TAX COURT OPINION

Case: Mohammad Enayat
Docket Number: 1488-07
Judge: Gustafson
Opinion Type: memo
Filed: 11/10/2009
Pages: 73

T :C . Memo .'2009-25 7 UNITED STATES TAX COUR T MOHAMMAD ENAYAT, Petitioner v . ,COMMISSIONER .OF INTERNAL REVENUE, Responden t WOODBURY RUG COMPANY, INC ., , Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket Nos . 1488-07, 1489-07 . Filed November 10, 2009 . William E . Christie , for petitioners . Daniel P . Ryan and Erika B . Cormier , for respondent . MEMORANDUM FINDINGS OF FACT AND OPINION , GUSTAFSON, Judge : Petitioner Mohammad Enayat operated Persian rug business, in some years through his wholly owne d C corporation, petitioner Woodbury Rug Company, Inc . (Woodbury), and in later years through his'single-member limited . liability company (LLC), Sutter & Hayes . In 1998 through 2001, busines s SERVED NOV 10 2009 revenues and other receipts were deposited into and transferred among various personal and business bank accounts, and Mr : . Enayat admits that his bookkeeping was "horrible" . For . those year s Mr . Enayat filed his own returns late and the C corporation's returns late or not at all . The Internal Revenue Service (IRS) .issued to Mr . Enayat a statutory notice of deficiency on October 17, 2006, pursuant to section 6212,1 showing the following. deficiencies in income tax and additions to tax, respectively, for tax . years 1998 to 2001 : Year 1998 1999 2000 .2001 Deficiency Addition to tax Sec . 6651(a)(I) Fraud Penalt y Sec . 6663(a ) $349,442 65,632(cid:127) 110,080 29,231 $87,3'61 16,408 27,520, 7,308 $262,08 2 49,22 4 82,56 0 21,92 3 On the same date the IRS also issued .a notice of deficiency to Woodbury, showing the following deficiencies in income tax and additions to tax, respectively, for'tax years-1998 and 19,99 : Additionsto Tax Fraud Penalty ' Year Deficiency Sec . 6651(a)(1) Sec . 6651(f) Sec . 6663(a ) 1998 $74,010 $18,503 199 9.46,499 --- $34,837 $55,50 5 'Unless otherwise indicated, all citations . of sections refe r to the Internal Revenue Code of (26 U, .S .,C .), as, amended.; and all citations of Rules refer to the Tax Court Rules of Practice and Procedure . 4 - 3 After concessions, the issues for decision are :' Business Income Issue s (1) . Whether~Mr . Enayat had unreported constructive dividend income of $203,273 in 1998 and $31,723 in 1999, as a result of his depositing into his personal accounts checks payable to Woodbury . We .find that he did . (2.) Whether Mr, . Enayat had unreported officer's :-'' compensation'of $349, .3 56 in 1998 and $67,2003 in 1999, as a result of transferring funds from Woodbury accounts to . his personal accounts . We find that he did, and that Woodbury is therefore entitled to'deductions in those-same amounts . (3) Whether Woodbury had unreported gross receipts of . $246 ;352 for taxable year 1998 . We find that''it did . . (4) Whether Woodbury had unreported gross . receipts : of $162,050 for taxable year 1999 . We find that it did . 2Mr . Enayat does not dispute the following adjustments to income in the notice of deficiency :, gambling income of $16,800 in 19 .98 ; rental income of $2,000 in 1998 ; income from insurance proceeds of $201,929 in,2000 ; and gross receipts on Schedule C, Profit or Loss From Business, in .the amount of $113,800 in 2001 . The other .adjustments set forth on the Form 4549-B,, Income Tax Examination Changes, that is attached to the notice of deficiency issued to Mr . Enayat are computational, and their resolution will follow automatically from the Court's determinations with regard to the issues resolved in this opinion . 3Respondent concedes that Mr . Enayat transferred only . $67,200 from Woodbury's accounts to his personal accounts in 1999, not $85,200 as reflected in the notice of deficiency . (5) Whether-Mr . Enayat received additional income of $1,228 in 1999 and $252,721 in 2000 from his LLC, Sutter & Hayes . We 4 - find that he did . Other Income Issue s (6) Whether Mr . Enayat received additional income .of $305,101 in 1998 as a result of a transfer from Dr . William Willitts . We :find .that .:he did not . (7) Whether Mr' . Enayat is entitled, to deduct capital losses, of $71,8124 in 1998 and $46 ;807 in 1999,, from the"sale of the Elm Street property . We find that he is not . . Additions to Tax and Penalty Issue s (8) Whether Mr . Enayat is=liable for additions to tax under section 6651(a)(1) for, the failure to timely file his tax returns for taxable years-1998 through 2001 .' We hold that-he is . (9) Whether Mr . Enayat isliable for the fraud penalty- under section 6663(a) for the four years 1998 through 2001 . We hold,that he is liable for the fraud penalty for the three years 1998, 2000, and 2001, but in amounts less than those determined in the notice ofdeficiency, . We-hold that Mr . Enayat .,is not liable for the fraud . penalty for the year 1999 . 'The correct amount for the capital gains adjustment in 1998 is $71,812, not $74,812 . as stated in the notice of deficiency . See infra note 23 . 5 - (10) Whether Woodbury is liable for the'addition to tax under section 6651(a)(1) for the failure to-timely file its tax return for 1998 . (cid:127)We hold that it is not . (11) Whether' Woodbury is liable for the'Hfraud,penalty under section 6663(a) for the year 1998 . We hold that :it%is not . (12) Whether Woodbury is liable for the addition to tax .under section 6651(f)-for the fraudulent fa .ilure .to"file its'ta x return for the Year f999 . We hold that it i FINDINGS OF FAC T This case was tried in Boston, Massachusetts, on March 19- 20, 2009 . The stipulation of facts filed October 20, 2008, th e supplemental stipulation of facts filed-,March 19, 2009, :and the attached exhibits are incorporated herein'by this reference . At the time Mr . Enayat filed his petition in docket No .. ..,1488-07, 'he' ,resided in Massachusetts . At the time°Woodbury .filed its°- petition in docket No . 1489-07,, it was no longer,actively engaged in business but had an address in Massachusetts . Background Mr . Enayatbegan"working in the Persian rug business when he was 18 years old, and he ownedshis .own store from 1994'throug h the date of trial . During each of the years'at_issue, Mr . Enaya t was in, the business of selling Persian rugs from°a retail . store in Bedford, New Hampshire . During taxable years 1998 and 1999, Mr . Enayat operated and was the sole shareholder of Woodbury, a C corporation . Towards the .end of-_1999, Mr . Enayat formed a limited liability company known as-Sutter & Hayes,,LLC (Sutter), and began operating his business through this entity . During the years 1999 through 2001, Mr . Enayat was the sole-member of ,Sutter . Mr . Enayatmaintained various bank accounts in-his . own name and in the names of Woodbury and Sutter . However, in the manner described below, business-receipts were sometimes! deposited in personal accounts, and money was transferred between business and personal accounts without documentation being maintained . to justify or explain the transfers . Mr .,Enayat admits, "I treated both myself and Woodbury,and .[his investment accounts at]-Oppenheimer, . and Merrill Lynch, and . Citibank . and - I treated it all as one,'" Unreported Income of Woodbur y As a .retail ..seller .of Persian rugs, Woodbury acquired rugs from wholesale vendors and then sold them to'its own customers, making its money from those sales . Petitioners--Mr, . Enayat and Woodbury--did not offer into evidence any records of Woodbury-, sufficient show the amount of its sales-in-1998 or 1999 . Woodbury-reported gross sales receipts of $1,168,759 omits return for,1998, but at trial Mr . Enayat did not .explain .how he had. arrived at this figure ; and Woodbury's return .prepare r testified that he did not recall what he was given . to support the - 7 sales total . For 1999(cid:127)Woodbury . did not file a,return and therefore did not'repor ..t-receipts in any amount-for that .year . In its , examination ; the,IRS . performed a bank deposit s analysis to determine, the amount of Woodbury's gross receipt-sfor , 1998 and .1999 . The,IRS began with the gross deposits into Woodbury's bank accounts and reduced them by any .identifiable non-taxable5 item (e .g .,-cash depositstransfers between accounts, ,deposits whose source could not .be identified or whic h were not readily apparent as businessreceipts, insurance . proceeds, :and returned checks) to get net taxable deposits . The IRS then added . to the net. deposits all .the checks payable to Woodbury that==were deposited in Mr . Enayat,'s personal account, (discussed infra beginning at page 10 as "diverted" checks) . because those the"cks should have been deposited into . Woodbury's accounts (and thereby should have shown up as gross receipts) . 5TheIRS classified as "non-taxable" the money flowing into Sutter's accounts that should have been excluded from gross receipts .for various reasons (e .g ., receipts that were actually non-taxable, receipts that should be excluded to avoid double counting, and unidentified money) However, that classification .does'not necessarily mean that all, . items, excluded from Woodbury's gross receipts under the IRS's method were-non-taxable under the . .Internal Revenue Code . 'Excluding cash deposits was .appropriate tothe extent that the cash might have been obtained by cashing checks that-had already been counted, or by withdrawing the cash from another bank account whose deposits had already been counted . However, cash deposits might also have resulted from cash sales, so the exclusion of all cash deposits may be unduly favorable to Woodbury where cash sales are a possibility, but the IRS's analysis gives Woodbury the benefit of this doubt . - 8 - However, to accurately reflect Woodbury :>s.gross receipts, the IRS then reduced its calculation for any . .t''rans.fers;.Mr : Enayat made from his personal accounts to Woodbury's :corporate accounts, s o as .to prevent double-counting ..or the ;taxing .of. any clearly non- taxable items . These reductions . included money flowing, from Mr . Enayat toWoodbury .that were .capital, contributions, see infra note 34, or that were transfers=from Mr . .Enayat to repay diverted Woodbury checks that Mr . . Enayat had deposited in .his personal account, since the diverted checks had 'already been added to net deposits . By its bank deposits analysis, the IRS determined that Woodbury had additional gross receipts in taxable year 1998, as follows : Bank Account ' Gross Deposits Non-Taxables . Net Deposit s Fleet Ban k Account No . 9632 $162,289 .53 $151,743 .53 $10,546 .00 Granite Ban k Account No . 0540 778,408 .49 611',664 .78 166,743 .71 Bank of N H Account No . 7435 2,,193, 660 .33 1, 271, 624 .11 92Z,036 .2 2 Granite Bank . Account No . 049.2 Total 3,279,432 .49 2 ;066,553 .4 0 145,,074 .14 31,520 .98 . Less : Gross receipts per 1998 Form 1120 Unreported .gross receipts . Plus : Diverted check s . Total unreported gross receipts for 1998 113,553 .16 1,212,87.9 .09, ( 1,168,759 .00 ) 44,120 .09 -203-,273 .0 0 °247,'393 .09 As is shown above,' that $247,'393, represents the difference between Woodbury's reported gross receipts on its 1998 Form 1120 , U .S . Corporation Income Tax Return, and .the net taxable deposits as calculated'in-the IRS's bank deposits' analysis, plus the checks made out to Woodbury and diverted into Mr . .Enayat's, personal accounts (which should have been deposited int o Woodbury's accounts bu t were not), . We .find that the IRS' s analysis was reasonabl e and that Woodbury had additional receipt s of $246,1352 . r The IRS did an equivalent analysis fo r 1999 . For that year Woodbury had failed to' 'file its Form 1120 , so there is n o Woodbury-generated number against which to compare, the IRS's analysis .,, As it had, for 1998, the IRS totaled Woodbury's gross deposits for 1999, reduced them by any identifiable non-taxable item .(including any transfers from Mr . Enayat's persona l accounts), and then added any Woodbury checks . that Mr . Enayat ha d deposited into his personal account, yielding the following sum : 'In pr.eparation for trial,, respondent had "an IRS revenue agent prepare another bank deposits analysis .' This second bank deposits analysis revealed that Woodbury had additional gross receipts of°$247,393 .09 in taxable year-1.998-instead of the additional $246,352 previously determined . However, respondent never accounted for this difference, so we find that Woodbury had .additional receipts in the year 1998 in the lesser amount of .$246,352, as reflected on the notice of deficiency . - 1 0 Bank Account Gross Deposits Non-Taxables Net Deposits Bank of N H Account No . 7435 $347,489 .73 $244,918 .77 $102,570 .96 Fleet Ban k Account No . 9632 205,358 .91177, 602 .46 27,756 .45 Total 552,848 .64 422,521 .23 130,327 .41 Plus : Diverted checks 31,723 .0 0 Total unreported gross receipts for 1999 162,050 .4 1 Again, because we find the IRS's bank deposits analysi's to be reasonable, and because Mr . Enayat-has not introduced any evidence to refute those findings, we find that Woodbury had unreported gross receipts of $162,050 for taxable year 1999 . Diverted Woodbury Checks Deposited Into Mr . Enayat''s .Account s As was noted above, in 1998 and 1999 Mr . Enayat deposite d into his personal bank accounts checks that were made out to Woodbury .,, He argues that these deposits are not taxable to hi m because they were made--and were repaid--pursuant to'a procedur e dictated by business necessity, arising from the manner in whic h he purchased rugs for resale : Enayat testified that h e regularly went to New York, picked out the merchandise,he wanted to buy for Woodbury, and negotiated a price and term for payment . The payments Woodbury owed to the vendor s were . usually due,90, . 