T.C. Mem o. 2 01 5- 17 4

UNITED STAT ES TAX COURT

MANJ IT ROCHLANI, DECEASED, A ND BONY M. ROCHLANI, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 53 83 -1 1. Fi le d S ep te m be r 8, 2 01 5.

Bo ny M. Roc hl an i, p ro se. Ali ci a A. Mazu rekan d Al ex an dr a E. Nich ol ai de s, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION BUCH, Ju dg e: Res po nd en t i ss ue d ano ti ce o f de fic ie nc y de te rm in in g t he fo ll owi ng de fic ie nc ie s an d p en al ti es with re sp ectto Man jitRo ch lani , dec eas ed , an d B on y Ro ch lani ’s Fed eral in co m e ta x fo r y ears 20 08 an d 2 00 9: 1 Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 (co nt in ue d...)- 2 -

[* 2] Year Defi ci en cy Pen al ty se c. 66 62 (a) 20 08 $6 ,77 2 $1 ,35 4 20 09 5,8 28 1,1 66 Afte r co nc es si on s b y

th e p art ie s, the is su es rem ai ni ng forco ns id erat io n a re whe th er Mr . andMrs . Roc hl an i o pe rat edth ei r bu si ne ss , Ult im at e Pre sa le s, as a C co rp or at io n andwhet he r th ey are l iabl e fo r acc ur acy-rela te d p en al ti es . If th ey di d no t o pe rat e Ult im at e Pre sa le s as a C co rp or at io n, the n the is su e is whet he r th ey en ga ge d i n t ha t ac ti vi ty for p ro fit . On th e ev id en ce p res en te d at tria l, we h ol d t ha t Ult im at e Pre sa le s was a C co rp or at io n a ndth atth e Ro ch lani s, the refo re, are no t en ti tl edto de du ctbu si ne ss lo ss es on th ei r pe rs on al returns . Furt he r, res po nd en t m ethi s b ur de n o f pr oduc ti on as t o t he accu racy-rela te d p en al ti es , andth e Ro ch lani s d idno t es tabl is h a ny defe ns e to th os e p en al ti es . FINDINGS OF FACT Mr. Ro ch lani st art edUlt im at e Pre sa le s i n 2 00 6 a ndwas the pro pr ie to r of th e bu si ne ss . Thro ug h Ul ti m at e Pre sa le s, M r. Ro ch lani bo ug htan d re so ldsp orti ng , co nc ert , andot he r ti ck et s. With ou t p erm is si on fro m hi s p aren ts an d wh il e h e was (...co nt inue d) 1 Rev enue Co de ineffe ctforth e y ears inis su e, an d a ll Ru le refe ren ces are t o t he Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. All m on et ary am ou nt s ar e ro un de d t o th e n eare stdo ll ar.- 3 -

[* 3] st il l a m in or , th e Ro ch lani s’ so n Kh us ha l i nc or po rat edUlt im at e Pre sa le s i n Mi ch ig aninJu ly 200 6 u si ng anon li ne leg al servi ce. Khu sh al was u na ware o f th e ta x d iff eren ces be twee n aso le pro pr ie to rs hi p a nda co rp or at io n wh enhe reg is te red th e b us in es s as a co rp or at io n. Whenth e p ap erwo rkarri ve d, M r. Ro ch lani ask ed Khu sh al whet he r he ha d i nc or po rat edUlt im at e Pre sa le s b utdi d n ot hi ng to st op or un win d t he in co rp or at io n p ro ces s. Th erea fte r, Mr. Ro ch lani fil edco rp or at e an nu al rep orts forUlt im at e Pre sa le s wi th th e Mi ch ig anDepa rtment o f Ene rg y , Labo r & Eco no m ic Growth. Dur in g t he y ears inis su e Mr. an d M rs . Roc hl an i an d t he ir s on s trav el edto va rio us lo cat io ns withi n t he m etro po li tan Det ro itareainad di ti on to tra ve li ng aro un d t he co un try to b uy andres el l s po rti ng , con cert , andothe r ti ck et s. At the sa m e ti m e, Mr. Ro ch lani work edful l t im e as anen gi ne er wi th Fo rdMo to r Co . The Ro ch lani s u se d p ers on al cred itcard s t o m ak e al l p ur ch as es rel at edto th e b us in es s b ecau se Ult im at e Pre sa le s d idno t h av e a b us in es s cr ed itcard . Furth er, al l b us in es s ex pe ns es were p ai d fr om an d b us in es s i nc om e was de po si te d in to th e Ro ch lani s’ per so na l b an k a cco un ts . Accor di ng to Mrs . Roc hl an i, Ul ti m at e Pres al es ha d i ts ownba nkacco un t t o u se forbu si ne ss ex pe ns es , bu t s he clo se d t he acco un t b ecau se th ey

