Michael H. Shaut

United States Tax Court

T.C. Memo. 2024-103

MICHAEL H. SHAUT,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket No. 16041-22. Filed November 6, 2024.

__________

Michael H. Shaut, pro se.

Ryan Z. Sarazin and John D. Davis, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JONES, Judge: Petitioner, Michael H. Shaut, seeks

redetermination of a deficiency in federal income tax determined by the

Internal Revenue Service (IRS) for the 2019 taxable year. After

concessions, the issues for decision are whether Mr. Shaut is (1) entitled

to a theft or casualty loss deduction; (2) in the alternative, entitled to

deduct legal fees as an ordinary and necessary business expense;

(3) entitled to a net operating loss (NOL) deduction; and (4) liable for an

accuracy-related penalty under section 6662(a). 1

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulatory references are

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,

and Rule references are to the Tax Court Rules of Practice and Procedure. All monetary

amounts are rounded to the nearest dollar.

Served 11/06/24

2

[*2] For the reasons set forth below, we will sustain the

Commissioner’s deficiency and accuracy-related penalty

determinations, as limited by the parties’ concessions and this Opinion.

FINDINGS OF FACT

The trial in this case took place during a Cleveland, Ohio, trial

session. We incorporate by this reference the Stipulation of Facts, the

Stipulated Exhibits, and any Exhibits admitted at trial and in the

Court’s post-trial Order, except as set forth herein.

Mr. Shaut resided in Ohio when he timely petitioned this Court.

I. Mr. Shaut’s Education and Work History

Mr. Shaut attended Colgate University for his undergraduate

education, where he studied philosophy and religion. He attended

Georgetown Law School and has worked in various roles as a lawyer

since graduating. He has significant experience in business, economics,

and finance.

When he first became an attorney, Mr. Shaut worked at a

government agency and then for Conrail as an environmental and labor

lawyer. He is also a member of the bar of this Court, and he has

represented individuals before the IRS and this Court. But he

acknowledged that his own trial is the first time he has had a trial before

the Court.

When Mr. Shaut moved to Cleveland, he worked as a bank lawyer

and then at a firm in a business consulting role. Eventually, he started

a student loan company with former clients, which he ultimately sold to

a Fortune 200 company. Although he stayed at the company for two

years after selling it, the company eventually went bankrupt. In 2008,

Mr. Shaut started a solar energy company named Carbon Vision, LLC

(Carbon Vision), where he served as the chief executive officer.

II. Downing Investment Partners, LLP

In February 2014, Mr. Shaut began investing in a company called

Downing Investment Partners, LLP (Downing). Initially, Mr. Shaut

transferred $250,000 to Downing as part of his investment, and he made

additional investments in Downing. Though Downing purported to be

engaged in the development of patentable technology, the first

investment started what Mr. Shaut describes as a ten-year saga related

3

[*3] to the Downing “Ponzi” scheme. See Jensen v. Commissioner, T.C.

Memo. 1993-393, 1993 WL 325102, at *1 n.1 (defining a Ponzi scheme),

aff’d, 72 F.3d 135 (9th Cir. 1995); Berenbeim v. Commissioner, T.C.

Memo. 1992-272, 1992 Tax Ct. Memo LEXIS 294, at *9 n.5 (defining a

Ponzi scheme).

Mr. Shaut also made several loans to Downing from

approximately 2014 through 2016, as the partnership experienced

cashflow issues. The loans, ranging from the low five figures to over

$100,000, were never repaid.

In March 2014, Mr. Shaut began working as Downing’s president

with a salary of $200,000. He served in that role until September 2014.

According to Mr. Shaut, he ceased receiving a salary after he made his

second investment in Downing and stopped serving as its president at

that time. In total, Mr. Shaut received approximately $100,000 of his

salary in 2014.

In February 2015, Mr. Shaut became a managing director of

Downing, instead of an officer, so that he could fundraise for the

company. In this role, he recruited several individuals to invest

substantial sums, each investing $1 million or more. Mr. Shaut

disclaims receiving any compensation for raising funds. However, he

was given preferred or special investment options, such as warrants.

Eventually, a potential investor conducted significant due

diligence into Downing’s business practices. Despite potential financial

issues with Downing, in June 2016, the investor lent $1,250,000, secured

by Downing’s anticipated patent technology. The loan was funded on the

condition that the money be used for technological developments. In

June of that year, Mr. Shaut also lent another $60,000 to Downing. Mr.

