TAX COURT OPINION

Case: Haroutioun Iskenderian
Docket Number: 12574-11
Judge: Gustafson
Opinion Type: bench
Filed: 04/24/2012
Pages: 13

UNITED STATES TAX COURT WASHINGTON, DC 20217 CZ HAROUTIOUN ISKENDERIAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 12574-11. ) ) ) ) ORD E R 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge David Gustafson at Boston, Massachusetts, on April 12, 2012, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated. Washington, D.C. April 24, 2012 SERVEDApr242012 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 David Gustafson April 11, 2012 Iskenderian v. Commissioner Docket No. 12574-11 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, which shall not be relied on as precedent in any other case. 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 Rules of Practice and Procedure. By notice of deficiency dated February 24, 2011, respondent (the IRS) determ.ined.a deficiency in the Federal income tax of·Petitioner Haroutioun Iskenderian for the year 2007, pl'us an accuracy- related penalty under section 6662(a). The parties have settled the issues giving rise to the deficiency, and the resulting revised amount has not yet been computed. Still in dispute is the accuracy-related penalty. For the reasons explained hereafter, we will sustain the determination of the accuracy-related penalty, in an amount equal to 20 percent of the yet- to-be-determined amount of the redetermined deficiency. Trial of this case was conducted 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 April 12, 2012, in Boston, Massachusetts. Respondent was represented by Nina Ching, and petitioner was represented by Timothy Burke. We find the following facts: Findings of Fact Petitioner's background Mr. Iskenderian, now age 50, was born in Lebanon. His formal education ceased at age 15 or 16, after which he worked in his father's business. He has never had any:training in bookkeeping, accounting, or taxation. He came .to the United States in 1999. He worked odd jobs until 2003, when he started his own business, a clothing store called Boline.Boutique. Petitioner's business : Mr. Iskenderian worked as a professional tailor and operated Boline Boutique as a retail clothing store, which also offered custom tailor services. He conducted this business in 2007, the year at issue here. He did not keep formal books and records for the business. Customers paid him with checks, credit cards, and cash. At the end of the business day he counted his earnings, in order to gain a sense of whether he was on track to being able to pay his bills, but he did not keep track of the daily counts. 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 The credit card companies deposited his credit card receipts into his account, and he deposited other receipts himself. He maintained multiple personal and business bank accounts, for which he kept the monthly statements. Income, expenses, and tax reporting Mr. Iskenderian timely filed for 2007 a Form 1040, "U.S. Individual Income Tax Return", and on Schedule C he reported the income and expenses of his business. To prepare that return, Mr. Iskenderian relied on Mr. Ahmad Debs, whose mother is Lebanese and whom Mr. Iskenderian met when Mr. Debs was an employee of Citizens- Bank. Mr. Debs did business under the auspices of:Pay Less Taxes, a return preparation company that had three locations. Mr. Iskenderian did not know how to prepare tax returns, and he believed that Mr. Debs--as a former bank employee and a partner at Pay Less--was competent to prepare tax returns. Mr. Iskenderian provided information to Mr. Debs with which to prepare Mr. Iskenderian's return. After the end of 2007, he took to Mr. Debs both monthly recaps of his cash register sales (printed off from the register at the end of each month), and also copies of his bank statements for each month of the year, utility bills, rent 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 statements, and credit card statements. From that information Mr. Debs prepared the return. We find that the gross receipts reported on Mr. Iskenderian's return, as prepared by Mr.·Debs, correspond to the monthly recaps that he provided to Mr. Debs. Mr. Iskenderian signed the return, but he did so without reviewing it, because he had no specialized knowledge about taxes and he relied on Mr. Debs to prepare the return correctly. Errors on Mr. Iskenderian's return As the parties have stipulated, there were two substantial errors in his reporting: First, Mr. Iskenderian under-reported his "Gross receipts or sales" as $223,087. In fact, his gross receipts were actually $377,314--a discrepancy of $154,227. Second, Mr. Iskenderian over-reported cost of goods sold ("COGS"). The discrepancy was attributable to, in part, errors in his reporting of: (i) cost of labor, which he over-reported as $23,916, but which was actually only $14,764; (ii) beginning inventory, which he over-reported as $49,500, but which in fact was only $14,645; and (iii) purchases, which he under-reported .