                            T.C. Summary Opinion 2016-85



                           UNITED STATES TAX COURT



                      CHRISTIAN SIOUI, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 24843-13S.                           Filed December 19, 2016.



      Christian Sioui, pro se.

      Alexander N. Martini, for respondent.



                                 SUMMARY OPINION


      CARLUZZO, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not


      1
          Unless otherwise indicated, subsequent section references are to the
                                                                        (continued...)
                                         -2-

reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      In a notice of deficiency dated July 29, 2013 (notice), respondent

determined a $3,763 deficiency in petitioner’s 2010 Federal income tax. In an

amendment to answer, filed February 18, 2015, respondent claimed an increased

deficiency and a section 6662(a) accuracy-related penalty.

      The issues for decision arising from both the notice and the amendment to

answer are: (1) whether petitioner is entitled to various trade or business expense

deductions claimed on a Schedule C, Profit or Loss From Business, and (2)

whether petitioner is liable for a section 6662(a) accuracy-related penalty.

                                     Background

      Some of the facts have been stipulated, and they are so found. At the time

that the petition was filed and at all other times relevant here, petitioner resided in

Florida.

      During the year in issue petitioner was employed as a solution architect for

Perficient, Inc. (Perficient). Petitioner’s position with Perficient required him to


      1
       (...continued)
Internal Revenue Code in effect for the year in issue. Rule references are to the
Tax Court Rules of Practice and Procedure. Monetary amounts are rounded to the
nearest dollar.
                                         -3-

travel at least 40 weeks in 2010, mostly to Detroit, Michigan, to provide

consulting services to Ford Direct, a Perficient client. Petitioner also traveled to:

(1) California to attend AJI Network conferences and the Atlassian Summit

conference and (2) Canada on business related to his employment with Perficient.

      During 2010 Perficient’s Travel and Expense Policy (reimbursement policy)

entitled petitioner to reimbursement for employee business-related expenses,

including travel expenses, cellular telephone service, training and professional

development expenses, and office expenses.

      Perficient reimbursed petitioner on a semimonthly basis in accordance with

its reimbursement policy. Taking into account expenses for airfares and related

fees, ground transportation such as rental cars, parking, lodging, and meals and

incidental expenses, during 2010 petitioner received approximately $34,400 in

travel expense reimbursements from Perficient.

      Petitioner was also the sole proprietor of a consulting business that he

operated before and during 2010 under the name Kwak Communications (Kwak).

Petitioner maintained a business checking account for Kwak. He routinely

transferred money from his personal bank account to Kwak’s business checking

account in order to pay Perficient-related travel expenses.
                                        -4-

      According to petitioner, he used Microsoft Money to keep track of Kwak’s

expenses for Federal income tax return preparation purposes; but no reports

generated by that program were made available at trial. Instead, in a schedule

prepared shortly before trial petitioner reconstructed expenses that he claims to

have paid in connection with Kwak’s trade or business during the year in issue.

Bank statements, sales receipts, and other documents included with this schedule

of expenses substantiate some of those expenses.

      Petitioner prepared his own 2010 Federal income tax return, which shows

his $108,316 wage income from Perficient. That return includes a Schedule C on

which the income and expenses attributable to Kwak are shown. The Kwak

Schedule C shows $1,470 of gross receipts and $71,298 of expenses, resulting in a

$69,828 loss, which is taken into account in the computation of the adjusted gross

income reported on petitioner’s 2010 return. More specifically, the following

deductions are claimed on the Kwak Schedule C:

                    Expense                           Amount

      Advertising                                     $13,133
      Car and truck                                     6,570
      Commissions and fees                                 637
      Contract labor                                     9,129
      Mortgage (other)                                     522
      Legal and professional services                    1,863
      Office                                            18,721
                                        -5-

      Rent or lease
        (vehicles, machinery, and equipment)             1,703
      Repairs and maintenance                            2,316
      Supplies                                           2,985
      Taxes and licenses                                    472
      Travel                                              8,402
      Meals and entertainment                               136
      Utilities                                          3,307
      Wages                                              1,402


      In the notice respondent disallowed the deductions for car and truck

expenses, legal and professional services, travel, and meals and entertainment

expenses. The increased deficiency claimed in the amendment to answer results

from the disallowance of the remaining deductions. According to respondent, the

only trade or business expenses that petitioner incurred during 2010 related to his

employment with Perficient, and to the extent he incurred any such expenses he

has been reimbursed, or could have been reimbursed, by Perficient.

                                     Discussion

      As we have observed in countless opinions, deductions are a matter of

legislative grace, and the taxpayer bears the burden of proof to establish

entitlement to any claimed deduction.2 Rule 142(a); INDOPCO, Inc. v.


      2
        Petitioner does not claim and the record does not otherwise demonstrate
that the provisions of sec. 7491(a) are applicable here, and we proceed as though
they are not.
                                       -6-

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934). Respondent bears the burden of proof with respect to the

increased deficiency and section 6662(a) accuracy-related penalty claimed in the

amendment to answer. See Rule 142(a)(1).

