TAX COURT OPINION

Case: Sudhanshu K. & Abha Ghoshal
Docket Number: 7928-11
Judge: Holmes
Opinion Type: bench
Filed: 08/27/2012
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 SUDHANSHU K. & ABHA GHOSHAL, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) O R D E R Docket No. 7928-11. Pursuant to Tax Court Rule 152(b), it is ORDERED that the Clerk of the Court shall transmit herewith the pages of the to Petitioners and to respondent a copy of transcript of Holmes at San Francisco, California, on June 27, 2012, containing his oral of the trial in the above cas.e before Judge Mark V. findings of fact and opinion rendered at the conclusion the trial. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. August 27, 2012 SERVED AUG 2 8 2012 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 Bench Opinion by Judge Mark V. Holmes June 27, 2012 Sudhanshu K. & Abha Ghoshal v. Commissioner Docket No. 7928-11 3 THE COURT: In the case of Ghoshal v. Commissioner, Docket No. 7928-11, 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. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court's Rules of Practice & Procedure. The Ghoshals were California residents when they filed their petition, and this case concerns their 2007 taxes, which actually reported, on the return e-t--wk-i-c.Alhey__ actua-14y-teperrted, no tax due after deductions. The Ghoshals are a retired couple. Mrs. Ghoshal remained silent and didn't have much to do with the case, but Mr. Ghoshal, Dr. Ghoshal, prepared the return and defended it. He is in his 70s and, as I said, listed his occupation as retired, and I conclude that he was a completely and utterly unreliable witness. Let me give three examples. On his real estate log for his Schedule E travel expenses, Dr. Ghoshal reported, for instance, that on Heritage Reporting Corporation (202) 628-4888 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 4 6/30/2007, he 'incurred 40 miles to talk to the clients, advising them, expired listings get them, study of real estate, deoppressed (sic) market,' 40 miles for that on June 30th of 2007. That same day, according to his travel log for one of his Schedule C businesses, he was spending 30 miles on 'used software and computers, explore possibility of business data crunch, use library, take part in discussions in with interested people, meeting with experts in the area in Stanford University, Berkeley, and San Francisco University.' Remarkably, on that same day, June 30th, 2007, he also recorded eight hours on his Schedule E travel log, eight hours of 'maintenance, Euclid Avenue property, maintenance, Walnut Street property, Mr. and Ms. Dillip Ghoss are interested in going through the good deals, went through the MLS listings of Ruby Hill, Pleasanton, San Ramon, Danville properties, showed the clients properties, study of commercial and residential listings, advise clients accordingly, real estate sales and rental listings, real estate residential and commercial investment studies, leasing and purchases, rate-of-return study, talks to the people and solicit business, talk to the renters, Mr. and Ms. of each family very interested buying income properties.' Heritage Reporting Corporation (202) 628-4888 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 5 Or again for another day, March 5th, 2007, the real estate log states six hours on 'real property construction, 1512 Germano Way, Pleasanton, California 94566, foundation, steel structure, J. Wells quality home furishing (sic) system, Ed Rodriguez's electrical contractor, sennin' (ph.) hardwood floor check and study the listings in the MLS, newspaper and real estate magazines. Talked the owners, other builders for the sale and purchase of propertise (sic) both residential and income-producing properties, building at 1512 Germano Way, PLE--' six hours on the real estate log. That same day, 225 miles on one of his Schedule C business logs, 'Use software and computers, explore possibility of business, data crunch, use library, take part in discussions, in with interested people, meeting with experts in the area.' So 225 miles on same day that he was working most of a full day on his rental real estate business. Or take, for instance, the fact that for dozens of days, Dr. Ghoshal was reporting 225 miles on his Schedule C business, which he stipulated was between UC, Davis, and Pleasanton, where he lived. But the distance between Pleasanton and Davis is 72 miles. When asked in another coruscatingly outstanding cross-examination why a round trip of 145 miles, 144 miles, each day had become 225 miles, Heritage Reporting Corporation (202) 628-4888 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 Dr. Ghoshal reported that he often got lost. Apparently he got lost the same number of miles each day and recorded it in his log, we are to believe, faithfully and consistently day after day doing the same chores at UC, Davis, making the same mistakes in his navigation. An easier and, I think, much more likely conclusion is that