Victor Attisha & Josephine Attisha ( 2023 )

United States Tax Court
T.C. Memo. 2023-150VICTOR ATTISHA AND JOSEPHINE ATTISHA,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 21857-19. Filed December 18, 2023.
—————
Venar R. Ayar, Joseph Falcone, and Hayden G. Leithauser, for petitioner
Victor Attisha.
Chelsea Megan Rebeck and Justin G. Esshaki, for petitioner Josephine
Attisha.
Alissa L. VanderKooi and Daniel James White, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARSHALL, Judge: In a notice of deficiency dated November 8,
2019, and a supplement to the notice of deficiency dated November 27,
2019, respondent determined a deficiency of $211,451 and a section
6662(a) 1 accuracy-related penalty of $42,290 for petitioners’ 2017 tax
year (year at issue). On December 10, 2019, petitioners timely filed a
Petition disputing the notice of deficiency and the supplement to the
notice of deficiency.
1 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. Except
where otherwise indicated, monetary amounts are rounded to the nearest dollar.
Served 12/18/23
2
[*2] The issues for decision are (1) whether petitioners had unreported
income of $512,777 for the year at issue from the sale of marijuana and
(2) whether petitioners are liable for a section 6662(a) accuracy-related
penalty of $42,290.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
stipulation of facts and the accompanying exhibits are incorporated
herein by reference. Petitioners resided in Michigan when they filed
their Petition. 2
During the year at issue, petitioner operated several businesses
and reported income from those businesses on petitioners’ jointly filed
federal income tax return for the taxable year ended December 31, 2017
(2017 return). On the 2017 return Victor Attisha’s occupation was listed
as “Credit Card Sales” and Josephine Attisha’s occupation was listed as
“Homemaker.” The 2017 return was prepared by Robert J. Kainaya, a
licensed accountant in the State of Michigan. On the 2017 return
petitioners reported the following income: (1) rental income of $18,000
on Schedule E, Supplemental Income and Loss; (2) nonpassive
partnership income of $147,646 on Schedule E, from Platinum
Processing Services, LLC (Platinum Processing); (3) gross receipts of
$27,124 reported on Schedule C, Profit or Loss From Business, for an
ATM Sales/Credit Card Sales business; (4) gross receipts of $63,656 from
a Schedule C business, Merchant Banking-ATM Machines with the
business name A&S ATM, LLC (A&S ATM); (5) wages of $100,000 from
Platinum Processing to petitioner reported on a Form W–2, Wage and
Tax Statement; and (6) wages of $4,137 from Vincent Attisha to
petitioner reported on a Form W–2. Petitioners did not report any
income or activity on the 2017 return from the sale of marijuana or the
operation of a marijuana business.
As discussed in detail below, petitioner operated several
businesses during the year at issue. Platinum Processing was a credit
card processing company organized as a domestic limited liability
company under the laws of the State of Michigan on May 2, 2008.
2 In a Stipulation of Settled Issues filed on May 6, 2021, the parties stipulated
that if the Court determines “that there is a deficiency in income tax as well as any
penalties due from petitioners for the 2017 taxable year, the parties agree that
petitioner Josephine Attisha is entitled to relief from joint and several liability for the
2017 taxable year pursuant to [section] 6015(c).” Accordingly, any further reference to
“petitioner” in this Opinion refers only to Victor Attisha.
3
[*3] Petitioner was a member of Platinum Processing along with his
partner Sabah Ammouri (Ammouri). Petitioner and Ammouri each
owned 50% of Platinum Processing. Platinum Processing was located at
John R. Road, Hazel Park, Michigan (John R. Road location).
A&S ATM was organized as a domestic limited liability company
under the laws of the State of Michigan on June 7, 2016. Petitioner was
listed as the resident agent of A&S ATM in the 2017 annual statement
filed with the State of Michigan on November 10, 2016.
ATM of America, Inc. (ATM of America), was incorporated under
the laws of the State of Michigan on November 29, 2001. The 2017
annual report for ATM of America lists Ammouri as its resident agent,
and the August 17, 2007, amendment to the articles of incorporation of
ATM of America lists Ammouri as its president. Ammouri, his sister,
Lydia Sitto, and her husband, Jason Sitto, were the owners of ATM of
America. Petitioner represented himself as a salesperson of ATM of
America. ATM of America was co-located with Platinum Processing at
the John R. Road location. Several other businesses were also co-located
at the John R. Road location.
Holy Moly Donut Distribution, LLC (Holy Moly Donut
Distribution), was organized under the laws of the State of Michigan on
December 11, 2017. Holy Moly Donut Shop, Inc. (Holy Moly Donut
Shop), was incorporated under the laws of the State of Michigan on June
8, 2017. Petitioner was the resident agent and an incorporator of Holy
Moly Donut Shop. There was also a second store, in the name of Holy
Moly Donut Shop #2, Inc. (Holy Moly Donut Shop 2). The record does
not contain the incorporation date, incorporator, or resident agent of
Holy Moly Donut Shop 2. Holy Moly Donut Shop shared a commercial
building with Unified Collective, an unlicensed marijuana dispensary,
located at West Eight Mile Road, Detroit, Michigan (Eight Mile Road
location).
In 2017 petitioner resided at Gemini Drive, Sterling Heights,
Michigan. Drug Enforcement Administration (DEA) Special Agent
Edward Dosch (Special Agent Dosch) was assigned to a task force in
2017 that investigated illegal drugs. Through an investigation in
Oakland County, Michigan, Special Agent Dosch learned of petitioner
and petitioner’s potential involvement in manufacturing and
distributing marijuana. On October 3, 2017, Special Agent Dosch
executed a federal search warrant at petitioner’s home. During the
execution of the search warrant, items including U.S. currency,
4
[*4] marijuana, four cellular phones, an iPad, and documents were
seized. During its investigation, the DEA identified six telephone
numbers associated with petitioner, which were related to the four
cellular phones that were seized. The DEA retrieved information,
including text messages, pictures, and notes from the four cellular
phones that were seized from petitioner’s home using standard DEA
procedures. The evidence included text messages from telephone
numbers associated with petitioner by which he communicated with
associates, customers, and suppliers of a marijuana operation during the
year at issue. The evidence also included ledgers that contained the
name, quantity, price (in some cases), and dollar value of marijuana
strains; some ledger entries were undated while others were dated in
the 2016 and 2017 tax years.
Simultaneously with the search at petitioner’s residence, DEA
agents executed a federal search warrant at West Seven Mile Road,
Detroit, Michigan (Seven Mile Road location), another location
associated with petitioner. Petitioner, and others, operated a business
out of the Seven Mile Road location called Elevated Treats, which
manufactured marijuana edibles. During the execution of the search
warrant, items including sheets of paper containing suspected
marijuana wax, receipt books, notebooks with handwritten notations,
and a photocopy of petitioner’s driver’s license were seized. One of the
seized items, a notebook, included detailed lists of quantities of
suspected marijuana strains, the purchase prices, and the dates. At trial
the Court admitted this notebook into evidence.
On February 14, 2018, DEA agents executed a federal search
warrant at the Eight Mile Road location for Holy Moly Donut Shop and
Unified Collective and seized U.S. currency. On the same date, DEA
agents executed a federal search warrant at the John R. Road location
and seized U.S. currency.
