Holding

The Tax Court sided with the IRS and tossed out the rest of the disputed Schedule C deductions. It also said the late-filing penalty for 2017 and accuracy-related penalties for all three years stand. The final bill will be calculated under Rule 155, after factoring in whatever the parties already agreed on.

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Why it matters

• The decision applies settled substantiation rules. Operating a business and producing receipts do not automatically entitle a taxpayer to every claimed expense. Taxpayers must connect their evidence to the specific deductions they seek. Newton could not explain which receipts supported the disputed amounts.

• Additional records produced during litigation secured IRS concessions. After reviewing documents Newton supplied at the calendar call, the IRS allowed several expenses. The dispute concerned deductions beyond those allowances. The opinion therefore distinguishes expenses the IRS accepted from additional claims Newton failed to prove.

• Negligence independently supported the accuracy-related penalties. Inadequate records established negligence after the IRS demonstrated supervisory approval. The alternative substantial-understatement ground remained contingent on the final computations. The Court did not need that alternative ground to sustain penalty liability.

• The holding has specific limits. The opinion expressly carries no precedential effect in other cases. It resolves an evidentiary failure and penalty liability on this record. It does not establish a new substantive restriction on daycare business expenses, and it does not fix the final tax or penalty amounts.

Key facts

Newton operated a daycare service at two locations. The business provided subsidized childcare to low-income families and received most of its income from Pennsylvania.

Her original 2016 return reported $15,000 of daycare gross receipts and no expenses. She later amended that return to report $318,969 of gross receipts and $303,968 of expenses.

For 2017, Newton reported $273,836 of gross receipts and $282,881 of expenses. For 2018, she reported $263,688 of gross receipts and the same amount of expenses.

Newton filed both the 2017 and 2018 returns on May 13, 2019. An extension made the 2018 return timely. She did not file an extension for 2017, so that return was late.

During examination, the IRS analyzed deposits into seven bank accounts. Its analysis identified gross receipts of:

• $609,868.03 for 2016.

• $642,291.43 for 2017.

• $738,590.33 for 2018.

The September 29, 2021 notice of deficiency determined income tax deficiencies of $133,746, $139,567, and $204,329 for 2016, 2017, and 2018, respectively. Those figures preceded the concessions and final computations.

The IRS allowed expenses Newton substantiated during examination. It allowed additional deductions at trial after reviewing records she produced at the October 5, 2026 calendar call. Those additional allowances included $47,400 of rental expense for each year, several other 2016 expenses, and $12,887 of repair and maintenance expense for 2018.

After concessions, the disputed deduction claims were:

• 2017: $16,800 for travel; $20,000 for meals and entertainment; and $22,524 for wages misclassified as contract labor.

• 2018: $3,112 for travel; $21,414 for meals and entertainment; $23,661 for office expenses; and $55,684 for rent or lease of vehicles, equipment, or other business property.

The remaining penalty issues included the 2017 late-filing addition and accuracy-related penalties for all three years.

Judge Joseph W. Nega tried the case on October 7, 2026, and delivered the bench opinion on October 14. The Court served the transmitting order and opinion on October 19.

Statutory and regulatory framework

• Business expenses and records. Section 162 permits deductions for ordinary and necessary business expenses. An ordinary expense is normal, usual, or customary in the business; a necessary expense is appropriate or helpful. Section 262 generally bars personal, living, and family expenses. Section 6001 and Treasury Regulation section 1.6001-1 require sufficient supporting records.

• Proof of deductions. Rule 142(a) generally places the burden of proof on the taxpayer. Section 7491(a) permits a shift under specified conditions, including substantiation, recordkeeping, and cooperation. The Court resolved this case on the preponderance of the evidence, so allocation of the burden did not control the result.

• Late filing. Section 6651(a)(1) imposes an additional tax for an untimely return unless the taxpayer establishes reasonable cause and an absence of willful neglect.

• Accuracy-related penalties. Section 6662 imposes a 20% penalty on underpayments attributable to negligence, disregard of rules or regulations, or substantial understatement. For an individual, an understatement is substantial if it exceeds the greater of 10% of the required tax or $5,000. Inadequate books and records can establish negligence.

• Penalty proof and approval. Section 7491(c) places the burden of production for the accuracy-related penalty on the IRS. Section 6751(b)(1) requires personal written supervisory approval of the initial penalty determination. The opinion also recognizes a reasonable-cause and good-faith defense.

Arguments

Taxpayer argued:

• Newton sought additional deductions for the travel, meals and entertainment, wages, office expenses, and rental or lease expenses that remained disputed.

• She offered receipts and testimony concerning the daycare’s expenses, including costs associated with its subsidized meal program.

• She testified that she paid $100,000 in cash for food in each year.

• In addressing the accuracy-related penalties, she testified about her dedication to her work.

Government argued:

• Newton had not substantiated deductions beyond those the IRS had already allowed.

• Her untimely 2017 return supported the late-filing addition.

• Negligence or substantial understatements supported accuracy-related penalties for 2016, 2017, and 2018.

• A civil penalty approval form established the required supervisory approval.

Court’s reasoning

• The evidence resolved the deduction dispute. The Court reviewed the ordinary burden-of-proof rules but concluded that the result did not depend on which party carried that burden. It decided the issues from the preponderance of the evidence in the record.

• Newton did not connect her receipts to her claims. She produced an assortment of receipts but appeared unable to identify the amount of a deduction she sought to substantiate or explain how particular receipts supported it. The Court applied the established requirement that a taxpayer use the evidence to demonstrate entitlement to a deduction. Submitting unorganized receipts did not satisfy that requirement.

• The meal-expense testimony lacked credibility. The Court rejected Newton’s testimony that she spent $100,000 in cash on food each year. Her explanation appeared to begin with payments from Pennsylvania and then derive grocery, labor, and transportation expenses from those payments. The Court viewed that approach as rationalizing her state billings rather than accurately reconstructing her records. Her acknowledgment that the state had not audited the program during the years at issue further diminished the reliability of that testimony.

• The remaining expense claims lacked useful supporting evidence. Newton failed to establish entitlement to deductions beyond those the IRS had already allowed. The Court therefore sustained the disallowance of all remaining disputed Schedule C deductions. It resolved those claims on the adequacy of the evidence rather than by issuing separate substantive rulings on each expense category.

• Newton established no reasonable cause for the late return. She conceded that she filed her 2017 return late and offered no evidence demonstrating reasonable cause. The Court upheld liability under section 6651(a)(1).

• The IRS established approval and negligence. A civil penalty approval form established supervisory approval. Newton’s recordkeeping failures established negligence or disregard under section 6662(b)(1). Her testimony about dedication to the daycare did not establish reasonable cause sufficient to excuse the accuracy-related penalties.

• The alternative substantial-understatement ground required computation. Rule 155 computations would determine whether the understatements exceeded the statutory threshold. Negligence already supplied an independent basis for the penalties. Treasury Regulation section 1.6662-2(c) permits only one accuracy-related penalty on a given portion of an underpayment, even when multiple grounds apply.

Result

Bottom line: the court backed the IRS on the disputed deductions, said the late-filing and accuracy penalties stick, and told everyone to go do the final math.

List of citations

• I.R.C. §§ 162 and 262(a): Govern ordinary and necessary business expenses and generally exclude personal expenses.

• I.R.C. § 6001; Treas. Reg. § 1.6001-1(a), (e): Require sufficient supporting records.

• Tax Court Rule 142(a); I.R.C. § 7491(a): Address the burden of proof and conditions for shifting it.

• I.R.C. § 6651(a)(1): Governs the late-filing addition and reasonable-cause exception.

• I.R.C. § 6662(a), (b)(1), (b)(2), and (d)(1)(A): Establish the accuracy-related penalty and relevant grounds.

• Treas. Reg. § 1.6662-3(b)(1), (2): Defines negligence and disregard, including inadequate recordkeeping.

• Treas. Reg. § 1.6662-2(c): Prevents multiple accuracy-related penalties on the same portion of an underpayment.

• I.R.C. §§ 7491(c) and 6751(b)(1): Address the IRS’s penalty burden of production and written supervisory approval.

• I.R.C. § 7459(b); Tax Court Rules 152 and 155: Address oral findings and opinions, service of the transcript, and computation of the decision.

• Welch v. Helvering, 290 U.S. 111, 115 (1933): Supports the general presumption of correctness of deficiency determinations.

• Deputy v. Du Pont, 308 U.S. 488, 493, 495 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934): Address entitlement to deductions and ordinary business expenses.

• Dagres v. Commissioner, 136 T.C. 263, 279 (2011): Supports resolving issues from the evidence when burden allocation does not affect the outcome.

• Commissioner v. Heininger, 320 U.S. 467, 471 (1943): Addresses ordinary and necessary business expenses.

• Hale v. Commissioner, T.C. Memo. 2010-229; Patterson v. Commissioner, T.C. Memo. 1979-362: Supports the requirement to explain how records establish claimed deductions.

• United States v. Boyle, 469 U.S. 241, 245 (1985): Addresses reasonable cause and willful neglect for late filing.

• Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017); Fumo v. Commissioner, T.C. Memo. 2025-97: Supports the supervisory-approval requirement discussed in the opinion.

• Higbee v. Commissioner, 116 T.C. 438, 446–447 (2001): Addresses penalty burdens and the reasonable-cause and good-faith defense.

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Holding

Judge Lauber allowed Watson Lake a $115,300 easement deduction for 2016 and Meadow Lake a $208,500 easement deduction for 2017. The Court sustained the gross valuation misstatement penalty for both partnerships, rejected the petitioner’s constitutional and fair-trial objections, and directed entry of decisions under Rule 155.

Why it matters

• The decision applies established valuation law. After the parties’ concessions, only easement values and penalties remained. The opinion does not establish a new rule disqualifying conservation contributions. It reinforces the evidentiary weight of recent property purchases and comparable local sales when appraisers propose substantially higher values based on future development.

• Development potential requires evidence of demand and probable approval. A conceptual site plan did not establish that either property could support the proposed housing and commercial uses. The petitioner also failed to establish a reasonable probability that the necessary rezoning would be approved. The Court rejected the development assumptions before accepting the IRS expert’s local sales analysis.

• The penalty ruling limits the available defense. Section 6664(c)(3) bars the reasonable-cause defense for a gross valuation misstatement involving charitable contribution property. The 40% rate applies to the underpayment of tax attributable to the excessive deduction, not to the property’s value or the deduction amount itself.

• The procedural rulings identify separate evidentiary obligations. The Court upheld judicial questioning of experts and limits on cross-examination that assumed facts outside the record. It also rejected a transcript complaint after the petitioner failed to seek correction through the prescribed motion procedure. Neither dispute changed the valuation result.

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Holding

The U.S. District Court for the District of Columbia ruled that the IRS properly invoked Freedom of Information Act (FOIA) Exemption 7(E) to protect information about its artificial intelligence (AI) audit-selection methods.

But the IRS couldn’t convince the court it deserved a total blackout. It didn’t show why it couldn’t just black out the sensitive bits and release the rest.

So Judge Cooper split the difference. The IRS gets partial credit, but now has homework: show your work if you want to keep everything under wraps.

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IRS sets federal tax interest rates for October 2026

Rev. Rul. 2026-19

The IRS rolled out the October 2026 federal rates: short-term clocks in at 4.25%, mid-term at 4.61%, and long-term at 5.22%. The §7520 rate is 5.60%. If you care about §382 ownership changes, the long-term tax-exempt rate is 3.95%.

Why It Matters:

• AFRs affect related-party lending and certain below-market loans.

• The §382 rate influences annual limitations on pre-change tax losses.

• The §7520 rate affects valuations for estate, gift, and charitable planning.

Takeaway: The rates change monthly, but applying the wrong one can create consequences that last much longer.

Tax Court upholds unreported wages but declines to review disputed $3,000 tax payment

Summer H. El Deeb v. Commissioner, T.C. Memo. 2026-101

The Tax Court said yes to a $16,027 adjustment for wages left off a 2021 return. The taxpayer admitted the income but argued that the IRS ignored a missing $3,000 payment or credit. The Court shrugged—payment disputes aren’t its problem in a deficiency case. The IRS dropped a $1,000 penalty, and everyone was told to go do the math.

Why It Matters:

• Unreported wages remain taxable even when taxpayers subsequently file amended returns.

• Estimated payments and prior-year credits generally fall outside deficiency jurisdiction.

• Agreed withholding and refundable credits can materially change the final liability.

Takeaway: Challenging a tax deficiency and disputing how the IRS applies payments are two different legal fights.

Tax Court upholds $24,000 income adjustment based on bank deposits analysis

Allen Shay v. Commissioner, T.C. Memo. 2026-103

The Tax Court backed a $24,000 income adjustment after the IRS conducted forensic accounting using bank records. The taxpayer said the money was already reported as rental income on an amended return, but couldn’t actually prove it. He also argued that the IRS should have interviewed him in person. The Court wasn’t buying it.

Why It Matters:

• Bank deposits remain an accepted method of reconstructing unreported income.

• Claims of duplicate taxation require transaction-level evidence.

• An IRS examination does not necessarily require a personal interview.

Takeaway: Claiming the IRS counted income twice means little without records showing where the duplication occurred.

Court denies Schedule C deductions after taxpayer fails to substantiate expenses

MD M. Rahman & Syeda Momotaz v. Commissioner, Docket No. 8286-23

The Tax Court approved a $59,527 adjustment for unreported business receipts in 2019. Deductions for meals and repairs? Denied—no paperwork, no deduction. Supplies got a pass because both sides agreed. The IRS wanted a $2,557.80 penalty but forgot the required sign-off. The Court tossed the penalty and told everyone to finish the math.

Why It Matters:

• Schedule C deductions require adequate substantiation under §162.

• Courts may reject estimates when the record provides no reasonable basis for calculating expenses.

• The IRS must independently establish applicable penalty requirements, even when the underlying adjustment survives.

Takeaway: The IRS can prove a taxpayer owes additional tax and still lose the penalty by failing to satisfy its own procedural requirements.

Overall Takeaway

We can debate new tax laws and IRS priorities all day, but this week’s cases boiled down to something simpler: did the numbers have backup?

Bank records beat stories. No receipts, no deductions. And the IRS tripped over its own rules and lost a penalty.

This cuts both ways. The law says what you have to prove. The records decide if you actually can.

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The October rates include a 4.25% short-term AFR, 4.61% mid-term AFR, and 5.22% long-term AFR, assuming annual compounding. The rate under Section 7520 is 5.60%.

These rates apply to different transactions under specific provisions of the Internal Revenue Code. Taxpayers and advisers must select the rate that corresponds to the transaction, applicable period, and compounding convention.

IRS Action

Revenue Ruling 2026-19 establishes the prescribed federal tax rates for October 2026.

The ruling provides five categories of rates:

• Applicable federal rates under Section 1274.

• Adjusted applicable federal rates under Section 1288.

• Corporate ownership change rates under Section 382.

• Low-income housing tax credit percentages under Section 42.

• Present-value valuation rates under Section 7520.

The ruling updates the monthly numerical rates. It does not change the underlying statutory requirements.

Why It Matters

• Related-party loans: AFRs provide statutory interest benchmarks for transactions involving family members, shareholders, businesses, and other related parties. Loans with inadequate stated interest can trigger tax consequences under applicable provisions.

• Corporate ownership changes: Section 382 limits the use of certain tax attributes following qualifying ownership changes. The October long-term tax-exempt rate of 3.95% is relevant to calculating the annual limitation.

