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T.C. Memo. 2025-3

YOSEF SEHATI a.k.a. JOSEPH SEHATI AND LILLY

KOHANIM-SEHATI, ET AL., 1

Petitioners

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket Nos. 23585-17, 23593-17,

23594-17, 25174-18,

25175-18.

__________

Filed January 15, 2025.

Philip Garrett Panitz, for petitioners.

Michael W. Berwind, Albert B. Brewster II, Eric M. Herskovitz, Sarah A.

Herson, Nathan C. Johnston, and Christiane C. Sanicola, for

respondent.

TABLE OF CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION ..................... 3

FINDINGS OF FACT .............................................................................. 8

Family ............................................................................................... 8

II.

Emigration from Iran and Israel ..................................................... 9

III. JFJ..................................................................................................... 9

IV. SJC .................................................................................................. 10

1 Cases of the following petitioners are consolidated herewith: Shahbaz Sehati

and Anna Demidova Sehati, Docket Nos. 23593-17 and 25174-18; and Shahrokh Sehati

and Farahnaz Makabi-Sehati, Docket Nos. 23594-17 and 25175-18.

Served 01/15/25

[*2]

SJS .................................................................................................. 11

VI. Barukh ............................................................................................ 12

VII. Personal Bank Accounts................................................................. 12

VIII. Jamshid ......................................................................................... 13

IX. Tax Reporting and Examinations .................................................. 14

OPINION ................................................................................................ 17

Gift Jewelry Story........................................................................... 17

II.

Evidentiary Matters ....................................................................... 20

Exhibit 835-P: Jewellery Studio Invoices .............................. 21

Exhibit 836-P: Iranian Invoices.............................................. 22

Exhibit 839-P: Logbook ........................................................... 26

III. Evaluation of Evidence ................................................................... 27

IV. Analysis........................................................................................... 28

Unreported Income ................................................................. 29

Guaranteed Payments ............................................................ 42

NOL Carryforward Deductions .............................................. 44

Penalties ......................................................................................... 48

2012–14: Fraud Penalties ....................................................... 49

Joseph .............................................................................. 51

Lilly .................................................................................. 53

Shahbaz............................................................................ 53

Anna ................................................................................. 54

Shahrokh.......................................................................... 56

[*3]

Farahnaz .......................................................................... 57

2015 and 2016: Accuracy-Related Penalties .......................... 58

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Joseph 2 and his wife Lilly own a company

operating two jewelry kiosks in a California shopping mall. Joseph’s

brothers, Shahbaz and Shahrokh, who once worked for that business,

now own a separate company operating a jewelry store within walking

distance of that mall. In addition Joseph, Shahbaz, and Shahrokh

together own two separate companies, one that invests in residential

real estate and another that invests in commercial real estate. When

respondent’s agent examined the returns of Joseph, Lilly, Joseph and

Lilly’s jewelry company, and Joseph, Shahbaz, and Shahrokh’s real

estate companies, she discovered a bank account previously undisclosed

to her. That bank account and others received numerous deposits of

unreported income that she determined belonged partly to Joseph and

Lilly’s jewelry company and partly to Shahbaz and Shahrokh’s jewelry

company. Perhaps unsurprisingly, the scope of the examination

expanded to include the returns of Shahbaz and Shahrokh’s jewelry

company, as well as Shahbaz, his wife Anna, Shahrokh, and his wife

Farahnaz individually.

Respondent—wielding a stack of canceled checks and other bank

records—maintains that Joseph and Lilly failed to report substantial

sums from their jewelry business as income for 2012–14 and that

Shahbaz, Anna, Shahrokh, and Farahnaz did the same with respect to

Shahbaz and Shahrokh’s jewelry business. Petitioners present a united

front and urge us to conclude that the unreported income was

nontaxable because it allegedly derived from sales of jewelry items

originally received as gifts from Joseph, Shahbaz, and Shahrokh’s

mother; furthermore, they allege those sales were for amounts equal to

or below the alleged gift jewelry items’ adjusted bases. Although

2 For clarity in this Opinion, we refer to each petitioner and to other members

of their family who are not petitioners (including Jamshid Sehati and Mohtaram

Baroukh Sehati) by their first names. Joseph is also known as Yosef, Yousef, Josef, or

Shahram. Lilly is also known as Loeiz. Shahbaz is also known as Shahar. Shahrokh

is also known as Shah. Jamshid is also known as Nader. We use only the names

Joseph, Lilly, Shahbaz, Shahrokh, and Jamshid for them in this Opinion. We do not

intend to convey any disrespect through these usages.

[*4] petitioners’ description of the alleged gifts conjures up images of a

treasure trove of gold and jewels, petitioners never mentioned this

remarkable theory during the examination to respondent’s agent, who

was instead told by two of them that the income represented loan or

inheritance proceeds.

Respondent also argues that petitioners have not substantiated

net operating loss (NOL) carryforward deductions they claimed (for

2012–14 for Joseph and Lilly and for 2012–16 for the other petitioners).

Separately, respondent further asks us to determine that Shahbaz and

Anna received a section 707(c) 3 guaranteed payment from their rent-free

use of a residence owned by one of Joseph, Shahbaz, and Shahrokh’s real

estate companies during 2012–14. Petitioners counter that they

substantiated the NOL carryforward deductions, and Shahbaz and

Anna further argue that they did not live at the residence in question

for part of the period respondent determined they did. Finally, the

parties dispute the applicability of section 6663 fraud penalties, which

respondent determined for 2012–14, as well as section 6662

accuracy-related penalties, which respondent determined in the

alternative for 2012–14 and as his primary penalty position for 2015 and

2016.

Petitioners have not proven their theory of the case, and we will

uphold respondent’s determinations on all of the nonpenalty issues

(except to the extent respondent has conceded otherwise). 4 We also

uphold fraud penalties on four of the six petitioners for 2012–14 but not

on Anna or Farahnaz. Finally, we uphold accuracy-related penalties on

Shahbaz, Anna, Shahrokh, and Farahnaz for 2015 and 2016. We note

that Joseph and Lilly’s 2015 and 2016 taxable years are not at issue in

these cases.

We will give a procedural overview of these cases before turning

to our Findings of Fact. On August 17, 2017, respondent determined

3 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,

and Rule references are to the Tax Court Rules of Practice and Procedure. Some

monetary amounts have been rounded to the nearest dollar.

4 Respondent has made concessions about the amounts of unreported income

properly attributed to petitioners, as well as the disallowed amount of an NOL

carryforward deduction claimed by Shahbaz and Anna. See infra notes 21, 39.

[*5] deficiencies in petitioners’ federal income tax and section 6663

fraud penalties for taxable years 2012–14 as follows:

Docket No. 23585-17—Joseph and Lilly

Year

Deficiency

§ 6663 Penalty

2012

$587,659

$440,744

2013

563,844

422,883

2014

347,030

260,272

Docket No. 23593-17—Shahbaz and Anna

Year

Deficiency

§ 6663 Penalty

2012

$240,470

$180,352

2013

163,865

122,898

2014

231,038

173,278

Docket No. 23594-17—Shahrokh and Farahnaz

Year

Deficiency

§ 6663 Penalty

2012

$135,958

$101,968

2013

134,962

101,221

2014

135,886

101,914

Respondent also determined accuracy-related penalties under

section 6662(a) in the alternative for petitioners’ 2012–14 taxable years.

Petitioners timely filed Petitions on November 13, 2017, contesting

respondent’s determinations. Respondent later modified the amounts of

some of his determinations during these proceedings. See infra notes

21, 39.

In addition on September 21, 2018, respondent determined

deficiencies and accuracy-related penalties under section 6662(a)

against Shahbaz, Anna, Shahrokh, and Farahnaz for their 2015 and

2016 taxable years as follows:

[*6] Docket No. 25174-18—Shahbaz and Anna

Year

Deficiency

§ 6662(a) Penalty

2015

$5,685

$1,137

2016

6,527

1,305

Docket No. 25175-18—Shahrokh and Farahnaz

Year

Deficiency

§ 6662(a) Penalty

2015

$5,378

$1,075

2016

3,884

776

On December 19, 2018, Shahbaz, Anna, Shahrokh and Farahnaz

timely filed Petitions contesting respondent’s determinations for their

2015 and 2016 taxable years. All five cases were consolidated pursuant

to Rule 141 for purposes of trial, briefing, and opinion.

On January 31, 2024, the parties filed a Stipulation of Settled

Issues in which they agreed to the proper amounts of some of the

adjustments at issue and to the appropriate resolution of certain legal

issues. Petitioners’ Simultaneous Opening Brief, however, does not

address certain issues that remain unresolved even after the filing of

the Stipulation of Settled Issues. Specifically, petitioners’ Simultaneous

Opening Brief does not make any argument about (1) respondent’s

determination that Joseph’s Fine Jewelers (JFJ) failed to report

$130,097 of income from gold sales in 2013, (2) respondent’s

determination that Sehati Jewelry Couture (SJC) failed to report

$135,466 of income from gold sales in 2013, (3) a $29,225 method of

accounting adjustment respondent made with respect to Barukh Group

(Barukh) for 2012, (4) respondent’s determinations to reallocate $80,000

and $120,000 of income from SJC to Barukh pursuant to section 482 for

2013 and 2014, respectively, or (5) respondent’s determinations to

disallow deductions for certain alleged expenses of SJS Group (SJS) and

Barukh for 2012–14. 5 None of these issues was resolved by the

5 Petitioners argue in their Simultaneous Reply Brief that their Simultaneous

Opening Brief addressed SJS’s “deductions for repairs, maintenance, taxes, licenses,

interest payments, and depreciation for tax years 2012, 2013 and 2014.” This

argument is without merit because petitioners have cited only a portion of their

Simultaneous Opening Brief that addresses adjustments to “Shahbaz’s income” of

“$48,000 per year” for 2012 and 2013 and $46,000 for 2014 (i.e., the guaranteed

payments issue addressed infra OPINION Part IV.B).

[*7] Stipulation of Settled Issues, 6 and petitioners needed to address

them in their Simultaneous Opening Brief if they wished to preserve

any arguments about them. Petitioners addressed some of those issues

for the first time in their Simultaneous Reply Brief, but their belated

engagement with those issues subverts our briefing schedule and takes

respondent by surprise. Accordingly, we deem petitioners to have

conceded their challenges to respondent’s determinations on those

issues. See Considine v. Commissioner, 74 T.C. 955, 969–70 (1980)

(characterizing as “untimely” and thus declining to consider an

argument advanced for the first time in a reply brief); Ashkouri v.

Commissioner, T.C. Memo. 2019-95, at *24 n.9 (“Having conceded an

issue by failing to advance a meaningful argument on that issue in their

opening brief, [the taxpayers] could not withdraw that concession by

belatedly including a cognizable argument in their reply brief.”); see also

Burlington N. & Santa Fe Ry. Co. v. Vaughn, 509 F.3d 1085, 1093 n.3

(9th Cir. 2007) (stating that litigants “waived [an] argument by raising

it for the first time in their reply brief”).

The remaining issues for decision 7 are:

(1) Whether Joseph and Lilly failed to report income from JFJ for

2012–14;

(2) Whether Shahbaz, Anna, Shahrokh, and Farahnaz failed to report

income from SJC for 2012–14;

(3) Whether Shahbaz and Anna failed to report guaranteed payments

from their personal use of SJS’s partnership property as a residence

for their 2012–14 taxable years;

(4) Whether (i) petitioners are entitled to NOL carryforward deductions

for their 2012–14 taxable years and (ii) Shahbaz, Anna, Shahrokh,

and Farahnaz are entitled to NOL carryforward deductions for their

2015 and 2016 taxable years;

6 Petitioners’ Simultaneous Opening Brief does, however, make arguments

concerning the taxability of a distribution from SJS to Joseph and Shahbaz.

Nonetheless, this issue was resolved by the Stipulation of Settled Issues, and we do

not address it further.

7 We distinguish the remaining issues for decision from the remaining

computational issues, which include (but are not necessarily limited to) the

computational issues respondent identified in his Simultaneous Opening Brief. We

will require these computational issues to be addressed through Rule 155.

[*8]

(5) Whether petitioners are liable for fraud penalties (or, in the

alternative, accuracy-related penalties) for their 2012–14 taxable

years; and

(6) Whether Shahbaz, Anna, Shahrokh, and Farahnaz are liable for

accuracy-related penalties for their 2015 and 2016 taxable years.

As already stated, we sustain respondent’s determinations on these

issues (other than to the extent respondent has conceded otherwise),

except that with respect to the fifth issue and pursuant to section

6663(c), Anna and Farahnaz are not individually liable for the fraud

penalty. We also address deferred evidentiary rulings.

FINDINGS OF FACT

The parties have filed a First Stipulation of Facts, a First

Supplemental First Stipulation of Facts, a Second Supplemental First

Stipulation of Facts, a Third Supplemental First Stipulation of Facts,

and accompanying Exhibits. We incorporate by this reference the

Stipulation of Settled Issues, the Stipulations of Facts and their

accompanying Exhibits, and any Exhibits admitted at trial, except to

the extent set forth herein. Petitioners resided in California when they

filed their Petitions. 8

Family

Joseph, Shahbaz, and Shahrokh are brothers and

third-generation jewelers. They have other siblings who are not parties

to these cases, including Jamshid, who resides in Israel and whose

deposition testimony is in evidence. Their father died in 1968, and their

mother, Mohtaram, died in 2018. Joseph is married to Lilly, Shahbaz is

married to Anna, and Shahrokh is married to Farahnaz. Mosh Mehrnia,

who has been petitioners’ accountant since 2000, is petitioners’

brother-in-law. 9

8 Unless otherwise agreed by the parties in writing, see § 7482(b)(2), venue for

an appeal is the U.S. Court of Appeals for the Ninth Circuit, see § 7482(b)(1)(A).

9 Specifically, Mr. Mehrnia is married to Joseph, Shahbaz, Shahrokh, and

Jamshid’s sister.

[*9] II.

Emigration from Iran and Israel

Joseph moved from Iran to the United States in 1975. Shahrokh

moved to the United States in 1977. After completing high school,

Shahrokh attended Bowman Technical School in Lancaster,

Pennsylvania, to learn jewelry making, as well as the Indiana

University of Pennsylvania to study “[f]ine arts and metal.”

Mohtaram, Jamshid, and Shahbaz fled Iran in 1979 10 in the wake

of the Iranian Revolution and settled in Israel. Mohtaram had been in

the jewelry business in Iran sometime before the Iranian Revolution.

Shortly before leaving Iran, Mohtaram purchased gemstones and

jewelry to take with her to Israel. Joseph began working at Weisfield’s

Jewelers in 1981.

Shahbaz moved to the United States in 1986. Mohtaram came to

the United States in 1987 and at some point began working in jewelry

stores in downtown Los Angeles.

III.

JFJ

In 1987 Joseph opened JFJ as a single kiosk selling jewelry. 11

JFJ’s business later came to include a second kiosk. The kiosks are in a

shopping mall in Ventura, California, and are approximately 300–400

feet apart. On June 22, 2001, Joseph organized JFJ as a California

limited liability company. On July 15, 2001, Joseph, Shahbaz, and

Shahrokh signed JFJ’s operating agreement. In 2001 Joseph owned a

65% interest in JFJ, Shahbaz owned a 17.5% interest in JFJ, and

Shahrokh owned a 17.5% interest in JFJ. Shahbaz and Shahrokh

worked at JFJ until 2008. During 2012–14, Joseph owned a 70%

interest in JFJ, and Lilly owned a 30% interest in JFJ. Before May 10,

2012, JFJ had a Rabobank checking account with an account number

ending in 2418 (Rabobank 2418). On May 10, 2012, JFJ closed

10 This finding is based on a stipulated fact. Jamshid testified that Mohtaram

actually left Iran “[d]uring the last months of the year 1978” and that he had left Iran

before her in 1978. Nonetheless, the stipulation is not clearly erroneous in view of the

entire record, so we will not disregard it. Cf. Cal-Maine Foods, Inc. v. Commissioner,

93 T.C. 181, 195 (1989) (holding that we are not obliged to accept a stipulation between

the parties when it is clearly contrary to facts disclosed by the record or there is

substantial evidence contrary to it). In any case, the difference between the stipulation

and Jamshid’s testimony is immaterial for purposes of this Opinion.

