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Parker v. Commissioner (T.C. Memo. 2021-111)

On September 23, 2021, the Tax Court issued a Memorandum Opinion in the case of Parker v. Commissioner (T.C. Memo. 2021-111). The primary issues presented in Parker were (1) whether petitioners can deduct, on Schedule C (Profit or Loss From Business), car and truck expenses in excess of the amount the IRS allowed; (2) whether petitioners can deduct retirement contributions in excess of the amount the IRS allowed; (3) whether petitioners can deduct expenses on Schedule A (Itemized Deductions), in excess of the amount the IRS allowed; and (4) whether petitioners can deduct the cost of demolishing a structure and their basis in that structure.

Background to Parker v. Commissioner

In 2015, Mrs. Parker was a personal trainer enrolled in a Ph.D. program at Georgia State. As part of this program she conducted research by traveling in the Atlanta metro area to collect data and meet with study participants.

Camaro BerryPetitioners owned a custom-built 1969 Camaro, their only car. Ms. Parker used the Camaro for commuting to personal training appointments and for travel in connection with her research. The car broke down frequently, and the parts required to repair it were difficult to obtain. While the Camaro was being repaired, Ms. Parker used ride-sharing services or public transportation.

Mr. Parker worked in IT as a network engineer.  He was a “teleworker,” and he was paid a fixed hourly rate by CTS, was eligible for medical and retirement benefits, was required to submit weekly timecards, and was terminable by CTS at will.  His employment agreement classified him as an employee.  He switched jobs in August 2015, and both jobs reported the wages they paid Mr. Parker during 2015 on Forms W-2 (Wage and Tax Statement), and he reported this income as wages on petitioners’ 2015 return.

Petitioners’ Tax Reporting and IRS Examination

Petitioners jointly and timely filed Form 1040, U.S. Individual Income Tax Return, for 2015. The IRS selected that return for examination and issued them a timely notice of deficiency making numerous adjustments. They timely petitioned this Court, and we tried the case remotely via Zoomgov in September 2020.

Car and Truck Expenses

Petitioners attached to their 2015 return a Schedule C listing Mrs. Parker as the sole proprietor of a personal training business. On that Schedule C they claimed a deduction of $25,870 for car and truck expenses. They calculated $32,313 of expenses for operating the Camaro in 2015 and multiplied that sum by a “business use” percentage of 80.06% (assuming 10,662 business-use miles and 2,656 miles devoted to commuting or personal use). They also claimed a deduction of $4,083 for depreciation on the 1969 Camaro.

However, the petitioners did not keep a contemporaneous mileage log in 2015 and did not have access to reliable odometer readings from that period. During the IRS examination they tried to estimate Mrs. Parker’s business mileage using her calendar, her driving habits, and distances drawn from Google Maps. Ultimately, the revenue agent (RA) determined that petitioners had substantiated neither the full amount of their reported expenses nor their business use percentage.

Retirement Contributions

In January 2015 petitioners created a “Solo 401(k)” plan for Mrs. Parker’s personal training business, intending it as a vehicle for consolidating their existing retirement accounts. On April 14, 2016, they deposited $140,000 into this account, intending that the deposit be attributed to the 2015 tax year.

Unreimbursed Employee Business Expenses

Parker v. CommissionerOn their return petitioners claimed Schedule A deductions totaling $15,129 for transportation, overnight travel expenses, meals and entertainment, and other business expenses allegedly associated with Mr. Parker’s IT work. The RA disallowed these deductions in their entirety but concluded that Mr. Parker had incurred $730 of home office expenses, calculated as an allocable percentage of petitioners’ utilities expense for the first eight months of 2015 (the period in which Mr. Parker was employed by CTS). Because $730 was less than 2% of petitioners’ adjusted gross income (AGI), no deduction was ultimately allowed. See IRC § 67(a); IRC § 162(a); Jones v. Commissioner, 146 T.C. 39, 44 (2016).

