# United States Tax Court

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URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ac24e7fd6a0d4b706

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

United States Tax Court
T.C. Memo. 2026-78
HANK RISAN, ET AL., 1
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

__________
Docket Nos.

4313-20, 28048-21,
32885-21, 32909-21.

Filed September 2, 2026.

__________
Woodford G. Rowland, for petitioners.
Daniel J. Kleid, Sharyn M. Ortega, Christiane C. Sanicola, Michael
Skeen, and Charles A. S. Wiseman, for respondent in Docket No.
4313-20.
Daniel J. Kleid, Aimee R. Lobo-Berg, Sharyn M. Ortega, Brian A. Pfeifer,
Christiane C. Sanicola, and Charles A. S. Wiseman, for respondent in
Docket Nos. 28048-21 and 32885-21.
Daniel J. Kleid, Aimee R. Lobo-Berg, Sharyn M. Ortega, Christiane C.
Sanicola, and Charles A. S. Wiseman, for respondent in Docket No.
32909-21.

1 We consolidated Media Rights Technologies, Inc., Docket Nos. 28048-21 and
32885-21: and Hank Risan, Docket No. 32909-21, with this case.

Served 09/02/26

2
[*2]

MEMORANDUM FINDINGS OF FACT AND OPINION

HOLMES, Judge: Hank Risan is, by his own testimony, a gifted
theoretical mathematician, a renowned collector and expert restorer of
vintage guitars and chess sets, a pioneering inventor of programs to protect digital rights, heir to valuable California real estate, and the entrepreneurial founder of several corporations.
The Commissioner says, however, that his tax returns for
2014–17, and the returns of one of his companies for two of those years,
greatly underreported taxable income and exaggerated deductions and
credits, all to the tune of more than $4 million in taxes and penalties.
To decide these cases, we need to pick our way through issues that were
left uncontested, issues that turn on the burden of proof, and some burdens of proof that the parties at first shouldered only to let fall.
FINDINGS OF FACT
I.

Mr. Risan

Mr. Risan is a California-based music enthusiast with a knack for
invention. He grew up in the San Fernando Valley and stayed in California to pursue higher education. He testified that he attended UCLA
for a couple of years before finishing his bachelor’s degree at UCSC. He
also said that he concurrently enrolled in Ph.D. programs in neurobiology and mathematics at UCSC and did some Ph.D. work in mathematics
at Berkeley. He said that he did not complete his doctorate but also
testified to post-doc work at “Cambridge in London.” He became disillusioned with mathematics, he testified, after his groundbreaking solution of what he called the “Alexander Postulate” was misappropriated
by another post-doc. Mr. Risan said he learned of this while at the Sorbonne in Paris, where a professor showed him that post-doc’s work, and
Mr. Risan believed it to be his own. 2

2 Within mathematics, there is a subfield of topology called knot theory to
which a Princeton mathematician named James Waddell Alexander II made pioneering contributions, including something called the Alexander polynomial. Alexander
polynomial, Academic, https://en-academic.com/dic.nsf/enwiki/554295 (last visited
Aug. 21, 2026). This became a fruitful source of advances in knot theory in the late
twentieth century. The field is so recondite that one is not surprised that Mr. Risan’s
self-acknowledged contributions have been left unmentioned in descriptions of topology and knot theory that are simple enough for laymen to understand.

3
[*3] Mr. Risan testified this was not the last time his own work was
appropriated by others.
II.

Mr. Risan’s Ventures
A.

Corporations

Three of Mr. Risan’s businesses are relevant here. Media Rights
Technologies, Inc. (MRT) is the other petitioner in these cases. BlueBeat, Inc., and Encryptos, Inc., are corporations whose corporate-level
income the Commissioner included in his determination of Mr. Risan’s
own.
MRT is in the businesses of digital-rights management, intellectual property, and software development.
Mr. Risan and his
bookkeeper, Leslie Schlaefli, testified that MRT did not have customers
from 2014 through 2017. It nevertheless employed people in a variety
of fields. MRT claimed salary expenses for software engineers, marketing staff, a human resources person, and “music rippers.” These music
rippers were the employees who put music on the BlueBeat website—
more on that shortly. MRT hired Ms. Schlaefli, the only entirely credible
witness in these cases, as its bookkeeper beginning in 2007. While not
a tax accountant, she did fill in and prepare the company’s tax returns
when no one else was available to do so. Her approach was to print out
a profit-and-loss statement and input the numbers listed there to QuickBooks. She did not check the accuracy of the numbers, and she wasn’t
familiar with the underlying revenues or expenses associated with the
numbers she was seeing on that statement. She was also not personally
familiar with Mr. Risan’s guitar sales and recorded them using Mr.
Risan’s bank statements and his own descriptions of what the transactions were.
Mr. Risan founded MRT, serves as its president and CEO, and
retains majority ownership, his share hovering by his own account somewhere between 51 and 67%. MRT had an orchestra of other investors—
Mr. Risan estimated it had 400 shareholders at the end of 2017. As MRT
did not have customers during the years at issue, it relied on shareholder loans to cover its expenses, such as employee salaries. Ms.
Schlaefli testified that Mr. Risan had an “ongoing” loan to MRT, which
she estimated was between $5 and $10 million. Ms. Schlaefli credibly
named three additional shareholders who lent money to MRT: Daniel
Lewin, Tom Antonopoulos, and Don Lieberman, with Mr. Lieberman
lending over a million dollars to the company. These loans were sent

4
[*4] via checks and wire transfers, and Ms. Schlaefli testified that stockholder paperwork did accompany the shareholder loans. There may
have been other loans, but Ms. Schlaefli was not sure.
Why did a company with no customers and lots of expenses have
so many shareholders? Mr. Risan testified that people were investing
because of the value of the burgeoning catalog of music held by BlueBeat—a separate entity. 3
This leads us to Mr. Risan’s two other business entities. In 1998
Mr. Risan had an “online guitar museum” called TheMomi.org. He
started broadcasting music on the site, and the broadcasting service
evolved into BlueBeat. Mr. Risan incorporated BlueBeat in 2003, and it
has been broadcasting ever since with Mr. Risan serving as its CEO.
Mr. Risan testified that BlueBeat streamed music for free, as all broadcasting platforms did “in the early days.” As a result, BlueBeat did not
produce significant revenue. It did, however, have a small amount of
advertising revenue (about $3,500 a year) from ads on the BlueBeat
website. Ms. Schlaefli included BlueBeat’s ad revenue in MRT’s income
because she kept only one set of books for MRT and BlueBeat. While
BlueBeat had its own bank accounts, Ms. Schlaefli would record deposits
with MRT’s own transactions. BlueBeat employees were initially paid
by MRT, and Ms. Schlaefli was unsure when that practice ceased.
While BlueBeat was not generating significant revenue, Mr.
Risan had a plan to make it a hit. The asset, he testified, was its digital
audio catalog, which he copyrighted. He believed this catalog was the
largest copyright registration in history and was “worth a lot of money.”
The plan was to sell the catalog to “a stronger partner” who would buy
Mr. Risan out. Mr. Risan testified this sale was in progress at the time
of trial.
In 2016, Mr. Risan noticed a rise in cyber attacks on institutions
such as banks, and he believed the BlueBeat catalog would be a prime
target for a similar attack. He therefore invented a technology called
“The Enigma,” which BlueBeat used to protect its network. Mr. Risan
incorporated Encryptos in 2016, and it is the entity that controls The
3 A federal grand jury has since alleged that the reason is a long series of misrepresentations by Mr. Risan about the value and origins of MRT’s business and BlueBeat’s catalog. According to the indictment, Mr. Risan told investors and lenders that
the catalog was worth at least $90 billion. It also charges that Mr. Risan assembled
this catalog from purchases of CDs “at retail locations.” Indictment, United States v.
Risan, 25cr222 (N.D. Cal. July 31, 2025).

5
[*5] Enigma. There is nothing in the record describing the ownership
structures of either BlueBeat or Encryptos.
Mr. Risan named another reason why people invested in MRT:
The value of its litigation with Microsoft. This brings us to his intellectual property and ensuing civil litigation.
B.

Patents

Mr. Risan testified that MRT incurred large expenses for patent
attorneys, who filed at least 50 worldwide patents, all of which were
granted. He also said MRT hired a team of engineers and technologists
to embody these patents. And he testified, albeit without any documentary proof, that this patent portfolio was valued by Bank of America Securities in 2011 between $7 and $10 billion. Mr. Risan testified he was
the sole patent author.
The patents included some that Mr. Risan secured for artificial
synthetic sounds generated by his vintage instrument collection and AI.
In using AI this way, Mr. Risan claimed he was one of the pioneers of
the technology. These synthetic sounds, or “psychoacoustic simulations,” were the subject of a lawsuit when Capitol Records sued BlueBeat for copyright infringement. Capitol Records, LLC v. BlueBeat, Inc.,
765 F. Supp. 2d 1198, 1203–04 (C.D. Cal. 2010). 4 In that case, the district court ruled against BlueBeat on summary judgment and determined BlueBeat was liable for misappropriation, unfair competition,
and conversion for offering for sale 52,173 simulations of The Beatles’
sound recordings. Id. at 1206. While Mr. Risan argued these recordings
were novel technological simulations that contained new and original
“spherical source point waves,” the court stated: “[Mr.] Risan’s obscure
and undefined pseudo-scientific language appears to be a long-winded
4 We take judicial notice of this case sua sponte, which we have authority to do.

See Fed. R. Evid. 201(c)(1); Leyshon v. Commissioner, T.C. Memo. 2015-104, at *15,
aff’d, 649 F. App’x 299 (4th Cir. 2016).
Records of a particular court in one proceeding commonly are the subject of judicial notice by the same and other courts in other proceedings.
Petzoldt v. Commissioner, 92 T.C. 661, 674 (1989), and cases there
cited. That a particular case is on file, its docket number, who the attorneys of record are, who the presiding judge is, . . . as well as the text
of the opinion, are all facts that are part of the public record. They are
capable of ready and accurate determination and cannot reasonably be
questioned.

