Have Cell Phone, Will Travel But Keep Records!

Heres a reminder for busy financial advisors: Keep your cell phone records in tip-top shape to qualify for a business expense deduction.

In a recent ruling, the Tax Court upheld the Internal Revenue Services disallowance of a real estate agents cell phone expenses on the basis that the agent lacked proper documentation.

Keeping track of business expenses is certainly not anyones idea of a good time. And when it comes to the stringent record-keeping burdens required for listed property (i.e., automobiles, computers, cell phones and pagers)well, the fun fades faster than ice cream does on a hot summer day.

So, just how good does the record keeping have to be for listed property? The Code requires that the taxpayer substantiate by adequate records or by sufficient evidence corroborating the taxpayers own statement:

(1) the amount of the expense;

(2) the time and place of the expense;

(3) the business purpose of the expense; and

(4) the business relationship to the taxpayer of the person(s) involved in the expense.

To meet the “adequate records” requirement, the regulations state that the taxpayer must maintain an account book, diary, log, statement of expense, trip sheet, or similar record and documentary evidence that, in combination, are sufficient to establish each element of an expense or use.

Although a contemporaneous log is not required, the account book, etc., must be prepared or maintained in such a manner that each recording of an element of an expense or use is made “at or near the time of the expense or use.” According to the regulations, a log maintained on a weekly basis that accounts for use during the week will be considered a record made “at or near the time of such use.”

Although an adequate record must generally be written, the regulations further state that a record of the business use of listed property prepared in a computer memory device with the aid of a logging program will constitute an adequate record.

In this case, the taxpayer (Moss) installed an Ameritech telephone line (separate from her personal home telephone) in the basement of her home. The Ameritech line serviced her business phone number, a fax number and an Internet line. Ameritech also billed Moss for cell phone services. Moss paid $4,128.24 for telephone services in 1998.

The problem in this case was that the copies of the Ameritech phone bills for 1998 that Moss submitted to the Tax Court contained summary information on her telephone charges but gave no detail on the non-basic and larger charges included in the total bill. Each bill showed a monthly service charge, and separate charges for local and long distance service, and for taxes.

For some months, the bills showed separate charges for Internet service and for paging. Other monthly bills showed, in some cases, hundreds of dollars of charges for which there was no explanation whatsoever. The front of the bill stated “For detailed chargesSee Page 3,” yet there was no Page 3 available for any of the bills.

And with respect to what the Tax Court assumed from Moss testimony might have been cell phone charges, the court declared that there was nothing in the record that met the stringent requirements under the regulation. The court stated that if the charges were other than cell phone charges, Moss had failed to offer any explanation or any substantiation for them.

Consequently, the court allowed a deduction only for $1,148.15, representing monthly service charges, separate charges for local and long distance services, taxes, Internet service, and paging.

In summary, despite the sheer drudgery and the time involved, its better to hunker down and keep your records in order than risk losing a valuable deduction. [Moss v. Comm., TC Summary Opinion 2004-56.]

Sonya E. King, J.D., LL.M., is an assistant editor of Tax Facts, a publication of the National Underwriter Company.


Reproduced from National Underwriter Edition, July 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.