T.C. Summary Opinion 2001-109

UNITED STATES TAX COURT

ALI MOTAGHAYER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15237-99S. Filed July 25, 2001.

Ali Motaghayer, pro se.

Usha Ravi, for respondent.

CARLUZZO, Special Trial Judge: This case was heard pursuant

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

effect at the time the petition was filed. Subsequent section

references are to the Internal Revenue Code in effect for 1995. 

Rule references are to the Tax Court Rules of Practice and

Procedure. The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority. 
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Respondent determined a deficiency of $13,129 in, and a

section 6662(a) penalty of $2,625.80 with respect to,

petitioner’s 1995 Federal income tax.

The issues for decision are: (1) Whether, and if so to what

extent, petitioner underreported his 1995 income; (2) whether any

unreported income is subject to the tax imposed by section 1401;

and (3) whether any underpayment of tax required to be shown on

petitioner’s 1995 Federal income tax return is due to negligence.

Background

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

At the time the petition was filed, petitioner resided in

Saratoga, California.

Petitioner moved to the United States from Iran in 1985. In

1991, petitioner, his brothers Majeed and Nima Motaghayer, and

his sister Mehri Motaghayer formed Submarine 21 Sandwiches &

Salads (Submarine 21), a corporation that elected to be taxed

under Subchapter S of the Internal Revenue Code. Petitioner and

his siblings were equal shareholders in Submarine 21. 

Submarine 21 owned and operated a sandwich shop in San Jose,

California. During the year in issue, the shop was open seven

days a week from approximately 11 a.m. until 9 p.m. Petitioner

was the manager of the shop. Typically, he worked there 6 to 7

days a week. Aside from his managerial responsibilities, his

duties at the shop also consisted of taking orders from customers
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and preparing the food. Other members of petitioner’s family

also worked at the sandwich shop.

On its 1995 Form 1120S, U.S. Income Tax Return for an S

Corporation, Submarine 21 reported income, expenses and a net

loss as follows:

Gross receipts $97,731

Cost of goods sold (39,423)

Total income 58,308

Deductions

Rents 30,804

Taxes and licenses 4,684

Depreciation 4,332

Advertising 3,574

Other deductions 18,222

Total deductions 61,616

Net loss (3,308)

Submarine 21 claimed no deduction for salaries and wages

expenses.

During 1995, petitioner maintained a brokerage account with

Charles Schwab and Co. (the brokerage account). Petitioner

engaged in numerous transactions and trades through the brokerage

account on behalf of himself and other family members. In a

series of stock dispositions (not less than 14) that occurred

between February 28 and October 23, 1995, petitioner realized a

net gain totaling $42,479. 

Petitioner also maintained a personal checking account at

Valley Credit Union (the checking account). In 1995, deposits

totaling $77,485.58 were made into the checking account. Of that
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amount, fifteen cash deposits totaling $32,580 (the cash

deposits) were made as follows:

Date of Deposit Amount

 Jan. 6 $3,635

 Jan. 17 5,340

 Jan. 18 8,700

 Jan. 23 4,000

 Feb. 1 350

 Feb. 7 1,000

 Mar. 7 1,000

 Mar. 7 400

 May 5 1,785

 June 6 100

 June 22 800

 July 17 120

 Nov. 20 1,700

 Dec. 13 150

 Dec. 19 3,500

Petitioner kept a check register for the checking account. 

For the most part, entries into the check register are in

English, although some entries also contain notations made in

Farsi. With the exception of the $100 deposit made on June 6,

all of the deposits listed above are recorded in the check

register. Some of the deposit entries contain notations made in

Farsi. 

On his 1995 Federal income tax return, petitioner reported

adjusted gross income of $34,083, which includes: (1) Dividend

income of $55; (2) a short-term capital gain of $42,579 from the
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stock dispositions discussed above; (3) a nonpassive loss of $827

from Submarine 21; and (4) a net operating loss carryover of

$7,724. Petitioner did not report any wages or salary income.

The examination of petitioner’s 1995 return resulted from

respondent’s receipt of four Forms 4789, Currency Transaction

Report, from Valley Credit Union reporting the cash deposited by

petitioner into the checking account in January of 1995. 

Petitioner met with respondent’s agents several times during the

course of the examination. Respondent’s agents reviewed the

monthly statements for the checking account, petitioner’s check

register, and the records from the brokerage account. Petitioner

was asked to identify the sources of the cash deposits. He told

the agents that one of the cash deposits came from the sale of an

automobile and the other cash deposits resulted from gifts from

family members. 

In the notice of deficiency, respondent determined that the

cash deposits represent income to petitioner. Respondent further

determined that such income constitutes net earnings from selfemployment within the meaning of section 1402 and is therefore

subject to the self-employment tax imposed by section 1401. 