Petitioner was a defendant in criminal case No. 2:18-cr-20668,
United States of America v. Junior Asmar, Victor Attisha, and James
Shammas, in the Eastern Judicial District of Michigan. In a grand jury
indictment filed on October 4, 2018, petitioner was charged with one
count of Conspiracy to Manufacture, Possess With Intent to Distribute,
and Distribute Marijuana; five counts of Possession with Intent to
Distribute Marijuana & Aiding and Abetting; one count of
Manufacturing Marijuana & Aiding and Abetting; one count of
Conspiracy to Launder Monetary Instruments; and one count of
Conspiracy to Structure Currency Transactions. In a plea agreement
5
[*5] filed on June 25, 2019, petitioner pleaded guilty to Conspiracy to
Manufacture, Possess with Intent to Distribute, and Distribute
Marijuana. The other counts against petitioner were dismissed in
exchange for his plea. In the plea agreement, petitioner admitted that
he and others operated an unlicensed marijuana dispensary called
Unified Collective at the Eight Mile Road location. The plea agreement
also states that petitioner and others “cultivated and grew marijuana in
commercial and residential growing operations . . . secreted in the
Detroit metropolitan area and sold the marijuana in the Detroit
metropolitan area.” Finally, the plea agreement states that petitioner
and others “purchased hundreds of pounds of marijuana worth over $1
million from suppliers in California and elsewhere, to sell in the Detroit
metropolitan area.”
As part of petitioner’s plea agreement, he agreed, pursuant to 21
U.S.C. § 853, to forfeit to the United States the following assets:
(a) Fifty Thousand Dollars ($50,000.00) in U.S. Currency
in Safe Deposit Box #[XXXX], located at JP Morgan
Chase Bank,[3]
(b) Twenty-One Thousand Six Hundred Ninety-Eight
Dollars ($21,698.00) in U.S. Currency seized from a
residence in Bloomfield Hills, Michigan on February 14,
2018;
(c) One Hundred Twelve Thousand Five Hundred Twenty
Dollars ($112,520.00) in U.S. Currency seized from the
John R. Road location on February 14, 2018;
(d) Approximately Ninety-Nine Thousand Three Hundred
and Seventy Dollars and Twenty-Six Cents ($99,370.26)
on deposit seized from JP Morgan Chase Bank N.A.,
Checking Account No. ending 9573;
(e) One Thousand Six Hundred Eighty-Five Dollars
($1,685.00) in U.S. Currency seized from Holy Moly
Donut Shop on February 14, 2018;
(f) Approximately Two Hundred Sixty-Eight Thousand
Five Hundred Thirty-Five Dollars and Ninety-Seven
Cents ($268,535.97) on deposit seized from JP Morgan
Chase Bank, N.A., Checking Account No. ending 3236;
3 The Contract Entry Card for the safe deposit box states that the joint lessees
of the safe deposit box were Jason Sitto, Lydia Sitto, and Ammouri.
6
[*6] (g) Thirty-Eight Thousand and Eighty-Eight Dollars
($38,088.00) in U.S. Currency seized from Unified
Collective on February 14, 2018;
(h) Approximately One Hundred Six Thousand Four
Hundred Forty Dollars and Eighty-Two Cents
($106,440.82) on deposit seized from JP Morgan Chase
Bank, N.A., Checking Account No. ending 2339;
(i) Approximately Ten Thousand Dollars ($10,000.00) on
deposit seized from JP Morgan Chase Bank, N.A.,
Checking Account No. ending 8903; and
(j) Four Thousand Four Hundred Thirty-Nine Dollars
($4,439.00) in U.S. Currency seized from Holy Moly
Donut Shop on August 21, 2018.
The forfeited assets 4 listed above totaled $512,777. 5 Additionally, in the
plea agreement, petitioner agreed “that there is a sufficient nexus
between [the assets subject to forfeiture] and his violations.” Petitioner
signed the plea agreement and dated it June 1, 2019.
At petitioner’s sentencing hearing his criminal defense attorney
explained to the court that petitioner had agreed to forfeit
approximately $500,000 and acknowledged to the court that there would
be a tax assessment on the forfeiture. 6 Additionally, petitioner
4 Ammouri filed an administrative claim with the DEA for a return of (1) the
$50,000 seized from Safe Deposit Box #[XXXX]; (2) the $21,698 seized from the
residence in Bloomfield Hills, Michigan, which was Ammouri’s residence; and (3) the
$112,520 seized from the John R. Road location. The DEA agreed to return the $50,000
seized from the safe deposit box and the $21,698 seized from the residence in
Bloomfield Hills, Michigan but not the $112,520 seized from the John R. Road location.
5 The Government agreed to return to petitioner $200,000 of the $268,535.97
seized from JP Morgan Chase Bank, N.A., Checking Account No. ending 3236, less any
claims of the Government. This $200,000 is excluded from the $512,777 total noted
above.
6 MR. KRIGER: No. We agreed to forfeit. They seized 500 and some
thousand dollars of which we -- or 700 and some -- and we forfeited 500
and some thousand, and there’s going to be a tax assessment on that.
THE COURT: Okay. And so the amount given back to Mr. Attisha was
–
THE DEFENDANT: Nothing.
MR. KRIGER: Nothing. The IRS is taking that for past taxes on the
marijuana proceeds. So he’s getting nothing back, although he can use
some of it for his tax liability.
7
[*7] addressed the court before his sentencing. Petitioner acknowledged
to the court that he was involved in an unlicensed and illegal marijuana
business for financial reasons. 7
After the February 14, 2018 seizure, where the DEA seized
(1) $50,000 from Safe Deposit Box #[XXXX], (2) $21,698 seized from
Ammouri’s residence in Bloomfield Hills, Michigan, and (3) $112,520 in
U.S. currency seized from the John R. Road location, the DEA served
notice of the administrative forfeiture proceedings on all interested
parties. On April 2 and 10, 2018, Ammouri filed administrative claims
of ownership with the DEA as to items (1)–(3) described above. On
February 15, 2019, Ammouri and the DEA entered into a Memorandum
of Agreement with respect to the seized assets described above. The
Memorandum of Agreement states that the parties wished to resolve the
matter without incurring further litigation and that therefore certain of
the seized assets were returned to Ammouri. Ammouri and the DEA also
stipulated that the $112,520 seized from the John R. Road location was
forfeited to the United States of America pursuant to 21 U.S.C.
§ 881(a)(6) and that Ammouri’s right, title, or interest in the $112,520
was forever extinguished.
The parties have stipulated certain Exhibits including
petitioner’s bank records for his personal account and business accounts
for Holy Moly Donut Shop and Holy Moly Donut Distribution. 8 The bank
statements for petitioner’s personal account were for the period
December 21, 2017, through March 20, 2018. The bank statements for
Holy Moly Donut Distribution were for the period January 26 through
February 28, 2018. The bank statements for Holy Moly Donut Shop were
for the period December 30, 2017, through February 28, 2018. Petitioner
received a $500,000 check from ATM of America dated January 4, 2018,
signed by Lydia Sitto and then deposited that check into one of the bank
Ex. 5-J, 20 of 31.
7 Your Honor, I wrote some things down for the past few months
thinking of what I would say when I came to see you on this day.
Your Honor, I know that I made some very poor choices in getting
involved in the business that is federally illegal. I was making a good
living, and there was simply no reason to engage in conduct that I knew
to be illegal other than for money.
Ex. 5-J, 21 of 31.
8 This includes the bank statements for Holy Moly Donut Shop and Holy Moly
Donut Shop 2.
8
[*8] accounts for Holy Moly Donut Shop. 9 Subsequently, amounts that
nearly totaled the original $500,000 deposit were transferred to other
business bank accounts for Holy Moly Donut Shop, Holy Moly Donut
Distribution, and petitioner’s personal bank account.
Additionally, at trial the Court admitted into evidence petitioner’s
Proposed Trial Exhibit 15-P titled “Membership Interest Purchase
Agreement for Platinum Processing,” dated December 4, 2017 (Purchase
Agreement). The Exhibit is a contract for the sale of petitioner’s 50%
membership interest in Platinum Processing to Platinum Processing
(through an assignment of his membership interest to Platinum
Processing) wherein he would sell his interest in Platinum Processing
for a purchase price equal to (i) Platinum Processing’s cash on hand as
of the closing date, plus (ii) $1,500,000, minus (iii) a “customer attrition
adjustment” as defined in the Purchase Agreement. The Purchase
Agreement stated that a portion of the purchase price equal to (i) the
cash on hand as of the closing, plus (ii) $1,200,000 was to be paid to
petitioner on the closing date.
