                             T.C. Summary Opinion 2015-30



                         UNITED STATES TAX COURT



     VICENTE MORATAYA AND RUTHY A. MORATAYA, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 24314-13S.                        Filed April 20, 2015.



      Vicente Morataya and Ruthy A. Morataya, pro sese.

      Miles Friedman, Kim-Khanh Nguyen, Hans F. Famularo, and Shari Wight

(student), for respondent.



                                SUMMARY OPINION


      GUY, 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
                                          -2-

filed.1 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.

        Respondent determined a deficiency of $2,722 in petitioners’ Federal

income tax for 2010 (year in issue). Petitioners filed a timely petition for

redetermination with the Court pursuant to section 6213(a). At the time the

petition was filed, petitioners resided in California.

        The sole issue for decision is whether petitioners are entitled to deductions

for unreimbursed employee business expenses and miscellaneous expenses

reported on Schedule A, Itemized Deductions, for the year in issue.

                                     Background

        Some of the facts have been stipulated and are so found. The stipulation of

facts and the accompanying exhibits are incorporated herein by this reference.

I. Mr. Morataya’s Background and Employment

        Mr. Morataya emigrated from Guatemala to the United States in 1988. In

2010 Mr. Morataya was employed by IC Property Management (IC) as a


        1
        Unless otherwise indicated, section references are to the Internal Revenue
Code, as amended and in effect for 2010, and Rule references are to the Tax Court
Rules of Practice and Procedure. Monetary amounts are rounded to the nearest
dollar.
                                         -3-

maintenance supervisor. His duties included supervising and performing

maintenance and repairs at approximately 50 rental properties that IC owned in

Southern California.

II. Employment Expenses

      Mr. Morataya testified that in 2010 he paid various unreimbursed expenses

related to his work for IC.

      A. Vehicle Expenses

             1. Mileage

      IC sent instructions to Mr. Morataya each morning, either by facsimile

transmission or email, listing the properties that he was to visit and describing the

work to be performed at each property. Mr. Morataya owned a 2009 Ford Ranger

pickup truck (pickup) which he used to get to and from IC’s properties. Mr.

Morataya testified that he used the pickup exclusively for work, he drove at least

120 miles every workday, and most days he visited multiple IC properties. He did

not maintain a mileage log of any sort, and there is no record of the properties that

he visited or the number of miles that he drove each day. He testified that the

instructions that IC had sent to him each day were destroyed in accordance with

company policy.
                                        -4-

            2. Vehicle Insurance and Maintenance

      Mr. Morataya maintained automobile liability insurance for three vehicles in

2010, including the pickup. The record includes the first page of petitioners’

automobile insurance premium notice for the one-year period beginning June 19,

2009 to 2010, which shows that petitioners paid at least $422 annually to insure

the pickup. The premium notice recites that the pickup would be driven 5,000 to

6,499 miles annually. Mr. Morataya also presented receipts showing that he paid

$166 for oil changes and repairs to the pickup in 2010. These records indicate that

Mr. Morataya drove the vehicle approximately 22,000 miles between February and

August 2010.

            3. Reimbursement

      The record includes a statement from IC that it reimbursed Mr. Morataya

approximately $400 monthly for vehicle expenses. IC did not suggest that Mr.

Morataya was eligible to be reimbursed for any expenses other than vehicle

expenses.2 Although Mr. Morataya suggested that the reimbursement amounts he

received from IC varied from month to month, he did not offer any records to

show how much he was actually reimbursed.


      2
      Mr. Morataya testified that IC had never provided him with a written
employee expense reimbursement policy.
                                         -5-

      B. Cellular Phone Charges

      In 2010 Mr. Morataya maintained a Verizon Wireless service plan for four

cellular phones. He used one phone, and his wife and two children used the other

phones. Mr. Morataya testified that he used his cellular phone approximately 80%

of the time for business purposes (e.g., to stay in touch with IC personnel while he

was working).

       The record includes a copy of petitioners’ Verizon Wireless billing

statement for the period July 20 to August 19, 2010. The statement shows that

petitioners paid $173 for cellular service that month and the charges were nearly

equally divided among the four phones.

      C. Work Clothes and Shoes

      IC did not require Mr. Morataya to wear a uniform. Mr. Morataya testified,

however, that IC required that he wear work boots and that he found it necessary

to routinely replace the soiled and damaged clothes that he wore to work.

      D. Internet Access and Phone Charges

      As previously mentioned, Mr. Morataya routinely received communications

from IC by facsimile transmission or email. Although he testified that his son

helped him to retrieve emails, he was unable to produce any bills or other records

to substantiate the amount that he paid for Internet access charges. The record
                                         -6-

includes an AT&T billing statement for December 2010 which shows that

petitioners were charged $26 and $7 that month for local and long-distance phone

services, respectively.

      E. Work Tools and Safety Equipment

      Mr. Morataya testified that he purchased tools and safety equipment that he

used at work. He did not produce any bills, receipts, or other records to

substantiate the amounts he paid for work tools and safety equipment.

