T.C. Summary Opinion 2015-54

UNITED STATES TAX COURT

DAVID WILLIAM LAUDON, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 27380-11S. Filed September 8, 2015.

David William Laudon, pro se.

Christina L. Cook and John Schmittdiel, for respondent.

SUMMARY OPINION

HOLMES, Judge: David Laudon is a chiropractor licensed in Minnesota. 

He made nearly $290,000 in bank deposits from 2007 to 2009 yet reported only a

bit less than $210,000 in gross receipts on his returns. He deducted as business

expenses for his chiropractic home office a Microsoft Xbox 360, Nintendo Wii,

and numerous pieces of hair-salon equipment. He also claimed deductions for
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driving tens of thousands of miles throughout Minnesota and the Dakotas--both to

treat patients and to perform an assortment of other services. The Commissioner

thought this was a stretch and urges us to support his adjustments.

1

Background

Laudon owns and operates a rather unconventional chiropractic business in

Detroit Lakes, Minnesota. He treats some of his patients in his home and claims to

use roughly half of his house--the basement and half of the garage--for business. 

Like many chiropractic offices, Laudon’s has beds, tables, and a waiting area. But

unlike most, his also comes equipped with a Wii, Xbox 360, big-screen TVs and,

for a time, a working hair salon. 

Laudon testified that he also makes “house calls” and reported that he

racked up between 40,000 and 60,000 miles per year in his business vehicles. He

said that his patients often called him a psychiatrist, chauffeur, physician, peace

officer, or even a pheasant hunter. Some of Laudon’s stated reasons for making

2

 We tried this small case in St. Paul under Internal Revenue Code section 1

7463(f). (All section citations are to the Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and Procedure.) Trial as

a small case means that this decision isn’t reviewable by any other court, and this

opinion shouldn’t be cited as precedent.

 But not a ghostbuster. The Commissioner rhetorically asserted that some

2

of Laudon’s trips might have made more sense if he was claiming to be a

(continued...)
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these trips strain credibility: for example, driving to a “schizophrenic” patient who

was--on more than one occasion--“running scared of demons” down a rural

Minnesota highway, or driving to a patient’s home in a Minneapolis suburb--

expensing 261 miles--because he had received a call from police that she had

overdosed on OxyContin prescribed by her physician. Laudon claimed to have

driven hundreds of miles per day--sometimes without a valid license--to see

patients, but several of these trips were for medical procedures he was not licensed

to perform. Even his testimony about multiple entries in the logs where he wrote

“DUI” was not credible: He claimed that these were not references to being

stopped by police while under the influence, or driving while his license was

suspended, but instead were his misspellings of a patient named “Dewey”--a

supposed patient of his. He testified that he took one business trip to pick up a

patient left stranded due to a domestic dispute with his girlfriend. And he even

testified about trips he made to test his patients’ urine:

(...continued) 2

ghostbuster. Laudon then disclaimed any employment as a ghostbuster. In his

reply brief the Commissioner conceded that Laudon was not “employed or under

contract to perform work as a ghostbuster during the tax years at issue in this

case.” We therefore need make no finding on the existence of a market for

“supernatural elimination” in west-central Minnesota. See “Ghostbusters”

(Columbia Pictures 1984). 
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Absolutely we do * * * [test urine]. It’s part of the--I believe it’s

Federal, you know, that they have--we have to abide by that. It’s

specific gravity. You’re basically, looking for sugar, let alone height,

weight, blood pressure. Make sure they’re not drunk, doing illegal

drugs.

We find Laudon not credible in his testimony regarding his business

mileage, and this finding affects our views of his testimony’s credibility on every

other issue in the case. 

These other issues arise from his unusual returns that reported no net

income:3

Year Gross Receipts Expenses Taxable Income

2007 $59,056 $111,250 $(60,944)

2008 67,068 71,005 (65,081)

2009 33,952 56,313 (84,393)

Laudon did, however, make unexplained deposits into his bank accounts. The

Commissioner analyzed these accounts and discovered that Laudon had put nearly

$80,000 more into them than he’d reported on his tax returns. The Commissioner

 The gross receipts and expenses come from Laudon’s Schedules C, which 3

constitute the biggest part of his returns. He combined his Schedule C losses with

other items--Schedule A itemized deductions or the standard deduction depending

on the year, his personal exemption, and large “other income” items that were

carried-forward losses--to arrive at his taxable income. 
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added this amount to Laudon’s income and disallowed many deductions. The

notice of deficiency determined: 

Year Gross Receipts Expenses Taxable Income

2007 $71,056 $11,319 $46,766

2008 105,997 28,780 62,812

2009 62,014 23,290 26,138

Laudon filed a timely petition, and we tried his case in St. Paul. Laudon

remains a Minnesota resident, as he was when he began his case.

