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EXTORTIONATE CAB FARE: DEDUCTIBLE?

September 07, 2005

Enigmatic hydra-headed blogger State 29 asks:

Do you think, considering that cab drivers were allegedly charging $1000 to drive 15 miles to the airport prior to the arrival of what was then-thought to be a Category 5 hurricane, that the IRS would allow that sort of business deduction?

The tax law allows deductions for "ordinary and necessary" business expenses. Because travel expenses are ripe for abuse --e.g. that "business vacation" with your girlfriend to Las Vegas to evaluate hotel and casino stocks -- the tax law imposes additional requirement for deducting travel expenses. As Biitker and Lokken explain in their treatise:

For most deductions and credits subject to § 274(d), the taxpayer is required to substantiate, by adequate records or sufficient evidence corroborating the taxpayer's own statement, four aspects of the deducted or credited item: (1) its amount; (2) the time and place of the travel, entertainment, or use of the facility or the date and description of the gift; (3) the business purpose of the item; and (4) the business relationship between the taxpayer and the persons entertained, using the facility, or receiving the gift

We can assume that the extortionate (ok, market-clearing) cab fare meets the "ordinary and necessary" test, assuming the taxpayer was in New Orleans on business in the first place. It would take a judge with a heart (or brain) of stone to deny that any amount paid to get out of New Orleans last week was "ordinary and necessary."

Substantiation might be a bigger problem. Under the circumstances, the cab driver might be reluctant to accept anything but cash -- knowing that an ungrateful refugee might attempt to cancel the charge with the credit card company. With other $1,000 fares awaiting his services, he may not choose to linger long enough to write a receipt.

Fortunately, the tax law has an out that seems to apply -- Regulation Sec. 1.274-5T(c)(4):

   Substantiation in exceptional circumstances.  If a taxpayer 
   establishes that, by reason of the inherent nature of the 
   situation—

     (i) He was unable to obtain evidence with  respect to an element 
   of the expenditure or use which conforms fully to the “adequate 
   records” requirements of paragraph (c)(2) of this section, 

     (ii) He is unable to obtain evidence with respect to such 
   element which conforms fully to the “other sufficient evidence” 
   requirements of paragraph (c)(3) of this section, and 

     (iii) He has presented other evidence, with respect to such 
   element, which possesses the highest degree of probative value 
   possible under the circumstances, such other evidence shall be 
   considered to satisfy the substantiation requirements of section 
   274(d) and this paragraph. 

Under the circumstances, if the traveler has made a note somewhere of how much he paid the cab driver, the deduction should pass muster. But short of a hurricane, don't skimp on travel substantiation.

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