III. Petitioners’ 2010 Tax Return

      Petitioners filed a joint Federal income tax return for 2010 reporting wage

income of $45,706. Petitioners attached a Schedule A to their return and claimed

itemized deductions including unreimbursed employee business expenses of

$22,418 and miscellaneous expenses including tax return preparation fees of $215

and hobby expenses and accounting fees of $1,364.

      Petitioners reported on Form 2106, Employee Business Expenses, that Mr.

Morataya drove 33,006 miles for business purposes in 2010. Electing to apply the

standard mileage rate of 50 cents per mile, petitioners reported total vehicle

expenses of $16,503.3 Petitioners reported other business expenses of $5,915

      3
       The Commissioner generally updates the optional standard mileage rates
annually. See sec. 1.274-5(j)(2), Income Tax Regs. The standard mileage rate of
                                                                   (continued...)
                                          -7-

comprising $2,691 for vehicle maintenance and insurance, $576 for cellular phone

charges, $1,107 for work clothes and shoes, $720 for Internet access charges, and

$821 for work tools and safety equipment.

IV. Tax Return Preparation

      Fannie Ordonez, an employee of the tax preparation firm Tax Guy Albert,

prepared petitioners’ 2010 tax return. Albert Ortiz, the owner of Tax Guy Albert,

testified at trial. He confirmed that petitioners paid tax return preparation fees to

his firm in 2010.

V. Notice of Deficiency

      Respondent issued a notice of deficiency to petitioners disallowing the

deductions for employee business expenses and miscellaneous expenses outlined

above. Respondent determined that petitioners failed to establish that the

expenses were paid in 2010 or that the expenses were ordinary and necessary

within the meaning of section 162.

VI. Closing the Record

      At the close of the trial the Court left the record open for 60 days to permit

the parties to exchange and possibly stipulate additional records that might allow

      3
       (...continued)
50 cents per mile for 2010 is set forth in Rev. Proc. 2009-54, sec. 2.01, 2009-51
I.R.B. 930, 930.
                                         -8-

petitioners to substantiate the deductions in dispute. Petitioners failed to exchange

any additional documents with respondent, and the record was closed.

                                    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).4

      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). A taxpayer 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, 89-90 (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 a statutory provision and must further


      4
       Petitioners do not contend, and the record does not otherwise suggest, that
the burden of proof should shift to respondent pursuant to sec. 7491(a).
                                        -9-

substantiate that the expense to which the deduction relates has been paid or

incurred. Sec. 6001; Hradesky v. Commissioner, 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 normally

may estimate the amount allowable as a deduction. Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-

743 (1985). There must be sufficient evidence in the record, however, 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).

I. Unreimbursed Employee Business Expenses

      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. A deduction normally is not allowed, however, for personal, living, or

family expenses. Sec. 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).

      The term “trade or business” includes performing services as an employee.

Primuth v. Commissioner, 54 T.C. 374, 377-378 (1970). An employee business

expense is not ordinary and necessary, however, if the employee is entitled to
                                         -10-

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.

      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 entertainment expenditures, and expenses related to the use of

listed property as defined in section 280F(d)(4)(A). See Sanford v. Commissioner,

50 T.C. 823, 827 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969). The term “listed

property” includes, inter alia, passenger automobiles. Sec. 280F(d)(4)(A)(i). To

satisfy the requirements of section 274(d), a taxpayer generally must maintain

adequate records or produce sufficient evidence corroborating his or her own

statement, which, in combination, are sufficient to establish the amount, date and

time, and business purpose for each expenditure for travel away from home or

each expenditure or business use of listed property. Sec. 1.274-5T(b)(2), (6),

(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46014, 46016-46017 (Nov. 6,

1985).

      Section 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017-

46018 (Nov. 6, 1985), provides in relevant part that “adequate records” generally

consist of an account book, a diary, a log, a statement of expense, trip sheets, or a

similar record made at or near the time of the expenditure or use, along with
                                       -11-

supporting documentary evidence. Section 1.274-5(j)(2), Income Tax Regs.,

provides in relevant part that a taxpayer who elects the optional standard mileage

rate method to compute vehicle expenses must nevertheless substantiate the

amount of business use and the time and business purpose of each use. Moreover,

the Court may not use the rule established in Cohan v. Commissioner, 39 F.2d at

543-544, to estimate expenses covered by section 274(d). Sanford v.

Commissioner, 50 T.C. at 827; sec. 1.274-5T(a), Temporary Income Tax Regs., 50

Fed. Reg. 46014 (Nov. 6, 1985).

