T.C. Summary Opinion 2020-26



                            UNITED STATES TAX COURT



                   ANNA M. ARMSTRONG, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23698-18S.                            Filed September 17, 2020.



      Anna M. Armstrong, pro se.

      Samuel M. Warren, 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 at the time the

petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                         -2-

reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      Respondent determined a deficiency in petitioner’s Federal income tax for

taxable year 2015 (year in issue) of $2,640. The issue for decision is whether

petitioner is entitled to deduct unreimbursed employee business expenses of

$26,842.

                                     Background

      Some of the facts have been stipulated, and we incorporate the stipulation

and accompanying exhibits by this reference. The record consists of the

stipulation of facts with attached exhibits, exhibits introduced at trial, and

petitioner’s testimony.

      Petitioner lived in California when the petition was timely filed.

I.    Petitioner’s Professional Background

      During the tax year in issue petitioner worked as an outside sales

representative for Ace Relocation Systems, Inc. (ARS), a global and domestic

shipping company. ARS is headquartered in San Diego, California.


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

      Petitioner has worked for ARS since October 1999. Her duties consist of

identifying and meeting with prospective customers, participating in organizations

and clubs, and attending trade shows and conferences. During a typical week in

2015 petitioner either worked at her employer’s office in Long Beach, California,

or traveled to client meetings offsite. She also worked at home during most

evenings throughout the week and on the weekends.

      Petitioner resided in a house consisting of approximately 1,100 square feet.

She converted a nook in her kitchen into a home office of approximately 300

square feet. The office space contained a desk, an office chair, a laptop computer,

a monitor, a hard drive, a telephone, and other office items. Petitioner used the

space to work on client contracts and to perform other sales-related activities, but

she did not generally meet with clients at the home office.

      Petitioner’s position required her to travel to client worksites daily for in-

person sales meetings. In order to reach the client meetings petitioner drove her

personal vehicle or a rental vehicle either from ARS’ office or directly from her

home. ARS paid petitioner a $500-per-month vehicle allowance to compensate

for her travel expenses. In 2015 ARS had an expense reimbursement policy in

place that allowed reimbursement of business-related expenses up to 90 days after

they were incurred. Petitioner’s employer did not reimburse for vehicle expenses
                                        -4-

beyond the $500 per month vehicle allowance, including any additional gas,

maintenance, toll, and parking expenses. Neither did the company reimburse for

professional clothing.

II.    Petitioner’s Business Records

       Petitioner retained some personal and business expense receipts. She did

not provide receipts to her employer for reimbursement. She did not maintain a

contemporaneous mileage log or any other document listing the time, date,

business purpose, and miles traveled for client meetings. Instead, petitioner

maintained records of her client contracts for each year on which she added

handwritten notes estimating the miles driven to and from each client site. It is

unclear whether the handwritten notes were created contemporaneously with

petitioner’s work trips or were added later to the documents in order to estimate

her total mileage driven for the year. Petitioner also retained receipts and

substantiating documents for other reported business expenses, including meals,

groceries, utilities, home goods, and postage.

III.   Petitioner’s 2015 Income Tax Return

       Petitioner timely filed her individual Federal income tax return for 2015.

She hired a professional tax return preparer to prepare her return and provided tax
                                        -5-

documents and receipts to him. Petitioner reported gross income of $55,730 on a

Form 1040, U.S. Individual Income Tax Return.

      Petitioner’s tax return for the year in issue included Schedule A, Itemized

Deductions, on which she claimed various deductions including, as relevant here,

the following unreimbursed employee expenses as reported on Form 2106,

Employee Business Expenses:

                               Expenses                      2015
             Vehicle                                        $7,981
             Parking fees, tolls, and transportation         1,691
             Business expenses                              16,842
             Reimbursements                                 (6,000)
               Total unreimbursed employee expenses         20,514

      Petitioner did not provide a breakdown of the reported expenses categorized

broadly as “business expenses” on her 2015 tax return. She did, however,

introduce into evidence numerous photocopies of receipts and other documents

related to the purported business expenses. In addition to documentation related

to her personal vehicle, petitioner’s receipts related to reported business expenses

for 2015 in the following categories: (1) cell phone and internet service,

(2) business use of home as an office, (3) meals and groceries, (4) clothing and

grooming, and (5) postage.
                                        -6-

IV.   Notice of Deficiency

      On October 1, 2018, respondent issued a notice of deficiency to petitioner

for taxable year 2015. Respondent disallowed petitioner’s unreimbursed

employee business expense deductions, determining that petitioner did not

establish that they were paid or incurred during the taxable year or that the

expenses were ordinary and necessary to her business. Petitioner timely petitioned

this Court for redetermination.

