Media Rights Technologies, Inc.

Opinion

United States Tax Court

T.C. Memo. 2026-78

HANK RISAN, ET AL., 1

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

__________

Docket Nos. 4313-20, 28048-21, Filed September 2, 2026.

32885-21, 32909-21.

__________

Woodford G. Rowland, for petitioners.

Daniel J. Kleid, Sharyn M. Ortega, Christiane C. Sanicola, Michael Skeen, and Charles A. S. Wiseman, for respondent in Docket No. 4313-20.

Daniel J. Kleid, Aimee R. Lobo-Berg, Sharyn M. Ortega, Brian A. Pfeifer, Christiane C. Sanicola, and Charles A. S. Wiseman, for respondent in Docket Nos. 28048-21 and 32885-21.

Daniel J. Kleid, Aimee R. Lobo-Berg, Sharyn M. Ortega, Christiane C. Sanicola, and Charles A. S. Wiseman, for respondent in Docket No. 32909-21.

1 We consolidated Media Rights Technologies, Inc., Docket Nos. 28048-21 and

32885-21: and Hank Risan, Docket No. 32909-21, with this case.

Served 09/02/26

[*2] MEMORANDUM FINDINGS OF FACT AND OPINION

HOLMES, Judge: Hank Risan is, by his own testimony, a gifted theoretical mathematician, a renowned collector and expert restorer of vintage guitars and chess sets, a pioneering inventor of programs to protect digital rights, heir to valuable California real estate, and the entrepreneurial founder of several corporations.

The Commissioner says, however, that his tax returns for 2014–17, and the returns of one of his companies for two of those years, greatly underreported taxable income and exaggerated deductions and credits, all to the tune of more than $4 million in taxes and penalties. To decide these cases, we need to pick our way through issues that were left uncontested, issues that turn on the burden of proof, and some burdens of proof that the parties at first shouldered only to let fall.

FINDINGS OF FACT

I. Mr. Risan

Mr. Risan is a California-based music enthusiast with a knack for invention. He grew up in the San Fernando Valley and stayed in California to pursue higher education. He testified that he attended UCLA for a couple of years before finishing his bachelor’s degree at UCSC. He also said that he concurrently enrolled in Ph.D. programs in neurobiology and mathematics at UCSC and did some Ph.D. work in mathematics at Berkeley. He said that he did not complete his doctorate but also testified to post-doc work at “Cambridge in London.” He became disillusioned with mathematics, he testified, after his groundbreaking solution of what he called the “Alexander Postulate” was misappropriated by another post-doc. Mr. Risan said he learned of this while at the Sorbonne in Paris, where a professor showed him that post-doc’s work, and Mr. Risan believed it to be his own. 2

2 Within mathematics, there is a subfield of topology called knot theory to

which a Princeton mathematician named James Waddell Alexander II made pioneering contributions, including something called the Alexander polynomial. Alexander polynomial, Academic, https://en-academic.com/dic.nsf/enwiki/554295 (last visited Aug. 21, 2026). This became a fruitful source of advances in knot theory in the late twentieth century. The field is so recondite that one is not surprised that Mr. Risan’s self-acknowledged contributions have been left unmentioned in descriptions of topology and knot theory that are simple enough for laymen to understand.

3

[*3] Mr. Risan testified this was not the last time his own work was appropriated by others.

II. Mr. Risan’s Ventures

A. Corporations

Three of Mr. Risan’s businesses are relevant here. Media Rights Technologies, Inc. (MRT) is the other petitioner in these cases. Blue- Beat, Inc., and Encryptos, Inc., are corporations whose corporate-level income the Commissioner included in his determination of Mr. Risan’s own.

MRT is in the businesses of digital-rights management, intellectual property, and software development. Mr. Risan and his bookkeeper, Leslie Schlaefli, testified that MRT did not have customers from 2014 through 2017. It nevertheless employed people in a variety of fields. MRT claimed salary expenses for software engineers, marketing staff, a human resources person, and “music rippers.” These music rippers were the employees who put music on the BlueBeat website— more on that shortly. MRT hired Ms. Schlaefli, the only entirely credible witness in these cases, as its bookkeeper beginning in 2007. While not a tax accountant, she did fill in and prepare the company’s tax returns when no one else was available to do so. Her approach was to print out a profit-and-loss statement and input the numbers listed there to Quick- Books. She did not check the accuracy of the numbers, and she wasn’t familiar with the underlying revenues or expenses associated with the numbers she was seeing on that statement. She was also not personally familiar with Mr. Risan’s guitar sales and recorded them using Mr. Risan’s bank statements and his own descriptions of what the transactions were.

Mr. Risan founded MRT, serves as its president and CEO, and retains majority ownership, his share hovering by his own account somewhere between 51 and 67%. MRT had an orchestra of other investors— Mr. Risan estimated it had 400 shareholders at the end of 2017. As MRT did not have customers during the years at issue, it relied on shareholder loans to cover its expenses, such as employee salaries. Ms. Schlaefli testified that Mr. Risan had an “ongoing” loan to MRT, which she estimated was between $5 and $10 million. Ms. Schlaefli credibly named three additional shareholders who lent money to MRT: Daniel Lewin, Tom Antonopoulos, and Don Lieberman, with Mr. Lieberman lending over a million dollars to the company. These loans were sent

4

[*4] via checks and wire transfers, and Ms. Schlaefli testified that stockholder paperwork did accompany the shareholder loans. There may have been other loans, but Ms. Schlaefli was not sure.

Why did a company with no customers and lots of expenses have so many shareholders? Mr. Risan testified that people were investing because of the value of the burgeoning catalog of music held by Blue- Beat—a separate entity. 3

This leads us to Mr. Risan’s two other business entities. In 1998 Mr. Risan had an “online guitar museum” called TheMomi.org. He started broadcasting music on the site, and the broadcasting service evolved into BlueBeat. Mr. Risan incorporated BlueBeat in 2003, and it has been broadcasting ever since with Mr. Risan serving as its CEO. Mr. Risan testified that BlueBeat streamed music for free, as all broadcasting platforms did “in the early days.” As a result, BlueBeat did not produce significant revenue. It did, however, have a small amount of advertising revenue (about $3,500 a year) from ads on the BlueBeat website. Ms. Schlaefli included BlueBeat’s ad revenue in MRT’s income because she kept only one set of books for MRT and BlueBeat. While BlueBeat had its own bank accounts, Ms. Schlaefli would record deposits with MRT’s own transactions. BlueBeat employees were initially paid by MRT, and Ms. Schlaefli was unsure when that practice ceased.

While BlueBeat was not generating significant revenue, Mr.

Risan had a plan to make it a hit. The asset, he testified, was its digital audio catalog, which he copyrighted. He believed this catalog was the largest copyright registration in history and was “worth a lot of money.” The plan was to sell the catalog to “a stronger partner” who would buy Mr. Risan out. Mr. Risan testified this sale was in progress at the time of trial.

In 2016, Mr. Risan noticed a rise in cyber attacks on institutions such as banks, and he believed the BlueBeat catalog would be a prime target for a similar attack. He therefore invented a technology called “The Enigma,” which BlueBeat used to protect its network. Mr. Risan incorporated Encryptos in 2016, and it is the entity that controls The

3 A federal grand jury has since alleged that the reason is a long series of mis-

representations by Mr. Risan about the value and origins of MRT’s business and Blue- Beat’s catalog. According to the indictment, Mr. Risan told investors and lenders that the catalog was worth at least $90 billion. It also charges that Mr. Risan assembled this catalog from purchases of CDs “at retail locations.” Indictment, United States v. Risan, 25cr222 (N.D. Cal. July 31, 2025).

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[*5] Enigma. There is nothing in the record describing the ownership structures of either BlueBeat or Encryptos.

Mr. Risan named another reason why people invested in MRT:

The value of its litigation with Microsoft. This brings us to his intellectual property and ensuing civil litigation.

B. Patents

Mr. Risan testified that MRT incurred large expenses for patent attorneys, who filed at least 50 worldwide patents, all of which were granted. He also said MRT hired a team of engineers and technologists to embody these patents. And he testified, albeit without any documentary proof, that this patent portfolio was valued by Bank of America Securities in 2011 between $7 and $10 billion. Mr. Risan testified he was the sole patent author.

The patents included some that Mr. Risan secured for artificial synthetic sounds generated by his vintage instrument collection and AI. In using AI this way, Mr. Risan claimed he was one of the pioneers of the technology. These synthetic sounds, or “psychoacoustic simulations ,” were the subject of a lawsuit when Capitol Records sued Blue- Beat for copyright infringement. Capitol Records, LLC v. BlueBeat, Inc., 765 F. Supp. 2d 1198, 1203–04 (C.D. Cal. 2010). 4 In that case, the district court ruled against BlueBeat on summary judgment and determined BlueBeat was liable for misappropriation, unfair competition, and conversion for offering for sale 52,173 simulations of The Beatles’ sound recordings. Id. at 1206. While Mr. Risan argued these recordings were novel technological simulations that contained new and original “spherical source point waves,” the court stated: “[Mr.] Risan’s obscure and undefined pseudo-scientific language appears to be a long-winded

4 We take judicial notice of this case sua sponte, which we have authority to do.

See Fed. R. Evid. 201(c)(1); Leyshon v. Commissioner, T.C. Memo. 2015-104, at *15, aff’d, 649 F. App’x 299 (4th Cir. 2016).

Records of a particular court in one proceeding commonly are the subject of judicial notice by the same and other courts in other proceedings. Petzoldt v. Commissioner, 92 T.C. 661, 674 (1989), and cases there cited. That a particular case is on file, its docket number, who the attorneys of record are, who the presiding judge is, . . . as well as the text of the opinion, are all facts that are part of the public record. They are capable of ready and accurate determination and cannot reasonably be questioned.