Shaut was not repaid from any investor contributions.

Meanwhile, no progress was made on the development of

Downing technology. Eventually, in approximately 2016, investors

determined that principals of Downing had been misleading them and

mismanaging Downing. Mr. Shaut stated that it became clear that one

of the principals was dishonest and could not be trusted.

These discoveries led to legal action, including approximately 17

lawsuits, wherein Mr. Shaut was named as a defendant. According to

Mr. Shaut, these lawsuits predominantly occurred and were resolved in

the two years after the 2016 investor discoveries.

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[*4] According to Mr. Shaut, two principals of Downing were

eventually investigated, prosecuted, and sentenced to prison in 2019 for

their roles in the scheme. Mr. Shaut claims that he spent approximately

$600,000 in legal fees related to Downing. Further, Downing cost him

all the money he had previously made, leaving him broke. Thus in 2019,

Mr. Shaut began practicing law again at the age of 67.

III. The IRS’s Examination

Mr. Shaut timely filed Form 1040–SR, U.S. Tax Return for

Seniors, for the 2019 tax year (2019 Return). The IRS examined Mr.

Shaut’s 2019 Return.

On February 11, 2022, Group Manager Robin L. Lawless timely

executed managerial approval of the substantial understatement

penalty. On April 21, 2022, the IRS issued to Mr. Shaut a Notice of

Deficiency (NOD) for the 2019 taxable year.

In the NOD, the IRS determined a deficiency of $38,149 and an

accuracy-related penalty of $7,630. Respondent now concedes that Mr.

Shaut did not receive an additional $97,454 in gross receipts reported

on Schedule C, Profit or Loss From Business, as stated in the NOD.

IV. The Amended Return

Although Mr. Shaut prepared and filed a tax return for 2019, he

admits that he “botched” the filing. Thus, after issuance of the NOD, Mr.

Shaut prepared an amended return for 2019 and sent it to the IRS.

Therein, he attempted to correct filing errors in the original 2019 Return

and address the deficiency set forth in the NOD.

The amended return was accompanied by a letter from Mr.

Shaut’s certified public accountant (CPA). According to the letter, Mr.

Shaut needed to correct several errors on his original tax return. In

relevant part the letter requested that the IRS:

• Allow a fraud loss deduction related to Downing; and

• Reinstate a carryover NOL of approximately $570,000.

We will address each in more detail.

First, Mr. Shaut’s CPA stated that Mr. Shaut is entitled to deduct

a fraud loss related to Downing. The amended return included

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[*5] Form 4684, Casualties and Thefts, claiming a fraud or casualty loss

related to Downing. His purported loss is comprised of a $720,000

investment in Downing and approximately $600,000 in attorney’s fees.

Although these amounts total $1,320,000, the CPA stated that Mr.

Shaut is entitled to a fraud loss of $1,380,000. On the form, Mr. Shaut

stated that he was the victim of investment fraud, with no recovery

made.

Mr. Shaut claimed the $600,000 in legal expenses was related to

his protection and defense of his investment in Downing. However, he

did not produce legal bills totaling $600,000. The parties stipulated that

Mr. Shaut produced legal bills totaling approximately $539,000. Those

bills are for various years, including 2017, 2018, 2019, and 2021.

Mr. Shaut also claimed approximately $720,000 in losses related

to his investment in and loans to Downing. Mr. Shaut produced various

receipts and promissory notes from Downing, purportedly

demonstrating wire transfers between 2014 and 2016 to Downing.

However, these amounts do not equal $720,000, and Mr. Shaut admits

that he is missing documentation for some of the claimed wire transfers.

Finally, the amended return included carryforward Schedule C

losses from the 2018 taxable year of approximately $570,000. Although

the amount was initially reported as an NOL for Shaut Law Offices, the

amended return reported that amount on a Schedule C for Carbon

Vision. Mr. Shaut also reported an additional $44,380 of Schedule C

expenses.

The amended return has not been processed or accepted by the

IRS.

V. Mr. Shaut’s 2017 and 2018 Tax Returns

Because Mr. Shaut claims an NOL, we also take into account his

relevant prior income tax returns. See, e.g., Deutsch v. Commissioner,

T.C. Memo. 2012-318, at *9. Thus, we consider Mr. Shaut’s 2017 and

2018 tax returns.

