Yosef Sehati A.K.A. Joseph Sehati and Lilly Kohanim-Sehati
2025 TC Memo 3
Tax Ct.2025Background
- Joseph and Lilly Sehati operated JFJ (two mall kiosks); Shahbaz and Shahrokh Sehati owned SJC (nearby retail store). The brothers also co‑owned two real‑estate partnerships (SJS and Barukh).
- IRS agent discovered substantial business‑related customer checks and cash deposits routed into personal accounts (notably Rabobank 2472 and SBBT 8226) rather than the entities’ operating accounts for 2012–2014; petitioners’ accountant (family relation) was not told about some accounts.
- Petitioners initially told the examiner deposits were loans or inheritance advances; at trial they advanced a new “gift jewelry” theory (maternal gifts of decades‑old Israeli/Iranian jewelry sold in 2011–2014) to explain unreported deposits and assert low/no gain.
- IRS reconstructed income using bank‑deposits and specific‑items methods, asserted deficiencies for 2012–2014 (and later accuracy penalties for 2015–2016 for some petitioners), and assessed fraud penalties for 2012–2014.
- The Tax Court admitted some documentary exhibits (Jewellery Studio invoices, portions of Iranian invoices, and a logbook for limited purposes) but found the gift‑jewelry story inadequately corroborated, implausible, and unsupported by contemporaneous records.
- Court sustained respondent’s determinations of unreported income, disallowed NOL carryforwards claimed (except as conceded), upheld guaranteed‑payment adjustments for personal use of partnership property, imposed fraud penalties on Joseph, Lilly, Shahbaz, and Shahrokh (but not on Anna or Farahnaz), and upheld accuracy‑related penalties for 2015–2016 for the four nonexempt petitioners.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Unreported income from JFJ and SJC (2012–2014) | Deposits came from sales of mother’s gifted jewelry (nontaxable or no gain) tracked by a logbook and historic invoices | Bank records show business checks/cash diverted to personal accounts; taxpayers concealed accounts and misled examiner; reconstructed income is reasonable | Court sustained respondent; petitioners failed to trace specific sales to gifted items or substantiate bases; gift story rejected |
| Gift‑jewelry defense (basis/revenue treatment) | Proceeds derived from gifts received from mother decades earlier; sales were at or below donors’ bases so no taxable gain | Even sales of gifted property can produce taxable gain; taxpayers failed to substantiate bases, inventories, or contemporaneous sales records | Rejected: sale of gifted property is taxable; petitioners did not meet tracing/substantiation burden |
| Guaranteed payments for personal use of partnership property (1143 Colina Vista) | Shahbaz and Anna claimed they did not reside at the property for the periods assessed; renovations and other residence usage reduced or eliminated benefit | Residence was partnership property used by partners; fair‑market‑value imputed as guaranteed payments | Sustained: Shahbaz and Anna failed to prove nonuse/alternative residence; guaranteed‑payment amounts upheld |
| NOL carryforward deductions (various years through 2016) | Claimed substantial NOL carryforwards; computations attached to returns suffice | Returns lacked required detailed schedules; books and records unreliable; NOLs not proven or shown available to carry forward | Denied except for concessions: petitioners failed to meet statutory/regulatory substantiation and tracing requirements |
| Fraud penalties (sec. 6663) for 2012–2014 | No willful intent; reporting errors attributable to bookkeeping and complex family transactions | Understatements, diversion of receipts to personal accounts, false statements to examiner, inadequate records, inconsistent/implausible testimony show intent to evade | Fraud penalties imposed on Joseph, Lilly, Shahbaz, and Shahrokh (clear and convincing evidence). Anna and Farahnaz not shown to have requisite intent |
| Accuracy‑related penalties (sec. 6662) for 2015–2016 | NOL positions were reasonable | NOL substantiation inadequate; substantial understatement and negligence shown | Sustained for Shahbaz, Anna, Shahrokh, and Farahnaz (penalties for substantial understatement or negligence as applicable) |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (burden of proof presumption for Commissioner)
- Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (broad definition of gross income)
- Helvering v. Clifford, 309 U.S. 331 (realization of gain included in gross income analysis)
- Cooper v. United States, 280 U.S. 409 (sale of gifted property can produce taxable gain)
- Spies v. United States, 317 U.S. 492 (fraudulent intent may be inferred from circumstantial evidence)
- United States v. Weimerskirch, 596 F.2d 358 (9th Cir.) (minimal evidentiary showing linking taxpayer to income‑producing activity)
- Anderson v. City of Bessemer City, N.C., 470 U.S. 564 (appellate standard for reviewing factual findings)