Demolition Expenses

In September 2008 Mr. Parker bought a house, sight unseen, on English Avenue in Atlanta. He originally thought he might live in the house but decided against it after his first on-site visit. His initial efforts to rent the house were unsuccessful, and he never derived any income from it. In early 2010 Mr. Parker canceled the insurance policy on the house. In January 2014 vandals broke into the building and set a fire that destroyed it. In 2015 petitioners paid $10,000 to have the burned-out structure demolished and $175 for a related permit. On Schedule E (Supplemental Income and Loss), petitioners claimed a deduction of $10,000, denominated a “repairs” expense, for the cost incurred to have the structure demolished.

Deductions in General

Parker GraceDeductions are a matter of legislative grace, and taxpayers bear the burden of proving their entitlement to any deduction claimed. Tax Court Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). A taxpayer must show that he or she has met all requirements for each deduction and keep books or records that substantiate the expenses underlying it. IRC § 6001; Roberts v. Commissioner, 62 T.C. 834, 836 (1974). Failure to keep and present such records counts heavily against a taxpayer’s attempted proof. Rogers v. Commissioner, T.C. Memo. 2014-141.

Under Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), if a taxpayer claims a deduction but cannot fully substantiate the underlying expense, the Court in certain circumstances may approximate the allowable amount, “bearing heavily if it [so] chooses upon the taxpayer whose inexactitude is of his own making.” The Court must have some factual basis for its estimate, however, else the allowance would amount to “unguided largesse.” Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).

Returning to Car and Truck Expenses

IRC § 162(a) permits a taxpayer to deduct all ordinary and necessary expenses paid or incurred during the taxable year in carrying on the taxpayer’s trade or business. When deducting vehicle expenses, a taxpayer may choose between the standard “mileage allowance” and a deduction based on actual expenses, including depreciation. See Mears v. Commissioner, T.C. Memo. 2013-52; see also Rev. Proc. 2010-51.

A taxpayer using the actual expense method may deduct only that percentage of her costs that corresponds to her “business use” of the vehicle. See Larson v. Commissioner, T.C. Memo. 2008-187; Treas. Reg. § 1.274-5T(d)(2).

Blossom ProofIRC § 274(d)(4) sets forth heightened substantiation requirements (and overrides the Cohan Rule) with respect to “listed property.” As in effect during 2015, “listed property” included “any passenger automobile.” IRC § 280F(d)(4)(A)(i); Treas. Reg. § 1.280F-6(b)(1)(i). No deduction is allowed for vehicle expenses unless the taxpayer substantiates, by adequate records or sufficient evidence corroborating her own statements, the amount, time and place, and business purpose for each expenditure. See Treas. Reg. § 1.274-5T(c).

Substantiation by “adequate records” generally requires the taxpayer to “maintain an account book, diary, log, statement of expense, trip sheets, or similar record” prepared contemporaneously with the use of the vehicle, as well as evidence documenting the expenditures. Treas. Reg. § 1.274-5T(c)(2). An actual contemporaneous log is not strictly required, but records made at or near the time of the expenditure have greater probative value than records made later. Treas. Reg. § 1.274-5T(c)(1).

Needless to say, the petitioners had no contemporaneous log, or any records really.  Because the Cohan rule did not apply to car and truck expenses, the Tax Court upheld the IRS’ adjustments in the notice of deficiency.

Retirement Contributions

The Code allows taxpayers to deduct certain qualified contributions to retirement plans. IRC § 62(a)(6)-(7); IRC §219(a), IRC § 404(a). As with other deductions, the burden of showing the amount and deductibility of contributions to an eligible plan is on the taxpayers. See Barie v. Commissioner, T.C. Memo. 2016-160. “Rollovers”—that is, transfers from one retirement account to another—are, however, not deductible. See Treas. Reg. § 1.219-1(b)(2)(iii).  Viewing the evidence as a whole, the Tax Court found that petitioners failed to carry their burden of proving that any portion of the $60,444 contribution consisted of new cash rather than nondeductible rollover.

