Opinion
6540-20S
02-17-2022
AARON J. SONNTAG AND STEFANIE R. GILMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Aaron J. Sonntag and Stefanie R. Gilman, pro sese. Michael W. Tan, Nicole M. Mitchell, and Ping Chang, for respondent.
NOT PRECEDENTIAL
Aaron J. Sonntag and Stefanie R. Gilman, pro sese.
Michael W. Tan, Nicole M. Mitchell, and Ping Chang, for respondent.
SUMMARY OPINION
WEILER, JUDGE
This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent determined that petitioners are liable for a federal income tax deficiency for the 2017 taxable year of $12,347 and an accuracy-related penalty pursuant to section 6662(a) of $2,469. Petitioners invoked the Court's jurisdiction by filing a timely petition for redetermination pursuant to section 6213(a). Petitioners resided in California when the petition was filed.
After concessions, the issue remaining for decision is whether petitioners are entitled to deductions claimed on Schedule C for the 2017 tax year.
Respondent concedes that petitioners are entitled to partial deductions for expenses reported on Schedule C, Profit or Loss From Business, for travel of $9,851, meals and entertainment of $5,571, and other of $7,768. Respondent also concedes that petitioners are not liable for an accuracy-related penalty under section 6662(a). Petitioners concede an unspecified expense of $188 respondent disallowed for travel.
Some of the facts have been stipulated by the parties and are incorporated herein.
Petitioners, husband and wife, each had sources of income during the year in issue. During 2017 Mrs. Gilman worked in media sales and Mr. Sonntag worked as a producer, musician, writer, and photographer. Mr. Sonntag operated a music studio, called Shed Studios, from a shed in the backyard of petitioners' home. Petitioners used an electronic application called "Itemize" to track their business expenses and receipts.
Although Mrs. Gilman was aware of the trial in this case and made a brief appearance, she did not otherwise participate in the trial proceedings. Mrs. Gilman allowed Mr. Sonntag to appear on her behalf, as the issues for trial pertained to his 2017 Schedule C activity.
I. Petitioners' Tax Return
Petitioners timely filed their joint 2017 Form 1040, U.S. Individual Income Tax Return (joint return). On their joint return petitioners reported $247,201 in income from Form W-2, Wage and Tax Statement. They attached a Schedule C to their joint return reporting gross receipts of $18,550. They claimed Schedule C deductions totaling $47,385, resulting in a business loss of $28,835.
The following Schedule C expenses are the items remaining in dispute. Respondent does not dispute Mr. Sonntag's activities are Schedule C business activities, nor does respondent seek to classify his activities as a hobby. See I.R.C. § 183.
A. Travel
During 2017 Mr. Sonntag traveled often. Petitioners deducted $11,713 on their joint return for travel expenses. The amount remaining at issue for travel expenses is $1,674. When Mr. Sonntag traveled, his wife did not accompany him.
Mr. Sonntag traveled to Marfa and Big Bend, Texas, during the year in issue. Petitioners deducted $349 for airfare expenses. To support this expense they provided a spreadsheet Mr. Sonntag prepared of credit card transactions (credit card spreadsheet) indicating the trip and the amount paid for by credit card. However, they did not produce any receipts from the airline.
Mr. Sonntag traveled to Barcelona, Spain, during the year in issue. Petitioners deducted $921 for airfare expenses for this trip. The cost of the trip was included on the credit card spreadsheet, but they did not produce a receipt or invoice from the airline.
Mr. Sonntag traveled to Biarritz, France, during the year in issue. Petitioners deducted $172 for lodging expenses. They did not provide any documentation, invoices, or receipts indicating lodging expenses.
Mr. Sonntag traveled to Phoenix, Arizona, during the year in issue. Petitioners deducted $221 for airfare expenses for this trip. They provided a "cost and payment summary" for this flight, totaling $127. Before trial, respondent conceded this reported expense of $127; as a result, the amount remaining in dispute is $96. They did not submit an airline receipt or bank statements indicating the cost or payment of the airfare to Phoenix.
Mr. Sonntag traveled to the Oregon Coast, Oregon, during the year in issue. Petitioners deducted $136 for airfare expenses. The airfare expenses were included on the credit card spreadsheet, but they did not provide a receipt indicating the cost of airfare or that a payment was made.