On Mr. Shaut’s 2017 tax return (2017 Return), he reported

negative taxable income of $72,399, purportedly the result of a claimed

2016 NOL carryforward of $99,903. The 2017 Return listed a net loss of

$306,705 for Carbon Vision. The 2017 Return also included Form 1045,

Application for Tentative Refund, Schedule A, NOL, which lists an NOL

of $5,894 remaining for carryforward.

6

[*6] On his 2018 Form 1040, Mr. Shaut reported zero wages or other

income after business losses of approximately $567,806, claimed on

three separate Schedules C. The first Schedule C was for Shaut Law

Offices and reported a loss of $233,093. The Schedule C also reported

“Personal losses carry over from 2017” of $109,547 under Other

Expenses.

The second Schedule C was for Carbon Vision and reported a net

loss of $74,013, including $32,500 in legal and professional expenses, but

no net loss carryforward. The third Schedule C was for Downing, which

Mr. Shaut described as a business investment firm. On that Schedule C,

Mr. Shaut reported no gross receipts and $260,700 in expenses.

OPINION

I. Evidentiary Issue Regarding Exhibit 14-R

Before we examine the issues for decision, we must first address

Mr. Shaut’s objections to Exhibit 14-R (Doc. 32), an Arbitration Award

related to another case involving Downing. At trial, respondent offered

Exhibit 14-R, purportedly for the sole purpose of impeachment. But on

brief, respondent uses the Arbitration Award to make substantive

factual points and relies upon the Exhibit for the truth of the matter

asserted.

Mr. Shaut asks the Court to reconsider its decision to admit the

Arbitration Award. On brief, he argues that the contents of the

Arbitration Award are misleading. He also argues that the evidence was

a surprise, should have been disclosed before trial, and, therefore,

should be excluded for this additional reason.

Any party may attack the credibility of a witness, including by

offering impeachment evidence. See Fed. R. Evid. 607; see also Barkley

Co. of Ariz. v. Commissioner, 89 T.C. 66, 68 (1987). One way that a party

can impeach a witness is by offering evidence that a fact to which a

witness testified is not true. See Charles Alan Wright & Arthur R.

Miller, Federal Practice and Procedure § 6096 (2d ed. 2023 & Supp.

2024); see also United States v. Abel, 469 U.S. 45, 50–51 (1984).

Impeachment evidence is admissible unless excluded under the

Federal Rules of Evidence. Wright & Miller, supra, § 6092; see also, e.g.,

Costa v. Commissioner, T.C. Memo. 1990-572 (examining whether a

document offered for impeachment purposes may be admitted where

portions are otherwise inadmissible hearsay). Thus, an out-of-court

7

[*7] statement, offered for impeachment purposes, is inadmissible to the

extent the statement is offered to show the truth of its contents, unless

an exception to hearsay applies. United States v. Morlang, 531 F.2d 183,

190 (4th Cir. 1975); Mississippi ex rel. Derrow v. Burham, 444 F.2d 152

(5th Cir. 1971); Hood v. Bare, No. 17-cv-471, 2021 WL 5001929, at *8

(S.D. Ohio Oct. 28, 2021); see also Exxon Corp. & Affiliated Cos. v.

Commissioner, T.C. Memo. 1992-92, 1992 Tax Ct. Memo LEXIS 94.

Here, the Arbitration Award clearly contradicts Mr. Shaut’s

testimony. But it also contains hearsay statements, and respondent has

not offered an exception for admission of the Arbitration Award so as to

rely upon it for the truth of the matter asserted. See, e.g., United States

v. Stinson, 647 F.3d 1196, 1210 (9th Cir. 2011); Lobster 207, LLC v.

Pettegrow, No. 19-cv-00552, 2023 WL 4882808, at *2 (D. Me. Aug. 1,

2023) (“As a general rule, an arbitrator’s award, like the decision of a

judge, is inadmissible hearsay when offered to prove the truth of the

findings found therein unless an exception to the hearsay rule applies.”);

see also Physicians Healthsource, Inc. v. Allscripts Health Sols., Inc., 244

F. Supp. 3d 716, 720 (N.D. Ill. 2017) (observing that it is an abuse of

discretion to accept arbitration findings as proving truth of matter

asserted); Bucur v. FedEx Ground Package Sys. Inc., No. 15-cv-1117,

2015 WL 13285090, at *1 n.2 (C.D. Cal. Sept. 10, 2015) (noting that court

would take judicial notice of award but would not accept findings in

arbitration award for truth of matter asserted).

