TAX COURT OPINION

Case: Noha Enterprises, Inc.
Docket Number: 27306-11
Judge: Gustafson
Opinion Type: bench
Filed: 11/27/2012
Pages: 17

SEC UNITED STATES TAX COURT WASHINGTON, DC 20217 NOHA ENTERPRISES, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 27306-11. ) ) ) ) O R D E R Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Washington, D.C., on October 26, 2012, containing his oral findings of fact and opinion, 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 Gustafson at Washington, D.C., 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, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated. Washington, D.C. November 27, 2012 SERVED Nov 27 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 3 1 Bench Opinion by Judge David Gustafson 2 Noha Enterprises, Inc. Docket No. 27306-11 3 October 22, 2012 4 5 THE COURT: The Court has decided to render the following as its oral Findings of Fact and 6 Opinion in this case. This opinion shall not be 7 8 relied on as precedent in any other case. This bench opinion is made pursuant to the 9 authority granted by section 7459 (b) of the Internal 10 Revenue Code, and Rule 152 of the Tax Court Rules of 11 Practice and Procedure. 12 13 14 By notice of deficiency dated November 17, 2011 (Ex. 1-R), the Internal Revenue Service (IRS) determined a deficiency in the Federal income tax of 15 petitioner Noha Enterprises, Inc., for the year 2008. 16 Trial of this case was conducted on October 25, 2012, 17 18 in Washington, D.C. Petitioner was represented by its officer Hazem Garada, and respondent was 19 represented by Andrew K. Glover. Because of Mr. 20 Garada's non-cooperation (of which the Court itself 21 got a first-hand view in two difficult telephone 22 conferences with the parties), the parties, in 23 violation of Rule 91(a), had no Stipulation of Facts .24 to offer into evidence. 25 Consequently, at the beginning of trial the (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 4 1 2 3 4 5 6 7 8 .Court directed respondent to authenticate the basic documents of the case such as petitioner's tax returns and transcripts and the notice of deficiency; and petitioner had no valid objections; so the documents were received into evidence. Then comparing the notice of deficiency with petitioner's two tax returns filed for 2008 (a comparison facilitated by charts that appeared in respondent's 9 pretrial memorandum and that respondent proffered as 10 Exhibit 10-R, without objection from petitioner), the 11 Court determined, and the parties agreed, that the 12 only issues in dispute are: (1) the fact, amount, 13 14 and character of any loss incurred by petitioner upon the sale of its business in 2008, and (2) 15 petitioner's entitlement in 2008 to deductions 1.6 (greater than respondent already allowed) for (a) 17 18 salaries and wages, (b) repairs and maintenance, (c) bad debts, (d) rents, and (e) loan repayment. 19 Testimony was given by Mr. Hua Trung (a former 20 employee of petitioner), Ms. Sonya Moorehead (an IRS 21 agent), and Mr. Garada. 22 For the reasons stated herein, we largely 23 sustain the IRS's determinations. 24 FINDINGS 25 Acauisition in 2006 (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 5 1 2 3 4 5 In 2006 petitioner acquired a gas station business from Mr. Allen Thai. The purported purchase agreement (Ex. 16-P) recites that the gas station itself is sold and recites that an attached Schedule A (which was not attached to the document presented 6 at trial) lists equipment involved in the sale; but 7 Mr. Garada insists that only intangible assets such 8 9 as goodwill were transferred, and that Mr. Thai remained petitioner's landlord in the property. 10 Because of that contradiction, other irregularities 11 12 13 14 in the document (such as two different page ones), and the lack of credibility in Mr. Garada's testimohy, we cannot conclude exactly what was bought and sold, nor what petitioner actually paid for 15 whatever it bought. We conclude that petitioner paid 16 no more than $225,000, the price stated on the 17 purported agreement, but petitioner provided no 18 substantiation for this figure. 19 Sale in 2008 20 In 2008 petitioner sold the business back to Mr. 21 Thai. The purported purchase agreement (Ex. 14-P) 22 recites a sale price of $190,000 plus $15,736 for 23 inventory, totaling $205,736, and we assume that 24 petitioner received no less than that amount, but 25 petitioner provided no substantiation for this (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 1 2 figure. We assume that the sale took place effective no later than August 23, 2008--the date on the 6 3 purported agreement. 