Prater v. Commissioner, 65 T.C.M. (CCH) 2989, 2992 (1993).

6
[*6] way of describing ‘sampling,’ i.e. copying, and fails to provide any
concrete evidence of independent creation.” Id. at 1204.
Mr. Risan’s other patents also included novel technological concepts, including one invention he summarized as “the essential ingredient in all modern rights management and broadcasting work.” Another
was “the modern cloud.” Mr. Risan also testified that he invented all of
the rights technologies being used by movie streaming platforms, such
as Netflix and Amazon.
Mr. Risan claimed that, like his graduate-level topological work,
these revolutionary technologies were stolen. He identified the thief:
“Microsoft in 2003 in an act of industrial espionage.” Microsoft put the
allegedly misappropriated technology into a product called PlayReady,
which Mr. Risan stated is used by over a thousand manufacturers, including Disney, Spotify, and Amazon, to protect and monetize streamed
media. Mr. Risan sued Microsoft for the misappropriation of intellectual
property. 5 He testified that during the week we heard his case his litigation team planned to file a fraud report with the U.S. Patent and
Trademark Office alleging that Microsoft had copied his patents. And,
as the final step of his litigation plan, Mr. Risan planned to use attorneys David Nimmer and Irell Manella “to go for a [copyright] takedown
for the misappropriation against PlayReady, which is a Microsoft division that basically streams multimedia.” Mr. Risan testified that this
litigation, with its monetary outcomes worth billions of dollars (per the
alleged Bank of America valuation), attracted shareholders to invest in
MRT. 6

5 Media Rights Techs., Inc. v. Microsoft Corp., No. 17-cv-01925, 2017 WL
4685702 (N.D. Cal. July 29, 2017), aff’d in part, rev’d in part and remanded, 922 F.3d
1014 (9th Cir. 2019). MRT voluntarily dismissed with prejudice its 2013 patent infringement suit against Microsoft after a court in a separate proceeding declared one
of the patents at issue invalid. Media Rights Techs., 922 F.3d at 1017. In this subsequent suit for “copyright infringement, violation of the Digital Millennium Copyright
Act (‘DMCA’), and breach of contract,” the district court found MRT’s claims were precluded and dismissed the case for failure to state a claim. Id. On appeal, the Ninth
Circuit affirmed the district court’s holding except for those claims that accrued after
MRT filed its patent-infringement suit: “[N]amely, claims arising from the sale of Microsoft products after MRT filed its patent-infringement suit.” Id. MRT voluntarily
dismissed this suit without prejudice on December 2, 2019. Notice of Voluntary Dismissal of Action Without Prejudice, Media Rights Techs., Inc. v. Microsoft Corp.,
No. 17-cv-01925 (N.D. Cal. Dec. 2, 2019).
6 As of 2019, MRT had dismissed all its copyright infringement lawsuits
against Microsoft. See supra note 5.

7
[*7]

C.

Guitars

Mr. Risan also said that he owned an impressive collection of vintage guitars. He specialized in jazz guitars and guitars that had been
owned by celebrities, including Mick Jagger, Mark Twain, Django Reinhardt, and Charlie Christian. At its peak, this collection allegedly consisted of 700 to 1,000 guitars. And this total did not include various
mandolins, banjos, Steinway pianos, and other instruments that he
owned.
Mr. Risan said that he lent the instruments to museums, including the Museum of Modern Art, the Smithsonian, the Boston Museum,
and the Library of Congress. Such use wore, and sometimes damaged,
the instruments. All this wear and tear meant the instruments required
extensive repairs, and Mr. Risan testified that these repairs could cost
$25,000 per guitar. Mr. Risan said he hired contract repairmen to assist
him with the repairs.
Mr. Risan also ran Washington Street Music, which he described
as a guitar business. It is unclear whether Mr. Risan sold guitars
through Washington Street Music or whether it served as a sort of museum where Mr. Risan promoted his guitars, which he sold separately.
It is also unclear whether Mr. Risan purchased the guitars personally
or through Washington Street Music.
The nature and amount of these purchases and, importantly, the
costs of repairs, are not supported by documentation of the kind one normally sees in tax litigation. Mr. Risan had no records to substantiate
his cost of goods sold. This is unusual, but according to Mr. Risan, is
entirely explained by an unfortunate incident in 2004 during which Mr.
Risan’s secretary’s boyfriend stole these records and held them for ransom—offering to return them if Mr. Risan murdered the secretary and
paid $150,000 in cash. Mr. Risan declined this unusual murder-for-hire
offer and never recovered the records that would have helped him with
his case. 7
Mr. Risan testified he did not sell guitars after 2002. He also testified that during the years at issue, 2014–17, he bought and sold vintage musical instruments dated before 1950. We’re left unsure what to
7 Both the Commissioner’s and Mr. Risan’s counsel discussed during the trial
a police report that might have corroborated this incident, but neither party entered it
into evidence. We therefore have only Mr. Risan’s testimony regarding his missing
records.

8
[*8] make of this but can find it more likely than not that the business
was not booming during the tax years at issue. In Mr. Risan’s experience, the industry was hottest in the 1990s but had dramatically declined by the mid-2010s. 8 At its peak, the guitar business was earning,
Mr. Risan claimed, “a few million dollars a year in sales,” and Mr. Risan
said he had accumulated wealth from this period of prosperity.
Mr. Risan said guitar sales during the years at issue provided
funds for MRT and BlueBeat because he could sell instruments as
needed whenever there was a cash crunch. He was less than clear about
who sold the guitars. Sometimes, he testified that MRT sold them; other
times he testified that BlueBeat sold them. Either way, Mr. Risan testified that the sales were processed through BlueBeat—meaning, BlueBeat received the sale proceeds directly from the buyer. Mr. Risan said
he would provide the instruments to BlueBeat and, in return, receive a
note payable for the sale of the instrument. 9
D.

Real Estate

Mr. Risan is also an heir. His mother gave him a real-estate portfolio comprised of some ten condominiums and a house in Southern California while she was still alive. He began selling this real estate in 2002
and sold at least ten properties by 2014. He estimated that the condos
sold for about $300,000 each, but he wasn’t selling them for cash. Rather, he exchanged them for “better properties” so there “wasn’t a tax
liability.” In 2014, he was left with what he said were two nice houses
in the Santa Cruz mountains, worth a few million dollars. These are
referred to as the Moore Creek property and the Rockridge property.
Mr. Risan took out a mortgage of approximately $500,000 on at least one
of these homes to provide MRT with capital. Mr. Risan admitted that
he fell behind on paying property taxes, which he “had to make up later.”
III.

Mr. Risan’s Bank Accounts

During the years at issue, money continually sloshed between Mr.
Risan and his businesses. Mr. Risan had personal bank accounts; MRT
had bank accounts in its own name; BlueBeat had a bank account in its
own name; and Encryptos had a bank account in its own name. The
boundaries between these accounts are, however, blurred. Mr. Risan
8 As an example, Mr. Risan testified he owned a jazz guitar made by John
D’Angelico that would have sold for $100,000 in the 1990s but would fetch only $30,000
in 2016.
9 These notes were not submitted to the record.

9
[*9] testified that when he was short on cash, say for a credit-card payment or a grocery run, he would withdraw as much as he needed from
either MRT’s or BlueBeat’s Wells Fargo account, walk down the street
to Bank of America, and deposit the money into his personal account for
his own use.
Ms. Schlaefli testified, and we find credible, that the cash MRT
received from shareholder loans sometimes went directly to Mr. Risan, 10
sometimes directly deposited into MRT’s account, and sometimes directly deposited into BlueBeat’s account. This varied treatment of funds
is reflected in the business records, such as the loan schedules.
Although Mr. Risan would withdraw money from MRT freely, Ms.
Schlaefli would record Mr. Risan’s deposits into an MRT account as
loans. She could not, however, identify MRT’s liability to Mr. Risan on
MRT’s tax returns, and she couldn’t say whether and where these loans
were reported. 11
We find, based only on Ms. Schlaefli’s testimony, that there was
only one set of books for BlueBeat and MRT. We note there is no mention in the record of Encryptos’s books or its accounting practices. We
also note that it is unclear whether BlueBeat and Encryptos ever filed
any tax returns. There are none in the record, and neither party refers
to them. We do know that Mr. Risan and MRT filed tax returns for
2014–17.
IV.

The Tax Returns

Mr. Risan timely filed his own tax returns for 2014–17. For each
year he reported negative total income due to a combination of business,
capital, rental real-estate, and other losses. Mr. Risan also claimed
itemized deductions each year, the majority of which were home-mortgage interest deductions. As a result, Mr. Risan’s tax returns reported
no taxable income (and, consequently, no taxes owed) for all years at
issue. We summarize his returns:

10 Ms. Schlaefli noted that some of these loans were loans made to Mr. Risan
personally, but sometimes they were loans to MRT that he deposited into his personal
accounts.

11 MRT’s tax returns do report short-term notes, but Ms. Schlaefli credibly testified that was not how she characterized Mr. Risan’s loans, so these entries must refer
to other loans.

10
[*10]
Year

Net Operating
Loss

Total Income

Deductions

2014

($14,032,803)

($15,536,346)

$47,843

$0

$0

2015

(15,533,438)

(16,190,520)

37,301

0

0

2016

(16,187,592)

(16,205,346)

34,615

0

0

2017

(3,527,372)

(3,564,380)

58,299

0

0

Taxable
Income

Tax
Owed

Mr. Risan noted, however, that his tax returns did not provide a
complete picture of his income. He claimed that he would report income
on his returns but, because his businesses were short on cash, it was not
money that he actually received—he regarded it as an increase in the
balance of what he said the companies owed him. As a result, though
“on paper” he received $50,000 a month in salaries from each of MRT
and BlueBeat, he only withdrew small amounts to cover his personal
expenses. 12 Mr. Risan also stated his “actual salary” was $150 per
month, the minimum amount required to provide him with medical insurance, but he did not cash these paychecks either. Despite all of this,
Mr. Risan also testified that his income-tax returns were “an accurate
reflection of the wages” he received.
MRT filed its 2016 income-tax return on February 17, 2021 and
its 2017 income-tax return on July 2, 2018. We summarize:
Year

Net Operating
Loss

Total Income

Deductions

Taxable
Income

2016

($29,000,178)

$104,343

$1,477,513

($1,373,170)

$0

2017

(30,373,348)

18,434

1,244,311

(1,225,877)

0

V.