11 There is no evidence about how Joseph acquired JFJ’s opening inventory.

[*10] Rabobank 2418 and reopened it as a Rabobank checking account

with an account number ending in 1381 (Rabobank 1381).

During 2012–14 JFJ issued customers a receipt for each sale, and

it kept a corresponding sales invoice. JFJ did not have a machine or

system to generate the sales invoices or receipts, so they were all

handwritten.

JFJ employed approximately 30–40 people during

2012–14, and three or four employees would work at a single kiosk at

any given time. Joseph did not personally maintain JFJ’s books or

produce sales, inventory, or expense records.

Lilly worked at JFJ part time during 2012–14. She has been an

alumni member of the Gemological Institute of America (GIA) since

2007 and holds a Graduate Colored Stones Diploma, Graduate

Diamonds Diploma, and Graduate Gemologist Diploma from the GIA.

During 2012–14 Lilly performed sales-related tasks at JFJ. She would

be considered the most senior employee while she was working, and she

left sales invoices she wrote behind for JFJ’s staff to handle at the end

of the day. Lilly held herself out as an owner of JFJ on a 2004 loan

application. She has also executed interspousal transfer deeds in

respect of residential properties that Joseph purchased.

IV.

SJC

On December 8, 2009, Shahbaz and Shahrokh incorporated SJC

as a California corporation. Shahbaz and Shahrokh each own half of

SJC’s stock. Since 2010 SJC has operated a jewelry store in Ventura,

California. SJC’s store is, in Shahbaz’s words, “about 1,000 feet” or a

“five minutes’ walk” from the shopping mall where JFJ’s kiosks are.

Shahbaz dealt with the “financial aspects of things” at SJC,

including sales and financial records. SJC promoted checks and credit

cards to its customers as methods of payment. In February 2010 SJC

opened a Rabobank checking account with an account number ending in

4263 (Rabobank 4263). SJC continued to use Rabobank 4263 through

at least January 2015. During 2012–14, SJC used a software program

to manage sales and inventory. Shahbaz, however, admitted that SJC

conducted “sloppy bookkeeping.”

Shahrokh’s work at SJC focused on custom jewelry design,

especially computer-aided design. Shahrokh was not involved with

managing SJC’s finances or with sales. Shahbaz “env[ied]” Shahrokh

because he “was behind the bench . . . and having fun” and “not going

through any of those transaction[s].”

[*11] Anna is a chemical engineer by training, but she worked at SJC

during 2011–17. She worked at SJC for about ten hours per week on

average during 2012–14. Her duties included sales, marketing, and

administrative and bookkeeping work. Anna also made entries into

SJC’s computerized inventory management system during 2012–14.

The inventory information she entered included the suggested retail

price of items for sale.

Farahnaz worked at SJC during 2011–17, where her duties

included merchandizing and assisting with inventory. 12 At the time of

trial, Farahnaz worked part time at SJC entering inventory data.

SJS

On May 3, 2004, Joseph, Shahbaz, and Shahrokh formed SJS as

a California limited liability company. Each of them owned (and, as of

the time of trial, continued to own) a one-third interest in SJS. SJS has

acquired several residential properties.

On or about April 8, 2005, Joseph, Shahbaz, and Shahrokh—not

SJS—purchased a property at 1143 Colina Vista, Ventura, California

(1143 Colina Vista), for $800,000. They acquired 1143 Colina Vista both

for investment and so that Shahbaz could live closer to Mohtaram. On

or about July 1, 2005, Joseph, Shahbaz, and Shahrokh transferred the

title of 1143 Colina Vista to SJS.

Shahbaz and Anna listed 1143 Colina Vista as their home address

on their income tax returns for 2012–14, and they also received mail at

1143 Colina Vista during 2012–14. SJS did not try to rent out 1143

Colina Vista to third parties during 2012–14. Petitioners have not

produced any written agreement among SJS, Shahbaz, and Anna

relating to Shahbaz and Anna’s use of 1143 Colina Vista. On or about

December 11, 2014, SJS transferred the title of 1143 Colina Vista to

Joseph and Shahbaz. 13

12 This finding is based on a stipulated fact.

Shahrokh and Farahnaz both

testified contrary to the stipulation that although Farahnaz now works at SJC,

Farahnaz did not work at SJC during 2012–14. Shahrokh testified that Farahnaz was

“basically raising our kids” during those years. Nonetheless, the stipulation is not

clearly erroneous in view of the entire record, so we will not disregard it. Cf. Cal-Maine

Foods, Inc., 93 T.C. at 195.

13 The parties have provided contradictory stipulations on this point. They

have stipulated both that SJS “transferred the title of 1143 Colina Visita [sic] to Joseph

[*12] VI.

Barukh

On September 20, 2007, Joseph, Shahbaz, and Shahrokh formed

Barukh. They used Barukh to acquire commercial properties. Each of

them owned (and, as of the time of trial, continued to own) a one-third

interest in Barukh.

VII.

Personal Bank Accounts

During 2011–15 petitioners held accounts at various financial

institutions, either separately or in combination with each other. As

explained below, Jamshid—without his knowledge or consent—was also

named as an accountholder on some of the accounts. The parties have

produced exhaustive banking records for these accounts. We will

provide an overview of the accounts that are most important for our

purposes.

Joseph and Shahbaz opened a Rabobank joint checking account

with an account number ending in 2472 (Rabobank 2472) in December

2011. Rabobank 2472 received numerous deposits of certain of JFJ’s

and SJC’s customer checks that Joseph and Shahbaz did not deposit into

JFJ’s and SJC’s business bank accounts. In other words, Joseph and

Shahbaz diverted numerous customer checks to Rabobank 2472 in lieu

of depositing them into Rabobank 2418, Rabobank 1381, or Rabobank

4263 (as applicable). Joseph and Shahbaz did not provide information

about Rabobank 2472 to Mr. Mehrnia in order to prepare their tax

returns. 14

Joseph and Shahbaz invested some of the funds in Rabobank 2472

into SJS, which in turn invested in residential real estate. Shahrokh

was aware that proceeds from jewelry sales were used to purchase

property. Joseph and Shahbaz also transferred some of the funds in

Rabobank 2472 to JFJ’s and SJC’s business bank accounts, sometimes

by depositing checks written from Rabobank 2472 that referred to

Jamshid or a loan into those accounts. In addition, they used some of

and Shahbaz” and that SJS transferred 1143 Colina Vista’s title “to a 1/3 tenant in

common relationship in the name of each brother individually.” We disregard the

latter stipulation because the documentary evidence in the record reflects that SJS

transferred 1143 Colina Vista’s title to Joseph and Shahbaz, not to Joseph, Shahbaz,

and Shahrokh. See Cal-Maine Foods, Inc., 93 T.C. at 195.

14 We need not and do not make any finding about whether Mr. Mehrnia was

otherwise aware of Rabobank 2472 although we note that a $6,000 check written to

him from that account and dated June 29, 2012, was paid.

[*13] the funds for personal purposes. They used Rabobank 2472

through April 2014, when activity in the account stopped.

Through at least December 2014 a checking account ending in

8226 in Jamshid’s name and over which Joseph, Shahbaz, and Shahrokh

each held a power of attorney was maintained at Santa Barbara Bank

& Trust (SBBT 8226). SBBT 8226 was opened in August 2002. Lilly

disclosed assets in SBBT 8226 to a bank in connection with a loan

application in 2004. During 2012–14 SBBT 8226 received deposits of

several five- and six-figure checks written to Jamshid from Rabobank

2472 or from third parties. At least one check whose memo line

references a loan to SJC was written from SBBT 8226 and deposited in

Rabobank 4263, SJC’s business bank account. 15 On June 18, 2013, an

outgoing wire for $988,924 was made from SBBT 8226 to an escrow

company. This occurred around the same time that SJS purchased a

residential property for $1.04 million.

Joseph opened a JPMorgan Chase Bank checking account with

an account number ending in 8913 (Chase 8913) in his and Jamshid’s

names in November 2010. This account remained open through at least

May 2014.

Shahbaz and Anna maintained a Bank of America joint checking

account with an account number ending in 7088 (BofA 7088) during

2012–14. 16 Anna also maintained a Bank of America checking account

with an account number ending in 5186 (BofA 5186) during 2012–14.

VIII. Jamshid

Jamshid 17 has been retired since 2005 and receives a pension.

His last job before retiring was working at a “factory that produced

safety items like security doors, security locks, [and] lock cylinders.”

Jamshid has never resided in the United States, although he has visited

the United States two or three times. Jamshid has also never opened

any bank accounts in the United States except for “a small account for

15 The check was for $70,000 and dated July 8, 2014. Jamshid’s name is printed

on the check.

16 This finding is based on a stipulated fact. Some of the account documents

for BofA 7088 are addressed to Shahbaz and Joseph, not Shahbaz and Anna.

Nonetheless, because the stipulation is not clearly erroneous, we will not disturb it.

See Cal-Maine Foods, Inc., 93 T.C. at 195.

17 Although Jamshid’s deposition testimony is in evidence, he is neither a party

to these cases nor a trial witness.

[*14] my daughter . . . [that] I closed . . . later because I needed the

money,” nor did he bring anything of value with him on his trips to the

United States. He has never lent money to Joseph’s, Shahbaz’s, or

Shahrokh’s businesses or otherwise had any involvement with their

businesses or properties. Jamshid did not receive any checks over

$10,000 from Joseph, Shahbaz, or Shahrokh during 2012–14.

Although Jamshid was the named accountholder of SBBT 8226

and his name was printed on some checks written from it, he has no

knowledge of the account and does not recognize any of the signatures

on the signature card for it. Neither does he recognize (1) a $200,000

check written to him from Rabobank 2472 on January 15, 2012, (2) a

$200,000 check written to him from Rabobank 2472 on May 8, 2013, (3) a

$155,000 check written to him from Rabobank 2472 on March 21, 2014,

or (4) a loan agreement dated November 18, 2009, purporting to

memorialize a loan from him to SJC or his purported signature on that

document. Shahbaz and Shahrokh signed the November 18, 2009, loan

agreement on SJC’s behalf.

IX.

Tax Reporting and Examinations

Petitioners all timely filed Forms 1040, U.S. Individual Income

Tax Return, for 2012–14. Shahbaz and Anna also timely filed Forms

1040 for 2015 and 2016, as did Shahrokh and Farahnaz. 18 At all

relevant times, JFJ, SJS, and Barukh were taxable as partnerships for

federal income tax purposes, and SJC was taxable as an S corporation. 19

The income and losses from all four entities therefore passed through to

their respective owners.

Petitioners’ 2012–14 income tax returns were examined by

Internal Revenue Service (IRS) Revenue Agent Laura Hurtado

(RA Hurtado). During the examination, Mr. Mehrnia represented

petitioners and their business entities.

18 Joseph and Lilly’s 2015 and 2016 taxable years are not at issue in these

cases, and we make no finding of fact about them.

19 An S corporation is governed under the rules in subchapter S of chapter 1 of

subtitle A of the Code. S corporations are not generally themselves subject to federal

income tax but, like partnerships, are conduits, through which income flows to their

shareholders. See § 1366; Gitlitz v. Commissioner, 531 U.S. 206, 209 (2001)

(“Subchapter S allows shareholders of qualified corporations to elect a ‘pass-through’

taxation system under which income is subjected to only one level of taxation.”); see

also Allen Fam. Foods, Inc. v. Commissioner, T.C. Memo. 2000-327, slip op. at 5 & n.3.

[*15] RA Hurtado summoned records from financial institutions during

the examination. Importantly, RA Hurtado noticed that a large number

of business-related deposits had been made into Rabobank 2472, an

account in Joseph’s and Shahbaz’s names. Some of the deposited checks

had memo lines that referenced items other than jewelry, such as

watches or wine glasses, or services that do not constitute sales of

jewelry, such as watch repair, ring repair, or ring sizing. RA Hurtado

also located specific items of income in SBBT 8226, Chase 8913, BofA

7088, and BofA 5186. There were relatively few check and cash deposits

in JFJ’s and SJC’s alleged sole operating accounts, and the check and

cash deposits that occurred were for relatively small amounts. SJC’s

sales journals identified substantial check and cash sales that do not

correspond to the check and cash deposits in its operating account.

Joseph and Shahbaz each falsely represented to RA Hurtado

during the examination that JFJ or SJC, respectively, had only one

operating account for its business. In addition, Joseph falsely stated

that a loan carried on JFJ’s books was administered by Jamshid and

represented an advance on an inheritance. Similarly, Shahbaz falsely

stated that a loan carried on SJC’s books represented an advance on his

future inheritance from his father’s estate. During the examination RA

Hurtado made repeated written requests for information about sources

of nontaxable income, such as gifts or inheritances. Joseph, Shahbaz,

and Mr. Mehrnia, however, never mentioned sales of gift jewelry at all—

much less suggested it as a nontaxable source of income—during RA

Hurtado’s examination. When RA Hurtado confronted Shahbaz about

Rabobank 2472 and asked him why the financial activity in Rabobank

2472 stopped in April 2014, Shahbaz, in RA Hurtado’s words, “indicated

that that’s when they went straight.”

During the examination RA Hurtado determined that JFJ

understated its gross receipts by $1,053,316, $605,565, and $315,581 for

its 2012–14 taxable years, respectively. RA Hurtado also determined

that SJC understated its gross receipts by $896,407, $495,504, and

$397,615 for the same years. RA Hurtado determined the adjustments

to JFJ’s and SJC’s gross receipts using a combination of the bank

deposits analysis and specific items methods. In addition, RA Hurtado

made several other adjustments to petitioners’ income, only a few of

which are noncomputational and remain unresolved at this stage of the

proceedings. Although petitioners allege that Mr. Mehrnia dropped off

original business records to the IRS’s Camarillo, California, office and

[*16] that the IRS failed to return them, we find as fact that Mr.

Mehrnia never dropped off original business records at that office. 20

On May 23, 2017, RA Hurtado’s group manager, Andrew

Hernandez, approved the assertion of the section 6663 fraud penalty

(and, in the alternative, the section 6662 accuracy-related penalty)

against petitioners for their 2012–14 taxable years. On June 8, 2017,

respondent issued revenue agent reports to petitioners summarizing the

examination changes, including the initial determinations to assert

penalties.

On August 17, 2017, respondent timely mailed Notices of

Deficiency to petitioners for their 2012–14 taxable years via certified

mail. On November 13, 2017, petitioners timely filed Petitions

requesting redetermination of the deficiencies respondent determined.

Respondent later asserted an increase to JFJ’s income for 2013, as well

as several decreases to JFJ’s and SJC’s income. 21

Shahbaz and Anna’s 2015 and 2016 income tax returns, as well

as Shahrokh and Farahnaz’s 2015 and 2016 income tax returns, were

20 Mr. Mehrnia’s testimony was vague regarding to whom he supposedly gave

the records, what records he allegedly gave to the IRS, and when he purportedly

furnished those records. His testimony was not corroborated by documentary

evidence, such as a receipt, even though RA Hurtado credibly testified that it was her

office’s practice to provide one in similar circumstances. Mr. Mehrnia’s testimony that

he furnished original documents to the IRS on several occasions because did not have

time to make copies was also implausible: A reasonable person in his position would

not have given original business documents to an unidentified person even once—let

alone several times—without obtaining a receipt or exploring other alternatives, such

as asking for an extension, requesting a secure way to produce (or permit inspection

of) the documents, or using a professional copying service. Finally, Mr. Mehrnia’s

testimony lacked credibility because of his familial relationship to petitioners. We

instead credit RA Hurtado’s testimony that she never received original documents

from Mr. Mehrnia.

Somewhat relatedly, we do not credit Joseph’s testimony that some of JFJ’s

invoices burned in a 2017 wildfire. Joseph was not a credible witness on the whole. In

addition it is unclear from the record whether his testimony that some of JFJ’s invoices

burned in a 2017 wildfire is consistent with his testimony that he regularly provided

JFJ’s invoices to Mr. Mehrnia during 2012–14.

