In a recent Tax Court case, Shryock v. Commissioner, T.C. Memo. 2026-44, the Tax Court sustained income tax deficiencies and additions to tax against a taxpayer who failed to file federal income tax returns for 2011, 2012, and 2013, failed to report income from a for-profit business operating under the name Boobies Rock! Inc. (“BR”), and failed to respond meaningfully in the Tax Court proceedings.[1]
The case is a useful reminder of several tax basics that can become very expensive very quickly: gross receipts are income unless properly excluded, corporate expenses belong to the corporation and not the shareholder[2], distributions from a corporation to its owner can become constructive dividends, and failing to file returns can move beyond ordinary late-filing penalties into fraudulent failure to file penalties under IRC § 6651(f).[3]
Background
The taxpayer, as sole shareholder, formed BR in California as a for-profit corporation in 2011. From February 2011 through June 2013, BR hosted at least 3,600 purported fundraising events around the country. At those events, promotional models sold breast cancer awareness merchandise and collected monetary donations. The Court found that the representatives falsely told attendees that the funds would support breast cancer research.
The proceeds were deposited into accounts controlled by the taxpayer or delivered directly to him. During the years at issue, the taxpayer controlled an account under the name Seven Group LLC (“SG”), which the IRS treated as a sole proprietorship because it could not confirm whether an entity corresponding to SG had ever been formed. SG received deposits of $171,765 in 2011, $3,955 in 2012, and $103,476 in 2013. Square, Inc. also reported credit card sales to the taxpayer personally of $4,492 in 2011 and $98,348 in 2012.
In addition, the taxpayer received net distributions from BR of $87,116 in 2011, $332,496 in 2012, and $81,419 in 2013. These distributions included cash payments to the taxpayer and payments made by BR for his benefit, including credit card charges and personal expenses paid by check.
Additional Background on Taxpayer
This case appears to be the civil fallout following criminal issues involving the taxpayer and his willful failure to file a tax return (discussed in the Opinion).[4] This criminal matter related to BR appears to have been addressed prior to the civil case. Additionally, the taxpayer was also involved and pleaded guilty to another charitable fraud scheme in May of 2016.[5] The Court also took note of certain other actions with respect to scams by the taxpayer, including injunctions and prohibitions against the taxpayer and BR, in several states including Texas, Colorado, Indiana, Kansas, and Illinois.[6]
The IRS Reconstructs Income
The taxpayer did not file Forms 1040 for the years at issue. In fact, the Court noted that he had not filed a Form 1040 since 2001. He also made no estimated tax payments and did not submit records of his income-producing activities to the IRS during the examination.
The IRS therefore reconstructed his income using third-party financial records and a bank deposits analysis. The IRS reviewed monthly statements for accounts the taxpayer controlled, added deposits, and subtracted identifiable nontaxable items and transfers. The IRS also prepared substitutes for returns under IRC § 6020(b).[7]
The notice of deficiency determined the following unreported income:
| Item | 2011 | 2012 | 2013 |
| Gross Receipts or Sales | $176,257 | $102,303 | $103,476 |
| Constructive Dividends | $87,116 | $332,496 | $81,419 |
| Rents | — | — | $900 |
After concessions by the IRS for 2012, the remaining deficiencies and additions to tax were:
| Year | Deficiency | IRC § 6651(f)[8] | IRC § 6651(a)(2)[9] |
| 2011 | $69,013 | $50,034 | $17,253 |
| 2012 | $59,507 | $43,143 | $14,877 |
| 2013 | $45,600 | $33,060 | $11,400 |
Ignoring the Tax Court Did Not Help
The procedural posture of the case mattered substantially. In his Petition, the taxpayer argued that the IRS failed to allow certain deductions. However, he did not deny receiving the unreported income, did not allege that the receipts were nontaxable, did not dispute that he failed to file returns, did not dispute that he failed to pay tax, and did not challenge the additions to tax.
After the IRS filed its Answer, the taxpayer failed to reply. The IRS subsequently moved to have certain affirmative allegations deemed admitted. The Court ordered the taxpayer to respond and warned him of the consequences if he did not. Nevertheless, he failed to respond, so the Court deemed the allegations admitted.
