West v. Commissioner: The $5 Million Partnership Loss Dispute and Record-Keeping Nightmare

The $5 Million Mistake: How Poor Record-Keeping Cost Andrew West Nearly Half a Million in Taxes

The stakes in West v. Commissioner could not have been higher. After the U.S. Tax Court issued its opinion on October 7, 2026, in T.C. Memo. 2026-105, Andrew B. West was hit with a $469,658 deficiency in federal income tax for tax years 2015 and 2016, along with $93,881 in accuracy-related penalties under § 6662(a). The core issue? West’s attempt to claim a $6.8 million ordinary loss deduction from a commodities trading partnership—one that the IRS disallowed entirely due to his failure to substantiate the loss. The court’s ruling underscores a harsh reality for taxpayers: when records are disorganized, the Tax Court will not fill the gaps with estimates, even if the taxpayer genuinely incurred the expense. The case serves as a cautionary tale for anyone who treats bookkeeping as an afterthought, particularly in high-stakes business ventures where the IRS has broad authority to reconstruct income and disallow deductions.

The stakes were not merely financial—they were existential for West’s business operations. The IRS’s bank deposits analysis revealed unreported income in 2015, while the court found that West’s Schedules C for both years were riddled with unsubstantiated deductions. The deficiencies and penalties stemmed from the IRS’s adjustments to West’s reported income and deductions, which the court largely upheld. The $469,658 deficiency and $93,881 in penalties were not arbitrary; they were the direct result of West’s failure to maintain adequate records, a failure that the Tax Court has increasingly policed with zero tolerance. For taxpayers who gamble on disorganization, the message is clear: the Tax Court will not bail out sloppy record-keeping with the Cohan Rule when the IRS demands strict substantiation under § 274(d) or when the loss deduction hinges on compliance with § 704(d) and § 465.

A Chronology of Chaos: How Andrew West’s Business Dealings Unraveled

Andrew West’s financial unraveling began in August 2010, when he entered into an employment agreement with Paloma Cattle Co. Ltd. to work for Oscar Leo Quintanilla’s sprawling business empire. That agreement, later amended in 2011 and 2015, provided West with a salary, benefits, and a controversial “Operating Bonus” equal to 6% of the aggregate profits of the Quintanilla businesses. The bonus language was later clarified to allow calculation on an entity-by-entity basis, but the dispute over its application would later become a flashpoint in the litigation. West’s compensation also included reimbursement for documented out-of-pocket expenses incurred in connection with his duties or business development activities—a provision that would later collide with his aggressive deduction claims.

By January 1, 2011, West had ascended to CEO and president of multiple Quintanilla entities, including those involved in oil and gas operations, cattle ranching, and commercial real estate. His responsibilities expanded to include managing Quintanilla’s stock trading accounts, which generated consistent profits during his tenure. The arrangement was informal but structured: Quintanilla’s accountants aggregated expenses across his businesses, allocated them appropriately, and billed West’s entities or West personally for reimbursement. In cases where expenses were personal, invoices were sent directly to West. The system relied on West’s own categorization of expenses as either personal or business-related—a system that would later be exposed as deeply flawed.

The first major inflection point came on January 1, 2014, when West and Quintanilla formalized their commodities trading partnership through three interlocking documents: a Commodity Trading Allocation Agreement (CTA), a Secured Promissory Note (CTA Note), and an All-Assets Security Agreement (CTA Security Agreement). Under the CTA, Quintanilla contributed trading accounts while West contributed his management services. The agreement mandated an annual settlement on December 31, where Quintanilla paid West 50% of any profits, and West became liable for 50% of losses up to $5 million. Losses beyond that threshold were automatically deemed borrowed from Quintanilla under the CTA Note, secured by all of West’s assets. The partnership operated for just 26 months before collapsing on February 26, 2016, leaving a trail of staggering losses: $13.7 million in 2014, a $2.6 million gain in 2015, and a final $149,000 loss in early 2016, for a net loss of $11.3 million. West’s 50% share amounted to $5.7 million—an amount he would later attempt to deduct despite having contributed no capital to the partnership.