Tax
Owed

The Audit

Mr. Risan may be an eclectic genius, but the IRS doesn’t honor
eclecticism in tax reporting, and his and MRT’s returns attracted the
Commissioner’s attention. One of his revenue agents (RA), Miguel Delgado, asked Mr. Risan to explain the deposits, but Mr. Risan refused.
As a result, RA Delgado subpoenaed bank records and pieced together
his analysis without input from Mr. Risan.

12 What he said is not what he did: We find that Mr. Risan received only $1,200
in W-2 wages from MRT every year.

11
[*11] A.

Bank Deposits Analyses

Upon receiving the bank records from accounts over which Mr.
Risan had signatory authority, RA Delgado began to analyze them. A
bank-deposits analysis identifies income by identifying the total deposits made to a bank account and then subtracting nontaxable deposits,
such as loans or transfers between a taxpayer’s accounts. RA Delgado
reviewed accounts belonging to Mr. Risan, MRT, BlueBeat, and Encryptos. He testified that he netted out deposits that looked like loans
(though, again, he had to make those determinations without Mr.
Risan’s help).
RA Delgado reviewed six accounts over which Mr. Risan had signatory authority:
•

an account ending in 6993 at Bank of America under the name
Hank Risan;

•

an account ending in 3029 at Wells Fargo under the name BlueBeat, Inc.;

•

an account ending in 8816 at Wells Fargo under the name Hank
Risan;

•

an account ending in 2963 at Wells Fargo under the name Media
Rights Technologies;

•

an account ending in 9724 at Wells Fargo under the name Media
Rights Technologies; and

•

an account ending in 2382 at Wells Fargo under the name Encryptos, Inc.

Based on the information that RA Delgado saw, he did not believe that
Mr. Risan and MRT had reported all of their taxable income.
1.

Mr. Risan

Mr. Risan did not cooperate with RA Delgado’s bank-deposits
analyses, and he did not cooperate during the investigation by providing
any other explanation for why the deposits were not taxable income.
Even after Mr. Risan got copies of the bank-deposits analyses, he did not
offer to list and clarify his disagreements with RA Delgado’s work. At
trial, however, Mr. Risan was considerably more voluble and assured us

12
[*12] that the deposits into his own accounts were money he received
from loans and selling real estate. Some, he claimed, were transfers
from his companies that he deposited into his personal account to pay
mortgages on his properties. He generally called these deposits “borrowed money” and not income. And these were in addition to the smaller
sums he would take from his companies’ accounts to cover groceries and
living expenses.
a.

2014

For 2014, RA Delgado reviewed bank statements and determined
that the total deposits into the accounts ending in 6993 (under Mr.
Risan’s name) and 3029 (under BlueBeat’s name) totaled close to $2.6
million. This included $1.9 million in “Ca Tlr Transfer” funds transferred to the 6993 account which RA Delgado attributed to other income
because the source was unknown. He subtracted the $1.6 million in income Mr. Risan reported on his 2014 tax return. He subtracted ATM
surcharge rebates and returns of posted checks, treating them as transfers. He also subtracted overdraft-protection fees and a deposit from
OCWEN Loan Servicing, treating these items as loans. We summarize
this analysis:
Total deposits

$2,590,097 13

Subtract reported items

(1,648,809)

Subtract ATM surcharge rebates and returns of posted checks

(24,194)

Subtract overdraft protections and a deposit from OCWEN loan servicing

(13,172)

Equals total unexplained deposits

903,922

RA Delgado concluded the $903,922 in unexplained deposits to
those two accounts was additional income to Mr. Risan.
b.

2015

For 2015, RA Delgado reviewed bank statements and determined
that the total deposits into the accounts ending in 6993 (under Mr.
Risan’s name) and 3029 (under BlueBeat’s name) were $2.9 million. He
subtracted the $1.2 million Mr. Risan reported as income on his 2015
13 The original bank-deposits analysis stated the total deposits between these
two accounts as $2,598,192. The Commissioner caught an addition error and corrected
the amount in his brief. The account ending in 6993 should have total deposits of
$2,237,417, not $2,245,512.

13
[*13] tax return. He also subtracted items which he treated as transfers: returns of posted checks, transfers from BlueBeat’s account to Mr.
Risan’s account, 14 and transfers from Mr. Risan’s and MRT’s other accounts into the BlueBeat account ending in 3029. He also subtracted
what he classified as loan items—a combination of overdraft protections,
a “Rev Crd Pmt,” and a deposit from “C. Garcia Washer/Drier.” 15 We
summarize this analysis:
Total deposits

$2,913,646

Subtract reported items

(1,216,223)

Subtract transfers and returns of posted checks

(335,631) 16

Subtract loans
Equals total unexplained deposits

(18,941)
1,342,851 17

RA Delgado determined that almost $50,000 of these unexplained
deposits was rental income. 18 He determined that more than $700,000
was from unreported guitar sales. 19 He concluded that the remaining
unexplained deposits were “other income.” We summarize:

14 RA Delgado identified only an $8,000 transfer from the BlueBeat account
ending in 3029 to Mr. Risan’s account ending in 6993. However, in reviewing the bank
deposits analyses for these cases, the Commissioner identified an additional $204,849
in deposits from BlueBeat to Mr. Risan.
15 The Commissioner identified an additional $800 when reviewing the analysis for these cases.
16 In the Commissioner’s brief, he states this number as $335,629.

gether the items listed as transfers, however, equals $335,631.

Adding to-

17 In the Commissioner’s brief, he states this number as $1,342,671.

We find
this to be a copying error and proceed on the basis of the reasoning he provided, if not
his specific calculations.
18 These were deposits totaling $6,000 from Edward Fitzgerald and $42,950
from Julia Zimmer-Bell.

19 Of this amount, $7,500 was deposited to Mr. Risan’s account ending in 6993,
and $1,936,566 was deposited to BlueBeat’s account ending in 3029. These amounts
totaled $1,944,066. RA Delgado subtracted from this amount the $1,214,951 Mr. Risan
had reported as gross receipts on Schedule C, Profit or Loss From Business.

14
[*14]
Total unexplained deposits

$1,342,851

Subtract unreported rental income

(48,950)

Subtract unreported Schedule C income

(729,115)

Equals other income

564,786 20

c.

2016

For 2016, RA Delgado reviewed Mr. Risan’s account ending in
6993, BlueBeat’s account ending in 3029, and Encryptos’s account ending in 2382. Deposits into these accounts totaled more than $2.5 million.
He adjusted his analysis of the 6993 account for overdraft charges, a
refund of a monthly service charge, a temporary credit adjustment, and
a return of a posted check. He treated these as nontaxable loans and
subtracted them from the total deposits to reach the amount of unexplained deposits. 21 RA Delgado concluded that the unexplained deposits
into all three accounts were Schedule C gross receipts. Mr. Risan had
reported more than $850,000 on his Schedule C for 2016. Subtracting
the reported Schedule C gross receipts from the unexplained deposits
led to a substantial increase in Mr. Risan’s Schedule C income:
Total deposits

$2,505,275

Subtract loans

(10,004)

Subtract reported Schedule C gross receipts

(854,400)

Equals total unreported Schedule C gross receipts

1,640,871 22

The Commissioner therefore determined Mr. Risan had unreported Schedule C gross receipts of $1,640,871 for 2016.
d.

2017

For 2017, RA Delgado analyzed the same three accounts he had
for 2016. He identified transfers from BlueBeat’s account to Mr. Risan’s
20 In his brief the Commissioner listed this number as $564,606.

The Commissioner recognized that his figure was $98,221 less than the adjustment in the notice of
deficiency and conceded the difference.
21 We note that RA Delgado elsewhere labeled returns of posted checks as
transfers but, as the result is the same, we do not alter that description here.
22 In his brief, the Commissioner recorded this number as $1,640,771. We find
this to be a typo.

15
[*15] and from Encryptos’s account to BlueBeat’s. He identified several
overdraft-protection fees and returned checks for Mr. Risan’s account,
as well as credits for mistaken fees for Encryptos’s and BlueBeat’s accounts. He then subtracted these to reach a grand total:
Total deposits

$1,787,148

Subtract transfers

(57,100)

Subtract loans

(6,885)

Equals total unexplained deposits

1,723,163

Of these unexplained deposits, RA Delgado determined that
$21,600 was rental income, of which Mr. Risan had underreported
$1,600. He determined the remaining deposits were additional Schedule C gross receipts. Mr. Risan had reported some gross receipts on his
return for 2017, so RA Delgado determined:
Total unexplained deposits

$1,723,163

Subtract reported rental income

(20,000)

Subtract unreported rental income

(1,600)

Subtract reported Schedule C gross receipts

(325,000) 23

Equals total unreported Schedule C gross receipts

1,376,563

2.

MRT

The Commissioner completed a bank-deposits analysis for MRT
for only the 2017 tax year—which was also the only year that he determined MRT had underreported gross receipts.
RA Delgado reviewed MRT’s bank statements for its account ending in 9724. After he subtracted nontaxable loans, he concluded MRT
had nearly $400,000 in unexplained cash deposits. RA Delgado subtracted the nontaxable loans and reported gross receipts to determine
the amount of MRT’s unexplained deposits:

23 See infra page 31 explaining that the bank-deposits analysis listed the
amount of Schedule C gross receipts for 2016 ($854,500), but this error was corrected
on the notice of deficiency, so we will use the correct number here for clarity.

