TAX COURT OPINION

Case: Chun M. NG. & Angela Pei Wang
Docket Number: 30280-15
Judge: Goeke
Opinion Type: bench
Filed: 10/13/2016
Pages: 8

UNITED STATES TAX COURT WASHINGTON, DC 20217 CHUN M. NG. & ANGELA PEI WANG, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 30280-15. ) ) ) ) ORDER Pursuant to Rule 152(b), 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 trial in the above case before Judge Joseph Robert Goeke at Seattle, Washington on September 22, 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, a decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. October 13, 2016 SERVED OCT 1 7 2016 Capital Reporting Company 3 1 2 3 4 5 Bench Opinion by Judge Joseph Robert Goeke September 22, 2016 Chun M. NG & Angela Pei Wang v. Commissioner Docket No. 3D280 15 THE COURT: The Court has decided to render 6 Oral Findings of Fact and Opinion in this case and 7 8 9 10 11 12 13 14 the following represents the Court's Oral Findings of Fact and Opinion. The Oral Findings of Fact and Opinion shall not be relied upon as precedent in any other case. This opinion is rendered pursuant to Internal Revenue Code section 7459(b) and Rule 152 of the Tax Court Rules of Practice and Procedure. Rule references after this are to the Tax - 15 Court Rules and section references are to the 16 17 18 19 20 Internal Revenue Code in effect for the year 2012. This is a deficiency case upon which our jurisdiction arises under section 6213(a) and 6214 (a) . The IRS issued the Notice of Deficiency to 21 Petitioners for 2012 and asserted an income tax 22 23 24 deficiency of $19,084, and the addition to tax under section 6662(a) in the amount of $3,816.80. At the time the petition was filed, the 25 Petitioners were residents of the State of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 Washington. The Petitioners timely filed their 2 3 4 5 income tax return for 2012 and on that return they reported the sale of certain rental property. The rental property in question was the 5819 Stewart Park Avenue South in Seattle. 6 Petitioners purchased that property in October 2009 7 8 9 10 11 12 13 14 15 16 17 18 19 and paid $625,000 for it. They held the property as rental property and claimed depreciation in 2010, 2011, and 2012. They sold the property on July 18, 2012, for $815,000. They reported a basis of $734,037 and selling costs of $68,570. They reported some un-recaptured depreciation but only in the amount of $7,305, which was significantly less than the amounts they claimed in the three prior years. They also claimed an itemized deduction for state and local general sales taxes in the amount of $91,656. It was later determined, and the 20 Petitioners have agreed, that of that amount, $10,050 21 22 23 24 25 was paidAthe year 2013 rather than 2012, and, therefore, was appropriately disallowed by Respondent. In the Notice of Deficiency, Respondent issued to the Petitioners Respondent's adjustments, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 relative to the basis claimed for the sale of the rental property, 'reflected both the inclusion of additional amounts of un-recaptured prior depreciation in the amount of $23,926, and adjustments to Petitioners' basis in the amount of $63,897. The parties have resolved everything except what is the correct amount of their basis in the rental property, and that issue has been resolved but for certain cash payments that Petitioners made to a contractor who was referenced in the document submitted by the Petitioners by the name of Peter. The question, as it is presented to the 14 Court, is whether Petitioners ha ubstantiated cash 15 16 17 18 payments to this individual in the amount of $75,200. Respondent concedes of that $75,200, $41,000 and argues that the remaining amounts have not been substantiated by the Petitioners. 19 Petitioners argue that they did make cash payments 20 21 22 23 24 25 and they referenced their bank account showing that they withdrew cash amounts to pay the individual in question for various remodeling activities. Petitioners also provided other evidence to corroborate that the remodeling activities took place, which include photographs and significant 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 information showing how much work was needed to resell the house at the that Petitioners achieved. We have analyzed independently the bank records in question and we find that Petitioners' position is supported by those bank records but for a cash payment in the amount of $10,200 in January of 2010, which would have been claimed as basis. tw Petitioners' information in the record and the testimony provided is sufficient to support the fact that the remaining amounts were incurred to pay for rehabilitation of the rental property before it was sold. Petitioner has the burden of proving that 15 Respondent's determinations are In error, pursuant to 16 17 18 19 Rule 142(a) and well-established case law. Under certain circumstances, that burden could shift to Respondent but those circumstances are not applicable in the present case because 20 Petitioners' corroboration was not sufficient to 21 22 23 24 25 shift the burden to the Respondent. Petitioner had the obligation to maintain records to support their position, but in the context of the basis question before us, the Court can apply a more favorable rule to the taxpayers allowing for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 them to estimate certain expenditures. That rule was first set forth in the long-established precedent, Cohen v. Commissioner, 39 F.2d, 540 (2d Cir 1930). Given that precedent, and the record in this case, we believe it would be appropriate to allow Petitioners additional basis up to the amount that we stated in the factual findings that was not corroborated in the amount of $10,200. We would revise the adjustment to the basis and limit that 10 adjustment to $10,200. 11 12 13 14 15 16 17 18 19 20 21 22 We obviously would sustain the agreed recapture adjustment and the adjustment to itemized deductions, which Petitioners have agreed to. This resolves the deficiency issues, but leaves for resolution the addition to tax under section 6662(a). Respondent argues that Petitioners did not establish reasonable cause for the adjustments that remain in this case. Petitioners argue that these were technical adjustments and they acted in good faith. We believe the Petitioner position has 23 merit with respect to the itemized deductions, which 24 25 were disallowed but were allowable in the next year, 2013. Given the circumstances of that specific 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 adjustment, we would find that Petitioners acted in good faith and would find that the addition to tax under section 6662(a) would not be applicable to the adjustment for itemized deductions, which were disallowed simply because they were claimed in the wrong year. However, with respect to the recapture adjustments Petitioner agreed to, and the amount of basis we have determined should be disallowed, we 10 believe Petitioners' records are inadequate in that 11 Petitioners efforts to report the transaction were 12 13 remiss in their 6ever to properly account for the recapture of depreciation; and we find that 14 Petitioners have not established reasonable cause 15 with respect to those adjustments, and we would 16 17 18 19 20 21 22 23 24 25 sustain the addition to tax only with respect to the tax liabilities resulting from those adjustments. All these factors require that this case be resolved under Rule 155 of this Court, which would entail a computation by M parties and a re-computation to be submitted after the opinion is rendered but before a decision can be rendered in the case. This concludes the Court's Oral Findings of Fact and Opinion in this case. 866.488.DEPO www.CapitalReportingCompany.com 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 Capital Reporting Company (Whereupon, at 11:20 a.m., the above- entitled matter was concluded.) 9 866.488.DEPO www.CapitalReportingCompany.com