T.C. Mem o. 2 01 3- 16 9

UNITED STAT ES TAX COURT

ABDOLREZA T. AZIMZADEH AN D ZOHRA EH SAN, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 17 92 4- 10
. Fil edJu ly 23, 2 01 3.

Abd ol rezaT. Azimzad eh an d Zo hr a Ehs an , pro se. Tim ot hy R. Berry , Nich ol as D. Dou ka s, an d J on D. Feld ha m m er, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION HOLMES, Ju dg e: Abd ol rezaAzim zad eh an d h is wife , Zoh ra Eh san, ea rn ed
m os t o f th ei r in co m e in 20 06 fro m Ste ve ns Cree k Au to Cen te r, a sm al l u se d- car bu si ne ss inCal ifo rn ia . ButAzim zad eh an d Eh sa n h adhu ndred s o f th ou sa nd s o f- 2 -

[* 2] do ll ars m ov in g i n a ndou t o f th ei r ba nkacco un ts , add it io ns to th e d eal ers hi p’s in ve nt ory of m or e th ana m il li on do ll ars , andso m e o f ki ndof a rran ge m en t-- itis
no t qui te cle ar wh atki nd --wi th a th irdpa rty who m ay or m ay no t h av e b een Azim zad eh ’s partn er. All supp orte d- -o r so Azim zad eh sai d- -b y reco rd s t ha t wer e in di sa rray, mis si ng , alt ered , or n ev er i n e xi st en ce atall
. W e’ll o pe n t he ho odan d s ee wh at ’s go in g o n.

FINDINGS OF FACT At St ev en s C reek , Azimzad eh pe dd le d e ve ryth in g fr om bu dg etsed an s an d
m in iv an s up t o p os h B MWs an d P or sc he s. He an d Eh sa n a ls o h adothe r job s- -h e to okcare of h is m ot he r un de r Cal ifo rn ia ’s In- Hom e Supp orti ve Serv ic es (IHSS) pr og ram , andsh e worke d fo r a co up le of s ta ffi ng ag en ci es an d a s a m ak eup a rti st fo r Ch ris ti anDio r. The co up le fil eda joi nt20 06 return s ix m on th s l at e, an d d id n’t rep ort i nc om e fro m

th es e si de job s b ecau se th ey say the y di dn ’t getm os t o f th ei r W -2 s. Th ei r tr oubl es be ga n wh enth e Co m m is si on er s el ect edth em

forau di t. The au di t qui ck ly tan ke d. Azi mzad eh ’s reco rdke ep in g fo r St ev en s C reek
was anin co m

pl et e jum bl e o f ba rel y

leg ib le do cu m en ts , so th e Co m m is si on er d ida ba nk -d ep os it s an al y si s t o g etat t he car b us in es s’s g ro ss rece ip ts , andth enhe di sa ll owe d a ll of the in ve nt ory co st s an d e xp en se s. Th e Co m m is si on er s en t Azim zad eh an d Eh sa n ano ti ce o f de fic ie nc y for20 06 sayin g t ha t the y ha d a lm os t- 3 -

[* 3] $2 00 ,00 0 i n u nr ep orte d i nc om e, di sa ll owi ng $1 .2 m il li on of v ari ou s l os se s, de du ct io ns , andexpe ns es , andim po si ng ov er $ 20 0,0 00 inad di ti on s t o t ax an d pe na lt ie s. Th e fo ll owi ng ch artsu m m ari zes whatAzim zad eh an d Eh sa n re po rte d
on th ei r ta x re tu rn , th e Co m m is si on er’s i ni ti al de te rm in at io ns , hi s l at er co nc es si on s, an d wh at ’s st il l l eftforus to de ci de :

As re po rte d on tax return As

de te rmin ed Co m

mis si on er’s co nc es si on s St il l i n

di sp ut e Sch edul e C gro ss rece ip ts $1 ,21 5,8 25 $1 ,39 5,0 34 -0
- $1 79 ,20 9.0 0 Sch edul e C co st of g oo ds so ld 1,0 23 ,82 5 -0
- $3 50 ,61 0.5 7 67 3,2 14 .43 Sch edul e C othe r ex pe ns es 10 8,7 67 -0
- 12 7,7 88 .00 Add it io na l recei pt s fr om Azimzad eh Sch edul e E real est at e lo ss 9,2 83 -0
- -0
- 9,2 83 .00 Tax ab le in te res t -0
- 49 -0
- 49 .00 Sh ort-t erm

ga in -0
- 3,6 51 -0
- 3,6 51 .00 W ag es , sal ari es andti ps 7,0 45 22 ,71 6 -0
- 15 ,67 1.0 0 Fed eral in co m e tax withh ol di ng 62 4 87 3 -0
- 24 9.0 0 Hom e m ortg ag e in te res t 54 ,24 0 -0
- -0
- 54 ,24 0.0 0- 4 -

[* 4] Azim zad eh an d Eh sa n wer e Cal ifo rn iares id en ts when th ey fil edth ei r pe ti ti on . W e tr ie d t he cas e in SanFran ci sc o. Ano th er i ss ue aro se at t ria l-- 1 whe th er Azi mzad ehco nduc te d h is bu si ne ss as apartn ers hi p wi th an othe r m anin th e cartra de , Ray

Barg hi , or B arg hi ’s bu si ne ss , Lux ury forLess . W e m us t al so de ci de whet he r Azi mzad ehan d Eh sa n o we anaccu racyrel at edpe na lty

un de r se ct io n 6 66 2( a) an d a n a dd it io n t o t ax un de r se ct io n 2 66 51 (a)( 1) for

fai li ng to ti m el y

fil e th ei r ta x re turn . OPINION W e st artwith arem in de r th atth e Co m m is si on er’s d efi ci en cy

de te rm in at io ns are p res um edco rrec t, an d t ax pa y ers be ar the burd enof p ro vi ng ot he rwis e. See Ru le 14 2( a); INDOPCO, In c. v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ). The C od e al so requi res tax pa y ers to m ai nt ai n re co rd s s uf fic ie ntto subs ta nt ia te th ei r cl ai m ed de du ct io ns , in cl ud in g re co rd s o f th ei r in ve nt or ie s. See sec . 60 01 ; s ec. 1 .60 01 -1 (a), In co m e Tax Reg s. Tho ug h Eh san’s n am e was on th e p et it io n, s he ne it he r si gn edth e 1 st ip ul at io n o f fac ts no r ap pe aredat t ria l. We the refo re g ran te d t he Co m m is si on er’s or al m ot io n t o d is m is s h er fro m th e cas e fo r la ckof p ro se cu ti on , with the un de rs ta nd in g t ha t the de ci si onwe en te r as to he r wil l b e th e sa m e am ou ntwe ul ti m at el y

de te rm in e fo r he r hu sb an d. Unl es s we s ay

ot he rwis e, al l s ect io n re fere nc es are t o t he Int ern al Rev enue 2 Co de ineffe ctforth e y ear i n i ss ue . All R ul e ref eren ces are t o the Tax C ou rt Rul es of Prac ti ce an d P ro cedur e.- 5 -

[* 5] I. Part ne r orSo le Pro pr ie to r W e b eg in ou r an al y si s wi th anim po rta ntqu es ti on th ataffe ct s t he res t o f Azim zad eh ’s cas e: W as Ste ve ns Cree k h is own bu si ne ss , or d idhe ownitin pa rtn ers hi p wi thso m eo ne els e? The p ot en ti al pa rtn er h ere i s a m anna m edRay Barg hi . Azimzad ehtes ti fie d t ha t h e an d B arg hi were p artne rs ina “ joi nt pa rtn ers hi p” fro m

Octo be r 20 05 un ti l Oct ob er 2 00 6. If we f in d apa rtn ers hi p, tha t wou ldreduc e th e d efi ci en cy , add it io n t o t ax , andpe na lt y th atAzim zad eh an d h is wife owe. Th e Co m

m is si on er d oe sn ’t th in k t ha t Azi mzad eh an d B arg hi were pa rtn ers , andask edus to lo okat C al ifo rn ialaw t o s ee i f th ey were. Bu t fe de ral tax la w, andon ly feder al tax law, co nt ro ls th e cl as si fic at io n o f “partn ers ” an d

“pa rtn ers hi ps ” fo r fed eral tax pu rp os es . See s ec. 3 01 .77 01 -1 (a), Pr oc ed . & Adm in
. Reg s.; see als o C omm is si on er v . Tower, 3 27 U.S. 28 0, 2 88 , 29 0 (1 94 6)
. A partn ers hi p i s a b us in es s en ti ty w it h t wo o r m or e o wne rs . See s ecs . 30 1.7 70 1- 1( a)(1 ), 30 1.7 70 1- 3( a), Pro ced . & Adm in . Reg s. Th e b us in es s en ti ty requi rem en t d oe sn ’t m ean th atth e p artne rs hi p n eed s t o e xi stsep arat el y fro m it s own ers or o th erwi se be reco gn iz edun de r st at e la w, see sec . 30 1.7 70 1- 1( a)(1 ), Pro ced . & Adm in . Reg s., s o i t’s n otfat al th atAzimzad ehan d B arg hi di dn ’t form a se pa rat e st at e-l aw en ti ty to d o b us in es s. Ra th er, the ha ll m arkof apa rtn ers hi p i s th at“ th e p art ic ip an ts carry on a tr ad e, bu si ne ss , fin an ci al op erat io n, o r ve ntur e an d- 6 -

