Branch v. Commissioner, T.C. Memo. 2026-51, Docket No. 7214-20 (Filed June 17, 2026)

In Branch v. Commissioner, T.C. Memo. 2026-51, the United States Tax Court addressed several critical issues concerning unreported Medicaid gross receipts, the substantiation of Schedule A itemized deductions, the application of the Cohan rule to Schedule C business expenses, and the applicability of late-filed additions to tax. The taxpayer, Colette Branch, operated a sole proprietorship providing personal care and day-care services to Medicaid recipients under the Louisiana New Opportunities Waiver (NOW) program. Despite generating multi-million dollar revenues, the taxpayer failed to file federal income tax returns for the tax years 2015 through 2017.

The Internal Revenue Service (IRS) prepared substitutes for returns (SFRs) under Internal Revenue Code (I.R.C.) § 6020(b) and determined multi-million dollar deficiencies. While the taxpayer conceded the gross receipts, she argued that the IRS failed to account for offsetting business expenses and itemized deductions. The Tax Court’s decision serves as an authoritative reminder of the stringent requirements of I.R.C. § 274(d), the boundaries of judicial notice under Federal Rule of Evidence 201(b), the binding nature of pre-trial concessions, and the established principle that reliance on a tax professional to delay filing during an ongoing audit does not constitute "reasonable cause" under I.R.C. § 6651(a).

Procedural History and Unreported Gross Receipts

Colette Branch owned and operated A-1 Absolute Best Care, LLC (A-1), a sole proprietorship, since 1998 in the New Orleans metropolitan area. A-1 provided personal care attendants, supervised independent living services, and an "Adult Day Care– Day Habilitation" program (daycare) for approximately 100 adult clients with intellectual and physical handicaps. A-1 was heavily regulated, and almost all of its gross receipts were derived from Medicaid payments under the NOW program.

For the tax years 2015 through 2017, Branch failed to file federal income tax returns. In 2019, the Commissioner prepared SFRs under I.R.C. § 6020(b) and on January 7, 2020, issued a Notice of Deficiency determining the following substantial federal income tax deficiencies and additions to tax:

Tax Year 2015: Deficiency of $2,766,561; I.R.C. § 6651(a)(1) addition of $621,909; I.R.C. § 6654 addition of $1,415; and I.R.C. § 6651(a)(2) addition to be computed.
Tax Year 2016: Deficiency of $2,702,605; I.R.C. § 6651(a)(1) addition of $608,086; I.R.C. § 6654 addition of $64,604; and I.R.C. § 6651(a)(2) addition to be computed.
Tax Year 2017: Deficiency of $2,856,528; I.R.C. § 6651(a)(1) addition of $642,698; I.R.C. § 6654 addition of $68,390; and I.R.C. § 6651(a)(2) addition to be computed.

The parties subsequently entered into a binding pre-trial stipulation establishing that A-1’s actual gross receipts were $6,571,989 for 2015, $6,502,372 for 2016, and $6,789,616 for 2017. Additionally, the parties stipulated that Branch received non-Schedule C taxable income of $11,124 for 2015, $1,979 for 2016, and $3,478 for 2017.

Based on records produced during the examination, the Commissioner conceded that A-1 was entitled to Schedule C business expense deductions of $4,901,421 for 2015, $5,014,311 for 2016, and $5,196,898 for 2017. However, the taxpayer claimed she was entitled to additional Schedule C business expense deductions of $926,720 for 2015, $1,071,475 for 2016, and $1,500,849 for 2017, alongside various Schedule A itemized deductions.

The Burden of Proof and Rejection of Extra-Record Evidence

As a fundamental rule of federal tax litigation, the Commissioner’s deficiency determinations are presumed correct, and the taxpayer bears the burden of proving that such determinations are erroneous. This principle, established in Welch v. Helvering, 290 U.S. 111, 115 (1933), operates in tandem with the rule that tax deductions are a matter of "legislative grace," placing the burden of proving entitlement squarely on the taxpayer. Under I.R.C. § 6001 and Treas. Reg. § 1.6001-1(a), a taxpayer must maintain records sufficient to enable the Commissioner to determine the correct tax liability.

While I.R.C. § 7491(a) permits the burden of proof to shift to the Commissioner on factual issues if the taxpayer produces "credible evidence" and meets certain substantiation requirements, the court in Branch noted that it did not need to decide which party bore the burden of proof for most issues because they could be resolved based on a preponderance of the evidence. For the remaining issues decided solely on the burden of proof, the court ruled that the taxpayer "failed to introduce credible evidence with respect to such issues and therefore failed to satisfy the requirements of section 7491".