16
[*16]
Total deposits

$389,869.20

Subtract nontaxable loans

(3.60)

Subtract reported gross receipts

(18,434.00)

Equals total unexplained deposits

371,431.60 24

In the absence of any information from MRT explaining the deposits, RA Delgado treated all the unexplained deposits as unreported
gross receipts.
B.

Notices of Deficiency

After the audit was over, the Commissioner sent Mr. Risan four
notices of deficiency—two for his individual returns and two for MRT’s
returns. He included accuracy-related penalties and, for MRT, additions
to tax for untimely filing:
Additions to Tax/Penalties

MRT

Hank Risan

Petitioner

Year

Deficiency

§ 6651(a)(1) 25

§ 6662(a)

2014

$1,288,849

—

$257,769.80

2015

1,051,140

—

210,228.00

2016

1,026,495

—

205,299.00

2017

684,827

—

136,965.00

2016

23,944

$5,986.00

4,788.80

2017

132,556

19,883.40

26,511.20

Mr. Risan resides in Santa Cruz, California, where MRT has its
principal place of business. 26

24 The Commissioner’s brief states this number as $371,436.

nation for the discrepancy, so we will use RA Delgado’s number.

There’s no expla-

25 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.

26 Appellate venue therefore presumptively lies in the Ninth Circuit.
See
§ 7482(b)(1)(A) and (B).

17
[*17]

OPINION

The notices of deficiency proposed numerous adjustments, and
the parties resolved through pleadings and stipulations only a very few
of them. Mr. Risan’s testimony was not often credible, documentary evidence from both sides was less than well-organized, and the parties’
posttrial briefs only sometimes clarified the issues. This leaves us to
decide much of these cases with our default rules for the burdens of production and proof.
We begin with a number of issues for which Mr. Risan presented
no evidence or argument, or about which he included only an underdeveloped argument in his brief. Taxpayers usually bear the burden of
proof in cases before us. Rule 142(a). The Code does sometimes shift
this burden to the Commissioner. See § 7491(a). 27 But when neither
party presented evidence in these cases, we simply find that Mr. Risan
did not comply with the Code’s recordkeeping requirements and did not
cooperate with the Commissioner’s reasonable requests for information.
This means that, for a great many issues, we find against Mr. Risan and
for the Commissioner.
There were a very large number of these orphaned issues. The
Commissioner wins them all: 28
27 Additionally, the Ninth Circuit requires that the Commissioner present substantive evidence establishing a “minimal evidentiary foundation” in all cases involving the receipt of unreported income to preserve the statutory notice’s presumption of
correctness. Weimerskirch v. Commissioner, 596 F.2d 358, 361–62 (9th Cir. 1979), rev’g
67 T.C. 672 (1977). This includes “some substantive evidence” demonstrating that “the
taxpayer received unreported income.” Rapp v. Commissioner, 774 F.2d 932, 935 (9th
Cir. 1985). Once the Commissioner has carried his initial burden of introducing some
substantive evidence linking the taxpayer with income-producing activity, the taxpayer has the burden to rebut the presumption of correctness of the Commissioner’s
deficiency determination by a preponderance of the evidence that the deficiency determination is arbitrary or erroneous. Id. We find the Commissioner’s bank-deposits
analyses and notices of deficiency sufficient to meet this burden.
28 Rule 151(e)(4) and (5) requires that a party’s brief state the points on which
he relies. See also 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, petitioners could not withdraw that concession by belatedly including a
cognizable argument in their reply brief”); Burke v. Commissioner, 98 T.C.M. (CCH)
547, 550 (2009) (“To the extent that the three-fold issues originally stated in his petition exceed the single issue eventually argued in his brief, [taxpayer] has abandoned
those other issues . . . .”); Remuzzi v. Commissioner, T.C. Memo. 1988-8 (affirming that
an issue not addressed by the taxpayers on brief deemed conceded), aff’d, 867 F.2d 609
(4th Cir. 1989) (unpublished table decision).

18
[*18]
•

Mr. Risan received and failed to report $3,000 in capital gains for
2017.

•

Mr. Risan is entitled to only $57,125 in additional Schedule E1
losses after the passive-loss limitation for 2015.

•

Mr. Risan is not entitled to $34,547 in an additional Schedule
E2—mortgage-interest deduction for 2015.

•

Mr. Risan is not entitled to itemized deductions for mortgage interest of $29,291, $26,900, $17,569, and $42,445 for 2014, 2015,
2016, and 2017, respectively.

•

Mr. Risan failed to report $204,775 in additional gain from Form
4797, Sales of Business Property, for 2015.

•

Mr. Risan is liable for section 6662(a) accuracy-related penalties
for 2014–17.

•

MRT is not entitled to general business-credit carryforwards of
$178,582 and $178,582 for 2016 and 2017.

•

MRT is not entitled to research credits of $9,499 and $9,499 for
2016 and 2017.

•

MRT is not entitled to deduct net-operating-loss-carryforward deductions of $29,000,178 and $30,373,348 for 2016 and 2017.

•

MRT is liable for section 6651(a)(1) additions to tax for late filing.

•

MRT is liable for section 6662(a) accuracy-related penalties.

This leaves for us to decide:
•

the statute of limitations for each of Mr. Risan’s tax years;

•

whether Mr. Risan and MRT underreported their income; and

•

whether Mr. Risan and MRT are entitled to various deductions.

19
[*19] I.

Statute of Limitations

As a general matter, the Commissioner has three years to assess
income tax. We measure this period from the later of the date a tax
return is filed or the date that return is due. § 6501(a). This period
grows to six years where a taxpayer has omitted from his gross income
more than 25% of the gross income stated in the return. § 6501(e)(1).
The Commissioner and a taxpayer can agree in writing to extend the
period. § 6501(c)(4).
The Commissioner sent Mr. Risan a notice of deficiency for his
2014 and 2015 tax years on February 11, 2020. He argues that the sixyear limitations period applies to these years. Mr. Risan reported
$1,648,809 of gross income on his tax return for 2014. The Commissioner argues that he omitted $903,922 from his gross income, which
exceeds the 25% threshold. And Mr. Risan reported $2,429,223 in gross
income on his tax return for 2015. The Commissioner argues that Mr.
Risan omitted $1,360,471 from his gross income, which also exceeds the
25% threshold. If the Commissioner is anywhere near correct about this
unreported income, the six-year limitations period applies.
Even before six years had lapsed, however, the Commissioner
asked Mr. Risan’s consent to extend the limitations period. In April
2018 the Commissioner received a signed Form 872, Consent to Extend
the Time to Assess Tax, extending the period to assess Mr. Risan’s 2014
tax year until December 31, 2019. In August 2019 the Commissioner
received two signed Forms 872, one for 2014 and one for 2015. Both
extended the time for assessment until December 31, 2020.
Mr. Risan testified that he did not sign the forms extending the
limitations period for these years. We looked at the signatures and find
it more likely than not that he did sign them.
The Commissioner did not seek to extend the limitations periods
for Mr. Risan’s 2016 and 2017 tax years. He sent a notice of deficiency
for these years on July 7, 2021, which is within the six-year statute of
limitations that applies should we find a sufficiently large omission of
gross income. And if not, Mr. Risan raised the argument that the limitations periods had expired for the 2016 and 2017 tax years in his petition, but he failed to raise it at trial or on brief. At trial, he addressed
the statute of limitations for 2014 and 2015 but raised unrelated concerns for 2016 and 2017. On brief, Mr. Risan addressed only the statute
of limitations for the 2014 and 2015 tax years. We conclude that Mr.

20
[*20] Risan abandoned his argument objecting to the limitations periods
for 2016 and 2017. See, e.g., Nicklaus v. Commissioner, 117 T.C. 117,
120 n.4 (2001); Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988).
II.

Income

Before examining the bank-deposits analyses themselves, we
must address the validity of an assumption that RA Delgado made—
that deposits made to BlueBeat’s and Encryptos’s bank accounts are income to Mr. Risan. We agree with the Commissioner that Mr. Risan’s
income has to include income that he received indirectly, as well as what
was paid directly to him. See, e.g., Foxworthy, Inc. v. Commissioner, 98
T.C.M. (CCH) 177, 188 (2009), aff’d, 494 F. App’x 964 (11th Cir. 2012);
K&M La Botica Pharmacy, Inc. v. Commissioner, T.C. Memo. 2006-214,
2006 Tax Ct. Memo LEXIS 218, at *7, supplementing T.C. Memo. 2005277; Zand v. Commissioner, T.C. Memo. 1996-19, 1996 Tax Ct. Memo
LEXIS 23, at *225 (interest to a “mere skeleton” of a corporation is attributed to its sole shareholder), aff’d, 143 F.3d 1393 (11th Cir. 1998).
And that in turn leads us to the important issue of how close Mr.
Risan and his corporations were during the years at issue.
A.

Relationship Between Mr. Risan and His Companies
1.

Whether BlueBeat and Encryptos Were Alter Egos

The notion that we look beyond nominal ownership to economic
reality when we try to figure out who owes tax on income received in
another’s name, or whose property the Commissioner can take to pay
tax, is an old one. There are such things as corporations that the Code
treats as “tax nothings”—sham corporations with no valid business purpose. See Moline Props., Inc. v. Commissioner, 319 U.S. 436, 439 (1943);
Shaw Constr. Co. v. Commissioner, 323 F.2d 316, 319–20 (9th Cir. 1963),
aff’g 35 T.C. 1102 (1961). If we treat a corporation as a sham under the
Code, we treat its property and income as belonging to its owner. See
Moline Props., Inc. v. Commissioner, 319 U.S. at 439.
There’s something similar that goes on with taxpayers who stumble into accusations of assigning their income. We don’t let attempted
assignments change who has to pay tax either. Lucas v. Earl, 281 U.S.
111, 114–15 (1930); Trousdale v. Commissioner, 16 T.C. 1056, 1065
(1951), aff’d, 219 F.2d 563 (9th Cir. 1955). And we ignore such attempted assignments as a matter of federal tax law.

