Opinion
21094-17S
06-24-2021
ROBERT J. SHERMAN & CATHERINE SHERMAN, Petitioners v. Commissioner of Internal Revenue, Respondent
ORDER
Ronald L. Buch Judge
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit with this order to petitioners and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Las Vegas, Nevada, containing his oral findings of fact and opinion rendered at the remote trial session at which the case was heard.
In accordance with the oral findings of fact and opinion, decision will be entered for respondent
Bench Opinion
Ronald L. Buch, Judge
May 20, 2021
THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied on as precedent in any other case. This opinion is in conformity with Internal Revenue Code section 7459(b) and Rule 152(a) of the Tax Court Rules of Practice and Procedure. Any section references refer to the Internal Revenue Code or the Treasury regulations in effect during the year at issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
This case was heard pursuant to section 7463. Under section 7463(b), the decision to be entered in this case is not reviewable by any other court, and this opinion may not be treated as precedent for any other case.
During the year at issue, the Shermans maintained a personal residence in Las Vegas, Nevada, while Mr. Sherman worked in Arizona. To compensate Mr. Sherman for his expenses, his employer paid him an expense reimbursement at a daily rate. On their 2014 income tax return, the Shermans claimed deductions for unreimbursed employee business expenses, principally consisting of vehicle and travel expenses. The Commissioner disallowed those deductions.
To be deductible, employee business expenses must be ordinary and necessary, incurred in a trade or business, and properly substantiated by the taxpayer. Mr. Sherman's expenses were largely reimbursed by his employer. They are also personal in nature; they were incurred for the purpose of maintaining a home and not for business travel. And his expenses are largely unsubstantiated. Accordingly, we will sustain the notice of deficiency and enter a decision in favor of the Commissioner.
BACKGROUND
Before the year in issue, Robert and Catherine Sherman were married and resided in Las Vegas, Nevada, with their minor daughter. Ms. Sherman was a homemaker.
In late 2013, Mr. Sherman took a job with Sundt, a construction company located in Tempe, Arizona, as a pipe fitter assistant. Throughout 2014, Mr. Sherman worked at two Sundt job sites, both located in Morenci, Arizona. Mr. Sherman incurred significant vehicle, lodging, meal, and travel costs which he characterizes as employee business expenses. These included travel to and from work and frequent trips to visit his family in Las Vegas. In addition, he incurred costs for purchasing tools and other supplies.
Although the record does not include a reimbursement policy for Sundt, the company provided Mr. Sherman $80 per day to defray some of his expenses. For 2014, Sundt provided Mr. Sherman a total reimbursement of over $25,000, which Sundt did not report as taxable income to Mr. Sherman.
When Mr. Sherman completed his work on the Morenci job sites in February of 2015, his employment with Sundt ended. However, Sundt rehired him in March that same year, and he continued to work for Sundt for most of 2015.
On their 2014 Form 1040, U.S. Individual Income Tax Return, the Shermans reported $60,295 of adjusted gross income, which did not include the Sundt reimbursements. On their Schedule A, Itemized Deductions, the Shermans reported $34,940 of unreimbursed employee expenses, before the 2% adjusted gross income reduction. Part I of their Form 2106, Employee Business Expenses, breaks those expenses out into the following categories: vehicle, $13,440; travel, $18,500; and meals, $6,000.
Part II of Form 2106 contains the information used to calculate unreimbursed employee vehicle expenses. To arrive at the deductible portion of the vehicle expense, a taxpayer must report the total personal, and business miles driven. The taxpayer then multiplies the reported business miles by the standard milage rate, which for 2014 was 56¢. The Shermans indicated on the form that Mr. Sherman used two vehicles for business purposes during 2014. Between those vehicles, they reported that he cumulatively drove 24, 000 business miles, which significantly exceeded his personal use of those vehicles.
The Shermans did not report any employer reimbursements from Sundt on the Form 2106.
The Commissioner examined the Shermans' Schedule A deductions and requested records to substantiate the employee business expenses. In response, the Shermans completed a Form 1040X, Amended U.S. Individual Income Tax Return. Their amended Schedule A reported $43,199 of unreimbursed employee business expenses, consisting of the following: vehicle, $20,300; travel, $11,150; other, $4,000; and meals, $7,749.
On Part II of his amended Form 2106, the Shermans recalculated Mr. Sherman's vehicle expenses, reporting that he had driven 36, 250 business miles. This figure exceeded his previous estimate by over 12, 000 miles. Once again, the Shermans indicated that none of these expenses had been reimbursed by Sundt.
The Shermans submitted this amended return, but it was not accepted or processed by the Commissioner.
The Commissioner issued a notice of deficiency disallowing the Shermans' unreimbursed employee expense deductions as reported on their original return, citing their failure to substantiate the expenses or otherwise demonstrate deductibility. The Shermans filed a timely petition.
To substantiate their deductions, the Shermans provided the Court with a letter from Sundt confirming the duration and nature of Mr. Sherman's employment and a copy of Sundt's 2013 and 2014 payroll reports showing the days Mr. Sherman worked, his compensation, and his expense reimbursements. That report also contains handwritten notations calculating the total mileage needed to commute to work plus additional mileage for trips to Nevada.
DISCUSSION
As a general matter, the Commissioner's determinations in a notice of deficiency are presumed to be correct, and the taxpayer bears the burden of proving an error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Because deductions are a matter of legislative grace, the taxpayer bears the burden of proving his right to any claimed deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992), Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Whether an expenditure satisfies the requirements for deductibility is a question of fact. Cloud v. Commissioner, 97 T.C. 613, 618 (1991).
