United States Tax Court

T.C. Memo. 2023-22

LUNDY NATH AND TANYA NATH,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket Nos. 6783-18, 18050-19. Filed February 27, 2023.

—————

Lundy Nath and Tanya Nath, pro sese.

Erik W. Nelson, Kimberly L. Clark, Catherine J. Caballero, Janice B. 

Geier, and Kelley A. Blaine, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BUCH, Judge: The Commissioner determined additional income 

for the Naths for 2014 and 2016 (years in issue) by performing a bank 

deposits analysis. Most of the deposits originated with Mr. Nath’s 

Cambodian family business, Grand Lion Group Co., Ltd. (GLG), which 

Mr. Nath controlled. Mr. Nath contends that these transfers were loans 

to him from GLG, but he also testified that they were advances on future 

earnings intended to fund his lifestyle. Advances on future income are 

taxed when received, and the transfers to Mr. Nath were, in fact, taxable 

advances.

FINDINGS OF FACT

Married petitioners Lundy and Tanya Nath received income from

GLG, a Cambodian construction company that specializes in building

hotels. Mr. Nath and his father are the sole, equal owners of GLG. Mr. 

Nath also performs services for GLG such as project oversight and 

contractor selection. 

Served 02/27/23
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[*2] During 2014 and 2016, GLG borrowed money from Cambodian 

banks to conduct its general operations. Mr. Nath wired money from 

GLG to himself in the United States to pay his family’s living expenses. 

He transferred approximately $1.5 million in 2014 and $450,000 in 

2016. The ultimate decision to transfer the money did not require 

approval from anyone other than Mr. Nath and his father. 

The Naths timely filed returns for 2014 and 2016 on which they 

reported total tax liabilities of $20,761 and $29,772, respectively. 

Notably, they did not report the wire transfers they received from 

Cambodia during 2014 and 2016 as income on the return for either of 

those years. 

Most of the income they reported for both years was on Schedule 

C, Profit or Loss From Business. They also claimed deductions for 

various Schedule C expenses, including meals and entertainment,

airfare, and hotels. Their reported expenses totaled $93,008 for 2014 and 

$236,297 for 2016. They reported that Mr. Nath’s Schedule C business 

was “consulting.”

I. Examination

The Commissioner examined the 2014 and 2016 returns. During 

the examination, the Naths failed to produce books and records from 

which to determine their income and expenses, so the Commissioner 

computed their income using a bank deposits analysis. Through the 

bank deposits analysis, the Commissioner uncovered unreported 

deposits, most of which were wire transfers from Cambodia.

The Commissioner determined unreported income on the basis of 

deposits and disallowed expense deductions on the basis of lack of 

substantiation. The Commissioner also determined that a section 6662 

accuracy-related penalty applied for each year in issue.1 The examiner 

who made the initial determination to assert penalties obtained written 

approval for each penalty from his group manager before that penalty 

was communicated to the Naths in an examination report attached to 

Letter 5153 or Letter 950, or in a notice of deficiency. 

1 Unless otherwise indicated, all statutory references are to the Internal 

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

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

times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

All monetary amounts are rounded to the nearest dollar. 
3

[*3] II. Notices of Deficiency 

The Commissioner mailed a notice of deficiency for 2014 on 

January 12, 2018. On the basis of the unreported deposits from 

Cambodia, the Commissioner determined additional income (ordinary 

dividends) of $1,530,687. Additionally, the Commissioner disallowed all 

Schedule C expense deductions and determined a section 6662 penalty 

for either a substantial understatement of income tax or negligence. 

The Commissioner mailed a notice of deficiency for 2016 on 

July 1, 2019. On the basis of the unreported deposits, the Commissioner 

determined additional income (gross receipts) of $327,475. Additionally, 

the Commissioner disallowed all Schedule C expense deductions and 

determined a section 6662 penalty for either a substantial 

understatement of income tax or negligence. 

