TAX COURT OPINION

Case: Intan N. Ismail & Mohd Razi Abd Rahim
Docket Number: 15704-24
Judge: Buch
Opinion Type: bench
Filed: 12/01/2025
Pages: 13

United States Tax Court Washington, DC 20217 INTAN N. ISMAIL & MOHD RAZI ABD RAHIM, Docket No. 15704-24. Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Kansas City, Missouri, 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, a decision will be entered for the Commissioner. (Signed) Ronald L. Buch Judge Served 12/01/25 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 Ronald L. Buch October 15, 2025 3 Intan N. Ismail & Mohd Razi Abd Rahim v. Commissioner of Internal Revenue Docket No. 15704-24 THE COURT: The Court has decided to render oral findings of fact and opinion in this case and the following represents the oral findings of fact and opinion. The oral findings of fact and opinion are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Rule references are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code, as in effect at all relevant times. INTRODUCTION The Court must decide this case on the basis of a very limited evidentiary record. Before trial and in accordance with the Court's standing pretrial order, the Commissioner submitted three proposed trial exhibits. Those exhibits were not offered until after the record in this case was closed and thus were not received into evidence. Petitioners did not submit any proposed trial exhibits before this case was called for trial, at which time they informed the Court that they had a small number of paper exhibits. But they had no copies for the Court 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 or for Respondent's counsel. After a several hours long 4 recess, petitioners returned with copies of those exhibits plus a flash drive containing an untold number of electronic files. The only documents received into evidence without limitation were three bank statements and one page of a multi-page automotive receipt. In addition, the Court received as evidence two document compilations to be used to aid Mr. Rahim with his testimony. Consistent with Bradshaw v. FFE Transp. Servs., Inc., 715 F.3d 1104, 1109 (8th Cir. 2013), the Court instructed the parties that the documents could be used to guide Mr. Rahim's testimony but that the Court would not rely on those exhibits as evidence themselves. See Fed. R. Evid. 107. The Court did not receive the flash drive or its contents into evidence because it was not timely provided to the Court. Given this limited evidentiary record, the Court's findings of fact are largely based on testimony provided by Mr. Rahim. FINDINGS OF FACT Petitioners Razi Rahim and Intan Ismail are husband and wife. At the time they filed their petition in this case, Ms. Ismail resided in Overland Park, Kansas. Mr. Rahim resided outside the United States. During 2022, Mr. Rahim was involved in two 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 businesses, RNR Global Resources Sendirian Berhad (RNR) 5 and PT Bintang Cipta Mulia (Bintang). The record does not include any organizational documents for these entities. According to Mr. Rahim, RNR is a Malaysian Sendirian Berhad, which is akin to a limited liability company. During 2022, Mr. Rahim co-owned RNR with his father, but Mr. Rahim was the decisionmaker for the business. Also according to Mr. Rahim, Bintang is an Indonesian Perseroan Terbuka that, like RNR, is akin to a limited liability company. During 2022, Mr. Rahim co-owned Bintang with one or two other individuals, and as with RNR, Mr. Rahim was the decisionmaker for the entity. Neither entity has filed a Form 8832, Entity Classification Election. In 2022, Mr. Rahim entered into many transactions with or on behalf of RNR and Bintang. He paid expenses on behalf of those entities. He borrowed money to be used in, with, or by those entities. And he transferred funds to those entities. On their 2022 federal income tax return, petitioners deducted various expenses relating to RNR and Bintang. They did not include with their tax return or otherwise file for either entity a Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs), or a Form 5471, Information Return of U.S. Persons With Respect to 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 Certain Foreign Corporations. 6 We digress to reiterate what is included and not included in the record of this case. The findings of fact in the previous paragraph are entirely taken from Mr. Rahim's testimony. The tax return that was not received into evidence includes a Schedule C, Profit or Loss from Business, for RNR. It does not include a Schedule C for Bintang. We accept Mr. Rahim's testimony that petitioners reported deductions for both entities for purposes of these findings of fact. For example, both entities may have been aggregated into a single Schedule C. It is unnecessary to resolve whether petitioners reported items for one entity or both entities for the purpose of deciding this case. On July 3, 2024, the Commissioner mailed a notice of deficiency to petitioners. Petitioners attached a partial