      A. Vehicle Expenses

      Respondent disallowed deductions that petitioners claimed for vehicle

expenses, including mileage expenses of $16,503 and vehicle maintenance and

insurance charges of $2,691. Although Mr. Morataya reported that he drove a

total of 33,006 miles for business purposes in 2010, he did not maintain a

contemporaneous mileage log, and he did not offer other records to corroborate his

testimony that he drove at least 120 miles per day while working for IC. Likewise,

petitioners did not offer any evidence to properly account for the monthly amounts

that IC reimbursed Mr. Morataya for vehicle expenses. Without more detailed

records, including a copy of IC’s employee reimbursement policy or similar

evidence, we cannot determine whether Mr. Morataya was reimbursed in whole or
                                        -12-

in part for the vehicle expenses in dispute. See Podems v. Commissioner, 24 T.C.

at 22-23. On this record, we sustain respondent’s determination disallowing the

deductions that petitioners claimed for vehicle expenses.

      B. Cellular Phone Charges

      Respondent disallowed a deduction of $576 that petitioners claimed for

cellular phone charges. As previously mentioned, IC did not suggest that

Mr. Morataya was entitled to reimbursement for cellular phone charges.

      For taxable years beginning after December 31, 2009, cellular phones are no

longer included in the definition of listed property in section 280F(d)(4), which

was amended by the Small Business Jobs Act of 2010, Pub. L. No. 111-240, sec.

2043(a), 124 Stat. at 2560. As a result of this change, cellular phones are no

longer subject to the strict substantiation requirements of section 274(d).

      The record includes a Verizon Wireless billing statement showing that

petitioners paid about $170 monthly (or a total of $2,040 in 2010) for cellular

service for four phones. Mr. Morataya used one phone, and his wife and children

used the other three. Mr. Morataya credibly testified that he used his cellular

phone approximately 80% of the time for business purposes. On this record, we
                                        -13-

hold that petitioners are entitled to a deduction of $408 for cellular phone charges

(before the application of the 2% floor prescribed in section 67(a)).5

      C. Work Clothes and Shoes

      Respondent disallowed a $1,107 deduction that petitioners claimed for work

clothes and shoes. Mr. Morataya testified that he frequently replaced the clothes

that he wore to work for IC and that he was obliged to wear work boots at IC’s

properties.

      The cost of clothing that is “required or essential in an employment, and

which * * * [is] not suitable for general or personal wear and [is] not so worn” is a

deductible expense. Yeomans v. Commissioner, 30 T.C. 757, 767 (1958); see

Wasik v. Commissioner, T.C. Memo. 2007-148. The cost of heavy duty work

clothing normally is not a deductible expense, see Donnelly v. Commissioner, 262

F.2d 411, 412-413 (2d Cir. 1959), aff’g 28 T.C. 1278 (1957), and the cost of work

clothing adaptable to general wear is not deductible even if the taxpayer’s work

leaves the clothing soiled with grease, mud, and plaster, see Drill v.

Commissioner, 8 T.C. 902 (1947).




      5
        The deduction of $408 represents 80% of $510 (the latter amount
representing one-quarter of the approximately $2,040 that petitioners paid for
cellular phone service in 2010).
                                         -14-

      IC did not require Mr. Morataya to wear a uniform, and he failed to show

that the clothes and work boots that he wore to work were not also suitable for

general or personal wear. Consequently, we sustain respondent’s determination

that petitioners are not entitled to a deduction for these items.

      D. Internet Access and Phone Charges

      Although petitioners claimed a deduction of $720 for Internet access

charges, Mr. Morataya failed to produce any bills, canceled checks, or similar

records substantiating Internet access charges. He did, however, present an AT&T

billing statement showing that petitioners were charged $26 and $7 that month for

local and long-distance phone services, respectively.

      Section 262(b) provides that, in the case of an individual, any charge for

basic local telephone service with respect to the first telephone line provided to

any residence shall be treated as a personal expense. Although Mr. Morataya

testified that he frequently used the telephone line to receive facsimile

transmissions from IC, he did not offer any testimony that IC’s facsimile

transmissions resulted in long-distance telephone charges. On this record, we

conclude that any telephone charges related to his work for IC were attributable to

basic local service. It follows that petitioners are not entitled to a deduction for

Internet access or telephone charges.
                                         -15-

      E. Work Tools and Safety Equipment

      Petitioners deducted $561 for work tools and $260 for safety equipment

(i.e., gloves and waist belts). Mr. Morataya failed to produce receipts, canceled

checks, or similar records substantiating these expenses. We sustain respondent’s

determination disallowing the deductions petitioners claimed for work tools and

safety equipment.

II. Other Miscellaneous Expenses

      A. Tax Return Preparation Fees

      Petitioners deducted $215 for tax preparation fees. Albert Ortiz, the owner

of Tax Guy Albert, testified at trial that petitioners paid $215 to his firm for tax

return preparation services in 2010. On this record, we conclude that petitioners

are entitled to a $215 deduction for tax preparation fees (before the application of

the 2% floor prescribed in section 67(a)).

      B. Hobby Expenses and Accounting Fees

      Respondent disallowed a $1,364 deduction that petitioners claimed for

hobby expenses and accounting fees. Mr. Morataya failed to offer any evidence

substantiating hobby expenses and accounting fees. Respondent’s determination

disallowing a deduction for these items is sustained.
                             -16-

To reflect the foregoing,


                                    Decision will be entered

                            under Rule 155.