Prater v. Commissioner, 65 T.C.M. (CCH) 2989, 2992 (1993).

6

[*6] way of describing ‘sampling,’ i.e. copying, and fails to provide any concrete evidence of independent creation.” Id. at 1204.

Mr. Risan’s other patents also included novel technological concepts , including one invention he summarized as “the essential ingredient in all modern rights management and broadcasting work.” Another was “the modern cloud.” Mr. Risan also testified that he invented all of the rights technologies being used by movie streaming platforms, such as Netflix and Amazon.

Mr. Risan claimed that, like his graduate-level topological work, these revolutionary technologies were stolen. He identified the thief: “Microsoft in 2003 in an act of industrial espionage.” Microsoft put the allegedly misappropriated technology into a product called PlayReady, which Mr. Risan stated is used by over a thousand manufacturers, including Disney, Spotify, and Amazon, to protect and monetize streamed media. Mr. Risan sued Microsoft for the misappropriation of intellectual property. 5 He testified that during the week we heard his case his litigation team planned to file a fraud report with the U.S. Patent and Trademark Office alleging that Microsoft had copied his patents. And, as the final step of his litigation plan, Mr. Risan planned to use attorneys David Nimmer and Irell Manella “to go for a [copyright] takedown for the misappropriation against PlayReady, which is a Microsoft division that basically streams multimedia.” Mr. Risan testified that this litigation, with its monetary outcomes worth billions of dollars (per the alleged Bank of America valuation), attracted shareholders to invest in MRT. 6

5 Media Rights Techs., Inc. v. Microsoft Corp., No. 17-cv-01925, 2017 WL

4685702 (N.D. Cal. July 29, 2017), aff’d in part, rev’d in part and remanded, 922 F.3d 1014 (9th Cir. 2019). MRT voluntarily dismissed with prejudice its 2013 patent infringement suit against Microsoft after a court in a separate proceeding declared one of the patents at issue invalid. Media Rights Techs., 922 F.3d at 1017. In this subsequent suit for “copyright infringement, violation of the Digital Millennium Copyright Act (‘DMCA’), and breach of contract,” the district court found MRT’s claims were precluded and dismissed the case for failure to state a claim. Id. On appeal, the Ninth Circuit affirmed the district court’s holding except for those claims that accrued after MRT filed its patent-infringement suit: “[N]amely, claims arising from the sale of Microsoft products after MRT filed its patent-infringement suit.” Id. MRT voluntarily dismissed this suit without prejudice on December 2, 2019. Notice of Voluntary Dismissal of Action Without Prejudice, Media Rights Techs., Inc. v. Microsoft Corp., No. 17-cv-01925 (N.D. Cal. Dec. 2, 2019).

6 As of 2019, MRT had dismissed all its copyright infringement lawsuits

against Microsoft. See supra note 5.

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[*7] C. Guitars

Mr. Risan also said that he owned an impressive collection of vintage guitars. He specialized in jazz guitars and guitars that had been owned by celebrities, including Mick Jagger, Mark Twain, Django Reinhardt , and Charlie Christian. At its peak, this collection allegedly consisted of 700 to 1,000 guitars. And this total did not include various mandolins, banjos, Steinway pianos, and other instruments that he owned.

Mr. Risan said that he lent the instruments to museums, including the Museum of Modern Art, the Smithsonian, the Boston Museum, and the Library of Congress. Such use wore, and sometimes damaged, the instruments. All this wear and tear meant the instruments required extensive repairs, and Mr. Risan testified that these repairs could cost $25,000 per guitar. Mr. Risan said he hired contract repairmen to assist him with the repairs.

Mr. Risan also ran Washington Street Music, which he described as a guitar business. It is unclear whether Mr. Risan sold guitars through Washington Street Music or whether it served as a sort of museum where Mr. Risan promoted his guitars, which he sold separately. It is also unclear whether Mr. Risan purchased the guitars personally or through Washington Street Music.

The nature and amount of these purchases and, importantly, the costs of repairs, are not supported by documentation of the kind one normally sees in tax litigation. Mr. Risan had no records to substantiate his cost of goods sold. This is unusual, but according to Mr. Risan, is entirely explained by an unfortunate incident in 2004 during which Mr. Risan’s secretary’s boyfriend stole these records and held them for ransom —offering to return them if Mr. Risan murdered the secretary and paid $150,000 in cash. Mr. Risan declined this unusual murder-for-hire offer and never recovered the records that would have helped him with his case. 7

Mr. Risan testified he did not sell guitars after 2002. He also testified that during the years at issue, 2014–17, he bought and sold vintage musical instruments dated before 1950. We’re left unsure what to

7 Both the Commissioner’s and Mr. Risan’s counsel discussed during the trial

a police report that might have corroborated this incident, but neither party entered it into evidence. We therefore have only Mr. Risan’s testimony regarding his missing records.

8

[*8] make of this but can find it more likely than not that the business was not booming during the tax years at issue. In Mr. Risan’s experience , the industry was hottest in the 1990s but had dramatically declined by the mid-2010s. 8 At its peak, the guitar business was earning, Mr. Risan claimed, “a few million dollars a year in sales,” and Mr. Risan said he had accumulated wealth from this period of prosperity.

Mr. Risan said guitar sales during the years at issue provided funds for MRT and BlueBeat because he could sell instruments as needed whenever there was a cash crunch. He was less than clear about who sold the guitars. Sometimes, he testified that MRT sold them; other times he testified that BlueBeat sold them. Either way, Mr. Risan testified that the sales were processed through BlueBeat—meaning, Blue- Beat received the sale proceeds directly from the buyer. Mr. Risan said he would provide the instruments to BlueBeat and, in return, receive a note payable for the sale of the instrument. 9

D. Real Estate

Mr. Risan is also an heir. His mother gave him a real-estate portfolio comprised of some ten condominiums and a house in Southern California while she was still alive. He began selling this real estate in 2002 and sold at least ten properties by 2014. He estimated that the condos sold for about $300,000 each, but he wasn’t selling them for cash. Rather , he exchanged them for “better properties” so there “wasn’t a tax liability.” In 2014, he was left with what he said were two nice houses in the Santa Cruz mountains, worth a few million dollars. These are referred to as the Moore Creek property and the Rockridge property. Mr. Risan took out a mortgage of approximately $500,000 on at least one of these homes to provide MRT with capital. Mr. Risan admitted that he fell behind on paying property taxes, which he “had to make up later.”

III. Mr. Risan’s Bank Accounts

During the years at issue, money continually sloshed between Mr.

Risan and his businesses. Mr. Risan had personal bank accounts; MRT had bank accounts in its own name; BlueBeat had a bank account in its own name; and Encryptos had a bank account in its own name. The boundaries between these accounts are, however, blurred. Mr. Risan

8 As an example, Mr. Risan testified he owned a jazz guitar made by John

D’Angelico that would have sold for $100,000 in the 1990s but would fetch only $30,000 in 2016.

9 These notes were not submitted to the record.

9

[*9] testified that when he was short on cash, say for a credit-card payment or a grocery run, he would withdraw as much as he needed from either MRT’s or BlueBeat’s Wells Fargo account, walk down the street to Bank of America, and deposit the money into his personal account for his own use.

Ms. Schlaefli testified, and we find credible, that the cash MRT received from shareholder loans sometimes went directly to Mr. Risan, 10 sometimes directly deposited into MRT’s account, and sometimes directly deposited into BlueBeat’s account. This varied treatment of funds is reflected in the business records, such as the loan schedules. Although Mr. Risan would withdraw money from MRT freely, Ms. Schlaefli would record Mr. Risan’s deposits into an MRT account as loans. She could not, however, identify MRT’s liability to Mr. Risan on MRT’s tax returns, and she couldn’t say whether and where these loans were reported. 11

We find, based only on Ms. Schlaefli’s testimony, that there was only one set of books for BlueBeat and MRT. We note there is no mention in the record of Encryptos’s books or its accounting practices. We also note that it is unclear whether BlueBeat and Encryptos ever filed any tax returns. There are none in the record, and neither party refers to them. We do know that Mr. Risan and MRT filed tax returns for 2014–17.

IV. The Tax Returns

Mr. Risan timely filed his own tax returns for 2014–17. For each year he reported negative total income due to a combination of business, capital, rental real-estate, and other losses. Mr. Risan also claimed itemized deductions each year, the majority of which were home-mortgage interest deductions. As a result, Mr. Risan’s tax returns reported no taxable income (and, consequently, no taxes owed) for all years at issue. We summarize his returns:

10 Ms. Schlaefli noted that some of these loans were loans made to Mr. Risan

personally, but sometimes they were loans to MRT that he deposited into his personal accounts.

11 MRT’s tax returns do report short-term notes, but Ms. Schlaefli credibly tes-

tified that was not how she characterized Mr. Risan’s loans, so these entries must refer to other loans.

10

[*10]

Net Operating Taxable Tax Year Total Income Deductions Loss Income Owed 2014 ($14,032,803) ($15,536,346) $47,843 $0 $0 2015 (15,533,438) (16,190,520) 37,301 0 0 2016 (16,187,592) (16,205,346) 34,615 0 0 2017 (3,527,372) (3,564,380) 58,299 0 0

Mr. Risan noted, however, that his tax returns did not provide a complete picture of his income. He claimed that he would report income on his returns but, because his businesses were short on cash, it was not money that he actually received—he regarded it as an increase in the balance of what he said the companies owed him. As a result, though “on paper” he received $50,000 a month in salaries from each of MRT and BlueBeat, he only withdrew small amounts to cover his personal expenses. 12 Mr. Risan also stated his “actual salary” was $150 per month, the minimum amount required to provide him with medical insurance , but he did not cash these paychecks either. Despite all of this, Mr. Risan also testified that his income-tax returns were “an accurate reflection of the wages” he received.

