West v. Commissioner: Bank Deposits, Unproved Expenses, and a Partnership Loss

West v. Commissioner, T.C. Memo. 2026-105

West v. Commissioner, T.C. Memo. 2026-105 (filed Oct. 7, 2026), is a memorandum opinion by Judge Gustafson. It resolves four disputes arising from IRS adjustments to Andrew B. West's 2015 and 2016 federal income tax returns: a bank deposits reconstruction adding unreported income, widespread disallowance of Schedule C expense deductions, rejection of a claimed partnership loss, and imposition of accuracy-related penalties. The court largely sustained the IRS's position, while allowing modest increases in a few substantiated deduction categories. Final tax amounts remain subject to computation under Rule 155.

Background: Business Structure and Key Relationships

West, a Texas resident during the years at issue, operated multiple businesses. He owned three single-member LLCs — MPC Equipment, LLC, ABW Equipment Rentals, LLC, and Tilden Operating Management, LLC — and reported their activities across separate Schedules C attached to his returns, along with a fourth Schedule C for Management Services. He also held 50 percent interests in BL Aviation, LLC and Prime Materials, LLC alongside business associate Oscar Leo Quintanilla. West, T.C. Memo. 2026-105, at *5.

Beginning in 2010, West worked for Quintanilla's network of oil, gas, real estate, and cattle operations. An employment agreement provided salary, benefits, and a 6 percent operating bonus on aggregate business profits. Quintanilla's centralized accounting staff managed billing and expense allocation across all entities; when expenses arose for West's personal benefit or his separate businesses, Quintanilla's accountants issued invoices to West or his LLCs, which West then paid from his own accounts. West, T.C. Memo. 2026-105, at *6–*7.

On January 1, 2014, West and Quintanilla executed three documents forming a commodities trading partnership under Section 761(a): a Commodity Trading Allocation Agreement, a Secured Promissory Note capped at $5 million, and an All-Assets Security Agreement. Quintanilla contributed all capital; West contributed his trading management labor. Gains and losses were split equally, and West's 50 percent share of losses was automatically deemed borrowed from Quintanilla under the note, secured by all of West's assets. West, T.C. Memo. 2026-105, at *7–*8. Over the partnership's 26-month life, it incurred a net loss of $11,315,071; West's share was $5,657,536. West had contributed no monetary capital at any point. West, T.C. Memo. 2026-105, at *8.

In March 2015, West sold various business assets to Quintanilla for approximately $4.5 million, satisfied not in cash but by Quintanilla's payments to West's creditors. Subsequent Texas state court litigation found that the 2015 asset sale was unrelated to the CTA and did not satisfy West's debt under the promissory note; the Bexar County district court found West liable to Quintanilla for $5,878,127 as of February 26, 2016. West, T.C. Memo. 2026-105, at *11–*12.

IRS Examination and Notice of Deficiency

The IRS performed a bank deposits analysis of three Jefferson Bank accounts connected to West and determined he had $162,091 in unreported taxable deposits for 2015. The examination also disallowed nearly $1 million in Schedule C deductions across 16 categories for both years. On July 10, 2019, the IRS issued a Notice of Deficiency determining deficiencies of $463,827 for 2015 and $5,831 for 2016, and accuracy-related penalties of $92,765 and $1,116 respectively. West, T.C. Memo. 2026-105, at *12–*13. West petitioned the Tax Court and filed an amended petition claiming a $6.8 million ordinary partnership loss for 2016, assertable as a carryback to eliminate both deficiencies. West, T.C. Memo. 2026-105, at *2.

Evidentiary Rulings: What the Court Would and Would Not Consider

West attached hundreds of pages of documents — bank statements, invoices, an unsigned post-trial affidavit, and narrative testimony summaries — to his post-trial briefs. The court held that evidence must be offered and admitted at trial; documents not admitted into evidence at trial may not be used to establish facts, regardless of their volume. West, T.C. Memo. 2026-105, at *14–*18. The court also declined to treat spreadsheet columns labeled "Testimony" and "Explanation," filled in and signed after trial, as equivalent to actual trial testimony. West, T.C. Memo. 2026-105, at *17–*18. Only the Bates-numbered, stipulated exhibits admitted at the start of trial were considered.