ne ve r us edit .- 4 -

[* 4] Mr. Ro ch lani pre pa redan d t im el y fil edjoi ntFo rm s 1 04 0, U.S. In di vi du al In co m e Tax Return, fo r 20 08 an d 2 00 9. Th e Ro ch lani s at ta ch edto each Fo rm 10 40 a Sch edul e C, Pro fitor Lo ss Fro m Bu si ne ss , id en ti fy in g t he pri nc ip al bu si ne ss of Ul ti m at e Pre sa le s as “ Sel l Go od s” in20 08 an d “ Sel l Go od s an d Tick e[t s]” in20 09 . The Ro ch lani s re po rte d S ch edul e C l os se s o f $4 1,6 10 for20 08 an d $ 44 ,06 6 fo r 20 09 . The rep orte d b us in es s ex pe ns es in cl ud e: bu si ne ss us e o f ho m e, supp li es ex pe ns es , off ic e ex pe ns es , leg al an d p ro fes si on al ex pe ns es , adve rti si ng ex pe ns es , trave l ex pe ns es , car an d t ru ckexpe ns es , othe r ex pe ns es , co nt ractlab orex pe ns es , dep reci at io n a ndsec ti on 17 9 e xp en se s, an d c omm is si on s an d fe es ex pe ns es . Mr. Ro ch lani di d n otke ep an y lo gs or c al en da rs for

tra ve lrel at edexpe ns es or o th er ex pe ns es . He reta in edcred itcardst at em en ts th athe wou ldlat er u se to reco ns tru ctUlt im at e Pre sa le s’ exp en se s. Res po nd en t ex am in edth e Ro ch lani s’ 20 08 an d 2 00 9 re tu rn s an d i ss ue d a no ti ce o f de fic ie nc y

on Decem

be r 10 , 20 10 . In the no ti ce re sp on de ntad jus te d t he Ro ch lani s’ tax li ab il it ie s t o re fle ctrem ov al of the Sch edul es C, as se rti ng th at Ult im at e Pre sa le s was a co rp or at io n. Inad di ti on , res po nd en t m ad e o th er ad jus tm en ts no t i n i ss ue an d d et erm in edaccuracy-rela te d p en al ti es un de r se ct io n 66 62 (a) fo r bo th y ears . W hi le res id in g i n M ic hi ga n, the Ro ch lani s t im el y pe ti ti on ed .- 5 -

[* 5] Afte r th e p et it io n was fil ed , Mr. Ro ch lani pa ss edaway . Mrs . Roc hl an i, as si st edby K

hu sh al , rep res en te d h er i nt eres ts at t ria l. Aft er tria l the Co urt di sm is se d M r. Ro ch lani aft er g iv in g h is he irs anop po rtu ni ty to s te p i nt o h is pl ace. OPINION I. Bu rd enof P ro of The Co m m is si on er’s d et erm in at io ns ina no ti ce o f de fic ie nc y are g en eral ly pr es um edco rrec t, an d t ax pa y ers be ar the bu rd enof p ro vi ng ot he rwis e. The 2 bu rd enm ay

sh iftto th e Co m

m is si on er u nd er s ect io n 7 49 1( a) i f th e ta xp ay er h as co m pl ie d wi th th e n eces sa ry

subs tant ia ti on requi rem en ts , m ai nt ai ne d a de qu at e reco rd s, an d c oo pe rat edwith re as on ab le reque st s b y th e Co m m is si on er fo r witne ss es , in fo rm at io n, d oc um en ts , m eet in gs , andin te rv ie ws. The Ro ch lani s h av e no t ad equa te ly sub st an ti at edall th e ex pe ns es inis su e. Add it io na ll y , th e Ro ch lani s do no t as se rt t ha t the bu rd ensh ou ldsh iftto res po nd en t. As ares ul t, the bu rd en rem ai ns on th e Ro ch lani s.

Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). 2- 6 -

[* 6] II. Rec og ni ti onas aC Co rp or at io n The co rp or at e fo rm

all ows bu si ne ss es “ to ga in anadva nt ag e und er the law of th e st at e o f in co rp or at io n.” Whe re a t ax pa y er ad op ts th e co rp or at e fo rm , and 3

“ so lo ng as t ha t p ur

po se is th e equi va le ntof b us in es s ac ti vi ty or is fol lo wedby the carry in g o n o f bu si ne ss by the co rp or at io n, the co rp or at io n re m ai ns a se pa rat e ta xabl e en ti ty.” 4 To d et erm in e whe th er a co rp or at io n i s o rg an iz edfora bu si ne ss purp os e, we ha ve st at edth at“ [t]he de gr ee o f co rp or at e p ur po se an d a ct iv ity

requi rin g reco gn it io n o f th e co rp or at io n a s a s ep arat e en ti ty is ex tre m el y lo w” an d t he de te rm in at io n t ha t a c or

po rat io n i s d oi ng bu si ne ss is “ ‘notne ces sa ril y de pe nd en t up on th e qua ntum

of b us in es s.’” To b e rec og ni zedas asep arat e ta xabl e en ti ty, a 5 co rp or at io n d oe s n otne edto ke ep acco un t b oo ks or r eco rd s, m ai nt ai n s ep arat e

Mo li ne Pro ps ., Inc . v. Co m m is si on er, 3 19 U.S. 43 6, 4 38 (19 43 ) (ci ti ng 3 Tex as -Em

pi re Pi pe Lin e Co . v. Co m m is si on er, 1 27 F.2d22 0 (1 0t h C ir. 1 94 2) , rev ’g 42 B.T.A. 36 8 (1 94 0) ). Mo li ne Pro ps ., Inc . v. Co m m is si on er, 3 19 U.S. at 4 39 (ci ti ng New Co lo ni al 4 Ice C o. v . Helv eri ng , 29 2 U.S. 4 35 , 44 2 (1 93 4) , andDepu ty v. duPo nt , 30 8 U.S. 48 8, 4 94 (19 40 )). Stro ng v. Co m

m is si on er, 6 6 T.C. 1 2, 2 4 (1 97 6) (qu ot in g B rit t v . Uni te d 5 St at es , 43 1 F .2d22 7, 2 35 , 23 7 (5 th Cir . 19 70 )), aff ’d witho utpubl is he d o pi ni on , 55 3 F .2d94 (2dCir . 19 77 ).- 7 -

[* 7] ba nkacco un ts or c red itcard s, o r own an y ass et s. Andwhen th e co rp or at e

6 fo rm is ad op te d, t ax pa y ers are n otpe rm itte d t o c la im in di vi du al de du ct io ns forth e pa ym en t o f co rp or at e ex pe ns es . A tax pa y er’s ch oi ce t o a do ptth e co rp or at e fo rm 7 requi res th e acc ep tanc e o f it s t ax di sa dv an ta ge s. 8 Co urts ha ve he ldth at“ th e co rp or at e fo rm m ay be di sr eg ard edwher e itis a sh am or u nr eal .” Whe n atax pa y er trie s t o avo idth e ta x d is advant ag es of t he

9 co rp or at e fo rm , ho wev er, the “ cl ai m th athi s co ntro ll edco rp or at io n s ho ul d b e di sr eg ard edwil l b e cl os el y scrut in iz ed .” 1 0 The Ro ch lani s re po rte d the fol lo win g b us in es s ex pe ns es on th ei r 20 08 an d 20 09 Fo rm s Sc he du le C: b us in es s u se of h om e, supp li es ex pe ns es , off ic e ex pe ns es , leg al an d p ro fes si on al servi ces ex pe ns es , adv ert is in g e xp en se s, trav el ex pe ns es , car an d t ru ckex pe ns es , othe r ex pe ns es , con tra ctlab orex pe ns es , de pr eci at io n a ndsec ti on 17 9 e xp en se s, an d c omm is si on an d fe es expe ns es . Howev er, Khus ha l i nc or

