TAX COURT OPINION

Case: Kwang J. & Pia J. Youn
Docket Number: 15833-08S
Judge: Colvin
Opinion Type: bench
Filed: 07/09/2009
Pages: 7

UNITED STATES TAX COURT Washington, D .C . 2021 7 KWANG J . AND PIA J . YOUN, Petitioners, v . Docket No . 15833-08S COMMISSIONER OF INTERNAL REVENUE, Respondent . ) O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s 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 of the above case befor e Special Trial Judge Lewis R . Carluzzo at Los Angeles, California, on May 28, 2009, containing his oral findings of fact and opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155 . (Signed ) Lewis R. Carluzzo Special Trial Judg e Dated : Washington, D .C . July 9, 2009 SERVED JU 1 0 2009 3 1 Bench Opinion by Special Trial Judge Lewis R . Carluzzo 2 Kwang J . & Pia J . Youn Docket No . 15833-08S 3 May 28, 200 9 4 The Court has decided to render ora l 5 findings of fact and opinion in this case and th e 6 following represents the Court's oral findings of fact 7 and opinion . The oral findings of fact and opinio n 8 shall not be relied upon as precedent in any other 9 case . 10 This proceeding for the redetermination of a 11 deficiency is a small tax case conducted pursuant to 12 the provisions of Section 7463 of the Internal Revenue 13 Code of 1986, as amended, and Rules 170 through 175 of 14 the Tax Court Rules of Practice and Procedure . 15 This bench opinion is made pursuant to the 16 authority granted by Section 7459(b) of the Internal 17 Revenue Code of 1986, as amended, and Rule 152 of the 18 tax Court Rules of Practice and Procedure . 19 Hereinafter in this bench opinion, section references 20 are to the Internal Revenue Code of 1986, as amended, 21 in effect for 2004 . Rule references are to the Tax 22 Court Rules of Practice and Procedure . 23 Kwang J . Youn and Pia J . Youn appeared pro 24 se . Donna F . Herbert appeared on behalf o f 25 Respondent . In a notice of deficiency dated May 14, Heritage Reporting Corporatio n (202) 628-4888 4 1 2008, Respondent determined a $17,511 deficiency in 2 Petitioners' 2004 federal income tax and imposed a 3 $3,502 Section 6662(a) penalty . 4 The issues for decision are : 1) whether the 5 cost of goods sold reported in connection with th e 6 trade or business of Kwang J . Youn, Petitioner, has 7 been accurately computed ; 2) whether certain legal 8 expenses are attributable to that trade or business ; 9 and 3) whether Petitioners are liable for the Section 10 6662(a) penalty . 11 Some of the facts have been stipulated and 12 are so found . Petitioners are, and were, at all times 13 relevant married to each other . At the time th e 14 petition was filed they resided in California . 15 During 2004, Petitioner was self-employed as 16 an electrical contractor . Pia J . Youn's employmen t 17 status is not known, but she did own an interest in a 18 woman's clothing store that she had acquired several 19 years before the year in issue at a cost of at least 20 $600,000 . During 2004, the clothing store was in some 21 manner or another involved in a bankruptcy proceeding 22 apparently initiated by another individual who als o 23 owned some interest in that business . 24 In order to protect her significan t 25 investment in the clothing store business, Petitioner Heritage Reporting Corporation (202) 628-4888 5 1 incurred at least $46,791 in legal fees, the legal 2 fees . Petitioners' 2004 joint federal income tax 3 return was timely filed . It was prepared by a 4 certified public accountant . The return includes a 5 Schedule A, Itemized Deductions, as well as a Schedule 6 C, Profit or Loss from Business, on which income an d 7 deductions from Petitioner's electrical contracting 8 business are reported . 9 The $343,471 cost of goods sold shown on the 10 Schedule C includes : 1) $35,500 of items duplicated 11 in the computation of Petitioner's 2003 cost of goods 12 sold which apparently were properly reported in that 13 year ; and 2) union dues otherwise duplicated in a 14 $22,022 deduction claimed on the Schedule C . The 15 Schedule C also includes a $46,981 deduction for legal 16 fees and professional services which, although in a 17 slightly different amount, consist of the legal fees 18 discussed above . 19 In the above-referenced notice o f 20 deficiency, Respondent 1) decreased the cost o f 21 goods sold shown on the Schedule C by $33,044, which 22 adjustment takes into account the elimination of the 23 above-referenced duplication, the elimination of the 24 union dues duplicated in a separate deduction, and the 25 allowance of other items not originally reported ; 2 ) Heritage Reporting Corporation (202) 628-4888 6 1 reduced the Schedule C deduction for union dues by the 2 amount unsubstantiated ; 3) disallowed the deductio n 3 claimed for legal and professional fees on th e 4 Schedule C and instead allowed a lesser amount as an 5 itemized deduction ; 4) recomputed Petitioners ' 6 itemized deductions accordingly ; and 5) imposed a 7 Section 6662(a) penalty on several alternativ e 8 grounds . 9 Other adjustments made in the notice of 10 deficiency are computational and need not b e 11 discussed . After carefully reviewing the evidence in 12 this case, which includes the testimony of the revenue 13 agent who conducted the examination of Petitioners ' 14 2004 return, we find as follows : 15 1) Respondent's adjustment to the cost of 16 goods sold is sustained . We could not completel y 17 follow the manner in which the adjustment wa s 18 computed, but because the adjustment is less than the 19 adjustment that would result if only the duplicated 20 items were taken into account, we need not consider it 21 further . 22 2) Respondent's disallowance of the 23 deduction for legal and professional fees claimed on 24 the Schedule C is sustained . Those expenses wer e 25 obviously neither incurred in connection with Heritage Reporting Corporation (202) 628-4888 7 1 Petitioner's electrical contracting business, no r 2 ordinary and necessary to that business . See Section 3 162(a) . 4 3) The increase to Petitioners' itemized 5 deduction should be adjusted to allow an additional 6 $1,286 of legal fees not previously substantiated to 7 the revenue agent who conducted the examination . 8 4) Petitioners apparently do not dispute the 9 adjustment to the union fees deduction, and w e 10 consider that item to have been conceded . 11 5) Petitioner's claim that the cost of goods 12 sold should be increased by amounts accrued but unpaid 13 is rejected . The revenue agent who conducted th e 14 examination clearly demonstrated that the income and 15 deductions shown on the Schedule C were computed with 16 reference to the cash receipts and disbursement s 17 method of accounting . 18 6) Taking into account all of the facts and 19 circumstances, including the fact that Petitioners' 20 return was prepared by a certified public accountant, 21 we find that Petitioners are not liable for th e 22 Section 6662(a) accuracy-related penalty . See Section 23 6664(c) . 24 To reflect the foregoing, decision will be 25 entered under Rule 155 . This concludes the Court's Heritage Reporting Corporatio n (202) 628-4888 1 oral findings of fact and opinion in this case . 2 (Whereupon, at 9 :40 a .m ., the bench opinion 3 in the above-entitled matter was concluded . ) 8 4 5 6 7 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 2 4 25 Heritage Reporting Corporation (202) 628-4888