Opinion
892-19
01-10-2022
Lafayette Lorenzo Nelson, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER
David Gustafson, Judge.
Pursuant to Rule 152(b) of the Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to the Commissioner a copy of the pages of the transcript of the trial in this case before the undersigned judge at the Washington, D.C. session containing his 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, decision will be entered under Rule 155.
Bench Opinion by Judge David Gustafson December 17, 2021
Lafayette Lorenzo Nelson, III v. Commissioner Docket No. 892-19
THE COURT: The Court has decided to render the following as its oral findings of fact and opinion in this case. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152; and it shall not be relied upon as precedent in any other case. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code (26 U.S.C.), as amended and in effect at the relevant times. Dollar amounts are rounded.This is a deficiency case brought pursuant to section 6213(a), in which petitioner, Lafayette Lorenzo Nelson, III, asks us to redetermine a deficiency in his Federal income tax for the year 2014, as determined by respondent, the Commissioner of the Internal Revenue Service ("IRS"), and as set forth in the statutory notice of deficiency ("SNOD") sent to Mr. Nelson on October 12, 2018. (Ex. 2-J.) Mr. Nelson's deadline to file a petition with the Tax Court expired on January 10, 2019. See sec. 6213. His petition bears a signature date of January 7, 2019, and a postmark of January 9, 2019, and is therefore treated as timely filed. See sec. 7502(a)(1). We accordingly have jurisdiction over this case.
Trial of this case was conducted in person in Washington, D.C., on December 13, 2021. Mr. Nelson represented himself, and Jacob Russin represented the Commissioner.
After concessions, the issues for decision are: (1) whether Mr. Nelson is entitled to deduct on Schedule A $3,555 for cash contributions to charity and $60,267 for unreimbursed employee business expenses; (2) whether Mr. Nelson is entitled to deduct on Schedule C $8,200 for travel costs and $37,787 for other expenses; and (3) whether Mr. Nelson is liable for the addition to tax under section 6651(a)(1) for failure to file.
On the evidence before us, and using the burden-of-proof principles explained below, the Court finds the following facts:
FINDINGS OF FACT
Mr. Nelson resided in Maryland at the time he filed his petition in this case. (Stip. 1.) Mr. Nelson's employment
During 2014 Mr. Nelson was employed as Chief of Operations for Egyptian Magic Skin Cream, LLC ("Egyptian Magic"), a business founded by his uncle. (Stip. 3.) For his job with Egyptian Magic, Mr. Nelson spent time in both Washington, D.C., and Dallas, Texas. His work responsibilities were to manage production in Washington, D.C. (which was his principal location for Egyptian Magic), and bottling and distribution in Dallas, Texas. Mr. Nelson rented an apartment in Upper Marlboro, Maryland, which he considered his home, and where he resided with his girlfriend who lived there year-round. Because Mr. Nelson spent substantial time working for Egyptian Magic in Dallas, he rented a hotel room at a Residence Inn by Marriott in Dallas, beginning in March 2014 through the end of the year. He did not reside in Dallas full-time during this period, but he reserved and paid for the Dallas hotel room for extended periods to take advantage of a reduced nightly rate.
Mr. Nelson incurred expenses of $18,709 for lodging in Dallas, $4,910 for air travel to Dallas and from Dallas to Washington, D.C., and $6,207 for car rentals in Dallas. Egyptian Magic did not have a reimbursement policy for its employees, and Mr. Nelson was not reimbursed for the expenses he incurred in connection with his employment. As his bank statements confirm, he did not receive deposits from Egyptian Magic other than his recurring salary. Mr. Nelson's Schedule C business Mr. Nelson is the managing member of Swagg Money 37 Entertainment, LLC ("Swagg Money"), a limited-liability company organized under the laws of the State of Texas that is engaged in the business of musician services. (Ex. 1-J at 0005.) Swagg Money is a record label responsible for signing artists, recording, and marketing their music, booking their concerts, and planning logistics for their tours. Mr. Nelson tries to identify promising new artists, invest in them, build their success, and profit from them in the long term. Although Swagg Money maintained a Texas business address, its principal place of business was Atlanta, Georgia.
Mr. Nelson's travel
In 2014 Mr. Nelson traveled considerably between Washington, D.C., Dallas, and Atlanta. He also traveled to Africa and the Dominican Republic for music tours of Swagg Money artists. He traveled with and managed the artists. His bank and credit card statements show that, in 2014, Mr. Nelson spent approximately 3 months in Dallas, 3 months in Washington, D.C., 2 months in Atlanta, and 4 months touring outside of the U.S. (3.5 months in Africa and 2 weeks in the Dominican Republic).
