Tax Court in Brief | Eze v. Commissioner | Schedules C and C2 Business Expense Deductions of a Sole Proprietorship

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The Tax Court in Brief – August 1st – August 5th, 2022

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Tax Litigation:  The Week of August 1st, 2022, through August 5th, 2022

Eze v. Comm’r, T.C. Memo. 2022-83 | August 4, 2022 | Lauber, J. | Dkt. No. 21425-19


Short Summary: During tax years 2015 and 2016, Petitioner Nnabugwu C. Eze (“Petitioner”) reported income and expenses from two sets of activities on Schedules C—consulting in the electronic healthcare field (“Schedule C1”) and residential construction (“Schedule C2”). Petitioner reported expenses on Schedules C1 and C2 primarily related to car/truck expenses and other expenses. While Schedule C1 reported net profits in tax years 2015 and 2016, Schedule C2 reported significant net losses nearly offsetting Schedule C1’s net profit.

The IRS selected Petitioner’s 2015 and 2016 tax returns for examination and issued Petitioner a timely notice of deficiency. The IRS disallowed all car/truck expenses on Schedules C1 and C2, 90 percent of the other expenses on Schedule C1, and all of the other expenses on Schedule C2. Additionally, the IRS assessed certain accuracy-related penalties under Section 6662(a).

Petitioner timely filed his petition for redetermination of the deficiencies and accuracy-related penalties. The IRS conceded the accuracy-related penalties, pursuant to I.R.C. § 6751(b)(1). After Petitioner changed counsel, eventually representing himself pro se, and obtaining continuances, Petitioner’s case proceeded to remote trial on March 29, 2022.

Key Issue:

Primary Holding:

Key Points of Law:

Insight: As this case suggests, taxpayers must be able to substantiate all expenses claimed on their tax returns. Failure to provide sufficient, accurate books and records, especially with respect to car and truck expenses, will result in the IRS disallowing such expenses. In fact, as the Court notes, the taxpayer’s explanation for the expenses must be plausible and credible. Moreover, taxpayers should be wary of claiming significant expenses on Schedule C that result in large net losses. Those situations may result in a higher likelihood of an IRS audit. Finally, although it was not a focus of the opinion, this case did involve the IRS’s concession of certain penalties, pursuant to I.R.C. § 6751(b)(1), as the IRS could not demonstrate adequate supervisory approval of the penalties.