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Harrison v. Comm’r, T.C. Memo 2022-6 | May 12, 2022 | Panuthos, J | Dkt. No. 12170-19S
Summary: The IRS declared a deficiency, additional tax, and accuracy-related penalties on the 2015 income tax return of Nicole Harrison, an employee of Samsung Electronics and a consultant on the side. Harrison made several charitable contributions, mostly made through a PayPal account, and she regularly donated clothing, shoes, and jewelry to organizations such as Goodwill and Dress for Success. Harrison traveled in connection with Samsung and normally booked business class flights; however, when company policy changed so that she could only be reimbursed for the cost of coach, she continued to book business class. She began to deduct the difference on her Schedule A and substantiated the costs with bank statements of her corporate card. In connection with her sole proprietorship consulting, she paid a company to set up a website, networked, traveled for two clients, bought a laptop, and renovated her personal apartment to include a home-office. Lastly, she and a relative, purchased a rental property. She contributed to the mortgage by sending Venmo payments. She did not receive any income and claimed passive-activity losses for remediating a flooded basement, insurance, and other house-related expenses.
Key Points of Law
Insights. This case demonstrates the taxpayer’s burden of production once the IRS has declared a deficiency due to improper deductions. The case highlights the factual circumstances a court will inquire into for certain claimed deductions. As such, taxpayers will need to keep detailed records for cash and noncash charitable contributions. Moreover, taxpayers should note that pre-business expenses are not deductible under § 162. Instead, the deduction for start-up costs is allowable under §§ 195 and 709. Travel expenditures should be accompanied with times, places, and documentation of the business purpose. Lastly, this case shows the complicated passive activity loss disallowance rules. Specifically, those related to real estate owned by individuals.
For additional information on the subject passive versus nonpassive, see Freeman Law’s Tax Court in Brief: Tax Court in Brief | Rogerson v. Commissioner | Passive Income, Rent of Yachts, and Reliance on Competent Tax Counsel – Freeman Law (May 12, 2022).
For additional information on the tax treatment of charitable contributions, see Freeman Law’s blog on Joint Committee on Taxation Report on Tax Treatment of Charitable Contributions – Freeman Law (March 22, 2022).