21
[*21] The Commissioner’s problem is that RA Delgado relied solely on
Mr. Risan’s control of corporate bank accounts to attribute deposits into
them to Mr. Risan. He noted in his bank-deposits analyses: “Taxpayer
had commingled transactions from personal and corporate bank accounts (which taxpayer controls).” But what is there in the record of
these cases that shows that Mr. Risan’s income should include money
deposited into accounts in BlueBeat’s and Encryptos’s names? The Commissioner does not argue that these corporations were shams or nominees. In briefing, he argues only that both BlueBeat and Encryptos were
Mr. Risan’s alter egos.
The problem here is that caselaw usually uses the concepts of
“shamming” and “assignment of income” to decide whether money received by one entity needs to be recognized by its actual owner. Caselaw
usually uses concepts like “nominee ownership” or “alter ego” to decide
whether the Commissioner can collect tax by taking property of one entity to pay the tax owed by another. Wolfe v. United States, 798 F.2d
1241, 1243 (9th Cir. 1986) (employing the alter-ego doctrine to find the
sole shareholder and president of a corporation could be required to pay
the tax assessed against the corporation, even if that corporation had a
valid business purpose and was not a sham).
We think this is a key mistake.
The general rule in tax law, one must remember, is that incorporation creates a distinct taxpayer—the mere fact of ownership and control of a corporation by its shareholder does not make the corporation
his agent, much less his corporation’s property his own. See Moline
Props., Inc. v. Commissioner, 319 U.S. at 440. A party may invoke an
exception to this general rule, but if he does so, he must make a prima
facie case alleging “specific facts;” “[c]onclusory allegations of alter-ego
status are insufficient.” Motul S.A. v. USA Wholesale Lubricant, Inc.,
686 F. Supp. 3d 900, 911 (N.D. Cal. 2023) (quoting Gerritsen v. Warner
Bros. Ent. Inc., 116 F. Supp. 3d 1104, 1136 (C.D. Cal. 2015)); accord Collins v. Pension & Ins. Comm. of S. Cal. Rock Prods. & Ready Mixed Concrete Ass’ns, 144 F.3d 1279, 1282 n.3 (9th Cir. 1998) (per curiam)
(“[E]xistence of an alter-ego relationship or a conflict of interest is not
presumed without proof of specific facts to support these theories”).
The Commissioner does not point to any law guiding his alter-ego
arguments. In another case appealable to the Ninth Circuit, we determined what law applies to the question of whether a corporation is a
taxpayer’s alter ego. Jenkins v. Commissioner, T.C. Memo. 2021-54,

22
[*22] at *24, aff’d sub nom. Gentry v. Commissioner, No. 23-4174, 2026
WL 153015 (9th Cir. May 29, 2026). The question is one of fact, but
jurisdictions differ on the standards and tests by which to evaluate those
facts, and we must look to the applicable state law for a specific test. Id.
at *31–32. When determining which state law to apply, we consider a
couple relevant facts. Mr. Risan is a California resident, and we heard
these cases in California. Encryptos is a California corporation. 29 BlueBeat, however, was incorporated in Delaware. 30 Should California state
law completely govern our alter-ego analysis? Or is Delaware law relevant too?
When we determine whether a corporation is a person’s alter ego,
section 6(2) of the Second Restatement of Conflict of Laws guides our
choice-of-law determination. Jenkins, T.C. Memo. 2021-54, at *39. That
section requires us to consider:
•

the needs of the interstate and international systems;

•

the relevant policies of the forum;

•

the relevant policies of other interested states and the relative
interest of those states in the determination of the particular issue;

•

the protection of justified expectations;

•

the basic policies underlying the particular field of law;

•

the certainty, predictability, and uniformity of result; and

•

the ease in the determination and application of the law to be applied.

We must use these principles to determine which state has the
“most significant relationship,” and then use that state’s laws. Jenkins,
T.C. Memo. 2021-54, at *39; Restatement (Second) of Conflict of L., § 6(2)
cmt. c (A.L.I. 1971). In Jenkins, we found Arizona state law applied for
29 In the absence of any information in the record on the formation of Encryptos, we take judicial notice of this information as published by the California Secretary
of State. Cal. Sec’y of State, Business Search, https://bizfileonline.sos.ca.gov/
search/business (search in search bar for “Encryptos”) (last visited Aug. 21, 2026).
30 This information was also published on the California Secretary of State’s
website as BlueBeat has a California registered agent: Hank Risan. Id. (search in
search bar for “Bluebeat”).

23
[*23] numerous reasons, including that the tax debts arose from acts
the taxpayer committed in Arizona; the taxpayer was domiciled in Arizona; Arizona presumably has an interest in regulating in a sensible and
uniform way those whose conduct in Arizona affects corporate creditors
in Arizona; and Arizona has an interest in whether its residents should
be subject to potential liability via the alter-ego doctrine. These factors
persuaded us to follow Arizona law on the matter, even though some of
the corporations in question were incorporated outside of Arizona.
The facts are similar in these cases. We are not questioning the
validity of BlueBeat’s incorporation; we are looking at whether a third
party—Mr. Risan—used the corporation as an alter ego. The corporate
form is less of a question than the actions taken by Mr. Risan, who is
domiciled, conducted business, and brought these cases in California. It
is a California resident who could potentially be subject to liability via
the alter-ego doctrine, not a Delaware corporation. We find California
has the most significant relationship to this issue, and we will follow
California law in analyzing whether Mr. Risan used his corporations as
his alter egos.
There are two conditions in California for alter-ego liability:
•

“such a unity of interest and ownership that the individuality, or
separateness, of the said person and corporation has ceased;” and

•

“adherence to the fiction of the separate existence of the corporation would . . . sanction a fraud or promote injustice.”

Goodrich v. Briones (In re Schwarzkopf), 626 F.3d 1032, 1038 (9th Cir.
2010) (citing Wood v. Elling Corp., 572 P.2d 755, 761 n.9 (1977)).
The Commissioner in these cases fails to make even a prima facie
showing that either of these conditions is present. There is literally
nothing in the voluminous record here—no stipulation, no testimony,
and no documentary evidence—of who owns either BlueBeat or Encryptos. There is likewise no mention in any of the Commissioner’s arguments that suggest Mr. Risan was using these corporations to “sanction
a fraud or promote injustice.” 31

31 We are aware, see supra note 3, that another part of the federal government
has indicted Mr. Risan precisely on charges that he used these corporations to commit
fraud. We must, however, decide these cases on the record the parties compiled for

24
[*24] The Commissioner gives us little to work with. His most persuasive point is the frequent ebb and flow of money between Mr. Risan’s
personal accounts and those of these corporations. But the Commissioner’s other arguments are weaker. He notes that BlueBeat and Encryptos share an address for their bank accounts—yet this is neither the
address Mr. Risan uses for his personal accounts nor his own residence.
The Commissioner also notes that Mr. Risan was the CEO of BlueBeat
and Encryptos, which he contends means that Mr. Risan asserted control over the companies.
This is a problem for the Commissioner. Of course CEOs have
control over their corporations. In private companies, it’s not unusual
to see the IRS claim that distributions of money or property from a corporation are constructive dividends, or that transfers from a shareholder
to his corporation are capital contributions rather than repayments of
loans. But he didn’t do that here—all we have is the Commissioner’s
proof that the companies shared a common address for their bank correspondence and a common CEO. He introduced no evidence of the companies’ ownership or corporate structures, or even whether Mr. Risan
was the sole officer of either corporation. The movement of money into
and out of corporate accounts is enough to show some overlap, but we
cannot find that the Commissioner has met his burden of proving a
prima facie case of the required ownership by Mr. Risan of either BlueBeat or Encryptos. As the Ninth Circuit has held, “Ownership is a prerequisite to [alter-ego] liability, and not a mere ‘factor’ or ‘guideline’.”
SEC v. Hickey, 322 F.3d 1123, 1128 (9th Cir. 2003). Even ownership of
a single share of stock would suffice, but proof of control does not. Id.
at 1129.
Nor has the Commissioner shown any reason in these cases for us
to conclude that treating BlueBeat and Encryptos as distinct entities
would promote fraud or injustice.
We therefore do not find that BlueBeat and Encryptos were alter
egos of Mr. Risan.
The Commissioner does have an alternative argument about
BlueBeat. He contends, very briefly, that even if we do not find that
BlueBeat is Mr. Risan’s alter ego, we should still attribute the funds
them. In these cases, the Commissioner did not seek a penalty for civil fraud and did
not argue that the limitations period had not begun to run because Mr. Risan or MRT
had filed fraudulent returns or that BlueBeat or Encryptos fraudulently failed to file
theirs. See § 6501(c)(1).

25
[*25] deposited into its accounts to him because Mr. Risan deposited
money from sales of his guitars into BlueBeat’s account. Yet on the previous page of his brief, the Commissioner admits that Mr. Risan reported those sales on his own Schedules C. How this shows dominion
and control such that we should treat all deposits into BlueBeat’s accounts as income to Mr. Risan eludes us.
That means, that on the very unusual record in these cases, we
find that we should exclude the deposits into BlueBeat’s and Encryptos’s
accounts from Mr. Risan’s income.
2.

