The Tax Court sided with the IRS on a $24,000 unreported income adjustment. Why? The taxpayer couldn’t show that the flagged bank deposits were already counted on his amended return. Translation: If you claim the IRS is double-counting your income, you need receipts—literally. Also, the IRS doesn’t need to sit you down for a chat. A bank deposits analysis and some paperwork will do the trick.
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.
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.