United States Tax Court

United States Tax Court

T.C. Memo. 2022-42

TRACY RENEE VALENTINE,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 6724-19.

Filed April 28, 2022.

—————

In 2016 P worked as a sales associate for a multilevel marketing company and received commissions on her

sales. P also received disability payments from the

Department of Veterans Affairs (“VA”) and retirement

distributions from the Department of Defense.

P filed late her income tax return for the year 2016.

On that return P claimed significant business expense

deductions on Schedule C, “Profit or Loss From Business”,

for travel and miscellaneous expenses. P excluded a large

portion of her retirement distributions from gross income

on the premise that a disability determination from the VA

entitled her to exclude both her disability payments and a

portion of her retirement distributions.

By a statutory notice of deficiency issued in 2019, R

determined that P improperly excluded the retirement

distributions from gross income and that her claimed

business expense deductions should be disallowed. R also

determined that P is liable, pursuant to I.R.C. § 6651(a)(1)

and (a)(2), for additions to tax for failure to file a return

and failure to pay tax shown on a return.

Held: P’s retirement distributions do not qualify for

exclusion under I.R.C. § 104(a)(4) and therefore are

properly includible in gross income under I.R.C. § 61(a).

Served 04/28/22

2

[*2]

Held, further, with few exceptions, P failed to

substantiate her entitlement to her claimed deductions for

business expenses.

Held, further, P is liable for additions to tax under

I.R.C. § 6651(a)(1) and (a)(2).

—————

Tracy Renee Valentine, pro se.

Bartholomew Cirenza and Stephen C. Welker, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GUSTAFSON, Judge: The Internal Revenue Service (“IRS”)

issued to petitioner, Tracy Renee Valentine, a statutory notice of

deficiency (“SNOD”) pursuant to section 6212 1 on February 19, 2019,

determining for the year 2016 a deficiency in her federal income tax in

the amount of $11,034 (and additions to tax).

Ms. Valentine filed with this Court a timely petition under section

6213(a) for redetermination of the deficiency and additions to tax. We

must decide the following issues: (1) whether Ms. Valentine may exclude

a portion of her retirement distributions in the year 2016 from gross

income; (2) whether she is entitled to certain business expense

deductions she claimed for the year 2016; (3) and whether she is liable

for the section 6651(a)(1) and (a)(2) additions to tax determined by the

IRS. We will uphold the IRS’s determinations in large part, and we will

uphold the additions to tax under section 6651(a)(1) and (a)(2).

On the evidence before us, and employing the burden-of-proof

principles set out below, we find the following facts.

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code (“the Code”, Title 26 of the United States Code) as in effect at the relevant times;

references to regulations are to Title 26 of the Code of Federal Regulations (“Treas.

Reg.”) as in effect at the relevant times; and references to Rules are to the Tax Court

Rules of Practice and Procedure. Dollar amounts are rounded.

3

[*3]

FINDINGS OF FACT

At the time she filed her petition, Ms. Valentine resided in the

State of Maryland.

Disability payments

For 22 years Ms. Valentine served her country in the U.S. Army.

She was honorably discharged in 2002, and thereafter she received

monthly disability payments from the Veterans’ Administration (since

1989 the Department of Veterans Affairs, with both entities referred to

as the “VA”), for “service-connected disabilities”. The amount of each

monthly disability payment correlated with a service-connected

disability determination (stated as a percentage of total disability)

issued by the VA to Ms. Valentine. In 2014 her combined “serviceconnected” disability rating was 60%; and in 2016 she received,

pursuant to the VA’s determination, payments of approximately $1,100

per month in January, February, March, and April. Effective May 1,

2016 (and reported to her by letter of May 27, 2016), the VA increased

her combined “service-connected” disability rating to 90%, and

thereafter she received payments of approximately $1,700 per month for

the remainder of 2016, for a total of $18,000 for the year.

The parties agree that these disability payments are not taxable.

The VA’s determinations made no reference to Ms. Valentine’s disability

being “combat-related”.

Retirement distributions

In addition to her disability payments, Ms. Valentine received

retirement distributions from her Army-based retirement plan in 2016

totaling $23,801. (It is unclear whether her retirement distributions

were calculated on the basis of years of service or otherwise.) She

received from the U.S. Department of Defense Accounting and Finance

Services (“DOD”) a Form 1099–R, “Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc.”, reporting the entire amount of the retirement

distributions as “taxable”.

The taxability of these retirement distributions is in dispute.

4

[*4] Air Force employment in 2016

In 2016 Ms. Valentine worked as a civilian Equal Opportunity

Employment Specialist for the U.S. Air Force. In this capacity she

worked primarily at Andrews Air Force Base in Maryland, a short

distance from her home. She also traveled to Maxwell Air Force Base in

Montgomery, Alabama, for Air Force training. The Air Force paid for

Ms. Valentine’s travel expenses to Maxwell Air Force Base (including

airfare) and provided her a per diem payment for meal and incidental

expenses incurred during travel.

LegalShield self-employment in 2016

In 2016 Ms. Valentine also worked (as she had since 2000) as an

independent sales associate for Pre-Paid Legal Services, Inc., d.b.a.

LegalShield. LegalShield is a multi-level marketing corporation that

sells legal insurance. Ms. Valentine marketed its products to smallbusiness owners and similar target markets.

She received

approximately $2,500 in commissions in 2016, which was consistent

with the amount of commissions she had received from LegalShield in

prior years. LegalShield reported Ms. Valentine’s commissions to the

IRS on Form 1099–MISC, “Miscellaneous Income”.

Ms. Valentine attended multiple in-state and out-of-state events

hosted by LegalShield in 2016. She attended “Sensational Sunday”

meetings and “Business Opportunity Meetings” (collectively, “BOMs”)

in Maryland and Delaware. These BOMs typically consisted of business

networking, sales associate recognition and training, and presentations

by LegalShield guest presenters. Ms. Valentine invited potential clients

to attend BOMs to expose them to LegalShield’s products and

membership opportunities. She also attended out-of-state leadership

summit conferences hosted by LegalShield in San Jose, California, and

New Orleans, Louisiana. As to another LegalShield destination—

Montgomery, Alabama—she also had business related to her

employment with the Air Force (i.e., the training mentioned above), and

in at least one instance the Air Force reimbursed her expenses.

Under the burden of proof and substantiation principles

discussed below in part I.A, we find that Ms. Valentine paid business

expenses related to LegalShield in amounts (set out below in part II.B.7)

that total $1,812.

5

[*5] Examination and SNOD

Ms. Valentine did not file a federal income tax return for 2016 by

the extended October 2017 due date. Neither did she pay any income

tax for 2016 beyond the amounts that had been withheld from her wages

and retirement distributions by payors, as reported on Form W–2,

“Wage and Tax Statement” (i.e., $4,730 from her Air Force wages), and

Form 1099–R (i.e., $1,553 from her retirement distributions).

The IRS prepared for Ms. Valentine a substitute for return

(“SFR”) pursuant to section 6020(b). The SFR was subscribed by an

officer of the IRS, contained Ms. Valentine’s contact and identification

information and a computation of her tax liability for 2016, and

purported to be a valid return. Using information provided by third

parties, the IRS included on that SFR the $23,801 of retirement

distributions reported by the DOD and $2,458 reported by LegalShield.

(The SFR did not reflect the $18,000 of disability payments not in

dispute.) On February 19, 2019, the IRS issued to Ms. Valentine an

SNOD determining a tax deficiency of $11,034 for 2016, as well as

additions to tax pursuant to section 6651(a)(1) and (a)(2).