Paragraph 5 of the Purchase Agreement defined the closing and
closing date as occurring “at 10 am on December 31, 2017 or at such time
and date as the parties may agree.” The remainder of the purchase price
was to be paid on the first and second anniversaries of the closing date
subject to the customer attrition adjustment. The Purchase Agreement
states that the purchase price was to be paid by the “Company” which is
defined in the Purchase Agreement as “Platinum Processing Services,
LLC.” The Purchase Agreement was signed by petitioner as the seller
and Ammouri on behalf of Platinum Processing as the buyer.
In August 2019 respondent assigned a revenue agent to review
petitioner’s tax liability for the year at issue and to determine whether
a jeopardy assessment was appropriate. The revenue agent noticed that
the 2017 return did not report any income from the sale of marijuana.
The revenue agent reviewed the following information during the course
of her investigation: (1) two search warrants from 2017, (2) three search
warrants from 2018, (3) records regarding bank accounts and safe
deposit boxes seized by the DEA, (4) petitioner’s indictment, (5) court
documents on PACER, (6) petitioner’s plea agreement, (7) petitioner’s
tax returns for 2016 and 2017, and (8) Platinum Processing’s Form 1065,
U.S. Return of Partnership Income, for 2017.
9 The memo line on the check states “Acquisition of Platinum.”
9
[*9] On September 6, 2019, the revenue agent interviewed petitioner
at his attorney’s office. Petitioner answered basic background questions
about himself but refused to answer any questions regarding income
generated from marijuana manufacturing and sales. Petitioner also
failed to provide the revenue agent with documents that she requested.
On September 20, 2019, respondent made a jeopardy assessment
against petitioners for the year at issue of $358,744, which comprised a
tax deficiency of $298,953 and a section 6662(a) accuracy-related
penalty of $59,791. Petitioners filed an administrative appeal of the
jeopardy assessment, and that administrative appeal was considered by
respondent’s Independent Office of Appeals (Office of Appeals). After
further consideration of the jeopardy assessment by the Office of
Appeals, respondent’s proposed increase to petitioner’s gross business
income was reduced by $200,000. Shortly thereafter, respondent issued
the notice of deficiency on November 8, 2019.
On November 27, 2019, respondent issued a Letter 555T and an
examination report supplementing the notice of deficiency reflecting a
reduction to the tax increase determined in the notice of deficiency for
the year at issue. Because of this reduction, the total jeopardy
assessment for the year at issue was correspondingly reduced to
$253,741, which comprises a tax deficiency of $211,451 and a section
6662(a) accuracy-related penalty of $42,290. Neither petitioner filed a
request for judicial review under section 7429(b) after the Office of
Appeals’ consideration of the jeopardy assessment.
OPINION
I. Jurisdiction
The parties do not dispute that respondent issued a valid notice
of deficiency and that petitioners timely petitioned the Court. See Rule
13(a), (c); Hallmark Rsch. Collective v. Commissioner, 159 T.C. 121, 131
(2022); Monge v. Commissioner, 93 T.C. 22, 27 (1989); Normac, Inc. v.
Commissioner, 90 T.C. 142, 147 (1988). The notice of deficiency has been
described as “the taxpayer’s ticket to the Tax Court” because without it,
there can be no prepayment judicial review by this Court of the
deficiency determined by the Commissioner. Mulvania v. Commissioner,
81 T.C. 65, 67 (1983). Because of the section 6213(a) restrictions on
assessment, the deficiency cases that come to our Court are typically
preassessment. But section 6213(a) makes an exception for “jeopardy
assessments” under section 6861, and that section authorizes the
10
[*10] Commissioner to assess a deficiency even before issuing a notice
of deficiency if he believes the assessment or its collection will be
jeopardized by delay. Where the Commissioner has made a jeopardy
assessment before a decision of the Court has been issued, the Court has
jurisdiction to redetermine the entire amount of the deficiency and of all
the amounts assessed at the same time in connection with it. § 6861(c);
Treas. Reg. § 301.6861-1(c).
II. Burden of Proof
Ordinarily, the statutory notice of deficiency carries with it a
presumption of correctness which places the burden on the taxpayer to
show that the Commissioner’s determination is erroneous. Rule 142(a);
Helvering v. Taylor, 293 U.S. 507, 515 (1935); Welch v. Helvering, 290
U.S. 111, 115 (1933); United States v. Walton, 909 F.2d 915, 918 (6th
Cir. 1990); Traficant v. Commissioner, 884 F.2d 258, 263 (6th Cir. 1989),
aff’g 89 T.C. 501 (1987); Calderone v. United States, 799 F.2d 254, 258
(6th Cir. 1986); Schrader v. Commissioner, 420 F.2d 443, 444 (6th Cir.
1970), remanding per curiam T.C. Memo. 1968-224; Garavaglia v.
Commissioner, T.C. Memo. 2011-228, 102 T.C.M. (CCH) 286, 298, aff’d,
521 F. App’x 476 (6th Cir. 2013). The Supreme Court has stated that a
“‘naked’ assessment without any foundation whatsoever” is “not
properly subject to the usual rule with respect to the burden of proof in
tax cases” and is arbitrary and erroneous. See United States v. Janis,
428 U.S. 433, 441–42 (1976); see also Weimerskirch v. Commissioner, 596
F.2d 358, 362 (9th Cir. 1979) (concluding that the “Court erred in finding
that the presumption of correctness attached to the deficiency
determination” and “[a] deficiency determination which is not supported
by the proper foundation of substantive evidence is clearly arbitrary and
erroneous”), rev’g 67 T.C. 672 (1977). “In the context of unreported
income, the Court of Appeals for the Sixth Circuit has held that before
the notice of deficiency is entitled to a presumption of correctness, such
determinations must be supported by at least a ‘minimal’ factual
predicate or foundation of substantive evidence linking the taxpayer to
the income-producing activity or to the receipt of funds.” Garavaglia,
102 T.C.M. (CCH) at 298 (first citing Walton, 909 F.2d at 918–919; and
then citing Richardson v. Commissioner, T.C. Memo. 2006-69, 91 T.C.M.
(CCH) 981, 989, aff’d, 509 F.3d 736 (6th Cir. 2007)). 10
10 Absent a stipulation to the contrary, this case is appealable to the Sixth
Circuit, and we follow the precedent of that court that is squarely on point. See
11
[*11] Where taxpayers establish by a preponderance of the evidence
that the Commissioner’s determinations are arbitrary and excessive,
then the notice of deficiency is no longer presumed correct. Helvering v.
Taylor, 293 U.S. at 515; Traficant v. Commissioner, 884 F.2d at 263.
III. Respondent’s Burden of Production Where Income Is Earned
Through Illegal Activities
In cases where the Commissioner has alleged that the taxpayer
received unreported income from illegal activities, courts have held that
the Commissioner has satisfied his burden to show that the
determination had a minimal evidentiary foundation by introducing
evidence that establishes a nexus between the taxpayer and the activity
that, the Commissioner asserts, generated the unreported income. See
Solimene v. Commissioner, T.C. Memo. 1982-370, 44 T.C.M. (CCH) 321,
324 (first citing Suarez v. United States, 582 F.2d 1007, 1010 n.3 (5th
Cir. 1978); then citing Llorente v. Commissioner, 649 F.2d 152 (2d Cir.
1981), aff’g in part, rev’g in part 74 T.C. 260 (1980); then citing
Weimerskirch v. Commissioner, 596 F.2d 358; and then citing Jackson
v. Commissioner, 73 T.C. 394 (1979)).