• Estate and gift tax planning: The Section 7520 rate of 5.60% affects the valuation of annuities, life interests, term interests, remainders, and reversions. The applicable rate can materially affect valuations.

• Affordable housing investments: The IRS provides October percentages for calculating certain low-income housing tax credits. The statutory 9% minimum continues to apply to qualifying new buildings that are not federally subsidized.

This is a routine monthly rate publication, not a new enforcement initiative or change in tax policy. Its significance lies in applying updated rates to transactions governed by existing law.

Applicable Federal Rates for October 2026

Section 1274 establishes rules for determining the issue price of certain debt instruments issued in exchange for property.

The applicable federal rate serves as a statutory interest benchmark for specified debt transactions.

Revenue Ruling 2026-19 establishes the following AFRs for October 2026.

Short-term AFR

Applies to debt instruments with terms of three years or less.

• Annual compounding: 4.25%

• Semiannual compounding: 4.21%

• Quarterly compounding: 4.19%

• Monthly compounding: 4.17%

Mid-term AFR

Applies to debt instruments with terms exceeding three years but not exceeding nine years.

• Annual compounding: 4.61%

• Semiannual compounding: 4.56%

• Quarterly compounding: 4.53%

• Monthly compounding: 4.52%

Long-term AFR

Applies to debt instruments with terms exceeding nine years.

• Annual compounding: 5.22%

• Semiannual compounding: 5.15%

• Quarterly compounding: 5.12%

• Monthly compounding: 5.10%

The IRS also publishes rates equal to specified percentages of the AFR.

For October 2026, the annual-compounding rates include:

• 110% of the short-term AFR: 4.68%

• 120% of the short-term AFR: 5.11%

• 130% of the short-term AFR: 5.54%

• 110% of the mid-term AFR: 5.08%

• 120% of the mid-term AFR: 5.54%

• 130% of the mid-term AFR: 6.02%

• 150% of the mid-term AFR: 6.96%

• 175% of the mid-term AFR: 8.14%

• 110% of the long-term AFR: 5.75%

• 120% of the long-term AFR: 6.28%

• 130% of the long-term AFR: 6.81%

The ruling also provides the corresponding semiannual, quarterly, and monthly compounded rates.

Tax professionals should use the rate specifically required by the governing Code provision rather than treating the standard AFR as universally applicable.

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Holding

The Tax Court sided with the IRS: Summer H. El Deeb left $16,027 in wages off her 2021 tax return. No surprise there. As for the $3,000 credit she claimed from estimated payments or a 2020 carryover? The Court said, not our problem.

The IRS dropped its $1,000 penalty claim. Both sides hashed out the rest of the credits before and during trial. The Court punted the final math to Rule 155.

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Holding

The Tax Court found that Allen Shay did not report $24,000 in taxable income for 2016. The IRS used bank records and a deposits analysis to support its case. Shay could not show that the deposits in question were already reported as rental income, were nontaxable, or were wrongly included by the IRS.

The Court directed the parties to compute the final tax liability under Rule 155.

Why It Matters

• Bank deposits remain an accepted method of reconstructing income. When taxpayers maintain inadequate records, the IRS may use bank statements, deposit records, and other financial information to identify unreported income. The IRS must account for known nontaxable sources.

• Claims of duplicate taxation require supporting evidence. Reporting similar amounts on an original and amended return does not establish that the amounts represent the same income. Taxpayers must connect specific transactions to the income previously reported.

• An IRS examiner need not personally interview the taxpayer. The Internal Revenue Manual permits examiner interviews but does not make them mandatory for a bank deposits analysis. An otherwise reasonable reconstruction does not become invalid solely because the examining agent relied on records and information obtained by another agent.

• A broadly worded deficiency notice can preserve the taxpayer’s burden of proof. The Court treated the disputed $24,000 as falling within the scope of the original notice, even though the precise adjustment emerged later. This was a fact-specific application of existing rules, not a new standard for deficiency notices.

The decision applies established law. Its practical significance lies in the Court’s treatment of the taxpayer’s double-taxation argument and its distinction between the evidentiary foundation of an IRS determination and the taxpayer’s burden to disprove it.

Key Facts

Allen Shay worked as an entrepreneur and real estate broker and owned several income-producing rental properties.

Following financial difficulties associated with the 2008 recession, Shay filed for bankruptcy in May 2012. He received a bankruptcy discharge in May 2016, which canceled indebtedness income and resulted in the issuance of Form 1099-C.

Shay prepared estimated income and expense figures for his bankruptcy proceeding and later used those estimates when filing his delinquent federal income tax returns.

On or around November 24, 2017, Shay filed his original 2016 Form 1040. He reported $16,650 in rental income from Property A and $29,750 from Property B on Schedule E. He also reported $24,000 as other income on line 21.

During the IRS examination, Shay submitted an amended 2016 return that the IRS did not process.

The amended return reported rental receipts of $19,200 from Property A, $47,750 from Property B, and $24,420 from Property C. Shay eliminated the $24,000 previously reported as other income.

Shay maintained that he had moved the $24,000 from line 21 to Schedule E to reflect rental income from Property C.

The IRS disputed that explanation.

Revenue Agent Ely Yaron reconstructed Shay’s income using bank statements, deposit tickets, and other records from accounts Shay controlled at Ameritrade and Bank of America.

The analysis identified:

• Total deposits: $344,916.

• Nontaxable deposits: $132,515.

• Taxable deposits: $212,401.

• Taxable income stipulated by the parties: $187,301.

• Additional taxable deposits: $25,100.

• Amount conceded by the IRS: $1,100.

• Remaining disputed income: $24,000.

The $132,515 in nontaxable deposits included $70,000 associated with Shay’s Ameritrade account.

The IRS initially determined deficiencies of $17,834 for 2015 and $50,351 for 2016, together with late-filing additions and accuracy-related penalties.

Before trial, the parties resolved all 2015 issues and narrowed the 2016 dispute.

Shay conceded liability for the late-filing additions under section 6651(a)(1) for both years. The IRS conceded the accuracy-related penalties under section 6662(a) for both years.

The only remaining issue for the Court was whether Shay owed tax on the additional $24,000 for 2016.

Statutory and Regulatory Framework

Section 61(a) generally includes income from all sources in gross income unless a specific exclusion applies.

Section 6001 requires taxpayers to maintain records sufficient to establish their income and tax liabilities.

Section 446(b) permits the IRS to compute taxable income using a method that clearly reflects income when the taxpayer’s accounting method does not do so.

Tax Court Rule 142(a) generally places the burden of proof on the taxpayer. The IRS bears the burden for new matters, increases in deficiencies, and certain affirmative defenses.

The bank deposits method reconstructs income by examining deposits into accounts the taxpayer controls. Deposits constitute prima facie evidence of income, subject to adjustments for nontaxable amounts and income already reported.

The IRS must consider known nontaxable sources when applying this method. Once the IRS establishes a sufficient evidentiary foundation for an unreported-income determination, the taxpayer generally must show that the reconstruction is erroneous.

Arguments

Taxpayer argued:

• The IRS was attempting to tax the same $24,000 twice.

• The $24,000 reported as other income on the original return had been reclassified as rental income from Property C on the amended return.

• The IRS bank deposits analysis did not adequately distinguish taxable income from nontaxable transfers.

• Some deposits represented personal capital transferred from retirement savings to support business operations.

• Revenue Agent Yaron could not accurately classify the deposits because he never personally interviewed Shay.

• Shay’s own income calculations should prevail over the IRS reconstruction.

Shay also maintained that the parties’ settlement discussions and stipulations supported his understanding that the disputed amount had already been addressed.

Government argued:

• The bank deposits analysis established $25,100 in income that Shay had not reported on his amended return.

• The disputed deposits were separate from the rental income Shay reported for Property C.

• The IRS had already accounted for known nontaxable transfers.

• Shay failed to produce documentation establishing additional nontaxable deposits or errors in the reconstruction.

• After conceding $1,100, the IRS sought to include only $24,000 in additional taxable income.

• The parties’ signed stipulations remained binding.

Court’s Reasoning

1. The disputed adjustment did not constitute a new matter.

The $24,000 adjustment was not separately identified in the original notice of deficiency.

Ordinarily, an IRS theory outside the scope of a deficiency notice may constitute a new matter, placing the burden of proof on the government.

Judge Cathy Fung examined the notice and its accompanying Form 4549B, which identified adjustments involving rental receipts and other income.

The Court concluded that the notice’s language was broad enough to encompass the disputed income.

The parties had also discussed the $24,000 during settlement negotiations, demonstrating that Shay knew the amount remained in dispute before trial.

The Court therefore retained the burden of proof on Shay under Rule 142(a).

2. The IRS established the required evidentiary foundation.

Although the adjustment did not constitute a new matter, the IRS still needed evidence linking Shay to the allegedly unreported income.

The Court applied the Ninth Circuit’s requirement that unreported income determinations have an evidentiary foundation before receiving the presumption of correctness.

The IRS produced bank statements, deposit records, and other documentation connecting Shay to the relevant accounts and transactions.

Those records satisfied the threshold requirement.

The Court did not require the IRS to identify a separate income-producing activity for each disputed deposit.

3. The bank deposits analysis adequately distinguished taxable and nontaxable amounts.

Revenue Agent Yaron reviewed financial records from Shay’s Ameritrade and Bank of America accounts.

He also considered information Shay had provided to the revenue agent previously assigned to the examination.

The analysis classified $132,515 of deposits as nontaxable.

The Court concluded that the IRS used an organized and sufficiently clear method to distinguish taxable deposits from nontaxable transactions.

Shay did not identify specific errors that undermined the resulting $212,401 taxable-deposit calculation.

4. The taxpayer failed to substantiate his double-taxation claim.

Shay’s central argument concerned the similarity between the $24,000 originally reported as other income and the $24,420 subsequently reported as rental income from Property C.

He maintained that the amended return merely reclassified the original income.

The Court rejected that explanation because Shay produced no corroborating evidence connecting the two amounts.

The IRS analysis identified $25,100 in taxable deposits exceeding the income stipulated by the parties.

After the IRS conceded $1,100, the remaining $24,000 matched the amount Shay had removed from line 21 of his amended return.

The Court emphasized that matching or similar figures do not establish that two amounts represent the same underlying transactions.

Shay needed records showing that the disputed deposits were already included in the rental income reported on Schedule E.

His testimony alone did not establish that connection.

5. The taxpayer’s alternative accounting lacked adequate documentation.

Shay submitted a monthly income summary identified as Exhibit 9-J.

The summary listed deposits and general income sources but lacked supporting checks, bank statements, and sufficiently detailed transaction descriptions.

It also failed to distinguish clearly between Schedule C business income and Schedule E rental income.

The document included rental income from properties beyond the three principally discussed in the dispute.

Without additional records or persuasive testimony, the Court declined to treat the summary as an accurate reconstruction of Shay’s 2016 income.

6. The IRS had already recognized substantial nontaxable transfers.

Shay argued that some deposits represented capital transferred from retirement savings into his business accounts.

His own monthly summary identified $29,400 in nontaxable Ameritrade deposits.

The IRS analysis, however, classified $70,000 in Ameritrade deposits as nontaxable.

The Court also noted that Shay appeared to misunderstand the IRS treatment of certain deposits, believing that the agency had classified $70,000 as taxable when the relevant taxable amount was $15,000.

Shay produced no documentation demonstrating that the IRS had overlooked additional nontaxable deposits beyond the $132,515 already excluded.

7. The absence of a personal interview did not invalidate the examination.

Shay challenged the bank deposits analysis because Revenue Agent Yaron had not personally interviewed him.

The Court rejected that argument.

The Internal Revenue Manual gives examiners discretion to conduct interviews during an examination. It does not require an interview as a condition of performing a bank deposits analysis.

Yaron testified that he followed the applicable procedures and relied on documents Shay had previously supplied to another agent.

Shay presented no evidence showing that an additional interview would have changed the classification of any deposit.

The Court also observed that Shay had an opportunity at trial to present records distinguishing taxable from nontaxable amounts but failed to do so.

The absence of a personal interview therefore did not undermine the analysis.

Treatment of Settlement Stipulations

The Court separately addressed the effect of three signed stipulations resolving issues between the parties.

Under Tax Court Rule 91(e), stipulations generally bind the parties unless relief is necessary to prevent manifest injustice.

Shay had agreed to include $2,392 of cancellation of indebtedness income and $16,697 of Schedule C gross receipts as other income for 2016.

Those amounts totaled $19,089, not $24,000.

The Court concluded that the agreed amounts did not resolve the separate $24,000 dispute.

Shay also attempted to introduce a spreadsheet prepared during settlement discussions as evidence that the IRS had agreed to eliminate the disputed adjustment.

The document lacked a date, signatures, identifying case information, and language establishing an agreement. Portions of its figures were obscured.

The Court declined to treat it as evidence of a binding settlement.

Although the Court concluded that it could enforce the signed stipulations, it separately evaluated Shay’s substantive arguments and supporting evidence.

The Court found no manifest injustice that would justify relieving Shay of the stipulations’ binding effect.

This aspect of the opinion reinforces the importance of distinguishing signed agreements from informal settlement materials. It does not alter the existing standard governing Tax Court stipulations.

Result

The Tax Court sustained the $24,000 unreported income adjustment for 2016 and directed entry of decision under Rule 155, which governs the computation of the final deficiency after the Court resolves the disputed issues.

The opinion did not determine a final recomputed tax deficiency.

The IRS concessions eliminating the section 6662(a) accuracy-related penalties remained in effect, while Shay’s concessions concerning the section 6651(a)(1) late-filing additions also remained binding.

The Takeaway

If you’re dealing with a bank deposits exam, match every disputed deposit to a specific transaction and show where you already reported it. Amended returns and vague income summaries won’t cut it. The IRS wants hard records, not stories.

This case doesn’t give the IRS any new powers. It just shows how the usual burden-of-proof rules play out when someone tries to fight a bank deposits analysis that’s already backed by the numbers.

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List of Citations

Statutes and procedural rules

• I.R.C. § 61(a): Establishes the general definition of gross income.

• I.R.C. § 6001: Requires taxpayers to maintain adequate records.

• I.R.C. § 446(b): Authorizes the IRS to use a method that clearly reflects income.

• I.R.C. § 6651(a)(1): Governs additions to tax for failure to file timely returns.

• I.R.C. § 6662(a): Governs accuracy-related penalties.

• Tax Court Rule 142(a): Allocates the burden of proof between taxpayers and the IRS.

• Tax Court Rule 91(e): Establishes the binding effect of stipulations.

• Tax Court Rule 155: Governs computations following the Court’s resolution of disputed issues.

Judicial authorities

• Welch v. Helvering, 290 U.S. 111 (1933): Establishes the general presumption of correctness for IRS deficiency determinations.

• Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979): Requires an evidentiary foundation linking the taxpayer to alleged unreported income.

• Abatti v. Commissioner, 644 F.2d 1385 (9th Cir. 1981): Addresses when a theory consistent with a broadly worded deficiency notice does not constitute a new matter.

• Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500 (1989): Distinguishes new matters from theories that clarify or develop an existing deficiency determination.

• Clayton v. Commissioner, 102 T.C. 632 (1994): Recognizes the bank deposits method as an accepted means of reconstructing income.

• DiLeo v. Commissioner, 96 T.C. 858 (1991): Addresses bank deposits reconstruction and the treatment of nontaxable deposits.