A taxpayer may shift the burden of proving the facts to the Commissioner by introducing credible evidence concerning their liability. Sec. 7491(a)(1). However, the ability to shift the burden is conditioned on the taxpayer's compliance with applicable substantiation and record-keeping requirements and his cooperation with reasonable requests by the Commissioner for "witnesses, information, documents, meetings, and interviews." Sec. 7491(a)(2)(A), (B). The Shermans do not allege, nor does the record support, that they are entitled to a shifting of the burden of proof.
Section 162 permits taxpayers to deduct expenses paid or incurred during the taxable year in carrying on any trade or business. An individual may be in the trade or business of being an employee. Kurkjian v. Commissioner, 65 T.C. 862, 869 (1976). When reporting expenses incurred as an employee, the taxpayer may deduct those expenses as itemized deductions under section 162. Secs. 62(a)(1), 63(d).
To be deductible, the taxpayer must show that an expense was ordinary and necessary. Sec. 162(a). Ordinary means "normal, usual, or customary." Deputy v. du Pont, 308 U.S. 488, 495 (1940). Necessary means "appropriate and helpful." Welch v. Helvering, 290 U.S. 111, 113 (1933). Costs ultimately incurred by the taxpayer's employer, through reimbursement or allowances, are not ordinary and necessary expenses, regardless of whether the employee actually seeks reimbursement. Sec. 1.274-5T(f), Temporary Income Tax Regs.; Podems v. Commissioner, 24 T.C. 21, 22-23 (1955). If a taxpayer's business expenses are reimbursed by the employer, then the taxpayer is entitled to a deduction only for the amount of expenses that exceeds the reimbursement. Diaz v. Commissioner, T.C. Memo. 2002-192
Sundt compensated Mr. Sherman for his expenses through an untaxed per diem reimbursement, rendering Mr. Sherman's expenses as not deductible up to the amount of that reimbursement. To be entitled to a deduction for unreimbursed employee business expenses, the Shermans must establish that Mr. Sherman incurred deductible expenses in excess of the amount reimbursed by Sundt. They did not.
One of the reasons they did not establish that he incurred expenses in excess of the amount reimbursed by Sundt is that many of the expenses claimed by the Shermans are nondeductible personal living expenses because they were not incurred away from Mr. Sherman's home.
Costs that are incurred primarily for personal, living, or family purposes are not deductible as trade or business expenses. Sec. 262(a). For this reason, a travel-related expense is only deductible under section 162 if the expense is incurred away from home. Sec. 162(a)(2); Liljeberg v. Commissioner, 148 T.C. 83, 92 (2017). And an expense is not deductible if it is associated with maintaining a separate residence for personal or familial reasons, rather than business reasons. Liljeberg v. Commissioner, 148 T.C. 83, 93 (2017). Thus, we must ask the question whether the Shermans were maintaining two separate homes (one in Arizona and one in Nevada) or if Mr. Sherman was temporarily away from his home in Nevada when he was working in Arizona. If Mr. Sherman's home was in Nevada, his travel expenses might be deductible. The Code provides an answer.
The term "home" for these purposes means the location of a taxpayer's principal place of employment, not the location of his personal residence. Mitchell v. Commissioner, 74 T.C. 578, 581 (1980). Generally, if the location of the taxpayer's place of business changes for an extended period, so does his tax home. Kroll v. Commissioner, 49 T.C. 557, 562 (1968). More specifically, if a person works in a location for more than one year, then that person is not treated as being temporarily away from home when at that location. Sec. 162(a) (flush language).
Arizona was Mr. Sherman's tax home during 2014. Mr. Sherman took a job with an employer based in Arizona and worked on jobsites located in Arizona for over a year, including all of 2014. Arizona was his principal place of employment, and the duration of his relocation falls outside of the statutory definition of temporary employment.
This brings us to Mr. Sherman's travel expenses. His claimed travel falls into two categories: commuting expenses from his Arizona home to his worksite and expenses travelling between his Arizona home and his Nevada home. To the extent Mr. Sherman's mileage was between his Arizona home and his work site, which he testified was part of his claimed mileage, commuting expenses are not deductible. Sec. 1.162-2(e); Kroll v. Commissioner, 49 T.C. 557, 566 (1968). The remainder of Mr. Sherman's vehicle expenses arose from regular trips between his home in Arizona and Ms. Sherman's home in Nevada. That is not a business expense.
Even if the Code did not prevent deduction of the expenses claimed by the Shermans, they failed to adequately substantiate their deductions. As previously noted, the Shermans would need to establish that they incurred deductible expenses in excess of the reimbursement from Sundt. They didn't.
Their only substantiation is a record of days worked with an estimate of how many miles would have been driven as a result of those days worked plus the travel to Las Vegas. The Shermans did not provide any other records, and a mileage allowance for the miles claimed would fall below the amount reimbursed by Sundt. To the extent Mr. Sherman incurred other expenses, he did not provide substantiation and merely referred to the need to provide his own tools. In short, the Shermans did not meet their burden as to any deduction beyond what was already reimbursed by Sundt.
CONCLUSION
Mr. Sherman's claimed expenses fail each of the requirements for deductibility under section 162. His employer paid him a per diem to reimburse him for his expenses. He was not temporarily away from home because his tax home was Arizona, where he worked for over a year. The travel and vehicle expenses he incurred to commute or to travel between his two homes are not deductible. And even if his expenses had not failed for those reasons, the Shermans failed to substantiate any expenses in excess of the amount reimbursed by Mr. Sherman's employer. Accordingly, decision will be entered for the commissioner. (Whereupon, at 8:57 a.m., the above-entitled matter was concluded.)