Salesperson Can Deduct Some Expenses for Cards Sent to Customers

Marc A. Julson & Cynthia D. Julson,
Petitioner
v.
Commissioner of Internal Revenue,
Respondent

United States Tax Court
Washington, DC 20217

ORDER

Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is

ORDERED that the Clerk of the Court shall transmit herewith to the parties a copy of the pages of the transcript of the proceedings in the above case before Judge Elizabeth Crewson Paris at Oklahoma City, Oklahoma, containing her oral findings of fact and opinion rendered at the remote trial session at which the case was heard.

In accordance with the oral findings of fact and opinion and concessions of the parties, a decision will be entered under Rule 155.

Elizabeth Crewson Paris
Judge

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Bench Opinion by Judge Elizabeth Crewson Paris

March 2, 2021

THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's findings. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. Rule references in this opinion will be to the Tax Court Rules of Practice and Procedure, and section references will be to the Internal Revenue Code, as amended and in effect for the taxable year in issue.

This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152.

On September 20, 2018, the Commissioner issued to petitioners a statutory notice of deficiency determining a deficiency of $1,020 concerning their 2015 tax year. The entire deficiency resulted from the Commissioner's disallowance of $8,424 of petitioners' unreimbursed employee expenses on their 2015 Schedule A as well as a disallowance of a $13 qualified mortgage insurance premium due to computational adjustment due to petitioners' adjusted gross income. After stipulations and concessions, the amounts remaining in dispute for trial consisted solely of whether the following were deductible business expenses on petitioners' Schedule A: $100 in Christmas cards, $135 in Thank You cards, and $50 in business card expense. At trial respondent conceded the $50 business card expense.

Petitioners resided in Oklahoma when they timely filed their petition with this Court.

This case was tried virtually on March 2, 2021, at the Oklahoma City, Oklahoma, remote trial session of the Court. Cynthia D. Julson appeared with her counsel Brian C. Trent and Vassiliki E. Farrior appeared on behalf of respondent.

FINDINGS OF FACT

During 2015 Ms. Julson was employed as a saleswoman at an automobile dealership (the dealership). She received wages for which the dealership issued her a W-2. Her compensation from the dealership was based entirely on commissions, which she was paid at the end of each month, but she would also receive a draw during the middle of the month, as an advance against her monthly commissions. Sometimes, the dealership would require an employee to make certain purchases from the dealership and the employee would repay the expenses through deductions from the employee's paycheck. For example, Ms. Julson was required to purchase a Microsoft Surface computer. The $2,500 purchase price was recouped through deductions from Ms. Julson's wages, which appeared as an entry of accounts receivable, titled "A/R", and reflected on Ms. Julson's pay stubs.

The petitioners timely filed their Form 1040 for their 2015 taxable year. They reported an adjusted gross income of $101,713. Along with their Form 1040, petitioners filed a Schedule A on which they reported $8,424 in unreimbursed employee expenses. On September 20, 2018, the Commissioner issued petitioners a statutory notice of deficiency disallowing all of petitioners' unreimbursed employee business expenses and determining a deficiency of $1,020 concerning petitioners' 2015 tax year. Petitioners timely petitioned this Court, asserting that most of the expenses were correct.

Ms. Julson testified at trial that she sold an average of 18 cars a month in 2015 and that within a week she would send a Thank You card to each person who purchased a vehicle from her. She paid for the cards and the postage. She calculated her annual expense by multiplying an estimate of the cost of the cards by the sum of cars she sold during the year, resulting in an expense of $135. She further testified that she could not provide receipts for these sales because she had given the receipts to her accountant, who has since died. While Ms. Julson knew that she generally purchased cards from WalMart or Office Depot, her bank statements could not reflect the exact amounts because her purchases were not itemized.

Regarding Christmas cards, Ms. Julson testified while she was not required to send Christmas cards, she did so to all of her past purchasers. She could not produce receipts for these sales for the same reasons she could not produce receipts for her Thank You cards.

The Human Resources Director for the now-parent company of the dealership testified that the dealership had no written policy regarding Christmas cards.

OPINION

The Commissioner's determinations in the notice of deficiency are presumed correct, and taxpayers bear the burden to establish those determinations are incorrect. See Rule 142(a), Welch v. Helvering, 290 U. S. 111, 115 (1933).

Regarding unreimbursed employee expenses, in 2015 an individual performing services as an employee could deduct expenses incurred in the performance of services as an employee as miscellaneous itemized deductions on Schedule A to the extent the expenses exceed 2% of the taxpayer's adjusted gross income. See secs. 62(a), 63(a), (d), 67(a) and (b).

If taxpayers are able to establish that they paid or incurred a deductible expense but are unable to substantiate the precise amount, the Court generally may approximate the deductible amount, but only if taxpayers present sufficient evidence to establish a rational basis for making the estimate. See Cohan v. Commissioner, 39 F. 2d 540, 543-544 (2d Cir. 1930).

The Court finds that petitioners adequately provided a rational basis for the Thank You card expense. The Court further finds that Thank You cards for customer purchases are an ordinary business expense. Petitioner credibly testified that she sold an average of 18 cars a month during 2015 but could not substantiate her expenses for the cards. The Court takes judicial notice that in 2015 the Federal postage rate was 49 cents, and the Court finds that petitioners are therefore entitled to an expense deduction of $105.84 for Thank You cards. This amount consists of Ms. Julson's rational basis for sending customers 216 cards in 2015 multiplied by the Federal postage rate of 49 cents per card.

Regarding Christmas cards, the Court finds that petitioners were not able to provide a rational basis for their Christmas card expenses. Unlike the Thank You cards being based on average monthly sales, the Christmas card estimate appears to be no more than guesswork since Ms. Julson sent Christmas cards to all past clients plus others.

CONCLUSION

The Court holds that, after stipulations and concessions at trial, petitioners are entitled to an additional deduction of $105.84, subject to the 2% of adjusted gross income limitation. A decision will be entered under Rule 155.

The Court has considered all arguments made, and, to the extent not mentioned, the Court concludes they are moot, irrelevant, or without merit.

This concludes the Court's oral Findings of Fact and Opinion in this case.

(Whereupon, at 2:00 p.m., the above-entitled matter was concluded.)