The Tax Court sustained a $59,527 unreported receipts adjustment for 2019, denied additional deductions for meals and repairs, allowed a $2,253 supplies deduction, and rejected the $2,557.80 accuracy-related penalty because the IRS did not provide evidence of required supervisory approval.
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The opinion is nonprecedential.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.
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.