• Price v. United States, 335 F.2d 671 (5th Cir. 1964): Establishes the need to consider known nontaxable sources in a bank deposits analysis.

• Petzoldt v. Commissioner, 92 T.C. 661 (1989): Addresses the IRS’s authority to reconstruct income using a reasonable method.

• Higbee v. Commissioner, 116 T.C. 438 (2001): Addresses evidentiary burdens and the sufficiency of taxpayer proof.

• Vallone v. Commissioner, 88 T.C. 794 (1987): Explains that Internal Revenue Manual procedures generally do not impose mandatory legal requirements.

• Bail Bonds by Marvin Nelson, Inc. v. Commissioner, 820 F.2d 1543 (9th Cir. 1987): Addresses enforcement of Tax Court stipulations and the manifest-injustice exception.

Source: Allen Shay v. Commissioner, T.C. Memo. 2026-103, filed September 30, 2026.

Holding

The Tax Court held that MD M. Rahman and Syeda Momotaz understated 2019 gross receipts by $59,527. The Court denied deductions for meals and repairs and maintenance, while allowing a $2,253 deduction for supplies based on the parties’ agreement. The Court also held that petitioners were not liable for the section 6662(a) accuracy-related penalty because the IRS did not meet its burden of production regarding supervisory approval. The Court directed that decision be entered under Rule 155.

Procedural Background

The Tax Court tried the case in Philadelphia, Pennsylvania, on October 5, 2026. Judge Joseph W. Nega later issued oral findings of fact and opinion on October 7, 2026. The Court’s October 13, 2026 order transmitted the transcript pages containing those oral findings and opinion to the parties.

The Court issued the opinion as a bench opinion under section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. The opinion expressly states that the oral findings of fact and opinion “shall not be relied upon as precedent in any other case.”

Why It Matters

• The decision applies established substantiation principles for Schedule C business deductions. Taxpayers must keep adequate records to support reported income and claimed expenses.

• The Court accepted a bank-deposit analysis because petitioners did not provide sufficient evidence to explain the additional deposits.

• The ruling shows that penalty issues remain separate from the underlying tax adjustments. The IRS sustained the income adjustment but failed to satisfy its burden of production for the accuracy-related penalty.

• The opinion is nonprecedential. It resolves the parties’ dispute but does not establish a binding rule for future cases.

Key Facts

• Petitioners MD M. Rahman and Syeda Momotaz were married and resided in Pennsylvania when they filed their petition.

• In 2019, Mr. Rahman operated multiple businesses, including tax preparation, accounting services, insurance sales, travel agency services, immigration paperwork preparation, MoneyGram agency services, cellular phone sales, taxi driving, and Uber driving.

• Petitioners filed a joint 2019 Form 1040 with a Schedule C reporting $21,850 in gross receipts or sales.

• They claimed:

  • $5,700 for repairs and maintenance.

  • $4,500 for supplies.

  • $2,340 for meals.

• The IRS conducted a bank deposits analysis and identified $81,378 in gross receipts. The notice of deficiency used $81,377, resulting in a $59,527 adjustment for unreported gross receipts or sales.

• The IRS disallowed the claimed meals and repairs deductions and allowed $2,253 for supplies based on available documentation.

Statutory or Regulatory Framework

• Section 61 includes income from all sources.

• Section 446(b) allows the IRS to determine taxable income using a method that clearly reflects income when records are inadequate.

• Section 162 allows deductions for ordinary and necessary business expenses.

• Section 262 generally prevents deductions for personal, living, or family expenses.

• Section 6662(a) imposes an accuracy-related penalty for certain underpayments.

• Section 6751(b)(1) requires personal written supervisory approval of the initial determination of a penalty assessment.

Arguments

Taxpayer argued:

• The IRS overstated gross receipts because some bank activity did not represent taxable income.

• A $40,000 American Express line of credit contributed to the bank activity and resulted in an overstated receipts calculation.

• Petitioners were entitled to additional deductions for meals, supplies, and repairs.

• Missing records resulted from the looting of the taxpayer’s store in 2020 and 2021.

Government argued:

• The bank deposits analysis accurately reflected additional business receipts.

• Petitioners lacked sufficient documentation to support the disputed deductions.

• Petitioners were liable for the section 6662(a) accuracy-related penalty.

Court’s Reasoning

• The Court noted that IRS deficiency determinations are generally presumed correct, and taxpayers bear the burden of proving they are erroneous.

• The Court resolved the disputed issues based on the preponderance of the evidence in the record rather than applying burden-of-proof rules.

• The Court determined that the bank deposits method was an appropriate method for reconstructing income.

• The Court found that petitioners’ evidence did not adequately explain the additional deposits connected to Mr. Rahman’s business activities.

• The Court rejected the argument that the American Express line of credit explained the additional receipts because petitioners did not provide sufficient support.

• The Court found that petitioners understated gross receipts by $59,527.

• The Court considered whether it could estimate additional deductions but found that the record did not contain enough evidence to determine allowable amounts for meals or repairs and maintenance.

• The Court allowed the $2,253 supplies deduction because the parties stipulated to that amount.

• The Court held that the IRS did not meet its burden of production for the accuracy-related penalty because the evidence did not show personal written supervisory approval and the issue was not addressed at trial.

Result

The Court will enter a Rule 155 decision reflecting the sustained income adjustment, allowed supplies deduction, denial of meals and repairs deductions, and elimination of the $2,557.80 accuracy-related penalty for 2019.

The Takeaway

The decision reinforces that taxpayers operating Schedule C businesses need reliable records supporting both receipts and deductions. The IRS may sustain the underlying tax adjustment while losing a penalty when it cannot establish required penalty procedures.

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List of Citations

• Internal Revenue Code § 61: Defines gross income and supports inclusion of unreported business receipts.

• Internal Revenue Code § 162: Allows deductions for ordinary and necessary business expenses.

• Internal Revenue Code § 262: Limits deductions for personal expenses.

• Internal Revenue Code § 446(b): Permits income reconstruction methods when records do not clearly reflect income.

• Internal Revenue Code § 6662(a): Provides for accuracy-related penalties.

• Internal Revenue Code § 6751(b)(1): Requires personal written supervisory approval of the initial determination of a penalty assessment.

• Internal Revenue Code § 7491(c): Places the burden of production on the IRS regarding penalties.

• Tax Court Rule 142(a): Establishes taxpayer burden of proof principles.

• Tax Court Rule 152: Governs bench opinions.

• Tax Court Rule 155: Governs entry of decision after adjustments are determined.

• Welch v. Helvering, 290 U.S. 111 (1933): Addresses the presumption of correctness of IRS deficiency determinations.

• Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930): Allows estimation of deductions only when sufficient evidence establishes that a deductible expense was incurred.

• Cole v. Commissioner, 637 F.3d 767 (7th Cir. 2011): Supports use of bank deposits analysis for reconstructing income.

• Clayton v. Commissioner, 102 T.C. 632 (1994): Recognizes bank deposits as a method of determining taxable income.

• Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017): Addresses supervisory approval requirements for penalties.

Holding

The Tax Court concluded that the IRS Independent Office of Appeals had not abused its discretion in refusing to recognize an offer in compromise which the IRS apparently accepted six months after the taxpayer had died. Since the taxpayer had died before the IRS issued its written acceptance, no valid compromise could have arisen under §7122 and the relevant Treasury regulations. The Court therefore granted summary judgment for the IRS and upheld the federal tax lien.

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Holding

The Tax Court rejected Airbnb's applications to exclude two declarations provided by an IRS software expert in relation to the competing discovery protective orders. The Court, considering this to be a question of first impression, ruled that Tax Court Rule 143(g), which deals with reports from experts who are called at trial, does not extend to declarations that are submitted merely in support of pretrial discovery motions.

The Court did not determine whether each statement in the declarations was appropriate, but stated that it would disregard any legal opinions or advocacy when deciding the underlying discovery dispute.

Why It Matters

• The ruling defines the reach of the Tax Court’s expert-report rules. Rule 143(g) governs expert witnesses at trial. The Court declined to extend those requirements to declarations supporting pretrial discovery motions.

• The decision gives parties more flexibility to use technical experts during discovery. A party may submit a declaration from an expert or consultant to explain technical discovery issues without first satisfying the formal report requirements that would apply if that person later testified as an expert witness at trial.

• The ruling is procedural, not a decision on Airbnb’s transfer pricing liability. The Court did not decide whether the IRS may increase Airbnb’s income by approximately $4.2 billion under §482. It also did not resolve the parties’ competing proposals regarding the protection of Airbnb’s source code and other technical information.

• The Court preserved limits on expert declarations. Keeping a declaration in the record does not require the Court to accept its legal conclusions, factual assumptions, or reasoning. The Court may disregard improper portions and assign little or no weight to unsupported statements.

Key Facts

Airbnb is challenging an IRS determination that increased its income by $4,195,858,428 under §482.

The adjustment concerns resources, capabilities, and rights that Airbnb made available on December 31, 2013, to an affiliated company organized in Ireland and tax resident in Jersey.

Airbnb’s software and related technology are central to the underlying transfer pricing dispute.

During discovery, Airbnb sought a protective order governing access to its source code and other technical materials. Airbnb proposed that sensitive information be reviewed in a secure clean room located at Airbnb’s offices or at the offices of its counsel.

The IRS filed its own proposed protective order. Among other differences, the IRS wanted the clean room in Austin, Texas, where its software consultant, Monty G. Myers, was based. The IRS also proposed placing a narrower category of information under clean-room restrictions.

Myers has decades of software development experience and has worked as an expert witness or consultant in more than 100 software-related matters. The IRS retained him to provide technical consulting and analysis in the Airbnb dispute.

The IRS submitted two declarations from Myers in support of its proposed protective order and in opposition to Airbnb’s proposal.

The declarations addressed how the clean room should operate, what information should be subject to its restrictions, and how Airbnb’s proposed procedures compared with procedures Myers had encountered in other technology litigation.

Airbnb moved to strike both declarations.

Statutory and Procedural Framework

Section 482 allows the IRS to allocate income, deductions, credits, and other tax items among commonly controlled businesses when necessary to prevent tax avoidance or clearly reflect income. The underlying Airbnb case concerns an IRS adjustment under that provision, but the Court did not address the merits of the §482 determination in this opinion.

Tax Court Rule 103 allows the Court to issue protective orders governing discovery.

Rule 143 governs evidence at Tax Court trials. Rule 143(g) imposes disclosure and reporting requirements on a party that calls an expert witness.

Rule 52 permits the Court to strike redundant, immaterial, impertinent, frivolous, or scandalous material from documents filed with the Court.

Federal Rule of Evidence 702 governs testimony from expert witnesses whose specialized knowledge may help the trier of fact understand evidence or decide a factual issue.

Arguments

Taxpayer argued:

• Myers’s declarations effectively operated as expert witness reports.

• Because the declarations functioned as expert reports, they had to comply with Rule 143(g).

• The declarations did not satisfy Rule 143(g)’s requirements and therefore should be removed from the record.

• Portions of the declarations contained legal conclusions and advocacy rather than permissible technical opinions.

• Myers relied on protective orders from other cases that Airbnb considered insufficiently similar to its case.

Government argued:

• Rule 143 did not apply because the declarations were submitted for a pretrial discovery dispute rather than as trial evidence.

• Federal Rule of Evidence 702 likewise did not provide a basis for striking the declarations at this stage.

• Myers’s statements concerned technical discovery procedures and did not constitute improper legal opinions requiring removal from the record.

Court’s Reasoning

• Rule 143 applies to trials. The Court emphasized both the placement and wording of the rule. Rule 143 appears in the portion of the Tax Court Rules governing trials, is titled “Evidence,” and addresses how trials before the Court are conducted.

• Rule 143(g) specifically addresses experts who are called as witnesses. The provision applies to a party that “calls an expert witness.” No trial had occurred, and the IRS had not yet firmly identified the experts it intended to call at trial.

• Myers’s declarations addressed discovery rather than the merits. The declarations concerned the operation and scope of a proposed clean room for sensitive technological material. They did not address the substantive transfer-pricing questions that the Court ultimately must decide.

• The Court therefore rejected Airbnb’s Rule 143(g) theory. Because the declarations served a pretrial procedural purpose, the formal expert-report requirements did not apply to them.

• Possible legal conclusions did not require striking the declarations. Experts generally cannot instruct a Court on ultimate questions of law. But the Court concluded that even if portions of Myers’s declarations crossed that line, it could simply disregard those portions rather than remove the declarations entirely.

• Airbnb had not shown sufficient prejudice. Motions to strike are generally disfavored. Because the judge can independently determine the law and disregard improper opinions, the continued presence of the declarations in the record did not create the type of prejudice that would justify striking them.

• Challenges to the declarations can be handled through other procedures. Airbnb remains free to submit competing declarations, challenge the factual basis of Myers’s opinions, or request an evidentiary hearing at which Myers could potentially be cross-examined. Questions about reliability and weight, therefore, did not require striking the documents at the discovery stage.

Limits of the Decision

The ruling does not determine whether Myers will qualify as an expert witness at trial.

It does not excuse the IRS from complying with Rule 143(g) if it later calls an expert witness under circumstances where the rule applies.

It does not establish that the Court will rely on Myers’s declarations when deciding the protective-order dispute.

It also does not decide where the clean room will be located, which materials will be subject to its restrictions, or which party’s proposed discovery procedures the Court will adopt.

Most importantly, the decision says nothing about whether the IRS’s $4.195 billion transfer pricing adjustment is correct.

Result

The Tax Court rejected Airbnb's two motions to strike and kept the IRS expert's declarations in the record as the discovery dispute continues.

The Takeaway

For tax practitioners, the decision establishes a helpful distinction between technical declarations made to settle pretrial discovery issues and formal expert testimony given at trial. Although the ruling itself is procedural, the Court's initial interpretation of Rule 143(g) offers guidance in complex cases where the parties rely on specialists to handle discovery before trial.

List of Citations

• I.R.C. §482: Authorizes allocations among controlled taxpayers to prevent tax avoidance or clearly reflect income and forms the basis of the underlying Airbnb adjustment.

• Tax Court Rule 52: Authorizes the Court to strike certain improper material from filings and supplies the procedural basis for Airbnb’s motions.

• Tax Court Rule 103 governs protective orders in discovery and provides the framework for the parties’ competing clean-room proposals.

• Tax Court Rule 143(g): Establishes report and disclosure requirements for expert witnesses called at trial. The Court held that it does not apply to declarations supporting pretrial discovery motions.

• Fed. R. Evid. 702: Governs admissibility of expert testimony based on specialized knowledge.

• Fed. R. Evid. 704: Addresses opinion testimony on ultimate issues and informs the Court’s discussion of expert use of legal terminology.

• Clay v. Commissioner, 152 T.C. 223 (2019), aff’d, 990 F.3d 1296 (11th Cir. 2021): Explains that motions to strike are disfavored and generally require material unrelated to the controversy or prejudice to the moving party.

• Estate of Jephson v. Commissioner, 81 T.C. 999 (1983): Provides the Tax Court’s standard for evaluating motions to strike.

• Nationwide Transportation Finance v. Cass Information Systems, Inc., 523 F.3d 1051 (9th Cir. 2008): Addresses the distinction between impermissible expert legal conclusions and permissible use of legal terminology.

• Hangarter v. Provident Life & Accident Insurance Co., 373 F.3d 998 (9th Cir. 2004): Supports the rule that an expert may not give an opinion resolving an ultimate question of law.

