T.C. Summary Opinion 2001-109
UNITED STATES TAX COURT
ALI MOTAGHAYER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15237-99S. Filed July 25, 2001.
Ali Motaghayer, pro se.
Usha Ravi, for respondent.
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Subsequent section
references are to the Internal Revenue Code in effect for 1995.
Rule references are to the Tax Court Rules of Practice and
Procedure. The decision to be entered is not reviewable by any
other court, and this opinion should not be cited as authority.
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Respondent determined a deficiency of $13,129 in, and a
section 6662(a) penalty of $2,625.80 with respect to,
petitioner’s 1995 Federal income tax.
The issues for decision are: (1) Whether, and if so to what
extent, petitioner underreported his 1995 income; (2) whether any
unreported income is subject to the tax imposed by section 1401;
and (3) whether any underpayment of tax required to be shown on
petitioner’s 1995 Federal income tax return is due to negligence.
Background
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioner resided in
Saratoga, California.
Petitioner moved to the United States from Iran in 1985. In
1991, petitioner, his brothers Majeed and Nima Motaghayer, and
his sister Mehri Motaghayer formed Submarine 21 Sandwiches &
Salads (Submarine 21), a corporation that elected to be taxed
under Subchapter S of the Internal Revenue Code. Petitioner and
his siblings were equal shareholders in Submarine 21.
Submarine 21 owned and operated a sandwich shop in San Jose,
California. During the year in issue, the shop was open seven
days a week from approximately 11 a.m. until 9 p.m. Petitioner
was the manager of the shop. Typically, he worked there 6 to 7
days a week. Aside from his managerial responsibilities, his
duties at the shop also consisted of taking orders from customers
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and preparing the food. Other members of petitioner’s family
also worked at the sandwich shop.
On its 1995 Form 1120S, U.S. Income Tax Return for an S
Corporation, Submarine 21 reported income, expenses and a net
loss as follows:
Gross receipts $97,731
Cost of goods sold (39,423)
Total income 58,308
Deductions
Rents 30,804
Taxes and licenses 4,684
Depreciation 4,332
Advertising 3,574
Other deductions 18,222
Total deductions 61,616
Net loss (3,308)
Submarine 21 claimed no deduction for salaries and wages
expenses.
During 1995, petitioner maintained a brokerage account with
Charles Schwab and Co. (the brokerage account). Petitioner
engaged in numerous transactions and trades through the brokerage
account on behalf of himself and other family members. In a
series of stock dispositions (not less than 14) that occurred
between February 28 and October 23, 1995, petitioner realized a
net gain totaling $42,479.
Petitioner also maintained a personal checking account at
Valley Credit Union (the checking account). In 1995, deposits
totaling $77,485.58 were made into the checking account. Of that
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amount, fifteen cash deposits totaling $32,580 (the cash
deposits) were made as follows:
Date of Deposit Amount
Jan. 6 $3,635
Jan. 17 5,340
Jan. 18 8,700
Jan. 23 4,000
Feb. 1 350
Feb. 7 1,000
Mar. 7 1,000
Mar. 7 400
May 5 1,785
June 6 100
June 22 800
July 17 120
Nov. 20 1,700
Dec. 13 150
Dec. 19 3,500
Petitioner kept a check register for the checking account.
For the most part, entries into the check register are in
English, although some entries also contain notations made in
Farsi. With the exception of the $100 deposit made on June 6,
all of the deposits listed above are recorded in the check
register. Some of the deposit entries contain notations made in
Farsi.
On his 1995 Federal income tax return, petitioner reported
adjusted gross income of $34,083, which includes: (1) Dividend
income of $55; (2) a short-term capital gain of $42,579 from the
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stock dispositions discussed above; (3) a nonpassive loss of $827
from Submarine 21; and (4) a net operating loss carryover of
$7,724. Petitioner did not report any wages or salary income.
The examination of petitioner’s 1995 return resulted from
respondent’s receipt of four Forms 4789, Currency Transaction
Report, from Valley Credit Union reporting the cash deposited by
petitioner into the checking account in January of 1995.
Petitioner met with respondent’s agents several times during the
course of the examination. Respondent’s agents reviewed the
monthly statements for the checking account, petitioner’s check
register, and the records from the brokerage account. Petitioner
was asked to identify the sources of the cash deposits. He told
the agents that one of the cash deposits came from the sale of an
automobile and the other cash deposits resulted from gifts from
family members.
In the notice of deficiency, respondent determined that the
cash deposits represent income to petitioner. Respondent further
determined that such income constitutes net earnings from self-
employment within the meaning of section 1402 and is therefore
subject to the self-employment tax imposed by section 1401.
Lastly, respondent determined that the underpayment of tax
required to be shown on petitioner’s 1995 return is due to
negligence and imposed a penalty under section 6662(a).
