T.C. Memo. 1955-171

A taxpayer’s claiming of deductions for personal travel expenses, despite awareness that they are not business-related, can support a finding of fraudulent intent to evade tax.

Summary

Jenkins, an airline pilot, claimed deductions for travel expenses on his tax return, including amounts for personal trips. The IRS determined a deficiency and asserted fraud penalties. The Tax Court upheld the deficiency determination in part, but found that the taxpayer’s inclusion of personal travel expenses as business deductions demonstrated fraudulent intent to evade tax. The court reasoned that Jenkins, given his intelligence and experience, must have known that personal trips were not deductible and that he deliberately included them to reduce his tax liability.

Facts

Jenkins was an airline pilot for TWA based in Chicago. He was temporarily assigned to duty in Washington D.C. During the tax year in question, he claimed deductions for travel expenses, including foreign and domestic travel. He included expenses for personal trips, such as visits to New York, Pittsburgh, and St. Louis, as business expenses. Jenkins claimed he relied on the advice of a tax preparer named Nimro, who allegedly assured him that all expenses incurred while away from Chicago were deductible.

Procedural History

The IRS assessed a tax deficiency against Jenkins and imposed fraud penalties. Jenkins challenged the deficiency and the fraud penalties in the Tax Court. The Tax Court upheld the deficiency in part, finding that Jenkins had not substantiated all of his claimed expenses. However, the court sustained the fraud penalty due to the inclusion of personal travel expenses as business deductions.

Issue(s)

Whether the taxpayer’s inclusion of personal travel expenses as business deductions on his tax return constituted fraud with the intent to evade tax.

Holding

Yes, because the taxpayer, a pilot of apparent intelligence, knew or should have known that personal travel expenses were not deductible and deliberately included them to reduce his tax liability.

Court’s Reasoning

The court acknowledged Jenkins’ argument that he relied on the advice of his tax preparer, Nimro. However, the court found that some of the claimed deductions, particularly those for personal travel, were so obviously non-deductible that Jenkins must have known they were improper. The court stated: “It is extremely difficult, however, to comprehend how a man of petitioner’s apparent intelligence, ability, and experience could possibly believe, even with the assurance of Nimro, that the cost of pleasure trips to New York and pleasure and personal trips to Pittsburgh or St. Louis could be regarded as expenses sufficiently related to the conduct of his business as a pilot for TWA to believe that they were traveling expenses while away from home in the pursuit of his trade or business so as to entitle him to a deduction therefor in the computation of his income tax.” The court concluded that Jenkins “knew that such items were not expenditures in the course of his employment, and, rather than being convinced that they were allowable deductions, it is our conclusion that he persuaded himself or allowed himself to be convinced that they would not be checked, but would be overlooked, to the end that he would not have to pay the full amount of his tax.”

Practical Implications

This case underscores that taxpayers cannot blindly rely on the advice of a tax preparer to justify patently unreasonable deductions. The court will consider the taxpayer’s knowledge, experience, and intelligence when determining whether fraud exists. Claiming deductions for obviously personal expenses as business expenses is a strong indicator of fraudulent intent. Taxpayers must exercise due diligence and ensure that deductions claimed on their tax returns are legitimate and supported by adequate documentation. This case serves as a cautionary tale for taxpayers and tax professionals alike, highlighting the importance of ethical tax reporting and the potential consequences of fraudulent tax practices. Later cases cite this case to demonstrate how a pattern of claiming unsupportable deductions can evidence fraudulent intent. The key takeaway is that a taxpayer cannot claim ignorance when the impropriety of a deduction is obvious.