Tax Court denies COVID-19 leave credits after taxpayer fails to prove self-employment
Lawrence Hubbard v. Commissioner. United States Tax Court. No. 10585-24. T.C. Memo., filed July 27, 2026.
A taxpayer cannot claim refundable COVID-19 sick and family leave credits using only unverified payment logs, screenshots, or testimony that do not prove a real trade or business or a COVID-19-related inability to work.
Holding
The Tax Court upheld a 2021 income tax deficiency against Lawrence Hubbard because he did not report $22,925 in unemployment compensation, could not prove he ran a trade or business, and did not provide enough evidence for $31,890 in refundable COVID-19 sick and family leave credits. The IRS dropped a $6,378.40 penalty under §6676 for an incorrect refund or credit claim.
Why It Matters
The decision is primarily a case of substantiation. The Court applied established burden-of-proof rules rather than announcing a new interpretation of the COVID-19 credit provisions.
Self-employment was a threshold issue. The COVID-19 sick and family leave credits depended on income from a trade or business. Hubbard could not establish that his barber, music, and cooking activities met that requirement.
Payment records alone did not prove business activity. Screenshots showing Zelle, Cash App, and cash deposits did not identify the business purpose of the payments or connect them to services performed.
A fraud allegation does not overcome a Form 1099-G without supporting evidence. Hubbard disputed unemployment compensation reported by California EDD, but evidence that he filed a bank fraud claim did not establish that he never received the income.
Key Facts
Lawrence Hubbard filed a 2021 federal income tax return reporting self-employment activity as a barber.
His Schedule C reported:
$10,344 of gross business income.
$5,509 of business expenses.
$4,835 of net business income.
He also claimed $31,890 of refundable COVID-19 sick and family leave credits:
$14,960 for leave before April 1, 2021.
$16,930 for leave after March 31, 2021.
Hubbard did not attach Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to support the credits.
California EDD issued Hubbard a Form 1099-G reporting $22,925 of unemployment compensation and $1,260 of federal income tax withholding. Hubbard did not report either amount on his return.
The IRS issued a notice of deficiency determining $32,938 of additional income tax and initially imposed a $6,378.40 penalty under §6676. The IRS later conceded the penalty.
Regulatory Framework
Gross income generally includes income from all sources under §61.
Under §162, taxpayers may deduct ordinary and necessary expenses incurred in carrying on a trade or business. A taxpayer must conduct an activity with continuity and regularity and primarily for income or profit for the activity to qualify as a trade or business.
Section 6001 and Treas. Reg. §1.6001-1 require taxpayers to maintain records sufficient to establish their tax liability and substantiate deductions and credits.
Congress created refundable sick and family leave credits for qualifying self-employed individuals under the Families First Coronavirus Response Act, or FFCRA, and later extended similar credits through the American Rescue Plan Act, or ARPA.
The credits depended on self-employment income and required taxpayers to establish a qualifying COVID-19-related reason for not working. Required documentation generally included the dates of leave, the qualifying reason, written support for that reason, and a statement that the taxpayer could not work because of it.
Arguments
Taxpayer argued:
He did not receive the $22,925 of unemployment compensation reported by California EDD for 2021.
Fraud involving unemployment benefits occurred, and he filed a fraud claim with his bank and California EDD.
He worked as a self-employed barber, musician, and chef.
He received customer payments through Zelle, Cash App, and cash.
He used part of his residence for barber services and as a music studio.
His self-employment activity supported his claimed COVID-19 sick and family leave credits.
Government argued:
The Form 1099-G established Hubbard’s receipt of $22,925 of unemployment compensation.
Hubbard did not provide adequate evidence proving that the reported unemployment compensation resulted from fraud.
His records did not establish that he operated a qualifying trade or business.
His reported Schedule C income and expenses lacked adequate substantiation.
He failed to establish either the self-employment or qualifying-leave requirements for the COVID-19 credits.
Court’s Reasoning
California EDD’s Form 1099-G provided the required evidentiary connection between Hubbard and the reported $22,925 of unemployment compensation. That shifted the burden to Hubbard to establish that the amount was not taxable to him.
Hubbard produced evidence that he filed a fraud claim with Bank of America, but he did not document the outcome of that claim or provide evidence of a fraud determination from the California EDD.
Screenshots from his EDD account, primarily related to unemployment compensation received in another tax year. They did not establish that the 2021 Form 1099-G was incorrect.
Hubbard’s business records did not demonstrate that he conducted a trade or business with continuity and regularity. His payment log showed transactions from several individuals but did not explain what services generated the payments.
His expense records listed amounts paid but did not say what business purpose they served. For example, a $337 Airbnb payment and a $3,400 check were not explained.
The payment log did not match his Schedule C. The log showed $9,330.69 in income, $5,452 in expenses, and $3,878.69 in net income, but his tax return reported $10,344, $5,509, and $4,835 for these amounts.
Since Hubbard could not prove he ran a trade or business, he did not meet the basic requirement for the COVID-19 sick and family leave credits. Even if he had shown he had a business, he did not provide enough documents to show qualifying leave dates, a COVID-19 reason, or when he could not work.
Result
The Tax Court ruled in favor of the IRS on the income tax deficiency and in favor of Hubbard on the §6676 penalty, which the IRS had already dropped.
The Takeaway
Practitioners working on self-employed COVID-19 leave credit claims should treat proof of a trade or business and proof of qualifying leave as separate requirements. Screenshots and payment logs may show money was received, but they do not explain what the income was for, why an expense was business-related, or why the taxpayer qualified for the credit.
List of Citations
§61(a). Defines gross income broadly to include income from all sources unless an exclusion applies.
§162(a). Permits deductions for ordinary and necessary trade or business expenses.
§6001. Requires taxpayers to maintain records supporting their tax liability.
§6201(d). Addresses disputes involving information returns when taxpayers reasonably contest reported income.
§6676(a). Provides a penalty for certain erroneous claims for refund or credit. The IRS conceded this penalty.
§7491(a). Provides circumstances in which the burden of proof may shift to the IRS.
Treas. Reg. §1.6001-1(a). Requires taxpayers to maintain adequate books and records.
Welch v. Helvering, 290 U.S. 111 (1933). Establishes the general presumption of correctness for IRS deficiency determinations.
Commissioner v. Groetzinger, 480 U.S. 23 (1987). Defines the continuity, regularity, and profit requirements for a trade or business.
Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979). Requires an evidentiary foundation connecting a taxpayer to alleged unreported income before the presumption of correctness applies.
Hardy v. Commissioner, 181 F.3d 1002 (9th Cir. 1999). Recognizes third-party information returns as sufficient evidence connecting a taxpayer to income.
FFCRA §§7002 and 7004. Created refundable sick and family leave credits for qualifying self-employed individuals.
ARPA §§9642 and 9643. Extended and modified refundable sick and family leave credits for qualifying self-employed individuals.