TAX COURT OPINION

Case: Renee Sunyoung Lim
Docket Number: 15130-15
Judge: Gustafson
Opinion Type: bench
Filed: 12/19/2016
Pages: 16

JRN UNITED STATES TAX COURT WASHINGTON, DC 20217 RENEE SUNYOUNG LIM, Petitioner, v. ) ) ) ) Docket No. 15130-15. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant Rule 152(b) of the Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the proceedings in the above case before the undersigned judge at Los Angeles, California, on December 7, 2016, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) David Gustafson Judge Dated: Washington, D.C. December 19, 2016 SERVED Dec 20 2016 Capital Reporting Company 3 Bench Opinion by Judge David Gustafson December 7, 2016 Renee Sunyoung Lim v. Commissioner Docket No. 15130-15 The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code (26 U.S.C.), and Rule 152 of the Tax Court Rules of Practice and Procedure; and it shall not be relied on as precedent in any öther case. By notice of deficiency ("NOD") dated March 10, 2015 (Ex. 1-J), the Internal Revenue Service ("IRS") determined a deficiency of $82,301 in the Federal income tax of petitioner Renee Sunyoung Lim for the year 2011, along with an addition to tax under section 6651(a)(1) for failure to timely file a return and an accuracy-related penalty under section 6662(a). There were two adjustments in the NOD: (1) additional income from an S Corporation, which Dr. Lim has conceded, and ( ) disallowance of a claimed loss of $205,053 on the sale of real estate, which is the principal issue for decision here. For the reasons explained hereafter, we sustain the IRS's 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 disallowance of the claimed loss, as well as the addition to tax and the penalty. Trial of this case was conducted on December 6, 2015, in Los Angeles, California. Dr. Lim was represented by Howard R¢senblatt; and the respondent, the Commissioner, was represented by Steven Roth. Employing the burden-of-proof principles set out below, we find the follàwing facts: FINDINGS OF FACT 10 Dr. Lim is a dentist who owns and practices in 11 multiple offices. 12 13 Purchase and sale of condominium In 2000 Dr. Lim purchased a condominium in 14 Malibu for approximately $368,000. In 2007 she 15 16 17 18 19 20 21 22 23 24 25 began using it as rental property. Sometime during the time she owned the condo, she twice refinanced it, borrowing against her equity in the condo and drawing out first $705,000 and later $113,000. Dr. Lim alleges that, during the time she owned the condo, she made improvements--which she described in some detail--at an estimated cost of between $230,000 and $250,000. (Her testimony was equivocal, but she sometimes seemed to say that she made these expenditures using some of the proceeds of the refinancing. However, she also testified that she 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 used those proceeds (or some of them) for improvements on another piece of property, so we cannot tell whether any,of the proceeds were spent on the condo, or in what amounts. ) Dr. Lim offered no documentary evidence toisupport the fact or amount of any expenditures for aný improvements, so we are unable to find that any improvements on the condo were made at any cost. In 2011 she sold the condo for $490,000. She 10 characterized the transaction as a "short sale", 11 which we take to mean that the proceeds were not 12 13 14 15 16 17 18 19 20 21 sufficient to pay off the mortgage debt. The initial non-filing of the 2011 tax return Dr. Lim's long-time return preparer was Mr. An. In 2011 he went through a divorce and for that reason failed to timely file returns of Dr. Lim and several other customers. He mitigated his fault to Dr. Lim and minimized the value of filing returns on time, explaining to her that if you file your return late, the IRS is less likely to audit you--a rumor she said she had also heard from some of her acquaintances. 22 When Mr. An's failures became known, some of Dr. Lim's acquaintances fired Mr. An and did not use him thereafter. 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 Nonetheless, sometime soon after the end of 2011, Dr. Lim took her 2011 financial information to 3 Mr. An and once again asked him to prepare her 4 return. He told her he would file it electronically. 5 Mr. An did not file a 2011 return for Dr. Lim, and 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Dr. Lim then began to g;et letters from the IRS inquiring about her 2011 return. Dr. Lim testified that she asked Mr. An what was going on. We accept that she did contact Mr. An, but her testimony as to the details of their conversation--i.e., tha·t he assured her that the return had been filed, that he told her that the IRS often loses returns, and that when she asked him for a copy of her return, he said he could not give it to her because it had been filed electronically--are not credible to us, and we are unable to find the precise facts of that conversation. In any event, Dr. Lim did not initiate any communication with the IRS about her 2011 return. The late filing of the 2011 return In May 21, 2014--25 months after the 2011 return had been due--a tax return was filed on Dr. Lim's 23 behalf--filed on paper and not electronically. The 24 25 return bears her name and address and reflects a detailed knowledge about her financial affairs, and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 she does not contend that the information reflected on it is incorrect. On the contrary, she resists the correction to the loss item at issue here. The return bears a paid preparer's name and signature of David A. Shin, a collleague o Mr. An. The return also bears a purported signature of Dr. Lim as taxpayer, dated "5-20-14", but it is unclear whether Dr. Lim actually signed it. However, we do find that the return was based on the information that Dr. Lim gave to Mr. An and was prepared and submitted in belated response to her authori ation to file a return. 12 Moreover, Dr. Kim has not disavowed the return. 