TAX COURT OPINION

Case: Harinder Grewal
Docket Number: 17880-13
Judge: Holmes
Opinion Type: bench
Filed: 07/05/2016
Pages: 9

HARINDER GREWAL, Petitioner(s), ) ) ) ) ) v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) Docket No. 17880-13. ) ) ) ) ) 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 petitioner and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Mark V. Holmes at San Diego, CA, on May 26, 2016 containing his oral findings of fact and opinion rendered after the conclusion of trial. In accordance with the oral findings of fact and opinion, a decision under Rule 155 will be entered. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. July 5, 2016 SERVED JUL - 8 2016 Capital Reporting Company 3 1 2 Bench Opinion by Judge Mark V. Holmes May 26, 2016 3 Harinder Grewal v. Commissioner 4 5 6 7 8 9 10 11 12 13 14 15 Docket No. 17880-13 THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION AND THE FOLLOWING IS 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 and Procedure. This case arises from Dr. Grewal's 2009 and 2010 tax years. During those years she was a child psychiatrist who generally operated her psychiatry practice in drug trial research activities through a 16 wholly owned corporation, World Wide Research Center, 17 18 19 20 21 22 23 24 25 Inc., a C corporation incorporated in Nevada. However, for both of the tax years involved, Dr. Grewal attached to her individual income tax return a Schedule C on which she reported the income and expenses associated with World Wide. She was at all times a California resident. World Wide Research's case settled and this case had initially more than $300,000 in deficiencies and penalties determined under Section 6662. But the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 parties cooperated expensively and whittled the issues down to a very small number, namely the tax consequences of two payments to people in Brazil, several hundred dollars in payments to Southwest Family Counseling in Temecula, California, and two payments to Home Depot, plus the penalties asserted by the Government under 6662. I'll take them in order beginning with the deductions. The first contested deduction were those payments to Brazil. One payment of $58,064 to someone named Ferreira, F-E-R-R-E-I-R-A, on August 17th, 2009, and $60,000 to Bonco Bradesco, B-R-A-D-E- S-C-0, Construtroa, C-O-N-S-T-R-U-T-R-O-A, Olympia, for $60,000 on 10/15/09. I find that Dr. Grewal was credible in her testimony about the purpose of these payments. They were certainly not for goods or services for her psychiatry practice, her World Wide Research's corporate activities, but instead were seed money for a possible Brazilian joint venture involving nutraceuticals, which is an agricultural activity. They're either, therefore, startup expenses under Section 195(a), or more likely, capital in nature. They're certainly not ordinary and necessary 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 business expenses, so I'll disallow those under 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 Section 162, though at some point I would suggest to Dr. Grewal she may take them as either a capital loss or, if it ever does get off the ground, a deducible expense under the rules under Section 195. Under the second cluster of deductions were a series of payments that Dr. Grewal said were rent payments to Southwest Family Clinic. Again, I find her completely credible here. She found useful to have a satellite office in Temecula, some distance 10 from where her main office was at Fallbrook, 11 California, and this sort of informal arrangement 12 13 14 15 16 17 18 19 20 21 22 23 24 could easily and understandably be done orally with the payments done somewhat sporadically but always to the same payee and always in a reasonably small amount. So I will certainly allow those payments as deductible expenses under 162. The third category of deduction here were expenses to Home Depot. They total slightly less than $8,000. There were two of them. There was some confusion because one payment of $6,000 was reversed and then. reinstated, or made again. But, again, I find her testimony credible on this point. The particular products involved were 25 a large amount of carpeting and installation 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 agreement for that carpeting for her business place, not her home. There was some evidence in the record that she was doing some home renovation projects a little 5 bit later in time, but in addition to her testimony, 6 which I found credible, if I was construing 7 8 -(-i-neudá-btF) on the home renovation project, that was for installing wooden floors and you wouldn't put 9 wall-to-wall carpeting on top of a wooden floor, 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 unless you were nuts. So I'll allow that deduction as well. . That leaves the major issue here, which are penalties under 6662. The Code imposes an accuracy- related penalty if there is an underpayment, which is attributable to negligence or disregard of the rules, or any substantial understatement of income tax. The penalty will not be applied to the portion of the understatement for which the taxpayer can show that there was a reasonable cause, and that the taxpayer acted in good faith, with respect to that portion. See I.R.C. Section 6664(c)(1). Negligence is defined by the regulation, See 26 C.F.R. Section 1.662-3(b)(1) as including, "Any failure to make a reasonable attempt to comply 25 with the provisions of the Internal Revenue laws ... 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 negligence also is any failure by the taxpayer to keep adequate books and records or to substantiate items properly." So I do find that the Government has met its burden of production here. Dr. Grewal kept grossly inadequate tax records in her business, and in addition, substantially underpaid her taxes, if my back of the envelope calculations on the effects of the concessions, and my findings on the Brazilian payments are correct. So the Government's come forward with its burden of production. I do note that Dr. Grewal was not a tax professional, but she is highly educated. And as a 14 medical professional, she's familiar with the 15 16 17 18 19 20 21 22 23 24 25 importance of records for diagnosing and treating her patients, and also in seeking reimbursement in this bureaucratic century of ours, in a practice that is heavily dependent on payments from Medical, yet her financial and tax records were apparently not kept in any organized fashion, unlike her reimbursement records and her patient records. She said she had no general books and records, but simply kept her business records in the form of checkbooks and credit card statements with apparently no boundaries whatsoever between her 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 personal and business expenses, and between her corporation and her as an individual. The Government highlighted such things as tax payments on behalf of her mom from corporate assets. There were law school payments, and law school bookstore payments on a charge card to her daughter, some of those came out of the corporate account. There were also numerous cash withdrawals in some of the exhibits that the parties stipulated to. So, again, I find that respondent has met his burden of production for the determination of the accuracy-related penalty based on negligence, as well as substantial understatement. That then means that I turn to whether Dr. 16 Grewal has adequately shown the affirmative defense 17 18 19 20 of reasonable cause and good faith. In her case, relies on a professional advisor, the CPA who prepared her taxes during those years in question. The regulation, again, gives me a little 21 bit of guidance here. 26 C.F.R. Section 1.664- 22 23 24 25 4 (b) (1) says, "The determination of whether a taxpayer acted with reasonable cause and in good faith is made by on a case-by-case basis taking into account all pertinent facts and circumstances ... 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances, including the experlence, knowledge, and education of the taxpayer." I note in this regard that Dr. Grewal did not bring her tax return preparer or get him subpoenaed, and she candidly admitted that she did not review the returns that he prepared for her. Thus, I think it more likely than not that she did not receive advice from him, but simply signed returns without either seeking or getting advice from him. Alternatively, I would find that she did not rely on her preparer, even -- I would not find that her reliance on her preparer, even a CPA, to be in these circumstances reasonable or in good faith, given her high level of intelligence and great success and experience in managing complex recordkeeping requirements of both mentally ill patients and the MediCal system. Because of concessions on both sides, the decision will have to be entered under Rule 155. This concludes the Court's oral findings of fact and 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 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 9:18 a.m., the above- entitled matter was concluded.) 10 866.488.DEPO www.CapitalReportingCompany.com