Mr. Nelson's pattern of charitable giving
Mr. Nelson is a life-long giver to churches and other charities. In 2014, Mr. Nelson donated $1,000 to The Wisdom Center (a church located in Fort Worth, Texas), and the Commissioner does not dispute the deductibility of that donation. Mr. Nelson also made payments that we cannot quantify to Edwene Gaines Seminars, LLC, a spiritual retreat center in Valley Head, Alabama, where he sometimes spent a week for spiritual refreshment. (Ex. 12-P.) At trial he did not contend that this center is a qualifying charity under section 170. Mr. Nelson's 2014 Federal income tax return
Mr. Nelson was granted an extension of time to file his Form 1040, "U.S. Individual Income Tax Return", for 2014, which extended his filing deadline to October 15, 2015. (Ex. 14-R at 0199.) However, Mr. Nelson did not file his 2014 Federal income tax return until July 18, 2016. (Ex. 14-R at 0199.) Mr. Nelson was aware of the requirement to file a tax return and of the deadline, but he did not timely file because he was preoccupied with his employment and business.
On his 2014 Federal income tax return, Mr. Nelson listed his personal address as his apartment in Upper Marlboro, Maryland, and gave a business suite address in Dallas, Texas, on his Schedule C for Swagg Money. (Ex. 1-J at 0002, 0005.) In the income section of his 2014 Federal income tax return, Mr. Nelson reported wages of $140,000 from Egyptian Magic and a business loss of ($61,991) from his Schedule C for Swagg Money. (Ex. 1-J at 0002, 0005.) Mr. Nelson also claimed $65,258 in total itemized deductions on Schedule A, mostly comprised of a claim for $5,055 in charitable gifts and a claim for $60,267 of unreimbursed employee business expenses. (Ex. 1-J at 0004.)
Examination and deficiency determination
The IRS selected Mr. Nelson's 2014 Federal income tax return for examination, and fully disallowed deductions of $8,200 for travel expenses and $37,787 for other expenses claimed on Schedule C, as well as deductions of $4,555 for cash contributions to charity, and $60,267 for unreimbursed employee expenses claimed on Schedule A. (Ex. 2-J at 0028.) The IRS mailed to Mr. Nelson an SNOD on October 12, 2018, setting forth adjustments to his 2014 Federal income tax return that resulted in a deficiency of $19,813, and asserting an addition to tax under section 6651(a)(1) for failure to file. (Ex. 2-J.) (The SNOD also determined a 20% accuracy-related penalty under section 6662(a), but the Commissioner conceded the penalty in his pretrial memorandum. (Doc. 28 at 18.) Tax Court proceedings
Mr. Nelson filed his petition for redetermination of the deficiency for 2014 on January 9, 2019. Specifically, he challenges the Commissioner's disallowances of his deductions for unreimbursed employee business expenses, charitable contributions, and Schedule C business expenses. As evidence for those expenditures, he offers copies of receipts (Ex. 3-P) and annotated bank and credit card statements (Exs. 6-P, 7-P, & 8-P), along with a detailed demonstrative exhibit cross-referencing those documents and showing his categorizations of his expenses (Ex. 5-P).
In his pre-trial memorandum (Doc. 28), the Commissioner conceded that Mr. Nelson's $1,000 of cash contributions to The Wisdom Center is deductible and conceded the section 6662(a) accuracy-related penalty on the grounds that the IRS did not meet the requirements of section 6751(b) and this Court's decision in Belair Woods, LLC v. Commissioner, 154 T.C. 1 (2020), interpreting the timing requirements of that statute. Accordingly, we address here the remaining amounts in dispute.
OPINION
I. General legal principles
A. Burden of proof
Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer has the burden of proving it wrong. Rule 142(a); see also Welch v. Helvering, 290 U.S. 111, 115 (1933). Mr. Nelson therefore bears the burden of proof to substantiate his claimed deductions in this deficiency case.
B. A taxpayer's entitlement to deductions
When deductions are in dispute, the taxpayer must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Taxpayers must maintain records adequate to substantiate their income and deductions. Sec. 6001.
