Hank Risan, et al. v. Commissioner of Internal Revenue, T.C. Memo. 2026-78 (Sept. 2, 2026)

Hank Risan is a California-based music enthusiast and inventor who claimed to have an advanced, multi-disciplinary academic background in theoretical mathematics and topology, vintage guitar restoration, and software development. He founded and served as President and CEO of Media Rights Technologies, Inc. (MRT), an intellectual property and digital rights management software firm in which he held a 51% to 67% majority ownership stake. Although MRT had no customers from 2014 through 2017, it claimed more than 400 shareholders by the end of 2017 and maintained substantial salary expenses for software engineers, marketing staff, and “music rippers” who digitially uploaded tracks onto BlueBeat.com, a music broadcasting site.

Risan also controlled BlueBeat, Inc. (incorporated in 2003) and Encryptos, Inc. (incorporated in 2016), which held “The Enigma” network security technology. BlueBeat ran an online guitar museum called TheMomi.org and streamed music, generating negligible revenue of approximately $3,500 annually in advertisements. Despite their separate corporate statuses, Risan kept only one set of books for MRT and BlueBeat, commingling their bank transactions and records. Risan would regularly withdraw funds from corporate Wells Fargo bank accounts for his personal credit card payments, groceries, and other living expenses, or deposit investor loans directly into his personal Bank of America account. On paper, Risan was entitled to a salary of $50,000 per month from both MRT and BlueBeat, but he withdrew only small amounts and reported W-2 wages of just $1,200 per year from MRT.

In addition to his software ventures, Risan claimed to own an extensive collection of 700 to 1,000 vintage celebrity guitars, which he repaired at his home workshop. He claimed that in 2004, his secretary’s boyfriend stole his guitar business records and demanded a ransom—asking Risan to murder the secretary and pay $150,000 in cash—which Risan refused, leaving him without historical documentation for his cost of goods sold (COGS). He also received a real estate portfolio from his mother, which he traded via Section 1031 exchanges, eventually retaining two valuable Santa Cruz properties (Moore Creek and Rockridge), one of which he mortgaged for $500,000 to fund MRT.

The IRS audited Risan’s individual returns for 2014–2017 and MRT’s corporate returns for 2016–2017. Because Risan refused to cooperate with Revenue Agent (RA) Miguel Delgado, the IRS conducted a bank-deposits analysis across six accounts over which Risan had signatory authority. The IRS issued notices of deficiency proposing multi-million dollar deficiencies, Section 6662(a) negligence penalties, and Section 6651(a)(1) late-filing additions to tax.

Taxpayer Arguments and Relief Requested

Risan petitioned the U.S. Tax Court for relief from these deficiencies and penalties, asserting several procedural and substantive arguments.

First, Risan raised statute of limitations objections. He argued that the normal three-year statute of limitations under Section 6501(a) barred assessment for 2014 and 2015, testifying that he did not sign the Forms 872 (Consent to Extend the Time to Assess Tax) that extended the limitations period to December 31, 2020. He also claimed the limitations period had expired for his 2016 and 2017 individual tax years.
Second, Risan challenged the bank-deposits analyses in their entirety. He asserted that the IRS made excessive and arbitrary assumptions under Westby v. Commissioner, failing to account for inter-corporate transfers, shareholder loans, and real estate exchange proceeds, and failing to review MRT’s Bank of America account ending in 7835, which would show that over $970,000 of his personal deposits were nontaxable loan repayments from MRT.
Third, Risan and MRT sought to sustain millions of dollars in business expense deductions, S corporation net operating loss (NOL) carryforwards, and COGS. Risan argued that his guitar and antique chess set restoration activities constituted bona fide business ventures and that he was entitled to home office deductions under Section 280A for his workshop, backed by photos of his driveway and utility bills. For MRT, Risan asserted that corporate expenses were based on valid checks written for employee salaries and officer compensation.

The Tax Court’s Legal Analysis

The Tax Court’s legal analysis centered on the burden of proof, the alter-ego doctrine, the bank-deposits methodology, and statutory substantiation requirements.

Under Rule 142(a) of the Tax Court Rules of Practice and Procedure, the taxpayer generally bears the burden of proof. While Section 7491(a) allows the burden of proof to shift to the Commissioner on factual issues, this requires the taxpayer to introduce credible evidence, comply with substantiation requirements, maintain all required records, and cooperate with reasonable IRS requests. Under Section 7491(c), the Commissioner bears the burden of production for individual penalties and additions to tax, but the ultimate burden of proof remains on the taxpayer.

