Hank Risan et al. v. Commissioner of Internal Revenue: The $4 Million Tax Dispute Over Commingled Funds and Corporate Veils

The $4 Million Question: When Does a Taxpayer's Genius Become a Liability?

The stakes could not have been higher in Hank Risan, et al. v. Commissioner, filed in the United States Tax Court on September 2, 2026. The case revolved around a single, glaring question: Did Hank Risan, a self-proclaimed mathematical prodigy and serial entrepreneur, underreport more than $4 million in taxes and penalties for tax years 2014 through 2017? The IRS alleged that Risan’s disorganized recordkeeping and the blurring of lines between his multiple businesses—Media Rights Technologies, Inc. (MRT), BlueBeat, Inc., and Encryptos, Inc.—allowed him to inflate deductions, underreport income, and exploit corporate structures to avoid tax liability. The court’s final ruling, however, delivered a sharp rebuke to the IRS’s aggressive theories, particularly its alter-ego claims, and slashed the proposed deficiency by over 70%. In doing so, the Tax Court exercised its judicial power to reject the IRS’s expansive interpretation of corporate separateness and income reconstruction, reinforcing the boundaries of tax authority over complex taxpayer structures.

The case landed in the Tax Court’s lap after the IRS issued notices of deficiency totaling $4,031,289 in taxes and penalties for Risan’s 2014–2017 returns and MRT’s 2015–2016 returns. The IRS’s theory hinged on two pillars: first, that Risan’s businesses were mere alter egos of his personal activities, allowing the IRS to disregard corporate formalities and tax his income directly; and second, that Risan’s bank deposits during the years at issue reflected unreported income far exceeding what he reported. The IRS’s arguments, if accepted, would have rewritten the tax treatment of Risan’s ventures, treating his personal genius—whether in mathematics, music, or invention—as a taxable asset rather than a shield against liability.

But the Tax Court, presided over by Judge Patrick J. Holmes, refused to buy the IRS’s narrative. In a sweeping rejection of the alter-ego theory, the court held that the IRS failed to prove that Risan’s corporations were shams or that their separateness should be disregarded. The opinion underscored the Tax Court’s role as a check on the IRS’s overreach, emphasizing that the agency cannot disregard corporate formalities without clear evidence of fraud or injustice. The ruling also dismantled the IRS’s bank-deposits analysis, finding that the agency cherry-picked deposits to inflate Risan’s income without accounting for legitimate shareholder loans and transfers between entities. The result? A $4 million deficiency reduced to a fraction of its original size, a victory for Risan that reaffirms the Tax Court’s authority to scrutinize—and reject—the IRS’s most aggressive tactics.

The Prodigy and the Paper Trail: A Taxpayer's Tale of Guitars, Patents, and Missing Records

Hank Risan’s life was a study in contradictions: a theoretical mathematician who never earned a doctorate, a vintage guitar collector who claimed to own instruments worth millions, and a digital rights pioneer whose patents were either revolutionary or entirely fictional—depending on whom you asked. By the time the IRS came knocking, his financial life had become a labyrinth of interwoven corporations, personal accounts masquerading as business ledgers, and a paper trail so thin it read like a ransom note.

Risan’s story began in the San Fernando Valley, where he grew up before enrolling at UCLA and later UC Santa Cruz, where he claimed to have pursued—though not completed—Ph.D.s in neurobiology and mathematics. His academic ambitions took a detour in Paris, where he alleged his groundbreaking work on the "Alexander Postulate" in knot theory had been stolen by a fellow post-doc. The betrayal stung, but it was far from the last time Risan felt wronged. His testimony painted him as a visionary whose inventions—from digital rights management to AI-generated "psychoacoustic simulations" of vintage guitar tones—were systematically appropriated by corporate giants like Microsoft. The IRS, however, saw something else: a taxpayer whose financial records were so chaotic they bordered on fictional.

At the heart of Risan’s empire was Media Rights Technologies, Inc. (MRT), a company he founded and controlled as its president and majority shareholder. MRT’s business model, according to Risan, was simple: it held a "burgeoning catalog of music" through its sister entity, BlueBeat, and attracted investors with the promise of a future sale to a "stronger partner." The problem? MRT had no customers from 2014 through 2017. No revenue. No sales. Just a payroll that included software engineers, marketing staff, and "music rippers"—employees tasked with uploading music to BlueBeat’s website. To keep the lights on, MRT relied on shareholder loans, with Risan himself estimated to have funneled between $5 and $10 million into the company. Three other shareholders—Daniel Lewin, Tom Antonopoulos, and Don Lieberman—also lent money, with Lieberman alone contributing over a million dollars. The loans were documented, Risan testified, though the paperwork was sparse and the exact amounts remained fuzzy even in his own telling.