                                     Discussion

I.    Burden of Proof

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

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

determination is in error. Rule 142(a); Welch v. Helvering, 

, 115

(1933).2 Deductions are a matter of legislative grace, and a taxpayer bears the

burden of proving that she is entitled to any deduction claimed. INDOPCO, Inc.

v. Commissioner, 

, 84 (1992); New Colonial Ice Co. v. Helvering, 

, 440 (1934).


      2
       Pursuant to sec. 7491(a), the burden of proof as to factual matters shifts to
the Commissioner under certain circumstances. Petitioner has neither alleged that
sec. 7491(a) applies nor established her compliance with its requirements.
Petitioner therefore bears the burden of proof.
                                        -7-

      A taxpayer claiming a deduction on a Federal income tax return must

demonstrate that the deduction is provided for by statute and must further

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

incurred. Sec. 6001; Hradesky v. Commissioner, 

, 89-90 (1975), aff’d

per curiam, 

(5th Cir. 1976); Meneguzzo v. Commissioner, 

, 831-832 (1965); sec. 1.6001-1(a), Income Tax Regs. A taxpayer is required

to maintain records sufficient to enable the Commissioner to determine his correct

tax liability. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Such records must

substantiate both the amount and purpose of the claimed deductions. Higbee v.

Commissioner, 

, 440 (2001).

II.   Unreimbursed Employee Business Expenses

      Section 162(a) allows deductions for all ordinary and necessary business

expenses paid or incurred during the taxable year in carrying on a trade or

business. Boyd v. Commissioner, 

, 313 (2004). Performing services

as an employee constitutes a trade or business. Primuth v. Commissioner, 

, 377-378 (1970). In order to deduct employee business expenses, a taxpayer

must not have received reimbursement and must not have had the right to obtain

reimbursement from her employer. See Orvis v. Commissioner, 

,

1408 (9th Cir. 1986), aff’g T.C. Memo. 1984-533. The taxpayer bears the burden
                                        -8-

of proving that she is not entitled to reimbursement from her employer for such

expenses. See Fountain v. Commissioner, 

, 708 (1973). The taxpayer

can prove that she was not entitled to reimbursement by showing, for example,

that she was expected to bear these costs. See id.; see also Dunkelberger v.

Commissioner, T.C. Memo. 1992-723 (finding that management team expected

taxpayer to bear expense of business lunches with vendors).

      When a taxpayer establishes that she has paid a deductible trade or business

expense but is unable to adequately substantiate the amount, the Court may

estimate the amount and allow a deduction to that extent. Cohan v.

Commissioner, 

, 543-544 (2d Cir. 1930). To apply the Cohan rule,

however, the Court must have a reasonable basis upon which to make an estimate.

Vanicek v. Commissioner, 

, 742-743 (1985).

      Congress overrode the Cohan rule with section 274(d), which requires strict

substantiation for certain categories of expenses; in the absence of evidence

demonstrating the exact amounts of those expenses, deductions for them are to be

disallowed entirely. Sanford v. Commissioner, 

, 827-828 (1968), aff’d

per curiam, 

(2d Cir. 1969). Expenses subject to section 274(d)

include travel and meal expenses as well as expenses for listed property such as

passenger automobiles. Sec. 280F(d)(4). A taxpayer must substantiate by
                                         -9-

adequate records or by sufficient evidence corroborating her own statement the

amount, time, place, and business purpose of these expenditures. Sec. 274(d); sec.

1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

      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 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).

      Petitioner reported expenses totaling $26,514 for tax year 2015 in

connection with her employment at ARS. She reported $6,000 in reimbursements

from her employer. Thus the total net business expenses reported for 2015 is

$20,514. According to respondent, petitioner has failed to establish that the

reported expenses were ordinary and necessary expenses related to her business

and, if business related, that they were not reimbursable by her employer.
                                         - 10 -

      A.     Vehicle, Parking, Toll, and Travel Expenses

      Petitioner’s 2015 vehicle, parking, toll, and travel expenses are subject to

the strict substantiation rules of section 274(d) and thus they cannot be estimated.