MRT filed its 2016 income-tax return on February 17, 2021 and its 2017 income-tax return on July 2, 2018. We summarize:

Year Net Operating Total Income Deductions Taxable Tax Loss Income Owed 2016 ($29,000,178) $104,343 $1,477,513 ($1,373,170) $0 2017 (30,373,348) 18,434 1,244,311 (1,225,877) 0

V. The Audit

Mr. Risan may be an eclectic genius, but the IRS doesn’t honor eclecticism in tax reporting, and his and MRT’s returns attracted the Commissioner’s attention. One of his revenue agents (RA), Miguel Delgado , asked Mr. Risan to explain the deposits, but Mr. Risan refused. As a result, RA Delgado subpoenaed bank records and pieced together his analysis without input from Mr. Risan.

12 What he said is not what he did: We find that Mr. Risan received only $1,200

in W-2 wages from MRT every year.

11

[*11] A. Bank Deposits Analyses

Upon receiving the bank records from accounts over which Mr.

Risan had signatory authority, RA Delgado began to analyze them. A bank-deposits analysis identifies income by identifying the total deposits made to a bank account and then subtracting nontaxable deposits, such as loans or transfers between a taxpayer’s accounts. RA Delgado reviewed accounts belonging to Mr. Risan, MRT, BlueBeat, and Encryptos . He testified that he netted out deposits that looked like loans (though, again, he had to make those determinations without Mr. Risan’s help).

RA Delgado reviewed six accounts over which Mr. Risan had signatory authority:

• an account ending in 6993 at Bank of America under the name Hank Risan;

• an account ending in 3029 at Wells Fargo under the name Blue-

Beat, Inc.;

• an account ending in 8816 at Wells Fargo under the name Hank Risan;

• an account ending in 2963 at Wells Fargo under the name Media Rights Technologies;

• an account ending in 9724 at Wells Fargo under the name Media Rights Technologies; and

• an account ending in 2382 at Wells Fargo under the name Encryptos , Inc.

Based on the information that RA Delgado saw, he did not believe that Mr. Risan and MRT had reported all of their taxable income.

1. Mr. Risan

Mr. Risan did not cooperate with RA Delgado’s bank-deposits analyses, and he did not cooperate during the investigation by providing any other explanation for why the deposits were not taxable income. Even after Mr. Risan got copies of the bank-deposits analyses, he did not offer to list and clarify his disagreements with RA Delgado’s work. At trial, however, Mr. Risan was considerably more voluble and assured us

12

[*12] that the deposits into his own accounts were money he received from loans and selling real estate. Some, he claimed, were transfers from his companies that he deposited into his personal account to pay mortgages on his properties. He generally called these deposits “borrowed money” and not income. And these were in addition to the smaller sums he would take from his companies’ accounts to cover groceries and living expenses.

a. 2014

For 2014, RA Delgado reviewed bank statements and determined that the total deposits into the accounts ending in 6993 (under Mr. Risan’s name) and 3029 (under BlueBeat’s name) totaled close to $2.6 million. This included $1.9 million in “Ca Tlr Transfer” funds transferred to the 6993 account which RA Delgado attributed to other income because the source was unknown. He subtracted the $1.6 million in income Mr. Risan reported on his 2014 tax return. He subtracted ATM surcharge rebates and returns of posted checks, treating them as transfers . He also subtracted overdraft-protection fees and a deposit from OCWEN Loan Servicing, treating these items as loans. We summarize this analysis:

Total deposits $2,590,097 13 Subtract reported items (1,648,809) Subtract ATM surcharge rebates and returns of posted checks (24,194) Subtract overdraft protections and a deposit from OCWEN loan ser- (13,172) vicing Equals total unexplained deposits 903,922

RA Delgado concluded the $903,922 in unexplained deposits to those two accounts was additional income to Mr. Risan.

b. 2015

For 2015, RA Delgado reviewed bank statements and determined that the total deposits into the accounts ending in 6993 (under Mr. Risan’s name) and 3029 (under BlueBeat’s name) were $2.9 million. He subtracted the $1.2 million Mr. Risan reported as income on his 2015

13 The original bank-deposits analysis stated the total deposits between these

two accounts as $2,598,192. The Commissioner caught an addition error and corrected the amount in his brief. The account ending in 6993 should have total deposits of $2,237,417, not $2,245,512.

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[*13] tax return. He also subtracted items which he treated as transfers : returns of posted checks, transfers from BlueBeat’s account to Mr. Risan’s account, 14 and transfers from Mr. Risan’s and MRT’s other accounts into the BlueBeat account ending in 3029. He also subtracted what he classified as loan items—a combination of overdraft protections, a “Rev Crd Pmt,” and a deposit from “C. Garcia Washer/Drier.” 15 We summarize this analysis:

Total deposits $2,913,646 Subtract reported items (1,216,223) Subtract transfers and returns of posted checks (335,631) 16 Subtract loans (18,941) Equals total unexplained deposits 1,342,851 17

RA Delgado determined that almost $50,000 of these unexplained deposits was rental income. 18 He determined that more than $700,000 was from unreported guitar sales. 19 He concluded that the remaining unexplained deposits were “other income.” We summarize:

14 RA Delgado identified only an $8,000 transfer from the BlueBeat account

ending in 3029 to Mr. Risan’s account ending in 6993. However, in reviewing the bank deposits analyses for these cases, the Commissioner identified an additional $204,849 in deposits from BlueBeat to Mr. Risan.

15 The Commissioner identified an additional $800 when reviewing the analy-

sis for these cases.

16 In the Commissioner’s brief, he states this number as $335,629. Adding together the items listed as transfers, however, equals $335,631.

17 In the Commissioner’s brief, he states this number as $1,342,671. We find this to be a copying error and proceed on the basis of the reasoning he provided, if not his specific calculations.

18 These were deposits totaling $6,000 from Edward Fitzgerald and $42,950

from Julia Zimmer-Bell.

19 Of this amount, $7,500 was deposited to Mr. Risan’s account ending in 6993,

and $1,936,566 was deposited to BlueBeat’s account ending in 3029. These amounts totaled $1,944,066. RA Delgado subtracted from this amount the $1,214,951 Mr. Risan had reported as gross receipts on Schedule C, Profit or Loss From Business.

14

[*14] Total unexplained deposits $1,342,851 Subtract unreported rental income (48,950) Subtract unreported Schedule C income (729,115) Equals other income 564,786 20

c. 2016

For 2016, RA Delgado reviewed Mr. Risan’s account ending in 6993, BlueBeat’s account ending in 3029, and Encryptos’s account ending in 2382. Deposits into these accounts totaled more than $2.5 million. He adjusted his analysis of the 6993 account for overdraft charges, a refund of a monthly service charge, a temporary credit adjustment, and a return of a posted check. He treated these as nontaxable loans and subtracted them from the total deposits to reach the amount of unexplained deposits. 21 RA Delgado concluded that the unexplained deposits into all three accounts were Schedule C gross receipts. Mr. Risan had reported more than $850,000 on his Schedule C for 2016. Subtracting the reported Schedule C gross receipts from the unexplained deposits led to a substantial increase in Mr. Risan’s Schedule C income:

Total deposits $2,505,275 Subtract loans (10,004) Subtract reported Schedule C gross receipts (854,400) Equals total unreported Schedule C gross receipts 1,640,871 22

The Commissioner therefore determined Mr. Risan had unreported Schedule C gross receipts of $1,640,871 for 2016.

d. 2017

For 2017, RA Delgado analyzed the same three accounts he had for 2016. He identified transfers from BlueBeat’s account to Mr. Risan’s

20 In his brief the Commissioner listed this number as $564,606. The Commissioner recognized that his figure was $98,221 less than the adjustment in the notice of deficiency and conceded the difference.

21 We note that RA Delgado elsewhere labeled returns of posted checks as

transfers but, as the result is the same, we do not alter that description here.

22 In his brief, the Commissioner recorded this number as $1,640,771. We find

this to be a typo.

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[*15] and from Encryptos’s account to BlueBeat’s. He identified several overdraft-protection fees and returned checks for Mr. Risan’s account, as well as credits for mistaken fees for Encryptos’s and BlueBeat’s accounts . He then subtracted these to reach a grand total:

Total deposits $1,787,148 Subtract transfers (57,100) Subtract loans (6,885) Equals total unexplained deposits 1,723,163

Of these unexplained deposits, RA Delgado determined that $21,600 was rental income, of which Mr. Risan had underreported $1,600. He determined the remaining deposits were additional Schedule C gross receipts. Mr. Risan had reported some gross receipts on his return for 2017, so RA Delgado determined:

Total unexplained deposits $1,723,163 Subtract reported rental income (20,000) Subtract unreported rental income (1,600) Subtract reported Schedule C gross receipts (325,000) 23 Equals total unreported Schedule C gross receipts 1,376,563

2. MRT

The Commissioner completed a bank-deposits analysis for MRT for only the 2017 tax year—which was also the only year that he determined MRT had underreported gross receipts.

RA Delgado reviewed MRT’s bank statements for its account ending in 9724. After he subtracted nontaxable loans, he concluded MRT had nearly $400,000 in unexplained cash deposits. RA Delgado subtracted the nontaxable loans and reported gross receipts to determine the amount of MRT’s unexplained deposits:

23 See infra page 31 explaining that the bank-deposits analysis listed the

amount of Schedule C gross receipts for 2016 ($854,500), but this error was corrected on the notice of deficiency, so we will use the correct number here for clarity.