B. Meals and Entertainment
Petitioners deducted $5,763 for meals and entertainment expenses. After concessions, the remaining disallowed expense is a payment to Bellagio Nails and Spa of $192.
Petitioners provided a receipt for a payment to Bellagio Nails and Spa, though the receipt is not itemized. They labeled the expense "Personal Care" on Itemize, their recordkeeping application.
C. Other Expenses
Petitioners deducted $20,324 for other expenses. After concessions, the remaining amount in dispute for other expenses is $12,556. The following expenses were reported as "other expenses."
When considering the additional amounts sought by petitioners, the total remaining amount in dispute is alternatively $12,842.
1. Bank Charges
Petitioners deducted $113 for bank charges. The bank charges comprised ATM fees that accrued in a foreign country. Petitioners did not provide any itemized receipts, nor did they provide any other documentation to support this expense.
2. Batteries
Petitioners deducted $86 for battery expenses. During the audit process petitioners gathered additional documentation and, on the basis of those documents, asserted they were entitled to an increased deduction for batteries of $312.
Petitioners provided a list of dates and amounts for Mr. Sonntag's battery purchases for various shows. They did not provide any bank statements, itemized receipts, or credit card statements related to Mr. Sonntag's battery expenses.
3. Books and Publications
Petitioners deducted $262 for book and publication expenses. Before trial, they asserted that they are entitled to an increased deduction of $400.
Mr. Sonntag used various books to stay current on business information, as well as for technical and specific topics relating to music. Petitioners submitted various self-prepared spreadsheets, credit card statements, and screenshots of payments to substantiate the $400 in expenses. Mr. Sonntag often made these payments in cash.
4. Briefcase
Petitioners deducted $87 for a briefcase Mr. Sonntag purchased in Mexico. They did not produce any documentation to support this expense.
5. Credit Card Interest and Annual Fees
Petitioners deducted $95 for credit card annual fees. Before trial, they asserted that they are also entitled to deduct credit card interest of $849. The credit card statements produced for the record include both personal and business transactions.
6. Camera Parts
Petitioners deducted $113 for what Mr. Sonntag listed as camera parts, accessories and supplies, an iPhone case, and charging cables. Mr. Sonntag used the items abroad for social media content. Petitioners did not provide any documents, receipts, or bank statements to substantiate these expenses.
7. Costume Cleaning
Petitioners deducted $319 for costume cleaning expenses. Before trial, they asserted that they are entitled to an increased deduction of $383.
Petitioners provided a self-prepared spreadsheet of the various costume cleaning expenses; however, Mr. Sonntag commonly paid for these services in cash.
8. Stage Costumes
Petitioners deducted $1,792 for stage costume expenses. Before trial, they asserted that they are entitled to an increased deduction of $1,821.
Petitioners provided a breakdown of various items Mr. Sonntag purchased during the year in issue that were claimed as stage costumes. The items include black Allbirds shoes, jet black Nike shoes, and a vintage Wrangler shirt.
9. Special Events Catering
Petitioners deducted $764 for special events catering expenses. Before trial, they asserted that they are entitled to an increased deduction of $1,171.
Mr. Sonntag created a concert series that was intimate in setting, where artists and their fans could converse and get to know each other.
To support this deduction, petitioners provided a self-prepared spreadsheet with various purchases and their associated costs. Additionally, they provided some receipts for purchases included on the spreadsheet.
10. Labor
Petitioners deducted $480 for labor expenses. Before trial, they asserted that they are entitled to an increased deduction of $660.
Petitioners provided screenshots of payments to Johnny Gonzalez and Fernando Sanchez through a money exchange phone application to support the reported expenses. The screenshots they produced did not describe the payments.
11. Office Supplies
Petitioners deducted $317 for office supply expenses. Before trial, they asserted that they are entitled to an increased deduction of $428.
To support their deduction petitioners provided an itemized list Mr. Sonntag created for trial of his purchases from Costco and a credit card statement indicating the total purchase price. They did not, however, produce any receipts or invoices for any of the items claimed as office supplies.
12. Physical Culture
Petitioners deducted $327 for physical culture expenses. Before trial, they asserted that they are entitled to an increased deduction of $500.