21 Specifically, respondent asserted that (1) the adjustment to JFJ’s gross

receipts for 2012 should be reduced by $322,133 to $731,183, (2) the adjustment to

JFJ’s gross receipts for 2013 should be increased by $71,382 to $676,947, (3) the

adjustment to JFJ’s other income for 2013 should be reduced by $810 to $130,097,

(4) the adjustment to JFJ’s gross receipts for 2014 should be reduced by $255,773 to

$55,809, and (5) the adjustment to SJC’s gross receipts for 2013 should be reduced by

$75,000 to $420,504.

[*17] examined by Revenue Agent Tam Mai (RA Mai). On August 16,

2018, RA Mai’s group manager, June Liu, approved the assertion of

section 6662 accuracy-related penalties against Shahbaz, Anna,

Shahrokh, and Farahnaz for their 2015 and 2016 taxable years. On the

same date, respondent issued revenue agent reports to Shahbaz, Anna,

Shahrokh, and Farahnaz summarizing the examination changes and

communicating the initial determinations to assert penalties. The

adjustments RA Mai determined primarily concerned NOL

carryforward deductions claimed by Shahbaz, Anna, Shahrokh, and

Farahnaz, which are the only noncomputational adjustments for 2015

and 2016 requiring our decision.

On September 21, 2018, respondent timely mailed Notices of

Deficiency to Shahbaz, Anna, Shahrokh, and Farahnaz for their 2015

and 2016 taxable years via certified mail. On December 19, 2018,

Shahbaz, Anna, Shahrokh, and Farahnaz timely filed Petitions

requesting redetermination of the deficiencies respondent determined

against them for their 2015 and 2016 taxable years.

OPINION

Gift Jewelry Story

Petitioners, relying on some of their own and Jamshid’s testimony

and some of the documentary evidence, present us with a story about

why they did not report a substantial portion of JFJ’s and SJC’s sales as

income (gift jewelry story). We summarize the gift jewelry story in this

part without making any finding that it has any truth. 22

Jamshid testified in his deposition that Mohtaram purchased

finished jewelry from Jewellery Studio in Tel Aviv, Israel, and the

finished jewelry incorporated some of the gemstones Mohtaram had

purchased in Iran. Jamshid also testified that he was present during

some, but not all, of the occasions when Mohtaram visited Jewellery

Studio. According to Jamshid, in late 1983 Mohtaram (with his

assistance) boxed and shipped the gemstones, finished jewelry, and

22 As discussed infra Part IV.A, there is very little in the record to corroborate

the gift jewelry story. Consequently, we summarize the gift jewelry story only to

explain why we conclude as we do in this Opinion. For the purposes of our analysis,

we do not adopt these stories as findings of fact, and the elements of the story recited

here should not be construed as findings of fact.

[*18] related receipts from Israel to Joseph in the United States because

she intended to emigrate from Israel to the United States.

Joseph testified that he received the box sent from Mohtaram in

December 1983 and returned it unopened to Mohtaram in 1987 after she

immigrated to the United States. He further testified that Mohtaram

gave the still-unopened box and its contents as gifts to him, Shahbaz,

Shahrokh, and Jamshid in 2010, which was approximately 23 years

after she immigrated to the United States and 8 years before she died.

Joseph, Shahbaz, and Shahrokh each testified to being present when the

box was opened, and Joseph and Shahrokh further testified that

Mohtaram was present. Jamshid testified that Joseph told him about

the gifts in 2010.

Joseph testified that the box was filled with jewelry, gemstones,

precious stones, gold, platinum, legal documents, receipts from Israel,

and Farsi-language (i.e., Persian) receipts, and Shahbaz corroborated

that description. According to Joseph, there were about 1,600 to 1,700

items of jewelry in total. Joseph and Shahbaz testified that the items

were dated and out of style. Joseph further testified that Mohtaram

gave him and his brothers a handwritten letter (also referred to as a gift

note) memorializing the gift of jewelry; the gift note also memorialized

a separate gift of two houses to two of her other children. 23

Shahbaz and Shahrokh testified that the gift jewelry was later

modified to increase its marketability. Joseph and Shahbaz testified

that sales of the gift jewelry began in 2011 and stopped sometime in

2014. Joseph testified that most of the gift jewelry was kept at SJC,

while other items were kept in JFJ’s safe.

Joseph and Shahbaz testified that the proceeds from the gift

jewelry sales totaled approximately $3 million and were deposited into

Rabobank 2472. According to them, the gift jewelry was segregated from

JFJ’s and SJC’s regular merchandise via yellow tags affixed to the gift

jewelry and white or silver tags affixed to regular merchandise. Joseph

testified that cost figures on Exhibit 835-P (Jewellery Studio invoices),

23 The alleged gift note is in evidence as Exhibit 833-P, and a certified

translation is in evidence as Exhibit 834-P. The Second Supplemental First

Stipulation of Facts identifies Exhibit 834-P as a translation of a nonexistent “Exhibit

831-P” (only Exhibit 831-J is in the record), and this identification is also erroneous

because Exhibit 834-P is a translation of Exhibit 833-P, not Exhibit 831-J. We

disregard the stipulation to the extent it is erroneous. See Cal-Maine Foods, Inc., 93

T.C. at 195.

[*19] a set of invoices that we discuss later, were used to price each item

of gift jewelry for sale and that “[w]e knew how much the cost was based

upon the catalog number.”

Joseph testified that

Exhibit

839-P

(logbook) was

contemporaneously prepared to track sales of the gift jewelry, and

Shahbaz corroborated that testimony. The logbook, which is a spiral

notebook, contains handwritten entries including (1) notations briefly

describing each item, (2) the date of sale, (3) the check number

associated with the sale, (4) the sale amount, and (5) the item number

(i.e., the catalog number from the Jewellery Studio invoices). Joseph

asserted that the primary purpose of creating the logbook was to

facilitate an equitable division of the proceeds from sales of the gift

jewelry among himself, Shahbaz, Shahrokh, and Jamshid. Joseph and

Shahbaz testified that credit card sales of the gift jewelry were not

recorded in the logbook and that those sales were reported as sales of

JFJ’s and SJC’s regular merchandise, with the result that taxes were

imposed on that income. Joseph and Shahbaz testified that the logbook

moved back and forth between SJC and JFJ, which are within walking

distance of each other, although it typically remained at SJC.

Joseph testified that he instructed his employees to set aside the

yellow tags from the gift jewelry items that had been sold, as well as any

checks customers used to purchase those items, for subsequent

recording in the logbook. He also testified that JFJ employees

sometimes recorded sales of the gift jewelry on paper before those sales

were entered into the logbook. According to Shahbaz, SJC’s employees

recorded sales of gift jewelry in the logbook, including yellow tags or

notes that came from JFJ across the street; furthermore, at SJC, the

yellow tags were discarded after an item of gift jewelry was sold. Joseph

and Shahbaz asserted that they did not inform Mr. Mehrnia about the

gift jewelry because he was married to their sister, and their sister

might have taken offense at not being included in Mohtaram’s gift of the

jewelry.

Shahbaz testified that he showed the gift jewelry to an IRS agent

(not RA Hurtado or RA Mai) who toured SJC. Joseph testified that

because the gift jewelry was dated and out of style, he and his brothers

sold it with the objective of recouping as much of its original cost as

possible instead of attempting to make a profit over and above its

original cost. Joseph and Shahbaz testified that the proceeds from the

gift jewelry sales were deposited into Rabobank 2472, not into JFJ’s and

SJC’s business bank accounts. In addition they testified that after they

[*20] deposited the proceeds in Rabobank 2472, they invested most of

the proceeds in residential real estate, including through SJS. Finally,

they testified that they paid Jamshid $90,000 in mid-2014 in respect of

his share of the gift jewelry proceeds.

II.

Evidentiary Matters

As a preliminary matter, we must address the admissibility of

certain documentary evidence introduced at trial but for which we

reserved ruling. Our evidentiary rulings are determined under the

Federal Rules of Evidence. See § 7453; Rule 143(a). Statements in briefs

and unadmitted allegations in pleadings do not constitute evidence. See

Rule 143(c).

Irrelevant evidence is not admissible. See Fed. R. Evid. 402. An

item of evidence is relevant to the extent it tends to make a fact more or

less probable and the fact is consequential to determining the action.

See Fed. R. Evid. 401. When the relevance of evidence depends on a fact,

proof must be introduced sufficient to support a finding that the fact

does exist. See Fed. R. Evid. 104(b). The “requirement of showing

authenticity or identity falls in the category of relevancy dependent

upon fulfillment of a condition of fact and is governed by the procedure

set forth in Rule 104(b).” Fed. R. Evid. 901(a) advisory committee’s note

to 1972 proposed rules. “To satisfy the requirement of authenticating or

identifying an item of evidence, the proponent must produce evidence

sufficient to support a finding that the item is what the proponent claims

it is.” Fed. R. Evid. 901(a).

Hearsay is not admissible unless any of the following provides

otherwise: a federal statute, the Federal Rules of Evidence, or other

rules prescribed by the Supreme Court. Fed. R. Evid. 802. Hearsay

means a statement that (1) the declarant does not make while testifying

at the current trial or hearing and (2) a party offers in evidence to prove

the truth of the matter asserted in the statement. Fed. R. Evid. 801(c).

At trial we admitted Exhibit 835-P, the Jewellery Studio invoices,

for a limited purpose, cf. Fed. R. Evid. 105, but reserved ruling on

whether the Jewellery Studio invoices may be used to prove the truth of

their contents. In addition, we reserved ruling on the admissibility of

Exhibit 836-P (Iranian invoices), as well as Exhibit 839-P, the logbook.

Petitioners have conceded that they are offering the Iranian invoices

and the logbook only for limited purposes. We will (1) admit the

Jewellery Studio invoices (Exhibit 835-P) without any limitation,

[*21] (2) exclude the first three pages of the Iranian invoices (Exhibit

836-P) and admit the remainder for a limited purpose, and (3) admit the

logbook (Exhibit 839-P) for a limited purpose.

Exhibit 835-P: Jewellery Studio Invoices

The Second Supplemental First Stipulation of Facts identifies

Exhibit 835-P, the Jewellery Studio invoices, as “seventeen invoices for

jewelry purchases in 1983 from Jewellery Studios [sic] in Israel.” 24 The

contents of the Jewellery Studio invoices include, inter alia, handwritten

notations of catalog numbers, quantity figures, “Total Price” figures, and

jewelry terms, as well as handwritten notations referring to Mohtaram.

They do not specify on their face whether they record purchases of

jewelry from Jewellery Studio or sales of jewelry to Jewellery Studio.

that

The Second Supplemental First Stipulation of Facts states in part

all exhibits referred to herein and attached hereto may be

accepted as authentic and are incorporated in this

stipulation and made a part hereof; provided, however,

that either party has the right to object to the admission of

any such facts and exhibits in evidence on the grounds of

relevancy and materiality, but not on other grounds unless

expressly reserved herein.

Respondent reserved only a hearsay objection to Exhibit 835-P. On its

face this constitutes respondent’s waiver of any authentication objection

to Exhibit 835-P. At trial we admitted Exhibit 835-P for a limited

purpose but reserved ruling on whether it may be used to prove the truth

of its contents.

Respondent now purports to object to Exhibit 835-P on

authentication grounds in addition to his reserved hearsay objection.

Nonetheless, Rule 91(e) prevents a party from qualifying, changing, or

contradicting a stipulation, except as we may permit if justice requires.

The record as a whole does not support a conclusion that justice requires

us to permit respondent to vary from the stipulation. For example, while

respondent notes that Jamshid “did not identify which exact documents

24 The stipulation’s reference to “Jewellery Studios” instead of Jewellery Studio

is a scrivener’s error. The reference to 17 invoices instead of 18 invoices is also a

scrivener’s error. We disregard the erroneous portions of the stipulation. See

Cal-Maine Foods, Inc., 93 T.C. at 195.

[*22] in Exhibit 835-P corresponded to [the] times he was present” at

Jewellery Studio, respondent and petitioners filed the Second

Supplemental First Stipulation of Facts over a month after Jamshid’s

deposition occurred. Respondent thus presumably considered—and, in

any case, could have considered—the content of Jamshid’s deposition

testimony when he decided which objections to reserve. Neither does

respondent argue that the Jewellery Studio invoices record sales of

jewelry by Mohtaram to Jewellery Studio instead of purchases by her

from Jewellery Studio. 25 We will hold respondent to the terms of the

binding stipulation to which he agreed.

We consider respondent’s hearsay objection, but it is easily

overruled. Rule 803(16) of the Federal Rules of Evidence provides that

a statement in a document that was prepared before January 1, 1998,

and whose authenticity is established, is not excluded by the rule

against hearsay, regardless of whether the declarant is available as a

witness. The authentication requirement of Rule 803(16) of the Federal

Rules of Evidence “is governed by the standards set forth in” Rule 901(a)

of the Federal Rules of Evidence. Dartez v. Fibreboard Corp., 765 F.2d

456, 464 (5th Cir. 1985); see Cave Buttes, L.L.C. v. Commissioner, 147

T.C. 338, 360–62 (2016). Therefore, whether a hearsay exception under

Rule 803(16) of the Federal Rules of Evidence is available for a document

prepared before January 1, 1998, is derivative of whether the document

can be properly authenticated. Here, the Jewellery Studio invoices were

prepared in 1983, and the parties authenticated them by agreement in

the Second Supplemental First Stipulation of Facts. Therefore, an

exception to the rule against hearsay applies, and we admit Exhibit

835-P into evidence without any limitation on its use.

Exhibit 836-P: Iranian Invoices

Petitioners allege that Exhibit 836-P comprises three invoices for

gemstones purchased in 1978 and 1979 in Iran. Petitioners stated at

trial that they are offering the Iranian invoices to show that Mohtaram

acquired items in Iran that she took to Israel, but “not as to the cost or

the specifics of the invoices themselves.”

Respondent reserved

objections for authentication, hearsay, and lack of foundation in the

Second Supplemental First Stipulation of Facts but abandoned the lack

of foundation objection at trial. We will hold petitioners to their

25 Although Jamshid initially testified that Mohtaram did not sell any jewels

to Jewellery Studio, Jamshid later submitted an errata sheet with a correction stating

that “[s]he traded some.”

[*23] concession on the limited purpose for which each Iranian invoice

may be used, even if admitted into evidence. Cf. Fed. R. Evid. 105. We

will consider each Iranian invoice individually in determining whether

it may be admitted for this limited purpose. We sustain in part and

overrule in part respondent’s objections, and we admit Exhibit 836-P for

the limited purpose identified by petitioners except for the portion as to

which we sustain respondent’s objections.

We begin with respondent’s authentication objection. Rule 901(a)

of the Federal Rules of Evidence provides that “[t]o satisfy the

requirement of authenticating or identifying an item of evidence, the

proponent must produce evidence sufficient to support a finding that the

item is what the proponent claims it is.” “The terms of the Rule are thus

satisfied, and the proffered evidence should ordinarily be admitted, once

a prima facie case has been made on the issue. . . . At that point the

matter is committed to the trier of fact to determine the evidence’s

credibility and probative force.” United States v. Johnson, 637 F.2d

1224, 1247 (9th Cir. 1980).

A document may be authenticated by the testimony of a witness

with knowledge that the item is what it is claimed to be. See Fed. R.

Evid. 901(b)(1). A witness may testify to a matter only if evidence is

introduced sufficient to support a finding that the witness has personal

knowledge of the matter. Fed. R. Evid. 602. A document may also be

authenticated through “[t]he appearance, contents, substance, internal

patterns, or other distinctive characteristics of the item, taken together

with all the circumstances.” Fed. R. Evid. 901(b)(4). Documentary

evidence generally should not be excluded “on the sole ground that [it]

must be authenticated by a competent witness with personal knowledge

of [its] authenticity” if the evidence “could have been authenticated by

review of [its] contents if [it] appeared to be sufficiently genuine.” Las

Vegas Sands, LLC v. Nehme, 632 F.3d 526, 533 (9th Cir. 2011).

The Iranian invoices comprise (1) an invoice from Jannati Jewelry

dated May 27, 1979 (Jannati document), (2) an invoice referencing

Firoozeh Gold dated November 1, 1978 (Firoozeh Gold document), and

(3) an invoice from Moozeh Zar Jewelry dated May 3, 1978 (Moozeh Zar

document). We will address the Firoozeh Gold and Moozeh Zar

documents first. Jamshid testified that he recognized the Firoozeh Gold

and Moozeh Zar documents as “the papers that my mother had received

for the purchase of the jewelry in Iran.” Jamshid’s deposition testimony

could support a potential finding that he had adequate personal

knowledge to make that statement. There are no obvious alterations to

[*24] these two documents, and the face of the documents (as

translated) could support the identification petitioners advanced. Cf.

