Background
Nikita Krasilnikov operates a mobile sauna business from his vehicle. In 2019, he delivered the vehicle to a mechanic for transmission work; the mechanic refused to return it. When 2019 ended and the vehicle still had not been recovered, Krasilnikov deducted $15,515 on his Massachusetts personal income tax return as a theft loss related to his trade or business — comprising $5,000 paid to the uncooperative mechanic, $9,515 to a second mechanic to undo the damage (the second mechanic confirmed that “very little work was done, some parts were missing”), and $1,000 for an insurance deductible on a related repair. He eventually recovered the vehicle in January 2020.
The Department of Revenue audited the return and issued a Notice of Audit Determination disallowing the deduction on the stated ground that “Casualty losses are not an allowable deduction for MA purposes.” That statement, as both the Commissioner and the court would later acknowledge, was legally incorrect: G. L. c. 62, § 2 (d) (1) expressly permits a deduction for theft losses parallel to the federal deduction. The Commissioner’s subsequent denial of Krasilnikov’s abatement request pivoted to a different rationale — failure to substantiate the loss or demonstrate its connection to his trade or business. The Appellate Tax Board (ATB), following a hearing at which Krasilnikov represented himself, affirmed that denial, finding that he “did not submit to the Commissioner or to the Board any detail or documentation supporting the denied deduction, including, but not limited to: receipts, itemized bills, credit card statements, and insurance documentation.” The total assessment at issue, including penalties and interest, was $915.31.
The Court’s Holding
Affirmed. The Appeals Court acknowledged the erroneous legal basis in the original audit notice but found no ground to disturb the ATB’s decision.
Massachusetts does allow theft-loss deductions. The court confirmed what the Commissioner conceded: DOR’s original audit notice got the law wrong. G. L. c. 62, § 2 (d) (1) allows a state income tax deduction for theft losses related to a trade or business, parallel to the federal provision. The erroneous legal statement in the audit notice, however, did not infect the ATB’s ruling because the abatement denial and the ATB’s affirmance rested on the independent ground of substantiation failure — a basis the court found adequate regardless of the audit notice’s legal error.
Factual dispute over documentation: no transcript, no relief. Krasilnikov swore in an affidavit that he had in fact transmitted a packet of evidentiary materials to the DOR Audit Division in May 2022, including receipts, a federal Form 4684, criminal case records, and computation worksheets. The ATB found to the contrary — that no such documentation was submitted. The Appeals Court acknowledged that if the taxpayer’s account were accurate, a remand for an evidentiary hearing “might be proper.” But Krasilnikov had not provided a transcript of the ATB hearing. The court applied the settled appellate rule that “it is the appellant’s responsibility to ensure that the record is adequate for appellate review,” Roby v. Superintendent, Mass. Correctional Inst., Concord, 94 Mass. App. Ct. 410, 412 (2018), quoting Commonwealth v. Woody, 429 Mass. 95, 97 (1999). Without a transcript the court could not evaluate whether, or how, the question of what was submitted to the commissioner was litigated before the ATB, and it therefore had to accept the ATB’s factual finding as not clearly erroneous. Pro se status, the court noted, does not relieve an appellant of this responsibility.
Key Takeaways
- Massachusetts does allow a state income tax deduction for business theft losses. G. L. c. 62, § 2 (d) (1) tracks the federal deduction. DOR audit notices that state otherwise are legally incorrect, and taxpayers should push back promptly in writing.
- An erroneous legal statement in a DOR audit notice does not automatically entitle the taxpayer to relief if the denial was separately justified on substantiation grounds and the ATB’s decision rests on an independent, adequate basis.
- Appealing to the ATB and then to the Appeals Court requires ordering a hearing transcript. Without it, a taxpayer cannot challenge adverse factual findings — including the critical question of whether supporting documents were submitted below — because the Appeals Court will accept the ATB’s factual determinations as not clearly erroneous.
- Pro se status provides no exception to appellate record-completion requirements. Practitioners stepping in after an adverse ATB ruling should immediately check whether a transcript was ordered; if not, the path to challenging adverse factual findings may already be foreclosed.
- For business-theft-loss claims, practitioners should document each transaction element meticulously: the business nexus, the theft or conversion, the amount of loss, and contemporaneous evidence of value. Assembling that documentation before audit reduces dependence on disputed after-the-fact submissions.
Why It Matters
For Massachusetts tax practitioners, Krasilnikov carries two practical messages. The first is corrective: DOR audit notices have apparently issued stating that casualty and theft losses are categorically disallowed in Massachusetts, but G. L. c. 62, § 2 (d) (1) says otherwise. Business owners who receive such a notice should not simply accept the stated legal basis — it may be wrong — and they should respond in writing citing the statute. The second is procedural: the case illustrates how an appellate record gap can be fatal. Even a colorable factual dispute about what was actually submitted to the DOR becomes unreachable on appeal if the taxpayer does not put an ATB hearing transcript in the record.
The decision is also a reminder that the ATB’s findings of fact carry real weight on appeal. When a taxpayer disputes those findings — as Krasilnikov did, claiming he had submitted detailed documentation that the ATB said was never provided — the Appeals Court will not resolve that dispute without the transcript that would show how the issue was presented and argued at the hearing level. For counsel entering a matter at the appellate stage, confirming the adequacy of the appellate record should be among the first tasks undertaken.