Tax Court Rejects Reeds’ Deduction Claims Over Poor Recordkeeping And Commingled Funds

On August 5, 2026, the Tax Court issued its decision in Reed v. Commissioner, T.C. Memo. 2026-64, sustaining most of the IRS’s determinations against Scott L. Reed, a real estate consultant, and Dr. Stacy N. Reed, a physician, for tax years 2012 through 2015. The opinion offers a useful reminder of how far courts will go to hold taxpayers to the consequences of sloppy bookkeeping and casually structured transactions.

The Reeds ran several ventures during the years at issue, including a real estate consulting firm, three historic rehabilitation projects in Arkansas and Alabama, a private dermatology practice, and a small business selling reclaimed wood. The IRS used a bank deposit analysis to reconstruct unreported income and disallowed roughly $500,000 in claimed deductions, leading to a notice of deficiency and penalties.

Mr. Reed had used personal funds to cover expenses for his consulting firm’s development projects and then deducted those amounts as business expenses, unreimbursed partnership expenses, or bad debts. The court rejected all three theories. Because the entities had recorded the transfers as loans, some of which were later repaid, the payments were not deductible business expenses. The court also found no partnership agreement requiring Mr. Reed to personally cover partnership costs, and no evidence the underlying loans had become worthless, since the project entities still held valuable real estate. As the court put it, taxpayers are bound by the tax consequences of the form they choose for a transaction, whether they intended those consequences or not.

The opinion also illustrates the limits of the Cohan doctrine, which sometimes allows courts to estimate deductions when records are incomplete. The Reeds tried to establish their basis in a partnership interest using a year-end Schedule K-1, but the court found the document did not reflect the timing of contributions and liabilities relative to when the units were actually sold. Because the record could not establish the Reeds’ basis at the relevant time, the court declined to estimate a number in their favor, noting that doing so would effectively substitute for the taxpayers’ burden of proof rather than fill a narrow evidentiary gap.

The taxpayers did prevail on a few issues. The court excluded a $40,000 deposit from a friend that was credibly shown to be a due diligence advance rather than income, and it allowed a $50,000 farmland rent deduction based on unrebutted testimony. The court also rejected a late, unproven attempt by the IRS to argue for an even larger capital gain. Still, the bulk of the deficiencies, along with additions to tax for late filing and accuracy-related penalties, were upheld.

Reed v. Commissioner underscores that separating personal and business finances, and documenting the terms of any related-party transfers in writing, can make the difference between a sustained deduction and a lost one.

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