As a general rule, the IRS okays deductions by real estate brokers, sales agents and other self-employed individuals for business travel and entertainment expenses only if those outlays are substantiated by diaries or other "adequate records." But the IRS does make some exceptions.

Among other things, the feds will waive the record-keeping requirements and accept a reasonable reconstruction of your records when, according to the agency's administrative regulations, the loss of your records was "due to circumstances beyond the taxpayer's control, such as destruction by fire, flood, earthquake, or other casualty." Not surprisingly, those regulations include a cautionary reminder that whether an event was beyond a person's control depends on the particular circumstances.

Consider, for instance, what happened in a dispute over write-offs for travel and entertainment that pitted the IRS against Joe Gizzi, who acted as his own attorney before the Tax Court. According to Joe, the government acted unreasonably when the examining agent refused to excuse him from the usual substantiation requirements. It seems that Joe had stored records of entertainment expenditures in his home and they somehow vanished after he voluntarily moved out because of marital problems.

Unfortunately for Joe, that explanation got exactly nowhere with the Tax Court, which refused to treat the loss as caused by a casualty beyond his control. "Marital difficulties and their consequences, no matter how seemingly independent of the taxpayer's will, do not sufficiently resemble floods or fire to be considered a casualty," the ruling stated. Moreover, noted the court, even if marital problems provided a good excuse, Joe failed to furnish an adequate reconstruction of his records.

Subsequently, however, the Tax Court had some second thoughts. It ruled that marital problems caused the loss to be beyond the control of Matthew Canfield, who also represented himself before the court, but did so with more success than Joe Gizzi.

Here, the circumstances differed considerably. Unlike Joe, Matthew did not voluntarily move out of his home and leave his records; he departed because his wife obtained a court order requiring him to stay away from their dwelling. The wife either destroyed or burned his records during the time the couple was separated, and Matthew was unable to enter his home because of the court order.

Note, though, that the Tax Court has no second thoughts where records disappear while a person moves his or her belongings to a new residence. It flatly refuses to allow reconstruction of such records.

Still, sometimes the tax takers try to press things too far. To the surprise of no one but the IRS, the Tax Court relieved Raymond Jackson of the need to produce records that disappeared after he handed them over to a revenue agent during an audit. Result: Raymond was allowed to reconstruct what he spent on entertainment and managed to convince the judge that the disputed deductions were backed up by the lost records.

Published: March 22, 2004

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Julian Block is an attorney and author based in Larchmont, N.Y. He has been cited as "a leading tax professional" (New York Times), "an accomplished writer on taxes" (Wall Street Journal) and "an authority on tax planning" (Financial Planning Magazine). This article is excerpted from "The Home Seller’s Guide To Tax Savings." Law professor James Edward Maule of Villanova University praised the book as "An easy-to-read and well-organized explanation of the tax rules. Home sellers would be well advised to buy this book." To order it, go to julianblocktaxexpert.com.