                            T.C. Summary Opinion 2019-31



                            UNITED STATES TAX COURT



                      BRENT KATUSHA, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 6879-17S.                             Filed October 10, 2019.



      Brent Katusha, pro se.

      Elizabeth F. Rodoni and Victoria Z. Gu, for respondent.



                                 SUMMARY OPINION


      PANUTHOS, 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, section references are to the Internal Revenue
                                                                          (continued...)
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reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      Respondent determined a deficiency of $4,090 in petitioner’s Federal

income tax for tax year 2014 as a result of unreported income. In a joint

stipulation of settled issues filed with this Court, petitioner agreed that he did not

report $10,081 of nonemployee compensation. Having agreed to the adjustment

for omitted income, petitioner now asserts he is entitled to additional expense

deductions on Schedule C, Profit or Loss From Business. The sole issue for

decision is whether petitioner is entitled to deduct certain purported business

expenses in excess of those respondent allowed.

                                     Background

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

fact and the attached exhibits are incorporated herein by this reference. Petitioner

resided in California when the petition was timely filed.

I.    Petitioner’s Business Activity

      Petitioner has worked as a professional automobile racing mechanic in

California since 1999, specializing in car fabrication and maintenance. During tax

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

year 2014 petitioner worked as a contract race mechanic for several professional

IndyCar racing teams.2 He also worked for an engineering firm where he built

robotic machines for use in vehicle manufacturing overseas.

      In his work for the racing teams petitioner attended training days and “race

weekends” at various raceways in California and elsewhere in the western United

States. His racing business consisted of hauling race cars to and from the

raceways and maintaining the cars before, during, and after the races. Petitioner

estimates that he worked approximately 20 race weekends and an additional 30 to

50 practice days during 2014. Petitioner regularly had meals and coffee with

members of race teams, including mechanics and engineers. He often discussed

his business activity at these meals. He also attended or arranged various

entertainment events at which he networked with clients and colleagues.

II.   Petitioner’s Tax Return and Respondent’s Determination

      Petitioner timely filed a 2014 Form 1040, U.S. Individual Income Tax

Return. He hired a professional tax return preparer. On Schedule C petitioner

reported nonemployee compensation of $61,399 and expenses of $13,146 related

to his self-employment activity.


      2
       Petitioner explained that IndyCar racing is a discipline of car racing in the
United States.
                                        -4-

       As indicated, petitioner conceded that he received and did not report

$10,081 of nonemployee compensation. Petitioner now contends that he is

entitled to deduct business expenses of $7,355 in excess of those that he

previously reported on the 2014 Schedule C. The additional expenses include

$7,171 for meals and entertainment, $69 for gifts, and $115 for office.

III.   Petitioner’s Business Records

       Petitioner hired a certified public accountant (C.P.A.) based in Santa Rosa,

California, to assemble the receipts and other documents needed to substantiate his

business-related expenses for tax year 2014. Many of the documents were lost

when the C.P.A.’s house was destroyed in a wildfire in October 2017. Because of

the damage to his business and home, the C.P.A. was unable to assist petitioner in

reconstructing and assembling documents needed to support the claimed expense

deductions before trial.

       As a result of these events petitioner’s business expense records are limited.

The Court received into evidence 49 pages of monthly checking account

statements for 2014 from Wells Fargo Bank, N.A. The checking account

statements provide the name of the vendor, the date, and the amount of each

charge. Petitioner marked the checking account statements with handwritten

abbreviations noting various companies and individuals that he worked with in the
                                         -5-

racing industry, e.g., “SPT” for Small Precision Tool, “Send-It” for Send-It

Motorsports, and “Worldspeed” for World Speed Motorsports. Petitioner also

produced an email dated February 18, 2014, from World Speed Motorsports that

details the 2014 schedule for its racing team. Petitioner asserts that he either

attended test days or the race weekends related to 5 of the 10 racing events listed

on the World Speed Motorsports schedule. To support this assertion he offered

digital copies of race results and schedules related to those events into evidence.