16

[*16] Total deposits $389,869.20 Subtract nontaxable loans (3.60) Subtract reported gross receipts (18,434.00) Equals total unexplained deposits 371,431.60 24

In the absence of any information from MRT explaining the deposits , RA Delgado treated all the unexplained deposits as unreported gross receipts.

B. Notices of Deficiency

After the audit was over, the Commissioner sent Mr. Risan four notices of deficiency—two for his individual returns and two for MRT’s returns. He included accuracy-related penalties and, for MRT, additions to tax for untimely filing:

Additions to Tax/Penalties Petitioner Year Deficiency § 6651(a)(1) 25 § 6662(a)

2014 $1,288,849 — $257,769.80 Hank Risan

2015 1,051,140 — 210,228.00 2016 1,026,495 — 205,299.00 2017 684,827 — 136,965.00 2016 23,944 $5,986.00 4,788.80 MRT

2017 132,556 19,883.40 26,511.20

Mr. Risan resides in Santa Cruz, California, where MRT has its principal place of business. 26

24 The Commissioner’s brief states this number as $371,436. There’s no explanation for the discrepancy, so we will use RA Delgado’s number.

25 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.

26 Appellate venue therefore presumptively lies in the Ninth Circuit. See § 7482(b)(1)(A) and (B).

17

[*17] OPINION

The notices of deficiency proposed numerous adjustments, and the parties resolved through pleadings and stipulations only a very few of them. Mr. Risan’s testimony was not often credible, documentary evidence from both sides was less than well-organized, and the parties’ posttrial briefs only sometimes clarified the issues. This leaves us to decide much of these cases with our default rules for the burdens of production and proof.

We begin with a number of issues for which Mr. Risan presented no evidence or argument, or about which he included only an underdeveloped argument in his brief. Taxpayers usually bear the burden of proof in cases before us. Rule 142(a). The Code does sometimes shift this burden to the Commissioner. See § 7491(a). 27 But when neither party presented evidence in these cases, we simply find that Mr. Risan did not comply with the Code’s recordkeeping requirements and did not cooperate with the Commissioner’s reasonable requests for information. This means that, for a great many issues, we find against Mr. Risan and for the Commissioner.

There were a very large number of these orphaned issues. The Commissioner wins them all: 28

27 Additionally, the Ninth Circuit requires that the Commissioner present sub-

stantive evidence establishing a “minimal evidentiary foundation” in all cases involving the receipt of unreported income to preserve the statutory notice’s presumption of correctness. Weimerskirch v. Commissioner, 596 F.2d 358, 361–62 (9th Cir. 1979), rev’g 67 T.C. 672 (1977). This includes “some substantive evidence” demonstrating that “the taxpayer received unreported income.” Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985). Once the Commissioner has carried his initial burden of introducing some substantive evidence linking the taxpayer with income-producing activity, the taxpayer has the burden to rebut the presumption of correctness of the Commissioner’s deficiency determination by a preponderance of the evidence that the deficiency determination is arbitrary or erroneous. Id. We find the Commissioner’s bank-deposits analyses and notices of deficiency sufficient to meet this burden.

28 Rule 151(e)(4) and (5) requires that a party’s brief state the points on which

he relies. See also 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, petitioners could not withdraw that concession by belatedly including a cognizable argument in their reply brief”); Burke v. Commissioner, 98 T.C.M. (CCH) 547, 550 (2009) (“To the extent that the three-fold issues originally stated in his petition exceed the single issue eventually argued in his brief, [taxpayer] has abandoned those other issues . . . .”); Remuzzi v. Commissioner, T.C. Memo. 1988-8 (affirming that an issue not addressed by the taxpayers on brief deemed conceded), aff’d, 867 F.2d 609 (4th Cir. 1989) (unpublished table decision).

18

[*18]

• Mr. Risan received and failed to report $3,000 in capital gains for 2017.

• Mr. Risan is entitled to only $57,125 in additional Schedule E1 losses after the passive-loss limitation for 2015.

• Mr. Risan is not entitled to $34,547 in an additional Schedule E2—mortgage-interest deduction for 2015.

• Mr. Risan is not entitled to itemized deductions for mortgage interest of $29,291, $26,900, $17,569, and $42,445 for 2014, 2015, 2016, and 2017, respectively.

• Mr. Risan failed to report $204,775 in additional gain from Form 4797, Sales of Business Property, for 2015.

• Mr. Risan is liable for section 6662(a) accuracy-related penalties for 2014–17.

• MRT is not entitled to general business-credit carryforwards of $178,582 and $178,582 for 2016 and 2017.

• MRT is not entitled to research credits of $9,499 and $9,499 for 2016 and 2017.

• MRT is not entitled to deduct net-operating-loss-carryforward deductions of $29,000,178 and $30,373,348 for 2016 and 2017.

• MRT is liable for section 6651(a)(1) additions to tax for late filing.

• MRT is liable for section 6662(a) accuracy-related penalties.

This leaves for us to decide:

• the statute of limitations for each of Mr. Risan’s tax years;

• whether Mr. Risan and MRT underreported their income; and

• whether Mr. Risan and MRT are entitled to various deductions.

19

[*19] I. Statute of Limitations

As a general matter, the Commissioner has three years to assess income tax. We measure this period from the later of the date a tax return is filed or the date that return is due. § 6501(a). This period grows to six years where a taxpayer has omitted from his gross income more than 25% of the gross income stated in the return. § 6501(e)(1). The Commissioner and a taxpayer can agree in writing to extend the period. § 6501(c)(4).

The Commissioner sent Mr. Risan a notice of deficiency for his 2014 and 2015 tax years on February 11, 2020. He argues that the six- year limitations period applies to these years. Mr. Risan reported $1,648,809 of gross income on his tax return for 2014. The Commissioner argues that he omitted $903,922 from his gross income, which exceeds the 25% threshold. And Mr. Risan reported $2,429,223 in gross income on his tax return for 2015. The Commissioner argues that Mr. Risan omitted $1,360,471 from his gross income, which also exceeds the 25% threshold. If the Commissioner is anywhere near correct about this unreported income, the six-year limitations period applies.

Even before six years had lapsed, however, the Commissioner asked Mr. Risan’s consent to extend the limitations period. In April 2018 the Commissioner received a signed Form 872, Consent to Extend the Time to Assess Tax, extending the period to assess Mr. Risan’s 2014 tax year until December 31, 2019. In August 2019 the Commissioner received two signed Forms 872, one for 2014 and one for 2015. Both extended the time for assessment until December 31, 2020.

Mr. Risan testified that he did not sign the forms extending the limitations period for these years. We looked at the signatures and find it more likely than not that he did sign them.

The Commissioner did not seek to extend the limitations periods for Mr. Risan’s 2016 and 2017 tax years. He sent a notice of deficiency for these years on July 7, 2021, which is within the six-year statute of limitations that applies should we find a sufficiently large omission of gross income. And if not, Mr. Risan raised the argument that the limitations periods had expired for the 2016 and 2017 tax years in his petition , but he failed to raise it at trial or on brief. At trial, he addressed the statute of limitations for 2014 and 2015 but raised unrelated concerns for 2016 and 2017. On brief, Mr. Risan addressed only the statute of limitations for the 2014 and 2015 tax years. We conclude that Mr.

20

[*20] Risan abandoned his argument objecting to the limitations periods for 2016 and 2017. See, e.g., Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4 (2001); Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988).

II. Income

Before examining the bank-deposits analyses themselves, we must address the validity of an assumption that RA Delgado made— that deposits made to BlueBeat’s and Encryptos’s bank accounts are income to Mr. Risan. We agree with the Commissioner that Mr. Risan’s income has to include income that he received indirectly, as well as what was paid directly to him. See, e.g., Foxworthy, Inc. v. Commissioner, 98 T.C.M. (CCH) 177, 188 (2009), aff’d, 494 F. App’x 964 (11th Cir. 2012); K&M La Botica Pharmacy, Inc. v. Commissioner, T.C. Memo. 2006-214, 2006 Tax Ct. Memo LEXIS 218, at *7, supplementing T.C. Memo. 2005- 277; Zand v. Commissioner, T.C. Memo. 1996-19, 1996 Tax Ct. Memo LEXIS 23, at *225 (interest to a “mere skeleton” of a corporation is attributed to its sole shareholder), aff’d, 143 F.3d 1393 (11th Cir. 1998).

And that in turn leads us to the important issue of how close Mr.

Risan and his corporations were during the years at issue.

A. Relationship Between Mr. Risan and His Companies

1. Whether BlueBeat and Encryptos Were Alter Egos

The notion that we look beyond nominal ownership to economic reality when we try to figure out who owes tax on income received in another’s name, or whose property the Commissioner can take to pay tax, is an old one. There are such things as corporations that the Code treats as “tax nothings”—sham corporations with no valid business purpose . See Moline Props., Inc. v. Commissioner, 319 U.S. 436, 439 (1943); Shaw Constr. Co. v. Commissioner, 323 F.2d 316, 319–20 (9th Cir. 1963), aff’g 35 T.C. 1102 (1961). If we treat a corporation as a sham under the Code, we treat its property and income as belonging to its owner. See Moline Props., Inc. v. Commissioner, 319 U.S. at 439.

There’s something similar that goes on with taxpayers who stumble into accusations of assigning their income. We don’t let attempted assignments change who has to pay tax either. Lucas v. Earl, 281 U.S. 111, 114–15 (1930); Trousdale v. Commissioner, 16 T.C. 1056, 1065 (1951), aff’d, 219 F.2d 563 (9th Cir. 1955). And we ignore such attempted assignments as a matter of federal tax law.

