Charles L. Frost v. Commissioner, 154 T.C. 2

Petitioner Charles L. Frost, an enrolled agent and self‑employed insurance salesman, filed Forms 1040 for tax years 2010–2012 reporting Schedule C business expenses (notably travel between Oregon and Texas) and a 2011 Schedule E distributive loss from an 80% interest in Retirewell.org (a Texas LLC treated as a partnership).
Frost prepared his own returns and continued preparing returns for others; he experienced family/health problems that limited his access to some records.
Retirewell.org reported expenses in 2011 but Frost did not document any capital contribution or otherwise substantiate adjusted basis in the partnership; many partnership expenses paralleled amounts Frost reported on his 2011 Schedule C.
IRS Appeals issued notices of deficiency for 2010–2012, disallowing significant Schedule C deductions, disallowing the entire 2011 Schedule E loss, and proposing §6662(a) accuracy‑related penalties for each year.
The IRS produced a Civil Penalty Approval Form electronically signed May 20, 2014, approving a substantial‑understatement penalty for 2012; no supervisory approval evidence was produced for 2010–2011.
The Tax Court sustained the Commissioner’s disallowances of the Schedule C deductions and the Retirewell.org loss; it denied the §6662 penalties for 2010–2011 for lack of §6751(b)(1) supervisory approval but sustained the §6662 penalty for 2012 (proper approval shown and substantial understatement established).

Issue	Frost's Argument	Commissioner's Argument	Held
Deductibility of Schedule C expenses (2010–2012)	Expenses were ordinary and necessary business costs (travel, meals, etc.)	Expenses not substantiated under §274(d) and general recordkeeping §6001; many trips were personal	Court sustained Commissioner’s reductions—Frost failed to meet strict substantiation; Cohan inapplicable for §274(d) items
Deductibility of 2011 Schedule E loss (Retirewell.org)	Claimed distributive share of $28,187 loss; asserted an alleged $50,000 loan/investment	Frost failed to prove adjusted basis; returns/K‑1s are assertions not proof	Court sustained disallowance—no credible evidence of basis, so loss not deductible
Validity of §6662(a) penalties (procedural)	Penalties improper if IRS failed to follow procedures for selection/examination	Commissioner must produce evidence of written supervisory approval under §6751(b)(1) as part of initial burden under §7491(c)	For 2010–2011 Commissioner failed to produce approval—penalties disallowed; for 2012 Commissioner produced Civil Penalty Approval Form predating formal notice—initial burden met
§6662(a) penalty (merits for 2012)	Reasonable cause due to health/family issues and record difficulty	Underpayment > statutory threshold; no reasonable cause/proper substantiation	Court held substantial understatement established and Frost failed to show reasonable cause—penalty sustained for 2012

Welch v. Helvering, 290 U.S. 111 (establishes ordinary burden of proof rule)
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930) (permits estimation of expenses when taxpayer proves they were incurred)
Sanford v. Commissioner, 50 T.C. 823 (rules strict substantiation for certain travel/meal expenses under §274)
Higbee v. Commissioner, 116 T.C. 438 (2001) (Commissioner’s burden of production under §7491(c))
Graev v. Commissioner, 149 T.C. 485 (2017) (holds Commissioner must produce evidence of §6751(b)(1) penalty approval)
Clay v. Commissioner, 152 T.C. 223 (2019) (addresses timing of supervisory approval and first formal communication for penalties)