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Discussion
1. Unreported Income
Respondent contends that during the course of the
examination, petitioner provided inconsistent explanations
regarding the source of the cash deposits. According to
respondent, petitioner failed to establish that the cash deposits
were from nontaxable sources, and therefore the cash deposits
represent income to petitioner. See Ruark v. Commissioner, 449
F.2d 311, 312 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-
48. By calling the Court’s attention to petitioner’s
relationship to and involvement with Submarine 21, respondent
suggests, if only by implication, that the source of the cash
deposits was compensation that petitioner received for working in
the sandwich shop.
Petitioner readily admits that he worked long hours at the
sandwich shop during 1995, but claims that he received no
compensation at all for his efforts. We understand that
Submarine 21 was, as petitioner described it, a family business,
and therefore, he did not expect to be, and was not, compensated
as an unrelated employee might have been. Nevertheless, we find
it difficult to accept petitioner’s claim that he received no
compensation whatsoever for his efforts, particularly when the
extent of those efforts is considered.
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Petitioner further claims that with four exceptions
(discussed below), the source of the cash deposits was a gift
from his mother. According to petitioner, his mother gave him
$35,000 in November of 1994. Assuming, without finding, that
this event occurred, we find it unlikely that a single cash gift
made to petitioner in 1994 would result in the pattern of the
cash deposits here under consideration.
Petitioner testified that one of the deposits made in
January consisted of the proceeds of the sale of an automobile
and that three deposits were made from the proceeds of checks
payable to him from his brokerage account. Petitioner testified
that he gave the brokerage account checks to his brother, who
gave petitioner cash in return, which was then deposited into
petitioner’s checking account. According to petitioner, it was
easier to have his brother cash the brokerage account checks
because brokerage account checks deposited into petitioner’s
checking account took 2 weeks to clear. Petitioner could not
identify the specific deposits to which the foregoing
explanations related. We, like respondent, are not convinced
that any of the cash deposits were from the sale of an automobile
or the proceeds of brokerage checks cashed by petitioner’s
brother.
After careful consideration of the record, however, we are
satisfied that some of the cash deposits were from nontaxable
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sources. Specifically, we find that the source of the $8,700
deposit made on January 18 was a cash gift from petitioner’s
mother. This is consistent with petitioner’s general claim and
apparently noted in Farsi in the check register. Likewise,
notations in the check register lead us to conclude that the
$1,000 deposit made on February 7, and deposits for $1,000 and
$400 made on March 7, were from nontaxable sources. Finally,
given the amounts involved and the passage of time between the
deposits and respondent’s examination, we do not find it unusual
that petitioner could not satisfactorily explain the deposits
made on February 1, June 6, July 17, and December 13. We accept
petitioner’s generalized testimony that these four cash deposits
were not from taxable sources.
Petitioner failed to satisfactorily explain the remaining
deposits, specifically:
Date of Deposit Amount
Jan. 6 $3,635
Jan. 17 5,340
Jan. 23 4,000
May 5 1,785
June 22 800
Nov. 20 1,700
Dec. 19 3,500
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Consequently, we are unable to conclude that these deposits were
made from nontaxable sources. Respondent’s determination that
petitioner’s 1995 income was understated by the total of these
deposits is therefore sustained.
2. Self-Employment Tax
We accept petitioner’s claim that with the exception of
Submarine 21, he was not otherwise employed, or self-employed
during 1995. To the extent that Submarine 21 was the source of
the omitted income as determined above, that income would not
constitute net earnings from self-employment, see sec. 1402, and
therefore would not be subject to the section 1401 tax imposed on
such income. Consequently, we reject respondent’s determination
that the omitted income is subject to the section 1401 tax.
3. Negligence Penalty
Respondent determined that the understatement of tax
required to be shown on petitioner’s 1995 return is due to
negligence. Section 6662(a) imposes an accuracy-related penalty
of 20 percent on any portion of an underpayment of tax that is
attributable to negligence or disregard of rules or regulations.
Section 6662(a) defines “negligence” to include any failure to
make a reasonable attempt to comply with the Internal Revenue
Code, and defines “disregard” to include any careless, reckless,
or intentional disregard of rules or regulations. The negligence
penalty does not apply to any portion of an underpayment if it is
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shown that there was reasonable cause for such portion and the
taxpayer acted in good faith with respect thereto. See sec.
6664(c)(1).
Petitioner claims that he did not omit any income from his
1995 return, but we have found differently as discussed above.
Otherwise, petitioner offered no evidence to establish that
respondent’s imposition of the negligence penalty is erroneous.
Accordingly, respondent’s determination that petitioner is liable
for the negligence penalty for 1995 is sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
Based on the foregoing,
Decision will be
entered under Rule 155.