Tax Court Chides Attorney for Apparent AI-Generated Case Cites
(Parker Tax Publishing February 2026)
The Tax Court rejected a taxpayer's attempt to invalidate a notice of deficiency on the basis that it was not manually signed by an IRS employee after finding that an unsigned notice of deficiency is valid. The court also found that the taxpayers' attorney cited three cases that appeared to have been generated by a large language model artificial intelligence (AI) program, but stopped short of imposing sanctions. Clinco v. Comm'r, T.C. Memo. 2026-16.
Background
The late Peter Clinco was an attorney whose practice focused on real-estate leasing and representing small businesses. He was also an entrepreneur who spent much of his time running MedCafe Westwood, LLC, a restaurant and bar near UCLA. MedCafe was a family business, owned and managed by Clinco and his two brothers. Clinco was in charge of dealing with vendors, landlords, the city, and other third parties, and he supervised MedCafe's daily operations. He spent around 25-30 hours a week on the restaurant, and in 2015, he converted MedCafe into a single-member LLC.
MedCafe had approximately 60 employees, most of whom worked only three to four hours a shift. It did not record tips or claim a tips deduction. Employees received tips at the end of each day, including cash paid by customers, which was not deposited into MedCafe's bank accounts, and they were themselves responsible for recording the tips that they earned. Clinco estimated that 90 percent of MedCafe's income came from credit-card payments and 10 percent came from cash. Some payments were processed through Grubhub.
Clinco prepared his own 2015 Forms 1065, U.S. Return of Partnership Income, and 1040. He filed the Form 1040 jointly with his wife, and it was filed late: the IRS received the Clincos' 2015 tax return in September 2018. On his 2015 Schedule C for MedCafe, Clinco reported gross receipts of more than $1.6 million. After claiming $1.4 million in cost of goods sold and $600,000 in total expenses, Clinco reported a net loss of about $400,000.
Clinco also owned two rental properties and claimed depreciation deductions on his Schedule E. He attached to that schedule Forms 4562, Depreciation and Amortization, on which he stated he had placed the properties in service in May 2015. The properties were both in Pasadena. One was an apartment building with what Clinco claimed was a basis of about $1.8 million and depreciation of about $41,000. The second was a single-family home with what he claimed was a basis of $700,000 and depreciation of about $16,000. He did not provide any additional information on how he arrived at these bases or the depreciation deductions, which added up to about $57,000.
Revenue Agent (RA) Yi Liu began examining Clinco's returns in 2019. Clinco was already quite sick, and his accountant took the greater portion of the conversations with the RA. The RA did meet with Clinco personally to discuss his delinquency in filing, to ask for documents, and to better understand his health concerns which contributed to the delays in resolving his tax troubles. It was in this meeting that Clinco estimated 10 percent of the restaurant revenues were in cash. The conversations between the RA, Clinco's accountant, and on occasion Clinco himself continued through late 2020.
The RA found in the end that there was a discrepancy between the gross receipts for 2015 as Clinco reported them and the audited gross receipts based on the credit-card-sales-to-cash ratio. This prompted the RA to summons Clinco's bank records to conduct a bank-deposits analysis. She identified many transfers and nontaxable deposits, but there were also some deposits she identified as business income from UCLA, Grubhub, and other payors. The RA also pulled third-part 1099 Information Return Processing (IRP) data to identify payments to MedCafe from third-party payors. This revealed four important Forms 1099: a Form 1099-MISC issued to MedCafe by UCLA, a Form 1099-K, Payment Card and Third Party Network Transactions, issued to MedCafe by First Data Reporting, a Form 1099-K issued to MedCafe by American Express, and a Form 1099-K issued to MedCafe by Grubhub. The RA reconciled her bank-deposits analysis with the third-party IRP data and Clinco's statements about unreported cash receipts to determine MedCafe's gross receipts.
The resulting notice of deficiency for the 2015 tax year made adjustments for underreported gross receipts, unsubstantiated depreciation on the two Pasadena properties, and additions to tax and penalties. The IRS subsequently reduced the underreported revenues by $82,000 when it agreed with Clinco that some of the check deposits into MedCafe's accounts were capital contributions. Within months after the IRS sent the Clincos a notice of deficiency, Clinco passed away. The Clincos filed a petition with the Tax Court.
There were three issues before the court: (1) was the notice of deficiency invalid because it was not properly signed; (2) was MedCafe's income understated; and (3) was Clinco entitled to the depreciation he claimed. Clinco argued that a notice of deficiency must be signed in ink by an IRS employee with legitimate delegated authority for it to be valid, and thus for the court to have jurisdiction. Regarding MedCafe's underreported gross receipts, Clinco asserted that the IRS did not sufficiently substantiate the sources of unreported income and that MedCafe was never profitable. On the depreciation issue, Clinco asserted that the allowance he claimed for 2015 was the same as the depreciation allowance he claimed for 2017, and that the IRS never questioned those amounts.
Analysis
The Tax Court rejected Clinco's argument that a notice of deficiency must be manually signed. According to the court, while the IRM sets forth what makes a signature valid, it does not require that a notice of deficiency must be signed to be valid. Rather, the court found that under caselaw going back to before World War II, even an unsigned notice of deficiency is valid.
Observation: The court noted that Clinco's attorney, Abraham Wagner, cited four cases in support of the argument that a notice of deficiency must be signed -- and three of them appeared to be "hallucinations" generated by a large language model artificial intelligence (AI). For example, Wagner cited a Tax Court supposedly holding that the IRS's failure to issue a valid signed notice of deficiency deprived the court of jurisdiction. The court found that the case appeared not to exist and that the page number of the Tax Court Reports fell within a different case discussing an issue that was completely unrelated to this case. In addition, Wagner's brief stated that the case he cited overturned two other cases, but the court found that those cases also did not exist as cited. The court said that fictitious cases have made frequent appearances in legal briefing in recent years. Submitting a brief with fictitious caselaw, the court pointed out, is eligible for sanctions and a clear violation of the Federal Rules of Civil Procedure. However, in a footnote, the court said that it was not absolutely clear that Wagner used generative AI. The court concluded that "a bit of embarrassment" was sufficient for now, but it also noted that courts have begun to more seriously sanction lawyers who use AI as a shortcut in drafting.
On the issue of whether MedCafe underreported its income, the court explained that the IRS is authorized to reconstruct a taxpayer's income if the method the taxpayer employes doesn't clearly reflect income. The IRS's reconstruction of income need only be reasonable and is presumed correct unless the taxpayer proves otherwise. Thus, the court found that the IRS had the authority to reconstruct Clinco's income when it discovered the discrepancy between Clinco's reported gross receipts and the audited gross receipts, thus revealing that Clinco might not have accurately reported his income. The court noted that the IRS identified the Forms 1099 through IRP data and the estimated cash receipts through the RA's interview with Clinco. These sources were not arbitrary, the court said, nor did Clinco demonstrate that they were incorrect. In the court's view, Clinco offered only speculative objections. For example, he said that the IRS could have confused MedCafe for a different restaurant, but he offered no substantive evidence for that assertion.
The court also rejected Clinco's argument that MedCafe was not profitable, finding that even money-losing businesses can have unreported income. Clinco's argument regarding his depreciation deduction also failed, as the court pointed out that whether Clinco claimed the same deduction in 2017 was no proof that he was entitled to it for 2015.
For a discussion of deficiency notices, see Parker Tax ¶263,135.
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