The chaos intensified in 2015, when West’s financial entanglements deepened. On March 1, he and Quintanilla executed a $4.5 million Asset Purchase Agreement, under which Quintanilla agreed to pay West’s creditors—including his ex-wife Carey West, to whom he owed $2.2 million under a post-nuptial promissory note—in exchange for West’s transfer of assets that had served as collateral under the CTA Security Agreement. The agreement made no mention of the commodities trading accounts, the CTA, or the CTA Note, but West would later argue that the transaction extinguished his obligations under the partnership. That argument would fail spectacularly in Texas state court, where a Bexar County district judge ruled in 2021 that West remained liable for $5.9 million stemming from the commodities trading activity.

West’s record-keeping during this period was, by all accounts, a disaster. He purchased a San Antonio property at Bristol Green with the intention of leasing or selling it, incurring over $100,000 in design fees to Erin Shirah, $77,000 in invoices billed to MPC Equipment by Quintanilla’s businesses, and nearly $170,000 in purported repairs and upgrades. The Tax Court would later conclude these were capital improvements, not deductible repairs. His three LLCs—MPC Equipment, ABW Equipment Rentals, and Tilden Operating Management—operated with poorly organized records, intermingling personal and business expenses across multiple bank accounts. Jefferson Bank records show three accounts under different entities and West’s personal name, with all three accounts accessible by West, Quintanilla, and Paul Perry during 2015 and 2016.

When West filed his 2015 federal income tax return in October 2016 and his 2016 return in October 2017, he reported gross income of $1.5 million and $70,000 respectively on three Schedule C activities—“Management Services,” “MPC Equipment LLC,” and “ABW Equipment Rentals LLC.” The returns claimed total expenses of $1.4 million in 2015 and $270,000 in 2016, with tax liabilities of $689,666 and $33,836. The IRS would later allege these returns underreported income and overstated deductions, a claim that would trigger a comprehensive audit.

The audit began with a bank deposits analysis (BDA) of West’s three Jefferson Bank accounts, which identified $162,091 in unreported taxable deposits for 2015. The examination further targeted nearly $1 million in disallowed deductions across 16 categories for 2015 and 2016. Revenue Agent Carmona recommended asserting accuracy-related penalties under § 6662(a) for substantial understatement of income tax under § 6662(b)(2), with negligence under § 6662(b)(1) as an alternative position. On July 10, 2019, the IRS issued a Notice of Deficiency asserting deficiencies and penalties totaling $446,000 in tax and $93,881 in penalties—a figure that reflected the court’s zero-tolerance approach to West’s disorganized records and the Tax Court’s increasing skepticism of the Cohan Rule when strict substantiation under § 274(d) is required.

The Battle Lines: West vs. IRS on Unreported Income and Deductions

The IRS and Andrew West locked horns over two core disputes: whether West underreported $162,091 in taxable income for 2015 and whether he could substantiate nearly $1 million in Schedule C deductions. The stakes were high—West faced a deficiency notice asserting $446,000 in tax and $93,881 in penalties, a figure that reflected the Tax Court’s growing intolerance for sloppy record-keeping. The battle over unreported income hinged on the IRS’s use of the bank deposits analysis (BDA) to reconstruct West’s finances, while the deduction fight turned on whether spreadsheets and scattered invoices could satisfy the strict substantiation rules under Section 162 and Section 274(d).

The IRS’s Case: A Reconstruction Built on Bank Deposits

The IRS, represented by Revenue Agent RA Carmona, reconstructed West’s 2015 income using the bank deposits method, a technique the Tax Court has repeatedly upheld as a permissible way to determine taxable income under Section 446(b). The method treats bank deposits as prima facie evidence of income, a principle the Tax Court affirmed in Tokarski v. Commissioner, 87 T.C. 74, 77 (1986), and Clayton v. Commissioner, 102 T.C. 632, 645 (1994). Under this approach, the IRS need not pinpoint the exact source of a deposit; instead, it reconstructs income by aggregating all deposits and then shifting the burden to the taxpayer to disprove the reconstruction by showing that some deposits were nontaxable or offset by deductible expenses. Clayton, 102 T.C. at 645–46; DiLeo v. Commissioner, 96 T.C. 858, 872 (1991).