Bank Deposits: Unreported Income Sustained

The court explained that bank deposits constitute prima facie evidence of income, and the IRS bank deposits method is a permissible income reconstruction technique. Once the IRS establishes the foundation, the taxpayer bears the burden of proving that specific deposits are non-taxable. West, T.C. Memo. 2026-105, at *18–*19.

West raised two challenges. First, he argued that a $115,870 deposit in August 2015 was a non-taxable reimbursement for a vehicle purchase made on Quintanilla's behalf. The court agreed in principle but found the IRS had already classified that item as non-taxable in its own analysis — so the challenge did not correct any error. West, T.C. Memo. 2026-105, at *19–*20. Second, West argued a $50,000 item was a water company refund. The bank record showed the corresponding check was marked "For Loan pmt," and no deposit into West's accounts from Water Well could be identified. The court found West had not proved any error in the reconstruction. West, T.C. Memo. 2026-105, at *20–*21. The $162,091 adjustment was sustained in full.

Schedule C Deductions: Partial Allowances and Wholesale Disallowances

The court evaluated West's deduction claims under Section 162 (ordinary and necessary business expenses), Section 263(a) (capital expenditures), and Section 274(d) (strict substantiation for travel and listed property). West, T.C. Memo. 2026-105, at *21–*43.

Spreadsheet Deficiencies

West submitted eight spreadsheets to his opening brief to organize his deduction evidence. The court identified systemic problems: four spreadsheets omitted invoice Bates numbers entirely; several spreadsheets claimed deductions in amounts substantially larger than those West originally reported on his returns; and the spreadsheets were inconsistent with each other. The court noted that claims made seven years after the tax years at issue, without explanation of the discrepancy from the original returns, warranted heightened scrutiny. West, T.C. Memo. 2026-105, at *22–*27.

Capital Improvements

West claimed professional fees paid to interior designer Erin Shirah — more than $100,000 across 2015 — as deductible Schedule C expenses. The court found that invoices for "Interior Design Consultation for 43 Bristol Green" reflected nondeductible capital improvements to residential property intended for lease or sale, not current repair expenses. Related renovation costs for the same property were similarly capitalized. West, T.C. Memo. 2026-105, at *35–*36.

Travel and Aviation

West sought deductions of approximately $195,855 for aircraft travel billed by BL Aviation, LLC, Q2BW, and QMC Aviation in 2015. Section 274(d) requires contemporaneous records establishing the amount, time and place, and business purpose for each use of listed property, including aircraft. West produced no flight logs, travel calendars, or records showing the business purpose of individual trips. Several invoices explicitly stated "PURPOSE: PERSONAL" on trip request forms. Others split costs with Quintanilla but listed the full amounts on West's spreadsheets. The court disallowed all travel deductions beyond what the IRS had already conceded. West, T.C. Memo. 2026-105, at *29–*32.

Professional Fees: Partial Allowances

For 2015 Schedule C-2, the court allowed $9,103 in professional fees: $8,350 paid to CPA Timothy Braden for tax return preparation and asset-sale consulting, and $753 paid to QMC for Jackson Walker legal fees. For 2016 Schedule C-2, the court allowed $45,000 paid to litigation counsel — $20,000 to Cedillo, $20,000 to Strasberger, and $5,000 to Smith Robertson — all connected to West's business disputes with Quintanilla. The IRS's larger concession on 2016 Schedule C-1 professional fees ($131,730) was left undisturbed. All other professional fee claims were disallowed: payments for Bristol Green renovation management, personal divorce legal fees, trust administration, or to individuals without documented business purpose were not deductible. West, T.C. Memo. 2026-105, at *32–*39.

