Yosef Sehati A.K.A. Joseph Sehati and Lilly Kohanim-Sehati

United States Tax Court

T.C. Memo. 2025-3

YOSEF SEHATI a.k.a. JOSEPH SEHATI AND LILLY
KOHANIM-SEHATI, ET AL., 1
Petitioners

COMMISSIONER OF INTERNAL REVENUE,
Respondent

__________

Docket Nos. 23585-17, 23593-17, Filed January 15, 2025.
23594-17, 25174-18,
25175-18.
__________

Philip Garrett Panitz, for petitioners.

Michael W. Berwind, Albert B. Brewster II, Eric M. Herskovitz, Sarah A.
Herson, Nathan C. Johnston, and Christiane C. Sanicola, for
respondent.

TABLE OF CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION ..................... 3

FINDINGS OF FACT .............................................................................. 8

I. Family ............................................................................................... 8

II. Emigration from Iran and Israel ..................................................... 9

III. JFJ..................................................................................................... 9

IV. SJC .................................................................................................. 10

1 Cases of the following petitioners are consolidated herewith: Shahbaz Sehati

and Anna Demidova Sehati, Docket Nos. 23593-17 and 25174-18; and Shahrokh Sehati
and Farahnaz Makabi-Sehati, Docket Nos. 23594-17 and 25175-18.

Served 01/15/25
2

[*2]
V. SJS .................................................................................................. 11

VI. Barukh ............................................................................................ 12

VII. Personal Bank Accounts................................................................. 12

VIII. Jamshid ......................................................................................... 13

IX. Tax Reporting and Examinations .................................................. 14

OPINION ................................................................................................ 17

I. Gift Jewelry Story........................................................................... 17

II. Evidentiary Matters ....................................................................... 20

A. Exhibit 835-P: Jewellery Studio Invoices .............................. 21

B. Exhibit 836-P: Iranian Invoices.............................................. 22

C. Exhibit 839-P: Logbook ........................................................... 26

III. Evaluation of Evidence ................................................................... 27

IV. Analysis........................................................................................... 28

A. Unreported Income ................................................................. 29

B. Guaranteed Payments ............................................................ 42

C. NOL Carryforward Deductions .............................................. 44

V. Penalties ......................................................................................... 48

A. 2012–14: Fraud Penalties ....................................................... 49

1. Joseph .............................................................................. 51

2. Lilly .................................................................................. 53

3. Shahbaz............................................................................ 53

4. Anna ................................................................................. 54

5. Shahrokh.......................................................................... 56
3

[*3] 6. Farahnaz .......................................................................... 57

B. 2015 and 2016: Accuracy-Related Penalties .......................... 58

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Joseph 2 and his wife Lilly own a company
operating two jewelry kiosks in a California shopping mall. Joseph’s
brothers, Shahbaz and Shahrokh, who once worked for that business,
now own a separate company operating a jewelry store within walking
distance of that mall. In addition Joseph, Shahbaz, and Shahrokh
together own two separate companies, one that invests in residential
real estate and another that invests in commercial real estate. When
respondent’s agent examined the returns of Joseph, Lilly, Joseph and
Lilly’s jewelry company, and Joseph, Shahbaz, and Shahrokh’s real
estate companies, she discovered a bank account previously undisclosed
to her. That bank account and others received numerous deposits of
unreported income that she determined belonged partly to Joseph and
Lilly’s jewelry company and partly to Shahbaz and Shahrokh’s jewelry
company. Perhaps unsurprisingly, the scope of the examination
expanded to include the returns of Shahbaz and Shahrokh’s jewelry
company, as well as Shahbaz, his wife Anna, Shahrokh, and his wife
Farahnaz individually.

Respondent—wielding a stack of canceled checks and other bank
records—maintains that Joseph and Lilly failed to report substantial
sums from their jewelry business as income for 2012–14 and that
Shahbaz, Anna, Shahrokh, and Farahnaz did the same with respect to
Shahbaz and Shahrokh’s jewelry business. Petitioners present a united
front and urge us to conclude that the unreported income was
nontaxable because it allegedly derived from sales of jewelry items
originally received as gifts from Joseph, Shahbaz, and Shahrokh’s
mother; furthermore, they allege those sales were for amounts equal to
or below the alleged gift jewelry items’ adjusted bases. Although

2 For clarity in this Opinion, we refer to each petitioner and to other members

of their family who are not petitioners (including Jamshid Sehati and Mohtaram
Baroukh Sehati) by their first names. Joseph is also known as Yosef, Yousef, Josef, or
Shahram. Lilly is also known as Loeiz. Shahbaz is also known as Shahar. Shahrokh
is also known as Shah. Jamshid is also known as Nader. We use only the names
Joseph, Lilly, Shahbaz, Shahrokh, and Jamshid for them in this Opinion. We do not
intend to convey any disrespect through these usages.
4

[*4] petitioners’ description of the alleged gifts conjures up images of a
treasure trove of gold and jewels, petitioners never mentioned this
remarkable theory during the examination to respondent’s agent, who
was instead told by two of them that the income represented loan or
inheritance proceeds.

Respondent also argues that petitioners have not substantiated
net operating loss (NOL) carryforward deductions they claimed (for
2012–14 for Joseph and Lilly and for 2012–16 for the other petitioners).
Separately, respondent further asks us to determine that Shahbaz and
Anna received a section 707(c) 3 guaranteed payment from their rent-free
use of a residence owned by one of Joseph, Shahbaz, and Shahrokh’s real
estate companies during 2012–14. Petitioners counter that they
substantiated the NOL carryforward deductions, and Shahbaz and
Anna further argue that they did not live at the residence in question
for part of the period respondent determined they did. Finally, the
parties dispute the applicability of section 6663 fraud penalties, which
respondent determined for 2012–14, as well as section 6662
accuracy-related penalties, which respondent determined in the
alternative for 2012–14 and as his primary penalty position for 2015 and
2016.

Petitioners have not proven their theory of the case, and we will
uphold respondent’s determinations on all of the nonpenalty issues
(except to the extent respondent has conceded otherwise). 4 We also
uphold fraud penalties on four of the six petitioners for 2012–14 but not
on Anna or Farahnaz. Finally, we uphold accuracy-related penalties on
Shahbaz, Anna, Shahrokh, and Farahnaz for 2015 and 2016. We note
that Joseph and Lilly’s 2015 and 2016 taxable years are not at issue in
these cases.

We will give a procedural overview of these cases before turning
to our Findings of Fact. On August 17, 2017, respondent determined

3 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are
to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,
and Rule references are to the Tax Court Rules of Practice and Procedure. Some
monetary amounts have been rounded to the nearest dollar.
4 Respondent has made concessions about the amounts of unreported income

properly attributed to petitioners, as well as the disallowed amount of an NOL
carryforward deduction claimed by Shahbaz and Anna. See infra notes 21, 39.
5

[*5] deficiencies in petitioners’ federal income tax and section 6663
fraud penalties for taxable years 2012–14 as follows:

Docket No. 23585-17—Joseph and Lilly

Year Deficiency § 6663 Penalty
2012 $587,659 $440,744
2013 563,844 422,883
2014 347,030 260,272

Docket No. 23593-17—Shahbaz and Anna

Year Deficiency § 6663 Penalty
2012 $240,470 $180,352
2013 163,865 122,898
2014 231,038 173,278

Docket No. 23594-17—Shahrokh and Farahnaz

Year Deficiency § 6663 Penalty
2012 $135,958 $101,968
2013 134,962 101,221
2014 135,886 101,914

Respondent also determined accuracy-related penalties under
section 6662(a) in the alternative for petitioners’ 2012–14 taxable years.
Petitioners timely filed Petitions on November 13, 2017, contesting
respondent’s determinations. Respondent later modified the amounts of
some of his determinations during these proceedings. See infra notes
21, 39.

In addition on September 21, 2018, respondent determined
deficiencies and accuracy-related penalties under section 6662(a)
against Shahbaz, Anna, Shahrokh, and Farahnaz for their 2015 and
2016 taxable years as follows:
6

[*6] Docket No. 25174-18—Shahbaz and Anna

Year Deficiency § 6662(a) Penalty
2015 $5,685 $1,137
2016 6,527 1,305

Docket No. 25175-18—Shahrokh and Farahnaz

Year Deficiency § 6662(a) Penalty
2015 $5,378 $1,075
2016 3,884 776

On December 19, 2018, Shahbaz, Anna, Shahrokh and Farahnaz
timely filed Petitions contesting respondent’s determinations for their
2015 and 2016 taxable years. All five cases were consolidated pursuant
to Rule 141 for purposes of trial, briefing, and opinion.

On January 31, 2024, the parties filed a Stipulation of Settled
Issues in which they agreed to the proper amounts of some of the
adjustments at issue and to the appropriate resolution of certain legal
issues. Petitioners’ Simultaneous Opening Brief, however, does not
address certain issues that remain unresolved even after the filing of
the Stipulation of Settled Issues. Specifically, petitioners’ Simultaneous
Opening Brief does not make any argument about (1) respondent’s
determination that Joseph’s Fine Jewelers (JFJ) failed to report
$130,097 of income from gold sales in 2013, (2) respondent’s
determination that Sehati Jewelry Couture (SJC) failed to report
$135,466 of income from gold sales in 2013, (3) a $29,225 method of
accounting adjustment respondent made with respect to Barukh Group
(Barukh) for 2012, (4) respondent’s determinations to reallocate $80,000
and $120,000 of income from SJC to Barukh pursuant to section 482 for
2013 and 2014, respectively, or (5) respondent’s determinations to
disallow deductions for certain alleged expenses of SJS Group (SJS) and
Barukh for 2012–14. 5 None of these issues was resolved by the

5 Petitioners argue in their Simultaneous Reply Brief that their Simultaneous

Opening Brief addressed SJS’s “deductions for repairs, maintenance, taxes, licenses,
interest payments, and depreciation for tax years 2012, 2013 and 2014.” This
argument is without merit because petitioners have cited only a portion of their
Simultaneous Opening Brief that addresses adjustments to “Shahbaz’s income” of
“$48,000 per year” for 2012 and 2013 and $46,000 for 2014 (i.e., the guaranteed
payments issue addressed infra OPINION Part IV.B).
7

[*7] Stipulation of Settled Issues, 6 and petitioners needed to address
them in their Simultaneous Opening Brief if they wished to preserve
any arguments about them. Petitioners addressed some of those issues
for the first time in their Simultaneous Reply Brief, but their belated
engagement with those issues subverts our briefing schedule and takes
respondent by surprise. Accordingly, we deem petitioners to have
conceded their challenges to respondent’s determinations on those
issues. See Considine v. Commissioner, 74 T.C. 955, 969–70 (1980)
(characterizing as “untimely” and thus declining to consider an
argument advanced for the first time in a reply brief); Ashkouri v.
Commissioner, T.C. Memo. 2019-95, at *24 n.9 (“Having conceded an
issue by failing to advance a meaningful argument on that issue in their
opening brief, [the taxpayers] could not withdraw that concession by
belatedly including a cognizable argument in their reply brief.”); see also
Burlington N. & Santa Fe Ry. Co. v. Vaughn, 509 F.3d 1085, 1093 n.3
(9th Cir. 2007) (stating that litigants “waived [an] argument by raising
it for the first time in their reply brief”).

The remaining issues for decision 7 are:

(1) Whether Joseph and Lilly failed to report income from JFJ for
2012–14;

(2) Whether Shahbaz, Anna, Shahrokh, and Farahnaz failed to report
income from SJC for 2012–14;

(3) Whether Shahbaz and Anna failed to report guaranteed payments
from their personal use of SJS’s partnership property as a residence
for their 2012–14 taxable years;

(4) Whether (i) petitioners are entitled to NOL carryforward deductions
for their 2012–14 taxable years and (ii) Shahbaz, Anna, Shahrokh,
and Farahnaz are entitled to NOL carryforward deductions for their
2015 and 2016 taxable years;

6 Petitioners’ Simultaneous Opening Brief does, however, make arguments

concerning the taxability of a distribution from SJS to Joseph and Shahbaz.
Nonetheless, this issue was resolved by the Stipulation of Settled Issues, and we do
not address it further.
7 We distinguish the remaining issues for decision from the remaining

computational issues, which include (but are not necessarily limited to) the
computational issues respondent identified in his Simultaneous Opening Brief. We
will require these computational issues to be addressed through Rule 155.
8

[*8]
(5) Whether petitioners are liable for fraud penalties (or, in the
alternative, accuracy-related penalties) for their 2012–14 taxable
years; and

(6) Whether Shahbaz, Anna, Shahrokh, and Farahnaz are liable for
accuracy-related penalties for their 2015 and 2016 taxable years.

As already stated, we sustain respondent’s determinations on these
issues (other than to the extent respondent has conceded otherwise),
except that with respect to the fifth issue and pursuant to section
6663(c), Anna and Farahnaz are not individually liable for the fraud
penalty. We also address deferred evidentiary rulings.

FINDINGS OF FACT

The parties have filed a First Stipulation of Facts, a First
Supplemental First Stipulation of Facts, a Second Supplemental First
Stipulation of Facts, a Third Supplemental First Stipulation of Facts,
and accompanying Exhibits. We incorporate by this reference the
Stipulation of Settled Issues, the Stipulations of Facts and their
accompanying Exhibits, and any Exhibits admitted at trial, except to
the extent set forth herein. Petitioners resided in California when they
filed their Petitions. 8

I. Family

Joseph, Shahbaz, and Shahrokh are brothers and
third-generation jewelers. They have other siblings who are not parties
to these cases, including Jamshid, who resides in Israel and whose
deposition testimony is in evidence. Their father died in 1968, and their
mother, Mohtaram, died in 2018. Joseph is married to Lilly, Shahbaz is
married to Anna, and Shahrokh is married to Farahnaz. Mosh Mehrnia,
who has been petitioners’ accountant since 2000, is petitioners’
brother-in-law. 9

8 Unless otherwise agreed by the parties in writing, see § 7482(b)(2), venue for

an appeal is the U.S. Court of Appeals for the Ninth Circuit, see § 7482(b)(1)(A).
9 Specifically, Mr. Mehrnia is married to Joseph, Shahbaz, Shahrokh, and

Jamshid’s sister.
9

[*9] II. Emigration from Iran and Israel

Joseph moved from Iran to the United States in 1975. Shahrokh
moved to the United States in 1977. After completing high school,
Shahrokh attended Bowman Technical School in Lancaster,
Pennsylvania, to learn jewelry making, as well as the Indiana
University of Pennsylvania to study “[f]ine arts and metal.”

Mohtaram, Jamshid, and Shahbaz fled Iran in 1979 10 in the wake
of the Iranian Revolution and settled in Israel. Mohtaram had been in
the jewelry business in Iran sometime before the Iranian Revolution.
Shortly before leaving Iran, Mohtaram purchased gemstones and
jewelry to take with her to Israel. Joseph began working at Weisfield’s
Jewelers in 1981.

Shahbaz moved to the United States in 1986. Mohtaram came to
the United States in 1987 and at some point began working in jewelry
stores in downtown Los Angeles.

III. JFJ

In 1987 Joseph opened JFJ as a single kiosk selling jewelry. 11
JFJ’s business later came to include a second kiosk. The kiosks are in a
shopping mall in Ventura, California, and are approximately 300–400
feet apart. On June 22, 2001, Joseph organized JFJ as a California
limited liability company. On July 15, 2001, Joseph, Shahbaz, and
Shahrokh signed JFJ’s operating agreement. In 2001 Joseph owned a
65% interest in JFJ, Shahbaz owned a 17.5% interest in JFJ, and
Shahrokh owned a 17.5% interest in JFJ. Shahbaz and Shahrokh
worked at JFJ until 2008. During 2012–14, Joseph owned a 70%
interest in JFJ, and Lilly owned a 30% interest in JFJ. Before May 10,
2012, JFJ had a Rabobank checking account with an account number
ending in 2418 (Rabobank 2418). On May 10, 2012, JFJ closed

10 This finding is based on a stipulated fact. Jamshid testified that Mohtaram

actually left Iran “[d]uring the last months of the year 1978” and that he had left Iran
before her in 1978. Nonetheless, the stipulation is not clearly erroneous in view of the
entire record, so we will not disregard it. Cf. Cal-Maine Foods, Inc. v. Commissioner,
93 T.C. 181, 195 (1989) (holding that we are not obliged to accept a stipulation between
the parties when it is clearly contrary to facts disclosed by the record or there is
substantial evidence contrary to it). In any case, the difference between the stipulation
and Jamshid’s testimony is immaterial for purposes of this Opinion.
11 There is no evidence about how Joseph acquired JFJ’s opening inventory.
10

[*10] Rabobank 2418 and reopened it as a Rabobank checking account
with an account number ending in 1381 (Rabobank 1381).