To address the statute of limitations, the Court analyzed Section 6501(a), which provides a three-year baseline assessment window, and Section 6501(e)(1), which extends the limitations period to six years if a taxpayer omits gross income exceeding 25% of the gross income reported on the return. Additionally, Section 6501(c)(4) permits the taxpayer and IRS to extend the limitations period via written agreement. On procedural issues, Tax Court Rule 151(e)(4) and (5) dictates that any issue raised in the pleadings but not argued on posttrial brief is deemed conceded or abandoned (Nicklaus v. Commissioner; Rybak v. Commissioner).

A critical legal issue was the Commissioner’s attempt to attribute deposits into BlueBeat’s and Encryptos’s corporate bank accounts to Risan personally. Under Moline Properties, Inc. v. Commissioner, “incorporation creates a distinct taxpayer”. The corporate form can only be ignored if the corporation is a sham or nominee. To determine whether a corporation is an alter ego, the Tax Court looks to the Restatement (Second) of Conflict of Laws Section 6(2) to resolve conflict-of-laws issues (Jenkins v. Commissioner; Gentry v. Commissioner). Under the Jenkins analysis, state law with the “most significant relationship” governs. For a California resident conducting business in California, California state law applies, which requires two conditions for alter-ego liability: (1) “such a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased” and (2) “adherence to the fiction of the separate existence of the corporation would . . . sanction a fraud or promote injustice” (Goodrich v. Briones (In re Schwarzkopf)). Furthermore, federal appellate precedent dictates that “Ownership is a prerequisite to [alter-ego] liability, and not a mere ‘factor’ or ‘guideline’” (SEC v. Hickey).

For the bank-deposits method, deposits are considered prima facie evidence of taxable income (Tokarski v. Commissioner). The taxpayer bears the burden of showing that deposits are nontaxable (Welch v. Commissioner). An entire bank-deposits analysis can be discarded if the taxpayer proves it contains “several obvious errors” and is “excessive, i.e., erroneous and/or arbitrary, ‘without rational foundation’” (Helvering v. Taylor; Westby v. Commissioner). In such cases, if the taxpayer successfully undermines the analysis, the burden shifts back to the Commissioner to rehabilitate it (Garibyan v. Commissioner). Otherwise, under Canatella v. Commissioner, the Court will correct specific, identifiable errors year-by-year.

Regarding deductions, Section 162(a) allows deductions for ordinary and necessary business expenses, but Section 6001 and Treas. Reg. § 1.6001-1(a) require taxpayers to keep permanent books and records sufficient to substantiate those expenses. Under Section 280A, deductions for the business use of a home are disallowed unless a portion of the dwelling is “exclusively used on a regular basis . . . as the principal place of business” or in a “separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business”. Under Cohan v. Commissioner, the Court may estimate expenses, but only if the taxpayer proves they were actually incurred and provides a credible basis for an estimate (Blythe v. Commissioner).

For Net Operating Losses (NOLs), Section 172 and Treas. Reg. § 1.172-1(c) mandate that any taxpayer claiming an NOL deduction “shall file with his return for such year a concise statement setting forth the amount of the net operating loss deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation”. Failure to attach this statement is sufficient grounds for disallowance (Bulakites v. Commissioner).

Finally, on corporate litigation, the Court applied the rule that raising an argument for the first time in a posttrial reply brief is untimely, and the Court will not consider it (DiLeo v. Commissioner; Neely v. Commissioner).

Application of Law to Facts

Applying these legal frameworks, the Tax Court reached several distinct conclusions.

Regarding the statute of limitations, the Court rejected Risan’s claim that his signatures on the Forms 872 were forged, finding “it more likely than not that he did sign them”. Because the Forms 872 extended the assessment period to December 31, 2020, the IRS’s February 11, 2020 notice of deficiency for 2014 and 2015 was timely. For 2016 and 2017, the Court concluded that Risan “abandoned his argument objecting to the limitations periods” by failing to raise it on brief.

On the corporate alter-ego issue, the Court held that the Commissioner failed to make a prima facie case. The record contained “literally nothing . . . of who owns either BlueBeat or Encryptos”. Because “Ownership is a prerequisite to [alter-ego] liability,” the Court rejected the alter-ego characterization and ruled that corporate deposits into BlueBeat’s and Encryptos’s bank accounts could not be attributed to Risan personally.

Analyzing the individual bank-deposits determinations: For 2014 and 2015, Risan successfully demonstrated that the IRS’s bank-deposits analysis was fatally flawed under the Westby standard. The IRS failed to include MRT’s Bank of America account ending in 7835, which was a “significant omission” because it was the source of over $970,000 in personal deposits to Risan’s account. Combined with “major computational errors” (including an $8,000 deposit added three times) and irreconcilable concessions on brief, the Court tossed out the 2014 and 2015 determinations of unreported income entirely.