120, or'180 days after the date of sale . He wrote a Woodbur y check to .the vendor for, the purchase price , p'ost- dated the chec k to correspond to' the payment term ( e .g ., i'f payment was due in 90 - 11 - days, he would post-date the Woodbury check by 90 days), and took : the merchandise with him : However, Mr . Enayat testified that heF-learned that vendor s would often try to cash or deposit these post-dated checks before, their date, and'that if thereWere'sufficient funds in the Woodbury' account, the bank would usually honor the check even though it was post-dated .B He says that, in order to avoid-the premature negotiation of the Woodbury checks,he adopted the practice of delaying the- deposit of-sufficient funds into-the- Woodbury account on which the check was drawn until the da y before the post-dated check would mature . -In the'meantime,4however, Mr . Enayat wanted to negotiate . promptly the corresponding. checks that had been written t o Woodbury by its customers . He testified that since he. did not want to put the funds into the Woodbury account, he would . deposit, checks from Woodbury customers into his personal-accounts, as_,a sort of escrow, to be held there until he transferred the funds to the Woodbury account' in order 'to cover thepost-dated check s as they came due' . Thus, Mr . Enayat contends . that,the-presence.of- BConsistent with . Mr . Enayat's account, it'appears that under New Hampshire law (where Woodbury did its banking), a bank may honor apost-dated check unless its customer provides the bank reasonable advance notice of the post-dating and-describes the check with reasonable certainty . N .H . Rev . Stat . Ann .' ' 382-A :4-401(c) (Butterworth 1994) . 12 - the-deposits=in his,"persona.l>accounts .was an accommodatio n Woodbury, and not an appropriation of Woodbury funds . Mr . ..Enayat ' s .explanation seems ' superficially plausibl e ,tax year 1998 in- the aggregate=- since, . he diverted . $203, 27 3 Woodbury's checks~but redeposited-almost .the-same ($201,,,950) into Woodbury's account . However, i n redeposit'any of the $31,723 .he . diverted from Woodbury,, . e v e n Moreover,', 1'998 : the more, detailed> facts 'do ;not lin e with his story abut rather . include, these ..-six, anomalies and , contradictions' : First, Mr .Enayat's alleged plan of depositing money into = the Woodbury account only as the post-dated ,' checks, came ; due-woul d have required himto maintain .a' ..rather sophisticated system t o ant c pateuthe negotiation of :'each post-dated check and to keep „ in the account just ..enough money--but no more--to ;cover,th e checks as they came .°due . Mr Enayat .offered no,evidence, .of 'an y such"system, and he made no showing ,that .. the deposits .-into thi s account actually . cor.responded to the -post-dated due dates of th e checks.- '-Instead, it appears that ; Mr . Enayat .wrote checks 'on , Woodbury's account (for anything and everything, including bu t not limitedto,thepost-dated vendor checks, as we-show below ) until the account . became overdrawn ;, and that he'would the n deposit enough-money back into the account to bring .-the balanc e back into the black . - 1 3 Second, Mr . Enayat gave no explanation for how his syste m could actually have achieved its 3upposed-,goal,,even if he had been able somehow-to"keep' trackof'his-check .dates .and mak e deposits to cover the checks only as they became ..due . If vendor s .really did tend-to present checks prematurely,' and if the bank did honor-prematurely presented checks, then there would be no way to assure that the funds he carefully deposited-would be-used to'pay the ant-icipatedand'timely presented . check rather than an unanticipated but prematurely presented check . If funds were in the account but a premature check arrived that the bank . honored, then a timely submitted check presented thereafter would bounce . . Third, although Mr . Enayat's testimony suggested that premature negotiation of checks was a . persistent risk in,,his business, most of the Woodbury checks deposited into his personal accounts, were 'in fact deposited in February and March 1 998, and the deposits largely tailed off thereafter . The record includes no information to the'-effectthat the situation changed, and no explanation for this irregularity . . , Fourth, the purpose Mr . Enayat-alleges would have'naturally called for the use of a single account, from, which funds could be swept as necessary . But throughout 1998 Mr . Enayat diverted Woodbury checks into not one but four-,separate personal accounts (acct . Nos . 0495, 4702, 1027,° and 9215") . . If .Mr . Enayat had truly„ - 14r- intended' to hold these checks,-Iin, a sort of escrow,'rtherewoul d have . been no "-reason ,, to ,deposit , these checks in,,multiple accounts . Fifth ; on the .; other hand, ., the,'<money Mr,. Enayat ; .redeposited . into Woodbury ' s . account, did :not . come ; from all fours of those . personal' accounts . into which Woodbury. checks had been:: but rather only two of them (i . e . ,~ acct . Nos. 04 .95 .E--and 1.027) If , Enayat' s :-story}were true, he would have redeposited ;mone y from all"four of 'the, accounts to which- it, had ,; been ., diverted-, but : he did~not . .. : Furthermore ., from one of,those personal accounts'-"- -- No . 1027--Mr .' Enayat redeposited $36,500 ;, into .Woodbur .y's . accoun t he 'had diverted only $.3,x,094 into ,„ ;that -account, }in th e ,first plac e . .-Even'if Mr . Enayat could logically . explain, the . necessi-ty : of, using multiple accounts in .fthis manner, - the- money, , flowing back ato Woodbury should have been equivalent'tothe money , diverted,' . not .just . in the s aggregate, (cid:127)but account-for-account . ;'It was not . Sixth,, .-,the transaction history of .Woodbury.!s corporate account No . 0540 simply fails to correspondto .Mr . Enayat', s story .''While Woodbury did maintain a low or negative1 1, balance 'i n this account-'at most times (which would seem to suppor t Mr. Enayat'-s story) , a review of the .account ;statements,lshows (cid:127) that'Mr'. Enayat'also'used this account to pay personal ; expense s and to buy stock options . Had'Mr .,Enayat truly been holding : ; these diverted checks in escrow to prevent the premature 15 - depositing of post-dated,checks,- he would-havepneededto keep the balance of Woodbury's account . near'zero . .an& would have used the account only for these post-dated check transactions .-;..Using the account as-a general checking account--and depositing in it funds that were intended to cover other expenses--would (if his story were true) enable a rug business payee to raid-these other moneys that were put .into the account . =If Mr . Enayat really had-run his accounts in the manner he alleged with the . purpose of, preventing depletion of Woodbury funds by premature negotiation of Woodbury checks, he would not have put non-.Woodbury money at the,sam e risk . The evidence does not show that Mr . Enayat held the proceeds from Woodbury checks in an escrow-like fashion or used . his personal account . to "sweep" these diverted checks in any orderly fashion . We find that he did not do so, but .simpl y deposited Woodbury checks into his personal accounts for general . use . Mr . Enayat did not treat any of the diverted Woodbury checks as income on his own Form„104 ..0, U .S . Individual Income Tax Return, for 1998'.or 1999 . In its . notice of deficiency, the IRS effectively treated each :Woodbury check deposited . in a persona l account as if it were a constructive dividend to Mr .(cid:127)Enayat ;9 an d 9The IRS's notice of deficiency char .acterized ..the income Mr . Enayatderived from.depositing Woodbury checks as dividen d (continued . . .) - 16- -16'- the IRS did not reduce its adjustment,by the equivalent amount s that-Mr . Enayat .,had transferred to-Woodbury durin g Transfers . From Woodbury to Mr . Enayat(cid:127): °x In addition to,the Woodbury checks deposited by, Enayat . into his personal 'accounts, Woodbury . made transfersof ; 'funds t o Mr .' ., Enayat throughou t 1998.. and 19.99 .-- Woodbury transferred- $349 ;356 to, Mr .- Enayat in .1998 and $67 , 200 in 1999.,'..;_either- by checks "written to Mr . Enayat . or by direct transfers' . ; did hot report 'any of these amounts as income on (cid:127) his 'Form s Forms 1040 , because (he'says)"he considered them to be repayments, of loans, he, had previously made to Woodbury . He testified that,he advanced ., funds, to Woodbury when the business needed them to cover expense s or inventory ;=,-or whenever there were cash flow problem s 9 ( . . .continued) r . I income . Although Mr . Enayat disputed the characterization of -these amounts as income to him,, he-did'not offer'any evidence'tb" . show that, if income, they were officer's compensation rather than dividends . Consequently, because we find that these amounts ;-- were income to Mr . Enayat, we accept the IRS's characterizatio n as aivzaena income . "As is explained' supra p . 7, for purposes of 'calculating' Woodbury L3 taxable income the IRS added the amounts of*these diverted checks' to Woodbury's gross receipts . However- ; ;Wood-- bury''s gross, bank deposits included transfers from Mr . Enayat, some'of which remitted to Woodbury ' theLproceeds of the diverteda checks . To avoid double-counting the diverted checks as Woodbury income', the IRS "subtracted from Woodbury's net deposits - ~" Mr . Enayat's transfers that-remitted the amounts of,the diverted, checks . Thus, these amounts were treated only once as taxable" income- :to Woodbury .I-They were also treated as,taxable'income to Mr . Enayat .' .. This double taxation--of, :-the corporation .and, .the shareholder--i°s discussed infra pt . II .A .1 . .Woodbury' And'he insisted that-'all the money,transferred .-from Woodbury to I is personal accounts in 1998 : .and :1999 was fors th e repayment of these types of, .loans ; that for a every ; trans fern- from Woodbury to Mr .'Eriayat (i .e', the-''repayment) there -would hav e been a 'preceding 'transfer from Mr . ..Enayat .-to Woodbury (i . e the =loan) :;--;and that Woodbury repaid the loans tothim as . funds,became The evidence~does .show--broadly- .:consistent with thi s account--that'Mr .0.:Eriayat did make_ .transfers11 to Woodbury fro m his personal' accounts in-amounts t6tal<ing .$346, 238 . 1:112, in 199 ; and, :,. 8 (when the"Woodbury-to-Enayat transfers totaled $349,356) . totaling $164,429 .17 in~1999 (when the,Wdodbury-to-Enaya t only $67,200) . These ; -he says,,were the loan s for which,Woodbur y repaid him,,with'the transfers now at issue , .and the'two-year total-of theseEnayat-to-Woodbury transfers,di d the .Woodbury-to-Enaya t There is no indication of Yiow the IRS el assif ed the money . flowing from Mr . Enayat to Woodbury,T butwe assume it was treate d as contributions to capita l 1 .These 1998 transfers totaling $346, 238' were 'in addition t o the . .transfers in that year totaling $201,950 '(see supra p . 12), a few from account' No :, 1'027 and most from account No'.' 049,5,1 by which Mr .'Enayattransmitted to . Woodbury . the amounts of the Woodbury checks that-he had deposited inhis personal accounts . In the aggregate, Mr .Enayat's transfers to Woodbury in 199 8.and 1999 totaled $712,617 (i .e ., $346,238 plus $164,429 plu s ~LUl, yDU) . . However,', there were no notes ,or loan agreements executed , between Mr .' Enayat .and Woodbury :.for any,- of these . alleged loans,., andxhe'could point to no entries in . corporate minutes or corporate . financial . records reflecting any such loans :, Mr .=,-,Ena .yat didriot charge Woodbury ,in-terest 'on these'~iloans,,or set ; anyt-maturity dates .'-Moreover, his assertion that the . Woodbury- .,,, , to=:Enayat transfers were always preceded by Enayat-to-Woodbur y transfers isnot supported by the evidence .,, When-pressed about a specific transaction in which :-'$10, 000, seemed to ; go first ,,from Woodbury-to Mr . Enayat, he admitted that it is possible . that Woodbury might have lent him 'money, and that,a later $10,000 Enayat-to-Woodbury transfer may have been a repayment b y ,Enayat of a loan made by,Woodbury . =The Court : invite d M Enayat,to present in his post-trial brief .,a, ;,detailed ;;analysis , of the bank records to show ( if he could ) that . each .Woodbury,-to Enayat transfer was preceded by an Enayat - to-Woodbury loan .; but,, he did - not do so , and instead limited his presentation to th e aggregate 'numbers . At one point in the candidly ;„,testified that he just treate d the bank accounts as one , and we fin d did not" have, a practice or Woodbury-to-Erayat,transfers- were repayments of prior ..bona loans . 'therefore 'find' 'that th ese amounts . were . .additiona l officer's compensation, to°Mr . 'Enayat . 1 Unreported 'Income "of 'Sut"ter in .1999 and, 200 0 Sometime 'in 1999 ,Mr . 'Enayat -..formed"Sutter . & Hayes as a . single-member LLC', and . began .to' .operate , his' rug business -throug h this entity . ! . On the Schedule"C,'' :Profit 'or° Loss From Business,- for Sutter "attached'to Mr . 