But, equally concerning to the Court, the Arbitration Award was

introduced late in the trial. Our Standing Pretrial Order (Doc. 13)

requires the parties to exchange proposed trial exhibits. The Order

states:

No later than 14 days before the first day of the trial

session . . . [a]ll documents or materials (except

impeachment documents or materials) that a party expects

to use at trial that are not in the Stipulation of Facts must

be exchanged with the opposing party as Proposed Trial

Exhibits.

(Doc. 13 at 3).

Although the Order does not require exchange of impeachment

evidence, we have previously held that this exception relates to

unanticipated arguments. See Exxon Corp. & Affiliated Cos., 1992 Tax

Ct. Memo LEXIS 94. Further, “evidence which is inadmissible for

8

[*8] substantive purposes may not be deliberately introduced under the

guise of impeachment.” Id. at *75 (first citing United States v. Gomez-

Gallardo, 915 F.2d 553, 555–56 (9th Cir. 1990); and then citing United

States v. Peterman, 841 F.2d 1474, 1479 (10th Cir. 1988)). While most of

the cases employing this rule are in a criminal context, it has been

applied in civil cases as well. See Whitehurst v. Wright, 592 F.2d 834,

839 (5th Cir. 1979).

Mr. Shaut’s testimony was not a surprise to respondent. Long

before this litigation commenced, Mr. Shaut claimed to be a victim of

fraud related to Downing. Thus, Mr. Shaut’s testimony was anticipated.

Moreover, it appears that respondent is attempting to use inadmissible

hearsay for substantive findings, through the guise of impeachment.

On the facts before us, we find that the Arbitration Award should

have been disclosed before trial. Accordingly, the Court will vacate its

admission of the Arbitration Award and will sustain Mr. Shaut’s

objections to Exhibit 14-R. Exhibit 14-R is no longer admitted as an

exhibit in this case. Further, to cure any potential prejudice to Mr.

Shaut, the Court has not considered any testimony related to

Exhibit 14-R.

II. Burden of Proof

The determinations in a Notice of Deficiency bear a presumption

of correctness, see Welch v. Helvering, 290 U.S. 111, 115 (1933), and the

taxpayer generally bears the burden of proving them erroneous in

proceedings in this Court, see Rule 142(a)(1). The taxpayer also bears

the burden of proving entitlement to any deduction claimed. INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Thus, a taxpayer claiming

a deduction on a federal income tax return must demonstrate that the

deduction is provided for by statute and must maintain records

sufficient to enable the Commissioner to determine the correct tax

liability. See § 6001; Hradesky v. Commissioner, 65 T.C. 87, 89–90

(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Treas. Reg.

§ 1.6001-1(a).

III. Evaluation of Evidence

In deciding whether a taxpayer has carried his burden of proof,

witness credibility is an important consideration. Ishizaki v.

Commissioner, T.C. Memo. 2001-318, 2001 WL 1658189, at *7. “[T]he

distillation of truth from falsehood . . . is the daily grist of judicial life.”

Diaz v. Commissioner, 58 T.C. 560, 564 (1972). “As a trier of fact, it is

9

[*9] our duty to listen to the testimony, observe the demeanor of the

witnesses, weigh the evidence, and determine what we believe.” Kropp

v. Commissioner, T.C. Memo. 2000-148, 2000 WL 472840, at *3.

We found Mr. Shaut’s testimony to present a complicated picture.

At first blush, Mr. Shaut presented a compelling story regarding his

business acumen, success of various businesses, and the aftermath of

the downfall of Downing, including his substantial loss. But we found

his testimony regarding his limited role in Downing to be self-serving.

On the basis of our evaluation of his statements and demeanor at trial,

we found much of his testimony regarding Downing and his lack of

knowledge regarding the inner workings to be implausible. It is

improbable that Mr. Shaut served as president and later as managing

director of Downing—in the latter role raising millions of dollars—while

having no role in Downing’s day-to-day operations or a detailed

understanding of Downing’s finances and operations. With this

credibility determination in the background, we will now turn to

examining the disputed issues in this matter.