[* 6] di vi de th e p ro fit s t he refr om .” See s ec. 3 01 .77 01 -1 (a)( 2) , Pro ced . & Adm in
. Reg s. We lo okto sev eral fact or s: 1. th e ag reem en t o f th e p art ie s an d t he ir c on du ctinex ecu ti ng it s te rm s; 2. th e co ntrib ut io ns , if an y , whi ch eachpa rty has m ad e to th e ve ntur e; 3. th e p art ie s’ con tro l o ve r in co m e an d c ap it al an d the rig htof each to m ak e withd rawal s; 4. whe th er ea ch pa rty was a p rin ci pa l an d c op ro pr ie to r, sh ari ng a m utua l p ro pr ie ta ry

in te res t i n t he ne t p ro fit s an d h av in g a n ob li ga ti on to sh are l os se s, o r whe th er o ne pa rty was th e ag en t orem pl oyee of th e o th er, rec ei vi ng forhi s s erv ic es co nt in ge nt co m pe ns at io n i n t he form

of ape rcen ta ge of i nc om e; 5. whe th er b us in es s was co nduc te d i n t he joi ntna m es of t he pa rti es ; 6. whe th er the pa rti es fil edFed eral pa rtn ers hi p re tu rn s o r ot he rwis e rep res en te d t o t he Co m mis si on er o r to pe rs on s wi th who m th ey de al t tha t the y

were joi ntve ntur ers ; 7. whe th er s ep arat e b oo ks of a cco un t wer e m ai nt ai ne d fo r th e ve ntur e; an d 8. whe th er the pa rti es ex erci se d m utua l co nt ro l o ve r an d a ss um ed m utua l re sp on si bi li ti es forth e en te rp ris e. See Lu nav. Co m

m is si on er, 4 2 T.C. 1 06 7, 1 07 7- 78 (19 64 ). The “ es se nt ia l qu es ti on is whet he r th e p art ie s i nt en de d t o, an d d idinfact , join to ge th er fo r th e pr es en t co nduc t o f anun de rta ki ng or e nt erp ris e.” Id . at 1 07 7 (c it in g- 7 -

[* 7] Co m m is si on er v . Cul be rts on , 33 7 U.S. 7 33 (19 49 )); see als o To wer, 3 27 U.S. at28 6- 87 ; So ut hg at e Ma st er Fu nd , L.L. C. ex rel . Mo nt go m ery Cap it al Adv is or s v . Uni te d S ta te s, 6 59 F.3d46 6, 4 88 (5t h C ir. 2 01 1) ; TIFD II I-E, In c. v. Un it edSta te s, 45 9 F .3d22 0, 2 31 -3 2 (2 d C ir. 2 00 6) . W e’ll l oo k a t ea chof t he se fact or s. Part ie s’ Agre em en t. We’ d e xp ectso m e k in d o f fo rm al ag reem en t wh entwo un rel at edbu si ne ss m enag ree t o jo in to ge th er i n ane w ent erp ris e. Bu t Azi mzad eh di dn ’t pro du ce ev id en ce o f an y writ te n p artne rs hi p a gr eem en t o r co nt ract fo rm al iz in g t he arra ng em en t b etweenhi m an d B arg hi , andhe to ldth e Co m m is si on er tha t n o wri tt enag reem en t ev er ex is te d. He al so di dn ’t tes ti fy to th e te rm s o f an y

ora l ag reem en t ab ou t h ow t he two wou lddi vv y th in gs up , or c al l Barg hi to do th e sa m e. Azim zad eh adm it te d t ha t Ba rg hi withd rew v arying su m s o f
m on ey at i rreg ul ar i nt erv al s, wh enhe ne ed edto bu y m or e car s o r pa y

hi s p ers on al
ex pe ns es , bu t d id n’t ex pl ai n h ow the y cal cu la te d the am ou ntof t ho se withd rawal s. Thi s fa ct or

weig hs ag ai ns t fi nd in g apa rtn ers hi p. Part ie s’ Con tri bu ti on to th e Ven tu re. Azi mzad eh tes ti fie d t ha t h e an d Barg hi eachco nt rib ut ed$1 00 ,00 0 t o t he ir v en tu re n ear t he en d o f 20 05 . This is n’t ba ck edup by his ba nkreco rd s- -St ev en s C reek ’s on ly ban k a cco un t h ada ba la nc e un de r $1 ,00 0 a t the en d o f 20 05 . He als o t es ti fie d t ha t Ba rg hi co nt rib ut edsev eral hu nd redth ou sa nddo ll ars ’ worthof c ars to th ei r ve ntur e. The c ar re cei pt s s ho w- 8 -

[* 8] th atLux ury

forLess pu rch as edov er $ 40 8,8 80 wort h o f car s t ha t St ev en s 3 Cree k l at er s ol d. Azi mzad ehtes ti fie d t ha t “ al l the cars an d p ro pe rty [were] the St ev en s C reekAut o C en te r’s,” b utth ere a ren ’t any tit le tra ns fer re co rd s fr om Lux ury forLess to Ste ve ns Cree k fo r an y of the cars . So we’re n otsu re wh ethe r th e car s wer e actua ll y

co nt rib ut edto th e v en tu re o r rem ai ne d Lu xu ry forLess ’s
se pa rat e p ro pe rty ona m ere c on si gn m en t t o S te ve ns Cree k. Be cau se th e ev id en ce is mix ed , th is fact oris ne ut ral
. Part ie s’ Con tro l Ov er In co m e an d C ap it al . Stev en s C reekha d o nl y on e ba nkacco un t, an d B arg hi was aut ho riz edto writ e ch eck s o n t hi s b an k a cco un t. Thro ug ho utth e y ear B arg hi si gn eda la rg e num be r of th e ch eck s wri tt enon th e acco un t, i nc lu di ng lar ge ch eck s wri tt ento hi m se lf o r to Lux ury forLess . This fact or weig hs infav orof f

in di ng a pa rtn ers hi p. Co pr op rie to rs Vers us Ano th er, No np artne r, Rel at io ns hi p. Azi mzad eh te st ifi edat d iff

eren t t im es th atBarg hi was a“ supp li er”, an d t ha t “ I own edth e
Azim zad eh tes ti fie d t ha t Lu xu ry forLess bo ug ht$4 00 ,71 5 wo rth of c ars 3 th atSte ve ns Cree k l at er s ol d. Th e rec or ds he pro vi de d d on ’t addup to th is am ou nt , bu t i t’s cl os e. W e h av e p ur ch as e rec or ds for 18 cars th atLux ury

forLess bo ug htfora to ta l o f m or e th an$4 41 ,55 0 (the re’s o ne car wi th ou t a p ric e, a 1 99 5 BMW). Andwe ha ve reco rd s t ha t s ho w th atSte ve ns Cree k u lt im at el y so ld16 of th os e car s, wh os e o rig in al pu rch as e p ric e ad de d up t o $ 40 8,8 80 . W e d on ’t kn ow wha t h ap pe ne d t o t he rem ai ni ng two cars . So we fi ndth atBarg hi co nt rib ut ed(or tra ns ferr edinso m e way ) car s wo rth m or e th an$4 08 ,88 0.- 9 -

[* 9] bu si ne ss ,” bu t tha t fo r m os t o f 20 06 Barg hi was a“pa rtn er”. If Azi mzad eh is to be be li ev ed , he a ndBarg hi de ci de d t o d o b us in es s t og ethe r be cau se Barg hi ha d a who le sa le li cen se to bu y

cars , andAzim zad eh ha d aret ai l l ic en se an d s to rag e sp ace fo r se ll in g c ars . Azimzad eh ve ry cle arl y sp el le d o utfor

us th atm any

of t he pa y m en ts to Barg hi were “ dr aws ”. He di d n ot , ho wev er, p ro du ce Ba rg hi to tes ti fy ab ou t the na tu re o f th e p aym en ts , or e xp la in why Barg hi co ul d n ottes ti fy . Andth e ev id en ti ary tra il of r ecei pt s an d c he ck s i n t he reco rdleave s o nl y th e m ud di es t o f tra ck s. Whil e m any

of t he ch eck s t o B arg hi ha ve “ DRAW ” wri tt eninth e n ot e co lu m n, the re’s n o e vi de nc e th atAzim zad eh reg ul arl y rece iv edm at ch in g “ dr aws ” fro m th e v en tu re’s fund s. An d we f in d n o re la ti on sh ip be twee n t he pa ym en ts m ad e to Barg hi an d t he pu rch as e p ric e, sa le pri ce, o r pr of it s m ad e o n t he Lux ury

forLess
cars inth e ch ao ti c st ackof p ur ch as e an d s al e d oc um en ts an d c he ck s t ha t Azim zad eh ga ve us . The p aym en ts to Barg hi are l it tl e b et te r th anran do m . W e can ’t tel l fr om

th e m on ey

tra il whet he r Bar gh i was a supp li er, a b ai lo r, ora pa rtn er. Azim zad eh tes ti fie d t ha t Ba rg hi rep orte d t he pro fit s fr om th ei r ve ntur e o n h is tax return, b utth ere’s n o e vi de nc e th atAzim zad eh or S te ve ns Cree k o r an y on e el se ev er i ss ue d B arg hi a K-1 , 10 99 , or aW -2 . The ev id en ce i s a m es s, an d Azim zad eh ’s tes ti m on y

th athe an d B arg hi were p artne rs is n’t en ou gh to fin d t hi s fact orto be inhi s favo r.- 10 -