During 2012–14 JFJ issued customers a receipt for each sale, and
it kept a corresponding sales invoice. JFJ did not have a machine or
system to generate the sales invoices or receipts, so they were all
handwritten. JFJ employed approximately 30–40 people during
2012–14, and three or four employees would work at a single kiosk at
any given time. Joseph did not personally maintain JFJ’s books or
produce sales, inventory, or expense records.

Lilly worked at JFJ part time during 2012–14. She has been an
alumni member of the Gemological Institute of America (GIA) since
2007 and holds a Graduate Colored Stones Diploma, Graduate
Diamonds Diploma, and Graduate Gemologist Diploma from the GIA.
During 2012–14 Lilly performed sales-related tasks at JFJ. She would
be considered the most senior employee while she was working, and she
left sales invoices she wrote behind for JFJ’s staff to handle at the end
of the day. Lilly held herself out as an owner of JFJ on a 2004 loan
application. She has also executed interspousal transfer deeds in
respect of residential properties that Joseph purchased.

IV. SJC

On December 8, 2009, Shahbaz and Shahrokh incorporated SJC
as a California corporation. Shahbaz and Shahrokh each own half of
SJC’s stock. Since 2010 SJC has operated a jewelry store in Ventura,
California. SJC’s store is, in Shahbaz’s words, “about 1,000 feet” or a
“five minutes’ walk” from the shopping mall where JFJ’s kiosks are.

Shahbaz dealt with the “financial aspects of things” at SJC,
including sales and financial records. SJC promoted checks and credit
cards to its customers as methods of payment. In February 2010 SJC
opened a Rabobank checking account with an account number ending in
4263 (Rabobank 4263). SJC continued to use Rabobank 4263 through
at least January 2015. During 2012–14, SJC used a software program
to manage sales and inventory. Shahbaz, however, admitted that SJC
conducted “sloppy bookkeeping.”

Shahrokh’s work at SJC focused on custom jewelry design,
especially computer-aided design. Shahrokh was not involved with
managing SJC’s finances or with sales. Shahbaz “env[ied]” Shahrokh
because he “was behind the bench . . . and having fun” and “not going
through any of those transaction[s].”
11

[*11] Anna is a chemical engineer by training, but she worked at SJC
during 2011–17. She worked at SJC for about ten hours per week on
average during 2012–14. Her duties included sales, marketing, and
administrative and bookkeeping work. Anna also made entries into
SJC’s computerized inventory management system during 2012–14.
The inventory information she entered included the suggested retail
price of items for sale.

Farahnaz worked at SJC during 2011–17, where her duties
included merchandizing and assisting with inventory. 12 At the time of
trial, Farahnaz worked part time at SJC entering inventory data.

V. SJS

On May 3, 2004, Joseph, Shahbaz, and Shahrokh formed SJS as
a California limited liability company. Each of them owned (and, as of
the time of trial, continued to own) a one-third interest in SJS. SJS has
acquired several residential properties.

On or about April 8, 2005, Joseph, Shahbaz, and Shahrokh—not
SJS—purchased a property at 1143 Colina Vista, Ventura, California
(1143 Colina Vista), for $800,000. They acquired 1143 Colina Vista both
for investment and so that Shahbaz could live closer to Mohtaram. On
or about July 1, 2005, Joseph, Shahbaz, and Shahrokh transferred the
title of 1143 Colina Vista to SJS.

Shahbaz and Anna listed 1143 Colina Vista as their home address
on their income tax returns for 2012–14, and they also received mail at
1143 Colina Vista during 2012–14. SJS did not try to rent out 1143
Colina Vista to third parties during 2012–14. Petitioners have not
produced any written agreement among SJS, Shahbaz, and Anna
relating to Shahbaz and Anna’s use of 1143 Colina Vista. On or about
December 11, 2014, SJS transferred the title of 1143 Colina Vista to
Joseph and Shahbaz. 13

12 This finding is based on a stipulated fact. Shahrokh and Farahnaz both
testified contrary to the stipulation that although Farahnaz now works at SJC,
Farahnaz did not work at SJC during 2012–14. Shahrokh testified that Farahnaz was
“basically raising our kids” during those years. Nonetheless, the stipulation is not
clearly erroneous in view of the entire record, so we will not disregard it. Cf. Cal-Maine
Foods, Inc., 93 T.C. at 195.
13 The parties have provided contradictory stipulations on this point. They

have stipulated both that SJS “transferred the title of 1143 Colina Visita [sic] to Joseph
12

[*12] VI. Barukh

On September 20, 2007, Joseph, Shahbaz, and Shahrokh formed
Barukh. They used Barukh to acquire commercial properties. Each of
them owned (and, as of the time of trial, continued to own) a one-third
interest in Barukh.

VII. Personal Bank Accounts

During 2011–15 petitioners held accounts at various financial
institutions, either separately or in combination with each other. As
explained below, Jamshid—without his knowledge or consent—was also
named as an accountholder on some of the accounts. The parties have
produced exhaustive banking records for these accounts. We will
provide an overview of the accounts that are most important for our
purposes.

Joseph and Shahbaz opened a Rabobank joint checking account
with an account number ending in 2472 (Rabobank 2472) in December
2011. Rabobank 2472 received numerous deposits of certain of JFJ’s
and SJC’s customer checks that Joseph and Shahbaz did not deposit into
JFJ’s and SJC’s business bank accounts. In other words, Joseph and
Shahbaz diverted numerous customer checks to Rabobank 2472 in lieu
of depositing them into Rabobank 2418, Rabobank 1381, or Rabobank
4263 (as applicable). Joseph and Shahbaz did not provide information
about Rabobank 2472 to Mr. Mehrnia in order to prepare their tax
returns. 14

Joseph and Shahbaz invested some of the funds in Rabobank 2472
into SJS, which in turn invested in residential real estate. Shahrokh
was aware that proceeds from jewelry sales were used to purchase
property. Joseph and Shahbaz also transferred some of the funds in
Rabobank 2472 to JFJ’s and SJC’s business bank accounts, sometimes
by depositing checks written from Rabobank 2472 that referred to
Jamshid or a loan into those accounts. In addition, they used some of

and Shahbaz” and that SJS transferred 1143 Colina Vista’s title “to a 1/3 tenant in
common relationship in the name of each brother individually.” We disregard the
latter stipulation because the documentary evidence in the record reflects that SJS
transferred 1143 Colina Vista’s title to Joseph and Shahbaz, not to Joseph, Shahbaz,
and Shahrokh. See Cal-Maine Foods, Inc., 93 T.C. at 195.
14 We need not and do not make any finding about whether Mr. Mehrnia was

otherwise aware of Rabobank 2472 although we note that a $6,000 check written to
him from that account and dated June 29, 2012, was paid.
13

[*13] the funds for personal purposes. They used Rabobank 2472
through April 2014, when activity in the account stopped.

Through at least December 2014 a checking account ending in
8226 in Jamshid’s name and over which Joseph, Shahbaz, and Shahrokh
each held a power of attorney was maintained at Santa Barbara Bank
& Trust (SBBT 8226). SBBT 8226 was opened in August 2002. Lilly
disclosed assets in SBBT 8226 to a bank in connection with a loan
application in 2004. During 2012–14 SBBT 8226 received deposits of
several five- and six-figure checks written to Jamshid from Rabobank
2472 or from third parties. At least one check whose memo line
references a loan to SJC was written from SBBT 8226 and deposited in
Rabobank 4263, SJC’s business bank account. 15 On June 18, 2013, an
outgoing wire for $988,924 was made from SBBT 8226 to an escrow
company. This occurred around the same time that SJS purchased a
residential property for $1.04 million.

Joseph opened a JPMorgan Chase Bank checking account with
an account number ending in 8913 (Chase 8913) in his and Jamshid’s
names in November 2010. This account remained open through at least
May 2014.

Shahbaz and Anna maintained a Bank of America joint checking
account with an account number ending in 7088 (BofA 7088) during
2012–14. 16 Anna also maintained a Bank of America checking account
with an account number ending in 5186 (BofA 5186) during 2012–14.

VIII. Jamshid

Jamshid 17 has been retired since 2005 and receives a pension.
His last job before retiring was working at a “factory that produced
safety items like security doors, security locks, [and] lock cylinders.”
Jamshid has never resided in the United States, although he has visited
the United States two or three times. Jamshid has also never opened
any bank accounts in the United States except for “a small account for

15 The check was for $70,000 and dated July 8, 2014. Jamshid’s name is printed

on the check.
16 This finding is based on a stipulated fact. Some of the account documents

for BofA 7088 are addressed to Shahbaz and Joseph, not Shahbaz and Anna.
Nonetheless, because the stipulation is not clearly erroneous, we will not disturb it.
See Cal-Maine Foods, Inc., 93 T.C. at 195.
17 Although Jamshid’s deposition testimony is in evidence, he is neither a party

to these cases nor a trial witness.
14

[*14] my daughter . . . [that] I closed . . . later because I needed the
money,” nor did he bring anything of value with him on his trips to the
United States. He has never lent money to Joseph’s, Shahbaz’s, or
Shahrokh’s businesses or otherwise had any involvement with their
businesses or properties. Jamshid did not receive any checks over
$10,000 from Joseph, Shahbaz, or Shahrokh during 2012–14.

Although Jamshid was the named accountholder of SBBT 8226
and his name was printed on some checks written from it, he has no
knowledge of the account and does not recognize any of the signatures
on the signature card for it. Neither does he recognize (1) a $200,000
check written to him from Rabobank 2472 on January 15, 2012, (2) a
$200,000 check written to him from Rabobank 2472 on May 8, 2013, (3) a
$155,000 check written to him from Rabobank 2472 on March 21, 2014,
or (4) a loan agreement dated November 18, 2009, purporting to
memorialize a loan from him to SJC or his purported signature on that
document. Shahbaz and Shahrokh signed the November 18, 2009, loan
agreement on SJC’s behalf.

IX. Tax Reporting and Examinations

Petitioners all timely filed Forms 1040, U.S. Individual Income
Tax Return, for 2012–14. Shahbaz and Anna also timely filed Forms
1040 for 2015 and 2016, as did Shahrokh and Farahnaz. 18 At all
relevant times, JFJ, SJS, and Barukh were taxable as partnerships for
federal income tax purposes, and SJC was taxable as an S corporation. 19
The income and losses from all four entities therefore passed through to
their respective owners.

Petitioners’ 2012–14 income tax returns were examined by
Internal Revenue Service (IRS) Revenue Agent Laura Hurtado
(RA Hurtado). During the examination, Mr. Mehrnia represented
petitioners and their business entities.

18 Joseph and Lilly’s 2015 and 2016 taxable years are not at issue in these

cases, and we make no finding of fact about them.
19 An S corporation is governed under the rules in subchapter S of chapter 1 of

subtitle A of the Code. S corporations are not generally themselves subject to federal
income tax but, like partnerships, are conduits, through which income flows to their
shareholders. See § 1366; Gitlitz v. Commissioner, 531 U.S. 206, 209 (2001)
(“Subchapter S allows shareholders of qualified corporations to elect a ‘pass-through’
taxation system under which income is subjected to only one level of taxation.”); see
also Allen Fam. Foods, Inc. v. Commissioner, T.C. Memo. 2000-327, slip op. at 5 & n.3.
15

[*15] RA Hurtado summoned records from financial institutions during
the examination. Importantly, RA Hurtado noticed that a large number
of business-related deposits had been made into Rabobank 2472, an
account in Joseph’s and Shahbaz’s names. Some of the deposited checks
had memo lines that referenced items other than jewelry, such as
watches or wine glasses, or services that do not constitute sales of
jewelry, such as watch repair, ring repair, or ring sizing. RA Hurtado
also located specific items of income in SBBT 8226, Chase 8913, BofA
7088, and BofA 5186. There were relatively few check and cash deposits
in JFJ’s and SJC’s alleged sole operating accounts, and the check and
cash deposits that occurred were for relatively small amounts. SJC’s
sales journals identified substantial check and cash sales that do not
correspond to the check and cash deposits in its operating account.

Joseph and Shahbaz each falsely represented to RA Hurtado
during the examination that JFJ or SJC, respectively, had only one
operating account for its business. In addition, Joseph falsely stated
that a loan carried on JFJ’s books was administered by Jamshid and
represented an advance on an inheritance. Similarly, Shahbaz falsely
stated that a loan carried on SJC’s books represented an advance on his
future inheritance from his father’s estate. During the examination RA
Hurtado made repeated written requests for information about sources
of nontaxable income, such as gifts or inheritances. Joseph, Shahbaz,
and Mr. Mehrnia, however, never mentioned sales of gift jewelry at all—
much less suggested it as a nontaxable source of income—during RA
Hurtado’s examination. When RA Hurtado confronted Shahbaz about
Rabobank 2472 and asked him why the financial activity in Rabobank
2472 stopped in April 2014, Shahbaz, in RA Hurtado’s words, “indicated
that that’s when they went straight.”

During the examination RA Hurtado determined that JFJ
understated its gross receipts by $1,053,316, $605,565, and $315,581 for
its 2012–14 taxable years, respectively. RA Hurtado also determined
that SJC understated its gross receipts by $896,407, $495,504, and
$397,615 for the same years. RA Hurtado determined the adjustments
to JFJ’s and SJC’s gross receipts using a combination of the bank
deposits analysis and specific items methods. In addition, RA Hurtado
made several other adjustments to petitioners’ income, only a few of
which are noncomputational and remain unresolved at this stage of the
proceedings. Although petitioners allege that Mr. Mehrnia dropped off
original business records to the IRS’s Camarillo, California, office and
16

[*16] that the IRS failed to return them, we find as fact that Mr.
Mehrnia never dropped off original business records at that office. 20

On May 23, 2017, RA Hurtado’s group manager, Andrew
Hernandez, approved the assertion of the section 6663 fraud penalty
(and, in the alternative, the section 6662 accuracy-related penalty)
against petitioners for their 2012–14 taxable years. On June 8, 2017,
respondent issued revenue agent reports to petitioners summarizing the
examination changes, including the initial determinations to assert
penalties.

On August 17, 2017, respondent timely mailed Notices of
Deficiency to petitioners for their 2012–14 taxable years via certified
mail. On November 13, 2017, petitioners timely filed Petitions
requesting redetermination of the deficiencies respondent determined.
Respondent later asserted an increase to JFJ’s income for 2013, as well
as several decreases to JFJ’s and SJC’s income. 21

Shahbaz and Anna’s 2015 and 2016 income tax returns, as well
as Shahrokh and Farahnaz’s 2015 and 2016 income tax returns, were

20 Mr. Mehrnia’s testimony was vague regarding to whom he supposedly gave

the records, what records he allegedly gave to the IRS, and when he purportedly
furnished those records. His testimony was not corroborated by documentary
evidence, such as a receipt, even though RA Hurtado credibly testified that it was her
office’s practice to provide one in similar circumstances. Mr. Mehrnia’s testimony that
he furnished original documents to the IRS on several occasions because did not have
time to make copies was also implausible: A reasonable person in his position would
not have given original business documents to an unidentified person even once—let
alone several times—without obtaining a receipt or exploring other alternatives, such
as asking for an extension, requesting a secure way to produce (or permit inspection
of) the documents, or using a professional copying service. Finally, Mr. Mehrnia’s
testimony lacked credibility because of his familial relationship to petitioners. We
instead credit RA Hurtado’s testimony that she never received original documents
from Mr. Mehrnia.
Somewhat relatedly, we do not credit Joseph’s testimony that some of JFJ’s
invoices burned in a 2017 wildfire. Joseph was not a credible witness on the whole. In
addition it is unclear from the record whether his testimony that some of JFJ’s invoices
burned in a 2017 wildfire is consistent with his testimony that he regularly provided
JFJ’s invoices to Mr. Mehrnia during 2012–14.
21 Specifically, respondent asserted that (1) the adjustment to JFJ’s gross

receipts for 2012 should be reduced by $322,133 to $731,183, (2) the adjustment to
JFJ’s gross receipts for 2013 should be increased by $71,382 to $676,947, (3) the
adjustment to JFJ’s other income for 2013 should be reduced by $810 to $130,097,
(4) the adjustment to JFJ’s gross receipts for 2014 should be reduced by $255,773 to
$55,809, and (5) the adjustment to SJC’s gross receipts for 2013 should be reduced by
$75,000 to $420,504.
17

[*17] examined by Revenue Agent Tam Mai (RA Mai). On August 16,
2018, RA Mai’s group manager, June Liu, approved the assertion of
section 6662 accuracy-related penalties against Shahbaz, Anna,
Shahrokh, and Farahnaz for their 2015 and 2016 taxable years. On the
same date, respondent issued revenue agent reports to Shahbaz, Anna,
Shahrokh, and Farahnaz summarizing the examination changes and
communicating the initial determinations to assert penalties. The
adjustments RA Mai determined primarily concerned NOL
carryforward deductions claimed by Shahbaz, Anna, Shahrokh, and
Farahnaz, which are the only noncomputational adjustments for 2015
and 2016 requiring our decision.

