March 23, 2015

The requirement to keep adequate records when attempting to deduct various business-related expenses can’t be taken lightly.

In the case of Peterson v. Commissioner, Matthew Peterson filed individual income tax returns for tax years 2011 and 2012. The returns contained various trade and business expenses on his Schedule C and various unreimbursed employee expenses on Schedule A.

Peterson claimed vehicle expense, parking fees, travel expense and other business expenses on his Schedule A as unreimbursed employee expenses. The vehicle expense and travel expense items are subject to the very strict substantiation requirements of Internal Revenue Code Section 274.

The taxpayer must have documentary evidence to substantiate the following:

  • Amount of the expense
  • Time and place of travel or entertainment
  • Business purpose of the expense
  • Business relationship to the taxpayer of the persons entertained
  • The U.S. Tax Court ruled that Peterson failed to meet Section 274’s strict substantiation requirements. It denied the vehicle and travel expense deductions for both tax years 2011 and 2012.

    The parking fees and other business expenses for the same two years were denied because the taxpayer could not provide a business purpose for the expenses and was unable to prove that he was not reimbursed by his employer for these expenses. Taxpayers who are reimbursed by their employers for various expenses, or have the right to be reimbursed, are not allowed deductions for these expenses on their tax returns.

    Peterson ran into these same issues regarding his Schedule C business expenses. He had expenses for meals and entertainment, travel and office expense.

    Regarding the meals and entertainment and travel, Peterson again was not able to meet the strict substantiation requirements of Section 274 and was denied deductions in both 2011 and 2012 for these line items.

    For the office expense, Peterson produced some sort of log right before he was scheduled to go to trial but did not have any receipts or third-party documentation. The court disallowed this deduction because it determined that a business purpose for the deduction was not provided.

    Many of these Schedule C and A items could have been legitimate expenses except Peterson did not keep adequate records. The burden of proof regarding expense deductions falls on the taxpayer.

    In this case, the taxpayer could not meet that burden of proof, and the deductions were denied (Matthew C. Peterson v. Commissioner, U.S. Tax Court, TC Memo 2015-23, Feb. 11, 2015).

    This article was originally posted on March 23, 2015 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at