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Real Estate Agent's Remax Fee Tax Deductible as Professional Expense.
(Parker's Federal Tax Bulletin: August 5, 2013)
A Remax sales agent could deduct the monthly fee she paid to Remax to maintain her affiliation with the real estate firm; but unsubstantiated vehicle expenses and loss deductions relating to her real estate activity were disallowed, and penalties were imposed. Hardnett v. Comm'r, T.C. Summary 2013-56 (7/15/13).
Toraino Hardnett and Marvell Preston-Hardnett timely filed a joint Form 1040 for 2008. Toraino worked as a police officer. Marvell was a real estate agent who worked as an independent contractor for Remax Hometown, Inc. Marvel operated a sole proprietorship, JM Partners Realty. The business reported receipts of $11,100; various expenses, including $4,725 of professional fees paid to Remax and $10,300 for vehicle expenses; and a net loss of $9,480. Marvell, a licensed real estate agent, claimed that Remax required its sales agents to pay a monthly fee of $350 to maintain an affiliation with the firm. She had monthly statements from Remax showing that she paid $4,800 to the firm in 2008. The statements listed the balance due each month and the date and amount of each payment, but did not describe the nature or source of the charges. The statements showed that Remax routinely charged Marvell's credit card account each month for January through September and December in 2008. However, her October and November statements varied in both the amount and timing of the charges. On Schedule C, Marvell reported that she drove 20,450 miles while conducting real estate sales and supervising work on an investment property. She provided no records to support the reported vehicles expenses and instead used the optional standard mileage rate to compute the expenses.
Toraino and Marvell also attached to their return a Schedule E, Supplemental Income or Loss, for a residential property they bought as an investment in 2007. The couple reported that they received no rents for the property, but incurred expenses for insurance, management fees, mortgage interest, repairs, and supplies. As a result, they claimed a rental real estate loss of $25,000 on Schedule E and Form 8582, Passive Activity Loss Limitations. Although the couple had some receipts for hardware and plumbing supplies, they did not have invoices, receipts, or canceled checks to substantiate the insurance, management fees, repairs, and most of the supplies expenses. The couple's return was prepared by a paid tax return preparer. The preparer did not review the return with the couple, nor did the couple review their return for accuracy before signing and filing it. The IRS selected the couple's 2008 return for audit and issued a notice of deficiency disallowing the claimed business expense deductions for the professional fees, vehicle expenses, and the $25,000 rental real estate loss.
Code Sec. 162 generally allows a deduction for ordinary and necessary expenses paid during the tax year in carrying on a trade or business. No deduction is allowed for personal, living, or family expenses. Code Sec. 274 provides substantiation requirements before a taxpayer may deduct certain categories of expenses, including expenses related to the use of listed property. To satisfy the substantiation requirements, a taxpayer must generally maintain records and documents that are sufficient to establish the amount, date, and business purpose of the expense or business use of the listed property.
OBSERVATION: No deduction is allowed for an expense for any listed property unless the taxpayer can substantiate each element of the expense or use.
The IRS asserted that Marvell failed to prove that the charges listed on the Remax statements were professional fees because the statements did not describe the nature and source of the charges at issue.
Based on Marvell's credible testimony that she paid Remax monthly fees to maintain her affiliation with the firm and supporting Remax statements for 10 months in 2008, the Tax Court held that Toraino and Marvell could deduct $3,500 for the professional fees paid to Remax. The court disallowed the couple's claimed deductions for vehicle expenses since they failed to satisfy the substantiation requirements imposed by Code Sec. 274. The court rejected Marvell's claim that she maintained a notebook in which she contemporaneously recorded the mileage she drove for business purposes after she conceded that some of the notebook entries had been altered. The couple was also denied the loss deduction claim relating to the real estate property they purchased but did not rent during the year in issue. Marvell failed to show that she materially participated in supervising work on the investment property, did not produce any records to substantiate the claimed expenses and was unable to approximate the number of hours she spent with respect to her activities with the investment property.
Finally, the court imposed the accuracy-related penalty. Although Toraino and Marvell relied on a paid tax preparer, they provided no evidence regarding the preparer's experience or qualifications to show that they reasonably relied on him. The return was not reviewed by the preparer with the couple, nor did Toraino and Marvell review the return on their own. They did not provide necessary and accurate information to their return preparer; therefore, the court concluded that the couple did not act with reasonable cause and in good faith.
For a discussion of the substantiation requirements for business expenses, see Parker Tax ΒΆ91,130.
Parker Tax Publishing Staff Writers
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