[* 10 ] Whe th er Bu si ne ss W as Co nduc te d i n J oi ntNam es . Azimzad eh he ldBarg hi
ou t as a pa rtn er attri al , bu t h e d id n’t t es ti fy th atBarg hi rep res en te d h im se lf a s a pa rtn er t o c us to m ers or o th er b us in es se s. An d o nc e ag ai n, h e d id n’t p ro du ce Barg hi to tes ti fy . All o f th e sa le s re co rd s Azi mzad eh ha nd edov er l is t St ev en s Cree k, n otBarg hi or Lu xu ry forLess , as t he on ly sell er ev enwhen th e carwas or ig in al ly bou gh t b y

Lux ury forLess . This fact or

weig hs ag ai ns t fi nd in g a pa rtn ers hi p. Return F il in gs . As we’ve s ai d, Azi mzad eh di dn ’t gi ve Barg hi a K-1 , 10 99 , W -2 , or a ny oth er t ax form refl ect in g t he m on ey

pa idto hi m . Mor e te ll in gl y , Azim zad eh rep orte d a ll of S te ve ns Cree k’s i nc om e an d e xp en se s- -in cl ud in g t he
en ti re am ou ntpa idforth e Lux ury forLess cars --o n h is own tax return. Th is fact or weig hs ag ai ns t fi nd in g apartn ers hi p. Sep arat e Bo ok s. Keep in g a ny sort o f or de rly reco rd s fo r hi s b us in es s d oe sn ’t ap pe ar t o h av e b een Azim zad eh ’s stro ng su it , bu t h e d idn’t p ro du ce an y bo ok s o r acco un ti ng th atrefl ect edBarg hi ’s sep arat e in te res t i n t he ir v en ture. Tha t’s
so m ethi ng we’d ex pe ctto fin d i n a n a rm ’s-le ng th bu si ne ss de al , so th is fact or weig hs ag ai ns t fi nd in g apartn ers hi p. Mu tu al Co nt ro l an d R es po ns ib il it ie s. Azi mzad ehtes ti fie d t ha t St ev en s Cree k h ada joi ntacco un t o ve r whi ch Barg hi ha d e qu al co ntro l. The nu m ero us- 11 -

[* 11 ] ch eck s t ha t Barg hi si gn edco rro bo rat e th atst ory . Butth ere’s n o e vi de nc e o f wha t Ba rg hi ’s rol e was be y on d h is si gn atur e o n m any of the ch eck s an d afew o f th e sa le s re co rd s. Ov eral l, thi s fa ct oris ne ut ral
. Onl y on e Lun a fac to r wei gh s i n fa vo r of fin di ng a pa rtn ers hi p. Th e res t ar e ei th er n eu tra l o r wei gh ag ai ns t fi nd in g t ha t Azi mzad eh an d B arg hi joi ne d t og ethe r as pa rtn ers . Azimzad ehbe ars th e b ur de n o f pr ov in g t he Co m m is si on er’s de te rm in at io ns wron g, an d h e h as n’t m etithe re. W e fi ndth atno pa rtn ers hi p ex is te d. II. Gro ss Rece ip ts The Co m m is si on er cl ai m s t ha t Azi mzad eh un de rrep orte d h is in co m e an d h e us eda ba nk -d ep os it s an al y si s t o re co ns tru ctAzim zad eh ’s gro ss rece ip ts for20 06
-- a m etho d l on g app ro ve d b y ou r Co urt. See Fact orv. Co m m is si on er, 2 81 F.2d10 0, 11 4- 16 (9t h C ir. 1 96 0) , aff’g T.C. Mem o. 1 95 8- 94 ; Di Leo v. Co m m is si on er, 9 6 T.C. 85 8, 8 67 (19 91 ), aff’d, 9 59 F.2d16 (2dCir . 19 92 ). Thi s k in d o f an al y si s b eg in s wi th a li stof d ep os it s i nt o aba nkacco un t. The Co m mis si on er i sn ’t requi redto sh ow t ha t ea ch de po si t i s i nc om e, Gem m a v . Co m mis si on er, 4 6 T.C. 8 21 , 83 3 (1 96 6) , or t ha t i t ca m e fro m a pa rti cu la r, orev en pr ob ab le , so ur ce, Cl ayto n v . Comm is si on er, 1 02 T.C. 63 2, 6 45 (19 94 ). Bu t h e m us t, as he di d i n thi s ca se , subt ractfro m th e to ta l d ep os it edan y

in co m e th atth e- 12 -

[* 12 ] ta xp ay er re po rte d a ndany no nt ax ab le it em s (e .g., l oa ns or g ift s) to de te rm in e un rep orte d i nc om e. See Di Leo , 96 T.C. at 8 68 . Unex pl ai ne d b an k d ep os it s ar e pr ima fa ci e ev id en ce o f in co m e whe re a t ax pay er h as fai le d t o m ai nt ai n a de qu at e reco rd s. To ka rs ki v. Co m m is si on er, 8 7 T.C. 7 4, 7 7 (1 98 6) . It’s th e ta xp ay er’s bu rd ento sh ow t ha t the Co m m is si on er’s b an k- de po si ts an al y si s i sn ’t rig ht --fo r ex am pl e, by pro vi ng th ata pa rti cu la r de po si t ca m e fro m a no nt ax ab le so ur ce. Ru le 14 2( a); Cla yto n, 1 02 T.C. at 6 45
. The Co m m is si on er’s rev enue ag en t ad de d up a ll of S te ve ns Cree k’s d ep os it s m ad e b y ch eck , wire t ran sf

er, an d c as h. He ex cl ud edan y no nt ax ab le de po si ts --fo r ex am pl e, ch eck s p ay ab le to Azim zad eh in di vi du al ly. He di dn ’t exc lu de an y cas h withd rawal s, b utAzim zad eh ha sn ’t arg ue d t ha t the cas h d ep os it s an d wi th dr awal s were a c irc ul ar fl ow o f cas h, an d i t’s Azi mzad eh who ’d be ar the bu rd enof p ro of on th atpo in t. See Ru le 14 2( a); Mac Greg orv. Co m mis si on er, T.C. Mem o. 2 01 0- 18 7, 20 10 W L 33 22 50 9, at*1 1. We th us fin d t ha t the rev enue ag en t’s b an k- de po si ts
an al y si s ac cu rat el y

refl ect edAzimzad eh ’s gro ss rece ip ts , andsu st ai n t he Co m mis si on er’s d et erm in at io n t ha t Azi mzad eh un de rrep orte d h is gro ss rece ip ts . III. Co stof Go od s So ld Co stof g oo ds so ldis subt ract edfro m gro ss rece ip ts to co m

pu te gro ss bu si ne ss in co m e. Sec. 1 .61 -3 (a), In co m e Tax Reg s. Itis no t a d educ ti on , andso- 13 -

[* 13 ] is n’t s ub

ject t o t he li m it s o n d educ ti on s i n s ect io n 1 62 , Metra Ch em . Cor p. v . Co m mis si on er, 8 8 T.C. 6 54 , 66 1 (1 98 7) , bu t an y am ou ntcla im edas c os t o f go od s so ldst il l h as to be subs ta nt ia te d, Ki ng v. Co m m is si on er, T.C. Mem o. 1 99 4- 31 8, 19 94 W L 33 06 13 , at * 2, af f’d wit ho utpubl is he d o pi ni on , 69 F.3d54 4 (9 th Cir
. 19 95 ). The n ot ic e o f de fic ie nc y di sa ll owe d a ll $1 ,02 3,8 25 inco stof g oo ds so ld th atAzim zad eh rep orte d o n h is return b ecau se he di dn ’t subs ta nt ia te th os e ex pe ns es . At tri al th e Co m m is si on er al lo wed$3 50 ,61 0.5 7 fo r th e co stof 2 1 o f th e cars th atAzim zad ehpro ve d h e h adso ldin20 06
. One co m m on way of c om pu ti ng co stof g oo ds so ldis to st artwith i nv en to ry atth e b eg in ni ng of t he y ear, ad d any new p ur ch as es durin g t he y ear, an d s ub tra ct
an y in ve nt ory

rem ai ni ng at t he en d o f th e y ear. Se e se c. 1.1 62 -1 (a), In co m e Tax Reg s. Th at ’s whatAzimzad ehdi d o n h is tax return t o a rri ve at $ 1,0 23 ,82 5- -h e rep orte d ast art in g i nv en to ry of $ 13 ,30 0, ad de d p ur ch as es an d o th er co st s dur in g 20 06 of $ 1,0 45 ,82 5, an d s ub tra ct edclo si ng in ve nt ory of $ 35 ,30 0. Th ere are pr ob le m s wi th th es e num be rs . Azimzad eh ga ve us ev id en ce tha t h e sp en t o ve r $1
m il li on acqui rin g n ew cars du rin g 2 00 6. Bu t we ca n’t v eri fy hi s b eg in ni ng an d
en di ng in ve nt ory

fig ur es . This ledth e Co m m is si on er t o a rg ue at t ria l tha t Azim zad eh sh ou ldbe all owe d t o c la im on ly the co stof t he cars th athe canpro ve he so ldin20 06 . Azimzad eh ob jecte d b ecau se he cla im s t he Co m m is si on er as ke d- 14 -

