Borna v. Commissioner of Internal Revenue, 050117 FEDTAX, 24641-11

Docket Nº24641-11
Opinion JudgeWHERRY, Judge.
Party NameEDDIE BORNA AND VICTORIA BORNA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent 2004 2005 2006 Expense category Amounts reported by petitioners Amounts allowed per respondent Amounts remaining in dispute
AttorneySolis Cooperson, for petitioners. Steven M. Roth and Sarah A. Herson, for respondent.
Case DateMay 01, 2017
CourtUnited States Tax Court

T.C. Memo. 2017-73

EDDIE BORNA AND VICTORIA BORNA, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 24641-11

United States Tax Court

May 1, 2017

P-H is a real estate entrepreneur. During or before 1997, P-H and at least two Chinese citizens who he believed were politically influential formed a venture in China intending to prosper financially from the Summer Olympics scheduled to be held in China in 2008. P-H aimed to raise sufficient funds for the venture through a plan under which he self-financed the purchase of third-party notes. The venture failed. R determined, in part, that P-H failed to report as income amounts that he received from the obligors of the third-party notes.

Held: Ps failed to report income to the extent stated herein.

Held,

further, tax consequences determined as to four items that the parties dispute as to income that respondent determined was reportable on Schedule D, Capital Gains and Losses.

Held,

further, Ps may deduct sole proprietorship expenses for rents and leases, taxes and licenses, and commissions and fees to the extent stated herein.

Held,

further, Ps are liable for the accuracy-related penalties to the extent stated herein.

Solis Cooperson, for petitioners.

Steven M. Roth and Sarah A. Herson, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge.

Petitioners petitioned the Court to redetermine respondent's determination of the following deficiencies in their Federal income tax for 2004, 2005, and 2006, an addition to tax under section 6651(a)(1), and accuracy-related penalties under section 6662(a):1

Year Deficiency Addition to tax sec. 6651(a)(1) Accuracy-related penalty sec. 6662(a)

2004

$267, 397

$15, 243

$53, 479

2005

943, 426

-0-

188, 685

2006 340, 121 -0- 68, 024 Respondent subsequently altered that determination, asserting in an amended answer that there are increased deficiencies, addition to tax, and accuracy-related penalties as follows:2

Year Deficiency Addition to tax sec. 6651(a)(1) Accuracy-related penalty sec. 6662(a)

