                              T.C. Memo. 2018-43



                        UNITED STATES TAX COURT



                    PAUL J. RADEMACHER, Petitioner v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 30820-15.                        Filed April 4, 2018.



      Christopher J. Rajotte, Joseph A. DiRuzzo III, and Paul C. Shuman, for

petitioner.

      D’Aun E. Clark and John T. Arthur, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      GOEKE, Judge: The adjustments we must address in this deficiency case

are the disallowance of employee business expense deductions for mileage and for

various cash expenditures for other employee business expenses, and charitable
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[*2] contribution deductions for 2013 and 2014. Also at issue are section 6662(a)

accuracy-related penalties.1 For the reasons we explain, we find certain of the

mileage expenses are deductible but the other deductions claimed are not and the

penalties are not sustained.

                               FINDINGS OF FACT

      At the time the petition was filed, petitioner resided in Florida. His income

tax returns for the 2013 and 2014 tax years were timely filed. He was a manager

at a car dealership and ran the used car part of the business.

      On September 15, 2015, respondent issued a notice of deficiency to

petitioner for his 2013 and 2014 tax years, disallowing deductions claimed on

Schedule A, Itemized Deductions, of $38,974 and $38,989 for 2013 and 2014,

respectively.

      On Schedule A of his 2013 income tax return, petitioner deducted itemized

deductions including cash charitable contributions of $2,912 and a deduction for

unreimbursed employee expenses of $38,175, subject to a statutory reduction.

These deductions were disallowed in the notice of deficiency. On Schedule A of

his 2014 income tax return, petitioner claimed a deduction for cash charitable

      1
       All section references are to the Internal Revenue Code in effect for the
years at issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                        -3-

[*3] contributions of $3,116 and a deduction for unreimbursed employee expenses

of $38,563, also reduced for the limitation applied to miscellaneous deductions.

Respondent again disallowed these deductions.

      The nature of petitioner’s employment is uncontested. He was involved in

the used car segment of a new car dealership. He did not produce any documents

to support his position on the cash expenditures, but he was not reimbursed by his

employer for automobile mileage.

      Petitioner alleged that he contributed $20 per week to his church, Good

Shepherd, in 2013 and 2014. He also claimed that he gave $400 every year to the

Little League team at the church school, but he admitted that he failed to get

receipts for these contributions.

      Petitioner attached Form 2106, Employee Business Expenses, to each

return. During the audit, after he had moved to Florida, one of respondent’s

employees asked him for substantiation of his unreimbursed employee expenses.

Petitioner made no effort to contact his former employer or credit card companies

to obtain records. He allegedly paid all his expenses in cash. He admitted that in

2013 and 2014 he did not keep receipts or keep track of his expenses.

      On Form 2106 petitioner reported vehicle expenses based upon having

driven 53,333 and 53,060 miles for business purposes for 2013 and 2014,
                                           -4-

[*4] respectively. As part of his duties, petitioner attended the same four car

auctions each week. Petitioner drove his personal vehicle back and forth to the

auctions four days a week. His yearly business mileage was 38,400. Petitioner

admitted that he overestimated his claimed mileage for 2013 and 2014.

       Petitioner claimed deductions for parking fees, tolls, and transportation

expenses of $2,777 and $3,233 for 2013 and 2014, respectively. He provided no

documentation to substantiate these expenses. He paid tolls with E-Z Pass and

received statements from E-Z Pass, but he acknowledged that he no longer had the

statements. Petitioner acknowledged that he could have documented the amounts

of the tolls in anticipation of trial but did not.

       Petitioner reported expenses for overnight travel of $1,212 and $1,202 for

2013 and 2014, respectively. He provided no documentation to substantiate these

expenses. Petitioner reported other business expenses of $389 and $363 for 2013

and 2014, respectively. He provided no documentation to substantiate these

expenses.

       Petitioner also reported meals and entertainment expenses of $7,327 and

$8,101 for 2013 and 2014, respectively. He claimed that he bought coffee or

snacks for customers and drinks at bars for people to whom he handed his

business card. He guessed these expenses to be about $60 per day. Petitioner
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[*5] chose not to keep track of these expenses or write anything down. He

estimated these expenses when he was preparing the returns. He “guessed” at the

expenses by how much cash he took out of the ATM. Petitioner failed to produce

any documentation of these amounts.

                                     OPINION

      No deduction is allowed under section 170(a) for all or part of any

charitable contribution of $250 or more unless the taxpayer substantiates the

contribution with a contemporaneous written acknowledgment from the donee

organization. See also sec. 170(f)(8). Petitioner failed to provide any

documentation to corroborate his testimony that he gave $400 to the Little League

team at his church in each tax year at issue. With respect to cash contributions of

less than $250, he did not seek verification from his church and apparently did not

participate in any regular program that would have documented his contributions.

We sustain respondent’s disallowance of petitioner’s claimed charitable

contribution deductions.