Petitioner’s late 2016 federal income tax return

After she received the SNOD and before she filed her Tax Court

petition, Ms. Valentine hired an accountant to prepare her 2016 return

on Form 1040, “U.S. Individual Income Tax Return”. Her accountant

calculated the expense deductions and the taxable portion of her

retirement distributions that were reported on the return.

Ms. Valentine provided the disability letters from the VA to her

accountant, but the evidence does not show what information

Ms. Valentine provided to the accountant regarding her business

expense deductions or the per diem reimbursements she received from

the Air Force.

The return as prepared by Ms. Valentine’s accountant reported

as follows:

Ms. Valentine’s return reported as gross income only $3,158 of

her retirement distributions, and she excluded the remaining $20,643 of

the $23,801 she had received. The return did not include any

explanation for her exclusion of most of the retirement distributions, but

Ms. Valentine did attach the Form 1099-R she had received from the

DOD. She excluded (i.e., she did not report on her return) the entire

6

[*6] $18,000 of her disability payments, and the Commissioner does not

dispute this treatment.

On her return Ms. Valentine reported as gross income on

Schedule C, “Profit or Loss From Business”, her LegalShield

commissions of $2,458; and on that Schedule C she deducted business

expenses of $11,713 yielding a claimed business loss of $9,255, offsetting

that portion of gross income otherwise appearing on the return.

Ms. Valentine’s claimed business expense deductions consisted of

expenses for advertising, car and truck expenses (mileage), commissions

and fees, legal and professional services, office expenses, travel and

meals (including airfare for her out-of-state travel), and other

miscellaneous expenses (including website fees, postage, telephone

charges, convention fees, tolls, “Info tracks”, and incidentals). A small

portion of her reported travel and meal expenses correlate to her travel

to in-state and out-of-state LegalShield events. She claimed deductions

for travel and meal expenses (which the Air Force had reimbursed) for

her trip to Montgomery, Alabama, for Air Force training. She also

claimed business travel expense deductions for travel to locations in

which she had friends and family members, including Chesapeake,

Virginia, the State of Connecticut, New York City, New York, and

Greenville, South Carolina.

On March 25, 2019 (i.e., before she filed her Tax Court petition),

Ms. Valentine filed with the IRS her Form 1040 for 2016. She did not

submit a payment with the return, since it claimed a refund of $2,626.

On April 25, 2019, Ms. Valentine filed a timely petition in this

Court for redetermination of the deficiencies and additions to tax. Her

petition stated: “I filed my 2016 tax March 15, 2019 [later stipulated to

be March 25, 2019] and I am due a refund in the amount of $2,626.00.”

OPINION

I.

Applicable legal principles

A.

Burden of proof as to the deficiency

The IRS’s determination of a deficiency in the SNOD that it

issued to Ms. Valentine, which arises from the disallowance of

deductions that she claimed, is presumed correct; and Ms. Valentine has

the burden to prove that the adjustments are incorrect. See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). Taxpayers must satisfy

7

[*7] the specific requirements for any deduction claimed. INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

The IRS may rely on information returns (such as Forms 1099)

from third-party payors when determining a taxpayer’s taxable income.

See, e.g., Cabirac v. Commissioner, 120 T.C. 163, 165–67 (2003), aff’d per

curiam without published opinion, 95 A.F.T.R.2d (RIA) 2004-5490 (3d

Cir. 2004).

Ms. Valentine does not contend that the burden of proof should

shift to the Commissioner pursuant to section 7491(a), and there is no

support in the record for such a contention. It follows that in this case

Ms. Valentine has the burden to prove that the Commissioner’s

determination of a deficiency for 2016 is incorrect.

B.

Exclusions of military retirement pay from gross income

Section 61(a) provides that gross income means “all income from

whatever source derived”.

Pensions and retirement allowances

constitute gross income unless otherwise excluded by law. § 61(a)(11);

Treas. Reg. § 1.61-11(a). Military retirement pay is pension income

within the meaning of section 61(a)(11). Wheeler v. Commissioner, 127

T.C. 200, 205 n.11 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008).

It is well established that statutory exclusions from income are

narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995).

Taxpayers seeking an exclusion from income must demonstrate that

they are eligible for the exclusion and “bring themselves within the clear

scope of the exclusion.” Dobra v. Commissioner, 111 T.C. 339, 349 n.16

(1998).

Section 104(a)(4) provides the general rule that amounts received

as a pension, annuity, or similar allowance are not included in gross

income when they arise from personal injuries or sickness resulting from

active service in the armed forces of any country. As the Commissioner

concedes, this is the provision that, in conjunction with section

104(b)(2)(D), entitles Ms. Valentine to exclude from gross income her

disability payments from the VA. She attempts to extend this exclusion

to her retirement distributions from the DOD, but section 104(b) limits

the exclusion prescribed in subsection (a)(4), as relevant here, to an

individual who either “receives [a pension, annuity, or similar

8

[*8] allowance] by reason of combat-related injury”, 2 § 104(b)(2)(C)

(emphasis added), or “on application therefor . . . would be entitled to

receive [not “is receiving”] disability compensation from the Veterans’

Administration,” § 104(b)(2)(D) (emphasis added). 3 In the latter case,

the amount excludable from gross income is “not . . . less than the

maximum amount which such individual, on application therefor, would

be entitled to receive as disability compensation from the Veterans’

Administration.” 4 § 104(b)(4) (emphasis added).

The restrictions imposed in section 104(b) are discussed in the

legislative history underlying the Tax Reform Act of 1976, Pub. L. No.

94-455, § 505(b), 90 Stat. 1520, 1567, in which Congress explained the

restrictions as follows:

At all times, Veterans’ Administration disability

payments will continue to be excluded from gross income.

In addition, even if a future serviceman who retires does

Section 104(b)(3) defines the term “combat-related injury” as an injury

incurred “(i) as a direct result of armed conflict, (ii) while engaged in extrahazardous

service, or (iii) under conditions simulating war; or (B) which is caused by an

instrumentality of war.”

2

3 In 2018—i.e., after the year at issue—section 104(b)(2)(D) (but not section

104(b)(4)) was amended to reflect the change in name of the Veterans’ Administration

(to the Department of Veterans Affairs), but the amendment has no effect on the

outcome of this case.

4 Ms. Valentine cites IRS Publication 525, “Taxable and Nontaxable Income”

(2016), to support her position regarding the nontaxable nature of her retirement

distributions. Administrative guidance contained in IRS publications is not binding

on the IRS, nor can it change the plain meaning of tax statutes. Miller v.

Commissioner, 114 T.C. 184, 195 (2000). Even so, Ms. Valentine misconstrues IRS

Publication 525 to support her contention that a portion of her retirement distributions

is nontaxable. IRS Publication 525 provides an example of the disability payment

exclusion under section 104(a)(4) and corresponding limitation under section

104(b)(2)(D) and (b)(4). The paragraph entitled “Retroactive VA determination[s]”

states that

[i]f [a taxpayer] retire[s] from the armed services based on years of

service and [is] later given a retroactive service-connected disability

rating by the VA, [the taxpayer’s] retirement pay for the retroactive

period is excluded from income up to the amount of VA disability

benefits [the taxpayer] would have been entitled to receive.