• Sunoco, Inc. & Subsidiaries v. Commissioner, 118 T.C. 181 (2002): Addresses limits on expert testimony concerning legal conclusions.

• Dynamo Holdings Limited Partnership v. Commissioner, 143 T.C. 183 (2014): Illustrates the Court’s ability to conduct an evidentiary hearing and permit examination of declarants in a pretrial dispute.

• Airbnb, Inc. & Subsidiaries v. Commissioner, U.S. Tax Court, filed September 2, 2026: Holds that Rule 143(g) does not apply to declarations submitted in support of pretrial discovery motions.

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Holding

The Tax Court found that Myrna Marin left $205,281 of taxable income off her 2021 return. That meant she owed the usual late-filing penalty under §6651(a)(1). But Marin didn't stop there. She kept repeating arguments the court had already called frivolous, so they tacked on a $2,500 penalty under §6673(a)(1) for good measure.

The IRS also tried for an accuracy-related penalty under §6662(a), but ended up conceding that one before the finish line.

Why It Matters

• The income issue is straightforward. Marin admitted receiving the amounts identified by the IRS, and federal tax law plainly treated them as gross income.

• The IRS still had to establish an evidentiary foundation. Because the case was appealable to the Ninth Circuit, the IRS had to connect Marin to the unreported income before the usual presumption of correctness applied. Information returns, her Wage and Income Transcript, and her admissions satisfied that requirement.

• The §6673 penalty is the more consequential part of the decision. The Court warned Marin that her arguments were frivolous and could result in a penalty. She repeated them anyway, including in her post-trial brief.

• The decision does not expand the scope of gross income. It applies settled law and reinforces the risk of penalties for continuing to litigate positions that courts have repeatedly rejected.

Key Facts

Marin filed her 2021 Form 1040 on January 23, 2023. She reported only $15,150 in state unemployment benefits.

The IRS determined that she failed to report $205,281 consisting of:

• $154,566 of rental income

• $12 of interest

• $107 of dividends

• $50,596 of gambling winnings

The IRS issued a notice of deficiency on March 25, 2024, determining a $47,846 deficiency, an $11,041 addition to tax under §6651(a)(1), and a $9,569 accuracy-related penalty under §6662(a).

Marin stipulated before trial that she received the amounts identified by the IRS. She nevertheless argued that the payments were not taxable because they did not arise from a federally taxable activity.

The Court warned her that courts had repeatedly rejected those arguments as frivolous and that §6673 could authorize a penalty. Marin continued to make the same arguments after the trial.

The IRS conceded the §6662(a) accuracy-related penalty.

Statutory or Regulatory Framework

Section 61 generally defines gross income to include all income from any source and expressly mentions interest, rents, and dividends; furthermore, gambling winnings are considered gross income in accordance with well-settled precedent.

In cases where income is unreported, the IRS has to establish first an evidentiary basis linking the taxpayer to that income; after that, the taxpayer has to prove that the determination is wrong or that an exclusion applies.

An addition to the tax under section 6651(a)(1) will be imposed if the taxpayer does not prove that they had reasonable cause and that there was no willful neglect.

Under section 6673(a)(1) the Tax Court has the power to impose a penalty of $25,000 if a taxpayer holds a frivolous or groundless position or uses the proceeding mainly for the purpose of delay.

Arguments

Taxpayer argued:

• The payments reported by third parties did not arise from a federally taxable activity.

• The amounts, therefore, did not constitute taxable income.

Government argued:

• Information returns, Marin’s Wage and Income Transcript, and her admissions established receipt of the income.

• Federal tax law includes the amounts in gross income.

• Marin filed her return late and did not establish reasonable cause.

• Her continued reliance on frivolous arguments justified a §6673 penalty.

Court’s Reasoning

• The IRS established the required connection to the income. Third-party information returns, Marin’s Wage and Income Transcript, and her admissions supplied the evidentiary foundation required under Ninth Circuit precedent.

• Marin did not dispute receipt. Her argument concerned only whether the amounts were taxable.

• Federal law treated the payments as gross income. Section 61 covered the rents, interest, and dividends, while established precedent covered the gambling winnings. Marin identified no applicable exclusion.

• Her legal theory was frivolous. The Court treated her claim that the payments were outside the federal tax system as a variation of arguments repeatedly rejected by federal courts.

• The late-filing addition applied. Marin filed after the April 18, 2022, deadline and offered no reasonable-cause explanation.

• Her continued conduct justified the §6673 penalty. She persisted after the Court warned her that the arguments lacked merit and could result in a penalty.

Result

Bottom line: The Tax Court sided with the IRS on the $205,281 of unreported income, added the late-filing penalty, slapped on a $2,500 §6673 penalty, and adjusted the final numbers to reflect the IRS's concession on the accuracy penalty.

The Takeaway

The income issue is settled law. The real lesson is about the §6673 penalty: if a court tells you your argument is frivolous and you keep pushing it, you can end up owing more than just the original tax bill.

List of Citations

• I.R.C. §61: Defines gross income broadly and includes interest, rents, and dividends.

• I.R.C. §63: Defines taxable income generally as gross income minus allowable deductions.

• I.R.C. §6201(d): Addresses reliance on third-party information returns when a taxpayer reasonably disputes reported income.

• I.R.C. §6651(a)(1): Imposes an addition to tax for failure to timely file a return absent reasonable cause.

• I.R.C. §6673(a)(1): Authorizes penalties for frivolous or groundless positions and proceedings maintained primarily for delay.

• I.R.C. §7491(c): Places the burden of production on the IRS for certain penalties and additions to tax.

• Welch v. Helvering, 290 U.S. 111 (1933): Establishes the general presumption of correctness for deficiency determinations.

• Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979): Requires an evidentiary foundation connecting the taxpayer to unreported income.

• Hardy v. Commissioner, 181 F.3d 1002 (9th Cir. 1999): Applies the Ninth Circuit evidentiary-foundation requirement.

• Walquist v. Commissioner, 152 T.C. 61 (2019): Addresses the IRS’s burden in unreported-income cases.

• Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955): Establishes the broad scope of gross income.

• Campodonico v. United States, 222 F.2d 310 (9th Cir. 1955): Treats gambling winnings as gross income.

• Wilcox v. Commissioner, 848 F.2d 1007 (9th Cir. 1988): Rejects frivolous challenges to federal income taxation.

• Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984): Recognizes that courts need not extensively address plainly frivolous tax arguments.

• Wnuck v. Commissioner, 136 T.C. 498 (2011): Addresses the treatment of frivolous tax positions.

• Higbee v. Commissioner, 116 T.C. 438 (2001): Explains the IRS’s burden of production for penalties and additions to tax.

Holding

The Tax Court ruled that Ivan Merida Ortiz was not entitled to the $1,400 economic recovery rebate credit for 2021 since he had provided an individual taxpayer identification number or ITIN instead of the Social Security number required under §6428B. Furthermore, the Court did not have jurisdiction to consider his separate claim concerning recovery rebate payments for 2020 as the notice of deficiency related only to 2021.

Why It Matters

• Section 6428B requires a Social Security number. An ITIN may serve as a taxpayer identification number for federal filing purposes, but it does not satisfy the identification requirement Congress imposed for the 2021 recovery rebate credit.

• The decision applies the statute as written. It does not announce a new eligibility rule or expand IRS authority. Section 6428B itself defines the identification number required to claim the credit.

• The 2020 claim illustrates a recurring problem with Tax Court jurisdiction. A taxpayer generally cannot use a deficiency case involving one year to obtain relief for another year that the notice of deficiency did not place before the Court.

• Practitioners should not treat taxpayer identification numbers as interchangeable. Eligibility for a particular credit depends on the identification standard contained in the statute governing that credit.

Key Facts

Ivan Merida Ortiz got an ITIN from the IRS prior to 2021.

He used that ITIN when filing his 2021 federal income tax return and claimed a Economic Recovery Rebate Credit of $1,400 under §6428B.

The credit was rejected by the IRS since Ortiz had not given the identification number required by law. On July 24, 2025, the IRS sent out a statutory notice of deficiency stating that there was a deficiency of $1,400 for the year 2021.

Ortiz promptly filed a petition with the Tax Court and requested that the court release the recovery rebate payments he said he was entitled to for 2020.

The IRS asked for a judgment on the pleadings pursuant to Tax Court Rule 120(a), on the ground that Ortiz's use of an ITIN had made him legally ineligible for the 2021 credit.

Statutory and regulatory framework

Congress created the 2021 economic recovery rebate credit through the American Rescue Plan Act of 2021 and codified it in §6428B.

Section 6428B generally provided a $1,400 credit for an eligible individual, $2,800 for taxpayers filing jointly, and an additional $1,400 for each qualifying dependent.

For a return other than a joint return, §6428B(e)(2)(A) treats the basic credit amount as zero unless the taxpayer includes a valid identification number on the return.

Section 6428B(e)(2)(D)(i) defines a valid identification number for this purpose as a Social Security number issued by the Social Security Administration on or before the filing deadline.

Treas. Reg. §301.6109-1(d)(3)(i) defines an ITIN as a taxpayer identification number that the IRS issues to an alien individual for federal tax filing purposes. The regulation expressly distinguishes an ITIN from a Social Security number.

Treas. Reg. §301.6109-1(d)(4) also bars the IRS from issuing an ITIN to a person who has or qualifies for a Social Security number.

Tax Court Rule 120(a) permits judgment on the pleadings when no genuine issue of material fact remains and the moving party is entitled to judgment as a matter of law.

Arguments

Taxpayer argued:

• He satisfied the identification requirement by including a taxpayer identification number on his 2021 return.

• His ITIN should qualify as the identification number required for the economic recovery rebate credit.

• He also sought recovery rebate amounts that he claimed he should have received for 2020.

Government argued:

• Section 6428B requires a Social Security number, not any taxpayer identification number.

• Ortiz reported an ITIN on his return.

• An ITIN does not meet the statutory definition of a valid identification number under §6428B.

• Because the pleadings established the relevant facts, the IRS was entitled to judgment as a matter of law.

Court’s Reasoning

• Section 6428B conditions the $1,400 credit on the taxpayer providing a valid identification number.

• Congress defined that term specifically for the credit. The statute requires a Social Security number issued by the Social Security Administration within the statutory deadline.

• Ortiz provided an ITIN issued by the IRS rather than a Social Security number.

• Treasury regulations expressly state that an ITIN is not a Social Security number.

• The rules governing ITIN issuance further supported that distinction. The IRS does not issue an ITIN to someone who has or qualifies for a Social Security number.

• Because Ortiz did not provide the identification number required by §6428B, §6428B(e)(2)(A) reduced his allowable basic credit amount to zero. The pleadings left no factual dispute that could change that result.

The 2020 recovery rebate claim

Ortiz also asked the Tax Court to release an economic impact payment for 2020 that he claimed he had not received. That request implicated the recovery rebate provisions in §§6428 and 6428A.

The Court did not address whether Ortiz qualified for a 2020 payment. It lacked jurisdiction to decide the claim.

The notice of deficiency underlying the case covered only 2021. The Tax Court exercises only the jurisdiction Congress grants it, and its deficiency jurisdiction generally covers only the tax years identified in a notice of deficiency and presented to the Court through a timely petition.

The same limitation applies to the Court’s overpayment jurisdiction under §6512(b). Because the IRS had not issued Ortiz a notice of deficiency for 2020 in this case, the Court could not adjudicate his claim for a 2020 recovery rebate.

Result

The Tax Court granted the IRS’s motion for judgment on the pleadings and entered a decision for the Commissioner.

The Takeaway

The ITIN issue is a narrow application of §6428B and does not change the law governing recovery rebate credits. The more reusable procedural point is jurisdictional: practitioners cannot assume that placing a case one year before the Tax Court gives the Court authority to resolve claims arising from another year.

List of Citations

• §6213(a): Authorizes a taxpayer to petition the Tax Court for redetermination of a deficiency after the IRS issues a notice of deficiency.

• §6428B: Establishes the 2021 economic recovery rebate credit.

• §6428B(b): Sets the general amount of the 2021 credit.

• §6428B(e)(2)(A): Treats the basic credit amount as zero when the taxpayer fails to provide a valid identification number.

• §6428B(e)(2)(D)(i): Defines a valid identification number for the taxpayer as a Social Security number issued within the statutory deadline.

• §§6428 and 6428A: Govern earlier recovery rebate credits associated with 2020 economic impact payments.

• §6512(b): Governs the Tax Court’s limited authority to determine overpayments in deficiency proceedings.

• Treas. Reg. §301.6109-1(d)(3)(i): Defines an ITIN and distinguishes it from a Social Security number.

• Treas. Reg. §301.6109-1(d)(4): Provides that an individual who has or qualifies for a Social Security number will not receive an ITIN.

• Tax Court Rule 120(a): Governs motions for judgment on the pleadings.

• Tax Court Rule 142(a): Generally places the burden of proof on the taxpayer.

• Ortiz v. Commissioner, T.C. Memo., filed September 3, 2026: Holds that an ITIN does not satisfy §6428B’s Social Security number requirement for the 2021 economic recovery rebate credit.

• Rowen v. Commissioner, 156 T.C. 101 (2021): Addresses the treatment of allegations when ruling on a motion based on the pleadings.

• Nis Family Trust v. Commissioner, 115 T.C. 523 (2000): States the standard for judgment on the pleadings.

• Abrams v. Commissioner, 82 T.C. 403 (1984): Supports judgment on the pleadings when no genuine issue of material fact remains.

• Rickard v. Commissioner, 88 T.C. 188 (1987): Addresses the taxpayer’s burden to establish entitlement to tax deductions and credits.

• Deputy v. du Pont, 308 U.S. 488 (1940): Supports the rule that deductions depend on statutory authorization.

• Williams v. Commissioner, 131 T.C. 54 (2008): Explains the limits of the Tax Court’s statutory jurisdiction.

• Breman v. Commissioner, 66 T.C. 61 (1976): States that the Tax Court may exercise only jurisdiction granted by statute.

• Hillenbrand v. Commissioner, T.C. Memo. 2002-303: Explains that deficiency jurisdiction is limited to tax years included in the notice of deficiency.

• Menard, Inc. v. Commissioner, 130 T.C. 54 (2008): Explains the limits of the Tax Court’s overpayment jurisdiction.

Holding

The Tax Court sided with the IRS. No, they didn’t abuse their discretion by refusing to wipe out $1,649 of interest on Andrew Tabaka’s 2016 tax bill. The IRS moved the case along at a normal pace, and the stuff Tabaka complained about was all about figuring out his actual tax—not some clerical slip-up.

Why It Matters

• The decision applies a narrow statutory standard. Section 6404(e) does not authorize interest abatement whenever an IRS examination, Appeals proceeding, or Tax Court case takes longer than the taxpayer believes necessary. The taxpayer must connect the interest to an unreasonable IRS error or delay involving a qualifying ministerial or managerial act.

• Normal litigation time generally does not qualify. The Court treated the approximately 16 months between the IRS’s first written contact and entry of the stipulated Tax Court decision as routine, particularly because the case moved through examination, Appeals, IRS counsel, and settlement.

• Disputes over substantive tax liability fall outside §6404(e). Determining whether reported Forms 1099-R correctly reflected taxable retirement distributions required legal and factual judgment. Those decisions were not ministerial or managerial acts.

