Williams v. Commissioner, T.C. Memo. 2026-91, (Sept. 23, 2026)

This analysis examines Williams v. Commissioner, T.C. Memo. 2026-91, a United States Tax Court decision evaluating the disallowance of significant personal casualty loss deductions, noncash charitable contributions, state and local tax (SALT) deductions, and active-duty military commuting expenses claimed as reservist travel deductions following a catastrophic natural disaster. The decision serves as a critical precedent for certified public accountants (CPAs) and enrolled agents (EAs) regarding the non-negotiable statutory substantiation standards under Internal Revenue Code (IRC) Sections 165, 170, 164, 162, and 274, as well as the procedural mechanics of Section 6662(a) accuracy-related penalties and Section 6751(b) supervisory approval requirements.

Case Background and Factual Summary

Petitioners Brenton E. Williams and Octavia P. Williams were married during the 2018 and 2019 tax years in issue, though they subsequently separated prior to trial. During the tax years in question, Octavia was an active-duty service member in the active component of the United States Air Force stationed at Tyndall Air Force Base (Tyndall) near Panama City, Florida. On October 10, 2018, Hurricane Michael—a Category 5 storm—made landfall on the Florida panhandle and, as noted by the court, “virtually levelled” Tyndall Air Force Base.

The petitioners resided in military housing located on Tyndall, which sustained catastrophic structural damage, rendering the home completely uninhabitable. Following the hurricane, the petitioners evacuated to Debary, Florida, where they established a new residence. Octavia continued her active-duty service at Tyndall and was later transferred to Patrick Air Force Base (now Patrick Space Force Base) in central Florida, regularly commuting from their new home in Debary to Tyndall and subsequently to Patrick.

Approximately ten days after the storm, petitioners returned to Tyndall with a Federal Emergency Management Agency (FEMA) inspector and an insurance adjuster from United Services Automobile Association (USAA) to assess the damage and salvage undamaged personal property. Petitioners documented extensive damage using photographs of the first floor; however, they could not photograph or inspect the second floor because structural instability made traversing it too dangerous. Crucially, the petitioners failed to compile a contemporaneous itemized inventory of destroyed personal property or secure professional appraisals for any lost property.

The petitioners subsequently submitted an insurance claim to USAA. USAA issued a claim settlement letter dated November 3, 2020, itemizing living room and primary bedroom property losses and disbursed payments equal to the policy limits. USAA paid $4,724 for loss of use (prohibited use), $1,422 for additional living expenses, $34,500 under personal property coverage (reflecting a $35,000 policy limit less a $500 deductible), $500 for refrigerated products, $3,000 for personal computer coverage, and $10,000 under a separate valuable personal property policy covering jewelry and watches.

During 2018 and 2019, petitioners also routinely donated various personal items to Goodwill Industries and the Airman’s Attic (a nonprofit assisting military families), as well as directly to needy community members immediately following the storm. However, petitioners failed to obtain Contemporaneous Written Acknowledgments (CWAs) from Goodwill or the Airman’s Attic for any donations either before or after Hurricane Michael.

Petitioners engaged Bruce Baugh, a commercial tax preparer, to prepare their joint 2018 and 2019 Forms 1040 (U.S. Individual Income Tax Return). On their 2018 return, petitioners reported a gross casualty loss of $182,037 for personal property (furniture, electronics, appliances, clothing, and overseas artifacts). After applying the statutory $100 per-casualty floor under IRC § 165(h)(1) and the 10% Adjusted Gross Income (AGI) threshold under IRC § 165(h)(2), petitioners claimed a net Schedule A casualty loss deduction of $162,075. Petitioners calculated the $182,037 figure based solely on unverified memory and informal documentation. On their original 2018 return, petitioners reported a total tax liability of $207; the IRS subsequently determined a corrected tax liability of $30,488.

