United States Tax Court

T.C. Summary Opinion 2022-21

JOSHUA M. YAGUDA AND JOELI YAGUDA,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 19113-19S. Filed October 20, 2022.

—————

Joshua M. Yaguda and Joeli Yaguda, pro sese.

Daniel Z. Nettles, for respondent.

SUMMARY OPINION

PANUTHOS, Special Trial Judge: This case was heard pursuant 

to the provisions of section 7463 of the Internal Revenue Code in effect 

when the petition was filed.1 Pursuant to section 7463(b), the decision 

to be entered is not reviewable by any other court, and this opinion shall 

not be treated as precedent for any other case.

In a notice of deficiency dated July 31, 2019, respondent 

determined a deficiency in petitioners’ federal income tax of $29,201 and 

a section 6662(a) accuracy-related penalty of $5,840.20 for taxable year 

2015 (year in issue).

1 Unless otherwise indicated all statutory references are to the Internal 

Revenue Code (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.

Served 10/20/22
2

The issues for decision are:

(1) whether $7,188 in taxable interest of Estate Financial, Inc.

(EFI), is includible in petitioners’ income for the year in 

issue;

(2) whether a $97,565 distributive share of income of EFI is

includible in petitioners’ income for the year in issue; and

(3) whether petitioners are liable for a section 6662(a) 

accuracy-related penalty for the year in issue. 

Background

Some of the facts have been stipulated and are so found. We 

incorporate the Stipulation of Facts and attached Exhibits by this 

reference. The record consists of the Stipulation of Facts with attached 

Exhibits and the testimony of Mr. Yaguda (petitioner).

Petitioners resided in California when the Petition was timely 

filed.

I. Estate Financial, Inc.

EFI was incorporated in California in 1991. At that time EFI

made a valid election to be treated as an S corporation. During the year 

in issue, EFI conducted business as a loan service provider. Petitioners

held a 10% shareholder interest in EFI, while petitioners’ daughter, 

Isabella Yaguda, held a 5% shareholder interest.

On June 25, 2008, a creditor filed an involuntary bankruptcy 

petition against EFI. On July 16, 2008, the case was converted to a 

voluntary chapter 11 bankruptcy. Subsequently, Thomas P. 

Jeremiassen was appointed trustee in the bankruptcy proceedings. The 

chapter 11 bankruptcy proceeding continued throughout the year in 

issue.

During the year in issue, as directed by the trustee, EFI engaged 

in business activity, including liquidating certain assets. Petitioner was 

aware of the trustee’s directing of EFI during the year in issue, in 

servicing loans, generating fees, and liquidating assets. Pursuant to 

EFI’s election as an S corporation, EFI filed with the Internal Revenue 

Service (IRS) several Schedules K–1, Shareholder’s Share of Income, 

Deductions, Credits, etc., for shareholders, which included petitioners
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and their daughter. Petitioners’ EFI Schedule K–1 for the year in issue, 

filed with the IRS, reported that they were allocated ordinary business 

income of $81,464, a net rental real estate loss of $16,421, and interest 

income of $4,792. Petitioners’ daughter’s EFI Schedule K–1 for the year 

in issue, filed with the IRS, reported that she was allocated ordinary 

business income of $40,732, a net rental real estate loss of $8,210, and 

interest income of $2,396.

II. Petitioner’s Criminal Proceedings

In 2007 petitioner was arrested and charged with several counts 

of securities fraud. On October 16, 2008, a Notice of Pendency of Action

(Lis Pendens) was filed in the criminal proceeding in the California 

Superior Court, listing petitioner’s property and assets, including 

petitioners’ shares in EFI, to be preserved from any transfer, 

conveyance, or encumbrance. Petitioner entered a plea agreement on 

October 5, 2009, in which he relinquished and forfeited assets.

In the sentencing hearing on December 7, 2009, petitioner’s 

interest in EFI, which was subject to the bankruptcy proceedings, was

assigned to the District Attorney’s Office of the County of San Luis 

Obispo to oversee for the benefit of the victims of the securities fraud. 

In addition, the court requested that EFI’s bankruptcy trustee inform 

the County of San Luis Obispo of the bankruptcy proceedings and any 

distributions made to investors. On July 15, 2010, the court appointed 

a receiver for the purpose of liquidating assets and paying restitution to 

victims. Petitioner remained incarcerated until 2012.