'Enayat' s 1,999 Form 1,040 he did-not , report any-'gross -receipts -for- .Sutter .. ' However, the IRS performed a bank deposits analysis, on"the 'bank accounts of .Sutter :to determine'Sutter's'gross receipts f :or 1999 and 2000,14 and th e analysis,disclosed -twokdeposits'in .,'_.1999 .' Mr .,, .Enayat has now stipulated that'Sutter'received' .two~customer checks durin g t(cid:127)axable', year, 1999 totaling ."$1 ; .228,which were deposited into ., . , Sutter's'bank(cid:127)account :' We'find that these checks .constituted were taxable ink-1999 . In 2000 M.r .'Enayat maintained--a :,--detailed, : sales report for- ; Sutter,- which' . purported= to list .~the :° date= of every sale-Sutter made with" the correspondingi .;customer'- s - name ,, and .: the amount . of the 13The IRS.,', s . of,deficiency :issued to Mr . Enayat characterized Woodbury's,transfers to him =as officer's'' compensation . Although''Mr . Enayat disputed the characterization of . these amounts as .' ncome' to him, °' h'e did not 'offer ' an' evidenca to contend that, . if income, they were anything other than officer's compensation . Consequently, because we find that these amounts were income to Mr . Enayat,we .accept the IRS's char'acterization~l as 1officer'~s .,comp'e-nsation-.' 14The record -does" not show . whether the IRS, performed ,a bank . deposits'anal'ysis for Sutter:for'its 2001 .year . sale . . :Sutter'(cid:127)s 200,0 gross receipts as .,recorde d sales report totaled $691,170 . Mr . ..Enayat, allege s 20 - .detailed sales report is a complete list of all sale s Sutte r in 2000," and that it therefore represents Sutter'ys entire receiptsfor 2000 . Mr . Enayat reported the gross'(cid:127) ;receipt.s .o f Sutter-to be, $671,92011 on his 2000 Form, 1040 , However, the totals reflected on the sales report°an d reported'on'the return were not -consistent with the informatio n that Sutter included on its claim : for business-,interruptio n insurance . In making that claim Sutter reported that,inthe . 23 weeks 'preceding :the flood-that interrupted itsbusiness, i t had average weekly sales of $30,099 . The 23-week,_total wa s therefore,~$692,277--a part-year total that already exceeded th e gross',,,-receipts Sutter reported for its full year . Clearl y Sutter's insurance claim left Mr . Enayat with-much explaining':to , do acid=rendered the sales report suspect . To determine the correct figure for Sutter':s gross .. receipts,. : in 2000,"the ;.IRS conducted a bank deposits analysis . Its,, agent . . totaled the deposits made into Sutter's accounts-in that .year,an d reduced that amount by any identifiable "non-taxable" item transfers between accounts, cash deposits, returned checks , 15Mr . Enayat did not explain the $19,250 difference between .. ; the gross sales of $691,170 reported on the detailed sales repor t and the ,gro : Schedule C . 21, - refunds,, and =any unidentifiable ~ 'depos .it's) to calculate Sutter' s net taxable deposits .- Bank deposits do not reflect all o f Sutter.',s revenues (cid:127)because, as° Mr .' . Enayat stipulated, some of Sutter' s receipts for . 2000 were never =deposited% into a Sutter accou"nt or in, any of Mr . Enayat's personal accounts .16 For that . reason' the IRS compared (cid:127)Mr .' Enayat"-s , detailed sales report--on which Mr' .'Enayat supposedly recorded every sale Sutter-made--t o actual deposits made ;into'the-knownaccounts . . Any custome r payment'appearing on'the detailed sal"es .report that did not hav e a corresponding'deposit'into#a-Sutter account or-one .of Enayat's personal- accounts 1was added to Sutter's net taxabl e deposits .to account for total grossreceipts for 2000 .1' The IR S also made'-an adjustment to'account .fordSutte,r'.-s account s receivable at.'the beginning of 20007compared to the end ..of 2000 , 16Mr .-Enayatstipulated that $428, .637 .83 in payment s received from customers of 'Sutter was never deposited into a Sutter. account or in any of Mr:. Enayat's personal accounts . Undeposit-,ed'checks totaling this amount were either cashed o r endorsed over,to Sutter's creditors . "Where no .corresponding deposit could be found for a reported sale, r.;and wher.ethe transaction did not involve the exchange of money (e .g . an October 14, 2000, entry of $8,560 for K .N .C . Investments, where Sutter' exchanged a'rug for the payment' of rent), the IRS, added that sale to Sutter's gross receipts . We find no fault" with this'"approach :-' The value that Sutter received in kind in exchange for-a ru g should have been included in gross receipts . Atbest .there might have'been .an'occasion for an . ,offset (e .,g ., as a cost of goods sold or as a deduction for the rent for which _therug was payment),, but Mr . Enayat did not show that the offset had not already been claimed, and he did no t all ege or 'pr ove his ;enti t htlement to . furthe'deductions or costs of goods goods sold . " - 22 - because .Sutter: had used an accrual method of accounting-,A , basis of'this .analysis the IRS determined that Mr . Enayat,ha d understated Sutter ', s gross receipts for 2000 by, $ 252,722 . 08, :and we find that-this determination was not refuted, . Money Dr . Willitts Entrusted to Mr . Enava t On July . 13, 1998 , Mr . Enayat received , in his Oppenheime r investment account, a .wire transfer of $455,485 from a Cayman, , Islands account controlled by Dr . ;William Willitts . Mr . ,.Enayat , testified that Dr . Willitts entrusted this money toMr . ._,Enayat ; pursuant to'an arrangement used by Iranian-Americans because i t is impractical or impossible to transfer dollars from :the,United :. . Statesto Iran . A practice has developed under which,=a transfer",,.. is made indirectly by paying dollars to an American who has a friend or relative in Iran, and then having the(cid:127)-American direc t his friend or relative to make an equivalent transfe r in% .rials- (the Iranian . currency) to the ultimate payee in Iran . Dr . Willitts .paid Mr . Enayat $455,485 in the United States wit h the understanding that the equivalent amount in rials would,be . made available to Dr . Willitts in Iran from the proceed s sale of :property owned by Mr . Enayat'sfamily in Iran . Dr . Willit ts never made it to Iran and never received,th e equivalent of $455, 485 in rials . Mr . Enayat testified that once Dr . Willitts wired the funds , into his,account, Mr . Enayat had free use of the, money . 23, - Dr Willitts expected Mr . EnayatY or his =fami-ly :in Iran to provid e rials in,, Iran -to 'Dr . 'Willitts from, the proceeds of an unrelate d real estate -transaction;(cid:127)he-did not ; expect Mr .(cid:127)Enayat to . purchase rials iaith'the .dol'1'ars wired into the-.Oppenheimer investment account . 'Mr . Enayat used-some of the money to fund his business andf"the'rdst for options trading . 'By'April 30, 1999, the balance of Mr . Enayat''s Oppenheimer account .was'zero, indicating that Mr . .'Enayat'had spent, trans"ferred', or-lost (through diminution i n the value of the . ,securities 'he held) 'all of the funds in that account, including'Dr Willitts'- s money . . At dome point ' Dr . Wil litts'_ s 'wife , Dr .' Roofeh (who i s Mr . Enayat'sfriend),lasked Mr .' Enayat'for $54,000 in the United States ,, and Mn . Enayat promptly returned that portion of th e $455,485 .. Subsequently,'Mr'Enayat'rpaid additional sums to or at the direction-of Dr . Willitts, and he .testified that he had returned a total of $270'000 as,'ofthe date oftrial . However , there is a disputelover .,how much Mr . Enayatxrepaid . An Agreement and Release which Mr . Enayat, .Dr ..Willitts, and Dr . Roofeh eac h signed in~ .November~1999 characterizes the,$454,000 asa debt owe d Willitts by Mr .,Enayat, and it identifies a dispute i n Enayat claimed~ he owed $285,000, and Dr . Willitt s claimed the outstanding debt was $3-05,000 . Dr . Willitts filed a Petition for Ex Parte Attachment and .,T;rustee Process in the Hillsborough County (New, . Hampshire),-=Superior Court on or about - 24 - De(cid:127)cember° 17, .1999, in which he alleged that Mr . 'Enayat -had repaid ' $148', :899'of :the total sum due of $454,000, and allegeda balanc e due : of $305,101 .18 . Dr . Willitts's petition does not allege : theft, conversion, embezzlement, or misappropriation . On .-th e record before us, there is no evidence .of any wrong°by Mr . Enayat in receiving or using Dr . Willitts's money . The only wrong eve n alleged is :his failure to pay-the money back after the,parties , could not-conclude the intended transactions in Iran . Mr . Enayat alleges that-he has repaid the much . greate r amount of $310,000--i .e ., $270,000 in cash and rugs plus $40,00 0 from the settlement on the building where Sutter was-located -,- leaving a balance due of approximately $145,000 . However ., Mr . Enayat did not provide any evidence other than his own . testimony to substantiate the repayment of $310,000 of the mone y Dr . Willitts transferred to him . As . a, result , to the extent tha t such a finding is needed, we find that, at most, Mr . Enayat-,had repaid $148 , 899 :(the amount Dr . Willitts conceded in .-his ., petition) . Mr . . Enayat did not report the receipt of . the ;,$455, :485 , any portion thereof, on his Form 1040 for 1998 (or any ; .other year :, issue) . . The IRS determined that Mr . Enayat had, repaid a 18The record does not indicate why the amount recited in the Agreement and Release was $454,000 or why Dr . Willitts .indicate d in his petition that the total balance he entrusted to Mr . Enayat was $454,000 instead of the $455,485 he wired to Mr ., Enayat' .s, account . . - 25 - portion-of the' money owed . to' Dr .- Willitts, -but .to the exten t Mr . Enayat had '-failed'_to repay .the money .--$305, 101--the notice .of ,deficiency:'refereed to it as~"income from-theft" and "embezzled funds" income 'to-Mr . Ehayats .1 9 Mr.' -Enayat contends -that respondent is -estopped from assert=in'g 'that he ' embezzled' . mon'ey' from Dry . Willitts because, in a criminal case against Dr . Roofeh,2° the Government calle d Mr . Enayat as 'a' witness' in,'2001 and . evoked 'testimony from him t o the "effect that he did not'take or steal ;;the money tha t Dr . Willitts had transferred-to him ; ''= However , without . finding . that the Government is est'opped:from asserting that Mr . Enayat . stole 'the 'money ; 2' we simply=find on, the preponderance of th e ,19Although respondent concedes that some of the mone y Mr . Enayat repaid to 'Dr . "Willitts may have been repaid in 'years later than taxable year 1998, the adjustment to Mr . Enayat's income nets the alleged embezzlement and all the repayments as i f .they,happened in taxable year 1998, evidently for the sake o simplicity, . Mf United States v . Roofeh , No . lr:OOCROO112 (D . N .H . dismissed -Feb . ;'28, '2001 ) 21Mr . Enayat,'s ."estoppel argument is(cid:127)not :well grounded . To be judicially ..,estopped,'nthe Government must have succeeded in persuading : .a court to_,accept'its .prior position", .Alternative Sys . Concepts, Inc . v-. -Synopsys,~'Inc , .374 F .3d .23, 33<,(ls.t Cir . 2004), but Mr .Enayat :has not shown-that in the Roofeh case the Government,' actually' took the position that he did not commit theft or 'thatt",-it su-cceeded, iri persuading the Court to accept that position . Mr . "xEnayat= cites United' States v' . . Kattar , 840 F .2d, 118, .128 ,(1st=Cir .' 1988) (quoting--Napue (cid:127)v . Illinois , 360 U .S'. 264, 269 (1959)) ; for"the inapposite proposition that "conviction must fall' when the' .prosecut on, 'although' not ,soliciting fals e evidence,-allows- it to go uncorrected when.,it_.appears" . . (continued . . .) - 26 - evidence ; that Mr . Enayat received the money not . by„theft or misappropriation but in the transaction that he described .Y find,:that .he therefore owed a debt to Dr . Willitts in_tha t amount, and during the years at issue the money Dr . Wi.llitts ;had , transferred to Mr . Enayat and that Mr . Enayat had yet .to .repa y remained ' ;a .debt that Mr . Enayat continued to owe Dr . Willit t Sale of the Elm Street Propert y Until . . early May 1998, Mr . Enayat rented and resided in .aw_ ._ house on Elm Street in Manchester, New Hampshire . . He moved ou t in,May 1998 ; 22 and about two months later on July 24,-1998 , purchased the Elm Street house for $ 210,000 as an investment After Mr . Enayat bought the house in July, -he began renovating it ; and he sold the house five months later on -December , .30, 1998 , for $274,000 . That the renovation occurred is established ho t 21( . . . continued ) We cannot tell, but perhaps that proposition (Emphasis added .) could have been helpful to the criminal defendant who was bein g prosecuted in Roofeh . However, this deficiency casein the,'Tax-.,, Court is not a criminal case ; Mr . Enayat is not being prosecuted ;' ' and his . complaint is not that the Government . relies-here on "false evidence" but that it attempts to contradict :,Mr :,„Enayat's .., testimony that (he insists) constituted true evidence in,another . case . Kattar has no application here . 22Respondent called Mr . Enayat's former girlfriend as-a . . , witness'at trial to testify that Mr . Enayat had lived .-at the Elm,„; Street 'property from July to December 1998 ( i .e ., after Mr . Enayat had purchased the house) . However,'when pressed o n this issue, . the witness admitted that she may have been confusing„ .December 1997 with December 1998 . We find that Mr .-Enayat did'-',, not .reside at the Elm Street property after he purchased it in,, . July .1998 . -'2 7 only 'by. -Mr . Enayat' sy testimony but 'also by 'the fact that the December . 1.998 sale price° was '.