A Maryland woman who spent her evenings and weekends looking after a neighbor's daughter with a mental impairment ended up owing the IRS more than $18,900 in back taxes and penalties for two years of deductions on a "business" that, in the eyes of the Tax Court, never existed. Her gas receipts for 2020 totaled less than $40. Her Schedule C claimed $3,900 in gas expenses that same year. The math never had a chance.
The case, Lucas v. Commissioner (T.C. Memo. 2026-22), decided in February 2026, is a compact lesson in exactly how the IRS and the Tax Court dismantle a side-hustle deduction claim — and it's worth reading closely if you run any kind of side business, gig work, or informal caregiving arrangement and have ever wondered how much documentation is really "enough."
The Arrangement Behind "Tracey's TLC"
Tracey Yvonne Lucas worked full-time for the Social Security Administration, earning roughly $50,000 to $54,000 a year in wages. On the side, she reported a home healthcare business on Schedule C called Tracey's TLC. Its only activity was looking after Michelle Smith, the daughter of an acquaintance, six or seven days a week while the father worked. Ms. Smith had a mental impairment, spent her days at Lucas's home using the kitchen, living room, laundry room, cable, and streaming services, and was driven to stores for groceries and personal items — but never spent the night, and was never billed a fixed rate.
Payment was informal. Sometimes the father gave Lucas $25 or $30. Sometimes nothing. In total, she received less than $200 a year — and never reported even that on her Schedule C.
Despite reporting zero gross receipts, Tracey's TLC generated substantial deductions: $5,760 and $9,000 in equipment rental expenses across the two years, $1,800 and $4,200 in utilities, $7,850 in car and truck expenses, $3,000 in repairs, $6,700 and $5,940 in car and renter's insurance, and the now-infamous $3,900 and $5,200 in "gas" expenses. Combined, these deductions wiped out most of her W-2 tax liability, producing refund-boosting losses of roughly $30,000 across the two years on a business with no revenue.
The IRS disallowed every dollar. The Tax Court agreed with the IRS on every point.
Point One: It Wasn't a Business at All
Before a court even gets to whether individual expenses are deductible, it has to answer a threshold question: was the taxpayer actually engaged in a trade or business? Courts weigh three things: whether the taxpayer intended to earn a profit, whether she was regularly and actively involved, and whether the activity had genuinely commenced as a business.
Lucas failed on the first factor immediately. By her own testimony, the purpose of Tracey's TLC was to "help" people — not to earn income. She never charged a fixed rate, never invoiced, never pursued other clients, and the sporadic cash she did receive went unreported. The court also noted she kept no separate books, no dedicated bank account, and none of the "systematic and businesslike" practices that distinguish a business from a favor between neighbors.
This matters far beyond this one case. It's the same three-factor lens — profit intent, active involvement, actual commencement — that shows up whenever the IRS challenges a Schedule C loss from an activity that looks more like a hobby, a side project, or an act of generosity than a business. If you can't point to pricing, marketing, multiple clients, or a business bank account, you're vulnerable to exactly this argument, regardless of how sincere your effort was.
Point Two: Even If It Were a Business, the Records Didn't Hold Up
The court didn't stop at "this isn't a business" — it went further and showed that even a legitimate business couldn't have deducted these expenses on this documentation.
Lucas's records consisted of a personal checking account statement with personal transactions blacked out by hand (she missed at least one) and a handful of gas receipts. The court found the bank withdrawals she labeled "business" were, on their face, personal: utility bills for her own residence, insurance for her own car. There was no dedicated business account, no invoices, no mileage log — just a personal account with a highlighter run through it after the fact.
Many taxpayers assume that if the IRS challenges an estimate, a court can still approve a reasonable substitute number under the Cohan rule — the doctrine, dating to a 1930 case involving entertainer George M. Cohan, that lets a court estimate a deductible expense when a taxpayer proves something was spent but can't pin down the exact amount. It's a real doctrine, and it does get applied in Tax Court. But it has two hard limits that Lucas ran into: it doesn't apply to categories Congress specifically flagged for stricter proof under Section 274(d) — vehicle expenses chief among them, requiring a contemporaneous log or similar record — and it doesn't apply when there's no way to separate business use from personal use at all. A blacked-out personal bank statement doesn't give a court anything to estimate from.
The gap between her receipts and her deductions made the point starkly: less than $40 in documented gas for 2020, versus $3,900 claimed. Under $500 for 2021, versus $5,200 claimed. That's not a rounding difference the court could smooth over — it's a category the court found simply unsubstantiated.
Point Three: The Penalty Came Anyway
Beyond the disallowed deductions, the court upheld accuracy-related penalties of 20% on the underpayment — $1,579 and $1,552 for the two years — because the shortfalls were both a "substantial understatement" (more than 10% of required tax, or $5,000, whichever is greater) and attributable to negligence, which the regulations define to include a plain failure to keep adequate books and records.
Lucas tried to argue reasonable cause — that she'd relied on advice from someone she called a "counselor" or "auditor person" when deciding to deduct residence expenses and not report the caregiving payments. The court rejected this outright: she prepared her own returns, offered no evidence of who this adviser was or what they actually told her, and the reasonable-cause defense for relying on professional advice requires showing the adviser was genuinely qualified, was given accurate information, and was actually relied upon in good faith. Vague, unverifiable testimony doesn't clear that bar.
What This Means If You Run a Side Business
None of this requires running a formal LLC or hiring a bookkeeper on day one. But Lucas draws a clear line between what looks like a business to the IRS and what doesn't:
- Charge something consistent, and invoice it. A business sets prices and asks for payment. Accepting whatever someone feels like giving — sometimes $25, sometimes nothing — reads as a favor, not a trade or business, no matter how many hours you put in.
- Keep business money separate from day one. A dedicated checking account or card for the activity, even informally, is the single clearest signal of "businesslike" operation the court looks for — and it makes your own bookkeeping dramatically easier, since you're not reconstructing which of 200 debit-card swipes were "business."
- Log vehicle and travel expenses contemporaneously. Mileage and vehicle costs are one of the few categories where an after-the-fact estimate legally cannot save you, no matter how reasonable it sounds. A simple trip log — date, purpose, miles — beats a year-end guess every time.
- Keep receipts that match your claims, not your memory. The gap between $40 in receipts and $3,900 in claimed expenses wasn't a documentation style problem — it was a size problem. Whatever you deduct should be traceable to an actual record, not backed into from a target refund.
- Report the income too. Lucas didn't report the (small) payments she did receive, which undercut her own claim that this was income-producing activity. Reporting real, if modest, revenue is actually part of establishing that a profit motive exists.
Keep Your Side Business's Books Honest From the Start
Whether you're doing gig work, freelancing, or turning a favor into paid work, the discipline that keeps you out of a case like this one is the same discipline that makes a business easier to run: separate accounts, contemporaneous records, and numbers you can actually trace back to a receipt. Beancount.io provides plain-text accounting that gives you a transparent, auditable ledger — every transaction traceable to its source, with a version-controlled history instead of a blacked-out bank statement. Get started for free and keep records that would hold up if anyone ever asked to see them.