Return Preparer Failed to Properly Substantiate Deductions

Frederica S. Brown,
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 hereby

ORDERED that the Clerk of the Court shall transmit to petitioner and respondent a copy of the pages of the transcript of the trial in the above-referenced case before Judge Emin Toro in Washington, D.C., on January 28, 2021 (remote proceeding), containing the Court's Oral Findings of Fact and Opinion, rendered at the trial session at which this case was heard.

In accordance with the Oral Findings of Fact and Opinion, a Decision will be entered for respondent.

Emin Toro
Judge

---

United States Tax Court
400 Second Street, NW
Room 400
Washington, District Of Columbia 20217 (Remote Proceeding)

January 28, 2021

The above — entitled matter came on for bench opinion, pursuant to notice at 1:03 p.m.

BEFORE: HONORABLE EMIN TORO
Judge

APPEARANCES:

For the Petitioner:
No Appearance

For the Respondent:
No Appearance

PROCEEDINGS

THE CLERK: Calling from the calendar docket number 16604-19, Frederica S. Brown.

(Whereupon, a bench opinion was rendered.)

Bench Opinion by Judge Emin Toro

THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE.

This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise noted, all section references in the opinion are to the Internal Revenue Code, as amended and in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar.

The Commissioner of Internal Revenue determined a deficiency in the Federal income tax of petitioner, Frederica S. Brown, in the amount of $3,981 for the 2016 taxable year. The sole issue for decision is whether Ms. Brown has substantiated her entitlement to a deduction for car and truck expenses that she claimed on Schedule C, Profit or Loss From Business, of her 2016 return. For the 4 reasons set forth below, we find that Ms. Brown has failed to carry her burden of substantiating the expenses at issue and therefore uphold the Commissioner's determination.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The parties' joint stipulation of facts and all attached exhibits are incorporated herein by this reference. Trial of this case was held on January 25, 2021, during the Court's remote trial session for Washington, D.C. Ms. Brown resided in North Carolina at the time the petition was filed.

In 2016, Ms. Brown earned $47,351 in wages. The record does not disclose Ms. Brown's time or place of employment with respect to these wages.

In the same year, Ms. Brown prepared U.S. Federal income tax returns for third parties under the business name "Gomillion Tax Service." Ms. Brown maintained an office in Charlotte, North Carolina, but conducted a significant portion of her return-preparation business from her car. Ms. Brown had a practice of visiting clients and prospective clients in person, and would sometimes drive long distances to facilitate those meetings. Ms. Brown was also capable of operating remotely through a web portal that allowed clients to send her electronic versions of their tax documents.

On Schedule C of her 2016 Federal income tax return, Ms. Brown reported $5,659 in income and $18,831 in deductible car and truck expenses related to the return preparation business. The parties have stipulated that the deductible expenses "consisted of a deduction for 34,560 miles of travel at the standard mileage rate for 2016." The standard mileage rate for 2016 was 54 cents per mile, as set forth in IRS Notice 2016-1, 2016-2 I.R.B. 265. The product of 34,560 miles and 54 cents per mile is $18,662, not $18,831 as stipulated by the parties. The record does not explain the reason for this disparity, but in light of our disposition we need not address it further.

The Commissioner audited Ms. Brown's 2016 return and disallowed the entire deduction for car and truck expenses reflected on Schedule C. In a notice of deficiency, dated June 3, 2019, the Commissioner determined that Ms. Brown owed additional tax of $3,981.

In response, Ms. Brown submitted to the Internal Revenue Service (the "IRS") a log, titled "Mileage Tracker — Gomillion Tax & Bookkeeping Service 2016." The log reflected daily entries for the period from January 1, 2016, through March 31, 2016 (except for January 31, 2016), and included columns titled "Date," "Start Location," "End Location," "Reason," "Start Odometer," "Stop Odometer," and "Total Miles." For each day, the log included two entries — one indicating that Ms. Brown traveled from "Office" to "Client" and another reflecting return travel from "Client" to "Office." The entries reflected total daily mileage ranging from 50 miles to 1,380 miles. In 64 out of the 90 days, the daily mileage was more (and frequently substantially more) than 200miles. None of the entries included a client name,address, or other identifying information with respect to the location of the meeting. The only "Reason" given for each entry was "Business," and Ms. Brown did not provide any e-mails, calendar entries, or other documentation to corroborate or supplement the log. The starting odometer reading for the first day of the log (January 1, 2016) was 78,452. The ending odometer reading for the last day of the log (March 31, 2016) was 113,011.

After receiving Ms. Brown's documentation, the IRS explained by letter that the log was insufficient to substantiate Ms. Brown's claimed expenses. In September 2019, Ms. Brown timely petitioned our Court for review. As noted, we held a trial on January 25, 2021.

At the trial, the parties introduced into evidence the mileage log previously submitted to the IRS. Although Ms. Brown testified on how the log was prepared, she was unable to provide additional documentation or testimony to supplement the information in the log. Ms. Brown was also unable to recall which clients were serviced on any of the days in the log.

