Eleventh Circuit Upholds Disallowance of Tax Deductions Due to Poor Substantiation: A Cautionary Tale for Taxpayers Without Records

By Luke Ryan  |  April 2025

In Patitz v. Commissioner, No. 23-12440 (11th Cir. April 23, 2025), a recent unpublished decision of the Eleventh Circuit, the court affirmed a ruling by the Tax Court that rejected a host of Schedule A and Schedule C deductions claimed by taxpayers Lori Patitz and Andrew Moody for tax years 2015 and 2016.  The Eleventh Circuit found that the taxpayers had failed to properly substantiate their claimed expenses and upheld a substantial underpayment penalty for the 2016 tax year.

I.                    Background: Claimed Deductions and IRS Deficiency

The taxpayers reported over $36,000 in itemized deductions and more than $23,000 in business expenses on Schedule C in 2015.  In 2016, they claimed nearly $38,000 in Schedule A deductions—$28,074 of which were medical expenses—and over $41,000 in Schedule C business deductions.  Following an examination, the IRS disallowed nearly all of these deductions, determining that they lacked adequate substantiation.  The IRS issued deficiency notices totaling $7,495 and $15,366 for 2015 and 2016, respectively, along with accuracy-related penalties.

II.                  Tax Court Findings

At trial, the Tax Court permitted only a narrow subset of the claimed deductions, including unreimbursed employee mileage for 2015.  It denied the remaining Schedule A and Schedule C deductions due to lack of documentary evidence.  Although Patitz testified that several boxes of receipts had been destroyed by Hurricane Matthew, the court was not persuaded that alternative substantiation—such as credit card statements—were unavailable.

a.      Mileage Deductions

While the Tax Court allowed unreimbursed employee mileage for 2015 based on credible testimony and contemporaneous logs, it disallowed similar deductions for 2016.  The Tax Court emphasized that Patitz had commingled mileage from her employment at Ricoh and her side insurance business, and failed to clearly allocate between the two or show what had not been reimbursed.

b.      Medical Expenses

The IRS conceded $18,598 in substantiated medical expenses for 2016.  Patitz sought over $48,000 in total medical deductions, much of it tied to care for her dependent father.  However, the Tax Court found that many receipts lacked proof of payment or failed to show the expenses were not covered by insurance.  Handwritten notations and statements from relatives were insufficient under the strict substantiation rules of IRC § 213 and accompanying regulations.

c.      Business Expenses

Patitz claimed various deductions for her insurance business, including home office expenses, meals, legal services, internet usage, and auto expenses.  However, she admitted using the home office for both her job at Ricoh and her insurance work, and could not apportion usage.  Other expenses lacked receipts or were not clearly connected to the business.  The Tax Court declined to apply the Cohan rule for estimation,[fn.1] citing the lack of credible evidence from which to extrapolate reasonable amounts.

III.                Eleventh Circuit Analysis

The Eleventh Circuit upheld the Tax Court’s ruling in full.  It found no clear error in the Tax Court’s factual determinations, including its credibility assessment and refusal to estimate deductions under the Cohan rule.  The appellate court reiterated that taxpayers bear the burden of proof for deductions and must meet rigorous substantiation requirements, especially for vehicle, travel, and medical expenses.

The Eleventh Circuit also affirmed the $2,848.20 accuracy-related penalty for 2016 under IRC § 6662(a), finding that the understatements were substantial and not excused by reasonable cause.

IV.               Why This Matters

The Eleventh Circuit’s decision underscores the critical importance of documentation.  Taxpayers who lose records due to casualty events must still provide alternative evidence or credible reconstruction of expenses.  The court’s refusal to allow estimates—even when presented with credible testimony—demonstrates the high bar for applying the Cohan rule.

In addition, taxpayers who are both employees and self-employed must clearly segregate deductions between Schedule A and Schedule C, and ensure they are not claiming duplicate expenses or deducting reimbursed amounts.

V.                  Conclusion

Patitz v. Commissioner is a cautionary tale for any taxpayer tempted to “guesstimate” deductions or rely on memory in the absence of records.  Even sympathetic facts—such as natural disaster loss and a dependent's medical needs—could not overcome the strict substantiation rules of the Internal Revenue Code.  For tax practitioners, Patitz reinforces the need to counsel clients on the risks of inadequate documentation, especially for deductions subject to heightened scrutiny.

[fn.1] The Cohan rule is a legal principle that allows courts to estimate deductible business expenses when a taxpayer cannot provide complete documentation—as long as there is some credible basis to believe the expenses were incurred.