Lastly, respondent determined that the underpayment of tax

required to be shown on petitioner’s 1995 return is due to

negligence and imposed a penalty under section 6662(a). 
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Discussion

1. Unreported Income

Respondent contends that during the course of the

examination, petitioner provided inconsistent explanations

regarding the source of the cash deposits. According to

respondent, petitioner failed to establish that the cash deposits 

were from nontaxable sources, and therefore the cash deposits

represent income to petitioner. See Ruark v. Commissioner, 449

F.2d 311, 312 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-

48. By calling the Court’s attention to petitioner’s

relationship to and involvement with Submarine 21, respondent

suggests, if only by implication, that the source of the cash

deposits was compensation that petitioner received for working in

the sandwich shop.

Petitioner readily admits that he worked long hours at the

sandwich shop during 1995, but claims that he received no

compensation at all for his efforts. We understand that

Submarine 21 was, as petitioner described it, a family business,

and therefore, he did not expect to be, and was not, compensated

as an unrelated employee might have been. Nevertheless, we find

it difficult to accept petitioner’s claim that he received no

compensation whatsoever for his efforts, particularly when the 

extent of those efforts is considered.
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Petitioner further claims that with four exceptions

(discussed below), the source of the cash deposits was a gift

from his mother. According to petitioner, his mother gave him

$35,000 in November of 1994. Assuming, without finding, that

this event occurred, we find it unlikely that a single cash gift

made to petitioner in 1994 would result in the pattern of the

cash deposits here under consideration.

Petitioner testified that one of the deposits made in

January consisted of the proceeds of the sale of an automobile

and that three deposits were made from the proceeds of checks

payable to him from his brokerage account. Petitioner testified

that he gave the brokerage account checks to his brother, who

gave petitioner cash in return, which was then deposited into

petitioner’s checking account. According to petitioner, it was

easier to have his brother cash the brokerage account checks

because brokerage account checks deposited into petitioner’s

checking account took 2 weeks to clear. Petitioner could not

identify the specific deposits to which the foregoing

explanations related. We, like respondent, are not convinced

that any of the cash deposits were from the sale of an automobile

or the proceeds of brokerage checks cashed by petitioner’s

brother.

After careful consideration of the record, however, we are

satisfied that some of the cash deposits were from nontaxable
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sources. Specifically, we find that the source of the $8,700

deposit made on January 18 was a cash gift from petitioner’s

mother. This is consistent with petitioner’s general claim and

apparently noted in Farsi in the check register. Likewise,

notations in the check register lead us to conclude that the

$1,000 deposit made on February 7, and deposits for $1,000 and

$400 made on March 7, were from nontaxable sources. Finally,

given the amounts involved and the passage of time between the

deposits and respondent’s examination, we do not find it unusual

that petitioner could not satisfactorily explain the deposits

made on February 1, June 6, July 17, and December 13. We accept

petitioner’s generalized testimony that these four cash deposits

were not from taxable sources. 

Petitioner failed to satisfactorily explain the remaining

deposits, specifically: 

Date of Deposit Amount

 Jan. 6 $3,635

 Jan. 17 5,340

 Jan. 23 4,000

 May 5 1,785

 June 22 800

 Nov. 20 1,700

 Dec. 19 3,500
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Consequently, we are unable to conclude that these deposits were

made from nontaxable sources. Respondent’s determination that

petitioner’s 1995 income was understated by the total of these

deposits is therefore sustained. 

2. Self-Employment Tax

We accept petitioner’s claim that with the exception of

Submarine 21, he was not otherwise employed, or self-employed

during 1995. To the extent that Submarine 21 was the source of

the omitted income as determined above, that income would not

constitute net earnings from self-employment, see sec. 1402, and

therefore would not be subject to the section 1401 tax imposed on

such income. Consequently, we reject respondent’s determination

that the omitted income is subject to the section 1401 tax. 

3. Negligence Penalty

Respondent determined that the understatement of tax

required to be shown on petitioner’s 1995 return is due to

negligence. Section 6662(a) imposes an accuracy-related penalty

of 20 percent on any portion of an underpayment of tax that is

attributable to negligence or disregard of rules or regulations. 

Section 6662(a) defines “negligence” to include any failure to

make a reasonable attempt to comply with the Internal Revenue

Code, and defines “disregard” to include any careless, reckless,

or intentional disregard of rules or regulations. The negligence

penalty does not apply to any portion of an underpayment if it is
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shown that there was reasonable cause for such portion and the

taxpayer acted in good faith with respect thereto. See sec.

6664(c)(1). 

Petitioner claims that he did not omit any income from his

1995 return, but we have found differently as discussed above. 

Otherwise, petitioner offered no evidence to establish that

respondent’s imposition of the negligence penalty is erroneous. 

Accordingly, respondent’s determination that petitioner is liable

for the negligence penalty for 1995 is sustained.

Reviewed and adopted as the report of the Small Tax Case

Division.

Based on the foregoing,

Decision will be

entered under Rule 155.