Fed. R. Evid. 901(b)(4). The Firoozeh Gold and Moozeh Zar documents

make clear that they record purchases of gemstones or jewelry by

Mohtaram in Iran in 1978. Petitioners have therefore authenticated the

Firoozeh Gold and Moozeh Zar documents, although we must still

address respondent’s hearsay objection to them.

As we stated at trial, although petitioners have offered the

Iranian invoices for a limited purpose, petitioners have still offered them

for a hearsay purpose (i.e., to show the truth of their assertions that

Mohtaram purchased gemstones in Iran in 1978 and 1979). Therefore,

the Firoozeh Gold and Moozeh Zar documents are excludable as hearsay

unless an exception to the rule against hearsay applies. On brief

petitioners rely only on Rule 803(16) of the Federal Rules of Evidence.

As explained above, whether a hearsay exception is available under Rule

803(16) of the Federal Rules of Evidence for a document prepared before

January 1, 1998, is derivative of whether the document can be properly

authenticated. Furthermore, while Rule 803(16) of the Federal Rules of

Evidence provides an exception to the rule against hearsay for

statements in ancient documents, it does not require the proponent to

authenticate the document pursuant to Rule 901(b)(8) of the Federal

Rules of Evidence, which merely provides an illustrative example

concerning the authentication of ancient documents. Instead, the only

requirement is that Rule 901(a) (or Rule 902) of the Federal Rules of

Evidence be satisfied. See Fed. R. Evid. 803(16) advisory committee’s

note to 2017 amendment (“The limitation of the ancient documents

hearsay exception [to documents prepared before January 1, 1998,] is

not intended to have any effect on authentication of ancient documents.

The possibility of authenticating an old document under Rule

901(b)(8)—or under any ground available for any other document—

remains unchanged.”). Because petitioners have authenticated the

Firoozeh Gold and Moozeh Zar documents, including the claim that they

were prepared before January 1, 1998, we overrule respondent’s

objections to them and admit them for the limited purpose petitioners

identified at trial.

Jamshid also testified, however, that he had never seen the

Jannati document. Despite being unable to rely on Jamshid’s testimony

to authenticate the Jannati document, petitioners invoke Rule 901(b)(8)

of the Federal Rules of Evidence, which is an illustrative example of

evidence satisfying the authentication requirement for an ancient

document. The rule provides that, for a document or data compilation,

[*25] evidence satisfying the requirement of authenticating or

identifying an item of evidence includes evidence that it (1) is in a

condition that creates no suspicion about its authenticity; (2) was in a

place where, if authentic, it would likely be; and (3) is at least 20 years

old when offered.

As an initial matter, the Jannati document—a purported receipt

for a 1979 sale transaction in Iran whose letterhead bears a World Wide

Web address on it—is at least arguably in a condition that creates

suspicion about its authenticity. 26 While the parties have strenuously

argued this matter, 27 we need not reach this dispute 28 for another

reason: Petitioners have not introduced any evidence about where they

found the Jannati document. While Joseph testified that there were

“Persian receipts” in the alleged gift box, he also testified that although

he “can’t remember,” he thought there were only “two . . . receipts from

Iran” in the box. Joseph did not testify about which of the Iranian

invoices in Exhibit 836-P, if any, corresponded to the receipts he saw in

the box. Likewise, Shahbaz testified vaguely that there were a “bunch

of other invoices from Iran” in the box, but he did not testify about

Exhibit 836-P at all, let alone the Jannati document. Petitioners thus

have not introduced evidence showing where the Jannati document was

found and have not authenticated the Jannati document pursuant to

Federal Rule of Evidence 901(b)(8).

Even if petitioners had argued that Federal Rule of Evidence

901(b)(4) applies—or, alternatively, even assuming we needed to

consider pursuant to Federal Rule of Evidence 901(b)(8)(A) whether the

Jannati document “is in a condition that creates no suspicion about its

authenticity”—petitioners still could not authenticate the Jannati

26 At trial we requested petitioners to provide us with the original hard-copy

versions of certain exhibits, including Exhibit 836-P. After trial, we received and

reviewed the hard-copy versions of those exhibits. The World Wide Web address is

somewhat difficult to read on the version of the Jannati document on the electronic

case record, but it is clear on the hard-copy Jannati document.

27 Although it is clear the World Wide Web “was not developed until 1989,”

Kubota Corp. v. Shredderhotline.com Co., No. 12 C 6065, 2013 WL 6096999, at *4 n.1

(N.D. Ill. Nov. 20, 2013), it is unclear whether, for example, someone may have

properly obtained the Jannati document by contacting the merchant at a later date.

We note, however, that if the Jannati document was generated later, it would need to

have been generated before January 1, 1998, for Federal Rule of Evidence 803(16) to

provide a hearsay exception.

28 We also avoid another potential issue with petitioners’ position. Jamshid

testified that Mohtaram left Iran in 1978, not 1979, but we have disregarded that

testimony as inconsistent with one of the parties’ stipulations. See supra note 10.

[*26] document. This is because a review of its contents reveals the

suspect appearance of a World Wide Web address on it. We have also

viewed the original hard-copy Jannati document, see supra note 26, and

the incongruity between the inclusion of the World Wide Web address

and the seemingly aged paper is more readily appreciable by viewing

the original, cf. McGuire v. Blount, 199 U.S. 142, 145 (1905) (stating that

the “production of the originals . . . has given the court an opportunity

to inspect” certain ancient documents and analyzing whether “[t]hey

bear upon their face every evidence of age and authenticity” or, to the

contrary, there is anything “about them to suggest that they have been

forged or tampered with”). There may be an explanation for the Jannati

document’s unusual appearance, but testimony addressing it would be

necessary for us to consider admitting it. Because petitioners have not

authenticated the Jannati document, we sustain respondent’s

authentication and hearsay objections to it, and we exclude it from

evidence. 29

Exhibit 839-P: Logbook

Petitioners allege that the logbook, Exhibit 839-P, is a “photocopy

of an alleged original ledger of sales of the gifted jewelry.” Petitioners

conceded in their Simultaneous Opening Brief that they “seek to admit

the Logbook not for the truth of its content, but rather to show

Petitioners’ intent in creating the Logbook itself.” Respondent reserved

hearsay, authentication, lack of foundation, and best evidence rule

objections in the Second Supplemental First Stipulation of Facts but

conceded the best evidence rule objection at trial. We will hold

petitioners to their concession on the limited purpose for which the

logbook is being offered. Cf. Fed. R. Evid. 105. We overrule respondent’s

objections in view of that concession and admit the logbook for the

limited purpose petitioners identified.

Showing petitioners’ alleged intent is a nonhearsay purpose for

offering the logbook, so we overrule respondent’s hearsay objection. We

also overrule respondent’s foundation and authentication objections in

view of the limited purpose for which petitioners are offering the

logbook. Joseph and Shahbaz testified about how petitioners allegedly

instructed their employees to create the logbook, how it was allegedly

maintained, and how it was purportedly intended to be a sales record

29 We note that, in any case, we have made the factual finding for which

petitioners intended the Jannati document to provide additional support (i.e., that

Mohtaram purchased gemstones in Iran before emigrating to Israel).

[*27] for items they intentionally segregated from their regular

merchandise. To be clear, this testimony was arguably vague, as well

as barely sufficient to authenticate the logbook and lay a foundation for

connecting it to petitioners’ alleged intent. For example, no witness

identified the handwriting or named the person who wrote in the

logbook.

Nonetheless, under the circumstances here, those

considerations concern the weight we should accord the logbook and not

its admissibility. Accordingly, we admit the logbook into evidence for

the limited purpose petitioners identified.

III.

Evaluation of Evidence

“The most important and most crucial action the courts take in [a

trial] is to resolve facts.” United States v. Gainey, 380 U.S. 63, 88 (1965)

(Black, J., dissenting); see Diaz v. Commissioner, 58 T.C. 560, 564 (1972)

(“[T]he distillation of truth from falsehood . . . is the daily grist of

judicial life.”). The fact-finding process often requires the Court as the

finder of fact to evaluate the credibility of witness testimony before

making findings on the basis of that testimony. We have stated that in

determining credibility,

[w]e observe the candor, sincerity, and demeanor of each

witness in order to evaluate his or her testimony and

assign it weight for the primary purpose of finding disputed

facts. We determine the credibility of each witness, weigh

each piece of evidence, draw appropriate inferences, and

choose between conflicting inferences in finding the facts of

a case. The mere fact that one party presents unopposed

testimony on his or her behalf does not necessarily mean

that the elicited testimony will result in a finding of fact in

that party’s favor. We will not accept the testimony of

witnesses at face value if we find that the outward

appearance of the facts in their totality conveys an

impression contrary to the spoken word.

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 84 (2000), aff’d,

299 F.3d 221 (3d Cir. 2002). As the trier of fact we may credit evidence

in full, in part, or not at all. We may credit the part of a witness’s

testimony that is not self-serving, while requiring some form of

corroboration before crediting the portion that is. See Factor v.

Commissioner, 281 F.2d 100, 114 n.27 (9th Cir. 1960) (“The Tax Court

may accept parts and reject other parts of a witness’s testimony.”),

aff’g T.C. Memo. 1958-94; Baumgardner v. Commissioner, 251 F.2d 311,

[*28] 321 (9th Cir. 1957) (“The Tax Court was willing to accept in part

the taxpayer’s claim of alleged profits from buying and selling

improvement bonds. It was not required to accept it in full.”), aff’g T.C.

Memo. 1956-112.

It is “the exclusive province of the fact finder to determine the

credibility of witnesses, resolve evidentiary conflicts, and draw

reasonable inferences from proven facts.” United States v. Hubbard,

96 F.3d 1223, 1226 (9th Cir. 1996); see Anderson v. City of Bessemer City,

N.C., 470 U.S. 564, 573–74 (1985) (stating that if the trial court’s view

of the evidence is plausible in the light of the record, a reviewing court

may not disturb it absent clear error, even when the trial court’s findings

“do not rest on credibility determinations, but are based instead on

physical or documentary evidence or inferences from other facts”);

United States v. Yellow Cab Co., 338 U.S. 338, 342 (1949) (stating that

where there are two permissible views of the evidence, the factfinder’s

choice between them is not clearly erroneous); United States v. U.S.

Gypsum Co., 333 U.S. 364, 395 (1948) (stating that a finding is clearly

erroneous when “the reviewing court on the entire evidence is left with

the definite and firm conviction that a mistake has been committed”);

Estate of Rau v. Commissioner, 301 F.2d 51, 54 (9th Cir. 1962) (“The Tax

Court personally observed the witnesses . . . and from that vantage

point was in a position to evaluate their testimony in the light of their

attitude and demeanor while being interrogated.”), aff’g T.C. Memo.

1959-117. We may reject “vague and implausible testimony” in a case

involving unreported income. Delaney v. Commissioner, 743 F.2d 670,

672 (9th Cir. 1984), aff’g T.C. Memo. 1982-666. We determine the

credibility of witnesses, resolve evidentiary conflicts, and draw

inferences from the record with this framework in mind.

IV.

Analysis

The Commissioner’s determinations in a notice of deficiency are

generally presumed correct, and the taxpayer bears the burden of

proving that the determinations are incorrect. See Rule 142(a)(1); see

also Welch v. Helvering, 290 U.S. 111, 115 (1933); Rockwell v.

Commissioner, 512 F.2d 882, 885–87 (9th Cir. 1975), aff’g T.C. Memo.

1972-133. Nonetheless, if the Commissioner raises a new matter, seeks

an increase in deficiency, or asserts an affirmative defense, the

Commissioner bears the burden of proof as to the new matter, increased

deficiency, or affirmative defense. See Rule 142(a). After respondent

issued the Notice of Deficiency to Joseph and Lilly for their 2012–14

taxable years, respondent asserted that JFJ’s gross receipts for 2013

[*29] should be increased by $71,382. Accordingly, respondent bears

the burden of proof with respect to the increased income tax deficiency

attributable to this adjustment.

Petitioners have not argued or shown that the burden of proof

should shift to respondent under section 7491(a), and we conclude that

section 7491(a) does not apply under the circumstances here.

Petitioners thus bear the burden of proof with respect to the other

nonpenalty determinations at issue in these cases, although respondent

bears the burden of production with respect to unreported income, as

discussed below. We discuss the burden of proof applicable to the

penalties respondent determined against petitioners separately in

connection with our discussion of those penalties.

Unreported Income

Section 61(a) defines gross income as “all income from whatever

source derived,” including income derived from business. Exclusions

from gross income are narrowly construed. See Commissioner v.

Schleier, 515 U.S. 323, 328 (1995); Commissioner v. Glenshaw Glass Co.,

348 U.S. 426, 429–30 (1955); Helvering v. Clifford, 309 U.S. 331, 334

(1940). A taxpayer must maintain books and records establishing the

amount of his or her gross income. See § 6001; Treas. Reg. § 1.6001-1(a).

If the taxpayer fails to do so, the Commissioner may reconstruct income

through any reasonable method that clearly reflects income.

See § 446(b); Petzoldt v. Commissioner, 92 T.C. 661, 693 (1989). The

reconstruction need only be reasonable in view of the surrounding facts

and circumstances. See Petzoldt, 92 T.C. at 687; see also Union Stock

Farms v. Commissioner, 265 F.2d 712, 721 (9th Cir. 1959).

In cases of unreported income, “the Commissioner must establish

a ‘minimal evidentiary showing’ connecting the taxpayer with the

alleged income-producing activity,” Walquist v. Commissioner, 152 T.C.

61, 67 (2019) (quoting Blohm v. Commissioner, 994 F.2d 1542, 1549

(11th Cir. 1993), aff’g T.C. Memo. 1991-636); see also Weimerskirch v.

Commissioner, 596 F.2d 358, 361 (9th Cir. 1979), rev’g 67 T.C. 672

(1977), “or demonstrate that the taxpayer actually received unreported

income,” Walquist, 152 T.C. at 67 (citing Edwards v. Commissioner, 680

F.2d 1268, 1270 (9th Cir. 1982)). The requisite evidentiary foundation

is “minimal.” Banister v. Commissioner, T.C. Memo. 2008-201, 96

T.C.M. (CCH) 114, 114, aff’d, 418 F. App’x 637 (9th Cir. 2011). “Once

the Commissioner makes the required threshold showing, the burden

shifts to the taxpayer to prove by a preponderance of the evidence that

[*30] the Commissioner’s determinations are arbitrary or erroneous.”

Walquist, 152 T.C. at 67–68 (first citing Helvering v. Taylor, 293 U.S.

507, 515 (1935); and then citing Tokarski v. Commissioner, 87 T.C. 74

(1986)); see Hardy v. Commissioner, 181 F.3d 1002, 1004–05 (9th Cir.

1999), aff’g T.C. Memo. 1997-97.

The Commissioner “may choose to proceed under any single

theory of proof or a combination method, including a combination of

circumstantial and direct proofs.” United States v. Abodeely, 801 F.2d

1020, 1023 (8th Cir. 1986); see Dyer v. Commissioner, T.C. Memo.

2012-224, at *15–20; Price v. Commissioner, T.C. Memo. 2004-103, slip

op. at 24–25. “Although the absence of adequate tax records does not

give [the Commissioner] carte blanche for imposing Draconian

absolutes, such absence does weaken any critique of [the

Commissioner’s] methodology.” Petzoldt, 92 T.C. at 693 (citing Webb v.

Commissioner, 394 F.2d 366, 373 (5th Cir. 1968), aff’g T.C. Memo.

1966-81).

The bank deposits method is an accepted indirect method for

reconstructing income. See Clayton v. Commissioner, 102 T.C. 632, 645–

46 (1994); DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), aff’d, 959

F.2d 16 (2d Cir. 1992); Estate of Mason v. Commissioner, 64 T.C. 651,

656 (1975), aff’d, 566 F.2d 2 (6th Cir. 1977). The bank deposits method

assumes that all deposits are taxable, but the Commissioner must

account for any nontaxable source or deductible expense of which he has

knowledge. See Clayton, 102 T.C. at 645–46; DiLeo, 96 T.C. at 868.