The IRS then moved for summary judgment. Again, the taxpayer failed to respond. The Court scheduled a hearing to give him another opportunity to prosecute his case. He did not appear. The Court then issued an Order to Show Cause, and he failed to respond again.
That left the Tax Court with deemed admissions, an unrebutted motion for summary judgment, and no genuine dispute of material fact. The result was unsurprisingly predictable.
Unreported Income Was Deemed Conceded
Under Tax Court Rule 34(b)(1)(G), a petition must contain clear and concise assignments of each error alleged to have been committed by the IRS. Issues not raised are generally deemed conceded.[10]
Because the taxpayer did not assign error to the IRS’s determination that he received unreported income, the Court held that he conceded the issue. Even beyond the concession, the Court found that the record clearly established that he received unreported income consisting of gross receipts from SG and Square, constructive dividends from BR, and rent payments from BR.
Corporate Expenses Are Not the Shareholder’s Personal Deductions
The taxpayer argued that the IRS failed to allow deductions for alleged BR expenses, including cost of goods sold, labor, marketing, shipping, and more than $150,000 in alleged charitable contributions.
The problem was that BR was a corporation separate and distinct from the taxpayer. The Court agreed with the IRS that expenses incurred by BR in furtherance of BR’s business were deductible, if at all, by BR—not by the taxpayer individually.[11]
The Court also noted that even if the expenses somehow could have been deducted by the taxpayer, he failed to provide records or receipts substantiating the amounts and nature of the expenses.
This is a common but important distinction. A shareholder does not get to simply lift expenses out of a corporation and deduct them personally. Likewise, paying personal expenses from a corporation can create a separate tax problem, as discussed below.
Constructive Dividends
The Court treated the distributions from BR to the taxpayer as constructive dividends.
A constructive dividend generally occurs where a corporation confers an economic benefit on a shareholder without an expectation of repayment. Under IRC §§ 301 and 316, corporate distributions made out of earnings and profits are treated as dividends.[12]
Here, the distributions included cash payments and payments of personal expenses for the taxpayer’s benefit. The Court found that the distributions were made from BR’s earnings and profits and that there was no evidence that the taxpayer intended to repay BR. Accordingly, they were properly included in the taxpayer’s gross income as constructive dividends.
This is another basic point that frequently creates problems in closely held businesses. When a corporation pays the owner’s personal expenses, those payments do not just disappear. There will be some classification of those payments, be it compensation or dividends. Such classifications may be compensation, dividends, or loans (provided documented and respected accordingly) depending on the facts. In this case, the Court treated them as constructive dividends.
Fraudulent Failure to File Under IRC § 6651(f)
IRC § 6651(a)(1) imposes an addition to tax for failing to timely file a return. If the failure to file is fraudulent, IRC § 6651(f) increases the addition to tax from increasing penalty rates from 5% to 15% (monthly) and from 25% to 75% (maximum).[13]
To establish fraudulent failure to file, the IRS must prove that the taxpayer failed to timely file a return for a year in which a tax liability was required to be shown and that the failure was fraudulent. The IRS bears the burden of proving fraud by clear and convincing evidence.[14]
Fraud is rarely proven by direct evidence. Courts therefore look to circumstantial evidence and so-called “badges of fraud.” These may include understatement of income, inadequate records, failure to file returns, implausible explanations, concealment of assets, failure to cooperate with tax authorities, failure to make estimated tax payments, dealing in cash, engaging in illegal activity, and attempting to conceal illegal activity.[15]
The Tax Court held that the deemed admissions established fraud. The taxpayer had substantial unreported income, had not filed federal income tax returns for years, made no estimated tax payments, failed to maintain or produce adequate records, failed to cooperate with the IRS, and paid personal expenses from the account of his wholly owned corporation.
The Court also considered the taxpayer’s broader conduct. Multiple states had found that the taxpayer and BR engaged in deceptive trade practices in connection with purported charitable fundraising. The taxpayer had also pleaded guilty in federal court to willfully failing to file his 2011 return.
