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Daniel Omar Parker and Chantrell Antoine Parker v. Comm’r, No. 13231-19, T.C. Memo 2021-111 | September 23, 2021 | Lauber | Dkt. No. 13231-19

Short Summary:  This case analyzes the availability of certain deductions of the taxpayer, namely:  (1) Car and truck expenses; (2) Retirement contributions; (3) Certain unreimbursed employee business expenses claimed as itemized deductions on Schedule A; and (4) the cost of demolishing a structure.

Key Issues:

• The deductibility of various expenditures.

Facts and Primary Holdings: 

Car and Truck Expenses

• Parker worked as a personal trainer. She used the couples’ only car, a Chevy Camaro, to travel to either her clients’ homes or to a gym where she rented space.  For 2015, she claimed a deduction of $25,870 for car and truck expenses – based on a business use percentage of 80.06% and 10,662 business-use miles.
• Taxpayers did not keep a contemporaneous mileage log in 2015 and did not have access to reliable odometer readings for that period.
• Parker was employed as an IT worker, first with a staffing company, and then directly with Federal Reserve Bank.
• Since the taxpayers were unable to substantiate neither the full amount of the reported expense nor the business use percentage, the Court affirmed the IRS’s denial of the deductibility of the expense. Taxpayers were unable to produce any records of the total mileage driven, nor were they able to account for their personal use of the car.  Additionally, the taxpayers’ evidence produced at trial was inconsistent and not credible.

Retirement Contributions

• The taxpayers claimed a Self-Employed SEP, Simple, and Qualified Plan deduction of $60,444 of unexplained funds.
• The IRS disallowed that deduction for lack of substantiation, and the Court sustained the disallowance. The Court found that the taxpayers failed to prove that any portion of the contribution consisted of new cash rather than nondeductible rollover.

Unreimbursed Employee Business Expenses

• Taxpayers claimed $15,129 for transportation, overnight travel expenses, meals and entertainment, and other business expenses allegedly associated with Mr. Parker’s IT work.
• The IRS disallowed these deductions in their entirety, and the Court sustained the disallowance.
• A subscription expense was allowed as an education deduction where it was not reimbursed by his employer.
• The taxpayers failed to demonstrate that Mr. Parker’s home office was for the convenience of his employer, and therefore the home office deduction was denied.

Demolition Expenses

• In September 2008, Mr. Parker bought a house in Atlanta for $17,000 with plans to either live in the house or rent it out.
• In early 2010, Mr. Parker canceled the insurance policy on the property.
• In January 2014, vandals broke into the building and set a fire that destroyed it.
• In 2015, the taxpayers paid $10,000 to have the burned-out structure demolished.
• On Schedule E of the taxpayers’ 2015 return, they claimed a deduction for the cost of demolition, denominating the expense as one for “repairs.”
• The IRS disallowed the deduction. At trial, the taxpayers agreed that this deduction was not proper on Schedule E, but urged that they were entitled to the deduction on Schedule A, as well as a deduction in the amount of $13,681 for their alleged basis in the demolished building.
• Since the fire destroyed the building in 2014, no casualty loss deduction was allowable in 2015.

Key Points of Law:

Generally

• Taxpayers bear the burden of proving their entitlement to any deduction claimed. Rule 142(a); INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992).
• A taxpayer must show that he or she has met all requirements for each deduction and keep books or records that substantiate the expenses underlying it. Sec. 6001; Roberts v. Comm’s, 62 T.C. 834, 836 (1974).
• Failure to keep and present such records counts heavily against a taxpayer’s attempted proof. Rogers v. Comm’r, T.C. Memo 2014-141.
• Under Cohan v. Comm’r, 39 F.2d 540, 543-544 (2d Cir. 1930), if a taxpayer claims a deduction but cannot fully substantiate the underlying expense, the Court in certain circumstances may approximate the allowable amount. The Court must have some factual basis for its estimate.  Williams v. United States, 245 F.2d 559, 560 (5^th 1957).

Car and Truck Expenses

• Section 162(a) permits a taxpayer to deduct all ordinary and necessary expenses paid or incurred during the taxable year in carrying on the taxpayer’s trade or business.
• When deducting vehicle expenses, a taxpayer may choose between the standard “mileage allowance” and a deduction based on actual expenses, including depreciation. Mears v. Comm’r, T.C. Memo 2013-52.
• A taxpayer using the actual expense method may deduct only that percentage of her costs that corresponds to her “business use” of the vehicle. Larson v. Comm’r, T.C. Memo 2008-187
• Section 274(d)(4) sets forth heightened substantiation requirements (and overrides the Cohan rule) with respect to “listed property.” As in effect during 2015, “listed property” included “any passenger automobile.”
  1. No deduction is allowed for vehicle expenses unless the taxpayer substantiates, by adequate records or sufficient evidence corroborating her own statements, the amount, time and place, and business purpose for each expenditure. See sec. 1.274-5T(c), Temporary Income Tax Regs.
  2. Substantiation by “adequate records” generally requires the taxpayer to “maintain an account book, diary, log, statement of expense, trip sheets, or similar record” prepared contemporaneously with the use of the vehicle, as well as evidence documenting the expenditures. at (c)(2).  An actual contemporaneous log is not strictly required, but records made at or near the time of the expenditure have greater probative value than records made later.  Id. at (c)(1).

Retirement Contributions

• The Code allows taxpayers to deduct certain qualified contributions to retirement plans. Secs. 62(a)(6) and (7), 219(a), 404(a).
• “Rollovers”—transfers from one retirement account to another—are not deductible. See 1.219-1(b)(2)(iii), Income Tax Regs.

Unreimbursed Business Expenses

• During 2015 a wage-earning employee was allowed to deduct certain work-related expenses that his employer did not reimburse, subject to a 2%-of-AGI floor. Secs. 67(a), 162(a).
• Education expenses are deductible if the education “[m]aintains or improves skills” required by the taxpayer in his employment. See sec. 1.162-5(a)(1), Income Tax Regs.
• Section 280A generally disallows deductions related to a dwelling used by the taxpayer as a residence. However, there is an exception for a dwelling (or portion thereof) that is “exclusively used on a regular basis” as the principal place of business for an employee, but only if it is “for the convenience of his employer.” Sec. 280A(c)(1).

Demolition Expenses

• Section 280B provides that , “[i]n the case of the demolition of any structure,” no deduction otherwise allowable shall be allowed to the owner for “any amount expended for such demolition” or “any loss sustained on account of such demolition.” Sec. 280B(1). Rather, these amounts “shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located.” Sec. 280B(2).
• Regulation 1.165-3 has no effect for demolitions carried out after section 280B’s effective date. Tonawanda Coke Corp. v. Comm’r, 95 T.C. 124, 128 (1990).

Insight:  The taxpayer’s positions in this case appeared to have been developed only after the IRS made its assessment.  There appears to have been very little planning and documentation on the part of the taxpayers.  Since the burden is on taxpayers to support any deductions claimed, taxpayers must take care to keep solid documentation, especially when dealing with expenses identified in Section 274 that carry a heightened substantiation requirement.

Have a question? Contact Jason Freeman, Freeman Law, Texas.