STATE OF WISCONSIN
TAX APPEALS COMMISSION
PHILIP AND PATRICIA SUNICH
P.O. Box 315
Benet Lake, WI 53102
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8933
Madison, WI 53708
|DOCKET NO. 96-I-914
DECISION AND ORDER
MARK E. MUSOLF, CHAIRPERSON:
This matter was heard at Milwaukee on May 6, 1998. Both parties have filed briefs. The petitioners represent themselves. Attorney Donald J. Goldsworthy represents the respondent.
Having considered the entire record, the Commission hereby finds, concludes, and orders as follows:
FINDINGS OF FACT
1. The period under review is the years 1991 through 1994.(1) During that period, petitioner Philip Sunich was employed by the Chicago & Northwestern Transportation Co. as a locomotive engineer.
During 1991, Patricia Sunich was employed by the Cellular Division of Antioch Tire, Inc.(2)
2. Petitioners filed Wisconsin and federal income tax returns claiming as itemized deductions Employee Business Expenses from federal Form 2106. Among the claimed expenses were vehicle expenses, including depreciation, based on a claimed percent of vehicle business use of between 82.34% and 86.08%.
3. After audit, the respondent ultimately allowed(3) some of the claimed vehicle expenses, but disallowed others as unsubstantiated, as follows:
1991 1992 1993 1994
Expenses Claimed $5,962 $13,752 $7,406 $11,522
Expenses Disallowed 3,722 11,004 4,136 8,783
Expenses Allowed 2,240 2,748 3,270 2,739
Respondent also determined that petitioners had not substantiated the percent of vehicle business use claimed for any of the years under review.
4. Respondent also disallowed petitioners' claimed capital losses of $3,000 for 1993 and $3,000 for 1994(4) with respect to a default judgment they obtained against Frederick Bon, dated February 3, 1993, in the total amount of $9,894.90. This consisted of $4,008 on a defaulted promissory note dated May 2, 1984 and $5,886.90 for Mr. Bon's failure to share the cost of utilities and food purchases when he resided with petitioners. Petitioners were unable to collect anything on the judgment because Mr. Bon could not be located.
5. Petitioners timely filed a petition for redetermination with respondent, which was denied, and they timely appealed the denial to this commission.
6. Petitioners' only evidence supporting the disputed claimed vehicle expenses was their own testimony and handwritten pages summarizing their claimed business mileage and vehicle expenses. They presented no independent verification of the business use of their vehicles or receipts substantiating any of their claimed vehicle expenses.
1. Did the petitioners substantiate, as required by § 274 of the Internal Revenue Code, the unreimbursed employee vehicle expense deductions claimed on their Wisconsin income tax returns but disallowed by the respondent for the period under review?
2. Did the petitioners substantiate a worthless debt under § 166 of the Internal Revenue Code, deductible as a short-term capital loss on their 1993 and 1994 Wisconsin income tax returns but disallowed by the respondent?
APPLICABLE INTERNAL REVENUE CODE
Sec. 274 [1986 Code].
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(d) SUBSTANTIATION REQUIRED.--No deduction or credit shall be allowed --
(1) under section 162 or 212 for any traveling expense ...
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unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement (A) the amount of such expense or other item, (B) the time and place of the travel, ... or use of the facility or property, ... (C) the business purpose of the expense or other item, ....
Treas. Reg. § 1.274-5T
(c) Rules of substantiation--
(1) In general. Except as otherwise provided in this section and § 1.274-6T, a taxpayer must substantiate each element of an expenditure or use (described in paragraph (b) of this section) by adequate records or by sufficient evidence corroborating his own statement. Section 274(d) contemplates that a taxpayer will maintain and produce such substantiation as will constitute proof of each expenditure or use referred to in section 274. Written evidence has considerably more probative value than oral evidence alone. In addition, the probative value of written evidence is greater the closer in time it relates to the expenditure or use. A contemporaneous log is not required, but a record of the elements of an expenditure or of a business use of listed property made at or near the time of the expenditure or use, supported by sufficient documentary evidence, has a high degree of credibility not present with respect to a statement prepared subsequent thereto when generally there is a lack of accurate recall. Thus, the corroborative evidence required to support a statement not made at or near the time of the expenditure or use must have a high degree of probative value to elevate such statement and evidence to the level of credibility reflected by a record made at or neat the time of the expenditure or use supported by sufficient documentary evidence. The substantiation requirements of section 274(d) are designed to encourage taxpayers to maintain the records, together with documentary evidence, as provided in paragraph (c)(2) of this section.
(2) Substantiation by adequate records--
(i) In general. To meet the "adequate records" requirement of section 274(d), a taxpayer shall maintain an account book, diary, log, statement of expense, trip sheets, or similar record (as provided in paragraph (c)(2)(ii) of this section), and documentary evidence (as provided in paragraph (c)(2)(iii) of this section) which, in combination, are sufficient to establish each element of an expenditure or use specified in paragraph (b) of this section....
