West v. Commissioner, T.C. Memo. 2026-105, Oct. 7, 2026

The petitioner, Andrew B. West, was an entrepreneur involved in various commercial activities during the 2015 and 2016 taxable years, operating primarily in Texas. During these years, Mr. West owned three limited liability companies: MPC Equipment, LLC; ABW Equipment Rentals, LLC; and Tilden Operating Management, LLC. On his federal individual income tax returns (Forms 1040), Mr. West reported these business activities across three separate Schedules C: Schedule C-1 for “Management Services,” Schedule C-2 for “MPC Equipment LLC,” and Schedule C-3 for “ABW Equipment Rentals LLC.” In addition to his own entity operations, Mr. West was employed by Oscar Leo Quintanilla to manage Mr. Quintanilla’s extensive business interests, which spanned oil and gas, cattle operations, and real estate development. Under a 2011 employment agreement with Paloma Cattle Co. Ltd., Mr. West served as president and CEO of several Quintanilla-owned entities and was entitled to an “Operating Bonus” equal to 6% of aggregate business profits.

The financial relationship between Mr. West and Mr. Quintanilla was highly intertwined and characterized by informal, centralized accounting. Mr. Quintanilla’s accountants managed a centralized bill-paying apparatus that paid expenses for Quintanilla entities as well as personal and business expenses incurred directly by Mr. West or his LLCs. Expenses paid on Mr. West’s behalf were centrally billed to him via intercompany invoices, which Mr. West then settled from his personal or LLC bank accounts. Under his employment agreement, Mr. West was entitled to full reimbursement for out-of-pocket expenses incurred on behalf of Quintanilla entities; the court found that this centralized payment structure ensured that reimbursable employment expenses were paid directly by Quintanilla entities and were not borne by Mr. West personally.

On January 1, 2014, Mr. West and Mr. Quintanilla entered into a formal joint venture designated as the “Commodities Trading Partnership” to manage commodities trading accounts. The partnership was established through three executed instruments: a Commodity Trading Allocation Agreement (CTA), a Secured Promissory Note (CTA Note) capped at $5 million, and an All-Assets Security Agreement. Under the CTA terms, Mr. Quintanilla contributed 100% of the initial capital, while Mr. West contributed no capital, supplying only his labor and trading management services. Profits and losses were allocated 50% to each partner. Any net loss allocated to Mr. West at the annual December 31 settlement date was deemed automatically borrowed from Mr. Quintanilla under the CTA Note, secured by all of Mr. West’s personal and business assets.

Over its 26-month existence prior to termination on February 26, 2016, the Commodities Trading Partnership incurred significant net losses. In 2014, the partnership sustained a net loss of $13,729,319 (all of which Mr. Quintanilla claimed on his 2014 return). In 2015, the partnership generated net gains of $2,563,150, followed by a net loss of $148,902 during early 2016. Aggregate partnership net losses totaled $11,315,071, yielding a 50% distributive share of loss to Mr. West equal to $5,657,536.

In March 2015, while indebted under the CTA Note, Mr. West executed a Purchase Agreement (“2015 Asset Purchase Agreement”) selling approximately $4.5 million of his personal and LLC assets to Mr. Quintanilla. In lieu of cash proceeds, the agreement directed Mr. Quintanilla to satisfy various personal and business liabilities owed by Mr. West, including a $2.2 million post-nuptial note owed to his former spouse, Carey West. The assets sold had previously served as collateral under the CTA Note; however, the purchase agreement made no contractual reference to the CTA, the CTA Note, or the commodities trading venture.

Following Mr. West’s termination in February 2016, extensive state court litigation ensued in the Bexar County District Court of Texas. In December 2021, the Texas state court determined that Mr. West remained personally liable to Mr. Quintanilla for $5,878,127 under the CTA Note and that this liability had neither been satisfied nor released by the 2015 asset sale.