IRS Publication 525, at 18 (emphasis added). That circumstance can be contrasted

with that of a retiree who timely received a prospective disability rating and who in

the first instance received from the VA the disability payments appropriate for that

rating, and who was not granted any retroactive correction of that disability rating and

was therefore not entitled to any retroactive disability payments.

9

[*9]

not receive his disability benefits from the Veterans’

Administration, he will still be allowed to exclude from his

gross income an amount equal to the benefits he could

receive from the Veterans’ Administration. Otherwise,

future members of the armed forces will be allowed to

exclude military disability retirement payments from their

gross income only if the payments are directly related to

“combat injuries.”

S. Rep. No. 94-938, at 139 (1976), 1976-3 C.B. (Vol. 3) 49, 176–77

(emphasis added); see also Reimels v. Commissioner, 123 T.C. 245, 257

(2004), aff’d, 436 F.3d 344 (2d Cir. 2006); Kiourtsis v. Commissioner,

T.C. Memo. 1996-534. (Ms. Valentine was, by way of contrast, a retiree

who did “receive [her] disability benefits from the Veterans’

Administration”.)

A retired service member may receive both a disability pension

from the VA (which is excludable from income) and retirement

distributions (such as a service pension) from her respective branch of

the armed forces; but payments under retirement plans should

generally be included in income regardless of the existence of a VA

disability determination, except where certain exceptions may apply.

See Lambert v. Commissioner, 49 T.C. 57 (1967); Sidoran v.

Commissioner, T.C. Memo. 1979-56, aff’d, 640 F.2d 231 (9th Cir. 1981).

We have held that where a petitioner already receives an excludable

disability benefit from the VA, “a VA disability determination does not

prove that a portion of [additional retirement distributions are] received

for injuries sustained during active service” for the purpose of section

104(a)(4). 5 Holt v. Commissioner, T.C. Memo. 1999-348, 78 T.C.M.

(CCH) 625, 627 (noting that a percentage of disability determination had

already resulted in a disability benefit which was excluded from the

taxpayers’ income).

A retired service member who did not receive a disability

determination from the VA and who is not currently receiving disability

benefits may exclude from gross income a portion of her retirement

benefits under section 104 if she can prove that she would qualify for a

disability determination from the VA. See S. Rep. No. 94-938, at 139,

5 The “part of the retired pay of a member of an armed force, computed . . . on

the basis of years of service, which exceeds the retired pay that he would receive if it

were computed on the basis of percentage of disability is not considered . . . [an

excludable] pension, annuity, or similar allowance for personal injury or sickness . . . .”

Treas. Reg. § 1.104-1(e)(1).

10

[*10] 1976-3 C.B. (Vol. 3) at 176–77. Similarly, a service member who

receives a retroactive disability determination by the VA may exclude

from gross income a portion of the retirement benefits she received

during the retroactive period equal to the percentage of her disability

determination (if she did not already exclude them prior to the

determination). See, e.g., Strickland v. Commissioner, 540 F.2d 1196

(4th Cir. 1976), rev’g T.C. Memo. 1974-188; see also Rev. Rul. 78-161,

1978-1 C.B. 31.

C.

Schedule C expenses

Pursuant to section 162(a), a taxpayer may deduct “all the

ordinary and necessary expenses paid or incurred during the taxable

year in carrying on any trade or business”. In contrast, except where

specifically enumerated in the Code, no deductions are allowed for

personal, living, or family expenses. § 262(a).

When deductions are in dispute, the taxpayer must satisfy the

specific requirements for any deduction claimed. See INDOPCO, Inc. v.

Commissioner, 503 U.S. at 84. Furthermore, taxpayers are required to

maintain records sufficient to substantiate items underlying their

claimed deductions. See § 6001; Treas. Reg. § 1.6001-1(a); see also

Treas. Reg. § 1.6001-1(e) (“The books or records . . . shall be retained so

long as the contents thereof may become material in the administration

of any internal revenue law”). The failure to keep and present accurate

records counts heavily against a taxpayer’s attempted proof. Rogers v.

Commissioner, T.C. Memo. 2014-141, at *17.

Section 274(d) establishes higher substantiation requirements for

expenses related to travel, meals, and lodging while away from home,

entertainment, gifts, and “listed property”, defined in section 280F(d)(4)

to include passenger automobiles. For expenses associated with “listed

property”, taxpayers must prove: (1) the amount of each separate

expenditure with respect to such property; (2) the amount of each

business use (such as mileage for automobiles); (3) the date of the

expenditure or use with respect to listed property; and (4) the business

purpose for an expenditure or use with respect to such property. Temp.

Treas. Reg. § 1.274-5T(b)(6). Section 274(d) provides that no deduction

under section 162 shall be allowed for these expenses “unless the

taxpayer substantiates [the expenses] by adequate records or by

sufficient evidence corroborating the taxpayer’s own statement”. An

“adequate record[]” is an “account book, diary, log, statement of expense,

trip sheet[], or similar record” that is “made at or near the time of the

11

[*11] expenditure or use” and must be supported by documentary

evidence (such as receipts or paid bills), except where duplicative of the

underlying record. Temp. Treas. Reg. § 1.274-5T(c)(1) and (2). An

adequate record generally must contain a written statement of business

purpose. Id. subpara. (2)(ii)(B). However, the required degree of

substantiation “will vary depending upon the facts and circumstances”

surrounding the expense, and a written explanation of business purpose

is not required where business purpose “is evident from the surrounding

facts and circumstances”. Id. 6

For travel expenses, taxpayers must substantiate (1) the

“[a]mount of each separate [travel] expenditure”; (2) the time and place

of the travel; and (3) the “[b]usiness reason for travel or nature of the

business benefit derived . . . as a result of travel.” Id. para. (b)(2). If a

taxpayer’s trip is primarily personal, her traveling expenses are not

deductible, even if the taxpayer engages in business activities at her

destination. § 262(a); Treas. Reg. § 1.162-2(b)(1). 7 However, expenses

paid or incurred at the destination that are properly allocable to the

taxpayer’s trade or business are deductible even if the traveling

expenses to and from the destination are not deductible. Treas.

Reg. § 1.162-2(b)(1).

Whether travel is primarily related to the

taxpayer’s trade or business or is primarily personal is a question of fact.

Id. subpara. (2); see also Holswade v. Commissioner, 82 T.C. 686, 701

(1984). The taxpayer must prove that the trip was primarily related to

her trade or business. See Rule 142(a).

The substantiation requirements imposed by section 274(d)

preclude the use of the “Cohan rule” to estimate the amounts of

deductions subject to that section. Sanford v. Commissioner, 50 T.C.

823, 827–28 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969).

Section 274(n) further limits deductions for most meal and

entertainment expenses to “50 percent of the amount of such expense or

item which would . . . be allowable as a deduction.” As authorized by

Treasury Regulation § 1.274-5A(h), the IRS has established a method by

which taxpayers may elect to use a specific dollar amount for meals

while traveling, in lieu of substantiating the actual cost of those meals.

6 For example, a written explanation of the business purpose of travel is not

required “in the case of a salesman calling on customers on an established sales route”.

Temp. Treas. Reg. § 1.274-5T(c)(2)(ii)(B).

7 The Code generally disallows deductions for travel expenses (including

transportation, meals, and lodging) except where they are otherwise specifically

allowed. Treas. Reg. § 1.262-1(b)(5).

12

[*12] The IRS has adopted the “per diem” rates published by the

General Services Administration (“GSA”) for substantiating the cost of

meals, incidental expenses, and lodging for a given period and locality.

Rev. Proc. 2011-47, 2011-42 I.R.B. 520.