Mr. Risan’s Relationship with MRT

We needed to decide the alter-ego issue based on the arguments
and evidence offered by the parties. These arguments become even more
confusing, however, when we analyze MRT’s relationship to Mr. Risan.
MRT filed its own returns, and the Commissioner determined MRT’s tax
liabilities as a separate taxpayer. MRT received its own notices of deficiency for 2016 and 2017. The Commissioner never argues that MRT is
an alter-ego of Mr. Risan. Yet the arguments the Commissioner makes
about Mr. Risan’s relationship to BlueBeat and Encryptos could be made
just as well to describe Mr. Risan’s relationship with MRT: Mr. Risan
frequently withdrew money from MRT for his personal expenses and
served as its CEO, and MRT shares an address with BlueBeat and Encryptos. Ms. Schlaefli even testified that BlueBeat and MRT shared a
set of books. The Commissioner at times seems to acknowledge that the
commingling of funds occurred equally among BlueBeat, Encryptos, Mr.
Risan, and MRT. 32 But the Commissioner’s alter-ego theory does not
clarify why the relationship among Mr. Risan, BlueBeat, and Encryptos
should be viewed differently from their respective relationships with
MRT. In describing MRT, the Commissioner is careful to note that it is
distinct from Mr. Risan and that including transfers from MRT to Mr.
Risan in Mr. Risan’s taxable income doesn’t create double taxation.
It is also hard to understand what the Commissioner thinks of
MRT’s relationships to BlueBeat and Encryptos. For 2015 the Commissioner treats deposits from MRT to BlueBeat as nontaxable transfers,
with no explanation. He makes no argument for that year that we
32 When arguing we should find BlueBeat is Mr. Risan’s alter ego, the Commissioner’s brief states: “Checks deposited into Bluebeats [sic] account #3029 indicate that
they were for Risan, indicate they were paid for ‘Preferred Stock—MRT,’ were payable
to ‘Bluebeat/Hank Risan’, ‘MRT/Bluebeat’, ‘MRT or Bluebeat.’” The Commissioner did
not address the effect on MRT’s character of the credibility of those check descriptions.

26
[*26] should poke through the corporate veils between MRT and BlueBeat or Encryptos. We need not consider issues not raised by the parties
and will not sua sponte find that MRT is a sham.
Mr. Risan is also less than consistent on this issue. He sometimes
argues that the bank-deposits analyses should include only his personal
bank accounts. But then he also argues that “it makes all the sense in
the world that the deposits in question are transfers.” Mr. Risan would
have us find that he is distinct from all three of his corporations, while
also finding that transfers from the corporations to him personally are
nontaxable. This is not persuasive. See, e.g., Enayat v. Commissioner,
98 T.C.M. (CCH) 436, 449 (2009) (finding transfers from a taxpayer’s
corporation to his personal accounts were income).
The Commissioner seems sometimes to argue deposits to Mr.
Risan from BlueBeat and Encryptos are nontaxable because they are
essentially interaccount transfers. He seems to concede the same for
deposits from MRT to BlueBeat for 2015 but for other years does not
concede that deposits from MRT are presumptively nontaxable to their
recipient.
B.

Bank Deposits Analyses of Mr. Risan’s Accounts

Knocking out the Commissioner’s attempt to include in Mr.
Risan’s income deposits into BlueBeat’s and Encryptos’s accounts still
leaves us to figure out whether and how deposits into Mr. Risan’s personal bank accounts add to his income. We focus on deposits into Mr.
Risan’s own accounts, and we can begin with some general points. A
bank-deposits analysis is one acceptable method for reconstructing income and is frequently used when records—as is true of Mr. Risan’s—
are inadequate, incomplete, or unclear. See Westby v. Commissioner, 88
T.C.M. (CCH) 80, 87 (2004). Bank deposits are prima facie evidence of
income. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). A bankdeposits analysis assumes that all money deposited in a taxpayer’s bank
account during a given period is taxable income. Price v. United States,
335 F.2d 671, 677 (5th Cir. 1964).
The taxpayer bears the burden of showing that the deposits are
not taxable income but are derived from a nontaxable source. Welch v.
Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000), aff’g T.C. Memo.
1998-121. A taxpayer may try to rebut the Commissioner’s bank-deposits analysis in its entirety. This is rare, but once in a while an analysis
has so many obvious errors and is so out of tune with reality that we

27
[*27] toss it out entirely. See, e.g., Westby, 88 T.C.M. (CCH) 80. This
can happen if the taxpayer introduces credible evidence sufficient, if believed, to demonstrate by a preponderance of the evidence that the Commissioner’s determination is excessive, i.e., erroneous and/or arbitrary,
“without rational foundation.” Helvering v. Taylor, 293 U.S. 507, 514–15
(1935). If a taxpayer successfully undermines the Commissioner’s bankdeposits analysis by showing that it includes nontaxable deposits, the
burden shifts back to the Commissioner to rehabilitate it. Garibyan v.
Commissioner, T.C. Memo. 2025-105, at *13.
Mr. Risan argues that the Commissioner’s bank-deposits analyses are flawed for all the years at issue and must be disregarded in
their entirety. He points to major computational errors and argues that
the Commissioner made “unjustified assumptions” about the characteristics of the deposits into Mr. Risan’s accounts. Mr. Risan contends that
many of the deposits are loans and “mere transfers,” and he argues these
characterizations are obvious.
We are nevertheless also aware that, unlike the taxpayer’s problems in Westby, at least some of the problems in these cases are of Mr.
Risan’s own making. Keeping very poor records and refusing to cooperate in the audit weighs against completely disregarding the Commissioner’s work. We instead try to solve the resulting problem as we did
in Canatella v. Commissioner, T.C. Memo. 2017-124, at *13, where we
decided not to reject the IRS’s bank-deposits analysis in its entirety, but
to take it year by year and correct the specific mistakes we can identify.
Mr. Risan does identify several problems with the Commissioner’s bankdeposits analyses that mirror the facts of Westby. These concerns are
the Commissioner’s computational errors and failure to analyze all of
Mr. Risan’s bank accounts.
year.

We examine the Commissioner’s bank-deposits analysis for each
1.

2014

For 2014, RA Delgado noted on the bank-deposits analysis: “Exam
also identified a bank account not included on bank records received
from prior summons, for Media Rights Technologies, BoA #7835 that
show transferred deposits in 2014 and 2015.” It is unclear why the Commissioner didn’t get this account’s records. What is clear is that this
account, over which Mr. Risan had signatory authority, was not included
among the accounts RA Delgado reviewed for his analysis. Mr. Risan

28
[*28] alleges review of this bank account would show that most deposits
into Mr. Risan’s personal account ending in 6993 were from MRT. The
bank statements for MRT’s account ending in 7835 for 2014 are included
in the record in these cases. We looked at them ourselves and were able
to substantiate over $970,000 of the deposits in Mr. Risan’s account ending in 6993 as coming from this MRT account. 33 Mr. Risan argues that
these deposits were repayments of loans that he had extended to MRT
in prior years.
RA Delgado indicates the source of these deposits was unknown,
and the Commissioner does not address Mr. Risan’s arguments in his
answering brief. Regarding the deposits labeled “CA Clr Transfer,” the
Commissioner states: “Petitioners fail to show that such amount came
from another bank account of Risan or one of the companies that he controlled or another nontaxable source . . . . There are no corresponding
withdrawals in or around those dates from Bluebeat’s [sic] Wells Fargo
account ending in 3029, MRT’s Wells Fargo account ending in 2963,
Risan’s personal Wells Fargo account ending in 8816.” We have previously acknowledged the confusion over how the Commissioner treats
transfers of funds between Mr. Risan and MRT, but his own brief suggests he may have changed the characterization of these deposits if he
verified that they came from MRT. The Commissioner’s argument relies
on the source of these deposits being unknown; it does not address their
characterization once the source is identified. We therefore find the
Commissioner’s failure to consider the MRT account ending in 7835 to
be a significant omission—just as we did in Westby, where the Commissioner also failed to include the taxpayer’s bank accounts in his analysis.
See Westby, 88 T.C.M. (CCH) at 88.
The Commissioner’s bank-deposits analysis for 2014 also includes
major computational errors. He identifies some of these in his own brief.
First, he identifies a particular mistake in RA Delgado’s bank-deposits
analysis: a deposit mistakenly added three times that should have been
included only once, a roughly $8,000 adjustment. He then proceeds to
walk through RA Delgado’s bank-deposits analysis without identifying
any other specific errors, concluding that the analysis identified unexplained deposits of $903,922, which he characterizes as unreported
“other income.”
In a footnote without further explanation, the
33 RA Delgado’s bank-deposits analysis lists a number of deposits labeled
“CA clr transfer.” In his brief, Mr. Risan argues that these came from MRT. We could
identify 39 withdrawals from MRT occurring on the same days for the same amounts.
We find it more likely than not that these 39 deposits were transfers from MRT.

29
[*29] Commissioner acknowledges that this is $1,247,338 less than the
amount of unexplained deposits on the original bank-deposits analysis
and notice of deficiency, and he concedes the difference. He offers no
explanation for this difference, such as identifying specific deposits included by RA Delgado but conceded as nontaxable at the time of briefing.
As Mr. Risan points out in his reply brief, the lack of explanation makes
it extremely difficult for him to rebut the Commissioner’s argument as
it is unclear which deposits are still counted and which deposits are conceded.
This is very similar to Westby, where the Commissioner’s bankdeposits analysis contained “several obvious errors.” Id. We therefore
find by a preponderance of the evidence that for this year Mr. Risan has
successfully argued that the Commissioner’s analysis is flawed, and we
also find the Commissioner did not sufficiently rehabilitate his analysis.
We conclude, therefore, that the Commissioner’s determination that Mr.
Risan had unreported income for 2014 is not sustained.
2.

2015

The Commissioner’s bank-deposits analysis for 2015 suffers similar errors. He failed to include one of MRT’s bank accounts in his analysis, and, as for 2014, the Commissioner’s own brief catalogs numerous
errors in the original bank-deposits analysis. The Commissioner states:
“A review of the [bank-deposit] analysis indicates that Risan deposited
into account #6993 an additional $204,849 from the Bluebeat [sic] account #3029”—which the Commissioner now concedes is a nontaxable
transfer. He also identifies “another overdraft protection in the amount
of $800 which should have been included in RA Delgado’s loans.” We
would expect these errors to produce a $205,649 concession by the Commissioner, but that is not the case. The Commissioner’s math results in
only a $98,221 difference between his calculations on brief and the original bank-deposits analysis, and he again fails to explain how we should
reconcile these differences. We are again persuaded by Mr. Risan’s invocation of Westby, and we find it more likely than not that the Commissioner’s 2015 determination of income is excessive. The Commissioner
did not sufficiently address the points of concern on brief and has not
shifted the burden back on Mr. Risan. We will not sustain his determination of unreported income for 2015.

30
[*30]

3.