21

[*21] The Commissioner’s problem is that RA Delgado relied solely on Mr. Risan’s control of corporate bank accounts to attribute deposits into them to Mr. Risan. He noted in his bank-deposits analyses: “Taxpayer had commingled transactions from personal and corporate bank accounts (which taxpayer controls).” But what is there in the record of these cases that shows that Mr. Risan’s income should include money deposited into accounts in BlueBeat’s and Encryptos’s names? The Commissioner does not argue that these corporations were shams or nominees . In briefing, he argues only that both BlueBeat and Encryptos were Mr. Risan’s alter egos.

The problem here is that caselaw usually uses the concepts of “shamming” and “assignment of income” to decide whether money received by one entity needs to be recognized by its actual owner. Caselaw usually uses concepts like “nominee ownership” or “alter ego” to decide whether the Commissioner can collect tax by taking property of one entity to pay the tax owed by another. Wolfe v. United States, 798 F.2d 1241, 1243 (9th Cir. 1986) (employing the alter-ego doctrine to find the sole shareholder and president of a corporation could be required to pay the tax assessed against the corporation, even if that corporation had a valid business purpose and was not a sham).

We think this is a key mistake.

The general rule in tax law, one must remember, is that incorporation creates a distinct taxpayer—the mere fact of ownership and control of a corporation by its shareholder does not make the corporation his agent, much less his corporation’s property his own. See Moline Props., Inc. v. Commissioner, 319 U.S. at 440. A party may invoke an exception to this general rule, but if he does so, he must make a prima facie case alleging “specific facts;” “[c]onclusory allegations of alter-ego status are insufficient.” Motul S.A. v. USA Wholesale Lubricant, Inc., 686 F. Supp. 3d 900, 911 (N.D. Cal. 2023) (quoting Gerritsen v. Warner Bros. Ent. Inc., 116 F. Supp. 3d 1104, 1136 (C.D. Cal. 2015)); accord Collins v. Pension & Ins. Comm. of S. Cal. Rock Prods. & Ready Mixed Concrete Ass’ns, 144 F.3d 1279, 1282 n.3 (9th Cir. 1998) (per curiam) (“[E]xistence of an alter-ego relationship or a conflict of interest is not presumed without proof of specific facts to support these theories”).

The Commissioner does not point to any law guiding his alter-ego arguments. In another case appealable to the Ninth Circuit, we determined what law applies to the question of whether a corporation is a taxpayer’s alter ego. Jenkins v. Commissioner, T.C. Memo. 2021-54,

22

[*22] at *24, aff’d sub nom. Gentry v. Commissioner, No. 23-4174, 2026 WL 153015 (9th Cir. May 29, 2026). The question is one of fact, but jurisdictions differ on the standards and tests by which to evaluate those facts, and we must look to the applicable state law for a specific test. Id. at *31–32. When determining which state law to apply, we consider a couple relevant facts. Mr. Risan is a California resident, and we heard these cases in California. Encryptos is a California corporation. 29 Blue- Beat, however, was incorporated in Delaware. 30 Should California state law completely govern our alter-ego analysis? Or is Delaware law relevant too?

When we determine whether a corporation is a person’s alter ego, section 6(2) of the Second Restatement of Conflict of Laws guides our choice-of-law determination. Jenkins, T.C. Memo. 2021-54, at *39. That section requires us to consider:

• the needs of the interstate and international systems;

• the relevant policies of the forum;

• the relevant policies of other interested states and the relative interest of those states in the determination of the particular issue ;

• the protection of justified expectations;

• the basic policies underlying the particular field of law;

• the certainty, predictability, and uniformity of result; and

• the ease in the determination and application of the law to be applied .

We must use these principles to determine which state has the “most significant relationship,” and then use that state’s laws. Jenkins, T.C. Memo. 2021-54, at *39; Restatement (Second) of Conflict of L., § 6(2) cmt. c (A.L.I. 1971). In Jenkins, we found Arizona state law applied for

29 In the absence of any information in the record on the formation of Encryp-

tos, we take judicial notice of this information as published by the California Secretary of State. Cal. Sec’y of State, Business Search, https://bizfileonline.sos.ca.gov/ search/business (search in search bar for “Encryptos”) (last visited Aug. 21, 2026).

30 This information was also published on the California Secretary of State’s

website as BlueBeat has a California registered agent: Hank Risan. Id. (search in search bar for “Bluebeat”).

23

[*23] numerous reasons, including that the tax debts arose from acts the taxpayer committed in Arizona; the taxpayer was domiciled in Arizona ; Arizona presumably has an interest in regulating in a sensible and uniform way those whose conduct in Arizona affects corporate creditors in Arizona; and Arizona has an interest in whether its residents should be subject to potential liability via the alter-ego doctrine. These factors persuaded us to follow Arizona law on the matter, even though some of the corporations in question were incorporated outside of Arizona.

The facts are similar in these cases. We are not questioning the validity of BlueBeat’s incorporation; we are looking at whether a third party—Mr. Risan—used the corporation as an alter ego. The corporate form is less of a question than the actions taken by Mr. Risan, who is domiciled, conducted business, and brought these cases in California. It is a California resident who could potentially be subject to liability via the alter-ego doctrine, not a Delaware corporation. We find California has the most significant relationship to this issue, and we will follow California law in analyzing whether Mr. Risan used his corporations as his alter egos.

There are two conditions in California for alter-ego liability:

• “such a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased;” and

• “adherence to the fiction of the separate existence of the corporation would . . . sanction a fraud or promote injustice.”

Goodrich v. Briones (In re Schwarzkopf), 626 F.3d 1032, 1038 (9th Cir. 2010) (citing Wood v. Elling Corp., 572 P.2d 755, 761 n.9 (1977)).

The Commissioner in these cases fails to make even a prima facie showing that either of these conditions is present. There is literally nothing in the voluminous record here—no stipulation, no testimony, and no documentary evidence—of who owns either BlueBeat or Encryptos . There is likewise no mention in any of the Commissioner’s arguments that suggest Mr. Risan was using these corporations to “sanction a fraud or promote injustice.” 31

31 We are aware, see supra note 3, that another part of the federal government

has indicted Mr. Risan precisely on charges that he used these corporations to commit fraud. We must, however, decide these cases on the record the parties compiled for

24

[*24] The Commissioner gives us little to work with. His most persuasive point is the frequent ebb and flow of money between Mr. Risan’s personal accounts and those of these corporations. But the Commissioner ’s other arguments are weaker. He notes that BlueBeat and Encryptos share an address for their bank accounts—yet this is neither the address Mr. Risan uses for his personal accounts nor his own residence. The Commissioner also notes that Mr. Risan was the CEO of BlueBeat and Encryptos, which he contends means that Mr. Risan asserted control over the companies.

This is a problem for the Commissioner. Of course CEOs have control over their corporations. In private companies, it’s not unusual to see the IRS claim that distributions of money or property from a corporation are constructive dividends, or that transfers from a shareholder to his corporation are capital contributions rather than repayments of loans. But he didn’t do that here—all we have is the Commissioner’s proof that the companies shared a common address for their bank correspondence and a common CEO. He introduced no evidence of the companies ’ ownership or corporate structures, or even whether Mr. Risan was the sole officer of either corporation. The movement of money into and out of corporate accounts is enough to show some overlap, but we cannot find that the Commissioner has met his burden of proving a prima facie case of the required ownership by Mr. Risan of either Blue- Beat or Encryptos. As the Ninth Circuit has held, “Ownership is a prerequisite to [alter-ego] liability, and not a mere ‘factor’ or ‘guideline’.” SEC v. Hickey, 322 F.3d 1123, 1128 (9th Cir. 2003). Even ownership of a single share of stock would suffice, but proof of control does not. Id. at 1129.

Nor has the Commissioner shown any reason in these cases for us to conclude that treating BlueBeat and Encryptos as distinct entities would promote fraud or injustice.

We therefore do not find that BlueBeat and Encryptos were alter egos of Mr. Risan.

The Commissioner does have an alternative argument about BlueBeat. He contends, very briefly, that even if we do not find that BlueBeat is Mr. Risan’s alter ego, we should still attribute the funds

them. In these cases, the Commissioner did not seek a penalty for civil fraud and did not argue that the limitations period had not begun to run because Mr. Risan or MRT had filed fraudulent returns or that BlueBeat or Encryptos fraudulently failed to file theirs. See § 6501(c)(1).

25

[*25] deposited into its accounts to him because Mr. Risan deposited money from sales of his guitars into BlueBeat’s account. Yet on the previous page of his brief, the Commissioner admits that Mr. Risan reported those sales on his own Schedules C. How this shows dominion and control such that we should treat all deposits into BlueBeat’s accounts as income to Mr. Risan eludes us.

That means, that on the very unusual record in these cases, we find that we should exclude the deposits into BlueBeat’s and Encryptos’s accounts from Mr. Risan’s income.

2. Mr. Risan’s Relationship with MRT

We needed to decide the alter-ego issue based on the arguments and evidence offered by the parties. These arguments become even more confusing, however, when we analyze MRT’s relationship to Mr. Risan. MRT filed its own returns, and the Commissioner determined MRT’s tax liabilities as a separate taxpayer. MRT received its own notices of deficiency for 2016 and 2017. The Commissioner never argues that MRT is an alter-ego of Mr. Risan. Yet the arguments the Commissioner makes about Mr. Risan’s relationship to BlueBeat and Encryptos could be made just as well to describe Mr. Risan’s relationship with MRT: Mr. Risan frequently withdrew money from MRT for his personal expenses and served as its CEO, and MRT shares an address with BlueBeat and Encryptos . Ms. Schlaefli even testified that BlueBeat and MRT shared a set of books. The Commissioner at times seems to acknowledge that the commingling of funds occurred equally among BlueBeat, Encryptos, Mr. Risan, and MRT. 32 But the Commissioner’s alter-ego theory does not clarify why the relationship among Mr. Risan, BlueBeat, and Encryptos should be viewed differently from their respective relationships with MRT. In describing MRT, the Commissioner is careful to note that it is distinct from Mr. Risan and that including transfers from MRT to Mr. Risan in Mr. Risan’s taxable income doesn’t create double taxation.