A significant evidentiary dispute arose when the Commissioner attempted to assert facts in his opening brief based on materials that were not part of the trial record. These materials included photos of properties on Google Maps (using the Street View feature), internet reviews of certain restaurants, and other online sources. The Commissioner requested the court to take judicial notice of these facts.

The Tax Court, operating under the Federal Rules of Evidence pursuant to I.R.C. § 7453 and Tax Court Rule 143(a), rejected this request. Under Federal Rule of Evidence 201(b), a court may judicially notice a fact only if it is not subject to reasonable dispute because it:

is generally known within the trial court's territorial jurisdiction; or
can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.

The court ruled that the Commissioner's extra-record internet materials satisfied neither prong of the rule, declaring: "Accordingly, we decline to make factual findings based on any of the materials in question".

Filing Status, Late-Raised Claims, and Community Property Traps

The Notice of Deficiency originally listed Branch's filing status as single. At trial and on brief, the Commissioner asserted that the proper filing status was married filing separate, and the court agreed. Branch married Timothy Branch, Sr. on October 14, 2015. Although she later provided draft returns to counsel marked "Do not file" reflecting a "married filing joint" status, her husband did not sign those draft returns, nor did he file his own return. Under I.R.C. § 6013(a), "Taxpayers can secure joint filing status only by filing a joint tax return". Since no valid joint return was filed, Branch’s filing status was held to be married filing separate for each year.

In her answering brief, Branch raised a new argument: because she was married and lived in Louisiana, a community property state, any income earned by her or A-1 should be allocated one-half to her and one-half to her spouse under community property principles.

The Tax Court flatly rejected this argument, treating it as abandoned and conceded due to its late presentation. Citing Dutton v. Commissioner, 122 T.C. 133, 142 (2004), the court noted: "Our practice is not to consider new issues raised for the first time in an answering brief". Furthermore, the court emphasized that Branch’s failure to raise the community property issue in a timely manner prejudiced the Commissioner by preventing him from establishing facts under I.R.C. § 66(b), which allows the IRS to disallow community property treatment if a taxpayer acted as if they were solely entitled to the income and failed to notify their spouse.

Substantiation of Schedule A State and Local Taxes and Pretrial Concession Enforcement

Branch claimed a 2015 Schedule A deduction of $20,095 for state and local taxes paid, submitting two checks paid to the Louisiana Department of Revenue in May 2015 from her joint account. The checks contained memo lines reading "2012 LDR" and "2013 State Tax". The Commissioner argued that the payments might have been for an unrelated business and that substantiation was insufficient.

The court ruled in favor of Branch, finding that although the checks were written from a joint account, they were signed by Branch and paid in May 2015, prior to her remarriage to her husband in October 2015. Consequently, they represented her separate pre-marital obligations and were allowed as deductible state income taxes under I.R.C. § 164.

An important procedural dispute arose regarding stipulated charitable contributions. In their First Stipulation of Facts, the parties stipulated that the taxpayer made charitable contributions to John Curtis Christian School (JCCS) totaling $70,310 for 2015, $76,484 for 2016, and $67,956 for 2017 (including minor contributions to St. Augustine Church and All4One Society). In his pre-trial memoranda, the Commissioner listed these exact figures under a section titled "RESOLVED ISSUES".

On brief, however, the Commissioner attempted to walk back these concessions, arguing that because Branch's filing status was married filing separate in a community property state, she was only entitled to deduct 50% of the contributions paid from the joint bank account. This would have reduced her allowed deductions to $45,505 for 2015, $67,034 for 2016, and $47,232 for 2017.

The Tax Court held the Commissioner to his pre-trial concessions, refusing to permit the reduction. Under Tax Court Rule 91(e), stipulations are generally binding unless "manifest injustice" would result. The court noted that the Commissioner was fully aware of the marriage and the joint account when filing the pre-trial memoranda. By listing these deductions as "RESOLVED ISSUES," the Commissioner had led the taxpayer to believe the issue was settled. Had the Commissioner raised the 50% limitation timely, the taxpayer might have introduced evidence to prove the separate nature of the funds used.

Substantiation Requirements and Strict Limits for Charitable Donations

Branch sought deductions for additional charitable donations exceeding the stipulated amounts: $97,900 for 2015, $19,000 for 2016, and $39,654 for 2017. The court disallowed these additional deductions entirely due to a failure of substantiation.

Under I.R.C. § 170(a)(1) and I.R.C. § 170(f)(8)(A), no deduction is allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment (CWA) from the donee organization. The CWA must state the amount of cash contributed, describe any goods or services provided in consideration, and provide a good-faith estimate of their value.