po rat edUlt im at e Pre sa le s i n M ic hi ga n i n J ul y 20 06 . An Mo li ne Pro ps ., Inc . v. Co m m is si on er, 3 19 U.S. at 4 38 . 6 Dep ut y v. du P on t, 3 08 U.S. at 4 94 . 7 Bu rn etv. Co m

m on weal th Im

pr ov em en t Co ., 28 7 U.S. 4 15 , 41 9- 42 0 (1 93 2) . 8 Mo li ne Pro ps ., Inc . v. Co m m is si on er, 3 19 U.S. at 4 39 . 9 Stro ng v. Co m

m is si on er, 6 6 T.C. at24 . 1 0- 8 -

[* 8] en ti ty form edas aSta te -la w cor po rat io n i s treat edas aco rp or at io n fo r Fed eral ta x p ur po se s. See sec . 30 1.7 70 1- 2( b) (3 ), Pro ced . & Adm in . Reg s. No ne th el es s, th e Ro ch lani s ar gu e th atth e Co urt s ho ul d d is reg ardth e co rp or at e fo rm . The re i s n o i ss ue with Ul ti m at e Pre sa le s’ bo nafid e b us in es s p ur po se . Ult im at e Pre sa le s was org an iz edforth e b on a fi de bu si ne ss pu rp os e o f bu y in g a nd res el li ng sp orti ng , con cert , andot he r ev en t t ic ke ts . The i ss ue is whethe r Ult im at e Pres al es is a co rp or at io n fo r Fed eral in co m e ta x p ur po se s. To d eci de whet he r Ult im at e Pre sa le s s ho ul d b e res pe ct edas aco rp or at io n, anin it ia l que st io n a ris es reg ard in g wh ethe r th e Ro ch lani s ar e b ou ndby K hu sh al ’s un au th or iz edactof r eg is te rin g Ul ti m at e Pre sa le s as a co rp or at io n. Th e ev id en ce i s cl ear t ha t Khus ha l was no t au th or iz edor i ns tru ct edby Mr. Roc hl an i t o re gi st er Ult im at e Pre sa le s as a co rp or at io n. Bu t upo n l earn in g tha t i t h adbe enreg is te red , Mr. Ro ch lani di d n othi ng to un do whathi s s on ha d d on e. Infact , Mr. Ro ch lani rat ifi edhi s s on ’s act . Und er Mi ch ig anlaw, u naut ho riz edact s m ay be rat ifi edex pl ic it ly or im pl ic it ly. Andth e unaut ho riz edact s o f anag en t ar e rat ifi edif the pri nc ip al

1 1 Dav idSto ttFlo urMi ll s, In c. v. Sa gi na w Cnt y . Farm Bureau , 21 3 N.W. 1 1 14 7, 1 49 (Mi ch . 19 27 ) (s ta ti ng th ata pr in ci pa l “ m ay im pl ie dl y rat ify the actof o ne as su m in g t o a ctas h is ag en t b y co nduc t, wh ic h o n h is part, c on st itut es anass en t t o th e act s i n que st io n” ).- 9 -

[* 9] acce pt s tho se act s wi th kn owl ed ge of t he m at eri al fact s. Whi le Khu sh al ’s 1 2 actof i nc or

po rat in g Ul ti m at e Pre sa le s was un au th or iz ed , Mr. Ro ch lani th erea fte r res pe ct ed , at l eas t i n p art , th e co rp or at e fo rm by fili ng an nu al rep orts with t he Mi ch ig anDepa rtment o f Ene rg y , Labo r & Eco no m ic Growth. Indo in g s o, h e reco gn iz edan d ra ti fie d t he co rp or at e fo rm . The Ro ch lani s p oi ntus to th e fai lu re t o m ai nt ai n c or po rat e b oo ks or acco un ts . The Supr em e Co urt ad dr es se d t he si gn ifi can ce o f su chfact s i n M ol in e Pro ps . Inc ., where th e Co urt d et erm in edth atth e co rp or at e ex is te nc e co ul d n otbe ig no redas m erel y

fic ti ti ou s ev enth ou gh th e co rp or at io n “ ke ptno bo ok s an d m ai nt ai ne d n o b an k a cco un t dur in g i ts ex is te nc e an d o wne d n o o th er [s ig ni fic an t] as se ts ”. 1 3 Bec au se Ult im at e Pre sa le s was a co rp or at io n, the Ro ch lani s ar e n oten ti tl ed to de du ctlo ss es fro m

Ult im at e Pre sa le s o n t he ir p ers on al 20 08 an d 2 00 9 re tu rn s. The Ro ch lani s’ rat ifi cat io n a ndad op ti on of t he co rp or at e fo rm requi res th e acce pt an ce o f it s t ax di sa dv an ta ge s.