Discussion 

A. Income

We first ask whether Laudon underreported his income. Laudon did not

keep records of his income in any decipherable form; and when this happens the

Commissioner may reconstruct a taxpayer’s income by using any rational method

that separates taxable income from nontaxable income and expenses. A bankdeposits analysis is an acceptable method. See, e.g., Caulfield v. Commissioner,

33 F.3d 991, 993 (8th Cir. 1994), aff’g T.C. Memo. 1993-423. 

For us to accept his bank-deposits analysis, the Commissioner must show

that Laudon operated an income-producing business for the tax years at issue, and

made regular deposits into this business’s bank accounts. He may then compute
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net taxable income by distinguishing taxable deposits from deposits of nontaxable

income and income from years not at issue. See United States v. Abodeely, 801

F.2d 1020, 1023 (8th Cir. 1986). Using this long-accepted method, the

Commissioner determined that Laudon had made net taxable deposits for the tax

years before us:4

Year Total Deposits Reported and

non-taxable

income

Total unreported

taxable income

2007 $99,578 $87,578 $12,000

2008 113,448 74,519 38,929

2009 74,862 46,800 28,062

Total 287,888 208,897 78,991

Because the Commissioner used an acceptable method of income

reconstruction, Laudon has the burden of proving that the Commissioner made

some mistake. See Caulfield, 33 F.3d at 993; Dodge v. Commissioner, 981 F.2d

350, 354 (8th Cir. 1992), aff’g 96 T.C. 172 (1991). Laudon contends that the

Commissioner failed to classify certain deposits as nontaxable, including

insurance payments for damage to several vehicles, one of which was involved in

a “high speed police chase” with a man “high on meth and cocaine.” He also

 The Commissioner did concede that one $900 deposit shouldn’t be

4

included in the bank-deposits analysis due to a bank error.
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claims he had proceeds from car sales gone awry, the sale of scuba equipment,

compensation for lost luggage, and payments from Best Buy and FedEx for

damage to his laptop computer on two different occasions. And he claims that

“Wells Fargo lost [a] cash deposit” of $6,000 or maybe $7,850.

But because he didn’t produce any evidence verifying that these amounts

were deposited into the relevant accounts, Laudon hasn’t met his burden of proof.

Cf. Caulfield, 33 F.3d at 993-94. The Commissioner calculated Laudon’s income

by adding the deposits in his personal accounts and business account for each of

the years at issue. He then reduced the total by Laudon’s reported income and by

any deposits identified as nontaxable. We therefore accept the Commissioner’s

reconstruction of Laudon’s income.

B. Deductions

We next look at Laudon’s deductions. The Commissioner allowed very few

of them:

Schedule C expenses

Year Amount reported

on return

Amount allowed

by exam

Adjustment

2007 $111,250 $11,319 $99,931

2008 71,005 28,780 42,225

2009 56,313 23,290 33,023
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Total 238,568 63,389 175,179

The Commissioner’s reason was simple: Like any taxpayer, Laudon can claim

business-expense deductions only for the ordinary and necessary expenses of his

business, see sec. 162(a), and he bears the burden of proof, see Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Taxpayers usually

meet this burden with records of some kind. See sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 89-90 (1975); sec. 1.6001-1(a)-(e), Income Tax Regs. 

And for some kinds of expenses, those records must be particularly detailed. See

sec. 274(d). 

Car and Truck Expenses

We look first at the very large deductions that Laudon claimed for his travel

throughout and between the Dakotas and Minnesota. The Commissioner objected

to all of these on the ground that Laudon’s records didn’t substantiate them:

Car and truck expenses

Year Amount reported

on return

Amount allowed

by exam

Adjustment

2007 $30,645 $0 $30,645

2008 24,899 0 24,899

2009 23,741 0 23,741
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Laudon’s problem is that car-and-truck expenses are governed by section

274(d), which requires his records to show (1) the amount of each expense, (2) the

dates that he drove for business purposes, (3) where he was going, and (4) his

business reason for going there. See sec. 274(d).