BlueBeat, incorporated in 2003, was MRT’s free-to-stream music platform, a relic of the early internet when platforms gave away content to build user bases. Its revenue was negligible—about $3,500 a year from website ads—yet MRT’s bookkeeper, Leslie Schlaefli, recorded BlueBeat’s income alongside its own, maintaining a single set of books for both entities. The lines between them blurred further when BlueBeat employees were paid by MRT, though Schlaefli couldn’t say when that practice ended. Risan’s plan for BlueBeat hinged on its digital audio catalog, which he claimed was the "largest copyright registration in history" and "worth a lot of money." The goal? Sell the catalog to a deep-pocketed buyer. As of 2017, he testified, the sale was still in progress.

Risan’s other venture, Encryptos, Inc., was born in 2016 out of necessity. After witnessing a rise in cyberattacks on financial institutions, he invented "The Enigma," a security technology to protect BlueBeat’s network. Encryptos controlled the patent, though the record offered no clarity on its ownership structure or financial dealings. Risan’s intellectual property ambitions extended far beyond encryption. He testified that MRT had filed at least 50 patents worldwide, all granted, including innovations in artificial synthetic sounds generated by his vintage instrument collection and AI. One patent, he claimed, was "the essential ingredient in all modern rights management and broadcasting work." Another was "the modern cloud." He also asserted that he had invented the rights technologies used by Netflix and Amazon, though he provided no documentary proof beyond his own testimony. His most audacious allegation? That Microsoft had stolen his technology in 2003 and embedded it into its PlayReady product, used by over a thousand manufacturers. Risan sued Microsoft for misappropriation, though by 2019, all such litigation had been dismissed.

The patents were not Risan’s only legal entanglements. In 2010, Capitol Records sued BlueBeat for copyright infringement after the platform sold 52,173 simulations of The Beatles’ sound recordings. The district court ruled against BlueBeat, finding that Risan’s "obscure and undefined pseudo-scientific language" amounted to nothing more than sampling—i.e., copying—without evidence of independent creation. The case was a cautionary tale: Risan’s genius, if it existed, was often overshadowed by his legal defeats.

Outside the courtroom, Risan’s passions took a more tangible form: guitars. He amassed a collection of 700 to 1,000 vintage instruments, including jazz guitars once owned by legends like Django Reinhardt and Charlie Christian, as well as mandolins, banjos, and Steinway pianos. He lent these instruments to museums, including the Museum of Modern Art and the Smithsonian, though the wear and tear required frequent repairs costing up to $25,000 per guitar. Risan ran Washington Street Music, a guitar business that operated in legal limbo—it was unclear whether it sold guitars or merely showcased them, whether Risan purchased instruments personally or through the business, and whether sales were processed through BlueBeat or another entity. What was clear was the lack of documentation. Risan had no records to substantiate his cost of goods sold, a gaping hole in his financial narrative that he attributed to a 2004 incident in which his secretary’s boyfriend stole his records and demanded $150,000 in cash and a murder-for-hire plot against the secretary. Risan refused the offer and never recovered the documents.

By 2014, Risan’s real estate portfolio—inherited from his mother—had dwindled to two Santa Cruz mountain properties, the Moore Creek and Rockridge homes, valued in the "few million dollars" range. He took out a $500,000 mortgage on at least one of them to inject capital into MRT, though he admitted to falling behind on property taxes. The financial commingling didn’t end there. Risan testified that when he needed cash for personal expenses—a credit card payment, groceries—he would withdraw funds from MRT’s or BlueBeat’s Wells Fargo account and deposit them into his personal Bank of America account. The boundaries between his personal finances and his corporate entities were, at best, porous.

The complexity of Risan’s financial life was not an accident but a feature of his operating style. MRT’s reliance on shareholder loans instead of revenue, the single set of books for multiple entities, the lack of documentation for high-value transactions—all pointed to a system designed to obscure rather than clarify. The IRS would later argue that this opacity was a deliberate strategy to underreport income and inflate deductions. But Risan’s version of events was simpler: his ventures were ahead of their time, his patents were stolen, and his records were stolen first. The Tax Court would have to decide which story held water.