The court found that Branch failed to show that the payments to JCCS (beyond the stipulated amounts) were charitable contributions rather than tuition, and she failed to provide a CWA for any of the alleged additional donations exceeding $250. Similarly, additional claimed contributions to "NOLA Hope," "Metairie Basketball," and "Tiffany Joseph" were disallowed for lack of substantiation and failure to comply with I.R.C. § 170(f)(8).

Schedule C Ordinary and Necessary Standard vs. Nondeductible Personal Expenditures

Under I.R.C. § 162(a), a taxpayer may deduct all "ordinary and necessary" expenses paid or incurred during the taxable year in carrying on any trade or business. As defined by the Supreme Court, an expense is "ordinary" if it is normal, usual, or customary within the specific industry, and "necessary" if it is appropriate and helpful for the development of the business (Deputy v. du Pont, 308 U.S. 488, 495 (1940); Welch v. Helvering, 290 U.S. 111, 113 (1933)). However, I.R.C. § 262(a) strictly prohibits the deduction of personal, living, or family expenses.

In A-1's operations, the line between business and personal expenses was heavily blurred. Branch paid personal expenses from A-1’s account and paid business expenses from her joint bank account and personal credit cards. However, the taxpayer established that A-1 purchased clothing, food, home goods, and other items for its intellectual-handicapped clients as part of their comprehensive, state-approved Plans of Care. The court recognized that while these appeared to be "personal items," they were ordinary and necessary to fulfill A-1's contractual and regulatory obligations to its clients, observing that the high volume of spending suggested she was not purchasing these items for her own family.

The Dual Standards of Business Substantiation: Cohan Rule Estimation vs. Section 274 Strict Substantiation

The Branch case highlights the distinct contrast between two substantiation standards: the Cohan rule of estimation and the strict substantiation requirements of I.R.C. § 274(d).

Under the landmark case Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930), if a taxpayer establishes that a deductible expense was incurred but cannot fully substantiate the exact amount, the court may approximate the allowable deduction, "bearing heavily... upon the taxpayer whose inexactitude is of his own making". However, the court is not required to guess; there must be some rational basis in the record upon which an estimate can be made (Vanicek v. Commissioner, 85 T.C. 731, 742-43 (1985)).

Conversely, I.R.C. § 274(d) overrides the Cohan rule for specific categories of expenses, including travel, entertainment, gifts, and "listed property" (such as passenger vehicles under I.R.C. § 280F(d)(4)). To deduct these expenses, the taxpayer must substantiate, through adequate records or sufficient corroborating evidence, the exact amount, time, place, business purpose, and business relationship of each expenditure. The Cohan rule cannot be used to approximate expenses covered by I.R.C. § 274(d) (Sanford v. Commissioner, 50 T.C. 823, 827-28 (1968)).

Analysis of Contested Schedule C Deductions: Rent, Utilities, and Contract Labor

The court meticulously evaluated several categories of additional claimed Schedule C expenses, applying these dual standards:

Rent Expenses

French Quarter Building: Branch claimed rent of $12,000 paid for a building intended for client job training. Because repairs were never completed and the facility never became operational, the court ruled she failed to prove it was an ordinary and necessary business expense.
Tim's Soul Food Building: Rent of $16,500 (2015), $18,000 (2016), and $16,500 (2017) was claimed for a building housing a restaurant registered to her husband. The court disallowed this entirely, finding no evidence that the restaurant was part of A-1’s business.
New Orleans Apartment: Rent of $23,865 (2015) and $12,250 (2016) was claimed for a vacant apartment kept for potential emergency use. The court rejected this, pointing to Branch's "rambling" testimony that "it was no rhyme or reason... just an apartment in New Orleans".
Houston Apartment: Rent of $8,325 (2015), $26,961 (2016), and $33,299 (2017) was claimed for an apartment in Houston, Texas. The court allowed these deductions in full, finding her detailed testimony highly credible. Because New Orleans is a coastal city at risk of hurricanes, maintaining a Houston apartment for client evacuation and administrative continuity was an ordinary and necessary business expense. Related emergency utilities of $1,000 in 2015 were also allowed.

Utilities

Branch claimed utilities paid from her joint bank account of $49,270 (2015), $52,650 (2016), and $38,148 (2017). The court found it credible that these expenses pertained to client or employee housing but lacked full documentation. Applying Cohan, the court allowed $35,000 (70%) for 2015, $37,000 (70%) for 2016, and $27,000 (70%) for 2017.

