TAX COURT OPINION

Case: Khanh Truong
Docket Number: 4374-12
Judge: Kroupa
Opinion Type: bench
Filed: 06/28/2013
Pages: 10

UNITED STATES TAX COURT WASHINGTON, D.C. 20217 KHANH TRUONG, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) ORDER Docket No. 4374-12 Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings of this case before Judge Diane L. Kroupa in Portland, Oregon on May 10, 2013, containing her 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, an appropriate decision will be issued for respondent. (Signed) Diane L. Kroupa Judge Date: Washington, DC June 28, 2013 SERVED JUN 28 2013 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 Bench Opinion by Judge Diane L. Kroupa May 10, 2013 . Khanh Truong v. Commissioner Docket No. 4374-12 BENCH OPINION THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THESE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This bench opinion is made pursuant to the authority granted in section 7459(b) and Rule 152. 14 All section references are to the Internal Revenue 15 16 17 18 19 20 21 22 23 24 25 Code for 2007, 2008, and 2009 (collectively the years at issue), and all Rule references are to the Tax Court Rules of Practice and Procedure. Petitioner appeared pro se, and Jeffery Rice appeared for respondent. FINDINGS OF FACT Certain facts have been stipu-lated. The stipulation of facts and the supplemental stipulation of facts the parties filed, with accompanying exhibits, are incorporated by this reference. The facts are so found. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 Petitioner resided in Happy Valley, Oregon at the time he filed the petition. Petitioner late filed returns for 2007 and 2008 and timely filed a return for 2009. Petitioner claimed substantial expenses involving a Schedule C business he operated during the years at issue that allegedly repaired arcade video games and gambling 8 machines for restaurant and bar owners. For example, 9 petitioner claimed expenses that constituted 80% of 10 the reported gross receipts for the years at issue. 11 Petitioner reported approximately $109,000 of gross 12 13 14 15 16 17 18 19 20 21 22 23 24 25 receipts in 2007, $124,000 in 2008 and $71,000 in 2009. For these years, he claimed expenses that resulted in a $2,000 loss in 2007, $31,000 of net income in 2008 and $33,000 of net income in 2009. Respondent examined the returns for each of the years at issue. Respondent focused primarily on petitioner's claimed Schedule C expenses. Petitioner was unable to provide, during the entire examination, any contemporaneous records or other documentation to substantiate the expenses claimed. Later during the examination, petitioner claimed that the gross receipts reported on the returns (which, incidentally were prepared by a tax preparer) were, in reality, loan proceeds from his nephew and sister. Petitioner 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 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 did not produce, however, any loan documents or any other documentation to substantiate this assertion. Respondent disallowed the claimed Schedule C expenses for each of the years at issue and issued deficiency notices for each of those years. Respondent also determined in the deficiency notices that petitioner late fi:led his return for 2007 and 2008, and he determined that petitioner was liable for an accuracy-related penalty under section 6662 for each of the years at issue. Respondent did not raise in the deficiency notices, however, the claimed over reporting of gross receipts petitioner asserts in the petition were actually loan proceeds. Petitioner ·failed to provide any loan documents to substantiate the alleged loan proceeds and failed to provide any witnesses to corroborate the alleged loans. At trial, petitioner provided a spread sheet of the bank deposits showing deposits of approximately $291,000 in 2007, $556,000 in 2008 and $114,000 in 2009. These amounts are far in excess of the amount of gross receipts reported on the returns. This contradicts testimony that the gross receipts reported on the returns were the total of all bank deposits made during each of the years at issue. In fact, the deposits were 200% to 500% more 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 than the gross receipts reported. Petitioner asserted in his pre-trial memorandum that he had a small deficiency in 2007 and a loss for 2008 and 2009. Again, petitioner provided no documentation to substantiate these amounts. OPINION This is primarily a substantiation case where we must determine whether petitioner is entitled to the claimed Schedule C expenses and 10 whether any part of the gross receipts for the 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Schedule C business consisted of any loan proceeds. We begin with two fundamental principles of tax litigation. First, the Commissioner's determinations are generally presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142 (a). The burden does not shift to respondent here as petitioner failed to comply with the substantiation requirements and failed to maintain adequate records. See sec . 