On Form 8283 (Noncash Charitable Contributions) attached to their 2019 Form 1040, petitioners claimed a noncash charitable contribution deduction of $27,787 for three separate donations to Goodwill on March 25, July 5, and August 21, 2019. The claimed property comprised “Electronics, Computer Equip.” with a reported Fair Market Value (FMV) of $8,500, “High End Clothing” with a reported FMV of $7,600, and “Furniture and Equip.” with a reported FMV of $11,687. No qualified appraisal was obtained, no itemized list was maintained, and no CWAs were secured. Furthermore, on Schedule A of the 2019 return, petitioners claimed deductions of $5,619 for state and local personal property taxes and $4,635 for state and local general sales taxes. Finally, on Line 8a of Form 1040 and Form 2106 (Employee Business Expenses), petitioners reported $26,289 in vehicle mileage expenses (reduced to $22,592 on Schedule 1) as an above-the-line adjustment to income for Octavia’s commutes to Tyndall, claiming eligibility under the military reservist travel expense rules. For 2019, petitioners reported tax due of $6,959, against a corrected liability determined by the IRS of $22,923.

Following an audit, the IRS Commissioner issued a Notice of Deficiency dated February 11, 2022, disallowing:

The entire $162,075 casualty loss deduction for 2018;
The $27,787 noncash charitable contribution deduction for 2019;
The $5,619 state and local personal property tax deduction for 2019;
$2,957 of the claimed $4,635 state and local general sales tax deduction for 2019 (disallowing the portion exceeding the IRS Optional State and Local Sales Tax Tables); and
The $26,289 reservist vehicle mileage expense deduction for 2019.

The IRS assessed tax deficiencies of $27,488 for 2018 and $6,764 for 2019, alongside IRC § 6662(a) accuracy-related penalties of $5,498 and $1,353, respectively, grounded in substantial understatement of income tax or, alternatively, negligence.

Taxpayers’ Request for Relief

Petitioners timely filed a petition with the United States Tax Court on April 20, 2022, seeking full redetermination and relief from all tax deficiencies and IRC § 6662(a) accuracy-related penalties assessed by the Commissioner.

Specifically, petitioners requested that the Tax Court uphold and allow:

The $162,075 net personal casualty loss deduction claimed on Schedule A for tax year 2018, contending that Hurricane Michael caused total destruction of their personal belongings and that their claimed figures reflected true replacement costs and uncompensated personal losses;
The $27,787 noncash charitable contribution deduction claimed on Schedule A for tax year 2019, arguing that their physical donations to Goodwill and local disaster victims were genuine and that strict substantiation rules should be tempered due to storm-related chaos;
The $5,619 state and local personal property tax deduction and the full $4,635 state and local general sales tax deduction claimed on Schedule A for tax year 2019;
The $26,289 above-the-line vehicle mileage expense deduction claimed on Schedule 1 / Line 8a for tax year 2019 in connection with Octavia’s active-duty commuting travel following her post-disaster relocation; and
Full relief from the 20% accuracy-related penalties under IRC § 6662(a) for both 2018 and 2019, contending that any underpayment was non-negligent, generated in good faith, and handled by a commercial tax preparer.

Court’s Analysis of the Law

Judge Marshall structured the opinion around statutory deduction criteria, strict substantiation mandates, procedural burden rules, and penalty approval requirements.

Statutory Burden of Proof and Presumption of Correctness

The Tax Court reiterated the foundational principle that tax deductions are not a matter of right but are permitted solely as a matter of “legislative grace, and only as specifically provided by statute” (INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992)). Under Tax Court Rule 142(a) and Welch v. Helvering, 290 U.S. 111, 115 (1933), the Commissioner’s deficiency determinations in a Notice of Deficiency carry a presumption of correctness, placing the legal burden of proof firmly on the taxpayer to demonstrate error.