[* 14 ] hi m forsal es reco rd s o nl y

forth e Lux ury

forLess cars , no t fo r al l the cars th athe so ldin20 06 . Buton e o f th e Co m m is si on er’s p aral eg al s, wh o h adatt en de d al l o f th e Bra ne rto n c on fere nc es , cred ib ly test ifi edth atIRS at to rn ey s t ol d 4 Azim zad eh ve ry

cle arl y to pro vi de “ al l d oc um en ts ” rel at in g t o h is bu si ne ss in20 06 , aton e p oi ntev enwrit in g “ ‘all d oc um en ts ’ in pre tt y bi g wri ti ng .” AndAzim zad eh di d p ro vi de m an y

reco rd s u nr el at edto Lux ury forLess cars , justno t al l o f th em . W e were l eftwith n o 2 00 6 s al es reco rd s fo r ov er $ 60 0,0 00 wort h o f th os e car s. Tha t n um be r jus t d oe sn ’t fitwith t he $3 5,3 00 en di ng in ve nt ory he rep orte d o n h is ta x re tu rn . Tax pa y ers ge ne ral ly hav e b ro adlat itud e in sel ect in g the ir m etho d o f
acco un ti ng , bu t “ [n ]o m etho d o f acc ou nt in g i s ac cep tabl e u nl es s, i n the op in io n o f th e Co m m is si on er, i t cl earl y

refl ect s i nc om e.” See sec . 1.4 46 -1 (c)( 1) (ii )(C) , In co m e Tax Reg s. Giv enAzim zad eh ’s ban ge d- up cred ib il it y , see in fra n ot e 6 , and th e sp ars en es s o f hi s i nv en to ry reco rd s, we ag ree wi th th e Co m m is si on er’s d eci si on to requi re p ro of

th ata car was so ldin20 06 be fo re al lo win g i t as co stof g oo ds so ld
. W e’ll a ll ow ad di ti on al car p ur ch as es --b es id es th e 2 1 c ars th atth e Co m m is si on er
Our ru le s en co ur ag e th e p art ie s t o m ak e rea so nabl e in fo rm al effo rts to 4 ex ch an ge fact s, d oc um en ts , andot he r da tato en co ur ag e m or e ex pe di en t tria ls an d to en co ur ag e se tt le m en t. See Ru le 70 (a)( 1) ; Br an ert on Co rp . v. Co m m is si on er, 6 1 T.C. 69 1, 6 92 (19 74 ).- 15 -

[* 15 ] al read y

co nc ed ed --o nl y

wher e Azi mzad eh ha s ad equa te ly sub st an ti at edth at he (1) actua ll y

pu rch as edth e car , and(2) th atth e carwas s ol d i n 2 00 6. Hi s en di ng in ve nt ory nu m be r is jus t t oo sm al l t o d o o th erwi se . Mo stof t he cars th atAzim zad eh pu rch as eddo n’t s at is fy th atsec on d requi rem en t-- whi le we ha ve a cred ib le , leg ib le reco rdth atSte ve ns Cree k b ou gh t th e car , th ere’s n o c orres po nd in g p ro of th atitso ldth e carin20 06 (orany ot he r ti m e). The Co m

mis si on er as ke d Azi mzad eh forsal es reco rd s m an y ti m es , and Azim zad eh pro m is edth em to us , to o. Bu t we s ti ll do n’t h av e th em , so th es e car s are d is al lo wed :
Date pu rch as ed Pu rch as er Pu rch as e p ric e Lastfiv e d ig it s o f VIN 11 /1 7/ 20 05 SCAC $8 ,20 0.0 0 19 14 8 1/ 4/ 20 06 SCAC 18 ,00 0.0 0 55 79 0 1/ 4/ 20 06 SCAC 2,7 50 .00 40 60 8 1/ 13 /2 00 6 SCAC 10 ,25 0.0 0 00 60 9 1/ 18 /2 00 6 SCAC 3,5 00 .00 17 39 0 1/ 18 /2 00 6 SCAC 1,6 00 .00 07 28 5 1/ 24 /2 00 6 SCAC 20 0.0 0 01 96 1 1/ 26 /2 00 6 SCAC 5,3 00 .00 60 33 6 2/ 2/ 20 06 SCAC 60 0.0 0 76 29 8 2/ 8/ 20 06 SCAC 74 5.0 0 06 29 8- 16 -

[* 16 ] 2/ 22 /2 00 6 SCAC 7,3 00 .00 77 52 6 3/ 2/ 20 06 SCAC 11 ,27 5.0 0 18 44 2 3/ 2/ 20 06 SCAC 11 ,02 5.0 0 62 80 8 3/ 6/ 20 06 SCAC 14 ,70 0.0 0 64 75 0 3/2 1/ 20 06 SCAC 1,9 70 .00 96 36 6 3/2 9/ 20 06 SCAC 7,5 00 .00 02 23 2 5/ 3/ 20 06 SCAC 10 ,20 0.0 0 24 84 7 5/1 0/ 20 06 SCAC 3,1 00 .00 61 52 4 5/1 7/ 20 06 SCAC 12 ,19 0.0 0 16 25 4 5/2 2/ 20 06 SCAC 14 ,93 5.3 6 01 15 5 6/ 4/ 20 06 SCAC 17 ,70 0.0 0 01 81 0 6/ 8/ 20 06 SCAC 25 ,75 0.0 0 90 74 6 6/1 4/ 20 06 SCAC 17 ,91 0.0 0 04 30 6 6/2 8/ 20 06 SCAC 4,7 00 .00 81 42 2 7/ 6/ 20 06 SCAC 27 ,00 0.0 0 00 53 3 7/1 5/ 20 06 SCAC 10 ,50 0.0 0 29 95 7 8/ 3/ 20 06 SCAC 16 ,00 0.0 0 80 52 6 8/ 3/ 20 06 SCAC 11 ,75 0.0 0 01 80 4 8/ 3/ 20 06 SCAC 14 ,50 0.0 0 81 39 6 8/ 7/ 20 06 SCAC 14 ,75 0.0 0 37 82 6 8/1 6/ 20 06 SCAC 5,4 50 .00 81 00 6 8/3 1/ 20 06 SCAC 9,2 50 .00 00 62 0 9/2 8/ 20 06 SCAC 13 ,60 0.0 0 70 69 3 9/2 8/ 20 06 SCAC 27 ,00 0.0 0 09 31 3- 17 -

[* 17 ] 9/ 28 /2 00 6 SCAC 22 ,50 0.0 0 98 79 7 10/ 6/ 20 06 SCAC 2,4 59 .00 26 33 4 10 /1 1/ 20 06 SCAC 2,6 00 .00 11 59 7 10 /1 1/ 20 06 SCAC 3,8 00 .00 09 51 6 10 /1 2/ 20 06 SCAC 12 ,02 5.0 0 48 69 5 10 /1 2/ 20 06 SCAC 12 ,47 5.0 0 28 14 9 10 /1 7/ 20 06 SCAC 16 ,70 0.0 0 15 19 6 10 /2 0/ 20 06 SCAC 6,5 00 .00 61 16 7 11/ 8/ 20 06 SCAC 4,5 00 .00 96 51 4 11/ 8/ 20 06 SCAC 5,3 00 .00 83 08 5 11 /1 6/ 20 06 SCAC 7,4 00 .00 91 06 9 11 /1 6/ 20 06 SCAC 66 00 .00 85 61 8 11 /1 6/ 20 06 SCAC 13 ,00 0.0 0 06 64 3 12/ 7/ 20 06 SCAC 13 ,07 5.0 0 49 24 9 12/ 7/ 20 06 SCAC 15 ,02 5.0 0 58 47 7 12 /3 0/ 20 06 SCAC 13 ,47 0.0 0 53 79 6 12 /3 0/ 20 06 SCAC 14 ,25 0.0 0 58 34 2 Azim zad ehals o g av e u s d oc um en ts th atwere n oten ti rel y leg ib le to sh ow h e bo ug hta few o th er ca rs --o n s om e we can ’t readth e car ’s VIN, andon so m e we can ’t readth e am ou nthe bo ug htitfor . There ’s no co rres po nd in g p ro of th athe so ld th es e car s i n 2 00 6, ei th er. Eve n i f th ere was , we cou ld n’t m at chth em up or p ic k a n am ou ntto all ow. The se cars are d is al lo wedas c os ts of g oo ds so ld :- 18 -