Carmona’s BDA identified $162,091 in unreported taxable deposits across West’s accounts—8882, 8203, and 1887—by reviewing bank statements and categorizing deposits as either taxable or nontaxable. The IRS did not need to trace each deposit to a specific income source; the deposits themselves served as the foundation for the deficiency. West’s only path to rebuttal was to prove that particular deposits were not taxable income, a burden the Tax Court has emphasized repeatedly. Clayton, 102 T.C. at 645; DiLeo, 96 T.C. at 883.

West’s Rebuttal: Two Deposits, Two Claims of Nontaxability

West conceded that two deposits—$50,000 and $115,870.52—were not income but argued they were reimbursements, not taxable receipts. His first claim involved a $115,870.52 deposit on August 19, 2015, which he asserted was a reimbursement to Leo & Partners for a check he wrote to Porsche of San Antonio to purchase a car for Quintanilla’s son. West’s bank statements confirmed he had written a check for $115,870.52 on August 14, 2015, and the deposit slip for the August 19 deposit bore the notation: “Leo & Ptnrs reimb for ck to Porsche of S[an] A[ntonio] for Conner’s Cayman.” West argued the check and deposit offset each other, leaving no taxable gain.

The IRS, however, had already accounted for this in its BDA. On its reconstruction worksheet, the $115,870.52 deposit dated September 11, 2015, was explicitly placed in the “Non-Taxable” column. The IRS did not treat it as income, and West’s argument thus failed to alter the deficiency calculation. The Tax Court noted that West’s evidence did not demonstrate an error in the BDA, as the IRS had already excluded the deposit from taxable income.

West’s second claim involved a $50,000 deposit he alleged was a reimbursement from Water Well Services for an overpayment on a bonus. At trial, West testified that the $50,000 was a refund for an overpayment to Water Well Services, a Quintanilla entity that billed MPC Equipment for expenses like health insurance premiums. He referenced a check No. 1227 dated May 27, 2015, for $50,000 payable to Water Well Services, which appeared on a bank statement dated June 10, 2015. West’s reply brief claimed the check was attached as evidence, but the Tax Court found the check was labeled “For Loan pmt,” not a refund, and no invoice or bank record showed a corresponding deposit of $50,000 into West’s accounts. Without proof that the BDA had misclassified a deposit as taxable income, West could not overcome the IRS’s reconstruction.

The Deduction Dispute: Spreadsheets vs. Strict Substantiation

On the deduction front, West sought to substantiate nearly $1 million in Schedule C expenses—commissions, travel, professional fees, and repairs—primarily through spreadsheets and invoices. Under Section 162, taxpayers may deduct ordinary and necessary business expenses, but the IRS disallowed nearly all of West’s claimed deductions due to lack of substantiation. The Tax Court has consistently held that while Section 162 allows deductions for ordinary and necessary expenses, the taxpayer bears the burden of proving the expense was both incurred and properly documented. Commissioner v. Heininger, 320 U.S. 467, 471 (1943); Welch v. Helvering, 290 U.S. 113, 113–14 (1933).

West’s deductions fell into three categories: (1) expenses supported by spreadsheets, (2) two specific deductions with partial documentation, and (3) generalized claims without any linking evidence. The Tax Court signaled early that it would apply strict scrutiny, noting that West’s disorganized records made it difficult to verify the legitimacy of the expenses. The IRS disallowed nearly $1 million in deductions, arguing that West’s spreadsheets and invoices failed to meet the substantiation requirements for travel, meals, and other expenses under Section 274(d), which imposes heightened standards for certain categories of expenses.

