Enayat v. Commissioner of Internal Revenue, T.C. Memo. 2009-257 (U.S.T.C. 11/10/2009)
| Decision Date | 10 November 2009 |
| Docket Number | No. 1489-07.,No. 1488-07.,1488-07.,1489-07. |
| Parties | MOHAMMAD ENAYAT, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. WOODBURY RUG COMPANY, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
William E. Christie, for petitioners.
Daniel P. Ryan and Erika B. Cormier, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Petitioner Mohammad Enayat operated a Persian rug business, in some years through his wholly owned C corporation, petitioner Woodbury Rug Company, Inc. (Woodbury), and in later years through his single-member limited liability company (LLC), Sutter & Hayes. In 1998 through 2001, business revenues and other receipts were deposited into and transferred among various personal and business bank accounts, and Mr. Enayat admits that his bookkeeping was "horrible". For those years Mr. Enayat filed his own returns late and the C corporation's returns late or not at all. The Internal Revenue Service (IRS) issued to Mr. Enayat a statutory notice of deficiency on October 17, 2006, pursuant to section 6212,1 showing the following deficiencies in income tax and additions to tax, respectively, for tax years 1998 to 2001:
Addition to tax Fraud Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6663(a)
1998 $349,442 $87,361 $262,082
1999 65,632 16,408 49,224
2000 110,080 27,520 82,560
2001 29,231 7,308 21,923
On the same date the IRS also issued a notice of deficiency to Woodbury, showing the following deficiencies in income tax and additions to tax, respectively, for tax years 1998 and 1999:
Additions to Tax Fraud Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6651(f) Sec. 6663(a)
1998 $74,010 $18,503 - $55,505
1999 46,499 - $34,837 -
After concessions, the issues for decision are:2
Business Income Issues
(1) Whether Mr. Enayat had unreported constructive dividend income of $203,273 in 1998 and $31,723 in 1999, as a result of his depositing into his personal accounts checks payable to Woodbury. We find that he did.
(2) Whether Mr. Enayat had unreported officer's compensation of $349,356 in 1998 and $67,2003 in 1999, as a result of transferring funds from Woodbury accounts to his personal accounts. We find that he did, and that Woodbury is therefore entitled to deductions in those same amounts.
(3) Whether Woodbury had unreported gross receipts of $246,352 for taxable year 1998. We find that it did.
(4) Whether Woodbury had unreported gross receipts of $162,050 for taxable year 1999. We find that it did.
(5) Whether Mr. Enayat received additional income of $1,228 in 1999 and $252,721 in 2000 from his LLC, Sutter & Hayes. We find that he did.
(6) Whether Mr. Enayat received additional income of $305,101 in 1998 as a result of a transfer from Dr. William Willitts. We find that he did not.
(7) Whether Mr. Enayat is entitled to deduct capital losses of $71,8124 in 1998 and $46,807 in 1999, from the sale of the Elm Street property. We find that he is not.
(8) Whether Mr. Enayat is liable for additions to tax under section 6651(a)(1) for the failure to timely file his tax returns for taxable years 1998 through 2001. We hold that he is.
(9) Whether Mr. Enayat is liable for the fraud penalty under section 6663(a) for the four years 1998 through 2001. We hold that he is liable for the fraud penalty for the three years 1998, 2000, and 2001, but in amounts less than those determined in the notice of deficiency. We hold that Mr. Enayat is not liable for the fraud penalty for the year 1999.
(10) Whether Woodbury is liable for the addition to tax under section 6651(a)(1) for the failure to timely file its tax return for 1998. We hold that it is not.
(11) Whether Woodbury is liable for the fraud penalty under section 6663(a) for the year 1998. We hold that it is not.
(12) Whether Woodbury is liable for the addition to tax under section 6651(f) for the fraudulent failure to file its tax return for the year 1999. We hold that it is.
This case was tried in Boston, Massachusetts, on March 19-20, 2009. The stipulation of facts filed October 20, 2008, the supplemental stipulation of facts filed March 19, 2009, and the attached exhibits are incorporated herein by this reference. At the time Mr. Enayat filed his petition in docket No. 1488-07, he resided in Massachusetts. At the time Woodbury filed its petition in docket No. 1489-07, it was no longer actively engaged in business but had an address in Massachusetts.