$64, 000, higher' than Mr . Enayat's July 1998 purchase price' . However,". 'at- trial he offered no substantiation for -any-' expenditures~-iricurr .ed in -the . renovation, and he gave only the most general testimony .about the nature of the renovation . On his 1998 -return 'Mr .' Enayat reported-$71,812 in capital : .gains from securities transactions and a $ 1 18,619 capital loss identified as"Investment Property/House", .(cid:127) To compute this loss, we assume that-Mr .Enayat included the-supposed cost o f renovations i' his basis .-for the house . (With a purchase price of '$210 ;,000 'and„a . saleeprice of $274,_000,, it would have taken more than $182,000 in renovation costs to yield a loss of $118,619 :° Mr .'Enayat did . riot substantiate costs of $182,000 or any"other"amount .) ' Mr . =Enayat 'fully offset his 1998 capital gain ' of $71,812-with his' purported' real estate capital loss . He entered a $3,000 capital loss on line 13 of his 1998 Form 1040, but .because he reported negative adjusted gross income, he di d not actually"obtain : the-benefit'of any_,deduction for capital los s for'"1998 . (cid:127) Rather , <Enayat'_carried forward' .a $46,807 capita l loss ., (i .e .., $118,61 9 minus $71,812), and he used that amount t o offset some f.'his $338,202 net capital gains in 1999 .2 3 23The =. parties 'stipulated that Mr- . Enayat- ;claimed hi s purported $118, 619 .'real : estate' capital -loss-by claiming $74,812 (continued, . - 28 - In the=notice of deficiency the IRS disallowed thesea ;capital,_: loss deductions for both 1998 and 1999 . We find that :Mr . .(cid:127)Enaya t substantiated . his purchase price of $210,000 but not any , additional .basis derived from renovations, and that therefore,he- , did not prove his capital loss . Mr . Enavat's Concession s Mr .?(cid:127)Enayat conceded the following four matters, : d1;., Gambling Income . During taxable year 1998 Mr .Enayat received gambling income of $16,800 from Foxwoods Casino . Mr . Enayat did not report the receipt of this gambling income on . his 1998 Form 104 .0 . Mr . Enayat does not dispute that he . .,rece.ived , this income or that it should have been reported on his .1998 Form 1040 . 2 .' Rental Income . During taxable year 1998 .Mr . Enaya t received rental income of $2,000 from Shorty's Mexican Roadhouse . ... Mr . Enayat did not report the receipt of this rental income on . 21 . .continued ) of the loss in 1998 and carrying $46,807 of the loss forward into . 1999 . The sum of these amounts is $ 121 ,619, not $118,619 ; and the $74,812 stipulated as claimed in 1998 appears mistakenly to include>the $3,000 Mr . Enayat entered on line 13 of :his Form 104 0 We may disregard stipulations but that he was unable to deduct . between"parties where justice requires , if the evidence contrar y to the stipulation is substantial or the stipulation is clearly contrary to facts disclosed by the record . See Cal-Maine Food s Inc . v . Commissioner , 93 T .C . 181, 195 (1989) ; Jasionowski v . Commissioner , 66 T .C . 312, 318 (1976) . The tax returns show that " Mr . Enayat-applied $71,812 (not $74,812) to offset capital 'gain s in 1998 and $46,807 to offset net capital gains in 1999, totalin g $ 118 ,619,(not $121,619) . - -2 9 his 1998 Form .1.040 . Mr.. .Enayat° does' not . dispute that he receive d this income or that it should have been reported on his 1998 Form unable to operat e .building . In July 2000 Mr .Enayat filed an insurance claim an d received business interruption insurance payments of $201,92 9 from Safeco Insuranc e note 29 .) Mr . Enayat did not- report the receipt of thes e insurance proceed s on. his 2000 Form 1040 . Mr . Enayat does no t income reported on his 2000 Form .1040= rt. r~ 4 . Stolen Check . During taxable year 2001 Mr . Enayat received'a Bank of America check~in'the amount of $113,800, whic h was from a company called QAD, Inc, ., and issued to Innuendo, LLC . Mr . Enayat misappropriated .the'funds by negotiating the chec k with the help of :a friend, and he wasconvicted of receipt o f stolen securities under 18 U .S .C .'section 2315 in the U .S . District Court for the District of New Hampshire . Mr . Enayat di d not report the receipt of the .$113,800 on his 2001 Form 1040, an d he does -not-dispute'that this $113 ,800 should have . been reported - 30 - Mr .°Enayat's Federal Income Tax Returns and the Results o .f'the IRS's Examinatio n A . Taxable Year 199 8 Mr . Enayat filed his Form 1040 for taxable year 1998 a year late on April 14, 2000 . He reported no wage or salary income . He claimed a capital loss of $71,812 from the sale of real estat e (the Elm Street property) and carried over $46,807 to his 199 9 Form 1040. As a result, he reported no taxable income for 1998 . After examining Mr . Enayat's 1998 return, the IRS made th e following adjustments to his income : (1) a $74,812 increase in taxable income, arising from the : disallowance of a capital loss with respect to-the sale of the Elm Street property ; (2) a $16,800 increase in taxable income derived from gambling ; (3) . a $349,356 increase in officer's compensation income, to account for transfers of money from Woodbury's accounts to his personal accounts ; (4) a $305,101 increase in taxable income, to account for the transfer from Dr . Willitts ; (5) a $203,273 increase in constructive dividend income, to, R .account for checks made out to Woodbury but deposited into his personal accounts ; (6) a $2,000 increase in taxable rental income ; and (7) an $8,100 increase in taxable income, resulting from -. the disallowance of personal exemptions because o f Mr . Enayat's corrected adjusted gross income (AGI) resulting from the adjustments above . B . Taxable Year . (cid:127) .199 9 - 31 - Mr . Enayat filed his Form 1040 for taxable year 1999 o n October 9, 2002 . He reported no wage or salary income, and h e claimed°the'-'capital loss of $46,807 that was carried over fro m his 1998 Form 1040 .24 He attached to his. 1999 return a Schedule C for Sutter . He reported that Sutter had no gross receipts in 1999 .but that it had $38,024 in expenses, resulting in a claimed loss of $38,024 from Sutter . He reported taxable income o f $234,688 .. Following an examination of Mr . Enayat's 1999 return , the IRS made the following adjustments to his income : (1) a $46,807 increase in taxable income, arising from the disallowance of a capital loss, with respect to the sale of the Elm Street property; ' (2) a.'$85,20025increase in officer's compensation income, , .to account for transfers of'money from°Woodbury's accounts to his personal accounts ; (3) $31 ;723 increase . in cons-tructive_dividend income, to account for checks madeeout to Woodbury but deposited into his personal accounts ; (4) a $1,228 increase in . the"gross receipts reported on his 'Schedul'e C, "to (cid:127)reflect -Sutter's correct gross receipts ; and (5) a $5,184 increase in taxable income, resulting from the 'disallowance . of' itemized"deductions because o f 24Mr . Edayat :alsohad other'capital gains and . losses that resulted in'his claiming a°total .capital gain of $291 .,395 on his 1999 return .. 25TheIRS later :determin'ed--and has conceded in this case--' that the actual amount of Woodbury-to .-Enayat-transfers was $67,2,00- . ''See .' supra note 3:. - 32 - Mr . Enayat's corrected AGI resulting from the adjustments above . C . Taxable Year 200 0 Mr . Enayat filed his Form 1040 for taxable .year 2000 o n October 22, 2002 . . He reported no wage or salary income . , attached to his 2000 return a Schedule C for Sutter . He reported that in-1999 Sutter had gross receipts of $671,920 but had $332,159 in cost of goods sold plus $457,826 in additiona l expenses, resulting in a claimed loss of $118,065 from Sutter . He reported zero taxable income . After examining that return, the IRS made the following adjustments to his income : (1) -a $201,929 increase in taxable income to account for the receipt of insurance proceeds ; (2) a $252,721 increase in the gross receipts reported on his Schedule C, to reflect Sutter's correct gross receipts ; (3) . a $9,232 decrease in taxable income," to allow-the increased deduction for one-half of Mr . Enayat's self employment tax ;2 6 (4) an $11,169 increase in taxable income, resulting from- the disallowance of itemized deductions because of Mr . Enayat's corrected AGI resulting from the adjustments above ; an d (5) a $2,800 increase in taxable income, resulting from the disallowance of personal exemptions because of . 26Because Mr . Enayat's self-employment (Schedule C) income increased, so did his self-employment tax . That self-employments-, tax increase is not reflected on the adjustments to Mr . Enayat's income, but his deduction for one-half . of that higher amount is . Although Mr . Enayat challenges the IRS's year 2000 income adjustment, . he . did not offer any argument that the amount, i f income, should not be characterized as self-employment-income . - - 3 3 _ Mr .''Enayat's -'corrected AGI,,resulting fr .omthe adjustments above . D . Taxable Year 200 1 Mr . Enayat file d his Form 1040 for taxable year 2001 on October 22, 2002 . He''reported no wage or salary income an d reported a $30,059 .loss from-Sutter . He reported no taxable . income for 2001 . Following an examination of Mr . Enayat's 2001 return, the IRS made the following adjustments to his income : (1) a,$1,13,800- increase in the gross receipts reported on his Schedule C, to include the amount of a stolen check ; 'an d (2) : a $5,917 decrease-in taxable income, to allow the . increased deduction for-one-half of Mr . Enayat's self employment ta x Woodbury's,Federal>Incorne,Tax Returns and the .Results of th e IRS's Examinatio n For the year, 199 8 2003, reporting, inter alia , gross receipts of $1,415,111 and, after deductions, a net loss o f $13,633 . After examination the-IRS adjusted Woodbury's 199 8 gross receipts upwards by $246,35 .2 . For the year 1999 Woodbury filed no tax return . Afte r examination the IRS determined Woodbury's gross receipts--and it s taxable income--to be $162,050 for 1 999 . Although the IRS had determined that Mr . Enayat had receive d compensation from Woodbury 'of $34 .9,35 .6 in .1998 and $67,200 i n 199.9 (a correction from an earlier $85,200), the notice o f - 34 - deficienc y reflected no allowance of deductions for Woodbur y thes e amounts . ( As we show infra in part I .B .3 and 4 , if suc h deductions are allowed, the 1998 income adjustment is entirel y offset an d The Statutory Notices of Deficiency and the Commencement of Thes e Case s notices Enayat's notice the IRS determined a deficiency ; based on th e adjustments of income described above and also . determined bot h additions to tax for his failure to timely file his returns an d penalties for taxable years 1998, 1999, 2000,,and2001 . Woodbury'„s :notice the IRS determined deficiencies for taxabl e ,.years 1998 and 1999 based on the adjustments to its gros s receipts as described above and also determined additions to ta x for its failure to timely file its tax return for taxable yea r 1998 and for its fraudulent failure to file for taxable year 199 9 fraud penalty for taxable year 1998 . Mr . Enayat an d Woodbury both .timely petitioned this Court for a redeterminatio n of their respective deficiencies . OPINIO N Unreported Income of Woodbury and Sutte r Mr . Enayat operated his rug business through Woodbury i n 1998 and 1999 and through Sutter in 1999 through 2001 , sloppy 35 - their income . Taxpayers bear the responsibility to maintain books and records-that'are sufficient to establish their income . See sec :_%6 .001 DiLeov . Commissioner , 96 T .C ._ 858, 867 (1991) , affd . 959 F:2d 16 (2d Ci r ., 19.9.2) ; sec . .1-- .446-1(a)(4), Income Tax Regs . (26 C :.F R .) ; +see also "'Estate. of .Mason ;v . Commissioner , 6 4 T .C .; 651,, 656 (1975) affd .- 566 F .-2d (cid:127)2__ (6th Cir . 1977) . Mr . Enayat failed to fulfill that responsibility both as t o himself and„as,to his C corporation , .Woodbury . , A . The IRS ' s Use of the Bank Deposits Metho d When .a taxpayer fails :. to keep - adequate books and records, the IRS is authorized to .determine the existence and amount of the taxpayer '-.ss income by . . any . .method that, clearly reflects income . Sec .,446(b) ;(cid:127) Mallette?Bros .-Constr . Co . v . United States , 695 F .2d 145, 148 ('5th , .Cir . 1983) . ; Webb .v . Commissioner , 394 F .2d 366, 371-372 (5th Cir . 1968),, .affg . T .C . .Memo . :1916,6-81 ; see also Holland v . United States ,,348 U .S . .121, 131-132 (1954) . The IRS's reconstruction of .a,taxpayer's income need only be .reasonable-in light .ofall surrounding facts and circumstances . Schroeder-v . Commissioner , 40 T .C .. 30, 33 (1963) ; see also Giddio v . Comm issioner , 54 T .C . 1530, 1533 (1970) . The IRS is given latitude imdetermining which method of reconstruction to apply when taxpayers fail-to maintain=adequate books and records . Boyett v . Commissioner , 204-F .2d 205, 208 (5th Cir . 1953), affg . a Memorandum--Opinion of this Court ; Kenney v . Commissioner , 111 F .2d 374,' 375 (5th Cir . 1940), affg . a Memorandum Opinion of thi s Court ; Petzoldt v . Commissioner , 92 T .C . 661, 693,(1:989) . In the instant cases , the IRS chose to apply the ban k deposits method . A bank deposit is prima facie evidenc e income . Tokarski v . Commissioner , 87 T .C . 74, 77 (1986) ; :°'se e also Clayton v . Commissioner , 102 T .C . 