                                T.C. Memo. 2020-10



                         UNITED STATES TAX COURT



 DANIEL ALAN NEAR AND DENISE FRANCES MAYHUGH, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 8721-18.                           Filed January 14, 2020.



      Daniel Alan Near, pro se.

      Daniel J. Kleid, Sharyn M. Ortega, and Brian A. Pfeifer, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      KERRIGAN, Judge: Respondent determined a deficiency of $8,721 and a

penalty pursuant to section 6662(a) of $1,744 for 2015. Unless otherwise

indicated, all section references are to the Internal Revenue Code (Code) in effect

for the year at issue, and all Rule references are to the Tax Court Rules of Practice

and Procedure. All monetary amounts are rounded to the nearest dollar.
                                        -2-

[*2] Respondent conceded one expense deduction petitioner husband claimed on

his Schedule C, Profit or Loss From Business, and the section 6662(a) penalty.

The issues for our consideration are whether petitioners are entitled to deduct

travel and car and truck expenses reported on petitioner husband’s Schedule C and

whether petitioner husband, in the alternative, is entitled to deduct unreimbursed

employee expenses.

                                FINDINGS OF FACT

      The parties did not stipulate any facts. Some of the facts are subject to

judicial notice and are so found. See infra pp. 4-5.

      Petitioners resided in California when they timely filed their petition.

During 2015 petitioner husband was an employee of the State of California

Department of Transportation (Caltrans) in Sacramento, California, and also had

his own law firm in Folsom, California. Until June 27, 2015, petitioner wife was a

legal secretary for Caltrans.

      Because petitioner husband had a monthly transit pass, he did not drive to

work regularly. Sometimes he would carpool with petitioner wife, but their work

schedules were not the same.

      In 2015 petitioner husband worked on the State civil case, Hukill v.

California, No. FCS037118 (Cal. Super. Ct. Solano Cty. Jan. 26, 2016) (Hukill
                                        -3-

[*3] trial), in his role as an employee of Caltrans. Proceedings related to the

Hukill trial were ongoing from October 26 through December 23, 2015, in Solano

County, California. Petitioner husband was listed as counsel for defendant on the

docket sheet for the Hukill trial.

      During the Hukill trial petitioner husband rented a hotel room near the

Solano County courthouse. Petitioner husband was entitled to reimbursement for

expenses for his work for Caltrans. The Agreement between the State of

California and California Attorneys, Administrative Law Judges and Hearing

Officers In State Employment covering Bargaining Unit 2 Attorneys and Hearing

Officers (collective bargaining agreement), which covers petitioner husband in his

capacity as a Caltrans attorney, provides for the reimbursement of miles beyond

one’s normal commute and lodging expenses.

      Petitioners filed a joint Federal income tax return for 2015. Petitioner

husband reported gross receipts of $19,500 and expenses associated with his law

firm on his Schedule C. Petitioner husband’s gross receipts included a $17,500

payment from CSAA Insurance Exchange which he deposited into his law firm’s

attorney-client trust account.1 His expenses totaled $64,192, including car and

      1
        The payment was for a settlement that petitioner husband obtained for a
client in a personal injury matter. He kept 25% of the payment plus additional
                                                                     (continued...)
                                         -4-

[*4] truck expenses of $5,259, travel expenses of $16,954, and other expenses of

$12,630. The travel expenses petitioner husband claimed deductions for consisted

of hotel stays and flights for his work during the Hukill trial and for several trips

including petitioners’ family members. Respondent issued a notice of deficiency

disallowing travel, car and truck, and other expenses.

                                      OPINION

I.    Evidentiary Issue

      At the beginning of the trial respondent filed a motion for the Court to take

judicial notice of the court docket in Hukill (Hukill docket) and the collective

bargaining agreement effective July 2, 2013, through July 1, 2016. Pursuant to

rule 201 of the Federal Rules of Evidence this Court may take judicial notice of a

fact that is not subject to reasonable dispute if it is generally known within our

territorial jurisdiction or can be accurately and readily determined from sources

whose accuracy cannot be reasonably questioned.

      Rule 201(c)(2) of the Federal Rules of Evidence provides that a court “must

take judicial notice if a party requests it and the court is supplied with the

      1
        (...continued)
fees, paid the remaining $12,630 to his client pursuant to a pre-existing contract,
and claimed an other expenses deduction in the amount paid to his client.
Respondent disallowed petitioners’ other expenses deduction in the notice of
deficiency but has since conceded this issue.
                                        -5-

[*5] necessary information.” The Hukill docket was downloaded from the Solano

County Superior Court’s website on September 9, 2019. The collective bargaining

agreement was downloaded from the California Department of Human Resources’

website on September 9, 2019. We take judicial notice of the Hukill docket and

the collective bargaining agreement.

