Court treats corporate funds as personal income
Chernomordikov v. Commissioner, T.C. Memo. 2025-129 (Dec. 15, 2025)
Running corporate money like a personal checking account triggers income tax. Proving fraud for failure to file still requires clear evidence of intent.
Holding
The Tax Court held that Mark Chernomordikov had unreported taxable income for 2012 and 2013 from his personal use of ONY Sales funds and denied any cost-of-goods-sold reduction due to a lack of substantiation.
The Court rejected fraud penalties for failure to file but sustained nonfraud failure-to-file, failure-to-pay, and estimated tax penalties. The Court also enforced a stipulation allowing married-filing-jointly status for 2013.
Why It Matters
Control and personal use of corporate funds can create taxable income even without ownership.
Cash-heavy operations without records invite bank-deposit reconstructions.
Fraud penalties demand clear and convincing proof of intent. Poor compliance alone is not enough.
Stipulations bind. The IRS cannot back out post-trial without cause.
Timeline
2011: Step-father dies. Mark assumes control of ONY Sales operations.
2012–2013: ONY Sales funds used for personal expenses. No individual returns filed.
2015: IRS opens examinations of ONY Sales and then the individuals.
2021: Notices of Deficiency issued.
Dec. 15, 2025: Tax Court opinion. Rule 155 computations ordered.
Key Facts
Mark’s mother owned ONY Sales. Mark ran the business and controlled bank accounts.
He withdrew large amounts of cash and paid personal expenses from corporate funds.
No receipts or invoices were provided to support the claimed cost of goods sold.
Returns for several years were prepared by an adviser but not filed.
IRS reconstructed income using bank deposits.
Statutory Framework
§61(a) gross income includes all accessions to wealth.
§6001 requires taxpayers to keep records.
§446(b) allows the IRS to reconstruct income when records fail.
§6651(a)(1), (a)(2) impose additions for failure to file and pay.
§6651(f) increases the addition for fraudulent failure to file.
§6654 imposes estimated tax penalties.
Arguments
Taxpayer argued:
ONY Sales funds were not personal income because he did not own the company.
Cash withdrawals represented business costs of goods sold.
Failures to file and pay were due to reliance on a tax professional.
Fraud penalties violated the Seventh Amendment after Jarkesy.
Government argued:
Bank deposits showed unreported income under the taxpayer’s control.
No substantiation was provided for the cost of goods sold.
The pattern of conduct showed fraudulent intent for failure to file.
Additions to tax fall within the public rights exception.
Court’s Reasoning
Personal use and control over corporate funds established taxable income.
Bank deposit analysis was reasonable given the missing and altered records.
No documents supported the cost of goods sold. Cash practices did not excuse proof.
Reliance on a preparer does not establish reasonable cause for failure to file or pay.
Fraud requires clear and convincing evidence of intent. That standard was not met.
Prior stipulation granting joint filing status for 2013 bound the IRS.
Post-Jarkesy arguments failed. Tax penalties fall within public rights.
Forward-Looking Implications
Informal control can override formal ownership in income determinations.
Taxpayers cannot rely on advisers to avoid filing and payment duties.
IRS must still meet a high bar to prove fraud.
Practitioners should treat stipulations as final and enforceable.
Result
Deficiencies largely sustained. Fraud penalties under §6651(f) denied. Nonfraud failure-to-file, failure-to-pay, and estimated tax penalties upheld. Joint filing status allowed for 2013. Rule 155 computations required.
The Takeaway
If you spend corporate money like it is yours, the IRS will tax it like it is yours. Fraud penalties still need proof of intent, not just chaos.