The opinion
T.C. Summary Opinion 2008-101
UNITED STATES TAX COURT
ALVIN FLOYD COTTRELL, SR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16067-06S. Filed August 12, 2008.
Alvin Floyd Cottrell, Sr., pro se.
Steven M. Friedberg, for respondent.
GOLDBERG, 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. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case. Unless otherwise indicated, subsequent
section references are to the Internal Revenue Code in effect for
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the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Respondent determined deficiencies of $1,085 and $2,728,
respectively, in petitioner’s 2003 and 2004 Federal income taxes.
After a concession,1 the issues for decision are: (1) Whether
petitioner is entitled to unreimbursed business expenses and
miscellaneous deductions for the taxable years 2003 and 2004 in
the amounts of $7,413 and $8,339, respectively, and; (2) whether
petitioner is entitled to itemized deductions for settlement
taxes, real estate taxes, and mortgage interest for the taxable
year 2004 in the amounts of $1,242, $1,608, and $6,318,
respectively.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioner resided in Maryland.
In 2003 and 2004 petitioner worked full time as an
automotive service supervisor for the State of Maryland (State)
1
In the notice of deficiency for 2004 respondent allowed
$8,574.64 for mortgage interest. At trial respondent conceded
that petitioner is entitled to an additional allowance of
$1,425.77 for mortgage interest paid in 2004 and that
petitioner’s total allowable mortgage interest deduction is
$10,000.41. Only the deductibility of points petitioner paid in
2004 and deducted as mortgage interest remains at issue with
respect to petitioner’s mortgage interest deduction.
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at a facility in Patapsco Valley State Park. Petitioner also
worked part time for United Parcel Service (UPS) as an aircraft
loader at Baltimore Washington International Airport (BWI).
Petitioner drove his personal vehicle from home to BWI when
working for UPS. After finishing his shift with UPS, petitioner
drove straight from BWI to his job site for the State. Between
both jobs, petitioner drove an average of 10 to 12 miles per day.
Petitioner estimated that the distance between BWI and his State
job site was 4 to 5 miles. In 2003 and 2004 petitioner generally
worked both jobs 5 days each week. Occasionally, petitioner
returned to his job with UPS after working with the State and
before driving home.
Petitioner was a member of the Maryland Classified Employees
Association, Inc., a State employees union. Petitioner was also
a member of another union in conjunction with his UPS job.
The State required petitioner to wear a uniform and provided
two types of uniforms, both including a shirt displaying the
State emblem, and to maintain certain grooming standards.
Petitioner had his uniforms professionally laundered. Petitioner
purchased rain gear, watertight boots, thermal underwear, and
other items to wear while loading aircraft for UPS. This
clothing was general purpose, and petitioner could wear these
items at other places. UPS did not reimburse petitioner for the
cost of his foul weather gear.
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Petitioner refinanced his personal residence in 2004. The
refinancing closed on or after November 30, 2004. At the closing
he paid $1,068.36 in advance to his lender for 6 months of county
real property taxes, $540 in State mortgage recordation taxes,
and $6,317.59 in points. The term of petitioner’s new loan was
360 months maturing on December 1, 2034.
Petitioner bought tools and supplies in 2003 and 2004 to
make improvements to his home. The items were purchased for
personal use and were not related to or required for either his
State job or his UPS job.
Petitioner used his personal cell phone on his State job
because radio reception was not as clear as the cellular
connection. Petitioner discussed projects and orders on his cell
phone and estimated that he used his phone for business purposes
at least 4 to 5 times a day. His claimed deductions represent
extra charges for excess minutes used to place calls related to
his State work. Petitioner deducted these expenses as “Supplies”
in 2003 and as “Cell Phone/Supplies” in 2004.
Petitioner engaged a tax return preparer to prepare his
income tax returns for 2003 and 2004. At the time of the
preparation of his returns petitioner gave his return preparer
bills and receipts to support his expenses and a mileage log for
the business use of his automobile. The preparer told petitioner
that he could deduct the expenses for: (1) Tools and supplies
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that he used to perform his own home improvements; (2) his mobile
phone, (3) work clothes purchased for his UPS job; (4) cleaning
of his uniforms; (5) automobile mileage; and (6) refinancing his
mortgage. Petitioner did not review his returns with the
preparer once the returns were completed.