In addition, the Commissioner introduced into evidence a schedule of Ms. Brown's clients and their addresses. The schedule listed 143 total clients, with 99 located in North Carolina (83 in Charlotte), 17 in Washington, D.C., 5 in Maryland, 4 in South Carolina, 4 in New York, 3 in Georgia, 3 in Florida, and 1 each in Pennsylvania, Virginia, Texas, Arizona, New Mexico, Idaho, and California.

OPINION

I. Burden of Proof

As a general rule, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that the determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. Ill, 115 (1933). Typically, the taxpayer also bears the burden of proving her entitlement to any deductions claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

II. Car and Truck Expense Deduction

Section 162(a) allows a taxpayer to deduct all ordinary and necessary expenses paid or incurred in carrying on a trade or business. A trade or business expense is ordinary if it is normal or customary within a particular trade, business, or industry. Welch v. Helvering, 290 U.S. at 114. A trade or business expense is necessary if it is appropriate and helpful for the development of the business. Commissioner v. Heininger, 320 U.S. 467, 471 (1943); Welch v. Helvering, 290 U.S. at 113.

The taxpayer must generally maintain records sufficient to substantiate the amounts of her income and entitlement to any deduction or credits claimed. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. If, however, a taxpayer can prove that she paid or incurred a deductible business expense but is unable to prove the amount of the expense, we may estimate the amount allowable in some circumstances under the Cohan rule. See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

For certain kinds of business expenses, including automobile expenses, section 274(d) overrides the Cohan rule and instead requires strict substantiation. For the 2016 taxable year, section 274(d)(4) provided, among other things, that no deduction would be allowed with respect to any property listed in section 280F(d)(4) unless the taxpayer established the following: (A) the amount of the expense or other item, (B) the time and place of the use of the property, (C) the business purpose of the expense, and (D) the business relationship to the taxpayer of the person using the property. Sec. 274(d) (flush language); sec. 1.274-5T(b)(6), Temporary Income Tax Regs.; cf. Berkley Mach. Works & Foundry Co. v. Commissioner, 623 F.2d 898, 901 (4th Cir. 1980) (discussing the relationship between section 162 and section 274), rev'g T.C. Memo. 1977-177; Boyd v. Commissioner, 122 T.C. 305, 313, 319-322 (2004) (same). Passenger automobiles are among the listed property included in section 280F(d)(4), see sec. 280F(d)(4)(A)(i), and the strict substantiation requirements of section 274(d) must be met for automobile expenses even where the optional standard mileage rate is used, see sec. 1.274-5(j)(2), Income Tax Regs.

Deductions arising from property subject to the strict substantiation requirements of section 274(d) are disallowed in full unless the taxpayer establishes each element of the requirements. Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff'd, 412 F.2d 201 (2d Cir. 1969); Fleming v. Commissioner, T.C. Memo. 2010-60; see also sec. 1.274-5T(a), Temporary Income Tax Regs.; cf. Berkley Mach. Works & Foundry Co., 623 F.2d at 906 (discussing the substantiation requirements of a prior version of the regulations under section 274 and observing that "[t]he requirement of substantiation allows the Government to double-check the amount and the true business character of the deduction, instead of being forced to rely on the taxpayer's 'own unsupported, self-serving testimony'" (quoting S. Rept. No. 1881, at 37 (1962))).

To satisfy strict substantiation, a taxpayer may substantiate her expenses either (1) by adequate records or (2) by sufficient evidence that corroborates her own statements. Sec. 274(d) (flush language); sec. 1.274-5T(c)(1), Temporary Income Tax Regs. For purposes of this analysis, written evidence generally has considerably more probative value than oral evidence. Sec. 1.274-5T(c)(1), Temporary Income Tax Regs. While a contemporaneous log is not required, "the probative value of written evidence is greater the closer in time it relates to the expenditure or use." Id.; see also Larson v. Commissioner, T.C. Memo. 2008-187. Taken alone, a taxpayer's unsupported testimony is insufficient to substantiate her entitlement to the deduction. See sec. 1.274-5T(a)(4), Temporary Income Tax Regs.

To meet the "adequate records" test under section 274(d) and the relevant regulations, the taxpayer must maintain an account book, diary, log, statement of expense, trip sheets, or similar records, as well as, in certain cases, documentary evidence such as receipts or bills. See sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs. In combination, these items must be sufficient to establish each element of an expenditure or use — specifically, the amount, time, and business use or purpose. See id.; sec. 1.274-5T(b)(6), Temporary Income Tax Regs.

To qualify as an adequate record, an account book, diary, log, or similar record must be prepared and maintained in such a manner that each entry is made at or near the time of the expenditure or use. Sec. 1.274-5T(c)(2)(ii)(B), Temporary Income Tax Regs. In order to establish business use, the record must contain sufficient information as to each element of every business use, but the level of detail required may vary depending on the facts and circumstances. Sec. 1.274-5T(c)(2)(ii)(C), Temporary Income Tax Regs. For example, a taxpayer who uses a truck to make deliveries on an established route may satisfy the adequate records requirement by recording the total number of miles driven during the taxable year, the length of the delivery route, and the date of each trip at or near the time of the trip. Id.