I. Schedule C Deductions

      Taxpayers must substantiate deductions claimed by keeping and producing

adequate records that enable the Commissioner to determine the taxpayer’s correct

tax liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89 (1975), aff’d

per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C.

824, 831-832 (1965). A taxpayer claiming a deduction on a Federal income tax

return must demonstrate that the deduction is allowable pursuant to some statutory

provision and must further substantiate that the expense to which the deduction

relates has been paid or incurred. See sec. 6001; Hradesky v. Commissioner, 65

T.C. at 89-90; sec. 1.6001-1(a), Income Tax Regs.

      Taxpayers may deduct ordinary and necessary expenses paid in connection

with operating a trade or business. Sec. 162(a); Boyd v. Commissioner, 122 T.C.

305, 313 (2004). Generally, the performance of services as an employee

constitutes a trade or business. Primuth v. Commissioner, 54 T.C. 374, 377

(1970). An employee business expense is not deductible as “ordinary and
                                        -7-

necessary” if the employee is entitled to reimbursement from his or her employer.

See Podems v. Commissioner, 24 T.C. 21, 22-23 (1955); Noz v. Commissioner,

T.C. Memo. 2012-272. The determination of 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).

      Section 274(d) imposes strict substantiation requirements for travel,

entertainment, gift, and listed property (including passenger automobiles)

expenses. Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam,

412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50

Fed. Reg. 46014 (Nov. 6, 1985). Under section 274(d), the taxpayer generally

must 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. For listed property expenses, the taxpayer

must establish the amount of business use and the amount of total use for such

property. See sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed.

Reg. 46016 (Nov. 6, 1985). Substantiation by adequate records requires the

taxpayer to maintain an account book, a diary, a log, a statement of expense, trip
                                         -8-

sheets, or a similar record prepared contemporaneously with the expenditure and

documentary evidence (e.g., receipts or bills) of certain expenditures. Sec. 1.274-

5(c)(2)(iii), Income Tax Regs.; sec. 1.274-5T(c)(2), Temporary Income Tax Regs.,

50 Fed. Reg. 46017 (Nov. 6, 1985). Substantiation by other sufficient evidence

requires the production of corroborative evidence in support of the taxpayer’s

statement specifically detailing the required elements. Sec. 1.274-5T(c)(3),

Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).

      Petitioner claimed a $71,298 deduction for expenses reported on the Kwak

Schedule C. According to petitioner these expenses are ordinary and necessary

business expenses of Kwak. According to respondent, petitioner failed to

substantiate the expenses at issue and is therefore not entitled to a deduction for

any of the expenses reported on the Kwak Schedule C.

      The Court carefully reviewed the record, including petitioner’s schedule of

expenses prepared shortly before trial, numerous canceled checks, bank

statements, and receipts petitioner submitted into evidence to substantiate the

amounts at issue. The Court is satisfied that petitioner is not entitled to a

deduction for any expense reported on the Kwak Schedule C.

      Petitioner admittedly did not keep accurate records. To the extent that

petitioner connected an item of substantiation to a deduction, the deduction was
                                        -9-

being claimed for a personal expense or for a Perficient-related expense that was

reimbursed or reimbursable by Perficient. With respect to the disallowed

deductions that respondent claimed in the amendment to answer, respondent has

met his burden of proof. Otherwise, we find that petitioner failed to meet his

burden of proof with respect to the deductions claimed on the Kwak Schedule C

that were disallowed in the notice. Accordingly, petitioner is not entitled to a

deduction for any expense reported on the Kwak Schedule C.

II. Accuracy-Related Penalty

      Lastly, we consider whether petitioner is liable for a section 6662(a)

accuracy-related penalty. That section imposes an accuracy-related penalty equal

to 20% of the underpayment of tax that is attributable to negligence or other

specified grounds. Negligence as used in section 6662(b)(1) is defined as any

failure to make a reasonable attempt to comply with the Code and any failure to

keep adequate books and records or to substantiate items properly. Sec. 6662(c);

sec. 1.6662-3(b)(1), Income Tax Regs. Negligence has also been defined as the

failure to exercise due care or the failure to do what a reasonable person would do

under the circumstances. See Allen v. Commissioner, 92 T.C. 1, 12 (1989), aff’d,

925 F.2d 348, 353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947

(1985).
                                        - 10 -

      Respondent bears the burden of proof with respect to the accuracy-related

penalty claimed in the amendment to answer. See Rule 142(a)(1).

      Petitioner failed to maintain adequate substantiating records for many of the

expenses underlying the deductions claimed on his 2010 return. To the extent that

petitioner did maintain substantiating records, the records show that the expenses

were personal, see sec. 262, or related to his employment with Perficient and that

he was, or could have been, reimbursed for them. Petitioner’s failure to keep

adequate records, and his treatment of reimbursed or reimbursable Perficient-

related employee business expenses as expenses relating to Kwak render him

liable for an accuracy-related penalty. Respondent’s imposition of the penalty in

the amendment to answer is sustained.

      To reflect the foregoing,


                                                       Because the amendment to

                                                 answer fails to include the amount of

                                                 the increased deficiency or the

                                                 amount of the accuracy-related

                                                 penalty, decision will be entered

                                                 under Rule 155.