It is also hard to understand what the Commissioner thinks of MRT’s relationships to BlueBeat and Encryptos. For 2015 the Commissioner treats deposits from MRT to BlueBeat as nontaxable transfers, with no explanation. He makes no argument for that year that we

32 When arguing we should find BlueBeat is Mr. Risan’s alter ego, the Commis-

sioner’s brief states: “Checks deposited into Bluebeats [sic] account #3029 indicate that they were for Risan, indicate they were paid for ‘Preferred Stock—MRT,’ were payable to ‘Bluebeat/Hank Risan’, ‘MRT/Bluebeat’, ‘MRT or Bluebeat.’” The Commissioner did not address the effect on MRT’s character of the credibility of those check descriptions.

26

[*26] should poke through the corporate veils between MRT and Blue- Beat or Encryptos. We need not consider issues not raised by the parties and will not sua sponte find that MRT is a sham.

Mr. Risan is also less than consistent on this issue. He sometimes argues that the bank-deposits analyses should include only his personal bank accounts. But then he also argues that “it makes all the sense in the world that the deposits in question are transfers.” Mr. Risan would have us find that he is distinct from all three of his corporations, while also finding that transfers from the corporations to him personally are nontaxable. This is not persuasive. See, e.g., Enayat v. Commissioner, 98 T.C.M. (CCH) 436, 449 (2009) (finding transfers from a taxpayer’s corporation to his personal accounts were income).

The Commissioner seems sometimes to argue deposits to Mr.

Risan from BlueBeat and Encryptos are nontaxable because they are essentially interaccount transfers. He seems to concede the same for deposits from MRT to BlueBeat for 2015 but for other years does not concede that deposits from MRT are presumptively nontaxable to their recipient.

B. Bank Deposits Analyses of Mr. Risan’s Accounts

Knocking out the Commissioner’s attempt to include in Mr.

Risan’s income deposits into BlueBeat’s and Encryptos’s accounts still leaves us to figure out whether and how deposits into Mr. Risan’s personal bank accounts add to his income. We focus on deposits into Mr. Risan’s own accounts, and we can begin with some general points. A bank-deposits analysis is one acceptable method for reconstructing income and is frequently used when records—as is true of Mr. Risan’s— are inadequate, incomplete, or unclear. See Westby v. Commissioner, 88 T.C.M. (CCH) 80, 87 (2004). Bank deposits are prima facie evidence of income. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). A bank- deposits analysis assumes that all money deposited in a taxpayer’s bank account during a given period is taxable income. Price v. United States, 335 F.2d 671, 677 (5th Cir. 1964).

The taxpayer bears the burden of showing that the deposits are not taxable income but are derived from a nontaxable source. Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000), aff’g T.C. Memo. 1998-121. A taxpayer may try to rebut the Commissioner’s bank-deposits analysis in its entirety. This is rare, but once in a while an analysis has so many obvious errors and is so out of tune with reality that we

27

[*27] toss it out entirely. See, e.g., Westby, 88 T.C.M. (CCH) 80. This can happen if the taxpayer introduces credible evidence sufficient, if believed , to demonstrate by a preponderance of the evidence that the Commissioner ’s determination is excessive, i.e., erroneous and/or arbitrary, “without rational foundation.” Helvering v. Taylor, 293 U.S. 507, 514–15 (1935). If a taxpayer successfully undermines the Commissioner’s bank- deposits analysis by showing that it includes nontaxable deposits, the burden shifts back to the Commissioner to rehabilitate it. Garibyan v. Commissioner, T.C. Memo. 2025-105, at *13.

Mr. Risan argues that the Commissioner’s bank-deposits analyses are flawed for all the years at issue and must be disregarded in their entirety. He points to major computational errors and argues that the Commissioner made “unjustified assumptions” about the characteristics of the deposits into Mr. Risan’s accounts. Mr. Risan contends that many of the deposits are loans and “mere transfers,” and he argues these characterizations are obvious.

We are nevertheless also aware that, unlike the taxpayer’s problems in Westby, at least some of the problems in these cases are of Mr. Risan’s own making. Keeping very poor records and refusing to cooperate in the audit weighs against completely disregarding the Commissioner ’s work. We instead try to solve the resulting problem as we did in Canatella v. Commissioner, T.C. Memo. 2017-124, at *13, where we decided not to reject the IRS’s bank-deposits analysis in its entirety, but to take it year by year and correct the specific mistakes we can identify. Mr. Risan does identify several problems with the Commissioner’s bank- deposits analyses that mirror the facts of Westby. These concerns are the Commissioner’s computational errors and failure to analyze all of Mr. Risan’s bank accounts.

We examine the Commissioner’s bank-deposits analysis for each year.

1. 2014

For 2014, RA Delgado noted on the bank-deposits analysis: “Exam also identified a bank account not included on bank records received from prior summons, for Media Rights Technologies, BoA #7835 that show transferred deposits in 2014 and 2015.” It is unclear why the Commissioner didn’t get this account’s records. What is clear is that this account, over which Mr. Risan had signatory authority, was not included among the accounts RA Delgado reviewed for his analysis. Mr. Risan

28

[*28] alleges review of this bank account would show that most deposits into Mr. Risan’s personal account ending in 6993 were from MRT. The bank statements for MRT’s account ending in 7835 for 2014 are included in the record in these cases. We looked at them ourselves and were able to substantiate over $970,000 of the deposits in Mr. Risan’s account ending in 6993 as coming from this MRT account. 33 Mr. Risan argues that these deposits were repayments of loans that he had extended to MRT in prior years.

RA Delgado indicates the source of these deposits was unknown, and the Commissioner does not address Mr. Risan’s arguments in his answering brief. Regarding the deposits labeled “CA Clr Transfer,” the Commissioner states: “Petitioners fail to show that such amount came from another bank account of Risan or one of the companies that he controlled or another nontaxable source . . . . There are no corresponding withdrawals in or around those dates from Bluebeat’s [sic] Wells Fargo account ending in 3029, MRT’s Wells Fargo account ending in 2963, Risan’s personal Wells Fargo account ending in 8816.” We have previously acknowledged the confusion over how the Commissioner treats transfers of funds between Mr. Risan and MRT, but his own brief suggests he may have changed the characterization of these deposits if he verified that they came from MRT. The Commissioner’s argument relies on the source of these deposits being unknown; it does not address their characterization once the source is identified. We therefore find the Commissioner’s failure to consider the MRT account ending in 7835 to be a significant omission—just as we did in Westby, where the Commissioner also failed to include the taxpayer’s bank accounts in his analysis. See Westby, 88 T.C.M. (CCH) at 88.

The Commissioner’s bank-deposits analysis for 2014 also includes major computational errors. He identifies some of these in his own brief. First, he identifies a particular mistake in RA Delgado’s bank-deposits analysis: a deposit mistakenly added three times that should have been included only once, a roughly $8,000 adjustment. He then proceeds to walk through RA Delgado’s bank-deposits analysis without identifying any other specific errors, concluding that the analysis identified unexplained deposits of $903,922, which he characterizes as unreported “other income.” In a footnote without further explanation, the

33 RA Delgado’s bank-deposits analysis lists a number of deposits labeled

“CA clr transfer.” In his brief, Mr. Risan argues that these came from MRT. We could identify 39 withdrawals from MRT occurring on the same days for the same amounts. We find it more likely than not that these 39 deposits were transfers from MRT.

29

[*29] Commissioner acknowledges that this is $1,247,338 less than the amount of unexplained deposits on the original bank-deposits analysis and notice of deficiency, and he concedes the difference. He offers no explanation for this difference, such as identifying specific deposits included by RA Delgado but conceded as nontaxable at the time of briefing. As Mr. Risan points out in his reply brief, the lack of explanation makes it extremely difficult for him to rebut the Commissioner’s argument as it is unclear which deposits are still counted and which deposits are conceded .

This is very similar to Westby, where the Commissioner’s bank-

deposits analysis contained “several obvious errors.” Id. We therefore find by a preponderance of the evidence that for this year Mr. Risan has successfully argued that the Commissioner’s analysis is flawed, and we also find the Commissioner did not sufficiently rehabilitate his analysis. We conclude, therefore, that the Commissioner’s determination that Mr. Risan had unreported income for 2014 is not sustained.

2. 2015

The Commissioner’s bank-deposits analysis for 2015 suffers similar errors. He failed to include one of MRT’s bank accounts in his analysis , and, as for 2014, the Commissioner’s own brief catalogs numerous errors in the original bank-deposits analysis. The Commissioner states: “A review of the [bank-deposit] analysis indicates that Risan deposited into account #6993 an additional $204,849 from the Bluebeat [sic] account #3029”—which the Commissioner now concedes is a nontaxable transfer. He also identifies “another overdraft protection in the amount of $800 which should have been included in RA Delgado’s loans.” We would expect these errors to produce a $205,649 concession by the Commissioner , but that is not the case. The Commissioner’s math results in only a $98,221 difference between his calculations on brief and the original bank-deposits analysis, and he again fails to explain how we should reconcile these differences. We are again persuaded by Mr. Risan’s invocation of Westby, and we find it more likely than not that the Commissioner ’s 2015 determination of income is excessive. The Commissioner did not sufficiently address the points of concern on brief and has not shifted the burden back on Mr. Risan. We will not sustain his determination of unreported income for 2015.