13 Deficiency notice and petition 14 15 The IRS evidently examined Dr. Lim's return, proposed adjustments to it, and issued the NOD on 16 March 10, 2015, which determined a deficiency of 17 18 19 20 21 22 23 24 25 income tax and a penalty. When she received the NOD (the starting point of which was the filed return), Dr. Lim responded by timely mailing her petition to this Court on June 8, 2015. Dr. Lim settled the first issue by a "Stipulation of Settled Issues" filed in this case on May 25, 2016, and she did not suggest in any fashion that the return was not validly hers. June 2016 calendar call 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 When this case was first scheduled for trial, Dr. Lim appeared with Mr. An at the calendar call on June 13, 2016. The Couþt permitted Mr. An to speak (with Dr. Lim present), and his comments included a reference to the "expenses that were deducted on the Schedule E ... when we prepared the return". (Tr. at 4.) Dr. Lim made no objection or correction to the statement that Mr. Án's firm had prepared "the return". Respondent's counsel described multiple unavailing efforts to obtain information and cooperation from Dr. Lih and Mr. An (Tr. 6-7), which Dr. Lim deflected by explaining that she was "busy practicing as a dentist" and had simply passed counsel's mail along to Mr. An (Tr. 8). After Dr. Lim requested a continuance, the Court granted it but warned Dr. Lim that a future judge "might not look favorably upon a continuance request", admonished her to "be diligent about getting those documents to the Respondent", and stated, "I don't know who you're going to choose to work!with you, Mr. An or his associate, or somebody else, but you should be diligent in working on this case." 24 Pretrial developments 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 Despite the admonition at the June 2016 calendar call, Dr. Lim thereafter evidently remained "busy practicing as a dentist" and continued to relegate the work on this case entirely to Mr. An. However, 5 Mr. An continued to fail to provide documents to 6 7 8 9 10 11 respondent. (See respondent's pretrial memorandum filed November 18, 2016, at 1.) On July 5, 2016, we served on the parties our standing pretrial order ("SPTO") and a notice that trial was set for the session beginning December 5, 2016. A reminder of the trial date was served 12 October 21, 2016. After the Court received 13 14 15 16 17 18 19 20 21 22 23 24 respondent's pretrial memorandum filed November 18, 2016, complaining of petitioner's non-cooperation, the Court attempted to initiate a telephone conference with the parties but was unable to reach Dr. Lim. We therefore issued an order on November 23, 2016, that stated, "Pursuant to notice issued on July 5, 2016, this case will be tried at the Court's session in Los Angeles, California, beginning at 10:00 a.m. On Monday, December 5, 2016", and that ordered Dr. Lim to telephone chambers. Dr. Lim did so, and on November 28, 2016, we held a telephone conference with the parties during 25 which Dr. Lim stated that she had appointments with 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 dental patients on December 5 and could not attend. We responded that she had been on notice of the trial schedule since we issue our notice and SPTO on July 5, 2016, that it had be n her responsibility to order her affairs in such a w y that she could comply with that schedule, and that we would not grant any further continuance. When the case was called from the calendar on December 5, 2016, Dr. Lim again requested a continuance, explaining that she hoped to hire a lawyer to help her, but we denied the request, citing Rule 133 (re "employment of new counsel"). We set her trial for 9:00 a.m. on December 6, 2016, and urged her to accept her opponent's offer to receive documents-from her that, day and include them in the parties' Rule 91(a) stipulation--despite their being 14 days overdue under the terms of the SPTO. Sometime after the calendar call, Dr. Lim telephoned the trial clerk and requested that her trial be delayed to the afternoon, because her new lawyer was available in the afternoon but not the morning. We granted that request and postponed the trial until 3:00 p.m. The case was called at that time. Dr. Lim was the only witness; and the only exhibits offered into 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company evidence were Dr. Lim's 2011 tax return (Ex. 2-J) and the NOD (Ex. 1-J), which were offered by the parties 11 jointly. I. Burden of proof OPINION The IRS's determination is presumed correct, and the taxpayer generally bears the burden to prove his entitlement to any deductions he claims. Rule 142(a). Taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001-1(a); see also id. sec. -1(e) ("The books or records * * * shall be retained so long as the contents thereof may become material in the administration of any internal revenue law"). Dr. Lim presented only her own testimony, and that testimony was problematic. She seemed to evade giving precise answers to questions, even those of her own attorney. We found her testimony unconvincing. It is true that we denied Dr. Lim a continuance that she requested in order to obtain additional 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 · 1 2 3 4 5 6 evidence, including evidence from Mr. An who, she professed to have learned only recently, is unreliable and unethical. However, her continuing to rely on Mr. An--despite his failures beginning as early as 2011 and despite learning at the June 2016 calendar call that he had failed to cooperate in the 7 pretrial business that she had left to him--was her 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 own decision. It was indeed most unwise to refuse to read her opponent's mail and the Court's orders and instead pass them along|to him, but one cannot shield oneself from responsibility by choosing to incur the obvious and known risks of relying on someone who has been manifestly unreliable. It is also true