IV. Casualty and Loss Deduction for 2019

Section 165(a) and (c) allows a deduction for losses arising from a

qualifying casualty or loss, including theft, not compensated for by

insurance or otherwise. See Treas. Reg. § 1.165-8; see also Brooks v.

Commissioner, T.C. Memo. 2013-141, at *14–15. Theft includes, but is

not limited to, larceny, embezzlement, or robbery. Treas. Reg. § 1.165-

8(d) (construing section 165(c)(3)).

To deduct a theft loss, a taxpayer must prove the existence of a

theft, the amount of the deductible loss, and the year in which the loss

was discovered. § 165(e); Treas. Reg. § 1.165-8(a); see also Vennes v.

Commissioner, T.C. Memo. 2021-93, at *28–29. The act resulting in the

alleged theft loss must have been a criminal act under the law of the

state in which the alleged theft occurred. Paine v. Commissioner, 63 T.C.

736, 740 (1975), aff’d without published opinion, 523 F.2d 1053 (5th Cir.

1975); see also Pascucci v. Commissioner, T.C. Memo. 2024-43, at *13–

14. The measure of a theft loss is the difference between the fair market

value of the property before and after the theft. Treas. Reg. §§ 1.165-

7(b)(1), 1.165-8(c). Further, “any loss arising from theft shall be treated

as sustained during the taxable year in which the taxpayer discovers

such loss.” See § 165(e); see also Treas. Reg. § 1.165-1(a), (d)(3).

Moreover, there can be no reasonable prospect of recovery for a theft loss

deduction. Treas. Reg. § 1.165-8(a)(2).

10

[*10] As an initial matter, Mr. Shaut has not introduced any reliable

evidence indicating when he discovered that the purported theft

occurred. According to Mr. Shaut’s own testimony, his investment in and

purported loans to Downing all occurred before 2019. Most of his legal

fees are for years other than the tax year at issue, and most of the

litigation was resolved by 2018. Mr. Shaut also testified that it became

clear in 2016 that a principal of Downing had been misleading him and

other investors, was dishonest, and could not be trusted.

Thus, it is evident that Mr. Shaut knew before 2019 that Downing

was a financial failure, that improper activity occurred, and that he

would not recover his investment. For these reasons alone, Mr. Shaut

failed to carry his burden of demonstrating that his purported theft

losses were “discovered” in 2019, thus entitling him to a casualty loss

deduction for that year. See Giunta v. Commissioner, T.C. Memo. 2018-

180, at *17–18 (finding that the taxpayers did not establish the year in

which they discovered the loss).

But, to the extent any loss can be attributed to the tax year at

issue, Mr. Shaut has failed to carry his burden of demonstrating that he

was the victim of theft. See Paine, 63 T.C. at 740; Greenberger v. United

States, No. 14-cv-01041, 2015 WL 4076976, at *4–11 (N.D. Ohio June

19, 2015) (examining theft under Ohio law). To the contrary, he was the

president of Downing for six months. Although he claims no intimate

involvement in the Downing operations after his role as president ended,

we find Mr. Shaut’s explanation implausible and not credible. Mr. Shaut

has extensive business expertise; he started multiple successful

businesses. After his role as the president at Downing, he served the

crucial role of raising millions of dollars for Downing. Indeed, he brought

on investors who were ultimately victims of the Downing scheme. His

self-serving testimony alleging theft is insufficient in this case to meet

his burden of proof. See Seaver v. Commissioner, T.C. Memo. 2009-270,

2009 WL 4163553, at *3–4 (denying theft loss deduction where

taxpayers “provided only uncorroborated testimony”).

Further, to the extent Mr. Shaut was somehow unaware of the

irregularities at Downing, he has not demonstrated that his

investments in Downing were anything more than a bad business

decision. The casualty and theft loss provision under section 165 is not

“designed to take care of all losses that the economic world may bestow

on its inhabitants.” Friedman v. Commissioner, T.C. Memo. 1992-588,

1992 WL 245961, at *4 (quoting Billman v. Commissioner, 73 T.C. 139,

141 (1979)), aff’d without published opinion, 48 F.3d 535 (11th Cir.

11

[*11] 1995). There is no credible evidence that Mr. Shaut lost all of his

investment and was never repaid for his loans. We find such a claim to

be improbable, and therefore Mr. Shaut has not met his burden of

demonstrating the purported amount of the theft loss.

