Under IRC §274(d) taxpayers are denied any deduction for certain expenses if they do not maintain adequate contemporary documentation to support the expense, even if it is obvious that the taxpayers must have incurred the expense and the amount of expense could be reasonably estimated. This rule was put into the IRC to override the “Cohan” rule, so called due to the case involving George M. Cohan where the Second Circuit ruled that documentation is not needed if it is clear a taxpayer incurred an expense and it can be reasonably estimated [Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).
The IRS claimed in the case of Ressen v. Commissioner, TC Summary Opinion 2015‑32 that the taxpayer’s records documenting his use of two vehicles, for which he claimed a 100% business use deduction on each, was inadequate. However the Tax Court did not agree with the IRS on this issue.
In the case in question Mr. Ressen was a construction manager with a construction company. He lived away from home for most of the year (all but 1½ months) on remote jobsites, returning home for weekends. When he stayed away from home he stayed in a fifth wheel recreational vehicle.
He had two pickups that he used to travel between his home and the jobsites and while at those jobsites. The pickups transported the fifth wheel to the various jobsites, which would then stay there for the duration.
Mr. Ressen’s employer paid him a per diem for food and lodging. The company also had a policy of reimbursing for airline tickets to remote job sites but would not reimburse employees for any vehicle use.
The following constituted the records maintained by Mr. Ressen:
Mr. Ressen maintained a calendar and a logbook to record his business activities and the business use of the 2007 and 2008 Chevys. Upon returning home at the end of each week he recorded the miles he drove during the previous week in the calendar. Additionally, as required by ICS, he recorded in general terms his daily business activities and weekly travel in the logbook. He also recorded the beginning and ending mileage for the 2007 and 2008 Chevys in the logbook.
He claimed the standard mileage rate for 100% of the mileage on each pickup, resulting in a claimed auto expense deduction on Form 2106 of $28,504.
The Tax Court summarized the basic rules provided for adequately documenting expenses covered by the “anti-Cohan” rule of §274(d):
To deduct these expenses, the taxpayer must “substantiate by adequate records or by sufficient evidence corroborating the taxpayer’s own statement”: (1) the amount of the expense or other item; (2) the time and place of travel, entertainment, or use of the property; (3) the business purpose of the expense or other item; and (4) the business relationship of the taxpayer to the persons entertained or using the property. See sec. 274(d). With respect to the use of listed property, the taxpayer must establish the amount of business use and the amount of total use for such property. See sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
The Court then examined Mr. Ressen’s documentation and found it (not surprisingly in the view of this author) perfectly fine to document business use:
With respect to the portion of the disallowed deduction attributable to their claimed use of the 2007 and 2008 Chevys, petitioners introduced copies of the calendar in which Mr. Ressen contemporaneously recorded his weekly mileage as an employee of ICS as well as some information regarding where he was working at various times. Petitioners also introduced copies of the pages in the logbook on which he contemporaneously recorded the beginning and ending miles for the 2007 and 2008 Chevys. Considering the facts and circumstances of Mr. Ressen's employment arrangement with ICS and his business use of the 2007 and 2008 Chevys we conclude that the calendar is a credible, adequate record of the amount of the business use of the property, the dates of such use, and the business purpose of such use, and the logbook pages are an adequate record of the total use of the property. See sec. 274(d); sec. 1.274-5T(b)(6)(i)(B), (c)(2), Temporary Income Tax Regs., supra; see also Lyseng v. Commissioner, T.C. Memo. 2011-226, 102 T.C.M. (CCH) 280, 282-283 (2011).
The Court went on, though, to look at the matter even if the Court accepted the view that the calendar was not an adequate log—which, in fact, the Court had not found. But even giving the IRS that concession the Court still found Mr. Ressen met the alternative test:
Additionally, even if the calendar is for some reason not an adequate record of the amounts or dates of the business use of the 2007 and 2008 Chevys, Mr. Ressen credibly and with specificity testified as to the business use of the property and the dates of such use. Petitioners corroborated this testimony with the pages from the logbook. See sec. 1.274-5T(c)(3)(i), Temporary Income Tax Regs., supra. Although petitioners did not introduce the entire logbook into evidence, we conclude that the pages of the logbook that they did introduce are representative of contemporaneous, adequate records that Mr. Ressen maintained for the entire year and that they sufficiently corroborate his testimony with respect to the amounts and dates of the business use of the 2007 and 2008 Chevys for the entire year. See id. subdiv. (ii)(A). We therefore conclude that petitioners satisfied the substantiation requirements of section 274(d) with respect to their claimed use of the 2007 and 2008 Chevys.
At first blush it’s tough to figure out how this matter even resulted in a claimed tax liability on exam. A sentence in the final paragraph gives what likely is the key answer—the Court notes that communications “broke down” between the taxpayers an the revenue agent. While the Court does not elaborate, it seems likely that the agent had some request outstanding that the taxpayers did not respond to, resulting in this case moving forward.
Regardless, though, Mr. Ressen’s bother and expense in having to take this case to Tax Court does give advisers a good look at the types of records that the Tax Court will consider adequate to support a claimed auto expense deduction—even when the taxpayer is claiming a 100% business use position.
What is not stated in the opinion, but is almost certainly crucial to this result, is that the Court noted Mr. Ressen testified credibly and in detail about the business use and the Court did not note any inconsistencies in the information given to it. Especially when claiming a very high level of business use of a vehicle (and 100% is clearly that) it’s important that the taxpayer is believable and refrains from “stretching” the truth. I suspect the Court would have come to a very different decision had it discovered any sort of “enhancing” of the facts in Mr. Ressen’.