Tax Court: Itemized receipts required to substantiate deductions.

A recent court case (Gorokhovsky v. Commissioner, T.C. Memo. 2012-206) disallowed deductions because the taxpayer lacked itemized receipts necessary to substatiate deductions.

Main Issue: Credit card statements and cancelled checks while are important to prove payment, do not contain the detail and itemization necessary to substantiate a deductable business expense, nor do self-generated expense records. Third-party vendor receipts are needed.

Some of the case highlights that the tax court uphelad for the Commissioner:

  • Generally, the Commissioner’s determination of a deficiency is presumed correct, and the taxpayer has the burden of proving it incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
  • Deductions are a matter of legislative grace, and taxpayers generally bear the burden of proving their entitlement to the deductions they claim. Sec. 6001; INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
  • To be deductible, such expenses generally must be substantiated. See Hradesky v. Commissioner, 65 T.C. 87 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); see also sec. 6001; sec. 1.6001-1(a), Income Tax Regs. A taxpayer must keep records sufficient to establish the amounts of the expenses reported on his return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
  • In other cases we have repeatedly concluded that self-generated or nonitemized receipts or expense records are insufficient to substantiate expenses. See, e.g., Robinson v. Commissioner, T.C. Memo. 2011-99 (holding that the taxpayer’s self-generated expense logs, nonitemized receipts, and nonitemized credit card statements were insufficient to substantiate claimed expenses); Good v. Commissioner, T.C. Memo. 2008-245 (holding that the taxpayers’ self-generated computer records and testimony were insufficient to substantiate claimed expenses); Gaylord v. Commissioner, T.C. Memo. 2003-273 (holding that the taxpayer’s nonitemized receipts and self-generated receipts were insufficient to substantiate claimed expenses).
  • We conclude that the self-generated, handwritten records petitioner submitted are insufficient to show either that petitioner paid the claimed expenses or that those expenses are deductible business expenses.
  • With respect to petitioner’s bad debt expenses, that even had petitioner established that he had uncollected receivables, he failed to establish that he took steps to enforce collection or that taking such steps would have been futile. Without such evidence, a debt generally is not regarded as wholly worthless. Perry v. Commissioner, 22 T.C. 968, 974 (1954); John v. Commissioner, T.C. Memo. 2004-257.
  • Finally, we consider whether petitioner is liable for the accuracy-related penalty pursuant to section 6662 with respect to his 2004 tax liability. Section 6662(a) imposes an accuracy-related penalty of 20% of any underpayment that is attributable to causes specified in subsection (b), including a “substantial understatement of income tax” or “[n]egligence or disregard of rules or regulations.” There is a “substantial understatement” of income tax for any tax year where the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return for the tax year or $5,000. Sec. 6662(d)(1)(A).