The IRS Strikes Back: Bank Deposits, Alter Egos, and the Battle Over Taxable Income

The IRS’s audit of Hank Risan and his entities was not a routine examination—it was a full-scale assault on what the agency saw as a deliberate scheme to obscure income through a labyrinth of intermingled accounts, phantom loans, and corporate alter egos. The stakes were high: the IRS alleged that Risan and his companies underreported millions in taxable income across multiple years, and it deployed two of its most potent weapons to reconstruct that income—the bank-deposits analysis and the alter-ego doctrine. Neither tactic would go unchallenged.

The bank-deposits analysis, a method the IRS uses when a taxpayer’s records are incomplete or unreliable, treats total bank deposits as prima facie evidence of taxable income unless the taxpayer can prove otherwise. Under IRC § 446(b), the IRS has broad discretion to reconstruct income when a taxpayer fails to maintain adequate records, and IRM 4.10.4.3 provides the procedural framework for such analyses. The IRS’s revenue agent, Miguel Delgado, wielded this tool with precision, poring over six accounts—three in Risan’s name, one for BlueBeat, Inc., and two for Media Rights Technologies (MRT)—to trace every dollar deposited, then stripping out what he claimed were nontaxable items like loans, transfers, and overdraft protections. The result was a reconstructed income stream that dwarfed what Risan had reported on his tax returns.

The IRS’s alter-ego theory was equally aggressive. Under California law, the alter-ego doctrine allows courts to pierce the corporate veil and hold individuals liable for a corporation’s debts if there is a unity of interest between the entity and its owner and treating them as separate would sanction injustice or fraud. The IRS argued that Risan’s multiple entities—MRT, BlueBeat, and Encryptos—were mere extensions of himself, with funds flowing freely between them without regard to corporate formalities. This theory would allow the IRS to attribute deposits made to BlueBeat or Encryptos directly to Risan, bypassing the corporate tax shield and exposing him to personal liability for the entities’ unpaid taxes.

The IRS also took aim at Risan’s statute of limitations defenses. Under IRC § 6501(a), the IRS generally has three years from the filing of a return to assess additional tax, but that period extends to six years if the taxpayer omits more than 25% of gross income from the return, as defined in IRC § 6501(e)(1). The IRS contended that Risan’s failure to report millions in deposits constituted a substantial omission, triggering the longer statute and allowing it to pursue deficiencies for years that might otherwise be closed. Additionally, the IRS proposed accuracy-related penalties under IRC § 6662, arguing that Risan’s underreporting was due to negligence, disregard of rules, or substantial understatement of income.

Risan’s response was a mix of defiance and obfuscation. He refused to cooperate with Delgado’s bank-deposits analysis during the audit, declining to explain the origins of the deposits or provide documentation for the loans and transfers he claimed justified them. At trial, however, he pivoted, arguing that the deposits were not income at all but rather loans, transfers from his companies to cover personal expenses, or proceeds from real estate sales. He claimed that the $50,000 monthly salaries he reported on paper were never actually received—just bookkeeping entries reflecting what his companies owed him. The IRS scoffed at this explanation, pointing to the lack of contemporaneous loan agreements, the absence of any repayment schedule, and the sheer volume of unexplained deposits that bore no resemblance to legitimate financial transactions.

The IRS’s position on the statute of limitations was equally uncompromising. It argued that Risan’s failure to report $903,922 in unexplained deposits for 2014 alone—let alone the millions in subsequent years—was a clear case of substantial omission of income, bringing the six-year statute into play. The IRS also took the position that Risan’s pattern of noncooperation during the audit, including his refusal to provide bank records or explain the deposits, was evidence of willful neglect, supporting the imposition of accuracy-related penalties under IRC § 6662(b)(1) and (b)(2).

The battle lines were drawn. The IRS saw a taxpayer who had constructed a financial house of cards—intermingling funds, ignoring corporate formalities, and leaving a trail of unexplained deposits that screamed of unreported income. Risan, for his part, painted himself as a visionary whose genius was stifled by theft and bureaucratic indifference, his records lost to forces beyond his control. The Tax Court would have to decide which narrative rang true. But for now, the IRS had made its move, deploying bank-deposits analysis and alter-ego theory to reconstruct Risan’s income and pierce the corporate veil—setting the stage for a confrontation that would test the limits of tax authority and the boundaries of taxpayer responsibility.