Dr. Ghoshal created records that cannot be relied upon by any reasonable person. And indeed, this colors the entire case, and I concluded that I could rely on no record that Dr. Ghoshal created unless it had some corroboration or the Commissioner had conceded the issue. There were numerous issues in this case. I'll divide them into categories of income, deductions, and penalties and additions to tax. Let's take income first. IRA distributions. On their 2007 tax return the Ghoshals reported that they had received $95,000 in IRA distributions, of which 47,500 was taxable. They also reported that they received $100,000 in pensions and annuities, of which $50,000 was taxable. Charles Schwab & Company, Inc., reported to the IRS that the Ghoshals had received $195,000 in IRS distributions in tax year 2007, and also reported that the taxable portion of these distributions was not determined. Section 408(d) (1) of the Code provides that IRA distributions are includable in the recipient's gross income Heritage Reporting Corporation (202) 628-4888 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 7 in the year in which the distribution is received. Schwab having reported to the IRS that the Ghoshals received $195,000 in IRA distributions in tax year 2007, it was incumbent upon the Ghoshals to show what portion was nontaxable in their view. The amount that Schwab reported matches the total gross amount of IRA distributions and pensions that the Ghoshals reported, but they provided no evidence that any amount of those distributions was not taxable. I find for the Commissioner on that issue. Turning to Schedule C business 1, the Allstates Investments entity, on their 2007 tax return, the Ghoshals claimed deductions for this activity, for utilities of $1560, other expenses of $4695, legal and professional services of $8750, travel expenses of $1250, and car and truck expenses of $3750, for this business which they named Allstate Investments. The Commissioner conceded that some of the utility expenses, namely $295,98, were in fact substantiated by the Ghoshals. But nothing else was remotely substantiated on the Allstate Investments business, and, of course, the log of travel expenses was completely discredited by the outstanding cross-examination of the Commissioner's lawyer. The proof of other expenses not allowed by the Commissioner generally consisted of lists of expenses composed by Heritage Reporting Corporation (202) 628-4888 8 Dr. Ghoshal. I find that these are not credible, and, of course, as for the car and truck and travel expenses, fall completely short of the enhanced substantiation requirements of section 274. Turning to the second Schedule C business, the Institute of Advanced Technology, whose stated purpose was 'One, support research in nanotechnology and cure for cancer and strokes, and, two, telemedicine and help to underserved areas of the society.' This business mostly generated thousands of miles in travel expenses, supposedly to and from the Ghoshals' home in Pleasanton and either Stanford or UC, Davis. And they claimed deductions for other expenses, $1550, utilities; $1350 in aforementioned car and truck expenses; and $1560 for this business. The Commissioner disallowed these claims. The Ghoshals during exam provided some documentation for a portion of the claims, but I agree with the Commissioner, these documents do not substantiate those claimed expenses. The Commissioner prevails on this. As with Allstate Investments, I find either a total lack of substantiation of the expenses disallowed by the Commissioner, but even more so in the case of the travel logs used to support the car and travel expenses whose reliability Commissioner's counsel effectively demolished. 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 Heritage Reporting Corporation (202) 628-4888 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 9 On Schedule E, the Ghoshals' real estate business, the Ghoshals did in fact own two rental properties in Berkeley, California, an eight-unit apartment building at 1675 Euclid Avenue in that city, and a seven-unit apartment building at 1619 Walnut Street. They claimed deductions for depreciation or depletion of $24,056; other expenses of $16,433; utilities of $25,310; taxes of $21,481; repairs of $11,535; mortgage interest of $28,589; cleaning and maintenance expenses of $10,266; and auto and travel expenses of $5107, on the Schedule E attached to their 2007 tax return. This was a real business on their part, and the Commissioner did allow many of the claimed expenses; many were also disallowed, and in some cases the Ghoshals did provide the Commissioner with evidence before and in some cases during trial of some other expenses that they were entitled to on the Schedule E. I find, however, that those expenses that the Commissioner did not allow, either during exam or during pretrial preparation or indeed at trial, remain unsubstantiated. The Ghoshals' lists of expenses prepared by Dr. Ghoshal are, as I said, tainted