• The decision also illustrates an important jurisdictional rule. When the IRS does not issue a formal final determination on an interest-abatement claim, §6404(h)(1)(A)(ii) allows an eligible taxpayer to petition the Tax Court after 180 days have passed from filing the claim. The absence of a formal denial, therefore, does not leave the taxpayer without judicial review.

Key Facts

Andrew Tabaka and his wife filed their 2016 federal income tax return in March 2017.

The IRS identified $93,200 of retirement income reported by third parties on two Forms 1099-R but not reported on the return. On April 16, 2018, the IRS issued a CP2000 proposing:

• A $23,960 income tax deficiency.

• A $4,792 accuracy-related penalty.

The IRS did not receive an adequate response and issued a notice of deficiency on July 9, 2018.

Tabaka petitioned the Tax Court on October 10, 2018. He also paid $10,590 toward the disputed 2016 liability that day.

The case went to the IRS Independent Office of Appeals in December 2018. Appeals scheduled a conference for January 2019 and warned Tabaka that interest would continue accruing until the liability was paid.

Appeals could not resolve the dispute and returned the docketed case to IRS counsel in April 2019 for trial preparation.

The Tax Court scheduled a trial on June 5, 2019. Tabaka made an additional payment of $7,848 on July 3, bringing his total payments to $18,438.

The parties then settled. They stipulated that:

• Tabaka owed an $18,438 deficiency for 2016.

• No accuracy-related penalty applied.

• Interest would be assessed as provided by law.

The Tax Court entered the stipulated decision on August 6, 2019.

The IRS initially calculated interest of $2,246 without properly accounting for Tabaka’s earlier payments. After recognizing the payments, the IRS abated $614 of interest and made minor account adjustments. The remaining interest liability was $1,649, which Tabaka paid in December 2019.

Fast forward to June 2020. Tabaka files Form 843, asking for his $1,649 back. His pitch? The IRS dragged its feet and turned a simple tax issue into a marathon.

The IRS never bothered to send a formal denial. So Tabaka took his shot in Tax Court in October 2024.

Statutory and Regulatory Framework

Interest on an income tax deficiency generally begins accruing on the original due date of the return and continues until the liability is paid. Interest compounds daily. §§6151(a), 6601(a), and 6622(a).

Section 6404(e)(1) permits the IRS to abate interest attributable to an unreasonable error or delay by an IRS officer or employee in performing a ministerial or managerial act.

A ministerial act is a procedural or mechanical task that requires no judgment or discretion after all prerequisites have been completed. Treas. Reg. §301.6404-2(b)(2).

A managerial act involves administrative matters such as personnel management or the temporary or permanent loss of records. Treas. Reg. §301.6404-2(b)(1).

A decision involving the proper application of federal tax law is neither ministerial nor managerial.

An error or delay counts under §6404(e) only when:

• No significant part of the error or delay is attributable to the taxpayer.

• The error or delay occurs after the IRS first contacts the taxpayer in writing regarding the deficiency.

Under §6404(h)(1), the Tax Court reviews the IRS’s refusal to abate interest for abuse of discretion. The Court may order an abatement if the IRS relied on an erroneous interpretation of law or a clearly erroneous assessment of the evidence.

Arguments

Taxpayer argued:

• The IRS dragged things out way too long for what Tabaka saw as a simple 2016 tax issue.

• The period between the 2017 return due date and the November 2019 interest notice was marked by multiple IRS errors and delays.

• The IRS unnecessarily prolonged the case by moving it through Appeals and later referring it to IRS counsel for trial preparation.

• The resulting $1,649 of interest should therefore be refunded under §6404(e).

Government argued:

• Interest accrued automatically because Tabaka had not paid the full 2016 tax liability by the return due date.

• The IRS handled the examination and subsequent Tax Court proceeding within a reasonable period.

• Referral of the docketed case to Appeals and then back to IRS counsel followed normal procedures.

• Any time spent resolving the correct tax treatment of the Forms 1099-R involved substantive tax determinations rather than ministerial or managerial acts.

• The IRS therefore had no statutory basis to abate the remaining interest.

Court’s Reasoning

• The relevant period began with the IRS’s first written contact. Section 6404(e) does not treat delays occurring before the IRS contacts the taxpayer in writing about the deficiency as grounds for abatement. The relevant starting date was therefore April 16, 2018, when the IRS issued the CP2000.

• The IRS moved the case forward without unreasonable inactivity. The IRS issued the notice of deficiency less than three months after the CP2000. Tabaka petitioned the Tax Court 93 days later. Appeals then received the docketed case, scheduled a conference, and attempted settlement.

• Returning the case to IRS counsel was not an improper delay. Appeals could not reach an agreement with Tabaka. Because the case was already pending in Tax Court, Appeals had to return it to IRS counsel for trial preparation. The Court rejected Tabaka’s characterization of that referral as unnecessary.

• The underlying dispute was resolved relatively quickly. The Tax Court scheduled a trial in June 2019, and the parties reached a settlement shortly afterward. The stipulated decision was entered on August 6, 2019. Less than 16 months elapsed between the first written contact from the IRS and the resolution of the deficiency proceeding.

• Elapsed time alone did not establish statutory delay. Citing Lee v. Commissioner, the Court emphasized that the ordinary passage of time during tax litigation does not by itself constitute an error or delay under §6404(e). The Court characterized Tabaka’s case as having been resolved comparatively quickly.

• The challenged activity involved substantive tax determinations. The IRS had to determine the proper treatment of two Forms 1099-R reporting fully taxable retirement distributions. Resolving that issue required evaluating documentation and determining the taxpayer’s correct liability. Those functions required judgment and therefore were not ministerial or managerial acts.

• The IRS corrected the actual interest-computation error. The IRS initially failed to account for Tabaka’s prior payments when calculating interest. Once it identified that problem, it abated $614. Tabaka did not dispute the mathematical correctness of the remaining $1,649.

Jurisdiction

The IRS never sent Tabaka a formal final determination denying his Form 843 claim.

That didn’t block the Tax Court from hearing the case.

Section 6404(h)(1)(A) provides two routes to Tax Court review. If the IRS issues a final determination, the taxpayer generally must petition within 180 days after the IRS mails it. If the IRS fails to issue a determination within 180 days after the taxpayer files an abatement claim, §6404(h)(1)(A)(ii) permits the taxpayer to petition after that waiting period.

Tabaka filed his Form 843 on June 5, 2020, and did not petition until October 19, 2024. Because the IRS had never issued a formal final determination, he had satisfied the statutory waiting period.

The Court also noted that jurisdiction would exist even if the IRS’s July 9, 2024, letter were treated as a final determination because Tabaka filed his petition within 180 days of that letter.

This technicality didn’t change the outcome, but it’s a handy tip for anyone else stuck waiting on an IRS answer.

Result

Bottom line: the Tax Court sided with the IRS. Tabaka’s $1,649 interest bill stands.

The Takeaway

This case reinforces that §6404(e) addresses specific administrative failures, not just slow cases. If you want interest abated, you need to point to a specific clerical or management screw-up that actually cost you money. Routine audits, Appeals, and Court fights won’t cut it.

List of Citations

Holding

The Tax Court sided with the IRS on every front. Dieffenbach, a Connecticut attorney, got hit with tax bills, late-filing penalties, and accuracy penalties for five years straight. The IRS had the paperwork—W-2s, 1099s, Social Security statements. Dieffenbach had... nothing. No evidence, no counter-numbers, just arguments. The court wasn’t impressed.

Why It Matters

• This is basic burden-of-proof territory. The IRS showed Dieffenbach got paid. After that, it was his job to prove the numbers were wrong. He didn’t.

• Procedural nitpicking is not a defense to owing tax. Dieffenbach spent his time arguing about the notice and whether the IRS ran two audits instead of one. None of that changed the fact that he never challenged the actual income numbers.

• As for the business expenses, Dieffenbach claimed a lot but proved nothing. He filed unsigned or amended returns with big Schedule C deductions, but didn’t back them up in court. The Tax Court gave him nothing.

• This case is a reminder: the Tax Court cares about evidence, not how the IRS ran the audit. If you want to win, bring receipts. Complaints about process won’t get you far.

Key Facts

Jeffery Dieffenbach is a licensed attorney in Connecticut who also performed bookkeeping work.

The IRS examined his federal income tax liabilities for 2015 through 2019.

From 2015 through 2017, the IRS treated Dieffenbach as a nonfiler and prepared substitute returns under §6020(b). Those returns relied on information reported by third parties.

Dieffenbach later submitted unsigned returns for 2015 through 2017 containing Schedule C deductions. The IRS did not accept those returns.

He filed a return for 2018 after the IRS examination began and timely filed his 2019 return. He later submitted amended returns for 2018 and 2019, but the IRS did not process them.

The IRS issued a notice of deficiency on October 24, 2023.

The notice determined the following deficiencies:

• 2015: $7,620

• 2016: $19,499

• 2017: $12,212

• 2018: $16,124

• 2019: $16,948

The notice also determined failure-to-file and failure-to-pay additions, an estimated tax addition for 2016, and accuracy-related penalties of $3,225 for 2018 and $3,390 for 2019.

Third-party information returns showed that Dieffenbach received income from several sources.

For 2015, he received:

• $3,927 of unemployment compensation from Rhode Island

• $9,093 of wages from Network and Simulation Technologies

• Social Security benefits

• $14,610 of independent contractor income from Greenleaf Compassionate Care Center

• $6,562 of independent contractor income from Malcom Company

In later years, he received additional wages, Social Security benefits, and compensation as an independent contractor.

Greenleaf reported payments of $14,610, $24,855, $37,870, and $50,575 for 2015 through 2018, respectively.

Dieffenbach also claimed substantial Schedule C expenses. He reported approximately:

• $22,101 for 2015

• $32,558 for 2016

• $38,011 for 2017

• $62,844 for 2018

Those claimed expenses included advertising, vehicles and equipment, taxes and licenses, interest, office expenses, utilities, and self-employed health insurance.

He also claimed a $75,000 net operating loss carryforward deduction on his 2019 return.

Statutory and Regulatory Framework

Section 61 generally includes all income from whatever source derived in gross income.

The IRS is ordinarily presumed to have the amounts in a notice of deficiency correct. The taxpayer bears the burden of proving otherwise under Tax Court Rule 142(a).

For unreported income, however, the IRS must first establish an evidentiary connection between the taxpayer and the income. Third-party Forms W-2 and 1099 can satisfy that threshold requirement.

Section 6020(b) allows the IRS to prepare a substitute for return when a taxpayer fails to file.

Section 6651(a)(1) imposes an addition to tax for failing to file a required return on time unless the taxpayer establishes reasonable cause.

Section 6651(a)(2) imposes an addition for failing to pay tax shown on a return. A substitute for return prepared under §6020(b) can constitute a return for purposes of that provision.

Section 6654 generally imposes an addition to tax when an individual fails to make required estimated tax payments.

Section 6662 imposes a 20% accuracy-related penalty on certain underpayments, including those attributable to negligence or a substantial understatement of income tax. A substantial understatement generally exists when the understatement exceeds the greater of 10% of the tax required to be shown or $5,000.

Arguments

Taxpayer argued:

• The notice of deficiency was invalid.

• He had filed returns on time for 2015 through 2017.

• The IRS improperly subjected him to multiple examinations.

• The IRS’s actions were unconstitutional.

• Res judicata barred the IRS from proceeding because it had previously filed a Tax Court case covering the same years.

Government argued:

• Third-party information establishes Dieffenbach’s receipt of taxable income.

• IRS records showed that he did not file valid returns for 2015 through 2017.

• The examination remained a single examination even though a second revenue agent took over after the first agent retired.

• The statutory period for assessing 2017 remained open because Dieffenbach executed Form 872, extending the period.

• The earlier Tax Court proceeding did not create res judicata because the case was dismissed for lack of jurisdiction and no judgment on the merits was rendered.

• Dieffenbach remained liable for the additions to tax and accuracy-related penalties because he failed to establish reasonable cause or otherwise rebut the IRS’s determinations.

Court’s Reasoning

• The IRS established the required evidentiary connection to the unreported income through Forms W-2, Forms 1099, Forms SSA-1099, and Form 1099-G.

• Once the IRS met that threshold burden, Dieffenbach had to show that the deficiency determinations were arbitrary or incorrect.

• Dieffenbach did not offer testimony or other evidence disputing the income amounts. When the Court asked whether he had evidence addressing the deficiency determinations, he continued to argue only that the notice was invalid.

• IRS records showed no valid returns for 2015 through 2017. Dieffenbach produced no persuasive evidence to overcome those records.

• The limitation period for 2017 had not expired. Dieffenbach signed Form 872 extending the assessment deadline to December 31, 2023, and the IRS issued the notice on October 24, 2023.

• The assignment of a second revenue agent after the first agent retired did not establish that the IRS conducted a prohibited second examination. Dieffenbach failed to prove that more than one examination occurred.

• The prior Tax Court proceeding did not bar the case under res judicata because it was dismissed for lack of jurisdiction. The earlier case therefore produced no final judgment on the merits.

• The Court found no substantial evidence of unconstitutional conduct by the IRS that would justify looking behind the notice of deficiency.

• IRS account transcripts established that Dieffenbach failed to file timely returns for 2015 through 2018. He did not show reasonable cause, so the Court sustained the §6651(a)(1) additions.

• Certified substitutes for returns established the basis for the §6651(a)(2) failure-to-pay additions for 2015 through 2017.

• Dieffenbach filed no 2015 or 2016 return and made no required estimated payments for 2016, supporting the §6654 addition.

• The 2018 and 2019 understatements exceeded $5,000 and qualified as substantial understatements. Dieffenbach did not establish reasonable cause and good faith, so the Court sustained the §6662 penalties.

Result

The Tax Court sustained the IRS’s deficiency, addition-to-tax, and penalty determinations, with the final amounts to be calculated under Tax Court Rule 155.

The Takeaway

Here’s the real takeaway: you can complain about IRS procedures all day, but if you don’t actually dispute the numbers, you’re out of luck. The Tax Court wants evidence, not just arguments.

List of Citations

• IRC §61(a): Defines gross income broadly as income from whatever source derived.

• IRC §6020(b): Authorizes the IRS to prepare substitutes for returns for nonfilers.

• IRC §6651(a)(1): Imposes the failure-to-file addition to tax.

• IRC §6651(a)(2): Imposes the failure-to-pay addition to tax.

• IRC §6651(g): Treats certain §6020(b) substitutes for returns as returns for failure-to-pay purposes.

• IRC §6654: Governs additions to tax for underpayment of estimated tax.

• IRC §6662: Imposes the 20% accuracy-related penalty.

• IRC §6664(c)(1): Provides the reasonable-cause and good-faith exception to the accuracy-related penalty.

• IRC §6751(b)(1): Requires written supervisory approval for the initial determination of certain penalties.

• IRC §7491(c): Places the burden of production on the IRS for individual penalties and additions to tax.

• IRC §7605(b): Limits unnecessary examinations and multiple inspections of a taxpayer’s books.

• Welch v. Helvering, 290 U.S. 111 (1933): Establishes the general presumption of correctness for deficiency determinations.

• INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992): Confirms that taxpayers must establish entitlement to deductions.

• New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934): Treats deductions as matters of legislative grace.

• Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979): Requires an evidentiary foundation connecting a taxpayer to alleged unreported income.

• Petzoldt v. Commissioner, 92 T.C. 661 (1989): Applies the evidentiary foundation requirement in unreported-income cases.