On September 21, 2018, respondent timely mailed Notices of
Deficiency to Shahbaz, Anna, Shahrokh, and Farahnaz for their 2015
and 2016 taxable years via certified mail. On December 19, 2018,
Shahbaz, Anna, Shahrokh, and Farahnaz timely filed Petitions
requesting redetermination of the deficiencies respondent determined
against them for their 2015 and 2016 taxable years.

OPINION

I. Gift Jewelry Story

Petitioners, relying on some of their own and Jamshid’s testimony
and some of the documentary evidence, present us with a story about
why they did not report a substantial portion of JFJ’s and SJC’s sales as
income (gift jewelry story). We summarize the gift jewelry story in this
part without making any finding that it has any truth. 22

Jamshid testified in his deposition that Mohtaram purchased
finished jewelry from Jewellery Studio in Tel Aviv, Israel, and the
finished jewelry incorporated some of the gemstones Mohtaram had
purchased in Iran. Jamshid also testified that he was present during
some, but not all, of the occasions when Mohtaram visited Jewellery
Studio. According to Jamshid, in late 1983 Mohtaram (with his
assistance) boxed and shipped the gemstones, finished jewelry, and

22 As discussed infra Part IV.A, there is very little in the record to corroborate

the gift jewelry story. Consequently, we summarize the gift jewelry story only to
explain why we conclude as we do in this Opinion. For the purposes of our analysis,
we do not adopt these stories as findings of fact, and the elements of the story recited
here should not be construed as findings of fact.
18

[*18] related receipts from Israel to Joseph in the United States because
she intended to emigrate from Israel to the United States.

Joseph testified that he received the box sent from Mohtaram in
December 1983 and returned it unopened to Mohtaram in 1987 after she
immigrated to the United States. He further testified that Mohtaram
gave the still-unopened box and its contents as gifts to him, Shahbaz,
Shahrokh, and Jamshid in 2010, which was approximately 23 years
after she immigrated to the United States and 8 years before she died.
Joseph, Shahbaz, and Shahrokh each testified to being present when the
box was opened, and Joseph and Shahrokh further testified that
Mohtaram was present. Jamshid testified that Joseph told him about
the gifts in 2010.

Joseph testified that the box was filled with jewelry, gemstones,
precious stones, gold, platinum, legal documents, receipts from Israel,
and Farsi-language (i.e., Persian) receipts, and Shahbaz corroborated
that description. According to Joseph, there were about 1,600 to 1,700
items of jewelry in total. Joseph and Shahbaz testified that the items
were dated and out of style. Joseph further testified that Mohtaram
gave him and his brothers a handwritten letter (also referred to as a gift
note) memorializing the gift of jewelry; the gift note also memorialized
a separate gift of two houses to two of her other children. 23

Shahbaz and Shahrokh testified that the gift jewelry was later
modified to increase its marketability. Joseph and Shahbaz testified
that sales of the gift jewelry began in 2011 and stopped sometime in
2014. Joseph testified that most of the gift jewelry was kept at SJC,
while other items were kept in JFJ’s safe.

Joseph and Shahbaz testified that the proceeds from the gift
jewelry sales totaled approximately $3 million and were deposited into
Rabobank 2472. According to them, the gift jewelry was segregated from
JFJ’s and SJC’s regular merchandise via yellow tags affixed to the gift
jewelry and white or silver tags affixed to regular merchandise. Joseph
testified that cost figures on Exhibit 835-P (Jewellery Studio invoices),

23 The alleged gift note is in evidence as Exhibit 833-P, and a certified

translation is in evidence as Exhibit 834-P. The Second Supplemental First
Stipulation of Facts identifies Exhibit 834-P as a translation of a nonexistent “Exhibit
831-P” (only Exhibit 831-J is in the record), and this identification is also erroneous
because Exhibit 834-P is a translation of Exhibit 833-P, not Exhibit 831-J. We
disregard the stipulation to the extent it is erroneous. See Cal-Maine Foods, Inc., 93
T.C. at 195.
19

[*19] a set of invoices that we discuss later, were used to price each item
of gift jewelry for sale and that “[w]e knew how much the cost was based
upon the catalog number.”

Joseph testified that Exhibit 839-P (logbook) was
contemporaneously prepared to track sales of the gift jewelry, and
Shahbaz corroborated that testimony. The logbook, which is a spiral
notebook, contains handwritten entries including (1) notations briefly
describing each item, (2) the date of sale, (3) the check number
associated with the sale, (4) the sale amount, and (5) the item number
(i.e., the catalog number from the Jewellery Studio invoices). Joseph
asserted that the primary purpose of creating the logbook was to
facilitate an equitable division of the proceeds from sales of the gift
jewelry among himself, Shahbaz, Shahrokh, and Jamshid. Joseph and
Shahbaz testified that credit card sales of the gift jewelry were not
recorded in the logbook and that those sales were reported as sales of
JFJ’s and SJC’s regular merchandise, with the result that taxes were
imposed on that income. Joseph and Shahbaz testified that the logbook
moved back and forth between SJC and JFJ, which are within walking
distance of each other, although it typically remained at SJC.

Joseph testified that he instructed his employees to set aside the
yellow tags from the gift jewelry items that had been sold, as well as any
checks customers used to purchase those items, for subsequent
recording in the logbook. He also testified that JFJ employees
sometimes recorded sales of the gift jewelry on paper before those sales
were entered into the logbook. According to Shahbaz, SJC’s employees
recorded sales of gift jewelry in the logbook, including yellow tags or
notes that came from JFJ across the street; furthermore, at SJC, the
yellow tags were discarded after an item of gift jewelry was sold. Joseph
and Shahbaz asserted that they did not inform Mr. Mehrnia about the
gift jewelry because he was married to their sister, and their sister
might have taken offense at not being included in Mohtaram’s gift of the
jewelry.

Shahbaz testified that he showed the gift jewelry to an IRS agent
(not RA Hurtado or RA Mai) who toured SJC. Joseph testified that
because the gift jewelry was dated and out of style, he and his brothers
sold it with the objective of recouping as much of its original cost as
possible instead of attempting to make a profit over and above its
original cost. Joseph and Shahbaz testified that the proceeds from the
gift jewelry sales were deposited into Rabobank 2472, not into JFJ’s and
SJC’s business bank accounts. In addition they testified that after they
20

[*20] deposited the proceeds in Rabobank 2472, they invested most of
the proceeds in residential real estate, including through SJS. Finally,
they testified that they paid Jamshid $90,000 in mid-2014 in respect of
his share of the gift jewelry proceeds.

II. Evidentiary Matters

As a preliminary matter, we must address the admissibility of
certain documentary evidence introduced at trial but for which we
reserved ruling. Our evidentiary rulings are determined under the
Federal Rules of Evidence. See § 7453; Rule 143(a). Statements in briefs
and unadmitted allegations in pleadings do not constitute evidence. See
Rule 143(c).

Irrelevant evidence is not admissible. See Fed. R. Evid. 402. An
item of evidence is relevant to the extent it tends to make a fact more or
less probable and the fact is consequential to determining the action.
See Fed. R. Evid. 401. When the relevance of evidence depends on a fact,
proof must be introduced sufficient to support a finding that the fact
does exist. See Fed. R. Evid. 104(b). The “requirement of showing
authenticity or identity falls in the category of relevancy dependent
upon fulfillment of a condition of fact and is governed by the procedure
set forth in Rule 104(b).” Fed. R. Evid. 901(a) advisory committee’s note
to 1972 proposed rules. “To satisfy the requirement of authenticating or
identifying an item of evidence, the proponent must produce evidence
sufficient to support a finding that the item is what the proponent claims
it is.” Fed. R. Evid. 901(a).

Hearsay is not admissible unless any of the following provides
otherwise: a federal statute, the Federal Rules of Evidence, or other
rules prescribed by the Supreme Court. Fed. R. Evid. 802. Hearsay
means a statement that (1) the declarant does not make while testifying
at the current trial or hearing and (2) a party offers in evidence to prove
the truth of the matter asserted in the statement. Fed. R. Evid. 801(c).

At trial we admitted Exhibit 835-P, the Jewellery Studio invoices,
for a limited purpose, cf. Fed. R. Evid. 105, but reserved ruling on
whether the Jewellery Studio invoices may be used to prove the truth of
their contents. In addition, we reserved ruling on the admissibility of
Exhibit 836-P (Iranian invoices), as well as Exhibit 839-P, the logbook.
Petitioners have conceded that they are offering the Iranian invoices
and the logbook only for limited purposes. We will (1) admit the
Jewellery Studio invoices (Exhibit 835-P) without any limitation,
21

[*21] (2) exclude the first three pages of the Iranian invoices (Exhibit
836-P) and admit the remainder for a limited purpose, and (3) admit the
logbook (Exhibit 839-P) for a limited purpose.

A. Exhibit 835-P: Jewellery Studio Invoices

The Second Supplemental First Stipulation of Facts identifies
Exhibit 835-P, the Jewellery Studio invoices, as “seventeen invoices for
jewelry purchases in 1983 from Jewellery Studios [sic] in Israel.” 24 The
contents of the Jewellery Studio invoices include, inter alia, handwritten
notations of catalog numbers, quantity figures, “Total Price” figures, and
jewelry terms, as well as handwritten notations referring to Mohtaram.
They do not specify on their face whether they record purchases of
jewelry from Jewellery Studio or sales of jewelry to Jewellery Studio.

The Second Supplemental First Stipulation of Facts states in part
that

all exhibits referred to herein and attached hereto may be
accepted as authentic and are incorporated in this
stipulation and made a part hereof; provided, however,
that either party has the right to object to the admission of
any such facts and exhibits in evidence on the grounds of
relevancy and materiality, but not on other grounds unless
expressly reserved herein.

Respondent reserved only a hearsay objection to Exhibit 835-P. On its
face this constitutes respondent’s waiver of any authentication objection
to Exhibit 835-P. At trial we admitted Exhibit 835-P for a limited
purpose but reserved ruling on whether it may be used to prove the truth
of its contents.

Respondent now purports to object to Exhibit 835-P on
authentication grounds in addition to his reserved hearsay objection.
Nonetheless, Rule 91(e) prevents a party from qualifying, changing, or
contradicting a stipulation, except as we may permit if justice requires.
The record as a whole does not support a conclusion that justice requires
us to permit respondent to vary from the stipulation. For example, while
respondent notes that Jamshid “did not identify which exact documents

24 The stipulation’s reference to “Jewellery Studios” instead of Jewellery Studio

is a scrivener’s error. The reference to 17 invoices instead of 18 invoices is also a
scrivener’s error. We disregard the erroneous portions of the stipulation. See
Cal-Maine Foods, Inc., 93 T.C. at 195.
22

[*22] in Exhibit 835-P corresponded to [the] times he was present” at
Jewellery Studio, respondent and petitioners filed the Second
Supplemental First Stipulation of Facts over a month after Jamshid’s
deposition occurred. Respondent thus presumably considered—and, in
any case, could have considered—the content of Jamshid’s deposition
testimony when he decided which objections to reserve. Neither does
respondent argue that the Jewellery Studio invoices record sales of
jewelry by Mohtaram to Jewellery Studio instead of purchases by her
from Jewellery Studio. 25 We will hold respondent to the terms of the
binding stipulation to which he agreed.

We consider respondent’s hearsay objection, but it is easily
overruled. Rule 803(16) of the Federal Rules of Evidence provides that
a statement in a document that was prepared before January 1, 1998,
and whose authenticity is established, is not excluded by the rule
against hearsay, regardless of whether the declarant is available as a
witness. The authentication requirement of Rule 803(16) of the Federal
Rules of Evidence “is governed by the standards set forth in” Rule 901(a)
of the Federal Rules of Evidence. Dartez v. Fibreboard Corp., 765 F.2d
456, 464 (5th Cir. 1985); see Cave Buttes, L.L.C. v. Commissioner, 147
T.C. 338, 360–62 (2016). Therefore, whether a hearsay exception under
Rule 803(16) of the Federal Rules of Evidence is available for a document
prepared before January 1, 1998, is derivative of whether the document
can be properly authenticated. Here, the Jewellery Studio invoices were
prepared in 1983, and the parties authenticated them by agreement in
the Second Supplemental First Stipulation of Facts. Therefore, an
exception to the rule against hearsay applies, and we admit Exhibit
835-P into evidence without any limitation on its use.

B. Exhibit 836-P: Iranian Invoices

Petitioners allege that Exhibit 836-P comprises three invoices for
gemstones purchased in 1978 and 1979 in Iran. Petitioners stated at
trial that they are offering the Iranian invoices to show that Mohtaram
acquired items in Iran that she took to Israel, but “not as to the cost or
the specifics of the invoices themselves.” Respondent reserved
objections for authentication, hearsay, and lack of foundation in the
Second Supplemental First Stipulation of Facts but abandoned the lack
of foundation objection at trial. We will hold petitioners to their

25 Although Jamshid initially testified that Mohtaram did not sell any jewels

to Jewellery Studio, Jamshid later submitted an errata sheet with a correction stating
that “[s]he traded some.”
23

[*23] concession on the limited purpose for which each Iranian invoice
may be used, even if admitted into evidence. Cf. Fed. R. Evid. 105. We
will consider each Iranian invoice individually in determining whether
it may be admitted for this limited purpose. We sustain in part and
overrule in part respondent’s objections, and we admit Exhibit 836-P for
the limited purpose identified by petitioners except for the portion as to
which we sustain respondent’s objections.

We begin with respondent’s authentication objection. Rule 901(a)
of the Federal Rules of Evidence provides that “[t]o satisfy the
requirement of authenticating or identifying an item of evidence, the
proponent must produce evidence sufficient to support a finding that the
item is what the proponent claims it is.” “The terms of the Rule are thus
satisfied, and the proffered evidence should ordinarily be admitted, once
a prima facie case has been made on the issue. . . . At that point the
matter is committed to the trier of fact to determine the evidence’s
credibility and probative force.” United States v. Johnson, 637 F.2d
1224, 1247 (9th Cir. 1980).

A document may be authenticated by the testimony of a witness
with knowledge that the item is what it is claimed to be. See Fed. R.
Evid. 901(b)(1). A witness may testify to a matter only if evidence is
introduced sufficient to support a finding that the witness has personal
knowledge of the matter. Fed. R. Evid. 602. A document may also be
authenticated through “[t]he appearance, contents, substance, internal
patterns, or other distinctive characteristics of the item, taken together
with all the circumstances.” Fed. R. Evid. 901(b)(4). Documentary
evidence generally should not be excluded “on the sole ground that [it]
must be authenticated by a competent witness with personal knowledge
of [its] authenticity” if the evidence “could have been authenticated by
review of [its] contents if [it] appeared to be sufficiently genuine.” Las
Vegas Sands, LLC v. Nehme, 632 F.3d 526, 533 (9th Cir. 2011).

The Iranian invoices comprise (1) an invoice from Jannati Jewelry
dated May 27, 1979 (Jannati document), (2) an invoice referencing
Firoozeh Gold dated November 1, 1978 (Firoozeh Gold document), and
(3) an invoice from Moozeh Zar Jewelry dated May 3, 1978 (Moozeh Zar
document). We will address the Firoozeh Gold and Moozeh Zar
documents first. Jamshid testified that he recognized the Firoozeh Gold
and Moozeh Zar documents as “the papers that my mother had received
for the purchase of the jewelry in Iran.” Jamshid’s deposition testimony
could support a potential finding that he had adequate personal
knowledge to make that statement. There are no obvious alterations to
24

[*24] these two documents, and the face of the documents (as
translated) could support the identification petitioners advanced. Cf.
Fed. R. Evid. 901(b)(4). The Firoozeh Gold and Moozeh Zar documents
make clear that they record purchases of gemstones or jewelry by
Mohtaram in Iran in 1978. Petitioners have therefore authenticated the
Firoozeh Gold and Moozeh Zar documents, although we must still
address respondent’s hearsay objection to them.

