Adam Shryock v. Commissioner of Internal Revenue: Fraudulent Failure to File and Unreported Income

The $250,000 Mistake: How a Serial Tax Evader Lost at Summary Judgment

The Tax Court granted summary judgment in favor of the IRS, upholding deficiencies and penalties exceeding $250,000 for tax years 2011–2013 against serial tax evader Adam Shryock. The ruling bypassed trial entirely due to Shryock’s failure to contest critical allegations. The IRS alleged $128,520 in unpaid taxes and $67,287 in fraudulent failure-to-file penalties under IRC § 6651(f), which imposes a 75% penalty on tax due when willful fraud in non-filing is proven. The case also involved allegations of constructive dividends under IRC § 301(c), where corporate funds were used for personal expenses and recharacterized as taxable income. Judge Arbeit’s ruling underscored that a taxpayer’s silence can suffice when noncompliance is clear.

The Scheme: How Boobies Rock! Inc. Operated as a Tax Evasion Vehicle

Boobies Rock! Inc. (BR), incorporated in 2011 by the petitioner, operated as a sham entity under the guise of a breast cancer awareness fundraising organization. Instead of selling products or services, BR hosted events where promotional models solicited donations and merchandise sales, with proceeds funneled into a slush fund controlled by the petitioner.

The petitioner exercised full control over BR’s finances, directing cash proceeds into a personal account (Seven Group LLC) and receiving credit card payments via Square, Inc. In 2011 alone, he received $176,257 in unreported income, with additional amounts in 2012 ($102,303) and 2013 ($103,476). He also used BR’s corporate accounts for personal expenses, including credit card charges and rent, totaling $332,496 in 2012 alone. The Tax Court later recharacterized these distributions as constructive dividends under IRC § 301(c), taxable as ordinary income.

By 2015, state authorities in Colorado obtained an injunction against BR and the petitioner for deceptive trade practices, followed by similar injunctions in Texas, Indiana, Kansas, and Illinois. Despite these legal setbacks, the petitioner continued to evade compliance, leading to multiple contempt charges and a 2022 arrest in Colorado.

The IRS’s examination revealed decades of noncompliance, including the petitioner’s failure to file a Form 1040 since 2001. In 2016, he was charged with six counts of willfully failing to file individual and corporate income tax returns under IRC § 7203, pleading guilty to one count in 2017 and receiving a one-year prison sentence. His subsequent violations of supervised release led to a 2022 arrest warrant.

The Dispute: Deductions vs. Fraudulent Intent

The core dispute centered on the petitioner’s claim that the IRS failed to account for business deductions, while the IRS argued that his systemic noncompliance and fraudulent intent invalidated his claims.

The petitioner alleged in his April 2023 petition that the IRS omitted deductions for BR’s business expenses, including cost of goods sold, labor, marketing, and shipping, as well as over $150,000 in charitable contributions. However, he did not dispute the IRS’s determination of $883,000 in unreported income, including gross receipts, constructive dividends from BR, and rental payments. He neither denied the unreported income nor provided evidence to rebut the IRS’s bank deposits analysis. His only substantive claim was that the IRS erred in disallowing deductions, without addressing the underlying tax liability or procedural consequences of his noncompliance.

The IRS countered that the petitioner’s procedural failures and conduct demonstrated fraudulent intent. The agency highlighted his repeated refusal to respond to filings, orders, or warnings, leading to deemed admissions under Tax Court Rule 37(c). The IRS also cited his failure to file returns for years with taxable income, concealment of assets, and cash transactions as evidence of fraud under IRC § 6651(f). Additionally, the IRS disputed the deductibility of the claimed expenses, arguing they belonged to BR—a separate corporate entity—and that the petitioner failed to substantiate them under IRC § 162 or provide required records under IRC § 6001.

The Court's Hammer: Why Summary Judgment Was Granted

The Tax Court granted summary judgment in favor of the IRS, dismantling the petitioner’s arguments on three key grounds: his admissions, the constructive dividends doctrine, and overwhelming evidence of fraudulent intent.

**Unreported Income: Admissions and Deemed Concessions

The court ruled that the petitioner’s failure to challenge the IRS’s unreported income determination was fatal. Under Tax Court Rule 34(b)(1)(G), any issue not raised in the petition is deemed conceded. The petitioner’s silence on the IRS’s calculation of $883,000 in unreported income—including gross receipts, constructive dividends from BR, and rental payments—left him no legal footing to contest the deficiencies. The court cited Ottuso v. Commissioner, T.C. Memo. 2024-91, which holds that unchallenged items in a bank deposits analysis are deemed conceded.

The record further supported the IRS’s position. The petitioner received unreported income through SG, Square, BR’s constructive dividends, and rent payments. Constructive dividends under IRC § 301(c)(1) occur when a corporation confers an economic benefit on a shareholder without repayment. The court found BR’s distributions were made from earnings and profits, and since the petitioner did not repay BR, they were properly treated as constructive dividends and included in his gross income. His prior criminal conviction for willful failure to file under IRC § 7203 reinforced his awareness of tax obligations and deliberate evasion.

