Tax Court in Brief | Spencer v. Commissioner | Itemized Business Deductions and Substantiation Requirements

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Tax Litigation:  The Week of June 6th, 2022, through June 10th, 2022

Spencer v Commissioner, T.C. Memo. 2022-8 | June 7, 2022 | Marshall, J.| Dkt. No. 17106-19S

Opinion

Short Summary: This case involves the disallowance of taxpayer’s deductions regarding (1) contract labor expenses, (2) car and truck expenses, and (3) repairs, and maintenance expenses for not meeting substantiation requirements. In tax years 2016 and 2017, Brandon Spencer (Spencer) operated Home Comfort Transportation LLC (Home Comfort), a business that offered non-emergency transportation services to medical patients. As part of its business, Home Comfort purchased and maintained vehicles and had full-time and part-time drivers who were paid by check and cash, respectively. Cash compensation payments were not documented. Additionally, Spencer retained receipts for vehicle rentals, purchases and tolls, invoices from repairs, an insurance statement, and vehicle registration records. On his tax returns for years 2016 and 2017, Spencer claimed Schedule C itemized deductions for Home Comfort’s expenses, including contract labor and vehicle-related expenses. The IRS selected Spencer’s returns for examination and IRS issued a notice of deficiency (IRS CP3219A Notice) to him. Spencer filed a petition with the Tax Court and, after concessions by the IRS, the issue remaining for trial regarded deductions for expenses for contract labor and vehicle-related expenses.

Key Issues:

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Insights:  This case is another example of a taxpayer failing to properly document and substantiate business expenses for deductions on Schedule C of Form 1040. To receive favorable tax treatment for itemized business expense deductions, Section 274 and related Treasury Regulations should be considered and honored by adequate and timely recordkeeping. For additional information on 26 U.S.C. Section 274(d) (substantiation requirements), see Freeman Law:

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For additional information on Notice of Deficiency, see Freeman Law attorney Matthew Robert’s What is an IRS Notice of Deficiency? | Income Tax Returns | Freeman Law