2007, and respondent’s determination in this regard
is sustained.
We have considered the parties’ arguments and, to the extent not discussed
herein, we conclude the arguments to be irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.
Harris Craig & Jennifer Gayle Cohen v. Commissioner
Court: United States Tax Court
Date filed: 2013-06-03
Citations: 2013 T.C. Summary Opinion 44
Copy CitationsCombined Opinion