Mr. Enayat began working in the Persian rug business when he was 18 years old, and he owned his own store from 1994 through the date of trial. During each of the years at issue, Mr. Enayat was in the business of selling Persian rugs from a retail store in Bedford, New Hampshire. During taxable years 1998 and 1999, Mr. Enayat operated and was the sole shareholder of Woodbury, a C corporation. Towards the end of 1999, Mr. Enayat formed a limited liability company known as Sutter & Hayes, LLC (Sutter), and began operating his business through this entity. During the years 1999 through 2001, Mr. Enayat was the sole member of Sutter. Mr. Enayat maintained various bank accounts in his own name and in the names of Woodbury and Sutter. However, in the manner described below, business receipts were sometimes deposited in personal accounts, and money was transferred between business and personal accounts without documentation being maintained to justify or explain the transfers. Mr. Enayat admits, "I treated both myself and Woodbury, and [his investment accounts at] Oppenheimer, and Merrill Lynch, and Citibank and — I treated it all as one."
As a retail seller of Persian rugs, Woodbury acquired rugs from wholesale vendors and then sold them to its own customers, making its money from those sales. Petitioners—Mr. Enayat and Woodbury—did not offer into evidence any records of Woodbury sufficient to show the amount of its sales in 1998 or 1999. Woodbury reported gross sales receipts of $1,168,759 on its return for 1998, but at trial Mr. Enayat did not explain how he had arrived at this figure; and Woodbury's return preparer testified that he did not recall what he was given to support the sales total. For 1999 Woodbury did not file a return and therefore did not report receipts in any amount for that year.
In its examination, the IRS performed a bank deposits analysis to determine the amount of Woodbury's gross receipts for 1998 and 1999. The IRS began with the gross deposits into Woodbury's bank accounts and reduced them by any identifiable non-taxable5 item (e.g., cash deposits,6 transfers between accounts, deposits whose source could not be identified or which were not readily apparent as business receipts, insurance proceeds, and returned checks) to get net taxable deposits. The IRS then added to the net deposits all the checks payable to Woodbury that were deposited in Mr. Enayat's personal account (discussed infra beginning at page 10 as "diverted" checks) because those checks should have been deposited into Woodbury's accounts (and thereby should have shown up as gross receipts). However, to accurately reflect Woodbury's gross receipts, the IRS then reduced its calculation for any transfers Mr. Enayat made from his personal accounts to Woodbury's corporate accounts, so as to prevent double-counting or the taxing of any clearly non-taxable items. These reductions included money flowing from Mr. Enayat to Woodbury that were capital contributions, see infra note 34, or that were transfers from Mr. Enayat to repay diverted Woodbury checks that Mr. Enayat had deposited in his personal account, since the diverted checks had already been added to net deposits.
By its bank deposits analysis, the IRS determined that Woodbury had additional gross receipts in taxable year 1998, as follows:
Bank Account Gross Deposits Non-Taxables Net Deposits
Fleet Bank
Account No. 9632 $162,289.53 $151,743.53 $10,546.00
Granite Bank
Account No. 0540 778,408.49 611,664.78 166,743.71
Bank of NH
Account No. 7435 2,193,660.33 1,271,624.11 922,036.22
Granite Bank
Account No. 0492 145,074.14 31,520.98 113,553.16
____________ ____________ _____________
Total 3,279,432.49 2,066,553.40 1,212,879.09
Less: Gross receipts per 1998 Form 1120 (1,168,759.00)
____________
Unreported gross receipts 44,120.09
Plus: Diverted checks 203,273.00
____________
Total unreported gross receipts for 1998 247,393.09
As is shown above, that $247,393 represents the difference between Woodbury's reported gross receipts on its 1998 Form 1120, U.S. Corporation Income Tax Return, and the net taxable deposits as calculated in the IRS's bank deposits analysis, plus the checks made out to Woodbury and diverted into Mr. Enayat's personal accounts (which should have been deposited into Woodbury's accounts but were not). We find that the IRS's analysis was reasonable and that Woodbury had additional receipts of $246,352.7
The IRS did an equivalent analysis for 1999. For that year Woodbury had failed to file its Form 1120, so there is no Woodbury-generated number against which to compare the IRS's analysis. As it had for 1998, the IRS totaled Woodbury's gross deposits for 1999, reduced them by any identifiable non-taxable item (including any transfers from Mr. Enayat's personal accounts), and then...
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