(ii) Account book, diary, etc. An account book, diary, log, statement of expense, trip sheet, or similar record must be prepared or maintained in such manner that each recording of an element of an expenditure or use is made at or near the time of the expenditure or use.
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(B) Substantiation of business purpose. In order to constitute an adequate record of business purpose within the meaning of section 274(d) and this paragraph (c)(2), a written statement of business purpose generally is required. However, the degree of substantiation necessary to establish business purpose will vary depending upon the facts and circumstances of each case. Where the business purpose is evident from the surrounding facts and circumstances, a written explanation of such business purpose will not be required. For example, in the case of a salesman calling on customers on an established sales route, a written explanation of the business purpose of such travel ordinarily will not be required....
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(C) Substantiation of business use of listed property--
(1) Degree of substantiation. In order to constitute an adequate record (within the meaning of section 274(d) and this paragraph (c)(2)(ii)), which substantiates business/investment use of listed property (as defined in § 1.280F-6T(d)(3)), the record must contain sufficient information as to each element of every business/investment use. However, the level of detail required in an adequate record to substantiate business/investment use may vary depending upon the facts and circumstances. For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of a truck is to make deliveries to customers on an established route may satisfy the adequate record requirement by recording the total number (of) miles driven during the taxable year, the length of the delivery route once, and the date of each trip at or near the time of the trips. Alternatively, the taxpayer may establish the date of each trip with a receipt, record of delivery, or other documentary evidence.
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(iii) Documentary evidence. Documentary evidence, such as receipts, paid bills, or similar evidence sufficient to support an expenditure shall be required for --
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(B) Any other expenditure of $75 or more ($25 or more for expenditures incurred before October 1, 1995) except, for transportation charges, documentary evidence will not be required if not readily available, ....
Sec. 166 [1986 Code].
(a) GENERAL RULE.--
(1) WHOLLY WORTHLESS DEBTS.--There shall be allowed as a deduction any debt which becomes worthless within the taxable year.
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(b) AMOUNT OF DEDUCTION.--For purposes of subsection (a), the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.
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(d) NONBUSINESS DEBTS.--
(1) GENERAL RULE.--In the case of a taxpayer other than a corporation --
(A) subsection (a) shall not apply to any nonbusiness debt; and
(B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 1 year.
(2) NONBUSINESS DEBT DEFINED.--For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than --
(A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or
(B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business.
Treas. Reg. § 1.1661-1. Bad debts.--
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(c) Bona fide debt required. Only a bona fide debt qualifies for purposes of section 166. A bona fide debt is a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money....
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(e) Prior inclusion in income required. Worthless debts arising from unpaid wages, salaries, fees, rents, and similar items of taxable income shall not be allowed as a deduction under section 166 unless the income such items represent has been included in the return of income for the year for which the deduction as a bad debt is claimed or for a prior taxable year.
CONCLUSIONS OF LAW
1. The petitioners did not substantiate, as required by § 274 of the Internal Revenue Code, the vehicle expense deductions disallowed by the respondent, and did not substantiate the percentages they claimed for business use of their vehicles during the period under review.
2. The petitioners substantiated a $4,008 nonbusiness debt which became worthless in 1993, deductible as a Wisconsin short-term capital loss of $500 in 1993, with $500 deductible as a carryover short-term capital loss in 1994. They did not substantiate as a bad debt the $5,886.90 for Mr. Bon's failure to share the cost of utilities and food purchases.
Substantiation of Claimed Vehicle Expenses
Internal Revenue Code § 274(d), supra, makes clear that no deduction is allowed without substantiation "by adequate records or by sufficient evidence corroborating the taxpayer's own statement" as to the amount of the expense, the time and place of travel, and the business purpose of the expense.
The problem with petitioners' vehicle expense testimony and evidence presented at the trial is that it is entirely self-serving. Rather than "corroborating the taxpayer's own statement," which the tax law requires, it is the taxpayers' own statement. This falls far short of the proof required. The petitioners presented no receipts or written statements of anyone other than themselves to verify the disputed expenses.
Our evaluation of the petitioners' evidence is as follows:
Exhibits B, D, E, and F. These documents were prepared by Mr. Sunich, purporting to show the days he claims to have driven roundtrips to various stations where he worked. Together with Exhibit C, which lists the various stations and their roundtrip miles from his home, Mr. Sunich insists that these exhibits substantiate his business mileage. They do nothing of the sort.