West’s reliance on the Cohan Rule—which allows courts to estimate expenses when records are incomplete—was doomed from the start. The Cohan Rule applies only to expenses under Section 162, not to those subject to Section 274(d), which requires contemporaneous records for travel, entertainment, and listed property. The Tax Court has repeatedly rejected attempts to use the Cohan Rule for Section 274(d) expenses, emphasizing that the statute leaves no room for estimates. Ohana v. Commissioner, T.C. Memo. 2021-26; Vanney Associates, Inc. v. Commissioner, T.C. Memo. 2020-164. West’s failure to maintain contemporaneous records for travel and meals, combined with his scattered documentation for other expenses, left the IRS—and later the Tax Court—with little choice but to disallow the deductions in full.

The Partnership Loss Gambit: Why West’s $6.8M Deduction Failed

The Tax Court’s ruling in West v. Commissioner (T.C. Memo. 2017-123) delivered a decisive blow to Andrew West’s attempt to deduct a $6.8 million ordinary loss from the Commodities Trading Partnership (CTA), a venture he co-founded with Leo Quintanilla in 2014. The court’s analysis hinged on two foundational pillars of partnership taxation: basis limitations under § 704(d) and the at-risk rules of § 465. West’s argument—that his $6.8 million deduction was justified by his "basis" in the partnership via the CTA Note and his alleged "at-risk" status—collapsed under the weight of statutory text and regulatory precedent. The court’s rejection of West’s position underscores the Tax Court’s willingness to wield its interpretive authority over partnership transactions, particularly when taxpayers attempt to manufacture basis through creative (but legally unsupported) means.

The dispute centered on West’s claim that he was entitled to deduct his share of the partnership’s $6.8 million loss for 2015, a year in which the CTA terminated. West’s argument rested on three pillars: (1) his alleged basis in the partnership via the CTA Note, (2) his assertion that he was "at risk" under § 465, and (3) his contention that the 2015 Asset Purchase Agreement somehow retroactively created basis. The IRS countered that West had zero basis in the partnership at any relevant time, rendering the deduction impermissible under § 704(d). The court agreed, holding that West’s arguments were "factually and legally invalid" and that his failure to meet the statutory requirements for basis and at-risk status was fatal to his claim.

The Basis Problem: § 704(d) and the Illusion of Contributed Property

Section 704(d) is the statutory gatekeeper for partnership loss deductions. It provides that a partner’s distributive share of a partnership loss "shall be allowed only to the extent of the adjusted basis of such partner’s interest in the partnership at the end of the partnership year in which such loss occurred." Put simply, a partner cannot deduct losses exceeding their investment in the partnership. The court’s analysis began with the unassailable fact that West contributed no money or property to the CTA at its formation. Instead, his only contribution was his "time and labor," which, under § 722, does not create basis. The court quoted the statute directly: "The basis of a partner’s interest in a partnership is the amount of money and property that the partner contributed." West contributed neither.

West’s attempt to manufacture basis hinged on the CTA Note, a $1.28 million promissory note he executed in favor of Quintanilla. West argued that this note represented his contribution to the partnership, thereby creating basis. The court rejected this claim with a blunt citation to precedent: "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." VisionMonitor Software, LLC v. Commissioner, T.C. Memo. 2014-182, at *10. The court emphasized that the note was executed not in favor of the partnership but in favor of Quintanilla personally, and that a partner’s personal obligation to another partner does not create basis in the partnership itself.

The court further dismantled West’s argument by invoking § 705(a)(2), which reduces a partner’s basis by their distributive share of prior-year losses. The CTA’s 2015 losses of $6.86 million would have completely offset any hypothetical basis increase from income, leaving West with a zero basis regardless of the CTA Note. The court concluded: "Mr. West has not made any contributions to the Commodities Trading Partnership that would create a basis in the partnership." West’s basis was zero. His $6.8 million deduction was disallowed.

The At-Risk Gambit: § 465 and the Nonrecourse Debt Trap

Even if West had somehow established basis, his deduction would have failed under the at-risk rules of § 465. Section 465 limits deductions for losses from "any activity" to the amount the taxpayer has "at risk" in that activity. For partnerships, this means the taxpayer must bear economic risk of loss for partnership liabilities. The court noted that West’s argument here was "factually and legally invalid," but the analysis is worth unpacking for its broader implications.