[* 18 ] Date pu rch as ed Pu rch as er Pu rch as e p ric e Lastfiv e di gi ts of VIN Mo de l 3/ 21 /2 00 6 SCAC $1 9,3 29 .70 Unkno wn 20 05 Mi ni 7/ 26 /2 00 6 SCAC 27 ,79 4.2 1 Unkno wn 20 02 Merc ed es 8/ 30 /2 00 6 SCAC 29 ,10 3.4 6 Unkno wn 20 02 Merc ed es 9/ 28 /2 00 6 SCAC 27 ,38 5.2 0 Unkno wn 20 03 Merc ed es Unkno wn SCAC Unkno wn Unkno wn Unkno wn A few ot he r car s p res en t a t ou gh er que st io n o f subs ta nt ia ti on , bec au se th e pu rch as e d oc um en ts sh ow tha t Lu xu ry forLess , no t St ev en s C reek , bo ug htth em . Azim zad eh ga ve us ch eck s fr om Ste ve ns Cree k p ay ab le to Lux ury forLess th at refe ren cedin di vi du al , id en ti fiabl e car s i n t he m em o l in es . Tho se cars are ea sy, and th e Co m m is si on er al lo wedth em . The que st io n i s wh atto do with t he ot he r car s- - on es wher e th ere’s n o c orres po nd in g p aym en t fr om Ste ve ns Cree k t o Lu xu ry for Less sp eci fic al ly ide nt ifyin g t ha t ca r. W e h av e ch eck s s ho win g t ha t St ev en s C reek pa idLux ury

forLess or B arg hi a to ta l o f $3 96 ,10 3.1 7. Th e Co m m is si on er’s al read y all owe d $ 25 4,4 40 of t ha t am ou ntfor 11 cars . Butth atlea ve s $ 14 1,6 63 .17 of th os e p aym en ts th atth e Co m m is si on er h as n’t al lo wedbe cau se th ey weren ’t tra ceab le to an y

pa rti cu la r Lux ury

forLess car. We als o h av e rec or ds th atsh ow- 19 -

[* 19 ] th atLux ury

forLess was t he so ur ce o f ab ou t $ 40 8,8 80 wort h o f car s t ha t St ev en s C reekso ldin20 06 --an d t he Co m m is si on er ac co un te d fo r $2 54 ,44 0 o f th es e, whi ch lea ve s $ 15 4,4 40 to m ak e se ns e o f. W e can tak e o urbe stgu es s atth e 5
am ou ntof a n a dd it io na l ex pe ns e whe n t he re’s en ou ghev id en ce i n the reco rdforus to co nc lu de th atth e ta xp ay er i nc urredex pe ns es inat l eas t the am ou ntall owe d, b ut whe re the ex actam ou ntab ov e th atis n’t cl ear. Se e Will ia m s v . Uni te d S ta te s, 2 45 F.2 d 5 59 , 56 0 (5 th Cir . 19 57 ); C oh anv. Co m m is si on er, 3 9 F .2d54 0, 5 43 -4 4 (2 d Ci r. 19 30 ). W e’re als o a ll owe d t o m ak e th atest im at e b eari ng he av il y ag ai ns t a ta xp ay er wh os e b adreco rd s ar e h is own fau lt . See Co han, 3 9 F .2dat 5 44
. Altho ug h we c an ’t ti e $ 14 1,6 63 .17 of t he pa ym en ts to Barg hi or Lu xu ry forLess to sp eci fic cars , we fin d i t m or e li ke ly tha n n otth atm os t o f th os e p aym en ts were i n ex ch an ge forth e $ 15 4,4 40 wort h o f Lux ury forLess cars th atare s ti ll un acco un te d fo r. Some of th e ch eck s wri tt ento Barg hi or Lu xu ry forLess were en ti rel y

or pa rti al ly for o th er ex pe ns es --the no te s t he m se lv es eit he r say so or Az im zad eh cl eare d t ha t up fo r us at t ria l. Tho se were:

• $3 ,81 0.1 7 fo r “ Ret ern[si c] Loan ”;

• $5 50 rei m

bu rs em en t fo r a b on d a ndli cen se fee;
Plu s t he va lu e o f a 1 99 5 B MW, butwe can ’t readwhatLux ury forLess 5 pa idforit
.- 20 -

[* 20 ] • $9 00 rei m

bu rs em en t fo r tr av el ex pe ns es ;

• $7 40 rei m

bu rs em en t fo r adve rti si ng ex pe ns es ;

• $5 0 re im

bu rs em en t fo r a b an k fe e;

• $4 85 rei m

bu rs em en t fo r ren t;

• $2 80 rei m

bu rs em en t fo r a car

rep ai r ex pe ns e; an d

• $2 ,30 0 re im

bu rs em en t fo r pe rm itfees
. Tha t ad ds up to $9 ,11 5.1 7 t ha t Azi mzad eh pa idLux ury forLess or B arg hi th atwasn ’t forcars . Thatlea ve s u s wi th $1 32 ,54 8 i n u ne xp la in edpa ym en ts fro m St ev en s C reekto Lux ury

forLess or B arg hi , andwe fin d t ha t tho se pa ym en ts were in ex ch an ge forth e rem ai ni ng Lux ury forLess cars . There fo re, we al lo w an ad di ti on al $1 32 ,54 8 a s co stof g oo ds so ld
. W e d idfin d re co rd s fo r two cars th atth e Co m m is si on er m is se d- -Azi mzad eh pr ov id edcred ib le , leg ib le reco rd s s ho win g t ha t St ev en s C reekbo ug htth e car s, an d we fo un d m at ch in g re co rd s s ho win g t ha t i t s ol d t he se same cars dur in g 2 00 6. We al lo w an a dd it io na l $ 31 ,40 0 i n c os t o f go od s s ol d fo r th es e car s:
Date purch as ed Date so ld Pu rch as er Pu rch as e pr ic e Lastfiv e d ig it s

of VIN 3/ 13 /2 00 6 5/ 2/ 20 06 SCAC $1 3,0 00 28 54 5 5/ 24 /2 00 6 5/ 27 /2 00 6 SCAC 18 ,40 0 21 87 4- 21 -

[* 21 ] IV. Oth er Ex pe ns es Sect io n 1 62 all ows a de du ct io n fo r al l o rd in ary an d n eces sa ry bu si ne ss ex pe ns es pa idor i nc urreddu rin g t he tax ab le y ear i n c arrying on an y tra de or bu si ne ss . Whe th er an ex pe ns e is ord in ary an d n eces sa ry is ge ne ral ly a qu es ti on of fact . Comm is si on er v . Hein in ge r, 32 0 U.S. 4 67 , 47 5 (1 94 3) . To be “ ne ces sa ry ”, an
ex pe ns e m

us t b e “ ap pr op ria te an d h el pf ul ” to th e ta xp ay er’s b us in es s. Welch v. Helv eri ng , 29 0 U.S. 1 11 , 11 3 (1 93 3) . For a n e xp en se to be “ or di na ry ”, “ th e tra ns act io n wh ic h g iv es ris e to itm us t b e o f co m

m on or f reque ntoc cu rren ce i n t he type o f bu si ne ss in vo lv ed .” Depu ty v. duPo nt , 30 8 U.S. 4 88 , 49 5 (1 94 0) (ci ti ng W el ch , 29 0 U.S. at11 4) . The Co de do es no t al lo w deduc ti on s fo r pe rs on al , li vi ng , an d fa m il y

ex pe ns es . Sec. 2 62 (a); sec . 1.2 62 -1 (a), In co m e Tax Reg s. Tax pa y ers are r equi redto m ai nt ai n re co rd s s uf fic ie ntto est ab li sh th e am ou nt s o f al lo wab le de du ct io ns an d t o e nabl e th e Co m m is si on er t o d et erm in e th e co rrec t t ax li ab il it y . Sec. 6 00 1; sec . 1.6 00 1- 1( a), In co m e Tax Reg s.; Sh ea v . Comm is si on er, 1 12 T.C. 18 3, 1 86 (19 99 ). In g en eral , tax pa y ers m us t s ub st an ti at e d educ ti on s wi th ev id en ce li ke in vo ic es or r ecei pt s t ha t es tabl is h t ha t the ex pe ns es were ac tu al ly inc urredan d th e b us in es s p ur

po se forth os e ex pe ns es . See Ly se ng v. Co m m is si on er, T.C. Mem o. 2 01 1- 22 6, 2 01 1 WL 43 89 64 4, at*3
.- 22 -