**Deductions: Corporate Expenses and Lack of Substantiation

The petitioner’s attempt to deduct BR’s corporate expenses was rejected. The court noted that corporations are distinct legal entities, and expenses incurred by a corporation are deductible by the corporation, not its owner. The petitioner’s failure to distinguish between personal and corporate expenses doomed his claims. The court relied on Alioto v. Commissioner, T.C. Memo. 2025-125, which bars taxpayers from deducting a wholly owned corporation’s business expenses on their individual returns.

Even if the expenses were deemed personal, the petitioner failed to substantiate them under IRC § 162 and IRC § 6001. He provided no receipts, invoices, or records to support the claimed deductions. The Ninth Circuit’s ruling in Bradford v. Commissioner, 796 F.2d 303 (9th Cir. 1986), holds that unsubstantiated expenses are not deductible. The Tax Court applied this principle, denying all claimed deductions.

**Fraudulent Failure to File: Badges of Fraud and Clear Evidence

The court found the petitioner’s failure to file tax returns was fraudulent under IRC § 6651(f), which imposes a 75% penalty on tax due for fraudulent failures to file. The IRS met its burden of proving fraud by clear and convincing evidence, relying on the petitioner’s admissions and "badges of fraud."

The petitioner exhibited multiple badges of fraud: understatement of income, inadequate records, failure to file returns, concealment of assets, and cash transactions. He failed to report $883,000 in income, kept no records, and used BR’s accounts for personal expenses. His prior criminal conviction for willful failure to file under IRC § 7203 conclusively established willful neglect. The court cited Petzoldt v. Commissioner, 92 T.C. 661 (1989), which recognizes consecutive years of non-filing as persuasive evidence of fraud.

The petitioner’s deemed admissions under Tax Court Rule 37(c) further established fraud. The IRS relied on his admissions—including failure to file despite taxable income—to meet the clear and convincing evidence standard. His history of noncompliance left no doubt that his failure to file was intentional.

The Fallout: What This Means for Taxpayers and the IRS

The Tax Court’s ruling in Boobies Rock! Inc. is more than a legal defeat for the petitioner—it is a stark warning to taxpayers who gamble with compliance, particularly those operating through corporate entities. The case underscores the IRS’s growing arsenal of tools to dismantle tax evasion schemes, from deemed admissions to bank deposit reconstructions, while also clarifying the high bar required to prove fraudulent intent.

For taxpayers with corporate income, the decision is a cautionary tale about the dangers of failing to file returns. The court’s summary judgment hinged on the petitioner’s admissions—including his failure to file despite taxable income—which the IRS used to establish fraud under Section 6651(f). This penalty, which imposes a 75% penalty on the unpaid tax, carries no statute of limitations and is reserved for cases where the IRS proves fraud by clear and convincing evidence. The petitioner’s history of noncompliance, including prior criminal convictions, left no room for doubt that his failure to file was intentional. Taxpayers who believe ignorance or oversight will shield them from liability should take note: the Tax Court has repeatedly rejected such arguments, especially when the taxpayer had actual knowledge of filing obligations.

The case also highlights the risks of using corporate accounts for personal expenses—a practice that can trigger constructive dividends under Section 301(c). The IRS treats personal withdrawals from a corporate entity as taxable dividends to the extent the corporation has earnings and profits, even if no formal distribution occurred. The court’s analysis in this case suggests that the IRS is increasingly scrutinizing such transactions, particularly in closely held corporations where the line between personal and business finances is often blurred. Taxpayers who treat corporate funds as their personal piggy bank risk not only dividend income tax but also accuracy-related penalties under Section 6662(a) for substantial understatements.

The IRS’s reliance on deemed admissions under Tax Court Rule 37(c) further demonstrates the agency’s procedural advantage in fraud cases. When a taxpayer fails to respond to a request for admissions, the matter is conclusively established—a rule that can tilt the scales in the IRS’s favor before trial even begins. The petitioner’s admissions, including his failure to file returns despite taxable income, were pivotal in meeting the clear and convincing evidence standard for fraud. This underscores the importance of timely and strategic responses to IRS requests, as silence can be interpreted as concession.

The court’s decision also reinforces the IRS’s use of bank deposits analysis to reconstruct income, a method that has become a staple in audits of cash-intensive businesses. By tracing unexplained deposits to personal accounts, the IRS can establish unreported income, shifting the burden to the taxpayer to disprove the inference. The petitioner’s inability to rebut the IRS’s reconstruction—combined with his admissions—sealed his fate. Taxpayers who operate in cash economies or lack meticulous records should heed this: the IRS’s forensic tools are increasingly sophisticated, and the burden of proof in fraud cases is steep.

Finally, the case serves as a reminder of the consequences of noncooperation with the IRS. The petitioner’s history of evasion, from prior criminal convictions to his refusal to engage in good faith with the agency, left the court with little sympathy. The Tax Court’s willingness to grant summary judgment in the IRS’s favor signals that taxpayers who stonewall or obfuscate will face swift and severe penalties. For those with similar fact patterns—sole owners of corporations, taxpayers with histories of noncompliance, or individuals who have previously skirted tax obligations—the message is clear: the IRS is not merely seeking to collect unpaid taxes; it is determined to punish fraud, and the courts are backing them up.