7491 (a) (2) (A) and (B) ; see also Higbee v. Commissioner, 116 T.C. 438 (2001). Second, deductions are a matter of legislative grace, and.the taxpayer must show that he or she is entitled to any deduction claimed. Rule 142 (a); Deputy v. du Pont, 308 U.S. 488, 493 (1940); 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 Welch v. Helvering, 290 U.S. 111 (1933). This 2 3 4 5 6 7 8 includes the burden of isubstantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5* Cir. 1976). Substantiation means that a taxpayer shall keep such permanent records or books of account as are sufficient to establish the amount of deductions claimed on the return. Sec. 6001; sec. 1.6001-1(a), (e),Income Tax Regs. The 9 Court need not accept a taxpayer's self-serving 10 11 12 13 14 15 16 17 18 19 testimony when the taxpayer fails to present other probative evidence. Beam v. Commissioner, T.C. Memo. 1990-304 (citing Tokarski v. Commissioner, 87 T.C. 74,77 (1986)). If a taxpayer establishes that he or she paid or incurred a deductible business expense but does not establish the 'amount of the deduction, this Court may approximate the amount of allowable business deductions, bearing heavily against the taxpayer whose inexactitude is of his or her own 20 making. Cohan v. Commissioner, 39 F.2d 540, 543-544 21 22 23 24 25 (2d Cir. 1930). For the Cohan rule to apply, however, a basis must exist on which this Court can make an approximation. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). Without such a basis, any allowance would amount to unguided largesse. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 Williams v. Commissioner, 245 F.2d 559, 560 (5th Cir. 2 3 4 5 6 7 8 9 10 11 12 1957). In addition, ;certain expenses, such as those for listed expenses, which includes car and truck expenses, may not be estimated because of the strict substantiation requirements mandated by section 274 (d). See sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201(2d Cir. 1969). For such expenses, only documentary substantiation will suffice. We now apply these rules to the facts here. 13 First and foremost we find the record and testimony 14 of petitioner to be incredible. Petitioner failed to 15 maintain books and records of his income and 16 17 18 19 20 21 22 23 24 25 expenses. At trial, petitioner failed to present any testimony or evidence öf the claimed expenses. Instead, petitioner focused on the gross receipts amount. Petitioner self-reported the amount of gross receipts for each of the years at issue. Petitioner had his returns professionally prepared ·and informed his tax preparer that the amounts reported were the correct amounts to report. It was only years later, when petitioner was under examination, that petitioner claimed he over reported the gross 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 receipts. We note that petitioner's actual gross receipts for the years at issue may have been greater than the amounts petitioner reported on the returns. 5 Petitioner's sister testified that the gross receipts 6 7 8 9 10 11 reported were all deposits made during the years at issue. At trial, however, petitioner prepared a spread sheet that contradicted his sister's testimony. The spreadsheet shows that the bank deposits were anywhere from 200% to 500% more than the gross receipts reported on the returns. 12 Petitioner claims that the bank deposits consist of 13 14 15 substantial loan amounts from his nephew and his sister. Substantial for this purpose is approximately $100,000 or more each year. Despite 16 petitioner's assertion, however, petitioner failed to 17 18 19 20 21 22 23 24 25 produce any loan documents nor did the bank records reflect any deposits that could potentially be loan amounts. In addition, petitioner failed to call his nephew as a witness to corroborate petitioner's assertion that he received loans from his nephew and, even though he called his sister as a witness, she did not testify as to any loans by either her or the nephew. She testified that she included all bank deposits as the gross receipts for the respective 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 year. We consistently have found that the failure of a party to introduce eviidence, which, if true, would be favorable to that party, gives rise to the presumption that evidence would be unfavorable if produced. Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10* Cir. 1947). Petitioner's lack of documents and business records does not bode well for him. Given the lack of any records, we are not obliged to speculate as to the amount of his expenses or the amount of any loan proceeds. Runkle v. Commissioner, T.C. Memo. 2005- 112 (and the cases cited therein); Pfluger v. Commissioner, 840 F.2d 1379 ,(7th Cir. 1988) (a taxpayer who will pay more tax than if he or she had been more forthright should not cause a court to bend the law in the taxpayer's favor), affg. T.C. Memo. 1986-78; Norgaard v. Commissioner, T.C. Memo. 1989- 390 (Cohan rule does not apply to estimate gambling losses where taxpayer failed to establish actual gambling gross receipts), affd. On this issue and revd. in part 939 F.2d 874 ('9th Cir. 1991). In addition, petitioner's contradictory testimony and reconstructed spreadsheet causes us pause. He simply was not believable. If we were to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 find that petitioner received loan proceeds in the amounts he asserts, we would have to find that every penny petitioner reported as gross receipts for each year as all attributable to loan proceeds and that petitioner did not generate any income from his business operations. This we refuse to do. We therefore sustain respondent's determinations in the deficiency notices that petitioner had deficiencies in his income tax for each of the years at issue. We turn now to respondent's determinations that petitioner is liable for the late filing addition for 2007 and 2008, and he is liable for the accuracy-related penalty for each of the years at issue. Petitioner did not challenge the imposition of these additions or penalties in the petition (or at trial). Accordingly, petitioner has conceded these issues. See Swain v. Commissioner, 118 T.C. 358 (2002) . To reflect the foregoing, decision will be entered for respondent. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 10:21 a.m., the above- entitled matter 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