1. Cash contributions to charity
Section 170(a)(1) allows a deduction for any charitable contribution made within the taxable year to a donee organization described in section 170(c). This deduction is subject to statutory and regulatory substantiation requirements. See sec. 170(a)(1); 26 C.F.R. sec. 1.170A-13. The specific substantiation requirements depend on the type and size of the contribution. For monetary gifts, the taxpayer must maintain "a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution." Sec. 170(f)(17). If the amount of any gift is greater than $250, the deduction must be substantiated by a contemporaneous written acknowledgment from the donee organization. See sec. 170(f)(8); 26 C.F.R. sec. 1.170A-13(f)(1).
2. Business expense deductions
Pursuant to section 162(a), a taxpayer may deduct "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." "The term 'ordinary and necessary business expenses' * * * does not include non-deductible personal, living, or family expenses." 26 C.F.R. sec. 1.162-17(a).
Section 274(d) establishes higher substantiation requirements for expenses related to travel, meals, and lodging while away from home, entertainment, gifts, and "listed property" as defined in section 280F(d)(4), including vehicles.
Section 274(d) provides that no deduction or credit under section 162 shall be allowed for these expenses unless the taxpayer substantiates the amount, time and place, business purpose, and business relationship to the taxpayer of the person receiving the benefit for each expenditure by adequate records or sufficient evidence corroborating his own statements. "A taxpayer's general statement that expenses were paid in pursuit of a trade or business is insufficient to establish that the expenses had a reasonably direct relationship to any such trade or business." Sham v. Commissioner, T.C. Memo. 2020-119, at *58.
a. Unreimbursed employee business expenses
For 2014 a taxpayer may claim an unreimbursed employee business expense as a miscellaneous deduction on Schedule A, pursuant to section 162(a). An employee is considered to be in the business of being an employee and may deduct expenses that are: (1) nonreimbursable; (2) related to the employee's trade or business of rendering services to the employer; and (3) ordinary and necessary expenses of such a trade or business. See Lucas v. Commissioner, 79 T.C. 1, 6-7 (1982). Unreimbursed employee expenses are subject to the itemized deduction limitation of section 67(a)--i.e., the 2% floor.
b. Travel expenses
Taxpayers may deduct "traveling expenses * * * while away from home in the pursuit of a trade or business." Sec. 162(a)(2). The regulations define traveling expenses to include "travel fares, meals and lodging, and expenses incident to travel." 26 C.F.R. sec. 1.162-2(a).
For the purposes of section 162(a)(2), a taxpayer's home is located at his principal place of business. See Harrington v. Commissioner, 93 T.C. 297, 307 (1989); Daly v. Commissioner, 72 T.C. 190, 195 (1979); see also Rev. Rul. 60-189. The focus of section 162(a)(2) is whether the taxpayer is required to travel away from his home for work. See Commissioner v. Flowers, 326 U.S. 465, 467 (1946).
If a taxpayer has two separate posts of duty, each required by real business necessity, the expenses incurred at the lesser post of duty are deductible. See Rev. Rul. 55-604. In determining which location is the lesser post, we consider the amount of time spent at each post, the amount of business actually conducted at each post, and the income generated at each location--none of which is conclusive. See, e.g., Markey v. Commissioner, 490 F.2d 1249, 1252 (6th Cir. 1974), rev'g T.C. Memo. 1972-154; see also Rev. Rul. 54-147. A taxpayer's tax home does not transfer to the location of a temporary assignment that is expected to last less than 12 months. See sec. 162(a); see also Rev. Rul. 93-86.
3. The "Cohan rule"
Where a taxpayer establishes that he actually incurred a deductible expense, but fails to prove the specific amount of the deduction, the Court may reasonably estimate the amount allowable as a deduction. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The taxpayer must lay the predicate for application of the Cohan rule by establishing that he is entitled to some deduction, see Norgaard v. Commissioner, 939 F.2d 874, 879 (9th Cir. 1991), aff'g in part, rev'g in part T.C. Memo. 1989-390, and must provide a reasonable basis for such an estimate, see Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
However, where Congress has statutorily provided for specific, heightened requirements to substantiate a claimed deduction (as in section 274(d), discussed above), such requirements control the taxpayer's entitlement to the deduction. A court may not apply the Cohan rule to approximate such expenses, see Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969), and we do not do so here.