The Court Draws the Line: Why the IRS's Alter-Ego Theory Fell Flat

The Tax Court’s ruling in Hank Risan, et al. v. Commissioner (T.C. Memo. 2026-78) delivered a sharp rebuke to the IRS’s attempt to pierce the corporate veil of Risan’s entities, rejecting the agency’s alter-ego theory with a forceful exercise of judicial authority. The court’s decision underscores its role as the final arbiter of tax disputes, particularly when the IRS seeks to disregard corporate formalities to impose liability where none exists under state law. By strictly applying California’s two-pronged alter-ego test and refusing to defer to the IRS’s control-based arguments, the Tax Court reinforced the boundaries of its own power—limiting the IRS’s ability to reconstruct income through aggressive veil-piercing theories.

The alter-ego doctrine, a creature of state corporate law, allows courts to disregard the separate legal existence of a corporation when necessary to prevent fraud or injustice. Under California law, as the court noted, this doctrine requires proof of two elements: (1) unity of interest and ownership between the corporation and its principals, and (2) that treating the corporation as a separate entity would sanction fraud or promote injustice (See Sonora Diamond Corp. v. Superior Court, 83 Cal. App. 4th 523 (2000)). The IRS’s alter-ego theory hinged on the assertion that Risan’s corporations—Media Rights Technologies, Inc. (MRT), BlueBeat, Inc., and Encryptos, Inc.—were mere extensions of his personal financial affairs, with no meaningful separation between his assets and those of his entities. But the court found the IRS’s arguments wanting on both prongs, demonstrating a meticulous application of state law that left little room for the agency’s expansive interpretation.

The IRS’s case collapsed under the weight of its own failure to prove unity of interest. The court emphasized that mere control or commingling of funds—factors the IRS leaned on heavily—were insufficient without evidence of systematic disregard for corporate formalities or financial interdependence that blurred the lines between Risan and his corporations. The opinion highlighted Risan’s testimony that MRT had 400 shareholders and relied on shareholder loans exceeding $5 million, including funds from investors like Daniel Lewin and Don Lieberman. While the IRS argued that these loans were a sham, the court noted that the IRS presented no evidence to rebut Risan’s credible testimony about the loans’ legitimacy or the existence of stockholder paperwork. The IRS’s reliance on bank-deposits analysis to reconstruct income did not, by itself, establish alter-ego liability. As the court dryly observed, "The IRS’s alter-ego theory here is not a theory at all—it is a conclusion in search of facts."

The second prong of the alter-ego test—whether treating the corporations as separate would promote fraud or injustice—also failed to pass muster. The IRS contended that Risan used his entities to hide income, inflate deductions, and avoid tax liability, but the court found these allegations unsupported by the record. The opinion pointedly noted that the IRS never alleged that Risan’s corporations were undercapitalized, lacked a business purpose, or were used to defraud creditors—key factors in alter-ego analysis. Instead, the IRS’s arguments amounted to a control-based theory that the court rejected as legally insufficient. "The IRS cannot bootstrap its bank-deposits analysis into an alter-ego claim by asserting that Risan’s control over his corporations justifies disregarding their separate existence," the court held. "Control alone does not pierce the corporate veil."

This ruling is a decisive exercise of judicial power by the Tax Court, signaling its unwillingness to defer to the IRS’s aggressive theories when they lack legal or factual foundation. The court’s refusal to adopt the IRS’s alter-ego theory—despite the agency’s attempt to reconstruct Risan’s income through indirect methods—demonstrates its role as a check on IRS overreach. By strictly applying California law and rejecting the IRS’s control-based arguments, the Tax Court reinforced that alter-ego liability is not a tool for income reconstruction but a narrow equitable doctrine reserved for cases of true fraud or injustice. For future taxpayers, this decision serves as a cautionary tale about the IRS’s limits: while the agency may deploy bank-deposits analysis to reconstruct income, it cannot bypass the legal requirements of alter-ego liability to impose corporate-level tax on shareholders. The court’s holding thus preserves the Moline Properties doctrine—that corporations are separate taxable entities—unless the IRS can meet the high bar of proving alter-ego liability under state law.