[* 22 ] Azim zad eh rep orte d $ 10 8,7 67 in“ Oth er Ex pe ns es ” o n S ch edul e C o f hi s t ax return. Th e Co m

m is si on er i ni ti al ly dis al lo wedall of i t, b utth enall owe d a ll of i t
an d the n s om e--$ 12 7,7 78 . Thatwou ld ’ve se tt le d t hi s p oi nt , bu t Azi mzad eh ga ve us ad di ti on al do cu m en ts purp orti ng to subs ta nt ia te ev enm or e ex pe ns es . The Co m m is si on er d id n’t ar gu e th atAzim zad eh sh ou ldbe requi redto cap it al iz e h is di rectan d i nd ire ctex pe ns es --fo r ex am pl e, m on ey

he sp en t o n cl ean in g c ars or h is ut il it y co st s- -in to hi s i nv en to ry co st s. Sm al l b us in es se s wi th gr os s re cei pt s u nd er $ 10 mil li on av erag edov er thr ee years d on ’t hav e to do th at . See s ec. 2 63 A(b )(2 )(B) . So i f Azi mzad eh subs ta nt ia te s the se ex pe ns es , he c an de du ctth em

forth e y ear h e p ai d o r in cu rredth em . W e tu rnto th os e n ow. So m e o f th e ad di ti on al ex pe ns es th atAzim zad eh cla im s ar e eas y to di sp os e of be cau se th ey

aren ’t fro m

20 06 : i nv oi ces or c he ck s cl earl y da te d 2 00 5; in vo ic es th atare u nd at ed ; an d, wo rs e, pa ge s upo n p ag es of i nv oi ces wher e Azi mzad eh fo rg edth e d at e b y

ch an gi ng th e 5 in20 05 to lo okli ke a 6. 6 Azim zad ehals o g av e u s s om e in vo ic es fro m car- rep ai r sh op s o r sh ip pe rs th at atlea stap pe ar t o b e fro m 20 06 . But , hav in g d en te d h is cred ib il it y with t he
Azimzad ehactua ll y

adm it te d a t tria l tha t h e h adch an ge d t he da te s o n 6 nu m ero us rece ip ts th athe ha d g iv ento th e Co m mis si on er. W e fi ndth is adm is si on cred ib le , andit s n atur al effe ctis to reduc e th e wei gh t we g iv e h is tes ti m on y on th is an d o th er i ss ue s.- 23 -

[* 23 ] do ct or edin vo ic es , we’ ll all ow o nl y th os e in vo ic es wher e th e d at e is in de pe nd en tl y

ve rif iabl e. Ther e are a few i nv oi ces forworkdo ne on cars forwhi ch we ha ve pro of

of t he ir p res en ce o n S te ve ns Cree k’s l otin20 06 . Tho se are:

• In vo ic e fro m

Cal i To uc h- Up Se rv ic e, da te d J anua ry 31 , 20 06 , for $1 ,20 0;

• In vo ic e fro m

Cal i To uc h- Up Se rv ic e, da te d Au gu st31 , 20 06 , for $8 00 ;

• In vo ic e fro m

Mr. “ TINT” Inc ., dat edAug us t 7 , 20 06 , for $4 00 ;

• In vo ic e fro m

Qual it y Sm og Cen te r, da te d F eb ru ary 18 , 20 06 , for $2 ,07 5;

• In vo ic e fro m

Sunn yva le Vale ro , dat edJune 9, 2 00 6, fo r $4 ,23 3.7 5;

• In vo ic e fro m

Sunn yva le Vale ro , dat edJune 15 , 20 06 , for$1 ,34 0;

• In vo ic e fro m

Co urte sy Auto Tran sp ort, d at edMarc h 2 , 20 06 , for $5 ,60 0. W e al lo w th e ab ov e am ou nt s as ex pe ns es forcar re pa irs an d s hi pp in g fe es . W e d is al lo w th e rem ai ni ng car re pa ir o r sh ip pi ng expe ns es . W e fi ndth atAzim zad eh ha s ad equa te ly sub st an ti at eda few o th er m is cel la ne ou s ex pe ns es :

• $5 4 p ai d t o B .C.A.A. for “ au ct io n fe es ” o n J ul y 5, 2 00 6. We hav e reco rd s t ha t s ho w th atSte ve ns Cree k b ou gh t s ev eral cars fro m B.C.A.A.- 24 -

[* 24 ] • $5 00 pa idto SanJo se Merc ury News o n J anua ry

18 , 20 06
. Azim zad ehtes ti fie d t ha t St ev en s C reekadve rti se d wi th th e Me rcu ry News.

• $5 00 pa idto SanJo se Merc ury News o n No ve m

be r 16 , 20 06
.

• $3 20 pa idto Ro sa li o R am ire z o n Ap ril 18 , 20 06 . The ch eckno te s t ha t it ’s forde ta il in g c ars , andwe fo un d i nv oi ces fro m Ram ire z in th e reco rdth atco nf

irm th atst ory .

• $1 20 pa idto Ro sa li o R am ire z o n M ay 8, 2 00 6.

• $3 60 pa idto Ro sa li o R am ire z o n S ep te m be r 13 , 20 06
.

• $1 2,8 50 pa idto Pay am Azim zad ehbe twee n J anua ry 5, 2 00 6, an d Sep te m be r 28 , 20 06 , in36 sep arat e p aym en ts . Azimzad eh tes ti fie d th atPay am

is hi s n ep he w andwork edat S te ve ns Cree k. We hav e nu m ero us bu si ne ss reco rd s wi th Pay am ’s nam e o n t he m , so we fin d th attes ti m on y

cred ib le
. W e al so ha ve to fig ur e o utho w to tre atth e $ 9,1 15 .17 th atAzim zad eh pa idto Barg hi or Lu xu ry

forLess as r ei m

bu rs em en t o f hi s ex pe ns es . See s up ra p . 20 . W e fin d t ho se am ou nt s t o b e d educ ti bl e, ex cep t fo r th e $ 3,8 10 .17 pa ym en t n ot ed

“ Ret ernLoan ” an d t he $9 00 rei m bu rs em en t fo r tr av el expe ns es . W e d is al lo w th e $ 3,8 10 .17 pa ym en t b ecau se th ere’s n o d educ ti on for rep aym en ts of l oa n p rin ci pa l. See Gran ge r v. C omm is si on er, T.C. Mem o. 1 97 8- 47 4, 1 97 8 Tax Ct. M em o LEXIS 3 9, at*8 , aff’d witho utpubl is he d o pi ni on , 61 8 F.2 d 9 8 (4 th Cir . 19 80 ); P hi ll ip s v . Comm is si on er, T.C. Mem o. 1 97 2- 21 , 19 72 Tax- 25 -

[* 25 ] Ct. M em o LEXIS 2 35 , at * 4. In te res t p ai d i s d educ ti bl e, se c. 16 3, b ut Azim zad eh di dn ’t sh ow t ha t an y pa rt o f th e p aym en t was forin te res t. Sect io n 2 74 (d ) al so im

po se s s tri ct er s ub st an ti at io n re qu ire m en ts fortrave l
ex pe ns es . A tax pa y er h as to sh ow, wi th reco rd s o r wit h s uf fic ie ntreco rd s co rro bo rat in g t he tax pa y er’s o wn t es ti m on y : (1 ) th e am ou ntof t he ex pe ns e o r ot he r it em ; (2 ) th e ti m e an d p la ce o f tr av el ; an d (3 ) th e b us in es s p ur po se of t he
ex pe ns e o r ot he r it em . Sec. 2 74 (d ); s ec. 1 .27 4- 5T(c ), Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4 (No v. 6 , 19 85 ). Azim zad eh tes ti fie d t ha t n ei th er h e n or Barg hi ke pta lo g o f hi s t rav el ex pe ns es , so we di sa ll ow t he $9 00 rei m bu rs em en t. Fi na ll y , we di sa ll ow an y

ex pe ns e whe re we ca n’t t el l h ow m uc h Azi mzad eh pa id , when he pa idit , or wh atit s b us in es s p ur po se was. Th e ab se nc e o f an y of th os e it em s i s fa ta l. Azi mzad eh ’s rem ai ni ng reco rd s l ackon e o r al l o f th os e v it al bi ts of i nf orm at io n. He h as n’t ad equa te ly sub st an ti at edth e ch eck s wri tt ento hi m se lf, G.D.R.R. Par is , Hon da s On ly, Karen Naeg el i, PG& E, th e San Jo se W at er Co m pany, andCap it al One. An d t he il le gi bl e d oc um en ts th athe subm it te d l ack
an y in fo rm at io n o n wh ic h we c ou ldfin d a n e xp en se . V. Sche du le E Loss Azim zad ehren te d aho us e to on e te na ntin20 06 an d c la im eda $9 ,28 3 l os s on a Sch edul e E, Sup pl em en ta l In co m e an d Lo ss , att ach edto hi s Fo rm 10 40 . The- 26 -

[* 26 ] Co m

m is si on er d is al lo wedth e lo ss init s en ti rety be cau se he says Azi mzad eh ha sn ’t pro ve n t ha t ei th er h e o r hi s wi fe was a real -es ta te pro fes si on al or m at eri al ly pa rti ci pa te d i n t he ren ta l ac ti vi ty in 2 00 6. The Co de all ows tax pa y ers to de du ctm os t b us in es s- rel at edan d p ro fit
se ek in g e xp en se s u nd er s ect io ns 16 2 a nd21 2, b utsec ti on 46 9 l im it s t he se de du ct io ns when th ey

ari se fro m

“pa ss iv e act iv it ie s.” Pa ss iv e act iv it ie s i nc lu de bo th (1) tra de or b us in es s ac ti vi ti es wher e th e ta xp ay er d oe sn ’t m at eri al ly pa rti ci pa te , and(2) ren ta l ac ti vi ti es . Sec. 4 69 (c)( 1) an d (2 ). Sect io n 4 69 do es n’t tre atren ta l ac ti vi ti es as p as si ve , ho wev er, i f th e ta xp ay er d ev ot es at l eas t 7 50 ho ur s an d m or e th anha lf o f hi s wo rk in g h ou rs to real -es ta te bu si ne ss es . Sec. 4 69 (c)( 7)
. Azim zad ehha sn ’t sh own th athe or h is wife fitwithi n t he ex cep ti on . He te st ifi edon ly tha t h e d ida few rep ai r job s i n the ap art m en t-- he ch an ge d t he carp et , an d fi xe d s om e p lu m

bi ng an d h eat in g p ro bl em s. Bu t tha t d oe sn ’t addup to en ou gh act iv it y to m ak e th e ren ta l i nc om e n onpa ss iv e. Sect io n 4 69 (i) all ows a m ax im um $2 5,0 00 de du ct io n fo r pa ss iv e act iv it y lo ss es co nn ect edwith re al est at e. It re qu ire s o nl y “ act iv e p art ic ip at io n,” whi ch is a m uc h l owe r ba r th an“ m at eri al parti ci pa ti on .” See M ad le r v. C ommis si on er, T.C. Mem o. 1 99 8- 11 2, 1 99 8 WL 11 80 75 , at * 3. Th e p ro bl em forAzim zad eh is th atth e de du ct io n b eg in s t o p ha se ou t o nc e a t axpay er’s m od ifi edad jus te d g ro ss in co m e- 27 -