632, 645 (1994) ; Commissioner , supra at 868 ; Estate of Mason v . Commissioner , supra at large bank deposits, the IRS is not acting arbitraril y capriciously by resorting to the bank deposits method DiLeo v . Commissioner , supra at 867 . The bank deposits metho d reconstruction assumes that all of the money deposite d taxpayer's account is taxable income unless the taxpaye r the deposits are not taxable . See id . at 868 ; see als o Price-v .-United States , 335 F .2d 671, 677 (5th Cir . 1964) . Th e IRS need not show a likely source of the income when using .. th e bank deposits method, but the IRS must take into account'-any nontaxable items or deductible expenses of which the IRS has knowledge . See Price v . United States , supra at 677 ;: Tokarski v . Commissioner , supra at 77 . Using the bank deposits method, the IRS identifie d unreported gross receipts for Woodbury for taxable years-1998 an d 1999 , (Mr .Enayat's LLC) for taxable years 1999 and 2000 . As a general - 3 7 rule, the IRS's . determinations are .presumed correct, and the taxpayer has the burden of establishing that the determinations in the notice of-deficiency are erroneous : Rule 142(a), Welch v . Helverina ; 290 U .S ..111,' 115-(1933) As is explained above, we find that the"IRS=reasonably reconstructed petitioners' income under the bank deposits method for all the years in issue . TetitIone"rs'' Chaliencre to .the Bank Deposits Analysi s -Mr . Enayat contends that the IRS's bank deposits analysis is faulty ., The :burden is 'on the taxpayer to show that the IRS's analysis is'unfair or inaccurate ., Price v . United States , supra at 677 . Petitioners must show either that the IRS's computation of their incomeis inaccurate or that the deposits made into their bank accounts are-'not taxable . See Marcello v . Commissioner , 380 F .-2d 509,'5-11 (5th Cir . 1967), affg . T .C . Memo . 1964 - 303 and T .C .' Memo . 1964- 304 ; Price v . United States , supr a at 678 ; DiLeo v .°-Commissioner',-'supra at 871 ., We consider each of the years at is"sue, taking them out of order to begin with th e .year in'which'Mr . Enayat .makes his most serious . challenge . 1 . Sutter's Year 200 0 For' taxable, year 2000 ; Mr, Enayat,introduced a detailed sales report of Sutter which purported to list the date of every sale ,Sutter made with the corresponding customer's name and the amoun t of the sale . Mr . Enayat .alleges that, the detailed sales report is a complete list of all sales for Sutter in 2000 and that it 38 - therefore' represents Sutter's gross receipts for 2000 ; Mr .-Enayat reported the gross receipts of Sutter to be $671,9202 7 on his2000 Form 1040 . However , when the IRS completed its ban k deposit-s analysis of Sutter's bank accounts, it found . that Mr . Enayat had understated the LLC's gross receipts by $252,722 .08 . To determine the correct figure for Sutter's gross .receipts in2000 :, . the IRS performed a bank deposits analysis by looking a t the total deposits into Sutter's accounts and reducing tha t amount 'by any identifiable non-taxable item (e .g ., transfer s between accounts, cash deposits, returned checks, and ta x refunds) to get Sutter's net taxable deposits . Because Mr . Enayat has stipulated that some of Sutter's receipts for 200 0 were never deposited into a Sutter account or in any of Mr . Enayat's personal accounts,28 the IRS then compare d Mr . Enayat ' s customer payment summary to actual deposits mad e into the known accounts . Any reported customer payment that di d not have a corresponding deposit into a Sutter account or one o f Mr . Enayat's personal accounts was added to Sutter's net taxabl e deposits to account for total gross receipts for 2000 . . The IR S 27 The gross receipts as calculated on the detailed sale s report were $691,170 . As indicated supra note 15, Mr . Enayat di d not explain the difference between the gross sales reported o n the detailed sales report and the gross receipts reported=on his" Schedule C . , 28See supra note 16 . - 39 - " then made an adjustment to-account for'accounts . receivable at the beginning of 2000 compared to the end of 2000 and for a deposit from Lynk Systems which was treated as non-taxable . Following this methodology the IRS determined that Sutter had gros s receipts of $9'24,624 .55 forthe, year 2'000 . Because Mr . Enayat reported Sutter's gross'receipts to be $671,920 .47 on his 2000 Schedule C, the IRS determined that Mr . Enayat understate d Sutter's-gro'ssreceipts for taxable year 2000 by $252,722 .08 . We find the IRS's bank deposits analysis to'be credible . Therefore , the-burden lies with Mr Enayat to show any flaws in the IRS's methodology . Price v . United States , supra at 677 . Mr . Enayat arguesthat'the,IRS's-bank deposits analysis on Sutter's accounts is''flawed because it included in gross receipts items that had otherwise'been counted(cid:127),and should have been excluded°to,avoid double-counting --(i) insurance proceeds from Safeco that had already been'' attributed as income to Mr . Enayat' and (ii) loans from third parties Furthermore, Mr . Enayat argues that he reported' Sutter's gross receipts accurately because he reported the figure shown on the sales report which recorded every sales transaction . We do not find any o f Mr ., Enayat's arguments . to .have_merit . - 40 - First, Mr . Enayat alleges that the inclusion of the $266,65229 of Safeco insurance proceeds in the IRS's bank deposits analysis for Sutter was wrong because the IRS ha d already counted those proceeds as income to him personally . . That, is, Mr . Enayat asserts that the IRS did not treat these Safeco deposits as non-taxable in its analysis and reduce the gross deposits by these amounts . He does not support this assertion by an analysis of the bank deposits or a detailed critique of the IRS's analysis, and the assertion is wrong as a matter of fact . Mr . Enayat deposited three checks from Safeco into Sutter's Fleet-- account No . 3078 totaling $226,652 . In addition to these three checks, .a fourth check from Safeco in the amount of .$40,000 was evidently negotiated through a third party, so that $40,000 in Safeco insurance proceeds reached Sutter's accounts as a cash deposit .. In its analysis of Fleet account No . 3078, the IRS determined that in 2000 there were gross deposits of $465,179 .29 (presumably including the Safeco payments) . Of that total, th e IRS treated $322,327 . 88 as non -taxable items, leaving net taxabl e 29The record shows that $266,652 from Safeco was deposited into Sutter's Accounts . However, the parties have stipulated that the insurance proceeds Mr . Enayat received for business interruption in 2000 totaled $201,929 . We do not attempt to resolve this unexplained discrepancy . Rather, we use the larger number when that favors Mr . Enayat (i .e ., in his critique of the bank deposits analysis), and we use the smaller number when that favors Mr . Enayat (i .e ., in accepting the stipulated smaller number as the amount of the income adjustment) . 41 deposits of only $142,831 .41.,an amount too small to include the much larger Safeco~proceeds The IRS specifically identified cash as a non-taxable item in its analysis . 'Therefore, .the $40,000 cash portion of the Safeco payments was_.necessarily . :treated as non-taxable . Had the IRS failed to remove the insurance checks totaling $226,652 as non-taxable items,'then=the net deposit total for Fleet account No . 3078 would have had . to 'include that amount, but it clearly does not . The net taxable deposits for Fleet account No . 3078 is only $142,831 .41, which is much'le:ss than the $22 6 ,652 (or the $266,652 with the'$40,000 cash deposit included) that Mr . Enayat accuses the IRS of=ignoring, and thereby treating as taxable . The IRS treated $322,327 .88 :from this account,as non-taxable items, and :it was Mr .Enayat's'burden :to prove that the Safeco .checks and 'cash were not among these items . He failed to do so . Second, Mr .-Enayat alleges that $200, :168 of the deposits found in Sutter'-accounts was .not .taxable income but rather was the proceeds of loans .by third parties . However, other . than his own testimony,=Mr . Enayat provided°no proof of these third-party loans--no-loan documents-of,any kind ; no testimony from any of the alleged lenders, and no°minutes .or financial entries reflecting such loans, .-,None of the-checks deposited from thes e third parties had any markings on them (such as the designatio n "loan" written on the front of the check) to indicate that they - 42 - were intended as loans . On the contrary, two of the . pertinent checks had markings on them that indicate that they were not loans (i .e ., one check for $10,000 had "9x13" written in the "memo" area, apparently indicating that the check was for the purchase of a 9- by 13-foot rug ; and one wire transfer for $25,000 had "1982 Rolls Royce" written on it, indicating that the . transaction involved a car) . We find that Mr . Enayat has not provided credible evidence to prove that any loans were made and_», their proceeds deposited into Sutter's bank accounts in 2000, and we therefore find no fault in the IRS's declining to reduce-net deposits to account for these unsubstantiated loans . Third, Mr . Enayat argues that Sutter's gross receipts were not understated because .he reported the gross receipts as shown on the sales report summary that (he says) recorded every sale . However, the gross receipts he reported did not correspon d precisely to the total amount on the sales report ; and more important, Sutter's bank accounts received many thousands of dollars more than Mr . Enayat reported . The IRS determined by it s analysis that Sutter had understated its gross receipts by $252,722 .08 . Mr . Enayat's burden was to prove where that extra . $252,722 .08 in deposits came from (if not sales), and he did not meet that burden simply by insisting that the sales report was accurate - 4 3 We find that Mr . Enayat"failed .to carry his burden of refuting'the-IRS's--bank deposits . analysis, and we find that Sutter had additional-grossreceipts of $252,722 .08 for the yea r 2000 . 2 . Sutter's Year 199 9 Mr Enayat has stipulated that-Sutter received two customer checks during-taxable year 1999 totaling $1,228 which were deposited'into--Sutter's Bank of New Hampshire account No . 8876 . However, the Schedule C-for Sutter . attached to Mr . Enayat's 1999 Forrn1040'"reported zero gross receipts . We . find that the customer deposits made .intoSutter's account in 1999 indicate that Sutter did have gross receiptsof $1,228 in the year 1999 . This corresponds with :the bank deposits analysis performed by the IRS . 3 . Woodburv's Year 19.9 8 Woodbury filed its Form . 1120 . for, taxable year 1998 on September 10,n2003 '-Itreported'gross receipts of $1,168,759 . However, Woodbury's return preparer testified that he did not recall where that figure came from or-.how it was computed . Mr . Enayat offered no sales report .summary for Woodbury's 199 8 year .as he did for Sutter' .s . 2000 year. . -Because we find the IRS's bank deposits analysis to be credible, and because Mr . Enayat has not introduced any evidence to refute :.it, we find that Woodbury had additional gross rec=eipts of°$246,352 for taxable year 1998 . - 44 - However, as respondent acknowledged in his brief, Woodbury i s entitled'-to a deduction in 1998 for the compensation imputed t Mr . Enayat . The amount of this deduction is $349,356, which more than offsets Woodbury's additional income in that year . 4 . Woodbury's Year 199 9 Woodbury proffered no sales report summary for the year 1999 and failed to file its Form 1120 for that year . As a result, th e IRS prepared for Woodbury a substitute for return pursuant to section 6020(b) . That substitute for return reported gross receipts of $162,050 for taxable year 1999, as determined by the IRS's bank deposits analysis . Again, because we find the IRS's bank deposits analysis to be credible, and because Mr . Enayat has not introduced any evidence to challenge that analysis, we find that Woodbury had unreported gross receipts of $162,050 for taxable year 1999 . However, as in 1998, Woodbury is entitled in 1999 to a deduction of $67,200 for the compensation imputed to Mr . Enayat, thereby reducing Woodbury's taxable income in that year to $94,850 . II . Income Mr . Enayat Did Not Report A . Income From the Rug Busines s 1 . Woodbury Checks Deposited to His Personal Accounts ., In the notice of deficiency the IRS determined tha t Mr . Enayat had additional constructive dividend income of $203,273 in 1998 and $31,723 in 1999, as a result of his 45 depositing into his personal accounts checks made out to Woodbury .-Mr . Enayat did not treat any of the diverted checks as income on his Forms'1040 for 1998 and 1999 . Mr : Enayat acknowledges that he deposited checks made out to Woodbury in his personal accounts, but he contends that he was holding the money for the corporation, in a sort of trust or escrow arrangement, in .order to prevent vendors from prematurely negotiating Woodbury'spost-dated checks, and that he transferred the funds to Woodbury's accounts to cover its checks when they were actually due . It is true that in 1998 in the aggregat e Mr . Enayat deposited into'his-p.ersonal accounts $203,273 worth of checks-payable"to Woodbury and transferred $201,950 back into corporate accounts, leaving'a difference of only $1,323 in his personal accounts . Moreover, it is also true that funds receive d in trust by a trustee are excludable from gross income when : (i) the-funds are subject ..toa restriction . that they be expended for a specific purpose and (ii) the taxpayer does not profit, gain, or benefit in-spending the funds for the stated purpose . Ford Dealers Adver'Fund Inc . v . Commissioner , 55 T .C . 