There is no independent verification whatsoever that Mr. Sunich's job required these trips or that he actually made them. No substantiation was presented from his employer or any supervisor or co-worker, and he showed no documentary proof that he made even one of the almost daily trips he claimed over the four-year period. No daily or weekly diary was presented; these exhibits appear to be no more than summaries prepared at a later time, not at or near the time of the trips. Even a short statement from his employer, verifying Mr. Sunich's assignments to various locations over the four-year period, could have validated Exhibits B through F. Without such proof these exhibits have little, if any, probative value.
Exhibits G, I, J, and K. These exhibits consist of pages from "logs" kept by Mrs. Sunich. They contain itemizations and summaries of annual mileage and business mileage, plus weekly amounts spent on car washes, oil changes, fuel, and miscellaneous supplies for all vehicles used during the period under review.
Again, no receipts or verifications of any of the listed expenses were presented. These exhibits appear to have been prepared at one time, not daily, weekly or near in time to the expenditures as Mrs. Sunich claimed. Except for a few of the miscellaneous expenses and the oil changes, there is no proof of the places of purchase of any items, including fuel. The fuel expenditures shown are nothing more than weekly summaries, with no itemization of dates or amounts. No odometer readings or dates are shown for the claimed mileage, only an annual summary for each vehicle. No verification of the nature of Mrs. Sunich's job or her travel requirements or claimed routes was provided. Self-serving summaries, without a trace of verification, fall far short of the substantiation requirements of Treas. Reg. § 1.274-5T(c)(2).
There were numerous other shortcomings, inconsistencies and discrepancies in the petitioners' testimony and records. Most of these are discussed in detail at pages 8-12 of respondent's brief. In any event, the petitioners' testimony and exhibits were not convincing with respect to either their claimed business mileage or vehicle expenses.
Petitioners attempt to bootstrap their lack of substantiation by claiming that each of their vehicle expenses was less than $25, thus bringing them within the safe harbor language in Treas. Reg. § 1.274-5T(c)(2)(iii)(B), supra. This argument fails in several regards.
First, Treas. Reg. § 1.274-5T(c)(2)(i) requires both a log and documentary evidence which, in combination, "establish each element of expenditure." Because the petitioners' logbook pages do not meet the contemporaneous entry requirements and are otherwise suspect as set forth above, petitioners fail the substantiation requirements.
Second, and more significantly, IRC § 274 requires substantiation not only of the amount of each expense and time and place of travel, but also the business purpose of the travel. As explained above, petitioners presented nothing other than their own testimony to verify the business purpose of their claimed mileage.
In short, the petitioners' record keeping was wholly inadequate to meet the substantiation requirements of the Code and Regulations. They were either unable or chose not to obtain the required verification after the fact, in spite of having had ample opportunity to do so.(5)
With respect to the basis of petitioners' various vehicles for depreciation purposes, adequate substantiation exists in the record. That is of no consequence, however, because the claimed business use and mileage were never substantiated.
Substantiation of Claimed Capital Losses
The basis for petitioners' claimed capital losses in 1993 and 1994 is a $9,894.90 default judgment they obtained against Frederick Bon in 1993. Treas. Reg. § 1.166-1(c), supra, specifies that only a "bona fide" debt is deductible, defined as "a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money."
The petitioners' default judgment does not itself prove that a bona fide debt existed; only satisfactory evidence of a valid and enforceable obligation to pay can do so. The promissory note dated May 1984, together with the 1993 judgment and Mr. Sunich's testimony, provide clear and satisfactory evidence of a $4,008 bona fide debt, which became worthless in 1993. An actual cash loss was sustained because the note was given to purchase a vehicle for $4,008 from Mr. Sunich. That amount is therefore deductible as a short-term capital loss in 1993, with the balance carried forward to 1994, both years being subject to Wisconsin's annual net capital loss limitation of $500.
However, clear and satisfactory evidence was notprovided to show that the balance of the judgment against Mr. Bon, relating to a claimed oral agreement to share food and utility costs, was a bona fide debt within the meaning of IRC § 166. Evidence of a judgment is not evidence of a bona fide debt under the tax law without clear evidence of a debtor-creditor relationship.
The respondent's action on petitioners' petition for redetermination is modified in accordance with Finding of Fact 3 and Conclusion of Law 2, supra, and is affirmed as so modified.
Dated at Madison, Wisconsin, this 14th day of September, 1999.
WISCONSIN TAX APPEALS COMMISSION
Mark E. Musolf, Chairperson
Don M. Millis, Commissioner
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
October 27, 1999 Petition for rehearing denied under § 227.49(3)
December 6, 1999 Appealed to Kenosha County Circuit Court (Case No. 99CV1229)
4 These amounts were claimed on petitioners' federal returns. The 1994 amount was a carryover of the unused loss from 1993. It is not disputed that Wisconsin law allows a maximum of $500 net capital loss for any year, with any balance carried forward.