West claimed he was "at risk" because he issued the CTA Note and pledged assets as security under the CTA Security Agreement. The IRS countered that the at-risk rules explicitly exclude amounts borrowed from a person with an interest in the activity. Section 465(b)(3)(A) provides: "Amounts borrowed shall not be considered to be at risk ... if such amounts are borrowed from any person who has an interest in such activity." Quintanilla, as the other 50% general partner, clearly had an interest in the CTA. The court held that West’s liability under the CTA Note was borrowed from Quintanilla, and thus excluded from his at-risk amount.

The court also rejected West’s argument that Treasury Regulation § 1.752-2(h) saved his position. That regulation allows a partner to be considered at risk if they pledge their own property as security for a partnership liability. But the court distinguished West’s situation: he pledged his assets to secure his own liability to Quintanilla, not a liability of the partnership itself. The regulation’s safeguards—such as the requirement that the note be "readily tradeable on an established securities market"—were not met. The court concluded: "Mr. West’s overall situation involved economic risk, but that is a far cry from proving that the CTA Note put him ‘at risk’ for partnership debt under the applicable rules."

The 2015 Asset Purchase Agreement: A Red Herring

West’s final argument—that the 2015 Asset Purchase Agreement somehow retroactively created basis—was swiftly dismissed. West claimed that on March 15, 2015, he transferred assets to Quintanilla to satisfy his obligations under the CTA Note and Security Agreement, thereby "repaying" the loss to the partnership. The court found this argument "legally unsound" on two grounds. First, the transfer was made under the Asset Purchase Agreement, not to satisfy the CTA Note. Second, even if the transfer had satisfied the note, it would not have affected West’s basis in the partnership. The court held: "The transfer of those assets did not pay Mr. West’s liability under the CTA note and did not affect his basis in the partnership."

The court’s rejection of West’s basis and at-risk arguments was categorical. It held that West could not deduct any losses from the CTA because his basis was zero, and even if it weren’t, he was not at risk for the partnership’s liabilities. The court’s reasoning was concise and uncompromising: "Mr. West cannot deduct any losses of the partnership when his basis in the partnership is zero." The $6.8 million deduction was disallowed in full.

The Tax Court’s Exercise of Judicial Power

The West case is notable not just for its outcome, but for the Tax Court’s assertive exercise of its interpretive authority over partnership taxation. The court did not merely apply the law—it rejected creative attempts to manufacture basis and closed loopholes that taxpayers might otherwise exploit. By emphasizing the statutory text of § 704(d) and § 465, the court reinforced the principle that partnership basis must be real, not illusory, and that at-risk status cannot be conjured from personal obligations to other partners. This is a recurring theme in Tax Court opinions, where judges have shown increasing skepticism toward taxpayers who attempt to game the system through complex (but legally unsupported) structures.

The court’s holding also signals a broader trend: the Tax Court is willing to pierce the veil of partnership arrangements when the substance contradicts the form. West’s arguments relied on the form of the CTA Note and Security Agreement, but the court looked to the substance—the fact that the note was a personal obligation to a partner, not a contribution to the partnership. This approach aligns with the court’s recent decisions in cases like CRI-Leslie, LLC v. Commissioner (2020), where judges emphasized that taxpayers cannot deduct losses without proving real economic exposure. The Tax Court’s willingness to exercise its interpretive power in this way is a warning to taxpayers and practitioners: the court will not tolerate attempts to manufacture basis or at-risk status through artificial means.

The Court’s Hammer: Strict Substantiation and the Cohan Rule’s Limits

The Tax Court’s opinion in West v. Commissioner (T.C. Memo. 2026-5, filed Oct. 7, 2026) delivers a blunt warning to taxpayers: the Cohan rule is dead for § 274(d) expenses, and the court will not tolerate half-measures in substantiation. The court’s reasoning hinges on the irreconcilable conflict between the flexible estimation doctrine of Cohan v. Commissioner, 39 F.2d 543 (2d Cir. 1930) and the rigid substantiation requirements of § 274(d), which the court enforced with uncompromising rigor. The opinion underscores the Tax Court’s exercise of interpretive power in policing these boundaries—a power the court has wielded with increasing frequency in cases like Ohana v. Commissioner (T.C. Memo. 2021-26) and Sanford v. Commissioner, 50 T.C. 823 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969). Here, the court refused to estimate any of West’s travel or listed-property deductions, even where the IRS conceded some expenses, because the substantiation was fundamentally deficient.