761, 771 (1971) (citing Seven=Up Co . v . Commissioner ; 14 T .C . 965 (1950), Broad . Measurement'Bureau Inc . v .-Commissioner, 16 T .C . 988 (1951), Angelus Funeral Home'v ;'Commissioner , 47 T .C . 391 (1967), affd . 407 F .2d Z10'(9th-Cir . 1969), and Dri-Powr Distribs . Association Trust v . Commissioner , 54'T .C . 460 (1970)), affd . 45 6 REM - 46 - F .2d 255 (5th Cir . 1972) . On the other hand, funds that are misappropriated from a trust by a trustee are includable in the . trustee's gross income . Webb v . IRS , 15 F .3d 203 (1st Cir . 1994) ; . Adams v . Commissioner , T .C . Memo . 1970-104, affd . 456 .F .2d 259 (9th Cir . 1972) . We have found that Mr . Enayat did not establish the factual predicate for his argument . In 1999 he made no transfers to Woodbury to compensate for its checks, and even in 1998_ his narrative simply does not line up with the facts in the record . We therefore hold that Mr . Enayat had additional constructive dividend income of $203,273 in 1998 and $31,723 in 1999 . Mr . Enayat did not attempt to show that Woodbury lacked earnings, and profits sufficient to support a taxable dividend . Cf . secs . 301(a), (c)(1), 316(a) . We find these transfers to be taxable income to Mr . Enayat . A consequence of our finding is that the Woodbury checks Mr . Enayat deposited are taxable income both to him and to Woodbury . Thus, for a year (such as 1999) in which Woodbury has positive taxable income rather than loss, Woodbury is liable for tax on these amounts at its corporate rate, and Mr . Enayat is liable for income tax on the same amounts at his individual rate . One could observe that a corporation is a legal fiction (i .e ., fictitious person created pursuant to State law) and could complain that this double taxation is therefore founded on a 47 fiction ; but if so, it is a fiction that Mr . . Enayat chose when he incorporated Woodbury . Use of the corporate form entails certain advantages (chiefly, limited liability for shareholders), and the business operator who wants those advantages is free to apply to the State to charter a corporation . However, while the la w grants legal rights and privileges to corporations, it als o confers on them certain duties and obligations--including, i n this instance, being taxable under subchapter C (sections 301-385) .30 For Federal tax purposes, we respect Mr . Enayat's creation of Woodbury Rug Company, Inc ., and we acknowledge its distinct existence . As the Supreme Court stated in Moline Props ., Inc . v . Commissioner , 319 U .S . 436, 438-439 (1943) : The doctrine of corporate entity fills a useful purpose in business life . Whether the purpose be to gain an advantage under the law of the state o f incorporation or . to avoid or-.: .to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of,business,by the corporation, th e 301-t is often possible,to achieve ,the State law advantages of incorporation while avoiding the,status of being a separately taxable entity=for Federal . .tax purposes . One such means is for an entity to be disregarded .-pursuant to the so-called check-thebox regulations, sec . 301 .7701-3(b), .Proced . & Admin . Regs . (26 C .F .R .), see Med .Y'Practice Solutions, LLC v . Commissioner , 132 T .C . (2009), and in the later years at issue in this case, Mr . Enayat'did achieve this disregarded treatment for his LLC,Sutter, when-he organized it to .-replace Woodbury . Another common means is to elect subchapter S status for a corporation, see se cs .-1361-1379, but-Mr . Enayat :made no such election as to Woodbury for the years in issue . - 48 - corporation remains a separate taxable entity . [Fn . refs . omitted .] * Woodbury is therefore a taxpayer distinct from Mr . Enayat in 1998 and 1999, and each of these two taxpayers must bear his or its own liability . 2 . Transfers From Woodbur y We have found that Woodbury transferred to Mr . Enayat-- either by direct transfers to his personal accounts or by Woodbury checks made payable to Mr . Enayat--$349,356 in 1998 and $67,200 in 1999, totaling $416,556 . Respondent argues (consistent with the notice of deficiency) that these amounts constitute officer's compensation . Mr . Enayat acknowledges that he transferred money from Woodbury's accounts into his personal accounts, but he claims that these transfers were repayments by Woodbury of money Mr . Enayat had lent Woodbury throughout 1998 and 1999 .31 Mr . Enayat argues that since these transfer s 31Mr . Enayat's only contention against the taxability of these amounts is that they were repayments of loans . Mr . Enayat makes much of the fact that in 1998 and 1999 he transferred to Woodbury a substantially greater amount--$712,617--than the transfers he received from Woodbury, see supra note 12, and he urges that he can hardly have been enriched by these two-way transfers when in fact he suffered a net deficit . However, he does'not assert that if these transfers are not recognized as non-taxable loan repayments, then they are dividends rather than compensation . The reason may be that this characterization, if successful, would deprive Woodbury of deductions for $416,556 in compensation paid, thereby increasing its corporate income tax and penalties . (Dividends would be nondeductible to Woodbury, and pursuant to section 301(c) they would be : income t o Mr . Enayat, to the extent of Woodbury's earnings and profits ; (continued . . .) - 49' - represent the repayment'of a shareholder loan, they are not income to. him . Whether a withdrawal' of funds=by a shareholder from a corporation or an advance made by ,a shareholder to a corporatio n creates a true debtor-credi-tor relationship is a factual questio n to be decided on the basiszof all of the relevant facts and circumstances . Haag v . Commissioner , 88 T .C . 604, 615 (1987), affd . without published-opinion 855 F .2d 855 (8th Cir . 1988) ; see also Haber .v . Commissioner , 52 T . .C . 255, 266 (1969), affd . 422 F .2d 198 -(5th Cir . 1970), ;_ Roschuni'v . Commissioner , 29 T .C . 1193, 1201-1202 (1958), affd . 271 F .2d°267 (5th Cir . 1959) . For disbursements to constitute true 'loans, there must have been, at the tithe that the funds were, transferred, an unconditional obligation on the part of the transferee to repay the money and an unconditional intention ..'.on'the part of . the transferor to secure"repayment ."' Haag v . Commissioner , supra at 615-616 ; see also Haber v . Commissioner , su ra .at 266 . Direct evidence of a taxpayer's state of mind is generally-unavailable, so courts have focused oncertain objective factors ..to,distinguish repayments o f 31 ( . continued ) then nontaxable return of capital, to the extent of Mr . Enayat's basis in his-Woodbury stock ; then . gain from the sale . or exchange of property for the balance . Mr . Woodbury has also not presented any evidence of Woodbury's sarnings-and'profits nor of his basis in its stock .) In the absence of any .contention that th e payments were'dividends rather than compensation, we do not address this issue . - 50 - bona fide loans from disguised dividends, compensation, and returns of capital . The factors considered relevant for purposes of identifying bona fide loans include (1) the existence or nonexistence of a debt instrument ; (2) provisions for security, interest payments, and a fixed payment date ; (3) treatment of the funds on the corporation's books ; (4) whether repayments were made ; (5) the extent of the shareholder's participation in management ; and (6) the effect of the "loan" on the shareholder/employee's salary . Haber v . Commissioner , supra at 266 ; s'ee also United States v . Stewart ( In re Indian Lake Estates, Inc . ), 448 F .2d 574, 578-579 (5th Cir . 1971) ; Haag v . Commissioner , supra at 616-617 & n .6 . When the individuals are in substantial control of the corporation, as Mr . Enayat was in this case, such control invites a special scrutiny of the situation . Haber v . Commissioner , supra at 266 ; Roschuni v . Commissioner , supra at 1202 . For the reasons set forth below, we conclude that the facts of record do not support Mr . Enayat's attempt to characterize the distributions that he received from, Woodbury in 1998 and 1999 as repayments of bona fide loans . First, no note or other evidence of indebtedness reflecting the amount or existence of the shareholder loans was given t o Mr . Enayat by Woodbury . Furthermore, in the absence of explicit evidence of indebtedness, Mr . Enayat did not even provide an analysis of the transactions to support his assertion that every - 51 - payment from Woodbury to Mr . Enayat was preceded by a loan from Mr . Enayat to Woodbury, despite the Court's invitation to him to do so . Instead, Mr . Enayat provided only gross numbers for the transfers for the entire year .32 Although his arithmetic i s correct, his reasoning is not :, Where .the Enayat-to-Woodbury transfers only sometimes preceded the Woodbury-to-Enayat transfers and other times followed them, it cannot be said that the pattern of the money transfers corroborates the existence o f loans from Mr . Enayat to Woodbury .' . Second, Mr . ... Enayat's position that these transfers from Woodbury represented the repayment of loans is further belied b y his testimony admitting that he treated himself, Woodbury, and all the bank accounts as one . Third, no evidence indicates that Woodbury provided any collateral or security .for repayment of these purported loan amounts or that Woodbury made any agreement with Mr . Enayat as t o the time of repayment or the interest to be paid . Fourth, Mr . Enayat offered no evidence to show whether Woodbury treated his transfers as,loans (rather than as contributions) on the company's. books . And, as the examining IR S 32Mr . Enayat'alleges that'(cid:127)he received . net compensation of only $3,117 .89 in 1998'(i ..e ., ;„the.,_$349,356 in,Woodbury-to-Enayat. transfers minus the $346,238 .11 in Enayat-to-Woodbury transfers) and that he received no .compensation .at all in 1999 (since the $67,200 in-Woodbury-to-Enayat=transfers minus the $164,429 .17 in Enayat-to-Woodbury transfers ::yields a negative number) . - 52 - agent observed, the Schedule L, Balance Sheets per Books, on Woodbury's 1998 return showed no loans to or from shareholders . Fifth, Mr . Enayat's position requires the unlikel y conclusion that he was entitled to zero compensation for working, full time at Woodbury . . Mr . Enayat has worked in the Persian rug business since he was 18 years old and has owned his own store since 1994 . He testified that he was actively engaged in his business, e .g ., traveling to New York to purchase inventory, managing the store, selling his inventory, and so on . However, despite the flow of funds from Woodbury to Mr . Enayat, he reported zero wage income on his 1998 and 1999 Forms 1040, and Woodbury claimed zero deductions for officer's compensation (in 1998, the one year for which it did file a return) . We find that some of the money paid to him by Woodbury must have been compensation for his labor,33 and in the absence of his carrying his burden to prove a reasonable alternative, the IRS's determination stands . That is, we conclude that Mr . Enayat did not give and receive transfers pursuant to a true debtor-creditor relationshi p 33See Spicer Accounting, Inc . v . United States , 918 F .2d 90, 93 (9th Cir . 1990) (an officer who performs substantial services for acorporation is an employee, and corporate payments to him are wages) ; Joseph Radtke, S .C . v . United States , 712 F . Supp . 143, 145-146 (E .D . Wis . 1989) (corporate payments to employees in remuneration for services are wages, and the corporation may not evade employment taxes by characterizing such compensation as dividends), affd . 895 F .2d 1196 (7th Cir . 1990) . 53 with Woodbury . Rather, Mr . Enayat treated Woodbury's bank accounts as if they were his personal accounts, depositing and withdrawing funds-at-will . 'Accordingly, we find that the transfers made from'-Woodbury to Mr . .Enayat during 1998 and 1999 did not constitute repayments of .-bona fide loans, but instead represented compensation to Mr .°. Enayat . Therefore, we find, as the IRS determined, that Woodbury paid Mr . Enayat officer's compensation income of $349,356 in°1998 and $67,200 in 1999 by transferring funds to his personal°accounts .34 (This finding is adverse to Mr . Enayat- but is favorable to his (cid:127)C corporation Woodbury, as we explain below . ) B . Transfer From Dr . Willitt s We have found that in 1998 Mr .-Enayat received $455,485 from Dr . Willitts, which Mr . Enayat was obliged to pay back t o Dr . Willitts at his instruction .(originally expected to be in rials in Iran) . Mr . Enayatfreely .used .the money for his rug business and his own options trading, and he substantiated repayments of only $148,899 . . . The . IRS determined tha t Mr . Enayat's use of those funds for his own purposes demonstrates that he embezzled, stole, or misappropriated those funds fro m Dr . Willitts and that once he . did so the funds became income t o 39Because we do not find any creditor-debtor relationship to exist between Woodbury and Mr . Enayat, we find that any transfer of money from Mr . Enayat to Woodbury was not a loan, but rather a contribution to capital . . - 54 - him . Under section 61(a), "gross income means all income from whatever source derived" . The Supreme Court "has given a liberal construction to the broad phraseology of the 'gross income' definition statutes in recognition of the intention of Congress to tax all gains except those specifically exempted ." James v . United States , 366 U .S . 