Nontaxable sources include funds attributable to interaccount bank

transfers and returned checks, as well as loans, gifts, inheritances, or

assets on hand at the beginning of the taxable period. See Showalter v.

Commissioner, T.C. Memo. 2022-114, at *5–6. The taxpayer bears the

burden of proving a nontaxable source for deposits. See DiLeo, 96 T.C.

at 869; Barnes v. Commissioner, T.C. Memo. 2016-212, at *32, aff’d, 773

F. App’x 205 (5th Cir. 2019); see also Tokarski, 87 T.C. at 77 (“A bank

deposit is prima facie evidence of income and [the Commissioner] need

not prove a likely source of that income.”).

The specific items method is a direct proof of income

reconstruction this Court has approved. See Dyer, T.C. Memo. 2012-224,

at *17. Once the Commissioner produces clear evidence of unreported

gross income, the taxpayer bears the burden of proving that the

Commissioner’s method of income reconstruction is unfair or inaccurate

under the specific items method. See Flynn v. Commissioner, T.C.

Memo. 2021-43, at *24. To carry this burden, the taxpayer generally

[*31] must offer “competent and relevant evidence from which it could

be found that he did not receive the income alleged in the deficiency

notice,” Dyer, T.C. Memo. 2012-224, at *18 (quoting Sharwell v.

Commissioner, 419 F.2d 1057, 1060 (6th Cir. 1969), vacating and

remanding T.C. Memo. 1968-89), or otherwise “prov[e] a nontaxable

source of the unreported income,” Levine v. Commissioner, T.C. Memo.

1998-383, 1998 WL 738061, at *6, aff’d, 229 F.3d 1158 (9th Cir. 2000)

(unpublished table decision).

The income-producing activities as to which respondent has

determined unreported income, and which remain in dispute, are the

jewelry businesses conducted by JFJ and SJC. The record, which

includes petitioners’ own testimony and relevant stipulations, clearly

establishes the connections between (1) Joseph, Lilly, and the jewelry

business conducted by JFJ, as well as (2) Shahbaz, Shahrokh, and the

jewelry business conducted by SJC. 30 The record also contains extensive

bank records and copies of canceled checks, along with summary

schedules, showing that petitioners received payments that they did not

report as income. Furthermore, as already discussed, Joseph and

Shahbaz admitted that they chose not to inform Mr. Mehrnia, their tax

return preparer, about deposits into Rabobank 2472. Respondent has

thus met his burden of production, and his determinations of unreported

income are generally entitled to a presumption of correctness.

Nonetheless, the burden of proof will remain with respondent with

respect to the increased income tax deficiency attributable to

respondent’s assertion that JFJ’s 2013 gross receipts should be

increased by $71,382, which we discuss separately.

While petitioners have argued that some of the income

respondent determined is attributable to a nontaxable source, which we

address below, petitioners have not shown that respondent’s

reconstruction of their income was otherwise arbitrary or erroneous. Cf.

Showalter, T.C. Memo. 2022-114, at *6 (noting that the “only flaw that

[the taxpayer] discerned in [the Commissioner’s] bank deposits analysis

was the alleged failure to exclude nontaxable . . . proceeds” and that the

taxpayer “alleged no other error in [the Commissioner’s] bank deposits

analysis”); Flynn, T.C. Memo. 2021-43, at *25 (noting that while the

taxpayer argued that “funds deposited into his bank accounts . . . were

30 Respondent attributed deposits of JFJ’s items to Joseph and Lilly, and

deposits of SJC’s items to Shahbaz and Shahrokh, with one qualification: Joseph and

Shahbaz jointly owned Rabobank 2472, so respondent attributed checks deposited in

that account and written to unknown or blank payees, to “Sehati,” to “Cash,” or to other

ambiguous payees half to JFJ and half to SJC.

[*32] investments,” the taxpayer “provided no credible evidence

demonstrating error in [the Commissioner’s] analysis, and he does not

dispute the amount of funds received for any of the years in issue”).

Respondent reasonably reconstructed petitioners’ income for 2012–14.

Petitioners failed to keep or provide adequate books and records from

which their tax liabilities could be computed, and Joseph and Shahbaz

each falsely represented to respondent that JFJ or SJC, respectively,

had only one business bank account. Respondent collected financial

information through third-party summonses and reconstructed

petitioners’ income using a combination of the bank deposits and specific

items methods. Respondent adjusted petitioners’ income for known

nontaxable items and reported income, and respondent allowed

additional adjustments after petitioners brought cases in this Court.

Respondent also cautiously—and generously—excluded cash sales that

were recorded on JFJ’s sales log but unmatched by a corresponding bank

deposit from his calculation of JFJ’s income. While respondent

generally does not bear the burden of proof on nonpenalty issues,

respondent nonetheless demonstrated at trial that petitioners

underpaid their tax and underreported their income for 2012–14

because many of the deposits into their personal bank accounts came

from taxable sources, such as checks with descriptions in their memo

lines like “To repair Rolex Watch” or “Rolex adjustment.” 31 Respondent

has clearly and convincingly shown that petitioners underreported their

income and, consequently, underpaid their income tax 32 for 2012–14.

Respondent has also met his burden of proof on the increase in

deficiency for Joseph and Lilly’s 2013 taxable year that is attributable

to a $71,382 adjustment to JFJ’s 2013 gross receipts. The adjustment

is calculated by subtracting $30,001 of adjustments in Joseph and Lilly’s

favor from a $101,383 upward adjustment to JFJ’s 2013 gross receipts

that respondent asserted after these cases were docketed. RA Hurtado

credibly testified that the $101,383 adjustment represented “the amount

of deposits for the month of January in 2013 [into Rabobank 1381 that]

was not in the analysis. So it’s a correction that’s being made.” The

account statements for Rabobank 1381 are in the record, and we have

verified that JFJ’s deposits into Rabobank 1381 for January 2013 have

31 Respondent has compiled a more comprehensive list of items of this sort with

citations of the record in his Simultaneous Reply Brief.

32 We reject petitioners’ computational arguments about the effect that

disallowing their claimed NOL deductions has on their income tax deficiencies infra

Part IV.C. See infra note 40 and accompanying text.

[*33] not been double counted after the increase in deficiency

respondent asserted.

Petitioners offer the gift jewelry story to explain why much of the

unreported income respondent has identified allegedly derives from a

nontaxable source of income. As an initial matter, petitioners’ reliance

on the gift jewelry story is misplaced because gain from the sale of gift

property (including any gain attributable to the holding period of a donor

or a succession of donors) is a taxable source of income, not a nontaxable

source. See §§ 61(a)(3), 1001(a), 1015; Cooper v. United States, 280 U.S.

409 (1930); Wilson Bros. & Co. v. Commissioner, 124 F.2d 606, 610 (9th

Cir. 1941); Shatzer v. Commissioner, 3 T.C. 914, 916 (1944); cf. § 102(a)

(excluding gifts from gross income but not mentioning sales of gift

property).

It is true, of course, that a sale of property for an amount realized

that is less than or equal to the property’s adjusted basis will not cause

a taxpayer to realize gain. See Treas. Reg. § 1.1001-1(a). Nonetheless,

petitioners have not done the work of tracing each item of income

respondent identified to a specific piece of alleged gift jewelry and an

alleged adjusted basis for each piece, let alone presenting this

information in a usable format or calculating the resulting gain or loss

on each piece. Likewise, they have not traced the entries on the

Jewellery Studio invoices to specific customer transactions or sales

invoices at JFJ or SJC. “We need not (and shall not) undertake the task

of sorting through the voluminous evidence . . . provided in an attempt

to see what is, and what is not, adequate substantiation of the” adjusted

basis for each piece. Hale v. Commissioner, T.C. Memo. 2010-229,

slip op. at 6. We also accord no weight to Joseph’s and Shahbaz’s

self-serving testimony that they sold the alleged gift jewelry at a price

equal to or below the original cost for which Mohtaram bought it

(together with adjustments for modifications) because those statements

are not an adequate substitute for documentary evidence under the

circumstances here. Cf. Treas. Reg. § 1.6001-1(a), (e).

The tracing problem is especially acute in these cases because the

logbook is in evidence only for the purpose of showing petitioners’ intent,

not for the truth of its contents, and there are no sales invoices in the

record. In other words petitioners have not laid an adequate foundation

to connect any item of income respondent identified to any item of

alleged gift jewelry, even if we made the effort ourselves. Petitioners

have thus admitted that the items of income respondent identified

derive from a source of income that is generally taxable without

[*34] establishing that special facts exist under which that source of

income would be nontaxable. While petitioners have provided some

shipment documents from 1983 with valuation figures on them, such as

a Brink’s memorandum of agreement and a Wolf D. Barth Co. invoice,

petitioners cannot use them to establish their bases for at least four

independently sufficient reasons: (1) they provide only evidence of

values at the time of shipment, not evidence of adjusted bases;

(2) alleged modification or redesign of the gift jewelry pieces before they

were sold 33 may have resulted in the removal of materials and

consequently reductions to the adjusted bases of many of the pieces, cf.

Treas. Reg. § 1.61-6(a); (3) the problem of tracing shipped items to

individual sale transactions at JFJ and SJC (or even to resale during

specific taxable years) is intractable; and (4) we reject the gift jewelry

story outright for reasons discussed below. Any attempt to use the

Jewellery Studio invoices to establish the items’ bases also suffers from

the second, third, and fourth of those problems, as well as an additional

problem regarding trial testimony about them that we discuss below.

The Moozeh Zar and Firoozeh Gold documents are not in evidence for

the truth of their cost figures at all.

In any case the gift jewelry story is entirely fanciful. We reject

the veracity of the gift jewelry story for the following reasons:

(1) The testimony we heard in support of the gift jewelry story simply

lacked credibility. Our observation of the relevant witnesses’

demeanor during questioning tended to refute, not confirm, the truth

of the gift jewelry story.

(2) The testimony we heard in support of the gift jewelry story was

implausible, including for the following reasons:

(a) Petitioners have not satisfactorily explained why there are

references to watches in the memo lines of some of the checks

deposited in Rabobank 2472 even though no witness testified that

watches were among the gift jewelry. The same is true of

numerous other checks with anomalous memo lines in the record,

including one for “wine glasses.”

33 There is no record, however, of which pieces of jewelry were modified or how

they were modified. Petitioners have not explained or substantiated any basis

adjustments in their favor that might have resulted from modifying the gift jewelry.

Cf. § 1016.

[*35]

(b) Petitioners have not adequately explained why their customers

purportedly used checks so frequently only when they bought gift

jewelry but so infrequently for sales in the regular course of

business. Shahbaz testified that “we wanted to avoid . . . credit

card” processing fees on the gift jewelry. It is unclear, however,

why this same consideration would not apply to other sales at

SJC. Indeed, Shahbaz testified that SJC “promote[s] mainly

check or credit card” (emphasis added) instead of cash because

“I’m not there often. I don’t want to look for money later.” While

Shahbaz also testified that “we . . . wanted to have a separate

account for [gift jewelry proceeds] . . . so we know what we got out

of it,” maintaining a separate account for the gift jewelry proceeds

would not require accepting mainly a single payment method. In

addition, petitioners already allegedly maintained the logbook for

the purpose of tracking their sales of gift jewelry. Finally, the

logbook entries reference checks deposited into more than one

account, including Rabobank 2472, SBBT 8226, Chase 8913, and

BofA 7088, not a single separate account.

and SJC diverted income from check and cash sales in the regular

course of business away from their operating accounts in an

attempt to conceal income. Deposits of credit card sale proceeds

into JFJ’s and SJC’s operating accounts regularly and

substantially exceeded deposits of customer checks and cash

deposits during 2012–14; individual deposits of cash and

customer checks were for relatively small amounts. SJC’s sales

journals identify substantial check and cash sales that do not

correspond to the check and cash deposits in its operating

account.

(d) RA Hurtado credibly testified that Joseph, Shahbaz, and Mr.

Mehrnia never mentioned gift jewelry sales when she interviewed

them and that when she asked Shahbaz about why the financial

activity in Rabobank 2472 stopped in April 2014, “he indicated

that that’s when they went straight.” We credit RA Hurtado’s

testimony and interpret Shahbaz’s statement as a party

admission that he underreported his income from SJC with the

intent to evade taxes.

(3) The testimony we heard in support of the gift jewelry story was

inconsistent, including for the following reasons:

[*36]

(a) Shahbaz testified that yellow tags with cost figures written on

them were already affixed to the gift jewelry pieces when the gift

box was opened, while Joseph testified that they were affixed

later.

(b) Shahbaz testified that SJC “promote[s] mainly check or credit

card” (emphasis added) as opposed to cash, but the record shows

that SJC had minimal check deposits into its business operating

account.

of the gift jewelry. While Joseph testified that he, Shahbaz, and

Shahrokh sent Jamshid $90,000 from the gift jewelry sales in

2014, Joseph also testified that “it was [for] an emergency that

we . . . sent him the [$]90,000.

He needed some medical

attention.” In addition, $90,000 is considerably less than

Jamshid’s purported one-fourth share of the alleged proceeds

from the gift jewelry sales: Shahbaz testified that the proceeds

totaled about $3 million. 34 The foregoing inconsistencies also

render implausible Joseph’s testimony that SJS received

unreported income (despite Jamshid’s not being an owner of SJS)

because “[w]e thought we would invest it in something . . . [and

later] we will divide it equally [among] the brothers.”

(d) Petitioners argue that the yellow tags were attached to items of

gift jewelry, but Anna testified that the yellow tags signified sale

items.

(e) Joseph testified that there were about 1,600 to 1,700 items of gift

jewelry in total, but respondent avers that (by his count) the

Jewellery Studio invoices “contain approximately 4,250

individual items.” The illegibility of portions of the Jewellery

Studio invoices prevents us from giving a definitive estimate of

the number of items of jewelry they concern, but it is considerably

more than 1,700 items.

Joseph’s testimony is therefore

inconsistent with petitioners’ argument that the Jewellery Studio

34 Petitioners allege that the gift jewelry sales concluded in 2014, so the size of

the alleged $90,000 payment to Jamshid in 2014 cannot be explained by petitioners’

not yet having concluded (or at least nearly concluded) their alleged sales of gift

jewelry.

[*37] invoices provide a straightforward means to establish the cost

basis of the alleged gift jewelry.

(4) The testimony we heard in support of the gift jewelry story was vague

in some important respects as well, including the following:

(a) We are unsure whether Joseph’s testimony that the gift box was

unopened was based on any personal knowledge other than his

observation of its physical appearance when it was opened.

(b) We are left without any sense of how Mohtaram allegedly stored

the gift box for decades or whether and how she ensured it

remained unopened. A better picture of Mohtaram’s finances

might have helped to establish whether she was likely to have

stored valuable jewelry for decades or to have liquidated it before

then, but we are left with only a vague sense of her economic

means. In any event we find the testimony that a box containing

jewelry and gemstones worth millions of dollars sat unopened for

decades to be incredible and not worthy of belief. Petitioners have

not established the source of JFJ’s opening inventory when

Joseph opened JFJ in 1987, nor have they proven that it was not

the jewelry Mohtaram allegedly shipped to Joseph a few years

earlier.

specificity, and the record contains no inventory list of the items

in the gift box to supplement that testimony.

(d) The logbook’s authorship has not been satisfactorily explained

beyond petitioners’ allegation that unnamed employees made

entries. 35 No petitioner admitted to making any entries in the

logbook.

(e) Despite Joseph’s testimony that the jewelry in the gift box could

be cross-referenced to the Jewellery Studio invoices via a catalog

number, the record reveals little about what the catalog is, how it

functions, and the process of matching particular jewelry pieces

35 Shahbaz’s testimony that the author of SJC’s entries was fired for stealing

also raises unanswered questions about the circumstances of the theft and whether

the logbook played any role in, or was adversely affected by, the theft.

[*38] to catalog numbers—and ultimately a cost figure—more

generally. 36

(f) Joseph and Shahbaz each explained Mr. Mehrnia’s purported

ignorance of their alleged gift jewelry sales by stating that Mr.

Mehrnia’s wife, who is also Joseph and Shahbaz’s sister, might

have been upset had she learned that she did not receive part of

the gift jewelry. Nonetheless, the alleged gift note states that Mr.

