2004 Tax Ct. Summary LEXIS 87">*87 PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
DEAN, Special Trial Judge: These consolidated cases were heard pursuant to the provisions of
Respondent determined for 1999 a deficiency in William G. Applegate's and Lucy S. Wang's Federal income tax of $ 7,176. 1 The issues for decision are: (1) Whether petitioners are entitled to deductions for employee business expenses; and (2) whether Ms. Wang is entitled to relief from joint and several liability on a joint return under
2004 Tax Ct. Summary LEXIS 87">*88 The stipulated facts and the exhibits received into evidence are incorporated herein by reference. At the time the petitions in these cases were filed, both petitioners resided in Attica, Indiana. The Court consolidated these cases for purposes of trial, briefing, and opinion because they involve common questions of law and fact.
Background
During taxable year 1999, petitioner William G. Applegate (Mr. Applegate) and petitioner Lucy S. Wang (Ms. Wang) were married to each other, and they presently remain so. Petitioners timely filed a joint Form 1040, U.S. Individual Income Tax Return, for 1999 which was prepared by Ms. Wang using information provided to her by Mr. Applegate. Ms. Wang did not discuss the return with Mr. Applegate.
Ms. Wang is a graduate of Purdue University, holding a degree in engineering. During taxable year 1999, Ms. Wang was employed as an environmental engineer with Eli Lilly & Co. (Eli Lilly), her employer of 22 years.
Mr. Applegate is also a graduate of Purdue University, holding a bachelor of science degree in industrial supervision. During 1999, Mr. Applegate, in his roles as president, secretary, shareholder, and employee of DriAll, Inc. (DriAll), earned2004 Tax Ct. Summary LEXIS 87">*89 $ 41,400. DriAll, a closely held corporation owned by Mr. Applegate's family, manufactures agricultural equipment and incinerators.
Petitioners maintained joint savings and checking accounts. Ms. Wang's wages from Eli Lilly, as well as checks from DriAll to Mr. Applegate, were deposited into their joint checking account. Ms. Wang had full access to both the joint savings and checking accounts. She reviewed the monthly bank statements, wrote checks, and balanced the checkbook.
DriAll had a reimbursement policy in place during 1999 which covered a variety of expenses. The reimbursable expenses included: (1) Business use of personal vehicles; (2) business travel expenses; (3) meals and entertainment expenses; and (4) general business expenses.
DriAll's reimbursement policies for business travel, meals and entertainment, and general business expenses required an employee to obtain preapproval for the expenses before incurring them. Preapproval for business travel and general business expenses could be obtained from the accounting department and the head of the department incurring the expense. Meals expenses in excess of $ 35 per day and any entertainment expenses also required preapproval,2004 Tax Ct. Summary LEXIS 87">*90 but only from the accounting department. Mr. Applegate was the head of his department and the head of accounting and preapproved his own expenses.
During 1999, Mr. Applegate paid the following expenses with respect to his employment with DriAll:
Item | Amount |
Mileage | $ 17,967.84 |
Travel | 6,500.27 |
Business expenses | 5,111.39 |
Meals & entertainment | 1,770.00 |
$ 31,349.50 |
Mr. Applegate gave Ms. Wang the receipts for his expenses, and on their 1999 Schedule A, Itemized Deductions, petitioners claimed a total deduction for unreimbursed employee business expenses of $ 31,349.50, less the 2-percent AGI floor of $ 2,132.24, or $ 29,217.26. Mr. Applegate could have received reimbursement from DriAll for these expenses instead of deducting them on their tax return. Respondent disallowed all of petitioners' claimed deductions for unreimbursed employee business expenses.
Petitioners also earned $ 17 in taxable interest from the Eli Lilly Credit Union which they failed to report on their return.
Ms. Wang seeks relief from joint and several liability for the deficiency pursuant to
Discussion
1. Unreimbursed Employee Business Expenses
Under section2004 Tax Ct. Summary LEXIS 87">*91 7491(a)(1), the burden of proof may shift to the Commissioner. Because the unreimbursed employee business expense issue is a question of law, section 7491 is inapplicable, and the Court decides the issue without regard to the burden of proof.