As we stated at trial, although petitioners have offered the
Iranian invoices for a limited purpose, petitioners have still offered them
for a hearsay purpose (i.e., to show the truth of their assertions that
Mohtaram purchased gemstones in Iran in 1978 and 1979). Therefore,
the Firoozeh Gold and Moozeh Zar documents are excludable as hearsay
unless an exception to the rule against hearsay applies. On brief
petitioners rely only on Rule 803(16) of the Federal Rules of Evidence.
As explained above, whether a hearsay exception is available under Rule
803(16) of the Federal Rules of Evidence for a document prepared before
January 1, 1998, is derivative of whether the document can be properly
authenticated. Furthermore, while Rule 803(16) of the Federal Rules of
Evidence provides an exception to the rule against hearsay for
statements in ancient documents, it does not require the proponent to
authenticate the document pursuant to Rule 901(b)(8) of the Federal
Rules of Evidence, which merely provides an illustrative example
concerning the authentication of ancient documents. Instead, the only
requirement is that Rule 901(a) (or Rule 902) of the Federal Rules of
Evidence be satisfied. See Fed. R. Evid. 803(16) advisory committee’s
note to 2017 amendment (“The limitation of the ancient documents
hearsay exception [to documents prepared before January 1, 1998,] is
not intended to have any effect on authentication of ancient documents.
The possibility of authenticating an old document under Rule
901(b)(8)—or under any ground available for any other document—
remains unchanged.”). Because petitioners have authenticated the
Firoozeh Gold and Moozeh Zar documents, including the claim that they
were prepared before January 1, 1998, we overrule respondent’s
objections to them and admit them for the limited purpose petitioners
identified at trial.

Jamshid also testified, however, that he had never seen the
Jannati document. Despite being unable to rely on Jamshid’s testimony
to authenticate the Jannati document, petitioners invoke Rule 901(b)(8)
of the Federal Rules of Evidence, which is an illustrative example of
evidence satisfying the authentication requirement for an ancient
document. The rule provides that, for a document or data compilation,
25

[*25] evidence satisfying the requirement of authenticating or
identifying an item of evidence includes evidence that it (1) is in a
condition that creates no suspicion about its authenticity; (2) was in a
place where, if authentic, it would likely be; and (3) is at least 20 years
old when offered.

As an initial matter, the Jannati document—a purported receipt
for a 1979 sale transaction in Iran whose letterhead bears a World Wide
Web address on it—is at least arguably in a condition that creates
suspicion about its authenticity. 26 While the parties have strenuously
argued this matter, 27 we need not reach this dispute 28 for another
reason: Petitioners have not introduced any evidence about where they
found the Jannati document. While Joseph testified that there were
“Persian receipts” in the alleged gift box, he also testified that although
he “can’t remember,” he thought there were only “two . . . receipts from
Iran” in the box. Joseph did not testify about which of the Iranian
invoices in Exhibit 836-P, if any, corresponded to the receipts he saw in
the box. Likewise, Shahbaz testified vaguely that there were a “bunch
of other invoices from Iran” in the box, but he did not testify about
Exhibit 836-P at all, let alone the Jannati document. Petitioners thus
have not introduced evidence showing where the Jannati document was
found and have not authenticated the Jannati document pursuant to
Federal Rule of Evidence 901(b)(8).

Even if petitioners had argued that Federal Rule of Evidence
901(b)(4) applies—or, alternatively, even assuming we needed to
consider pursuant to Federal Rule of Evidence 901(b)(8)(A) whether the
Jannati document “is in a condition that creates no suspicion about its
authenticity”—petitioners still could not authenticate the Jannati

26 At trial we requested petitioners to provide us with the original hard-copy

versions of certain exhibits, including Exhibit 836-P. After trial, we received and
reviewed the hard-copy versions of those exhibits. The World Wide Web address is
somewhat difficult to read on the version of the Jannati document on the electronic
case record, but it is clear on the hard-copy Jannati document.
27 Although it is clear the World Wide Web “was not developed until 1989,”

Kubota Corp. v. Shredderhotline.com Co., No. 12 C 6065, 2013 WL 6096999, at *4 n.1
(N.D. Ill. Nov. 20, 2013), it is unclear whether, for example, someone may have
properly obtained the Jannati document by contacting the merchant at a later date.
We note, however, that if the Jannati document was generated later, it would need to
have been generated before January 1, 1998, for Federal Rule of Evidence 803(16) to
provide a hearsay exception.
28 We also avoid another potential issue with petitioners’ position. Jamshid

testified that Mohtaram left Iran in 1978, not 1979, but we have disregarded that
testimony as inconsistent with one of the parties’ stipulations. See supra note 10.
26

[*26] document. This is because a review of its contents reveals the
suspect appearance of a World Wide Web address on it. We have also
viewed the original hard-copy Jannati document, see supra note 26, and
the incongruity between the inclusion of the World Wide Web address
and the seemingly aged paper is more readily appreciable by viewing
the original, cf. McGuire v. Blount, 199 U.S. 142, 145 (1905) (stating that
the “production of the originals . . . has given the court an opportunity
to inspect” certain ancient documents and analyzing whether “[t]hey
bear upon their face every evidence of age and authenticity” or, to the
contrary, there is anything “about them to suggest that they have been
forged or tampered with”). There may be an explanation for the Jannati
document’s unusual appearance, but testimony addressing it would be
necessary for us to consider admitting it. Because petitioners have not
authenticated the Jannati document, we sustain respondent’s
authentication and hearsay objections to it, and we exclude it from
evidence. 29

C. Exhibit 839-P: Logbook

Petitioners allege that the logbook, Exhibit 839-P, is a “photocopy
of an alleged original ledger of sales of the gifted jewelry.” Petitioners
conceded in their Simultaneous Opening Brief that they “seek to admit
the Logbook not for the truth of its content, but rather to show
Petitioners’ intent in creating the Logbook itself.” Respondent reserved
hearsay, authentication, lack of foundation, and best evidence rule
objections in the Second Supplemental First Stipulation of Facts but
conceded the best evidence rule objection at trial. We will hold
petitioners to their concession on the limited purpose for which the
logbook is being offered. Cf. Fed. R. Evid. 105. We overrule respondent’s
objections in view of that concession and admit the logbook for the
limited purpose petitioners identified.

Showing petitioners’ alleged intent is a nonhearsay purpose for
offering the logbook, so we overrule respondent’s hearsay objection. We
also overrule respondent’s foundation and authentication objections in
view of the limited purpose for which petitioners are offering the
logbook. Joseph and Shahbaz testified about how petitioners allegedly
instructed their employees to create the logbook, how it was allegedly
maintained, and how it was purportedly intended to be a sales record

29 We note that, in any case, we have made the factual finding for which

petitioners intended the Jannati document to provide additional support (i.e., that
Mohtaram purchased gemstones in Iran before emigrating to Israel).
27

[*27] for items they intentionally segregated from their regular
merchandise. To be clear, this testimony was arguably vague, as well
as barely sufficient to authenticate the logbook and lay a foundation for
connecting it to petitioners’ alleged intent. For example, no witness
identified the handwriting or named the person who wrote in the
logbook. Nonetheless, under the circumstances here, those
considerations concern the weight we should accord the logbook and not
its admissibility. Accordingly, we admit the logbook into evidence for
the limited purpose petitioners identified.

III. Evaluation of Evidence

“The most important and most crucial action the courts take in [a
trial] is to resolve facts.” United States v. Gainey, 380 U.S. 63, 88 (1965)
(Black, J., dissenting); see Diaz v. Commissioner, 58 T.C. 560, 564 (1972)
(“[T]he distillation of truth from falsehood . . . is the daily grist of
judicial life.”). The fact-finding process often requires the Court as the
finder of fact to evaluate the credibility of witness testimony before
making findings on the basis of that testimony. We have stated that in
determining credibility,

[w]e observe the candor, sincerity, and demeanor of each
witness in order to evaluate his or her testimony and
assign it weight for the primary purpose of finding disputed
facts. We determine the credibility of each witness, weigh
each piece of evidence, draw appropriate inferences, and
choose between conflicting inferences in finding the facts of
a case. The mere fact that one party presents unopposed
testimony on his or her behalf does not necessarily mean
that the elicited testimony will result in a finding of fact in
that party’s favor. We will not accept the testimony of
witnesses at face value if we find that the outward
appearance of the facts in their totality conveys an
impression contrary to the spoken word.

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 84 (2000), aff’d,
299 F.3d 221 (3d Cir. 2002). As the trier of fact we may credit evidence
in full, in part, or not at all. We may credit the part of a witness’s
testimony that is not self-serving, while requiring some form of
corroboration before crediting the portion that is. See Factor v.
Commissioner, 281 F.2d 100, 114 n.27 (9th Cir. 1960) (“The Tax Court
may accept parts and reject other parts of a witness’s testimony.”),
aff’g T.C. Memo. 1958-94; Baumgardner v. Commissioner, 251 F.2d 311,
28

[*28] 321 (9th Cir. 1957) (“The Tax Court was willing to accept in part
the taxpayer’s claim of alleged profits from buying and selling
improvement bonds. It was not required to accept it in full.”), aff’g T.C.
Memo. 1956-112.

It is “the exclusive province of the fact finder to determine the
credibility of witnesses, resolve evidentiary conflicts, and draw
reasonable inferences from proven facts.” United States v. Hubbard,
96 F.3d 1223, 1226 (9th Cir. 1996); see Anderson v. City of Bessemer City,
N.C., 470 U.S. 564, 573–74 (1985) (stating that if the trial court’s view
of the evidence is plausible in the light of the record, a reviewing court
may not disturb it absent clear error, even when the trial court’s findings
“do not rest on credibility determinations, but are based instead on
physical or documentary evidence or inferences from other facts”);
United States v. Yellow Cab Co., 338 U.S. 338, 342 (1949) (stating that
where there are two permissible views of the evidence, the factfinder’s
choice between them is not clearly erroneous); United States v. U.S.
Gypsum Co., 333 U.S. 364, 395 (1948) (stating that a finding is clearly
erroneous when “the reviewing court on the entire evidence is left with
the definite and firm conviction that a mistake has been committed”);
Estate of Rau v. Commissioner, 301 F.2d 51, 54 (9th Cir. 1962) (“The Tax
Court personally observed the witnesses . . . and from that vantage
point was in a position to evaluate their testimony in the light of their
attitude and demeanor while being interrogated.”), aff’g T.C. Memo.
1959-117. We may reject “vague and implausible testimony” in a case
involving unreported income. Delaney v. Commissioner, 743 F.2d 670,
672 (9th Cir. 1984), aff’g T.C. Memo. 1982-666. We determine the
credibility of witnesses, resolve evidentiary conflicts, and draw
inferences from the record with this framework in mind.

IV. Analysis

The Commissioner’s determinations in a notice of deficiency are
generally presumed correct, and the taxpayer bears the burden of
proving that the determinations are incorrect. See Rule 142(a)(1); see
also Welch v. Helvering, 290 U.S. 111, 115 (1933); Rockwell v.
Commissioner, 512 F.2d 882, 885–87 (9th Cir. 1975), aff’g T.C. Memo.
1972-133. Nonetheless, if the Commissioner raises a new matter, seeks
an increase in deficiency, or asserts an affirmative defense, the
Commissioner bears the burden of proof as to the new matter, increased
deficiency, or affirmative defense. See Rule 142(a). After respondent
issued the Notice of Deficiency to Joseph and Lilly for their 2012–14
taxable years, respondent asserted that JFJ’s gross receipts for 2013
29

[*29] should be increased by $71,382. Accordingly, respondent bears
the burden of proof with respect to the increased income tax deficiency
attributable to this adjustment.

Petitioners have not argued or shown that the burden of proof
should shift to respondent under section 7491(a), and we conclude that
section 7491(a) does not apply under the circumstances here.
Petitioners thus bear the burden of proof with respect to the other
nonpenalty determinations at issue in these cases, although respondent
bears the burden of production with respect to unreported income, as
discussed below. We discuss the burden of proof applicable to the
penalties respondent determined against petitioners separately in
connection with our discussion of those penalties.

A. Unreported Income

Section 61(a) defines gross income as “all income from whatever
source derived,” including income derived from business. Exclusions
from gross income are narrowly construed. See Commissioner v.
Schleier, 515 U.S. 323, 328 (1995); Commissioner v. Glenshaw Glass Co.,
348 U.S. 426, 429–30 (1955); Helvering v. Clifford, 309 U.S. 331, 334
(1940). A taxpayer must maintain books and records establishing the
amount of his or her gross income. See § 6001; Treas. Reg. § 1.6001-1(a).
If the taxpayer fails to do so, the Commissioner may reconstruct income
through any reasonable method that clearly reflects income.
See § 446(b); Petzoldt v. Commissioner, 92 T.C. 661, 693 (1989). The
reconstruction need only be reasonable in view of the surrounding facts
and circumstances. See Petzoldt, 92 T.C. at 687; see also Union Stock
Farms v. Commissioner, 265 F.2d 712, 721 (9th Cir. 1959).

In cases of unreported income, “the Commissioner must establish
a ‘minimal evidentiary showing’ connecting the taxpayer with the
alleged income-producing activity,” Walquist v. Commissioner, 152 T.C.
61, 67 (2019) (quoting Blohm v. Commissioner, 994 F.2d 1542, 1549
(11th Cir. 1993), aff’g T.C. Memo. 1991-636); see also Weimerskirch v.
Commissioner, 596 F.2d 358, 361 (9th Cir. 1979), rev’g 67 T.C. 672
(1977), “or demonstrate that the taxpayer actually received unreported
income,” Walquist, 152 T.C. at 67 (citing Edwards v. Commissioner, 680
F.2d 1268, 1270 (9th Cir. 1982)). The requisite evidentiary foundation
is “minimal.” Banister v. Commissioner, T.C. Memo. 2008-201, 96
T.C.M. (CCH) 114, 114, aff’d, 418 F. App’x 637 (9th Cir. 2011). “Once
the Commissioner makes the required threshold showing, the burden
shifts to the taxpayer to prove by a preponderance of the evidence that
30

[*30] the Commissioner’s determinations are arbitrary or erroneous.”
Walquist, 152 T.C. at 67–68 (first citing Helvering v. Taylor, 293 U.S.
507, 515 (1935); and then citing Tokarski v. Commissioner, 87 T.C. 74
(1986)); see Hardy v. Commissioner, 181 F.3d 1002, 1004–05 (9th Cir.
1999), aff’g T.C. Memo. 1997-97.

The Commissioner “may choose to proceed under any single
theory of proof or a combination method, including a combination of
circumstantial and direct proofs.” United States v. Abodeely, 801 F.2d
1020, 1023 (8th Cir. 1986); see Dyer v. Commissioner, T.C. Memo.
2012-224, at *15–20; Price v. Commissioner, T.C. Memo. 2004-103, slip
op. at 24–25. “Although the absence of adequate tax records does not
give [the Commissioner] carte blanche for imposing Draconian
absolutes, such absence does weaken any critique of [the
Commissioner’s] methodology.” Petzoldt, 92 T.C. at 693 (citing Webb v.
Commissioner, 394 F.2d 366, 373 (5th Cir. 1968), aff’g T.C. Memo.
1966-81).

The bank deposits method is an accepted indirect method for
reconstructing income. See Clayton v. Commissioner, 102 T.C. 632, 645–
46 (1994); DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), aff’d, 959
F.2d 16 (2d Cir. 1992); Estate of Mason v. Commissioner, 64 T.C. 651,
656 (1975), aff’d, 566 F.2d 2 (6th Cir. 1977). The bank deposits method
assumes that all deposits are taxable, but the Commissioner must
account for any nontaxable source or deductible expense of which he has
knowledge. See Clayton, 102 T.C. at 645–46; DiLeo, 96 T.C. at 868.
Nontaxable sources include funds attributable to interaccount bank
transfers and returned checks, as well as loans, gifts, inheritances, or
assets on hand at the beginning of the taxable period. See Showalter v.
Commissioner, T.C. Memo. 2022-114, at *5–6. The taxpayer bears the
burden of proving a nontaxable source for deposits. See DiLeo, 96 T.C.
at 869; Barnes v. Commissioner, T.C. Memo. 2016-212, at *32, aff’d, 773
F. App’x 205 (5th Cir. 2019); see also Tokarski, 87 T.C. at 77 (“A bank
deposit is prima facie evidence of income and [the Commissioner] need
not prove a likely source of that income.”).