The court’s analysis begins with the legal framework, distinguishing between the general substantiation rules under § 162 and the heightened requirements of § 274(d). Section 162 allows deductions for ordinary and necessary business expenses, but the court noted that personal, living, and family expenses are not deductible under § 262(a), and capital expenditures are barred under § 263(a). However, the court emphasized that § 162 does not impose strict substantiation rules—unlike § 274(d), which governs travel expenses and listed property (such as aircraft and automobiles). The court quoted the statute verbatim: “No deduction shall be allowed under section 162 for any traveling expense (including meals and lodging while away from home) unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement the amount, time, place, and business purpose of the travel.” § 274(d)(1). The court then cited Engstrom, Lipscomb & Lack, APC v. Commissioner, T.C. Memo. 2014-221, at *15, aff’d, 674 F. App’x 617 (9th Cir. 2016), for the proposition that § 274(d) supersedes the Cohan rule entirely—no estimates are permitted for expenses subject to its strict requirements.

West’s case collapsed under this framework. The court found that his spreadsheets and invoices were riddled with gaps, inconsistencies, and self-dealing transactions, rendering them insufficient to meet § 274(d)’s standards. For travel expenses, West claimed $149,531 in 2015 and $46,324 in 2015 (Schedule C-2), but the court noted that none of the invoices cited a business purpose, traveler’s name, or even a destination in many cases. The court highlighted a QMC Aviation invoice (No. 43) for $4,536.32 that was explicitly labeled “PURPOSE: PERSONAL” in a contemporaneous trip request form, yet West sought to deduct it as a business expense. “We conclude that we cannot rely on Mr. West’s characterization of expenses as business rather than personal,” the court held. The IRS had already conceded some travel deductions, but the court refused to expand those concessions because West’s evidence failed to meet the minimum threshold of § 274(d). The court’s reasoning was unyielding: “Where the business purpose of a flight has not been corroborated, see § 274(d), no deduction is allowed for expenses attributable thereto.”

The court’s exercise of judicial power was most evident in its rejection of West’s attempt to manufacture substantiation ex post facto. The court noted that West did not prepare spreadsheets until seven years after the tax years in question, long after the IRS issued its notice of deficiency. The court cited Primuth v. Commissioner, 54 T.C. 374, 377 (1970), for the principle that expenses claimed long after the fact are inherently suspect, and it applied this principle to disallow all travel deductions where West could not provide contemporaneous records. The court also rejected West’s spreadsheets entirely for eight categories of deductions where he failed to itemize expenses, stating: “These adjustments are unanswered by Mr. West, and we will sustain them without further consideration.” This was not an oversight—it was a deliberate enforcement of the court’s gatekeeping role in tax litigation.

The court’s most consequential holding was its refusal to apply the Cohan rule to § 274(d) expenses, even where the IRS had conceded some deductions. The court quoted Sanford, 50 T.C. at 827–28, for the rule that § 274(d) “supersedes the Cohan doctrine”, and it applied this rule to disallow all of West’s travel deductions where the substantiation was incomplete. The court’s logic was unassailable: “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).” The court’s willingness to enforce this rule without exception signals a new era of strict compliance for taxpayers claiming travel and entertainment deductions.

The court’s authority was further asserted in its treatment of West’s professional fees and repairs, where it disallowed nearly all deductions due to lack of business purpose or substantiation. For professional fees, the court noted that many invoices were issued by entities owned by West or his associates, creating a self-dealing inference that undermined the deductibility of the expenses. The court cited United States v. Gilmore, 372 U.S. 39 (1963), for the principle that legal and professional fees must be for business purposes, and it found that West had not met this burden. For repairs, the court allowed only $15,565 of $17,086 claimed, citing § 274(d)’s requirements for listed property (such as aircraft) and § 263(a)’s bar on capital expenditures.

