Maki v. Comm’r

Abstract

Case Name: Maki v. Commissioner, T.C. Summary Op. 2019-34 (Nov. 4, 2019).
Jurisdiction: U.S.T.C.
Petitioners: Roger G. Maki, Lilane J. Gervais. 
Respondent: Commissioner of the Internal Revenue Service.
Concepts: Tax; Self-Employment; Business Expense; Federal Rate Deduction; Luxury Water Travel; Lodging, Meals, & Incidentals.
Nature of Case: (1) Whether petitioner substantiated that his travels were “ordinary and necessary” business expenses under Internal Revenue Code Section 162(a)(2), and, if so, (2) is petitioner justified in applying per diem rate deductions for lodging, meals, and incidentals under 2011-42 I.R.B. 520 despite having no record of incurring expenses for lodging.

Introduction

Petitioner owns valuable timber properties which he personally maintains and secures.¹  To do so, he usually traveled three days of each week; he entered into evidence a summary of his travels extracted from a travel log.² Although his travel log was stolen, Petitioner gave credible testimony of its existence and content.  For tax year 2013, he deducted $7,011 for travel expenses and also applied per diem rates between $320-$374 per day computed for “Luxury Water Travel” away from home, but kept no record of food or lodging expenses.³ The court found that Petitioner sufficiently substantiated his travels and that they were ordinary and necessary; however, the per diem rate of “Luxury Water Travel” was not justified.⁴

First, Respondent questioned whether Petitioner substantiated his travels and whether the extracted summary of travels was accurate. Here, the repetitive pattern of travel was easily verifiable and petitioner testified credibly that during his travels he kept a log from which the summary was extracted, thus substantiating his travels.  Second, Respondent questioned whether these travels were “ordinary and necessary” business expenditures.  In the timber industry security is common and Petitioner also maintained the timber and planted new trees on his visits.⁵  Third, and lastly, Respondent questioned whether the per diem rate for “Luxury Water Travel” was justified.  Although self-employed individuals may deduct meals at the Federal rate established by locality, lodging requires demonstration that expense actually occurred.  Here, because the “Luxury Water Travel” per diem rate allotted for Lodging in addition to meals and incidentals, Petitioner was not justified in applying it.  Furthermore, that designation is intended for “away from home expenses incurred on an ocean liner or cruise ship.⁶

Background

This petition for rehearing is pursuant to 26 U.S.C. § 7463(a)(1) to redetermine a disputed deficiency not more than $50,000.  Here, the deficiencies related to deductions for Petitioner’s self employment reported on his schedule C.  All ordinary and necessary expenses incurred in carrying on a trade or business are deductible, including travel and related lodging and meals while “away from home” in pursuit of business.^{7 8}  Generally, substantiation of a deduction requires “sufficient evidence corroborating . . . (A) the amount . . . , (B) the time and place of the travel . . . , (C) the business purposes . . . , and (D) the business relationship to the taxpayer.⁹  While a taxpayer may substantiate actual expenses through adequate record keeping, he may also deduct expenses at the Federal per diem rate for the locality of travel to substantiate lodging, meals and incidental expenses.^{10 11}

A per diem allowance excludes lodging and only includes meals and incidentals if there is not a reasonable belief that lodging expenses occurred.¹²  In lieu of the actual expense amount, the amount may be computed at the Federal meal and incidental rate for the number of days a self-employed individual travels away from home.^13[vii]  The Federal rate for meals and incidentals is deemed substantiated for the purposes of 26 C.F.R. § 1.274-5T(b)(2)(i) and C, Temporary Income Tax. Regs., 50 Fed. Reg, 46014-16 (Nov. 6, 1985), if the self-employed individual substantiates the elements of “time, place, and business purpose of the travel.”

Case Description

For tax year 2013, rather than corroborate the actual amount of expenses incurred during travel for Petitioner’s timber business, he applied per diem rates.¹⁴  He substantiated his time and place   through credible testimony that he kept a log of his travels, from which he created a summary that he entered into evidence, and by traveling at regular intervals of approximately three days each week to the same place.¹⁵  The court said that petitioner’s repetitive travels could be easily verified.¹⁶  He also substantiated that his travels were “ordinary and necessary” to his business.¹⁷  Commercial timber companies commonly payed for security, demonstrating Petitioner’s need to monitor the property.¹⁸  Furthermore, Petitioner once lost trees to illegal harvesters during a prior period when he was ill and could not monitor his property.¹⁹  Finally, Petitioner planted new trees when he visited the property, thus furthering his business in an ordinary sense.²⁰ 

Although Petitioner substantiated his time, place and business purpose for his per diem travel expenses, the court held that Petitioner incorrectly applied the per diem rates for “Luxury Water Travel” because he provided no evidence that he incurred lodging expenses in the “ordinary and necessary” pursuit of his timber business.²¹  The per diem rates for “Luxury Water Travel” include lodging, in addition to meals and incidentals.  Because a tax payer is relegated to per diem rates for only meals and incidentals, excluding lodging, if there is no reasonable belief that lodging expenses were incurred, petitioner was entitled to apply the per diem rates for the locality to which he travelled.  Furthermore, “Luxury Water Travel” is “intended only for away from home expenses incurred on an ocean liner or cruise ship.”²²

Conclusion

To apply per diem rates for “Luxury Water Travel,” which includes lodging, meals and incidentals incurred in the pursuit of business purpose, a tax-payer must substantiate that lodging expenses were incurred, in addition to substantiating time, place and connection to “ordinary and necessary” business purpose.  Here, the court held that Petitioner could not apply the per diem rates for “Luxury Water Travel” because there was no reasonable belief that petitioner incurred lodging expenses. 

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1. Petitioner inherited 100 acres and planted trees whose matured value was over $1,000,000.  Maki v. Commissioner, T.C. Summary 2019-34, slip op at 2-3.
2. Petitioner’s round trips were approximately 300 miles.  Id. at 2.
3. The “Luxury Water Travel” deduction includes lodging, meals and incidentals and is the highest Federal Rate.  Id. at 6-7.
4. Petitioner took 47 trips in 2013.  Id. at 6.  He correctly applied the per mile rate for his travel expense multiplied by the number of miles and number of trips.  Id. at 7.
5. When Petitioner previously took ill and could not check the property, it was stripped of fur trees.   Petitioner claimed no income from the timber business and could not afford to pay for security.  Id. at 3-4.
6. Id. at 6-7.
7. 26. U.S.C. § 162(a)(2).
8. “Away from home” means “overnight.”  Commissioner v. Flowers, 326 U.S. 465, 470-72 (1946).
9. 26 U.S.C. § 274(d).
10. Rev. Proc. 2011-47, sec. 1, 2011-42 I.R.B. 520, 520.
11. The locality of travel is where the individual stops for sleep or rest.  Rev. Proc. 2011-47, sec 3.
12. Rev. Proc. 2011-47, sec. 4. 
13. Id.
14. Maki v. Commissioner, T.C. Summary 2019-34, slip op at 4.
15. Id. at 5-6.
16. Id. at 6.
17. Id.
18. Id. at 3, 6.
19. Id. at 3.
20. Id.
21. Id. at 7.
22. Id.