The specific items method is a direct proof of income
reconstruction this Court has approved. See Dyer, T.C. Memo. 2012-224,
at *17. Once the Commissioner produces clear evidence of unreported
gross income, the taxpayer bears the burden of proving that the
Commissioner’s method of income reconstruction is unfair or inaccurate
under the specific items method. See Flynn v. Commissioner, T.C.
Memo. 2021-43, at *24. To carry this burden, the taxpayer generally
31

[*31] must offer “competent and relevant evidence from which it could
be found that he did not receive the income alleged in the deficiency
notice,” Dyer, T.C. Memo. 2012-224, at *18 (quoting Sharwell v.
Commissioner, 419 F.2d 1057, 1060 (6th Cir. 1969), vacating and
remanding T.C. Memo. 1968-89), or otherwise “prov[e] a nontaxable
source of the unreported income,” Levine v. Commissioner, T.C. Memo.
1998-383, 1998 WL 738061, at *6, aff’d, 229 F.3d 1158 (9th Cir. 2000)
(unpublished table decision).

The income-producing activities as to which respondent has
determined unreported income, and which remain in dispute, are the
jewelry businesses conducted by JFJ and SJC. The record, which
includes petitioners’ own testimony and relevant stipulations, clearly
establishes the connections between (1) Joseph, Lilly, and the jewelry
business conducted by JFJ, as well as (2) Shahbaz, Shahrokh, and the
jewelry business conducted by SJC. 30 The record also contains extensive
bank records and copies of canceled checks, along with summary
schedules, showing that petitioners received payments that they did not
report as income. Furthermore, as already discussed, Joseph and
Shahbaz admitted that they chose not to inform Mr. Mehrnia, their tax
return preparer, about deposits into Rabobank 2472. Respondent has
thus met his burden of production, and his determinations of unreported
income are generally entitled to a presumption of correctness.
Nonetheless, the burden of proof will remain with respondent with
respect to the increased income tax deficiency attributable to
respondent’s assertion that JFJ’s 2013 gross receipts should be
increased by $71,382, which we discuss separately.

While petitioners have argued that some of the income
respondent determined is attributable to a nontaxable source, which we
address below, petitioners have not shown that respondent’s
reconstruction of their income was otherwise arbitrary or erroneous. Cf.
Showalter, T.C. Memo. 2022-114, at *6 (noting that the “only flaw that
[the taxpayer] discerned in [the Commissioner’s] bank deposits analysis
was the alleged failure to exclude nontaxable . . . proceeds” and that the
taxpayer “alleged no other error in [the Commissioner’s] bank deposits
analysis”); Flynn, T.C. Memo. 2021-43, at *25 (noting that while the
taxpayer argued that “funds deposited into his bank accounts . . . were

30 Respondent attributed deposits of JFJ’s items to Joseph and Lilly, and

deposits of SJC’s items to Shahbaz and Shahrokh, with one qualification: Joseph and
Shahbaz jointly owned Rabobank 2472, so respondent attributed checks deposited in
that account and written to unknown or blank payees, to “Sehati,” to “Cash,” or to other
ambiguous payees half to JFJ and half to SJC.
32

[*32] investments,” the taxpayer “provided no credible evidence
demonstrating error in [the Commissioner’s] analysis, and he does not
dispute the amount of funds received for any of the years in issue”).
Respondent reasonably reconstructed petitioners’ income for 2012–14.
Petitioners failed to keep or provide adequate books and records from
which their tax liabilities could be computed, and Joseph and Shahbaz
each falsely represented to respondent that JFJ or SJC, respectively,
had only one business bank account. Respondent collected financial
information through third-party summonses and reconstructed
petitioners’ income using a combination of the bank deposits and specific
items methods. Respondent adjusted petitioners’ income for known
nontaxable items and reported income, and respondent allowed
additional adjustments after petitioners brought cases in this Court.
Respondent also cautiously—and generously—excluded cash sales that
were recorded on JFJ’s sales log but unmatched by a corresponding bank
deposit from his calculation of JFJ’s income. While respondent
generally does not bear the burden of proof on nonpenalty issues,
respondent nonetheless demonstrated at trial that petitioners
underpaid their tax and underreported their income for 2012–14
because many of the deposits into their personal bank accounts came
from taxable sources, such as checks with descriptions in their memo
lines like “To repair Rolex Watch” or “Rolex adjustment.” 31 Respondent
has clearly and convincingly shown that petitioners underreported their
income and, consequently, underpaid their income tax 32 for 2012–14.

Respondent has also met his burden of proof on the increase in
deficiency for Joseph and Lilly’s 2013 taxable year that is attributable
to a $71,382 adjustment to JFJ’s 2013 gross receipts. The adjustment
is calculated by subtracting $30,001 of adjustments in Joseph and Lilly’s
favor from a $101,383 upward adjustment to JFJ’s 2013 gross receipts
that respondent asserted after these cases were docketed. RA Hurtado
credibly testified that the $101,383 adjustment represented “the amount
of deposits for the month of January in 2013 [into Rabobank 1381 that]
was not in the analysis. So it’s a correction that’s being made.” The
account statements for Rabobank 1381 are in the record, and we have
verified that JFJ’s deposits into Rabobank 1381 for January 2013 have

31 Respondent has compiled a more comprehensive list of items of this sort with

citations of the record in his Simultaneous Reply Brief.
32 We reject petitioners’ computational arguments about the effect that

disallowing their claimed NOL deductions has on their income tax deficiencies infra
Part IV.C. See infra note 40 and accompanying text.
33

[*33] not been double counted after the increase in deficiency
respondent asserted.

Petitioners offer the gift jewelry story to explain why much of the
unreported income respondent has identified allegedly derives from a
nontaxable source of income. As an initial matter, petitioners’ reliance
on the gift jewelry story is misplaced because gain from the sale of gift
property (including any gain attributable to the holding period of a donor
or a succession of donors) is a taxable source of income, not a nontaxable
source. See §§ 61(a)(3), 1001(a), 1015; Cooper v. United States, 280 U.S.
409 (1930); Wilson Bros. & Co. v. Commissioner, 124 F.2d 606, 610 (9th
Cir. 1941); Shatzer v. Commissioner, 3 T.C. 914, 916 (1944); cf. § 102(a)
(excluding gifts from gross income but not mentioning sales of gift
property).

It is true, of course, that a sale of property for an amount realized
that is less than or equal to the property’s adjusted basis will not cause
a taxpayer to realize gain. See Treas. Reg. § 1.1001-1(a). Nonetheless,
petitioners have not done the work of tracing each item of income
respondent identified to a specific piece of alleged gift jewelry and an
alleged adjusted basis for each piece, let alone presenting this
information in a usable format or calculating the resulting gain or loss
on each piece. Likewise, they have not traced the entries on the
Jewellery Studio invoices to specific customer transactions or sales
invoices at JFJ or SJC. “We need not (and shall not) undertake the task
of sorting through the voluminous evidence . . . provided in an attempt
to see what is, and what is not, adequate substantiation of the” adjusted
basis for each piece. Hale v. Commissioner, T.C. Memo. 2010-229,
slip op. at 6. We also accord no weight to Joseph’s and Shahbaz’s
self-serving testimony that they sold the alleged gift jewelry at a price
equal to or below the original cost for which Mohtaram bought it
(together with adjustments for modifications) because those statements
are not an adequate substitute for documentary evidence under the
circumstances here. Cf. Treas. Reg. § 1.6001-1(a), (e).

The tracing problem is especially acute in these cases because the
logbook is in evidence only for the purpose of showing petitioners’ intent,
not for the truth of its contents, and there are no sales invoices in the
record. In other words petitioners have not laid an adequate foundation
to connect any item of income respondent identified to any item of
alleged gift jewelry, even if we made the effort ourselves. Petitioners
have thus admitted that the items of income respondent identified
derive from a source of income that is generally taxable without
34

[*34] establishing that special facts exist under which that source of
income would be nontaxable. While petitioners have provided some
shipment documents from 1983 with valuation figures on them, such as
a Brink’s memorandum of agreement and a Wolf D. Barth Co. invoice,
petitioners cannot use them to establish their bases for at least four
independently sufficient reasons: (1) they provide only evidence of
values at the time of shipment, not evidence of adjusted bases;
(2) alleged modification or redesign of the gift jewelry pieces before they
were sold 33 may have resulted in the removal of materials and
consequently reductions to the adjusted bases of many of the pieces, cf.
Treas. Reg. § 1.61-6(a); (3) the problem of tracing shipped items to
individual sale transactions at JFJ and SJC (or even to resale during
specific taxable years) is intractable; and (4) we reject the gift jewelry
story outright for reasons discussed below. Any attempt to use the
Jewellery Studio invoices to establish the items’ bases also suffers from
the second, third, and fourth of those problems, as well as an additional
problem regarding trial testimony about them that we discuss below.
The Moozeh Zar and Firoozeh Gold documents are not in evidence for
the truth of their cost figures at all.

In any case the gift jewelry story is entirely fanciful. We reject
the veracity of the gift jewelry story for the following reasons:

(1) The testimony we heard in support of the gift jewelry story simply
lacked credibility. Our observation of the relevant witnesses’
demeanor during questioning tended to refute, not confirm, the truth
of the gift jewelry story.

(2) The testimony we heard in support of the gift jewelry story was
implausible, including for the following reasons:

(a) Petitioners have not satisfactorily explained why there are
references to watches in the memo lines of some of the checks
deposited in Rabobank 2472 even though no witness testified that
watches were among the gift jewelry. The same is true of
numerous other checks with anomalous memo lines in the record,
including one for “wine glasses.”

33 There is no record, however, of which pieces of jewelry were modified or how

they were modified. Petitioners have not explained or substantiated any basis
adjustments in their favor that might have resulted from modifying the gift jewelry.
Cf. § 1016.
35

[*35]
(b) Petitioners have not adequately explained why their customers
purportedly used checks so frequently only when they bought gift
jewelry but so infrequently for sales in the regular course of
business. Shahbaz testified that “we wanted to avoid . . . credit
card” processing fees on the gift jewelry. It is unclear, however,
why this same consideration would not apply to other sales at
SJC. Indeed, Shahbaz testified that SJC “promote[s] mainly
check or credit card” (emphasis added) instead of cash because
“I’m not there often. I don’t want to look for money later.” While
Shahbaz also testified that “we . . . wanted to have a separate
account for [gift jewelry proceeds] . . . so we know what we got out
of it,” maintaining a separate account for the gift jewelry proceeds
would not require accepting mainly a single payment method. In
addition, petitioners already allegedly maintained the logbook for
the purpose of tracking their sales of gift jewelry. Finally, the
logbook entries reference checks deposited into more than one
account, including Rabobank 2472, SBBT 8226, Chase 8913, and
BofA 7088, not a single separate account.

(c) A more plausible explanation for these discrepancies is that JFJ
and SJC diverted income from check and cash sales in the regular
course of business away from their operating accounts in an
attempt to conceal income. Deposits of credit card sale proceeds
into JFJ’s and SJC’s operating accounts regularly and
substantially exceeded deposits of customer checks and cash
deposits during 2012–14; individual deposits of cash and
customer checks were for relatively small amounts. SJC’s sales
journals identify substantial check and cash sales that do not
correspond to the check and cash deposits in its operating
account.

(d) RA Hurtado credibly testified that Joseph, Shahbaz, and Mr.
Mehrnia never mentioned gift jewelry sales when she interviewed
them and that when she asked Shahbaz about why the financial
activity in Rabobank 2472 stopped in April 2014, “he indicated
that that’s when they went straight.” We credit RA Hurtado’s
testimony and interpret Shahbaz’s statement as a party
admission that he underreported his income from SJC with the
intent to evade taxes.

(3) The testimony we heard in support of the gift jewelry story was
inconsistent, including for the following reasons:
36

[*36]
(a) Shahbaz testified that yellow tags with cost figures written on
them were already affixed to the gift jewelry pieces when the gift
box was opened, while Joseph testified that they were affixed
later.

(b) Shahbaz testified that SJC “promote[s] mainly check or credit
card” (emphasis added) as opposed to cash, but the record shows
that SJC had minimal check deposits into its business operating
account.

(c) Jamshid testified that he never received any proceeds from sales
of the gift jewelry. While Joseph testified that he, Shahbaz, and
Shahrokh sent Jamshid $90,000 from the gift jewelry sales in
2014, Joseph also testified that “it was [for] an emergency that
we . . . sent him the [$]90,000. He needed some medical
attention.” In addition, $90,000 is considerably less than
Jamshid’s purported one-fourth share of the alleged proceeds
from the gift jewelry sales: Shahbaz testified that the proceeds
totaled about $3 million. 34 The foregoing inconsistencies also
render implausible Joseph’s testimony that SJS received
unreported income (despite Jamshid’s not being an owner of SJS)
because “[w]e thought we would invest it in something . . . [and
later] we will divide it equally [among] the brothers.”

(d) Petitioners argue that the yellow tags were attached to items of
gift jewelry, but Anna testified that the yellow tags signified sale
items.

(e) Joseph testified that there were about 1,600 to 1,700 items of gift
jewelry in total, but respondent avers that (by his count) the
Jewellery Studio invoices “contain approximately 4,250
individual items.” The illegibility of portions of the Jewellery
Studio invoices prevents us from giving a definitive estimate of
the number of items of jewelry they concern, but it is considerably
more than 1,700 items. Joseph’s testimony is therefore
inconsistent with petitioners’ argument that the Jewellery Studio

34 Petitioners allege that the gift jewelry sales concluded in 2014, so the size of

the alleged $90,000 payment to Jamshid in 2014 cannot be explained by petitioners’
not yet having concluded (or at least nearly concluded) their alleged sales of gift
jewelry.
37

[*37] invoices provide a straightforward means to establish the cost
basis of the alleged gift jewelry.

(4) The testimony we heard in support of the gift jewelry story was vague
in some important respects as well, including the following:

(a) We are unsure whether Joseph’s testimony that the gift box was
unopened was based on any personal knowledge other than his
observation of its physical appearance when it was opened.

(b) We are left without any sense of how Mohtaram allegedly stored
the gift box for decades or whether and how she ensured it
remained unopened. A better picture of Mohtaram’s finances
might have helped to establish whether she was likely to have
stored valuable jewelry for decades or to have liquidated it before
then, but we are left with only a vague sense of her economic
means. In any event we find the testimony that a box containing
jewelry and gemstones worth millions of dollars sat unopened for
decades to be incredible and not worthy of belief. Petitioners have
not established the source of JFJ’s opening inventory when
Joseph opened JFJ in 1987, nor have they proven that it was not
the jewelry Mohtaram allegedly shipped to Joseph a few years
earlier.

(c) Witnesses described the contents of the gift box without much
specificity, and the record contains no inventory list of the items
in the gift box to supplement that testimony.

(d) The logbook’s authorship has not been satisfactorily explained
beyond petitioners’ allegation that unnamed employees made
entries. 35 No petitioner admitted to making any entries in the
logbook.

(e) Despite Joseph’s testimony that the jewelry in the gift box could
be cross-referenced to the Jewellery Studio invoices via a catalog
number, the record reveals little about what the catalog is, how it
functions, and the process of matching particular jewelry pieces

35 Shahbaz’s testimony that the author of SJC’s entries was fired for stealing

also raises unanswered questions about the circumstances of the theft and whether
the logbook played any role in, or was adversely affected by, the theft.
38

[*38] to catalog numbers—and ultimately a cost figure—more
generally. 36

(f) Joseph and Shahbaz each explained Mr. Mehrnia’s purported
ignorance of their alleged gift jewelry sales by stating that Mr.
Mehrnia’s wife, who is also Joseph and Shahbaz’s sister, might
have been upset had she learned that she did not receive part of
the gift jewelry. Nonetheless, the alleged gift note states that Mr.
Mehrnia’s wife was to receive real property instead and that
Mohtaram “wish[es] that this division [of property] may not
create any issues and problem[s] among” her children, who have
“always been . . . supportive of each other.” While conceivably
there may still have been reasons for Mr. Mehrnia’s wife to be
upset, those reasons are speculative on the record before us.

