The Tax Court in Brief – July 4th – July 8th, 2022
Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.
For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.
Tax Litigation: The Week of July 4th, 2022, through July 8th, 2022
Wolpert v. Commissioner, T.C. Memo. 2022-70 | July 7, 2022 | Jones, J.| Dkt. No. 3182-20, 4693-20
Opinion
Short Summary: Julian Wolpert (Wolpert)—a civics consultant and former Ivy League university professor—was married to Eileen Wolpert. She died in 2016, and Wolpert served as the executor of her estate. Wolpert did not maintain a separate checking or credit card account for his consulting activities. Wolpert filed a Form 1040, U.S. Individual Income Tax Return, for his and Mrs. Wolpert’s taxable year 2016 under the filing status “married filing jointly.” The return included a Schedule C, Profit or Loss From Business, for Wolpert’s consulting activities that included a number of purported business expenses, including car and truck, travel, cell phone, scanning, software, mapping, postage and freight, and miscellaneous payments-for-services expenses. Wolpert filed a Form 1040 for his taxable year 2017 under the filing status “single.” The 2017 return similarly included a Schedule C for Wolpert’s consulting activities. The Wolperts’ joint 2016 return and Wolpert’s individual 2017 return were selected for audit. The IRS issued two notices of deficiency dated November 22 and December 9, 2019, for taxable years 2016 and 2017, respectively. Due to lack of substantiation, the IRS disallowed most of the expenses reported on the Schedule C for both taxable years. Wolpert and the estate timely filed petitions challenging the determinations.
Key Issues:
- Whether Wolpert and the estate are entitled to deduct $34,627 in purported business expenses with respect to taxable years 2016 and 2017.
- Whether Wolpert is liable for an accuracy-related penalty under section 6662(a) with respect to taxable year 2017.
Primary Holdings:
- No, Wolpert and the estate failed to substantiate the purported business expenses as required by the Code. “The lack of documentary evidence substantiating the amounts and purposes of these expenses . . . is pervasive.” Thus, they are not entitled to the deductions under section 162(a).
- No, Wolpert is not liable for an accuracy-related penalty for taxable year 2017 because the IRS did not satisfy his burden of production with respect to section 6751(b)(1) (requiring written supervisory approval for the assessment of penalties).
Key Points of Law:
- Burden of Proof. The determinations rendered in a notice of deficiency bear a presumption of correctness, and the taxpayer generally bears the burden of proving them erroneous in proceedings in the Tax Court. See Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
- Schedule C Business Expenses. Section 26 U.S.C. § 162(a)(3) allows a taxpayer to deduct the ordinary and necessary expenses paid required to carry out any trade or business made within a taxable year. Taxpayers must maintain books and records sufficient to establish income and deductions. See 26 U.S.C. § 6001; Treas. Reg. § 1.6001-1(a), (e). No deduction is permitted for personal, living, or family expenses unless expressly permitted under the Code. See 26 U.S.C. § 262(a). If the taxpayer is unable to substantiate the precise amount considered deductible, the Tax Court may estimate the amount of deductible expenses (Cohan rule). See Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930).
- Section 274(d) overrides the Cohan rule for certain expenses. See Treas. Reg. § 1.274-5T(a) (flush language). Section 274(d) provides that, for the taxpayer to deduct certain expenses under Section 162, including expenses for the use of listed property such as passenger automobiles must meet stricter substantiation requirements.
- The taxpayer must substantiate by adequate records or by sufficient evidence corroborating the taxpayer’s testimony: (1) the amount of the expense or other item, (2) the time, place the date and description of the expense, (3) the business purpose of the expense or use, and (4) the business relationship. See 26 U.S.C. 274(d); Temp. Treas. Reg. § 1.274-5T(a).
- Automobile-Related Business Expenses. For automobile usage business expenses, a taxpayer must substantiate (1) the amount of each expense, (2) the mileage for each business use of the vehicle and the total mileage for all use of the vehicle during the taxable year, (3) the date of each business use of the vehicle, and (4) the purpose of each business use. See Treas. Reg. § 1.274-5T(b)(6). These elements must be substantiated using “adequate records” or “sufficient evidence corroborating the taxpayer’s own statement.” See § 274(d) (flush language); Temp. Treas. Reg. § 1.274-5T(c)(1), (2), and (3).
- Generally, a taxpayer must maintain a contemporaneous log, trip sheet, or similar record, as well as corroborating documentary evidence that together establish each required element of the expense. See Treas. Reg. § 1.274-5T(c)(2)(i) and (ii). In the absence of adequate records, a taxpayer must establish each required element by “his own statement, whether written or oral, containing specific information in detail as to such element” and by “other corroborative evidence sufficient to establish such element.” See id. subpara. (3)(i); Rev. Proc. 2010-51, § 1, 2010-51 I.R.B. 883, 883 (allowing use of business standard mileage rates).
- Traveling Expenses. To be allowed a deduction of travel expenses under section 162, section 274(d)(1) requires that the taxpayer proves (1) the amount of each expenditure for traveling away from home, (2) the date of departure and return for each trip and the number of days spent on business, (3) the destination or locality of travel, and (4) the business reason for travel or the expected benefit to be derived from such travel. See Treas. Reg. § 1.274-5T(b)(2), (c).
- Admission of Testimony in Support. The Tax Court is not obligated to accept a taxpayer’s self-serving testimony in support of an otherwise unsubstantiated business expense. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
- Section 6662(a) Penalty As part of the IRS’s burden of production under section 7491(c) regarding inter alia penalties, the IRS respondent must produce evidence of its compliance with the written supervisory approval requirement of section 6751(b)(1) for the assessment of penalties. See Frost v. Commissioner, 154 T.C. 23, 32 (2020). Here, the IRS did not address whether the IRS complied with section 6751(b)(1), nor did the IRS produce evidence establishing compliance. Thus, the IRS failed to satisfy its burden of production with respect to the section 6662(a) accuracy-related penalty determined against Wolpert for taxable year 2017.
Insights: Another classic case of a taxpayer failing the substantiation requirements for deductions of business expenses under section 162. Wolpert and the estate failed to substantiate the car and truck expenses, the travel expenses, and purported payments-for-services expenses through adequate records required for each particular subset of expenses. Insufficient corroborating testimony was given, and generalized testimony (regarding the mileage logs and calendars) is insufficient to otherwise establish any of the required elements for deduction of these expenses. As the Tax Court noted, “None of the purported consulting projects described by Mr. Wolpert and the estate bear a logical nexus with such a stated purpose, and they did not otherwise offer an explanation.” Fortunately for Wolpert and the estate, the IRS acquiesced as to the accuracy-related penalty.
[View source.]