In support of the reported vehicle expenses of $7,981 and parking, toll, and

transportation expenses of $1,691 for the year in issue, petitioner produced the

following stipulated exhibits: (1) a schedule showing ARS client orders with

handwritten notes and estimated total mileage driven and related to each client,

(2) client order forms showing handwritten notes with estimated miles driven to

each client, and (3) receipts totaling $1,431 for parking, tolls, vehicle infractions,

auto repair maintenance and other automobile purchases.

      Petitioner’s total mileage estimate includes 11,520 “office” miles driven as a

part of her daily commute between her residence and her office and 1,477 “client”

miles driven between either her office or her residence and client sites for

meetings. Generally, expenses that a taxpayer incurs in commuting between her

home and her place of business are personal and nondeductible. Commissioner v.

Flowers, 

, 473-474 (1946); Heuer v. Commissioner, 

, 951

(1959), aff’d per curiam, 

(5th Cir. 1960); secs. 1.162-2(e), 1.262-

1(b)(5), Income Tax Regs. Expenses incurred for traveling between two or more

places of business may be deductible as ordinary and necessary business expenses
                                        - 11 -

under section 162 if incurred for business reasons. Steinhort v. Commissioner,

, 503-504 (5th Cir. 1964), aff’g and remanding T.C. Memo. 1962-

233; Heuer v. Commissioner, 

; see also Fausner v. Commissioner,

(1971) (permitting section 162 deductions for travel between jobs or

job locations). If one of the places of business is the taxpayer’s residence,

however, the residence must be the taxpayer’s principal place of business for the

trade or business the taxpayer conducts at those other locations. See Strohmaier v.

Commissioner, 

(1999). As discussed infra, we conclude that

petitioner’s residence was not her principal place of business. Thus, petitioner’s

“office” mileage (the travel between home and place of business) is not deductible.

      At trial petitioner testified that she could not provide a contemporaneous log

of miles driven from either her home or ARS’ office to client meetings and

worksites. Although we found petitioner’s testimony generally credible and we

have no doubt that she traveled significant distances for sales meetings with

clients, she was unable to provide the Court with reliable evidence of her vehicle

expenses. Further, the mileage estimates found on the client order forms and log

do not detail the dates of travel, the names of events or meetings attended, or the

departure and arrival locations for each trip. For these reasons, we conclude that
                                          - 12 -

petitioner’s estimate of “client miles” is insufficient to satisfy the strict

substantiation requirements of section 274(d) and related regulations.

      Standing alone, the vehicle expense, parking, and toll receipts and other

substantiating documents are also insufficient to show that petitioner paid those

expenses in connection with her employment with ARS. It is additionally unclear

which, if any, of the expenses reported were covered by the $6,000 reimbursement

that petitioner received and reported from her employer for vehicle and travel

expenses. Accordingly, we conclude that petitioner has not established that she is

entitled to deduct any amount of vehicle or parking, toll, and transportation

expenses under section 274(d) for tax year 2015.

      B.     Business Expenses

      The remaining unreimbursed employee expense items for consideration are

the deductions claimed and identified by petitioner as “business expenses” of

$16,842 for 2015. Petitioner did not include a schedule detailing her business

expenses with her 2015 tax return; however, the record contains a large number of

purported business receipts. The categories of reported business expenses are cell

phone and internet service, business use of home, meals and groceries, clothing

and grooming, and postage. We consider these items separately.
                                        - 13 -

             1.    Cell Phone and Internet Service

      The record includes receipts totaling $399 relating to unreimbursed

employee business expense deductions for cell phone and internet service supplied

by AT&T U-verse for 2015. Cell phone and internet service expenses are not

subject to the strict substantiation requirements of section 274(d).3 Therefore,

pursuant to the Cohan rule, the amount of deductible expenses can be estimated by

this Court provided we have a reasonable basis for making an estimate of the

amount of the expenses related to business use. See Vanicek v. Commissioner, 

(finding that estimate must have reasonable evidentiary basis).

      Although evidence in the record regarding the nature of petitioner’s

employment supports her contention that at least a portion of the reported cell

phone and internet service expenses was incurred for business purposes, the

service records petitioner supplied were in the name of her 25-year-old daughter.

