The Tax Law Report

Courier Allowed Deduction for 234 Miles Per Day (i.e. 58,250 per year)

Freeman v. Commissioner, T.C. Memo. 2009-213 (T.C. 2009)

Question for the Tax Court

[Is] Mr. Freemen entitled to a deduction under section 162 for his mileage between his personal residence and job locations . . . .(3).

Background

During the tax years 1999 and 2000, Mr. Freeman . . . was a courier for Parts Distribution Xpress, Inc. (PDX), and auto parts delivery company. (4).  During the years at issue, Mr. Freeman was an independent contractor with respect to PDX. (7).

Mr. Freeman's job as a courier involved picking up auto parts at PDX's warehouse in Baltimore, Maryland, and delivering those parts to 15 or more of PDX's customers on a route that went through several cities in Maryland and Delaware. (4)

Mr. Freeman made these deliveries for PDX 5 days each week, 50 weeks each year, during the tax years at issue.  He used is own vehicles to make these deliveries and was not reimbursed by PDX for his mileage. (4-5). 

During tax years 1999 and 2000, Mr. Freeman's delivery route took the form of a loop through Delaware and Maryland, with 15 or more stops at automobile dealers and repair shops. (5).

Mr. Freeman apparently drover more than 148 miles to make his individual stops; but as we explain below, he did not substantiate the greater number of miles he actually drove on this route. (6).

Mr. Freeman kept a daily log of [his] delivery route . . . by recording daily his vehicles' odometer readings and his stops in a spiral-bound logbook. (8).  On November 13, 2004, Mr. Freeman's house . . . was destroyed by an accidental fire. (8).  Mr. Freeman credibly testified . . . that the logbook was destroyed along with his house in the 2004 fire. (8).

Mr. Freeman claimed deductions for 193,000 business miles on his Schedule C for 1999, and 129,000 business miles for 2000. (10).  [T]he IRS disallowed Mr. Freeman's claimed deductions for car and truck expenses . . . . (10).

Rule for Deducting Travel Expenses

In general, the cost of daily commuting to and from work is a nondeductible personal expense.  See Commissioner v. Flowers, 326 U.S. 465, 473-474 (1946); sec. 1.162-2(e), Income Tax Regs.  However, 'certain types of business-related travel have been found to be deductible', including 'local travel incurred while performing a job . . . and travel between jobs or job locations. (11).

In Lopkoff v. Commissioner, T.C. Memo. 1982-701, we observed that '[i]f traveling between two businesses is an allowable section 162(a) deduction, traveling within a business is most assuredly so.' (12).  A '[delivery] business is the travel itself.'  Id. (12).Therefore, any transportation expenses incurred in delivery business is travel within a business, and 'is most assuredly' deductible. Id. (12).

Miles are Deductible...

We find that Mr. Freemen is entitled to a deduction for his mileage, except for the mileage added by his commute to and from his residence. (3).  It is clear that [the] mileage [from Mr. Freemans' delivery route] arose from travel between two job locations . . . and travel within a business, and is deductible under either rationale if substantiated. (14).

Therefore, Mr. Freeman is entitled to deduct--if substantiated--the costs of 234 miles per workday, which represents (i) the 148 miles . . . on his delivery route; and (ii) the 86 miles between his last stop and PDX's warehouse.  The additional 24 miles . . . from his last stop to home and back [to the warehouse] constitute nondeductible commuting that arose from his personal choice to live off his route. . . . (16).

...If Substantiated

[S]ection 274(d) imposes stringent substantiation requirements for claimed deductions relating to the use of 'listed property', which is defined under section 280F(d)(4)(A)(i) to include passenger automobiles. (17) (see here for requirements).

'It is well established that the Tax Court may permit a taxpayer to substantiate deductions through secondary evidence where the underlying documents have been unintentionally lost or destroyed.' (18)

[T]he regulations under [section 274] allow a taxpayer to 'substantiate a deduction by reasonable reconstruction of his expenditures or use' when records are lost through circumstances beyond the taxpayer's control, including a fire. Sec. 1.274-5T(c)(5), Temporary Income Tax Regs. (19).