Contract Labor and General Contractor Expenses

Contractor Checks (Joint Account): Branch claimed $49,931 (2015), $49,351 (2016), and $13,188 (2017, net of concession). Finding her testimony regarding contract labor credible but poorly documented, the court applied Cohan and allowed $35,000 (70%) for 2015, $35,000 (70%) for 2016, and $9,000 (approx. 70%) for 2017.
A-1 Bank Account Contractor Expenses: In 2015, Branch claimed $466,800. The court carved out $8,843 in travel and vehicle expenses (including $7,000 to Tiffany Joseph) because they failed I.R.C. § 274(d). It also carved out $10,205 in previously conceded duplications. The court then applied Cohan to the remaining $425,881, allowing $256,000 (60%). In 2016, out of $110,950 claimed, $2,480 was carved out as duplicative, and the court applied Cohan to allow $87,000 (80%) of the remaining $108,470.
Forms 1099-MISC (2017): Branch claimed $52,756 based on Forms 1099-MISC. After subtracting $25,932 in previously conceded amounts, the court allowed the remaining $26,824 because checks from A-1’s account matched the 1099 figures.

Petty Cash Spending, Vehicle Depreciation, and Collateral Estoppel Rulings

Branch claimed deductions for cash withdrawals representing client cash allowances and spending money. While she claimed $21,871 (2015), $26,230 (2016), and $23,178 (2017), the court limited the deductions to the amounts substantiated by physical petty cash receipts: $9,000 for 2015, $13,100 for 2016, and $13,400 for 2017. The court noted that because "cash is fungible," un-receipted withdrawals could not be confidently estimated under Cohan.

Regarding depreciation, Branch claimed deductions of $103,199 (2015), $98,577 (2016), and $91,952 (2017) based on a self-created depreciation schedule. Her primary argument was that because the IRS had reviewed and settled her 2014 tax year in a prior Tax Court case, the IRS was bound by collateral estoppel and res judicata to accept her depreciation schedule in subsequent years.

The Tax Court flatly rejected this argument on several grounds:

Separate Causes of Action: "each tax year stands on its own, with each year being the origin of new liability and a separate cause of action" (Koprowski v. Commissioner, 138 T.C. 54, 60 (2012)). Thus, res judicata does not apply.
No Prior Litigation of the Issue: Collateral estoppel requires a judicial decision on the merits, not merely a settlement. Since the 2014 case was settled by a stipulated decision, the depreciation issue was never actually litigated.
Prior Inaction Irrelevant: "It is well settled that the Commissioner’s failure to challenge a taxpayer’s treatment of an item in one taxable year is irrelevant in the determination of the proper treatment of a similar item in a different taxable year" (Little v. Commissioner, 106 F.3d 1445, 1453 (9th Cir. 1997)).
No Substantiation of Cost Basis or Ownership: Branch failed to provide deeds or records showing A-1 actually owned the properties, failed to substantiate purchase prices, and assigned unreasonably small, unsubstantiated amounts to non-depreciable land basis.
Strict Substantiation Failure for Vehicles: The vehicle depreciation claimed on a Ford F-450 and BMW SUV fell under the strict substantiation requirements of I.R.C. § 274(d) as "listed property" under I.R.C. § 280F(d)(4). Because Branch failed to produce mileage logs or business-use records, no depreciation was allowed.

Consequently, the court disallowed all depreciation deductions for 2015, 2016, and 2017.

Disallowance of Un-Categorized Credit Card Expenditures

Branch claimed significant deductions for miscellaneous expenses paid via her personal American Express card: $167,518 (2015), $357,635 (2016), and $500,929 (2017).

For 2015, she provided a category-specific spreadsheet listing $158,732 of the expenses. After carving out I.R.C. § 274(d) travel/vehicle expenses ($29,589), duplicative concessions ($1,956), and personal restaurant supply expenses ($10,524) associated with her husband's business, the court applied Cohan to the remaining $116,663 and allowed $35,000 (30%).

For 2016 and 2017, however, Branch provided no such categorization. She submitted spreadsheets that simply lumped together monthly credit card statement totals under a single "AMEX" category ($389,713 for 2016 and $579,514 for 2017).

The court completely disallowed all miscellaneous American Express deductions for 2016 and 2017, stating:

"Considering the mishmash of expenses shown on the American Express card statements and petitioner’s failure to make any effort to identify deductible expenses or expense categories, we find that we are unable to apply the Cohan rule to the claimed expenses. We rule that petitioner failed to meet her burden of proof to substantiate that any deductible business expenses were paid."