Unreimbursed Employee Business Expenses

Mr. Parker was a wage-earning employee throughout 2015, first for CTS and then for the Bank. Although he contends that he served CTS as an independent contractor, the Tax Court found no evidence to support that argument. The Tax Court applies a familiar seven-factor test to decide whether a worker is an employee or an independent contractor, and all the facts and circumstances of each case are considered. See Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 269-270 (2001); Jones v. Commissioner, T.C. Memo. 2014-125.  Applying this test, the Tax Court found the following facts most significant:

  1. Parker Office Space Looks Like Im WorkingParker’s contract with CTS categorized him as an “employee” or “contract employee” and stated that he was to “maintain an employment relationship with CTS at all times.”
  2. He was paid a fixed hourly rate by CTS, was eligible for medical and retirement benefits, and had no opportunity for profit or loss other than normal wages, which were reported on a Form W-2.
  3. He reported that income as wages and did not file a Schedule C. CTS required Mr. Parker to submit weekly timecards, and he was allowed to work remotely only if the Bank viewed his performance as satisfactory.
  4. He was furnished with a laptop computer, two external monitors, and any other “basic and necessary office supplies.”
  5. He was warned that “[a]ny changes in personal equipment must be approved by your manager in advance and in writing.”

Taken together, these facts demonstrate that Mr. Parker was an “employee” of CTS rather than an independent contractor.

Education expenses are deductible (inter alia) if the education “[m]aintains or improves skills” required by the taxpayer in his employment. See Treas. Reg. § 1.162-5(a)(1). The job training programs on the website Mr. Parker subscribed to were directly related to Mr. Parker’s job as a network engineer, and he credibly testified that this expense was not eligible for reimbursement by either of his employers. See Lucas v. Commissioner, 79 T.C. 1, 7 (1982).

A Note about Teleworking and Home Offices

Finally, the Tax Court found that petitioners have failed to prove entitlement to a home office deduction larger than the RA allowed. IRC § 280A generally disallows deductions related to a dwelling used by the taxpayer as a residence. However, there is an exception for a dwelling (or portion thereof) that is “exclusively used on a regular basis” as the principal place of business for an employee, but only if it is “for the convenience of his employer.” IRC § 280A(c)(1).

Parker Convenient
Convenient? Yes. Tax issues? Oh yeah.

Petitioners failed to demonstrate that Mr. Parker’s home office was for the convenience of CTS or the Bank. He made no showing that his home office was essential to the proper functioning of either employer’s business or necessary to enable him to perform his duties properly. See Frankel v. Commissioner, 82 T.C. 318, 325-326 (1984). A home office is not for the employer’s convenience if it is maintained for the employee’s personal convenience, comfort, or economic benefit. See Hamacher v. Commissioner, 94 T.C. 348, 358 (1990).

The evidence established that Mr. Parker elected to work from home in Atlanta because he did not wish to move to any of the three cities where the Bank had its offices. Neither CTS nor the Bank required Mr. Parker to work from home. To the contrary, the Telework Agreement stated: “You acknowledge that you have requested to telework and that you are voluntarily entering into this agreement.” Mr. Parker maintained a home office, not for his employer’s convenience, but for his own convenience and that of his spouse.

Demolition Expenses

Parker ImplosionIRC § 280B, captioned “Demolition of Structures,” provides that, “[i]n the case of the demolition of any structure,” no deduction otherwise allowable shall be allowed to the owner for “any amount expended for such demolition” or “any loss sustained on account of such demolition.” IRC § 280B(1). Rather, these amounts “shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located.” IRC § 280B(2).

In support of a contrary conclusion petitioners cite Treas. Reg. § 1.165-3. Such regulation, captioned “Demolition of Buildings,” has no effect for demolitions carried out after IRC § 280B’s effective date. See Tonawanda Coke Corp. v. Commissioner, 95 T.C. 124, 128 & n.2 (1990) (applying the regulation to a demolition expense deduction claimed for 1978 but noting that section 280B applies to all demolitions after July 18, 1984).

In sum, petitioners are not entitled to deduct for 2015 any amounts related to the demolition of the structure at the English Avenue property. Any costs associated with the demolition must be capitalized into the basis of the land and will be recovered if and when the land is sold. To the extent petitioners are seeking to deduct a casualty loss attributable to the fire itself, that loss deduction cannot be claimed on their 2015 return.

(T.C. Memo. 2021-111) Parker v. Commissioner

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