San Diego State University Deductions, Vehicle Expenses & Substantiation Memorandum Compose an Internal Research Memo like the one in Exhibit 2-9 on page 2

San Diego State University Deductions, Vehicle Expenses & Substantiation Memorandum Compose an Internal Research Memo like the one in Exhibit 2-9 on page 2-20 of the text. [T.C. Summary Opinion 2013-106], Kristen L. Powers v. Commissioner. Consider how this 2013 case might apply to your individual tax clients. Be sure to consider how this case follows the 1930 precedent in Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). Also, Internal Revenue Code Sec. 274(d)(3) and Reg. Sec. 1.274-5t(b)(5). 400-450 words Case
[T.C. Summary Opinion 2013-106], Kristen L. Powers v. Commissioner.
Kristen L. Powers v. Commissioner.
Docket No. 7917-11S. Filed December 17, 2013.
[ Code Sec. 274]
Tax Court: Summary opinion: Deductions: Vehicle expenses: Substantiation.–
An individual employed as a real estate agent during the two years at issue was allowed deductions for
unreimbursed vehicle expenses arising from her daily drives between business locations. The taxpayer traveled
most mornings from her employer’s office to two primary business locations, housing developments of her
employer’s, where she sold houses. She used her own vehicle and was not reimbursed for the expenses
of those drives. She lost her employment and was unable to obtain her travel records. The taxpayer’s trial
testimony and other evidence in the record established that she drove substantial but routine distances
between her employer’s office and two of her employer’s housing developments. Further, logs that the taxpayer
reconstructed during the examination process were credible and the court allowed the deduction of claimed
vehicle expenses over and above amounts allowed by the IRS.—CCH.
[ Code Sec. 280A]
Tax Court: Summary opinion: Deductions: Home office expenses: Substantiation.–
An individual employed as a real estate agent during the two years at issue was denied home office deductions
for lack of substantiation. At trial, the taxpayer did not offer sufficient evidence to support the claimed cost of her
home mortgage payments and real estate tax liability. As a result, she was not allowed to use those costs to
substantiate a deduction for home office expenses.—CCH.
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS
PRECEDENT FOR ANY OTHER CASE.
Jan R. Pierce, Danielle Meyers (student), and Courtney Peck (student), for petitioner. Erik W. Nelson, for
respondent.
SUMMARY OPINION
GUY, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal
1
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 for any other case.
Respondent determined deficiencies of $10,492 and $8,975 in petitioner’s Federal income tax for 2007 and
2008, respectively (years in issue). Petitioner filed a timely petition for redetermination with the Court pursuant to
section 6213(a).
Petitioner concedes that she is not entitled to deductions for vehicle expenses, depreciation, business use of
her home, and other expenses reported on Schedules C, Profit or Loss From Business, for the years in issue.
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The issues remaining for decision are whether petitioner is entitled to deductions claimed on Schedule A
for unreimbursed employee business expenses for (1) vehicle expenses in excess of the $6,975 and $7,953
amounts respondent allowed for 2007 and 2008, respectively,
use of her home.
3
and (2) expenses attributable to the business
Background
Some of the facts have been stipulated and are so found. The stipulation of facts and the accompanying exhibits
are incorporated herein by this reference. Petitioner resided in Oregon at the time the petition was filed.
I. Petitioner’s Employment With Centex Homes
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[T.C. Summary Opinion 2013-106], Kristen L. Powers v. Commissioner.
Petitioner was employed as a real estate sales agent by Centex Homes (Centex) throughout 2007 and the first
nine months of 2008. Petitioner was an at-will employee and was compensated by commissions earned on
sales of Centex homes. Petitioner earned sales commissions of $146,524 and $79,759 while working for Centex
during 2007 and 2008, respectively.
Petitioner frequently worked seven days a week for Centex. She was ranked as one of Centex’s top three sales
agents in Oregon for 2007 and as its top sales agent in the State for 2008.
