Na v. Commissioner of Internal Revenue, 021115 FEDTAX, 25569-12

Docket Nº:25569-12
Opinion Judge:WHERRY, JUDGE
Attorney:Howard S. Fisher, for petitioner. Sameera Hasan and Michael K. Park, for respondent.
Case Date:February 11, 2015
Court:United States Tax Court

T.C. Memo. 2015-21




No. 25569-12

United States Tax Court

February 11, 2015

R determined a deficiency in income tax for P's 2008 taxable year arising from P's alleged failure to report additional income from her business. R also determined an I.R.C. sec. 6662(a) accuracy-related penalty. R computed P's alleged unreported income on the basis of a bank deposits analysis. P contends that she held funds in the analyzed bank accounts as an agent or trustee for her supervisor and that she acted as a mere conduit for payments to and by her supervisor. P contends that deposits of these funds do not represent income to her.

Held: P established by a preponderance of the evidence that she received some of the deposits allegedly constituting unreported income as an agent, trustee, and/or mere conduit, but she failed to prove this theory for other deposits and must include these latter deposits in income.

Held, further, because R determined that P derived the deposits she must include in income from her conduct of a trade or business and because P failed to produce evidence to the contrary, this income is subject to self-employment tax under I.R.C. sec. 1401(a) and (b).

Held, further, P is liable for the I.R.C. sec. 6662(a) and (b)(1) negligence penalty.

Howard S. Fisher, for petitioner.

Sameera Hasan and Michael K. Park, for respondent.



Respondent determined a Federal tax deficiency of $367, 297 for petitioner's taxable year 2008 after concluding that petitioner had underreported her income. Because respondent identified petitioner's business as the source of the unreported income, the determined deficiency consisted of both income and self-employment taxes. Respondent also determined a section 6662(a)1 accuracy-related penalty of $73, 459.40. The issues presented for decision are:

(1) whether petitioner failed to report $1, 013, 769.61 of income for 2008;

(2)whether petitioner's 2008 unreported income, if any, is subject to self-employment tax under section 1401(a); and

(3)whether petitioner is liable for a section 6662(a) accuracy-related penalty with respect to any underpayment of income tax for her 2008 tax year.


Some of the facts have been stipulated and are so found. When petitioner, Susan Na, filed her 2008 return and when she filed her petition, she lived in Los Angeles, California. Ms. Na speaks Korean and has very limited English-language skills.3

During 2008 Ms. Na worked at Artnouveau City USA, Inc. (Artnouveau). Doo Young Choi owned and operated Artnouveau and another company, Artmonde, LLC (Artmonde). Artnouveau paid Ms. Na a specified amount monthly. She performed services on the company's premises, and Mr. Choi established her working hours. For tax purposes Artnouveau reported compensation paid to Ms. Na on Form 1099-MISC, Miscellaneous Income, which Mr. Choi delivered to her.

I. Tax Return

Ms. Na timely filed her 2008 Form 1040, U.S. Individual Income Tax Return. Patrick Chyun prepared that return. Mr. Chyun, who holds bachelor of science degrees in both economics and accounting, has practiced as a certified public accountant (C.P.A.) since 1992. At the time of trial in December 2013, he had been preparing Ms. Na's annual Federal income tax returns for more than 10 years.

Ms. Na's 2008 Federal income tax return reported her occupation as "real estate sales". The appended Schedule C, Profit or Loss from Business, identified her "[p]rincipal business or profession" as "[o]ffices of real estate agents & brokers". The return reported income from the following sources, in the following amounts: (1) taxable interest income of $3, 138, (2) gambling winnings of $1, 421, 385, and (3) net business income of $65, 236. In 10 or more years of preparing Ms. Na's annual tax returns Mr. Chyun never reported her receipt of any gambling winnings other than in 2008. In Mr. Chyun's experience Ms. Na never reported more than $100, 000 of annual gross income other than in 2008.

A. Interest Income

As reported on Schedule B, Interest and Ordinary Dividends, Ms. Na received taxable interest income from Hanmi Bank. During 2008 she held two accounts at Hanmi Bank (Hanmi Bank accounts), a checking account (account 0349) and a money market account (account 5289). The account agreements under which Ms. Na opened these accounts provided that she was their sole owner and that she alone had signature authority on them. Ms. Na had no other bank accounts in 2008.

