The absence of records results in the disallowance of tax deductions and credits on audit. This is particularly true for expenses that are subject to the higher substantiation requirement in Section 280F, such as travel expenses. In Baker v. Commissioner, T.C. Memo. 2014-122, the court considered whether a truck driver’s transportation expenses are subject to the Section 280F rules.
Facts & Procedural History
Mr. Baker worked as a self-employed truck driver. He owned a 1995 Mack Truck tractor which he used to haul tank trailers from a pickup site to designated destinations.
In 2009, Mr. Baker received $119,289 in self-employment income, primarily from Advantage Tank Lines.
Mr. Baker failed to file his 2009 federal income tax return. The IRS prepared a substitute for return or SFR, which was based on information reported to the IRS by third parties.
Mr. Baker was not able to satisfy the IRS with the records he had or he simply opted not to provide records to the IRS as he did not have the records. Instead, Mr. Baker petitioned the U.S. Tax Court to redetermine his tax liability.
Substantiating Deductions & Credits
Taxpayers are generally required to provide proof of payment to be able to deduct business expenses. The courts can apply the Cohan rule to establish the amount of the expenses if it is clear that some amount of deductible expense was incurred and there is a basis for making an estimate. The courts cannot apply the Cohan rule if the heightened substantiation requirements in Section 280F apply.
The Higher Standard for Section 280F Expenses
Section 280F identifies “listed property” and includes an exception, which says that listed property does not include “property substantially all of the use of which is in a trade or business of providing to unrelated persons services consisting of the transportation of persons or property for compensation or hire.”
The court concluded that Mr. Baker’s truck is not listed property due to this exception. Thus, the court concluded that the following expenses were not subject to the higher substantiation requirements: fuel, truck maintenance, truck insurance, truck oil changes, truck storage fees, truck licenses plates, and heavy highway use taxes.
The Court Allows Estimates
Mr. Baker claimed that he incurred the following expenses: fuel ($38,516), truck maintenance ($12,200), truck insurance ($1,500), truck oil changes ($1,722), truck storage fees ($1,200), truck license plates ($1,450), and heavy highway use taxes ($550). He also claimed travel expenses ($6,500). These amounts were based on an estimate given that he drove 65,000 miles during the year.
Mr. Baker did not present any documentation in support of these expenses or the miles driven; however, the court believed that Mr. Baker incurred some amount of these expenses and believed Mr. Baker was a credible witness. Based on this, the court accepted Mr. Baker’s amounts, but significantly reduced the amounts given that Mr. Baker could not document the expenses.