The Tax Court in Brief February 14 – February 18, 2022
Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.
Tax Litigation: The Week of February 14 – February 18, 2022
Sonntag v. Comm’r, T.C. Summary Opinion 2022-3 | February 17, 2022 | Weiler, J. | Dkt. No. 6540-20S
Short Summary: This case focuses on the deductibility of item-by-item expenses contained on Schedule C (Profit or Loss From Business) of the taxpayers’ 2017 Form 1040 Individual Tax Return. Mainly, one of the taxpayers was music producer and musician, and the opinion addresses a wide range of expense categories that a musician might incur, including books and publications, costume cleaning, physical culture (i.e., Zen Fit training sessions), iTunes, Spotify, and Netflix. The IRS issued a notice of deficiency disallowing deductions for $37,800 of the total $47,385 of Schedule C expenses. The taxpayers challenged that decision.
- Taxpayers failed to prove the business (versus personal) purpose of the various expenses, and even where a deduction may have be available, taxpayers failed to adequately substantiate, with appropriate documentation, the expense as a legitimate and deductible business expense under Code section 162.
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.”
- A taxpayer must substantiate deductions claimed by keeping and producing adequate records that enable the IRS to determine the taxpayer’s correct tax liability. See 26 U.S.C. § 6001; Reg. § 1.6001-1(a). Unless specifically enumerated in the Code, no deductions are allowed for personal, living, or family expenses. See 26 U.S.C. § 262(a).
- Grooming expenses are never deductible because they are inherently personal. Fitness memberships and health supplements are also inherently personal expenses.
- Deduction for credit card interest and annual fees may be denied where the credit card is used for personal expenses and the taxpayer fails to provide documentation to allocate interest and fees to business versus personal use.
- Where business clothes are suitable for general wear, a deduction for them is not allowed.
- Purchase of periodicals of general interest does not generate an ordinary and necessary business expense under section 162. Expense for a trade-related periodical may be deductible, but the taxpayer bears the burden of proof on the issue.
- 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, dates, and place, and business purpose for each expenditure. See 26 U.S.C. § 274(d) (flush language); Treas. Reg. § 1.274- 5T(b)(2)(ii)-(iii) (defining “time” and “place” for these purposes). Taxpayers lacking a contemporaneous log are expected to maintain a record created as near in time as possible to the particular expenditure, which must be supported by corroborative documentary evidence that carries with it a high degree of probative value.
- Adequate records for travel-related expenses include an account book, log, or similar record and documentary evidence, contemporaneously made with the expense, that together are sufficient to establish each element of the expenditure. See id. at § 1.274-5T(c)(2)(i)-(ii)(C).
Insights: For an individual taxpayer to deduct expenses incurred in a trade or business, the taxpayer must have and maintain adequate records, contemporaneously made with the expense, to justify the available deduction. Expenses for goods or services that are inherently personal are not deductible under section 162. 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.