The Tax Court in Brief February 14 – February 18, 2022
Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.
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Tax Litigation: The Week of February 14 – February 18, 2022
Harwood v. Comm’r, T.C. memo. 2022-8 | February 15, 2022 | Urda, J. | Dkt. No. 425-19
Short Summary: This case focuses on the deductibility of unreimbursed employee expenses incurred by taxpayer (James Harwood) while working as a construction worker for various employers over the tax years in issue. The work required that Harwood leave his home for significant “chunks of time,” and through his tax returns, he sought to deduct unreimbursed expenses for meals and entertainment, lodging, vehicle, and other incurred during such employment. The IRS issued a deficiency based on the disallowance of a portion of Harwoods’ claimed deductions. Harwood challenged that decision.
Primary Holdings:
- Harwood adequately substantiated most of the expenses in question and was is therefore entitled to deduct those amounts. He maintained a log for recording the date and odometer readings of the vehicle used for business travel, and he sufficiently substantiated the time, place, and business purpose for meal expenses under review.
- Harwood’s job assignments were temporary, and he had sufficient business reasons for living in a particular city, rather than moving his family to other parts of the region where the temporary work sites were located. Thus, the expenses in question were incurred while he was “away from home” for employee expense deduction purposes.
Key Points of Law:
- Section 162(a) allows the deduction of “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” The term “trade or business” includes performing services as an employee.
- As a general rule, a cash basis taxpayer deducts expenses for the year of payment. To deduct employee business expenses, a taxpayer must prove that he or she did not receive, and did not have had the right to receive reimbursement from his or her employer.
- The taxpayer bears the burden of establishing his entitlement to permissible deductions and for substantiating the amounts of claimed. See 26 U.S.C. § 6001; Reg. § 1.6001-1(a). Unless specifically enumerated in the Code, no deductions are allowed for personal, living, or family expenses. See 26 U.S.C. § 262(a).
- For expenses of travel (including meals and lodging while away from home), no deduction is allowed unless the taxpayer substantiates by adequate records or by sufficient and credible evidence corroborating his own statement the amount, time and place, and business purpose for each expenditure. See 26 U.S.C. § 274(d) (flush language); Treas. Reg. § 1.274- 5T(b)(2)(ii)-(iii) (defining “time” and “place” for these purposes).
- For trade or business expenses relating to property, such as an automobile, the taxpayer must also establish the amount of business use “based on the appropriate measure (i.e., mileage for automobiles . . .), and the total use of the listed property for the taxable period.” at § 1.274-5T(b)(6)(i)(B).
- Adequate records for this purpose include an account book, log, or similar record and documentary evidence, contemporaneously made with the expense, that together are sufficient to establish each element of the expenditure. See id. at § 1.274-5T(c)(2)(i)-(ii)(C).
- A taxpayer may deduct reasonable and necessary travel expenses such as meals and lodging incurred “while away from home in the pursuit of a trade or business.” 26 U.S.C. § 162(a)(2) (emphasis added). The term “home” for these purposes refers to the vicinity of a taxpayer’s principal place of business rather than his personal residence. Thus, a taxpayer’s residence may be treated as his tax home, if his principal place of business is temporary rather than indefinite. Employment is “temporary” if it is the type that can be expected to last for only a short period, and is indefinite if “its termination cannot be foreseen within a fixed or reasonably short period of time.
Insights: To deduct employee business expenses, a taxpayer must prove that he or she did not receive, nor have the right to receive reimbursement from his or her employer. The taxpayer must have and maintain adequate records, contemporaneously made with the expense, to justify the available deduction. Travel logs, odometer readings, and other contemporaneous records to show the time, place, and business purpose for an expense are critical to appropriately substantiate entitlement to a deduction for an expense incurred in carrying on a trade or business, including services as an employee. For deductibility of mileage expenses for driving to or from a work site, as well as for meal and other expenses, the taxpayer must evaluate whether or not the expense is incurred “while away from home,” as that term or phrase is defined in the Code and is construed by the courts and the Commissioner.
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