Being born just past midnight on January 1 makes one an instant celebrity. Each New Year’s Day, the front page of most local newspapers carry an above-the-fold story of the lucky baby that succeeded in being the newest local resident of the town. He or she may not make the front page of a newspaper ever again, but on the first day of his or her life, that baby is famous–the first baby of the year in town.
For those interested in taxes and tax law, the first U.S. Tax Court case of the year provides a similar panache to what might otherwise be just another case. So, without further ado (drumroll . . .), the first published U.S. Tax Court case of 2013 is Martin v. Commissioner.
It is actually a good thing for those paying attention to tax details that Martin v. Commissioner is the 2013 Tax Court baby because it teaches a very, very important lesson, especially to those who want to improve their tax lives in the coming year. If you make one resolution in the tax realm this year, make it this one: keep good, contemporaneous tax records that are compliant with the requirements of the law.
In Martin, a husband and wife ran a real estate business from their home office in Florida. The husband was a real estate broker in Nevada and California, and the wife was a licensed real estate salesperson in Nevada and a licensed real estate assistant in California.
Since their real estate business (their listings and clients) were in the Tahoe area on the border of Nevada and California, they were required to travel from their home office in Florida to do business in Tahoe.
Not surprisingly, they claimed travel expenses on their tax returns based on airfare for their travel and incidental meals and other expenses while away from their Florida home.
It would have all been fine if they had kept a diary, log or other documentary record of their travels that complied with Section 274(d) of the Internal Revenue Code. Unfortunately, the Tax Court found that without such log or record, they could not substantiate their travel expenses, and, thus, their claimed expenses were disallowed as income tax deductions.
The morale of this case is this–make sure that you keep excellent tax records that comply with the tax code. If in doubt, consult a tax advisor about your recordkeeping.
In this case, for travel and related expenses, Section 274 requires that a taxpayer keep a log or record that includes (1) the amount of the expense; (2) time and purpose of the travel; (3) the business purpose of the expense; and (4) the business relationship to the taxpayer.
Learn from the 2013 Tax Court baby–make sure that 2013 is the year that you keep adequate tax records. It’s not that hard to establish good recordkeeping practices, and you’ll be glad you did when it comes time to file your 2013 income tax return.