      Petitioner reported unreimbursed employee business expenses for 2013 and

2014 on Schedule A. Business expenses are allowed as deductions only to the

extent that they are substantiated. Sec. 6001. The taxpayer bears the burden of

substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975). Petitioner
                                        -6-

[*6] testified that he purposely chose not to keep any receipts or contemporaneous

documents in 2013 or 2014. Despite being informed that he could reconstruct his

records, he made no attempt to obtain a single record. Petitioner did testify

credibly that he was required to go to auto auctions regularly as part of his

employment. In all other respects his business expenses are undocumented, and

there is no reasonable basis to allow deductions for any of these other expenses

under section 274.

      Certain categories of expenses must satisfy the strict substantiation

requirements of section 274(d) in order for a deduction to be allowed. Section 274

provides heightened substantiation requirements for travel expenses (including

meals and lodging while away from home), entertainment, and any listed property

under section 280F(d)(4). “Listed property” under section 280F(d)(4) includes

any passenger automobile. Sec. 280F(d)(4)(i); see Colvin v. Commissioner, T.C.

Memo. 2007-157, slip op. at 30 (“Automobile mileage deductions are subject to

the strict substantiation requirements of section 274(d).”). The term

“entertainment expenses” as used in section 274(d)(2) includes the costs of

business meals. See, e.g., Jones v. Commissioner, T.C. Memo. 2013-132, at *6

(citing Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d, 412 F.2d 201 (2d

Cir. 1969)). Thus, petitioner’s reported expenses for car, travel, meals, and
                                        -7-

[*7] entertainment are subject to the heightened substantiation requirements of

section 274(d).

      Section 274 precludes a deduction for specified expenses unless a taxpayer

substantiates “by [1] adequate records or [2] by sufficient evidence corroborating

the taxpayer’s own statement” the following five elements: the amount, date,

time, place, and business purpose of the expense. Sec. 274(d); see Reynolds v.

Commissioner, 296 F.3d 607, 615 (7th Cir. 2002) (citing Dowell v. United States,

522 F.2d 708, 714 (5th Cir. 1975)).

      The burden of proof regarding the deficiencies clearly rests on petitioner.

He has not maintained that the burden should shift under section 7491(a), and

there is no evidence in the record that would support such an assertion.

      Petitioner’s employment is not in dispute, and the nature of that employment

lends credibility to his testimony regarding the regularly required travel via

automobile to car auctions. Accordingly, we find that he has substantiated

expenses for a deduction for automobile mileage of 38,400 for each of the years at

issue under section 274(d).

      Regarding the deductions claimed for tolls, meals, and customer amenities,

petitioner has offered no specific evidence to support underlying expenses for

these amounts despite numerous requests that he do so. The toll expenses could
                                        -8-

[*8] have been documented if petitioner had chosen to do so. The remaining

testimony regarding business expenses was vague and unconvincing.

Accordingly, petitioner has failed to meet the requirements of sections 161 and

274 for these deductions.

      Petitioner’s argument regarding the validity of the regulations under section

274 has no bearing on the outcome because the lack of any evidence to support the

other items reported causes the disallowed deduction to fail on the basis of the

burden of proof and the provisions of section 274 itself.

      The notice of deficiency determined that petitioner is liable for accuracy-

related penalties under section 6662(a) for the 2013 and 2014 tax years. Section

6662(a) imposes an accuracy-related penalty of 20% of an underpayment of tax

required to be shown on a return.

      Pursuant to section 6662(a) and (b)(2), a taxpayer may be liable for a

penalty of 20% of the portion of an underpayment of tax due to a substantial

understatement of income tax. There is a substantial understatement of income tax

if the amount of the understatement for the taxable year exceeds the greater of

10% of the tax required to be shown on the return for the taxable year or $5,000.

Here, the deficiencies determined are $6,686 and $5,641 for 2013 and 2014,

respectively. However, we have allowed certain mileage expense deductions, and
                                          -9-

[*9] it is quite possible that the understatements of income tax are no longer

substantial.

      Nevertheless petitioner may be liable for a 20% accuracy-related penalty

pursuant to section 6662(a) and (b)(1) on the portion of each underpayment of tax

due to negligence or disregard of rules or regulations. Section 6662(c) provides

that “negligence” includes any failure to make a reasonable attempt to comply

with the tax laws. However, respondent bears the burden of production with

respect to the penalties and failed to include in the record evidence of supervisory

approval in compliance with section 6751(b)(1). See Graev v. Commissioner, 149

T.C. __ (Dec. 20, 2017), supplementing 147 T.C. __ (Nov. 30, 2016). Respondent

did so move belatedly but we denied that motion. We concluded that granting the

motion would not be in the interest of justice or judicial economy. Therefore, we

do not sustain the penalties.

      In reaching our holdings herein, we have considered all arguments the

parties made, and, to the extent we did not mention them above, we conclude they

are moot, irrelevant, or without merit.
                                  - 10 -

[*10] To reflect the foregoing,


                                                Decision will be entered under

                                           Rule 155.