[* 27 ] (i.e ., adju st edgro ss in co m e co m pu te d wi th ou t re ga rdto cla im edlo ss es ) is ab ov e $ 10 0,0 00 , andco m pl et el y ph as es ou t b y

$1 50 ,00 0. Se e se c. 46 9( i)( 3) (A). Ourot he r fi nd in gs on Azimzad eh ’s wage in co m e, gr os s b us in es s re cei pt s, co st s o f go od s s ol d, an d b us in es s ex pe ns es rai se hi s ad jus te d g ro ss in co m e b y

m or e th an $6 50 ,00 0. We thus su st ai n t he Co m m is si on er’s d et erm in at io n t o d is al lo w th at $9 ,28 3 o f Sch edul e E lo ss es forth e 2 00 6 t ax y ear. VI. Int eres t Two thi rd -p arty

pa y or s re po rte d t o t he Co m m is si on er $ 16 an d $ 33 of i nt eres t in co m e th atwas n otrefl ect edon Azim zad eh ’s tax return. Attri al , Azimzad eh ackno wled ge d t ha t h e rec ei ve d t hi s $ 49 of i nt eres t i nc om e, bu t s ai d h e d id n’t kno w whe re i t ca m e fro m . W e th eref or e su st ai n t he Co m

m is si on er’s d et erm in at io n. VII. Sh ort-Te rm

Gain Ehs an ’s form er em

pl oyer rep orte d t ha t s he ha d re cei ve d a$3 ,65 1 s ho rt- te rm cap it al ga in . Azimzad eh tes ti fie d t ha t thi s i nc om e was fro m a st oc k o pt io n t ha t h is wife ha d o wne d fo r a l on g t im e, an d t ha t s he ha d d ep os it edin to hi s b ro ke rag e acco un t. He d idno t, h owe ve r, pr ov id e an y ev id en ce o f hi s wi fe’s b as is or h ol di ng pe rio d i n t he op ti on . W e th us su st ai n t he Co m m is si on er’s d et erm in at io n.- 28 -

[* 28 ] VIII. W ag e In co m e an d Withh ol di ng The co up le als o re po rte d $ 7,0 45 inwage in co m e an d $ 62 4 i n fe de ral in co m e-t ax withh ol di ng fro m Ehs an ’s job as am ak eup a rti stat C hr is ti anDio r. Azim zad eh tes ti fie d t ha t the y rece iv eda W -2 fro m

Ch ris ti anDio r, whi ch is why th ey rep orte d t ho se wage s o n t he ir t ax return, b utdi dn ’t getW -2 s fr om any ot he r em pl oyer. The Co m

m is si on er ad

jus te d t he ir wa ge in co m e upwa rdby $15 ,67 1 a nd th ei r fed eral in co m e ta x wi th ho ld in g upwa rdby $24 9 u si ng in fo rm at io n p ro vi de d by thi rdpa rti es . Tho se nu m be rs bre akdo wn as fol lo ws:

• Barr et t Bu si ne ss Serv ic es , Inc ., rep orte d $ 8,6 83 inwage s an d $ 16 8 i n fed eral in co m e ta x wi th ho ld in g fo r Ehs an ;

• Ran ds ta d Em

pl . Sol ut io ns L.P. repo rte d $ 2,1 91 inwage s an d $ 81 in fed eral in co m e ta x wi th ho ld in g fo r Ehs an ;

• Xan go LLC rep orte d $ 77 2 i n n on ex em ptco m pe ns at io n fo r Ehs an ; an d

• IHSS Re ci pi en ts rep orte d $ 4,4 53 an d $ 34 4 i n wag es forAzim zad eh
. Azim zad ehadm it te d t ha t h is wife rece iv eda to ta l o f $1 0,8 74 inad di ti on al wag es . He als o a dm it te d t ha t h e rec ei ve d $ 4,7 97 inwage s fr om IHSS, whi ch pa id hi m fortak in g c are o f hi s m othe r. He ha sn ’t arg ue d t ha t an y of t he ad di ti on al wag es aren ’t in co m e, jus t tha t h e n ev er rec ei ve d a ny W -2 s, s o we s us ta in th e Co m mis si on er’s d et erm in at io n t o i nc reas e b ot h t he co up le ’s in co m e an d t he ir withh ol di ng cred it
.- 29 -

[* 29 ] IX. Hom e Mo rtg ag e-In te res t Deduc ti on Azim zad ehcla im eda $5 4,2 40 m ortg ag e-i nt eres t d educ ti on . The Co m mis si on er d is al lo wedth e en ti re d educ ti on be cau se Azim zad eh ha dn ’t pro ve n th atth e in te res t was “ qu al ifi edres id en ce i nt eres t” un de r se ct io n 1 63 (h )(3 ). Sect io n 1 63 all ows tax pa y ers a de du ct io n fo r “ qu al ifi edres id en ce i nt eres t” pa idon th e m ortg ag e o f th ei r fi rs t o r se co nd ary ho m e. Sec. 1 63 (a), (h )(2 )(D); sec . 1.1 63 -1 0T(b ), Tem

po rary Inco m e Tax Reg s., 5 2 F ed . Reg . 48 41 0 (De c. 22 , 19 87 ). Qua li fie d re si de nc e in te res t i s ei th er “ acqui si ti onin de bt edne ss ” o r “ ho m e equi ty in de bt edne ss .” Sec. 1 63 (h )(3 )(A). Acqui si ti on in de bt edne ss is a lo anof up t o $ 1
m il li on th at ’s us edto acqui re, co ns tru ct , or s ub st an ti al ly im pr ov e a res id en ce wh en th atres id en ce al so sec ur es th e lo an . Sec. 1 63 (h )(3 )(B) . New deb t t o re fin an ce o ld acqui si ti on in de bt edne ss co un ts , as l on g a s i t’s n otm or e th anth e ref in an cedde bt
. Sec. 1 63 (h )(3 )(B) (i) . Hom e-equi ty ind eb te dn es s i s an y ot he r type o f lo ansec ur ed by a qu al ifi edres id en ce, b utit ’s cap pe d a t the les se r of $1 00 ,00 0, o r th e fai r m ark et va lu e o f th e res id en ce m in us an y acqui si ti on in de bt edne ss on th e res id en ce. Sec
. 16 3( h) (3 )(C) . There ’s a li mitto qu al ifi ed -res id en ce i nt eres t wh ere t he to ta l av erag e ba lanc es for

th e ta xabl e y ear o f al l s ecu redde bt s o n ares id en ce ar e m or e th anth e ad jus te d p ur ch as e p ric e o f th e res id en ce. Sec . 1.1 63 -1 0T(c )(1 ), Tem po rary Inco m e Tax Reg s., 5 2 F ed . Reg . 48 41 1 (De c. 22 , 19 87 ).- 30 -

[* 30 ] The Co m

m is si on er g otth ree F orm s 1 09 8, M ortg ag e In te res t St at em en t, fro m ba nk s re po rti ng th atAzim zad eh pa id$2 9,7 85 , $1 2,2 56 , and$3 9,9 60 of m ortg ag e in te res t i n 2 00 6. Th os e p ro ve th atin te res t was actua ll y pa id , bu t n o m or e. The Fo rm s 1 09 8 d on ’t tel l u s wh atpro pe rty secu redth e lo an s, the pu rch as e p ric es of th os e p ro pe rti es , or wh enor wh y Azim zad ehto okou t the lo an s. Azi mzad eh te st ifi edth athe bo ug htth ei r ho m e fo r $3 10 ,00 0. He l at er b orro wedm on ey to rem od el it , andby 200 5 t he m ortg ag e b al an ce h adris ento $3 40 ,00 0. He the n t oo k
ou t a l in e cre di t o f $2 40 ,00 0 t o $ 25 0,0 00 inlat e 2 00 5, u si ng so m e o f th e m on ey to pa y off hi s cr ed itcardan d o th er ac cru edde bt s, the n i nv es ti ng th e rem ai ni ng $1 00 ,00 0 i n S te ve ns Cree k. Bu t Azi mzad eh di dn ’t li nkan y of the Fo rm s 1 09 8 t o an y of h is pro pe rti es --h e te st ifi edth athe own edhi s cu rren t h om e b ackin20 06 , bu t he was l iv in g a t a d iff

eren t ad dr es s wh enhe fil edhi s 2 00 6 t ax return, an d h e al so own edan ot he r ho us e th athe ren te d o ut . He di dn ’t say whi ch 10 98 refl ect edwhi ch lo an . W e al so do n’t kno w whet he r Azi mzad eh bo rro wedan y m on ey forth e in it ia l acqui si ti on of h is ho m e o r ho w m uc h h e b orro wedto do th e subs eque nt ren ov at io ns . Coh anall ows us to est im at e th e am ou ntof ade du ct io n, b uton ly whe n t he re’s en ou gh ev id en ce i n t he reco rdforus to co nc lu de th atth e ta xp ay er in cu rredanex pe ns e in at l eas t tha t am ou nt . See Co ha n, 3 9 F .2dat 5 43 -4 4. Bec au se we can ’t m at ch with a ny certa in ty the in te res t s ho wn o n t he Fo rm s 1 09 8- 31 -