(to his detriment) as $112,395, but which were actually $125,000. Mr. Heritage Reporting Corporation (202) 628-4888 7 Iskenderian over-reported cost of goods sold as $138,131. In fact, his COGS was actually only $106,729--a discrepancy of $31,401. Together these discrepancies ($154,227 and $31,401) resulted in his taxable income being under- reported by a total of $185,628. (Mr. Iskenderian also failed to report $25 of taxable interest.) The IRS's notice of deficiency The IRS examined Mr. Iskenderian's 2007 return. In the course of that exam, Mr. Bassam Kiriaki--a former partner of Mr. Debs (who had evidently moved away)--represented Mr. Iskenderian and provided to the IRS information that he and his firm had obtained from Mr. Iskenderian. On February 24, 2011, the Internal Revenue Service issued Mr. Iskenderian a notice of deficiency, determining a tax deficiency in the amount of $124,933 for the year 2007, plus an accuracy-related penalty under section 6662(a) in the amount of $24,987. (Respondent admits that the liabilities, when redetermined, will be less than these amounts.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 Proceedings in this case On May 25, 2011, Mr. Iskenderian timely mailed his petition to this Court, requesting a redetermination of his liability. At that time he resided in Massachusetts. Prior to trial, the parties stipulated the facts stated above concerning Mr. Iskenderian's income, expenses, and tax reporting. Opinion I. The accuracy-related penalty Section 6662 imposes an "accuracy-related penalty" of 20 percent of the portion of the underpayment of tax that is attributable to the taxpayer's negligence or disregard of rules or regulations or that is attributable to any substantial understatement of income tax. Under section 7491(c), the Commissioner bears the burden of production and must produce sufficient evidence that the imposition of the penalty is appropriate in a given case. An understatement is substantial, for purposes of the penalty, if it exceeds the greater of: (i) 10 percent of the tax required to be shown on the return for the taxable year, or (ii) $5,000. Sec. 6662(d) (1) (A). Even before precisely recomputing Mr. Iskenderian's deficiency pursuant to Rule 155, the parties agree that his understatement exceeded both 10 percent of 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 the tax required.to be shown and $5,000. This satisfies the Commissioner's burden of production, and we need not address the alternative ground of negligence. Once the Commissioner has thus met his burden, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). A taxpayer who is otherwise liable for the accuracy-related penalty may avoid the liability if he successfully invokes one of three other provisions: First, section 6662(d) (2) (B) provides that an understatement may be reduced where the taxpayer had substantial authority for its treatment of any item giving rise to the understatement. Mr. Iskenderian does not contend that there is any legal authority that would warrant his factually inaccurate reporting. Second, section 6662(d) (2) (B) provides that an understatement may be reduced where the relevant facts affecting the item's treatment are adequately disclosed on the taxpayer's return and the taxpayer had a reasonable basis for its treatment of that item. Mr. Iskenderian does not contend that these criteria are met here. 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 Third, section 6664 (c) (1) provides that, if the taxpayer shows, first, that there was reasonable cause for a portion of an underpayment and, second, that he acted in good faith with respect to such portion, then no accuracy-related penalty shall be imposed with respect to that portion. Mr. Iskenderian invokes this third defense, which we now discuss. II. Reasonable cause and good faith A. Good faith We assume that Mr. Iskenderian acted in good faith. The principal argument that the IRS makes against his good faith was his maintenance of several bank accounts that were not disclosed to the IRS during the audit, but about which the IRS learned only during discovery. However, the accounts seem to have been all but inactive, and the amounts deposited into these accounts were inconsequential. Mr. Iskenderian's actual gross receipts as stipulated by the parties were very close in amount to the gross receipts that the IRS determined on audit with the account information that Mr. Iskenderian did provide. The non-disclosure of those accounts was probably accidental and in any event was immaterial and does not reflect on his good faith. However, to invoke this defense 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 successfully, a taxpayer must show both good faith and 11 reasonable cause for the understatement. B. Reasonable cause We hold that Mr. Iskenderian did not show reasonable cause. Whether the taxpayer acted with reasonable cause depends on the pertinent facts and circumstances, including his efforts to assess his proper tax liability, his knowledge and experience, and the extent to which he relied on the advice of a tax professional. 