In the absence of adequate records to establish each element of an expense under section 274(d), a taxpayer may alternatively establish an element "(A) [b]y his own statement, whether written or oral, containing specific information in detail as to such element; and (B) [b]y other corroborative evidence sufficient to establish such element." Sec. 1.274-5T(c)(3)(i), Temporary Income Tax Regs. If the element the taxpayer seeks to establish is "the cost or amount, time, place, or date of an expenditure or use, the corroborative evidence shall be direct evidence, such as a statement in writing or the oral testimony of persons entertained or other witnesses setting forth detailed information about such element, or the documentary evidence described in paragraph (c)(2) of this section," which includes an account book, diary, log, statement of expense, trip sheets, or similar records. Sec. 1.274-5T(c)(3)(i) (flush language), Temporary Income Tax Regs. By contrast, circumstantial evidence may be sufficient to establish the business purpose of an expenditure. Id.

III. Application to Ms. Brown

To substantiate her entitlement to a deduction for miles driven, two paths were available to Ms. Brown under the strict substantiation rules. First, Ms. Brown could provide adequate records — e.g., a log — together with any other documentary evidence sufficient to substantiate the following elements for each use of her car: the amount (mileage based on the origin and destination of the trip), the date, and the business purpose. Sec. 274(d) (flush language); sec. 1.274-5T(b)(6), Temporary Income Tax Regs. Second, if adequate records were unavailable, Ms. Brown could establish the same elements using other sufficient evidence — namely, testimony containing specific, detailed information with respect to each element, together with other corroborative evidence. See id.; sec. 1.274-5T(c)(3)(i), Temporary Income Tax Regs. For example, Ms. Brown could have called as witnesses clients with whom she met.

The Court has no doubt that Ms. Brown worked hard and sometimes drove long distances to support her return-preparation business. But Ms. Brown has not offered sufficient evidence to satisfy the strict substantiation standard with respect to her mileage deduction.

To begin with, Ms. Brown's log does not constitute an adequate record within the meaning of the regulations. The log lists the mileage Ms. Brown traveled each day, but does not indicate the name or location of the clients or prospective clients that she visited. We therefore have no means of verifying the distance Ms. Brown traveled or whether the trips were ordinary and necessary for her business. Indeed, the log does not elaborate on business purpose at all other than to say that each trip was for "Business." And Ms. Brown was unable to provide any other evidence to corroborate or supplement the information listed in the log. Nor did she have an "established route" for her business travel. Sec. 1.274-5T(c)(2)(ii)(C), Temporary Income Tax Regs.

Certain aspects of the log also cast doubt on its reliability. For example, several entries represent that Ms. Brown drove more than 1,200 miles on a single day. At an average speed of 60 miles per hour with no breaks, a 1,200-mile trip would take 20 hours, leaving little time for meals or rest, let alone client meetings. And the log contains entries for long round trips (ranging from 50 miles to 1,380 miles) every day but one from January 1 to March 31. According to the log, in 64 out of the 90 days reflected in the log, Ms. Brown drove more (and frequently substantially more) than 200 miles. This strikes the Court as odd given that nearly 60% of the clients on Ms. Brown's list have addresses in Charlotte, North Carolina, where Ms. Brown lives and maintains her office.

In addition, Ms. Brown appears to have calculated the total mileage (34,560) underlying the deduction reflected on the Schedule C by subtracting the log's initial "start" odometer reading (78,452) from its final "stop" odometer reading (113,011) and rounding. But this method of calculating the total miles traveled fails to account for certain gaps in mileage reflected in the log. For example, Ms. Brown's first trip on January 1, 2016, ended with an odometer reading of 78,491 miles, and her next trip started with an odometer reading of 78,499 miles, leaving a gap of 8 miles. Similar gaps are present throughout the log. As a result, on its face, the log fails to document all of the 34,560 miles claimed by Ms. Brown.

Finally, apart from the log, Ms. Brown offered no additional evidence that might satisfy the second path under the strict substantiation rules. For example, she was unable to testify regarding the details of any particular trip, and she submitted no corroborating records such as e-mails, texts, or calendar entries. Therefore, we are unable conclude that Ms. Brown provided "other sufficient evidence" to substantiate her expenses. It was Ms. Brown's burden to establish her entitlement to the deduction she claimed, and she has failed to carry it.

IV. Conclusion

Ms. Brown has failed to carry her burden of substantiating the car and truck expenses she deducted on her 2016 return, and we will therefore uphold the Commissioner's determination disallowing that deduction.

To reflect the forgoing, decision will be entered for respondent.

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

(Whereupon, at 1:28 p.m., the above-entitled matter was concluded.)