Laudon had a mileage log, but it fails to meet section 274(d)’s standards. 

The July 31, 2007 entry, for example, describes his purpose as “[t]ravel to and

from places.” Even Laudon conceded that his log was “not a complete itemized

thing.” We find this log to be both incomplete and incomprehensible and disallow

Laudon’s mileage deductions in full.

Home Office Expenses

Laudon also took deductions for using his basement and garage as a home

office in 2007 and 2009:

Business use of home expense

Year Amount reported

on return

Amount allowed

by exam

Adjustment

2007 $5,235 $0 $5,235

2009 $1,787 $0 $1,787

Section 280A(c)(1) allows a taxpayer to claim a deduction for the portion of his

home allocated for business use. A taxpayer claiming a deduction under this

section must, however, show that he used the portion of his home exclusively for
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business. Id.; Langer v. Commissioner, 980 F.2d 1198, 1199 (8th Cir. 1992), aff’g

T.C. Memo. 1990-268.

While we accept that Laudon treated patients in his home at least some of

the time, we don’t find credible his testimony that his basement was used

exclusively for his business. We particularly disbelieve his claim that the Xbox,

Wii, big-screen TVs, and other electronics in his basement were used exclusively

for chiropractic purposes since this claim conflicts with his much more plausible

admission to the IRS examiner during audit that his daughter and his girlfriend’s

son would play these video games while he was on the phone. Laudon also

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admitted that he used his garage to store the cars that he used personally. This is

an entirely plausible use of a garage, but it means we won’t find that he used the

garage exclusively for business purposes. We also deny these deductions because

 Laudon further undermined his credibility by claiming that he used the Wii 5

and Xbox 360 to keep his patients “active and moving.” These are well-known

games whose features are not subject to reasonable dispute and are “generally

known within the trial court’s territorial jurisdiction.” Fed. R. Evid. 201(b)(1). 

One can imagine the Wii--with games such as Wii Bowling and Wii Fit that

feature motion-based controllers requiring physical activity from its users--might

be used for its physical benefits. But no reasonable person could think that the

Xbox 360 could be--Microsoft didn’t introduce the Kinect until late 2010, just in

time for Christmas and before the years at issue in this case. Before Kinect, Xbox

playing was more of the vegging-out-on-the-couch variety. 
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Laudon failed to substantiate his claimed home-office expenses with any records

or other documentation. 

Insurance, Repairs, Utilities, Office Expenses, and Wages Expenses

We’ll dispose of some other contested deductions on Laudon’s returns:

Insurance, repairs, utilities, office expenses, and wages

Year Expense

category

Amount

reported on

return

Amount

allowed by

exam

Adjustment

2007 Insurance $2,030 $850 $1,180

Repairs 5,405 0 5,405

Utilities 6,160 3,490 2,670

Office

expenses

13,169 1,553 11,616

2008 Insurance 3,717 850 2,867

Utilities 7,749 4,339 3,410

Wage 9,600 0 9,600

2009 Insurance 3,012 0 5,083*

Total 50,842 11,082 41,831*

* The notice of deficiency disallowed insurance expenses of this amount even

though Laudon had claimed a smaller amount. We suspect that the Commissioner

meant to disallow the $5,083 that Laudon claimed on his 2009 return as “Repairs

and Maintenance.” But this is just speculation, and neither party offered any

evidence on the subject. We therefore treat the disallowance of $5,083 as a

disallowance of the actual amount that Laudon claimed--$3,012. This reduces the

total adjustments for these expenses, and the parties should redo the

Commissioner’s math and use this lower amount in their Rule 155 computations. 
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Laudon produced no substantiation whatsoever that would let us allow anything

beyond what the Commissioner already has. 

Other Expenses

Other expenses

Year Amount reported

on return

Amount allowed

by exam

Adjustment

2007 $33,728 $2,741 $30,987

2008 3,299 1,850 1,449

2009 1,534 1,284 250

The Commissioner disallowed $30,987 of Laudon’s claimed “other

expenses” in 2007. Laudon didn’t substantiate any of his claimed deductions for

these “other expenses” for 2007, 2008, and 2009, so we agree with the

Commissioner’s determination. Most of this amount--$22,665--was a deduction

for the value of Laudon’s labor, supplies, and stolen tools related to the renovation

of a home that Laudon neither lived nor worked in, or even owned. We agree with

the Commissioner that these improvements aren’t related to Laudon’s chiropractic

business. They do seem to have produced some money for Laudon, though: He

filed a mechanic’s lien for expenses including a “Jacuzzi tub,” “Race Tracks,”

several hotel-room bills, a satellite dish, and several necessities for a “[b]asement

movie room,” and received $20,000 as a result. The Commissioner classified this
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$20,000 as nontaxable income, and we have no reason to disturb this

determination either.