Given those facts, the Court sustained the additions to tax under IRC § 6651(f) for fraudulent failure to timely file.
The Takeaway
This case is full of bad (or terrible) facts, but the practical lessons are straightforward.
First, failing to file (or affirmatively choosing to not file) returns is not a strategy. If substantial income exists and the taxpayer has a long history of non-filing, the IRS may pursue more than ordinary late-filing penalties.
Second, taxpayers must take Tax Court procedure seriously. A petition that fails to assign error to specific IRS determinations may concede those issues. Failing to respond to pleadings, motions, orders, and show-cause orders can result in deemed admissions and summary judgment.
Third, closely held business owners need to respect the separate nature of their entities.[16] Corporate expenses do not automatically become personal deductions, and corporate payments of personal expenses can become constructive dividends or other taxable income.
Finally, substantiation matters. Even where deductions may theoretically exist, the taxpayer must be able to prove them with records. Without records, the Tax Court is unlikely to rescue the taxpayer from the IRS’s reconstruction of income.
The case serves as a reminder that the tax consequences of bad records, entity confusion, personal use of corporate funds, and non-filing can stack quickly. When those facts are combined with deceptive conduct and a failure to participate in the court process, the result can be not only deficiencies, but fraud-level additions to tax.
[1] Shryock v. Comm’r, T.C. Memo. 2026-44.
[2] See Joshua W. Sage, J.D., LL.M., Fab Holdings – It is Called the “Tax Plan” (Jan. 11, 2022) and Fab Holdings, LLC, et. al. v. Comm’r, T.C. Memo 2021-135, discussing the issue of taxpayer-specific items not attributable to owners, resulting in whipsaw effects.
[3] IRC § 6651(a)(1), (a)(2), and (f).
[4] See Danika Worthington, Man behind bogus Boobies Rock! Charity sentenced to a year in prison after not filing tax return (Feb. 1, 2018), The Denver Post; U.S. District Attorney’s Office, District of Colorado Press Release, Castle Rock Breast Cancer Charity Promoter Sentenced for Failure to File Tax Return (Feb. 1, 2018).
[5] Woman gets 90 days in jail for charity scam that netted $1 million (May 25, 2016), The Denver Post. The taxpayer is discussed within the article as being involved and pleading guilty to the same charges as the woman, referenced in the headline.
[6] See State ex rel. Weiser v. Shryock, No. 22CA2254, 2024 WL 3764208, at *1–2 (Colo. App. Mar. 7, 2024); Texas v. Shryock, No. 2014CI17766 (Dist. Ct. Bexar Cnty. filed Nov. 12, 2014); Indiana v. Boobies Rock!, Inc., No. 71D06-1409-PL-000278 (Super. Ct. St. Joseph Cnty. filed Sept. 30, 2014); Kansas ex rel. Schmidt v. Shryock, 2013-CV001213 (3d Jud. Dist. Shawnee Cnty. filed Oct. 22, 2013); and Illinois v. Boobies Rock Inc., No. 2013-CH-13745 (Ill. Cir. Ct. Cook Cnty. filed May 30, 2013).
[7] IRC § 6020(b).
[8] Governs failure to file penalties involving fraudulent failure to file.
[9] Governs penalties related to failure to pay tax.
[10] Tax Court Rule 34(b)(1)(G); see also Ottuso v. Comm’r, T.C. Memo. 2024-91.
[11] See Alioto v. Comm’r, T.C. Memo. 2025-125.
[12] IRC §§ 301, 316; see also Magnon v. Comm’r, 73 T.C. 980 (1980).
[13] IRC § 6651(a)(1), (f).
[14] IRC § 7454(a); Tax Court Rule 142(b); see also Belcik v. Comm’r, T.C. Memo. 2024-49; Sanders v. Comm’r, T.C. Memo. 2023-71.
[15] See Bradford v. Comm’r, 796 F.2d 303 (9th Cir. 1986); Niedringhaus v. Comm’r, 99 T.C. 202 (1992); Clark v. Comm’r, T.C. Memo. 2021-114.
[16] Though, some distinction may ought be noted with respect to disregarded entities, such as wholly-owned limited liability companies.