(g) Petitioners allege that Shahrokh or other jewelers at SJC
modified the gift jewelry to make it more salable, but they also
allege that because the jewelry was dated, out of style, and not
salable, they sold it with the objective of recouping as much of its
original cost as possible instead of attempting to make a profit
over and above its original cost. The record does not adequately
illuminate whether or how these arguments are consistent with
each other.

(h) Shahbaz testified that loose gemstones in the alleged gift box
were originally packaged in plastic bags and that there was only
one yellow tag per plastic bag, not one yellow tag per gemstone.
It is unclear how petitioners are alleging these loose gemstones
were segregated from JFJ’s and SJC’s regular inventories and
tracked if each one did not have its own yellow tag. It is also
unclear whether and how Shahbaz’s testimony that yellow tags
were thrown out at SJC after an item of alleged gift jewelry was
sold applies to loose gemstones.

(i) Joseph, Shahbaz, Shahrokh, and Jamshid’s other siblings were
not witnesses and therefore did not testify about whether or when
they received the houses described in the alleged gift note. No
documentary evidence exists on this point either.

36 Shahbaz’s inconsistent account avoids this complication because, according

to him, “[t]he items were already yellow-tagged” with cost figures written on the tags.
39

[*39]
(5) At trial, Shahrokh—one of the purported donees of Mohtaram’s
alleged gift of jewelry, as well as someone who purportedly modified
it before it was resold—professed a lack of awareness concerning
whether sales of that jewelry ever occurred. He testified that “I
believe they have [been] sold, I don’t know, but . . . I would imagine,
we have sold them off from what I understand.”

(6) There is insufficient documentary evidence to support the gift
jewelry story. Cf. Wichita Terminal Elevator Co. v. Commissioner, 6
T.C. 1158, 1165 (1946) (“[T]he failure of a party to introduce evidence
within his possession and which, if true, would be favorable to him,
gives rise to the presumption that if produced it would be
unfavorable.”), aff’d, 162 F.2d 513 (10th Cir. 1947). While our
concern is largely general, some specific concerns include the
following:

(a) Petitioners have produced neither SJC’s computerized sales
invoices and inventory records nor Mr. Mehrnia’s digital
Quickbooks backup file.

(b) The only documentary evidence of a gift of jewelry to petitioners
in 2010 is the alleged handwritten gift note from Mohtaram, but
it is indistinguishable on its face (as translated) from a
holographic will. Indeed, Jamshid referred to it as a will in his
deposition testimony.

(c) There is no evidence that Mohtaram ever filed a gift tax return
for 2010 or any other year. In addition, the alleged gift note does
not provide evidence of a completed gift because we admitted it
only to prove Mohtaram’s then-existing state of mind (e.g., her
intent, motive, or plan), not to prove the fact of a completed gift.

(d) Much of the documentary evidence petitioners provided tends to
record events during or before 1983, but it largely does not help
to establish later events central to petitioners’ narrative. We are
unconvinced that any historical events petitioners may have
established are anything more than a smokescreen for their
improper income tax reporting.

(7) There is insufficient corroboration by witnesses unrelated to
petitioners to support the gift jewelry story. The following
considerations are particularly important in this regard:
40

[*40]
(a) Testimony by one or more of JFJ’s or SJC’s nonparty employees
or customers during 2012–14 with personal knowledge of the
events at issue would have been especially helpful. No such
testimony exists, however.

(b) While Shahbaz testified that an IRS agent observed the gift
jewelry, no party called the IRS agent as a witness.

(c) Mohtaram’s testimony would have been helpful to confirm or
refute the gift jewelry story. Petitioners could have made an
application to the Court to perpetuate her testimony pursuant to
Rule 81(a) or Rule 82 before her death. While we do not draw any
adverse inference against petitioners on these grounds,
Mohtaram’s death does not afford petitioners any leeway in
meeting their burden of proof. Cf. Kroner v. Commissioner, T.C.
Memo. 2020-73, at *9–10 (discussing the importance of hearing a
specific person’s testimony despite not drawing an adverse
inference from the person’s absence), rev’d in part on other
grounds, 48 F.4th 1272 (11th Cir. 2022).

(8) The logbook is in evidence only for the limited purpose of showing
petitioners’ intent. Nonetheless, viewed in the light of the entire
record, it does not demonstrate petitioners’ alleged intent to track
the sale of gift jewelry, including for the following reasons:

(a) Joseph’s and Shahbaz’s testimony about the logbook’s creation,
maintenance, and purpose simply was not credible.

(b) The logbook records check sales (allegedly of gift jewelry) but not
credit card sales. It would be illogical for the logbook to record
only sales via a single payment method if it were intended to track
the sale of gift jewelry.

(c) No witness identified the handwriting in the logbook or named
the person or people responsible for making entries in it. Absent
testimony from such a person—including as to when the logbook
was created and any other circumstances surrounding its
creation—the logbook does not convincingly demonstrate
petitioners’ contemporaneous intent. Petitioners have not
adequately proven that the logbook was contemporaneously
maintained in view of the lack of weight we give to Joseph’s and
Shahbaz’s testimony.
41

[*41]
(d) As already discussed, JFJ’s and SJC’s sales invoices, which might
refute or confirm the logbook entries, have not been introduced
into evidence. Some of the entries in the logbook correspond to
checks whose memo lines mention watches and wine glasses,
among other items, but watches, wine glasses, and certain other
items mentioned in the checks’ memo lines were not among the
alleged gift jewelry items.

(e) Joseph testified that the primary purpose of the logbook was to
facilitate an equitable division of the proceeds of the gift jewelry,
but he also testified that credit card sales of gift jewelry were not
recorded in the logbook, which would not facilitate an equitable
division of the proceeds. This is especially true with respect to
Jamshid, who was involved with neither JFJ nor SJC. Moreover,
some of the funds deposited into Rabobank 2472 were used for
personal purposes or deposited into JFJ’s and SJC’s operating
accounts.

(9) The gift jewelry story is underinclusive. Joseph, when asked which
personal bank accounts received deposits from gift jewelry sales,
replied only “Rabobank,” which we understand to mean Rabobank
2472. When he was asked, “So any sales of the mother’s gifted
jewelry went into the Rabobank [2472] account?”, he replied, “Yes, it
did.” We understand this to be a party admission that the gift
jewelry story is not applicable to the specific amounts deposited into
Chase 8913, SBBT 8226, BofA 7088, and BofA 5186 that respondent
identified as taxable. Because petitioners have not offered any other
explanation of these specific items, we deem them to have conceded
that they are taxable.

Petitioners have made generalized arguments about the
reliability of the IRS’s examination at the administrative level. These
arguments do not avail petitioners because

[a]s a general rule, this Court will not look behind a
deficiency notice to examine the evidence used or the
propriety of [the Commissioner’s] motives or of the
administrative policy or procedure involved in making his
determinations. . . . [A] trial before the Tax Court is a
proceeding de novo; our determination as to a [taxpayer’s]
tax liability must be based on the merits of the case and
42

[*42] not any previous record developed at the administrative
level.

Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327–28 (1974).
We are not faced here with the exceptional situation of respondent’s
making a naked assessment without any rational foundation. Cf.
United States v. Janis, 428 U.S. 433, 441–42 (1976). To the contrary,
there is overwhelming evidence of the correctness of all of respondent’s
positions in these cases that remain at issue (other than his
determination of fraud penalties against Anna and Farahnaz for
2012–14).

B. Guaranteed Payments

Payments a partner receives from a partnership generally fall
into one of three categories. See Bolles v. Commissioner, T.C. Memo.
2019-42, at *19–20. First, a partner may receive payments representing
distributions of his or her distributive share of partnership income.
See §§ 701, 702, 704(b), 731, 736(a)(1). Second, a partner may receive
payments in circumstances in which he or she is not treated as a
partner. See § 707(a). Third, a partner may receive guaranteed
payments for services or use of capital that do not represent
distributions of partnership income. See §§ 707(c), 736(a)(2). A
guaranteed payment is not automatically deductible by the partnership
making it; nonetheless, if the guaranteed payment would have been
deductible if it had been made to a nonpartner, then it is deductible if
made to a partner. See Cagle v. Commissioner, 539 F.2d 409, 414 (5th
Cir. 1976), aff’g 63 T.C. 86 (1974).

Respondent determined that Shahbaz and Anna failed to report
guaranteed payments of $48,000, $48,000, and $46,000 for 2012, 2013,
and 2014, respectively, reflecting the fair market value of their use of
1143 Colina Vista, SJS’s partnership property, as their personal
residence until mid-December 2014. Shahbaz and Anna do not argue
about which of the three just-described categories their personal use of
1143 Colina Vista should fall into. 37 Instead, they argue that as an

37 Petitioners’ lack of argument does not mean that the issue is

straightforward. Cf. Pratt v. Commissioner, 64 T.C. 203, 210 (1975) (holding that
payments based on gross rentals “are not determined without regard to the income of
the partnership as required by section 707(c) for a payment to a partner for services to
be a guaranteed payment”), aff’d in part, rev’d in part, 550 F.2d 1023 (5th Cir. 1977);
H.H. Mink & Son Bag Co. v. Commissioner, T.C. Memo. 1970-177, 1970 Tax Ct. Memo
43

[*43] alleged factual matter, they lived at 1143 Colina Vista “for less
than half of the 36-month period from January 1, 2012, to December 31,
2014.” They also argue that there were “nearly two years of renovations”
on 1143 Colina Vista, and that they “moved to a home directly across
the street” during this time. We take a dim view of Shahbaz and Anna’s
failure to develop the record adequately in this regard.

If it were true during 2012–14 (or some portion of it) that Shahbaz
and Anna resided at another residence and 1143 Colina Vista was under
construction, then they could have produced more than self-serving
testimony to support those facts. Some documentation concerning the
construction almost certainly would have existed. The testimony of
nonparty witnesses with knowledge, photographic or video evidence, or
other documentary evidence might also have been helpful. Evidence
concerning precisely when Shahbaz and Anna lived at one residence or
the other is also needed, but Shahbaz’s testimony was imprecise.

The failure of proof on this issue leaving the truth shrouded in
mystery—and us with a threadbare record at best—must fall on
Shahbaz’s and Anna’s shoulders. At any given time, Shahbaz and Anna
either resided at 1143 Colina Vista or they did not, and 1143 Colina
Vista either was undergoing renovations or it was not. Shahbaz and
Anna’s failure to adduce evidence other than their own testimony to help
us resolve where they resided during 2012–14—and when they did so—
is inexplicable. We will draw an adverse inference against Shahbaz and
Anna for failing to develop the record appropriately with respect to their
place of residence. We presume that any evidence they could have
produced in this regard would have been unfavorable to them. See
Wichita Terminal Elevator Co., 6 T.C. at 1165.

On the record before us, we are faced with Shahbaz and Anna’s
contemporaneous written statements on their income tax returns that
their home address was 1143 Colina Vista and their inconsistent,
self-serving testimony that they resided at another residence. Shahbaz

LEXIS 181, at *23–25 (characterizing a partner’s personal use of a partnership’s
automobile as income of the partnership); Treas. Reg. § 1.707-1(a) (“A partner who
engages in a transaction with a partnership other than in his capacity as a partner
shall be treated as if he were not a member of the partnership with respect to such
transaction. Such transactions include . . . the rendering of services by the partnership
to the partner . . . .”); Rev. Rul. 81-300, 1981-2 C.B. 143 (characterizing partners’
receipt of a percentage of gross rentals in exchange for providing management services
as guaranteed payments, contrary to Pratt). Nonetheless, because petitioners have
not argued that an alternative characterization is more appropriate and the analysis
would be highly fact intensive, we decline to assume the mantle in the first instance.
44

[*44] and Anna have not met their burden to show they resided
somewhere other than 1143 Colina Vista because (1) the testimony we
heard simply was not credible, (2) we have drawn an adverse inference
against them on account of their failure to develop the record
adequately, and (3) their income tax returns have the advantage of
contemporaneity.

Shahbaz and Anna also argue that Shahbaz “supervised and
managed the team of contractors working at” 1143 Colina Vista and that
they moved back to 1143 Colina Vista in 2014, “where [Shahbaz]
continued performing repairs.” These assertions are similarly
unsupported by credible evidence, but more importantly, they are
irrelevant: The issue is not whether Shahbaz made some contribution of
services to SJS but instead whether he received compensation
“determined without regard to the income of the partnership.” See
§ 707(c). Shahbaz and Anna have not made any argument that their
personal use of 1143 Colina Vista depended on SJS’s income, and we
conclude that it did not. Shahbaz and Anna also have not taken issue
with respondent’s methodology for calculating the fair market value of
their personal use of 1143 Colina Vista. Finally, petitioners’
Simultaneous Opening Brief does not argue that the Code entitles SJS
to a deduction in respect of the guaranteed payments it made to Shahbaz
and Anna, so we deem that line of argument to be conceded. We uphold
respondent’s determinations that Shahbaz and Anna failed to report
guaranteed payments of $48,000, $48,000, and $46,000 for 2012, 2013,
and 2014, respectively.

C. NOL Carryforward Deductions

The deductibility of an NOL, like other deductions, is a matter of
legislative grace, and taxpayers bear the burden of proving their
entitlement to NOL deductions. See INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992). Section 172 allows a taxpayer to deduct an NOL
for a taxable year. The amount of the NOL deduction equals the
aggregate of the NOL carryovers and carrybacks to the taxable year.
See § 172(a). Section 172(c) defines an NOL as the excess of deductions
over gross income, computed with certain modifications specified in
section 172(d). See Amos v. Commissioner, T.C. Memo. 2022-109, at *6,
aff’d per curiam, No. 23-10532, 2024 WL 1406646 (11th Cir. Apr. 2,
2024).

An unused NOL is first required to “be carried to the earliest of
the taxable years to which . . . such loss may be carried.” § 172(b)(2);
45

[*45] McRae v. Commissioner, T.C. Memo. 2019-163, at *23. Any excess
NOL that is not applied for one year is carried to the then-ensuing year.
See § 172(b)(2). For the years at issue, absent an election under section
172(b)(3), an NOL must first be carried back two years and then carried
over 20 years. 38 See § 172(b)(1)(A), (2). A taxpayer claiming an NOL
deduction must file with his return “a concise statement setting forth
the amount of the net operating loss deduction claimed and all material
and pertinent facts relative thereto, including a detailed schedule
showing the computation of the net operating loss deduction.” Treas.
Reg. § 1.172-1(c).

“A taxpayer who claims a net operating loss deduction bears the
burden of establishing both the existence of the net operating loss and
the amount that may be carried over to the year involved.” Chico v.
Commissioner, T.C. Memo. 2019-123, at *39, aff’d, No. 20-71017, 2021
WL 4705484 (9th Cir. Oct. 8, 2021). “Taxpayers cannot rely solely on
their own income tax returns to establish the losses they sustained.”
Barker v. Commissioner, T.C. Memo. 2018-67, at *13, aff’d, 853 F. App’x
571 (11th Cir. 2021). A taxpayer “must establish that the NOL was not
fully absorbed in the years preceding the particular year for which he
seeks the NOL deduction.” Villanueva v. Commissioner, T.C. Memo.
2022-27, at *3. In the case of a claimed NOL carryforward deduction,
taxpayers must both (1) show convincing evidence that they incurred an
NOL in one or more taxable years before the taxable year for which they
claim an NOL deduction and (2) prove their income for each taxable year
prior to the year for which they claim an NOL carryforward deduction,
up to two years before the year in which the earliest NOL was incurred.
See Power v. Commissioner, T.C. Memo. 2016-157, at *13–14.

Except to the extent respondent has conceded otherwise, 39
petitioners are not entitled to their claimed NOL carryforward
deductions because (1) they have failed to provide sufficient evidence of
the NOLs and (2) they have failed to show that any NOL was available
to carry forward to 2012–16. Even though the amount of the NOL
deduction equals the aggregate of the NOL carryovers and carrybacks
to the taxable year, petitioners have not identified the components of

38 The Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, § 13302(b), 131 Stat.

2054, 2122, amended section 172(b) by repealing the NOL carryback and allowing for
an indefinite carryforward. See Martin v. Commissioner, T.C. Memo. 2021-35, at *19
n.10.
39 In his Simultaneous Opening Brief, respondent concedes that $237,418 of

his $639,482 adjustment to Shahbaz and Anna’s claimed NOL deduction for 2012 was
erroneous.
46

[*46] each claimed NOL deduction. In other words, we do not know from
which taxable years the alleged NOLs originate and in what amount
each separate NOL was applied during 2012–16. We can hardly verify
that petitioners’ calculations of their NOL deductions are correct if we
do not know in which years the alleged NOLs were incurred.