D.

Additions to tax under section 6651(a)(1) and (2)

Section 6651(a)(1) authorizes the imposition of an addition to tax

for failure to file a timely return (unless the taxpayer proves that such

failure is due to reasonable cause and is not due to willful neglect). See

also United States v. Boyle, 469 U.S. 241, 245 (1985). The addition

consists of 5% per month (up to a maximum of 25%) of “the amount

required to be shown as tax on such return”. § 6651(a)(1).

Section 6651(a)(2) provides for an addition to tax for failure to

timely pay “the amount shown as tax on any return specified in

paragraph (1)” unless the taxpayer establishes that the failure was due

to reasonable cause and not willful neglect. The addition consists of

0.5% per month (up to a maximum of 25%) of “the amount shown as tax

on such return”. § 6651(a)(2). The amount of the addition to tax under

section 6651(a)(2) reduces the addition to tax under section 6651(a)(1)

for any month for which both additions to tax apply. See § 6651(c)(1).

The Commissioner bears the burden of production with respect to

additions to tax under section 6651(a)(1) and (2). 8 See § 7491(c); Higbee

v. Commissioner, 116 T.C. 438, 446–47 (2001). To meet this burden, he

must produce sufficient evidence that it is appropriate to impose the

addition to tax. Once the Commissioner has met his burden of

production, the taxpayer then bears the burden of proof as to reasonable

cause or other mitigating factors. See Higbee, 116 T.C. at 447. When a

taxpayer has not filed a return, the section 6651(a)(2) addition to tax

may not be imposed unless the Secretary has prepared an SFR that

meets the requirements of section 6020(b). Wheeler, 127 T.C. at 208–09.

Pursuant to section 6651(g)(2), an SFR prepared by the

Commissioner under section 6020(b) is treated as a taxpayer return for

purposes of determining the addition to tax under section 6651(a)(2). To

constitute a valid SFR under section 6020(b), “the return must be

subscribed, it must contain sufficient information from which to

compute the taxpayer’s tax liability, and the return form and any

8 Additions to tax under section 6651 are specifically excepted from the section

6751(b)(1) “immediate supervisor” penalty approval requirement. § 6751(b)(2).

13

[*13] attachments must purport to be a ‘return’”.

Rader v.

Commissioner, 143 T.C. 376, 382 (2014) (quoting Spurlock v.

Commissioner, T.C. Memo. 2003-124, 85 T.C.M. (CCH) 1236, 1244), aff’d

in part, appeal dismissed in part, 616 F. App’x 391 (10th Cir. 2015).

II.

Analysis

A.

Retirement distributions

Ms. Valentine argues that the disability determination she

received from the VA entitles her to exclude from gross income not only

her disability payments (which the Commissioner concedes, pursuant to

section 104(a)(4) and (b)(2)(D)) but also a portion of her retirement

distributions. 9 Ms. Valentine does not cite a specific subparagraph of

section 104(b) that would preserve the exclusion of section 104(a)(4). See

Reimels, 123 T.C. at 255–56 (“Section 104(b)(2) provides no independent

basis for exclusion. Instead, consistent with express legislative intent,

it limits the classes of persons who otherwise might be eligible for the

section 104(a)(4) exclusion”). As we observed in part I.B above, the two

available contentions appear to be that the amounts were received by

reason of a combat-related injury, § 104(b)(2)(C), (b)(3), or that the

amounts are those that the service member “would be entitled to receive

as disability compensation”, § 104(b)(2)(D), (b)(4). We consider each of

these two issues separately.

1.

“[C]ombat-related injury”

Under section 104(b)(2)(C) and (b)(3), Ms. Valentine may exclude

a portion of her retirement distributions only if the distributions qualify

as “amount[s] . . . [received] by reason of a combat-related injury”.

§ 104(b)(2)(C). Before trial, she made a single reference to “combat”:

[I]n 2015 or ‘14, I was made aware that my retirement

income from the Army [is excluded from gross income], if

I’m a disabled vet, combat-service related—and there’s

other stipulations, but that’s the one I fall under.

[Emphasis added.]

9 Ms. Valentine reported $3,158 of gross income from pensions and annuities

but could not explain how her accountant calculated this number (or why it was

identical to the $3,158 that appeared in the “State distribution” section (box 14) of the

Form 1099–R she received from the DOD).

14

[*14] Her phrase “combat-service related”, given in a pretrial

statement, 10 conflates two concepts in the exclusion provided in section

104—payments on account of injury “resulting from active service in the

armed forces”, § 104(a)(4) (emphasis added), and payments “by reason

of a combat-related injury”, § 104(b)(2)(C), (b)(3) (emphasis added). If

her blending of these terms was accidental, then we believe our

discussion below in part II.A.2 addresses her contention. But if she did

intend the additional or alternative contention that her Army

retirement payments were “by reason of a combat-related injury”, then

this contention fails for lack of evidence.

Ms. Valentine made no showing that the Army or the VA ever

determined that she had a “combat-related injury”. Rather, the letters

Ms. Valentine received from the VA detail her “service-connected

disability compensation” (emphasis added), without reference to

“combat”. Assuming that the Tax Court could make a “combat-related”

finding in the absence of such a ruling by the military, Ms. Valentine did

not provide evidence to support such a finding. She did not allege (or

provide evidence to support a contention) that her injuries were

“combat-related” as required by section 104(b)(2)(C) and (b)(3)

(emphasis added). In her sworn trial testimony, Ms. Valentine made no

reference to combat. She offered no documentary evidence that refers

to combat. As to the disability that she suffers, she made no explanation

of it that would enable us to infer what caused it.

2.

“[E]ntitled to receive as disability compensation”

Ms. Valentine contends that, on account of her 60% and 90% VA

disability determinations, she is entitled to exclude from gross income

60% of her Army retirement distributions for each of the first four

months of 2016 and 90% of her Army retirement distributions for the

last eight months of 2016. In so arguing, Ms. Valentine multiplies her

retirement distributions by her 60% and 90% disability ratings and

10 After Ms. Valentine’s pretrial statement that used the word “combat”, the

Court explained her need to give, as sworn testimony, all the information on which her

case depended: “You may feel like a few moments ago you already explained your

retirement disability situation, and you may feel like you’re done, but I’m sad to inform

you you’re not. Sitting there at that table [representing herself pro se], you are your

lawyer. You’re not giving testimony when you’re there. You’re explaining your

position. And in a moment, we’re going to have you come up and take the oath, and

then give testimony that’s sworn testimony and that can be relied on as evidence. And

so make sure that when you’re giving your testimony, you go ahead and tell the whole

story. Don’t suppose that what you said a moment ago will substitute for that.” Her

testimony thereafter did not mention “combat”.

15

[*15] thereby radically misconstrues the text and meaning of section

104(a)(4) and (b)(2)(D). A retired service member may exclude a portion

of her retirement distributions in an amount equal to the benefit that

she “would be entitled to receive as disability compensation from” the

VA, § 104(b)(4) (emphasis added), but only if she is not currently

receiving excludable disability benefits from the VA, as Ms. Valentine

was receiving. The legislative history supports this interpretation of

section 104(b)(4). See S. Rep. No. 94-938, at 138–39, 1976-3 C.B. (Vol. 3)

at 176–77.