III. Petitioners’ Tax Return and Examination

Petitioners timely filed Form 1040, U.S. Individual Income Tax 

Return, for the year in issue on June 6, 2016. It was prepared by a

certified public accountant (CPA). Petitioners reported adjusted gross 

income of $110,444 on their Form 1040. The return included Schedule 

E, Supplemental Income and Loss, on which petitioners reported total 

supplemental income of $29,880. Petitioners’ tax return did not include 

amounts reported on EFI’s Schedules K–1 filed with the IRS.

In a letter dated August 31, 2016, the bankruptcy trustee 

informed petitioners of the filing of the EFI Schedule K–1 as a result of 

EFI’s S corporation election. The bankruptcy trustee also informed 

petitioners that that the receiver appointed by the court in the criminal 
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proceeding had effectively abandoned petitioners’ EFI shares, thus 

leaving those shares in their names without any oversight.

Examination of petitioners’ 2015 return began on August 25, 

2017. Respondent subsequently determined that petitioners had failed 

to include in income amounts attributable to their interest in EFI. 

Respondent also determined that petitioners should have included in 

income the unearned income of their daughter, pursuant to section 1(g).2

On December 6, 2018, a Form 300, Civil Penalty Approval Form, was 

approved by the examiner’s manager on the basis of petitioner’s failure 

to report the flowthrough income.

On July 31, 2019, respondent issued a notice of deficiency to 

petitioners for the year in issue. Respondent adjusted petitioners’ 

income to include $7,188 in taxable interest and $97,565 in distributive 

share of income of EFI.

Discussion

Generally, the Commissioner’s determinations in a notice of 

deficiency are presumed correct, and the taxpayer bears the burden of 

proving that those determinations are erroneous. Rule 142(a); Welch v. 

Helvering, 290 U.S. 111, 115 (1933).3 In order for the presumption of 

correctness to attach to the deficiency determination in unreported 

income cases, the Commissioner must establish “some evidentiary 

foundation” connecting the taxpayer with the income-producing activity 

or demonstrate that the taxpayer received unreported income. 

Weimerskirch v. Commissioner, 596 F.2d 358, 361–62 (9th Cir. 1979),

rev’g 67 T.C. 672 (1977). Once the Commissioner introduces such 

evidence, the burden shifts to the taxpayer to show by a preponderance 

of the evidence that the determination was arbitrary or erroneous. 

Klootwyk v. Commissioner, T.C. Memo. 2006-130, slip op. at 4–5.

Petitioners do not dispute that they held interests in EFI in years 

before the year in issue or the amounts EFI reported on the Schedules 

K–1 for the year in issue. Petitioner even testified that he was aware

2 Under section 1(g), certain unearned income of children is taxed as the

parent’s income. Petitioners’ daughter was under the age of 18 during the year in 

issue.

3 Pursuant to section 7491(a), the burden of proof as to factual matters shifts 

to the Commissioner under certain circumstances. Petitioners have neither alleged 

that section 7491(a) applies nor established their compliance with its requirements. 

Therefore, petitioners bear the burden of proof.
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that the bankruptcy trustee was directing EFI’s activities during the 

year in issue to service loans, generate fees, and liquidate assets.

Therefore, on the basis of this record, including the Schedules K–1 filed 

with the IRS by EFI for the year in issue, respondent has established

“some evidentiary foundation” connecting petitioners with the income 

producing activity. See Weimerskirch v. Commissioner, 596 F.2d at 362. 

Respondent has met his burden as to the unreported income determined 

in the notice of deficiency.

I. Ownership of EFI Shares

Petitioners assert that pursuant to petitioner’s plea in the 

criminal proceedings, all of their ownership interest in EFI was

transferred to the receivership created by the California Superior Court. 

Petitioners assert that the receivership is required to pay and discharge 

all of the expenses of the receivership, including any tax liabilities 

imposed.

Petitioners submitted the record in the criminal proceedings in

support of the receivership’s notice purportedly assuming ownership of 

the EFI interest. The Lis Pendens notice includes the EFI interest, and

the sentencing transcript notes that petitioner’s interest in EFI, subject 

to the bankruptcy proceedings, is assigned to the District Attorney’s

Office of the County of San Luis Obispo. Nevertheless, the record does 

not support a finding that the receivership exercised control or 

ownership of the EFI interest. Rather, the sentencing hearing 

transcripts reflect the California court’s intention to defer to the 

bankruptcy trustee, requesting information about the proceedings and 

any distributions. Even if the receivership had authority to claim the 

EFI interest, in the letter dated August 31, 2016, the bankruptcy trustee

informed petitioners that the receivership trustee had abandoned the 

EFI interest, leaving the shares in the ownership of petitioners.

