Jadhav v. Commissioner: Why Vendor-Packaged Rates Fail
Disclaimer: This article is for educational purposes only and does not constitute tax or legal advice. Consult with a qualified CPA or tax attorney before implementing any tax strategy.
Jadhav v. Commissioner: Why Vendor-Packaged Rates Fail
If Sinopoli is the case about missing documentation, Jadhav is the case about outsourced numbers. Together, the two 2023 Tax Court decisions define what an Augusta Rule strategy must look like to survive an exam - and what gets one taken apart.
The Case
In November 2023, the U.S. Tax Court decided Jadhav v. Commissioner (T.C. Memo. 2023-140). The taxpayers, a couple who ran a successful chemical sales business, had purchased a packaged tax strategy plan. Following that plan, they:
- Restructured the business as an S corporation
- Rented four personal residences (their own home and family members' homes) to the corporation for business meetings
- Deducted the rent at the corporate level while excluding it personally under IRC §280A(g) - the Augusta Rule
On paper, this is the textbook structure. The structure was not the problem.
What They Relied On
The purchased plan did not just hand the Jadhavs a strategy - it handed them the numbers:
- The rental rates came from the vendor's packaged plan, not from the taxpayers' own market research
- There were no independent appraisals of what the homes would actually rent for as meeting space
- There was no file of self-researched, documented fair-market comparables
In other words: the single input that decides these cases - what is this space actually worth for this use? - was outsourced to the company selling the strategy.
What the Court Decided
The Tax Court disallowed the rental deductions. The corporation could not show that the payments were ordinary and necessary business expenses under IRC §162, and the taxpayers could not substantiate that the rates reflected the fair rental value of the properties.
The core failure was evidentiary: when the IRS asked "why this rate?", the answer was, in effect, "because the plan we bought said so." That is not evidence. It is marketing.
Jadhav vs. Sinopoli: Two Ways to Lose
| Sinopoli (T.C. Memo. 2023-105) | Jadhav (T.C. Memo. 2023-140) | |
|---|---|---|
| Failure mode | Meetings claimed but not documented; self-set inflated rates | Rates taken from a vendor-packaged plan; no independent support |
| Rate evidence | Owner's own $/sq-ft math, no comparables | Purchased plan's numbers, no appraisal |
| Result | Roughly 96% of deductions disallowed; about $500 per documented meeting allowed | Rental deductions disallowed |
| Core lesson | Document that the meetings actually happened | Document why the rate is actually fair market |
Different paths, same destination. The court is not hostile to the Augusta Rule itself - IRC §280A(g) is real law. It is hostile to unsupported numbers.
What Would Have Survived
Based on what the court faulted in both cases, a defensible file for each rental day contains:
- Your own comparables - documented quotes or listings for similar meeting space in your market (conference rooms, event spaces, executive rentals), gathered before you set the rate
- A written rental agreement - dated before the meetings it covers, at the documented rate
- Business purpose records - agendas, board minutes, attendee lists for each meeting
- Real payment proof - actual transfers from the business account, not year-end journal entries
- A 14-day count - tracked per property, per year, with personal-use days considered
None of this is exotic. It is exactly the research a landlord and a tenant negotiating at arm's length would produce naturally - which is the entire point.
The Uncomfortable Truth About "Done-for-You" Rates
Jadhav is a warning about an entire category of service: anyone who sells you a daily rate along with the strategy. After this case, a rate that arrives in the same envelope as the tax plan is not a shortcut - it is the first thing an examiner will attack, because it is the exact fact pattern a 2023 Tax Court decision already rejected.
The defensible alternative is slower but simple: you research the comparables, you keep the file, and every number in it traces back to a source you can hand to an examiner.
That is the approach this platform is built around - we do not hand you a number; we help you build your own evidence file.
Check Your Own Setup
- Not sure the Augusta Rule even works for your entity type? Take the free Eligibility Checker →
- Setting your rate? Start with the FMV Calculation Guide →
- Want the documentation-failure side of the story? Read Sinopoli Part 1 → and Part 2 →
This article is general information about a public court decision, not tax advice. For advice on your own situation, work with your own tax professional.
Read Time: 6 minutes | Difficulty: Intermediate