Drive all night. Mr. Charley told me so. An old joke says that you should spend for nice wheels because after all, while you can’t drive a house, you can always sleep in a car. A case in Tax Court yesterday involves a taxpayer who may have taken that advice to heart. Fortunately, he also took to heart the tax rules that require you to document your business miles.
The taxpayer, a Mr. Charley, had a business (“LubriDyne”) that involved devices used to clean hydraulic oil used by injection molders. He bought a used Cadillac with a trunk big enough to hold his demonstration equipment and traveled in it far and wide, according to Judge Paris (my emphasis):
The most effective way for Mr. Charley to pitch LubriDyne was to drive to clients and demonstrate how the equipment worked. He began most trips from his home where he officed and stored his equipment. All of Mr. Charley’s business trips were made in the Cadillac. Many of LubriDyne’s clients were within a four- to five-hour radius of Mr. Charley’s Missouri home although he also visited clients in Colorado, California, and Wisconsin. If Mr. Charley did not return home at the end of each day, he would either spend the night in his car or drive through the night.6. When he did stay overnight somewhere, he stayed with friends at their houses. Mrs. Charley did not accompany Mr. Charley on any of his business trips in 2010.
Footnote six explains the aversion to motels:
6 Mr. Charley testified that petitioners had spent $2,500 to rid their home of bed bugs after one hotel stay. Since then, he does not stay at hotels when he travels.
Whether or not you sleep in your car, the tax law requires extra substantiation for travel expenses. From the Tax Court opinion (citations omitted):
Under section 274(d), a taxpayer must satisfy strict substantiation requirements before a deduction is allowed. To deduct expenses related to travel, meals and entertainment, gifts, or listed property, the taxpayer must “substantiate by adequate records or by sufficient evidence corroborating the taxpayer’s own statement”: (1) the amount of the expense (i.e., mileage); (2) the time and place of the expense; (3) the business purpose of the expense; and (4) in the case of entertainment, the business relationship between the taxpayer and the person being entertained. Listed property includes passenger automobiles. To satisfy the requirements of section 274(d) by adequate records, a taxpayer must maintain records and documentary evidence that in combination are sufficient to establish each element of an expenditure or use.
This means the “Cohan Rule,” which enables courts to estimate expenses that are otherwise inadequately documented, cannot be used for car expenses. The IRS said Mr. Charley’s substantiation fell short. The Tax Court explained the taxpayer travel records:
Mr. Charley recorded the point-of-contact, telephone number, date he visited the client, and the client’s business address on an index card. Each index card was created at the time of the travel to that client. Although the mileage from Mr. Charley’s home to each client was not included on the index cards, most of his client’s business addresses included the city and State where the client was located. Some of the index cards record visits to multiple clients in the same geographical area.
The opinion doesn’t say why the IRS objected to the records — perhaps because he didn’t keep an actual travel log in the car? In any case, Judge Paris said the records were good enough (citations again omitted):
The Court finds that Mr. Charley substantiated that he had business mileage expenses for 2010 through his index cards and testimony — although not the amount reported on petitioners’ return.While Mr. Charley’s travel schedule may have been extreme, such extremity is not a bar to deducting otherwise properly substantiated expenses.
Mr. Charley left from his home office to begin each business trip. He would return home that day, drive through the night to return home the following day, or continue to another client in the same geographic location as the first client on the business trip. Mr. Charley’s index cards contain the business address for almost every client his visited in 2010. Allowing Mr. Charley the mileage for the shortest routes between his home office and his clients’ addresses, the Court finds that petitioners are entitled to car and truck expenses for 13,731 business miles for 2010.
While fewer miles than claimed on the return, it was 13,731 miles more than the IRS allowed.
The Moral: You have to be able to substantiate your travel to deduct it, but there’s more than one way to skin a Cadillac. While IRS loves auto logs, a detailed calendar or a smartphone app capturing the same information will work. So will old-fashioned 3×5 cards.
Gang Truce. Congress Reaches Deal on Five-Year Highway Funding Bill (Kyle Pomerleau, Tax Policy Blog). I find bipartisanship often is as helpful to the rest of us as an agreement to split crime proceeds between rival street gangs. The Highway bill is that sort of bipartisanship, with awful revenue raisers including a provision to revoke passports of “delinquent” taxpayers.
Anybody who has worked with the IRS knows that IRS recordkeeping is only getting worse. It can take years to fix an IRS mistake. Inevitably, some taxpayer will fall victim to a computer burp while overseas and be stranded and unable to sort out the mess for weeks. I just hope it’s a Congressman.
Robert D. Flach, YEAR-END AND HOLIDAY CHARITABLE CONTRIBUTIONS. “You can no longer say you put a five or ten dollar bill in the collection plate each week.” Not if you want a deduction, anyway.
Russ Fox, Third Party Transcript Requests Reportedly Will No Longer be Processed by the IRS. ” This policy has not been officially published anywhere by the IRS, but based on IRS actions it appears that this policy was put in place because of identity theft concerns.”
Keith Fogg, Legitimate Claim of 5th Amendment on Tax Return Should not Result in Frivolous Return Penalty (Procedurally Taxing). “Citing the 5th amendment on a tax return is something that a tax protestor might do which is why such an assertion makes the list, but it is also something that someone with a legitimate fear of prosecution should do.”
Jason Dinesen, Glossary: Section 179. “As usual, Congress continues to dither on any tax extender bill for 2015.”
Paul Neiffer, A Slow Slog to the Finish Line on Section 179
Kay Bell, December! Time for shopping, holiday parties and taxes! A good discussion of some standard year-end planning techniques.
Roberton Williams, The ACA Penalty Tax Is Going Up If You Don’t Get Health Insurance. (TaxV0x).
TaxProf, The IRS Scandal, Day 938
The Critical Question. What’s Next for Microsoft After Some Expensive Table Pounding? (Tax Analysts Blog)
News from the Profession. Fake Occupants Caused Some Problems in Grant Thornton’s Audit of Assisted Living Concepts (Caleb Newquist, Going Concern). Yeah, fake customers are probably not a good thing to find in an audit.