A. Petitioner’s Daily Activities and Responsibilities
Petitioner resided in Beaverton, Oregon, approximately 15 miles from Centex’s main office in the City of Portland
(Portland office). Centex regularly assigned her to work at its residential development sites in Salem, Gresham,
Canby, and Hillsborough, Oregon. Petitioner spent most of her time at the Salem and Gresham developments,
which were approximately 41 and 29 miles, respectively, from the Portland office. Salem and Gresham are 64.6
miles apart.
Petitioner used her personal vehicle for work-related transportation. It was Centex’s policy not to reimburse
employees for transportation or vehicle expenses.
Petitioner routinely started her workday at the Portland office, where she met with the division president, her
sales manager, and a real estate broker to conduct day-to-day business. Petitioner did not have a workstation in
the Portland office. Petitioner normally would leave the Portland office and drive directly to Salem or Gresham to
work in the sales office—either a Centex trailer or an office space in a model home. She often found it necessary
to drive between Centex developments during the day to meet with clients, finalize contracts, escort potential
buyers to home sites, and attend real estate closings. Petitioner would end her workday by returning to the
Portland office.
Petitioner testified that she drove an average of 187 miles daily on round trips from the Portland office to the
various Centex developments mentioned above. The record includes receipts for petitioner’s gasoline purchases
for one-week periods in January and May 2008, totaling $171 and $156, respectively. Petitioner testified that the
expenditures were representative of her weekly gasoline purchases for 2007 and 2008.
B. Petitioner’s Original Mileage Log
Petitioner testified that she kept a “messy” handwritten mileage log in her car where she recorded the miles
she traveled on daily work-related trips. She further testified that it was her practice to routinely transfer the
mileage from her handwritten log to an electronic spreadsheet that she kept on a Centex computer and flash
drive. Petitioner recorded her daily mileage by listing the distances between the Portland office and Salem or
Gresham, as the case might be, and taking odometer readings to account for the miles she drove between
Centex developments, individual home sites, and business meetings during the day.
C. Petitioner’s Use of Her Home for Centex Business
Petitioner resided in a home built by Centex, and she used two of the three bedrooms in the home to conduct
Centex business. Specifically, one bedroom was converted to an office where she met with clients and reviewed
sales contracts and the other bedroom contained large, three-dimensional topographical tables that allowed
potential clients to visualize individual home sites at Centex’s developments. Petitioner testified that she lived
alone during the years in issue and did not use either of the rooms in question for personal use.
D. Termination of Petitioner’s Employment With Centex
During fall 2008 residential real estate prices began to fall, and many Centex clients withdrew from contracts to
purchase new homes. Centex responded to adverse market conditions by delaying construction of homes under
contract for as many as eight months. Recognizing that her commissions would likewise be delayed, petitioner
inquired whether Centex would pay her a salary in the interim. When Centex declined, petitioner informed her
sales manager that she would have to seek employment elsewhere. Although petitioner assumed that she
would continue to work for Centex for the next couple of weeks, she testified that Centex immediately changed
the locks at the Salem office and that she was unable to gain access to the Centex computer and flash drive
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[T.C. Summary Opinion 2013-106], Kristen L. Powers v. Commissioner.
containing her mileage records. Petitioner was later informed that the flash drive had been broken and that the
computer she had been using could not be found.
Petitioner was self-employed as a real estate agent for the final three months of 2008.
II. Petitioner’s Tax Returns for 2007 and 2008
Petitioner timely filed Federal income tax returns for 2007 and 2008. Petitioner attached Schedules A and Forms
2106-EZ, Unreimbursed Employee Business Expenses, to her returns, claiming deductions for vehicle expenses
of $24,008 and $24,743 for 2007 and 2008, respectively.
4
As previously mentioned, petitioner also attached Schedules C to her returns. As relevant herein, petitioner
claimed deductions of $6,409 and $5,649 for business use of her home during 2007 and 2008, respectively.
Petitioner attached Forms 8829, Expenses for Business Use of Your Home, indicating that she used 400 square
feet or 25% of the total space in her home for business purposes. The Forms 8829 reveal that the deductions
petitioner claimed were derived as a percentage of mortgage interest of $25,636 for 2007 and a combination of
mortgage interest of $20,306 and real estate taxes of $2,290 for 2008.