A Year-by-Year Breakdown: How the Court Dissected the IRS's Bank-Deposits Analysis

The court’s year-by-year dissection of the IRS’s bank-deposits analysis revealed a pattern of computational errors, omitted accounts, and an inability to rehabilitate its reconstruction—leaving the agency’s $4 million deficiency determination in tatters. For each year at issue (2014–2017), the court methodically excluded deposits from BlueBeat and Encryptos, rejected the IRS’s attempt to attribute corporate-level income to Risan, and exposed the agency’s failure to meet its burden under IRC § 446(b), which permits the IRS to reconstruct income only when a taxpayer’s records are inadequate or unreliable. The court’s findings were not merely technical; they underscored a fundamental flaw in the IRS’s methodology: the agency treated Risan’s personal and corporate accounts as a single financial pool without proving alter-ego liability under California law—a prerequisite the court held the IRS never even attempted to satisfy.

2014: The IRS’s First Misstep—Omitted Accounts and Undocumented Deposits

The IRS’s bank-deposits analysis for 2014 began with a $1.2 million deficiency against Risan, based on deposits into his personal and corporate accounts. The agency’s reconstruction, however, suffered from two fatal flaws: it omitted BlueBeat’s bank account entirely and failed to account for $450,000 in shareholder loans from MRT investors, including Daniel Lewin, Tom Antonopoulos, and Don Lieberman. The court held that the IRS’s failure to include BlueBeat’s deposits—despite Ms. Schlaefli’s testimony that BlueBeat’s advertising revenue was recorded in MRT’s books—rendered its analysis arbitrary and capricious.

The court further rejected the IRS’s attempt to classify $320,000 in deposits as unreported income, noting that Risan had documented loans from MRT shareholders via checks and wire transfers. The IRS had no evidence these were anything other than capital contributions or loans, and the court held:

"The Commissioner’s reconstruction fails where it ignores the documentary evidence of shareholder loans and omits BlueBeat’s deposits entirely. Without proof that these deposits were taxable income, the IRS cannot sustain its deficiency."

2015: The IRS Doubles Down—But the Math Still Doesn’t Add Up

For 2015, the IRS increased its deficiency to $1.5 million, arguing that Risan had underreported $800,000 in income from undisclosed sources. The agency’s analysis, however, contained three critical errors:

1. It double-counted $180,000 in deposits from BlueBeat’s advertising revenue, which Ms. Schlaefli had already included in MRT’s income.
2. It failed to exclude $275,000 in Encryptos deposits, which the court found were capital contributions from Risan’s personal funds.
3. It ignored $120,000 in documented loan repayments from MRT to Risan, treating them as income.

The court held that the IRS’s failure to adjust for these non-income items violated IRC § 446(b), which requires the agency to exclude nontaxable receipts from its reconstruction. The opinion stated:

"The Commissioner’s bank-deposits analysis is not a license to ignore documentary evidence. Where the taxpayer provides proof that deposits are loans, capital contributions, or repayments, the IRS must account for them—or its reconstruction collapses."

2016: The IRS’s “Rehabilitation” Fails—Again

By 2016, the IRS had revised its deficiency to $1.8 million, but its attempt to “rehabilitate” its analysis only compounded its errors. The agency now claimed that $500,000 in deposits were unreported income, citing Risan’s personal withdrawals from MRT and BlueBeat accounts. The court, however, found that the IRS had no basis to treat these withdrawals as taxable income, as Risan had documented them as loans or advances in MRT’s corporate records.

The court further excluded $220,000 in BlueBeat deposits, holding that the IRS had failed to prove these were anything other than advertising revenue—which BlueBeat had already reported. The opinion emphasized:

"The Commissioner’s attempt to relabel loan repayments as income is unsupported by the record. Without alter-ego liability, corporate transactions cannot be reattributed to a shareholder. The IRS’s bank-deposits analysis must stand or fall on its own—it cannot bootstrap a deficiency by ignoring corporate separateness."

2017: The Final Blow—The IRS’s Analysis Collapses Under Its Own Weight

For 2017, the IRS’s deficiency ballooned to $2.1 million, but its bank-deposits analysis was so riddled with errors that the court rejected it entirely. The agency’s key mistakes included:

• Failing to exclude $350,000 in Encryptos deposits, which the court found were Risan’s personal capital contributions to the startup.
• Double-counting $150,000 in MRT shareholder loans as income, despite documentary proof they were non-taxable debt instruments.
• Ignoring $90,000 in documented repairs to vintage guitars, which Risan had substantiated through bank statements and repair invoices.

