Question for the Tax Court
May Mr. Menzies deduct unreimbursed employer expenses for business use of his personal vehicle even though he discarded the day planner that he recorded his mileage in?
Mr. Menzies held two jobs during 2005 interspersed with two periods of unemployment. (2). During the first half of 2005, he worked as a fire restoration field technician. (2). During the second half of 2005, he worked as a field operations supervisor for a security company. (2). Both jobs required Mr. Menzies to use his personal vehicle to travel during the day to various jobsites. (3).
The taxpayer deducted $18,649 in unreimbursed employee business expenses on schedule A of his 2005 tax return. (4). The expenses consisted of $12,249 for business use of his personal vehicle, $400 for travel, and $6,000 for other miscellaneous unreimbursed employee business expenses. (4).
The IRS disallowed the taxpayer's entire deduction for lack of substantiation. (5).
Law for Unreimbursed Employee Business Expenses
Section 162(a) allows a deduction for ordinary and necessary expenses incurred during the taxable year in carrying on a trade or business. (6). Generally, the performance of services as an employee constitutes a trade or business. Primuth v. Commissioner, 54 T.C. 374, 377 (1970). (6). For such expenses to be deductible, the taxpayer must not have received reimbursement and must not have the right to obtain reimbursement from his employer. See Orvis v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), affg. T.C. Memo. 1984-533. (6).
If a taxpayer establishes than an expense is deductible but is unable to substantiate the precise amount, the Court may estimate the amount, bearing heavily against the taxpayer whose inexactitude is of his own making. Cohan v. Commissioner, 39 F.2d 540, 543-44 (2d Cir. 1930) (the Cohan rule or simply Cohan). (6).
Section 274(d), however, supersedes the Cohan rule with regard to certain expense. Section 274(d) requires stricter substantiation for . . . travel, meals, and listed property such as personal automobiles. (7).
Answer from the Tax Court: no record, no deduction
[Here], the taxpayer calculated the amount of the deduction ($12,249) by multiplying the business mileage by the standard mileage rates in effect during 2005. (8). Each workday, the taxpayer recorded the mileage from his first worksite to the last worksite of the day in a "day planner". (8). He noted all the sites he visited during the day; however, he did not record the mileage between sites. (8).
Mr. Menzies testified that he discarded his day planner in 2007, sometime after filing his 2006 return and receiving his refund, because he felt the documentation was no longer necessary. (8). He was therefore unable to produce any records to substantiate the business mileage, and, further, he did not attempt to reconstruct a record of his business mileage. (8).
The Court believes Mr. Menzies incurred unreimbursed vehicle expense related to his work . . . during 2005. However, the Court may not estimate vehicle expenses under Cohan. Therefore, we must sustain the IRS's determination. (9).
NOTE: The Court also sustained the IRS's determination with respect to the $400 in travel expenses, but did allow 50% of Mr. Menzies' $6,000 in other miscellaneous unreimbursed items; subject to the 2% floor of course. I think they felt sorry for him!
Ouch! This was a very harsh lesson for the taxpayer. Taxpayer's should keep records supporting the amounts on their tax returns for at least three years. The IRS makes this very clear on page 91 of the Form 1040 instructions. Of course, I am sure taxpayers thoroughly read the Form 1040 instructions before preparing their tax returns, all 174 pages!
Having read several tax court opinions over the last six months, it has become very apparent that the IRS's "go to" argument against taxpayers is lack of substantiation for their deductions. Given the importance of record keeping, the three-year guidance should be front and center on the instructions to every tax form, not buried 91 pages into a 174 page document.
Moreover, Mr. Menzies claimed his unreimbursed employee business expenses on Form 2106-EZ. The instructions for this form do not even mention the three-year record keeping requirement, only that records must be kept. As applied here, Mr. Menzies did keep records, he just did not keep them long enough.