III. Petitions for Redetermination

While residing in California, the Naths filed Petitions for 

redetermination. In those Petitions, they challenge the notices of 

deficiency in their entirety. The following amounts are in dispute:

Tax Year Deficiency I.R.C. § 6662 

2014 $682,984 $136,597

2016 217,651 43,530

IV. Tax Court Proceeding

The evidentiary record in these cases is sparse. After repeated 

continuances, we tried these cases on October 24, 2022. The Naths

provided little documentary evidence to support their cases. Mr. Nath 

appeared and called only himself as a witness. He did not provide any 

evidence about the expenses he reported on Schedules C. 

Mr. Nath’s evidence regarding the wire transfers from Cambodia 

was unreliable and often conflicting. He testified that he was borrowing 

money from GLG and that the transfers represented advances of income 

from GLG. At times, he referred to the advances as a salary—for 

example, he testified that “the incoming wires that I sent over to my 

personal bank account here in California . . . [were] to take care of the 

family. . . . I took some of my salaries to help pay for my expenses here.” 

And at other times, he referred to the advances as part loan, part salary. 
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[*4] He offered various unreliable trial exhibits. Two exhibits purported

to be loan agreements between Mr. Nath and GLG for loans made in 

2014 and 2016. Mr. Nath signed the agreements both on his own behalf 

as the borrower and on behalf of GLG as the lender. Neither agreement 

is dated. They are identical except for the loan amounts and effective 

dates. Both provide that the “loan shall be repayable on 31 December 

2024” but that Mr. Nath “may, at his option, choose to repay part or all 

of the loan prior to [that] date.” They require him to pay interest “at a 

rate of 8% per annum” within 14 business days of receiving an annual 

invoice from GLG. Mr. Nath testified that he made monthly (not annual) 

payments, but he did not provide any documents evidencing those 

payments.

OPINION

In these cases, we are asked to redetermine (1) the amounts of 

unreported income for 2014 and 2016 that the Commissioner 

determined on the basis of a bank deposits analysis, (2) the amounts of 

Schedule C expenses, and (3) the applicability of section 6662 penalties.

The Naths do not dispute the total amount of deposits, but they contend 

that most of them are nontaxable loans from GLG. They also contend 

that the Commissioner’s disallowance of expense deductions and 

determination of penalties were erroneous.

I. Burden of Proof

Generally, the Commissioner’s determinations in a notice of 

deficiency are presumed correct, and taxpayers bear the burden of 

proving error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). 

In the Court of Appeals for the Ninth Circuit, to which these cases would 

be appealable, determinations of unreported income must be supported 

by a “minimal evidentiary foundation” before the presumption of 

correctness applies. Weimerskirch v. Commissioner, 596 F.2d 358, 361 

(9th Cir. 1979), rev’g 67 T.C. 672 (1977); see Golsen v. Commissioner, 54 

T.C. 742, 756–58 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). “[T]he 

Commissioner must offer some substantive evidence showing that the 

taxpayer received income from the charged activity.” Weimerskirch v. 

Commissioner, 596 F.2d at 360. In Weimerskirch, the Commissioner 

relied on a “naked assertion” and did not attempt to substantiate the 

unreported income through “other means, such as . . . bank deposits.” 

Id. at 362.
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[*5] Here, the Commissioner determined unreported income on the 

basis of bank deposits, which are prima facie evidence of income. 

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). The record reveals that 

these deposits stem from GLG, which the Naths do not dispute. The 

Commissioner’s determinations are presumptively correct, and the 

record does not support shifting the burden back to the Commissioner. 

See I.R.C. § 7491(a).

II. Unreported Income 

“[G]ross income means all income from whatever source derived,” 

including compensation for services such as wages and salaries, gross 

income derived from business, and dividends, among others. I.R.C. 

§ 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429–31 

(1955); see Durland v. Commissioner, T.C. Memo. 2016-133, at *61. 