C. Section 6651(a)(1) addition to tax
Section 6651(a)(1) imposes an addition to tax for failure to file a return before the deadline, including any extensions. The addition to tax is triggered when the taxpayer fails to file a return by the deadline, and adds "to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate." Id. The addition to tax may be abated where the taxpayer shows "that such failure is due to reasonable cause and not due to willful neglect." Id. II. Analysis
A. Mr. Nelson's tax home in 2014
Mr. Nelson's eligibility to deduct travel expenses on Schedule A (discussed below in part II.B.1.a) turns in part on the issue of his "tax home" in 2014. It is clear on the record before us that Mr. Nelson divided his time working for Egyptian Magic in Washington, D.C., and Dallas, Texas, and that for Swagg Money he worked primarily in Atlanta, Georgia (when not traveling). The Commissioner contends that Mr. Nelson's tax home in 2014 was Dallas, Texas, and that accordingly the expenses he incurred there for travel and lodging should not be deductible. (Doc. 28 at 15-16.)
However, Mr. Nelson testified credibly that his principal location for Egyptian Magic was in Washington, D.C., where he supervised employees who were engaged in production, and that his work in Dallas related to bottling and distribution of Egyptian Magic's product. He explained that he reserved a hotel room in Dallas for an extended period to take advantage of a reduced nightly rate. Although we acknowledge, as the Commissioner stressed, that Mr. Nelson's employment in Dallas persisted throughout 2014, Mr. Nelson's bank and credit card statements show that he spent only about 3 months of 2014 working in Dallas. Prior to June 2014, Mr. Nelson traveled to Dallas frequently but often stayed there for less than one week before either returning to Washington, D.C., or travelling to Atlanta. Mr. Nelson's only extended stay in Dallas was apparently the 2-month period from mid-September to mid-November of 2014, after which he returned to Washington, D.C. Mr. Nelson's work in Dallas for Egyptian Magic was therefore temporary and lasted less than 1 year. See sec. 162(a). Moreover, merely maintaining "housing in . . . a hotel--the quintessence of transience"-- is not decisive evidence that a taxpayer has established that location as his tax home. See e.g., Acone v. Commissioner, T.C. Memo. 2017-162, at *12.
Based on the facts and circumstances before us, we hold that Mr. Nelson's tax home in 2014 was Washington, D.C. Mr. Nelson testified that Egyptian Magic's principal place of business was Washington, D.C., where their product was produced and where they maintained a corporate office. Mr. Nelson further testified that his uncle (the owner of Egyptian Magic) sometimes worked in D.C., but never in Dallas. Mr. Nelson spent approximately 3 months working in Washington, D.C. and rented an apartment in Upper Marlboro, Maryland (approximately a 40-minute drive from Washington, D.C.), where he resided with his girlfriend who lived there full-time. His bank and credit card statements also show recurring charges for utilities for that apartment. We are persuaded it was his tax home. B. Deductions with heightened substantiation requirements
1. Travel expenses and section 274(d)
The IRS disallowed Mr. Nelson's deduction for travel expenses on Schedules A and C, for lack of substantiation. (Ex. 2-J.) The disputed deductions for business travel expenses are subject to the substantiation requirements of section 274(d) and the regulations thereunder, which require Mr. Nelson to substantiate the amount, time and place, and business purpose for each deduction by adequate records or with sufficient evidence corroborating his own testimony. To this end, Mr. Nelson offers receipts (Ex. 3-P), his annotated bank and credit card statements for 2014 (Exs. 6-P, 7-P, & 8-P), and his testimony and detailed categorization (Ex. 5-P) regarding business purpose. Mr. Nelson's receipts, bank statements, and credit card statements substantiate the time and place of each amount and are sufficiently specific to corroborate his credible testimony regarding their respective business purpose. The exhibits show the names and locations of hotels used for lodging, and the names of passengers as well as the departure and destination cities for flights. The dates of the charges for flights correspond approximately to the dates of hotel and other charges on Mr. Nelson's statements to corroborate his being in the destination cities. We will allow deductions for business travel expenses that are verifiable from Mr. Nelson's exhibits, to the extent claimed on his 2014 return.
a. Travel for Egyptian Magic as an unreimbursed employee business expense on Schedule A
Given that Mr. Nelson's tax home in 2014 was Washington, D.C., it follows that he was "away from home in the pursuit of a trade or business" while in Dallas, and that he should therefore be allowed deductions for air travel between Dallas and Washington, D.C., as well as for the cost of his lodging and car rentals while in Dallas. See sec. 162(a)(2). Mr. Nelson had a business purpose to reserve his hotel room in Dallas for an extended period, because of the indeterminate yet frequent nature of his travel to Dallas for his work with Egyptian Magic, and because of the preferential nightly rate that the hotel offered for extended rentals. Based on our review of his bank and credit card statements, we determine that Mr. Nelson incurred expenses of $18,709 for lodging in Dallas, $4,910 for air travel to Dallas and from Dallas to Washington, D.C., and $6,207 for car rentals in Dallas. Accordingly, we will allow him a deduction on Schedule A of $29,826 (as compared to the $60,267 he claimed on his return) for unreimbursed employee business expenses related to travel while away from home, pursuant to section 162(a)(2).