Pursuant to
Mr. Applegate testified that he incurred expenses on behalf of DriAll in his capacity as a corporate officer. He claims he sought reimbursement from DriAll for his expenses but DriAll did not have the funds to reimburse him. What happened, in practice, is that Mr. Applegate looked at DriAll's account to see if there was money available for reimbursement and did not seek reimbursement2004 Tax Ct. Summary LEXIS 87">*92 because he concluded that DriAll did not have sufficient funds. Mr. Applegate contends, therefore, that he is entitled to a deduction for these unreimbursed expenses. Respondent argues that the disallowed expenses were incurred by Mr. Applegate on behalf of DriAll and that they are DriAll's expenses, which may not be deducted by Mr. Applegate as his own trade or business expenses under
Mr. Applegate was entitled to reimbursement from DriAll for the expenses incurred on its behalf. Where such an arrangement exists, the failure to claim such reimbursement from the corporation will not convert the corporation's expenses into the corporate employee's own deductible ordinary and necessary business expenses.
Had Mr. Applegate requested reimbursement, the agreement by the corporation to reimburse an employee or officer, coupled with a failure to reimburse, might have given rise to a debt due from2004 Tax Ct. Summary LEXIS 87">*93 DriAll to Mr. Applegate for the unreimbursed amount. See
2. Relief From Joint and Several Liability Under
Generally, married taxpayers may elect to file a joint Federal income tax return.
Except as otherwise provided in
Ms. Wang seeks relief from liability under
(A) A joint return has been made for a taxable year; (B) on such return there is an understatement of tax attributable to erroneous items of 1 individual filing2004 Tax Ct. Summary LEXIS 87">*95 the joint return; (C) the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such an understatement; (D) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement; and (E) the other individual [makes a valid election] * * *
Respondent does not appear to dispute that Ms. Wang satisfies two elements of
The first of the two remaining elements of
Ms. Wang has a degree2004 Tax Ct. Summary LEXIS 87">*97 in engineering from Purdue University and had full responsibility for the family finances. She had full access to the family bank accounts, reviewed the bank account statements monthly, and maintained and balanced the family checkbook. Ms. Wang also prepared the tax return for the year in issue. Finally, Mr. Applegate made no attempt to deceive Ms. Wang about expenditures he made regarding his employment. In fact, she admits he gave her all his receipts for the expenditures. Ms. Wang simply made no effort to question him about them despite the fact that his expenses of over $ 31,000 equaled almost 76 percent of his income of $ 41,400.
The Court finds that Ms. Wang has failed to satisfy the requirements of
Ms. Wang may still qualify for relief, however, under
2004 Tax Ct. Summary LEXIS 87">*98 As contemplated by
Where the requesting spouse satisfies the threshold conditions set forth in
Where, as here, the requesting spouse fails to qualify for relief under
The sole factor weighing in favor of granting relief for Ms. Wang is that the items giving rise to the deficiency--the2004 Tax Ct. Summary LEXIS 87">*100 Schedule A employee business expense deductions--are attributable solely to Mr. Applegate. There are, however, several factors weighing against granting relief to Ms. Wang. First, she clearly knew about the employee business expense deductions because Mr. Applegate gave her his receipts and she used them to prepare their tax return. Second, Ms. Wang received significant benefit from Mr. Applegate's employee business expense deductions. His expenses of $ 31,349.50 equaled almost 30 percent of their gross income and constituted almost 70 percent of their total itemized deductions. Finally, Ms. Wang has provided no information at all to show that she will experience economic hardship if relief from the liability is not granted.
Accordingly, the Court concludes that it is not inequitable under
Reviewed and adopted as the report of the Small Tax Case Division.
Decisions will be entered for respondent in docket Nos. 19676-02S and 19692-02S.
1. In the notice of deficiency, respondent allowed petitioners a previously unclaimed child tax credit of $ 1,000.↩
2. (f) Equitable Relief.--Under procedures prescribed by the Secretary, if-- (1) taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either); and (2) relief is not available to such individual under subsection (b) or (c), the Secretary may relieve such individual of such liability.↩
3. The guidelines applicable herein are set forth in