A recent Tax Court decision underscores that even a thriving, mission-driven business cannot outrun basic tax compliance. In Branch v. Commissioner, the court sustained the bulk of a multi-million-dollar deficiency and significant additions to tax against the owner of a Louisiana home care company who failed to file returns for three straight years.
Colette Branch has owned A-1 Absolute Best Care, LLC since 1998, caring for roughly 100 adults with intellectual and physical disabilities in the New Orleans area. A-1’s gross receipts exceeded $6.5 million annually, almost entirely from Medicaid. Despite this, Branch did not file individual returns for 2015–2017. The IRS prepared substitute returns and assessed deficiencies exceeding $8.3 million plus additions to tax topping $2 million. Branch petitioned the Tax Court, arguing the IRS failed to account for offsetting business expenses and itemized deductions.
Branch sought hundreds of thousands in additional Schedule C deductions for rent, utilities, contractors, and miscellaneous expenses. Citing Cohan v. Commissioner, the court reaffirmed it may estimate deductions a taxpayer cannot fully substantiate, but only where there is “some basis on which an estimate may be made.”
The court allowed full deductions for a Houston apartment Branch credibly testified was kept as a hurricane evacuation site, and estimated partial deductions (20%–80%) for utilities, contractors, and client expenses with some documentary support. But where records gave the court nothing to work with, such as two years of American Express statements mixing personal and business charges with no separation attempted, deductions were denied entirely. A six-figure depreciation deduction also failed, due to an internally inconsistent depreciation schedule.
Vehicle and travel expenses face strict substantiation under Section 274(d), requiring contemporaneous records of amount, time, place, and business purpose, a gap the Cohan rule cannot fill. Branch lost every vehicle and travel deduction claimed across all three years for lack of such records, regardless of plausibility.
Branch claimed her bookkeeper advised her to delay filing during a prior audit. The court rejected this: advice to delay filing, unlike advice that no filing was required, does not excuse nonfiling, especially since Branch admitted she knew she had a filing obligation. All failure-to-file, failure-to-pay, and estimated tax penalties were sustained. For business owners facing multi-year nonfiling exposure, Branch is a reminder that the path back into compliance is far less costly when it starts with timely returns and disciplined recordkeeping. For more information about this update, contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page.