Taxpayers must maintain books and records sufficient to establish their 

income and expenses. I.R.C. § 6001; Treas. Reg. § 1.6001-1(a). If they 

fail to do so, the Commissioner may reconstruct income through any 

reasonable method that clearly reflects income. I.R.C. § 446(b); Petzoldt 

v. Commissioner, 92 T.C. 661, 693 (1989). We have long accepted the 

bank deposits method for this purpose. Clayton v. Commissioner, 102 

T.C. 632, 645–46 (1994). The bank deposits method assumes all deposits 

are taxable, but the Commissioner must account for any nontaxable 

source or deductible expense of which he has knowledge. Id. Taxpayers 

bear the burden of proving a nontaxable source for deposits. Barnes v. 

Commissioner, T.C. Memo. 2016-212, at *32–34, aff’d, 773 F. App’x 205 

(5th Cir. 2019).

The Naths argue that most of the deposits are not taxable because 

they are proceeds from a loan from GLG to Mr. Nath. A loan is not 

taxable income when received because the taxpayer has an obligation to 

repay it. Commissioner v. Tufts, 461 U.S. 300, 307 (1983). By 

comparison, an advance for future services is taxable in the year it is 

received. Beaver v. Commissioner, 55 T.C. 85, 91 (1970). Whether an 

advance is a bona fide loan is a question of fact that turns on whether 

the borrower and lender intended to make and enforce monetary 

repayment at the time the advance was made. Id. To answer this 

question, we consider various objective factors that are indicative of 

subjective intent. See Haag v. Commissioner, 88 T.C. 604, 616 n.6 (1987),

aff’d without published opinion, 855 F.2d 855 (8th Cir. 1988). Where, as 

in these cases, Mr. Nath sits on both sides of the advances, special 

scrutiny is warranted. See Nix v. Commissioner, T.C. Memo. 1982-330, 

44 T.C.M. (CCH) 105, 109.
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[*6] We find no evidence that the Naths intended to repay the 

advances at the time they were made, so they were not loans. The loan 

agreements are unenlightening as to intent at the time the advances 

were made because they do not indicate when Mr. Nath executed them.

There was no meaningful oversight of GLG’s decisions to make the 

advances. Mr. Nath gave no collateral; and because he approved the 

purported loan to himself on behalf of GLG, there were no real adverse 

interests between the lender and the borrower. We find it unlikely that 

Mr. Nath or his father would enforce monetary repayment if Mr. Nath 

could not satisfy the obligation through his services or otherwise. 

Further, Mr. Nath’s intent to satisfy the advances through future 

services or future income from GLG disqualifies them from being bona 

fide debt. See Beaver, 55 T.C. at 91. Finally, other than Mr. Nath’s

testimony, which we do not find credible, there is no evidence that he 

made any repayments.

The advances were not loans, and the Naths have failed to 

otherwise establish a nontaxable source for the unreported deposits. 

Thus, they have failed to meet their burden, and we uphold the 

Commissioner’s determinations. 

III. Expenses

Taxpayers bear the burden of proving that they are entitled to 

claimed deductions. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 

U.S. 79, 84 (1992). That burden requires substantiation. Higbee v. 

Commissioner, 116 T.C. 438, 440 (2001). Taxpayers must maintain 

records sufficient to establish the amount of each deduction. Rogers v. 

Commissioner, T.C. Memo. 2014-141, at *17; Treas. Reg. § 1.6001-1(a), 

(e). 

The Naths failed to put on evidence of their expenses at trial, so 

they failed to meet their burden. See Miller v. Commissioner, T.C. Memo. 

2014-105, at *12–13.

IV. Section 6662 Penalties

The Commissioner determined a section 6662(a) accuracy-related 

penalty for each year in issue. Section 6662(a) provides that a taxpayer 

may be liable for a penalty of 20% of the portion of an underpayment of 

tax required to be reported on a return that is attributable to, among 

other things, negligence or disregard of the rules or regulations or a 

substantial understatement of income tax. See I.R.C. § 6662(b)(1) and 

(2). The Commissioner determined penalties based on substantial 
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[*7] understatements and alternative penalties based on negligence for 

both years in issue. Only one section 6662 accuracy-related penalty may 

be imposed with respect to a given portion of an underpayment. Treas. 

