2017 T.C. Memo. 78
Tax Ct.2017Background
- In 2010 Kenneth D. Humphrey worked as a Customs and Border Protection (DHS) officer and resigned May 31, 2010; he was unemployed for the remainder of the year.
- On his 2010 Form 1040 Schedule A Humphrey claimed: $17,654 in unreimbursed employee business expenses; $125 tax-prep fees; and $11,875 labeled "other expenses" (identified as attorney and accounting fees).
- DHS had a 2010 reimbursement policy requiring prior authorization and receipts; Humphrey did not request reimbursement for the claimed expenses and DHS had no record of reimbursement claims.
- Humphrey produced partial evidence (carbon copies of checks and bank statements) for payments to a law firm, but the government showed the firm represented him in a personal bankruptcy unrelated to DHS employment.
- The Commissioner issued a notice of deficiency disallowing the Schedule A deductions and asserting a 20% accuracy-related penalty under I.R.C. §6662; the case proceeded to trial and the record closed at trial.
Issues
| Issue | Humphrey's Argument | Commissioner’s Argument | Held |
|---|---|---|---|
| Deductibility of unreimbursed employee business expenses under §162 | Expenses were ordinary/necessary for his DHS duties and thus deductible | Expenses were reimbursable under DHS policy; Humphrey did not seek reimbursement or show employer required him to bear costs | Disallowed: taxpayer failed to prove expenses were not reimbursable or that employer expected him to pay |
| Deductibility of attorney fees on Schedule A | Fees paid to resolve an EEOC claim related to DHS employment and thus deductible | Fees were not substantiated as employment-related; evidence showed counsel handled personal bankruptcy, not EEOC/DHS matters | Disallowed: fees were personal, not sufficiently connected to taxpayer’s trade or business |
| Deductibility of tax-preparation fees | (No developed argument at trial) | Not substantiated | Disallowed: issue conceded for lack of evidence/argument |
| Accuracy-related penalty under §6662(a) | Adequate disclosure and reasonable cause; acted in good faith | Taxpayer was negligent and substantially understated tax by claiming unsupported deductions | Penalty imposed: Commissioner met burden; Humphrey failed to show reasonable cause or adequate disclosure |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (establishes burden on taxpayer to prove deficiency incorrect and that deductions are a matter of legislative grace)
- INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (taxpayer bears burden to substantiate entitlement to deductions)
- New Colonial Ice Co. v. Helvering, 292 U.S. 435 (taxpayer must prove deductions are allowable and substantiated)
- Commissioner v. Heininger, 320 U.S. 467 (ordinary and necessary expense analysis under §162)
- United States v. Gilmore, 372 U.S. 39 (legal-fees deduction depends on origin and connection of claim to business)
- Orvis v. Commissioner, 788 F.2d 1406 (employee expenses not deductible where employer reimbursement was available and taxpayer failed to seek it)