that we denied petitioner's counsel's motion during closing argument to reopen the record to admit additional evidence. However, the additional evidence was not in the courtroom but was anticipated testimony of Mr. An. This motion was in effect simply another request for a continuance. We denied that motion. ¡(However, we did so without prejudice to a timely motion (see Rule 161) to reconsider this opinion, reopen the record, and allow into evidence actual documents proffered with the 24 motion. We do not say we would grant such a motion; 25 instead, we would consider its merits at the time; 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company but if Dr. Lim's position is that with a little more time she could have carried her burden of proof, then she has one last chance to demonstrate that with a 13 presentation of the actual proof.) II. Real estate losses Taxpayers are allowed deductions for certain business and investment expenses under sections 162 and 212. However, a tahpayer must substantiate her entitlement to the deductions and any resulting losses. Here the parties seem to agree that petitioner acquired her condo for about $368,000 and that she sold it for $490,000. Without more, those figures yield not a loss of $205,053 (as Dr. Lim's return reported) but a gain of at least $.122,000. Of course, that result could be affected by proving that one could add, to the cost of initially acquiring the condo, subsequent capital costs for improvements. But Dr. Lim failed to so prove. Respondent did not plead the greater deficiency that would result from determining gain on the sale, but rather simply defended the NOD's disallowance of the loss. We sustain that disallowance. III. Late-filing addition to tax 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 Section 6651(a)(1)i imposes an addition to tax for failure to file a timely return. We have found that Dr. Lim filed no tax return for 2011 until May 2014. The addition is therefore warranted, in the 5 manner computed in the NOD (Ex. 1-J at 13), "unless 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it is shown that such failure is due to reasonable cause and not due to willful neglect". Sec. 6651(a)(1). Dr. Lim argued, in effect, that Mr. An's failure to timely file her return was his fault; but she had already heard him excuse his late filing of returns, and she should have known he was unreliable. When she received notices from the IRS and accepted his state ents that the IRS loses returns, her failure to remedy the situation then was further evidence that she was not just delegating but abdicating her duties as a taxpayer. She has not shown reasonable cause. IV. Accuracy-related penalty Section 6662 1mposes an "accuracy-related penalty" of 20 percent of the portion of the underpayment of tax that is attributable to the taxpayer's negligence ör disregard of rules or regulations or that is attributable to any substantial understatement of income tax. The amount of the 2011 understatement that results from the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 adjustments that we have sustained (i.e., $82,301) is "substantial" under section 6662(d)--i.e., it exceeds both $5,000 and 10 percént of the tax that should have been reported (i.e., 10% of $85,817, or $8,582). We therefore need not reach the issue of negligence. Dr. Lim cannot successfully invoke any of the defenses that a taxpayer might assert against an accuracy-related penalty: She had no "substantial authority" for her position, and she did not disclose on her return that she was unable to substantiate her entitlement to the disputed items (see sec. 6662 (d) (2) (B) ) ; and she did not show reasonable cause and good faith for her erroneous reporting (see sec. 6664(c)(1)). This third potential defense might be available if the evidence showed, for example, that she had relied on the advice of a tax professional in taking the positions she took; but in this case she gave the return preparer the information that he used to prepare the return. If there were errors in that information, then the fault is hers and not his. She did not make any showing that the return as filed reflected information áther than what she had provided. She has not shown "reasonable cause and good faith". 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 During closing arg ment after trial, we raised 2 with respondent the question whether, if Dr. Lim did 3 4 5 6 7 8 not sign the return, then perhaps it might not have been her return; and section 6664(b) provides that the accuracy-related penalty applies "only in cases where a return of tax is filed". However, neither Dr. Lim nor her counsel initiated argument on that issue nor took it up after the Court raised it. 9 Moreover, while it is true that a return not signed 10 11 12 13 by the taxpayer is not.valid, see Mohamed v. Commissioner, T.C. Memo. 2013-255, it is also true that in some circumstances (such as a joint return) a taxpayer may file a return by "tacit consent", see 14 Reifler v. Commissioner, T.C. Memo. 2015-199, part 15 16 17 18 19 20 21 II.C, or may ratify an unsigned return, see Harris v. Commissioner, T.C. Memo. 2009-26, n.3; and it is also true that a taxpayer like Dr. Lim might be equitably estopped from making a contention, see Reifler v. Commissioner, T.C. Memo. 2013-258, that contradicted her prior behavior and the positions she took. In any event, respondent was genuinely surprised by the 22 Court's raising this issue; and if after trial 23 24 25 petitioner had moved for leave to amend her petition to state as a defense to penalty that she had not signed the return, then the motion would have been 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company denied as unfairly prejudicial to respondent. We therefore do not consider that issue now. This concludes the Court' s oral Findings of Fact and Opinion in this case. 17 (Whereupon, at 4:49 p.m., the above- entitled matt r was concluded. ) | 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com.