These expenses comprised ten Zen Fit training sessions and purchases of a health supplement oil, both of which were for Mr. Sonntag.
The postage/shipping expenses petitioners reported included payments for shipping services in addition to the post office box at issue. Respondent allowed a deduction for shipping payments. Even though the only remaining portion of postage/shipping is the post office box, we will keep the item labeled and refer to it as petitioners reported it on their joint return.
The amount remaining in dispute for a deduction for postage/shipping is $47. Petitioners deducted post office box expenses in Las Vegas, Nevada, but at no point during the year in issue did Mr. Sonntag work there.
14. Styling Products
The amount remaining in dispute for a deduction for styling products is $159.
Petitioners provided credit card statements indicating multiple payments to CVS Pharmacy. Mr. Sonntag created a list of the products he used, which included shampoo, teeth whitener, conditioner, nail maintenance supplies, cologne, and shaving supplies, among others. Petitioners did not provide any itemized CVS receipts to support the transactions on their credit card statements, nor did they produce any invoices for any of the items on the list Mr. Sonntag prepared.
15. Props
Petitioners deducted $358 for prop expenses. Before trial, they asserted that they are entitled to an increased deduction of $514.
To support this expense, petitioners provided credit card statements and a self-prepared document with a list and description of the props purchased. The credit card statements indicate transactions with multiple flower shops, a sign-making business, an antique shop, and Restoration Hardware. Petitioners, however, have not provided any itemized receipts, invoices, or other documentation to indicate the actual props purchased or their cost.
16. Research Admissions
Petitioners deducted $1,553 for research admission expenses. Before trial, they asserted that they are entitled to an increased deduction of $1,726. These expenses comprise admission fees to various museums and events, including a Rolling Stones museum exhibit, an outdoor screening of Dirty Dancing, VIP tickets to a music festival, and a Lana Del Rey concert, to name a few. Additionally, petitioners provided a list Mr. Sonntag created of dates of events he attended, their corresponding costs, and various order confirmations.
17. Cable Research
The amount remaining in dispute for a deduction for cable research expenses is $706. The cable research deduction comprised payments for DirectTV, as indicated on credit card statements petitioners provided. Petitioners conceded that approximately 50% of their cable use is allocable to Mr. Sonntag's Schedule C business while the other 50% is for personal use. More specifically, the $706 expense in dispute is approximately 25% of the DirectTV total amount paid in 2017.
While petitioners labeled this expense iTunes on their joint return, the associated subscription is for Apple Music.
The amount remaining in dispute for a deduction for Apple Music and Spotify subscriptions is $185. Mr. Sonntag used these streaming services to access their music libraries. Petitioners produced credit card statements indicating payments to both iTunes and Spotify throughout the year in issue.
19. Netflix
The amount remaining in dispute for a deduction for a Netflix subscription is $111. As he did with Apple Music and Spotify, Mr. Sonntag used Netflix for its accompanying library. Petitioners provided credit card statements in support of this expense.
20. Studio Supplies
Petitioners deducted $1,017 for studio supply expenses. Before trial, they asserted that they are entitled to an increased deduction of $1,293.
To support this deduction, petitioners provided a self-prepared spreadsheet with items Mr. Sonntag purchased and a credit card statement with accompanying transactions and their totals. They did not provide, however, any itemized receipts or documents indicating that the amounts on the receipts are allocable to the items Mr. Sonntag listed in the created document.
21. Cell Phone
The amount remaining in dispute for a deduction for cell phone expenses is $276. During the year in issue Mr. Sonntag used his cell phone for communicating, maintaining his social media profiles, and taking photographs and videos. Petitioners provided a spreadsheet Mr. Sonntag prepared with the total monthly payments for 2017 and the amount they allocated to Mr. Sonntag's business use.
Before trial, respondent partially conceded cell phone expenses and allowed 50% of 50% of the claimed deduction, or $276.
22. Tools
Petitioners deducted $284 for tool expenses. Before trial, they asserted that they are entitled to an increased deduction of $307.
To support this expense, petitioners submitted a self-prepared document listing various construction items including drill bits, plyers, paint brushes, and a table saw, in addition to credit card statements indicating transactions at the Home Depot. They did not produce any itemized receipts or invoices.
23. Legal Services
The amount remaining in dispute for a deduction for legal services is $586.
