Tax Court in Brief | Gonzalez v. Commissioner | Proving Up Business Expenses

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Tax Litigation:  The Week of July 18th, 2022, through July 22nd, 2022

Gonzalez v. Comm’r, T.C. Summary Opinion 2022-13 | July 18, 2022 | Panuthos, J. | Dkt. No. 1548-19S


Short Summary:  In 2015, Petitioner lived in Palo Alto, working full time for an employer in that city.  She also worked with a patternmaker in Los Angeles to make patterns and samples, having become interested the previous year in starting a business there as a wholesaler designing children’s clothing. Every other weekend Petitioner would drive from Palo Alto to a workshop in southern California, a trip of around 400 miles one way. There, she would review the workshop’s progress, provide supplies, and give further direction to the patternmakers.

Petitioner reported wages from her employer on her Form 1040, U.S. Individual Income Tax Return for 2015. On her Schedule C (Form 1040), Profit or Loss from Business, Petitioner deducted advertising expenses, other business property expenses, utilities expenses, car and truck expenses, travel expenses, and other business expenses.

The Internal Revenue Service (“IRS”) allowed Petitioner’s Schedule C deductions for “Rent or Lease—Other Business Property”, advertising, and utilities. Nevertheless, the IRS issued a notice of deficiency disallowing her deductions for car and truck expenses, travel expenses, and other business expenses.

To substantiate her travel expenses, Petitioner submitted logs estimating the miles she traveled and other expenses. She also had receipts for two vehicle services in 2015 and 2016.  To substantiate her other business expenses, Petitioner submitted an invoice from her patternmaker stating that payments were made by cashier check for 25 patterns to a workshop in Los Angeles.

Key Issues

Primary Holdings

Key Points of Law

Insights: This case demonstrates the importance of keeping sufficient records to substantiate business expenses.  It may be tedious at the time, but it can really pay off in the long run.