copy of that notice to their petition in this case, and respondent attached a complete copy to his answer. Nearly every adjustment set forth in that notice of deficiency included the same description, "Because we determined that the activity described on your Schedule C does not meet the guidelines of carrying on a trade or business within the meaning of IRC 162, we removed your Schedule C income and expenses." At the start of trial, counsel for the Commissioner confirmed that the 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 Commissioner is not disputing the nature or amount of any 7 claimed expenses. The Commissioner merely asserts that expenses for these businesses may not be claimed on petitioners' personal income tax return. OPINION In general, the Commissioner's determinations in a Notice of Deficiency are presumed correct, and taxpayers bear the burden of proving that they are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Typically, taxpayers also bear the burden of proving their entitlement to any deductions. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Except when the burden shifts, a taxpayer must prove that he incurred an expense and establish that a deduction is allowable under the Code. I.R.C. § 6001; Treas. Reg. § 1.6001-1(a), (e); see also Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff'd, 540 F.2d 821 (5th Cir. 1976). Here, because the burden did not shift, petitioners bear the burden of establishing that they are entitled to deductions for expenses they claimed. Other than the applicability of penalties, the sole issue for us to decide is whether petitioners may claim on their personal return expenses relating to foreign entities in which Mr. Rahim owns interests. Petitioners previously presented this same issue to the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Court in docket numbers 16366-16 and 13297-18, and the 8 Court decided this issue in T.C. Memo. 2022-113. We borrow liberally from our previous opinion. Quoting from that opinion... [Petitioners] are not allowed to offset their individual income with RNR's losses because RNR is a foreign corporation for federal tax purposes and, as a result, its losses do not flow through to its owners. "Whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law." Treas. Reg. § 301.7701-1(a)(1). Although an entity's classification under local law is not always recognized, carrying on a business and sharing the profits from it generally creates a separate entity for federal tax purposes. Id. subparas. 17 (2) and (3). 18 19 20 21 22 23 24 25 "[A]ny entity recognized for federal tax purposes . . . that is not properly classified as a trust . . . or otherwise subject to special treatment" is a "business entity." Treas. Reg. § 301.7701-2(a). A business entity that is not a "per se" corporation, known as an "eligible entity," may elect its classification for federal tax purposes. Treas. Reg. § 301.7701-3(a). Unless an election is made to the contrary, a "foreign 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 eligible entity" in which all members have limited 9 liability is an association (that is, a corporation). Id. para. (b)(2)(i)(B). RNR is organized as a Sendirian Berhad (a private limited liability company) under Malaysian law. Because a Sendirian Berhad is not a "per se" corporation, RNR is a foreign eligible entity permitted to elect its classification for federal tax purposes. See Treas. Reg. § 301.7701-2(b)(8)(ii)(3). However, for the tax years at issue, RNR did not file Form 8832. Because RNR did not make an election, it is subject to its default classification under the regulations. RNR is classified by default as a foreign corporation under the regulations. Treasury Regulation § 301.7701-3(b)(2)(i)(B) provides that a foreign eligible entity that has not elected otherwise and whose members all have limited liability is a corporation... That ends the quote from our prior opinion. And we reach the same conclusion for RNR in this case for the 20 same reasons. 21 22 23 24 25 We likewise conclude that Bintang is treated as a corporation for U.S. tax purposes but for a more direct reason. Treasury regulation 301.7701-2(b)(8) provides a list of foreign entities that are treated as corporations. That list includes an Indonesian Perseroan Terbuka. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Although the regulations also provide exceptions for when 10 an Indonesian Perseroan Terbuka may be treated as a business entity other than a corporation, petitioners did not establish that any exception applies. Thus, Bintang is classified by default as a foreign corporation. Because Bintang is a foreign corporation, its losses did not flow through to petitioners for the years at issue. Turning to penalties, the Commissioner's notice of deficiency determined an accuracy-related penalty pursuant to section 6662(a). The notice of deficiency attached to the Commissioner's answer included a copy of the penalty approval form showing that the reasons for that penalty were a substantial understatement under section 6662(d) and in the alternative, negligence under 15 section 6662(c). 