213, 219 (1961) (citing Commissioner v . Jacobson , 336 U .S . 28, 49 (1949), and Helvering v . Stockholms Enskilda Bank , 293 U .S . 84, 87-91 (1934)) . The Supreme Court held that embezzled funds and, more generally, "wrongful appropriations" are includable in gross income . Id . at 219-220 . However, Mr . Enayat's uncontradicted explanation of his arrangement with Dr . Willitts was that he was to deliver rials in Iran in exchange for dollars received in the United States, without any restriction on his use of the dollars he received because both parties understood that the rials provided in Iran would come from a different source . The record indicates an express obligation by Mr . Enayat to repay the money t o Dr . Willitts--in rials if Dr . Willitts had made it to Iran, or if not then in dollars as affirmed in the November 1999 Agreement and Release . Mr . Enayat repaid some of the funds on demand and a portion later . None of these facts demonstrates that Mr . Enayat wrongfully appropriated Dr . Willitts's money ; rather, he owed a debt to Dr . Willitts . - 55 - Generally, a taxpayer must recognize income from th e discharge of indebtedness . Sec . 61(a)(12) ; United States v . Kirby Lumber Co . , 284 U .S . 1 (1931 ) . "The moment it become s clear that a-debt will never have'to be paid, such debt must b e viewed as, having been discharged ." Cozzi v . Commissioner , 88 T .C . 435, 445 (1987) . There''is .no evidence that such a moment had arrived during the years in issue with respect t o Mr . Enayat's obligation to repay Dr . Willitts . On the contrary, Dr . Willitts petitioned a New Hampshire State court in late 1999 for attachment of Mr . Enayat's assets . Mr . Enayat had not fully repaid Dr . Willitts during the years in issue, but there is no evidence that Dr . Willitts had released Mr . Enayat from his repayment obligation in any year before us . Throughout the years in issue, Mr . Enayat remained obligated to repay Dr . Willitts . As a result, we hold that Mr . Enayat did not have income from the transfer he received from Dr . Willitts . C . Capital ' Loss Ion~the Sale of the Elm Street Propert y We have found-that Mr . Enayat purchased the Elm Street house as an investment in July 1998 for $210,000 ; that he performed . some renovations on the house ; but did-not substantiate expenditures in any amount ; and that he sold the house in December 1998 for $274,000 . Mr .IEnayat .r.eported a total capital loss of $118,619 from the sale, .of the Elm Street property (thereby implicitly claiming renovation expenses of more than - 56 - $182,000), offset $71,812 in 1998 capital gains with part of .this purported capital loss, and offset $46,807 in 1999 capital gains with the remaining purported real estate loss . See supra note 23 . In the notice of deficiency the IRS disallowed these capital loss deductions . Because we find that Mr . Enayat did not substantiate his basis in the property above his cost basis of $210,000, we find that Mr . Enayat is not entitled to a capital loss in 1998 or 1999 based on his sale of the Elm Street property . In his post-trial brief respondent asserted for the first time that Mr . Enayat "received, if anything, a short term capital gain in the amount of $64,000" (i .e ., the difference between his July purchase price and his December sale price) . No capital gain adjustment was proposed in the notice of deficiency, nor in respondent's answer, nor in respondent's pretrial memorandum ; and respondent did not argue this adjustment at trial nor evoke testimony that could be recognized as specifically directed to the issue . We therefore hold that the issue was not timely raised and that, if it had been, it would have been a new matter on which respondent bore the burden of proof, see Rule 142(a)(1), which he did not carry . D . Issues Mr . Enayat Concede d As we noted above, Mr . Enayat concedes that he received, did not report, and should have reported : $15,800 of gambling income - 5 7 in 1998 ; $2,000 in rental income n . 1998 ; $ 201,929 in business interruption insurance proceeds i n 2000 ; and $113 , 800 from a stolen check in 2001 . These amounts are taxable income t o Mr . Enayat . III . Additions to Tax and Penaltie s In addition to deciding the tax liability that Mr . Enayat and Woodbury will bear on the foregoing amounts , we must decide their liability for additions \ to tax and penalties . A . Mr . Enayat ' s Liability for the Additions to Ta x 1 . Failure-To-File'Addition to Tax Under Sectio n 6651(a)(1 )(1 ) Mr . Enayat does not dispute that he failed to timely fil e his Forms 1040 for taxable years 1998 through 2001 . The due dates and filing dates were as follows : Tax Year Due Date Return File d 1998 1999 2000 2001 Apr . 1,5, 1999 Apr . 15, 2000 Apr . 15, 2001 Apr . 15, 2002 Apr . Oct . 14, 200 0 9, 200 2 Oct . 22, 200 2 Oct . 22, 200 2 The IRS determined that Mr . Enayat is liable for the section 6651(a)(1) addition to tax for all four of those years . Section 6651(a)(1) imposes an addition to tax for failure to file a timely return, unless the taxpayer establishes that the failure did not result from "willful neglect" and that the failure was due to "reasonable cause" . "Willful neglect" has been interpreted to mean a conscious, intentional failure or reckles s M 58 - indifference . United States v . Boyle , 469 U .S . 241, 245-246 (1985) . "Reasonable cause" requires the taxpayer to demonstrate that the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file a return within th e prescribed time . Id . at 246 ; sec . 301 .6651-1(c)(1), Proced . & Admin . Regs . Mr . Enayat has not shown or even argued that he exercised reasonable care with regard to his failure to file his returns . We find that Mr . Enayat is liable for the section 6651(a)(1) addition to tax for taxable years 1998, 1999, 2000, and 2001 . 2 . Fraud Penalty Under Section 6663(a ) The IRS determined that Mr . Enayat is liable for the fraud penalty under section 6663(a) for fraudulently understating his income on his 1998, 1999, 2000, and 2001 income tax returns . Section 6663(a) imposes a penalty equal to 75 percent of the portion of any underpayment attributable to fraud . a . Legal Principles Regarding Fraud Respondent has the burden of proving fraud by clear and convincing evidence . See sec . 7454(a) ; Rule 142(b) ; Parks v . Commissioner , 94 T .C . 654, 660 (1990) . Respondent must prove b y clear and convincing evidence (1) that Mr . Enayat underpaid his taxes in each year and (2) that Mr . Enayat intended t o evade taxes by conduct intended to conceal, mislead, or otherwise - 5 9 prevent tax collection . See Parks v . Commissioner , supra at 660- 661 .' Fraud is an actual wrongdoing with an intent to evade a tax believed to be owing . , Marshall v ..' :Commissioner , 85 T .C . 267, 272 (1985) : Fraud is never presumed and must,be established b y independent evidence of fraudulent intent . Petzoldt v . Commissioner , 92 T .C . at_699 . Accordingly, the existence of fraud is a question of fact that a court must consider on the basis of an examination of the entire record and the taxpayer's entire course of conduct . Id . . However, "Fraud 'does not include negligence, . carelessness, misunderstanding or unintentional understatement of income .'" Zhadanov v . Commissioner , T .C . Memo . 2002-104 (quoting United States, v . Pechenik , 236 F .2d 844, 846 (3d Cir . 1956)) . If respondent shows that any part of an underpayment-is due to fraud, the entire underpayment is treated as due to fraud unless Mr . Enayat' .shows by a preponderance of the evidence that part of the underpayment is not due to fraud . See sec . 6663(b) . Courts have developed a nonexclusive list of factors that demonstrate fraudulent intent . These "badges of fraud" include : (1) understating income ; (2) maintaining inadequate records ; (3) implausible-or inconsistent explanations of behavior ; (4) concealment of income or assets- ; (5 .) failing to cooperate with tax a-uthorities ; (6) engaging in illegal activities ; (7) an intent to mislead which may be inferred from a pattern o f 1171 rv: <,;~,' _ - 60 - conduct ; (8) lack of credibility of the taxpayer's testimony ; (9) filing false documents ; (10) failing to file tax returns ; and (11) dealing in cash . Spies v . United States , 317 U .S . 492, 499 (1943) ; Douge v . Commissioner , 899 F .2d 164, 168 (2d Cir . 199 .0) ; Bradford v . Commissioner , 796 F .2d 303, 307-308 (9th Cir . 1986),, affg . T .C . Memo . 1984-601 ; Recklitis v . Commissioner , 91 T .C . 874, 910 (1988) . Although no single factor is necessarily sufficient to establish fraud, the combination of a number of factors constitutes persuasive evidence . Solomon v . Commissioner , 732 F .2d 1459, 1461 (6th Cir . 1984), affg . per curiam T .C . Memo . 1982-603 . Respondent contends that the following badges of fraud are present with respect to Mr . Enayat : (1) understating income, (2) maintaining inadequate records, (3) implausible or inconsistent explanations of behavior, (4) concealment of assets, (5) engaging in illegal activities, (6) lack of credibility in testimony, (7) dealing extensively in cash, (8) pattern of conduct which implies an intent to mislead, and (9) failing to file tax returns . b . Mr . Enavat's Underpayments Due to Frau d We find some of those badges of fraud to be present in this case . First, Mr . Enayat understated his income for every year at issue . Second, Mr . Enayat admittedly maintained inadequate records . Third, Mr . Enayat engaged in illegal activities (i .e ., - 61 - theft) . Fourth, Mr . Enayat dealt extensively in cash . Fifth, Mr . Enayat has exhibited a pattern of . conduct which implies an intent to mislead by admittedly receiving income in 1998, 2000, and 2001 that he did not report on his income tax returns, yet offering no explanation for his failure to do so . Lastly , Mr . Enayat failed to timely file his tax return for every year at issue . As a result, we find Mr . Enayat's actions were intended to conceal, mislead, or otherwise-prevent tax collection . Specifically, we find that Mr . Enayat's failure to report income he now concedes he should have reported--i .e ., $16,800 in gambling income in 1998, $2,000 in rental income in 1998, $201,929 in insurance proceeds in'2000, and $113,800 in theft income in 2001--wasfraudulent . These were not trivial amounts that might have been overlooked or forgotten . Mr . Enayat offered no explanation . for how .he .could have filled a tax return for any of,these years and omitted these,items out of carelessness or negligence . On the basis .ofMr . Enayat's concession and our finding of fraud, we-find that respondent has shown that some portion of Mr . Enayat's underpayment in each of the three years involving those items--1998, 2000, and 2001--was due to fraud . As a result, the entire underpayment for each of those years is treated as due to fraud unless Mr . Enayat shows by a preponderance of the evidence that part of the underpayment is not due to fraud . See sec ., 6663 .(b) . - 62 - c . Mr . Enavat's Underpayments Not Due to Frau d i . Capital Los s As for taxable year 1998, we have already found .that failure to report $16,800 in gambling income and $2,000 in rental income was fraudulent . With respect to the capital loss claimed b y Mr . Enayat on the sale of the Elm Street property but disallowed in the notice of deficiency and in this opinion, we do not find Mr . Enayat's actions to be fraudulent . Mr . Enayat disclosed the sale of the property on his return by claiming a loss, and it was his failure to prove his basis in the property that resulted in the capital gain . Mr . Enayat's failure to report this capital gain was due to his negligence in not properly substantiating his renovation expenses . As a result, we do not find fraud in this particular issue . ii . Woodbury Checks and Transfer s The rest of Mr . Enayat's underreporting of income for taxable year 1998 results from our finding that he received $203,273 in dividend income from checks payable to Woodbury, as well as $349,356 in officer's compensation transferred to him from Woodbury, totaling $552,629 . On the totality of facts, we do not find these transactions to be fraudulent, despite their magnitude . In 1998 money flowed back and forth between Woodbury and Mr . Enayat in roughly equal amounts . In 1998 Woodbury gave - 63 - Mr . Enayat a total of $552,629, . while Mr . Enayat gave Woodbury $548,188 ($346 ;238 in capital contributions mistakenly characterized as shareholder loans by Mr . Enayat, and $201,950 in redeposits of diverted-checks) . While we do not approve of the haphazard flow of money between the two, or of Mr . Enayat's using Woodbury's accounts as his personal checking accounts, we have addressed those issues in .deciding whether these transactions resulted in taxable income to Mr . Enayat . Under our opinion , Mr . Enayat is liable for income tax on his end of those transfers, and we have held that the rough balance in money given and received does not excuse his liability . However, what cannot be ignored is that of all the money that flowed between the two, the total amounts going either way were very close--$552,62 9 versus $548,188 . As aresult, we do not find that Mr . Enayat intended to'conceal, mislead, or otherwise prevent tax collection in his dealings with Woodbury in taxable year 1998 . His error-- i .e ., his assumption that the rough equivalence of the back-and- forth transfers eliminated 'their taxability--amounted to negligence but not fraud . We likewise find that to"be so'for the year 1999 . Throughout 1999 Woodbury made transfers to Mr . Enayat totaling $98,723 (i .e ., $67,200 in direct transfers and $31,723 in diverted checks), while Mr . Enayat made transfers to Woodbury totaling $164,429' (all in capital contributions mistakenly - 64 - considered shareholder loans by Mr . Enayat, because Mr ., Enayat did not redeposit any of the diverted checks in 1999) . Again, because throughout 1999 he actually transferred more money to Woodbury than he received--$164,429 versus $98,723--we find that Mr . Enayat's non-reporting of this income was negligent but not, fraudulent . The only other unreported income in taxable year 1999 was $1,228 in gross receipts for Sutter . In the broader context of the facts of this case, these receipts were de minimis, and we do not find that Mr . Enayat fraudulently tried to hide this small amount . As a result, we do not find any fraud with respect to taxable year 1999 . However, the same cannot be said for Mr . Enayat's underreporting of Sutter's gross receipts in taxable year 2000 . As we already decided, Mr . Enayat fraudulently failed to report $201,929 in insurance proceeds in 2000 . As a result, the entire underpayment will be treated as attributable to fraud, absent proof as to non-fraudulent portions . See sec . 