Reg. § 1.6662-2(c); see Mileham, T.C. Memo. 2017-168, at *46. 

Under section 7491(c), the Commissioner bears the burden of 

production with respect to penalties and must produce evidence that any

penalty is appropriate. See Higbee, 116 T.C. at 446. Because section 

6751(b) requires managerial approval of section 6662 penalties, under 

our precedent the Commissioner’s burden of production includes 

establishing compliance with section 6751(b). Walquist v. 

Commissioner, 152 T.C. 61, 68 (2019). Once the Commissioner meets his 

burden, the Naths must come forward with persuasive evidence that the 

Commissioner’s determination is incorrect or that an exception applies. 

Higbee, 116 T.C. at 446–47; see I.R.C. § 6664(c)(1) (reasonable cause and 

good faith exception).

A. Penalty Approval

Section 6751(b)(1) provides that no penalty shall be assessed 

unless the initial determination to assert penalties is approved (in 

writing) by the immediate supervisor of the person who made that 

determination. This Court has held that an “initial determination” 

occurs the earlier of when the Commissioner issues a notice of deficiency 

or otherwise formally communicates a decision to determine penalties. 

Belair Woods, LLC v. Commissioner, 154 T.C. 1, 14–15 (2020); Clay v. 

Commissioner, 152 T.C. 223, 248–49 (2019), aff’d, 990 F.3d 1296 (11th 

Cir. 2021). However, the Ninth Circuit arguably applies a different 

standard as to timing. See Laidlaw’s Harley Davidson Sales, Inc. v. 

Commissioner, 29 F.4th 1066 (9th Cir. 2022), rev’g and remanding 154 

T.C. 68 (2020). In Laidlaw’s, which involved an assessable penalty that 

was not subject to deficiency procedures, the Ninth Circuit held that 

approval can occur after formal communication to the taxpayer, so long 

as it occurs before assessment.2 Id. at 1074. 

Approval was timely in these cases. The initial determination to 

impose each penalty was approved before it was communicated to the 

Naths in a notice of deficiency or an examination report, so the 

Commissioner satisfied section 6751(b) both as interpreted by this Court 

2 Neither our Court nor the Ninth Circuit has addressed whether the rationale 

of Laidlaw’s extends to penalties that are subject to deficiency procedures, such as 

section 6662 penalties. We need not reach that question in these cases.
8

[*8] and under the standard established by the Ninth Circuit (to the 

extent, if any, it is applicable here).

B. Substantial Understatement

Section 6662(d)(1)(A) defines a substantial understatement of 

income tax as an understatement of tax that exceeds the greater of 10%

of the tax required to be shown on the tax return or $5,000. The Naths’

understatements of income tax for 2014 and 2016 are substantial 

because they exceed $5,000 and are greater than 10% of the amount 

required to be shown on their returns.

C. Negligence

“‘Negligence’ . . . includes any failure by the taxpayer to keep 

adequate books and records or to substantiate items properly.” Treas. 

Reg. § 1.6662-3(b)(1). The record shows that the Naths were negligent 

because they failed to keep adequate books and records to substantiate 

reported expenses. See Mileham, T.C. Memo. 2017-168, at *46.

D. Conclusion as to Penalty

The Commissioner met his burden of production as to penalties, 

and the Naths failed to put on evidence that the Commissioner’s 

determinations were erroneous or that the reasonable cause and good 

faith exception of section 6664(c)(1) applies. Thus, they failed to meet 

their burden of proof, and are liable for section 6662 accuracy-related 

penalties.

V. Conclusion

The Naths failed to demonstrate any error in the Commissioner’s 

notices of deficiency for 2014 and 2016. To reflect the foregoing, 

Decisions will be entered for respondent.