4 Salaries and wages 5 The IRS conceded that in 2008 petitioner paid 6 wages totaling $2,284. However, we find that the 7 wages were paid in a somewhat greater amoun.t. In 8 9 2008, as in prior years, petitioner posted a paper on the wall to reflect payment to its workers. Each 10 worker had a column, and in that column either the 11 worker or Mr. Garada wrote the amount that the worker 12 was paid for a two week period. This sheet. (Ex. 11- 13 14 P) was authenticated at trial by petitioner's former employee Mr. Trung, whose testimony we found 15 credible. He testified that Exhibit 11-P was the 16 actual original sheet posted at the gas station, and 17 18 that the amounts appearing on the sheet (some of them in his handwriting)--totaling $7,545--were actually 19 paid to him, either by check or by cash. A bank 20 statement (Ex. 18-P) corroborates that one of his 21 biweekly payments was by check, and the rest was 22 presumably by cash. We find that he was paid the 23 24 stated total. Mr. Trung also testified that another 25 worker--Than M. Pham--worked at the station, (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 1 consistent with his being listed on the sheet. Of 2 Mr. Pham's 14 payments listed on the sheet (totaling 3 $9, 684 . 87) , f our payments (totaling $2, 634 ) were 4 evidently paid by checks that are reflected on the S 6 bank statement (Ex. 18-P) . In the absence of any corroborating testimony by Mr. Pham, and given the 7 possibility of alteration of the sheet, we cannot 8 determine whether the other ten payments were 9 actually made to him. But we do find that he was 10 paid $2,634 by petitioner in 2008. 11 On the sheet there is also a column for Mr. 12 Garada, totaling $34,329, but we do not find that 13 petitioner paid himself compensation in these 14 15 amounts. Petitioner did not report for 2008 any wages or non-employee compensation on Forms W-3, W-2, or 16 1099; and Mr. Garada did not report any compensation 17 18 from petitioner on his income tax return for 2008. To explain this omission, he gave confusing testimony 19 about receiving payments as reimbursements or 20 advances for business expenses of petitioner--but if 21 22 that were true, then petitioner should have claimed (and, we assume, would have claimed) those expenses 23 as deductions in themselves. Petitioner would then 24 not be entitled to deduct them a second time as wages 25 to Mr. Garada. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 We find that petitioner paid employee 8 compensation totaling $10,179 in 2008, not just the $2,284 that the IRS allowed. 1 2 3 4 Repairs and maintenance 5 6 7 Petitioner did not offer any documentary evidence to corroborate Mr. Garada's brief, general, and unconvincing testimony as to additional 8 deductions for repairs and maintenance. As a result, 9 respondent's determination is sustained in this 10 11 12 13 14 15 16 17 18 regard. Bad debts Petitioner also did not offer any documentary evidence to corroborate Mr. Garada's unconvincing testimony as to additional deductions for bad debts, and a deduction for bad debts is appropriate only in the case of an accrual taxpayer who has recognized income before it is received and then may deduct the amount of a bad debt not actually paid. Respondent's 19 determination is therefore sustained. 20 Rent 21 The IRS conceded in the notice of deficiency (and 22 at trial) that in the first seven months of 2008 23 petitioner paid rent to Mr. Thai in amounts totaling 24 $24,290. We cannot determine whether any additional 25. rent was paid, since petitioner offered no (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 9 1 2 documentary evidence to corroborate Mr. Garada's testimony to the effect that rent was also paid for 3 August 2008. His testimony is at odds with the 2008 4 return that petitioner filed in June 2009 (Ex. 4-R), 5 which indicated that its business ended July 31, 2008 6 (correcting the indication on the return filed in 7 March 2009 (Ex. 3-R) , which had indicated that its 8 business ended in August 2008). As a result, 9 respondent's determination is sustained, and no 10 additional deduction for rent will be allowed. 11 Loan repayment 12 13 Petitioner claims a deduction of $16,866 for "Loan repayment". However, no documentation was 14 offered to prove the loan, any payment against it, or 15 the deductible character of the payments. Mr. Garada 16 eventually testified that some portion of that amount 17 (or perhaps more than that amount) did constitute 18 deductible interest, but his account was incoherent 19 and unsupported. We do not find any deductible 20 payment corresponding to this claim. 21 Mr. Garada's stint in the UAE 22 23 24 After selling the business, Mr. Garada took employment in the United Arab Emirates and departed for the UAE in about September 2008 . His family 25 stayed behind in the U.S. While still in the UAE Mr. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 10 1 Garada prepared a Form 1120 tax return for petitioner 2 (Exs. 2-R, 3-R), which he filed with the IRS by 3 mailing it in March 2009. The March return had 4 5 6 substantial errors on it (which, as we explain below, he corrected in June 2009). He explains his March 2009 errors by virtue of the fact that in the UAE he 7 did not have access to all the information he needed 8 9 10 11 to prepare a correct return. In about April or May of 2009 Mr. Garada left the UAE under exigent circumstances. and was forced to leave behind him virtually all his 12 possessions, including any records he had there. 