While IRC § 7491(a)(1) provides that the burden of proof shifts to the Commissioner on factual issues if a taxpayer introduces credible evidence, Judge Marshall noted that IRC § 7491(a)(2) conditions this shift on the taxpayer establishing full compliance with all statutory substantiation requirements, maintenance of required records, and full cooperation with reasonable IRS requests (Higbee v. Commissioner, 116 T.C. 438, 440–41 (2001)). Because petitioners failed to satisfy statutory recordkeeping, the burden remained entirely with the taxpayers.

Statutory Framework for Personal Casualty Losses

Under IRC § 165(a), taxpayers may deduct uncompensated losses sustained during the tax year. For individuals, IRC § 165(c)(3) limits personal loss deductions to those arising from “fire, storm, shipwreck, or other casualty.” Under IRC § 165(h)(1) and (2), personal casualty losses are deductible only to the extent each casualty exceeds $100 and net aggregate annual losses exceed 10% of AGI. Furthermore, for tax years beginning after December 31, 2017, and before January 1, 2026, IRC § 165(h)(5)(A) restricts personal casualty loss deductions strictly to losses attributable to a “Federally declared disaster.”

Regarding valuation, Treas. Reg. § 1.165-7(b)(1) dictates that a casualty loss deduction equals the lesser of:

The difference between the FMV of the property immediately before the casualty and its FMV immediately after the casualty; or
The property’s adjusted basis as prescribed in Treas. Reg. § 1.1011-1 for determining loss from a sale or disposition.

Treas. Reg. § 1.165-7(a)(2)(i) establishes that pre- and post-casualty FMV must generally be ascertained by a competent appraisal. In the absence of an appraisal, judicial precedent holds that “In deciding whether a taxpayer has substantiated his deductions, we ordinarily look at the proof he offers in the form of documentation and testimony” (Zilberberg v. Commissioner, T.C. Memo. 2011-5).

Statutory Framework for Noncash Charitable Contributions

IRC § 170(a)(1) allows deductions for verified charitable contributions made to qualified entities defined in IRC § 170(c). For noncash contributions of property exceeding $5,000 made after July 30, 2018, Treas. Reg. § 1.170A-16(d)(1) mandates that no deduction is allowed unless the donor satisfies a strict three-prong requirement:

Substantiates the contribution with a Contemporaneous Written Acknowledgment (CWA) under IRC § 170(f)(8) and Treas. Reg. § 1.170A-13(f);
Obtains a qualified appraisal prepared by a qualified appraiser pursuant to IRC § 170(f)(11)(C) and Treas. Reg. § 1.170A-17; and
Completes Form 8283 (Section B) and attaches it to the tax return on which the deduction is claimed.

To satisfy IRC § 170(f)(8) and Treas. Reg. § 1.170A-13(f)(2), a CWA must explicitly state: (1) the cash amount or description of noncash property transferred; (2) whether the donee provided any goods or services in consideration; and (3) a good faith estimate of the value of any goods or services provided. Additionally, IRC § 170(f)(16)(A) statutorily denies any deduction for contributed clothing or household items unless the items are in “good used condition or better.” Direct gifts to needy individuals, regardless of charitable intent, do not qualify under IRC § 170(c). Failure to comply with these statutory mandates completely precludes any deduction under IRC § 170(a)(1) and (f)(11)(A)(i).

Statutory Framework for State and Local Tax Deductions

IRC § 164(a)(2) permits itemized deductions for state and local personal property taxes, defined under IRC § 164(b)(1) as an ad valorem tax imposed annually on personal property. IRC § 164(a)(3) and (b)(5)(A) permit taxpayers to elect to deduct state and local general sales taxes in lieu of state and local income taxes. Taxpayers claiming actual sales tax expenses must substantiate every expenditure (Figures v. Commissioner, T.C. Memo. 2012-296). Alternatively, under IRC § 164(b)(5)(H), taxpayers may utilize the IRS Optional State and Local Sales Tax Tables for administrative convenience without detailed receipts.