      3
        For taxable years beginning after December 31, 2009, cell phones are no
longer included in the definition of listed property under sec. 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 amendment, deductions for cell
phone service expenses during the year in issue are not subject to the strict
substantiation rules of sec. 274(d). Internet service expenses have been
characterized as utility expenses rather than as expenses related to the use of listed
property. See Barnes v. Commissioner, T.C. Memo. 2016-212, at *71-*72, aff’d,
773 F. App’x 205 (5th Cir. 2019); Verma v. Commissioner, T.C. Memo. 2001-
132, slip op. at 12. So characterized, internet service expenses are also not
governed by the strict substantiation rules of sec. 274(d).
                                        - 14 -

At trial petitioner testified that she paid for the service in her daughter’s name and

that it was the only cell phone and internet service for their household. She further

testified that both she and her daughter used the AT&T U-verse service for

personal reasons but did not give an estimate of her business versus personal use.

Without such evidence the Court does not have a reasonable basis to estimate the

amount of the expenses related to business use. Furthermore, the record reflects

that petitioner was entitled to reimbursement of her business expenses pursuant to

ARS’ employee business expense reimbursement policy. There is no evidence

that any business use of her cell phone and internet service was not subject to that

policy. See Orvis v. 

; Fountain v. Commissioner,

. Accordingly, we hold that petitioner is not entitled to an

unreimbursed employee business expense deduction for cell phone and internet

service expenses for tax year 2015.

             2.     Business Use of Home

      The record includes receipts totaling approximately $1,213 in utilities

expenses and $2,173 in home goods and home improvements that petitioner

asserts are related to the business use of her home office in 2015. Section 280A(a)

generally provides that no deduction shall be allowed for a home office. For the

expense to be deductible, the taxpayer must show that the portion of the home
                                         - 15 -

purported to be used for business is: (1) the taxpayer’s principal place of business,

(2) a place where the taxpayer meets or deals with customers, clients, or patients,

or (3) a separate structure used in connection with the business. The home office

must be used exclusively on a regular basis for these purposes. Sec. 280A(c)(1).

An employee is entitled to the deduction only if the office is for the convenience

of the employer. See sec. 280A(c)(1) (flush language).

         Petitioner’s home office was in her kitchen, a place where she did not meet

or deal with clients. Therefore, petitioner could deduct expenses for business use

of the home only if her home office was her principal place of business.

Respondent argues that petitioner has not proven that her home office was the

principal place of business for her work as an employee of ARS. In addition,

respondent objects to petitioner’s claimed deductions for home goods and home

and landscaping maintenance expenses for areas of her property that were not used

for business. Petitioner asserts that she was required to work a substantial number

of hours from her home outside of normal business hours in order to complete her

sales duties. At trial she testified that she completed those duties from her home

because her employer did not allow her to work from the corporate office after

5 p.m.
                                       - 16 -

      When a taxpayer conducts business from both a home office and another

workplace, and a determination must be made as to which qualifies as the

taxpayer’s principal place of business, two objective factors are given primary

consideration: (1) the relative importance of the business functions or activities

conducted at each place and (2) the amount of time expended at each place.

Commissioner v. Soliman, 

, 175-177 (1993); Strohmaier v.

Commissioner, 

. The term “principal place of business”

includes a place of business which is used by the taxpayer for the administrative or

management activities of any trade or business of the taxpayer if there is no other

fixed location of the trade or business where the taxpayer conducts substantial

administrative or management activities of the trade or business. Sec. 280A(c)(1)

(flush language).

      Petitioner testified that she spent a significant amount of time working from

her home office during the week and on weekends. We credit petitioner’s

testimony on this matter and accept that she used her home office regularly and

exclusively in her work for the convenience of her employer. Nevertheless, after

careful consideration of the record, we conclude that petitioner’s home office was

not her principal place of business. Petitioner was required by her employer to

spend a significant amount of time traveling to and from client meetings as well as
                                       - 17 -

working in the corporate office in Long Beach, California. The record does not

reflect how many hours petitioner worked at home versus in sales meetings or in

her employer’s office. In addition on the basis of petitioner’s testimony the Court

views client sales meetings as the most important business activity petitioner

conducted in her work. Petitioner’s client meetings were required to complete her

sales transactions. She did not conduct these meetings in her home. Although

petitioner conducted administrative and other sales-related activities from her

home office, she also performed those activities at the corporate office.

      The record further reflects that petitioner was entitled to reimbursement of

her business expenses pursuant to ARS’ employee business expense

reimbursement policy. There is no evidence that the business use of petitioner’s

home was not subject to that policy. See Orvis v. 

; Fountain v. Commissioner, 

.