Alternatively, petitioners assert that they abandoned the interest

before the year in issue. A partner can abandon his partnership interest 

for federal tax purposes. See Citron v. Commissioner, 97 T.C. 200, 213 

(1991). In such a case, an affirmative act to abandon must be 

ascertained from all the facts and surrounding circumstances. Intention 

alone is not sufficient to accomplish abandonment but must be 

accompanied by an affirmative act of abandonment. See Beus v. 

Commissioner, 261 F.2d 176, 180 (9th Cir. 1958), aff’g 28 T.C. 1133 

(1957); United Cal. Bank v. Commissioner, 41 T.C. 437, 451 (1964), aff’d 
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per curiam, 340 F.2d 320 (9th Cir. 1965). From the record, the Court is 

unable to ascertain an affirmative act to abandon the interest.

Petitioners have not established that their EFI ownership

interest was transferred or abandoned.4 Therefore, we conclude that 

petitioners retained the EFI ownership interest during the year in issue.

II. EFI’s S Corporation Income

An S corporation is generally not subject to federal income tax at 

the entity level. See § 1363(a). Instead, the corporation’s income, losses, 

deductions, and credits are passed through to the shareholders as their 

pro rata shares. § 1366(a). The S corporation’s income is taxable to the 

shareholder regardless of whether any income is distributed. Treas. 

Reg. § 1.1366-1(a)(1). Once an entity elects S corporation status, the 

election is effective for all succeeding taxable years until terminated. 

§ 1362(c). The election will be terminated if and only if (1) the 

shareholders make an affirmative revocation, (2) the entity ceases to be 

a “small business corporation,” or (3) the entity’s passive investment 

income exceeds 25% of its total gross receipts for the previous three 

years. See § 1362(d).

Petitioners do not dispute that EFI had not revoked its

S corporation election, nor had it ceased to be a “small business 

corporation.” There is no evidence in the record that EFI’s passive 

income exceeded 25% of its total gross receipts for the previous three 

years. The Court concludes that EFI was an S corporation during the 

year in issue.

The filing of a petition in bankruptcy court generally creates a 

bankruptcy estate, which is a separate entity for bankruptcy purposes 

and a separate taxpayer for federal income tax purposes. See § 1398. 

Section 1398 does not apply to corporations. See § 1399. In an 

S corporation, shareholders remain liable for any income that is taxable 

and generated after the bankruptcy is filed, even when no benefit is 

received. See Mourad v. Commissioner, 121 T.C. 1, 6 (2003), aff’d, 387 

F.3d 27 (1st Cir. 2004).

As a result, EFI shareholders remained liable for any taxable 

income generated after the bankruptcy filing, even though no actual 

4 Alternatively, petitioners assert that the receivership was a Qualified 

Settlement Fund within the meaning of section 468B. Since we conclude that the 

receivership did not take ownership of the EFI interest, we need not opine further.
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benefit was received. Petitioners have not presented any evidence 

demonstrating that the taxable interest and distributive share of income 

as reported in the EFI Schedule K–1 issued to them is not taxable to 

them.

Petitioners also assert that their daughter’s taxable interest in 

and distributive share of income of EFI should not be included in their 

income for the year in issue. Section 1(g) provides that certain unearned 

income of children is taxed as the parent’s income if the child is under 

the age of 18 at the close of the taxable year. Petitioners’ daughter was 

under the age of 18 at the close of the taxable year. Petitioners have not 

presented any evidence demonstrating that their daughter’s taxable 

interest and distributive share of income as reported in the EFI 

Schedule K–1 are not taxable to them.

Accordingly, we sustain respondent’s determination with respect 

to the unreported taxable interest and distributive share of income

attributable to petitioners from EFI.

III. Section 6662(a) Accuracy-Related Penalty

Respondent determined that petitioners are liable for an 

accuracy-related penalty on their underpayment for the year in issue, 

due to either substantial understatement of income tax or negligence. 