Petitioner argues that the notice of deficiency and the supplement
to the notice of deficiency are not supported by substantive evidence and
therefore respondent has the burden of proving any alleged tax
deficiency. Specifically, petitioner argues that respondent did not
provide any direct evidence linking petitioner to any income-producing
activity. Additionally, petitioner argues that even if respondent
established a direct link between petitioner and the income-producing
activity, respondent’s calculation of petitioner’s income is not supported
by substantive evidence.
Respondent argues that the presumption of correctness applies
here because he linked petitioner with the income-producing activity
(i.e., illegal marijuana manufacturing and sales) during the year at
issue. Respondent further argues that he linked petitioner with the
income-producing activity through items seized from petitioner’s home
and other locations that were associated with petitioner, petitioner’s
criminal indictment, his plea agreement, petitioner’s forfeiture of assets
in connection with his plea agreement, and statements made by
petitioner and his counsel during petitioner’s sentencing hearing.
§ 7482(b)(1); Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th
Cir. 1971).
12
[*12] Turning to respondent’s calculation of petitioner’s income for the
year at issue, respondent argues that he had “great latitude in
reconstructing petitioner’s income from the illegal sale of marijuana
during the 2017 tax year” because petitioner failed to keep books and
records, refused to answer the Internal Revenue Service (IRS) revenue
agent’s questions about income that he received from the sale of
marijuana in 2017, and failed to provide respondent with requested
documents. Respondent argues that, absent this information and
considering the other evidence that linked petitioner with the income-
producing activity the year at issue, it was reasonable for him to
determine that the $512,777 that petitioner agreed to forfeit to the
Government as part of his plea agreement was income during the year
at issue from illegal marijuana manufacturing and sales.
For the reasons discussed below, we agree with respondent and
hold that (1) the presumption of correctness attaches to the unreported
income determination in the supplement to the notice of deficiency,
(2) petitioner has not satisfied his burden to produce evidence showing
that respondent’s determination is arbitrary and excessive, and
(3) respondent’s calculation of petitioner’s income for the year at issue
was not arbitrary or erroneous in the light of the evidence connecting
petitioner with the income-producing activity, including his criminal
forfeiture of $512,777, his failure to maintain books and records, and his
failure to cooperate with the IRS revenue agent regarding income that
he received from his illegal marijuana business.
As discussed above, in order for the presumption of correctness to
attach to the Commissioner’s determination of unreported income, the
determination must be supported by a minimal evidentiary foundation.
Garavaglia, 102 T.C.M. (CCH) at 298. In cases where the Commissioner
asserts that the taxpayer generated unreported income through illegal
activity, the minimal evidentiary foundation requirement is satisfied
where evidence in the record shows a nexus between the taxpayer and
the illegal tax-generating activity. Solimene, 44 T.C.M. (CCH) at 324.
Petitioner has not established by a preponderance of the evidence
that respondent’s determinations are arbitrary and excessive. Petitioner
did not offer any testimony explaining why the amounts forfeited were
not his despite conceding in his plea agreement that there was a
“sufficient nexus between [the assets subject to forfeiture] and his
violations.” In the light of his plea agreement, it strains credulity to
believe that petitioner agreed to forfeit assets that were not, in fact, his.
13
[*13] Instead, petitioner argues on brief that the amounts forfeited
were not his because there was no evidence that he owned the
dispensary or made income from the sale of marijuana. Petitioner
attempts to bolster this argument by further asserting that (1) he did
not have a leadership role in the organization but was only one of several
co-conspirators and (2) the items seized from petitioner’s residence do
not prove that he was the mastermind of the conspiracy. Additionally,
petitioner attempts to draw parallels between the present case and
Weimerskirch v. Commissioner, 596 F.2d 358, and Jackson, 73 T.C. 394.
In Weimerskirch v. Commissioner, 596 F.2d at 359, the notice of
deficiency was premised on the Commissioner’s determination that the
taxpayer was in the drug business. An IRS revenue agent called by the
taxpayer testified that the determination was based on statements of
unidentified informants and information supplied to the IRS by law
enforcement agencies. Weimerskirch, 67 T.C. at 673–74. The
Commissioner, however, did not present any direct evidence linking the
taxpayer with the drug business; instead, the Commissioner called no
witnesses and introduced no evidence at all. Weimerskirch v.
Commissioner, 596 F.2d at 359. Relying substantially on Janis, the U.S.
Court of Appeals for the Ninth Circuit held that the Commissioner’s
notice of deficiency was unsupported by the proper foundation of
substantive evidence and was arbitrary and excessive. Id. at 362.
In Jackson, 73 T.C. at 396–97, the notice of deficiency was also
premised on the Commissioner’s determination that the taxpayer was
in the drug business. The Commissioner again failed to present any
direct evidence to support that determination. Id. at 402. Instead,
similarly to Weimerskirch, the only evidence provided was the testimony
of an IRS revenue agent and a DEA special agent, neither of whom could
testify as to any direct contact with the taxpayer or his activities during
the relevant period. Id. at 400, 402–03. Concluding that the notice of
deficiency was based solely on the IRS revenue agent’s reliance “on a
secondhand report of peripheral statements made by an unreliable
informant [to the DEA special agent],” like the court of appeals in
Weimerskirch, the Court held the Commissioner’s determination
arbitrary and excessive. Id. at 403.
Initially, we note that both Weimerskirch and Jackson were
“naked assessment” cases where the Commissioner failed to introduce
direct evidence linking the taxpayer with the tax-generating activity.
The facts of the instant case are thus inapposite to Weimerskirch and
Jackson. Here, the notice of deficiency and the supplement to the notice
14
[*14] of deficiency were based on evidence that directly linked petitioner
with the manufacture and sale of marijuana.
The factual differences between Weimerskirch and Jackson and
the present case are significant. In October 2017 the DEA executed
search warrants at petitioner’s home and other locations linked with
petitioner and seized marijuana, cash, cellular phones, drug ledgers,
and notes. As discussed above, the items seized from petitioner’s home
included U.S. currency, marijuana, four cellular phones, an iPad, and
documents. These documents included ledgers with some undated
entries and some entries dated in the 2016 and 2017 tax years; the
ledgers contained the names, quantities, prices (in some cases), and
dollar values of marijuana strains. The evidence also included text
messages from telephone numbers associated with petitioner in which
he communicated with associates, customers, and suppliers of a
marijuana operation during the year at issue. The items seized from the
Seven Mile Road location (an address at which petitioner operated a
marijuana edibles business, Elevated Treats) included sheets of paper
containing suspected marijuana wax, receipt books, notebooks with
handwritten notations, and a photocopy of petitioner’s driver’s license.
Additionally, one of the seized items, a notebook, included detailed lists
of quantities of suspected marijuana strains, the purchase prices, and
the dates. In February 2018 the DEA executed a search warrant at the
Eight Mile Road location and seized U.S. currency. Before issuing the
notice of deficiency, respondent also reviewed petitioner’s indictment,
which described the Government’s investigation and the evidence
seized, and set forth petitioner’s alleged involvement in an illegal
marijuana business during 2017.
In addition to this evidence, respondent relied on petitioner’s plea
agreement, wherein he pleaded guilty to Conspiracy to Manufacture,
Possess with Intent to Distribute, and Distribute Marijuana. In the plea
agreement petitioner admitted to operating a marijuana dispensary,
growing marijuana in commercial and residential growing operations,
selling the marijuana in the Detroit metropolitan area, and purchasing
hundreds of pounds of marijuana to sell in the Detroit metropolitan
area. Additionally, in the plea agreement petitioner agreed to forfeit
$512,777 of assets and specifically agreed “that there is a sufficient
nexus between [the assets subject to forfeiture] and his violations.”
Moreover, at his sentencing hearing petitioner admitted that he
engaged in this illegal business for financial gain. Finally, at the
sentencing hearing petitioner’s criminal attorney explained to the court
that petitioner agreed to forfeit approximately $500,000 and
15
[*15] acknowledged that there would be a tax assessment on the
forfeiture which he described as “the marijuana proceeds.”
