STJ Peter Panuthos is unwilling to give Cohan treatment to any part of the $100K that Sam Fagenboym and Oksana Fagenboym, 2021 T. C. Sum. Op. 19, filed 7/19/21, say they paid for some purchases for Sam’s electrical contractor Sub S.

“Mr. Fagenboym submitted four pages of handwritten calculations that attempt to reconstruct [Sub S’] purchases and other expenses related to four alleged business contracts. Mr. Fagenboym testified that he created the handwritten document because he was unable to produce original records of the amounts paid to one of [Sub S’] electrical suppliers, AED, on the four business contracts. In support of his calculations Mr. Fagenboym testified that he was able to estimate the amount paid to AED by [Sub S] during the year in issue by taking the total amount paid to the S corporation on each of the four contracts and subtracting a 12% profit margin to produce an estimated total for the hard costs of each project. Mr. Fagenboym then subtracted all known labor and materials costs from the resulting total hard costs to produce the estimated total paid to AED on each contract. During the trial Mr. Fagenboym did not produce contemporaneous records or any other business records pertaining to [Sub S’] operations. He testified that he had previously provided substantiating documents to respondent for all hard costs on the four contracts except for the amounts paid to AED.

“Although Mr. Fagenboym’s testimony about industry operations was generally reliable, the amounts included in the handwritten calculations proffered are not backed by any underlying bank statements, receipts, or other documentation. Mr. Fagenboym testified that the 12% profit margin on which his calculations hinge was a rough estimate based on similar contracts in the industry. He stated that the 12% figure was ‘potential profit’ but noted that [Sub S’] actual profit was ‘much less than that’. Although we have no doubt that Mr. Fagenboym produced his calculations in good faith, the reconstruction of expenses on the basis of an individual’s estimate of industry standard profit margins does not take the place of substantiation or provide a rational basis upon which an estimate can be made under the Cohan rule. The record includes no reliable evidence establishing error in respondent’s determinations in the notice disallowing petitioners’ claimed loss deductions related to certain expenses reported by [Sub S] during the year in issue. On the record before us, we conclude that petitioners have failed to carry their burden of establishing that [Sub S] paid or incurred the expenses underlying the deductions that respondent disallowed for [year at issue]. 2021 T. C. Sum. Op. 19, at pp. 9-10. (Names omitted).