Freeman Law’s “Tax Court Brief” covers all of the Tax Court’s substantive opinions, providing a weekly summary of its decisions in clear, concise prose.

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Tax litigation: The week of August 29, 2022 to September 2, 2022

  • Sparta Pink Property, LLC v. Comm’r, TC Memo. 2022-88 | August 29, 2022 | Lauber, J. | Dekt. No. 12114-20
  • Pressman v. Comm’r, TC Summ. op. 2022-15 | August 29, 2022 | Panuthos, STJ | Dekt. No. 16084-19S
  • Domdom c. Comm’r, TC Summary Notice 2022-17 | August 30, 2022 | Carluzzo, J. | Dekt. No. 18270-17S
  • George Anton Remisovsky and Ellen Jones-Remisovsky c. Comm’r, TC Memo. 2022-89| August 30, 2022 | Lauber, A. | Dekt. No. 11945-20L

Butterfield v. Comm’r, TC Summ. 2022-16| August 30, 2022 | Carluzzo, SJT leader | Dekt. No. 2608-21S


Short summary: George Butterfield (Butterfield) was employed as construction superintendent. His job required him to travel to various locations in several states to build or remodel truck service stations. In 2017, he spent 245 nights away from home performing these services. The company Butterfield worked for reimbursed many of his travel expenses. In 2017, his company paid him a total of $18,375 in travel reimbursement using a per diem method. Butterfield’s tax preparer claimed $37,687 in unreimbursed employee expenses (after applying the 50% limit under section 274(n)) on Butterfield’s 2017 tax return. The IRS dismissed the employees’ unreimbursed expenses, and Butterfield sought Tax Court review.

Key questions:

  • Is Butterfield entitled to claim unreimbursed employee expenses as miscellaneous itemized deductions?

Main holdings:

  • Butterfield substantiated $3,153 for meals and $8,242 for lodging with his credible testimony and summaries of his bank and debit card statements. However, Butterfield can only claim these deductions if its reimbursable company payments were made under a “non-accounting plan”. Under Rule 155, the Tax Court held that the parties should be able to determine for themselves whether reimbursements received by Butterfield were within a chart of accounts or not and ordered the parties to record their agreement in the calculations of rule 155.

Main points of law:

  • Generally, the IRS’ determination of a taxpayer’s federal income tax in a deficiency notice is presumed to be correct, and the taxpayer bears the burden of proving that the determination is wrong. Rule 142(a); Welch versus Helvering,, 290 U.S. 111, 115 (1933).
  • Deductions are a matter of legislative grace; therefore, the onus is on the taxpayer to prove that he is entitled to any deduction claimed. Rule 142(a); INDOPCO, c. Comm’r, 503 US 79, 84 (1992). This burden requires the taxpayer to substantiate the expenses underlying the deductions claimed by maintaining and producing adequate records that allow the IRS to determine the taxpayer’s correct tax liability. See IRC § 6001; Hradesky vs. Comm’r65 TC 87, 89-90 (1975), aff’d by curiam540 F.2d 821 (5th Cir. 1976).
  • A taxpayer claiming a deduction on a federal income tax return must show that the deduction is allowable under a statutory provision and must further prove that the expense to which the deduction relates was paid or incurred. See RC § 6001; Hradesky, 65 CT at 89-90; Treasures. Reg. § 1.6001-1(a).
  • Taxpayers may deduct ordinary and necessary expenses paid in the course of carrying on a trade or business. CR § 162(a). Generally, the provision of services as an employee constitutes a trade or business. Primuth c. Comm’r, 54TC 374, 377 (1970). If, as a condition of employment, an employee is required to incur certain expenses, he is entitled to a deduction for those expenses, unless he is entitled to reimbursement from his employer. See Foundation c. Comm’r59TC 696, 708 (1973).
  • Under the cohan doctrine, if a taxpayer provides sufficient evidence that he or she incurred a business or commercial expense referred to in section 162(a) but is unable to adequately substantiate the amount, the court may estimate the amount and allow a deduction to this extent. Cohan vs. Comm’r, 39 F.2d 540, 543-44 (2d Cir. 1930). But in order for the Court to estimate the amount of any expense, there must be some basis upon which an estimate can be made. Vanicek v. Comm’r85TC 731, 742-43 (1985).
  • However, the Court cannot estimate the expenditure under cohan in situations where section 274 requires special justification. See CR § 274(d); Sanford vs. Comm’r50 TC 823, 827 (1968), aff’d by curiam, 412 F.2d 201 (2nd Cir. 1969). Deductions for expenses attributable to meals and lodging while traveling away from home, if otherwise permitted, are subject to strict justification rules. See IRC § 274(d). With respect to these types of expenses, Section 274(d) requires the taxpayer to substantiate either by adequate records or by sufficient evidence supporting his own statement of (1) the amount of the expense; (2) when and where the expense was incurred; (3) the business purpose of the expenditure; and (4) in the case of entertainment or gift expenses, the business relationship with the taxpayer of each expense incurred.
  • Substantiation by adequate records requires the taxpayer to maintain a book of accounts, journal, ledger, statement of expenses, travel sheets or similar record prepared at the same time as the expenses and documentary evidence (e.g., receipts or invoices) of certain expenses. Reg. § 1.274-5(c)(2)(iii); Temp. Treasures. Reg. § 1.274-5T(c)(2). Substantiation by other sufficient evidence requires the production of corroborating evidence in support of the taxpayer’s statement detailing precisely the elements required. Temp. Treasures. Reg. § 1.274-5T(c)(3).
  • Under section 62(a)(2)(A), an employee may deduct certain business expenses incurred in performing services for an employer as part of a reimbursement or other work arrangement. expense allowance. If these expenses are reimbursed by the employer in accordance with a “chart of accounts”, the reimbursed amount is not reported as wages on the employee’s W-2 form and is exempt from withholding and paying taxes on ‘use. Reg. § 1.62-2(c)(4). If the arrangement does not meet the requirements of Section 62 and applicable regulations, amounts paid under the arrangement will be treated differently as under a non-accounting plan—that’s to say, these amounts are included as gross income on the employee’s W-2 form and are subject to withholding and payment of employment taxes. It is only in the latter case that expenses can be deducted, provided that the employee can justify the total amount of his expenses.

Insight: The butter field the summary opinion reminds taxpayers of the importance of keeping records, even after filing a tax return. Taxpayers should strive to keep their records for at least 3 years after filing the return (but ideally six years, if possible).

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