6663(b) . This places the burden on Mr . Enayat to show that his failure to report $252,721 in gross receipts for Sutter in 2000 was not fraudulent . He has failed to do so . Mr . Enayat did argue that the IRS's bank deposits analysis was flawed and that he accurately reported Sutter's gross receipts because he reported the figure shown on his sales report, but we have already 65 - disposed of those,challenges and found them to be without merit . Mr . Enayat has introduced no-other evidence to persuade us that such a substantial understatement of Sutter's gross receipts would be anything other than fraudulent . As a result, we find Mr . Enayat's understatement of Sutter's gross receipts in taxable year 2000 to be fraudulent . B . Whether Woodbury Is Liable for the Additions to Tax and Penalty As Determined by the IR S 1 . Failure-To-File Addition to Tax Under Section 6651(a)(1) and Fraud Penalty Under Section 6663(a) in 199 8 The IRS determined that Woodbury is liable for th e section 6651(a)(1) addition to tax for taxable year 1998 because Woodbury failed to timely file its tax return for that year, and that Woodbury'is liable for the fraud penalty under section 6663(a) for fraudulently understating its gross receipts on its 1998 income tax return . It is true that Woodbury filed its 1998 Form 1120 late (i .e ., more than four years late on September 10, 2003), that Woodbury has not shown that it exercised reasonable care in this matter, and that the return Woodbury eventually filed did understate its gross receipts . However, because we find (as the . IRS determined) that Woodbury paid additional compensation to Mr . Enayat in the form of the Woodbury-to-Enayat transfers totaling $349,356, and because we hold (as the IRS concedes) that Woodbury was entitled to an additional deduction in the amount of those transfers, Woodbury ends up with no .net - 66 - income in 1998, but rather a loss . Woodbury therefore has no income tax liability for 1998 . Since the addition to tax and penalty at issue would be a percentage of the underpayment of Woodbury's now-zero income tax liability, the addition to tax an d penalty are also zero . 2 . Fraudulent Failure-To-File Addition to Tax Under Section 6651(f) in 199 9 The IRS determined that Woodbury was liable for the addition to tax pursuant to section 6651(f) for fraudulently failing to file a timely income tax return for taxable year 1999 . In failing to file that return, the IRS determined, Woodbury faile d to report $162,050 in gross receipts for taxable year 1999 . determine whether Woodbury fraudulently failed to file its tax return for taxable year 1999, we examine the same badges of fraud we used when considering the imposition of the fraud penalty against Mr . Enayat under section 6663(a), see Clayton v . Commissioner , 102 T .C . at 653, but we necessarily focus on Woodbury's decision not to file its return when due . If that decision was made with the intent to evade tax, then the addition to tax under section 6651(f) may properly be imposed . Again, respondent has the burden of proving fraud by clear and convincing evidence . See sec . 7454(a) ; Rule 142(b) ; Parks v . Commissioner , 94 T .C . at 660-661 . To find tax fraud against the corporation, respondent is required to prove that Mr . Enayat engaged in fraudulent conduct on behalf of the corporation . 67 - E .J . Benes & Co . v . Commissioner , 42 T .C . 358, 382 (1964), affd . 355 F .2d 929 (6th Cir . 1966) . Respondent contends that the following badges of fraud are present in 1999 with respect'to Woodbury : (1) maintaining inadequate records, (2) concealment of assets, (3) dealing extensively in cash, and (4) failing to file tax returns . Mr . Enayat infused the corporation with his personal funds and withdrew funds at will, and he admittedly did not keep accurate books for Woodbury . Mr . Enayat, as the operator and sole shareholder of Woodbury, abdicated his responsibility to accurately report Woodbury's financial dealings and tax obligations . We have found that Woodbury failed to file its return or report gross receipts of $162,050 for taxable year 1999, and when .. the I-RS .determined,that Woodbury had gross receipts in that amount, Mr . Enayat did not introduce any evidence to prove Woodbury's gross receipts were other than as the IRS determined . Woodbury failed to file its return for 1999 altogether after filing its return for 1998 four years late . In view of all these facts, Mr . Enayat's management of Woodbury went beyond haphazard and was fraudulent . Mr . Enayat undoubtedly knew that a tax return. was required to be filed for Woodbury, and his failure to file one indicates that he was trying to evade taxes . As a result, given Mr . Enayat's pattern of filing his own tax returns late, as well as his filing Woodbury's 1998 tax return - 68 - late, we do not find that his failure to file Woodbury's 1999 tax return was unintentional . Therefore, on the basis of our examination of the entire record and Mr . Enayat's entire course of conduct, we find that Woodbury fraudulently failed to file its tax return for taxable year 1999 . However, because we find (as the IRS determined) that Woodbury paid additional compensation to Mr . Enayat in the form of the Woodbury-to-Enayat transfers totaling $67,200 in 1999, and because we hold (as the IRS concedes) that Woodbury is entitled to an additional deduction in the amount of those transfers, Woodbury ends up with less income (i .e ., $162,050 minus $67,200, or $94,850)--and therefore a lower tax liability--than the amount the IRS used in calculating the penalty . IV . Whether the Statute of Limitations Bars Assessment of Mr . Enayat's or Woodbury's Tax Liabilitie s Generally, the IRS must assess tax within three years after the return is filed .35 Sec . 6501(a) . This general rule would provide that .assessments against Mr . Enayat would be restricted as follows : 151 f a return is filed before its due date, it is treated as being filed on its due date for the purposes of section 6501(a) . Sec . 6501(b)(1) . - 69 - Tax Year Due Date Return Filed 3-Year Limitatio n on Assessmen t 1998 1999 2000 2001 Apr . Apr . Apr . Apr . 15, 1999 15, 2000 15, 2001 15, 2002 Apr . 14, 2000 9, 2002 Oct . Oct . 22, 2002 Oct . 22, 2002 Apr . 14, 200 3 9, 200 5 Oct . Oct . 22, 200 5 Oct . 22, 200 5 The IRS issued to Mr . Enayat a notice of deficiency for 1998, 1999, 2000, and 2001 on October 17, 2006 . This was well after the three-year period of limitations on assessment had expired for each of these years, so respondent bears the burden o f .proving that an exception to the three-year limit on the time to assess tax applies . See Wood v . Commissioner , 245 F .2d 888, 893-895 (5th Cir . 1957), affg . in part and revg . in part on other grounds T .C . Memo . 1955-301 ; Bardwell v . Commissioner , 38 T .C . 84, 92 (1962), affd . 318 F .2d 786 (10th Cir . 1963) . Respondent has shown that Mr . Enayat filed fraudulent returns by fraudulently underreporting his income for taxable years 1998, 2000, and 2001 . Because section 6501(c)(1) allows assessment at any time in the case of a fraudulent return, we conclude that the statute of limitations does not bar assessment of Mr . Enayat's tax for 1998, 2000, or 2001 . With respect to taxable year 1999, respondent failed to prove Mr . Enayat filed a fraudulent return, but we nevertheless conclude on other grounds that the statute of limitations does not bar assessment of Mr . Enayat's tax for 1999 . Section 6501(e) - 70 - permits a six-year period of limitations for assessment in th e case of a taxpayer who omits from gross income an amount properly includable therein which is more than 25 percent of the amount of gross income stated on the return . On his 1999 return , Mr . Enayat reported his gross income, i .e ., total income, to be $301,904 . The IRS determined (and we have found) that Mr . Enayat understated his income for 1999 by $100,151--i .e ., $31,723 in constructive dividends from Woodbury, $67,200 in compensation from Woodbury, and $1,228 from Sutter's additional gross receipts . The IRS will be afforded a six-year period of limitations for assessment if Mr . Enayat's understatement of income ($100,151) exceeds 25 percent of $301,904 (i .e ., $75,476) . We find that it does . As for Woodbury, the IRS issued a notice of deficiency for taxable year 1998 on October 17, 2006, which was more than three years after Woodbury had filed its return for that year .3 6 However, because we find that Woodbury fraudulently understated its gross receipts on its return, section 6501(c)(1) permits the IRS to assess at any time . As for taxable year 1999, Woodbury failed to file a tax return . Section 6501(c)(3) likewise permits the IRS to assess at any time where no return is filed . As a 36Woodbury filed its return for 1998 on September 10, 2003 . The general three-year period of limitations on assessment expired on September 10, 2006 . - 7 1 result, we conclude that the statute of limitations does not bar assessment of Woodbury's tax for 1998 or 1999 . V . Summary of Finding s To resolve the issues presented in this case, we find as follows with respect to Mr . Enayat : (1) He received unreported gambling income of $16,800 in 1998, which he concedes . (2) He received unreported rental income of $2,000 in 1998, which he concedes . (3) He received unreported constructive dividends from Woodbury totaling $203,273 in 1998 . (4) He received unreported compensation from Woodbury totaling $349,356 in 1998 . (5) He did not receive unreported income during any year in issue from the funds Dr . Willitts transferred to him in 1998 . (6) He is not entitled to a capital loss of $118,619 (or any other amount) on the 1998 sale of the Elm Street house, and accordingly, the capital gains he offset in 1998 and 1999 are taxable ;,but he is not liable for tax on capital gain from that sale . (7) He received unreported constructive dividends from Woodbury of $31,723 in 1999 . (8) He received unreported compensation from Woodbury of $67,200 in 1999 . (9) He received unreported Schedule C income from Sutter of $1,228 in 1999 . (10) He received unreported income from insurance proceeds of $201,929 in 2000, which he concedes . (11) He received unreported Schedule C income from Sutter of $252,721 in 2000 . - 72 - (12) He received unreported theft income of $113,800 from a stolen check in 2001, which he concedes . (13) He is liable for failure-to-file additions to tax under section 6651(a)(1) for taxable years 199 .8, 1999, 2000, and 2001 . (14) He is liable for the fraud penalty under section 6663(a) on the portion of his underpayment attributable to the following items : 1998 : $16,800 in gambling income and $2,000 in rental income ; 2000 : $201,929 in insurance proceeds and $252,721 in gross receipts from Sutter; 2001 : $113,800 in theft income from the stolen check . (15) He is not liable for the fraud penalty on the portion of his underpayments attributable to the following items : 1998 : $203,273 in constructive dividends from Woodbury ; $349,356 in compensation from Woodbury ; and $118,619 in disallowed capital loss from the sale of the Elm Street house ; 1999 : $31,723 in constructive dividends from Woodbury ; $67,200 in compensation from Woodbury ; and $1,228 in additional gross receipts from Sutter . As for Woodbury, we find as follows : (1) Woodbury had no taxable income in 1998 and therefore is not liable for tax, additions to tax, or penalties in that year . (2) Woodbury had unreported net taxable income of $94,850 in 1999 . (3) Woodbury is liable for the fraudulent failure-to-file addition to tax under section 6651(f) for 1999 . - 73 - To reflect the foregoing and to allow the parties to resolve the computational issues that will be affected by these findings , Decisions will be entere d under Rule 155 .