30

[*30] 3. 2016

The Commissioner’s findings for Mr. Risan’s unreported income for 2016 differ from those for 2014 and 2015 because 2016 is the first year for which the Commissioner includes deposits from Encryptos in his analysis, and his brief concedes no errors in the original bank-deposits analysis. This is not, however, because the analysis is much better than it was for the other years. It included as income to Mr. Risan numerous transfers from BlueBeat, which the Commissioner has argued would be nontaxable under his alter-ego theory (which we reject). We do not find, however, that the entire 2016 analysis is unsalvageable. Unlike for the previous years, Mr. Risan does not argue for 2016 that specific deposits would be substantiated by considering the excluded MRT account, so its omission is less worrisome. Without unexplained math errors in the thousands of dollars, and with the bank records themselves in evidence, we could work our way through the analysis and consider Mr. Risan’s substantiation for individual deposits. We therefore uphold the presumption of correctness, see Petzoldt, 92 T.C. at 689–90, for the bank-deposits analysis for 2016 and consider the errors one by one on a preponderance of the evidence.

The Commissioner includes $106,850 of deposits into Encryptos’s Wells Fargo account ending 2382 as income to Mr. Risan. His only reason , however, is solely that Encryptos is Mr. Risan’s alter ego. We’ve already found that to be unproven; without other argument from the Commissioner, we must agree with Mr. Risan that deposits made to Encryptos are not, on this record, his personal income.

The Commissioner similarly determined $579,000 of deposits into BlueBeat’s Wells Fargo account ending in 3029 were Mr. Risan’s Schedule C income related to guitar sales, and another $1,471,088.19 were “undetermined activity” he treated as taxable income. As with the deposits made into Encryptos’s account, we agree with Mr. Risan that deposits made to BlueBeat are not, on this record, Mr. Risan’s personal income.

The bank-deposits analysis found $338,333 in taxable deposits made to Mr. Risan’s Bank of America account ending 6993. Mr. Risan’s brief includes a table of the deposits made to this account, with comments explaining why the deposit should be characterized as nontaxable . There are many flaws with this table—perhaps most obviously when a deposit is listed with no explanation whatsoever. Mr. Risan identifies a number of deposits that were transfers from BlueBeat and

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[*31] Encryptos. However, because deposits made to these corporations are not includible as income to Mr. Risan, we will find transfers from these corporations to Mr. Risan are includible.

Mr. Risan does identify a $100 overdraft protection credit the bank-deposits analysis mistakenly classified as income. The Commissioner does not provide an argument for why this deposit is taxable income , and we agree with Mr. Risan that it should be excluded.

Mr. Risan also argues that a $9,500 deposit on November 1, 2016 is a loan from “Betina and Spectrum,” and that he wrote a check and deposited it to BlueBeat. The record lacks any loan agreement or any other evidence that money associated with this deposit came from Betina Podolsky or Spectrum. We do have the image of a check Mr. Risan wrote from himself for $9,500. He wrote “Bluebeat [sic] Music” on the recipient line, and there is a deposit for $9,500 made into BlueBeat’s account ending 3029 on November 1, 2016. Evidence of where he deposited $9,500 does not, however, persuade us of the origin of the deposit made to Mr. Risan. We cannot agree that this deposit is nontaxable.

The Commissioner argues, based on the bank-deposits analysis, that Mr. Risan failed to report Schedule C gross receipts of $1,640,871 for 2016. 34 We find that the $106,850 of deposits made to Encryptos, the $2,050,088.19 of deposits made to BlueBeat, and the $100 overdraft protection credit made to Mr. Risan’s personal account are not includible in Mr. Risan’s Schedule C gross receipts. As the sum of these amounts exceeds the Commissioner’s determination of unreported income, we find that Mr. Risan does not have unreported Schedule C income for 2016.

4. 2017

The bank-deposits analysis for 2017 is, again, dotted with errors.

Most glaringly, it uses the amount of Schedule C gross receipts Mr. Risan reported for 2016—$854,500—instead of what he reported for 2017—$325,000. This error was corrected, however, on the notice of deficiency sent to Mr. Risan, so Mr. Risan’s concern that the Commissioner has increased the amount of deposits in question without amending his answer is without merit.

34 RA Delgado’s bank-deposits analysis identified $2,495,271 in unexplained

deposits across the accounts for Mr. Risan, Encryptos, and BlueBeat. He then subtracted the $854,400 in Schedule C gross receipts Mr. Risan did report.

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[*32] The bank-deposits analysis includes $144,870 in taxable deposits made into the Encryptos account ending 2382 and $1,444,851.62 in deposits made into BlueBeat’s account ending 3029. As discussed for 2016, we do not agree with the Commissioner’s alter-ego theory, so we cannot agree that these amounts should be included in Mr. Risan’s unreported income. Mr. Risan also identifies several transfers from Encryptos and BlueBeat to his personal bank account and argues that these should be excluded from his income. But he does not explain why these should be treated as nontaxable if we agree with him that Encryptos and BlueBeat are separate entities—which we do. In the same key, the Commissioner subtracted transfers to Mr. Risan from BlueBeat of $26,500, and we deem those includible in income given our conclusions about the relationship between Mr. Risan and BlueBeat.

This leaves Mr. Risan’s personal Bank of America account ending 6993. The Commissioner found total deposits into this account totaling $166,421.45. Mr. Risan’s brief states the total deposits made to Mr. Risan’s Bank of America account ending 6993 were $167,958.44. Mr. Risan acknowledges the difference between these two amounts in his brief—“Our number is slightly different”—but he doesn’t explain it. We will treat this as a small concession by the Commissioner in favor of Mr. Risan and proceed with the lower number. Either way, this is less than the amount of Schedule C gross receipts Mr. Risan reported for 2017: $325,000. Based on the bank-deposits analysis, we cannot agree with the Commissioner’s determination that Mr. Risan had unreported Schedule C gross receipts for 2017.

There is also the matter of unreported rental income. For 2017, Mr. Risan reported $20,000 of income from rent on his Schedule E. On his bank-deposits analysis, the Commissioner identified rental deposits totaling $21,600. Mr. Risan disputes the characterization of the additional $1,600 deposit made on March 16, 2017 as rent, but his evidence is a scan of a check withdrawing $1,600 from his account, not a deposit into his account. He has no argument or evidence explaining the nature of the $1,600 deposit into his account, so we could not find he has overcome the Commissioner’s presumption of correctness. The Commissioner , however, nowhere asks us to find that Mr. Risan underreported his Schedule E rental income for 2017. For 2017, he asks only for us to find that Mr. Risan underreported Schedule C income, and he subtracts the $21,600 of purported Schedule E income from his Schedule C calculations . We will not decide issues not raised, so we will not find that Mr. Risan underreported his Schedule E income for 2017 either.

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[*33] C. Bank Deposits Analysis of MRT’s Accounts

RA Delgado’s bank-deposits analysis found unreported gross receipts for MRT only for the 2017 tax year. He determined MRT had $371,431.60 in unreported gross receipts. The briefs make clear that Mr. Risan disagrees with this conclusion, but it’s unclear exactly why. In his opening brief he states:

The Revenue Agent determined that there was unreported income in 2017 of $371,436. The reported income was $18,434. Ms. Schaefli’s [sic] testimony about her devoted attention to detail should be sufficient by itself to overcome this adjustment. However, if one wants to look further, evidence in the file shows that the company’s working capital came from loans and capital contributions. MRT was in a constant struggle for capital. It received extensive loans and capital contributions. Schlaefli devotedly classified those payments based on the paperwork she received.

Ms. Schlaefli in fact testified that she could not recall the source of MRT’s income for 2017, though MRT did report some income. But she did attest that MRT paid its expenses by shareholder loans, sent to the company by private investors via check or wire transfer. We do not find that this nonspecific testimony sufficiently meets MRT’s burden to overcome the bank-deposits analysis’s presumption of correctness. The thin record on this issue benefits the Commissioner. There might have been a story about specific amounts or sources deposited into MRT that were capital and not income, but all agree that MRT had some income. That means that MRT never met its burden of disproving the Commissioner’s bank-deposits analysis even as to a few scattered items.

In his reply brief, Mr. Risan argues that some of the deposits into MRT’s account in 2017 were from BlueBeat and Encryptos. He also argues that $301,650.21 in deposits was stockholder contributions to convert common stock to preferred stock. He states that when MRT decided to litigate against Microsoft, there was a conversion of common stock to preferred stock in order to raise capital to fund the costs of litigation. To substantiate this claim, he identifies specific checks deposited into MRT’s bank accounts in 2017 with memo lines that refer to the stock conversion. He does not identify any of the deposits as loans. These are new arguments.

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[*34] Raising an argument for the first time in a reply brief is untimely, and we will not consider it. See, e.g., DiLeo v. Commissioner, 96 T.C. 858, 891 (1991) (“It is well settled that issues raised for the first time on brief will not be considered—when to do so prevents the opposing party from presenting evidence that he might have if the issue had been timely raised”), aff’d, 959 F.2d 16 (2d Cir. 1992); Neely v. Commissioner, 85 T.C. 934, 953 (1985) (refusing to consider argument raised for first time in reply brief). The Commissioner had no opportunity to attempt to rehabilitate his bank-deposits analysis after Mr. Risan submitted his specific arguments, and we are barred from examining them.

The Commissioner wins this one.