On Schedule A, Itemized Deductions, for the taxable year
2003 petitioner deducted job-related expenses and other
miscellaneous deductions as follows:
Unreimbursed employee expenses:
Vehicle expense--10,034
miles at $.36 per mile $3,612
Union and professional dues 490
Uniform and protective clothing 1,450
Equipment 1,215
Supplies 780
Total 7,547
Tax preparation fees 100
Total 7,647
In the notice of deficiency for 2003 respondent allowed an
itemized deduction only for $234 for dues paid to the Maryland
Classified Employees Association, Inc., and disallowed the
remainder--$7,413.
On Schedule A for the taxable year 2004, petitioner deducted
the following:
Taxes:
State and local income taxes $3,431
Real estate taxes 2,300
Settlement taxes 1,608
Total taxes 7,339
Interest:
Home mortgage interest and points 16,318
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Job expenses and other
miscellaneous deductions:
Vehicle expense - 10,050
miles at $.375 per mile $3,769
Union and professional dues 490
Uniforms and protective clothing 1,560
Equipment/tools 1,370
Cell phone/supplies 800
Grooming 250
Total 8,239
Tax preparation fees 100
Total 8,339
In the notice of deficiency for 2004 respondent disallowed a
portion of the real estate taxes, all of the settlement taxes,
home mortgage interest and points, and all but $234 of job
expenses and other miscellaneous deductions.
Discussion
In general, the Commissioner’s determination set forth in a
notice of deficiency is presumed correct, and the taxpayer bears
the burden of showing that the determination is in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions
are a matter of legislative grace, and the taxpayer bears the
burden of proving entitlement to any deduction claimed on a
return. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992);
Wilson v. Commissioner, T.C. Memo. 2001-139.
Pursuant to section 7491(a), the burden of proof as to
factual matters shifts to the Commissioner under certain
circumstances. Petitioner has neither alleged that section
7491(a) applies nor established his compliance with the
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requirements of section 7491(a)(2)(A) and (B) to substantiate
items, maintain records, and cooperate fully with respondent’s
reasonable requests. Petitioner therefore bears the burden of
proof.
A. Job Expenses and Miscellaneous Itemized Deductions
Section 162(a) allows a deduction for all ordinary and
necessary expenses incurred during the taxable year in carrying
on a trade or business. Generally, the performance of services
as an employee constitutes a trade or business. Primuth v.
Commissioner, 54 T.C. 374, 377 (1970). A taxpayer must maintain
records sufficient to substantiate the amounts of the deductions
claimed. Sec. 1.6001-1(a), Income Tax Regs. For such expenses
to be deductible, the taxpayer must not have the right to obtain
reimbursement from his employer. See Orvis v. Commissioner, 788
F.2d 1406, 1408 (9th Cir. 1986), affg. T.C. Memo. 1984-533.
Petitioner claimed deductions for employee and other
miscellaneous expenses of $7,647 and $8,339 for 2003 and 2004,
respectively. Petitioner contends he is entitled to deductions
for the following expenses: (1) Business use of his automobile;
(2) union dues; (3) cleaning his State uniform and purchasing
clothing to wear when working for UPS; (4) tools, equipment, and
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supplies used to improve his personal residence; (5) mobile
telephone usage; (6) haircuts;2 and (7) tax return preparation.
With the exception of allowing $234 per year for union dues
which petitioner substantiated with a letter from his State
employees union, respondent disallowed the claimed job expense
and miscellaneous deductions in full because petitioner did not
establish that the expenses were ordinary, necessary, and paid
during tax years 2003 and 2004.
1. Vehicle Expenses
Petitioner claimed deductions for the business use of his
automobile. Petitioner deducted his expenses for driving to and
between his two jobs. Expenses relating to the use of an
automobile while commuting between the taxpayer’s residence and
the taxpayer’s place of business or employment are not deductible
because such expenses are personal and not business expenses.
