The “And Here They Come….” Case

Petitioner: Willard Michael Christine & Patricia Ethel Borgia


Memo Number: 2010-144


Decision Date: June 30, 2010


Burden of Proof: Taxpayer


Case in a Nutshell:

IRS disallowed unreimbursed employee expense and home office expense deductions on Schedule A resulting in a deficiency. Taxpayer seeks to mitigate by compelling the court to allow deductions.

Discussion in a Nutshell:

Mr. Christine was a horse racing reporter for the L.A. Times. The paper reimbursed him for significant expenses.  Taxpayers may deduct all ordinary and necessary unreimbursed expenses incurred in the course of trade or business but must maintain records and prove entitlement to claimed deductions. Deductions must always be directly connected or pertaining to the business. To deduct expenses for travel away from home, entertainment/recreation, and use of listed property (computers, etc.) a taxpayer must have corroborating evidence with a “high degree of probative value” to support testimony as to the amount, time/place, business purpose and, business relationship to the taxpayer. Nearly all of taxpayer’s claimed deductions were in these categories.

• Ordinary: common or frequent in occurrence for that business

• Necessary: appropriately and helpful for that business.

 The Taxpayer submitted mailed IRS more than 700 pages of receipts, etc. much of which was illegible and unorganized. Further examination showed that at least some of the unreimbursed expenses had in fact been reimbursed.

In order for expenses allocable to a home office to be deductible the space must be regularly and exclusively used as the taxpayer’s PRINCIPAL place of business. In the case of an employee, it must also be for the convenience of the employer. Principal place of business means the most important and significant place based on importance of tasks completed at each place and time spent at each place. There can be only one PRINCIPAL place of business for each trade. The taxpayer had deducted 100% of cable TV expenses due to their use of 2 horse racing channels for business. The taxpayers allocated 1/3rd of all their home expenses to business but provided no evidence to support the correctness of this calculation.

The IRS argued that any allowed expenses should have been allocated in part to a hobby since the taxpayer was concurrently authoring a book. Hobby expenses are limited to the income derived from the hobby. The IRS also contended that any expenses related to authoring a book should have been amortized as start-up expenses since his book was not yet complete and available for sale.

Decision in a Nutshell:

Taxpayer in some cases met some or most of the four substantiation requirements but not all so these deductions were disallowed. The Taxpayer had attempted to claim mileage deductions for miles driven on a rental car. This deduction only applies to personally owned or leased automobiles. He should have deducted the actual cost of the rental, if not reimbursable. Taxpayers did not prove that dry cleaning is a customary expense in their trade or that the items cleaned were unsuitable for everyday wear. The expenses were disallowed.

The court allowed deductions for an LA Times subscription and mailing expenses that would have been paid by the paper if he had gone to the office of the paper which was 20 miles one way from his home office. Although the taxpayer proved that the LA times had inadequate office space to accommodate all writing staff, that alone was not enough to carry the burden of proof in regard to the office in part due to failure of the taxpayer to introduce a record of how much time was spent working in the office.

Taxpayer was able to prove that his PRIMARY or PRINCIPAL objective in engaging in the activity was for profit because: he did not manage the endeavor in an unbusiness-like fashion, employed an agent to help him sell his book, had expertise in the field, spent sufficient time on the trade, had some past success/profits at a similar endeavor and the book being authored in the disputed year did subsequently sell. The tax court recognized that a person can carry on a trade with a profit motive even if working full-time at another trade.

• The tax court recognized that some element of personal pleasure by itself does not preclude an activity from being legitimately for-profit.

• The tax court recognized that a trade may result in a loss that is used to offset other income and still be for-profit.

• The IRS held that the taxpayer’s sale of a book decades earlier qualified the writing as an active trade.

Take Aways:

• Only expenses for which a taxpayer could not have been reimbursed may be deducted. In other words, if a taxpayer is entitled to reimbursement but fails to seek it, the expenses are not deductible. The expense/inconvenience that the taxpayer would need to endure in order to meet company policy to be reimbursed was a factor favoring the taxpayer.

• The taxpayer’s time working in hotel rooms while on the road was a factor favoring the IRS in relation to whether his home office was his principal place of business.

• The taxpayers were not assisted much by the court’s lack of support for the IRS’s hobby or start-up disallowance arguments because most expenditures were disallowed due to their inability to provide adequate substantiation.

• In relation to the hobby issue, the court inferred that if the taxpayer’s profit objective was bona fide that may be enough to satisfy the court, even though most people might consider the expectation a profit from a given activity unreasonable.