Upon examination of Mr. West’s 2015 and 2016 returns, the Internal Revenue Service performed a Bank Deposits Analysis (BDA) across three of Mr. West’s primary bank accounts at Jefferson Bank. The revenue agent identified $162,091 in unreported gross receipts for 2015 and disallowed approximately $1 million in aggregate Schedule C deductions across 16 categories for 2015 and 2016. On July 10, 2019, the IRS issued a statutory Notice of Deficiency (NOD) asserting tax deficiencies of $463,827 for 2015 and $5,831 for 2016, along with I.R.C. § 6662(a) accuracy-related penalties totaling $93,881 ($92,765 for 2015 and $1,116 for 2016).

Taxpayer’s Claims and Request for Relief

Mr. West timely petitioned the United States Tax Court under I.R.C. § 6213(a) seeking redetermination of the deficiencies and accuracy-related penalties. In an amended petition, Mr. West asserted that he was entitled to recognize an ordinary partnership loss deduction of $6.8 million (or $6,894,774) for tax year 2016 stemming from the termination of the Commodities Trading Partnership, and to carry back the unused portion of that loss to tax year 2015. Mr. West contended that this loss carryback would entirely eliminate his taxable income and result in zero tax deficiency for both 2015 and 2016.

Regarding gross income, Mr. West challenged the Commissioner’s BDA determination, arguing that two specific bank deposits were non-taxable nontaxable reimbursements: a deposit of $115,870.52 (which he alleged was a repayment for a Porsche purchased for Mr. Quintanilla’s son) and a deposit of $50,000 (which he claimed represented an overpayment refund from Water Well Services).

Regarding trade or business expenses under I.R.C. § 162, Mr. West sought to substantiate disallowed Schedule C deductions by submitting eight post-trial spreadsheets attached to his briefs, claiming deductible amounts that differed substantially from—and in many cases exceeded—the amounts originally claimed on his tax returns. In addition, Mr. West argued for two specific deductions arising from the proceeds of the 2015 Asset Purchase Agreement: a $187,114.62 payment to Quintanilla Management Company (QMC) as Schedule C-2 “Professional Services” and a $112,257.21 payment to Q-Haul, Inc. as Schedule C-1 “Repairs and Maintenance.”

Finally, Mr. West asserted relief from I.R.C. § 6662(a) accuracy-related penalties under the reasonable cause and good faith exception of I.R.C. § 6664(c)(1). He argued that any recordkeeping deficiencies stemmed from his former partner’s hostility, unfulfilled federal subpoenas, and the IRS’s refusal to accept delivery of 27 boxes of documents tendered during litigation.

Court’s Analysis of the Law and Application to Facts

The United States Tax Court, with Judge Gustafson presiding, systematically evaluated the evidentiary framework, statutory requirements, and substantive tax provisions governing each disputed issue.

Statutory Burden of Proof and Admissibility Rules

Under Tax Court Rule 142(a) and established precedent in Welch v. Helvering, 290 U.S. 111, 115 (1933), the Commissioner’s deficiency determinations are presumed correct, placing the burden of proof squarely on the taxpayer to substantiate entitlement to claimed deductions (INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992)). While I.R.C. § 7491(a) can shift the burden of proof to the Commissioner under specified circumstances, Mr. West did not assert or satisfy the threshold requirements of section 7491(a).

In unreported income cases, the Commissioner must establish an initial evidentiary foundation connecting the taxpayer with the income-producing activity (Llorente v. Commissioner, 649 F.2d 152, 156 (2d Cir. 1981)) or demonstrate actual receipt of funds (Edwards v. Commissioner, 680 F.2d 1268, 1270–71 (9th Cir. 1982)). Once established, the burden shifts to the taxpayer to demonstrate that the determination is arbitrary or erroneous (Walker v. Commissioner, 757 F.2d 36, 38 (3d Cir. 1985)).

Addressing procedural mechanics, Judge Gustafson strictly enforced evidentiary boundaries regarding post-trial submissions. Under Niedringhaus v. Commissioner, 99 T.C. 202, 214 n.7 (1992), evidence must be formally introduced at trial; taxpayers cannot supplement the evidentiary record through post-trial brief attachments. Consequently, the court explicitly refused to consider several hundred pages of unadmitted invoices, bank records, an unsworn CPA affidavit, and post-trial narrative spreadsheets, ruling: “The information in the ‘Testimony’ and ‘Explanation’ columns is not equivalent to actual testimony, and we will not rely on it.”