II.   Burden of Proof

      Generally, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and a taxpayer bears the burden of proving those determinations

are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). In

order to shift the burden as to any relevant factual issue the taxpayer must comply

with all substantiation and recordkeeping requirements and cooperate with all

reasonable requests by the Commissioner for witnesses, information, documents,

meetings, and interviews, pursuant to section 7491(a)(2). See Higbee v.

Commissioner, 116 T.C. 438, 441 (2001). Petitioners have not claimed or shown

that they have met the specifications of section 7491(a) to shift the burden of proof

to respondent as to any relevant factual issue.
                                        -6-

[*6] III.    Schedule C Expenses

       Deductions are a matter of legislative grace, and a taxpayer must prove his

or her entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Taxpayers are required to substantiate the expense underlying each claimed

deduction by maintaining records sufficient to establish the amount and to enable

the Commissioner to determine the correct tax liability. Sec. 6001; Higbee v.

Commissioner, 116 T.C. at 440.

       Section 162(a) allows a taxpayer to deduct all ordinary and necessary

expenses paid in carrying on a trade or business. 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. 467, 471 (1943); sec. 1.162-1(a), Income Tax Regs. A taxpayer may not

deduct a personal, living, or family expense unless the Code expressly provides

otherwise. Sec. 262(a).

       Whether an expenditure is ordinary and necessary is generally a question of

fact. Commissioner v. Heininger, 320 U.S. at 475. A taxpayer must show a bona

fide business purpose for the expenditure; there also must be a proximate
                                        -7-

[*7] relationship between the expenditure and his or her business. Challenge Mfg.

Co. v. Commissioner, 37 T.C. 650, 660 (1962). In general, where an expense is

primarily associated with profit-motivated purposes--and personal benefit can be

said to be distinctly secondary and incidental--it may be deducted under section

162(a). Int’l Artists, Ltd. v. Commissioner, 55 T.C. 94, 104 (1970). A taxpayer’s

general statement that his or her expenses were incurred in pursuit of a trade or

business is not sufficient to establish that the expenses had a reasonably direct

relationship to any such trade or business. Ferrer v. Commissioner, 50 T.C. 177,

185 (1968), aff’d per curiam, 409 F.2d 1359 (2d Cir. 1969).

      Normally, the Court may estimate the amount of a deductible expense if a

taxpayer establishes that an expense is deductible but is unable to substantiate the

precise amount. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). This principle is

often referred to as the Cohan rule. See, e.g., Estate of Reinke v. Commissioner,

46 F.3d 760, 764 (8th Cir. 1995), aff’g T.C. Memo. 1993-197.

      Certain expenses specified in section 274 are subject to strict substantiation

rules. To meet these strict substantiation rules, a taxpayer must substantiate by

adequate records or by sufficient evidence corroborating the taxpayer’s own

statement (1) the amount, (2) the time and place of the travel or use, and (3) the
                                        -8-

[*8] business purpose. Sec. 274(d). To substantiate by adequate records, the

taxpayer must provide (1) an account book, a log, or a similar record and

(2) documentary evidence, which together are sufficient to establish each element

of an expenditure. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed.

Reg. 46017 (Nov. 6, 1985).

      Documentary evidence includes receipts, paid bills, or similar evidence.

Sec. 1.274-5(c)(2)(iii), Income Tax Regs. To substantiate by sufficient evidence

corroborating the taxpayer’s own statement, the taxpayer must establish each

element by his or her own statement and by documentary evidence or other direct

evidence. Sec. 1.274-5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg.

46020 (Nov. 6, 1985).

      A.     Travel Expenses

      Petitioner husband contends that he is entitled to a $16,954 Schedule C

deduction for travel expenses incurred while operating his law firm during 2015.

To substantiate the travel expenses reported on his Schedule C, petitioner husband

provided a list, receipts, and bank statements identifying the amounts, dates, and

locations of his reported travel expenses.

      Travel expenses are subject to the strict substantiation rules of section

274(d)(1). Although the documents petitioner husband produced do provide
                                         -9-

[*9] information regarding the amount, time, and place of incurred expenses, none

of the documents provide enough information for us to determine to what extent, if

any, these expenses had a business purpose. Petitioner husband produced no

contracts with clients to substantiate travel expenses incurred for client

engagements. Furthermore, some of the travel expenses were for trips that

included petitioners’ family members, and petitioner husband did not provide any

evidence distinguishing which travel expenses were incurred for business and not

personal purposes, if any.

      The strict substantiation requirements of section 274(d) with respect to

travel expenses were not met. Accordingly, petitioner husband is not entitled to a

deduction for his travel expenses.

