Tax Court in Brief | Patitz v. Comm’r | Schedule A and Schedule C Itemized Deductions and Documentation Requirements

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Tax Litigation:  The Week of September 26th, 2022, through September 30th, 2022

Patitz, Moody v. Comm’r, T.C. Memo. 2022-99 | September 27, 2022 | Weiler, J. | Dkt. No. 2784-19

Opinion

Short Summary: This case involves taxpayers’ entitlement to Schedule A itemized deductions and Schedule C deductions and the taxpayers’ obligation to substantiate those expenses to which the deductions were related were paid or incurred for the 2015 and 2016 tax years. Petitioners were husband and wife that jointly filed their tax return for the years at issue. Mrs. Patitz was an account executive with a copying company and she also operated her own insurance business selling supplemental insurance policies. Mrs. Patitz’s job responsibilities for the copying company required her to travel to client sites in Central Florida. Her employer reimbursed her for travel expenses incurred outside of her home base in Jacksonville, FL. Her weekly mileage expenses only accounted for her local trips in Jacksonville. In 2015 and for part of 2016 Mr. Moody was employed as an area manager for a courier service. His service area spanned from Vero Beach, FL to Key West, FL and his job duties required him to deliver “on demand” packages to clients in the service area. He had to travel to the employer’s warehouses weekly and occasionally had to stay overnight in hotels. For the second half of 2016, Mr. Moody began a new career as a teacher in Jacksonville, FL.

On their 2015 and 2016 joint income tax return petitioners claimed Schedule A deductions for their various businesses expenses which included vehicle expenses, meals and entertainment expenses, tool and supply expenses, uniform expenses, other business expenses, and medical expenses. The petitioners also claimed Schedule C deductions for business use of home, meals and entertainment, supplies, repairs and maintenance, legal and professional services, insurance, utilities, office, car and truck, travel, and mortgage interest. Mrs. Patitz did not provide any records, bank statements, itemized receipts, or credit card statements substantiating her 2015 or 2016 Schedule C expenses. Additionally, petitioners only substantiation of their Schedule A expenses were contemporaneous mileage logs while travelling, certain bank statements and receipts relating to Mr. Moody’s teaching expenses, and receipts for certain medical expenses on behalf of wife’s father, as well as some medical expenses incurred for themselves. At trial petitioner admitted receiving financial assistance from other family members for her father’s medical expenses.

On August 6, 2018, an IRS agent made the initial determination to assert accuracy-related penalties for 2015 and 2016, and on August 7, 2018, the agent’s immediate supervisor approved the penalty. IRS issued the Notice of Deficiency on November 7, 2018. The Notice of Deficiency disallowed all Schedule A deductions and applied the standard deduction to petitioner’s 2015 return. IRS also disallowed $19,534 of deductions petitioners claimed on their 2016 Schedule A and disallowed all deductions claimed on Schedules C for 2015 and 2016. IRS asserted accuracy-related penalties for substantial understatements of tax under section 6662(a) and (b)(2) for both years. The issues for decision were whether petitioners were (1) entitled to Schedule A deductions for 2015 and 2016, (2) entitled to Schedule C deductions for 2015 and 2016, and (3) liable for accuracy-related penalties under section 662(a) for 2015 and 2016.

Primary Holdings:

Key Points of Law:

Insights:

This case illustrates the importance of maintaining proper documentation for Schedule A and Schedule C expenses that are claimed on a return. Aside from adequately documenting vehicle mileage through contemporaneous logs and satisfying the strict requirements of section 274(d), the taxpayers did not provide the court with any other evidence to substantiate the expenses to which the other Schedule A and Schedule C expenses related. The Court was unpersuaded by the taxpayers’ argument that they couldn’t provide evidence of the expenses because they were lost for various reasons including that they were damaged from Hurricane Matthew flooding. A taxpayer’s argument that records or evidence that could have been used to substantiate an expense was lost is unlikely to be successful in today’s digital world where every type of account has electronical statements available.

Taxpayers have a greater ability to reconstruct records today than in any time in the past. In the absence of evidence to substantiate the taxpayer’s various claimed expenses the law required the court to sustain the Commissioner’s disallowances. In addressing the accuracy-related penalty and whether the petitioners met their burden to show reasonable cause, the court noted that the petitioners’ failure to provide documentation or detailed accounts of the water damage from Hurricane Matthew nor did they provide any documents to substantiate their claim related to credit card fraud which prohibited them from recovering statements. The court’s mention of these items suggests that the petitioners may have been able to meet their burden to show reasonable cause if they presented some evidence or testimony regarding flooding they experienced because of Hurricane Matthew or that they had been the victim of credit card fraud.

So, even if a taxpayer cannot reconstruct the record for reasons outside of its control, the taxpayer may be able to show reasonable cause to avoid the accuracy-related penalty if it can provide substantiating evidence demonstrating what occurred that prohibits the taxpayer from reconstructing the documentation that could otherwise substantiate the expense at issue.