Section 6662(a) and (b)(1) and (2) imposes an accuracy-related penalty 

of 20% on any portion of an underpayment of federal income tax

attributable to the taxpayer’s “[n]egligence or disregard of rules or 

regulations” or “substantial understatement of income tax.”

An understatement of federal income tax is substantial if the 

amount of the understatement for the taxable year exceeds the greater 

of 10% of the tax required to be shown on the return or $5,000. 

§ 6662(d)(1)(A).

“Negligence” includes any failure to make a reasonable attempt 

to comply with the Code and any failure to keep adequate books and 

records or to substantiate items properly. § 6662(c); Treas. Reg. 

§ 1.6662-3(b). Negligence has also been defined as the failure to exercise 

due care or the failure to do what a reasonable person would do under 

the circumstances. See Allen v. Commissioner, 92 T.C. 1, 12 (1989), aff’d,

925 F.2d 348 (9th Cir. 1991).
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The Commissioner bears the burden of production with respect to 

a section 6662 penalty. § 7491(c).5 To satisfy that burden the 

Commissioner must offer sufficient evidence to indicate that it is 

appropriate to impose the penalty. See Higbee v. Commissioner, 116

T.C. 438, 446 (2001). Once the Commissioner meets his burden of 

production, the taxpayer must come forward with evidence sufficient to 

show the Court that the determination is incorrect. Id. at 446–47. If 

the understatement of income tax for the year in issue is substantial, 

the Commissioner has satisfied the burden of producing evidence that 

the penalty is justified.

Respondent proposed an increase in tax of $29,201 for the year in 

issue, increasing petitioners’ total tax liability to $41,311. Respondent 

has met his burden because the amount of petitioners’ understatement 

for the year in issue was “substantial,” in that it exceeded the greater of 

10% of the tax required to be shown on the return or $5,000. See 

§ 6662(d)(1)(A).

Once the Commissioner has met his burden, the taxpayer may 

avoid a section 6662(a) accuracy-related penalty to the extent that he or 

she can demonstrate (1) reasonable cause for the underpayment and 

(2) that he or she acted in good faith with respect to the amount paid.

§ 6664(c)(1). The decision as to whether a taxpayer acted with

reasonable cause and in good faith is made on a case-by-case basis,

taking into account all pertinent facts and circumstances, including:

(1) the taxpayer’s efforts to assess the proper tax liability, (2) the

knowledge and experience of the taxpayer, and (3) reliance on the advice

of a tax professional. Treas. Reg. § 1.6664-4(b)(1). An honest

misunderstanding of the law that is reasonable in the light of the facts

and circumstances may support a conclusion that a taxpayer acted with

reasonable cause and in good faith with respect to a reported position.

Id.; see also Higbee, 116 T.C. at 448–49. Generally, the most important

factor is the extent of the taxpayer’s efforts to assess his or her proper

tax liability. Treas. Reg. § 1.6664-4(b)(1). Statutory complexity alone

does not constitute reasonable cause. Barnes v. Commissioner, T.C.

Memo. 2012-80, aff’d, 712 F.3d 581 (D.C. Cir. 2013).

5 The burden of production includes producing evidence establishing that the 

penalty was “personally approved (in writing) by the immediate supervisor of the

individual making such determination” unless a statutory exception applies. 

§ 6751(b)(1). On the basis of the Form 300 signed by the examiner’s supervisor on 

December 6, 2018, respondent has met his burden.
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Petitioners made a reasonable, good faith effort to correctly assess 

their tax liability. Petitioners timely filed their tax return, reported

other passive income, and provided documentation in support. Further, 

they relied on the assistance of a CPA in preparing their return. It was 

not entirely clear from the proceedings in the California Superior Court 

and the bankruptcy court the tax treatment of the shares in EFI.

Given the complexity of the interplay between the bankruptcy

proceedings and the receivership, and further noting that petitioners did 

not actually receive any funds as a distribution from EFI, we conclude 

that petitioners’ failure to include the distributive share of income of 

EFI in the year in issue does not subject them to the penalty that 

respondent determined.

On the basis of our findings, respondent’s determination as to the 

applicability of the accuracy-related penalty for the year in issue is not 

sustained.

We have considered all of petitioners’ arguments, and to the 

extent not addressed herein, we conclude that they are moot, irrelevant, 

or without merit. 

To reflect the foregoing,

Decision will be entered for respondent as to the deficiency and for 

petitioners as to the accuracy-related penalty under section 6662(a).