At trial Mr. Sonntag testified that the actual deduction should be for $1,175 for tax preparation fees and the deduction should actually be labeled as "consulting for business."
The joint return indicates that petitioners deducted $1,025 for legal and professional service expenses. Petitioners did not provide any invoices for legal, consulting, or other business services for the year in issue.
II. Notice of Deficiency
On February 10, 2020, respondent issued a notice of deficiency to petitioners disallowing deductions for $37,800 of the total $47,385 of Schedule C expenses. The disallowed amount comprised travel expenses of $11,713, meals and entertainment expenses of $5,763, and other expenses of $20,324. Respondent also determined that petitioners are liable for an accuracy-related penalty under section 6662(a). With the exception of the above-mentioned concessions, respondent has not allowed deductions for any of the items disallowed in the notice of deficiency.
Discussion
As a general rule, the Commissioner's determination of a taxpayer's liability in a notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).Deductions are a matter of legislative grace, and the taxpayer generally bears the burden of proving entitlement to any deduction claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Petitioners do not contend, and the record does not suggest, that the burden of proof should shift to respondent pursuant to section 7491(a).
I. Expenses Disallowed as Personal
Under section 162(a), a deduction is allowed for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. However, a deduction normally is not available for personal, living, or family expenses. I.R.C. § 262(a). Whether an expenditure satisfies the requirements for deductibility under section 162 is a question of fact. See Commissioner v. Heininger, 320 U.S. 467, 475 (1943). An ordinary expense is one that commonly or frequently occurs in the taxpayer's business, Deputy v. du Pont, 308 U.S. 488, 495 (1940), and a necessary expense is one that is appropriate and helpful in carrying on the taxpayer's business, Commissioner v. Heininger, 320 U.S. at 471; Treas. Reg. § 1.162-1(a).
A. Bellagio Nails and Spa
Respondent disallowed a deduction of $192 related to a receipt provided from Bellagio Nails and Spa. Mr. Sonntag testified that he took business partners with him to the spa as a "thank you."
We are not convinced, on the basis of our review of the record as a whole, that this was not a personal trip to the spa. Aside from Mr. Sonntag's own self-serving testimony, there is no evidence he was accompanied by anyone. Further, petitioners themselves have labeled this expense in their own Itemize records as "Personal Care." General grooming expenses are never deductible because they are inherently personal. Hynes v. Commissioner, 74 T.C. 1266, 1289-92 (1980); Drake v. Commissioner, 52 T.C. 842, 844 (1969). Consequently, respondent's disallowance is sustained.
We are not compelled to accept Mr. Sonntag's unsubstantiated, conclusory, and self-serving statement without additional evidence. See Johnson v. Commissioner, T.C. Memo. 1999-127, aff'd, 246 F.3d 674 (9th Cir. 2000).
B. Credit Card Interest and Annual Fees
Petitioners assert entitlement to disputed deductions of $849 for credit card interest and $95 for credit card annual fees. Mr. Sonntag testified at trial that the credit card interest and annual fees were for a credit card that was used solely for business expenses. Respondent pointed out in cross-examination, and Mr. Sonntag admitted, that the credit card statements in the record illustrate multiple personal transactions.
Petitioners have not provided any documentation or testimony as to the business nature of the transactions giving rise to the claimed interest nor an appropriate basis to allocate the charges for interest and fees between business and personal use. Accordingly, respondent's disallowance is sustained.
C. Stage Costumes
Respondent disallowed a $1,821 deduction petitioners claimed for Mr. Sonntag's stage costume expenses. Included in the stage costume expenses are shoes and clothes Mr. Sonntag purchased and wore during performances. Mr. Sonntag argued that respondent has a narrow view of what constitutes a costume and that a stage costume is not always a representation of a character but can be more subtle and can look like clothes that can be worn in "normal life." Mr. Sonntag further added that costumes are a means of portraying an image and a part of an entertainer's brand.
Although a business wardrobe is a necessary condition of employment, the cost of the wardrobe has generally been considered a nondeductible personal expense pursuant to section 262. See Mortrud v. Commissioner, 44 T.C. 208 (1965); Yeomans v. Commissioner, 30 T.C. 757 (1958). The general rule is that where business clothes are suitable for general wear, a deduction for them is not allowable. See Donnelly v. Commissioner, 262 F.2d 411, 412 (2d Cir. 1959), aff'g 28 T.C. 1278 (1957).
