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ANDREW L. HARRELL AND KATHERINE L. HARRELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, T.C. 2023-31

Background

At different times during the year in issue Andrew L. Harrell (petitioner) was employed by the following: (1) Goodwill, (2) GPR Logistics, LLC (GPR), and (3) Village Management Services, Inc. (Village). Each employer treated petitioner as an employee and reported his wages on Form W–2, Wage and Tax Statement.

Taxpayer was the transportation manager for both Goodwill and GPR. Services he performed for Goodwill and GPR were similar; he managed the distribution of inventory among their stores in California. For Village, taxpayer managed the fleet of buses that served a senior citizen residential complex. He was also responsible for managing the maintenance and condition of the roads, clubhouses, and assisted-living facilities in the complex. At various points throughout the year, he attended transportation industry expos to investigate vehicle options for each of his employers.

Taxpayer’s employment responsibilities, particularly for Goodwill and GPR, required frequent travel throughout southern California. He sometimes used his vehicles for employment-related travel. Taxpayer did not keep a logbook or other contemporaneous record of the expenses he incurred while traveling for business. Neither did he keep any record of how much of his use of his vehicles was employment-related and how much was personal.

Employers did not provide the employee expense reimbursement policies, if any, of taxpayer’s employers. It appears, however, that Village sometimes reimbursed employees for expenses he incurred on behalf of that company.

Taxpayer’s joint 2017 federal income tax return was prepared by a paid income tax return preparer. As relevant, on the return petitioners (1) reported the amounts reported on Forms W–2 issued to taxpayer by his employers and (2) claimed a miscellaneous itemized deduction for unreimbursed employee business expenses related to taxpayer’s employment. The deduction totals approximately 50% of the income shown on the Forms W–2 and includes amounts for vehicle expenses, travel expenses, meals and entertainment expenses, and other business expenses that taxpayer claims they paid or incurred in connection with his employment with one or another of his employers.

In the notice respondent disallowed the entire deduction taxpayer claimed for unreimbursed employee business expenses because, according to the notice, taxpayer “did not establish that the business expense shown on their tax return was paid or incurred during the taxable year and that the expense was ordinary and necessary to their business.”

Discussion

Generally, the performance of services as an employee constitutes a trade or business. If, as a condition of employment, an employee is required to incur certain expenses, then the employee is entitled to deduct those expenses unless entitled to reimbursement from his or her employer. As a general rule, if a taxpayer provides sufficient evidence that the taxpayer has incurred a trade or business expense contemplated by section 162(a) but is unable to adequately substantiate the amount, the Court may estimate the amount and allow a deduction to that extent.

Expenses subject to section 274

Deductions for certain otherwise deductible expenses, such as travel, meals, entertainment, and vehicle expenses, are subject to strict substantiation requirements. With respect to deductions for these types of expenses, section 274(d) requires that the taxpayer substantiate either by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (1) the amount of the expense, (2) the time and place the expense was incurred, (3) the business purpose of the expense, and (4) in the case of an entertainment or gift expense, the business relationship to the taxpayer of each expense incurred. Substantiation by adequate records requires the taxpayer to maintain an account book, a diary, a log, a statement of expense, trip sheets, or a similar record prepared contemporaneously with the expenditure and documentary evidence (e.g., receipts or bills) of certain expenditures.

A portion of the unreimbursed employee business expense deduction here in dispute includes amounts for vehicle expenses, travel expenses, and meals and entertainment expenses that petitioner claims to have incurred or paid in connection with his employment with one or more of his employers. To support inclusion of the amounts expended for such purposes petitioners offered (1) bank statements with particular entries highlighted and (2) a contract for the purchase of a pickup truck. As noted, petitioner did not keep a logbook or other record that reflects the use of this truck or other of petitioners’ privately owned vehicles for employment related purposes. Petitioners’ bank statements show amounts spent at restaurants and for public transportation, but petitioner’s generalized testimony with respect to these expenses is not sufficient to satisfy the requirements necessary to allow for deductions for those expenses.

Furthermore, it is unclear whether petitioner’s employers reimbursed petitioner for any expenses he incurred on behalf of any of them. Petitioner testified that one of his employers would occasionally reimburse him for purchases he made on behalf of the employer, but he did not provide the reimbursement policies of this employer or any other of his employers. Because petitioners failed to present sufficient evidence substantiating the deductions claimed for vehicle usage, travel expenses, and meals and entertainment expenses, they are not entitled to deduct any of those expenses.

Expenses not subject to section 274(d)

The disallowed deduction also includes amounts for other expenses that petitioners report relate to petitioner’s employment for one or the other of his employers. At trial petitioner pointed to some charges shown in petitioners’ bank statements and claimed that these purchases related to his employment. According to petitioner, he was not reimbursed for any of these purchases by any of his employers. Reimbursement aside, petitioners failed to explain how the items purchased related to petitioner’s employment. For example, according to petitioner he purchased clothing for individuals being honored at an event sponsored by Goodwill. Although a generous gesture, petitioners failed to establish how the purchase was an ordinary and necessary expense related to petitioner’s employment with Goodwill.

With respect to deductions claimed for various other expenses, as respondent explained in the notice, petitioners have failed to establish that the expenses were paid or incurred, or if so, how the expenses related to petitioner’s employment with any of his employers. It follows that petitioners are not entitled to deduct these expenses.