2016

The Commissioner’s findings for Mr. Risan’s unreported income
for 2016 differ from those for 2014 and 2015 because 2016 is the first
year for which the Commissioner includes deposits from Encryptos in
his analysis, and his brief concedes no errors in the original bank-deposits analysis. This is not, however, because the analysis is much better
than it was for the other years. It included as income to Mr. Risan numerous transfers from BlueBeat, which the Commissioner has argued
would be nontaxable under his alter-ego theory (which we reject). We
do not find, however, that the entire 2016 analysis is unsalvageable.
Unlike for the previous years, Mr. Risan does not argue for 2016 that
specific deposits would be substantiated by considering the excluded
MRT account, so its omission is less worrisome. Without unexplained
math errors in the thousands of dollars, and with the bank records themselves in evidence, we could work our way through the analysis and consider Mr. Risan’s substantiation for individual deposits. We therefore
uphold the presumption of correctness, see Petzoldt, 92 T.C. at 689–90,
for the bank-deposits analysis for 2016 and consider the errors one by
one on a preponderance of the evidence.
The Commissioner includes $106,850 of deposits into Encryptos’s
Wells Fargo account ending 2382 as income to Mr. Risan. His only reason, however, is solely that Encryptos is Mr. Risan’s alter ego. We’ve
already found that to be unproven; without other argument from the
Commissioner, we must agree with Mr. Risan that deposits made to Encryptos are not, on this record, his personal income.
The Commissioner similarly determined $579,000 of deposits into
BlueBeat’s Wells Fargo account ending in 3029 were Mr. Risan’s Schedule C income related to guitar sales, and another $1,471,088.19 were
“undetermined activity” he treated as taxable income. As with the deposits made into Encryptos’s account, we agree with Mr. Risan that deposits made to BlueBeat are not, on this record, Mr. Risan’s personal
income.
The bank-deposits analysis found $338,333 in taxable deposits
made to Mr. Risan’s Bank of America account ending 6993. Mr. Risan’s
brief includes a table of the deposits made to this account, with comments explaining why the deposit should be characterized as nontaxable. There are many flaws with this table—perhaps most obviously
when a deposit is listed with no explanation whatsoever. Mr. Risan
identifies a number of deposits that were transfers from BlueBeat and

31
[*31] Encryptos. However, because deposits made to these corporations
are not includible as income to Mr. Risan, we will find transfers from
these corporations to Mr. Risan are includible.
Mr. Risan does identify a $100 overdraft protection credit the
bank-deposits analysis mistakenly classified as income. The Commissioner does not provide an argument for why this deposit is taxable income, and we agree with Mr. Risan that it should be excluded.
Mr. Risan also argues that a $9,500 deposit on November 1, 2016
is a loan from “Betina and Spectrum,” and that he wrote a check and
deposited it to BlueBeat. The record lacks any loan agreement or any
other evidence that money associated with this deposit came from
Betina Podolsky or Spectrum. We do have the image of a check Mr.
Risan wrote from himself for $9,500. He wrote “Bluebeat [sic] Music” on
the recipient line, and there is a deposit for $9,500 made into BlueBeat’s
account ending 3029 on November 1, 2016. Evidence of where he deposited $9,500 does not, however, persuade us of the origin of the deposit
made to Mr. Risan. We cannot agree that this deposit is nontaxable.
The Commissioner argues, based on the bank-deposits analysis,
that Mr. Risan failed to report Schedule C gross receipts of $1,640,871
for 2016. 34 We find that the $106,850 of deposits made to Encryptos, the
$2,050,088.19 of deposits made to BlueBeat, and the $100 overdraft protection credit made to Mr. Risan’s personal account are not includible in
Mr. Risan’s Schedule C gross receipts. As the sum of these amounts
exceeds the Commissioner’s determination of unreported income, we
find that Mr. Risan does not have unreported Schedule C income for
2016.
4.

2017

The bank-deposits analysis for 2017 is, again, dotted with errors.
Most glaringly, it uses the amount of Schedule C gross receipts Mr.
Risan reported for 2016—$854,500—instead of what he reported for
2017—$325,000. This error was corrected, however, on the notice of deficiency sent to Mr. Risan, so Mr. Risan’s concern that the Commissioner
has increased the amount of deposits in question without amending his
answer is without merit.
34 RA Delgado’s bank-deposits analysis identified $2,495,271 in unexplained
deposits across the accounts for Mr. Risan, Encryptos, and BlueBeat. He then subtracted the $854,400 in Schedule C gross receipts Mr. Risan did report.

32
[*32] The bank-deposits analysis includes $144,870 in taxable deposits
made into the Encryptos account ending 2382 and $1,444,851.62 in deposits made into BlueBeat’s account ending 3029. As discussed for 2016,
we do not agree with the Commissioner’s alter-ego theory, so we cannot
agree that these amounts should be included in Mr. Risan’s unreported
income. Mr. Risan also identifies several transfers from Encryptos and
BlueBeat to his personal bank account and argues that these should be
excluded from his income. But he does not explain why these should be
treated as nontaxable if we agree with him that Encryptos and BlueBeat
are separate entities—which we do. In the same key, the Commissioner
subtracted transfers to Mr. Risan from BlueBeat of $26,500, and we
deem those includible in income given our conclusions about the relationship between Mr. Risan and BlueBeat.
This leaves Mr. Risan’s personal Bank of America account ending
6993. The Commissioner found total deposits into this account totaling
$166,421.45. Mr. Risan’s brief states the total deposits made to Mr.
Risan’s Bank of America account ending 6993 were $167,958.44. Mr.
Risan acknowledges the difference between these two amounts in his
brief—“Our number is slightly different”—but he doesn’t explain it. We
will treat this as a small concession by the Commissioner in favor of Mr.
Risan and proceed with the lower number. Either way, this is less than
the amount of Schedule C gross receipts Mr. Risan reported for 2017:
$325,000. Based on the bank-deposits analysis, we cannot agree with
the Commissioner’s determination that Mr. Risan had unreported
Schedule C gross receipts for 2017.
There is also the matter of unreported rental income. For 2017,
Mr. Risan reported $20,000 of income from rent on his Schedule E. On
his bank-deposits analysis, the Commissioner identified rental deposits
totaling $21,600. Mr. Risan disputes the characterization of the additional $1,600 deposit made on March 16, 2017 as rent, but his evidence
is a scan of a check withdrawing $1,600 from his account, not a deposit
into his account. He has no argument or evidence explaining the nature
of the $1,600 deposit into his account, so we could not find he has overcome the Commissioner’s presumption of correctness. The Commissioner, however, nowhere asks us to find that Mr. Risan underreported
his Schedule E rental income for 2017. For 2017, he asks only for us to
find that Mr. Risan underreported Schedule C income, and he subtracts
the $21,600 of purported Schedule E income from his Schedule C calculations. We will not decide issues not raised, so we will not find that Mr.
Risan underreported his Schedule E income for 2017 either.

33
[*33] C.

Bank Deposits Analysis of MRT’s Accounts

RA Delgado’s bank-deposits analysis found unreported gross receipts for MRT only for the 2017 tax year. He determined MRT had
$371,431.60 in unreported gross receipts. The briefs make clear that
Mr. Risan disagrees with this conclusion, but it’s unclear exactly why.
In his opening brief he states:
The Revenue Agent determined that there was unreported
income in 2017 of $371,436. The reported income was
$18,434. Ms. Schaefli’s [sic] testimony about her devoted
attention to detail should be sufficient by itself to overcome
this adjustment. However, if one wants to look further, evidence in the file shows that the company’s working capital
came from loans and capital contributions. MRT was in a
constant struggle for capital. It received extensive loans
and capital contributions. Schlaefli devotedly classified
those payments based on the paperwork she received.
Ms. Schlaefli in fact testified that she could not recall the source of
MRT’s income for 2017, though MRT did report some income. But she
did attest that MRT paid its expenses by shareholder loans, sent to the
company by private investors via check or wire transfer. We do not find
that this nonspecific testimony sufficiently meets MRT’s burden to overcome the bank-deposits analysis’s presumption of correctness. The thin
record on this issue benefits the Commissioner. There might have been
a story about specific amounts or sources deposited into MRT that were
capital and not income, but all agree that MRT had some income. That
means that MRT never met its burden of disproving the Commissioner’s
bank-deposits analysis even as to a few scattered items.
In his reply brief, Mr. Risan argues that some of the deposits into
MRT’s account in 2017 were from BlueBeat and Encryptos. He also argues that $301,650.21 in deposits was stockholder contributions to convert common stock to preferred stock. He states that when MRT decided
to litigate against Microsoft, there was a conversion of common stock to
preferred stock in order to raise capital to fund the costs of litigation. To
substantiate this claim, he identifies specific checks deposited into
MRT’s bank accounts in 2017 with memo lines that refer to the stock
conversion. He does not identify any of the deposits as loans. These are
new arguments.

34
[*34] Raising an argument for the first time in a reply brief is untimely,
and we will not consider it. See, e.g., DiLeo v. Commissioner, 96 T.C.
858, 891 (1991) (“It is well settled that issues raised for the first time on
brief will not be considered—when to do so prevents the opposing party
from presenting evidence that he might have if the issue had been timely
raised”), aff’d, 959 F.2d 16 (2d Cir. 1992); Neely v. Commissioner, 85 T.C.
934, 953 (1985) (refusing to consider argument raised for first time in
reply brief). The Commissioner had no opportunity to attempt to rehabilitate his bank-deposits analysis after Mr. Risan submitted his specific
arguments, and we are barred from examining them.
The Commissioner wins this one.
III.

