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A tax court has considered the IRS's denial of a taxpayer's claimed business deductions, including claimed deductions for cellular phone service and home office expenses.
Ajuba Gaylord ("Taxpayer") worked as an administrative assistant for Columbia University. She also had a second job as a "field trainer" for a telecommunications company. She received a percentage of each customer's bill that she successfully solicited for the telecommunications company.
The Taxpayer filed tax returns for 1999 and 2000 which contained itemized deductions that the Internal Revenue Service ("IRS") disallowed. The Taxpayer's deductions were based on business expenses she incurred while attempting to obtain customers for the telecommunications company. The basis for the IRS denials were that the claimed deductions were not "ordinary or necessary", lacked sufficient substantiation, or were personal. The Taxpayer challenged the IRS's denials of her claimed business deductions.
The United States Tax Court mostly affirmed the IRS's denials of the Taxpayer's claimed deductions. The court first stated that it was the Taxpayer who had the burden of demonstrating to the court that the IRS had improperly denied her deductions. While the federal Tax Code in section 162 allows a deduction for "ordinary and necessary" business expenses, the requirements for claiming a business deduction under section 274(d) for traveling expenses, gifts, meals, entertainment, and "listed property" are more stringent than for ordinary business expense deductions and require the following showing by the taxpayer: the amount of the expenses; the time and place of the expenses; the business purpose of the expenses; and the business relationship of the expenses to the taxpayer. Cellular phones are considered "listed property" under section 274(d).
The court examined the Taxpayer's claimed deductions. The Taxpayer claimed a $3,545 deduction for office expenses, with expenses including such things as music cds, videos, a laptop computer, office supplies, cleaning products, and postage. To support her claimed deductions, the Taxpayer offered receipts and bank statements. Some of the receipts merely indicated the amount spent by the Taxpayer and were not itemized to show what was purchased, and so the court rejected those receipts as insufficient support for her claimed deductions. The court did find that $44 of office supplies was properly documented, and so allowed her a deduction for that amount. Her $421 postage deductions was again not itemized, but the court recognized that at least a portion of that amount was business related and so allowed her a $75 deduction. The court rejected the remainder of the claimed office expense deductions, finding that the Taxpayer had failed to show that these expenses were business-related and not personal.
Next, the court examined $752 in disallowed expenses for business meetings. In support of these deductions, the Taxpayer had submitted receipts containing handwritten notations such as "training". The Taxpayer failed to identify the business purpose of the expense, the payee, or the nature of the expense. Thus, the court affirmed the IRS's denial of these deductions.
The court then looked at the disallowed gift, meal, and entertainment expenses totaling $1,848. The only support the Taxpayer offered for these deductions were receipts with her own notations, such as "gifts for client" or "meeting with ----". The court ruled that the Taxpayer had failed to meet the substantiation requirements of section 274(d), and so the court affirmed the IRS's disallowance of these deductions.
The court considered the cellular phone deductions the IRS had disallowed. In support of the claimed deductions, the Taxpayer offered checks indicating payment of her cellular phone bills. The court affirmed the disallowance of these deductions as well, finding that the Taxpayer had failed to substantiate that the cellular phone service was used for a business purpose.
Finally, the court examined the IRS's disallowance of utility expenses for her home. The Taxpayer claimed that she used 50 percent of her home for business purposes. Section 280A(c)(1) of the Tax Code does not allow for deductions based on the use of a taxpayer's residence except when the taxpayer can establish that a portion of the home was used exclusively as the taxpayer's principal place of business or place of business used by clients or customers in the normal course of business dealing with the taxpayer. The court found that the Taxpayer had offered no evidence in support of her claimed deductions. Evidence which could have supported her deduction would have been a diagram of her house showing the areas for which she sought a deduction. Thus, the court affirmed this deduction disallowance by the IRS as well.
Gaylord v. Comm'r, T.C.M. 2003-273 (2003).
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