The evidence shows that Ms. Valentine was already receiving—

as disability payments from the VA—the entire amount that she was

entitled to receive from the VA. A 60% disability determination (made

in 2014) was applied to the first four months of 2016; and a 90%

disability determination (made in May 2016) was applied to the

remaining eight months of 2016. These facts indicate that in 2016

Ms. Valentine received from the VA the entire amount that she was

“entitled to receive as disability compensation from the Veterans’

Administration”, for purposes of section 104(b)(4). She suggests no basis

for concluding otherwise.

At trial Ms. Valentine seemed to complicate the question by

characterizing as “retroactive” the VA’s determination of her disability.

A retroactive disability determination reflects the VA’s decision that a

prior disability determination had been incorrect and should be

corrected with retroactive effect; and it may indicate that previous

payments that were deemed not allocable to a disability when paid

should have been so allocated. Therefore, upon receipt of an actually

retroactive disability determination from the VA, a service member may

be entitled to exclude a portion of the retirement benefits that she

received during the retroactive period and that (in hindsight) were

mischaracterized as taxable. See Rev. Rul. 78-161. Ms. Valentine’s

“retroactive” contention might be: that after she had received her 60%

and 90% disability payments, she received a retroactive determination

that her disability was greater; that she was therefore entitled to

disability payments greater than the VA had actually paid her in 2016;

and that therefore a portion of her Army retirement paid should be

excluded from gross income pursuant to section 104(b)(4). If this is her

contention, it fails on the facts of this case.

The VA made no “retroactive” disability determination for

Ms. Valentine after 2016 that was “retroactive” to 2016. What

Ms. Valentine’s evidence shows is only that a determination of 60%

16

[*16] made in 2014 was applied prospectively to the first four months of

2016, and that an increased 90% determination made in May 2016 was

applied contemporaneously to that month and the remaining months of

2016.

Ms. Valentine did not offer evidence to show—nor did she even

allege—that the VA made any post-2016 determination of her disability,

nor does she argue that any such post-2016 disability determination

should be retroactively applied to 2016. Rather, the letters from the VA

that she offered as evidence outline only the “current” disability benefits

paid to her as of their dates of April 15 and May 27, 2016. The effective

dates of her then-current disability ratings were December 1, 2014

(effective for the first four months of 2016), and May 1, 2016 (effective

for the last eight months of 2016); and there is no evidence to support a

contention that either of these determinations or any other was

retroactive. Section 104(b)(2)(D) and (b)(4) therefore provides no basis

for the exclusion she claims; and we hold that the retirement

distributions Ms. Valentine received of $23,801 are properly includible

in her gross income pursuant to section 61(a)(11).

B.

Business expense deductions on Schedule C

Under the provisions of section 274, any deduction claimed with

respect to an expense paid or incurred for business travel (e.g., airfare,

lodging, meal, and incidentals) and the use of a passenger automobile

will be disallowed unless the taxpayer substantiates specific elements of

the expense and use by adequate records or by sufficient evidence

corroborating the taxpayer’s own statement. § 274(d); Temp. Treas.

Reg. § 1.274-5T(c)(1). As we discuss below, Ms. Valentine fails to

substantiate most of the expenses for which she claimed deductions on

Schedule C, and we must deny deductions for the unsubstantiated

expenses.

To substantiate her claimed deductions, Ms. Valentine offered

her personal calendar, “screen shot” captures of her online bank

accounts depicting various debit and credit transactions, and ticket

stubs to certain LegalShield events. To support her testimony regarding

her deductions, she also offered summaries of the foregoing information

(specifically, a monthly summary, which lists total mileage and meal

allowance deductions by month, a daily summary, which lists mileage

and meal deductions claimed for each instance of travel, a summary of

airfare and public transportation expenses, and a summary of fees paid

for LegalShield conferences) which she had prepared in anticipation of

17

[*17] trial with the help of an attorney. We analyze the evidence for its

probative value and summarize at the end of this section the claimed

deductions for which Ms. Valentine has provided sufficient

substantiation.

1.

Testimony

We found Ms. Valentine, as a witness, to be subjectively sincere.

However, she failed to keep detailed logs and records of her business

travel and expenses as required by the Code and the regulations. Her

memory, three years after the end of the year at issue, was likely

imprecise and unduly selective, to her own benefit.

Other factors also undermine Ms. Valentine’s testimony. At trial,

she was generally unfamiliar with certain calculations her accountant

used to complete the Schedule C 11 and was thus unable to offer clear

testimony to support substantiation of those expenses. She also testified

that the amounts in her documentary evidence would match the

amounts reported on her return, but that statement was largely

untrue. 12

Consequently, Ms. Valentine’s uncorroborated testimony was not

completely convincing.

2.

Calendar

Throughout 2016 Ms. Valentine kept a calendar on which she

listed personal and business travel. For each instance of travel, she

made an entry giving the intended destination and the automobile

mileage she expected to accrue (but excluded specific information

regarding air travel and lodging, such as flight numbers or the names of

11 Ms. Valentine did not calculate the meal deductions she reported on her

return, and instead she relied on her accountant’s calculations. She was uncertain of

the accuracy of the meal allowance values in the summaries she provided. This is

particularly problematic because a taxpayer may deduct only 50% of a meal expense

or the per diem allowable amount. § 274(n).

12 A mileage deduction calculated using the total mileage handwritten on Ms.

Valentine’s calendar does not match either her monthly summary or the Schedule C

filed with her Form 1040. Using the 2016 standard mileage rate of $0.54 per mile

under I.R.S. Notice 2016-1, 2016-2 I.R.B. 265, and the mileage listed each month on

Ms. Valentine’s calendar (totaling 11,467 miles) would yield a total mileage deduction

of $6,192; but her monthly summary calculates a total mileage deduction of $6,607 (for

12,235 miles); and her Schedule C reports “car and truck expenses” of $6,181 (with

total mileage not specified).

18

[*18] airlines or hotels).

Nevertheless, the calendar is not a

comprehensive record of her travel and associated expenses. The

calendar’s primary flaw lies in its nature: A calendar typically lists

future events, which one may or may not ultimately attend, and is not

the same as a contemporaneous log of actual activity. The evidence

shows that Ms. Valentine used her calendar to list events that she

planned to attend. For example, a recurring entry for a BOM in

Greenbelt, Maryland, appears on almost every Tuesday of the month for

each month between March and December. When questioned about

these entries, however, Ms. Valentine testified that “every Tuesday [she]

did not attend, but [she] tried to attend.” Indeed, an entry for “Greenbelt

BOM” appears on September 20 and 27, 2016, but Ms. Valentine does

not claim a deduction (mileage or otherwise) for any travel on those

days, suggesting that her overall attendance did not correspond to her

calendar entries and accordingly diminishing the calendar’s reliability

for substantiating her business deductions.

Other factors also call into question the calendar’s accuracy,

consistency, and completeness: (1) the calendar lists frequent weekday

events that likely conflicted with Ms. Valentine’s full-time job working

for the Air Force; (2) mileage values on her calendar conflict with

mileage values on her summaries for the same dates of travel (or are

missing entirely); 13 (3) events that are distant from each other

geographically are listed close in temporal proximity, which makes it

unlikely that she in fact attended every listed event; 14 and (4) large

portions of the calendar are absent from our record, where it appears

For example, Ms. Valentine claims 34 miles on March 16 in her daily

summary, but her calendar does not contain a mileage entry for the event titled

“Business Luncheon” on the same day. Similar discrepancies exist for the entries on

her calendar for May 27 (the daily summary claims 290 miles, but no mileage entry

appears on the calendar) and June 29 (the daily summary claims 35 miles for a trip to

Bowie, Maryland, but the calendar states she was to be in Connecticut and does not

contain a mileage entry).