Bank Deposits Analysis and Unreported Income

Under I.R.C. § 446(b), the bank deposits method is a recognized, legally permissible approach for reconstructing gross income, and bank deposits constitute prima facie evidence of taxable income (Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Clayton v. Commissioner, 102 T.C. 632, 645 (1994)). In applying the method, the IRS must account for any known non-taxable sources (Clayton, 102 T.C. at 645–46).

Applying these principles, the court sustained the Commissioner’s determination of $162,091 in unreported 2015 income. Regarding the $115,870.52 Porsche reimbursement, the court found that the IRS examiner had already identified this item as non-taxable in the audit schedule, meaning no adjustment was necessary. Regarding the claimed $50,000 Water Well refund, the check produced in evidence indicated “For Loan pmt” rather than a refund, and Mr. West failed to trace any corresponding deposit into his bank accounts. Thus, Mr. West failed to meet his burden of proving the BDA was inaccurate.

Schedule C Substantiation and Interplay of the Cohan Rule with Section 274(d)

Under I.R.C. § 162(a), taxpayers may deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business, while personal living expenses (I.R.C. § 262(a)) and capital expenditures (I.R.C. § 263(a)) are strictly non-deductible. Taxpayers bear the statutory duty under I.R.C. § 6001 and Treas. Reg. § 1.6001-1(a) to maintain permanent books and records sufficient to establish deduction amounts and business purpose (Higbee v. Commissioner, 116 T.C. 438, 440 (2001)).

Under the long-standing Cohan doctrine (Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930)), if a taxpayer proves that a deductible expenditure occurred but cannot prove the exact amount, the court may estimate the allowable deduction, bearing heavily against the non-substantiating taxpayer. However, Judge Gustafson emphasized a critical statutory limitation: the Cohan estimation doctrine does not apply to expenses governed by I.R.C. § 274(d). Citing Sanford v. Commissioner, 50 T.C. 823, 827–28 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969), the court emphasized: “a court may not invoke the Cohan doctrine to estimate the amount of a deductible expense–such as travel and ‘listed property’–that is subject to the strict substantiation requirements in section 274(d), since those requirements supersede the Cohan doctrine.”

Applying I.R.C. § 274(d) to Mr. West’s claimed Schedule C travel expenses (including private aircraft and helicopter flights), the court held that Mr. West failed to provide contemporaneous flight logs, travel calendars, or evidence corroborating business purpose. Furthermore, the court discovered that several travel invoices represented personal trips (including doctor visits and recreational events) or transfers between Mr. West’s own entities (BL Aviation and Q2BW). As Judge Gustafson observed: “One could say that he has proved he took money out of his left pocket and put it in his right pocket, but he has not shown that he made a deductible expenditure from his right pocket.” All disallowed travel deductions were sustained.

Regarding legal and professional fees under I.R.C. § 162, the origin-of-the-claim doctrine determines deductibility (United States v. Gilmore, 372 U.S. 39, 49 (1963)). The court analyzed individual payees:

Payments of $108,500 to interior designer Erin Shirah for the “Bristol Green” residential property were held to be non-deductible capital improvements under I.R.C. § 263(a) rather than ordinary repairs.
Legal fees paid to Ford Murray for divorce proceedings were personal and non-deductible (United States v. Patrick, 372 U.S. 53, 57 (1963)).
Tax preparation and consulting fees paid to CPA Timothy Braden ($11,100) were substantiated as business-related and allowed under I.R.C. § 162.
Litigation defense fees paid to trial counsel Ricardo Cedillo ($20,000), Strasburger ($20,000), and Smith Robertson ($5,000) for ongoing business litigation were substantiated and allowed for tax year 2016.

For claims arising from the 2015 Asset Purchase Agreement, the court disallowed the $187,114.62 payment to QMC because the contract failed to identify the underlying business nature of the debt. Conversely, the court allowed a $112,257.21 deduction for heavy equipment repairs paid directly to Q-Haul, Inc., holding that equipment maintenance for oilfield machinery constituted a fully substantiated I.R.C. § 162 business expense.