III. Deductions

Section 162(a) allows a deduction for the expenses of carrying on a trade or business. Taxpayers must, however, keep records sufficient to enable the Commissioner to determine the character and amount of these expenses. Anderson v. Commissioner, T.C. Memo. 2024-95, at *16; see § 6001; Treas. Reg. § 1.6001-1(a). Taxpayers must show that they paid or incurred a purported business expense primarily for business rather than personal reasons and that there was a proximate relationship between the expense and the business. Walliser v. Commissioner, 72 T.C. 433, 437 (1979).

There are still tighter rules for taxpayers, like Mr. Risan, who claim deductions for the use of their home. See § 280A(a). These deductions are allowed “to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis . . . as the principal place of business for any trade or business of the taxpayer . . . or . . . in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.” § 280A(c)(1). We have held that this means the designated portion of the home must be used solely for the purpose of carrying out the taxpayer ’s trade or business. Sam Goldberger, Inc. v. Commissioner, 88 T.C. 1532, 1557 (1987).

It is a taxpayer’s responsibility to keep and produce records to prove his entitlement to business-expense deductions. § 6001. We can estimate some expenses under Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930), if we are convinced from the record that such expenses were incurred by the taxpayer and that they otherwise satisfy the requirements of the Code as to their deductibility, and we have a

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[*35] basis on which to make an estimate of them, Blythe v. Commissioner , T.C. Memo. 1999-11, 1999 Tax Ct. Memo LEXIS 11, at *14–15.

A. Mr. Risan’s Schedule C Expenses

On his Schedules C, Mr. Risan claimed the following business expenses :

2014

Business Use of Home $15,981

2016

Repairs and Maintenance $52,000 Utilities 1,200 Janitorial 1,600 Plumbing 1,000 Total 55,800

2017

Business Use of Home $16,324 Commissions and Fees 16,250 Insurance (other than health) 12,000 Legal and Professional Services 25,000 Office Expenses 3,000 Vehicles, machinery, and entertainment 1,500 for rent or lease Repairs and maintenance 43,250 Utilities 8,700 Total 126,024

The Commissioner disallowed everything.

Mr. Risan’s opening brief skimps on arguments in support of these deductions. He states that he maintained a facility at his home used exclusively for music repair, musical-instrument storage, and repair of antique chess sets, which he described as a “new venture.” He also claims that he spent money on utilities, cleaning, and plumbing repairs , and other repairs to both the property and his classic guitars. But

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[*36] the only evidence is his own testimony, although in his reply brief he mentions a letter his attorney sent to RA Delgado in 2020. This letter did include photocopies of Mr. Risan’s utility bills for 2016, as well as a photocopy of a physical check and records of two other checks paid to Victoria Andasol. Mr. Risan says the payments to Ms. Andasol, which totaled $3,440, were for janitorial services rendered. It is unclear whether Ms. Andasol was cleaning Mr. Risan’s house in addition to his workshop. It is clear, however, that the utility bills reflect utility charges for both Mr. Risan’s house and workshop. Mr. Risan claims that his house is approximately 1,450 square feet and that the workshop is 675 square feet, so he attributed 32% of his utility bills to his business.

Mr. Risan admits he cannot find information to substantiate his 2016 plumbing expense. He also admits he does not have documentation for the $52,000 in claimed repairs for 2016, but he attributes this to the repair of two Martin guitars and a repair of the driveway leading to the workshop’s entry. He does not have the bill for the driveway repair, but he did include a photo of the driveway.

Finding Mr. Risan’s records from 2016 sufficient to substantiate his claimed utilities and janitorial expenses would require us to believe that Mr. Risan incurred these expenses primarily for business reasons and that there was a proximate relationship between the expense and business. Mr. Risan, however, offers no evidence to support any such finding. His testimony about his guitars does not support the conclusion that owning the guitars was more for business than personal use. 35 To conclude Mr. Risan properly claimed deductions for the business use of his home, we would have to rely on his unsubstantiated testimony regarding the space and its purpose. And we are quite wary of crediting his testimony without such support, even when it isn’t self-contradictory . In his brief, moreover, he admits that he used the workspace for activities other than the storage and repair of his guitars—namely his chess sets. We have no way of determining whether Mr. Risan properly allocated his utility expenses between his personal residence and his workshop, and we would have to guess as to whether his janitorial expenses exclusively served his alleged business. Finally, we would still have no evidence or arguments about any of the other expenses that he claimed.

35 Mr. Risan stated he didn’t sell guitars after 2002. While he also testified

that he did sell guitars after 2002, he said these sales were sporadic. He testified that he retained ownership of the guitars personally, and he did not claim that this personal ownership was more for business than personal purposes.

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[*37] We therefore find that the Commissioner was right to disallow deductions for all of Mr. Risan’s Schedule C expenses for 2014, 2016, and 2017.

B. Cost of Goods Sold

Mr. Risan claimed the following amounts in cost of goods sold:

Year Item Amount 2014 Cost of goods sold $2,595,730 2015 Cost of goods sold 1,685,001 Cost of goods sold—labor 37,000 2016 Cost of goods sold—beginning inventory 777,700 2017 Cost of goods sold—purchases 222,000

The Commissioner disallowed all of them.

To support his claimed cost of goods sold, Mr. Risan’s sole argument states that “the court will be aware that vintage guitars are costly to acquire and costly to maintain.” We do not find this persuasive. Mr. Risan had no records to substantiate these costs. He instead estimated them, plucked from his memory and what he claimed was his experience as an appraiser for Lloyd’s of London and Chubb. We do not find these estimates or his testimony credible because of the absence of any specific details to support these estimates. This also means that we will not ourselves estimate these numbers under Cohan v. Commissioner, 39 F.2d at 543–44.

The Commissioner wins.

C. Mr. Risan’s Net Operating Losses

Mr. Risan reported the following net operating losses:

Year Net operating loss 2014 $14,032,803 2015 15,533,438 2016 16,187,592 2017 3,527,372

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[*38] A net operating loss is the excess of allowable deductions over gross income for a given tax year, § 172(c), although we are supposed to consider certain deductions in calculating an individual’s net operating loss, § 172(c) and (d). Unless an exception applies, a net operating loss must first be carried back two years and then carried forward 20 years. § 172(b)(1)(A). A taxpayer bears the burden of establishing the actual existence of net operating losses in the prior years and his right to deduct them. Rule 142(a); Keith v. Commissioner, 115 T.C. 605, 621 (2000); Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), rev’d, 259 F.2d 300 (5th Cir. 1958). And if a taxpayer claims a net-operating-loss deduction , he 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); accord Ghafouri v. Commissioner, 111 T.C.M. (CCH) 1022, 1024 (2016).

Mr. Risan did not include such a “concise statement” with his return for any of the years at issue. This alone is sufficient reason to disallow them. See Bulakites v. Commissioner, 113 T.C.M. (CCH) 1384, 1386 (2017).

But that’s not the only problem. Both Mr. Risan and his accountant , David Jacobs, testified that Mr. Risan’s 2014–16 tax returns had a multimillion-dollar error. Mr. Jacobs testified the erroneous net operating losses were created in 2011. He also testified that he recalculated the deduction for 2017 using prior tax returns dating all the way back to 1999. Mr. Risan did not, however, provide any other information about these net operating losses and their origins.

We sustain the disallowance.

D. MRT’s Business Expenses

MRT also claimed business expenses for 2016 and 2017:

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[*39] Expense 2016 2017 Taxes and Licenses $59,307 44,418 Interest 16,223 18,080 Depreciation 4,655 4,526 Compensation of Officers 1,200 1,200 Salaries 715,618 524,261 Employee Benefits Program 2,200 — Amortization 170,327 — Bank Charges 1,409 — CD Purchases 9,740 — Consulting 2,400 — Dues and Subscriptions 463 — Insurance 100,235 — Janitorial 2,220 — Legal and Professional 267,976 — Marketing 51,541 — Office Expense 19,906 — Postage 53 — Security 703 — Supplies 631 — Telephone 12,477 — Utilities 22,475 36 — Web Fees 15,754 — Rent — 214,802 Other Deductions (not specified) — 437,024 Total 1,477,513 1,244,311

In the notice of deficiency sent to MRT for the 2016 tax year, the Commissioner lists the total of disallowed expense deductions as $1,477,513. In his brief, the Commissioner omitted the telephone expense of $12,477, flagged in our table with a footnote. This accounts for

36 In the Commissioner’s brief, his table of these reported expenses lists “Tele-

phone: $22,475,” apparently accidentally swapping the numbers listed for Telephone and Utilities and omitting the actual Telephone expense number. This is so obviously a proofreading error that we will not treat it as a concession.

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[*40] the $12,477 discrepancy between MRT’s claimed expenses for 2016 and the number the Commissioner disallows in his brief ($1,465,036). For 2017, all numbers are consistent across the notice of deficiency, the Commissioner’s brief, and our own review of the record.

Mr. Risan offers very little to substantiate any of these expenses.

His bookkeeper testified, but she could not identify them: She stated only that she pulled expense numbers off MRT’s profit-and-loss statement . Mr. Risan asserts on brief that these expenses were based on checks written to various parties, with the exception of amortization and depreciation, which are noncash expenses. What’s missing are any of these checks and the identities of the putative payees. We do have Mr. Risan’s personal tax returns that show wages of $1,200 from MRT reported on his W-2, which might account for MRT’s officer compensation expense. Yet even the substantiation of this minor expense is undermined by Mr. Risan’s testimony that he logged a salary “on paper” but never received it. When Mr. Risan’s bookkeeper was asked who was being compensated, she didn’t list Mr. Risan. There is nothing to substantiate that this or any other expense was actually paid or incurred by MRT.

We uphold the Commissioner’s disallowance.

To reflect the foregoing,

Decisions will be entered under Rule 155.