13

14 Ms. Valentine’s calendar contains entries for anticipated travel to

Connecticut, Maryland, and Massachusetts from September 3 through 6, then to New

Orleans from September 9 through 11. It also contains entries for anticipated travel

to Rockville, Maryland, on October 8 (Saturday), then to New Jersey on October 9

(Sunday) (a distance of approximately 181 miles). Presumably, she had to travel back

to Maryland for work at her full-time job on October 11 (the day after Columbus Day).

19

[*19] that Ms. Valentine tried to scan the calendar into electronic form

but missed the tops and bottoms of certain pages. 15

Especially in view of the heightened standard of proof under

section 274, the calendar does not satisfy the “adequate records”

requirement. Only where Ms. Valentine is able to corroborate the

information on her calendar with additional evidence can we determine

that she actually traveled to the reported destinations and paid the

reported expenses. As we discuss below, Ms. Valentine provides

corroborating evidence for only a few of her reported expenses.

3.

Demonstrative exhibits

Ms. Valentine offered into evidence various typewritten

“Summar[ies]”, prepared by her attorney after the fact in anticipation of

trial, that tally the deductions she claimed. Since these were not

contemporaneous records, we did not admit them as substantive

evidence but only as demonstrative exhibits showing her contentions.

Like her calendar, the summaries suffer from many flaws:

First, the header “2016 Bus Miles” appears above the mileage

totals on her monthly summary. In this context we might assume that

the word “Bus” is simply an abbreviation for “Business”, but Ms.

Valentine did apparently include on a separate summary report a

separate deduction for a Greyhound bus ticket (for an unlisted date and

destination). This reporting casts doubt on whether she actually drove

the “Bus Miles” reported or instead purchased a ticket to ride a bus. If

these were indeed “Bus Miles” on a Greyhound bus, then she could

possibly receive a deduction for the price of her ticket, but not for the

bus’s mileage.

Second, the total “Std Meal Allowance” amounts on the monthly

summary conflict with the “Standard Meal Allowance” amounts on the

daily summary: The former claims $136 for meal allowances in the

month of June and the latter claims $114 for meal allowances in the

same month. 16

15 For example, the margins cut off calendar information for March 8 through

12, May 10 through 12, June 11 and 18, August 9, and September 4 through 10—all

dates for which Ms. Valentine claims travel expense deductions.

16 The daily summary reports a single meal deduction on June 12 for $114, but

it also reports $136 as the total meal deduction claimed for that month. Either the

20

[*20] Third, the chronological listing of the mileage and meal

deductions in the daily summary claims 438 miles (round trip) for a trip

from District Heights, Maryland, to Newark, Delaware. The actual

distance between those two locations (as to which we take judicial notice,

see Fed. R. Evid. 201(b)(2), of an online atlas) is only about 200 miles

(round trip).

Fourth, the daily summary contains typographical errors that

contribute to the summary’s overall lack of clarity. For example, an

August trip to District Heights, Maryland, has a June 28 return date

listed (but appears in the section of the summary dedicated to the month

of August). And the summary contains an entry entitled “Return” trip

from Dallas, Texas, to District Heights, Maryland, on March 10 that

immediately precedes additional travel to and within Dallas through

March 14.

Fifth, Ms. Valentine did not inform her attorney (who drafted the

daily summary) of the per diem payment she received from the Air Force

for travel to Maxwell Air Force Base in Montgomery, Alabama. That

reimbursement would preclude her claiming a meal allowance deduction

for that trip—and yet it appeared on her summary and in the deduction

claimed on her return.

We do not expect perfection in business records or in calculations

of expenses, but the frequency of these errors undermines the credibility

of Ms. Valentine’s total claimed mileage and meal allowances.

4.

Personal motive for travel to destinations with

friends and family

Ms. Valentine had friends and family residing in several of the

locations for which she claimed business travel expense deductions. 17

Although she testified that in each instance her primary purpose was to

expose her friends and family members to the LegalShield product line,

she offered no additional evidence to distinguish the time spent or

individual deduction on June 12 or the total for June is incorrect. Even if the

individual deduction in the daily summary is correct, it is inconsistent with Ms.

Valentine’s monthly summary, which lists a total meal deduction of $136 for the month

of June.

17 These locations include: the State of Connecticut (she claimed deductions for

travel to Hartford and Stratford), the State of New York (she claimed deductions for

travel to New York City), the city of Greenville, South Carolina, and the city of

Chesapeake, Virginia.

21

[*21] expenses paid for business activities versus personal activities

with her friends and family. Her history of making no more than $2,500

per year on LegalShield prompts the question of why someone would be

willing to incur substantial travel expense for so little return (indeed,

for a loss). As the party bearing the burden of proof, Ms. Valentine was

obliged to answer that question and to prove that her purpose for travel

to these family-friendly destinations was her LegalShield business. We

hold that Ms. Valentine did not sustain that burden for her travel to

destinations in which she had friends and family. We conclude that

personal considerations justified making these trips without regard to

their yielding a business profit. Her claimed deductions for expenses

paid for travel to these destinations and within these destinations must

be disallowed. In light of this holding, we limit further substantiation

analysis to the destinations in which Ms. Valentine did not have

resident friends and family.

5.

Substantiation as to other destinations

i.

Business purpose

Ms. Valentine must substantiate the business purpose or “nature

of the business benefit derived” for each instance of travel. See Temp.

Treas. Reg. § 1.274-5T(b)(2)(iv). Generally, a written statement of

business purpose is required, except where the business purpose of an

expenditure is evident from the surrounding facts and circumstances.

Id. para. (c)(2)(ii)(B). Ms. Valentine did not provide a written statement

regarding the business purpose for any instance of travel. However, she

credibly explained at trial the imperative role the BOMs played in

business development. Notably, she called on potential clients to solicit

their attendance at BOMs, and she attended the meetings with the

expectation that she would have the opportunity to sell them

LegalShield’s products. From these facts and circumstances, we hold

that the business purpose of Ms. Valentine’s attendance at BOMs was

evident so as to meet the exception under Temporary Treasury

Regulation § 1.274-5T(c)(2)(ii)(B), and we hold that Ms. Valentine has

substantiated the business purpose for her attendance at BOMs for the

purposes of section 274.

Similarly, each training seminar and

leadership summit conference that Ms. Valentine attended was hosted

by LegalShield, and for that reason we hold that her attendance at these

events (and travel to these events) had an evident business purpose and

is substantiated without a written statement.

22

[*22]

ii.

BOMs and training

Ms. Valentine claims business expense deductions for 83 BOMrelated events in 2016: a mix of BOMs, business luncheons, LegalShield

question-and-answer sessions, and LegalShield training sessions.

Ms. Valentine claims attendance at events in Maryland, Delaware, New

Jersey, Alabama, and Virginia. With few exceptions, her calendar

contains an entry for each event on the date referenced in her daily

summary.