                                     Discussion

I.    Burden of Proof

      In general, the Commissioner’s determination set forth in a notice of

deficiency is presumed correct, and the taxpayer bears the burden of proving that

the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Pursuant to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances. Petitioner has not

asserted or otherwise shown that section 7491(a) applies. See sec. 7491(a)(2)(A)

and (B). Therefore, petitioner bears the burden of proof.

II.   Petitioner’s Schedule C Deductions

      Deductions are a matter of legislative grace, and the taxpayer generally

bears the burden of proving he is entitled to any deduction claimed. Rule 142(a);
                                       -6-

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

v. Helvering, 292 U.S. 435, 440 (1934). 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. 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); sec.

1.6001-1(a), Income Tax Regs.

      A taxpayer 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, no deduction is allowed for personal, living, or family

expenses. See sec. 262(a). The taxpayer must show that any deducted expenses

were incurred primarily for business rather than personal reasons. See Rule

142(a); Walliser v. Commissioner, 72 T.C. 433, 437 (1979). A proximate

relationship between each deducted expense and the business is required. See

Walliser v. Commissioner, 72 T.C. at 437.

      The taxpayer is required to maintain records sufficient to substantiate

expenses underlying deductions claimed on his return. Sec. 6001; sec. 1.6001-

1(a), (e), Income Tax Regs.; see New Colonial Ice Co. v. Helvering, 292 U.S. at
                                         -7-

440. If the taxpayer is able to establish that he paid or incurred a deductible

expense but is unable to substantiate the precise amount, the Court generally may

approximate the deductible amount, but only if the taxpayer presents sufficient

evidence to establish a rational basis for making the estimate. See Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); see also Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985). The failure to keep and produce

appropriate records counts heavily against a taxpayer’s attempted proof. Rogers v.

Commissioner, T.C. Memo. 2014-141, at *17.

      Section 274(d) imposes stricter substantiation requirements for certain kinds

of expenses otherwise deductible under section 162(a). No deduction is allowed

for travel expenses, gifts, meals, and entertainment, or for listed property as

defined by section 280F(d)(4), unless the taxpayer substantiates by adequate

records or corroborates by sufficient evidence the taxpayer’s own statements as to:

(1) the amount of the expense, (2) the time and place the expense was incurred,

(3) the business purpose of the expense, and (4) the recipient’s business

relationship for each expenditure. Sec. 274(d); sec. 1.274-5T(a), (b), and (c),

Temporary Income Tax Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6, 1985). Section

274(d) substantiation requirements supersede the Cohan test. See Sanford v.
                                         -8-

Commissioner, 50 T.C. 823, 827-828 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969);

sec. 1.274-5T(a), Temporary Income Tax Regs., supra.

       Substantiation by adequate records requires the taxpayer to maintain an

account book, a diary, a log, a statement of expense, trip sheets, or a similar record

prepared contemporaneously with the expenditure and documentary evidence

(e.g., receipts or paid 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).

      “Where the taxpayer establishes that the failure to produce adequate records

is due to the loss of such records through circumstances beyond the taxpayer’s

control, such as destruction by fire, flood, earthquake, or other casualty, the

taxpayer shall have a right to substantiate a deduction by reasonable

reconstruction of his expenditures or use.” Id. subpara. (5), 50 Fed. Reg. 46022.

The burden is on the taxpayer to show that the documentation was actually lost or

destroyed because of circumstances beyond his control. See McClellan v.

Commissioner, T.C. Memo. 2014-257, at *13.
                                        -9-

      The Court received credible evidence to corroborate the fact that

petitioner’s C.P.A.’s home was destroyed in a wildfire. Petitioner, however, did

not provide evidence by means of testimony or documents as to his usual business

recordkeeping practices and specifically what records were destroyed.

      Petitioner contends that he should be allowed deductions for gifts, meals,

entertainment, and office expenses related to his business as a race mechanic. He

claims business expense deductions for Christmas gifts to his business associates.

He also seeks to deduct office expenses in the form of books, magazines, and

music he purchased for his mechanic’s shop.

      Accepting petitioner’s testimony that his records were destroyed in a

wildfire, we review this record in the light of these particular circumstances.

