• Key point: Clergy who cannot substantiate the number of miles they drive their car for business purposes during a year cannot use the actual expense method of computing their car expenses. They may be able to use the standard mileage rate, multiplied times a reasonable estimate of business miles driven during the year.
• The Tax Court refused to allow a minister to use the “actual expense” method of computing his car expenses since he could not substantiate the actual number of miles he drove the car during the year for business purposes. The minister often traveled by car in connection with his ministry, and he reported travel expenses on his tax return for the years in question using the actual expense method. The IRS audited the minister, and determined that he could not deduct the actual expenses incurred in operating his car, since he had no records to substantiate the percentage of total miles that the car was used for business purposes. It is important to note that the minister had adequate records to substantiate his actual business expenses, but he did not have records to substantiate the percentage of total miles that were for business purposes. Car expenses computed under the actual expense method consist of actual car expenses multiplied times the percentage of total miles that the car is used for business purposes (the business use percentage). Since the minister could not establish the percentage of total miles that he used his car for business purposes, he was not able to deduct any portion of his actual expenses (even though he had records to substantiate the amount of his actual expenses). The IRS did allow the minister to claim a much lower deduction based on a reasonable estimate of the number of business miles driven during the years in question multiplied times the standard mileage rate for those years. The minister appealed, and the Tax Court upheld the IRS position. The court noted that taxpayers have the burden of substantiating their deductions, including car expenses. And, while the minister demonstrated that it was necessary for him to incur expenses for the operation and maintenance of his automobile so that he could carry on his ministry, and he was able to substantiate many actual car expenses, “his deduction must be limited, however, to only that portion of expenses properly allocable to business use. His personal expenses, including commuting expenses, are not deductible.” Accordingly, “in order to deduct his actual automobile expenses, he must substantiate his business use of his automobile by keeping adequate records of his business use. He must allocate expenses such as gasoline and repairs between personal and business use. In short, [the minister] must show the number of business miles he drove in relation to the total number of miles he drove each year, and he must substantiate his actual expenses for each year.” While the minister had adequate records to document his car expenses, he had no records to substantiate the business use of his car. The court observed: “[The minister] rarely recorded his destination, mileage, date, or business purpose when he traveled. He merely saved receipts for gasoline and hotel expenses. He kept no log or documentation . . . which showed his personal use of the vehicle, and he did not substantiate all of his claimed business expenditures, such as insurance.” Accordingly, the minister could not deduct his actual expenses in maintaining and operating his car for the years in question. Estimates of the percentage of business use of a car are not permitted under section 274(d) of the Code. The court also agreed with the IRS determination that the minister could claim a deduction based on the standard mileage rate. Since it was clear that the minister drove his car for business purposes, and a reasonable estimate of the total business miles driven during the years in question was possible, the IRS permitted the minister to claim a business expense deduction computed by multiplying the standard mileage rate times the estimated number of miles the car was used for business purposes. This ruling is an important one for the following reasons. First, it illustrates that the actual expense method of calculating car expenses is not available unless a minister can substantiate the total miles driven during a year and the percentage of those miles that were for business purposes. Second, and more importantly, this case will be a useful precedent for those clergy who are audited and who are denied any deduction for their car expenses because of a lack of adequate substantiation. Remember that both the Tax Court and the IRS in this case allowed the minister to claim a deduction based on a reasonable estimate of business miles driven during the years in question multiplied times the standard mileage rate. Of course, this ruling should not be interpreted as liberalizing any recordkeeping requirements. It is entirely possible for the IRS and the courts to deny a minister any car expense deduction based on inadequate substantiation. Our recommendation is that clergy maintain adequate records of their business miles and expenses. But, if for any reason a minister has insufficient records to substantiate the business use of a car, this ruling will be a useful precedent. Parker v. Commissioner, T.C. Memo. 1993-15.
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