26 C.F.R. sec. 1.6664-4 (b) (1). We accept that Mr. Iskenderian's relevant knowledge and experience were modest, but he has not made a persuasive showing as to these other criteria: 1. Effort to assess proper tax liability It is certainly appropriate for someone unfamiliar with the tax laws to delegate that difficult work to someone knowledgeable.. And it is understandable if a recent immigrant feels he has done all he can do if he simply hirés a return preparer and dumps documents on him. However, 2007 was Mr. Iskenderian's ninth year in the U.S. and his fifth year of running Boline Boutique. The blur and chaos of a new venture in a new country must have largely subsided; and if Mr. Iskenderian still remained ignorant of the basic requirements of tax compliance-- 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 keeping records, assuring that all income is reported, and assuring that all expenses are substantiated--then that was because he had no plan for learning those basic requirements . Even a non-tax expert should notice when his business income has been under- reported by as much as $185,628. Accepting at face value his description of his methods, we cannot say that in 2007 Mr. Iskenderian was exerting much effort to assess his proper tax liability. 2. Reliance on professional advice Mr. Iskenderian contends that his reliance on Mr. Debs meets this exception. However, it was Mr. Iskenderian's burden to show not just that he had hired a professional to prepare his return but to show, specifically, that his under-reporting of gross receipts and his over-reporting of COGS were attributable to his reliance on Mr. Debs. He did not make such a showing. The record includes almost nothing to explain the over-reporting of COGS. If Mr. Iskenderian provided all his bank statements and credit card statements to Mr. Debs, that would not explain how Mr. Debs could derive from those records the amounts of Mr. Iskenderian's cost of labor, opening inventory, and purchases. We do not know 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 exactly why COGS was overstated by more than $31,000, and we cannot assume that it was because Mr. Debs failed to put on the return information that Mr. Iskenderian had provided. At trial most of the parties' time was spent on the subject of gross receipts, which was understated by more than $150,000. Mr. Iskenderian testified that he provided monthly register tapes to Mr. Debs for use in preparing the return; and it is stipulated that Mr. Iskenderian's representative provided to the IRS monthly ;register tapes that corresponded to the amounts :reported on the return. We therefore conclude that Mr. Iskenderian provided the monthly register tapes that understated his actual receipts. Petitioner argues that the provenance of the representative's tapes was not actually established at trial; but since he bears the burden of proof, we will not invent a scenario of false tapes doctored or manufactured to excuse misdeeds by the representative. Rather, we infer that the tapes Mr. Iskenderian provided to Mr. Debs failed to show all the receipts. We believe that Mr. Iskenderian did, in addition, provide to Mr. Debs his bank statements, on which virtually all of the gross receipts were Heritage Reporting Corporation (202) 628-4888 , 14 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 reflected. However, they were there among non-taxable deposits and loans. It was quite a forensic project for the parties to ferret out, from gross deposits of $677,314, the actual gross business receipts of $377,314. It would not have been reasonable for Mr. Iskenderian to assume that his return preparer would think to undertake such a project in order to contradict and correct the register tapes, provided by Mr. Iskenderian, :that should have reflected all the gross receipts (but did not). Mr. Iskenderian did not disclose gross receipts of $377,314 to his return preparer. Since he thus failed to provide his return preparer with all the relevant information, he cannot rely on that professional advice to excuse the under- reporting of his :income. See Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002). Decision will be entered under Rule 155, so that the parties can recompute Mr. Iskenderian's tax liability and the accuracy-related penalty thereon. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 3:57 p.m., the bench opinion in the above-entitled matter was.concluded.) // Heritage Reporting Corporation (202) 628-4888