Mehrnia’s wife was to receive real property instead and that

Mohtaram “wish[es] that this division [of property] may not

create any issues and problem[s] among” her children, who have

“always been . . . supportive of each other.” While conceivably

there may still have been reasons for Mr. Mehrnia’s wife to be

upset, those reasons are speculative on the record before us.

(g) Petitioners allege that Shahrokh or other jewelers at SJC

modified the gift jewelry to make it more salable, but they also

allege that because the jewelry was dated, out of style, and not

salable, they sold it with the objective of recouping as much of its

original cost as possible instead of attempting to make a profit

over and above its original cost. The record does not adequately

illuminate whether or how these arguments are consistent with

each other.

(h) Shahbaz testified that loose gemstones in the alleged gift box

were originally packaged in plastic bags and that there was only

one yellow tag per plastic bag, not one yellow tag per gemstone.

It is unclear how petitioners are alleging these loose gemstones

were segregated from JFJ’s and SJC’s regular inventories and

tracked if each one did not have its own yellow tag. It is also

unclear whether and how Shahbaz’s testimony that yellow tags

were thrown out at SJC after an item of alleged gift jewelry was

sold applies to loose gemstones.

(i) Joseph, Shahbaz, Shahrokh, and Jamshid’s other siblings were

not witnesses and therefore did not testify about whether or when

they received the houses described in the alleged gift note. No

documentary evidence exists on this point either.

36 Shahbaz’s inconsistent account avoids this complication because, according

to him, “[t]he items were already yellow-tagged” with cost figures written on the tags.

[*39]

(5) At trial, Shahrokh—one of the purported donees of Mohtaram’s

alleged gift of jewelry, as well as someone who purportedly modified

it before it was resold—professed a lack of awareness concerning

whether sales of that jewelry ever occurred. He testified that “I

believe they have [been] sold, I don’t know, but . . . I would imagine,

we have sold them off from what I understand.”

(6) There is insufficient documentary evidence to support the gift

jewelry story. Cf. Wichita Terminal Elevator Co. v. Commissioner, 6

T.C. 1158, 1165 (1946) (“[T]he failure of a party to introduce evidence

within his possession and which, if true, would be favorable to him,

gives rise to the presumption that if produced it would be

unfavorable.”), aff’d, 162 F.2d 513 (10th Cir. 1947). While our

concern is largely general, some specific concerns include the

following:

(a) Petitioners have produced neither SJC’s computerized sales

invoices and inventory records nor Mr. Mehrnia’s digital

Quickbooks backup file.

(b) The only documentary evidence of a gift of jewelry to petitioners

in 2010 is the alleged handwritten gift note from Mohtaram, but

it is indistinguishable on its face (as translated) from a

holographic will. Indeed, Jamshid referred to it as a will in his

deposition testimony.

for 2010 or any other year. In addition, the alleged gift note does

not provide evidence of a completed gift because we admitted it

only to prove Mohtaram’s then-existing state of mind (e.g., her

intent, motive, or plan), not to prove the fact of a completed gift.

(d) Much of the documentary evidence petitioners provided tends to

record events during or before 1983, but it largely does not help

to establish later events central to petitioners’ narrative. We are

unconvinced that any historical events petitioners may have

established are anything more than a smokescreen for their

improper income tax reporting.

(7) There is insufficient corroboration by witnesses unrelated to

petitioners to support the gift jewelry story.

The following

considerations are particularly important in this regard:

[*40]

(a) Testimony by one or more of JFJ’s or SJC’s nonparty employees

or customers during 2012–14 with personal knowledge of the

events at issue would have been especially helpful. No such

testimony exists, however.

(b) While Shahbaz testified that an IRS agent observed the gift

jewelry, no party called the IRS agent as a witness.

refute the gift jewelry story. Petitioners could have made an

application to the Court to perpetuate her testimony pursuant to

Rule 81(a) or Rule 82 before her death. While we do not draw any

adverse inference against petitioners on these grounds,

Mohtaram’s death does not afford petitioners any leeway in

meeting their burden of proof. Cf. Kroner v. Commissioner, T.C.

Memo. 2020-73, at *9–10 (discussing the importance of hearing a

specific person’s testimony despite not drawing an adverse

inference from the person’s absence), rev’d in part on other

grounds, 48 F.4th 1272 (11th Cir. 2022).

(8) The logbook is in evidence only for the limited purpose of showing

petitioners’ intent. Nonetheless, viewed in the light of the entire

record, it does not demonstrate petitioners’ alleged intent to track

the sale of gift jewelry, including for the following reasons:

(a) Joseph’s and Shahbaz’s testimony about the logbook’s creation,

maintenance, and purpose simply was not credible.

(b) The logbook records check sales (allegedly of gift jewelry) but not

credit card sales. It would be illogical for the logbook to record

only sales via a single payment method if it were intended to track

the sale of gift jewelry.

the person or people responsible for making entries in it. Absent

testimony from such a person—including as to when the logbook

was created and any other circumstances surrounding its

creation—the logbook does not convincingly demonstrate

petitioners’ contemporaneous intent.

Petitioners have not

adequately proven that the logbook was contemporaneously

maintained in view of the lack of weight we give to Joseph’s and

Shahbaz’s testimony.

[*41]

(d) As already discussed, JFJ’s and SJC’s sales invoices, which might

refute or confirm the logbook entries, have not been introduced

into evidence. Some of the entries in the logbook correspond to

checks whose memo lines mention watches and wine glasses,

among other items, but watches, wine glasses, and certain other

items mentioned in the checks’ memo lines were not among the

alleged gift jewelry items.

(e) Joseph testified that the primary purpose of the logbook was to

facilitate an equitable division of the proceeds of the gift jewelry,

but he also testified that credit card sales of gift jewelry were not

recorded in the logbook, which would not facilitate an equitable

division of the proceeds. This is especially true with respect to

Jamshid, who was involved with neither JFJ nor SJC. Moreover,

some of the funds deposited into Rabobank 2472 were used for

personal purposes or deposited into JFJ’s and SJC’s operating

accounts.

(9) The gift jewelry story is underinclusive. Joseph, when asked which

personal bank accounts received deposits from gift jewelry sales,

replied only “Rabobank,” which we understand to mean Rabobank

2472. When he was asked, “So any sales of the mother’s gifted

jewelry went into the Rabobank [2472] account?”, he replied, “Yes, it

did.” We understand this to be a party admission that the gift

jewelry story is not applicable to the specific amounts deposited into

Chase 8913, SBBT 8226, BofA 7088, and BofA 5186 that respondent

identified as taxable. Because petitioners have not offered any other

explanation of these specific items, we deem them to have conceded

that they are taxable.

Petitioners have made generalized arguments about the

reliability of the IRS’s examination at the administrative level. These

arguments do not avail petitioners because

[a]s a general rule, this Court will not look behind a

deficiency notice to examine the evidence used or the

propriety of [the Commissioner’s] motives or of the

administrative policy or procedure involved in making his

determinations. . . . [A] trial before the Tax Court is a

proceeding de novo; our determination as to a [taxpayer’s]

tax liability must be based on the merits of the case and

[*42] not any previous record developed at the administrative

level.

Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327–28 (1974).

We are not faced here with the exceptional situation of respondent’s

making a naked assessment without any rational foundation. Cf.

United States v. Janis, 428 U.S. 433, 441–42 (1976). To the contrary,

there is overwhelming evidence of the correctness of all of respondent’s

positions in these cases that remain at issue (other than his

determination of fraud penalties against Anna and Farahnaz for

2012–14).

Guaranteed Payments

Payments a partner receives from a partnership generally fall

into one of three categories. See Bolles v. Commissioner, T.C. Memo.

2019-42, at *19–20. First, a partner may receive payments representing

distributions of his or her distributive share of partnership income.

See §§ 701, 702, 704(b), 731, 736(a)(1). Second, a partner may receive

payments in circumstances in which he or she is not treated as a

partner. See § 707(a). Third, a partner may receive guaranteed

payments for services or use of capital that do not represent

distributions of partnership income. See §§ 707(c), 736(a)(2). A

guaranteed payment is not automatically deductible by the partnership

making it; nonetheless, if the guaranteed payment would have been

deductible if it had been made to a nonpartner, then it is deductible if

made to a partner. See Cagle v. Commissioner, 539 F.2d 409, 414 (5th

Cir. 1976), aff’g 63 T.C. 86 (1974).

Respondent determined that Shahbaz and Anna failed to report

guaranteed payments of $48,000, $48,000, and $46,000 for 2012, 2013,

and 2014, respectively, reflecting the fair market value of their use of

1143 Colina Vista, SJS’s partnership property, as their personal

residence until mid-December 2014. Shahbaz and Anna do not argue

about which of the three just-described categories their personal use of

1143 Colina Vista should fall into. 37 Instead, they argue that as an

37 Petitioners’ lack of argument does not mean that the issue is

straightforward. Cf. Pratt v. Commissioner, 64 T.C. 203, 210 (1975) (holding that

payments based on gross rentals “are not determined without regard to the income of

the partnership as required by section 707(c) for a payment to a partner for services to

be a guaranteed payment”), aff’d in part, rev’d in part, 550 F.2d 1023 (5th Cir. 1977);

H.H. Mink & Son Bag Co. v. Commissioner, T.C. Memo. 1970-177, 1970 Tax Ct. Memo

[*43] alleged factual matter, they lived at 1143 Colina Vista “for less

than half of the 36-month period from January 1, 2012, to December 31,

2014.” They also argue that there were “nearly two years of renovations”

on 1143 Colina Vista, and that they “moved to a home directly across

the street” during this time. We take a dim view of Shahbaz and Anna’s

failure to develop the record adequately in this regard.

If it were true during 2012–14 (or some portion of it) that Shahbaz

and Anna resided at another residence and 1143 Colina Vista was under

construction, then they could have produced more than self-serving

testimony to support those facts. Some documentation concerning the

construction almost certainly would have existed. The testimony of

nonparty witnesses with knowledge, photographic or video evidence, or

other documentary evidence might also have been helpful. Evidence

concerning precisely when Shahbaz and Anna lived at one residence or

the other is also needed, but Shahbaz’s testimony was imprecise.

The failure of proof on this issue leaving the truth shrouded in

mystery—and us with a threadbare record at best—must fall on

Shahbaz’s and Anna’s shoulders. At any given time, Shahbaz and Anna

either resided at 1143 Colina Vista or they did not, and 1143 Colina

Vista either was undergoing renovations or it was not. Shahbaz and

Anna’s failure to adduce evidence other than their own testimony to help

us resolve where they resided during 2012–14—and when they did so—

is inexplicable. We will draw an adverse inference against Shahbaz and

Anna for failing to develop the record appropriately with respect to their

place of residence. We presume that any evidence they could have

produced in this regard would have been unfavorable to them. See

Wichita Terminal Elevator Co., 6 T.C. at 1165.

On the record before us, we are faced with Shahbaz and Anna’s

contemporaneous written statements on their income tax returns that

their home address was 1143 Colina Vista and their inconsistent,

self-serving testimony that they resided at another residence. Shahbaz

LEXIS 181, at *23–25 (characterizing a partner’s personal use of a partnership’s

automobile as income of the partnership); Treas. Reg. § 1.707-1(a) (“A partner who

engages in a transaction with a partnership other than in his capacity as a partner

shall be treated as if he were not a member of the partnership with respect to such

transaction. Such transactions include . . . the rendering of services by the partnership

to the partner . . . .”); Rev. Rul. 81-300, 1981-2 C.B. 143 (characterizing partners’

receipt of a percentage of gross rentals in exchange for providing management services

as guaranteed payments, contrary to Pratt). Nonetheless, because petitioners have

not argued that an alternative characterization is more appropriate and the analysis

would be highly fact intensive, we decline to assume the mantle in the first instance.

[*44] and Anna have not met their burden to show they resided

somewhere other than 1143 Colina Vista because (1) the testimony we

heard simply was not credible, (2) we have drawn an adverse inference

against them on account of their failure to develop the record

adequately, and (3) their income tax returns have the advantage of

contemporaneity.

Shahbaz and Anna also argue that Shahbaz “supervised and

managed the team of contractors working at” 1143 Colina Vista and that

they moved back to 1143 Colina Vista in 2014, “where [Shahbaz]

continued performing repairs.”

These assertions are similarly

unsupported by credible evidence, but more importantly, they are

irrelevant: The issue is not whether Shahbaz made some contribution of

services to SJS but instead whether he received compensation

“determined without regard to the income of the partnership.” See

§ 707(c). Shahbaz and Anna have not made any argument that their

personal use of 1143 Colina Vista depended on SJS’s income, and we

conclude that it did not. Shahbaz and Anna also have not taken issue

with respondent’s methodology for calculating the fair market value of

their personal use of 1143 Colina Vista.

Finally, petitioners’

Simultaneous Opening Brief does not argue that the Code entitles SJS

to a deduction in respect of the guaranteed payments it made to Shahbaz

and Anna, so we deem that line of argument to be conceded. We uphold

respondent’s determinations that Shahbaz and Anna failed to report

guaranteed payments of $48,000, $48,000, and $46,000 for 2012, 2013,

and 2014, respectively.

NOL Carryforward Deductions

The deductibility of an NOL, like other deductions, is a matter of

legislative grace, and taxpayers bear the burden of proving their

entitlement to NOL deductions. See INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992). Section 172 allows a taxpayer to deduct an NOL

for a taxable year. The amount of the NOL deduction equals the

aggregate of the NOL carryovers and carrybacks to the taxable year.

See § 172(a). Section 172(c) defines an NOL as the excess of deductions

over gross income, computed with certain modifications specified in

section 172(d). See Amos v. Commissioner, T.C. Memo. 2022-109, at *6,

aff’d per curiam, No. 23-10532, 2024 WL 1406646 (11th Cir. Apr. 2,

2024).

An unused NOL is first required to “be carried to the earliest of

the taxable years to which . . . such loss may be carried.” § 172(b)(2);

[*45] McRae v. Commissioner, T.C. Memo. 2019-163, at *23. Any excess

NOL that is not applied for one year is carried to the then-ensuing year.

See § 172(b)(2). For the years at issue, absent an election under section

172(b)(3), an NOL must first be carried back two years and then carried

over 20 years. 38 See § 172(b)(1)(A), (2). A taxpayer claiming an NOL

deduction must file with his return “a concise statement setting forth

the amount of the net operating loss deduction claimed and all material

and pertinent facts relative thereto, including a detailed schedule

showing the computation of the net operating loss deduction.” Treas.

Reg. § 1.172-1(c).

“A taxpayer who claims a net operating loss deduction bears the

burden of establishing both the existence of the net operating loss and

the amount that may be carried over to the year involved.” Chico v.

Commissioner, T.C. Memo. 2019-123, at *39, aff’d, No. 20-71017, 2021

WL 4705484 (9th Cir. Oct. 8, 2021). “Taxpayers cannot rely solely on

their own income tax returns to establish the losses they sustained.”

Barker v. Commissioner, T.C. Memo. 2018-67, at *13, aff’d, 853 F. App’x

571 (11th Cir. 2021). A taxpayer “must establish that the NOL was not

fully absorbed in the years preceding the particular year for which he

seeks the NOL deduction.” Villanueva v. Commissioner, T.C. Memo.

2022-27, at *3. In the case of a claimed NOL carryforward deduction,

taxpayers must both (1) show convincing evidence that they incurred an

NOL in one or more taxable years before the taxable year for which they

claim an NOL deduction and (2) prove their income for each taxable year

prior to the year for which they claim an NOL carryforward deduction,

up to two years before the year in which the earliest NOL was incurred.

See Power v. Commissioner, T.C. Memo. 2016-157, at *13–14.

Except to the extent respondent has conceded otherwise, 39

petitioners are not entitled to their claimed NOL carryforward

deductions because (1) they have failed to provide sufficient evidence of

the NOLs and (2) they have failed to show that any NOL was available

to carry forward to 2012–16. Even though the amount of the NOL

deduction equals the aggregate of the NOL carryovers and carrybacks

to the taxable year, petitioners have not identified the components of

38 The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, § 13302(b), 131 Stat.

2054, 2122, amended section 172(b) by repealing the NOL carryback and allowing for

an indefinite carryforward. See Martin v. Commissioner, T.C. Memo. 2021-35, at *19

n.10.

