The IRS frequently challenges travel expenses. These expenses have a higher substantiation requirement, which the IRS uses to disallow every expense no matter how reasonable or how certain it is that the expense was incurred. But what if it was exceedingly certain that the expense was incurred and there is a method for computing the amount? The court addresses this in Gervais v. Commissioner, T.C. Summary 2019-34, in the context of expenses for repetitive travel to and from the same location.
Facts & Procedural History
The taxpayer inherited 100 acres of land in Washington in 1980. The land was situated in two counties. The taxpayer planted trees on the land to harvest for timberland. The trees were almost mature at the time this tax case came about.
The tax case involved a number of issues, but for this article we’re focusing on the travel expenses. The taxpayer traveled every week to take care of and to monitor the timber on the land. He had to do this to deter illegal harvesting by third parties.
This was a 300 mile visit for each trip. The taxpayer maintained logs listing the days he visited the land. He used this log to make a summary of the visits for the IRS. After this, the logs were stolen when the building on the land was vandalized. The taxpayer’s summary showed 47 round trips to and from the land in 2013.
The taxpayer’s tax return included travel and per diem expenses for travel away from home. The IRS audited the tax return and disallowed both of these expenses.
Deduction for Travel Expenses
The general rule is that ordinary and necessary business expenses are deductible. This includes meals, lodging and mileage expenses.
A self-employed individual can deduct meal expenses using the Federal rate for travel away from home. This per diem amount varies by year. The benefit of this per diem amount is that it is deemed to be substantiated. Additional records showing the amount spent are not required.
But it should be noted that this per diem rule doesn’t apply to lodging expenses. The taxpayer used the “luxury water travel” per diem deduction, which includes lodging expenses. Thus, his $55,925 per diem deduction was overstated.
Taxpayers can also deduct miles driven for business activities. They can do so using the set mileage rate or their actual costs incurred.
The IRS’s Recordkeeping Policies
The IRS requires original contemporaneous records before it will allow most business deductions. The smaller the taxpayer, the larger this requirement is. A taxpayer has to fight for small mileage expenses, while a large corporation can avoid showing any records for very large deductions.
Mileage expenses are a prime example. The IRS requires small taxpayers, such as self-employed individuals like the one in this case, to maintain and produce a mileage log. Recreating it after the fact will not do. This is true regardless of whether the taxpayer uses mileage or actual costs. But when the mileage is used, the IRS always requires a mileage log. The absence of a log–even if it is destroyed by a hurricane–will result in a full disallowance of the expense at the administrative level.
We learned this in Houston during the Hurricane Harvey floods. The IRS rejected just about every deduction and claim by taxpayers in Houston who lost their records in the storms. It did so based on the lack of contemporaneous records. Recreated records were not sufficient. And it did so at all levels–IRS audit, IRS appeals, and in court. The result was unduly harsh for taxpayers in the Houston area.
Surely if the loss of records due to a presidentially declared disaster like Hurricane Harvey will not qualify, the loss of records due to a vandal would also not qualify–right? That brings us back to this case. In this case, the taxpayer deducted $7,011 in mileage based on the miles he drove. He didn’t have the mileage log as it was stolen when the property was vandalized. Good enough?
Exception for Repetitive Travel
There are hundreds (if not thousands) of cases in which the court denied these types of deductions for lack of substantiation. The basis for the denial is that these types of expenses have a higher substantiation requirement.
This is the argument IRS attorneys make in every case like this. The IRS made this very argument in this case. It argued that the taxpayer “did not provide a log and the information he provided was inaccurate.”
But the court did not agree with the IRS. With respect to the expenses, the court said:
Petitioner established a normal pattern of travel, usually three days each week, and that pattern rarely varied. He always traveled to the same locations. His testimony that he maintained a log is credible, and his summary, received in evidence, was extracted from the log he maintained. In any event, the repetitive pattern of travel would be easily verified because it was essentially the same each week. That fact along with petitioner’s credible testimony is sufficient to show the occasions on which he traveled to and visited the lumber properties. Accordingly, we have found that petitioner made 47 trips and spent 161 days at his timber properties during 2013. Finally, we are persuaded that petitioner’s travel expenses were ordinary and necessary because of the need to monitor the timber and to maintain and plant trees.
So there you have it. A taxpayer whose travel goes back to the same location should be allowed their travel, meals and mileage expenses even in the absence of records or a mileage log.
Taxpayers who have lost their records due to no fault of their own may find comfort in this court case. But even if cited by the taxpayer, the IRS is likely to ignore it. Taxpayers who find themselves in this situation may be better served by bypassing the IRS administrative function and just have the tax court hear the case.