2004

$268, 918

$15, 319

$53, 784

2005

1, 060, 127

-0-

212, 025

2006 479, 940 -0- 95, 988 Respondent has since conceded that petitioners are not liable for the addition to tax. Following concessions, we decide the remaining disputed issues for the years in issue: 1. whether petitioners failed to report income from petitioner husband Eddie Borna's sole proprietorship; 2. the tax consequences of four items that the parties dispute as to income that respondent determined were reportable on Schedule D, Capital Gains and Losses; 3. whether petitioners may deduct sole proprietorship expenses for rents and leases, taxes and licenses, and commissions and fees in amounts greater than respondent allowed; and 4. whether petitioners are liable for the accuracy-related penalties that respondent determined. FINDINGS OF FACT I. Preliminaries The parties submitted nine separate stipulations of facts and exhibits, together with three separate stipulations of settled issues. We find the stipulated facts and the settled issues accordingly. The stipulated facts and exhibits and the stipulations of settled issues are incorporated herein by this reference.3 Petitioners are husband and wife. They filed joint Federal income tax returns for 2004 through 2006 (respectively, 2004 return, 2005 return, and 2006 return; collectively, subject returns). They timely filed their petition commencing this action, and they resided in California at that time. II. Petitioners' Business Activities A. Land Bank Mr. Borna owned a real estate business, Land Bank of America (Land Bank). Land Bank was in California City, California, and it has been selling land since 1980.[4] Mr. Borna operated Land Bank as a sole proprietorship. B. Superb Properties Superb Properties was another business in California City. Superb Properties, although owned by others, operated under Mr. Borna's broker's license, primarily selling real estate through real estate agents. Mr. Borna normally received 10% of the real estate agent's commissions for the use of his real estate broker's license. C. Note Purchasing Business 1. Background During or before 1997, Mr. Borna with at least two Chinese citizens who he believed were politically influential formed a venture in China called Zhuo Zhou Borna Plaza Real Estate Development, Ltd. (Zhuo Zhou Development). Originally Mr. Borna conceived the idea for Zhuo Zhou Development and owned all of it. Early on to get going he partnered with an individual who he believed had been or was the Finance Minister of the People's Republic of China under Mao Zedong's government. This individual and/or his two daughters, who Mr. Borna believed were children of the Finance Minister and one (Helen Fongii) who Mr. Borna believed may have served in a governmental capacity, acquired a 5% interest in Zhuo Zhou Development shortly after its formation. Zhuo Zhou Development aimed to build a small town in China containing 15, 000 condominiums, a very long strip mall, two or three schools, and a hospital plus 100, 000 square meters of industrial and commercial buildings space. Mr. Borna, from its inception, did not have sufficient funds to invest in Zhuo Zhou Development, and he consequently sought ways to raise funds for the venture. Mr. Borna eventually met Nigel Barrow, who aspired to join the venture. Both Mr. Barrow and Mr. Borna anticipated that Zhuo Zhou Development would be profitable given, inter alia, that Bank of China financing was anticipated and the Summer Olympics were scheduled to be held in China in 2008. The politics surrounding Zhuo Zhou Development's operation in China and its location thousands of miles from California City made it difficult for Mr. Barrow to participate in the venture directly. Mr. Barrow structured a plan under which Mr. Borna would acquire from Mr. Barrow third-party notes that he owned (Barrow notes).5 Mr. Borna could then use proceeds from the notes to help fund Zhuo Zhou Development. Thereafter, Mr. Borna would pay to Mr. Barrow, without stated interest, the principal amounts of the Barrow notes two years after the due dates of the Barrow notes. These payments were generally scheduled to come due during 2015. 2. The Business Starting in or around 2002 through at least 2006, Mr. Borna acquired approximately 100 Barrow notes from Mr. Barrow under a formal agreement that they memorialized in writing on or about December 30, 2003. Mr. Borna acquired the Barrow notes by contemporaneously creating financing notes (Borna notes), each with corresponding identical principal balance due, which Mr. Borna in turn executed and gave to Mr. Barrow. Mr. Borna promised in the Borna notes to pay the face amount of the Barrow notes to Mr. Barrow in 2015; however, unlike the Barrow notes, none of the Borna notes had stated interest. The Borna notes were payable to Mr. Barrow at various dates in 2015, and no payments were due before 2015. Each Borna note was secured by a stated percentage of Mr. Borna's interest in Zhuo Zhou Development. Mr. Borna was entitled to keep all payments on the Barrow notes except to the extent that a payment was for principal. He had to account to Mr. Barrow for all principal payments during 2015 on December 31, 2015. In lieu of making the required principal payments to Mr. Barrow during 2015, Mr. Borna, at his sole discretion, could assign to Mr. Barrow Mr. Borna's interests in Zhuo Zhou Development and in a second company. The Barrow notes generally had seven-year terms and provided for monthly payments. The Barrow notes bore a stated annual rate of interest ranging from 5% to 10.9%, and most of the Barrow notes that Mr. Borna acquired had stated interest rates of 8.9% through 10.9%. Payments on the Barrow notes were applied first to any interest due, and then to principal. Mr. Barrow and Mr. Borna knew that collection action would be difficult, and at least some of the Barrow notes would never be paid in full. Mr. Borna received payments on the Barrow notes, and he paid commissions to persons who helped collect these payments. He committed some of the payments to Zhuo Zhou Development and spent most of the payments on personal items such as petitioners' mortgage, insurance, and credit card charges. Mr. Borna at the time of trial had not made any payments on the Borna notes. Mr. Borna eventually turned over on-site management of Zhuo Zhou Development to Mr. Barrow. The overheated Chinese real estate market crashed, and his important contracts dissipated with the illness of the two sisters he believed were the Finance Minister's daughters, one of whom died resulting in a loss of the project and the Chinese Government's taking over Zhuo Zhou Development in 2007. 3. Specifics of Barrow Notes and Payments Received Thereon The specifics of the Barrow notes and the payments that Mr. Borna received thereon are as follows.
Exhibit #1 Amount Interest rate Date of Barrow note Total payments received
2004 2005 2006
1017-P $95, 000 6.9 12/19/2004 $50, 448 -0- -0-
1040-P 52, 000 9.9 4/3/2004 16, 819 $15, 021 $9, 466
1069-P 20, 800 9.9 8/1/2004 4, 987 3, 435 2, 748
1070-P 48, 000 9.9 1/29/2004 20, 501 11, 213 13, 348
1071-P 16, 000 9.9 10/21/2002 2, 913 2, 118 2, 939
1072-P 22, 500 9.9 8/3/2004 -0- 21, 531 -0-
1073-P 32, 000 9.9
...

To continue reading

Request your trial