Mr. Nelson claimed a deduction based on mileage for business use of his vehicle. He offered no contemporaneous log of miles driven, nor even a reconstructed log, but only alleged an unexplained total of miles. Although his credit card statements do contain entries for gasoline purchases in Washington, Dallas, and Atlanta, we are unable to discern the number of miles driven, the relevant proportion of business or personal use, and whether Mr. Nelson was using his personal vehicle or a rental car. Accordingly, we must sustain the Commissioner's disallowance of Mr. Nelson's deduction for business use of his vehicle, for lack of substantiation.
b. Travel expense for Swagg Money on Schedule C
The Commissioner concedes that Mr. Nelson operates Swagg Money to engage in the business of musician services for the purpose of making a profit and that he is entitled to deduct its business expenses and costs of producing income. The dispute is whether the claimed expenses for travel and artist support are adequately substantiated as having been incurred and as relating to that business purpose. The Commissioner contended at trial that, because the claimed expenses for artist support appear to be for travel expenses, they are subject to the heightened substantiation requirements of section 274(d).
Mr. Nelson's exhibits as corroborated by his credible testimony show that he incurred expenses for himself and his artists to travel for music tours to and from Atlanta, as well as to destinations in Florida, Africa, and the Dominican Republic. Mr. Nelson's exhibits sufficiently prove his claimed deduction of $8,200 on his Schedule C for his own travel related to Swagg Money, and we will allow the full amount of this deduction.
Likewise, his exhibits and credible testimony sufficiently show that he incurred on behalf of Swagg Money artists $35,354 in travel expenses, and we will allow deduction of that amount (as opposed to $36,000 claimed on the return).
However, we view differently the miscellaneous "artist support" expenses identified in Mr. Nelson's demonstrative Exhibit 5-P. The amounts tallied there (totaling about $57,000) bear no visible relation to the $36,000 that he claimed on his return. This miscellaneous "artist support" consists of alleged money transfers to artists through Western Union, purchases at retail stores on artists' behalf, shipping costs to send items to artists, and ATM withdrawals while out of the country, identified in Exhibit 5-P and cross-referenced to bank and credit card statements. We have held that those statements, in conjunction with his receipts and corroborated by his testimony, are sufficiently specific to establish the business purpose for the travel expenses for Swagg Money artists; however, neither those statements nor Mr. Nelson's testimony are sufficiently specific to establish the nature and business purpose of these miscellaneous "support" expenses.
2. Cash contributions to charity and section 170
For the remaining $3,555 of claimed charitable contributions in dispute, Mr. Nelson was obliged to prove that the donations were made to an organization described in section 170(c) and to provide a contemporaneous written acknowledgment from the donee organization. See sec. 170(f)(8); 26 C.F.R. sec. 1.170A-13(f)(1). No such evidence appears in our record, so we must sustain the Commissioner's disallowance of this deduction.
C. Liability for the section 6651(a)(1) addition to tax
Mr. Nelson does not make any contention regarding reasonable cause for his failure to timely file his 2014 Federal income tax return. At trial, he testified that he missed the deadline to file his 2014 return because he was busy. Because Mr. Nelson willfully neglected to file his 2014 Federal income tax return before the deadline, we will sustain his liability for the section 6651(a)(1) addition to tax, but in a reduced amount corresponding to our redetermination of his deficiency for 2014.
III. Conclusion
We hold that Mr. Nelson is entitled to a deduction of $29,826 on Schedule A for unreimbursed employee expenses related to travel while away from home. We likewise hold that Mr. Nelson is entitled to deductions on his Schedule C of $8,200 for travel and $35,354 for artist support related to travel. The claimed contributions to charity, beyond those conceded by the Commissioner, must be disallowed for lack of substantiation. And we sustain Mr. Nelson's liability for the section 6651(a)(1) addition to tax for failure to file timely. So that the parties can recompute the liability in light of this opinion, decision will be entered under Rule 155.
This concludes the Court's oral Findings of Fact and Opinion in this case.
(Whereupon, at 2:25 p.m., the above-entitled matter was concluded.)