B. Gambling Winnings

Along with other documents necessary to prepare her 2008 tax return, Ms. Na presented Mr. Chyun with a series of Forms W-2G, Certain Gambling Winnings, from various Las Vegas and California casinos. Casinos issue these forms when a person wins more than $1, 200 at one time. Mr. Chyun reported Ms. Na's 2008 gambling winnings as other income on line 21 of Form 1040. On Schedule A, Itemized Deductions, Mr. Chyun deducted gambling losses equal to the reported winnings.4

C. Business Income

As part of Ms. Na's 2008 return, Mr. Chyun prepared Schedule C. Because Ms. Na had received a Form 1099-MISC from Artnouveau, Mr. Chyun reported on Schedule C Ms. Na's gross receipts of $95, 200, deducted her claimed expenses, and computed Ms. Na's net business income as $65, 236. Mr. Chyun transferred that figure to page 1 of Ms. Na's Form 1040.

II. Return Examination

In May 2010, IRS revenue agent M. Bolden (RA Bolden) began examining Ms. Na's 2008 tax return. As part of her examination, RA Bolden prepared summaries and analyses of 2008 deposits into account 0349 and account 5289.

A. Deposits

RA Bolden computed total 2008 deposits into account 0349 and account 5289 as, respectively, $887, 132 and $1, 279, 953. RA Bolden's bank deposits analysis reflects that Ms. Na received these deposits from the following sources, in the following amounts:5


Account 0349

Account 5289

Account 0349


$64, 000.00

Account 5289

$370, 000.00

Angie H. In

21, 900.00

14, 070.00


284, 224.99

292, 947.27


43, 800.00

61, 450.00

Chase Auto Finance



Chul and Shelly Kim

4, 500.00

Doo Young Choi

44, 245.83

5737, 195.00

Eric and Mihwa Mekus

1, 000.00

Hanmi Bank


63, 138.67

JK Worldwide Enterprise

57, 000.00

Koram Consulting

1, 609.00

Lee Gi Cheol

5, 976.50

Newkoa, LLC

100, 000.00

Pixma, Inc.


Prima Escrow

22, 103.89

Saehan Bank


85, 000.00

Sunmin Kim

3, 636.43

Unknown (2007 and 2009 deposits)

18, 727.00

Voyager Indemnity Insurance


Total deposits

887, 132.47

1, 279, 952.81

1All deposits consisted of checks, with three exceptions. First, Lee Gi Cheol wired $5, 976.50 to Ms. Na's checking account on July 3, 2008, and Mr. Choi wired $179, 995 to her money market account on February 29, 2008. Second, the source "Cash" refers to cash deposits. And third, when transferring funds between her accounts, Ms. Na sometimes used an internal Hanmi Bank withdrawal slip or electronically transferred the money.

2When Ms. Na deposited a $500 check from Ms. In on May 16, 2008, she received $100 cash back, for a net deposit of $400. RA Bolden did not include the $100 cash in her calculation of Ms. Na's unreported income, so we likewise omit that amount here.

3Ms. Na deposited numerous checks from Artnouveau into her accounts. Many of these checks were made out to cash or had blank payee lines, but others were made out to Ms. Na. On each of Feb. 15, Mar. 27, Apr. 1, 15, and 30, May 15 and May 30, June 16, July 1, July 21, and Aug. 1, 2008, Ms. Na deposited a $1, 500 check from Artnouveau. In nearly all instances, these checks were made out to her by name. On each of Aug. 15 and 29, Sept. 16 and 30, and Oct. 15 and 31, she deposited a $1, 400 check from Artnouveau, made out to her. On each of Nov. 14 and 28, and Dec. 15 and 31, she deposited a $1, 600 check from Artnouveau made out to her. These relatively regular payments are consistent with Ms. Na's testimony that she received a "salary" or "monthly basis at certain amount" from Artnouveau.

4One $3, 000 cash deposit occurred in 2009, so RA Bolden classified this deposit as nontaxable. See infra p. 11.

5Ms. Na deposited a single, $500 check from Pixma, Inc., the payee line of which was blank, into account 0349 on July 10, 2008. That check bounced on July 11, 2008. Ms. Na deposited a single, $7, 000 check from JK Worldwide Enterprise, Inc., the payee line of which was blank, into account 0349 on Apr. 2, 2008. The check bounced five days later. On Apr. 16, 2008, Ms. Na deposited a $9, 900 check from Mr. Choi, written to cash, into account 5289. The following day, that check also bounced. RA Bolden nevertheless included these three deposits in calculating Ms. Na's unreported income.

6Hanmi Bank paid Ms. Na interest on her money market account on the last day of each month.

B. Debits

Ms. Na made payments from account 0349 and account 5289 by check, direct debit, wire transfer, or withdrawal slip to the following recipients, in the following aggregate amounts:


Account 0349

Account 5289

Account 0349


$350, 000.00

Account 5289

$58, 000.00

Angie H. In

1, 500.00



100, 000.00


348, 750.00

250, 000.00

Belle Collection

30, 000.00

Blank (payee illegible from stub)

17, 585.12


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