Secs. 162, 262; Fausner v. Commissioner, 413 U.S. 838 (1973);
Commissioner v. Flowers, 326 U.S. 465 (1946); secs. 1.162-2(e),
1.262-1(b)(5), Income Tax Regs. Thus, any expenses petitioner
incurred in commuting between his residence and either job are
nondeductible personal expenses.
Transportation expenses incurred on trips between places of
business, however, may be deductible. Steinhort v. Commissioner,
2
Petitioner did not claim a separate deduction for haircuts
in 2003. In 2004 petitioner claimed $250 as a deduction for
“grooming”.
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335 F.2d 496, 503-504 (5th Cir. 1964), affg. and remanding T.C.
Memo. 1962-233. Nevertheless, section 274(d) requires a taxpayer
to substantiate: (A) The amount of the vehicle expense; (B) the
time and place of the expense; (C) the business purpose of the
expense; and (D) the business relationship of the expense to the
taxpayer. Even though petitioner testified that he worked two
jobs 5 days each week, he did not provide any evidence to support
the expenses he incurred driving between those jobs.
The distance between petitioner’s two job sites was 4 to 5
miles. The product of 5 miles per day, 5 days per week, and 50
weeks per year is 1,250 miles per year. Petitioner claimed
10,034 miles for 2003 and 10,050 miles for 2004 and asserted on
Forms 2106-EZ, Unreimbursed Employee Business Expenses, that he
had written evidence to support his mileage deductions.
Petitioner testified that he provided logs to his return
preparer, but he did not introduce any logs or other records at
trial to support these deductions. He also did not provide any
explanation for what appear to be inflated claims of business
mileage on his 2003 and 2004 returns. He testified that he
occasionally returned to work for UPS after his State job, but he
did not provide any details about how often this occurred. While
we accept that petitioner drove between his two jobs, we may not
use the Cohan doctrine to estimate expenses covered by section
274(d). See Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir.
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1930); see also Sanford v. Commissioner, 50 T.C. 823, 827 (1968),
affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Accordingly, petitioner is entitled to no deduction for the
business use of his vehicle. Respondent’s determination is
sustained because petitioner failed to meet the strict
substantiation requirements of section 274(d).
2. Union Dues
Petitioner claimed a deduction for $490 of union dues paid
to two labor unions in 2003 and 2004. Respondent allowed $234 of
State union dues petitioner paid in each year and disallowed the
remaining $256 for lack of substantiation. At trial petitioner
testified that he contributed approximately $37.50 per month in
union dues while employed at UPS. We are satisfied that he paid
dues to the two unions. However, petitioner introduced no
evidence to augment his testimony as to the amount he paid in
union dues while employed by UPS. When a taxpayer adequately
establishes that he paid or incurred a deductible expense but
does not establish the precise amount, the Court may in some
circumstances estimate the allowable deduction. Cohan v.
Commissioner, supra. We are instructed to approximate a
taxpayer’s expense, bearing heavily upon “the taxpayer whose
inexactitude is of his own making.” Id. at 544. We allow
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petitioner a deduction for UPS union dues in the amount of the
remaining $256 disallowed by respondent for 2003 and 2004.
3. Uniform Cleaning and UPS Clothing
Petitioner claimed business expense deductions for the costs
of cleaning his State uniforms and purchasing clothing to keep
him warm and dry when working for UPS. The costs to purchase and
maintain work clothing may be deductible under section 162 if the
taxpayer establishes that: (1) The clothing is required or
essential in the taxpayer’s employment; (2) the clothing is not
suitable for general or personal wear; and (3) the clothing is
not so worn. Yeomans v. Commissioner, 30 T.C. 757, 767-769
(1958); Kozera v. Commissioner, T.C. Memo. 1986-604.
With respect to the uniform cleaning, respondent does not
dispute that petitioner has satisfied the legal requirements for
deductibility. However, respondent disallowed the deductions for
lack of substantiation. The Court accepts petitioner’s testimony
that he paid to have his State uniforms cleaned. Therefore,
petitioner is entitled to deductions for these expenses.
Petitioner did not provide any information as to the frequency or
cost of his uniform cleaning. Estimating his expenses, see Cohan
v. Commissioner, supra at 544, we allow $10 per week, or $500 for
uniform cleaning for 2003 and 2004.