The facts of this case stand in stark contrast to those of
Weimerskirch and Jackson. Unlike those cases, where the notices of
deficiency were based on statements of unidentified or unreliable
informants and certain information that was given to the Commissioner
by law enforcement agencies, this case involves a notice of deficiency and
a supplement to the notice of deficiency that were based on many
different documents directly linking petitioner with the tax-generating
activity. Specifically, the notice of deficiency and the supplement to the
notice of deficiency were based on the following key items: (i) evidence
seized by law enforcement agencies at petitioner’s home and other
locations associated with petitioner, (ii) the grand jury indictment,
(iii) petitioner’s plea agreement and forfeiture of $512,777 that he
admitted had a sufficient nexus to the crime that he pleaded guilty to,
and (iv) the sentencing hearing transcript where petitioner and his
counsel made statements to the court acknowledging that he had
engaged in an illegal marijuana manufacturing and sales business and
that the forfeited assets (that had a sufficient nexus to the violations)
would be subject to tax. See also Barrington v. Commissioner, T.C.
Memo. 2022-68, at *7 (sustaining the Commissioner’s unreported
income determination where the Commissioner reasonably
reconstructed taxpayers’ unreported income using admissions in
taxpayers’ plea agreements); McHan v. Commissioner, T.C. Memo.
2006-84, 91 T.C.M. (CCH) 1069, 1072 (holding that taxpayer’s arrest,
guilty plea, subsequent criminal convictions for engaging in the illegal
sale of marijuana, criminal forfeitures, and the testimony of various co-
conspirators and taxpayer that he was involved in a conspiracy to
possess and to sell marijuana were sufficient to support Commissioner’s
unreported income determination), aff’d, 558 F.3d 326 (4th Cir. 2009);
Franklin v. Commissioner, T.C. Memo. 1993-184, 65 T.C.M. (CCH) 2497,
2501.
At trial petitioner objected to the introduction into evidence of
most of the items listed above on the basis of hearsay, lack of foundation,
and authentication. The Court generally overruled these objections and
admitted the Exhibits and related testimony into evidence, subject to
the parties’ addressing their weight on brief. Nonetheless, we note that
this Court has held that it will not find a statutory notice of deficiency
to be arbitrary and excessive just because the determination has been
based on hearsay or other inadmissible evidence. See Trescott v.
Commissioner, T.C. Memo. 2012-321, at *6–7 (citing Dellacroce v.
16
[*16] Commissioner, 83 T.C. 269, 280 (1984)); see also Rosano v.
Commissioner, 46 T.C. 681, 687 (1966). Thus, even if all of the items
listed above were hearsay or otherwise inadmissible (which we do not
find), respondent was permitted to base the determination in the notice
of deficiency on them.
We find that respondent has met his burden of introducing
evidence linking petitioner with the illegal activity upon which the
notice of deficiency and the supplement to the notice of deficiency are
based because respondent has produced substantive evidence of
petitioner’s extensive activities in illegally manufacturing and selling
marijuana in 2017. Accordingly, we find that respondent’s
determinations in the notice of deficiency and the supplement to the
notice of deficiency were supported by an evidentiary foundation and are
entitled to the presumption of correctness. 11 Petitioner, therefore, has
the burden of proving that respondent’s determinations are arbitrary or
erroneous. As discussed below, petitioner has failed to carry this burden.
IV. Petitioner’s Rebuttals of the Determinations in the Notice of
Deficiency
A. Whether the Seized Assets Were Generated by a Marijuana
Business in 2017
Petitioner argues that he has met his burden of rebutting the
determinations in the notice of deficiency and the supplement to the
notice of deficiency because (1) the seized assets were traced to money
from the sale of petitioner’s business, Platinum Processing, (2) the
assets belonged to third parties, and (3) the assets were other cash
receipts from 2018. In support of these contentions, petitioner
introduced into evidence (i) the Purchase Agreement for Platinum
Processing, (ii) a check for $500,000 from ATM of America to petitioner
dated January 4, 2018, and (iii) certain bank statements for Holy Moly
Donut Shop, Holy Moly Donut Shop 2, Holy Moly Distribution, and one
of petitioner’s personal bank accounts. Petitioner argues that this
evidence shows that the seized assets were income from the sale of his
11 At trial petitioner objected to introducing into evidence respondent’s
proposed trial Exhibits marked 1011-R through 1015-R. The Court reserved ruling on
these proposed Exhibits. The Court’s determination (i.e., that respondent’s
determinations in the notice of deficiency and the supplement to the notice of deficiency
were supported by a minimal evidentiary foundation) was not based on respondent’s
proposed trial Exhibits 1011-R through 1015-R. Accordingly, the Court need not rule
on petitioner’s evidentiary objections with respect to these proposed exhibits.
17
[*17] interest in Platinum Processing in 2018, receipts from Holy Moly
Donut Shop in 2018, and assets that belonged to third parties, or were
other receipts from petitioner’s legal businesses from 2018.
Petitioner’s argument on the origins of the seized assets is not
consistent with the underlying documents. In particular, petitioner
argues that most of the seized assets were actually proceeds from the
sale of his membership interest in Platinum Processing and that the
$500,000 check from ATM of America (signed by Lydia Sitto) to
petitioner was an “installment” on the sale. We note that Ammouri was
the other 50% owner of Platinum Processing. We further note that
Ammouri, his sister Lydia Sitto, and her husband Jason Sitto were the
owners of ATM of America. Under the specific terms of the Purchase
Agreement, in exchange for petitioner’s 50% membership interest in
Platinum Processing, he was to be paid by Platinum Processing an
amount equal to (i) the cash on hand as of the closing plus (ii) $1,500,000
minus a customer attrition adjustment. Moreover, the Purchase
Agreement states that the purchase price was to be paid by Platinum
Processing at the closing in an amount equal to the cash on hand as of
the closing plus $1,200,000 “by certified check or wire transfer.”
Thereafter, petitioner was to be paid an additional $150,000 on the first
anniversary of the closing and another $150,000 on the second
anniversary of the closing, less the customer attrition adjustment. The
closing and closing date was defined in paragraph 5 of the Purchase
Agreement as occurring on “December 31, 2017 or at such other time
and date as the parties may agree.”
The check that petitioner introduced into evidence to support his
position that the bulk of the seized assets originated from the sale of his
interest in Platinum Processing is inconsistent with the terms of the
Purchase Agreement. First, the amount of the check, $500,000, does not
correspond to paragraphs 2 and 3 in the Purchase Agreement that set
forth the total purchase price and the schedule on which it would be
paid. On brief, petitioner characterizes the check from ATM of America
as an “installment on the sale of Platinum Processing Services LLC for
$500,000.” However, no provision of the Purchase Agreement states that
the first tranche of the purchase price was permitted to be paid in a
$500,000 installment. Rather, paragraphs 2 and 3 of the Purchase
Agreement are specific as to the amount and the time of the purchase
price payment to petitioner. Additionally, the Purchase Agreement
states that the purchase price was to be paid by the “Company,” defined
in the Purchase Agreement as “Platinum Processing Services, LLC.”
Finally, paragraph 5 of the Purchase Agreement states that the first
18
[*18] tranche of the purchase price was to be paid at the closing which
was stated to occur “at 10 a.m. on December 31, 2017 or at such time
and date as the parties may agree.”
The $500,000 check that petitioner relies on was dated January
4, 2018, and was from ATM of America. 12 Petitioner did not introduce
any evidence or testimony indicating that the parties to the sale agreed
on a closing date and time other than 10 a.m. on December 31, 2017, as
stated in the Purchase Agreement. Nor did he offer an explanation for
why he received a check from ATM of America in exchange for his
interest in Platinum Processing when the Purchase Agreement
expressly states that Platinum Processing was to pay him for his
interest. Finally, the Purchase Agreement states that the payment was
to be made by a certified check or wire transfer. We see no indication
that the check from ATM of America was a certified check.
