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The Tax Court in Brief – August 29 – September 2, 2022

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

Luna c. Comm’r, TC Summ. op. 2022-18| September 1, 2022 | Carluzzo, SJT leader | Dekt. No. 17748-18S


Short summary: George Luna (Luna) served as executive director of a nonprofit organization, the Center for Health Justice, Inc. (CHJ). In addition, he was a board member of ESSE Mundo Digital (EMD), a Brazilian organization. During 2015, he traveled to different cities as part of his role as CEO of CHJ. Also in 2015, he traveled to Brazil to meet with other EMD board members. Luna claimed various itemized deductions on her 2015 return related to her trip to CHJ and EMD. He also claimed a $225 tax return preparation fee deduction. The IRS rejected all of these miscellaneous itemized deductions in their entirety. Aggrieved, Luna filed a petition in the Tax Court for review of the IRS rulings.

Key questions: Whether Luna is entitled to claim various itemized deductions for unreimbursed employee business expenses and tax preparation costs.

Main holdings:

  • Luna is disqualified from claiming various itemized deductions for unreimbursed employee business expenses because: (1) he has not demonstrated the connection of travel to the trade or business (e., his work); and (2) he failed to demonstrate how the trips were “useful” for his position. Further, with respect to many of the expenses claimed, he failed to properly substantiate the same under Section 274(d).

  • Luna is not entitled to claim various itemized deductions for his tax preparation expenses because, even if the amount he claimed were allowed, the amount would not exceed 2% of his adjusted gross income, which in itself would result in no allowable deductions.

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 Helvering290 US 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 Fountain v. Comm’r, 59TC 696, 708 (1973). An employee’s business expense is not “ordinary and necessary” if the employee is entitled to reimbursement from their employer but does not claim reimbursement. See Podems c. Comm’r24 TC 21, 22-23 (1955).

  • 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 pursuant to a “responsible plan”, the reimbursed amount is not reported as wages on the employee’s W-2 form and is exempt from withholding and payment of 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.

  • Section 212(3) allows a deduction for expenses incurred in preparing a tax return. Hughes v. Comm’r, Memo TC. 2008-249.

Knowledge: The decision in Moondemonstrates that taxpayers must be able to adequately explain, in many cases, the purpose of the deductions claimed. If that purpose has only a weak connection to a trade or business, the deduction will likely be disallowed in its entirety.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.