T.C. Memo. 2004-189
UNITED STATES TAX COURT
KAING CHIN AND HAE KYUNG BAEK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8740-03. Filed August 24, 2004.
Sang I. Lee, for petitioners.
Alan H. Cooper and Lauren Mark, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioners petitioned the Court to
redetermine respondent’s determinations as to their 1999 Federal
income tax. As to that year, respondent determined in the notice
of deficiency that petitioners were liable for a $154,896
deficiency and a $30,979.20 accuracy-related penalty under
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section 6662(a).1 The deficiency and penalty stemmed from
respondent’s determination that petitioners’ gross income for
1999 included $400,275 of unreported gross receipts received by
K & C International Co. (KC), the sole proprietorship of
petitioner Kaing Chin Baek (Baek). Respondent determined the
presence and amount of this unreported income from information
that he received from third parties stating that Baek had on each
of various days made deposits totaling at least $10,000 into KC’s
business checking account (KC account).
During this proceeding, respondent obtained the 1999 bank
statements of the KC account, spoke to Baek (or his counsel), and
conceded at the start of trial that none of the proceeds of the
referenced deposits were includable in petitioners’ gross income
as they were received by Baek in repayment of funds given to
Byung Chen Yoo (Yoo). Respondent now notes that the cash
deposited into the KC account during 1999 ($898,286.80) exceeds
the amount drawn on checks payable from that account to Yoo or to
one of his businesses ($771,640) by $126,646.80 and argues that
the $126,646.80 is taxable to petitioners unless they prove to
the contrary. Respondent conceded at the start of trial that
petitioners’ unreported income for 1999 is no greater than
$126,646.80 and that the deficiency and accuracy-related penalty
1
Section references are to the applicable versions of the
Internal Revenue Code.
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determined in the notice of deficiency must be reduced accordingly.
We decide whether petitioners’ gross income includes the
$126,646.80 just mentioned. We hold it does not. On the basis
of this holding, we also hold without further discussion that
petitioners have no understatement for that year and, hence, that
they are not liable for the accuracy-related penalty determined
by respondent.
FINDINGS OF FACT
Some facts were stipulated and are so found. The
stipulation of facts and the accompanying exhibits are
incorporated herein by this reference. Petitioners, husband and
wife, resided in Diamond Bar, California, when their petition to
this Court was filed. They filed a joint 1999 Federal income tax
return (1999 return) that reported that Baek’s wife had during
that year received $30,243 of income. They did not report on
their 1999 return any income received by Baek.
Before 1999, Baek operated a sole proprietorship, KC, that
exported sportswear to Japan. During 1999, KC did not export any
merchandise to Japan, and KC did not receive any income.
Petitioners reported on their 1999 Schedule C, Profit or Loss
From Business (Sole Proprietorship), that KC’s gross receipts and
expenses for 1999 were both zero and that KC continued as of the
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end of 1999 to hold $5,850 of inventory that it held as of the
beginning of that year.
Baek maintained the KC account from before 1999 until
September 30, 1999, when the account was closed. During 1999,
Baek deposited into the KC account cash totaling $898,286.80.
Baek obtained most of this cash from Yoo as repayment of funds
that Yoo received through checks drawn on the KC account. Before
and during 1999, Yoo and Baek were involved in a check kiting
scheme under which they obtained cash by floating checks written
on the KC account. Pursuant to this scheme, Baek, during 1999,
wrote a total of $771,640 in checks on the KC account to either
Yoo or to one of Yoo’s businesses. Baek also wrote to other
individuals or entities checks drawn on the KC account, and he
caused those funds to be received by Yoo as well. On each day
that a check was received from Baek, Yoo attempted to and usually
did cash that check at a bank that was different from the bank
that serviced the KC account (KC bank). Before the KC bank
processed Baek’s check for payment, a time that was typically the
day after Yoo cashed the check at the other bank but, on account
of weekends and holidays, was sometimes 3 or 4 days, Yoo usually
gave Baek cash equal to the amount of the check by cashing a
check drawn on Yoo’s account. During 1999, Yoo cashed at least
99 checks totaling $867,031 that were drawn on his account, and
he gave most of those proceeds to Baek who, in turn, deposited
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the proceeds into the KC account. As to $81,511.64 that was
deposited into the KC account during 1999 but was not received
from Yoo, Baek received that cash by cashing at a check cashing
establishment (establishment) a check payable on the KC account
to the establishment or to cash. Baek immediately deposited most
of the proceeds of those checks into the KC account so that other
checks from the KC account would be covered for payment.
OPINION
Respondent argues primarily that the $126,646.80 is taxable
to petitioners as compensation that Yoo paid to Baek during the
operation of KC’s export business. Respondent argues
alternatively that the $126,646.80 is taxable to petitioners
because they have failed to prove otherwise. Petitioners argue
primarily that the $126,646.80 is not taxable to them in that it
consists of (1) cash that Baek received from Yoo in repayment of
funds drawn by him from the KC account and (2) cash that Baek
received from his cashing of checks at the establishment.
Petitioners argue alternatively that respondent bears the burden
of proof and that he has failed to carry this burden.
We decide this case on the basis of the primary argument and
need not and do not decide the parties’ dispute as to who bears
the burden of proof. We note, however, that the Court of Appeals
for the Ninth Circuit, the court to which an appeal of this case
lies, has held repeatedly that respondent’s determination in a
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notice of deficiency loses its presumption of correctness when it
is arbitrary and excessive, e.g., Estate of Mitchell v.
Commissioner, 250 F.3d 696, 701-702 (9th Cir. 2001), affg. in
part, revg. in part, and remanding T.C. Memo. 1997-461; Morrissey
v. Commissioner, 243 F.3d 1145, 1148-1149 (9th Cir. 2001), revg.
Estate of Kaufman v. Commissioner, T.C. Memo. 1999-119; Cohen v.
Commissioner, 266 F.2d 5, 11-12 (9th Cir. 1959), remanding T.C.
Memo. 1957-172, that a notice of deficiency may be arbitrary and
excessive when it contains a valuation that respondent abandons,
e.g., Morrissey v. Commissioner, supra at 1148-1149, and that,
here, respondent at trial conceded in full his sole determination
in the notice of deficiency that each day’s deposits totaling
$10,000 or more constituted unreported gross receipts of KC.
As to the primary argument, the evidentiary record before us
is scant. The parties stipulated minimal facts and exhibits, and
petitioners at trial called the only two witnesses, Baek and Yoo,
whose testimony was brief on direct examination and even briefer
on cross-examination. We find, however, that Yoo did not pay the
$126,646.80 to Baek as compensation received in the operation of
KC’s export business. That business was not even in operation
during 1999. We also find that Baek received the $126,646.80
from nontaxable sources. In addition to the $771,640 that was
paid to Baek by Yoo in repayment of the checks written to Yoo or
to Yoo’s businesses, the $898,286.80 of deposits into the KC
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account, of which the $126,646.80 is part, included (1) most of
the $81,511.64 that was received from the checks cashed by Beak
at the establishment and (2) other amounts that Yoo gave Baek in
repayment of funds that Baek, either directly or indirectly,
caused to be received by Yoo. We hold for petitioners.
All arguments in this case have been considered, and those
arguments not discussed herein have been found to be without
merit or inapplicable to our decision.
Decision will be entered
for petitioners.