Ms. Valentine does not provide evidence to corroborate most of

the entries on her calendar. However, her bank statements show

charges paid in Baltimore, Maryland, on December 8 and 15, and in

Newark, Delaware, on December 11 that correspond to BOM entries on

her calendar. 18 We hold that, in these instances, Ms. Valentine

sufficiently substantiated the travel expenses associated with these

events and is entitled to deduct mileage and meal allowances. For her

trip to Newark, Delaware, we adjust the deductible mileage down to the

number of miles that we find to be the accurate round-trip distance

(from 438 miles to 200 miles) and the corresponding expense deduction

to $108 (at $0.54 per mile consistent with the 2016 standard mileage

rates for taxpayers under I.R.S. Notice 2016-1). We also recalculate the

meal allowance for the same trip, pursuant to 41 C.F.R. § 301-11.101

and to I.R.S. Revenue Procedure 2011-47, 2011-42 I.R.B. 520, from $57

to $21. 19

18 Ms. Valentine’s bank statements show meal expenses around these dates in

Aberdeen, Maryland, which is a short distance from both Baltimore, Maryland, and

Newark, Delaware.

Ms. Valentine’s bank statements also reflect various expenses for which she

does not claim a deduction, such as hotel fees paid in Springfield, Virginia, and meal

expenses in Greenbelt, Maryland. We exclude these and other similar expenses from

consideration.

19 We calculated this amount using the Meals & Incidental Expenses (M&IE)

Breakdown applicable to the Newark, Delaware, area (Wilmington) for the stated

period. See FY 2016 Per Diem Rates for Wilmington, Delaware, U.S. Gen. Servs.

Admin., https://www.gsa.gov/travel/plan-book/per-diem-rates/per-diem-rates-results

/?action=perdiems_report&fiscal_year=2016&city=Newark&state=DE&zip=

(last

visited Apr. 8, 2022). The “First & Last Day of Travel” rate is $40.50 (which we round

up to $41). Ms. Valentine reported one day of travel, for which she may claim one half

of the allowable meal expense as a deduction. We apply the same analysis for meal

allowance calculations discussed hereafter in this opinion (which vary by date and

destination).

23

[*23] Ms. Valentine may deduct $49 of mileage expense (90 miles) for

each of her trips to Baltimore, Maryland, on December 8 and 15. We

hold that Ms. Valentine did not substantiate expenses for events for

which her calendar does not have an entry. She is not entitled to deduct

expenses paid for those events. 20

Ms. Valentine claimed expense deductions for travel to

Montgomery, Alabama, on January 26. Her calendar has an entry for

travel to Maxwell Air Force Base in Montgomery, Alabama, on January

26, and her bank statements list charges paid in the area during that

time. However, Ms. Valentine traveled to Maxwell Air Force Base for

Air Force training, and the Air Force paid her airfare and a per diem

allowance for meals and incidentals incurred on the trip. Ms. Valentine

did not provide evidence to show she paid any business-related expenses

independent of her Air Force training while traveling to Montgomery,

Alabama, and thus does not sufficiently substantiate any of the

associated meal allowances she claimed. She is not entitled to deduct

expenses that the Air Force paid directly or for which she received

reimbursement. 21

iii.

Conferences

Ms. Valentine claimed deductions for travel expenses she paid for

four LegalShield “Leadership Summit” conferences held in Dallas,

Texas, from March 10 through 14; San Jose, California, from April 6

through 11; Oklahoma City, Oklahoma, from July 14 through 17; and

New Orleans, Louisiana, from September 9 through 11. Ms. Valentine’s

calendar has an entry for travel to each of these four destinations on the

Specifically, these supposed events include: (1) a business luncheon in

Greenbelt, Maryland, on March 16, (2) a BOM in Greenbelt, Maryland, on May 10,

(3) a business opportunity reception in Bowie, Maryland, on June 29, (4) a BOM

(“Sensational Sunday”) in Newark, Delaware, on August 7, and (5) a BOM in

Greenbelt, Maryland, on August 9.

20

21 “A trade or business expense deduction is not allowable to an employee to

the extent that the employee is entitled to reimbursement from his or her employer for

an expenditure related to his or her status as an employee.” Lucas v. Commissioner,

79 T.C. 1, 7 (1982) (citing Heidt v. Commissioner, 274 F.2d 25 (7th Cir. 1959), aff’g T.C.

Memo. 1959-31).

24

[*24] dates above and we address substantiation of expenses at each

destination in chronological order.

a.

Dallas, Texas (March 10–14)

Ms. Valentine did not offer sufficient evidence to corroborate her

calendar’s Dallas entry beginning March 10. The bank statements she

provided do not show transactions in March after the seventh day of the

month and, hence, cannot substantiate expenses she may have paid

while traveling to and around Dallas after that time. She does not

provide copies of receipts for hotel, meal, or conference expenses. The

bank statements she provided show airfare purchases on three purchase

dates: February 19, August 14, and October 30. Conceivably, the airline

ticket purchased in February could be associated with her trip to Dallas

in March, but the statement does not provide destination information,

and Ms. Valentine did not offer additional evidence to support this

hypothesis. 22 Consequently, Ms. Valentine has failed to corroborate her

calendar entry, and we hold that she has failed to substantiate the

destination, travel dates, and amount of any travel expenses in Dallas

for which she claims deductions.

b.

San Jose, California (April 6–11)

Ms. Valentine did offer sufficient evidence to corroborate her

calendar’s San Jose entry beginning April 6. Her bank statements show

meal charges and ATM withdrawals in San Jose, California, during the

requisite period. Ms. Valentine also provided ticket stubs showing the

amount, location, and date of each event in San Jose, which substantiate

both her attendance and the fees for conference events totaling $85. She

did not provide a record or other documentary evidence (such as a

receipt) for lodging during her stay and, as discussed, Ms. Valentine’s

bank statements fail to match airfare purchases to travel destinations

in any specificity. However, we conclude that Ms. Valentine booked

22 Ms. Valentine’s bank statement reflects airfare purchases exclusively from

Southwest Airlines, a company headquartered in Dallas, Texas. The letters “TX”

appear at the end of each transaction line. The transactions appear on Ms. Valentine’s

bank statements in February, August, and October, but Ms. Valentine reported travel

to Dallas in March only. Therefore, the “TX” in each transaction line likely refers to

the Southwest Airlines company headquarters and not to a travel destination.

Otherwise, the last letters in each transaction line would vary depending upon the

destination (e.g., “CA,” “OK,” and “LA”).

Under our analysis set out here,

Ms. Valentine can deduct expenses for two of her three substantiated airline trips

(since we allocate February to San Jose and August to New Orleans); and her October

airline ticket was too late for any of the four conferences.

25

[*25] airline travel in advance, and we will allocate the airline expenses

closest in time to her travel to destinations for which she has

corroborated her calendar entry. We therefore associate the airfare

purchase of $343 in February with her San Jose trip and hold that she

has substantiated this expense sufficiently. 23 She also claims 68 miles

(34 miles on each day of travel, evidently to and from the airport), for

which we approve a deduction of $37. See I.R.S. Notice 2016-1. Last,

Ms. Valentine claims six days of meal allowance of $408, which we will

adjust, using the aforementioned GSA guidelines, to $176. 24

c.

Oklahoma City, Oklahoma (July 14–

17)

Ms. Valentine did not offer sufficient evidence to corroborate her

calendar’s Oklahoma City entry beginning July 14.

Her bank

statements show a transaction entitled “Legalshield *Event” in

February with the letters “OK” at the end of the transaction description.

It is not impossible that this transaction corresponds with the Oklahoma

calendar entry. But Ms. Valentine’s bank statements do not reflect any

transactions in Oklahoma during the time of the conference.

Ms. Valentine likewise did not offer evidence regarding meal or lodging

expenses for the Oklahoma conference. We therefore hold that

Ms. Valentine has not met her burden of substantiation and may not

deduct expenses for travel to Oklahoma City.

d.