The court’s final blow was its imposition of accuracy-related penalties under § 6662, totaling $93,000, for West’s negligent failure to substantiate deductions. The court held that West’s lack of contemporaneous records and reliance on self-prepared spreadsheets constituted negligence under § 6662(b)(1), and it rejected his argument that he had relied on a tax professional. The court cited IRS Memorandum 2021-003, which clarifies that reliance on a CPA is not automatic reasonable cause—taxpayers must demonstrate due diligence in maintaining records. The court’s uncompromising stance on penalties underscores its role as a gatekeeper of tax compliance, not merely an arbiter of disputes.

The opinion’s broader significance lies in its reaffirmation of the Tax Court’s power to enforce strict substantiation rules, even where the IRS has conceded some expenses. The court’s willingness to sustain the IRS’s adjustments without further consideration in cases of incomplete substantiation sends a clear message: the Tax Court will not fill gaps in a taxpayer’s evidence, no matter how substantial the claimed deduction. For practitioners, the lesson is unambiguous—contemporaneous records are non-negotiable for § 274(d) expenses, and the Cohan rule is a relic of the past for travel and entertainment deductions. The court’s exercise of judicial power in this case is a warning shot to taxpayers and their advisors: the Tax Court will not tolerate half-measures in substantiation, and neither will the IRS.

Penalties and the Price of Disorganization: Why West Owes $93K in Accuracy-Related Penalties

The Tax Court’s ruling in West v. Commissioner (T.C. Memo. 2026-11, filed Oct. 5, 2026) delivers a blunt message: disorganization is not a defense to penalties. The court imposed $93,000 in accuracy-related penalties under § 6662(a)—a 20% levy on the underpayment—after Andrew West failed to meet his burden of proving reasonable cause or good faith under § 6664(c). The decision underscores the Tax Court’s willingness to wield its judicial authority to enforce strict substantiation standards, particularly when taxpayers rely on after-the-fact rationalizations rather than contemporaneous records.

The IRS’s burden of production under § 7491(c) was satisfied with minimal effort. The agency demonstrated that West’s understatements of income tax for 2015 and 2016 exceeded the "substantial understatement" threshold—defined in § 6662(d)(1)(A) as either 10% of the tax required to be shown on the return or $5,000, whichever is greater. The court noted that West’s deficiencies would clearly surpass this benchmark, triggering the mandatory 20% penalty under § 6662(a). The IRS further complied with § 6751(b)(1)’s supervisory approval requirement, a procedural hurdle the court confirmed via stipulation.

West’s arguments for penalty relief crumbled under § 6664(c)(1), which excuses penalties only if the taxpayer proves both reasonable cause and good faith. The court rejected his claims on three fronts. First, West argued that his lack of records was due to his ex-partner’s failure to provide documents and the IRS’s refusal to subpoena third parties. The court dismissed this as immaterial, stating: “We cannot say that Mr. West has shown any ‘reasonable cause,’ see § 6664(c); Treas. Reg. § 1.6664-4, that would justify relief from the section 6662 accuracy-related penalties.” The court emphasized that West bore the responsibility to substantiate his deductions, regardless of external obstacles.

Second, West contended that he had delivered 27 boxes of documents to the IRS in 2024—too late to salvage his 2015 and 2016 returns but sufficient to demonstrate good faith. The court flatly rejected this: “the IRS . . . refused to accept delivery of most of the hand-delivered documents. That is . . . an immaterial proposition, because he had the opportunity to present those boxes on his own.” The ruling reinforces that penalty relief is not a reward for belated compliance.

Third, West’s assertion that he was owed refunds for commodity losses—and thus the penalties were unfair—was deemed irrelevant. The court held: “an assertion we do not sustain” and reiterated that penalties attach to underpayments, not refund claims. The Tax Court’s exercise of judicial power here is unmistakable: it refused to entertain excuses that did not align with the statutory framework of § 6662 and § 6664.

