The two Tax Court cases that reshaped the Augusta Rule are Sinopoli v. Commissioner and Jadhav v. Commissioner, both decided in 2023. In each, S corporation owners rented their own homes to their businesses for meetings under Section 280A(g), and in each, the court cut the rental deductions down or wiped them out entirely. The rulings didn’t outlaw the strategy. They set a clear standard: if the rental rate is inflated, the meetings are poorly documented, or the arrangement looks like a disguised distribution, the business loses the deduction.
Sinopoli v. Commissioner
Sinopoli v. Commissioner (T.C. Memo. 2023-105) involved a group of medical professionals who owned Planet LA, LLC, an S corporation running several Planet Fitness franchises in Louisiana. Starting around 2015, the company paid $3,000 per month to each owner in exchange for using their homes for business meetings.
The company claimed three meetings per month across the different residences. The court didn’t buy it. Owners were typically the only people present, sometimes joined by a spouse, and other family members were often home during the supposed meetings. The court found that only one meeting per month actually took place.
The rental rate fell apart under the same scrutiny. The $3,000 figure had no market research behind it. The IRS pulled local rates for comparable meeting spaces and put the reasonable price at $500 per meeting. The Tax Court agreed, calling even that figure “generous.” For 2015, the allowed deduction came out to $6,000: twelve meetings at $500 each, a fraction of what the taxpayers claimed.1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
The court’s characterization mattered as much as the numbers. It called the arrangement a “tax savings scheme to distribute Planet’s earnings to petitioners through purported rent payments, claim rent deductions, and exclude the rent from their gross income.” That framing tells future taxpayers exactly how the court will read a related-party rental when substance and form don’t line up.
Jadhav v. Commissioner
Jadhav v. Commissioner (T.C. Memo. 2023-140) came down weeks after Sinopoli and went further. The facts looked similar: an S corporation claimed rental deductions for using its shareholder-owners’ homes for business. The court disallowed the rental expenses in full.
The difference from Sinopoli was documentation. In Sinopoli, the taxpayers at least proved some meetings happened, so the court gave them a reduced deduction. In Jadhav, they couldn’t clear that bar. The arrangement failed the reasonableness requirement of Section 162 outright, and nothing survived.1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
Read side by side, the two cases mark a spectrum. Prove some meetings but overprice them, and expect a steep reduction. Fail to prove much of anything, and expect the deduction to disappear.
What the Tax Court Looks For
The reasoning in both cases comes down to three questions. Miss on any one and the deduction is at risk.
Was the Rental Rate Reasonable?
The rent has to reflect what a stranger would pay for a comparable space. The Sinopoli taxpayers set $3,000 with no basis. The IRS found $500 in the local market. The court sided with the IRS. Section 162’s reasonableness requirement has, as the Sinopoli court put it, “particular significance in dealings between related parties.” When you’re renting to your own company, the price starts under suspicion.
Defensible pricing means gathering evidence before the rental happens: quotes from local hotels, conference centers, or co-working spaces, and appraisals when the amounts are meaningful. The comparison has to be honest. A living room with folding chairs isn’t a hotel ballroom with audiovisual gear. Hotel quotes generated three years later, after an audit notice, carry little weight.
Did the Meetings Actually Happen?
Claiming three meetings a month means proving three meetings a month. Sinopoli allowed one. Judges want contemporaneous records: minutes written at the time, reflecting actual business decisions and specific topics, not boilerplate copied month to month. Attendance logs matter. When the only people present are the homeowner and family, the court treats the gathering as personal.
Was There a Real Business Purpose?
The court asks why the business needed to meet in someone’s home instead of the company’s own office, a restaurant, or another venue. Both Sinopoli and Jadhav involved businesses with other space available. The court read the home rental as a way to move money out of the company, not as a response to any real operational need. A business with its own office has a harder time explaining why it also needs the owner’s dining room.
The Burden Is on the Taxpayer
When the IRS challenges a deduction, its determination is presumed correct. The taxpayer has to prove entitlement, a principle established in Welch v. Helvering and codified in Tax Court Rule 142(a). Vague testimony that meetings “probably happened” or rates “seemed fair” won’t do the work.
Substantiating an Augusta Rule arrangement means keeping, at minimum:1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
- A written rental agreement signed by both the homeowner and the business, specifying dates, hours, and the rate for each rental period.
- Meeting minutes created at the time of each meeting, showing topics discussed and decisions made.
- Attendance records listing every person present and their role in the company.
- Market rate evidence: quotes from local venues, hotel rate screenshots, or a professional appraisal showing the price aligns with comparable spaces.
- Payment records such as canceled checks or bank transfers proving the business actually paid the homeowner.
Without that paper trail, the Tax Court won’t estimate a reasonable deduction on your behalf. The Cohan doctrine sometimes lets courts approximate expenses when a taxpayer proves a cost was incurred but lost the receipt, but it has limits, and general statements that expenses were business-related don’t meet the standard.
Penalties and Interest When the Deduction Fails
Losing the deduction is only the first hit. When the Tax Court finds a rental deduction improper or the income wrongly excluded, the IRS can add a 20 percent accuracy-related penalty on the resulting underpayment.2Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments The penalty applies when the underpayment comes from negligence, disregard of IRS rules, or a substantial understatement of income tax.
Interest runs on top of the penalty. It starts from the original due date of the return and compounds daily until the balance is paid. The rate is set quarterly at the federal short-term rate plus three percentage points, and for the first quarter of 2026 that rate is 7 percent for individuals.3Internal Revenue Service. Quarterly Interest Rates When an audit reaches back several years, the combined interest and penalties can dwarf the tax savings the arrangement was designed to produce.
Section 6664(c) provides one exit. The penalty does not apply if the taxpayer shows reasonable cause and good faith.4Office of the Law Revision Counsel. 26 USC 6664 – Definitions and Special Rules In practice, that usually means showing you relied on a qualified professional who reviewed the arrangement and blessed it. A rubber stamp from an advisor who didn’t independently verify the rental rate and documentation probably won’t qualify.
What These Rulings Mean Going Forward
Sinopoli and Jadhav didn’t repeal the 14-day rental exclusion. Section 280A(g) still works as written for real short-term rentals to unrelated parties.5Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc. What the cases did was signal that self-rental arrangements between owners and their own companies face the same skepticism the court applies to any related-party deal. The price has to be real, the business purpose has to be real, and the records have to prove both.
For anyone still using the strategy, the compliance cost is the benchmark. Setting a defensible rate, documenting each meeting as it happens, and keeping market comparables on file takes work. If the tax benefit from a few thousand dollars of rent doesn’t justify that work, it probably doesn’t justify the audit risk either.