The Tax Court’s recent memorandum opinion in Goodwill-Oikerhe v. Commissioner, T.C. Memo. 2026-18, serves as a stark reminder of the rigorous substantiation standards required to support deductions and the severe consequences of failing to meet them. The case involves a petitioner who was not only a taxpayer but a "highly educated individual" with a master’s degree in accounting and a professional tax return preparer.

The Court sustained the IRS’s disallowance of numerous personal and business deductions and, notably, upheld the imposition of Section 6663 civil fraud penalties. For tax professionals, this opinion reinforces the critical importance of maintaining adequate records and the futility of "implausible or inconsistent explanations" when facing examination.

Findings of Fact

The petitioner, Jack Goodwill-Oikerhe, was the sole shareholder of an S corporation, Golden Express International, Inc. (GEI), through which he engaged in tax return preparation and shipping activities. During the years in issue (2015, 2016, and 2017), the petitioner also worked as a lot attendant for a car dealership, Bob Davidson Ford (BDF).

Upon examination, the IRS Revenue Agent (RA) requested documentation to support deductions claimed on the petitioner’s individual returns and GEI’s corporate returns. The petitioner provided minimal documentation. He justified this lack of records by claiming a flood at his residence had destroyed them and, alternatively, that the RA had taken the records and failed to return them,.

The RA found no evidence of a flood during site visits, and the petitioner failed to file insurance claims or provide photographs of the damage. Furthermore, the RA testified that he never retained original documents and returned all receipts to the petitioner immediately. The Court found the petitioner’s testimony regarding the destruction and confiscation of records to be "baseless assertion[s]".

The Taxpayer’s Request for Relief

The petitioner challenged the Notice of Deficiency, seeking the allowance of:

Dependency exemption deductions for two nephews;
A property tax deduction for a residence owned by his brother;
Unreimbursed employee expenses (Schedule A) for vehicle and cell phone use; and
Various flow-through deductions from GEI, including bad debts, rents, and nonemployee compensation.

The petitioner generally asserted that "he supplied documentation to support his expenses to the best of his ability" and should be excused from further production due to the alleged flood.

The Court’s Analysis of the Law and Application to Facts

Burden of Proof and Substantiation

The Court reiterated the fundamental principle that deductions are a matter of legislative grace. Citing INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992), and New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934), the Court noted the taxpayer bears the burden of proof. The Court emphasized that a taxpayer’s "self-serving declaration is generally not a sufficient substitute for records," citing Fine v. Commissioner, T.C. Memo. 2013-248, at *4.

Dependency Exemptions

The petitioner claimed dependency exemptions for his two nephews, who attended school in Ukraine. To qualify as a dependent under Section 152, the individual must generally share the same principal place of abode as the taxpayer for more than one-half of the taxable year (qualifying child) or receive more than one-half of their support from the taxpayer (qualifying relative),.

The Court found the petitioner’s testimony "implausible," noting he could not specify when the nephews visited or for how long. The Court held: "Considering petitioner’s failure to provide any credible evidence showing where the nephews actually lived during the taxable years in issue... we cannot and will not find that they lived with petitioner for more than one-half of any of those years".

Property Tax Deduction

The petitioner claimed a deduction for property taxes paid on a residence owned by his brother. Under Treasury Regulation § 1.164-1(a), taxes are generally deductible only by the person upon whom they are imposed. While an equitable owner may deduct taxes paid, as established in Steinert v. Commissioner, 33 T.C. 447, 449 (1959), the Court found the petitioner "failed to allege or produce any credible evidence that any real property taxes he did ostensibly pay were paid as the equitable owner".

Unreimbursed Employee Expenses

The petitioner claimed significant vehicle expenses, asserting he used his personal car for his employment at the car dealership. This deduction is subject to the strict substantiation requirements of Section 274(d).

The Court found the expenses were neither ordinary nor necessary under Section 162. Testimony from the petitioner’s supervisors indicated that the employer "discouraged employees from incurring personal expenses... including advising against the use of personal vehicles". The Court concluded: "Rather than give petitioner permission to incur such expenses, we instead find BDF discouraged him, along with its other employees, from doing so".

GEI Flow-Through Deductions

Bad Debts: GEI, a cash-basis taxpayer, claimed bad debt deductions for unpaid fees. The Court cited Gertz v. Commissioner, 64 T.C. 598, 600 (1975), regarding the requirement that the amount must have been included in income to be deductible as a bad debt. The Court rejected the deduction, stating: "As a cash basis taxpayer, however, GEI would not have included the fees in income before they were actually or constructively received".
Rents: The petitioner claimed rent paid to his brother for office space but provided no proof of payment.
Nonemployee Compensation: The petitioner claimed deductions for payments to day laborers but could not name the workers or provide Forms 1099. Citing Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957), the Court refused to estimate the expenses under the Cohan rule, noting that doing so "would amount to unguided largesse".

Civil Fraud Penalty

The most significant aspect of the opinion for practitioners is the analysis of the Section 6663 fraud penalty. To impose the penalty, the Commissioner must prove by clear and convincing evidence that an underpayment exists and that some portion is attributable to fraud.

Supervisory Approval (Section 6751(b)(1))

The Court first addressed the procedural requirement of written supervisory approval. The petitioner argued that the group manager signed the approval without speaking to him. The Court rejected this, citing Belair Woods, LLC v. Commissioner, 154 T.C. 1, 17 (2020), stating: "’[w]e decline to read into section 6751(b)(1) the subtextual requirement’ that respondent demonstrate the depth or comprehensiveness of the supervisor’s review".

Indicia of Fraud

The Court identified several "badges of fraud" derived from Spies v. United States, 317 U.S. 492 (1943), and Niedringhaus v. Commissioner, 99 T.C. 202 (1992). These included:

Sophistication of the taxpayer: "Petitioner is a well-educated businessman and an experienced tax return preparer, and yet he significantly overstated the deductions".
Inadequate records: The petitioner failed to provide documents and required the RA to summon bank records.
Implausible explanations: The Court highlighted the petitioner’s inconsistent stories regarding the flood and the behavior of the RA.

Conclusions

The Tax Court ruled entirely in favor of the Respondent. The Court sustained the deficiencies and the Section 6663 fraud penalties, concluding that the Commissioner had "clearly and convincingly established that at least some portion of the underpayment for each year in issue is attributable to fraud".

This case serves as a precedent that the Tax Court will look unfavorably upon tax professionals who fail to adhere to the record-keeping standards they are responsible for upholding for their clients. The petitioner’s professional background was explicitly used as a factor in establishing fraudulent intent, stripping away the defense of ignorance or mistake.

Prepared with assistance from NotebookLM.