• For partnership losses, Langlois couldn’t establish his adjusted basis in either partnership, providing receipts that failed to demonstrate personal payment of partnership expenses, which he treated as capital contributions.
• For Hair Station, Langlois incorrectly claimed Forms 1099-MISC payments to contractors as his capital contributions, when these payments were made by the partnership itself.
• The court sustained the 20% accuracy-related penalty (substantial understatement), as the $27,820 understatement exceeded both 10% of the correct tax and $5,000.

Tax practitioners should advise clients to implement regular basis tracking protocols, including records that clearly trace the flow of funds from personal accounts to business entities. Consider developing checklists for clients to follow when making business expenditures, ensuring they maintain proper substantiation contemporaneously rather than attempting reconstruction during an audit. Be sure to educate clients about the importance of maintaining separate financial identities for each business interest. There is danger in commingling personal and business expenses without proper documentation – even legitimate deductions will be disallowed without the paper trail to support them.

1. Partnership basis tracking is essential: Maintain comprehensive records of all partnership contributions, including initial capital, subsequent contributions, and payment of partnership expenses with personal funds.
2. Proper contribution documentation: Ensure contributions are clearly documented as coming from the partner personally, not from the partnership or third parties.
3. Business purpose evidence matters: Keep contemporaneous records demonstrating the business purpose of each expenditure claimed as a contribution or business expense.