Tax Court in Brief | Rau v. Comm’r | Business Expense and Non-cash Charitable Contribution Deductions

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Tax Court in Brief | Rau v. Comm’r | Business Expense and Non-cash Charitable Contribution Deductions

The Tax Court in Brief – March 7th – March 11th, 2022

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Tax Litigation:  The Week of March 7, 2022, through March 11, 2022

Rau v. Comm’r, T.C. Opin. 2022-4 | March 7, 2022 | Guy, J. | Dkt. No. 23074-19S

Opinion

Short Summary: Rau, a mortgage broker, worked as a freelance real estate agent and was employed by Westmore Group, LLC (LLC). Rau managed three residential rental properties. The LLC did not have a reimbursement policy for employee business expenses. The issues are whether Rau was entitled to various deductions claimed on her Form 1040 for the tax year in issue, including noncash charitable contributions, unreimbursed employee business expenses, and other business expenses.

Primary Holdings:

  • Rau’s mileage logs were insufficient to support deduction for mileage expenses as they lacked necessary information such as the location of where a trip started, her precise destination, and the business purpose. Rau also offered insufficient information for meal expenses as the records were not prepared contemporaneously and failed to identify a business purpose. And, for her noncash charitable contribution, Rau failed to present objective and credible evidence that the noncash household items that she donated were “in good used condition or better” as is required to qualify for a charitable contribution deduction.

Key Points of Law:

  • Section 162(a) allows the deduction of “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” The term “trade or business” includes performing services as an employee.
  • As a general rule, a cash basis taxpayer deducts expenses for the year of payment. To deduct employee business expenses, a taxpayer must prove that he or she did not receive, and did not have had the right to receive reimbursement from his or her employer.
  • The taxpayer bears the burden of establishing his entitlement to permissible deductions and for substantiating the amounts of claimed. See 26 U.S.C. § 6001; Treas. Reg. § 1.6001-1(a).
  • For expenses of travel (including meals and lodging while away from home), no deduction is allowed unless the taxpayer substantiates by adequate records or by sufficient and credible evidence corroborating his own statement the amount, time and place, and business purpose for each expenditure. See id. at § 274(d); Treas. Reg. § 1.274-5T(b)(2)(ii)-(iii).
  • Expenses for incidental repairs to an investment property may be deducted under section 162 by a cash basis taxpayer when paid, while capital improvements are added to the investment property’s basis and recovered upon the sale of the property under section 263.
  • Charitable contributions are deductible only if verified in accordance with regulations. No deduction is allowed for any contribution of clothing or a household item—such as furniture, furnishings, electronics, appliances, linens, and other similar items—unless such property is “in good used condition or better.” § 170(f)(16)(A), (D)(i).

Insights:  This case illustrates the ever-important requirement of documenting what might be deductible ordinary and necessary expenses paid or incurred during in carrying on a trade or business. To deduct employee business expenses, a taxpayer must prove that he or she did not receive, nor have the right to receive reimbursement from his or her employer. The taxpayer must have and maintain adequate records, contemporaneously made with the expense, to justify the available deduction. Travel logs, odometer readings, and other contemporaneous records to show the time, place, and business purpose for an expense are critical to appropriately substantiate entitlement to a deduction for an expense incurred in carrying on a trade or business, including services as an employee. For noncash charitable contributions of clothing or a household items, the taxpayer must be prepared to show that the property was donated “in good used condition or better.”