• Silver v. Commissioner, T.C. Memo. 2021-98: Recognizes third-party information returns as sufficient evidence of income.

• Walquist v. Commissioner, 152 T.C. 61 (2019): Explains the taxpayer’s burden after the IRS establishes receipt of unreported income.

• Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324 (1974): Limits Tax Court review of the IRS’s administrative examination process.

• United States v. Powell, 379 U.S. 48 (1964): Interprets §7605(b) as imposing no severe restriction on IRS investigative authority.

• Hough v. Commissioner, 882 F.2d 1271 (7th Cir. 1989): Addresses claims involving prohibited second examinations.

• Estate of Sower v. Commissioner, 149 T.C. 279 (2017): Addresses the taxpayer’s burden to establish an improper second examination.

• Federated Department Stores, Inc. v. Moitie, 452 U.S. 394 (1981): States principles governing res judicata.

• Monge v. Commissioner, 93 T.C. 22 (1989): Addresses jurisdiction and the effect of a prior Tax Court dismissal.

• Higbee v. Commissioner, 116 T.C. 438 (2001): Explains the IRS’s burden of production for penalties.

• Wheeler v. Commissioner, 127 T.C. 200 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008): Addresses the IRS’s evidentiary burden for failure-to-pay and estimated-tax additions.

• Dieffenbach v. Commissioner, No. 3921-22 (T.C. May 4, 2023): Earlier proceeding dismissed for lack of jurisdiction and therefore not a judgment on the merits.

Tell Me More

FinCEN is making its March 26, 2025 interim final rule permanent and adding more relief for U.S. persons. Domestic entities are no longer considered reporting companies. Foreign reporting companies do not need to report beneficial ownership information for U.S. person beneficial owners or company applicants. U.S. persons also do not have to update or correct information linked to their FinCEN identifiers.

The rule takes effect once it is published in the Federal Register. FinCEN has submitted the rule for publication and notes that the Federal Register version will be the official one.

Why It Matters

• The CTA reporting regime is now overwhelmingly a foreign-entity reporting regime. Corporations, LLCs, and similar entities created under U.S. state or tribal law remain exempt from BOI reporting even if they previously would have qualified as domestic reporting companies.

• U.S. persons now get more relief than they did under the March 2025 interim rule. Foreign reporting companies already did not have to report U.S. person beneficial owners, and now the exemption also covers U.S. person company applicants.

• Current U.S. FinCEN ID holders no longer need to keep updating their information. FinCEN estimates that about 760,000 U.S. persons have FinCEN IDs and will no longer have to update or correct their details.

• Foreign reporting companies still have compliance requirements. A foreign entity formed under foreign law and registered to do business in a U.S. state or tribal area generally must still report BOI unless another exemption applies.

• The final rule does not remove customer due diligence requirements for financial institutions. FinCEN makes it clear that the CTA Reporting Rule is separate from the Customer Due Diligence Rule, and financial institutions must still follow the latter while FinCEN reviews possible changes.

• FinCEN plans to delete much of the U.S. person information already in its BOI database. The agency expects to do a one-time removal of information that would not have been required under the final rule.

Key Facts

Congress enacted the Corporate Transparency Act in 2021 as part of the Anti-Money Laundering Act of 2020. The CTA added §5336 to the Bank Secrecy Act and directed Treasury to create a federal beneficial ownership reporting system.

FinCEN’s original 2022 Reporting Rule generally required both domestic and foreign reporting companies to provide identifying information about themselves and their beneficial owners. Companies created or registered after January 1, 2024 also had to report certain company applicants.

Litigation disrupted implementation during late 2024 and early 2025. Treasury then announced on March 2, 2025, that it would stop enforcing CTA reporting requirements on U.S. citizens and domestic reporting companies and would narrow the rule to apply only to foreign companies.

FinCEN implemented that policy through an interim final rule effective March 26, 2025. The interim rule:

• removed domestic entities from the definition of reporting company;

• exempted U.S. person beneficial owners from BOI reporting;

• retained reporting for foreign entities registered to do business in the United States;

• required those foreign reporting companies to report only non-U.S. beneficial owners; and

• retained a 30-day filing framework for covered foreign companies.

FinCEN received 118 comment letters on the interim rule. Forty clearly supported the narrowed reporting regime, 28 strongly opposed it, and 50 did not clearly support or oppose it.

The final rule retains the basic framework but provides two additional forms of relief for U.S. persons.

First, foreign reporting companies no longer have to identify applicants as U.S. persons. The interim rule had exempted U.S. beneficial owners but not necessarily U.S. company applicants.

Second, U.S. persons who obtained FinCEN identifiers no longer have to update or correct the identifying information associated with those identifiers.

Statutory Framework

The CTA generally requires reporting companies to provide BOI to FinCEN but gives Treasury substantial exemption authority.

Under 31 U.S.C. §5336(a)(11)(B)(xxiv), Treasury may exempt an entity or class of entities when the Secretary, with written concurrence from the Attorney General and Secretary of Homeland Security, determines that requiring BOI would not serve the public interest and would not be highly useful for national security, intelligence, or law enforcement purposes.

Treasury also relies on 31 U.S.C. §5318(a)(7), which authorizes appropriate exemptions from Bank Secrecy Act requirements.

The final rule modifies 31 CFR §1010.380, FinCEN’s CTA reporting regulation.

What the Final Rule Changes

Domestic entities remain exempt

The most consequential provision remains unchanged from the interim rule.

Entities created under U.S. state or tribal law are excluded from the operative definition of reporting company. FinCEN therefore does not require the millions of corporations, LLCs, and similar domestic entities that originally fell within the CTA Reporting Rule to submit BOI reports.

FinCEN rejected requests to replace the broad exemption with narrower exemptions based on factors such as company size, ownership, nonprofit status, foreign ownership, or shell-company characteristics.

Treasury concluded that the blanket domestic exemption better satisfied what it views as the CTA’s required balancing of useful information against private compliance costs.

Foreign reporting companies remain covered

A reporting company now effectively means an entity that:

• is formed under the law of a foreign country; and

• registers to do business in a U.S. state or tribal jurisdiction by filing a document with a secretary of state or similar office.

Existing statutory and regulatory exemptions continue to apply.

FinCEN estimates approximately 28,000 foreign entities may ultimately qualify as nonexempt reporting companies. About 13,000 had already filed reports by the end of 2025, leaving an estimated 15,000 existing foreign companies still expected to report. FinCEN expects roughly 1,800 additional foreign reporting companies each year.

U.S. beneficial owners remain exempt

Foreign reporting companies do not have to report BOI for beneficial owners who are U.S. persons.

A foreign reporting company owned entirely by U.S. persons can therefore still have a filing obligation even though its report contains no beneficial owner information.

The final rule relocates this exemption within §1010.380 but does not materially reverse the exemption adopted in 2025.

U.S. company applicants are now exempt

This is one of the principal changes to the final rule from the interim rule.

A company applicant generally includes the person who files the document registering the entity and, when applicable, the person primarily responsible for directing that filing.

Under the interim rule, a foreign company registered in the United States on or after January 1, 2024 could still have been required to report a U.S. person company applicant.

The final rule eliminates that requirement.

Reporting companies are exempt from reporting BOI for any U.S. person who is either:

• a beneficial owner; or

• a company applicant.

U.S. persons are correspondingly exempt from having to provide that information to the reporting company.

U.S. FinCEN ID holders no longer have to update information

The original rules required a person who obtained a FinCEN identifier to update or correct the underlying personal information when it changed.

That produced an odd result after the 2025 exemptions. A U.S. person could have no remaining BOI reporting obligation but still face a continuing obligation to maintain information associated with an old FinCEN ID.

The final rule eliminates that requirement for U.S. persons.

Only individuals who are not U.S. persons remain subject to the FinCEN ID update and correction requirement in revised 31 CFR §1010.380(b)(4)(iii)(A).

For non-U.S. persons, changes generally must be reported within 30 calendar days.

Filing Deadlines

FinCEN did not change the 30-day filing framework established under the interim rule.

A newly covered foreign reporting company generally must file its initial BOI report within 30 days after the earlier of:

• receiving actual notice that it has been registered to do business in the United States; or

• the relevant state or tribal office first providing public notice of the registration.

Covered reporting companies generally must also update or correct required information within 30 days after the relevant change or discovery of an error.

FinCEN rejected requests to extend the general filing period to 90 days.

Previously Reported U.S. BOI

The final rule addresses a major practical issue left unresolved by the interim rule: what FinCEN intends to do with information already submitted by U.S. companies and U.S. individuals.

Millions of domestic entities filed BOI reports before Treasury changed course.

FinCEN now states that privacy, information security, and public trust support removing, as practicable, information that would not have been required if the final rule had been in effect as of January 1, 2024.

FinCEN anticipates working with the National Archives and Records Administration to conduct a one-time deletion project.

The agency expects to identify domestic companies and U.S. persons using information already contained in BOI filings, including identification documents such as U.S. passports and U.S. driver’s licenses.

FinCEN does not expect U.S. companies or individuals to submit deletion requests.

It also does not plan to issue individual confirmations when records are deleted. FinCEN instead intends to announce publicly on its website once the deletion process is complete.

The contemplated deletion process has an important limitation. FinCEN says that if U.S. person information is submitted after a date 180 days following publication of the final rule, whether intentionally or inadvertently, the agency does not anticipate conducting additional periodic sweeps to delete it.

Customer Due Diligence Remains Separate

The final rule does not eliminate the collection of beneficial ownership information by banks and other covered financial institutions.

FinCEN emphasizes that the CTA Reporting Rule and its Customer Due Diligence Rule serve different purposes and derive from different legal authorities.

Covered financial institutions may therefore still be required to collect beneficial ownership information from legal-entity customers, even if the same domestic business has no obligation to file a CTA BOI report with FinCEN.

FinCEN acknowledges that this creates questions about how the two regimes interact.

The agency says it remains legally required to revise the CDD Rule and intends to return its attention to that rule now that the BOI Reporting Rule revisions have been completed.

Enforcement

The final rule does not amend the CTA’s existing reporting violation provisions.

Civil and criminal liability may be available for willful violations by persons and entities subject to reporting requirements.

FinCEN states that inadvertent mistakes and simple lack of awareness should not form the basis for enforcement because the statute requires willfulness.

That distinction matters primarily for foreign reporting companies and non-U.S. persons, as domestic companies and U.S. persons have largely been removed from the reporting regime.

Regulatory Impact

FinCEN treats the rule as a major deregulatory action.

The agency estimates that approximately 27.5 million domestic reporting companies were relieved of filing obligations through the 2025 interim rule.

Using the assumptions from its original Reporting Rule, FinCEN estimates that the rollback has eliminated approximately:

• 53 million reporting burden hours per year, on average; and

• $9 billion in reporting costs per year, on average.

FinCEN estimates roughly $18 billion in aggregate reporting cost savings for entities relieved from reporting since the interim rule took effect.

The additional changes made by this final rule produce much smaller incremental savings because the major deregulation already occurred in March 2025.

FinCEN estimates that eliminating U.S. FinCEN ID updates and U.S. company applicant reporting will save approximately:

• $233,439 during the first year; and

• $209,105 annually thereafter.

The table on page 50 summarizes the regulatory changes. It identifies three affected groups: reporting companies, U.S. persons generally, and U.S. persons holding FinCEN IDs. The rule eliminates reporting of U.S. beneficial owners and company applicants and removes ongoing FinCEN ID updates for U.S. persons.

FinCEN permanently adopts the 2025 narrowing of the Corporate Transparency Act reporting regime and expands it by eliminating BOI reporting for U.S. company applicants and ongoing FinCEN ID update requirements for U.S. persons.

The Takeaway

For most U.S.-formed businesses, CTA beneficial ownership reporting is now essentially finished under FinCEN’s current rule. Practitioners should focus BOI compliance efforts on foreign-organized entities registered to do business in the United States, and remember that financial institution customer due diligence requirements remain separate.

List of Citations

• 31 U.S.C. §5336: Corporate Transparency Act beneficial ownership reporting requirements and Treasury exemption authority.

• 31 U.S.C. §5336(a)(11)(B)(xxiv): Authorizes Treasury to exempt additional entities or classes of entities from the definition of reporting company.

• 31 U.S.C. §5336(b)(4)(A): Authorizes Treasury to establish procedures and standards governing FinCEN identifiers.

• 31 U.S.C. §5336(h): Establishes civil and criminal consequences for willful BOI reporting violations.

• 31 U.S.C. §5318(a)(7): Provides Treasury authority to grant appropriate exemptions from Bank Secrecy Act requirements.

• 31 CFR §1010.380: FinCEN regulation implementing CTA beneficial ownership reporting requirements.

• 90 FR 13688 (March 26, 2025): Interim final rule that initially narrowed CTA reporting primarily to foreign reporting companies.

• Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024): Cited by commenters challenging whether Treasury’s broad domestic-company exemption is consistent with the CTA.

• McHenry v. Texas Top Cop Shop, Inc., 145 S. Ct. 1 (2025): Supreme Court order staying a nationwide preliminary injunction involving CTA enforcement.

• Texas Top Cop Shop, Inc. v. Garland, 758 F. Supp. 3d 607 (E.D. Tex. 2024): CTA litigation that disrupted implementation of FinCEN’s original reporting deadlines.

• Smith v. U.S. Department of the Treasury, 761 F. Supp. 3d 952 (E.D. Tex. 2025): Additional litigation affecting implementation of the CTA Reporting Rule.

• National Small Business United v. U.S. Department of the Treasury, 161 F.4th 1323 (11th Cir. 2025): Appellate CTA litigation referenced in FinCEN’s procedural history.

• Flowers Title Co. v. Bessent, No. 6:25-CV-127-JDK, 2026 WL 782283 (E.D. Tex. Mar. 19, 2026): Decision cited by FinCEN concerning the separate Real Estate Reporting Rule.

Holding

The Tax Court rejected the Schedule C deductions related to the taxpayers’ corporation and denied the $49,986 charitable contribution deduction. The couple did not provide the necessary written proof or show that the recipient met §170(c) requirements.

Why It Matters

• This decision follows established law. A corporation and its shareholders are separate taxpayers, so shareholders usually cannot deduct corporate expenses on their own tax returns.

• The charitable contribution issue turned on substantiation, not merely on where the deduction appeared on the return. Moving an expense from Schedule C to Schedule A does not fix the problem if the §170 documentation requirements are not met.

• This opinion is a small tax case under §7463 and cannot be used as precedent.

Key Facts

Ehimwenma E. Aimiuwu and Kehinde F. Aimiuwu filed a joint 2021 federal income tax return.

Ehimwenma Aimiuwu owned Edofolks, Inc., a Georgia corporation that sold books. The corporation reported no income for the year.

The couple claimed a $79,136 Schedule C loss on their individual return—most of the expenses related to Edofolks rather than to a separate business conducted personally by the taxpayers.

The Schedule C also included a $49,986 expense labeled “Donation.” The couple said the payment went to an organization identified as Aimiuwu.com. Inc.

The taxpayers attributed the reporting errors to their paid return preparer, who allegedly advised them to deduct the corporation’s expenses personally because the corporation had no income.

By trial, the taxpayers conceded that the corporate expenses did not belong on their individual return. They continued to claim that the $49,986 payment should instead qualify as an itemized charitable contribution deduction on Schedule A.

They produced no canceled check, contribution receipt, acknowledgment from the recipient, or other written record supporting the payment. They also produced no evidence showing that Aimiuwu.com Inc. qualified as an eligible charitable organization.

