Opinion
Docket No. 14517-19S.
04-20-2021
Kit T. Klekamp, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Special Trial Judge Diana L. Leyden at Hartford, Connecticut, on March 17, 2021, containing her oral findings of fact and opinion rendered at the trial session at which the case was heard.
In accordance with the oral findings of fact and opinion, an appropriate decision will be entered for respondent.
(Signed) Diana L. Leyden
Special Trial Judge Pages: 1 through 13 Place: Detroit, Michigan (Remote Hearing) Date: March 17, 2021 Levin U.S. Courthouse
231 W. Lafayette Boulevard
Room 1031, 10th Floor
Detroit, Michigan 48226
(Remote Hearing) March 17, 2021
The above-entitled matter came on for bench opinion, pursuant to notice at 1:25 p.m.
BEFORE: HONORABLE DIANA L. LEYDEN Special Trial Judge
APPEARANCES:
For the Petitioner:
No Appearance
For the Respondent:
No Appearance
PROCEEDINGS
(1:25 p.m.)
THE CLERK: Calling from the calendar docket number 14517-19S, Kit T. Klekamp.
(Whereupon, a bench opinion was rendered.) Bench Opinion by Judge Diana L. Leyden March 17, 2021 Kit T. Klekamp v. Commissioner of Internal Revenue Docket No. 14517-19S
THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE, AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. See Rule 152(c), Tax Court Rules of Practice and Procedure.
Hereinafter in this bench opinion, all section references are to the Internal Revenue Code as amended and in effect for the relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 and Rules 170 through 174. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152.
The Court uses the term "Internal Revenue Service" or "IRS" to refer to administrative actions taken outside of these proceedings. The Court uses the term "respondent" to refer to the Commissioner of Internal Revenue Service, who is the head of the IRS and is respondent in this case, and to refer to actions taken in connection with this case.
The trial of this case was conducted at the remote trial session for Detroit, Michigan, on March 15, 2021. Petitioner appeared on his own behalf. Jenny M. Lingl appeared on behalf of respondent.
In a notice of deficiency dated May 6, 2019 the IRS determined a deficiency in petitioner's 2016 Federal income tax of $4,953.
The issues for decision by the Court are whether petitioner is entitled to claim the following deductions with respect to his 2016 tax year: (1) a deduction for meals and entertainment of $5,464; (2) a deduction for travel of $17,399; and (3) a deduction for car and truck expenses of $16,760. The adjustment of $792 respondent proposed in the notice of deficiency dated May 6, 2019, to the claimed itemized deductions is computational.
Background
Some of the facts are stipulated and are so found. The first stipulation of facts and exhibits 1-J, 2-J, 3-P, 4-P, 5-P, 9-P through 17-P, 19-P through 29-P, and 31-P through 43-P are incorporated herein by this reference. Petitioner resided in Michigan at the time he filed his petition with the Court.
During 2016, petitioner was employed as a platform engineer and worked full time. Petitioner on the Schedule A, Itemized Deductions, attached to his 2016 tax return claimed unreimbursed employee expenses of $17,269. According to the Form 2106-EZ also attached to his 2016 tax return such expenses consisted of $16,900 for vehicle expenses and $1,069 of business expenses. Petitioner calculated the claimed vehicle expenses based on 30,000 miles driven for "Business", 10,000 miles driven for "Commuting", and 10,000 miles driven for "Other".
During 2016 petitioner also performed computer consulting, repair, and sales through an S corporation, Digital Frontiers. Petitioner, however, reported the income and expenses from the S corporation on the Schedule C, Profit or Loss From Business, attached to his 2016 tax return. On the Schedule C Petitioner reported gross receipts of $3,000 and costs of goods sold of $3,400, for negative gross income of $400. Petitioner also reported expenses totaling $44,608 on the Schedule C consisting of: (1) advertising of $583; (2) car and truck expenses of $16,760; (3) office expense of $150; (4) supplies of $357; (5) travel expenses of $17,399; (6) deductible meals and entertainment of $5,464; (7) utilities of $629; and (8) other expenses of $866. Petitioner calculated the claimed car and truck expenses by reporting mileage driven during 2016 in the same amounts as the mileage he reported on the Form 2106-EZ to calculate the vehicle expense for his unreimbursed employee expenses.
Petitioner relied upon his girlfriend to help him keep track of his receipts and expenses on her computer. Sadly, his girlfriend passed away in March 2017 and since then he has been unable to access her computer.
Discussion
Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving it incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction claimed. INDOPCO,Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Under 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. Petitioner has not argued that section 7491(a) applies nor established that its requirements are met. The burden of proof remains with petitioner.
Schedule C Expenses
As an initial matter, petitioner was unable to explain why he reported the income and expenses that were earned by his S corporation on the Schedule C. For 2016, an S corporation was required to file a Form 1120S, U.S. Income Tax Return for an S Corporation, and to provide its shareholders with Schedules K and K-1. See 2016 Instructions for Form 1120S. Shareholders of an S corporation are to report their portion of the S corporation's income and loss on Schedule E, Supplemental Income and Loss. See 2016 Instructions for Schedule E (Form 1040). Petitioner did not know if the S corporation filed a tax return for 2016 and he did not report the S corporation's income and losses on Schedule E. Instead, he reported income and expenses related to the S corporation on his Schedule C.
