United States Tax Court

United States Tax Court

T.C. Summary Opinion 2022-9

RAUL ROMANA AND MARIA CORAZON ROMANA,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 1156-21S.

Filed June 16, 2022.

—————

Steven S. Chung, for petitioners.

Chae M. Kim and Michael E. Washburn, for respondent.

SUMMARY OPINION

CARLUZZO, Chief Special Trial Judge: This case was heard

pursuant to the provisions of section 7463 of the Internal Revenue Code

in effect when the petition was filed. 1 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.

In a notice of deficiency dated December 11, 2020 (notice),

respondent determined deficiencies in petitioners’ federal income tax

and section 6662(a) accuracy-related penalties for 2016, 2017, and 2018.

After concessions, the issues for decision are whether petitioners

(1) are entitled to a miscellaneous itemized deduction for unreimbursed

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

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the

Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and

Rule references are to the Tax Court Rules of Practice and Procedure.

Served 06/16/22

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employee business expenses for 2017 2 in excess of the amount already

allowed by respondent and (2) are liable for a section 6662(a) accuracyrelated penalty for any year in issue.

Background

Some of the facts have been stipulated and are so found.

Petitioners lived in California when the Petition was filed.

During each year in issue Mr. Romana was employed as a

stationary engineer; Mrs. Romana was employed as a nurse in a plastic

surgery clinic operated by Kaiser Permanente (Kaiser). Both petitioners

received most of their formal education in the Philippines although both

received additional professional and/or vocational training in the United

States after moving to the United States from the Philippines. Neither

petitioner had any formal training in accounting or federal income

taxation.

Kaiser’s dress code in effect at the location where she worked

required that Mrs. Romana be dressed in “comfortable” clothes and in a

manner that reflected her profession as a nurse. Neither Kaiser nor the

collective bargaining agreement for her nursing union had a policy that

allowed reimbursement for the expenses she incurred to purchase

clothing that satisfied her employer’s dress code. While at work, Mrs.

Romana wore clothing that resembled scrubs that she purchased at her

own expense from local department stores. In the operating room she

was required to wear scrubs provided by Kaiser. Routinely, depending

upon the operation schedule for any given day, she changed back and

forth between her scrublike clothing and the operating room scrubs her

employer provided.

During 2017 Mrs. Romana also purchased, at her own expense, a

white “lab” coat with “Kaiser Permanente” and her name embroidered

on it. The purchase was made as part of a bulk purchase along with

similar items purchased by fellow employees. The lab coat cost

approximately $45, and it was dry cleaned multiple times during the

year. Otherwise, the costs that petitioners paid for Mrs. Romana’s work

clothing cannot be precisely determined.

2 The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, § 11045, 131 Stat.

2054, 2088, amended section 67 by suspending miscellaneous itemized deductions for

any taxable year beginning after December 31, 2017, and before January 1, 2026.

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Petitioners’ federal income tax return for each year in issue was

prepared by a paid income tax return preparer. Petitioners’ return

preparer, who began preparing federal income tax returns for

petitioners around 2003, was hired on the recommendation of

petitioners’ family and friends. The return preparer assisted petitioners

with other financial matters as well. For example, the return preparer

advised petitioners to set up an S corporation to manage their rental

properties and helped them set up living trusts and living wills.

The Schedule A, Itemized Deductions, included with petitioners’

2017 return shows various deductions, including, as relevant here,

unreimbursed employee business expenses relating to Mrs. Romana’s

employment with Kaiser and Mr. Romana’s employment as a stationary

engineer. Attached to the Schedule A is a “TY 2017 Unreimbursed

Expense Statement” reflecting the detail of the unreimbursed employee

business expenses as follows:

Unreimbursed Expense

Amount

Union and professional dues

$3,616

Uniforms and protective clothing

1,915

Dry cleaning/laundry

399

Seminars

601

Tools

250

Telephone

263

Internet

1,134

Total

$8,178

In the notice and as relevant, respondent allowed the

miscellaneous itemized deduction for unreimbursed employee business

expenses claimed on petitioners’ 2017 Schedule A for union and

professional dues and for seminars. Otherwise, respondent disallowed

the miscellaneous itemized deduction for unreimbursed employee

business expenses claimed for uniforms and protective clothing, dry

cleaning and laundry, tools, telephone, and internet. As noted,

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respondent also imposed a section 6662(a) accuracy-related penalty for

each year in issue.