      B.     Car and Truck Expenses

      Petitioner husband contends that he is entitled to a $5,259 Schedule C

deduction for car and truck expenses incurred while operating his law firm during

2015. To substantiate these expenses petitioner husband provided a list of dates,

locations, mileage, and parking costs, along with bank statements, various

receipts, and a copy of a calendar. The calendar contains writings of names, times,

and locations but does not distinguish which appointments and locations were for
                                        - 10 -

[*10] personal reasons, for petitioner husband’s employment with Caltrans, or for

his law firm.

      Car and truck expenses are also subject to the strict substantiation rules of

section 274(d). Secs. 274(d)(4), 280F(d)(4)(A)(i) and (ii). Similar to the

documentation petitioner husband provided to substantiate his reported travel

expenses, the documentation he produced to substantiate his reported car and truck

expenses also specify the amount, time, and place that the expenses occurred but

do not provide enough information for us to determine the business purposes of

the expenses. The strict substantiation requirements of section 274(d) with respect

to car and truck expenses were not met. Therefore, petitioner husband is not

entitled to a deduction for his car expenses.

IV.   Unreimbursed Employee Business Expenses

      A taxpayer may deduct unreimbursed employee business expenses as

ordinary and necessary under section 162. Lucas v. Commissioner, 79 T.C. 1, 6-7

(1982). Miscellaneous itemized deductions, such as the deduction for

unreimbursed employee business expenses, are allowed only to the extent that the

total of such deductions exceeds 2% of adjusted gross income. Sec. 67(a).

Unreimbursed employee business expenses are similar to Schedule C business

expenses in that taxpayers are required to substantiate the expense underlying the
                                       - 11 -

[*11] claimed deduction by maintaining records sufficient to establish the amount

and to enable the Commissioner to determine the correct tax liability. Sec. 6001;

Higbee v. Commissioner, 116 T.C. at 440.

      To the extent that petitioner husband’s claimed Schedule C deductions are

for expenses incurred for the purpose of performing his duties as a Caltrans

employee, they are considered employee business expenses. Employee business

expenses paid on behalf of an employer who reimburses such costs may not be

converted into trade or business expenses by failure to seek reimbursement. Stolk

v. Commissioner, 40 T.C. 345, 356 (1963), aff’d per curiam, 326 F.2d 760 (2d Cir.

1964); Podems v. Commissioner, 24 T.C. 21, 22-23 (1955).

      When an employee has a right to reimbursement for expenditures related to

his status as an employee but fails to claim such reimbursement, the expenses are

not deductible because they are not “necessary”. Orvis v. Commissioner, 788 F.2d

1406, 1408 (9th Cir. 1986), aff’g T.C. Memo. 1984-533. California State

regulations provide for reimbursement of out-of-pocket expenses incurred by State

employees because of travel on official State business, including transportation

and lodging. See Cal. Code Regs. tit. 2, secs. 599.615, 599.619, 599.626 (2014).

The collective bargaining agreement states that “[w]hen an employee is authorized

* * * to operate a privately owned vehicle on State business the employee will be
                                       - 12 -

[*12] allowed to claim and be reimbursed” for their expenses and “[w]hen an

employee is required to report to an alternative work location, the employee may

be reimbursed for the number of miles driven in excess of his/her normal

commute.” The collective bargaining agreement also states that employees may

be reimbursed for lodging while on travel status to conduct State business.

      Many of the travel and car and truck expenses petitioner husband reported

on his Schedule C are related to his employment with Caltrans. He used his

personal automobile in the course of his employment, particularly to travel to and

from the Hukill trial daily. He rented a hotel for his lodging during the Hukill

trial. He included these expenses in his claimed Schedule C travel and car and

truck deductions.

      Petitioner husband contends that he needed the hotel room to operate his

law office while he was involved with the Hukill trial. He testified that he

attended the Hukill trial from October 26 through December 23, 2015. He does

not dispute that he could have received reimbursement from Caltrans for his travel

and lodging expenses had he requested it. Because such expenses were incurred

in the course of his employment and he was entitled to claim reimbursement for

them, they are not considered “necessary” under section 162(a). Orvis v.

Commissioner, 788 F.2d at 1408.
                                      - 13 -

[*13] The documentation petitioner husband produced does not provide enough

information to distinguish which expenses, if any, were incurred outside the scope

of his ordinary, reimbursable employee business expenses. Accordingly,

petitioner husband is not entitled to deductions for unreimbursed employee

expenses.

      Any contentions we have not addressed are irrelevant, moot, or meritless.

      To reflect the foregoing,


                                               Decision will be entered under

                                      Rule 155.