13 14 The second 2008 return In June 2009, after returning from the UAE, 15 Mr. Garada prepared a corrected Form 1120 tax return 16 17 for petitioner's 2008 year. (Ex. 4-R.) Evidently then having access to the necessary information he 18 had lacked while in the UAE, he made substantial 19 corrections and then filed the return. 20 IRS examination 21 22 The IRS examined petitioner's returns, and largely accepted the June return as filed, with the 23 exception of the issues in dispute here. The IRS 24 then issued the notice of deficiency, and petitioner 25 timely filed its petition. At the time he filed the (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 1 petition in this case, Mr . Garada resided in 2 Virginia. 11 3 4 5 6 7 OPINION I. Evidentiary principles A. General rules The IRS'·s determination is presumed correct, and the taxpayer generally bears the burden to prove his 8 entitlement to any deductions he claims. Rule 9 142(a). Deductions are a matter of legislative 10 grace, and taxpayers must satisfy the specific 11 requirements for any deduction claimed. See INDOPCQ, 12 Inc. v. Commissioner, 503 U. S. 79, 84 (1992). 13 Furthermore, taxpayers are required to maintain 14. records sufficient to substantiate their claimed 15 deductions . See sec. 6001; 26 C. F. R. sec. 1. 6001- 1(a) . 16 17 B. Cohan rule 18 Mr. Garada acknowledges petitioner's lack of 19 documentation on some particulars; but he alleges 20 21 that his records are unavailable to him through no fault of his own--left behind with his property in 22 the UAE when he was forced to depart--and that this 23 should affect the Court's evaluation of the evidence. 24 It is true that, under the rule of Cohan v. 25 Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), if (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 12 1 2 a taxpayer establishes that a deductible expense has been incurred but cannot establish the precise amount 3 of the deductible expense, then the Court should 4 5 estimate the amount on the basis of less-than-optimal evidence. In making the estimate, the Court "bear[s] 6 heavily if it chooses upon the taxpayer whose 7 inexactitude is of his own making". Id. at 544. Mr. 8 Garada alleges that the property he was forced to 9 leave behind in the UAE included two or three boxes 10 of records for the gas station business, including 11 12 employee time sheets, ·pay information, and bank records. However, we find that this is not 13 believable. His own account is that.in the UAE he 14 lacked the information necessary to prepare a correct 15 16 return. He gave no explanation for why he would have taken the trouble to bring with him to the UAE two or 17 three boxes of records of a business he had 18 discontinued, especially since his family remained in 19 20 the United States.' In short, he did not establish that his gas station records were ever in the UAE or 21 were left behind there, and he provided no credible 22 basis for estimating deductible expenses beyond those 23 24 the IRS conceded and we have found here. C. Petitioner's request for a separate 25 session (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 Mr. Garada stated that Mr. Allen Thai--who 13 sold the gas station to him in 2006 and bought it back in 2008--could testify as to the missing or 1 2 3 4 uncorroborated details of their agreements (and thus (cid:16)042 5 6 7 could establish his loss in 2008) and could establish that petitioner paid rent in August 2008 . He stated that Mr. Thai was away on travel and therefore was 8 not available for trial during this week-long 9 session. Mr. Garada stated that he did not know he 10 could have issued a subpoena to Mr. Thai to compel 11 12 him to attend. But see Rule 147 (a) ("A subpoena *** signed and sealed but otherwise blank, shal.1 be 13 issued to a party requesting it, who shall fill it in 14 before service. Subpoenas may be obtained at the 15 Office of the Clerk in Washington, D.C., or from a 16 17 trial clerk at a trial session. See Code sec. 7456 (a) ") . Mr . Garada theref ore requested· that the 18 Court not conclude the trial but hold a subsequent 19 trial session to which he would attempt to subpoena 20 Mr. Gar.èel-a-. For three reasons, however, we decline 21 22 to grant that request: First, we have no reason to think that Mr. 23 Garada knows what testimony he could expect to obtain 24 from Mr. Thai, nor that Mr. Garada actually intends 25 to subpoena him to attend, nor, if he does so intend (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 14 1 2 3 4 that he will actually follow through. Mr. Garada has demonstrated an apparent propensity for careless statements. At the calendar call on October 22, 2012, for example, Mr. Garada stated that he had an 5 order from a U.S. district court that would require 6 7 8 9 us to hold in secret the proceedings in this case, and he stated that he would have the order delivered by hand to chambers the next day. He never delivered the order, and at trial he did not have any such 10 order. In his pretrial memoranda and in pretrial 11 12 telephone conferences, he insisted on a need to call as witnesses Federal agents who would testify about 13 matters implicating national security. These 14 witnesses were never called (and there was no need 15 for them). We learned that we cannot rely on Mr. 16 Garada's representations about what he will do at trial. 