There are recognized exceptions to the general rule where, for example, the clothing was useful only in the business environment in which the taxpayer worked. See, e.g., Mortrud, 44 T.C. 208; Harsaghy v. Commissioner, 2 T.C. 484 (1943); Meier v. Commissioner, 2 T.C. 458 (1943). The rules for determining whether the cost of clothing is deductible as an ordinary and necessary business expense are: (1) the clothing is required or essential in the taxpayer's employment, (2) the clothing is not suitable for general or personal wear, and (3) the clothing is not so worn. Yeomans, 30 T.C. at 767; see also Wasik v. Commissioner, T.C. Memo. 2007-148, 2007 Tax Ct. Memo LEXIS 151, at *17.
Mr. Sonntag, through his own testimony, admitted that the shoes and clothes he purchased and wore as part of his stage costume are suitable for general and personal wear. Consequently, we agree with respondent that this expense is personal, and respondent's disallowance is sustained.
D. Special Events Catering
Respondent disallowed a $1,171 deduction for special events catering expenses. While we agree with Mr. Sonntag that the showcases or concerts he held are business activities, on the basis of our review of the record we are not convinced that the expenses associated with the events petitioners claim on their joint return are business related. The record left much to be desired, and we are unable to allocate items on the provided receipts between business and personal use. Accordingly, respondent's disallowance is sustained.
E. Physical Culture
Respondent disallowed a $500 deduction for physical culture expenses. Mr. Sonntag testified that the Zen Fit training sessions were not for physical training but were training sessions tailored specifically for musicians, including breathing exercises and meditation techniques. Mr. Sonntag also argued that the supplement oil was used to aid his health while traveling and eating an unbalanced diet, which is common among performers.
In both instances Mr. Sonntag based his arguments on the notion that the training sessions and the supplement oil are for health reasons separate and apart from his basic personal health.
The taxpayer must demonstrate that the expenses were different from or in excess of what he would have spent for personal purposes. Sutter v. Commissioner, 21 T.C. 170, 173 (1953). A fitness membership and health supplements are inherently personal expenses. It is desirable to be in top health regardless of one's profession. Some expenses are so inherently personal they cannot possibly be deductible irrespective of the role played by such expenditure in the overall scheme of the taxpayer's trade or business. Fred W. Amend Co. v. Commissioner, 55 T.C. 320, 325-26 (1970), aff'd, 454 F.2d 399 (7th Cir. 1971). Petitioners have not offered any evidence to show that Mr. Sonntag's expenses were different from or were in excess of what he would have spent for his own personal health reasons. Accordingly, respondent's disallowance is sustained.
F. Styling Products
Respondent disallowed a $159 deduction for styling products. Mr. Sonntag testified that the products were used to maintain an image specific to his brand and are part of his "costume," stating that the products that make up these purchases are used to style his hair and care for his nails and teeth.
The fact that Mr. Sonntag's business activities require him to maintain a neat appearance does not put him beyond our rationale and holding in Drake, nor does it elevate his expenses for personal grooming to those of ordinary and necessary business expenses. See Hynes, 74 T.C. at 1292. Accordingly, respondent's disallowance is sustained.
G. Research
Petitioners claimed business deductions for research expenses including the costs of concert admission fees, a portion of their cable TV bill, Apple Music and Spotify subscriptions, and a Netflix subscription. At trial Mr. Sonntag suggested that his status as someone in the music and performance line of work converts otherwise personal expenses into deductible business expenses, simply because the expenditure is related to something he intends for research and use in future business endeavors.
We have previously held subscribing to periodicals of general interest does not generate an ordinary and necessary business expense within the meaning of section 162. Specifically, the purchase of general circulation newspapers is a personal expense that taxpayers may not deduct. Stemkowski v. Commissioner, 690 F.2d 40, 47 (2d Cir. 1982), aff'g in part and rev'g in part 76 T.C. 252 (1981). However, subscription expenses with respect to trade and professional magazines relating to a taxpayer's trade or business may be deductible under section 162. See Kasey v. Commissioner, 54 T.C. 1642, 1650 (1970), aff'd, 457 F.2d 369 (9th Cir. 1972).