Statutory Framework for Travel Expenses and Military Reservists

IRC § 162(a) allows deductions for ordinary and necessary trade or business expenses, including travel while away from home. However, under IRC § 67(g), all unreimbursed employee business expenses deductible as miscellaneous itemized deductions under IRC § 67(a) were suspended for tax years beginning after December 31, 2017, and before January 1, 2026.

An exception exists under IRC § 62(a)(2)(E), which allows members of reserve components of the U.S. Armed Forces an above-the-line adjustment to gross income for travel expenses incurred while performing services more than 100 miles away from home. The statutory definition of “reserve components” is strictly defined in 10 U.S.C. § 10101 to include the Army Reserve, Marine Corps Reserve, Navy Reserve, Air Force Reserve, Coast Guard Reserve, Army National Guard, and Air National Guard. Active-duty service members do not fall within 10 U.S.C. § 10101.

When the IRS shifts its legal theory post-Notice of Deficiency, Tax Court Rule 142(a) and Shea v. Commissioner, 112 T.C. 183, 197 (1999) place the burden of proof on the Commissioner regarding the “new matter.” However, where a pure legal question remains following a factual concession, the court decides the issue without regard to the burden of proof (Estate of Morgens v. Commissioner, 133 T.C. 402, 409 (2009)).

Statutory Framework for Accuracy-Related Penalties and Administrative Approval

IRC § 6662(a) and (b)(1)–(2) impose a 20% penalty on tax underpayments attributable to negligence, disregard of rules or regulations, or substantial understatements of income tax. Negligence includes any failure to make a reasonable attempt to comply with the Code or maintain adequate books and records (IRC § 6662(c); Treas. Reg. § 1.6662-3(b)(1)). An understatement is “substantial” under IRC § 6662(d)(1)(A) if it exceeds the greater of 10% of the tax required to be shown on the return or $5,000.

Under IRC § 7491(c), the Commissioner carries the initial burden of production regarding penalty liability (Higbee, 116 T.C. at 446–47). This burden requires proving procedural compliance with IRC § 6751(b)(1), which mandates that no penalty shall be assessed unless the initial determination is personally approved in writing by the immediate supervisor of the examining agent (Graev v. Commissioner, 149 T.C. 485, 492–93 (2017)). In the Eleventh Circuit (to which this case was appealable under IRC § 7482(b)), written supervisory approval must be secured prior to penalty assessment (Kroner v. Commissioner, 48 F.4th 1272, 1278–79 (11th Cir. 2022)). Once the IRS establishes § 6751(b) approval and substantial understatement, the burden shifts to the taxpayer to establish an affirmative defense under IRC § 6664(c)(1) by proving reasonable cause and good faith.

Application of the Law to the Facts

Judge Marshall evaluated each disputed deduction and penalty against the factual record.

Casualty Loss Disallowance Application

Although the court acknowledged that physical destruction from Hurricane Michael constituted a qualified casualty event under IRC § 165(c)(3) (Lamphere v. Commissioner, 70 T.C. 391, 395 (1978)), the court ruled that petitioners completely failed to substantiate the claimed $182,037 loss.

Petitioners presented no pre- or post-casualty appraisals required by Treas. Reg. § 1.165-7(a)(2)(i). Furthermore, their trial evidence revealed fatal evidentiary gaps:

Unexplained Valuation Discrepancies: Petitioners initially claimed $61,000 in personal property losses to USAA (receiving $34,500 under policy limits), but claimed $182,037 on their 2018 tax return. Petitioners admitted arriving at $182,037 based solely on unverified personal memory.
Lack of Inventory or Documentation: Petitioners failed to produce an itemized list of destroyed goods, relying instead on first-floor photographs showing generalized destruction.
Insufficiency of Replacement Receipts: While petitioners introduced receipts for post-hurricane replacement furniture, Judge Marshall firmly rejected them, ruling that “the cost of a replacement item is not indicative of the value of the original item.” Moreover, the court noted that replacement receipts (such as a receipt for new sofas) overlapped with items already compensated by USAA ($34,500 payment for living room property), violating IRC § 165(a)’s bar on deducting compensated losses.