      For the aforementioned reasons, we conclude that petitioner is not entitled

to deduct expenses related to the business use of her home for tax year 2015. As a

result of this conclusion, we need not further consider the accuracy of the amounts

claimed for this purpose.
                                        - 18 -

             3.    Meal and Grocery Expenses

      Petitioner did not specifically report any amount of business meal expenses

on her tax return for the year in issue. The record, however, includes receipts she

provided that total $1,185 for food and beverage expenses in the form of meals

and groceries. At trial petitioner explained that the receipts related to business

meals with her clients and groceries that she purchased for the crews who worked

on her clients’ shipping sites. Petitioner contends that she should be allowed to

deduct these meal expenses because they were related to her employment. She

testified that her employer did allow reimbursement for food expenses related to

business but that she chose to include the meal and grocery expenses as itemized

deductions on her tax return.

      Section 162(a)(2) permits the deduction of amounts expended for meals

when away from home in the pursuit of a trade or business. In the context of

section 162(a)(2), a taxpayer’s home generally refers to the area of a taxpayer’s

principal place of employment, whether or not in the vicinity of the taxpayer’s

personal residence. Daly v. Commissioner, 

, 195 (1979), aff’d, 

(4th Cir. 1981); Kroll v. Commissioner, 

, 561-562 (1968). In

order to deduct food and beverage expenses, a taxpayer must not have had the

right to obtain reimbursement for the expenses from her employer. See Orvis v.
                                       - 19 -

. Additionally, the taxpayer must meet the strict

substantiation requirements of section 274(d).

      Petitioner testified that she had the right to reimbursement from her

employer for food and beverage expenses related to business. Therefore, she is

not entitled to deduct any given meal or grocery expenses. Further, even if her

employer had not had a reimbursement policy in place during the year in issue,

petitioner’s business receipts do not include any details on the purported business

purpose of each transaction and thus do not meet the strict substantiation

requirements of section 274(d). For these reasons, we conclude that petitioner was

not entitled to deduct any of the meal or grocery expenses for tax year 2015.

             4.    Clothing and Grooming Expenses

      The record includes receipts petitioner provided that total $1,088 for

clothing and $1,775 for grooming expenses in tax year 2015. The reported

expenses include amounts for shoes, work clothes, undergarments, dry cleaning,

hair and nail maintenance, cosmetics, and cosmetic treatments.

      Expenses for clothing are deductible if the clothing is of a type specifically

required as a condition of employment, is not adaptable to general use as ordinary

clothing, and is not worn as ordinary clothing. Yeomans v. Commissioner, 

, 767-769 (1958); Wasik v. Commissioner, T.C. Memo. 2007-148;
                                        - 20 -

Beckey v. Commissioner, T.C. Memo. 1994-514. The record confirms that

petitioner was required to dress in a professional manner as a condition of her

employment but that her employer did not reimburse employees for clothing

expenses. Petitioner testified that she would not have purchased her work clothes

for use in every day life. Nevertheless, a review of petitioner’s business records

reveals that all of the reported expenses are for clothing adaptable to general use

as ordinary clothing. Therefore, the amounts reported for clothing were expended

for personal purposes and as such are not deductible. See sec. 262(a).

      Grooming expenses (e.g., hair and nail maintenance) are inherently personal

expenses, and amounts expended for grooming are not deductible regardless of

whether an employer requires an employee to be well groomed. Hynes v.

Commissioner, 

, 1292 (1980). Accordingly, petitioner is not entitled

to a deduction for clothing or grooming expenses for tax year 2015.

             5.    Postage Expenses

      The record includes U.S. Postal Service receipts totaling $214 for postage

during tax year 2015. Petitioner testified that the charges were related to global

shipping orders for her clients at ARS. We are satisfied with petitioner’s

testimony on this matter. Nevertheless, in order to deduct employee business

expenses, a taxpayer must not have received reimbursement and must not have had
                                       - 21 -

the right to obtain reimbursement from her employer. See Orvis v. 

; Fountain v. Commissioner, 

. The record confirms

that petitioner had the right to request reimbursement for business-related

expenses from her employer up to 90 days from the date the expenses were

incurred. Petitioner testified that she did not attempt to request reimbursement for

her business expenses because they might not be accepted by her employer.

Because petitioner had the right to reimbursement but chose not to request it, she

is not entitled to deduct any of the reported postage expenses for tax year 2015.

III.   Conclusion

       In reaching our holdings herein, we have considered all arguments made by

the parties, and to the extent not mentioned above, we find them to be moot,

irrelevant, or without merit.

       To reflect the foregoing,


                                                Decision will be entered for

                                       respondent.