Taxpayers who try to reconstruct records when faced with an IRS exam often make obvious mistakes. But in the case of Burden, et al v. Commissioner, TC Summary Opinion 2019-11 the taxpayers may have set a new standard for creating records that clearly did not reflect reality.
The key issues in this case revolved around the taxpayers’ attempt to deduct $41,950 for unreimbursed employee business expenses for both spouses. Of those expenses $20,334 represented vehicle expenses computed at the standard mileage rate, $10,897 represented travel expenses and $2,904 represented meals and entertainment expenses.
All of those expenses are subject to the strict substantiation rules of IRC §274(d). That provision provides:
(d) Substantiation required
No deduction or credit shall be allowed—
(1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home),
(2) for any expense for gifts, or
(3) with respect to any listed property (as defined in section 280F(d)(4)),
unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount of such expense or other item, (B) the time and place of the travel or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of the person receiving the benefit. The Secretary may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations. This subsection shall not apply to any qualified nonpersonal use vehicle (as defined in subsection (i)).
With regard to the listed property issue for the vehicle, the taxpayers’ records were particularly questionable. The taxpayer had claimed the standard mileage rate on miles of 35,989. The taxpayers had a calendar log of mileage that showed 43,996 miles and a pure mileage log that reflected 44,093 miles.
As you might expect, those three different figures suggest that the taxpayer might not have the best records. A look at the records showed this expectation was correct. The IRS had a series of complaints about the records, all of which the Tax Court agreed were major problems with these records:
Respondent argues that the logs fail to substantiate adequately the mileage claimed under the strict substantiation requirements of section 274(d). First, he claims the logs are not reliable because they are not in agreement as to the business miles traveled during the year and petitioners have offered no explanation of the discrepancy. Second, he claims that neither log was prepared or maintained contemporaneously with the travel recorded. Indeed, Pastor Burden testified that there was another record, “a small calendar”, that contained the source information for the calendar and the mileage log. Petitioners, however, did not produce the small calendar. Third, respondent claims the logs lack specificity as to the starting and ending points of the trips reported. Fourth, respondent claims that the logs contain patently wrong or dubious entries. For instance, respondent points out, the logs purport that Pastor Burden drove for business purposes 360 days out of 365 days during 2013, and, on average, he drove more than 100 business miles a day in and around Columbus, Ohio. The travel log also appears to indicate that Pastor Burden drove to and from the Dominican Republic, once in January 2013, leaving on a Sunday and returning the next Wednesday, and again in September 2013, leaving on a Sunday and returning eight days later. And the log also indicates he drove to and from South Africa in December 2013. Also, while the logs claim business trips to Alabama, Florida, and Texas, petitioners failed to produce gas receipts or other records that would substantiate that the travel actually occurred. They also offered nothing other than Pastor Burden's testimony to prove the business purpose of any of the trips.
The taxpayers did not have a good explanation for these problems, including how their car managed to drive through the Atlantic Ocean, only pointing out they had claimed less mileage than either of their logs showed as business travel.
The Tax Court found that merely claiming less than what the very inaccurate logs showed as mileage was not the level of support required under IRC §274(d). Thus, the entire deduction for vehicle expenses were disallowed.
The taxpayer did not fare better with regard to their travel expenses. In addition to not having substantiation for the business related travel, the taxpayer also did not produce a copy of the reimbursable travel plan for the taxpayer’s employer and the court noted that if the taxpayer was eligible to have the expenses reimbursed under that plan they would not be allowed as a deduction—thus, the failure to produce that plan was fatal to that deduction.
As well, the taxpayer claimed deductions for trips to South Africa and the Dominican Republic. While the taxpayer (who is a minister) performed certain religious duties on the trips, it was also clear the taxpayers had significant personal time on each trip, with family in one location and visiting many tourist locations in the other. Since the taxpayers did not show that any of the trips were primarily related to the taxpayer’s trade or business, the entire deduction was denied.
For the meals expenses claimed, the taxpayers produced only credit card receipts from restaurants. While these receipts documented the amounts paid, the taxpayer produced no records to explain the business purpose of the meals or how they related to the taxpayer’s employment.
As if these §274(d) issues aren’t enough, the return also managed to be prepared in a form that caused the taxpayer to be treated as failing to elect to claim §179 expensing on assets the Court had found were related to the taxpayer’s business. As the opinion explains:
Office furniture is a capital asset, and, barring an election under section 179, petitioners were not entitled to deduct for 2013 the full cost of the furniture. See secs. 167(a), 263(a)(1)(G); Ellis Banking Corp. v. Commissioner, 688 F.2d 1376, 1379 (11th Cir. 1982), aff’g in part, remanding in part on other grounds T.C. Memo. 1981-123. Petitioners’ accountant testified at trial that he had not capitalized the cost of the furniture because he “just used the 179 deduction.” Section 179(a) provides an election to treat the cost of certain property as an expense not chargeable to a capital account. The election is made on IRS Form 4562, Depreciation and Amortization, which, the form specifies, is to be attached to the taxpayer’s return. A taxpayer who fails to make the election is denied the benefits of section 179. E.g., Jackson v. Commissioner, T.C. Memo. 2008-70, 2008 WL 731318, at *7.
While, given the amount of claimed deductions (and the driving through the ocean problem), it seems reasonable to assume the taxpayer had claimed more as deductions than were actually incurred, it’s also just as clear that the taxpayer lost deductions that could have been claimed had the taxpayer and preparer been more diligent in keeping documentation and preparing the tax return.