by the incredible nature of his testimony, and in particular the car and travel expenses on Schedule E totally fail to meet the enhanced substantiation requirements of section 274. Heritage Reporting Corporation (202) 628-4888 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 10 Moving to the second general category, deductions. These are the Schedule A deductions that the Ghoshals claimed. The first of these were unreimbursed employee business expenses of $20,767. In the notice of deficiency, the Commissioner had disallowed this claimed expense, and the Ghoshals provided some documentation regarding a portion of these expenses. The problem, however, is that the Ghoshals did not report, and the Commissioner has no record, that they ever received any wages in tax year 2007. In addition, they stated that their occupation was retired. This means that they weren't employees during 2007, which means they can't have unreimbursed employee business expenses during 2007. Commissioner wins on this one. Second category, miscellaneous deductions, $18,760 in those on the Schedule A. Here the Ghoshals provided no descriptions whatsoever of what these miscellaneous deductions were for. Needless to say, there was no substantiation, and I will allow nothing of them, either. The third category, other expenses of $5790. Once again, there was no proof or even a description of what these other expenses were. The Commissioner wins; these are all disallowed. The fourth category, $26,587 in non-cash charitable contributions. In the notice of deficiency the Heritage Reporting Corporation (202) 628-4888 11 Commissioner disallowed all of these. The Ghoshals did provide some documents for these alleged contributions to Goodwill, the Salvation Army, and an entity called CARH. However, they did not provide any appraisals or other third- party verification of their basis in, or fair market value of, the contributed items. What they gave me did not substantiate their claims. Taxpayers must, must, have a receipt from the charitable organization receiving the property and a reliable written record of specified information regarding that property. See 26 CFR section 1.170A-13 (b) (1). Dr. Ghoshal was unable on examination during trial to explain where he got any of the values that he reported in any coherent way. Again, I sustain the disallowance of these claimed deductions. The fourth and last category, penalties and additions to tax. The first of these is under section 6651(a) (1), failure to timely file a tax return. The Code provides for an addition to tax for failing to timely file a return, absent reasonable cause. The Ghoshals' 2007 tax return was due to be filed on October 15, 2008; they did not in fact file it until February 13, 2009. The Ghoshals did not file their 2007 tax return within the time prescribed by law, and gave no explanation as to why they did not. The Commissioner's determination that the Ghoshals 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 Heritage Reporting Corporation (202) 628-4888 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 12 are liable for the addition to tax under code section 6651(a) (1) for 2007 is therefore sustained. Second penalty, the accuracy-related penalty under section 6662. The Code provides for an addition to tax equal to 20 percent of the underpayment to be imposed when y portion of that underpayment is due to negligence or disregard of rules and regulations or any substantial understatement of income tax. The Ghoshals, remember, reduced, through their manufactured deductions, their tax bill to zero. A substantial understatement of income tax occurs when the amount of the understatement for a particular tax year exceeds the greater of 10 percent of the tax required to be shown on the return for the tax year, or $5000. The Ghoshals understated more than 10 percent of the tax required to be shown on their return, and the understatement was greater than $5000. The Commissioner has met his burden of proof. Second leg of the accuracy-related penalty is negligence, which includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws. See 26 CFR section 1.6662-3'(b). We find, I find, intentional disregard by the Ghoshals in manufacturing patently false logs of their activity, and negligence in manufacturing clearly overstated Heritage Reporting Corporation (202) 628-4888 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 13 deductions and taking deduction with no explanation whatsoever. Even if negligence and intentional disregard were not present, their tax bill was substantially understated on their return, and they showed no evidence whatsoever of good faith and reasonable conduct in calculating their tax bill. However, to reflect the Commissioner's concess1ons along the way, decision will have to be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case, and the San Francisco session is over. Enjoy your summer vacation. (Whereupon, at 6:06 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888