Section 162(a) allows as a deduction "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". Petitioner bears the burden of proving that reported business expenses were actually paid and were ordinary and necessary. See sec. 162(a); Rule 142(a). An expense is ordinary if it is normal, usual, or customary in the taxpayer's trade or business, and it is necessary, appropriate, or helpful for such a business. See Deputy v. du Pont, 308 U.S. 488, 495 (1940); see also Lingren v. Commissioner, T.C. Memo. 2016-213.
Section 274(d) imposes strict substantiation requirements for deductions claimed for travel including vehicle expenses, and meals, entertainment expenses. A deduction for these kinds of expenses is not allowed unless the taxpayer substantiates, by adequate records or by sufficient evidence corroborating his own statements, the amount, time and place, and business purpose for each expenditure. Sec. 274(d); sec. 1.274-5T(a), (b), and (c), Temporary Income Tax Regs., 50 Fed. Reg. 46014-46016 (Nov. 6, 1985).
Adequate records for this purpose require the taxpayer to maintain an account book, log, or similar record and documentary evidence that together are sufficient to establish each element of the expenditure. Id. para. (c)(2)(i), 50 Fed. Reg. 46017. In order to be adequate, records must be prepared or maintained in such a manner that each recording of an element or expenditure is made at or near the time of the expenditure or use. Id. subdiv. (ii). While a contemporaneous log is not required to substantiate the deduction, a taxpayer's subsequent reconstruction of his expenses does require corroborative evidence with a high degree of probative value to support such a reconstruction, in order to elevate that reconstruction to the same level of credibility as a contemporaneous record. Id. subpara. (1), 50 Fed. Reg. 46016.
To be deductible, travel expenses must be ordinary and necessary, have been incurred while the taxpayer was away from home, and have been incurred in the pursuit of a trade or business. Liljeberg v. Commissioner, 148 T.C. 83, 92-93 (2017), aff'd, 907 F.3d 623 (D.C. Cir. 2018). Travel expenses that are lavish or extravagant under the circumstances are not deductible. Sec. 162(a)(2); see Rundlett v. Commissioner, T.C. Memo. 2011-229.
If travel is for both business and personal purposes, the taxpayer has the burden to prove the primary purpose of the travel. Johnson v. Commissioner, T.C. Memo. 1982-517, aff'd, 729 F.2d 1447 (3d Cir. 1984). The primary purpose of travel is a question of fact, which places importance on the time spent on each type of activity. Id.
Personal meal expenses are generally not deductible, unless they are ordinary and necessary and constitute traveling expenses under section 162. Sec. 1.262-1(b)(5), Income Tax Regs. These expenses are subject to the strict substantiation requirements of section 274(d). See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., supra. For a variety of reasons, the Court does not find petitioner's worksheets, stipulated exhibits, and testimony sufficiently credible to meet the strict substantiation requirements.
Petitioner asks the Court to accept his summaries of his expenses and his bank and credit card statements as sufficient proof of his travel, meals and entertainment, and vehicle expenses. While the Court sympathizes with petitioner's personal tragedy of his girlfriend's death, the Court cannot excuse petitioner from the requirement to substantiate his expenses. Petitioner testified that he prepared his 2016 tax return and his girlfriend's 2016 tax return before she passed and presumably, he had access at that time to the records he claims he kept to substantiate not only the amounts and dates of his expenses but the business purposes of those expenses.
Petitioner's documentary evidence consists of spreadsheets, that do not include the dates that any of the noted expenses were incurred, and bank and credit card statements listing dates, names of establishments, and the amount of each charge. None of the documents presented indicate what if any business purpose the expenses served or how they were related to petitioner's computer sales, repair and consulting business. Thus, the stipulated exhibits fail the "adequate records" test under section 274(d).
Further, the Court does not find petitioner's testimony sufficient to convince the Court that his expenses were ordinary or necessary or incurred in the pursuit of his computer repair and consulting business. Petitioner testified that his travel and meal expenses were incurred over 277 days while he pursued business for his computer repair and consulting business. Yet based on the record it appears that petitioner also worked full time in the computer industry and he ignored the corporate existence of his computer repair and consulting business. The Court is not convinced that the expenses petitioner claimed with respect to his computer repair and consulting business were not related to his work as an employee. In fact, petitioner claimed exactly the same amount of miles driven for business, commuting, and other purposes for both his calculated unreimbursed employee vehicle expenses and the vehicle expenses with respect to his computer repair and consulting business.
Accordingly, because petitioner did not meet the strict substantiation requirements under section 274(d), the Court sustains respondent's determination that his travel expenses, meals and entertainment expenses, and car and truck expenses are not deductible. In order to give effect to our disposition of the disputed issues, decision will be entered for respondent.
THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE.
(Whereupon, at 1:41 p.m., the above-entitled matter was concluded.)
CERTIFICATE OF TRANSCRIBER AND PROOFREADER
We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 13 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Adrian Morris on March 17, 2021 before the United States Tax Court at its remote session in Detroit, MI, in accordance with the applicable provisions of the current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording.
/s/_________
Meribeth Ashley, CET-507
Transcriber
__________
3/23/21
Date
/s/_________
Lori Rahtes, CDLT-108
Proofreader
__________
3/23/21
Date