The evidence that petitioners have presented is “disorganized,
confusing, and inadequate.” See Larabee v. Commissioner, T.C. Memo.
1989-298, 1989 Tax Ct. Memo LEXIS 310, at *7. Petitioners did not
attach the detailed computational schedule required by Treasury
Regulation § 1.172-1(d) to any of their income tax returns, and we still
do not have any reasonable substitute for it. The books and records for
petitioners’ businesses, as well as petitioners’ income tax returns, are
unreliable and merit little weight. We have mostly unreliable secondary
sources; we do not have many source documents, including receipts,
invoices, or canceled checks (other than the canceled checks respondent
used to prove unreported income), let alone a summary of those source
documents in a usable format. See Jasperson v. Commissioner, T.C.
Memo. 2015-186, at *9 (“[The taxpayer] wished to prove his case by
submitting hundreds of accounting records from an electronic database
as replacements for source documents. . . . [W]ithout any sort of
direction as to the contents of these documents, this type of voluminous,
unverified, and indiscriminate documentation does not provide
adequate substantiation of the items [the taxpayer] reported on his tax
returns.”), aff’d, 658 F. App’x 962 (11th Cir. 2016); WB Acquisition, Inc.
& Subs. v. Commissioner, T.C. Memo. 2011-36, slip op. at 49 (holding
that a general ledger was insufficient to substantiate cost of goods sold
because the taxpayers failed to provide “receipts, invoices, canceled
checks, or any other evidence to prove the nature of these expenses or
whether such expenses were paid”), aff’d on other issues sub nom. DJB
Holding Corp. v. Commissioner, 803 F.3d 1014 (9th Cir. 2015).

Importantly, while we have heard testimony that SJC used a
software program to create sales invoices during 2012–14, petitioners
have not produced any of those invoices. The mere fact that NOL
deductions are involved does not relieve petitioners from providing the
requisite substantiation for the underlying expenses or losses or from
proving their income for relevant years. Cf. A&F Mgmt. Corp. v.
Commissioner, T.C. Memo. 1984-585, 1984 Tax Ct. Memo LEXIS 87,
at *6 (“Our finding as to the deductibility of the amounts claimed by [the
taxpayer] as operating expenses will determine the deductibility of the
net operating loss claimed by [the taxpayer] . . . .”).
47

[*47] Petitioners have provided some rudimentary calculations, but
they contain several defects:

(1) While petitioners’ income tax returns do not contain a section
172(b)(3) election, petitioners nonetheless calculated their NOL
deductions by carrying forward each alleged NOL, not by first
carrying them back two years.

(2) Even assuming arguendo that petitioners incurred NOLs at some
point, they have not proven that they remained available to use for
2012–16. A significant portion of the alleged NOLs appears to have
originated before or during 2011, but we do not have any records for
2009 or earlier.

(3) Petitioners’ calculations do not take into account whether their basis
in each partnership or S corporation that they own limits their NOL
deductions. Cf. Bryan v. Commissioner, T.C. Memo. 2023-74,
at *12–15 (considering whether sufficient outside basis existed in
upper- and lower-tier partnerships to support the taxpayer’s claimed
NOL deductions); Jasperson, T.C. Memo. 2015-186, at *8–9 (“[The
taxpayer] did not accurately account for his basis in his
S corporation. Instead he provided the corporation’s old tax returns
and workpapers . . . to show the presumed calculated value of his
basis in the corporation. These documents, without any
substantiation of their numeric content, are not a proper means of
establishing basis.”).

(4) Petitioners appear to allege that some of the NOLs are attributable
to Barukh and SJS, but they have conceded that they are not real
estate professionals for 2012–14, cf. § 469(c)(2), (4), (7), and they have
made no effort to show how the passive activity loss limitation under
section 469(a)(1) applies.

(5) Petitioners’ calculations of their NOLs and claimed NOL deductions
do not take into account concessions petitioners made in the
Stipulation of Settled Issues, let alone our findings of unreported
income. Cf. Schnackel v. Commissioner, T.C. Memo. 2024-76,
at *12–13.

We are not able to make any estimates of the allowable amounts of NOL
deductions, if any, on the wholly inadequate record before us. Cf.
Lehman v. Commissioner, T.C. Memo. 2010-74, slip op. at 5 (declining
to estimate the allowable amounts of NOL deductions where the
taxpayers “have proposed no facts that, were we to so find, would allow
48

[*48] us to make a reasonable estimate of . . . losses”). Petitioners’
computational arguments about the effect a disallowance of their NOL
carryforward deductions should have on their income tax deficiencies
are also wholly without merit. 40

V. Penalties

Only two issues remain for our decision. The first is whether
petitioners are liable for fraud penalties (or, in the alternative,
accuracy-related penalties) for their 2012–14 taxable years. The second
is whether Shahbaz, Anna, Shahrokh, and Farahnaz are liable for
accuracy-related penalties for their 2015 and 2016 taxable years.

The Commissioner generally bears the burden of production with
respect to a penalty or an addition to tax that an individual taxpayer

40 While petitioners’ computational arguments would ordinarily be raised and

considered in connection with Rule 155 computations, the parties effectively tried some
of the computational issues related to petitioners’ claimed NOL deductions by consent,
and we have adequately considered their arguments. Petitioners’ position, which
challenges RA Hurtado’s calculations at the administrative level and amounts to an
argument that disallowing their NOL deductions does not create income tax
deficiencies, is highly flawed for at least three reasons, even putting aside that
petitioners’ focus on events occurring at the administrative level disregards the
purpose of our de novo proceedings. Cf. Greenberg’s Express, Inc., 62 T.C. at 327–28.
First, petitioners misleadingly conflate Form 1040, line 43, which instructed
taxpayers to enter their taxable income as zero in lieu of using a negative number, and
Form 4549–A, Income Tax Examination Changes, a worksheet respondent used that
does not specify whether zero or a negative number should be entered as taxable
income. (The possibility of negative taxable income arose on the face of petitioners’
income tax returns because of highly negative numbers entered on Form 1040, line 21,
to reflect alleged NOLs.) Whether petitioners’ income is appropriately adjusted by the
entire amount of the NOL deductions they claimed, or only by what petitioners call the
utilized portion of their NOLs, depends directly on whether a negative number or zero
is entered as their taxable income on the worksheet. Contrary to petitioners’
assertions, respondent should not have adjusted petitioners’ income only by the
utilized portion of their alleged NOLs because respondent entered their taxable income
on the worksheet as a highly negative number derived largely from Form 1040, line
21, not zero. Put differently, respondent effectively adjusted line 21 of Form 1040, not
petitioners’ income directly. Second, a proper application of a utilization-based method
would require petitioners’ taxable income to be entered as zero on Form 4549–A, which
is less favorable to petitioners than the highly negative number respondent used.
Finally, even if a utilization-based method were used, petitioners could not rely on
their unadjusted income tax returns to determine the utilized portion of their NOLs
for purposes of Rule 155 computations because those unadjusted income tax returns
were incorrect. Cf. Schnackel, T.C. Memo. 2024-76, at *12–13. Our holdings in this
Opinion, as well as concessions made in the Stipulation of Settled Issues, greatly affect
how much of petitioners’ alleged NOLs would be considered utilized.
49

[*49] has contested in his or her petition. See § 7491(c); Funk v.
Commissioner, 123 T.C. 213, 216–18 (2004); Swain v. Commissioner,
118 T.C. 358, 363–65 (2002). To satisfy that burden, the Commissioner
must offer sufficient evidence to indicate that it is appropriate to impose
the penalty or addition to tax. See Higbee v. Commissioner, 116 T.C.
438, 446 (2001).

The Commissioner’s burden of production also includes showing
compliance with section 6751(b), which provides that, with certain
exceptions not applicable here, the “initial determination” of a penalty
or addition to tax must be “personally approved (in writing) by the
immediate supervisor of the individual making such determination.”
See Graev v. Commissioner, 149 T.C. 485, 492–93 (2017), supplementing
and overruling in part 147 T.C. 460 (2016). The Ninth Circuit has held
that written supervisory approval must occur “before the assessment of
the penalty or, if earlier, before the relevant supervisor loses discretion
whether to approve the penalty assessment.” Laidlaw’s Harley
Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir.
2022), rev’g and remanding 154 T.C. 68 (2020); see also Kraske v.
Commissioner, 161 T.C. 104 (2023).

A. 2012–14: Fraud Penalties

Section 6663(a) imposes a penalty of 75% of the portion of any
underpayment of tax required to be shown on a return that is
attributable to fraud. Fraud is the intentional wrongdoing of a taxpayer
to evade tax believed to be owing. See Petzoldt, 92 T.C. at 698. Fraud
is never imputed or presumed. See Parks v. Commissioner, 94 T.C. 654,
660 (1990). Rather, “[t]he existence of fraud is a question of fact to be
resolved upon consideration of the entire record.” Id.

To establish fraud, the Commissioner must prove that (1) an
underpayment of tax exists for the relevant year and (2) “the taxpayer
intended to evade taxes known to be owing by conduct intended to
conceal, mislead, or otherwise prevent the collection of taxes.” Id.
at 660–61. The Commissioner must prove both elements by clear and
convincing evidence. See § 7454(a); Rule 142(b); DiLeo, 96 T.C. at 873;
Petzoldt, 92 T.C. at 699. The Supreme Court has explained:

Clear and convincing evidence is that measure or degree of
proof which will produce in the mind of the trier of facts a
firm belief or conviction as to the allegations sought to be
established. It is intermediate, being more than a mere
50

[*50] preponderance, but not to the extent of such certainty as is
required beyond a reasonable doubt as in criminal cases.
It does not mean clear and unequivocal.

Ohio v. Akron Ctr. for Reprod. Health, 497 U.S. 502, 516 (1990) (quoting
Cross v. Ledford, 120 N.E.2d 118, 123 (Ohio 1954)).

Because direct proof of a taxpayer’s intent is rarely available,
fraudulent intent may be established by circumstantial evidence, and
reasonable inferences may be drawn from the relevant facts. See Spies
v. United States, 317 U.S. 492, 499 (1943); Bradford v. Commissioner,
796 F.2d 303, 307 (9th Cir. 1986), aff’g T.C. Memo. 1984-601. The
taxpayer’s entire course of conduct may be examined to establish the
requisite intent. See Stone v. Commissioner, 56 T.C. 213, 224 (1971);
Otsuki v. Commissioner, 53 T.C. 96, 106 (1969). Mere suspicion,
however, is not enough to prove fraud. See Katz v. Commissioner, 90
T.C. 1130, 1144 (1988).

Courts usually rely on several nonexclusive indicia (or badges) of
fraud in deciding whether a taxpayer had fraudulent intent. See
Niedrighaus v. Commissioner, 99 T.C. 202, 211 (1992). These badges of
fraud include (1) understated income; (2) maintaining inadequate
records; (3) failing to file tax returns; (4) implausible or inconsistent
explanations of behavior; (5) concealing income or assets; (6) failing to
cooperate with tax authorities; (7) engaging in illegal activities;
(8) dealing in cash; (9) failing to make estimated tax payments; and
(10) filing false documents. See Estate of Trompeter v. Commissioner,
279 F.3d 767, 773 (9th Cir. 2002), vacating and remanding 111 T.C. 57
(1998); Bradford v. Commissioner, 796 F.2d at 307–08; Recklitis v.
Commissioner, 91 T.C. 874, 910 (1988). The existence of any one badge
is not dispositive, but the existence of several badges may be persuasive
circumstantial evidence of fraud. Niedringhaus, 99 T.C. at 211. The
sophistication of the taxpayer is also relevant. See Stephenson v.
Commissioner, 79 T.C. 995, 1006 (1982), aff’d per curiam, 748 F.2d 331
(6th Cir. 1984); Holmes v. Commissioner, T.C. Memo. 2012-251, at *31,
aff’d, 593 F. App’x 693 (9th Cir. 2015).

“Section 6663(a) . . . applies to a specific, culpable taxpayer,”
Murrin v. Commissioner, T.C. Memo. 2024-10, at *7, appeal docketed,
No. 24-2037 (3d Cir. June 12, 2024), and is “tied to the culpability of a
particular taxpayer,” id. at *9. Section 6663(c) provides that in the case
of a joint return, the fraud penalty “shall not apply with respect to a
spouse unless some part of the underpayment is due to the fraud of such
51

[*51] spouse.” Our discussion therefore addresses each petitioner’s
liability for the fraud penalty separately.

If the Commissioner establishes that any portion of the
underpayment is attributable to fraud, then the entire underpayment is
treated as due to fraud unless the taxpayer can establish by a
preponderance of the evidence that some portion of it is not attributable
to fraud. § 6663(b). In addition, no fraud penalty may be imposed “with
respect to any portion of an underpayment if it is shown that there was
a reasonable cause for such portion and that the taxpayer acted in good
faith with respect to such portion.” § 6664(c)(1).

Respondent has met his burden of production for the fraud
penalties he determined against petitioners. We have already found
that respondent has clearly and convincingly demonstrated that
underpayments of tax exist for 2012, 2013, and 2014 with respect to each
petitioner. As we will discuss below, respondent has also adduced some
evidence of fraud with respect to each petitioner, including understating
income. Finally, respondent has shown that the relevant immediate
supervisor timely approved the assertion of fraud penalties against each
petitioner for 2012, 2013, and 2014 in accordance with section 6751(b),
and petitioners have not argued or shown otherwise. As we now explain,
however, respondent has met his burden of proof to demonstrate fraud
clearly and convincingly with respect to four of the six petitioners, but
not with respect to two of them.

1. Joseph

We agree with respondent that Joseph is liable for fraud penalties
for 2012, 2013, and 2014. Joseph certainly engaged in a pattern of
understating his and Lilly’s income by substantial amounts, and the
understatements were intentional because Joseph caused JFJ to report
its credit card sales as income, but not most of its check sales. Joseph
actively concealed the unreported income by diverting it into Rabobank
2472 and other personal accounts of which Mr. Mehrnia was unaware.
To create the appearance of loan disbursements, he returned some
untaxed proceeds to JFJ by writing checks from Rabobank 2472
referencing Jamshid or a loan and depositing those checks in JFJ’s
operating account. He invested other untaxed funds in SJS, which in
turn invested them in residential real estate. Joseph also wrote checks
for personal purposes from Rabobank 2472.
52

[*52] When questioned by RA Hurtado, Joseph continued to conceal the
untaxed income by incorrectly telling her that JFJ had only one business
operating account. In fact, Joseph deposited JFJ’s items into multiple
accounts. He also falsely stated that a loan carried on JFJ’s books was
administered by Jamshid and represented an advance on an
inheritance. Despite RA Hurtado’s repeated written requests for
information about sources of nontaxable income, such as gifts or
inheritances, Joseph never mentioned any aspect of the gift jewelry
story to RA Hurtado.

RA Hurtado discovered by summoning bank records that
Rabobank 2472 was funded by scores of deposited items from JFJ’s and
SJC’s businesses, not loan proceeds from Jamshid. Jamshid later
credibly testified that he was unaware of all of the business dealings in
his name. Joseph’s repeated use of Jamshid’s name without Jamshid’s
knowledge was fraudulent (regardless of whether it constituted an
illegal activity) because it was calculated to conceal Joseph’s unreported
income in the guise of a loan. It was also fraudulent because the
signature card for SBBT 8226, on which Joseph’s signature appears
twice, contains a false certification that Jamshid is not subject to backup
withholding because he is “a U.S. person (including a U.S. resident
alien)” and wrongly leaves unchecked a box stating that “I am not a U.S.
citizen or resident.” Even at trial, Joseph continued to refer falsely to
SBBT 8226 as “Jamshid’s Trust.”