Bru no v. Zwirko sk i, 3 35 N.W .2d12 0, 1 22 (Mi ch . Ct. Ap p. 1 98 3) . 1 2 Mo li ne Pro ps ., Inc . v. Co m m is si on er, 3 19 U.S. at 4 38 . 1 3- 10 -

[* 10 ] III. Sect io n 6 66 2( a) Accu racy-Rel at edPen al ti es Sect io n 6 66 2( a) an d (b )(1 ) an d (2 ) im po se s a 2 0% a ccu racy-rela te d p en al ty on an y po rti on of a n u nd erp aym en t o f ta x re qu ire d t o b e sh own ona return i f th e un de rp aym en t i s due to , am on g o th er rea so ns , neg li ge nc e, di sr eg ardof rul es or reg ul at io ns , or any sub st an ti al un de rs tate m en t o f in co m e ta x. Re sp on de ntbe ars th e b ur de n o f pr oduc ti on with re sp ectto an y pe na lty or a dd it io n t o t ax . The 1 4 Ro ch lani s the n b ear t he burd enof p ro vi ng an y de fen se s. 1 5 An u nd ers ta te m en t o f in co m e ta x i s “ subs tant ia l” if the un de rs ta te m en t ex ceed s the gre at er o f 10 % of t he tax requi redto be sh own on th e return o r $5 ,00 0. Res po nd en t m ad e n o s ho win g a s t o n eg li ge nc e.

1 6 Inacco rd an ce wi th th is op in io n, the Ro ch lani s’ exa ctun de rp aym en t fo r each y ear d ep en ds on th e Ru le 15 5 c om pu ta ti on s. If the se co m

pu tati on s es tabl is h a subs tant ia l u nd ers ta te m en t o f in co m e ta x fo r ei th er y ear, re sp on de ntha s m ethi s

Sec. 7 49 1( c). 1 4 Sec. 6 66 4( c)(1 ); s ee al so Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 47 1 5 (2 00 1) . Sec. 6 66 2( d) (1 )(A).

1 6- 11 -

[* 11 ] bu rd enwith re sp ectto th aty ear. Furth er, the Ro ch lani s fa il edto pro vi de 1 7 an y ev id en ce o f de fen se s ag ai ns t the pe na lt ie s. Acco rd in gl y , we su st ai n t he pe na lt ie s u nd er s ect io n 6 66 2( a) fo r 20 08 an d 20 09 on ly if th e Ru le 15 5 c om pu ta ti on s es tabl is h s ub st an ti al un de rs ta te m en ts . IV. Co nc lu si on On the ba si s o f ou r ex am in at io n o f th e rec or d b efo re u s an d t he pa rti es ’ arg um en ts at t ria l, we fi ndth atth e Ro ch lani s h av e fai le d t o s ho w th atth e co rp or at e fo rm

of Ul ti m at e Pre sa le s s ho ul d b e d is reg ard ed . Furt he r, res po nd en t ha s m ethi s b ur de n o f pr oduc ti on with re sp ectto th e p en al ti es on ly if th e Ru le 15 5 co m pu ta ti on s es tabl is h s ub st an ti al un de rs tate m en ts , andth e Ro ch lani s h av e fai le d to m eetth ei r bu rd ento sh ow tha t the pe na lt ie s s ho ul d n otap pl y . To re fle ctth e fo reg oi ng an d t he co nc es si on s o f th e p art ie s, Deci si on wil l b e en te red un de r Ru le 15 5.

See Ol ag un

ju v . Comm is si on er, T.C. Mem o. 2 01 2- 11 9; Jarm anv. 1 7 Co m m is si on er, T.C. Mem o. 2 01 0- 28 5.