Deductions

Section 162(a) allows a deduction for the expenses of carrying on
a trade or business. Taxpayers must, however, keep records sufficient
to enable the Commissioner to determine the character and amount of
these expenses. Anderson v. Commissioner, T.C. Memo. 2024-95, at *16;
see § 6001; Treas. Reg. § 1.6001-1(a). Taxpayers must show that they
paid or incurred a purported business expense primarily for business
rather than personal reasons and that there was a proximate relationship between the expense and the business. Walliser v. Commissioner,
72 T.C. 433, 437 (1979).
There are still tighter rules for taxpayers, like Mr. Risan, who
claim deductions for the use of their home. See § 280A(a). These deductions are allowed “to the extent such item is allocable to a portion of the
dwelling unit which is exclusively used on a regular basis . . . as the
principal place of business for any trade or business of the taxpayer . . .
or . . . in the case of a separate structure which is not attached to the
dwelling unit, in connection with the taxpayer’s trade or business.”
§ 280A(c)(1). We have held that this means the designated portion of
the home must be used solely for the purpose of carrying out the taxpayer’s trade or business. Sam Goldberger, Inc. v. Commissioner,
88 T.C. 1532, 1557 (1987).
It is a taxpayer’s responsibility to keep and produce records to
prove his entitlement to business-expense deductions. § 6001. We can
estimate some expenses under Cohan v. Commissioner, 39 F.2d 540,
543–44 (2d Cir. 1930), if we are convinced from the record that such expenses were incurred by the taxpayer and that they otherwise satisfy
the requirements of the Code as to their deductibility, and we have a

35
[*35] basis on which to make an estimate of them, Blythe v. Commissioner, T.C. Memo. 1999-11, 1999 Tax Ct. Memo LEXIS 11, at *14–15.
A.

Mr. Risan’s Schedule C Expenses

On his Schedules C, Mr. Risan claimed the following business expenses:
2014
Business Use of Home

$15,981
2016

Repairs and Maintenance

$52,000

Utilities

1,200

Janitorial

1,600

Plumbing

1,000

Total

55,800
2017

Business Use of Home

$16,324

Commissions and Fees

16,250

Insurance (other than health)

12,000

Legal and Professional Services

25,000

Office Expenses

3,000

Vehicles, machinery, and entertainment
for rent or lease

1,500

Repairs and maintenance

43,250

Utilities

8,700

Total

126,024

The Commissioner disallowed everything.
Mr. Risan’s opening brief skimps on arguments in support of
these deductions. He states that he maintained a facility at his home
used exclusively for music repair, musical-instrument storage, and repair of antique chess sets, which he described as a “new venture.” He
also claims that he spent money on utilities, cleaning, and plumbing repairs, and other repairs to both the property and his classic guitars. But

36
[*36] the only evidence is his own testimony, although in his reply brief
he mentions a letter his attorney sent to RA Delgado in 2020. This letter
did include photocopies of Mr. Risan’s utility bills for 2016, as well as a
photocopy of a physical check and records of two other checks paid to
Victoria Andasol. Mr. Risan says the payments to Ms. Andasol, which
totaled $3,440, were for janitorial services rendered. It is unclear
whether Ms. Andasol was cleaning Mr. Risan’s house in addition to his
workshop. It is clear, however, that the utility bills reflect utility
charges for both Mr. Risan’s house and workshop. Mr. Risan claims that
his house is approximately 1,450 square feet and that the workshop is
675 square feet, so he attributed 32% of his utility bills to his business.
Mr. Risan admits he cannot find information to substantiate his
2016 plumbing expense. He also admits he does not have documentation
for the $52,000 in claimed repairs for 2016, but he attributes this to the
repair of two Martin guitars and a repair of the driveway leading to the
workshop’s entry. He does not have the bill for the driveway repair, but
he did include a photo of the driveway.
Finding Mr. Risan’s records from 2016 sufficient to substantiate
his claimed utilities and janitorial expenses would require us to believe
that Mr. Risan incurred these expenses primarily for business reasons
and that there was a proximate relationship between the expense and
business. Mr. Risan, however, offers no evidence to support any such
finding. His testimony about his guitars does not support the conclusion
that owning the guitars was more for business than personal use. 35 To
conclude Mr. Risan properly claimed deductions for the business use of
his home, we would have to rely on his unsubstantiated testimony regarding the space and its purpose. And we are quite wary of crediting
his testimony without such support, even when it isn’t self-contradictory. In his brief, moreover, he admits that he used the workspace for
activities other than the storage and repair of his guitars—namely his
chess sets. We have no way of determining whether Mr. Risan properly
allocated his utility expenses between his personal residence and his
workshop, and we would have to guess as to whether his janitorial expenses exclusively served his alleged business. Finally, we would still
have no evidence or arguments about any of the other expenses that he
claimed.
35 Mr. Risan stated he didn’t sell guitars after 2002. While he also testified
that he did sell guitars after 2002, he said these sales were sporadic. He testified that
he retained ownership of the guitars personally, and he did not claim that this personal
ownership was more for business than personal purposes.

37
[*37] We therefore find that the Commissioner was right to disallow
deductions for all of Mr. Risan’s Schedule C expenses for 2014, 2016, and
2017.
B.

Cost of Goods Sold

Mr. Risan claimed the following amounts in cost of goods sold:
Year

Item

Amount

2014

Cost of goods sold

$2,595,730

2015

Cost of goods sold

1,685,001

Cost of goods sold—labor

37,000

Cost of goods sold—beginning inventory

777,700

Cost of goods sold—purchases

222,000

2016
2017

The Commissioner disallowed all of them.
To support his claimed cost of goods sold, Mr. Risan’s sole argument states that “the court will be aware that vintage guitars are costly
to acquire and costly to maintain.” We do not find this persuasive. Mr.
Risan had no records to substantiate these costs. He instead estimated
them, plucked from his memory and what he claimed was his experience
as an appraiser for Lloyd’s of London and Chubb. We do not find these
estimates or his testimony credible because of the absence of any specific
details to support these estimates. This also means that we will not
ourselves estimate these numbers under Cohan v. Commissioner, 39
F.2d at 543–44.
The Commissioner wins.
C.

Mr. Risan’s Net Operating Losses

Mr. Risan reported the following net operating losses:
Year

Net operating loss

2014

$14,032,803

2015

15,533,438

2016

16,187,592

2017

3,527,372

38
[*38] A net operating loss is the excess of allowable deductions over
gross income for a given tax year, § 172(c), although we are supposed to
consider certain deductions in calculating an individual’s net operating
loss, § 172(c) and (d). Unless an exception applies, a net operating loss
must first be carried back two years and then carried forward 20 years.
§ 172(b)(1)(A). A taxpayer bears the burden of establishing the actual
existence of net operating losses in the prior years and his right to deduct them. Rule 142(a); Keith v. Commissioner, 115 T.C. 605, 621
(2000); Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), rev’d, 259 F.2d
300 (5th Cir. 1958). And if a taxpayer claims a net-operating-loss deduction, he 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); accord Ghafouri v. Commissioner, 111 T.C.M. (CCH) 1022,
1024 (2016).
Mr. Risan did not include such a “concise statement” with his return for any of the years at issue. This alone is sufficient reason to disallow them. See Bulakites v. Commissioner, 113 T.C.M. (CCH) 1384,
1386 (2017).
But that’s not the only problem. Both Mr. Risan and his accountant, David Jacobs, testified that Mr. Risan’s 2014–16 tax returns had a
multimillion-dollar error. Mr. Jacobs testified the erroneous net operating losses were created in 2011. He also testified that he recalculated
the deduction for 2017 using prior tax returns dating all the way back
to 1999. Mr. Risan did not, however, provide any other information
about these net operating losses and their origins.
We sustain the disallowance.
D.

MRT’s Business Expenses

MRT also claimed business expenses for 2016 and 2017:

39
[*39]

Expense

2016

2017

Taxes and Licenses

$59,307

44,418

Interest

16,223

18,080

Depreciation

4,655

4,526

Compensation of Officers

1,200

1,200

715,618

524,261

2,200

—

Amortization

170,327

—

Bank Charges

1,409

—

CD Purchases

9,740

—

Consulting

2,400

—

463

—

Insurance

100,235

—

Janitorial

2,220

—

Legal and Professional

267,976

—

Marketing

51,541

—

Office Expense

19,906

—

Postage

53

—

Security

703

—

Supplies

631

—

Telephone

12,477

—

Utilities

22,475 36

—

Web Fees

15,754

—

Rent

—

214,802

Other Deductions (not specified)

—

437,024

1,477,513

1,244,311

Salaries
Employee Benefits Program

Dues and Subscriptions

Total

In the notice of deficiency sent to MRT for the 2016 tax year, the
Commissioner lists the total of disallowed expense deductions as
$1,477,513. In his brief, the Commissioner omitted the telephone expense of $12,477, flagged in our table with a footnote. This accounts for
36 In the Commissioner’s brief, his table of these reported expenses lists “Telephone: $22,475,” apparently accidentally swapping the numbers listed for Telephone
and Utilities and omitting the actual Telephone expense number. This is so obviously
a proofreading error that we will not treat it as a concession.

40
[*40] the $12,477 discrepancy between MRT’s claimed expenses for
2016 and the number the Commissioner disallows in his brief
($1,465,036). For 2017, all numbers are consistent across the notice of
deficiency, the Commissioner’s brief, and our own review of the record.
Mr. Risan offers very little to substantiate any of these expenses.
His bookkeeper testified, but she could not identify them: She stated
only that she pulled expense numbers off MRT’s profit-and-loss statement. Mr. Risan asserts on brief that these expenses were based on
checks written to various parties, with the exception of amortization and
depreciation, which are noncash expenses. What’s missing are any of
these checks and the identities of the putative payees. We do have Mr.
Risan’s personal tax returns that show wages of $1,200 from MRT reported on his W-2, which might account for MRT’s officer compensation
expense. Yet even the substantiation of this minor expense is undermined by Mr. Risan’s testimony that he logged a salary “on paper” but
never received it. When Mr. Risan’s bookkeeper was asked who was
being compensated, she didn’t list Mr. Risan. There is nothing to substantiate that this or any other expense was actually paid or incurred
by MRT.
We uphold the Commissioner’s disallowance.
To reflect the foregoing,
Decisions will be entered under Rule 155.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ac24e7fd6a0d4b706. Public record. Not legal advice.