Oleg Kolomiyets v. Comm., TCS 2024-8

Oleg Kolomiyets petitioned the Tax Court for a redetermination of a deficiency proposed by the IRS disallowing expenses for lack of substantiation. The taxpayer had a Schedule C “Real Estate Advising” that reported gross receipts of $5,250 and expenses of $117,475. Expenses claimed included (1) $8,625 car and truck, (2) $78,892 legal and professional, and (3) $14,141 for “Other.” In what reads like an opening offer, the taxpayer presented bank and credit card account statements, proposing that he “is entitled to a deduction for one-half of the expenditures.”

The court quickly educated Mr. Kolomiyets that “deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any claimed deduction.” Standard citations apply: INDOPCO, Inc. v. Comm., 503 US 79 (1992); New Colonial Ice Co. v. Helvering, 292 US 435 (1934). The court also provided a brief lesson on deductions for expenses attributable to travel or the use of listed property have strict substantiation rules. Taxpayers must substantiate such expenses by adequate records or by sufficient corroborative evidence accompanying testimony about (1) the amount of the expense, (2) the time and place the expense was incurred, (3) the business purpose of the expense, and (4) in the case of entertainment or gift expenses, the business relationship of the person involved. Cohan does not apply to this type of expense.

After the quick lesson and rejection of the taxpayer’s offer, the court explained how a complete lack of appropriate substantiation demonstrated a lack of reasonable cause or that he had acted in good faith were the reasons the accuracy-related penalties were being upheld.