5
III. Tax Return Preparation
Petitioner relied on a coworker to prepare her tax returns. She provided the preparer with her records, including
her handwritten mileage log, and relied on him to adequately prepare the returns.
When petitioner’s returns were selected for audit, a TurboTax representative assisted her. Petitioner testified
that the representative advised her to “recreate” mileage logs for the years in issue using her handwritten log to
provide a weekly mileage summary. Petitioner recreated the mileage logs as directed and apparently lost the
handwritten log.
The mileage logs that petitioner reconstructed for 2007 and 2008 contain monthly and weekly summaries of the
miles petitioner drove in connection with her work for Centex. The summaries include a generic description of
trips taken each week (e.g., “main office, agents competition, driving between neighborhoods”). Each trip was
reported to have originated in Beaverton
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and ended in Gresham, Canby, Hillsboro, or Salem. According to the
summaries, petitioner drove 49,503 miles in 2007 and 43,808 miles during January through September 2008.
7
Discussion
The Commissioner’s determination of a taxpayer’s liability in a notice of deficiency normally is presumed
correct, and the taxpayer bears the burden of proving that the determination is incorrect. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioner has not asserted that the burden of proof as to any
relevant factual issue should shift to respondent under section 7491(a). Seesec. 7491(a)(1) and (2); Higbee v.
Commissioner, 116 T.C. 438, 442-443 (2001).
Deductions are a matter of legislative grace, and the taxpayer generally 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 substantiate deductions claimed by keeping
and producing adequate records that enable the Commissioner to determine the taxpayer’s correct tax liability.
Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976);
Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965). A taxpayer claiming a deduction on a Federal
income tax return must demonstrate that the deduction is allowable pursuant to a statutory provision and must
further substantiate that the expense to which the deduction relates has been paid or incurred. Sec. 6001;
Hradesky v. Commissioner, 65 T.C. at 89-90.
When a taxpayer establishes that he or she paid or incurred a deductible expense, but fails to establish the
amount of the deduction, the Court normally may estimate the amount allowable as a deduction. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
There must be sufficient evidence in the record, however, to permit the Court to conclude that a deductible
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[T.C. Summary Opinion 2013-106], Kristen L. Powers v. Commissioner.
expense was paid or incurred in at least the amount allowed. Williams v. United States, 245 F.2d 559, 560 (5th
Cir. 1957).
Under section 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. A deduction normally is not allowed, however, for personal,
living, or family expenses. Sec. 262(a). Whether an expenditure satisfies the requirements for deductibility under
section 162 is a question of fact. See Commissioner v. Heininger, 320 U.S. 467, 475 (1943). The term “trade
or business” includes performing services as an employee. Primuth v. Commissioner, 54 T.C. 374, 377-378
(1970). However, an employee business expense is not ordinary and necessary if the employee is entitled
to reimbursement from his or her employer. See Podems v. Commissioner, 24 T.C. 21, 22-23 (1955); Noz v.
Commissioner, T.C. Memo. 2012-272.
Section 274(d) prescribes more stringent substantiation requirements to be met before a taxpayer may deduct
certain categories of expenses, including travel expenses, meals and entertainment expenditures, and expenses
related to the use of listed property as defined in section 280F(d)(4)(A). See Sanford v. Commissioner, 50 T.C.
823, 827 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969). As relevant here, the term “listed property” includes, inter
alia, passenger automobiles. Sec. 280F(d)(4)(A)(i). To satisfy the requirements of section 274(d), 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, date and time, and business purpose for each
expenditure or business use of listed property. Sec. 1.274-5T(b)(6), (c)(1), Temporary Income Tax Regs., 50
Fed. Reg. 46016-46017 (Nov. 6, 1985).
Section 1.274-5T(c)(2), Temporary Income Tax Regs., supra, provides in relevant part that “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. Section 1.274-5(j)
(2), Income Tax Regs., provides that the strict substantiation requirements of section 274(d) for vehicle expenses
must be met even where the optional standard mileage rate is used. Moreover, the Court may not use the rule
established in Cohan v. Commissioner, 39 F.2d at 543-544, to estimate expenses covered by section 274(d).