[* 31 ] to a qu al ifyin g l oa n o r to a qu al ifyin g p ro pe rty, we sus ta inth e Co m mis si on er’s d et erm in at io n t o d is al lo w Azim sa de h’s en ti re m ortg ag e-i nt eres t de du ct io n. X. Pena lt ie s an d Ad di ti on s t o Tax A. Sect io n 6 66 2( a) Pe na lt y The Co m m is si on er s eek s a 2 0% a ccu racy-rela te d p en al ty und er s ect io n 66 62 (a) fo r anun de rp aym en t at tri bu tabl e to (1) ne gl ig en ce, (2 ) di sr eg ardof rul es or reg ul at io ns , or (3 ) a s ub st an ti al un de rs ta te m en t o f in co m e ta x. Se e se c. 66 62 (b )(1 )
an d (2 ). The C omm is si on er h as to pro vi de so m e ev id en ce o f on e o f th e b as es . Onc e h e d oe s t ha t, the tax pa y er h as th e b ur de n o f pr ov in g tha t the Co m mis si on er’s pe na lt y de te rm in at io n was in co rrec t. See Ru le 14 2( a); Hig be e v . Comm is si on er, 11 6 T.C. 4 38 , 44 6- 47 (20 01 ). A tax pa y er ca n m eetth is burd enby sho win g t ha t, un de r al l the fact s an d c irc um st an ces , he a ct edwith re as on ab le cau se an d i n g oo d fai th . Sec. 6 66 4( c)(1 ); s ec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. W e h av e su st ai ne d t he Co m m is si on er’s d et erm in at io ns th atfou nd$1 79 ,20 9 in ad di ti on al gro ss bu si ne ss rece ip ts an d a lm os t $ 20 ,00 0 i n a dd it io na l i nc om e, an d th atdi sa ll owe d o ve r $4 60 ,00 0 fo r co stof g oo ds so ld , $5 4,2 50 inm ortg ag e in te res t,
an d $ 9,2 83 forpa ss iv e lo ss es . All o f th atlea ds to anun de rs ta te m en t o f m or e th an 10 % of t he tax requi redto be sh own on th e co up le ’s tax return, wh ic h i s m or e th an- 32 -

[* 32 ] $5 ,00 0. Th atm ak es th e u nd ers ta te m en t s ub st an ti al un de r se ct io n 66 62 (d )(1 )(A), an d s o t he y wil l o we th e 2 0% p en al ty unl es s t he y cansh ow reas on ab le cau se an d g oo d fa ith. Thi s i s a f

act s- an d- ci rcu m st an ces tes t, an d we f oc us on th e ex te ntto whi ch a ta xp ay er trie d t o fi gu re o uthi s p ro pe r ta x l iabi li ty whi le tak in g i nt o a cco un t h is
ex pe rie nc e, kn owl ed ge , andeduc at io n. Se c. 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. W e fi ndth atAzim zad eh ke pten ti rel y in ad equa te reco rd s: His fai lu re t o ke ep an y so rt o f le dg er o r ev enke ep all of h is rece ip ts reen fo rces ou r co nc lu si on th athe di dn ’t actreas on ab ly. W e th us fin d h im li ab le fora pe na lt y

forth e p artof th e u nd erp aym en t at tri bu tabl e to un de rrep orte d g ro ss rece ip ts an d o ve rs ta te d c os ts of go od s s ol d a ndot he r bu si ne ss ex pe ns es . W e h av e a s om ewh atdi ffer en t an al y si s o f whe th er h e act edwith re as on ab le
cau se an d g oo d fa ith fo r al l o f th e rem ai ni ng un de rs ta te m en ts of i nc om e. Neit he r Azim zad eh no r hi s wi fe i s a t ax pro fes si on al or ahi gh ly sop hi st ic at edbu si ne ss pe rs on , andAzim zad eh is no t a n at iv e Eng li sh sp eak er. Azi mzad eh di d h av e an acco un ta ntpre pa re h is 20 06 tax return, an d we l oo k t o t he us ua l thr ee fa ct or s t o t es t whe th er h e p ro pe rly reli edonpro fes si on al advi ce. See Neon at ol og y Ass oc s., P.A. v. Co m m is si on er, 1 15 T.C. 43 , 99 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2) . If he di d, tha t s ho ws re as on ab le cau se an d g oo d fa it h.- 33 -

[* 33 ] • Fi rs t, was th e ad vi se r a co m pe te ntpro fes si on al who ha d s uf fic ie nt ex pe rti se to jus ti fy

rel ia nc e?

• Seco nd , di d the tax pa y er p ro vi de ne ces sa ry an d a ccu rat e in fo rm at io n to th e ad vi se r?

• Thi rd , di d t he tax pa y er ac tu al ly rely ingo odfai th on th e ad vi se r’s jud gm en t? Id
. Azim zad ehch os e a s m al l ac co un ti ng bu si ne ss to pre pare h is 20 06 tax return; an d a lt ho ug h we d on ’t kn ow m uc h abo utit s qua li fic at io ns , we fin d t ha t the
acco un ta ntwou ld ’ve ap pe aredco m pe te ntto a la y

pe rs on . On the sec on d p oi nt , Azimzad eh fai le d t o turn o ve r fo urW -2 form s t o h is
acco un ta nt . Two of

th em were s en t t o h is pa ren ts ’ ho us e, an d two o th ers (pl us th e on e th ey di d re po rt) were s en t t o the co up le ’s curren t ad dr es s. A reas on ab ly prud en t p ers on sh ou ldtry to fi ndou t wh ere h is m is si ng W -2 form s ar e, an d we d o no t fi ndAzimzad eh ’s tes ti m on y th athe di dn ’t recei ve th em to be cred ib le . So we fin d t ha t Azi mzad eh ’s fai lu re t o g iv e th es e fo rm s t o h is acco un ta ntdo es no t l ethi m av oi d t he pe na lt y

forno t re po rti ng th os e it em s. We fin d t he same to b e tr ue forth e 10 99 form s re po rti ng hi s i nt eres t i nc om e an d s ho rt- te rm cap it al -g ai n i nc om e. Azim zad eh withh el d t hi s i nf orm at io n fr om

hi s ac co un ta nt .- 34 -

[* 34 ] W e d o fi ndth atAzim zad eh reas on ab ly reli edon th e acc ou nt an t’s jud gm en t in cla im in g areal -es ta te lo ss to whi ch he wasn ’t ent it le d. Re po rti ng ren ta l i nc om e is n’t an eas y

no okof t ax law t o s nu gg le in to --a re as on ab le an d p ru de ntlaypers on with Azi mzad eh ’s edu cat io n a ndex pe rie nc e wou ld n’t kno w to askab ou t the pa ss iv e-l os s- li m it at io n ru le s. Th e sa m e g oe s fo r th e m ortg ag e in te res t-- wha t i s o r is n’t qua li fie d re si de nc e in te res t ca n b e d iff ic ul t t o fi gu re, es pe ci al ly whe n a res id en ce h as be enrefi na nc edor h adequi ty cash edou t m or e th anon ce. It ’s an
areawher e a t axpa y er i s en ti tl edto tru sthi s ac co un ta nt . W e fi ndth atAzim zad eh di d n otwithh ol d a ny inf

orm at io n o n t he se it em s fr om hi s ac co un tantan d d idact with re as on ab le cau se an d i n g oo d fa it h i n c la im in g t he real -es ta te lo ss es an d h om e m ortg ag e-i nt eres t d educ ti on . B. Sect io n 6 65 1( a) Ad di ti on to Tax Sect io n 6 65 1( a)(1 ) im

po se s an ad di ti on to tax forfai lure t o t im el y fil e a t ax return. Th e Co m

m is si on er h as m ethi s b ur de n o f pr oduc ti on on th is on e b ecau se Azim zad eh st ip ul at edth athe di dn ’t fil e h is 20 06 tax return, wh ic h was du e Octo be r 15 , 20 07 , un ti l Ap ril 28 , 20 08 . AndAzim zad eh ha sn ’t arg ue d tha t h e h ad- 35 -

[* 35 ] reas on ab le cau se to tar di ly file . W e th us su st ai n the Co m m is si on er’s de te rm in at io n o n t he lat e-fi li ng ad di ti on . The res ul t i s m ix ed , so Deci si on wil l b e en te red
un de r Ru le 15 5.