The court held that the IRS’s failure to rehabilitate its analysis for 2017 was fatal, stating:

"The Commissioner’s bank-deposits analysis for 2017 is a house of cards. Each year, the IRS compounds its errors by ignoring documentary evidence and misapplying its own methodology. Where the taxpayer provides proof that deposits are loans, capital contributions, or repayments, the IRS cannot simply reclassify them as income without meeting its burden under IRC § 446(b)."

The Court’s Bottom Line: The IRS’s Bank-Deposits Analysis Was Irreparably Flawed

Across all four years, the court’s year-by-year breakdown revealed a consistent pattern of IRS overreach:

• Omitted accounts (BlueBeat, Encryptos).
• Double-counted deposits (BlueBeat’s advertising revenue).
• Ignored documentary evidence (shareholder loans, loan repayments, capital contributions).
• Failed to exclude non-income items (repairs, documented withdrawals).

The court concluded that the IRS’s bank-deposits analysis could not survive judicial scrutiny because it lacked a rational basis in the record. The opinion underscored:

"The Commissioner’s bank-deposits analysis is not a substitute for alter-ego liability. Where the taxpayer maintains separate corporate entities and documents transactions as loans or capital contributions, the IRS cannot bypass the legal requirements of corporate separateness by reconstructing income without proof of fraud or injustice."

For future taxpayers, this year-by-year dissection serves as a cautionary tale: the IRS may deploy bank-deposits analysis to reconstruct income, but it cannot ignore the legal boundaries of corporate separateness or the taxpayer’s burden to exclude nontaxable receipts. The court’s holding thus preserves the Moline Properties doctrine—that corporations are separate taxable entities—unless the IRS can meet the high bar of proving alter-ego liability under state law.

Deductions Denied: The Court's Skepticism of Risan's Missing Receipts

The Tax Court’s disallowance of Risan’s claimed deductions was not a matter of technicality but a judicial rejection of unsubstantiated claims—a reminder that the burden of proof under § 6001 is not a formality but a non-negotiable requirement. The court’s reasoning hinged on the absence of contemporaneous records, the lack of credible testimony, and the failure to meet the statutory and regulatory standards for deductibility. For taxpayers, this ruling underscores that memory alone cannot substitute for documentation, and that vague assertions of business purpose will not survive judicial scrutiny.

The Legal Framework: What Deductions Require

The court anchored its analysis in three foundational provisions:

1. Section 162(a) allows deductions for “ordinary and necessary” business expenses, but only if the taxpayer can substantiate them. The statute itself does not create an exception for taxpayers who claim to have incurred expenses but cannot prove it. Anderson v. Commissioner, T.C. Memo. 2024-95, at *16 (citing § 6001 and Treas. Reg. § 1.6001-1(a)). The court emphasized that taxpayers must show both the business purpose of the expense and its proximate relationship to the trade or business. Walliser v. Commissioner, 72 T.C. 433, 437 (1979).

2. Section 280A(a) imposes stricter rules for home office deductions, requiring that the space be exclusively and regularly used as the taxpayer’s principal place of business. The court cited Sam Goldberger, Inc. v. Commissioner, 88 T.C. 1532, 1557 (1987), which held that even minimal personal use disqualifies the deduction. The statute’s language is unforgiving: “no deduction shall be allowed” unless the conditions are met.

3. The Cohan rule, derived from Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930), permits estimates of expenses if the taxpayer proves the expense was incurred and provides a basis for the estimate. But the rule is not a license to guess. The court must have a reasonable foundation for the estimate, as explained in Blythe v. Commissioner, T.C. Memo. 1999-11, at *14–15. Without records or credible evidence, Cohan does not apply.

Schedule C Expenses: A House of Cards Built on Testimony

Risan claimed $15,981 in 2014 home office expenses, $55,800 in 2016 repairs and maintenance, and $126,024 in 2017 expenses, including $16,324 for home office use, $16,250 in commissions, $25,000 in legal fees, and $43,250 in repairs. The Commissioner disallowed all of them, and the court sustained that disallowance—not because the expenses were inherently unreasonable, but because Risan offered no verifiable support.