UPS required petitioner to wear clothing appropriate to the
weather conditions at BWI. Petitioner purchased rain gear, long
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underwear, and watertight boots to wear when loading freight for
UPS. Petitioner testified that the clothing and other items he
purchased were suitable for general wear. No deduction is
allowed for personal, living, or family expenses. Sec. 262(a).
Since general-purpose clothing is considered a personal expense,
petitioner is not entitled to any deduction for his costs to
purchase or maintain clothes worn when working for UPS. See
Hynes v. Commissioner, 74 T.C. 1266, 1291 (1980).
4. Tools, Equipment, and Supplies for Home Improvement
Petitioner claimed itemized deductions for tools and
supplies which he used for home improvements, in the amounts of
$1,215 and $1,370 for tax years 2003 and 2004, respectively.
As mentioned above, a taxpayer may not deduct personal,
family, or living expenses. Sec. 262(a). Furthermore, under
section 263, no deduction is allowed for capital expenditures.
Capital expenditures include any amount paid for permanent
improvements or betterments made to increase the value of
property. Sec. 263(a)(1). Petitioner made improvements to his
personal residence in order to enhance his enjoyment and to
increase the value of his home. Therefore, he is not entitled to
a deduction for home improvements for tax years 2003 and 2004.
Respondent’s determination that petitioner may not deduct his
“Equipment” and “Equipment/Tools” expenses is sustained.
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5. Mobile Telephone Expenses
Petitioner used his personal mobile telephone to communicate
business matters related to his State employment. Petitioner
deducted $780 for 2003 and $800 for 2004 for work-related mobile
phone expenses. As stated previously, section 274(d) disallows
deductions for traveling expenses, gifts, and meals and
entertainment, as well as for listed property. The term “listed
property” is defined in section 280F(d)(4) and includes mobile
phones. See sec. 280F(d)(4)(v). Petitioner did not provide any
evidence to substantiate his work-related mobile phone expenses.
Therefore, petitioner is not entitled to any deduction for the
business use of his mobile phone. Respondent’s determination is
sustained.
6. Haircuts
Petitioner claimed a deduction in 2004 for the cost of
maintaining a haircut for his State job. Grooming remains an
inherently personal expense and is not deductible, regardless of
whether an employer requires a particularly neat appearance.
Hynes v. Commissioner, supra at 1291-1292. Petitioner may not
deduct the cost of his haircuts. Respondent’s determination is
sustained.
7. Tax Preparation Fees
Petitioner’s 2003 and 2004 returns were professionally
prepared, and both report a $100 tax return preparation fee.
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Although petitioner introduced no specific evidence proving that
he paid these fees, we find it unlikely that a paid preparer
would list as a deduction an apparently reasonable fee for tax
return preparation on a client’s tax return and not collect that
fee. Petitioner is entitled to a $100 deduction for tax
preparation for each year at issue.
B. Real Estate and “Settlement” Taxes
Petitioner claimed deductions on his 2004 Schedule A for
$2,300 of real estate taxes paid and $1,608 of “Settlement
taxes”. Respondent allowed a $1,058 deduction for real estate
taxes and disallowed all of the claimed “Settlement” taxes.
Section 164(a) allows a deduction for certain, specified
taxes, including State and local real property taxes, which are
paid or accrued during the taxable year. Sec. 164(a)(1).
However, petitioner failed to produce any evidence to show that
he paid real estate taxes in 2004 greater than the amount
respondent allowed. Therefore respondent’s determination as to
the disallowed real estate taxes is sustained.
Petitioner’s deduction of $1,608 for “Settlement taxes”
includes: $1,068 for county property taxes paid into escrow at
closing and $540 for State recordation taxes paid in 2004. Form
HUD-1, Settlement Statement, for the closing at his refinancing
was received into evidence. This document shows that petitioner
paid $1,068.36, representing 6 months of county property taxes,
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in advance (placed in escrow), to his lender at the closing on or
after November 30, 2004. However, petitioner’s documentation
showing real property taxes actually paid to the county taxing
authority in 2004 reflects only the $1,058 respondent allowed.