Finally, Mr. Shaut has not demonstrated that his legal fees or

expenses are the result of a purported theft loss. Litigation costs may be

included as “further or additional or collateral theft losses” in certain

circumstances. Ander v. Commissioner, 47 T.C. 592, 595 (1967); see also

Tarsey v. Commissioner, 56 T.C. 553, 555–56 (1971) (disallowing legal

fees as part of purported “property” loss). Here, because there was no

theft loss in the first instance, Mr. Shaut’s claimed legal fees and other

costs related to Downing civil litigation are not eligible as deductions for

a theft loss.

We appreciate the difficulty of Mr. Shaut’s financial

circumstances; he earned a significant amount from previous business

ventures and then lost it. But we find that he has failed to substantiate

entitlement to a theft loss deduction, for 2019 or any year. Accordingly,

we sustain respondent’s determination that the casualty loss deduction

should be disallowed. See, e.g., Stoddard v. Commissioner, T.C. Memo.

2002-31, 2002 WL 122315, at *6–7 (finding that the taxpayers

introduced no reliable evidence to establish that the casualty loss

occurred).

V. Business Expenses Under Section 162

As an alternative position, Mr. Shaut argues that he is entitled to

deduct his legal expenses under section 162. Sections 162(a) and 212

permit a deduction for ordinary and necessary expenses paid to carry on

a trade or business or for the production of income during the taxable

year. An “ordinary” expense is one that is common and acceptable in the

particular business. Welch v. Helvering, 290 U.S. at 113–14. A

“necessary” expense under section 162(a) is an expense that is

appropriate and helpful in carrying on the trade or business. Heineman

v. Commissioner, 82 T.C. 538, 543 (1984). A taxpayer must maintain

adequate records to demonstrate the propriety of any deduction claimed.

Higbee v. Commissioner, 116 T.C. 438, 440 (2001); see also § 6001.

Further, “[a] taxpayer’s self-serving declaration is generally not a

sufficient substitute for records.” Fine v. Commissioner, T.C. Memo.

2013-248, at *4.

12

[*12] It is not entirely clear which business Mr. Shaut claims should

bear the Downing legal fees as an ordinary and necessary expense.

Other than expenses reported by his own law firm, the proposed

amended return does not include legal fees on a Schedule C.

Nonetheless, Mr. Shaut appears to suggest that his legal fee deduction

should be permitted as a business expense for Downing.

Regardless, Mr. Shaut failed to present reliable evidence

substantiating reported legal expenses associated with a business for

the 2019 taxable year. First, many of the legal invoices submitted were

for years other than 2019. Only business expenses incurred during the

taxable year are deductible under section 162. See, e.g., United States v.

Gen. Dynamics Corp., 481 U.S. 239, 242 (1987). Second, Mr. Shaut has

not presented any reliable evidence that these legal bills were a business

expense incurred in the ordinary course of conducting a trade or

business. Rather, Mr. Shaut claimed at trial that these expenses are

related to a fraud loss.

Even more problematic, Mr. Shaut’s alternative position is

entirely inconsistent with his claimed role at Downing. On the one hand,

Mr. Shaut claims that he was merely an individual who helped raise

money for Downing and that he had no role in its day-to-day operations.

On the other hand, he now claims that he was engaged in a business at

Downing and is entitled to deduct nearly $600,000 in legal fees as an

ordinary and necessary expense. Mr. Shaut cannot have it both ways.

We find that Mr. Shaut has not met his burden of demonstrating

that the legal fees were ordinary and necessary expenses incurred in a

trade or business during the 2019 taxable year. 2

VI. Carryforward NOL

Next, we examine whether Mr. Shaut is entitled to deduct a

carryforward NOL. Section 172 allows a taxpayer to deduct an NOL

carryover from earlier years when its taxable income in the current year

is more than zero. § 172(a), (b)(2). An NOL is the excess of deductions

2 If a taxpayer is unable to substantiate the amount of a deduction, the Court

may nonetheless allow it (or a portion thereof) if there is an evidentiary basis for doing

so. See Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). To apply the Cohan

rule, the Court must have a reasonable basis upon which to make an estimate. Vanicek

v. Commissioner, 85 T.C. 731, 742–43 (1985). Mr. Shaut failed to properly establish

that the alleged expenses were ordinary and necessary business expenses. Thus,

application of the Cohan rule would be inappropriate in this case. We also note that

Mr. Shaut did not invoke the Cohan rule as an alternative position.