Although the foregoing research sources undoubtedly keep Mr. Sonntag abreast of changes in his field, we find that these expenses are inherently personal and were incurred primarily for personal enjoyment rather than for his business practices. See, e.g., Int'l Artists, Ltd. v. Commissioner, 55 T.C. 94, 104 (1970); Meeks v. Commissioner, T.C. Memo. 1998-109, 1998 Tax Ct. Memo LEXIS 109, at *12, aff'd without published opinion, 208 F.3d 221 (9th Cir. 2000).
In addition, Mr. Sonntag's testimony failed to demonstrate that the aforementioned subscriptions served a valid and specific business purpose for his job as a musician, producer, writer, or photographer. Accordingly, respondent's disallowance is sustained.
H. Cell Phone
Respondent disallowed a deduction of $276 for cell phone expenses. Mr. Sonntag contends that the business use of his cell phone exceeds 75% of its total use. At trial Mr. Sonntag testified that he used his cell phone extensively in connection with his business ventures.
We agree with Mr. Sonntag that his cell phone played an important role in his business activities. However, we find that petitioners did not provide or establish any basis that would entitle them to a deduction in excess of what was previously allowed by respondent. Accordingly, respondent's disallowance is sustained.
II. Expenses Disallowed as Unsubstantiated
A. Nontravel
A taxpayer claiming a deduction on a federal income tax return must demonstrate that the deduction is allowable pursuant to a statutory provision and must further substantiate that the expense to which the deduction relates has been paid or incurred. I.R.C. § 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976). A taxpayer must substantiate deductions claimed by keeping and producing adequate records that enable the Commissioner to determine the taxpayer's correct tax liability. I.R.C. § 6001; Hradesky, 65 T.C. at 89-90.
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 may sometimes estimate the amount allowable as a deduction. Cohan v. Commissioner, 39 F.2d 540, 543-44 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-43 (1985). However, there must be sufficient evidence in the record 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).
As detailed above respondent disallowed deductions petitioners claimed for other expenses for bank charges, batteries, books and publications, a briefcase, camera parts, office supplies, and legal services. Petitioners were either unable to or did not produce invoices, receipts, or similar records to substantiate the above-listed expenses in question.
The Court carefully reviewed the documents that petitioners contributed to the record and did not find adequate substantiation for any of the expenses in excess of what respondent already conceded. Consequently, respondent's determination is sustained.
B. Travel
Section 274(d) prescribes more stringent substantiation requirements to be met before a taxpayer may deduct certain categories of expenses, including travel expenses, meals and lodging while away from home, and expenses with respect to listed property as defined in section 280F(d)(4). See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969).
To deduct travel expenses a taxpayer must substantiate with adequate records or by sufficient evidence corroborating his own statement: (1) the "[a]mount of each separate expenditure for traveling away from home . . . except that the daily cost of the traveler's own breakfast, lunch, and dinner and of expenditures incidental to such travel may be aggregated, if set forth in reasonable categories, such as for meals, for gasoline and oil, and for taxi fares"; (2) "[d]ates of departure and return for each trip away from home, and number of days away from home spent on business"; (3) "[d]estinations or locality of travel, described by name of city or town or other similar designation"; and (4) the "[b]usiness reason for travel or nature of the business benefit derived or expected to be derived as a result of travel." Temp. Treas. Reg. § 1.274-5T(b)(2), (c)(1); see also I.R.C. § 274(d).
Temporary Treasury Regulation § 1.274-5T(c)(2) provides in relevant part that "adequate records" generally consist of an account book, a diary, a log, a statement of expenses, trip sheets, or a similar record made at or near the time of the expenditure or use, along with supporting documentary evidence. The Court may not use the rule established in Cohan v. Commissioner, 39 F.2d at 543-44, to estimate expenses covered by section 274(d). Sanford, 50 T.C. at 827; Temp. Treas. Reg. § 1.274-5T(a). Taxpayers lacking a contemporaneous log are expected to maintain a record created as near in time as possible to the particular expenditure (including the elements outlined above), supported by corroborative documentary evidence that carries with it a high degree of probative value. Temp. Treas. Reg. § 1.274-5T(c)(1). If a taxpayer does not satisfy the adequate records requirements with respect to one or more elements, he or she may substantiate those elements with his or her own detailed statement and with other corroborative evidence. Id. subpara. (3).