Where records have been lost because of circumstances beyond a taxpayer’s

control, he must still undertake a “reasonable reconstruction”, which includes

substantiation through secondary evidence. See, e.g., Boyd v. Commissioner, 122

T.C. at 320; Probandt v. Commissioner, T.C. Memo. 2016-135, at *28 (and cases

cited thereat).

      Petitioner presented 49 pages of checking account statements with notations

providing partial but inadequate details on the business purpose of each expense

deduction claimed. Petitioner’s testimony was vague and unspecific as to the
                                       - 10 -

business expenses for meals, events, gifts, and purchases for his mechanic’s shop.

Petitioner’s attempts to specifically identify persons and business purposes related

to the purported expenses were not sufficient. While petitioner identified

individuals with whom he dined and attended social events, he later indicated that

his attempts at identification were speculative and acknowledged that his

reconstruction of expenses did not specifically identify the business conducted on

these occasions. Likewise, petitioner’s recall of purchases from music stores,

book stores, and other vendors was only general, and it was not clear whether the

expenditures were incurred primarily for business rather than personal reasons.

Petitioner acknowledged the difficulty in associating any expense paid in 2014

with a specific business purpose. On numerous occasions at trial petitioner

indicated that his notations could be inaccurate because he was attempting to piece

together his purchases years after charges were incurred.

      Moreover, petitioner’s checking account statements appear to contradict the

email detailing the World Speed Motorsports race weekends he purported to have

attended. Petitioner indicated that he attended 5 of the 10 race weekends listed in

the email: two at Thunderhill Raceway in Willows, California, and three at

Laguna Seca Raceway in Salinas, California. Petitioner’s checking account

statements appear to indicate petitioner’s involvement in one race weekend at
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Laguna Seca Raceway. For that weekend, March 28 through 30, 2014, petitioner

incurred $47 of charges at vendors near the raceway. For each of the other race

weekends petitioner’s checking account statements either do not reflect any

charges noted as business expenses or show multiple charges near petitioner’s

home and workplace and are marked with a variety of different notations in

addition to “Worldspeed”. On the basis of this evidence it is not possible for the

Court to ascertain which of petitioner’s meals and entertainment expenses he

incurred while attending World Speed Motorsports races.

      We note that the Internal Revenue Service allowed $109 in meals and

entertainment expenses as originally reported on the 2014 Schedule C. This

amount exceeds the $47 in charges that petitioner has been able to specifically

associate with a racing event. Petitioner was unable to produce testimony or other

evidence as to whether any business expenses recorded on his checking account

statements relate to amounts previously reported and allowed. Therefore, we

cannot conclude that any given charge for meals or entertainment is an additional

business expense rather one previously reported and allowed.

      Petitioner was similarly unable to adequately substantiate the reported gift

expense. Petitioner was charged $69 for a purchase at Kendall-Jackson on

December 17, 2014. Petitioner offered only vague testimony that the purchase
                                         - 12 -

was for gifts which he bought for “all the guys” for Christmas. This testimony is

insufficient to prove that the gifts were related to petitioner’s business or

purchased for any specific business contact.

      Finally, petitioner was unable to adequately substantiate the claimed

deduction of $115 for office expenses. He attempted to substantiate the expenses

by identifying charges incurred at Barnes & Noble and Ken Watts Music as

indicated on his checking account statements. However, petitioner offered only

vague testimony that these charges were for music, books, and magazines that he

purchased for his mechanic’s shop. Petitioner did not provide any evidence or

testimony indicating that he had not previously included the music, book, and

magazine expenses on Schedule C.

      Although the Court is sympathetic to the fact that many of the business

records petitioner needed to substantiate his claimed deductions were destroyed,

he has not undertaken a detailed reconstruction of them. Accordingly, we hold

that petitioner is not entitled to deduct additional gift, meals, entertainment, or

office expenses for tax year 2014.

      We have considered the parties’ arguments and, to the extent not addressed

herein, we conclude that they are moot, irrelevant, or without merit.
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To reflect the foregoing,


                                     Decision will be entered for

                            respondent.