Statutory and Regulatory Framework

A corporation ordinarily constitutes a taxpayer separate from its shareholders. One taxpayer generally cannot deduct expenses paid or incurred by another taxpayer.

Section 170 allows a deduction for qualifying charitable contributions. For cash contributions, §170(f)(17) requires a bank record, written communication from the charitable organization, or another qualifying written record showing the recipient, date, and amount of the contribution.

The taxpayer must also establish that the recipient qualifies under §170(c), which defines the organizations and entities eligible to receive deductible charitable contributions.

Arguments

Taxpayer argued:

• The return preparer incorrectly placed corporate expenses on the couple’s Schedule C.

• The $49,986 donation should have appeared on Schedule A rather than Schedule C.

• The payment therefore remained deductible despite the original reporting error.

Government argued:

• The expenses associated with Edofolks were the corporation's and could not be deducted by its shareholders.

• The taxpayers failed to provide the documentation required to substantiate the alleged charitable contribution.

• The taxpayers also failed to establish that the recipient qualified under §170(c).

Court’s Reasoning

• Edofolks, Inc. existed as a separate corporate taxpayer from the Aimiuwus.

• The taxpayers conceded that nearly all expenses claimed on Schedule C belonged to Edofolks.

• Longstanding federal tax principles prevent shareholders from deducting expenses attributable to their corporation.

• Moving the $49,986 donation from Schedule C to Schedule A would not establish entitlement to the deduction.

• Section 170 requires written substantiation for cash contributions.

• The taxpayers offered only testimony regarding the alleged payment and produced no required written evidence.

• They also failed to establish that Aimiuwu.com Inc. qualified as an eligible recipient under §170(c).

Result

The Tax Court sustained the IRS’s disallowance of the corporate expenses and the $49,986 charitable contribution deduction, with the final deficiency to be computed under Rule 155.

The Takeaway

This decision does not change the law, but it highlights two key rules: corporate expenses must stay with the corporation, and charitable deductions need documentation showing both the payment and the recipient’s eligibility.

List of Citations

• IRC §170: Allows deductions for qualifying charitable contributions.

• IRC §170(c): Defines organizations and recipients eligible to receive deductible charitable contributions.

• IRC §170(f)(17): Establishes substantiation requirements for cash contributions.

• IRC §7463: Governs small tax cases and provides that the resulting opinion is nonprecedential and generally not appealable.

• Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943): Establishes that a corporation generally remains a taxpayer separate from its shareholders.

• Deputy v. du Pont, 308 U.S. 488 (1940): Supports the principle that a taxpayer generally may deduct only that taxpayer’s own expenses.

• Columbian Rope Co. v. Commissioner, 42 T.C. 800 (1964): Applies the separate-taxpayer principle to deductions claimed by different taxpayers.

Holding

The Tax Court upheld §6663 civil fraud penalties for 2009 through 2012 after finding strong evidence that he intentionally hid taxable income by having his company pay his personal expenses and recording them as business costs.

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Why It Matters

• The decision uses established fraud rules and is based on a strong record of concealment. The court looked at several signs of fraud, not just one bookkeeping mistake.

• Having two sets of accounting records can be seen as evidence of fraud, even if one set was supposedly made for a reason unrelated to taxes.

• A taxpayer cannot avoid responsibility by blaming their tax preparer if they provided records that wrongly list personal expenses as business expenses.

• The ruling makes clear the difference between careless bookkeeping and intentional hiding of information. The court decided that repeatedly changing records, using fake payee names, leaving out payments, and not reporting personal benefits did not look like honest mistakes.

Key Facts

Walter Prezioso owned 25% of GSP Precision, Inc., a California aerospace manufacturing company, and became its chief executive officer in 2007.

GSP began paying some of Prezioso’s personal expenses in 2007. Corporate minutes authorized several categories of personal expenditures, including leased vehicles, insurance, medical coverage, life insurance, and certain credit card expenses.

The company paid substantially more than those expressly identified expenses. Payments included:

• Personal credit cards.

• Home renovations.

• A home-equity line of credit.

• Landscaping.

• Tennis Court and pool contractors.

• Home audio and visual equipment.

• Boat and recreational vehicle loans.

• Vehicle leases.

GSP issued more than 400 checks for Prezioso’s personal expenses during the years at issue.

Prezioso remained on GSP’s payroll and received a regular salary. GSP did not report the additional personal expenses on Forms W-2 or Forms 1099 issued to him.

Prezioso nevertheless understood that the payments increased his economic compensation. On an application for a Ferrari lease, he reported $52,950 of “Verifiable” W-2 income and $275,000 of “Actual” income.

Prezioso handled much of GSP’s bookkeeping. The company maintained two sets of charts of accounts.

The internal charts were available for shareholder review. Those records often replaced the true payees of Prezioso’s personal expenses with names of legitimate GSP vendors.

The accountant charts were provided to GSP’s outside accountant. Prezioso generally restored the correct payee names before generating those records, but personal expenses still carried business expense codes such as equipment repair, material purchases, and outside processing.

Those codes flowed into GSP’s financial statements and tax reporting. At least some of the personal expenses were ultimately included in cost of goods sold.

Prezioso and his wife filed joint individual income tax returns for 2009 through 2013. They reported his W-2 wages but did not report income arising from GSP’s payment of personal expenses.

The IRS determined deficiencies and fraud penalties for 2009 through 2013.

The Preziosos conceded all underlying deficiencies and conceded the fraud penalty for 2013. The only remaining dispute involved the §6663 fraud penalties for 2009 through 2012.

Statutory and Regulatory Framework

Section 6663(a) imposes a penalty equal to 75% of the portion of an underpayment attributable to fraud.

The IRS must prove fraud by clear and convincing evidence under §7454(a) and Tax Court Rule 142(b).

For each year, the IRS must establish:

• An underpayment of tax.

• Fraudulent intent with respect to at least part of that underpayment.

Fraud means intentional wrongdoing designed to evade tax the taxpayer knows or believes is due.

Because direct evidence of intent is uncommon, courts evaluate circumstantial evidence commonly called badges of fraud. Relevant indicators include consistently understated income, concealed income or assets, misleading books and records, false information supplied to tax preparers, implausible explanations, and false tax returns.

A corporation’s payment of a shareholder’s personal expenses generally creates taxable income to that shareholder, depending on the circumstances, as compensation or a constructive distribution.

Arguments

Taxpayer argued:

• The company legitimately paid certain personal expenses as part of Prezioso’s compensation arrangement.

• Prezioso supplied substantially accurate accounting information to GSP’s outside accountant.

• The company’s outside accountant knew about or approved the bookkeeping treatment.

• The internal accounting records concealed personal expenses from employees rather than from the IRS or the company’s accountant.

• Prezioso did not understand at the time that GSP’s payment of his personal expenses created taxable income.

• Any understatements resulted from mistake rather than fraudulent intent.

Government argued:

• Prezioso deliberately maintained misleading accounting records.

• He substituted legitimate vendor names for the true payees of personal expenditures.

• He classified personal expenses under business expense codes.

• Those classifications resulted in the payments being treated as corporate costs rather than compensation.

• Prezioso supplied incomplete or misleading information to the tax preparer.

• The repeated concealment, understatement of income, and double bookkeeping established fraudulent intent.

Court’s Reasoning

• The Court rejected Prezioso’s explanation that the company’s accountant authorized the bookkeeping system. The record contained no documents showing that the accountant knew personal expenses were being coded as ordinary business expenses.

• The available expense codes included specific categories for officer compensation, shareholder draws, and shareholder loans. The Court found it implausible that the accountant would instead instruct Prezioso to record home improvements, landscaping, personal credit card charges, and similar expenditures as material purchases or equipment repairs.

• The Court did not believe Prezioso created the misleading internal records merely to prevent employees from seeing his compensation. Prezioso repeatedly changed actual payees to legitimate company vendors and sometimes omitted direct payments entirely.

• The Court viewed the internal records as evidence that Prezioso sought to conceal both the frequency and the amount of personal expenditures from other shareholders.

• The existence of two sets of books supported a fraudulent intent, even if the misleading records originally served a non-tax purpose. The Court relied on prior cases treating double bookkeeping and falsified financial records as circumstantial evidence of fraud.

• The accountant charts did not cure the problem. Personal expenses continued to be recorded under misleading business expense codes, causing them to flow through the company’s books as ordinary corporate expenses.

• The Court found that Prezioso gave his return preparer incomplete or misleading information. Nothing in the accounting records clearly identified the personal expenditures as compensation or shareholder benefits.

• The consistent understatement of income also supported the finding of fraud. Prezioso failed to report substantial economic benefits, even though his Ferrari lease application showed he understood that his actual income substantially exceeded his reported W-2 wages.

• The Court rejected Prezioso’s claim that he did not know the payments constituted taxable income. His bookkeeping practices, failure to question the company’s recurring losses, and substantial difference between reported and actual income supported an inference of willful blindness at minimum.

• Taken together, the double bookkeeping, concealment, implausible explanations, inaccurate expense classifications, and repeated understatement of income satisfied the IRS’s clear and convincing evidence burden for each year from 2009 through 2012.

Result

The Tax Court sustained the §6663 fraud penalties for 2009 through 2012, with the final deficiency and penalty amounts to be computed under Rule 155.

The Takeaway

This case is important for closely held businesses where owners use company accounts to pay personal expenses. While there can be debates about how to treat certain payments for tax purposes, intentionally hiding personal expenses as business costs can turn a simple tax adjustment into a 75% fraud penalty.

List of Citations

• IRC §6663(a): Imposes the 75% civil fraud penalty on the portion of an underpayment attributable to fraud.

• IRC §7454(a): Places the burden of proving fraud on the IRS.

• IRC §7491(c): Establishes the IRS’s burden of production for penalties imposed on individuals.

• IRC §6751(b): Requires written supervisory approval for certain penalties.

• IRC §6013(d)(3): Makes spouses filing jointly jointly and severally liable for the tax due on the joint return.

• Neely v. Commissioner, 116 T.C. 79 (2001): Defines fraud as intentional wrongdoing designed to evade tax believed to be owing.

• Petzoldt v. Commissioner, 92 T.C. 661 (1989): Explains that fraud cannot rest on suspicion and may be proven through circumstantial evidence.

• Parks v. Commissioner, 94 T.C. 654 (1990): Addresses concealment and misleading conduct as evidence of fraudulent intent.

• Bradford v. Commissioner, 796 F.2d 303 (9th Cir. 1986): Identifies commonly used badges of fraud.

• Niedringhaus v. Commissioner, 99 T.C. 202 (1992): Explains that multiple badges of fraud can provide persuasive circumstantial evidence.

• Podlucky v. Commissioner, T.C. Memo. 2022-45: Supports treating double bookkeeping as evidence of fraudulent intent even when the false records also serve nontax purposes.

• Truesdell v. Commissioner, 89 T.C. 1280 (1987): Treats consistent and substantial understatement of income as strong evidence of fraud.

• Helvering v. Horst, 311 U.S. 112 (1940): Supports taxation of income to the person who earns or enjoys its economic benefit.

• Butler v. Commissioner, 114 T.C. 276 (2000): Addresses joint and several liability arising from a joint federal income tax return.

Holding

The Tax Court determined that HBM Holdings Co. could not use about $108 million in net operating loss carryovers from Delavau Holdings, LLC for consolidated NOL deductions in 2018, 2020, and 2021. Delavau was considered HBM’s predecessor under the consolidated return rules, and its preliquidation tax years were still separate return limitation years. HBM’s founding group members also did not qualify as an SRLY subgroup. The Court granted partial summary judgment to the IRS.

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Why It Matters

• This decision highlights an important limit on §381 attribute succession. An acquiring corporation can take on a liquidated corporation’s NOLs, but those losses do not automatically become unrestricted for the acquirer.

• The common parent exception to the SRLY rules does not cover losses created by a predecessor of the common parent. This difference was key to the outcome.

• The SRLY subgroup rules require that members were previously part of the same affiliated group. Simply having common ownership or economic ties before consolidation is not sufficient.

• This decision is especially important for restructurings that involve S corporations, QSubs, entity classification elections, §332 liquidations, and forming a consolidated group later on. The order of these transactions can affect whether inherited NOLs can be used to offset group income.

Key Facts

HBM Holdings Co. was the common parent of a consolidated corporate group.

Mississippi Lime Co. acquired Delavau Holdings, LLC in 2012. Delavau had approximately $78 million of NOL carryovers at that time and was treated as a loss corporation under §382.

HBM was formed in 2014 through an F reorganization and elected S corporation status. Several subsidiaries, including Mississippi Lime, later operated as qualified subchapter S subsidiaries, or QSubs.

HBM revoked its S corporation election effective July 1, 2018. The QSub status of four subsidiaries ended on the same date.

Delavau elected to be disregarded as a separate entity from HBM, effective July 1, 2018. That election caused Delavau to be deemed liquidated into HBM as of June 30, 2018.

The parties agreed that §§332 and 381 applied to the deemed liquidation. HBM therefore succeeded to Delavau’s NOL carryovers, which had grown to approximately $108 million.

HBM then became the common parent of a consolidated group beginning July 1, 2018. Delavau was never a member of that consolidated group.

HBM had no taxable income on a separate-entity basis for the short 2018 tax year through 2021.

The consolidated group nevertheless used Delavau’s NOL carryovers to claim CNOL deductions of approximately:

• $13.55 million for the short 2018 tax year.

• $14.97 million for 2020.

• Approximately $1.1 million for 2021.

The IRS disallowed the deductions under the SRLY rules.

Statutory or Regulatory Framework

Section 381 generally allows an acquiring corporation in certain tax-free corporate transactions, including qualifying §332 liquidations, to succeed to specified tax attributes of the distributor or transferor, including NOL carryovers.

The coThe consolidated return rules add another limit through the separate return limitation year (SRLY) rules. An SRLY usually includes a separate return year of a group member or its predecessor. Treas. Reg. §1.1502-21(c), an NOL generated during an SRLY generally may offset consolidated taxable income only to the extent that the consolidated group’s income is attributable to the member that generated or succeeded to the loss.

Treas. Reg. §1.1502-1(f)(2)(i), known as the lonely parent rule, excludes some separate return years of the current common parent from being considered SRLYs.

The subgroup rules offer another exception. Members can usually combine their income for SRLY purposes if they joined the current group together after being in the same affiliated group before.

Arguments

Taxpayer argued:

• Section 381 caused HBM to inherit Delavau’s NOL carryovers as HBM’s own tax attributes.

• Because HBM was the common parent of the consolidated group, the lonely parent rule should prevent Delavau’s historical separate return years from being treated as SRLYs.

• Delavau should not qualify as HBM’s predecessor because HBM was not yet a member of the consolidated group when the §381 transaction occurred.

• Alternatively, HBM and the other founding members should qualify as an SRLY subgroup because they were jointly controlled prior to the formation of the consolidated group.

Government argued:

• Delavau remained the source of the NOLs even after HBM succeeded to them under §381.

• Delavau was HBM’s predecessor under Treas. Reg. §1.1502-1(f)(4).

• The lonely parent exception applies to the common parent’s own separate return years, not the separate return years of its predecessor.

• The founding members could not form an SRLY subgroup because they had never previously belonged to another affiliated group together.

• Since HBM did not have its own taxable income during the relevant years, the SRLY limitation stopped the inherited Delavau losses from being used to offset the income of other group members.