Repairs and Maintenance: Partial Allowance

For 2015 Schedule C-1 repairs, the court allowed $15,565 in vendor payments for Water Well Services and Prime Materials, supported by checks in evidence. Additionally, the court allowed a separate $112,257 deduction: the 2015 Asset Purchase Agreement specified payment to Q-Haul for equipment repair charges incurred by West, the Commissioner acknowledged that West's companies owned heavy field machinery, and the payment was made on West's behalf from the sale proceeds. The court treated the $112,257 as substantiated even without a separate invoice and canceled check, because the asset purchase agreement documented the payment obligation and the IRS acknowledged the factual predicate. West, T.C. Memo. 2026-105, at *41–*42. Land Rover and aviation maintenance claims were disallowed for failure to satisfy Section 274(d). West, T.C. Memo. 2026-105, at *39.

Partnership Loss: Zero Basis, No Deduction

The court held that West was entitled to no loss deduction for 2016 from the commodities trading partnership. West, T.C. Memo. 2026-105, at *43–*46.

Under Section 704(d), a partner may deduct partnership losses only to the extent of adjusted basis in the partnership interest. West contributed no monetary capital; his only contribution was labor. Basis does not arise from a partner's personal promissory note executed in favor of the other partner rather than the partnership, and the court rejected the argument that the CTA Note created deductible basis. West, T.C. Memo. 2026-105, at *44.

The at-risk rules provided a separate barrier. Under Section 465(b)(3)(A), borrowed amounts are not at risk when borrowed from a person who has an interest in the activity. Quintanilla was a 50 percent partner; accordingly, West's liabilities under the CTA Note to Quintanilla were excluded from at-risk treatment. West, T.C. Memo. 2026-105, at *44–*46. The pledge of West's assets under the CTA Security Agreement did not save the argument because that provision of Treasury Regulation § 1.752-2(h) applies to pledges securing partnership liabilities, not a partner's personal debt to a co-partner. The 2015 Asset Purchase Agreement did not repay the CTA debt — it was a separate transaction — so Section 704(d)'s provision allowing deduction when the excess loss is "repaid to the partnership" was not satisfied. West, T.C. Memo. 2026-105, at *46. With basis at zero, no loss could be recognized. The court did not reach the alternative question of whether any allowable loss would have been ordinary or capital in character.

Accuracy-Related Penalties: Sustained

The court sustained Section 6662(a) penalties for both years based on substantial understatement of income tax under Section 6662(b)(2). A substantial understatement exists when the understatement exceeds the greater of 10 percent of the tax required to be shown or $5,000. The court expected that threshold to be met for both years, but expressly allowed the issue to be revisited if the Rule 155 computations showed otherwise. West, T.C. Memo. 2026-105, at *46–*47. The parties stipulated IRS compliance with the supervisory approval requirement of Section 6751(b)(1), satisfying the government's burden of production under Section 7491(c).

The court then considered whether West had shown reasonable cause and good faith under Section 6664(c). Although West hired CPA Timothy Braden to prepare his returns, West produced no evidence of what specific financial records, income figures, or supporting documentation he provided to Braden before filing. Without that showing, the preparer-reliance defense was unavailable. West, T.C. Memo. 2026-105, at *47–*48. The court did not reach negligence under Section 6662(b)(1) because the substantial-understatement ground was sufficient. West, T.C. Memo. 2026-105, at *47 n.46.

Outcome and Practical Observations

The court sustained IRS determinations in large part. Final deficiency amounts for 2015 and 2016 will be computed under Rule 155 to reflect the partial deduction allowances — slightly reducing the deficiencies below the amounts stated in the Notice of Deficiency, but not eliminating them. The accuracy-related penalties were sustained on the adjusted deficiency amounts.

The decision illustrates that a taxpayer operating multiple entities must maintain strict separation of accounts, retain contemporaneous records for every travel and listed-property deduction, preserve primary third-party invoices rather than relying on internally prepared billing summaries, and document exactly what information was furnished to a return preparer before the return was filed. For a practical framework to apply these requirements before an IRS examination, see Schedule C Audit Records: Reconcile Deposits, Expenses, and Each Business. Taxpayers managing outstanding IRS liabilities may also find relevant context in Vinatieri v. Commissioner.