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Schedule A Itemized Miscellaneous Business Deductions By Employee



Business Deductions By Employee

Opinion

Short Summary:

  • This case involves disallowance of itemized business expense deductions claimed by Mark Ryan Pedersen for the 2016 tax year. Pedersen resided in Oregon and worked as a project manager at JE Dunn Construction Co. He was assigned to oversee JE Dunn project sites. In 2016 JE Dunn asked Pedersen to oversee projects in California. Pedersen incurred what he claimed were employee business expenses incurred during travel between cities in California and his then-current residence in Oregon. On his tax return, he reported wages of $96,265 from Form W–2, showing earnings in both Oregon and California, offset in part by miscellaneous itemized deductions of $31,638 claimed on Schedule A, Itemized Deductions. He attached a Form 2106–EZ, Unreimbursed Employee Business Expenses, reporting unreimbursed employee business expenses of $24,201 claimed as Schedule A miscellaneous deductions – vehicle expenses, parking fees, tolls and transportation expenses (collectively, transportation expenses), travel expenses while away from home overnight, and meals and entertainment expenses. In preparation for trial, Pedersen prepared a log or schedule of expenses in each category. He did not explain the specific business purpose for any of the expenses, and he produced nothing to show the terms of employment that he claimed required that he travel to California for work. The IRS disallowed the deductions. Pedersen asked the Tax Court to review that determination.

Key Issues:

  • Whether Pedersen petitioner is entitled to a deduction for unreimbursed employee business expenses for tax year 2016?

Primary Holdings:

  • No. Pedersen failed to carry his burden to show that his employer expected that he incur the expenses in issue and did not reimburse same, and Pedersen failed to substantiate the expenses in issue in accordance with the standards required by the Code and Treasury Regulations.

Key Points of Law:

  • Precedential Value. The decision falls within 26 U.S.C. § 7463 (generally, $50,000 or less in dispute). Thus, the decision is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. at § 7463(b).
  • Review Standard. The IRS’s determinations of a taxpayer’s liability in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 7491(a) shifts the burden of proof to the IRS as to any factual issue relevant to a taxpayer’s liability for tax if the taxpayer meets certain preliminary conditions. See Higbee v. Commissioner, 116 T.C. 438, 442–43 (2001). The burden was not shifted to the IRS in this case.
  • Itemized Deductions. Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction claimed. 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). A taxpayer must demonstrate that the deduction is allowable pursuant to some statutory provision and must substantiate that the expense to which the deduction relates has been paid or incurred. I.R.C. § 6001; Hradesky v. Commissioner, 65 T.C. 87, 89–90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Treas. Reg. § 1.6001-1(a). A taxpayer must substantiate deductions claimed by keeping and producing adequate records that enable the IRS to determine the taxpayer’s correct tax liability. I.R.C. § 6001; Treas. Reg. § 1.6001-1(a).
  • Deduction of Business Expenses. Under 26 U.S.C. § 162(a), a deduction is allowed for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Performing services as an employee constitutes a trade or business. Primuth v. Commissioner, 54 T.C. 374, 377–78 (1970). Personal living expenses are nondeductible. I.R.C. § 262; Treas. Reg. §§ 1.162-2(a), 1.262-1(b)(5). In order to deduct employee business expenses, a taxpayer must show that he or she did not receive reimbursement, and that he or she did not have the right to obtain reimbursement from the employer. See Orvis v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), aff’gC. Memo. 1984-533; Fountain v. Commissioner, 59 T.C. 696, 708 (1973). The taxpayer can prove that he was not entitled to reimbursement by showing, for example, that he or she was expected to bear these costs. See Fountain, 59 T.C. at 708.
  • Deduction for Travel-Related Expenses. Section 274(d) prescribes more stringent substantiation requirements to be met before a taxpayer may deduct certain categories of expenses, including entertainment, travel away from home (including meals and lodging), and “listed property,” defined in section 280F(d)(4) to include passenger automobiles. Temp. Treas. Reg. § 1.274-5T(a); see Balyan v. Commissioner, T.C. Memo. 2017-140, at *7. A taxpayer generally must maintain adequate records or produce sufficient evidence corroborating his or her own statement, which, in combination, are sufficient to establish the amount, time and place, and business purpose for each expenditure. Temp. Treas. Reg. § 1.274-5T(b)(2), (6), (c)(1). “Adequate records” generally consist of an account book, a diary, a log, a statement of expense, trip sheets, or a similar record, made at or near the time of the expenditure or use, along with supporting documentary evidence. Treas. Reg. § 1.274-5T(c)(2). The Court may not use the Cohan doctrine to estimate expenses covered by section 274(d). See Boyd v. Commissioner, 122 T.C. 305, 320 (2004); Temp. Treas. Reg. § 1.274-5T(a).
  • Travel Expenses While Away from Home Overnight. Deductions for travel expenses (including lodging while away from home) are subject to the strict substantiation rules of section 274(d). I.R.C. § 274(d)(1); Baca v. Commissioner, T.C. Memo. 2019-78, at *16; Temp. Treas. Reg. § 1.274- 5T(a)(1). Deductions for traveling expenses are allowed if the expenses are ordinary and necessary and paid or incurred while away from home in the pursuit of a trade or business, including the business of being an employee. SeeR.C. § 162(a)(2); Mitchell v. Commissioner, 74 T.C. 578, 581 (1980). Travel expenses include travel fares, lodging, meals, and expenses incident to travel. Treas. Reg. § 1.162-2(a); Temp. Treas. Reg. § 1.274-5T(b)(2). For deduction, a taxpayer must substantiate by adequate records or by other sufficient evidence corroborating the taxpayer’s own testimony (1) the amount of the expense, (2) the dates of departure and return and the number of days spent away from home on business, (3) the destination or locality of travel, and (4) the business reason for the travel. Temp. Treas. Reg. § 1.274-5T(b)(2).
  • What is a “tax home”? For purposes of section 162(a)(2), a taxpayer’s home generally means the vicinity of his principal place of employment. As an exception to this general rule, a taxpayer’s residence may be treated as the taxpayer’s tax home, even though it is outside the vicinity of the principal place of employment, if the taxpayer’s employment is “temporary” and not “indefinite.” Peurifoy v. Commissioner, 358 U.S. 59, 60 (1958). Employment is “indefinite” rather than “temporary” if “its termination cannot be foreseen within a fixed or reasonably short period of time.” Stricker v. Commissioner, 54 T.C. 355, 361 (1970), aff’d, 438 F.2d 1216 (6th Cir. 1971). Section 162(a) further provides that a taxpayer will not be treated as temporarily away from home during any period of employment if such a period exceeds one year.
  • Meals and Entertainment Expenses. Standing alone, a taxpayer’s credit card statements, which do not distinguish between personal and business expenses, are likely insufficient to demonstrate that the amounts incurred are deductible as business expenses.

Insights:  This case illustrates a common theme at the Tax Court level: In order to receive the grace permitted for deducting miscellaneous business expenses, travel expenses, and meals and entertainment expenses, the taxpayer must substantiate those expenses according to section 162 and, where applicable, according to the more stringent requirements of section 274(d). Mileage logs, contemporaneously kept and showing beginning and ending address for each trip as well as odometer readings, are advisable. Expenses reflected in credit card statements must be corroborated with receipts and statement of purpose. The taxpayer must be able to explain the specific business purpose for any business trip during which claimed deductible expenses were incurred. Terms of employment, including policies for employer reimbursement, should be established by objective evidence. In short, it is advisable, if not required, to (1) substantiate the reported expenses, (2) prove that there was a requirement to incur the expenses in the course of employment, and (3) prove that any expenses incurred were not reimbursable or reimbursed by the employer.

Have a question? Contact Jason Freeman.

Mr. Freeman is the founding and managing member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney. Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service.
He was honored by the American Bar Association, receiving its “On the Rise – Top 40 Young Lawyers” in America award, and recognized as a Top 100 Up-And-Coming Attorney in Texas. He was also named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas” by AI.

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