Velez v. Comm’r, T.C. Memo. 2018-46 (2018)
In this case, the IRS denied a tax attorney’s deduction for vehicle expenses because the expenses were inadequately substantiated. The attorney maintained multiple offices and traveled between them regularly by car or truck. He did not maintain a contemporaneous written record of his travel, but on his tax return he claimed a business expense deduction of nearly $30,000, which he calculated using the applicable standard mileage rates. The IRS denied the deductions and assessed an accuracy-related penalty, and the attorney petitioned the Tax Court for review.
The court explained that while some business expenses can be estimated, automobile expenses are subject to rigorous substantiation requirements under Code § 274(d). To meet those requirements, taxpayers generally must maintain an account book, diary, log, or similar record, plus documentary evidence such as receipts or bills to establish each element of the expense. In the absence of adequate records, however, an element may be established by the taxpayer’s own statement and by other corroborative evidence. Although the attorney presented the court with reconstructed mileage logs based on entries in his electronic calendar and credit card statements, the court upheld the IRS’s determination, concluding that the logs were not “adequate” because they were created years later and “long after he had full present knowledge of…each expenditure or use.” And the credit card statements and other evidence offered—which notably did not include the electronic calendar—were insufficient to corroborate the purpose and location of the expenditures. Regarding the penalty, the court explained that the reasonableness of a taxpayer’s effort depends on the facts and circumstances, including the taxpayer’s knowledge, education, experience, and reliance on professional advice. In this case, the attorney offered no evidence of reasonable cause for the failure to maintain satisfactory mileage logs, so the court also sustained the IRS’s penalty assessment.
EBIA Comment: Tax mistakes by tax attorneys present irresistible opportunities for schadenfreude, but this case also offers a valuable lesson about substantiation. Even though the regulations under Code § 274(d) allow vehicle expense deductions to be established by testimony and “other corroborative evidence,” that form of substantiation will often be found inadequate. This also affects employers that provide company cars, or reimburse employees for business use of employees’ personal vehicles, because the income exclusions for those fringe benefits rely on either the working condition fringe rules or the accountable plan rules, both of which incorporate the strict substantiation requirements of Code § 274(d) when applied to vehicle expenses. Thus, for employees’ income to be excluded, and for employers to properly report and withhold income, employees must provide adequate substantiation. This case reminds us that adequate substantiation is reliably obtained only through contemporaneous, written documentation of each element of the business deduction. For more information, see EBIA’s Fringe Benefits manual at Sections IV.D (“Substantiating the Working Condition Fringe Exclusion”) and IV.F (“Employer Reimbursements for Business Use of an Employee’s Car”).
Contributing Editors: EBIA Staff.