Having observed Mr. Freeman's appearance and demeanor at trial, we find him to be credible with respect to the route he drove . . . [and] that Mr. Freeman at one time possessed adequate documentation . . . to establish the required elements under section 274(d). (19).

Therefore, we hold that Mr. Freeman is entitled to deductions under section 162 for 234 miles for each of his 250 workdays (i.e. 58,250 miles) in both 1999 and 2000 using the applicable standard mileage rates. (22).

Comments

You have to wonder why the IRS put Mr. Freeman through the wringer.  Especially since it was 'clear' to the tax court his miles were deductible if substantiated. (14).

The more interesting issue here is whether Mr. Freeman was truly an independent contractor rather than an employee, particularly in light of the recent news that FedEx is challenging the IRS on this very issue (here).  If FedEx loses, all those drivers's unreimbursed mileage expenses (assuming that is the case) will go from fully deductible for independent contractors, like Mr. Freeman, to partially deductible subject to the 2% of adjusted gross income limitation. See IRS Publication 463. In other words, the Treasury has a lot of money on the table here besides employment taxes. 

Qualifying Child; Commuting Expenses and Work Clothes

Not many opinions were released towards the end of the week. Therefore, I am writing about two summary opinions in this post.

In the first case, Mr. Rice lived in one house with his mother, girlfriend, his daughter, and his girlfriend's son. He claimed head-of-household filing status and took dependency exemptions for his daughter and his girlfriend's son. The IRS determined Mr. Rice should file single and denied both dependency exemptions.

Section  152(c) is controlling here. To claim someone has a dependent they must be a qualifying child; there is a four-part test for determining whether someone is a qualifying child; Support, Residence, Age, and Relationship. I tried to think of a catchy acronym like 'some roads are rough', but maybe it is easier to just remember the test as it is written.

After Mr. Rice produced a copy of his son's birth certificate proving he was the father, the IRS conceded head-of-household filing status and the dependency exemptions for his son. Mr. Rice, however, could not prove the relationship test with respect to his girlfriend's son. He also could not show he had adopted his girlfriend's son. Finally, he was not married to his girlfriend (that's called a wife), thus g's son was not Mr. Rice's step-son.

Download R2ice.SUM.WPD

The next opinion involved a construction worker who claimed deductions on his 2003 tax return for his work clothes (denim jeans, denim shirts, and boots), and his transportation expenses between his home and his work site.

Generally, clothing is a non-deductible personal expense. Revenue Ruling 70-474, however, states that clothing expense is deductible if required as a condition of employment and not adaptable for ordinary every day use. The IRS did not challenge Mr. Blackmon on this test, but rather denied his deduction because he could not substantiate the amount of his deduction (although, the Tax Court did mention this test in the footnotes). The Tax Court upheld the IRS's determination because Mr. Blackmon could not provide any records to substantiate the cost of his work clothes or boots.

Likewise, Mr. Blackmon could not substantiate his transportation expenses. But even if he could, his transportation expenses between his home and his job site are considered non-deductible commuting expenses. Revenue Ruling 99-7 provides three exceptions to this general rule: a deduction for transportation expenses is allowed (1) if the work location is temporary and the location is "outside the metropolitan area where the taxpayer lives and normally works," (2) if there are one or more regular work locations away from the residence, then daily transportation expenses are deductible between the taxpayer's residence and a temporary work location in the same trade or business, and (3) if the taxpayer's residence is their place of business. Temporary is generally defined as a realistic expectation that a work location will last less than one year.

Here, Mr. Blackmon worked at a plant in Darlington, NC and lived 71 miles away in Chadbourn, NC. He worked there for 7 years, and 11 1/2 months in 2003. The record is not clear, but it seems he was laid off a few times during that 7 year period, and worked at other jobs in different locations. Mr. Blackmon believed all his work locations were temporary because he might get laid off at a moment's notice. Unfortunately this is not the definition of temporary; if it were we could all deduct our commuting expenses since must of us are at-will employees.

Download Blackmon.SUM.WPD

Both Mr. Rice and Mr. Blackmon were completely ignorant of the law. As a taxpayer, I wish there was a way to resolve these types of meritless petitions without the expense of a hearing and a written opinion.