Discussion

As a general rule, the Commissioner’s determination of a

taxpayer’s federal income tax liability in a notice of deficiency is

presumed correct, and the taxpayer bears the burden of proving that the

determination is erroneous. Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933). 3

I.

Unreimbursed Employee Business Expenses

As we have observed in countless opinions, deductions are a

matter of legislative grace, and the taxpayer bears the burden of proving

entitlement to any claimed deduction. Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering,

292 U.S. 435, 440 (1934). This burden requires the taxpayer to

substantiate expenses underlying deductions claimed by keeping and

producing adequate records that enable the Commissioner to determine

the taxpayer’s correct tax liability. § 6001; Hradesky v. Commissioner,

65 T.C. 87, 89–90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976);

Meneguzzo v. Commissioner, 43 T.C. 824, 831–32 (1965). A taxpayer

claiming a deduction on a federal income tax return must demonstrate

that the deduction is allowable pursuant to some statutory provision and

must further substantiate that the expense to which the deduction

relates has been paid or incurred. See § 6001; Hradesky, 65 T.C.

at 89–90; Treas. Reg. § 1.6001-1(a).

Taxpayers may deduct ordinary and necessary expenses paid in

connection with operating a trade or business. § 162(a); Boyd v.

Commissioner, 122 T.C. 305, 313 (2004). Generally, the performance of

services as an employee constitutes a trade or business. Primuth v.

Commissioner, 54 T.C. 374, 377 (1970). If, as a condition of employment,

an employee is required to incur certain expenses, then the employee is

entitled to a deduction for those expenses unless entitled to

reimbursement from his or her employer.

See Fountain v.

Commissioner, 59 T.C. 696, 708 (1973); Spielbauer v. Commissioner,

T.C. Memo. 1998-80.

3 Petitioners do not claim and the record does not otherwise demonstrate that

the provisions of section 7491(a) need be applied here, and we proceed as though they

do not.

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The deduction for unreimbursed employee business expenses is a

miscellaneous itemized deduction. §§ 67(b), 63(d)(1), 62. During the

relevant period miscellaneous itemized deductions were allowable only

to the extent that the total of such deductions exceeded 2% of adjusted

gross income (AGI). § 67(a) and (b). Petitioners’ total miscellaneous

itemized deductions for 2017, as allowed by respondent in the notice,

exceed 2% of their AGI.

As a general rule, if a taxpayer provides sufficient evidence that

the taxpayer has incurred a trade or business expense contemplated by

section 162(a) but is unable to adequately substantiate the amount, the

Court may estimate the amount and allow a deduction to that extent.

Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). However,

in order for the Court to estimate the amount of an expense, there must

be some basis upon which an estimate may be made. Vanicek v.

Commissioner, 85 T.C. 731, 742–43 (1985).

All of the disputed deductions relate to Mrs. Romana’s

employment with Kaiser or Mr. Romana’s employment as a stationary

engineer. According to petitioners, they are entitled to unreimbursed

employee business expense deductions of $1,526 for clothing, $250 for

tools, $263 for telephone, and $1,134 for internet. According to

petitioners, each expense qualifies as an ordinary and necessary

business expense paid by petitioners but not reimbursable by their

employers. See § 162(a). According to respondent, petitioners have

failed to establish that (1) the expenses were paid or, if paid, (2) the

expenses were ordinary and necessary business expenses, and if

business related, (3) they were not reimbursable by petitioners’

employers.

A.

Clothing

On their 2017 return petitioners claimed $1,915 in expenses for

“Uniforms and protective clothing” and $399 for “dry cleaning/laundry.”

Petitioners now assert that they are entitled to deduct $1,526 for those

items.

Generally, the cost of a business wardrobe, even if required as a

condition of employment, is considered a nondeductible personal

expense within the meaning of section 262. See, e.g., Hynes v.