Sanford v. Commissioner, 50 T.C. at 827; sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985).
Taxpayers lacking a contemporaneous log are expected to maintain a record created as near in time as possible
to the particular expenditure or business use (including the elements outlined above), supported by corroborative
documentary evidence that carries with it a high degree of probative value. Sec. 1.274-5T(c)(1), Temporary
Income Tax Regs., supra. If a taxpayer’s records have been destroyed or lost due to circumstances beyond
his or her control, the taxpayer may substantiate expenses subject to section 274(d) by making a reasonable
reconstruction of the expenditures through other credible evidence. Boyd v. Commissioner, 122 T.C. 305, 320
(2004); sec. 1.274-5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985). A taxpayer is
required to reconstruct pertinent records to the fullest extent possible. See, e.g., Chong v. Commissioner, T.C.
Memo. 2007-12, 2007 WL 109055. If no other documentation is available, the Court may, but is not obliged to,
accept credible testimony of a taxpayer to substantiate a deduction. See Boyd v. Commissioner, 122 T.C. at 320
(citing Watson v. Commissioner, T.C. Memo. 1988-29); Freeman v. Commissioner, T.C. Memo. 2009-213, 2009
WL 2958663.
I. Vehicle Expenses
Petitioner elected to apply standard mileage rates and claimed deductions for vehicle expenses of $24,008 and
$24,743 for 2007 and 2008, respectively. The record includes reconstructed mileage logs that purport to show
the number of miles that petitioner drove in connection with her employment with Centex.
Petitioner’s testimony at trial describing her daily activities and responsibilities during the course of her
employment with Centex was forthright and credible. We are satisfied from her testimony and other evidence in
the record that she traveled substantial (but relatively routine) distances daily from Centex’s office in Portland
to various Centex developments (frequently Salem and Gresham) and back. We likewise are convinced that
the logs that petitioner reconstructed during the examination process generally are representative of the miles
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[T.C. Summary Opinion 2013-106], Kristen L. Powers v. Commissioner.
that she drove for business purposes, although they are inexact inasmuch as they comprise only weekly and
monthly summaries. Under the circumstances, giving appropriate weight to petitioner’s reconstructed mileage
logs, her testimony, and the sampling of gasoline receipts in the record, we conclude that she has adequately
substantiated that she drove 115 miles per day, six days a week, or a total of 35,880 and 26,910 miles in
connection with her work for Centex during 2007 and the first nine months of 2008, respectively.
8
II. Business Use of Home
A taxpayer generally is not entitled to deduct any expenses related to a dwelling unit used as a residence
during the taxable year. Sec. 280A(a). 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 for the taxpayer’s trade or business. Sec. 280A(c)(1); Lofstrom
v. Commissioner, 125 T.C. 271, 277-278 (2005). If the taxpayer is an employee, the exception under section
280A(c)(1) will apply only if the exclusive use of the office space is for the convenience of the taxpayer’s
employer. Sec. 280A(c)(1); Hamacher v. Commissioner, 94 T.C. 348, 353-354 (1990). As with all other business
expenses, the taxpayer must establish that the expense has been paid or incurred and the amount of the
expense. Sec. 6001.
Petitioner reported that she used 25% of her home for business purposes and claimed deductions of $6,409 and
$5,649 for business use of her home in 2007 and 2008, respectively. These amounts represent 25% of mortgage
interest that petitioner reported on Form 8829 for 2007 and a combination of mortgage interest and real estate
taxes that petitioner reported on Form 8829 for 2008.
Although we are convinced that petitioner otherwise was entitled to deductions for the business use of her home,
respondent determined in the notice of deficiency that petitioner was entitled to deductions for mortgage interest
and real estate taxes only on Schedule A for the years in issue. Petitioner did not contest the latter adjustments,
and she did not offer any evidence in respect of the difference between the home mortgage interest of $25,636
she reported on Form 8829 for 2007 and the $21,483 for mortgage inte…
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