Posted on June 24th, 2014

 Taxpayer salvages partial deduction for unsubstantiated trucking expenses based upon Cohan rule

In a recent decision, the Tax Court applied the Cohan  rule which allows a taxpayer to claim expenses for his business even where he cannot support the business expenses. The court permitted a taxpayer to claim a partial deduction for business mileage and associated expenses even though he had no records of the expenses. The strict listed property substantiation rules didn’t apply because the taxpayer’s vehicle was used for transportation of persons or property for compensation or hire.

Background.  Under the so-called Cohan  rule, if a taxpayer establishes that an expense is deductible, but is unable to substantiate the precise amount, a court may estimate the amount, bearing heavily against the taxpayer whose inexactitude is of his own making. The taxpayer must present sufficient evidence for a court to form an estimate. Stricter substantiation for travel, meals, and certain listed property, overrides the Cohan  rule., no deduction is allowed with respect to listed property unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement: (1) the amount of the expense; (2) the time and place of the expense; and (3) the business purpose of the expense.

However, in the alternative, for listed property, each element of an expense or use may be established by the taxpayer’s own written or oral statement “containing specific information in detail as to such element” combined with corroborative evidence sufficient to establish such element

Listed property generally means passenger autos and any other property used as a means of transportation. However, 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

Facts.  During 2009, Lee Baker worked as a self-employed truck driver. His business involved using his personally owned truck tractor to haul tank trailers from a pickup site to designated destinations. He failed to file a tax return for 2009. Not a good idea, as third parties frequently send in forms to say what they paid as for 2009. In 2012, IRS prepared a substitute for return for 2009 on the basis of information returns filed with it by third-party payors and issued a notice of deficiency. Baker disputed the deficiency and decided to argue his case before the Tax Court.

The point of contention was whether Baker was entitled to expenses for the business use of his truck. At trial, he claimed that he drove approximately 65,000 miles in 2009, and incurred approximately $63,638 of expenses related to his truck business. The $63,638 included amounts for fuel ($38,516), maintenance ($12,200), insurance ($1,500), oil changes ($1,722), storage fees ($1,200), license plates ($1,450), and heavy highway use taxes ($550). He also claimed travel expenses ($6,500). However, Baker couldn’t substantiate his expenses. He filed for bankruptcy in 2011 and, in the process of losing his home in 2011, lost all of his records relating to the truck operation.

Had he filed a tax return and claimed his deductions, no problem would have arisen. His big error was not filing a return.

Tax Court allows some deductions.  The Tax Court found that Baker’s truck thus wasn’t listed property. As a result, the claimed fuel, maintenance, insurance, oil changes, storage fees, license plates, and heavy highway use taxes, as expenses incurred “with respect” to the truck, weren’t subject to the heightened substantiation requirements of. The Tax Court said Baker credibly testified about his business, but all of his figures were based on rough estimates that were made years after the fact with no documentation. As a result, these expenses were subject to the Cohan  rule. On the facts, the Tax Court found that Baker was entitled to a deduction of only $18,000 for fuel expenses, $500 for insurance, $500 for oil changes, and $400 for license expenses. The Tax Court concluded that Baker did not present sufficient evidence to substantiate the maintenance, storage, taxes, and travel expenses that he said he incurred. Accordingly, he wasn’t entitled to a deduction for these expenses.

A taxpayer who establishes that he is unable to produce his records through circumstances beyond his control, such as fire, flood, earthquake or other casualty, may substantiate a deduction by means of a reasonable reconstruction of the expenses or uses. This escape hatch has been allowed where, for example, a taxpayer’s records were destroyed while in his accountant’s possession. The issue of whether Baker’s circumstances-losing his records in the process of losing his home-fell within this reg didn’t arise in the decision.