39 In his Simultaneous Opening Brief, respondent concedes that $237,418 of

his $639,482 adjustment to Shahbaz and Anna’s claimed NOL deduction for 2012 was

erroneous.

[*46] each claimed NOL deduction. In other words, we do not know from

which taxable years the alleged NOLs originate and in what amount

each separate NOL was applied during 2012–16. We can hardly verify

that petitioners’ calculations of their NOL deductions are correct if we

do not know in which years the alleged NOLs were incurred.

The evidence that petitioners have presented is “disorganized,

confusing, and inadequate.” See Larabee v. Commissioner, T.C. Memo.

1989-298, 1989 Tax Ct. Memo LEXIS 310, at *7. Petitioners did not

attach the detailed computational schedule required by Treasury

Regulation § 1.172-1(d) to any of their income tax returns, and we still

do not have any reasonable substitute for it. The books and records for

petitioners’ businesses, as well as petitioners’ income tax returns, are

unreliable and merit little weight. We have mostly unreliable secondary

sources; we do not have many source documents, including receipts,

invoices, or canceled checks (other than the canceled checks respondent

used to prove unreported income), let alone a summary of those source

documents in a usable format. See Jasperson v. Commissioner, T.C.

Memo. 2015-186, at *9 (“[The taxpayer] wished to prove his case by

submitting hundreds of accounting records from an electronic database

as replacements for source documents. . . . [W]ithout any sort of

direction as to the contents of these documents, this type of voluminous,

unverified, and indiscriminate documentation does not provide

adequate substantiation of the items [the taxpayer] reported on his tax

returns.”), aff’d, 658 F. App’x 962 (11th Cir. 2016); WB Acquisition, Inc.

& Subs. v. Commissioner, T.C. Memo. 2011-36, slip op. at 49 (holding

that a general ledger was insufficient to substantiate cost of goods sold

because the taxpayers failed to provide “receipts, invoices, canceled

checks, or any other evidence to prove the nature of these expenses or

whether such expenses were paid”), aff’d on other issues sub nom. DJB

Holding Corp. v. Commissioner, 803 F.3d 1014 (9th Cir. 2015).

Importantly, while we have heard testimony that SJC used a

software program to create sales invoices during 2012–14, petitioners

have not produced any of those invoices. The mere fact that NOL

deductions are involved does not relieve petitioners from providing the

requisite substantiation for the underlying expenses or losses or from

proving their income for relevant years. Cf. A&F Mgmt. Corp. v.

Commissioner, T.C. Memo. 1984-585, 1984 Tax Ct. Memo LEXIS 87,

at *6 (“Our finding as to the deductibility of the amounts claimed by [the

taxpayer] as operating expenses will determine the deductibility of the

net operating loss claimed by [the taxpayer] . . . .”).

[*47] Petitioners have provided some rudimentary calculations, but

they contain several defects:

(1) While petitioners’ income tax returns do not contain a section

172(b)(3) election, petitioners nonetheless calculated their NOL

deductions by carrying forward each alleged NOL, not by first

carrying them back two years.

(2) Even assuming arguendo that petitioners incurred NOLs at some

point, they have not proven that they remained available to use for

2012–16. A significant portion of the alleged NOLs appears to have

originated before or during 2011, but we do not have any records for

2009 or earlier.

(3) Petitioners’ calculations do not take into account whether their basis

in each partnership or S corporation that they own limits their NOL

deductions. Cf. Bryan v. Commissioner, T.C. Memo. 2023-74,

at *12–15 (considering whether sufficient outside basis existed in

upper- and lower-tier partnerships to support the taxpayer’s claimed

NOL deductions); Jasperson, T.C. Memo. 2015-186, at *8–9 (“[The

taxpayer] did not accurately account for his basis in his

S corporation. Instead he provided the corporation’s old tax returns

and workpapers . . . to show the presumed calculated value of his

basis in the corporation.

These documents, without any

substantiation of their numeric content, are not a proper means of

establishing basis.”).

(4) Petitioners appear to allege that some of the NOLs are attributable

to Barukh and SJS, but they have conceded that they are not real

estate professionals for 2012–14, cf. § 469(c)(2), (4), (7), and they have

made no effort to show how the passive activity loss limitation under

section 469(a)(1) applies.

(5) Petitioners’ calculations of their NOLs and claimed NOL deductions

do not take into account concessions petitioners made in the

Stipulation of Settled Issues, let alone our findings of unreported

income. Cf. Schnackel v. Commissioner, T.C. Memo. 2024-76,

at *12–13.

We are not able to make any estimates of the allowable amounts of NOL

deductions, if any, on the wholly inadequate record before us. Cf.

Lehman v. Commissioner, T.C. Memo. 2010-74, slip op. at 5 (declining

to estimate the allowable amounts of NOL deductions where the

taxpayers “have proposed no facts that, were we to so find, would allow

[*48] us to make a reasonable estimate of . . . losses”). Petitioners’

computational arguments about the effect a disallowance of their NOL

carryforward deductions should have on their income tax deficiencies

are also wholly without merit. 40

Penalties

Only two issues remain for our decision. The first is whether

petitioners are liable for fraud penalties (or, in the alternative,

accuracy-related penalties) for their 2012–14 taxable years. The second

is whether Shahbaz, Anna, Shahrokh, and Farahnaz are liable for

accuracy-related penalties for their 2015 and 2016 taxable years.

The Commissioner generally bears the burden of production with

respect to a penalty or an addition to tax that an individual taxpayer

40 While petitioners’ computational arguments would ordinarily be raised and

considered in connection with Rule 155 computations, the parties effectively tried some

of the computational issues related to petitioners’ claimed NOL deductions by consent,

and we have adequately considered their arguments. Petitioners’ position, which

challenges RA Hurtado’s calculations at the administrative level and amounts to an

argument that disallowing their NOL deductions does not create income tax

deficiencies, is highly flawed for at least three reasons, even putting aside that

petitioners’ focus on events occurring at the administrative level disregards the

purpose of our de novo proceedings. Cf. Greenberg’s Express, Inc., 62 T.C. at 327–28.

First, petitioners misleadingly conflate Form 1040, line 43, which instructed

taxpayers to enter their taxable income as zero in lieu of using a negative number, and

Form 4549–A, Income Tax Examination Changes, a worksheet respondent used that

does not specify whether zero or a negative number should be entered as taxable

income. (The possibility of negative taxable income arose on the face of petitioners’

income tax returns because of highly negative numbers entered on Form 1040, line 21,

to reflect alleged NOLs.) Whether petitioners’ income is appropriately adjusted by the

entire amount of the NOL deductions they claimed, or only by what petitioners call the

utilized portion of their NOLs, depends directly on whether a negative number or zero

is entered as their taxable income on the worksheet. Contrary to petitioners’

assertions, respondent should not have adjusted petitioners’ income only by the

utilized portion of their alleged NOLs because respondent entered their taxable income

on the worksheet as a highly negative number derived largely from Form 1040, line

21, not zero. Put differently, respondent effectively adjusted line 21 of Form 1040, not

petitioners’ income directly. Second, a proper application of a utilization-based method

would require petitioners’ taxable income to be entered as zero on Form 4549–A, which

is less favorable to petitioners than the highly negative number respondent used.

Finally, even if a utilization-based method were used, petitioners could not rely on

their unadjusted income tax returns to determine the utilized portion of their NOLs

for purposes of Rule 155 computations because those unadjusted income tax returns

were incorrect. Cf. Schnackel, T.C. Memo. 2024-76, at *12–13. Our holdings in this

Opinion, as well as concessions made in the Stipulation of Settled Issues, greatly affect

how much of petitioners’ alleged NOLs would be considered utilized.

[*49] has contested in his or her petition. See § 7491(c); Funk v.

Commissioner, 123 T.C. 213, 216–18 (2004); Swain v. Commissioner,

118 T.C. 358, 363–65 (2002). To satisfy that burden, the Commissioner

must offer sufficient evidence to indicate that it is appropriate to impose

the penalty or addition to tax. See Higbee v. Commissioner, 116 T.C.

438, 446 (2001).

The Commissioner’s burden of production also includes showing

compliance with section 6751(b), which provides that, with certain

exceptions not applicable here, the “initial determination” of a penalty

or addition to tax must be “personally approved (in writing) by the

immediate supervisor of the individual making such determination.”

See Graev v. Commissioner, 149 T.C. 485, 492–93 (2017), supplementing

and overruling in part 147 T.C. 460 (2016). The Ninth Circuit has held

that written supervisory approval must occur “before the assessment of

the penalty or, if earlier, before the relevant supervisor loses discretion

whether to approve the penalty assessment.”

Laidlaw’s Harley

Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir.

2022), rev’g and remanding 154 T.C. 68 (2020); see also Kraske v.

Commissioner, 161 T.C. 104 (2023).

2012–14: Fraud Penalties

Section 6663(a) imposes a penalty of 75% of the portion of any

underpayment of tax required to be shown on a return that is

attributable to fraud. Fraud is the intentional wrongdoing of a taxpayer

to evade tax believed to be owing. See Petzoldt, 92 T.C. at 698. Fraud

is never imputed or presumed. See Parks v. Commissioner, 94 T.C. 654,

660 (1990). Rather, “[t]he existence of fraud is a question of fact to be

resolved upon consideration of the entire record.” Id.

To establish fraud, the Commissioner must prove that (1) an

underpayment of tax exists for the relevant year and (2) “the taxpayer

intended to evade taxes known to be owing by conduct intended to

conceal, mislead, or otherwise prevent the collection of taxes.” Id.

at 660–61. The Commissioner must prove both elements by clear and

convincing evidence. See § 7454(a); Rule 142(b); DiLeo, 96 T.C. at 873;

Petzoldt, 92 T.C. at 699. The Supreme Court has explained:

Clear and convincing evidence is that measure or degree of

proof which will produce in the mind of the trier of facts a

firm belief or conviction as to the allegations sought to be

established. It is intermediate, being more than a mere

[*50] preponderance, but not to the extent of such certainty as is

required beyond a reasonable doubt as in criminal cases.

It does not mean clear and unequivocal.

Ohio v. Akron Ctr. for Reprod. Health, 497 U.S. 502, 516 (1990) (quoting

Cross v. Ledford, 120 N.E.2d 118, 123 (Ohio 1954)).

Because direct proof of a taxpayer’s intent is rarely available,

fraudulent intent may be established by circumstantial evidence, and

reasonable inferences may be drawn from the relevant facts. See Spies

v. United States, 317 U.S. 492, 499 (1943); Bradford v. Commissioner,

796 F.2d 303, 307 (9th Cir. 1986), aff’g T.C. Memo. 1984-601. The

taxpayer’s entire course of conduct may be examined to establish the

requisite intent. See Stone v. Commissioner, 56 T.C. 213, 224 (1971);

Otsuki v. Commissioner, 53 T.C. 96, 106 (1969). Mere suspicion,

however, is not enough to prove fraud. See Katz v. Commissioner, 90

T.C. 1130, 1144 (1988).

Courts usually rely on several nonexclusive indicia (or badges) of

fraud in deciding whether a taxpayer had fraudulent intent. See

Niedrighaus v. Commissioner, 99 T.C. 202, 211 (1992). These badges of

fraud include (1) understated income; (2) maintaining inadequate

records; (3) failing to file tax returns; (4) implausible or inconsistent

explanations of behavior; (5) concealing income or assets; (6) failing to

cooperate with tax authorities; (7) engaging in illegal activities;

(8) dealing in cash; (9) failing to make estimated tax payments; and

(10) filing false documents. See Estate of Trompeter v. Commissioner,

279 F.3d 767, 773 (9th Cir. 2002), vacating and remanding 111 T.C. 57

(1998); Bradford v. Commissioner, 796 F.2d at 307–08; Recklitis v.

Commissioner, 91 T.C. 874, 910 (1988). The existence of any one badge

is not dispositive, but the existence of several badges may be persuasive

circumstantial evidence of fraud. Niedringhaus, 99 T.C. at 211. The

sophistication of the taxpayer is also relevant. See Stephenson v.

Commissioner, 79 T.C. 995, 1006 (1982), aff’d per curiam, 748 F.2d 331

(6th Cir. 1984); Holmes v. Commissioner, T.C. Memo. 2012-251, at *31,

aff’d, 593 F. App’x 693 (9th Cir. 2015).

“Section 6663(a) . . . applies to a specific, culpable taxpayer,”

Murrin v. Commissioner, T.C. Memo. 2024-10, at *7, appeal docketed,

No. 24-2037 (3d Cir. June 12, 2024), and is “tied to the culpability of a

particular taxpayer,” id. at *9. Section 6663(c) provides that in the case

of a joint return, the fraud penalty “shall not apply with respect to a

spouse unless some part of the underpayment is due to the fraud of such

[*51] spouse.” Our discussion therefore addresses each petitioner’s

liability for the fraud penalty separately.

If the Commissioner establishes that any portion of the

underpayment is attributable to fraud, then the entire underpayment is

treated as due to fraud unless the taxpayer can establish by a

preponderance of the evidence that some portion of it is not attributable

to fraud. § 6663(b). In addition, no fraud penalty may be imposed “with

respect to any portion of an underpayment if it is shown that there was

a reasonable cause for such portion and that the taxpayer acted in good

faith with respect to such portion.” § 6664(c)(1).

Respondent has met his burden of production for the fraud

penalties he determined against petitioners. We have already found

that respondent has clearly and convincingly demonstrated that

underpayments of tax exist for 2012, 2013, and 2014 with respect to each

petitioner. As we will discuss below, respondent has also adduced some

evidence of fraud with respect to each petitioner, including understating

income. Finally, respondent has shown that the relevant immediate

supervisor timely approved the assertion of fraud penalties against each

petitioner for 2012, 2013, and 2014 in accordance with section 6751(b),

and petitioners have not argued or shown otherwise. As we now explain,

however, respondent has met his burden of proof to demonstrate fraud

clearly and convincingly with respect to four of the six petitioners, but

not with respect to two of them.

Joseph

We agree with respondent that Joseph is liable for fraud penalties

for 2012, 2013, and 2014. Joseph certainly engaged in a pattern of

understating his and Lilly’s income by substantial amounts, and the

understatements were intentional because Joseph caused JFJ to report

its credit card sales as income, but not most of its check sales. Joseph

actively concealed the unreported income by diverting it into Rabobank

2472 and other personal accounts of which Mr. Mehrnia was unaware.

To create the appearance of loan disbursements, he returned some

untaxed proceeds to JFJ by writing checks from Rabobank 2472

referencing Jamshid or a loan and depositing those checks in JFJ’s

operating account. He invested other untaxed funds in SJS, which in

turn invested them in residential real estate. Joseph also wrote checks

for personal purposes from Rabobank 2472.

[*52] When questioned by RA Hurtado, Joseph continued to conceal the

untaxed income by incorrectly telling her that JFJ had only one business

operating account. In fact, Joseph deposited JFJ’s items into multiple

accounts. He also falsely stated that a loan carried on JFJ’s books was

administered by Jamshid and represented an advance on an

inheritance. Despite RA Hurtado’s repeated written requests for

information about sources of nontaxable income, such as gifts or

inheritances, Joseph never mentioned any aspect of the gift jewelry

story to RA Hurtado.

RA Hurtado discovered by summoning bank records that

Rabobank 2472 was funded by scores of deposited items from JFJ’s and

SJC’s businesses, not loan proceeds from Jamshid. Jamshid later

credibly testified that he was unaware of all of the business dealings in

his name. Joseph’s repeated use of Jamshid’s name without Jamshid’s

knowledge was fraudulent (regardless of whether it constituted an

illegal activity) because it was calculated to conceal Joseph’s unreported

income in the guise of a loan. It was also fraudulent because the

signature card for SBBT 8226, on which Joseph’s signature appears

twice, contains a false certification that Jamshid is not subject to backup

withholding because he is “a U.S. person (including a U.S. resident

alien)” and wrongly leaves unchecked a box stating that “I am not a U.S.

citizen or resident.” Even at trial, Joseph continued to refer falsely to

SBBT 8226 as “Jamshid’s Trust.”

Petitioners now rely on the gift jewelry story instead of arguing

that JFJ received nontaxable loan proceeds, so Joseph’s initial

explanation of his behavior to RA Hurtado constitutes an inconsistent

explanation. That explanation was also implausible because Joseph

used much of the unreported income to invest in real estate, not in JFJ.