For 2016, the Court upheld the presumption of correctness for the bank-deposits analysis but corrected it item-by-item. After subtracting the deposits into Encryptos ($106,850) and BlueBeat ($2,050,088.19) due to the failed alter-ego theory, and a $100 overdraft credit, the remaining unexplained deposits were less than Risan’s reported Schedule C gross receipts. Consequently, the Court found Risan had zero unreported Schedule C gross receipts for 2016. The Court did, however, tax a $9,500 deposit because Risan failed to produce a loan agreement.

For 2017, the IRS’s bank-deposits analysis contained an error by using Risan’s 2016 reported Schedule C receipts ($854,500) instead of his 2017 reported receipts ($325,000), though this was corrected on the notice of deficiency. After excluding Encryptos ($144,870) and BlueBeat ($1,444,851.62) deposits, the remaining deposits to Risan’s personal account ($166,421.45) were far below his reported $325,000. Thus, no unreported individual gross receipts were sustained for 2017.

For MRT’s 2017 corporate return, the IRS’s bank-deposits analysis identified $371,431.60 in unexplained deposits. MRT’s bookkeeper provided only “nonspecific testimony” and copied numbers from a profit-and-loss statement without verification, failing to meet MRT’s burden of proof. In its reply brief, MRT argued that $301,650.21 of these deposits were stockholder contributions from common-to-preferred stock conversions, pointing to specific checks. The Court ruled this argument was untimely, stating: “Raising an argument for the first time in a reply brief is untimely, and we will not consider it”. The Court therefore sustained the $371,431.60 in unreported gross receipts for MRT.

For Risan’s Schedule C expenses and COGS, the Court held that the disallowance was proper. Risan’s “unusual” story about stolen records and a murder-for-hire ransom did not relieve him of his Section 6001 recordkeeping obligations. He provided no records for his $25,000-per-guitar repairs or purchase costs, relying entirely on his own “unsubstantiated testimony,” which the Court refused to credit. The Court declined to apply Cohan to estimate COGS because there were “no specific details to support these estimates”. Risan’s home office utility and janitorial deductions under Section 280A were disallowed because he commingled business and personal use and had “no way of determining whether Mr. Risan properly allocated his utility expenses”.

For Risan’s individual NOL deductions, the Court sustained the complete disallowance. Risan failed to file the “concise statement” and detailed schedule required by Treas. Reg. § 1.172-1(c), which “alone is sufficient reason to disallow them”. MRT’s claimed corporate business expenses (including $715,618 in 2016 salaries and $214,802 in 2017 rent) were also disallowed in full because MRT failed to produce checks, payees, or any other verification of payment.

Finally, because the taxpayers presented no evidence or arguments to contest them, the Court sustained the Section 6662(a) accuracy-related penalties against Risan and MRT, and the Section 6651(a)(1) late-filing additions to tax against MRT.

Conclusions and CPA Takeaways

The Tax Court’s decision in Risan v. Commissioner highlights critical lessons for tax practitioners representing entrepreneurial clients with complex, multi-entity operations.

First, the case demonstrates that while the IRS’s bank-deposits methodology carries a strong presumption of correctness, it is highly susceptible to mathematical and systemic errors when corporate structures overlap. Practitioners must meticulously review the IRS’s source documents and bank statements. As shown in Risan’s 2014 and 2015 tax years, identifying a single excluded corporate bank account that explains personal deposits can dismantle the IRS’s entire bank-deposits analysis under the Westby doctrine.

Second, the Court’s rejection of the alter-ego theory is a major victory for corporate separateness. It confirms that the IRS cannot pierce the corporate veil or disregard separate corporate entities simply because a majority shareholder exercises control as CEO and commingles funds. The IRS must meet the high bar of state law—including proving actual ownership and that the corporate form sanctions fraud or promotes injustice—to attribute corporate deposits to an individual.

Third, the case is a stark warning about the absolute necessity of strict recordkeeping. Uncorroborated oral testimony—even with colorful explanations like kidnapped files and ransom demands—will never satisfy the substantiation requirements of Section 162 and Section 6001. Furthermore, practitioners must strictly comply with procedural requirements, such as attaching the concise statement and detailed calculations required by Treas. Reg. § 1.172-1(c) for NOL deductions, and timely raising all defenses during the audit and initial briefing stages rather than attempting to introduce them in a reply brief.

Prepared with assistance from Gemini Notebook.