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Haghnazarzadeh v. Commissioner (T.C. Memo. 2021-47)

On April 29, 2021, the Tax Court issued a Memorandum Opinion in the case of Haghnazarzadeh v. Commissioner (T.C. Memo. 2021-47). The primary issue presented in Haghnazarzadeh was whether certain deposits into the petitioners’ nine bank accounts are ordinary income or nontaxable deposits.

A Bit of Context

This is an unreported income case, and the opinion is all of six pages long.  One has expectations of a couple thousand dollars-worth of unreported income.  But not in this case.  In this case, the IRS determined that petitioners had unreported taxable income of $4,854,849 and $1,868,212 for 2011 and 2012, respectively.

Wowza.  Those are two huge amounts of unreported income.  Surely the petitioners hired some hotshot tax counsel, and provided the IRS with EVERYTHING it asked for.  Nope, and nope. The petitioners appeared pro se, and they gave the IRS absolutely no substantiation whatsoever.

The Bank Deposits Analysis

IRC § 61(a) provides that gross income includes “all income from whatever source derived.” See also  Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955). A taxpayer is required to maintain books and records sufficient to establish his or her income. See IRC § 6001; DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992). If a taxpayer failed to maintain these records, the IRS may determine income under the bank deposit method.  DiLeo, 96 T.C. at 867. A bank deposit is prima facie evidence of income.  Id. at 868.

Once the IRS has made the prima facie case that a taxpayer received income, the taxpayer bears the burden of showing that the deposits made into his or her account represent nontaxable income. See id. at 869. The taxpayer must present credible evidence to shift the burden of proof to the Commissioner under IRC § 7491(a).  Somewhat foreseeably at this point, the petitioners failed to do so.

In unreported income cases such as this, the IRS must establish “some evidentiary foundation” connecting the taxpayer with the income-producing activity or demonstrating that the taxpayer actually received unreported income. See Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), rev’g 67 T.C. 672 (1977); see also Edwards v. Commissioner, 680 F.2d 1268, 1270-1271 (9th Cir. 1982) (holding that the IRS’s assertion of a deficiency due to unreported income is presumptively correct once some substantive evidence is introduced demonstrating that the taxpayer received unreported income).

The petitioners did not dispute receiving the income, and the bank deposit analysis provided evidence that they received the income.

The Petitioners’ Argument

The petitioners sought to have certain deposits treated as nontaxable at trial.  The rub, for the petitioners and the Tax Court, was that the petitioner-husband, who apparently acted as family tax counsel, did not, strictly speaking, provide any “evidence” substantiating his claim that any of these other deposits should be treated as nontaxable.

(T.C. Memo. 2021-47) Haghnazarzadeh v. Commissioner

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