Petitioner has not explained these discrepancies between the
check and the express terms of the Purchase Agreement. We believe that
they are significant and that they undermine petitioner’s assertion as to
the alternate source of the seized assets. It may be true that the parties
acted in a haphazard manner in handling the payment terms for the
sale of petitioner’s interest in Platinum Processing, but on the wrong
date, by the wrong method, the wrong person paid the wrong amount, to
petitioner. Petitioner’s explanation that the $500,000 “installment” paid
by ATM of America to him on January 4, 2018, in exchange for his
interest in Platinum Processing, which is not supported by testimony or
consistent with documentary evidence, is not credible.
Similarly, petitioner argues on brief that the U.S. currency seized
from Holy Moly Donut Shop was out of cash on hand and sales from the
shop that occurred during 2018. Petitioner makes the same assertion
with respect to the U.S. currency seized from Unified Collective, the
unlicensed marijuana dispensary that petitioner and others operated.
To support this contention, petitioner cites the plea agreement.
However, the plea agreement offers no support for the contention, as it
merely recites the fact that “Thirty Eight Thousand and Eighty Eight
12 We note that the memo line on the check states “Acquisition of Platinum.”
Nevertheless, the method and manner of the payment were inconsistent with the
express terms of the Purchase Agreement; and the memo line notation, by itself, is
insufficient to convince the Court that the check was for petitioner’s interest in
Platinum Processing.
19
[*19] Dollars ($38,088.00) in U.S. Currency [was] seized from Unified
Collective on February 14, 2018.”
Moreover, petitioner asks us to conclude that he had “very little
involvement” in Unified Collective and that it was owned by James
Shammas, “who was the primary focus of the investigation by the
[DEA].” Petitioner, who chose not to testify, cites Shammas’s testimony
for support of this assertion. Again, the record and the testimony in this
case do not support the assertion that Shammas was the owner of
Unified Collective.
On direct examination by counsel for respondent, Shammas was
asked what his role was at Unified Collective and he responded that he
worked at Unified Collective and that he was its owner. Upon further
questioning, however, Shammas contradicted himself and stated that he
was not the owner of Unified Collective. Respondent’s counsel asked
Shammas about statements he had made during his safety-valve
proffer 13 to Special Agent Dosch regarding Unified Collective.
Specifically, respondent’s counsel asked whether he recalled stating in
the safety-valve proffer that he was paid a wage by Unified Collective,
that he was an employee of Unified Collective, that he was the daytime
manager of Unified Collective, and that he was not the owner of Unified
Collective. Shammas responded that he did not remember making those
statements to Special Agent Dosch.
Similarly, he did not remember that, at his sentencing hearing,
he and his attorney both stated that he was an employee of Unified
Collective. Respondent’s counsel attempted to refresh Shammas’s
recollection of his role in Unified Collective by providing him a copy of
the sentencing hearing transcript from his criminal case. After having
his recollection refreshed with the relevant portions of the sentencing
hearing transcript, Shammas testified that his role at Unified Collective
was that of a manager and that he was not the owner of Unified
Collective.
13 The “safety valve” permits defendants who meet five requirements to be
sentenced without regard to drug-quantity-based mandatory minimum penalty
provisions. 2 Gerald F. Uelmen & Alex Kreit, Drug Abuse and the Law Sourcebook
§ 15:21 (2022). The safety valve is codified in 18 U.S.C. § 3553(f). A defendant can
qualify for the safety valve by making a proffer that the five requirements in 18 U.S.C.
§ 3553(f) are satisfied. 2 Uelmen & Kreit, supra, at § 15:21; see also U.S. Sent’g
Guidelines Manual § 5C1.2 (U.S Sent’g Comm’n 2023).
20
[*20] Additionally, respondent called Special Agent Dosch as a rebuttal
witness to testify about the safety-valve proffer that he conducted with
Shammas. Special Agent Dosch testified that, during the safety-valve
proffer, Shammas stated that he was not the owner of Unified Collective.
On the basis of the testimony and all other evidence presented in
this case, we do not find credible Shammas’s testimony that he was the
owner of Unified Collective. Accordingly, Shammas’s testimony does not
support petitioner’s assertion that Shammas was the owner of Unified
Collective and that the assets seized from Unified Collective were in fact
Shammas’s.
In a similar line of argument, petitioner asserts that certain other
seized assets did not belong to him. Specifically, he asserts that the
$50,000 seized from Safe Deposit Box #[XXXX] belonged to Jason Sitto,
Lydia Sitto, and Ammouri. He also asserts that the $21,698 seized from
a residence in Bloomfield Hills, Michigan, belonged to Ammouri. After
the February 14, 2018 seizure, the DEA served notice of administrative
forfeiture proceedings on all interested parties. On April 2 and 10, 2018,
Ammouri filed administrative claims of ownership with the DEA for a
return of (1) the $50,000 seized from Safe Deposit Box #[XXXX], (2) the
$21,698 seized from his residence in Bloomfield Hills, Michigan, and
(3) $112,520 in U.S. currency seized from the John R. Road location.
On February 15, 2019, Ammouri and the DEA entered into a
Memorandum of Agreement wherein the DEA agreed to return to
Ammouri the $50,000 seized from the safe deposit box and the $21,698
seized from his residence (returned property). The Memorandum of
Agreement states that the DEA and Ammouri acknowledge that items
(1)–(3) described above were seized by the DEA on February 14, 2018.
The Memorandum of Agreement further states that the parties wished
to resolve the matter without incurring further litigation and therefore
certain of the seized assets were returned to Ammouri. Ammouri and
the DEA also stipulated that the $112,520 seized from the John R. Road
location was forfeited to the United States of America pursuant to 21
U.S.C. § 881(a)(6) and that Ammouri’s right, title, or interest in the
$112,520 was forever extinguished.
While the Memorandum of Agreement does not definitively
establish ownership of the $50,000 that was stored in the safe deposit
21
[*21] box 14 and the $21,698 seized from the residence in Bloomfield
Hills, Michigan, we find that the returned property should not be
considered income to petitioner for the year at issue. The DEA may have
agreed to return the property to avoid litigation hazards with Ammouri;
however, it also suggests that the returned property was not owned by
petitioner or generated from his illegal marijuana business.
On the other hand, the fact that Ammouri agreed to forfeit the
$112,520 to the United States of America suggests that he did not own
it and that it was generated through petitioner’s illegal marijuana
business. 15 As noted above, the indictment alleges that petitioner and
his co-defendants used nominees to conceal the true identities of the
owners of certain assets. This allegation, with its factual underpinnings,
is a possible reason the DEA did not agree to return the $112,520 seized
from the John R. Road location to Ammouri. In addition, the DEA may
not have been willing to return the returned property to Ammouri unless
he agreed to forfeit any right, title, or interest that he asserted in the
$112,520. In other words, Ammouri agreed to forfeit his asserted right
over the $112,520 to secure the return of the returned property and to
avoid the cost and hazards of litigating these issues with the DEA.
Moreover, petitioner’s conclusory assertion that the $112,520
seized from the John R. Road location belonged to ATM of America is
not supported by the record. This is especially so considering that
several businesses, including ATM of America, Platinum Processing,
and others operated out of the John R. Road location. Petitioner has not
provided any evidence that the $112,520 belonged to ATM of America
aside from the Memorandum of Agreement. That document shows only
that Ammouri filed an administrative claim with the DEA for return of
those funds but that they were ultimately forfeited to the United States
of America.
