The Tax Court in Brief – January 30th – February 3rd, 2023
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Tax Litigation: The Week of January 30th, 2022, through February 3rd, 2023
Craddock v. Comm’r, T.C. Summary Opin. 2023-4 | January 30, 2023 | Landy, J. | Dkt. No. 22581-21S
Summary: In this non-precedential opinion (see section 7463(b)), the Tax Court addresses deficiencies for disallowed business expenses claimed by taxpayers, Mathew Craddock and Chasta Craddock. Mr. Craddock was employed full-time at Continental Automotive Systems, Inc. (CAS) and part-time at Greenville Technical College (GTC). Mrs. Craddock was not employed. Mr. Craddock also owned and operated an unincorporated business called Industrial Technologies Consulting (ITC). Mr. Craddock traveled substantially with the purpose of selling his consulting services. He owned a Ford F–150 truck that he used in his consulting business, for commuting to and from his employment at CAS, and for personal errands. On their 2018 Form 1040, the Craddocks reported $1,000 business income and a business loss of $33,104 from ITC, which they detailed on a Schedule C, Profit or Loss From Business. The expenses included car and truck expenses, depreciation expenses, legal and professional services, taxes and licenses, and other expenses such as cell phone, medical, uniforms, fuel, and tolls. The IRS selected the Craddocks’ 2018 Form 1040 for examination and issued a notice of deficiency disallowing various of their claimed deductions. To substantiate travel expenses, the Craddocks provided a mileage log that Mr. Craddock made contemporaneously with his business travel. The mileage log listed start and end dates, description, purpose, start and end locations, and start and end mileage for trips made in the truck. The mileage log accounted for every mile driven in the truck for the year in issue, including the miles driven for personal use, but did not specifically break down the mileage as business or personal. To substantiate the other expenses, the Craddocks provided bank statements with charges highlighted and labeled “tolls,” “car parts,” “fuel,” or “insurance” as business expenses. The Craddocks did not submit any receipts or other documentation.
Key Issues: Whether the Craddocks are entitled to deduct (1) car and truck expenses and (2) other expenses for the year in issue?
Primary Holdings: No. The Craddocks’ mileage log was inadequate to meet the strict substantiation requirements, and it was not credible and contained too many discrepancies to be given any credence by the Court. The bank statements were insufficient to substantiate the travel and “other expenses.”
Key Points of Law:
Burden of Proof. In general, the IRS’s determinations set forth in a notice of deficiency are presumed correct, and the taxpayers bear the burden of proving that the determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).3 Deductions are a matter of legislative grace, and the taxpayers bear the burden of proving that they are entitled to any deduction claimed. See Deputy v. du Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Section 162(a) – Business Expense Deductions. Section 162(a) permits taxpayers to deduct all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Taxpayers are required to maintain books and records sufficient to establish income and deductions. 26 U.S.C. § 6001; Treas. Reg. § 1.6001-1(a), (e). If taxpayers establish that an expense is deductible but are unable to substantiate the precise amount, the Court may estimate the allowable amount (Cohan rule). See Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). In estimating, the Tax Court bears heavily against taxpayers “whose inexactitude is of [their] own making.” Id. at 544. Taxpayers must present sufficient evidence to permit the Court to make an estimate. Williams v. United States, 245 F.2d 559, 560–61 (5th Cir. 1957).
Section 274(d) Override of Cohan. Section 274(d) overrides the Cohan rule for certain expenses. See Sanford v. Commissioner, 50 T.C. 823, 827–28 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969); Treas. Reg. § 1.274-5(c)(2)(iii); Temp. Treas. Reg. § 1.274-5T(a). Under section 274(d), taxpayers must meet stricter substantiation requirements to deduct certain expenses under section 162, including expenses for the use of listed property as defined in section 280F(d)(4), such as passenger automobiles. To meet the heightened substantiation requirements, taxpayers must substantiate by adequate records or by sufficient evidence corroborating their own statements (1) the amount of the expense, (2) the time and place of the expense or use of listed property, (3) the business purpose of the expense or use, and (4) the business relationship. 26 U.S.C. § 274(d).
Even if the expense would otherwise be deductible before the enactment of section 274(d), section 274(d) may still preclude a deduction if the taxpayers do not present sufficient substantiation. Temp. Treas. Reg. § 1.274-5T(a). To substantiate car and truck expenses through adequate records, taxpayers must maintain a contemporaneous log, trip sheet, or similar record, as well as corroborating documentary evidence, that together establish each required element of the expense. See Temp. Treas. Reg. § 1.274-5TI(2)(i) and (ii). In the absence of adequate records, taxpayers must establish each required element by “[their] own statement, whether written or oral, containing specific information in detail as to such element” and by “other corroborative evidence sufficient to establish such element.” See id. subpara. (3)(i).
Daily Commuting vs. Travel Between Two Businesses. In general, the cost of daily commuting to and from work is a nondeductible personal expense. See Commissioner v. Flowers, 326 U.S. 465, 473–74 (1946); Treas. Reg. § 1.162-2(e). However, “[u]nreimbursable transportation expenses incurred between two places of business are deductible.” Gilliam v. Commissioner, T.C. Memo. 1986- 90, 51 T.C.M. (CCH) 567, 572.
Insights: The Tax Court in Craddock, as the Court has done so many times before, provides the what-for and why-is for a taxpayer to properly deduct expenses incurred in a trade or business. Craddock emphasizes the importance of recordkeeping and substantiation for any type of deduction to be claimed by a taxpayer. As noted in Craddock, the Tax Court bears heavily against the taxpayer whose inexactitude in business expense deduction is of his or her own making.