Friday, June 27, 2014

Keeping Records - It Is Important

In a recent Tax Court decision, here, Garza v. Commissioner, T.C. Memo. 2014-121, the Tax Court found that the taxpayer was not entitled to deduct unreimbursed employee expenses.

The taxpayer was an outside salesperson who was required to use his own vehicle in his work, but was not reimbursed for his expenses.  He tried to deduct these expenses.

The taxpayer did not maintain a separate log for his mileage. Rather, the taxpayer maintained his records on his calendar. 

Taxpayer would record his odometer mileage in a calendar at the beginning of each month.  When the taxpayer filed his 2010 tax return, he deducted $24,048 in mileage expense and meals and entertainment.  He alleged that he had driven 40,171  business miles.  The taxpayer conceded that some of these miles were commuting miles.

The law is clear that a taxpayer must keep records to support the amounts reported on a tax return.  Section 6001 of the Internal Revenue Code; Treas. Reg. Sec. 1.6001-1(a), (e).

The Tax Court in Garza stated:

A taxpayer must substantiate deductions by keeping and producing adequate records that enable the Commissioner to determine the taxpayer’s correct liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).

When a taxpayer establishes that he or she paid or incurred a deductible expense but fails to establish the amount of the deduction, the Court normally may estimate the amount allowable as a deduction. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). There must be sufficient evidence in the record, however, to permit the Court to conclude that a deductible expense was paid or incurred in at least the amount allowed. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).  Furthermore, deductions for certain expenses are subject to strict substantiation requirements, and an allowance therefore may not be estimated by the Court.  The expenses in issue here fall within that category. See, e.g., Schladweiler v. Commissioner, T.C. Memo. 2000-351, aff’d, 28 Fed. Appx. 602 (8th Cir. 2002).

The taxpayer in Garza failed to follow the rules in Section 274(d) of the Code which require certain substantation requirements. 

The Tax Court further stated:

As relevant here, the term “listed property” includes passenger automobiles such as petitioner’s truck. See sec. 280F(d)(4)(A)(i). To satisfy the requirements of section 274(d), a taxpayer generally must maintain adequate records or produce sufficient evidence corroborating his own statement, establishing the amount, date, and business purpose of each expenditure or business use of property. Sec. 1.274-5T(b)(6), (c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016-46017 (Nov. 6, 1985).

The Tax Court found that while the taxpayer did have business expenses in relation to his employment, but he did not keep the required records as required to support a deduction.

In addition the Tax Court said:

that “adequate records” generally consist of an account book, a diary, a log, a statement of expense, trip sheets, or a similar record made at or near the time of the expenditure or use, along with supporting documentary evidence. The strict substantiation requirements of section 274(d) for vehicle expenses must be met even where the optional standard mileage rate is used. Sec. 1.274-5(j)(2), Income Tax Regs.

Even though the taxpayer in Garza had business expenses, his failure to follow the requirements of Section 274(d) of the Code allowed the Tax Court to disallow the deductions claimed.

While this seems somewhat of an unfair result, the Tax Court followed the Code and Regulations.  Had the taxpayer been more detailed in his record keeping, it is likely he would have been allowed the deduction. His excuse that it was “too much to do,” did not get him the deduction.

Clients need to be made aware of the requirements of recordkeeping for their business expenses.  See Baker v. Commissioner, here, where a truck driver who lost his records proved his expenses with estimates.
See Baker v. Commissioner, TC Memo 2014-122, where a truck driver who lost his records proved his expenses with estimates.