Additions to Tax and the Defeat of the Audit-Delay Reasonable Cause Defense

Under I.R.C. § 7491(c), the Commissioner bears the burden of production regarding additions to tax. To meet this, the Commissioner must offer sufficient evidence that imposing the addition is appropriate.

I.R.C. § 6651(a)(1) Failures

The Commissioner proved that Branch failed to timely file her income tax returns. Branch conceded she did not file returns but argued she had "reasonable cause". She claimed she provided all information to her bookkeeper, Bruce Thornton, who advised her to delay filing her 2015–2017 returns because of the ongoing IRS audit of her 2014 tax return.

The Tax Court rejected this defense. Citing United States v. Boyle, 469 U.S. 241 (1985), the court reiterated that while reliance on a professional that no return is required may constitute reasonable cause, reliance on advice to delay filing "do[es] not sanction an abdication of responsibility for the timely filing of a return admittedly due". Under I.R.C. § 6651(a)(1), the deadline is clear, and no special training is required to meet it.

Critically, the court emphasized the dangerous systemic implications of the taxpayer's argument:

"Allowing such a basis for reasonable cause would make timely filing optional for any taxpayer under audit. [Taxpayers] were aware that they had a duty to file a return timely and consciously failed to file. It is well settled that taxpayers must file timely returns using the best information available to them and may file amended returns if necessary."

Thus, the court held Branch liable for the I.R.C. § 6651(a)(1) failure-to-file additions to tax for all years.

I.R.C. § 6651(a)(2) Failures

Because the IRS prepared valid SFRs under I.R.C. § 6020(b) showing tax liabilities, and Branch offered no evidence or reasonable cause defense for her failure to pay, the court sustained the I.R.C. § 6651(a)(2) failure-to-pay additions to tax.

Estimated Tax Mandates and Mechanics

Under I.R.C. § 6654(a), an addition to tax is imposed on individuals who fail to make required quarterly estimated tax payments. This addition is mandatory, and no general "reasonable cause" exception exists.

To meet the burden of production under I.R.C. § 7491(c), the Commissioner must prove the taxpayer had a "required annual payment". Under I.R.C. § 6654(d)(1)(B), the required annual payment is the lesser of:

90% of the tax shown on the return for the tax year (or 90% of the actual tax if no return is filed); or
100% (or 110% for high-income taxpayers with prior-year AGI exceeding $150,000) of the tax shown on the return of the preceding tax year.

Importantly, an SFR prepared under I.R.C. § 6020(b) does not constitute a "return" for purposes of calculating the prior-year safe harbor under I.R.C. § 6654(d)(1)(B).

For the tax year 2015, the Commissioner established that Branch filed her 2014 return in April 2016, reporting a tax liability of $66,566. Since she was a high-income taxpayer, her 2015 required annual payment was properly calculated based on the safe harbor of 110% of her 2014 tax, which was lower than 90% of her 2015 tax.

For the tax years 2016 and 2017, because Branch had filed no returns for 2015 or 2016, she was ineligible for the prior-year return safe harbor. Therefore, her required annual payments were based on 90% of the tax shown on the 2016 and 2017 SFRs, respectively. The court sustained the I.R.C. § 6654 additions to tax for all years.

Key Technical Takeaways for Tax Practitioners

The Branch decision highlights several critical lessons for tax practitioners:

Audit-Delay Defense is Dead: Practitioners must never advise clients to withhold filing current-year tax returns because a prior-year audit is unresolved. Under Estate of Vriniotis v. Commissioner, 79 T.C. 298, 311 (1982), taxpayers must file timely returns using the best available information and amend them later if necessary.
Credit Card Statements are Not Substantive Records: Simply providing credit card statements showing monthly expenditures—without contemporaneous categorization and business purpose documentation—will lead to complete disallowance. The court will not apply the Cohan rule to an un-categorized "mishmash" of credit card expenses.
The Strictness of Section 274(d): Travel, auto, and listed property deductions are entirely lost without contemporaneous mileage logs, calendar entries, or similar records. The Cohan rule cannot rescue these expenses.
Pre-Trial Concessions Bind the IRS: If the Commissioner concedes an issue in a pre-trial memorandum under "RESOLVED ISSUES," the court will hold him to that concession if walking it back would prejudice the taxpayer.
Separate Entities Must Stay Separate: Rent and other business expenses paid for separate LLCs or a spouse’s distinct business ventures cannot be deducted on a sole proprietor’s Schedule C, even if there are operational overlaps (such as a spouse's restaurant preparing food for a daycare).

Prepared with assistance from NotebookLM.