Marie M. Kanda v. Commissioner, T.C. Summary Opinion 2026-3 (Docket No. 3772-24S. Filed April 20, 2026)

Between 2015 and 2023, Marie M. Kanda suffered from several serious health conditions, including breast cancer and severe osteoarthritis, which led to her doctor determining she was disabled and unable to work. During these years, she collected Social Security disability payments and notably never contracted COVID-19. Despite her medical status, Kanda claimed that she worked part-time on weekends cleaning and vacuuming vehicles for two to three hours a day. She failed to maintain contemporaneous business records for this activity, relying instead on her husband to keep track of limited customer invoices and handwritten monthly expense reports that were never recorded in a formal ledger. Furthermore, while Kanda and her husband signed a written partnership agreement in November 2020 to operate "Kanda Auto Service," they never filed a partnership tax return for 2021.

Kanda's tax reporting history was highly inconsistent. On her 2020 joint return, Kanda and her husband reported zero self-employment income, showing only $21,100 in unemployment income. For the 2021 tax year—the year at issue—Kanda filed married filing separately, reported her occupation as "childcare," but attached a Schedule C for an "auto mechanic" business showing $19,865 in gross receipts and $10,190 in net business income. Alongside this, she claimed $28,000 in refundable COVID-19-related sick and family leave credits ($12,900 under the Families First Coronavirus Response Act (FFCRA) and $15,100 under the American Rescue Plan Act of 2021 (ARPA)). Kanda did not include Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, with her original return. When audited, she submitted the form claiming $80,650 in net earnings from self-employment, electing to use her prior year (2020) net earnings, an amount drastically contradicting her filed 2020 return. She also provided an unsigned alternative 2020 return listing $6,700 in self-employment income, demonstrating three entirely different positions taken regarding her 2020 self-employment income.

Taxpayer's Request for Relief

The Internal Revenue Service (IRS) issued a Notice of Deficiency on February 12, 2024, disallowing all of Kanda's Schedule C income and deductions for the 2021 tax year and denying the $28,000 in refundable COVID-19-related sick and family leave credits. The IRS originally determined a deficiency of $26,560 and a penalty of $5,312 for an erroneous claim for refund or credit under Internal Revenue Code (IRC) section 6676. The IRS subsequently conceded the section 6676 penalty. Kanda petitioned the United States Tax Court for relief, challenging the disallowance of her Schedule C business activity and the denial of her COVID-19 credits.

Court's Analysis of the Law

Judge Way began the legal analysis by affirming that the IRS's determinations in a Notice of Deficiency are presumed correct under Tax Court Rule 142(a)(1) and Welch v. Helvering, 290 U.S. 111, 115 (1933). Consequently, the taxpayer bears the burden of proving entitlement to any claimed deductions or credits, citing INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

The Court emphasized the substantiation requirements of IRC section 6001 and Treasury Regulation section 1.6001-1(a), which mandate that taxpayers maintain adequate records to substantiate their income, deductions, and credits (Higbee v. Commissioner, 116 T.C. 438, 440 (2001)). Specifically concerning FFCRA and ARPA credits, the Court noted that self-employed individuals are subject to distinct statutory recordkeeping requirements that demand proper documentation, such as the dates of leave, the COVID-19-related reason for the leave, and a statement that the individual was unable to work.

To evaluate the validity of the Schedule C deductions, the Court analyzed IRC section 162(a), looking to Commissioner v. Groetzinger, 480 U.S. 23 (1987), which states that a taxpayer must engage in an activity with continuity, regularity, and the primary purpose of earning a profit for it to constitute a trade or business. The Court reinforced that determining the existence of a trade or business is a strict question of fact (Johnson v. Commissioner, T.C. Memo. 2025-87).

Finally, the Court outlined the statutory framework for the FFCRA and ARPA credits, which act as refundable credits for self-employed individuals who carry on a trade or business but were unable to work due to the COVID-19 pandemic. Both statutes require the taxpayer to establish a "need for leave" equivalent to what an employee would require, such as being subject to a quarantine order, experiencing COVID-19 symptoms, or caring for someone affected by COVID-19.

Application of the Law to the Facts

Applying the law to Kanda's Schedule C activity, the Court ruled against the taxpayer due to pervasive evidentiary flaws. Judge Way noted, "The Court agrees that there was no trade or business because the substantial inconsistencies in petitioner’s tax and business documents cast doubt on the extent of petitioner’s business activities or indeed whether they occurred at all, at least in the manner claimed." The Court observed that Kanda's handwritten expense reports were internally inconsistent and that the dates of these reports "precisely align with the limited months for which the COVID–19-related sick and family leave credits were available". Dismissing her oral assertions, the Court quoted Sham v. Commissioner, T.C. Memo. 2020-119: "A taxpayer’s general statement that expenses were paid in pursuit of a trade or business is insufficient to establish that the expenses had a reasonably direct relationship to any such trade or business." Relying on Jackson Crossroads, LLC v. Commissioner, the judge affirmed that "The Court is not bound to accept a taxpayer’s self-serving testimony."

Because Kanda failed to prove she engaged in a legitimate trade or business, the Court found she failed the threshold eligibility requirement for the COVID-19 tax credits. Furthermore, Kanda failed to establish any statutory "need for leave". While she documented severe general health problems, she did not contract COVID-19, nor did she face a quarantine order or school closure.

The Court was particularly critical of Kanda's documentation regarding her self-employment income calculations used for the credit. Pointing to the conflicting figures of $0, $6,700, and $80,650 reported across multiple filings for the 2020 tax year, the Court delivered a harsh assessment of her credibility: "These inconsistencies go beyond poor recordkeeping and suggest pure fabrication."

Conclusion

The Tax Court ruled entirely in favor of the Commissioner regarding the tax deficiency. Judge Way summarized the ruling by stating, "The Court concludes that, for the year at issue, petitioner did not engage in a trade or business and has failed to establish her eligibility for any COVID–19-related sick and family leave credits or to substantiate the amounts claimed." As a result, the deficiency of $26,560 was sustained in its entirety, while the decision reflected the IRS's pre-trial concession regarding the section 6676 penalty.

Prepared with assistance from NotebookLM.