It does not support his deduction of the $1,068, representing 6
months of real property taxes held in escrow by the lender.
Petitioner failed to demonstrate that the claimed $1,068 was
actually paid to the county taxing authority in 2004 (as opposed
to his paying funds in advance into his lender’s property tax
escrow account for the lender to pay later to the county on
petitioner’s behalf). Accordingly, we conclude that petitioner
may not deduct the $1,068 in 2004.
Petitioner also claimed $540 in State recordation taxes.
That amount is also reflected on the Form HUD-1. Section 164(a)
allows the taxpayer to deduct only certain delimited taxes, and
petitioner may deduct his recordation taxes only if section
164(a) permits. Only two of the five categories of deductible
taxes are even potentially relevant here: (1) State and local
real property taxes and (2) State and local personal property
taxes. See sec. 164(a)(1) and (2).
The recordation tax is a fee charged for the recording of
petitioner’s new mortgage. It is not a tax on a property
interest, real or personal. See Gibbons v. Commissioner, T.C.
Memo. 1976-125. Thus, petitioner is not entitled to deduct the
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$540 mortgage recordation tax. Respondent’s determinations as to
real estate taxes paid into an escrow account and the mortgage
recordation fee are sustained.
C. Home Mortgage Interest
Petitioner claimed an itemized deduction for a home mortgage
interest expense of $16,318 for the 2004 taxable year.
Respondent allowed a deduction of $8,574.64 in the notice of
deficiency. At trial respondent allowed an additional deduction
of $1,425.77 in home mortgage interest, leaving $6,317.59 in
dispute. This latter amount represents petitioner’s deduction of
the mortgage points paid when he refinanced the mortgage on his
residence.
Generally, interest paid on home indebtedness is deductible
by virtue of section 163(h)(2)(D), which provides that any
qualified residence interest does not constitute nondeductible
personal interest. Prepaid finance charges, to the extent such
charges represent deferred interest on a loan, are generally
deductible over the life of the loan. Sec. 461(g). The term
“points” refers to a fee equal to a percentage of the total loan,
generally paid to the lending institution to lower the interest
rate. Points are considered prepaid interest. Kelly v.
Commissioner, T.C. Memo. 1991-605.
Section 461(g) requires a cash method taxpayer to amortize
prepaid interest over the life of his loan, just as if he were on
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the accrual method of accounting. Kelly v. Commissioner, supra.
However, section 461(g) provides an exception which allows a
taxpayer to deduct his payment of certain points if they were
paid “in connection with the purchase or improvement of, and
secured by, the principal residence of the taxpayer”. Sec.
461(g)(2). Points paid when the taxpayer refinances a personal
residence to obtain a lower interest rate, however, are not
“incurred in connection with the purchase or improvement” of the
taxpayer’s residence; such points are not immediately deductible
and must be amortized. Kelly v. Commissioner, supra; Fox v.
Commissioner, T.C. Memo. 1989-232, affd. without published
opinion 943 F.2d 55 (9th Cir. 1991).
Petitioner did not introduce any evidence to demonstrate,
and the record does not indicate, that his refinancing was in
connection with his purchasing or improving his home.3 See
Huntsman v. Commissioner, 905 F.2d 1182 (8th Cir. 1990), revg. 91
T.C. 917 (1988). Respondent is correct in determining that
petitioner may not deduct the points entirely in 2004.
Because petitioner is a cash basis taxpayer, he may amortize
prepaid interest over the life of the loan. See sec. 461(g).
Amortizing the $6,317.59 in points over the 30-year term of the
loan produces a $210.58 annual deduction. Although the record
3
The Form HUD-1, Settlement Statement, which petitioner
introduced at trial indicates that petitioner used at least some
of the proceeds of the refinancing to pay off credit card debt.
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does not clearly reflect precisely when the refinancing occurred,
it is clear that the Form HUD-1 was printed November 30, 2004,
and that the maturity date of the 30-year loan is December 1,
2034. Therefore, we conclude that petitioner is entitled to
deduct $17.55 in 2004 for 1 month’s amortization of prepaid
interest.
To reflect the foregoing,
Decision will be entered
under Rule 155.