Joseph has continued this pattern by giving inconsistent and

implausible testimony in support of the gift jewelry story at trial.

Moreover, Joseph has failed to cooperate with these proceedings by

failing to produce any sales invoices or customer receipts, which might

refute the gift jewelry story or undermine petitioners’ claimed NOL

deductions. Instead of cooperating, he has opted to give us implausible

and inconsistent testimony with respect to those records’ whereabouts.

See supra note 20. Joseph also dealt in cash because JFJ’s sales logs

show cash sales that are unmatched by a corresponding bank deposit.

Furthermore, he claimed inflated NOL deductions and failed to keep

adequate records to substantiate them. Joseph’s entire course of

conduct demonstrates that he intended to evade income taxes he knew

to be owing on JFJ’s check sales and that he did so through conduct

[*53] designed to conceal, mislead, or otherwise prevent the collection of

those taxes.

Joseph has not shown that any portion of the

underpayments is not attributable to fraud or is attributable to

reasonable cause and good faith. Joseph is liable for the section 6663

fraud penalties on his and Lilly’s total underpayment for each of 2012,

2013, and 2014.

Lilly

Lilly is also liable for the fraud penalties for 2012, 2013, and 2014.

Lilly understated her and Joseph’s income for those years by substantial

amounts, and the understatements could not have been unwitting. Lilly

owned a 30% interest in JFJ, held herself out as JFJ’s owner, worked at

JFJ (including writing sales invoices), and was considered the most

senior person working when she was working. She was aware of

Joseph’s real estate dealings because she executed interspousal transfer

deeds in respect of residential properties that Joseph purchased. Even

though she worked part time at JFJ, she was aware that JFJ was much

more profitable than her and Joseph’s tax returns reflected.

Lilly concealed her assets from the Government through SBBT

8226 while selectively revealing them to a bank in connection with a

loan application. She has failed to cooperate with these proceedings by

failing to produce any sales invoices or customer receipts. At trial she

also misleadingly downplayed her involvement at JFJ. For example,

when asked whether she “ever [got] any accreditations in the jewelry

industry,” she mentioned getting a gemology degree from GIA “in the

February or January of this year.” Nonetheless, the record reveals that

she has been a GIA alumni member since 2007. Lilly also claimed

inflated NOL deductions and failed to keep adequate records to

substantiate them. Lilly has not shown that any portions of the

underpayments are not attributable to fraud or are attributable to

reasonable cause and good faith. Lilly is liable for the section 6663 fraud

penalties on her and Joseph’s entire underpayments for 2012–14.

Shahbaz

Respondent is correct that Shahbaz is liable for the fraud

penalties for 2012, 2013, and 2014. Shahbaz not only engaged in a

pattern of understating his and Anna’s income by substantial amounts,

but he also caused SJC to report very little of its check and cash sales as

income. Shahbaz actively concealed the income by diverting it into

Rabobank 2472 and other personal accounts of which Mr. Mehrnia was

[*54] allegedly unaware. He invested much of these untaxed proceeds

in SJS and also returned some to SJC in the guise of a loan from

Jamshid, the latter of which demonstrates forethought about how he

would respond if he were questioned about those transactions.

When questioned by RA Hurtado, Shahbaz continued to conceal

the untaxed income by incorrectly stating to her that SJC had only one

business operating account. He also falsely stated that a loan carried

on SJC’s books represented an advance on his future inheritance from

his father’s estate. Shahbaz never mentioned any aspect of the gift

jewelry story. When RA Hurtado confronted him with evidence of

business deposits into Rabobank 2472, however, he made an admission

to the effect that he underreported his income from SJC with the intent

to evade tax.

Petitioners, including Shahbaz, now rely on the gift jewelry story

instead of arguing that SJC received nontaxable loan or inheritance

proceeds, so Shahbaz’s initial explanation of his behavior to RA Hurtado

constitutes an inconsistent explanation. Shahbaz gave inconsistent and

implausible testimony in support of the gift jewelry story. Shahbaz also

dealt in cash because SJC’s sales journals identify substantial cash and

check sales that do not correspond to the cash and check deposits in its

operating account. In addition Shahbaz has failed to cooperate with

these proceedings by failing to produce any sales invoices, inventory

records, or customer receipts. Shahbaz also claimed inflated NOL

deductions and failed to keep adequate records to substantiate them.

Shahbaz’s entire course of conduct demonstrates that he intended to

evade income tax he knew to be owing on SJC’s check and cash sales

and that he did so through conduct designed to conceal, mislead, or

otherwise prevent the collection of that tax. Shahbaz has not shown

that any portions of the underpayments are not attributable to fraud or

are attributable to reasonable cause and good faith. Shahbaz is liable

for the section 6663 fraud penalties on his and Anna’s total

underpayments.

Anna

We part ways with respondent on the matter of Anna’s liability

for the fraud penalties for 2012–14. Respondent argues that Anna is

liable for the section 6663 fraud penalties because she understated her

and Shahbaz’s income, maintained inadequate records, and gave

implausible or inconsistent explanations of her behavior.

[*55] While Shahbaz and Anna substantially understated their income

and failed to substantiate their claimed NOL deductions, both of which

certainly raise suspicions about what Anna knew and her intent, we are

ultimately unconvinced that respondent has proven fraud. The heart of

respondent’s argument is that Anna must have known about, or willfully

ignored, the understatements of income on her and Shahbaz’s income

tax returns because her work at SJC included bookkeeping. Without

more foundation about what Anna knew or her lifestyle, however, the

probative value of Anna’s part-time work at SJC is limited. It is unclear,

for example, to what extent Anna’s bookkeeping and other work at SJC

gave her insight into SJC’s operating results. This is especially true in

view of Joseph and Shahbaz’s alleged misleading of Mr. Mehrnia. See

supra note 14 and accompanying text. Virtually no evidence of Anna’s

lifestyle has been presented. Furthermore, Anna may not have been

aware of funds invested in SJS, a real estate partnership of which she

was not a partner.

Respondent also argues that Anna testified inconsistently with

her income tax returns that she did not live at 1143 Colina Vista during

2012–14. Likewise, respondent argues that Anna should have been

aware that she understated her income by at least the amount of the

guaranteed payments respondent determined against her because she

lived in a house owned by SJS. We resolved the guaranteed payments

issue, however, on the basis of petitioners’ failure to meet their burden

of proof, not on the basis of a conclusive finding that Shahbaz and Anna

lived at 1143 Colina Vista. While petitioners had the burden of proof on

the guaranteed payments issue, respondent has the burden of proof on

the imposition of fraud penalties. Nonetheless, respondent has not

developed the record much more than petitioners in this regard. In

addition, even if Shahbaz and Anna resided at 1143 Colina Vista as

respondent alleges, there is no evidence that Anna knew SJS owned it.

We need not consider whether Anna is liable for an accuracy-related

penalty for 2012, 2013, and 2014 because “[i]n the case of a joint return

where one spouse is found liable for fraud, the accuracy-related penalty

cannot be imposed on the other spouse.” Graham v. Commissioner, T.C.

Memo. 2005-68, slip op. at 51, aff’d, 257 F. App’x 4 (9th Cir. 2007); see

Treas. Reg. § 1.6662-2(a) (“No accuracy-related penalty may be imposed

on any portion of an underpayment of tax on which the fraud penalty

set forth in section 6663 is imposed.”); see also § 6663(c).

[*56]

Shahrokh

Shahrokh, however, is liable for the fraud penalty for each of

2012, 2013, and 2014. Shahrokh engaged in a pattern of substantially

understating his and Farahnaz’s income. Although we accept that there

was a division of labor at SJC between Shahbaz and Shahrokh and that

Shahrokh focused his efforts on jewelry design, the record nonetheless

reveals Shahrokh’s awareness that SJC’s income was significantly

understated.

First, Shahrokh’s constant work on SJC’s jewelry necessarily

made him aware that SJC was much more profitable than he claimed

on his income tax returns. Second, Shahrokh was a partner of SJS,

which received much of SJC’s profits as capital that it used to make real

estate investments, and Shahrokh confirmed he was aware that

proceeds from jewelry sales were used to purchase property. Third,

Shahrokh’s signature appears on the November 18, 2009, loan

agreement that falsely purports to memorialize a loan with Jamshid.

Fourth, Shahrokh held a power of attorney over SBBT 8226, which

played a key role in the underreporting scheme. Finally, even though

Joseph and Shahbaz were the only named accountholders on Rabobank

2472, Shahrokh has never argued or testified that the income deposited

in it is attributable only to them and not to him. 41 His silence on the

matter stands in stark contrast to Jamshid’s disclaimer of knowledge

about even personal bank accounts in his own name. Likewise,

Shahrokh’s testimony that he was unaware that Joseph and Shahbaz

were making deposits of jewelry sale proceeds into personal bank

accounts is implausible except to the extent that unawareness might

have been due to willful blindness.

Shahrokh concealed income and assets in SBBT 8226, an account

over which he held a power of attorney, and in Rabobank 2472 through

his reliance on Shahbaz and Joseph to use its funds to make investments

into SJS, a real estate partnership of which he was a partner. Shahrokh

also dealt in cash because SJC’s sales journals identify substantial cash

sales that do not correspond to the cash deposits in its operating account.

Moreover, Shahrokh has failed to cooperate with these proceedings by

failing to produce any sales invoices or customer receipts. Shahrokh also

took inflated NOL deductions and failed to keep adequate records to

substantiate them. Shahrokh has not shown that any portions of the

41 Similarly, there is no evidence that he has demanded SJC to provide him

with an equitable accounting.

[*57] underpayments are not due to fraud, and he is liable for the

section 6663 fraud penalties on his and Farahnaz’s total underpayments

for 2012, 2013, and 2014.

Farahnaz

Respondent argues that Farahnaz understated her and

Shahrokh’s income and gave implausible or inconsistent explanations at

trial. While it is true that Farahnaz understated her income, we are

most interested in whether that proves she intended to evade tax known

to be owing. Respondent points out that Farahnaz worked at SJC and

there is some evidence that she was informed about the alleged gift of

jewelry. Therefore, respondent argues, “she was aware of SJC’s use of

the [gift] jewelry in its inventory and sales,” and further, “[g]iven how

she was informed of the alleged gift, it is implausible that she was

unaware of the residential real estate acquisitions of SJS Group during

the years at issue.”

Respondent, however, assumes the truth of the gift jewelry story

for purposes of proving Farahnaz’s liability for the fraud penalties, even

though respondent otherwise denies its truth and we find it to be

implausible. In addition, any inference about what Farahnaz might

have known from her work at SJC is speculative in view of respondent’s

concession that “she may not have been thoroughly involved with the

business.”

Farahnaz may have given inconsistent testimony by

contradicting the parties’ stipulation that she worked at SJC from 2011

to 2017, but even assuming arguendo that it is appropriate to consider

this inconsistency for purposes of imposing the fraud penalty, it does not

supply clear and convincing evidence of fraud, either standing alone or

in combination with the other modest evidence respondent has adduced.

There is no evidence that Farahnaz is sophisticated about tax, financial,

or business matters, and there is at least some evidence that she simply

signed tax returns presented to her by others. We also have virtually

no information about Farahnaz’s lifestyle.

On the basis of the entire record, respondent has not clearly and

convincingly demonstrated that Farahnaz intended to evade tax known

to be owing through conduct intended to conceal, mislead, or otherwise

prevent the collection of taxes. Farahnaz is not liable for the section

6663 fraud penalties. We need not consider whether Farahnaz is liable

[*58] for the accuracy-related penalty for any year for reasons already

stated in connection with Anna.

2015 and 2016: Accuracy-Related Penalties

The last issue remaining for our decision is whether Shahbaz,

Anna, Shahrokh, and Farahnaz are liable for accuracy-related penalties

for their 2015 and 2016 taxable years. We hold that they are.

With one exception, respondent determined section 6662

accuracy-related penalties on grounds of underpayments due to

substantial understatements of income tax, see § 6662(b)(2), (d), or in

the alternative, on grounds of negligence or disregard of rules or

regulations, see § 6662(b)(1), (c). For Shahrokh and Farahnaz’s 2016

taxable year, however, respondent determined the accuracy-related

penalty only on grounds of negligence or disregard of rules or

regulations.

Respondent bears the burden of production with respect to the

accuracy-related penalties. See § 7491(c). Once respondent comes

forward with sufficient evidence showing that it is appropriate to impose

a particular penalty, petitioners have the burden of proof to show that

respondent’s penalty determination is incorrect, including the burden of

proving that penalties are inappropriate because of reasonable cause.

See Higbee, 116 T.C. at 446–47. Respondent complied with the written

supervisory approval requirements of section 6751(b) for the

accuracy-related penalties he determined against Shahbaz, Anna,

Shahrokh, and Farahnaz for 2015 and 2016.

Section 6662(a) imposes a 20% penalty on the portion of an

underpayment of tax attributable to any substantial understatement of

income tax, see § 6662(b)(2), or negligence or disregard of rules or

regulations, see § 6662(b)(1). An understatement is substantial if it

exceeds the greater of (1) 10% of the tax required to be shown on the

return for the taxable year, or (2) $5,000.

See § 6662(d)(1)(A).

Negligence includes any failure to make a reasonable attempt to comply

with the provisions of the Code, and disregard includes any careless,

reckless, or intentional disregard. See § 6662(c). Negligence also

includes any failure by the taxpayer to keep adequate books and records

or to substantiate items properly. See Treas. Reg. § 1.6662-3(b)(1).

Negligence is strongly indicated where a taxpayer fails to make a

reasonable attempt to ascertain the correctness of a deduction, credit, or

exclusion on a return which would seem to a reasonable and prudent

[*59] person to be “too good to be true” under the circumstances. See id.

subdiv. (ii). Only one accuracy-related penalty for a given year may be

applied with respect to any given portion of an underpayment, even if

that portion is subject to the penalty on more than one ground. See

Treas. Reg. § 1.6662-2(c).

Petitioners have not argued in their

Simultaneous Opening Brief that any recognized exception, such as

reasonable cause and good faith, applies. Cf. § 6664(c). Petitioners have

therefore forfeited that line of argument.

We will first address the ground of negligence or disregard of

rules or regulations for Shahbaz and Anna’s 2015 and 2016 taxable

years and Shahrokh and Farahnaz’s 2015 and 2016 taxable years.

Shahbaz, Anna, Shahrokh, and Farahnaz failed to substantiate their

NOLs for those years, and the records they have presented are

disorganized, confusing, and inadequate. Indeed, Shahbaz admitted

that SJC conducted sloppy bookkeeping, and Shahrokh admitted that

he was essentially uninvolved with SJC’s finances. Shahbaz, Anna,

Shahrokh, and Farahnaz also disregarded a regulation requiring a

detailed computational schedule for their claimed NOL deductions to be

attached to their tax returns, and they still have not produced any

adequate substitute. Finally, they ignored that it was too good to be true

for profitable businesses for which there is no credible evidence of

economic losses for any year to simultaneously receive the benefit of

substantial NOL deductions each year. Respondent’s determinations of

accuracy-related penalties for 2015 and 2016 are therefore sustained on

grounds of negligence or disregard of rules or regulations.

We will also address the taxable years for which respondent has

imposed an accuracy-related penalty on grounds of substantial

understatement of income tax (Shahbaz and Anna’s 2015 and 2016

taxable years and Shahrokh and Farahnaz’s 2015 taxable year). The

understatements for Shahbaz and Anna’s 2015 taxable year and

Shahrokh and Farahnaz’s 2015 taxable year are substantial as an

arithmetic matter. Because Shahbaz, Anna, Shahrokh, and Farahnaz

have not argued or shown that any exception applies, respondent’s

determinations of accuracy-related penalties for those years are

sustained on grounds of substantial understatements of income tax. We

also sustain respondent’s determination of an accuracy-related penalty

on grounds of substantial understatement of income tax for Shahbaz

and Anna’s 2016 taxable year to the extent that Rule 155 computations

confirm that the understatement is substantial.

[*60] We have considered the parties’ other arguments and, to the

extent they are not discussed herein, find them to be irrelevant, moot,

or without merit.

To reflect the foregoing,

Decisions will be entered under Rule 155.

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