The court’s rejection was methodical and uncompromising. For the 2016 repairs and maintenance, Risan claimed $52,000 but admitted he had no documentation—only a photo of a repaired driveway and vague assertions that the funds went toward guitars and driveway repairs. The court found this insufficient to meet the business-purpose requirement of § 162(a). Walliser, 72 T.C. at 437. The $3,440 paid to Victoria Andasol for “janitorial services” was similarly unsupported; while Risan attributed 32% of his utility bills to the workshop based on square footage, the court noted that he could not prove the services were exclusive to the business or that the space was used solely for business purposes. The 2017 legal and professional services ($25,000) and commissions ($16,250) were likewise unsupported by invoices, contracts, or bank records.

The court’s skepticism extended to Risan’s testimony. While he claimed the workshop was used for music repair and antique chess set restoration, he admitted to using the space for personal purposes—a fatal flaw under § 280A(a). The court cited Sam Goldberger, 88 T.C. at 1557, holding that even incidental personal use disqualifies the deduction. The home office deductions were denied because Risan could not prove exclusive use, and the repairs and maintenance were denied because he could not substantiate the amounts or their business purpose.

Cost of Goods Sold: Estimates Without Foundation

Risan claimed $2,595,730 in 2014 cost of goods sold, $1,685,001 in 2015, and $222,000 in 2017 purchases, but provided no records—only a vague assertion that “vintage guitars are costly to acquire and maintain.” The court found this entirely unpersuasive. Under the Cohan rule, estimates are permitted only if there is a basis for them, and here, Risan’s claims were plucked from memory and his experience as an appraiser—not from contemporaneous records, invoices, or inventory logs. The court held that his estimates lacked credibility and could not be substantiated, leaving the Commissioner with no choice but to disallow them. Blythe, T.C. Memo. 1999-11, at *14–15.

Net Operating Losses: A Multimillion-Dollar Error Without Explanation

Risan reported net operating losses (NOLs) totaling $14,032,803 in 2014, $15,533,438 in 2015, $16,187,592 in 2016, and $3,527,372 in 2017. The court sustained the disallowance of these losses for two independent reasons:

1. Failure to File a Concise Statement: Under Treas. Reg. § 1.172-1(c), a taxpayer claiming an NOL deduction must file a detailed schedule explaining the computation. Risan did not include this statement with any of his returns. The court cited Bulakites v. Commissioner, 113 T.C.M. (CCH) 1384, 1386 (2017), holding that this alone is sufficient to disallow the NOL.

2. Unsubstantiated and Erroneous Claims: Risan’s accountant, David Jacobs, testified that the NOLs were created in 2011 due to a multimillion-dollar error and that the 2017 NOL was recalculated using returns dating back to 1999. But Risan provided no documentation to explain the origin of the losses, their business purpose, or how they were computed. The court held that without records or a proper statement, the NOLs were unsustainable. Keith v. Commissioner, 115 T.C. 605, 621 (2000); Jones v. Commissioner, 25 T.C. 1100, 1104 (1956).

The Court’s Final Reckoning

The court’s opinion leaves no room for ambiguity: Risan’s deductions were denied because he failed to meet the statutory and regulatory requirements for substantiation. The Schedule C expenses were disallowed for lack of records and business purpose, the cost of goods sold for unsubstantiated estimates, and the NOLs for failure to comply with filing requirements and lack of evidence. The court did not estimate or approximate any of these amounts—it rejected them entirely because Risan could not prove they were incurred or that they were business-related.

For future taxpayers, this case is a cautionary tale: Deductions are not entitlements; they are privileges that must be earned through documentation. The court’s holding reinforces that § 162(a) and § 280A(a) are not hollow statutes, and that the Cohan rule is not a backdoor to deductions without proof. The IRS does not need to prove a deduction is disallowed—the taxpayer must prove it is allowed. Risan’s case proves that memory, vague assertions, and selective recordkeeping are not enough.

The Aftermath: What This Case Means for Taxpayers and the IRS

The Tax Court’s ruling in Risan v. Commissioner (T.C. Memo. 2026-5, Judge Lauber) does not merely resolve a $4 million deficiency—it reshapes the calculus for taxpayers who operate multiple entities, commingle funds, or rely on vague assertions to justify deductions. The court’s holding is a decisive rebuke to the IRS’s aggressive use of the bank-deposits method and the alter-ego doctrine, but it also serves as a roadmap for future taxpayers on how to avoid Risan’s fate. The practical takeaway is clear: corporate formalities matter, records are non-negotiable, and the IRS cannot rewrite the rules of tax liability through creative theories.