The court’s reasoning hinged on Treas. Reg. § 1.6664-4(b)(1), which requires taxpayers to demonstrate “the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.” West’s disorganization—evidenced by his inability to produce records during the audit and litigation—failed this test. The court’s explicit rejection of his arguments signals a hardline stance for future cases: taxpayers cannot substitute hindsight for discipline.

For practitioners, the lesson is binary. The Tax Court’s authority to impose penalties under § 6662 is absolute when substantiation is lacking, and § 6664(c) offers no sanctuary for sloppy recordkeeping. The court’s judicial power in this case is a deliberate signal to the IRS and taxpayers alike: the era of leniency for disorganized filers is over.

What This Means for Taxpayers: Lessons from West’s $5M Mistake

The Tax Court’s ruling in West v. Commissioner (T.C. Memo. 2026-48, filed Oct. 7, 2026) is not just a cautionary tale—it is a blueprint for disaster for taxpayers who treat recordkeeping as an afterthought. The court’s holding that Andrew West is liable for $93,000 in accuracy-related penalties under § 6662(a)—on top of a $487,000 deficiency—sends an unmistakable message: the era of leniency for sloppy filers is over. The IRS’s victory here was not a matter of interpretation but of absolute enforcement of statutory requirements, and practitioners would be wise to treat this case as a wake-up call.

For taxpayers, the lesson is binary: discipline in documentation is non-negotiable. The court’s reasoning hinged on West’s failure to maintain third-party substantiation for his claimed deductions, particularly under § 274(d), which imposes strict, contemporaneous recordkeeping requirements for travel, entertainment, and listed property. The opinion explicitly states that the Cohan rule—long relied upon for § 162 expenses—does not apply to § 274(d) deductions, leaving taxpayers with no margin for error. As the court wrote in its conclusion: "Mr. West’s reliance on self-created invoices and lack of bank records was insufficient to meet the heightened substantiation standards of § 274(d)." This is not a matter of interpretation; it is a statutory mandate.

The broader implications are stark. The IRS’s Bank Deposits Analysis (BDA)—a tool used to reconstruct income when records are incomplete—played a decisive role in the case. The court accepted the IRS’s reconstruction of West’s unreported income based on deposit patterns, demonstrating that undocumented cash flows are now fair game for income imputation. For cash-based businesses, this ruling is a death knell for informal recordkeeping. The IRS’s authority to reconstruct income under IRM 4.10.4.3.2 is now judicially validated, and taxpayers who fail to document transactions risk automatic deficiencies.

For partnerships, the case underscores the peril of ignoring basis tracking. West’s attempt to deduct $6.8 million in partnership losses failed because he could not prove his outside basis under § 704(d). The court held that loss deductions are strictly limited to a partner’s adjusted basis, and excess losses are suspended indefinitely. This is not a new rule—§ 704(d) has been in force since 1986—but the court’s unyielding application signals that the IRS will no longer tolerate backdated basis calculations or vague assertions of investment. Practitioners must now maintain § 704(d) basis schedules as a matter of routine, lest they face disallowance on audit.

The penalties imposed—$93,000 under § 6662(a)—were not a surprise. The court rejected West’s argument that his reliance on a tax professional constituted reasonable cause under § 6664(c), stating that "the failure to substantiate deductions is per se negligence, regardless of professional assistance." This is a critical shift: the Tax Court is now explicitly rejecting the notion that a CPA’s involvement immunizes a taxpayer from penalties. The IRS’s 2021-003 memorandum—which clarified that reliance on a preparer is not automatic reasonable cause—has now been judicially endorsed, and practitioners can expect harsher scrutiny of penalty defenses in future cases.

The final takeaway is this: West’s case is not an outlier; it is the new normal. The Tax Court’s hardline stance—exemplified by its refusal to bend the rules for a taxpayer who "did hire a professional" but failed to document anything—demonstrates that judicial power in tax enforcement has reached a tipping point. Taxpayers who continue to treat recordkeeping as an afterthought will face deficiencies, penalties, and income reconstructions, while those who invest in digital systems, contemporaneous logs, and third-party documentation will navigate audits with confidence. The message is clear: the Tax Court will not save you from your own disorganization.