16 17 18 19 20 21 22 23 24 Section 6662(a) provides that a taxpayer may be liable for a penalty of 20% of the portion of an underpayment of tax required to be reported on a return that is attributable to, among other things, negligence or a substantial understatement of income tax. See I.R.C. § 6662(b)(1) and (2). Only one section 6662 accuracy- related penalty may be imposed with respect to a given portion of an underpayment. Treas. Reg. § 1.6662-2(c); see also Mileham v. Commissioner, T.C. Memo. 2017-168, at 25 *46. 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 Under section 7491(c), the Commissioner bears 11 the burden of production with respect to penalties and must produce evidence that any penalty is appropriate. See Higbee, 116 T.C. at 446. Once the Commissioner meets his burden, petitioners must come forward with persuasive evidence that the Commissioner's determination is incorrect or that an exception applies. Higbee, 116 T.C. at 446-47; see I.R.C. § 6664(c)(1) (reasonable cause and good faith exception). We have held that for penalties that require managerial approval pursuant to section 6751(b), the Commissioner must establish compliance with section 6751(b). Walquist v. Commissioner, 152 T.C. 61, 68 (2019). The circuits are split as to when the Commissioner must establish that the approval occurred. Some circuits have held that the Commissioner may establish approval at any time before assessment. See, e.g., Kroner v. Commissioner, 48 F.4th 1272, 1278 (11th Cir. 2022), rev'g in part T.C. Memo. 2020-73. When presented with arguments about the penalty approval requirement of section 6751(b), the United States Court of Appeals for the Eighth Circuit has likewise focused on assessment. See Wells Fargo & Co. v. United States, 957 F.3d 840, 854 (8th Cir. 2020) ("By its terms, the statute requires prior written approval to be obtained when the 1 2 3 4 5 6 7 8 9 10 11 government 'assesses' a penalty against a taxpayer."). 12 And we have previously cited the Eighth Circuit as among those circuits that does not require proof of penalty approval at the time of a proceeding in our Court. Green Valley Invs., LLC v. Commissioner, T.C. Memo. 2025-15 at *35. Although multiple proposed trial exhibits and the copy of the notice of deficiency attached to the Commissioner's answer show penalty approval, none of those items were received into evidence. But given the Eighth Circuit's focus on assessment, the Commissioner need not establish approval occurred at this time. That question 12 is premature. 13 14 15 16 17 18 19 20 21 22 23 24 25 We now turn to the specific ground for which the Commissioner determined an accuracy-related penalty in this case, specifically a substantial understatement of income tax, or in the alternative, negligence. Section 6662(d)(1)(A) defines a substantial understatement of income tax as an understatement of tax that exceeds the greater of 10% of the tax required to be shown on the tax return or $5,000. The Commissioner's notice of deficiency shows that petitioners' understatement is greater than 10% of the amount required to be shown on their return, thus the Commissioner has established that the substantial understatement penalty applies. The negligence penalty, asserted in the 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 alternative, also applies. "The term negligence includes 13 any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return." Treas. Reg. § 1.6662-3(b)(1). The Court decided the same issue presented in this case against petitioners in 2022, the same year that is at issue here. After the Court decided their prior case against them, petitioners nonetheless claimed entity-level deductions on their personal return. This evidences a failure to make a reasonable attempt to comply with the internal revenue laws and a failure to exercise ordinary and reasonable care in the preparation of their tax return. Notably, they cite no authority in support of their return position or contrary to the Court's prior opinion. Section 6664(c)(1) sets forth a reasonable cause and good faith exception to some accuracy-related penalties. But petitioners did not provide any evidence to support a finding of either reasonable cause or good faith. Accordingly, they have not established that the penalty exception applied. The section 6662 accuracy-related penalty applies for the year in issue. CONCLUSION Petitioners claimed on their return items attributable to foreign entities that are classified as 14 corporations for U.S. federal income tax purposes. They provided no evidence to support their eligibility to report those items on their personal return. Accordingly, we sustain the Commissioner's deficiency determination. This determination results in a substantial understatement of tax and an accuracy-related penalty. Decision will be entered for the Commissioner. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 4:21 p.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