17 18 Second, Mr. Garada failed to cooperate in 19 the pretrial process, and thus is not entitled to 20 exercises of discretion in his favor. It should have 21 been easy for the parties to stipulate the basi·c 22 background facts of the case--an undertaking that in 23 effect took about 45 minutes at the beginning of 24 trial. But because Mr. Garada was extremely 25 difficult to deal with, no stipulation was filed--a (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 1 serious failure to comply with Rule 91(a). The Court 2 held two pretrial telephone conferences in an attempt 3 to broker the stipulation, but the effort failed and 4 Mr . Garada was clearly the problem. It would be 15 5 6 7 8 inappropriate to allow a litigant to flout our rules and procedures but then receive special accommodations . Third, Mr . Thai's testimony would 9 apparently make little difference. Oral testimony 10 would usually be insufficient to prove payment or 11 receipt of money, and if Mr. Thai.has documents, 12 petitioner should have obtained those long ago. 13 Moreover, if petitioner could invoke Mr. Thai's 14 15 testimony in order to prevail in its contentions about the purchase and sale of the gas station, the 16 most it could prove would be that in 2006 it 17 18 purchased only intangibles for $225,000 (i.e., that there was no "Schedule A" to the agreement, despite 19 its terms) and that in 2008 it sold them for $205,736 20 (i.e., the base price of $190,000 plus the addition 21 of $15, 736) . That purchase price minus that sale 22 price yields a loss not in the $35,000 amount that 23 petitioner claimed (a loss amount that ignores the 24 addition) but instead a loss of only $19,264. 25 Moreover, petitioner's loss--a capital loss, not an (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 1 ordinary or operating expense, as it claims--must be 2 measured as the excess of its "adjusted basis" over 3 the amount realized. Sec. 1001(a). One of.the 4 adjustments to basis is the amount of amortization on 16 5 6 the property that is allowed or allowable. Sec. 1016 (a) (2). If the property acquired was (as 7 petitioner contends) only intangibles, then 8 amortization of the alleged $225,000 cost of those 9 intangibles was allowable over a 15-year period, 10 starting in March 2006. Sec. 197(a). Such 11 amortization would have amounted to $12,500 for the 12 13 14 10 months of March through December 2006 and $15,000 in the full year 2007. Thus, at the beginning of the year of sale, a total of $27,500 of amortization 15 would already have been allowable in prior years, and 16 petitioner's basis in the property would have been 17 adjusted downward to $197,500. Since petitioner 18 alleges it sold the property for a greater amount 19 than that adjusted basis--i.e. $205,736--it appears 20 that petitioner realized not a loss but a gain on the 21 transaction. Thus, Mr. Thai's testimony could not 22 salvage petitioner's claim of a loss. 23 II. Deduction issues 24 For the reasons we have already explained, 25 petitioner generally failed to meet its burden to (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises, Inc 10-26-2012 17 1 2 3 show an entitlement to deductions beyond those the IRS conceded. Petitioner failed to show any loss on the sale of the business, not only because of the 4 basis adjustment explained above but, more 5 6 7 8 9 fundamentally, because it failed to prove the terms-- including the price--of the 2006 and 2008 transactions. Petitioner failed to put on any documentary evidence to substantiate the additional $55 of repairs and maintenance that the IRS 10 disallowed, or to substantiate any amount of August 11 12 2008 rent, or to substantiate any deductible "loan repayment". Petitioner did not show how it could be 13 entitled to any "bad debt" deduction, nor did it show 14 the amount of any such- bad debt. The one exception 15 to this generality is that we hold that petitioner 16 did substantiate wages paid in the amount of $10,179, 17 not just the $2,284 that the IRS allowed. 18 The IRS's notice of deficiency is upheld in 19 part, to the extent shown above. So that the 20 liability can be recalculated, decision wi.ll be 21 22 entered pursuant to Rule 155. This concludes the Court's oral Findings of 23 Fact and Opinion in this case. 24 25 (Whereupon, at 11:39 a.m., the bench opinion in the above-entitled matter was (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Noha Enterprises INC 10-26-2012 concluded.) 18 (866) 448 - DEPO www.CapitalReportingCompany.com 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 2 4 25