Depreciation

Depreciation

Year Amount reported

on return

Amount allowed

by exam

Adjustment

2007 $5,172 $0 $5,172

2009 3,234 0 3,234

We turn next to depreciation. On this item, the Commissioner seems to

have made a mistake that benefits Laudon. For his 2007 tax year, Laudon claimed

a $5,172 depreciation expense; and for 2008, a $12,193 depreciation expense. But

the Commissioner in the notice of deficiency disallowed $12,193 in depreciation

for 2007 and didn’t disallow anything for 2008. For 2009 he disallowed $28,062,

but Laudon had claimed only $3,234. This suggests a clerical error, but the

Commissioner never asked to fix it. As a result, the Commissioner does not

dispute Laudon’s claimed $12,193 depreciation for 2008. And for 2007 and 2009,

the Commissioner’s adjustments were larger than the amounts that Laudon

claimed. Laudon didn’t present any evidence--either records or testimony--

substantiating his claimed depreciation in any amount, so we sustain their

disallowance. But only up to the amounts that he claimed. (As with the 2009
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“insurance” expense, the parties should take this into account when they do the

Rule 155 computations.)

Net Operating Losses

Net Operating Losses

Year Amount reported

on return

Amount allowed

by exam

Adjustment

2008 $52,194 $0 $52,194

2009 52,182 0 52,182

Laudon claimed net operating losses of $52,194 for 2008 and $52,182 for

2009, but the Commissioner disallowed them entirely. Laudon has the burden of

proof. See Keith v. Commissioner, 115 T.C. 605, 621 (2000). He did not,

however, ever address this issue at trial. We therefore find for the Commissioner

and sustain his disallowance.

C. Penalty

The last issue is whether to sustain the Commissioner’s application of an

accuracy-related penalty under section 6662 for Laudon’s underreported income

and overstated deductions. A taxpayer is subject to a substantial-understatement

penalty if he understates his income tax by the greater of $5,000 or ten percent of

the tax required to be shown for the taxable year. See sec. 6662(a), (d)(1)(A). 
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Laudon’s understated income tax meets this requirement for all three tax years at

issue. 

Laudon asserts the defense that he reasonably relied on the advice of a tax

professional. See sec. 1.6664-4(b), Income Tax Regs. To make this

determination, we look to three factors. Neonatology Assocs., P.A. v.

Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

C First, was the adviser a competent professional who had sufficient

expertise to justify reliance?

C Second, did the taxpayer provide necessary and accurate information

to the adviser?

C Third, did the taxpayer actually rely in good faith on the adviser’s

judgment?

We don’t need to address the first and third factors because we don’t believe

that Laudon provided “necessary and accurate information” to his adviser. See id. 

At trial Laudon presented the summaries of his tax information and expenses that

he provided to H&R Block’s preparers. He said he also provided his preparers

with “all my receipts and stuff,” but he didn’t present evidence suggesting he

provided all of his receipts or that what he provided was sufficiently detailed to

aid his preparers. For example, included in the exhibit alongside these summaries

was Laudon’s mileage log, but he later admitted his mileage log wasn’t a complete
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itemized list; and so if this is something he presented his preparers, it wouldn’t be

sufficient. Moreover, while he claimed to have brought all of his receipts to H&R

Block along with his summaries, he later stated that his preparers didn’t want him

to just walk in with his receipts and have them add it up, so it’s unclear to what

extent he actually went over his receipts with his preparers rather than just

presenting the summaries. And Laudon never mentioned explaining the diverse

and unconventional nature of his business so as to help his preparers understand

his (incomplete) logs and claimed expenses. All of this leads us to find that

Laudon did not provide all of the necessary and accurate information to his

advisers. Having blinded H&R Block to the details and peculiarities of his

chiropractic enterprise, Laudon cannot now claim that he relied on H&R Block’s

advice. We sustain the penalty.

Decision will be entered

under Rule 155.