13

[*13] over gross income, computed with certain modifications specified

in section 172(d). See also § 172(c).

“A taxpayer who claims [an NOL] deduction bears the burden of

establishing both the existence of the [NOL] and the amount that may

be carried over to the year involved.” Chico v. Commissioner, T.C. Memo.

2019-123, at *39 (citing Keith v. Commissioner, 115 T.C. 605, 621

(2000)), aff’d, No. 20-71017, 2021 WL 4705484 (9th Cir. Oct. 8, 2021);

Scharringhausen v. Commissioner, T.C. Memo. 2012-350. Tax returns

are merely statements of a taxpayer’s position. See Benavides & Co.,

P.C. v. Commissioner, T.C. Memo. 2019-115, at *17. Thus, they cannot

be used to substantiate a claimed deduction, including the amount of the

NOL to be carried forward. See Sparkman v. Commissioner, 509 F.3d

1149, 1156–57 (9th Cir. 2007), aff’g T.C. Memo. 2005-136; see also

Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); Davison v.

Commissioner, T.C. Memo. 2023-139, at *18; Amos v. Commissioner,

T.C. Memo. 2022-109, at *7, aff’d per curiam, No. 23-10532, 2024 WL

1406646 (11th Cir. Apr. 2, 2024).

Here, beyond his own testimony and tax returns, Mr. Shaut did

not offer any evidence proving the existence and amount of an NOL

carryforward from the 2017 or 2018 taxable year. Absent some other

credible corroborating evidence, these tax returns and self-serving

statements are insufficient to substantiate Mr. Shaut’s entitlement to

an NOL carryforward for 2019. See Aulisio v. Commissioner, T.C. Memo.

2024-29, at *33–35; see also Amos, T.C. Memo. 2022-109, at *7; Bulakites

v. Commissioner, T.C. Memo. 2017-79, at *8.

Indeed, as noted by respondent, Mr. Shaut’s tax returns are

inconsistent with his claimed NOL carryforward. For example, Mr.

Shaut’s 2017 Return shows a total remaining carryforward of only

$5,894. Yet, on his 2018 tax return, Mr. Shaut claimed over $109,000 for

a carryforward NOL from 2017. These inconsistent positions on Mr.

Shaut’s tax returns further undermine his credibility and entitlement

to an NOL carryforward.

In the light of the foregoing, Mr. Shaut has not established that

he had losses for 2017 and 2018 that can be carried forward to 2019, and

he is not entitled to an NOL. Thus, we sustain respondent’s

determination that Mr. Shaut is not entitled to the claimed NOL

deduction. See Villanueva v. Commissioner, T.C. Memo. 2022-27,

at *3–4.

14

[*14] VII. Penalties

The last issue for us to decide is whether Mr. Shaut is liable for

an accuracy-related penalty for an underpayment of tax required to be

shown on a return attributable to a substantial understatement of

income tax under section 6662(a) and (b)(2). Section 7491(c) generally

provides that “the Secretary shall have the burden of production in any

court proceeding with respect to the liability of any individual for any

penalty.” This burden requires the Commissioner to come forward with

sufficient evidence indicating that the imposition of the penalty is

appropriate. 3 See Higbee, 116 T.C. at 446. Once the Commissioner meets

his burden of production, the burden of proof is on the taxpayer to “come

forward with evidence sufficient to persuade a Court that the

Commissioner’s determination is incorrect.” Id. at 447.

An understatement of income tax is “substantial” if it exceeds the

greater of 10% of the tax required to be shown on the return or $5,000.

See § 6662(d)(1)(A). Accordingly, to the extent Rule 155 computations

confirm there is a substantial understatement of income tax, we sustain

respondent’s imposition of an accuracy-related penalty. See, e.g., Smiley

v. Commissioner, T.C. Memo. 2024-66, at *44.

VIII. Conclusion

On the basis of the foregoing and concessions by the parties, we

sustain the Commissioner’s deficiency and penalty determinations, as

set forth herein. In reaching our conclusions, we have considered all

arguments made by the parties, and to the extent not mentioned or

addressed, they are irrelevant or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

3 Respondent must also demonstrate compliance with supervisory approval

pursuant to section 6751(b). See Frost v. Commissioner, 154 T.C. 23, 34 (2020). The

record reflects that respondent has met his burden under section 7491(c) to

demonstrate compliance with the requirements of section 6751(b).