Partnership Loss Limitations, Tax Basis, and At-Risk Rules

The central legal issue concerned Mr. West’s claim to a $6.8 million ordinary partnership loss carryback under I.R.C. § 704(d). Section 704(d) provides that a partner’s distributive share of partnership loss is allowable only to the extent of the partner’s adjusted basis in the partnership interest at the end of the partnership year. Under I.R.C. § 722, adjusted basis includes money and property contributed to the partnership. Because Mr. West contributed zero capital (providing only labor), his initial outside basis was zero.

Mr. West argued that his execution of the $5 million CTA Note provided outside basis. The court rejected this position under settled precedent, citing VisionMonitor Software, LLC v. Commissioner, T.C. Memo. 2014-182: “We have long held that the contribution of a partner’s own note to his partnership isn’t the equivalent of a contribution of cash, and without more, it will not increase his basis in his partnership interest.” Furthermore, the note was executed in favor of Mr. Quintanilla individually, not the partnership.

The court further analyzed the “at-risk” rules under I.R.C. § 465. Under I.R.C. § 465(b)(3)(A), borrowed amounts are not considered at risk if borrowed from any person who has an interest in the activity (other than as a creditor). Because Mr. Quintanilla was a 50% co-partner in the joint venture, any liability borrowed from him was statutorily excluded from Mr. West’s at-risk amount. Additionally, under Treas. Reg. § 1.752-2(h)(4), a partner’s promissory note contributed to a partnership is disregarded for debt allocation purposes unless readily tradeable on an established securities market.

Finally, the court held that the 2015 Asset Purchase Agreement did not constitute a repayment of debt under I.R.C. § 704(d) because the asset sale was a separate transaction for full consideration ($4.5 million used to settle other liabilities) and did not satisfy the CTA Note. Because Mr. West maintained a zero tax basis, Judge Gustafson held: “Mr. West cannot deduct any losses of the partnership when his basis in the partnership is zero.”

Section 6662(a) Accuracy-Related Penalties

Under I.R.C. § 6662(a) and (b)(2), a 20% penalty applies to underpayments attributable to a “substantial understatement of income tax” (exceeding the greater of 10% of the required tax or $5,000). Under I.R.C. § 7491(c), the Commissioner bears the burden of production regarding penalty liability and must show compliance with the supervisory approval requirement of I.R.C. § 6751(b)(1). The parties stipulated that written supervisory approval was timely secured.

To avoid the penalty, the taxpayer must demonstrate “reasonable cause” and “good faith” under I.R.C. § 6664(c)(1) and Treas. Reg. § 1.6664-4. The court found that Mr. West failed to establish reasonable cause, noting that generalized claims regarding lost records, partner hostility, or unexamined document boxes do not satisfy the statutory defense. Judge Gustafson concluded: “The accuracy-related penalty is mandatory; the statute provides that it ‘shall be added.’”

Conclusions Arrived at by the Court

The Tax Court issued the following holdings resolving the case:

Unreported Income: Petitioner underreported taxable income for 2015 in the amount determined by the Bank Deposits Analysis ($162,091).
Schedule C Deductions: Petitioner failed to substantiate the majority of disputed business deductions. The court allowed specific substantiated deductions—including $112,257 for equipment repairs, $15,565 for additional repairs, $11,100 for CPA fees, and $45,000 for legal defense fees—while sustaining all other disallowances.
Partnership Loss: Petitioner did not incur a deductible partnership loss in 2016 under I.R.C. § 704(d) and I.R.C. § 465 due to maintaining a zero adjusted basis in his partnership interest and borrowing from a co-partner. No loss carryback to 2015 is permitted.
Accuracy-Related Penalties: Petitioner is liable for I.R.C. § 6662(a) substantial understatement accuracy-related penalties for both 2015 and 2016.

Decision will be entered under Tax Court Rule 155.

Prepared with assistance from Gemini Notebook.