New Orleans, Louisiana (September 9–

11)

Ms. Valentine did offer sufficient evidence to corroborate her

calendar’s New Orleans entry beginning September 9. Her bank

statements show transactions for meal expenses in New Orleans during

the requisite period. She also provides two ticket stubs (in the amounts

Ms. Valentine’s bank statement lists four separate transactions with

Southwest Airlines on this purchase date, two transactions of $12.50 each and two

transactions of $158.98 each (totaling $342.96, which we round to $343). We interpret

the former two charges as either baggage fees or similar charges and the latter two

charges as her departing and returning flights. The remaining Southwest Airlines

transactions on her bank statement follow an identical format (but vary in price), and

we interpret those transactions in the same manner.

23

24 See FY 2016 Per Diem Rates for Sunnyvale / Palo Alto / San Jose, California,

U.S. Gen. Servs. Admin., https://www.gsa.gov/travel/plan-book/per-diem-rates/perdiem-rates-results/?action=perdiems_report&fiscal_year=2016&city=San%20Jose

&state=CA&zip= (last visited Apr. 8, 2022).

26

[*26] of $159 and $15) substantiating the LegalShield event dates and

location. Ms. Valentine does not provide evidence of any expenses paid

for lodging. We associate the airfare purchase of $434 in August with

this trip. 25 Ms. Valentine claims three days of meal allowances totaling

$171, which we adjust to $80, following GSA guidelines. 26 We will allow

a mileage expense deduction of $37 for the 68 miles claimed (34 miles on

each of her travel days, evidently to and from the airport). See I.R.S.

Notice 2016-1.

6.

Miscellaneous expenses

Ms. Valentine’s bank statements show monthly fees paid for

access to LegalShield’s website service. The statements list the date and

amount of each transaction, and Ms. Valentine credibly testified that

she used the website to enroll new customers in LegalShield products.

Therefore, we hold that she has sufficiently substantiated her website

expenses and may claim a corresponding deduction of $219.

Ms. Valentine failed to substantiate the remaining business

expenses reported on Schedule C, and we therefore deny the deductions

she claimed for these expenses. Although she provided bank statements

showing payments for various highway tolls, we cannot reasonably

relate the dates of these transactions to any date of travel for which she

claimed a deduction. Ms. Valentine offered no documentary evidence or

testimony to substantiate the expenses she reported for advertising,

commissions and fees, legal and professional services, office expenses,

postage, business phone, or “Info tracks”, and we must deny deductions

for these in full. Ms. Valentine listed “Incidentals” individually in the

reported “Other expenses” on Schedule C, but we include these

“Incidentals” in the standard “meal and incidental” allowance

deductions that we approved above. To the extent we did not approve a

meal and incidental allowance for travel specifically, we deny

Ms. Valentine’s expense deductions for incidentals.

25 Ms. Valentine did not deduct expenses for any out-of-state conference-related

travel after the month of August and so the airfare charges paid in the month of

October must relate to either personal travel or business-related travel after the year

at issue.

26 See FY 2016 Per Diem Rates for New Orleans, Louisiana, U.S. Gen. Servs.

Admin., https://www.gsa.gov/travel/plan-book/per-diem-rates/per-diem-rates-results/?

action=perdiems_report&fiscal_year=2016&city=New%20Orleans&state=LA&zip=

(last visited Apr. 8, 2022).

27

[*27]

7.

Summary

The disputed expenses that Ms. Valentine substantiated,

compared to the deductions she claimed on Schedule C, are as follows:

Expenses

reported on

Schedule C

Expenses

substantiated

$30

-0-

Car and truck expenses

6,181

$280

Commissions and fees

725

-0-

Legal and professional

services

270

-0-

Office expense

344

-0-

Travel (i.e., airfare)

1,122

777

Deductible meals and

entertainment

918

277

Website

239

219

Postage

111

-0-

Business phone

837

-0-

Info tracks

150

-0-

Convention fees

460

259

Tolls

191

-0-

Incidentals

135

-0-

$11,713

$1,812

Advertising

Total

28

[*28] C.

Additions to tax under section 6651(a)(1) and (2)

1.

Section 6651(a)(1) addition to tax for failure to file

In the SNOD the IRS determined against Ms. Valentine additions

to tax under section 6651(a)(1) for failure to timely file and under

subsection (a)(2) for failure to timely pay. Ms. Valentine filed her 2016

income tax return on March 25, 2019, despite an October 2017 due date.

These facts are not in dispute and are sufficient to establish that the

Commissioner has met his burden of production to establish

Ms. Valentine’s liability under section 6651(a)(1). Ms. Valentine’s only

defense to these additions to tax would be a showing that her failure to

file a return was due to reasonable cause and not willful neglect, for

which she bears the burden of proof. See Higbee, 116 T.C. at 447. In

that regard Ms. Valentine argued that she was unable to file a return

because she could not find an accountant familiar with section 104(a)(4)

(as it applied to her disability payments and retirement distributions).

We find this argument unpersuasive. Ms. Valentine does not

present any evidence to support that she searched for an accountant

diligently, nor any communication (such as emails, notes regarding

conversations, lists of accountants contacted) to show that any

accountant she did contact was unfamiliar with section 104(a)(4), or that

such a search could reasonably take a year and a half to complete. Since

this addition to tax accrues at 5% per month for a maximum of 25%, a

delay of as little as five months yields the maximum addition. So even

if Ms. Valentine could show “reasonable cause” for not filing until

October 2018 (when the return was a year overdue), a return filed five

months later in March 2019 would still accrue the maximum addition to

tax.

Additionally, given the errors on Ms. Valentine’s return in the

reporting of her taxable retirement distributions, it does not appear that

the accountant Ms. Valentine found had particular competence in this

specific area—making her prolonged search both unfruitful and

unreasonable. We hold that Ms. Valentine is liable for the addition to

tax under section 6651(a)(1) for failure to timely file.

2.

Section 6651(a)(2) addition to tax for failure to pay

Section 6651(a)(2) imposes an addition to tax for failure to timely

pay the amount of tax shown on a return. (This addition is equal to onehalf percent of the tax shown but unpaid per month, again up to 25%.)

The addition to tax under section 6651(a)(2) applies only when an

29

[*29] amount of tax is shown on a return—in this case, on the SFR that

the Commissioner prepared for the year for which the addition was

determined. See Wheeler, 127 T.C. at 210. The SFR prepared by the

IRS contains sufficient information, purports to be a return, and is

subscribed as required by section 6020(b).

Accordingly, the

Commissioner has met his burden to show that tax was shown on a

return and was unpaid. 27

As with the section 6651(a)(1) failure-to-file addition to tax,

section 6651(a)(2) provides that the taxpayer is liable for the failure-to

pay addition to tax “unless it is shown that such failure is due to

reasonable cause and not due to willful neglect”. Ms. Valentine did not

prove or even allege that her failure to pay was due to reasonable cause

and not willful neglect. Therefore, we hold that she is liable for the

addition to tax under section 6651(a)(2).

Conclusion

The determinations in the SNOD are sustained in large part, to

the extent set out above. To give effect to the foregoing,

Decision will be entered under Rule 155.

27 Ms. Valentine’s late-filed return (filed after preparation of the SFR) has no

effect on our analysis under section 6651(a)(2). Under section 6651(g)(2), the SFR

prepared by the Commissioner under section 6020(b) is treated as Ms. Valentine’s

return for purposes of determining the addition to tax under section 6651(a)(2).