14 The Court admitted into evidence the Safe Deposit Access Records and the
Contract Entry Card for the safe deposit box. The Contract Entry Card states that the
joint lessees of the safe deposit box were Jason Sitto, Lydia Sitto, and Ammouri. While
these individuals jointly leased the safe deposit box, it does not definitively establish
ownership over the $50,000 that was stored inside the safe deposit box. This is
especially true in light of the fact that the indictment alleges that the co-defendants
used nominees, including a nominee that owned a safe deposit box containing $197,140
in U.S. currency, in furtherance of their conspiracy to launder monetary instruments.
15 The Government seized the $112,520 in U.S. currency on the basis of
reasonable cause to believe that the seized U.S. currency was proceeds subject to
forfeiture pursuant to 21 U.S.C. § 881(a)(6).
22
[*22] Finally, petitioner argues that the seized assets included other
cash receipts for legal businesses that were generated in 2018. He
asserts that the seizures of $1,685 and $4,439 from Holy Moly Donut
Shop were out of cash on hand and sales from the shop in 2018.
Petitioner relies on Holy Moly Donut Shop’s February 2018 bank
statement for support. The bank statement shows deposits made in
February 2018 totaling $3,675. The amounts are identified as “Merchant
Banked Deposit” and have a corresponding identification number. The
bank statement alone is insufficient to satisfy petitioner’s burden to
show that the funds were from Holy Moly Donut Shop’s cash on hand.
We note that petitioner and his codefendants were alleged to have used
nominees to conceal the true identities of the owners of assets and that
Unified Collective, petitioner’s unlicensed marijuana dispensary, was
also in the same building as Holy Moly Donut Shop. Petitioner has failed
to introduce evidence that the seized assets from Holy Moly Donut Shop
were from cash on hand and sales from Holy Moly Donut Shop and not
from Unified Collective, which was also at the Eight Mile Road location.
Below, we turn to petitioner’s argument that respondent’s calculation of
income is not supported by substantive evidence.
B. Whether Respondent’s Calculation of Income Is Supported
by Substantive Evidence
Next, petitioner argues that respondent did not use an approved
method of calculating the deficiency under section 446 and that
therefore the notice of deficiency and the supplement to the notice of
deficiency are arbitrary and erroneous. Petitioner further argues that
respondent “presumed from the plea agreement that the assets seized
in 2018 were income to Petitioners in 2017” and that respondent failed
to trace the seized assets to the year at issue or consider to whom the
assets belonged. Respondent argues that petitioner failed to keep books
and records establishing his gross income and that therefore respondent
may determine income under a method that, in the opinion of the
Secretary, clearly reflects income. Respondent further argues that he
had great latitude in reconstructing petitioner’s income because
(1) petitioner failed to keep books and records and (2) petitioner refused
to cooperate with the revenue agent’s examination. For the reasons
discussed below, we hold that respondent’s calculation of the deficiency
is supported by substantive evidence.
Section 6001 requires all taxpayers to maintain sufficient records
to determine their correct tax liabilities. Where a taxpayer fails to keep
the required books and records, or if the records he or she maintains do
23
[*23] not clearly reflect income, then the Commissioner is authorized by
section 446 to determine income “under such method as, in the opinion
of the Secretary, does clearly reflect income.” § 446(b); see Petzoldt v.
Commissioner, 92 T.C. 661, 693 (1989). The Commissioner is not limited
to certain prescribed methods; rather he may use any method that
clearly reflects income. Walton, 909 F.2d at 918; Petzoldt, 92 T.C. at 693.
“Although the absence of adequate tax records does not give [the
Commissioner] carte blanche for imposing Draconian absolutes, such
absence does weaken any critique of [the Commissioner’s] methodology.”
Petzoldt, 92 T.C. at 693 (citing Webb v. Commissioner, 394 F.2d 366, 373
(5th Cir. 1968), aff’g T.C. Memo. 1966-81. The Commissioner’s
reconstruction need only be reasonable in the light of all the surrounding
facts and circumstances. Giddio v. Commissioner, 54 T.C. 1530, 1533
(1970).
Section 6212(a) provides for the issuance of a notice of deficiency
where the Secretary “determines that there is a deficiency” in respect of
certain taxes. However, the Code does not have statutory guidelines that
“specif[y] the nature and quality of the evidence which the tax
administrator must gather to support the determination, or the form
and contents of the notice.” Petzoldt, 92 T.C. at 693 (citing Mayerson v.
Commissioner, 47 T.C. 340, 348 (1966)). Thus, the Commissioner has
great latitude in reconstructing a taxpayer’s income, and the
reconstruction “need only be reasonable in light of all surrounding facts
and circumstances.” Id. at 687, 693. The Commissioner has even greater
latitude when the case involves an illegal enterprise and the taxpayer
fails to keep records or cooperate in the ascertainment of his income. Id.
at 693. Mathematical precision is not required because if it were it
“would be tantamount to holding that skillful concealment is an
invincible barrier to proof.” Id. at 693–94 (quoting Llorente, 74 T.C. at
266).
Petitioner’s primary argument is that respondent did not use a
traditional method, such as the net worth method or the bank deposits
method, to determine petitioner’s unreported income for the year at
issue. Respondent’s failure to use any of the traditional methods for
reconstructing income indicates that the assessment lacks “any rational
evidentiary foundation,” according to petitioner.
Because petitioner did not keep books and records of the income
received from the illegal marijuana business, respondent may compute
petitioner’s income using any method that clearly reflects income. See
id. at 687 (citing Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965)).
24
[*24] We conclude that respondent’s method here clearly reflects
income.
An IRS revenue agent was assigned to petitioner’s case in August
2019 to determine whether respondent would proceed with jeopardy
assessments with respect to petitioner. The revenue agent testified that
she reviewed the following information during the course of her
investigation: (1) two search warrants from 2017, (2) three search
warrants from 2018, (3) records regarding bank accounts and safe
deposit boxes seized by the DEA, (4) petitioner’s indictment, (5) court
documents on PACER, (6) petitioner’s plea agreement, (7) petitioner’s
tax returns for 2016 and 2017, and (8) Platinum Processing’s Form 1065
for 2017. Additionally, on September 6, 2019, the revenue agent
interviewed petitioner at his attorney’s office. We note that the
interview was held after petitioner signed the plea agreement on June
1, 2019, but before his sentencing hearing in November 2019. The
revenue agent testified that, in the interview, petitioner answered basic
background questions about himself but refused to answer any
questions regarding income generated from the illegal dispensaries or
illegal grow houses. Petitioner also failed to provide the revenue agent
with documents that she requested.
On brief petitioner argues that there is no evidence that he
refused to discuss his income and expenses with the revenue agent. We
interpret this as petitioner’s making a distinction between income and
expenses generally and income and expenses associated with his illegal
marijuana business. Additionally, in his response to respondent’s
proposed Findings of Fact, petitioner objects to respondent’s Finding of
Fact that petitioner refused to cooperate during the meeting with
respondent’s revenue agent, and states that his refusal to answer the
revenue agent’s questions about illegal dispensaries or illegal grow
houses was based on assertion of privilege under the Fifth Amendment
of the Constitution. Respondent argues that the Court should draw
negative inferences from petitioner’s failure to cooperate with the
revenue agent during the September 6, 2019 interview, and his failure
to testify during the trial.
Generally, the Fifth Amendment privilege applies in cases before
this Court. Petzoldt, 92 T.C.at 684. However, this Court has held that “a
taxpayer may not ‘draw a conjurer’s circle around the whole matter’ of
his or her tax liability” and that application of the privilege does nothing
to shift the taxpayer’s burden of proof. Lee v. Commissioner, T.C. Memo.
2002-95, 83 T.C.M. (CCH) 1470, 1473 (quoting United States v. Sullivan,
25
[*25] 274 U.S. 259, 264 (1927)), aff’d, 61 F. App’x 471 (9th Cir. 2003). In
Petzoldt, the Court explained:
A valid assertion of the privilege against self-
incrimination . . . is not a “substitute for evidence that
would assist in meeting a burden of production,” for to
adopt such a view “would convert the privilege from the
shield against compulsory self- incrimination which it was
intended to be into a sword whereby a claimant asserting
the privilege would be freed from adducing proof in support
of a burden which would otherwise have been his.”