Petitioners now rely on the gift jewelry story instead of arguing
that JFJ received nontaxable loan proceeds, so Joseph’s initial
explanation of his behavior to RA Hurtado constitutes an inconsistent
explanation. That explanation was also implausible because Joseph
used much of the unreported income to invest in real estate, not in JFJ.
Joseph has continued this pattern by giving inconsistent and
implausible testimony in support of the gift jewelry story at trial.
Moreover, Joseph has failed to cooperate with these proceedings by
failing to produce any sales invoices or customer receipts, which might
refute the gift jewelry story or undermine petitioners’ claimed NOL
deductions. Instead of cooperating, he has opted to give us implausible
and inconsistent testimony with respect to those records’ whereabouts.
See supra note 20. Joseph also dealt in cash because JFJ’s sales logs
show cash sales that are unmatched by a corresponding bank deposit.
Furthermore, he claimed inflated NOL deductions and failed to keep
adequate records to substantiate them. Joseph’s entire course of
conduct demonstrates that he intended to evade income taxes he knew
to be owing on JFJ’s check sales and that he did so through conduct
53

[*53] designed to conceal, mislead, or otherwise prevent the collection of
those taxes. Joseph has not shown that any portion of the
underpayments is not attributable to fraud or is attributable to
reasonable cause and good faith. Joseph is liable for the section 6663
fraud penalties on his and Lilly’s total underpayment for each of 2012,
2013, and 2014.

2. Lilly

Lilly is also liable for the fraud penalties for 2012, 2013, and 2014.
Lilly understated her and Joseph’s income for those years by substantial
amounts, and the understatements could not have been unwitting. Lilly
owned a 30% interest in JFJ, held herself out as JFJ’s owner, worked at
JFJ (including writing sales invoices), and was considered the most
senior person working when she was working. She was aware of
Joseph’s real estate dealings because she executed interspousal transfer
deeds in respect of residential properties that Joseph purchased. Even
though she worked part time at JFJ, she was aware that JFJ was much
more profitable than her and Joseph’s tax returns reflected.

Lilly concealed her assets from the Government through SBBT
8226 while selectively revealing them to a bank in connection with a
loan application. She has failed to cooperate with these proceedings by
failing to produce any sales invoices or customer receipts. At trial she
also misleadingly downplayed her involvement at JFJ. For example,
when asked whether she “ever [got] any accreditations in the jewelry
industry,” she mentioned getting a gemology degree from GIA “in the
February or January of this year.” Nonetheless, the record reveals that
she has been a GIA alumni member since 2007. Lilly also claimed
inflated NOL deductions and failed to keep adequate records to
substantiate them. Lilly has not shown that any portions of the
underpayments are not attributable to fraud or are attributable to
reasonable cause and good faith. Lilly is liable for the section 6663 fraud
penalties on her and Joseph’s entire underpayments for 2012–14.

3. Shahbaz

Respondent is correct that Shahbaz is liable for the fraud
penalties for 2012, 2013, and 2014. Shahbaz not only engaged in a
pattern of understating his and Anna’s income by substantial amounts,
but he also caused SJC to report very little of its check and cash sales as
income. Shahbaz actively concealed the income by diverting it into
Rabobank 2472 and other personal accounts of which Mr. Mehrnia was
54

[*54] allegedly unaware. He invested much of these untaxed proceeds
in SJS and also returned some to SJC in the guise of a loan from
Jamshid, the latter of which demonstrates forethought about how he
would respond if he were questioned about those transactions.

When questioned by RA Hurtado, Shahbaz continued to conceal
the untaxed income by incorrectly stating to her that SJC had only one
business operating account. He also falsely stated that a loan carried
on SJC’s books represented an advance on his future inheritance from
his father’s estate. Shahbaz never mentioned any aspect of the gift
jewelry story. When RA Hurtado confronted him with evidence of
business deposits into Rabobank 2472, however, he made an admission
to the effect that he underreported his income from SJC with the intent
to evade tax.

Petitioners, including Shahbaz, now rely on the gift jewelry story
instead of arguing that SJC received nontaxable loan or inheritance
proceeds, so Shahbaz’s initial explanation of his behavior to RA Hurtado
constitutes an inconsistent explanation. Shahbaz gave inconsistent and
implausible testimony in support of the gift jewelry story. Shahbaz also
dealt in cash because SJC’s sales journals identify substantial cash and
check sales that do not correspond to the cash and check deposits in its
operating account. In addition Shahbaz has failed to cooperate with
these proceedings by failing to produce any sales invoices, inventory
records, or customer receipts. Shahbaz also claimed inflated NOL
deductions and failed to keep adequate records to substantiate them.
Shahbaz’s entire course of conduct demonstrates that he intended to
evade income tax he knew to be owing on SJC’s check and cash sales
and that he did so through conduct designed to conceal, mislead, or
otherwise prevent the collection of that tax. Shahbaz has not shown
that any portions of the underpayments are not attributable to fraud or
are attributable to reasonable cause and good faith. Shahbaz is liable
for the section 6663 fraud penalties on his and Anna’s total
underpayments.

4. Anna

We part ways with respondent on the matter of Anna’s liability
for the fraud penalties for 2012–14. Respondent argues that Anna is
liable for the section 6663 fraud penalties because she understated her
and Shahbaz’s income, maintained inadequate records, and gave
implausible or inconsistent explanations of her behavior.
55

[*55] While Shahbaz and Anna substantially understated their income
and failed to substantiate their claimed NOL deductions, both of which
certainly raise suspicions about what Anna knew and her intent, we are
ultimately unconvinced that respondent has proven fraud. The heart of
respondent’s argument is that Anna must have known about, or willfully
ignored, the understatements of income on her and Shahbaz’s income
tax returns because her work at SJC included bookkeeping. Without
more foundation about what Anna knew or her lifestyle, however, the
probative value of Anna’s part-time work at SJC is limited. It is unclear,
for example, to what extent Anna’s bookkeeping and other work at SJC
gave her insight into SJC’s operating results. This is especially true in
view of Joseph and Shahbaz’s alleged misleading of Mr. Mehrnia. See
supra note 14 and accompanying text. Virtually no evidence of Anna’s
lifestyle has been presented. Furthermore, Anna may not have been
aware of funds invested in SJS, a real estate partnership of which she
was not a partner.

Respondent also argues that Anna testified inconsistently with
her income tax returns that she did not live at 1143 Colina Vista during
2012–14. Likewise, respondent argues that Anna should have been
aware that she understated her income by at least the amount of the
guaranteed payments respondent determined against her because she
lived in a house owned by SJS. We resolved the guaranteed payments
issue, however, on the basis of petitioners’ failure to meet their burden
of proof, not on the basis of a conclusive finding that Shahbaz and Anna
lived at 1143 Colina Vista. While petitioners had the burden of proof on
the guaranteed payments issue, respondent has the burden of proof on
the imposition of fraud penalties. Nonetheless, respondent has not
developed the record much more than petitioners in this regard. In
addition, even if Shahbaz and Anna resided at 1143 Colina Vista as
respondent alleges, there is no evidence that Anna knew SJS owned it.
We need not consider whether Anna is liable for an accuracy-related
penalty for 2012, 2013, and 2014 because “[i]n the case of a joint return
where one spouse is found liable for fraud, the accuracy-related penalty
cannot be imposed on the other spouse.” Graham v. Commissioner, T.C.
Memo. 2005-68, slip op. at 51, aff’d, 257 F. App’x 4 (9th Cir. 2007); see
Treas. Reg. § 1.6662-2(a) (“No accuracy-related penalty may be imposed
on any portion of an underpayment of tax on which the fraud penalty
set forth in section 6663 is imposed.”); see also § 6663(c).
56

[*56] 5. Shahrokh

Shahrokh, however, is liable for the fraud penalty for each of
2012, 2013, and 2014. Shahrokh engaged in a pattern of substantially
understating his and Farahnaz’s income. Although we accept that there
was a division of labor at SJC between Shahbaz and Shahrokh and that
Shahrokh focused his efforts on jewelry design, the record nonetheless
reveals Shahrokh’s awareness that SJC’s income was significantly
understated.

First, Shahrokh’s constant work on SJC’s jewelry necessarily
made him aware that SJC was much more profitable than he claimed
on his income tax returns. Second, Shahrokh was a partner of SJS,
which received much of SJC’s profits as capital that it used to make real
estate investments, and Shahrokh confirmed he was aware that
proceeds from jewelry sales were used to purchase property. Third,
Shahrokh’s signature appears on the November 18, 2009, loan
agreement that falsely purports to memorialize a loan with Jamshid.
Fourth, Shahrokh held a power of attorney over SBBT 8226, which
played a key role in the underreporting scheme. Finally, even though
Joseph and Shahbaz were the only named accountholders on Rabobank
2472, Shahrokh has never argued or testified that the income deposited
in it is attributable only to them and not to him. 41 His silence on the
matter stands in stark contrast to Jamshid’s disclaimer of knowledge
about even personal bank accounts in his own name. Likewise,
Shahrokh’s testimony that he was unaware that Joseph and Shahbaz
were making deposits of jewelry sale proceeds into personal bank
accounts is implausible except to the extent that unawareness might
have been due to willful blindness.

Shahrokh concealed income and assets in SBBT 8226, an account
over which he held a power of attorney, and in Rabobank 2472 through
his reliance on Shahbaz and Joseph to use its funds to make investments
into SJS, a real estate partnership of which he was a partner. Shahrokh
also dealt in cash because SJC’s sales journals identify substantial cash
sales that do not correspond to the cash deposits in its operating account.
Moreover, Shahrokh has failed to cooperate with these proceedings by
failing to produce any sales invoices or customer receipts. Shahrokh also
took inflated NOL deductions and failed to keep adequate records to
substantiate them. Shahrokh has not shown that any portions of the

41 Similarly, there is no evidence that he has demanded SJC to provide him

with an equitable accounting.
57

[*57] underpayments are not due to fraud, and he is liable for the
section 6663 fraud penalties on his and Farahnaz’s total underpayments
for 2012, 2013, and 2014.

6. Farahnaz

Respondent argues that Farahnaz understated her and
Shahrokh’s income and gave implausible or inconsistent explanations at
trial. While it is true that Farahnaz understated her income, we are
most interested in whether that proves she intended to evade tax known
to be owing. Respondent points out that Farahnaz worked at SJC and
there is some evidence that she was informed about the alleged gift of
jewelry. Therefore, respondent argues, “she was aware of SJC’s use of
the [gift] jewelry in its inventory and sales,” and further, “[g]iven how
she was informed of the alleged gift, it is implausible that she was
unaware of the residential real estate acquisitions of SJS Group during
the years at issue.”

Respondent, however, assumes the truth of the gift jewelry story
for purposes of proving Farahnaz’s liability for the fraud penalties, even
though respondent otherwise denies its truth and we find it to be
implausible. In addition, any inference about what Farahnaz might
have known from her work at SJC is speculative in view of respondent’s
concession that “she may not have been thoroughly involved with the
business.”

Farahnaz may have given inconsistent testimony by
contradicting the parties’ stipulation that she worked at SJC from 2011
to 2017, but even assuming arguendo that it is appropriate to consider
this inconsistency for purposes of imposing the fraud penalty, it does not
supply clear and convincing evidence of fraud, either standing alone or
in combination with the other modest evidence respondent has adduced.
There is no evidence that Farahnaz is sophisticated about tax, financial,
or business matters, and there is at least some evidence that she simply
signed tax returns presented to her by others. We also have virtually
no information about Farahnaz’s lifestyle.

On the basis of the entire record, respondent has not clearly and
convincingly demonstrated that Farahnaz intended to evade tax known
to be owing through conduct intended to conceal, mislead, or otherwise
prevent the collection of taxes. Farahnaz is not liable for the section
6663 fraud penalties. We need not consider whether Farahnaz is liable
58

[*58] for the accuracy-related penalty for any year for reasons already
stated in connection with Anna.

B. 2015 and 2016: Accuracy-Related Penalties

The last issue remaining for our decision is whether Shahbaz,
Anna, Shahrokh, and Farahnaz are liable for accuracy-related penalties
for their 2015 and 2016 taxable years. We hold that they are.

With one exception, respondent determined section 6662
accuracy-related penalties on grounds of underpayments due to
substantial understatements of income tax, see § 6662(b)(2), (d), or in
the alternative, on grounds of negligence or disregard of rules or
regulations, see § 6662(b)(1), (c). For Shahrokh and Farahnaz’s 2016
taxable year, however, respondent determined the accuracy-related
penalty only on grounds of negligence or disregard of rules or
regulations.

Respondent bears the burden of production with respect to the
accuracy-related penalties. See § 7491(c). Once respondent comes
forward with sufficient evidence showing that it is appropriate to impose
a particular penalty, petitioners have the burden of proof to show that
respondent’s penalty determination is incorrect, including the burden of
proving that penalties are inappropriate because of reasonable cause.
See Higbee, 116 T.C. at 446–47. Respondent complied with the written
supervisory approval requirements of section 6751(b) for the
accuracy-related penalties he determined against Shahbaz, Anna,
Shahrokh, and Farahnaz for 2015 and 2016.

Section 6662(a) imposes a 20% penalty on the portion of an
underpayment of tax attributable to any substantial understatement of
income tax, see § 6662(b)(2), or negligence or disregard of rules or
regulations, see § 6662(b)(1). An understatement is substantial if it
exceeds the greater of (1) 10% of the tax required to be shown on the
return for the taxable year, or (2) $5,000. See § 6662(d)(1)(A).
Negligence includes any failure to make a reasonable attempt to comply
with the provisions of the Code, and disregard includes any careless,
reckless, or intentional disregard. See § 6662(c). Negligence also
includes any failure by the taxpayer to keep adequate books and records
or to substantiate items properly. See Treas. Reg. § 1.6662-3(b)(1).
Negligence is strongly indicated where a taxpayer fails to make a
reasonable attempt to ascertain the correctness of a deduction, credit, or
exclusion on a return which would seem to a reasonable and prudent
59

[*59] person to be “too good to be true” under the circumstances. See id.
subdiv. (ii). Only one accuracy-related penalty for a given year may be
applied with respect to any given portion of an underpayment, even if
that portion is subject to the penalty on more than one ground. See
Treas. Reg. § 1.6662-2(c). Petitioners have not argued in their
Simultaneous Opening Brief that any recognized exception, such as
reasonable cause and good faith, applies. Cf. § 6664(c). Petitioners have
therefore forfeited that line of argument.

We will first address the ground of negligence or disregard of
rules or regulations for Shahbaz and Anna’s 2015 and 2016 taxable
years and Shahrokh and Farahnaz’s 2015 and 2016 taxable years.
Shahbaz, Anna, Shahrokh, and Farahnaz failed to substantiate their
NOLs for those years, and the records they have presented are
disorganized, confusing, and inadequate. Indeed, Shahbaz admitted
that SJC conducted sloppy bookkeeping, and Shahrokh admitted that
he was essentially uninvolved with SJC’s finances. Shahbaz, Anna,
Shahrokh, and Farahnaz also disregarded a regulation requiring a
detailed computational schedule for their claimed NOL deductions to be
attached to their tax returns, and they still have not produced any
adequate substitute. Finally, they ignored that it was too good to be true
for profitable businesses for which there is no credible evidence of
economic losses for any year to simultaneously receive the benefit of
substantial NOL deductions each year. Respondent’s determinations of
accuracy-related penalties for 2015 and 2016 are therefore sustained on
grounds of negligence or disregard of rules or regulations.

We will also address the taxable years for which respondent has
imposed an accuracy-related penalty on grounds of substantial
understatement of income tax (Shahbaz and Anna’s 2015 and 2016
taxable years and Shahrokh and Farahnaz’s 2015 taxable year). The
understatements for Shahbaz and Anna’s 2015 taxable year and
Shahrokh and Farahnaz’s 2015 taxable year are substantial as an
arithmetic matter. Because Shahbaz, Anna, Shahrokh, and Farahnaz
have not argued or shown that any exception applies, respondent’s
determinations of accuracy-related penalties for those years are
sustained on grounds of substantial understatements of income tax. We
also sustain respondent’s determination of an accuracy-related penalty
on grounds of substantial understatement of income tax for Shahbaz
and Anna’s 2016 taxable year to the extent that Rule 155 computations
confirm that the understatement is substantial.
60

[*60] We have considered the parties’ other arguments and, to the
extent they are not discussed herein, find them to be irrelevant, moot,
or without merit.

To reflect the foregoing,

Decisions will be entered under Rule 155.

Yosef Sehati A.K.A. Joseph Sehati and Lilly Kohanim-Sehati

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