Commissioner, 74 T.C. 1266, 1290 (1980). Those costs are not deductible

even when it has been shown that the particular clothes would not have

been purchased but for the employment. Id. Clothing costs are

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deductible as ordinary and necessary business expenses under section

162 only if (1) the clothing is of a type specifically required as a condition

of employment, (2) it is not adaptable to general use as ordinary

clothing, and (3) it is not so worn. See Yeomans v. Commissioner, 30

T.C. 757, 767 (1958); see also Deihl v. Commissioner, T.C. Memo. 2005287.

Mrs. Romana was required to dress professionally and

comfortably for her job as a nurse. To do so, she purchased shirts and

pants at department stores. Because the clothing resembled scrubs, we

find that the clothing was not adaptable to general use as ordinary

clothing outside of her employment. Consequently, the cost of the

clothing and the cost to dry clean the clothing are deductible. Mrs.

Romana also purchased a white lab coat with “Kaiser Permanente” and

her name embroidered on it. This lab coat was not appropriate for

general use.

According to Mrs. Romana, the lab coat cost around $45.

Petitioners provided only generalized estimates for the costs of the

scrublike clothing that Mrs. Romana wore at work and the dry cleaning

costs paid to dry clean those items. After a careful review of the

evidence, and as best we can estimate from what has been submitted,

we find that petitioners are entitled to a $500 deduction for the

purchases of the clothing that Mrs. Romana was required to wear as a

condition of her employment and the related dry cleaning costs paid with

respect to those items. See Cohan v. Commissioner, 39 F.2d at 543–44.

B.

Tools

Petitioners claimed a deduction of $250 for tools for 2017. They

did not offer any evidence that identifies the type of tools, the cost of the

tools, or the business use of the tools. Furthermore, there is insufficient

evidence that would allow for a deduction based on an estimate. See

Vanicek, 85 T.C. at 742–43. Accordingly, petitioners are not entitled to

a deduction for unreimbursed employee business expenses for tools for

2017.

C.

Phone and Internet

Petitioners claimed deductions of $264 for phone expenses and

$1,134 for internet expenses. Petitioners did not offer documentary

evidence or testimony regarding their business use of the phone and

internet, nor did they explain how they arrived at their estimate of

business versus personal use. Without such evidence the Court does not

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have a reasonable basis to estimate the amounts of the expenses related

to business use. See id. Accordingly, petitioners are not entitled to a

deduction for unreimbursed employee business expenses for phone and

internet for 2017.

II.

Accuracy-Related Penalties

Lastly, we consider whether petitioners are liable for a section

6662(a) accuracy-related penalty for any year in issue. Relying upon

various grounds, respondent argues that petitioners are liable for the

penalty for each year. See § 6662(a)-(d).

Petitioners’ paid income tax return preparer prepared petitioners’

2016, 2017, and 2018 returns. Petitioners had retained the same return

preparer since approximately 2003 to prepare their returns. Routinely,

petitioners met with the return preparer two or three times each year.

As was petitioners’ practice with respect to their joint federal income tax

returns filed for other years, Mrs. Romana assembled petitioners’

personal and employment information, tax documents, and source

documents underlying the deductions shown on their returns and

provided them to the return preparer. Mrs. Romana also provided the

return preparer with various financial statements related to their rental

properties.

Petitioners’ presentation at trial satisfies us that petitioners

reasonably relied upon their return preparer to do what they paid their

return preparer to do. Neither petitioner had any formal training in

accounting or matters of federal income taxation. To the extent that

petitioners claimed disallowed deductions that they now concede, we

find that these deductions were claimed on the advice of their return

preparer and further find that it was not unreasonable for petitioners

not to have questioned that advice.

Under the circumstances, we find that petitioners had reasonable

cause for the underpayment of tax required to be shown on their return

for each year in issue and that they acted in good faith with respect to

those underpayments. See § 6664(c); Higbee v. Commissioner, 116 T.C.

438, 446–47 (2001). Petitioners are not liable for the section 6662(a)

accuracy-related penalty for any year in issue.

To reflect the foregoing,

Decision will be entered under Rule 155.