Consequently, Judge Marshall held: “On the record before us, we are unable to find that petitioners have substantiated their reported casualty loss.”

Charitable Contribution Disallowance Application

Regarding the $27,787 noncash charitable deduction for Goodwill donations claimed on Form 8283, petitioners failed every statutory substantiation requirement under IRC § 170(f)(11) and Treas. Reg. § 1.170A-16(d)(1):

They obtained no qualified appraisals for claimed donations exceeding $5,000;
They failed to provide an itemized list of donated items; and
They produced no CWAs from Goodwill as required by IRC § 170(f)(8).

While Judge Marshall found Octavia’s testimony credible regarding the fact that donations occurred post-storm, credibility cannot override explicit statutory commands: “We find credible Octavia’s testimony that petitioners made donations after Hurricane Michael; however, petitioners have failed to present evidence that satisfies the requirements of law for deductions of noncash charitable contributions.” Furthermore, direct transfers to needy neighbors failed to qualify under IRC § 170(c) because private individuals are not qualified charitable entities.

State and Local Tax Disallowance Application

The court sustained the disallowance of $5,619 in personal property taxes and $2,957 in general sales taxes because petitioners offered zero substantiation. At trial, both petitioners candidly testified that “they did not know what the personal property taxes that were reported on their 2019 Form 1040 related to.” Similarly, they could not identify the basis for the claimed sales tax figure. The IRS allowance under the Optional State and Local Sales Tax Tables was therefore sustained.

Reservist Mileage Disallowance Application

The IRS altered its legal theory at trial—moving from IRC § 274(d) substantiation to arguing that Octavia was not a military reservist under IRC § 62(a)(2)(E). Although this shifted the burden of proof to the IRS under Tax Court Rule 142(a) and Shea, petitioners conceded at trial that Octavia was an active-duty Air Force member, not a reservist defined in 10 U.S.C. § 10101.

Because Octavia was not a reservist, she was legally ineligible for above-the-line deductions under IRC § 62(a)(2)(E). Furthermore, her commuting expenses could not be deducted as IRC § 162(a) employee business expenses because miscellaneous itemized deductions were suspended under IRC § 67(g) for 2018–2025.

Accuracy-Related Penalty Application

The court sustained 20% accuracy-related penalties under IRC § 6662(a) for substantial understatements of tax ($30,488 corrected tax vs. $207 reported for 2018; $22,923 corrected tax vs. $6,959 reported for 2019). The IRS satisfied its § 7491(c) burden of production by submitting a Civil Penalty Approval Form signed on June 29, 2021, by supervisory agent Pamela Josephson prior to the Notice of Deficiency, satisfying IRC § 6751(b)(1) and Eleventh Circuit precedent in Kroner.

The court noted that accuracy-related penalties cannot be “stacked” for negligence and substantial understatement on the same underpayment under Treas. Reg. § 1.6662-2(c) (Ocampo v. Commissioner, T.C. Memo. 2015-150). Because the substantial understatement threshold was met, the IRS established penalty liability. The burden shifted to petitioners under IRC § 6664(c)(1) to prove reasonable cause and good faith. Because petitioners presented no evidence of reasonable cause or good faith reliance, Judge Marshall sustained the penalties in full.

Conclusions of the Court

The Tax Court concluded its opinion by sustaining the Commissioner’s deficiency determinations and IRC § 6662(a) accuracy-related penalties in their entirety for both the 2018 and 2019 tax years. Judge Marshall summarized the court’s final disposition as follows:

“For the foregoing reasons, we will sustain respondent’s deficiency and penalty determinations in the Notice. We have considered all other arguments made and facts presented in reaching our decision and, to the extent not discussed above, we conclude that they are moot, irrelevant, or without merit.”

Prepared with assistance from Gemini Notebook.