Marie M. Kanda v. Commissioner of Internal Revenue: Tax Court Denies COVID-19 Credits Due to Lack of Trade or Business

The $26,560 Question: Did Marie Kanda Qualify for COVID-19 Credits?

In Marie Kanda v. Commissioner (T.C. Memo. 2026-XX), the Tax Court addressed whether Marie M. Kanda, who filed pro se, qualified for COVID-19-related credits after the IRS issued a $26,560 deficiency notice for tax year 2022. The dispute centered on whether Kanda’s vehicle-cleaning activities constituted a trade or business under § 162, which is required to claim refundable credits under the Families First Coronavirus Response Act (FFCRA) (§ 7002 for sick leave and § 7004 for family leave). Judge Way ruled that Kanda failed to demonstrate she was engaged in a continuous, profit-driven trade or business, resulting in the denial of her credits.

A Chronology of Health Struggles and Tax Filings

Marie Kanda’s medical history included breast cancer, severe osteoarthritis in both knees, persistent right shoulder pain, right heel pain, and depression. Despite these conditions, she did not contract COVID-19. Her doctor assessed her as disabled and unable to work from 2018 through 2023, yet she continued working part-time cleaning vehicles—vacuuming, shining, and detailing cars—typically on weekends for two to three hours per day.

Kanda’s work lacked formal business records. She did not maintain ledgers or track expenses beyond handwritten notes. When clients paid her, she deducted the cost of cleaning materials and deposited the remainder into a personal bank account. Her husband, Richard Kanda, assisted with client management and income handling, keeping customer invoices and preparing handwritten monthly expense reports, but these were never formalized into a ledger or reconciled with bank statements.

In November 2020, Kanda and her husband signed a written partnership agreement forming Kanda Auto Service, but the couple did not file a partnership tax return for 2021 or take other steps consistent with a formal business arrangement.

Their tax filings reflected inconsistent positions on self-employment income. For 2017, they reported their occupations as “business” on their joint return, but their Schedule C listed only Richard as the proprietor of Kanda Auto Services and Transportation. In 2018, they filed a Schedule C-EZ reporting Richard as a mechanic, while Kanda listed herself as having no occupation. The same pattern continued in 2019 and 2020, with both years showing Richard as the sole business owner and Kanda with no reported occupation.

In 2020, the couple reported $21,100 in unemployment income, offset by the $10,200 unemployment compensation exclusion, resulting in $10,900 of total income. They reported no self-employment income and claimed no income tax liability. Under audit, Kanda provided three conflicting versions of her 2020 self-employment income: $0 on her filed return, $80,650 on Form 7202, and $6,700 on an unsigned alternative return.

The Battle Lines: Petitioner vs. IRS on Trade or Business

The dispute centered on whether Kanda’s vehicle-cleaning activities met the continuity and regularity standard required for a trade or business under § 162(a) and Commissioner v. Groetzinger, 480 U.S. 23 (1987). Kanda argued her part-time work, customer invoices, and partnership agreement demonstrated a profit motive and consistent income-generating activity. The IRS countered that her activities lacked continuity, her tax filings were inconsistent, and her records were insufficient to meet the Groetzinger test.

The IRS Strikes Back: Why COVID-19 Credits Were Denied

The IRS denied Kanda’s $28,000 claim for COVID-19-related credits for four reasons: (1) she failed to demonstrate she operated a trade or business under § 162 due to lack of continuity, regularity, and documented profit motive; (2) she did not provide contemporaneous records (e.g., medical documentation or quarantine orders) to substantiate her inability to work due to COVID-19-related reasons; (3) she did not comply with IRS documentation requirements for credit claims (Fact Sheets FS-2022-16 and FS-2022-15); and (4) her tax filings contained inconsistent self-employment income reports ($0 filed, $80,650 on Form 7202, and $6,700 on an unsigned return), which the IRS viewed as evidence of fabrication.

The Court's Verdict: No Trade, No Credits, No Exceptions

The Tax Court sustained the IRS’s deficiency in full, denying Kanda’s $26,560 claim for COVID-19 credits. The court ruled that Kanda failed to prove she operated a trade or business under § 162 due to lack of continuity, regularity, and credible records. Additionally, she did not substantiate her eligibility for credits under the FFCRA and ARPA because she provided no contemporaneous documentation (e.g., medical records or quarantine orders) to support her claims of inability to work due to COVID-19-related reasons.

Key Takeaways for Self-Employed Taxpayers

The Tax Court’s ruling underscores the importance of contemporaneous records and strict compliance with IRS documentation requirements for claiming COVID-19 credits. Taxpayers must maintain organized records (e.g., invoices, bank statements, medical documentation) to substantiate both their trade or business status under § 162 and their eligibility for credits under the FFCRA and ARPA. Failure to do so risks denial of credits and potential penalties under § 6676.