In Uncategorized on 05/23/2012 at 18:01

Or, It’s Not a Lease, It’s An Employee Expense Plan

Well, she was in California, and didn’t work for the County, but the old Jimmy Webb song that Glen Campbell made a hit in 1968 ran through my head as I read about the plight of Kathleen Murray, a/k/a Kathy the Cable Girl, 2012 T.C.Sum. Op. 49, filed 5/23/12. It’s another Section 7463 “so what?” case, but the unreimbursed employee business deduction angle makes it interesting.

Kathy started as a horse trainer, complete with a Sundowner Stampede horse trailer and a Dodge 3500 to pull it, but then met up with the Cable Guy (no, not Larry; Ernie Helm, known as Ernie the Cable Guy, hereinafter ETCG). ETCG convinces Kathy to stop training ponies and splice up with him (no, not that kind of splicing–splicing telephone wires).

They both worked for Prime West, an entity that connects things to other things, specifically telephone lines to add telephone and data services to people and businesses. ETCG and Kathy were employees of Prime West, and usually worked the same district. ETCG taught Kathy the trade.

Prime West supposedly leased Kathy’s trucks, and a van she owned, and certain tools she needed (not all cable can be spliced the same way with the same tools), and paid Kathy a flat hourly lease rent for all of them. But, says STJ Lew Carluzzo: “Prime West did not require petitioner to substantiate the actual expenses incurred for the use of her vehicles or tools, and she was not required to return to Prime West payments made pursuant to the equipment lease that exceeded her costs.” 2012 T.C.Sum. Op. 49, at p. 7.

Sound like a non-accountable employee expense reimbursement plan to you? It did to Judge Lew, lease notwithstanding. Also notwithstanding that Kathy reported her lease rent and expenses on a Schedule C. Also notwithstanding that she got a 1099-MISC for her lease rent.

Judge Lew disposes of the employee-independent contractor issue in four sentences (and it really doesn’t need more on these facts): “Petitioner was not engaged in an equipment rental trade or business independent of her employment with Prime West during any of the years in issue. Furthermore, there is nothing in the record that remotely connects the rental fee agreed upon in the equipment leases to the fair rental value of the equipment subject to those leases…. The form of the equipment leases notwithstanding, in substance the equipment leases represent Prime West’s program to reimburse its cable splicer/employees for expenses incurred in connection with their employment. For Federal tax purposes, the substance of a transaction takes precedence over the form of the transaction.” 2012 T.C. Sum. Op. 49, at p. 22.

Section 274 exactitude puts paid to most of Kathy’s vehicle expenses; she has no log, her oral testimony is inexact (she claims fuel and similar expenses for a month when she agrees she wasn’t working) and so she’s disconnected from strict substantiation. While a van she used might be exempt from Section 274 strictures, as it is a non-personal use vehicle, Kathy has insufficient substantiation even for the Cohan standard.

Now if whatever expenses she is allowed (and there isn’t too much, a GPS device and a digital camera she used to photograph her splices, which Prime West needed her to provide, utilities for a garage she used part of one tax year, some tools she bought and a storage unit she rented) were in fact deductible as unreimbursed employee business expenses, Kathy took the standard deduction and never itemized, so those expenses are lost.

But Judge Lew follows in the footsteps of The Great Dissenter, Judge Holmes (see my blogpost “The Busted Stipulation”, 1/27/12), and deftly ducks the issue. Judge Lew goes The Great Dissenter one better, and ducks in a footnote: “As noted, petitioner did not elect to itemize deductions for 2004 and 2005. Following the parties’ lead, we ignore the requirement that unreimbursed employee business expenses, if otherwise deductible, must be deducted as a miscellaneous itemized deduction pursuant to an election made on the taxpayer’s return. See sec. 63(e); see also Jahn v. Commissioner, T.C. Memo. 2008-141, aff’d, 392 Fed. Appx. 949 (3d Cir. 2010). Of course, itemized deductions allowed in this proceeding would be in lieu of, rather than in addition to, the standard deductions claimed on petitioner’s 2004 and 2005 Federal income tax returns.” 2012 T.C.Sum. Op. 49, at p. 11, Footnote 2.

And the parties can sort out whether to take the standard, or itemize and take the miscellaneous itemized above the 2% AGI floor, in the Rule 155 which will follow.

Kathy had a CPA do her taxes and told the CPA the whole story, so “gude faith, he maunna’ fa’ that”, as Scotland’s greatest remarked, and Section 6664(a) rescues Kathy from the Section 6662(a) penalty IRS wanted to splice onto Kathy’s bill.

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