Court’s Reasoning

• Section 381 allows tax attributes to be transferred, but their origin still matters. The regulations still treat NOL carryovers inherited from another company differently from those created by the acquiring company.

• Delavau met the regulatory definition of a predecessor because it distributed assets to HBM in a transaction to which §381 applied. The regulations did not require that HBM be a consolidated group member when the liquidation occurred.

• The Court rejected HBM’s proposed timing limitation because Treas. Reg. §1.1502-1(f)(4) contains no such requirement.

• Delavau’s preliquidation years remained separate return years of HBM’s predecessor. Those years therefore fell within the general definition of SRLYs.

• The lonely parent rule did not apply. Its text refers to separate return years of the common parent itself and does not include separate return years of a predecessor.

• The founding members did not qualify as an SRLY subgroup. Before July 2018, HBM was an S corporation and the other entities were QSubs disregarded as separate from HBM. They therefore had not previously belonged to another affiliated group.

• Because HBM generated no separate taxable income during the years at issue, there was no HBM-attributable income against which the Delavau SRLY NOLs could be used. Income earned by the other founding members could not expand the limitation.

Result

The Tax Court approved the IRS’s request for partial summary judgment, denied HBM’s cross-motion, and did not allow the consolidated NOL deductions related to Delavau’s NOL carryovers for 2018, 2020, and 2021.

The Takeaway

Section 381 succession does not make inherited NOLs the same as a successor corporation’s own losses for consolidated return purposes. Groups that acquire or inherit losses before consolidation must check the SRLY rules separately before assuming those losses can offset other members’ income.

List of Citations

• I.R.C. §332: Governs qualifying liquidations of subsidiaries into parent corporations.

• I.R.C. §381: Governs succession to specified tax attributes, including NOL carryovers, in qualifying corporate transactions.

• I.R.C. §382: Limits the use of NOLs following certain ownership changes.

• I.R.C. §1361: Governs S corporations and qualified subchapter S subsidiaries.

• I.R.C. §1504: Defines affiliated groups for consolidated return purposes.

• Treas. Reg. §1.1502-1(e): Defines a separate return year.

• Treas. Reg. §1.1502-1(f): Defines SRLYs, predecessors, successors, and relevant exceptions.

• Treas. Reg. §1.1502-21: Governs consolidated NOL deductions and the SRLY limitation.

• Treas. Reg. §1.381(c)(1)-1: Governs treatment of NOL carryovers succeeded to under §381.

• Treas. Reg. §301.7701-3: Governs entity classification elections and deemed transactions resulting from changes in classification.

• Wolter Construction Co. v. Commissioner, 68 T.C. 39 (1977), aff’d, 634 F.2d 1029 (6th Cir. 1980): Supports applying SRLY restrictions to predecessor losses inherited by a successor common parent.

• Dover Corp. & Subsidiaries v. Commissioner, 122 T.C. 324 (2004): Addressed succession to business history under §381 but did not establish that inherited NOLs become indistinguishable from the acquirer’s own attributes.

• AptarGroup Inc. v. Commissioner, 158 T.C. 110 (2022): Supports interpreting consolidated return regulations according to their text and structure.

• Florida Peach Corp. v. Commissioner, 90 T.C. 678 (1988): States the Tax Court’s standard and purpose for summary judgment.

Holding

The Tax Court upheld a 2021 income tax deficiency against Lawrence Hubbard because he did not report $22,925 in unemployment compensation, could not prove he ran a trade or business, and did not provide enough evidence for $31,890 in refundable COVID-19 sick and family leave credits. The IRS dropped a $6,378.40 penalty under §6676 for an incorrect refund or credit claim.

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Why It Matters

• The decision is primarily a case of substantiation. The Court applied established burden-of-proof rules rather than announcing a new interpretation of the COVID-19 credit provisions.

• Self-employment was a threshold issue. The COVID-19 sick and family leave credits depended on income from a trade or business. Hubbard could not establish that his barber, music, and cooking activities met that requirement.

• Payment records alone did not prove business activity. Screenshots showing Zelle, Cash App, and cash deposits did not identify the business purpose of the payments or connect them to services performed.

• A fraud allegation does not overcome a Form 1099-G without supporting evidence. Hubbard disputed unemployment compensation reported by California EDD, but evidence that he filed a bank fraud claim did not establish that he never received the income.

Key Facts

Lawrence Hubbard filed a 2021 federal income tax return reporting self-employment activity as a barber.

His Schedule C reported:

• $10,344 of gross business income.

• $5,509 of business expenses.

• $4,835 of net business income.

He also claimed $31,890 of refundable COVID-19 sick and family leave credits:

• $14,960 for leave before April 1, 2021.

• $16,930 for leave after March 31, 2021.

Hubbard did not attach Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to support the credits.

California EDD issued Hubbard a Form 1099-G reporting $22,925 of unemployment compensation and $1,260 of federal income tax withholding. Hubbard did not report either amount on his return.

The IRS issued a notice of deficiency determining $32,938 of additional income tax and initially imposed a $6,378.40 penalty under §6676. The IRS later conceded the penalty.

Regulatory Framework

Gross income generally includes income from all sources under §61.

Under §162, taxpayers may deduct ordinary and necessary expenses incurred in carrying on a trade or business. A taxpayer must conduct an activity with continuity and regularity and primarily for income or profit for the activity to qualify as a trade or business.

Section 6001 and Treas. Reg. §1.6001-1 require taxpayers to maintain records sufficient to establish their tax liability and substantiate deductions and credits.

Congress created refundable sick and family leave credits for qualifying self-employed individuals under the Families First Coronavirus Response Act, or FFCRA, and later extended similar credits through the American Rescue Plan Act, or ARPA.

The credits depended on self-employment income and required taxpayers to establish a qualifying COVID-19-related reason for not working. Required documentation generally included the dates of leave, the qualifying reason, written support for that reason, and a statement that the taxpayer could not work because of it.

Arguments

Taxpayer argued:

• He did not receive the $22,925 of unemployment compensation reported by California EDD for 2021.

• Fraud involving unemployment benefits occurred, and he filed a fraud claim with his bank and California EDD.

• He worked as a self-employed barber, musician, and chef.

• He received customer payments through Zelle, Cash App, and cash.

• He used part of his residence for barber services and as a music studio.

• His self-employment activity supported his claimed COVID-19 sick and family leave credits.

Government argued:

• The Form 1099-G established Hubbard’s receipt of $22,925 of unemployment compensation.

• Hubbard did not provide adequate evidence proving that the reported unemployment compensation resulted from fraud.

• His records did not establish that he operated a qualifying trade or business.

• His reported Schedule C income and expenses lacked adequate substantiation.

• He failed to establish either the self-employment or qualifying-leave requirements for the COVID-19 credits.

Court’s Reasoning

• California EDD’s Form 1099-G provided the required evidentiary connection between Hubbard and the reported $22,925 of unemployment compensation. That shifted the burden to Hubbard to establish that the amount was not taxable to him.

• Hubbard produced evidence that he filed a fraud claim with Bank of America, but he did not document the outcome of that claim or provide evidence of a fraud determination from the California EDD.

• Screenshots from his EDD account, primarily related to unemployment compensation received in another tax year. They did not establish that the 2021 Form 1099-G was incorrect.

• Hubbard’s business records did not demonstrate that he conducted a trade or business with continuity and regularity. His payment log showed transactions from several individuals but did not explain what services generated the payments.

• His expense records listed amounts paid but did not say what business purpose they served. For example, a $337 Airbnb payment and a $3,400 check were not explained.

• The payment log did not match his Schedule C. The log showed $9,330.69 in income, $5,452 in expenses, and $3,878.69 in net income, but his tax return reported $10,344, $5,509, and $4,835 for these amounts.

• Since Hubbard could not prove he ran a trade or business, he did not meet the basic requirement for the COVID-19 sick and family leave credits. Even if he had shown he had a business, he did not provide enough documents to show qualifying leave dates, a COVID-19 reason, or when he could not work.

Result

The Tax Court ruled in favor of the IRS on the income tax deficiency and in favor of Hubbard on the §6676 penalty, which the IRS had already dropped.

The Takeaway

Practitioners working on self-employed COVID-19 leave credit claims should treat proof of a trade or business and proof of qualifying leave as separate requirements. Screenshots and payment logs may show money was received, but they do not explain what the income was for, why an expense was business-related, or why the taxpayer qualified for the credit.

List of Citations

• §61(a). Defines gross income broadly to include income from all sources unless an exclusion applies.

• §162(a). Permits deductions for ordinary and necessary trade or business expenses.

• §6001. Requires taxpayers to maintain records supporting their tax liability.

• §6201(d). Addresses disputes involving information returns when taxpayers reasonably contest reported income.

• §6676(a). Provides a penalty for certain erroneous claims for refund or credit. The IRS conceded this penalty.

• §7491(a). Provides circumstances in which the burden of proof may shift to the IRS.

• Treas. Reg. §1.6001-1(a). Requires taxpayers to maintain adequate books and records.

• Welch v. Helvering, 290 U.S. 111 (1933). Establishes the general presumption of correctness for IRS deficiency determinations.

• Commissioner v. Groetzinger, 480 U.S. 23 (1987). Defines the continuity, regularity, and profit requirements for a trade or business.

• Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979). Requires an evidentiary foundation connecting a taxpayer to alleged unreported income before the presumption of correctness applies.

• Hardy v. Commissioner, 181 F.3d 1002 (9th Cir. 1999). Recognizes third-party information returns as sufficient evidence connecting a taxpayer to income.

• FFCRA §§7002 and 7004. Created refundable sick and family leave credits for qualifying self-employed individuals.

• ARPA §§9642 and 9643. Extended and modified refundable sick and family leave credits for qualifying self-employed individuals.

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Holding

The Tax Court agreed with a $4,917 tax deficiency after Charmaine Gray did not report $26,268 in Social Security benefits on her 2022 tax return. The Court found that $22,328, or 85% of her benefits, was taxable under §86.

Why It Matters

• The decision applies settled law. It does not change the taxation of Social Security benefits or create a new interpretation of §86.

• The $25,000 statutory base amount for most single taxpayers does not mean the first $25,000 of Social Security benefits is tax-free. The calculation depends on modified adjusted gross income plus one-half of Social Security benefits.

• Taxpayers with substantial wages or other income may have up to 85% of their Social Security benefits included in gross income.

• Arguments that Social Security taxation constitutes unconstitutional double taxation remain foreclosed by established Tax Court precedent.

Key Facts

Gray received $65,085 of wages from Stine Seed Co. during 2022.

She also received $26,268 in Social Security benefits, as reported by the Social Security Administration on Form SSA-1099.

Gray reported the wages on Form 1040-SR but reported none of the Social Security benefits.

She claimed the standard deduction, reported no adjustments to adjusted gross income, and reported taxable income of $50,385.

The IRS issued a notice of deficiency on June 23, 2025. It determined that $22,328 of Gray’s Social Security benefits was taxable and calculated a $4,917 deficiency.

Gray disputed the deficiency, claiming her Social Security benefits should not be taxed.

Statutory Framework

Section 61 says that income from all sources counts as gross income. Section 86 sets the rules for taxing Social Security benefits.

For most single taxpayers, §86 sets a $25,000 base amount and a $34,000 adjusted base amount. Social Security benefits become taxable when modified adjusted gross income plus half of the benefits is more than the base amount.

If this combined income is over the adjusted base amount, §86 may require up to 85% of Social Security benefits to be taxed.

The law does not say that Social Security benefits are excluded from tax just because the amount is under $25,000.

Arguments

Taxpayer argued:

• Her Social Security benefits were not taxable.

• She understood the $25,000 threshold enacted in 1983 to exempt benefits below that amount.

• Taxing her Social Security benefits after she had already paid Social Security taxes through payroll withholding amounted to double taxation.

• She also challenged the constitutionality of taxing the benefits.

Government argued:

• Gray received $26,268 of Social Security benefits and stipulated that she received the income.

• Her wages and Social Security benefits exceeded the statutory thresholds in §86.

• The statutory formula required $22,328 of her benefits to be included in gross income.

Court’s Reasoning

• Gray stipulated that she received the Social Security benefits. That evidence satisfied the IRS’s initial burden to connect her with the unreported income.

• Section 86 expressly requires taxpayers to include a portion of Social Security benefits in gross income when income exceeds statutory thresholds.

• Gray’s modified adjusted gross income was $65,085, since there were no adjustments shown in the record.

• Half of her $26,268 in Social Security benefits was $13,134.

• When $13,134 is added to her $65,085 modified adjusted gross income, the total is $78,219. This is much higher than the $34,000 adjusted base amount for her filing status.

• Because of this, the §86 formula required her to include up to 85% of her Social Security benefits as taxable income.

• 85% of $26,268 is $22,328. This was the correct amount to include in her gross income.

• The Court did not accept Gray’s argument about the $25,000 threshold. It explained that this amount is part of the income calculation, not a general exclusion.

• The Court also rejected her double-taxation and constitutional arguments, citing long-standing precedent supporting § 86.

Result

The Tax Court upheld the IRS’s $4,917 deficiency for Gray’s 2022 tax year.

The Takeaway

This case is a standard use of §86, but it clears up a common misunderstanding. The Social Security thresholds are used to figure out how much of the benefits are taxable. They do not mean that benefits below $25,000 are automatically excluded from tax.

List of Citations

• IRC §61(a): Defines gross income broadly as income from all sources.

• IRC §86: Governs the inclusion of Social Security benefits in gross income and establishes the applicable income thresholds.

• IRC §86(d): Defines Social Security benefits for purposes of §86 and addresses reductions for repayments.

• Rule 122, Tax Court Rules of Practice and Procedure: Allows parties to submit a case for decision based on stipulated facts without trial.

• Rule 142(a)(1), Tax Court Rules of Practice and Procedure: Generally places the burden of proof on the taxpayer.

• Welch v. Helvering, 290 U.S. 111 (1933): Establishes the general presumption that the Commissioner’s deficiency determination is correct.

• Walquist v. Commissioner, 152 T.C. 61 (2019): Explains the IRS’s initial evidentiary burden in unreported-income cases.

• Day v. Commissioner, 975 F.2d 534 (8th Cir. 1992): Requires some evidence connecting a taxpayer to unreported income before the presumption of correctness applies.

• El v. Commissioner, 144 T.C. 140 (2015): Confirms that stipulated receipt of income satisfies the IRS’s initial burden.

• Jelle v. Commissioner, 116 T.C. 63 (2001): Applies the §86 formula when income exceeds the adjusted base amount.

• Cotroneo v. Commissioner, T.C. Memo. 2024-70: Applies the 85% Social Security inclusion rules under §86.

• Lin v. Commissioner, T.C. Memo. 2023-37: Applies §86 to determine the taxable portion of Social Security benefits.

• Holland v. Commissioner, T.C. Memo. 2021-129: Rejects arguments attempting to avoid the express taxation of Social Security benefits.

• Kelley v. Commissioner, T.C. Memo. 2021-2: Rejects challenges to the statutory Social Security taxation rules and emphasizes that the Tax Court must apply the statute enacted by Congress.

• McAdams v. Commissioner, 118 T.C. 373 (2002): Rejects constitutional challenges to §86.

• Clark v. Commissioner, T.C. Memo. 1998-280: Upholds the constitutionality of taxing Social Security benefits.

• Roberts v. Commissioner, T.C. Memo. 1998-172: Rejects constitutional objections to §86.