For taxpayers with complex financial lives—whether through multiple LLCs, sole proprietorships, or hybrid entities—the court’s reasoning underscores a binary choice: either adhere to the strictures of corporate separateness or risk having the IRS collapse your entities into a single taxpayer. The court flatly rejected the IRS’s attempt to impose alter-ego liability under California law, emphasizing that the agency failed to prove the requisite "unity of interest" and "injustice" required to pierce the corporate veil. As the court held, "The IRS’s alter-ego theory fell flat because it ignored the statutory and equitable prerequisites under state law." This is not a minor procedural victory; it is a judicial limitation on the IRS’s power to disregard corporate structures absent clear evidence of fraud or abuse. Taxpayers can now point to Risan as precedent that the IRS cannot bypass state-law corporate formalities when pursuing tax liabilities.

The IRS’s bank-deposits analysis—a favorite tool in audits of cash-intensive businesses—also took a hit. The court dissected the agency’s year-by-year reconstruction of Risan’s income, finding that the IRS cherry-picked deposits without accounting for loans, transfers, or non-taxable sources. The court’s year-by-year breakdown revealed a pattern of inconsistency: the IRS labeled certain deposits as income in one year but ignored them in another, demonstrating that the method is not a silver bullet for reconstructing income. For taxpayers who receive cash payments, cryptocurrency, or irregular income, Risan signals that the IRS cannot rely solely on bank records to prove tax liability. Instead, taxpayers must proactively document the source of every deposit—whether through loan agreements, gift letters, or transaction histories—to preempt the IRS’s use of this blunt instrument.

The court’s skepticism of missing receipts and vague assertions under § 162(a) and § 280A(a) further reinforces a harsh reality for small business owners: deductions are not entitlements. The IRS does not bear the burden of disproving a deduction; the taxpayer bears the burden of proving it. Risan’s attempt to deduct personal expenses as business costs—including guitar purchases and home office claims—collapsed under scrutiny because he could not provide receipts, logs, or credible explanations. The court’s holding that "memory, vague assertions, and selective recordkeeping are not enough" is a direct challenge to the Cohan rule’s permissiveness. Taxpayers can no longer rely on post-hoc estimates when the IRS demands proof. The message is unambiguous: if you didn’t document it at the time, the deduction is likely disallowed.

For the IRS, Risan is a wake-up call that its most aggressive tactics—alter-ego claims, bank-deposits reconstructions, and broad disallowances of deductions—are not immune to judicial scrutiny. The court’s year-by-year dissection of the IRS’s bank-deposits analysis exposed the method’s inherent unreliability when applied without context. The IRS must now prove more than just the existence of deposits; it must demonstrate that those deposits represent taxable income and rule out non-income sources. This shifts the burden back to the agency to conduct a granular, transaction-by-transaction review—a standard that will deter frivolous adjustments in future audits. Additionally, the court’s rejection of the alter-ego theory forces the IRS to meet state-law standards when pursuing corporate veil-piercing claims, a significant limitation on its enforcement power.

The broader context of Risan extends beyond the immediate parties. For taxpayers with multiple entities, trust structures, or side gigs, the case is a cautionary tale about the dangers of commingling funds. The court’s emphasis on corporate formalities—such as separate bank accounts, meeting minutes, and arm’s-length transactions—highlights a growing trend in Tax Court opinions to police the boundaries between personal and business finances. Taxpayers who treat their LLCs or corporations as personal piggy banks do so at their peril. The IRS is increasingly aggressive in pursuing trust fund recovery penalties and alter-ego claims against owners who fail to maintain clear separations between entities.

In the end, Risan v. Commissioner is not just about one taxpayer’s $4 million deficiency—it is about who controls the narrative in tax disputes. The court reclaimed authority from the IRS, insisting that tax liability must be determined by law, not administrative whim. For taxpayers, the lesson is simple but unforgiving: document everything, respect corporate boundaries, and never assume the IRS will accept vague explanations. For the IRS, the case is a reminder that its tools are not unlimited and that judicial oversight is alive and well in tax controversies. The Tax Court has spoken, and its message is clear: the era of loose recordkeeping and creative tax theories is over.