Petzoldt, 92 T.C. at 684 (quoting United States v. Rylander, 460 U.S.
752, 758 (1983)). As this Court recognized in Petzoldt, in a civil
proceeding the Court “may draw a negative inference from a party’s
invocation of his Fifth Amendment right against self-incrimination
provided that there is some independent evidence in addition to the
mere invocation of the privilege upon which to base the negative
inference.” Id. at 685.
Whether or not petitioner invoked the Fifth Amendment privilege
in declining to answer the revenue agent’s questions, we decline to draw
a blanket negative inference from that event. Petitioner has not,
however, invoked a Fifth Amendment privilege in this case. And if he
had successfully done so, invocation of the privilege would not relieve
him of his burden in this case. See id. at 684; Lee, 83 T.C.M. (CCH) at
1473.
As discussed above, petitioner has asserted that the seized assets
were traced to money from the sale of Platinum Processing, that the
assets belonged to third parties, or that the assets were other cash
receipts from 2018. Petitioner could have cooperated with the revenue
agent by providing his explanations and documents to establish these
contentions. Nonetheless, on the evidence before the Court that links
petitioner with the seized assets, it is unnecessary to decide whether
petitioner properly invoked the Fifth Amendment privilege in his
interview with the revenue agent and whether we should draw a
negative inference from petitioner’s refusal to answer the revenue
agent’s questions.
In the absence of books and records or petitioner’s cooperation,
the revenue agent reviewed the sources of information that were
available to her. On the basis of this information, which included search
26
[*26] warrants, documentation regarding bank accounts and safe
deposit boxes, the indictment, publicly available court documents, the
plea agreement, petitioner’s tax returns for 2016 and 2017, and
Platinum Processing’s Form 1065 for 2017, the revenue agent made a
jeopardy assessment against petitioner for the year at issue in an
amount equal to the assets forfeited in the plea agreement subject to a
$200,000 reduction for the amount that the DEA agreed to return to
petitioner. This Court has held that the Commissioner’s reconstruction
of income was reasonable where the taxpayer lacked contemporaneous
records regarding the alleged income-producing activity, despite having
the opportunity to preserve records. See Barrington, T.C. Memo.
2022-68, at *7 (sustaining the Commissioner’s unreported income
determination where the Commissioner reasonably reconstructed
taxpayers’ unreported income using admissions in taxpayers’ plea
agreements); McHan, 91 T.C.M. (CCH) at 1072 (holding Commissioner’s
reconstruction of taxpayer’s income reasonable where taxpayer failed to
maintain and produce records of illegal narcotics sales); Franklin, 65
T.C.M. (CCH) at 2502 (finding taxpayer’s general denial of
Commissioner’s notice of deficiency determination insufficient to carry
burden of proof).
Finally, petitioner argues that respondent did not trace the assets
that were seized in 2018 to the 2017 tax year. This seems to be an
extension or variation of petitioner’s argument that we have already
rejected, i.e., that the seized assets were actually from the sale of
petitioner’s interest in Platinum Processing in the 2018 tax year. To the
extent that petitioner’s argument may instead be that, regardless of the
source of the funds, respondent did not demonstrate that they were
income to petitioner for the year at issue, we believe that the record
supports respondent’s determination that the seized assets were income
to petitioner for the year at issue.
Among the items seized from petitioner’s home during the
execution of the October 2017 search warrants were four cellular
phones, an iPad, and various documents. The documents included
ledgers with some undated entries and some entries dated in the 2016
and 2017 tax years; the ledgers contained the names, quantities, prices
(in some cases), and dollar values of marijuana strains. The evidence
also included text messages from telephone numbers associated with
petitioner in which he communicated with associates, customers, and
suppliers of a marijuana operation during the tax year at issue. These
documents and communications were seized during a multiyear DEA
investigation that began in 2015 and culminated with the execution of
27
[*27] the October 2017 search warrants. When all of the evidence is
considered, the ledgers and phone communications clearly tie petitioner
to sales of significant amounts of marijuana during the year at issue.
Accordingly, respondent’s determination that the assets seized during
the execution of the February 2018 search warrant were petitioner’s
unreported income for the year at issue is supported by the record.
Considering all of the facts and circumstances presented and
petitioner’s lack of cooperation, we conclude that it was reasonable for
the revenue agent to reconstruct the income that petitioner generated
from the illegal marijuana business in this manner and that
respondent’s calculation of income is supported by substantive evidence.
C. Conclusion 16
In sum, we find that the unreported income attributed to
petitioner in the supplement to the notice of deficiency should be
reduced to reflect the returned property (totaling $71,698) that the DEA
returned to Ammouri. Accordingly, we conclude that petitioner failed to
report income of $441,079 [$512,777 − $71,698 (returned property)].
Petitioner has not otherwise met his burden of rebutting the
determinations in the notice of deficiency and the supplement to the
notice of deficiency.
V. Section 6662(a)
Section 6662(a) imposes a 20% penalty on the portion of an
underpayment of tax that is attributable to a “substantial
understatement of income tax.” § 6662(b)(2). Section 6662(d)(2)
generally defines an “understatement” as the excess of the tax required
to be shown on the return over the amount shown on the return as filed.
An understatement of income tax is “substantial” if it exceeds the
16 In the Petition, petitioners also alleged that respondent erred in the notice
of deficiency and in the supplemental notice of deficiency in disallowing itemized
deductions and personal exemptions and in making a self-employment tax adjustment
for the year at issue. See Petition ¶¶ 5(b), (c), and (f). Petitioners did not address these
issues at trial or on brief, and we deem petitioners to have conceded respondent’s
adjustments to income by disallowing petitioners’ itemized deductions and personal
exemptions and making a self-employment tax adjustment. We may deem a taxpayer
to have conceded an issue that was raised in the petition if he or she made no argument
at trial or on brief relating to that issue. See Collins v. Commissioner, T.C. Memo. 2002-
115, 83 T.C.M. (CCH) 1620, 1624 (first citing Levin v. Commissioner, 87 T.C. 698, 722–
23 (1986), aff’d, 832 F.2d 403 (7th Cir. 1987); and then citing Zimmerman v.
Commissioner, 67 T.C. 94, 104 n.7 (1976)).
28
[*28] greater of 10% of the tax required to be shown on the return or
$5,000. § 6662(d)(1)(A). The Commissioner generally bears the burden
of production with respect to the liability of an individual for any
penalty. § 7491(c). 17
For the year at issue, petitioners reported a tax liability of
$70,487 on the 2017 return. Their corrected tax liability as shown on the
supplement to the notice of deficiency was $281,938, which was based in
part on respondent’s determination that petitioners failed to report
$512,777 of income. We have here concluded that petitioners instead
failed to report income of $441,079 [$512,777 − $71,698 (returned
property)]. Even with this downward adjustment, however, there is an
underpayment of tax required to be shown, all of which is attributable
to a substantial understatement of income tax. Respondent has satisfied
his burden of production under section 7491(c).
Once the Commissioner satisfies his burden of production with
respect to the accuracy-related penalty, the taxpayer then bears the
burden of proving that the Commissioner’s determination is incorrect or
that he has an affirmative defense, such as reasonable cause and good
faith under section 6664(c)(1). See Rule 142(a); Higbee v. Commissioner,
116 T.C. 438, 446–47 (2001). Petitioner has not shown that he acted with
reasonable cause and in good faith with respect to any portion of the
underpayment. We hold that petitioner is liable for a section 6662(a)
accuracy-related penalty to be computed in accordance with Rule 155.
We have considered all other arguments made and facts
presented in reaching our decision, and, to the extent not discussed
above, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.
17 We note that petitioner conceded that respondent satisfied the supervisory
approval requirements of section 6751(b).