Rahman: Missing Deduction Records Did Not Excuse Proof, but Penalty Approval Was Missing

In Rahman v. Commissioner, Docket No. 8286-23, the United States Tax Court evaluated a multi-venture sole proprietor's understated income and unsupported Schedule C deductions following the alleged destruction of business records. Rendered as an oral findings of fact and bench opinion by Judge Joseph W. Nega on October 7, 2026, and served on October 13, 2026, the decision highlights that missing business records do not relieve a taxpayer of the burden of proof. However, the court also ruled against the Commissioner on accuracy-related penalties due to a failure to establish statutory supervisory approval.

Procedural Posture and Issues Before the Court

Petitioners MD M. Rahman and Syeda Momotaz filed joint federal individual income tax returns for the 2017, 2018, and 2019 tax years. The Commissioner issued notices of deficiency asserting deficiencies, late-filing additions under Section 6651(a)(1), and accuracy-related penalties under Section 6662(a). On April 22, 2026, the Tax Court dismissed tax years 2017 and 2018 because the petition was untimely filed under Section 6213(a) as to those years. Those years were no longer at issue in the trial.

For the remaining 2019 tax year, the Commissioner determined a deficiency of $12,789 and a Section 6662(a) accuracy-related penalty of $2,557.80. Pursuant to a stipulation of settled issues filed on April 13, 2026, the parties resolved most notice items. The remaining issues presented for trial in Philadelphia, Pennsylvania on October 5, 2026, were:

• Unreported gross receipts: Whether petitioners underreported Schedule C gross receipts or sales by $59,527.
• Meals deduction: Whether petitioners were entitled to a claimed $2,340 Schedule C deduction for meals.
• Supplies deduction: Whether petitioners were entitled to a Schedule C supplies deduction greater than $2,253.
• Repairs and maintenance deduction: Whether petitioners were entitled to a claimed $5,700 Schedule C deduction for repairs and maintenance.
• Accuracy-related penalty: Whether petitioners were liable for the Section 6662(a) accuracy-related penalty of $2,557.80.

Factual Background

During 2019, Mr. Rahman engaged in multiple entrepreneurial ventures, including tax preparation, accounting services, insurance sales, travel agency services, immigration paperwork preparation, operating as a MoneyGram agent, cell phone retail sales, and driving for a taxi service and Uber. On their joint 2019 Form 1040, petitioners attached a single Schedule C reporting $21,850 in gross receipts and claiming deductions of $5,700 for repairs and maintenance, $4,500 for supplies, and $2,340 for meals.

The IRS examined the return and performed a bank deposits analysis. The analysis identified $81,378 in total gross receipts, which the IRS rounded down to $81,377 in the notice of deficiency. Subtracting the reported $21,850 yielded an adjustment of $59,527 in unreported gross receipts. The IRS disallowed the meals and repairs deductions in full and limited supplies to $2,253 based on credit card statements provided by petitioners during the examination.

During the examination, petitioners submitted a Form 1040-X (signed July 28, 2021) attaching a revised Schedule C reporting gross receipts of $59,027, repairs of $1,101, supplies of $2,384, and $0 for meals. At trial, Mr. Rahman testified that store lootings on June 1, 2020, and March 28, 2021, caused a total lack of documentation. He further asserted that a $40,000 line of credit from American Express resulted in an overstatement of gross receipts and acknowledged commingling personal and family funds in his business accounts.

The Separate Burdens for Income, Deductions, and Penalties

The court explained that a taxpayer ordinarily bears the burden of proving an erroneous deficiency determination and entitlement to a deduction. Here it resolved the disputed items on the preponderance of the record, rather than a burden-shifting determination. Rahman, bench op. tr. at 7–8.

The court accepted bank deposits as a permissible method of reconstructing income where adequate business records were absent. That method did not make a loan facility taxable income by definition: The missing link was an adequate explanation of how the claimed credit line affected the identified receipts. The taxpayer’s deductions separately required proof of an ordinary and necessary business expense; personal expenses could not be deducted as business costs. Id. at 8–10.

An estimate under the Cohan principle required a foundation showing that a deductible expense had actually been incurred in an amount the court could reasonably estimate. Destruction of records did not supply that foundation by itself. Penalties involved a separate burden: The IRS needed to produce the required written supervisory approval for the accuracy-related penalty. Id. at 10–12.

Our Schedule C audit guide addresses the broader income-and-expense reconciliation task. This decision separately addresses proof after records were reportedly destroyed and the IRS’s penalty-approval burden.

Tax Court Reasoning and Holdings

Judge Nega evaluated each issue based on the preponderance of evidence in the record, establishing distinct holdings across the disputed items:

1. Unreported Income Sustained

The court held that the IRS established a direct connection between petitioners and income-generating business activities. Mr. Rahman's admissions regarding imperfect bookkeeping and commingling of accounts supported the audit findings. The court rejected the argument that an American Express credit line disproved gross receipts because petitioners provided no factual explanation or documentary connection showing that loan proceeds accounted for the deposits. Unreported gross receipts of $59,527 were sustained, Rahman v. Commissioner, Docket No. 8286-23, bench op. tr. at 8–9 (T.C. Oct. 7, 2026).

2. Schedule C Expense Deductions Disallowed

The court rejected petitioners' contention that figures on the amended return (Form 1040-X) reflected deductible totals. The court clarified that audit and amended return discussions represent a cooperative endeavor to determine correct amounts, not binding proof of underlying expenditures. While acknowledging Mr. Rahman's testimony regarding store looting in 2020 and 2021, the court noted he failed to explain how he substantiated settled items but could provide no proof for remaining disputed items. Because incomplete bookkeeping and commingled personal expenses provided no baseline foundation, the court declined to make a Cohan estimate. The court disallowed meals ($0) and repairs ($0) in full, and limited supplies to the stipulated $2,253, Rahman, bench op. tr. at 9–11.

3. Section 6662(a) Accuracy-Related Penalty Disallowed

Regarding the Section 6662(a) penalty, the court held that the IRS failed to meet its burden of production under Section 7491(c). The record contained no evidence of written supervisory approval required by Section 6751(b)(1), and respondent did not address the issue at trial. Consequently, petitioners were held not liable for the $2,557.80 accuracy-related penalty, Rahman, bench op. tr. at 11–12.

Disposition and Narrow Procedural Scope

The Tax Court ordered decision to be entered under Rule 155, requiring recomputation of final tax liabilities consistent with the bench opinion and prior stipulations, Rahman, bench op. tr. at 12.

The transcript expressly states that these oral findings and opinion shall not be relied on as precedent in another case. Rahman, bench op. tr. at 3. The ruling illustrates that unlocated business records do not shift the burden of proof for deductions or supply a foundation for judicial estimates, while reinforcing that the IRS must strictly prove statutory written supervisory approval to sustain accuracy-related penalties.

For practical guidance on reconstructing financial ledgers and preparing business tax audit defenses, read our companion guide, Business Tax Records Were Destroyed: Rebuild Proof of Each Disputed Deduction. Learn about our our Tax Legal Services page.