Petitioners contend they are entitled to deduct travel expenses for 2017 related to Mr. Sonntag's various trips, as described above. They rely on a list identifying travel dates, the credit card spreadsheet listing expenses for airfare and lodging, and a list of credit card payments Mr. Sonntag created for the audit process.
Other than Mr. Sonntag's testimony, there is little evidence in the record reflecting payments for the outstanding travel deduction and supporting the accuracy and reliability of the spreadsheets produced. Petitioners failed to present a contemporaneous travel log or other sufficient evidence necessary to meet the strict substantiation requirements of section 274(d). Consequently, there is insufficient evidence to support a finding that they are entitled to a deduction for travel-related expenses for 2017 in excess of that respondent already conceded, respondent's disallowance is sustained.
III. Expenses Disallowed as Both Personal and Unsubstantiated
Respondent disallowed the following items as both personal and unsubstantiated. Should we find that an item is nondeductible for either reason, we need not consider the second as the result will be the same; i.e., if we find an item is personal, we need not consider whether it is properly substantiated, as in either instance the deduction will be disallowed.
A. Costume Cleaning
Respondent disallowed a deduction of $383 for costume cleaning expenses. These expenses are not deductible for the same reasons the stage costumes themselves are not deductible. See Roth v. Commissioner, 17 T.C. 1450, 1455 (1952). Accordingly, respondent's disallowance is sustained.
B. Labor
Respondent disallowed a deduction of $660 for labor expenses. Mr. Sonntag testified that the payments to Mr. Gonzalez were for management and security for Shed Studios and payments to Mr. Sanchez were for providing additional percussion for song production.
On the basis of our review of the record we cannot conclude that petitioners met their burden to substantiate labor expenses. They produced screenshots of money transfers but have not provided any other evidence or documentation such as an invoice or agreement with the individuals providing the labor. Consequently, respondent's disallowance is sustained.
C. Props
Respondent disallowed a deduction of $514 for prop expenses. Mr. Sonntag argued that all of the purchased materials and items included in the list he created were business related. However, without any further documentation in the record, we cannot allocate any of the expenses to business use, nor can we estimate a deduction pursuant to the Cohan rule. Accordingly, respondent's disallowance is sustained.
D. Studio Supplies
Respondent disallowed a deduction of $1,293 for studio supply expenses. At trial Mr. Sonntag testified that these expenses were for items he would offer to Shed Studios visitors, such as refreshments and dartboard games. In regard to the dartboard Mr. Sonntag testified that it is commonplace to have some type of game or distraction in a music studio.
Petitioners did not produce any itemized receipts or establish that the amounts on the credit card statements provided correspond to the items listed in the document Mr. Sonntag created. Consequently, we have no basis to appropriately estimate expenses under Cohan, nor can we allow petitioners to deduct expenses related to studio supplies. Accordingly, respondent's disallowance is sustained.
E. Tools
Respondent disallowed a deduction of $307 for tool expenses. Mr. Sonntag testified that these items were for a studio floor repair project. But while he listed various types of tools, he failed to describe the number, useful life, or cost of these items. See Wilson v. Commissioner, T.C. Memo. 2001-301, 2001 Tax Ct. Memo LEXIS 339, at *23. Petitioners also failed to produce receipts, invoices, or similar records substantiating these expenses. Consequently, respondent's disallowance is sustained.
It is unclear from the record whether respondent disallowed the postage/shipping deduction as personal or unsubstantiated. To be thorough, we will review this item under this section to determine whether the expense is deductible.
Respondent disallowed a deduction of $47 for postage/shipping expenses. The disallowance is predicated on a PayPal payment screenshot petitioners submitted into the record.
At trial Mr. Sonntag testified that the PayPal payment was for a post office box he maintained in Las Vegas to solicit work there. Petitioners did not produce any documentation such as an agreement or invoice from the post office nor any indication that Mr. Sonntag had a post office box in Las Vegas during the year in issue. Further, the PayPal screenshot does not include to whom or for what the payment was sent. Accordingly, respondent's disallowance is sustained.
To reflect the foregoing, Decision will be entered under Rule 155.