Gundotra v. Commissioner
| Decision Date | 12 July 1995 |
| Docket Number | Docket No. 21652-93.,Docket No. 21654-93.,Docket No. 21653-93. |
| Citation | 70 T.C.M. 17 |
| Parties | Paul K. Gundotra and Rita Gundotra, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Paul K. Gundotra, pro se, in Docket No. 21652-93. Paul K. Gundotra (an officer), for petitioners in Docket Nos. 21653-93 and 21654-93. Chalmers W. Poston, Jr., for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies in, and accuracy-related penalties on, petitioners' Federal income tax:
Accuracy-Related
Penalty
----------------
Section
Petitioner Year Deficiency 6662(a)2
Paul K. & Rita Gundotra ............... 1989 $37,351 $7,470
19903 21,041 4,208
PKG Foundation ........................ 1990 45,128 9,026
Trading Int'l ......................... 1990 12,605 2,521
The issues remaining for decision in these consolidated cases are:
(1) Was the investment activity in which petitioners Paul K. Gundotra and Rita Gundotra (Mr. and Mrs. Gundotra or the Gundotras) engaged during 1989 a trade or business? We hold that it was not.
(2) Did the Gundotras underreport their capital gains for 1989? We hold that they did.
(3) Are the Gundotras entitled to deduct for 1989 margin interest that they paid during that year even though they deducted that interest in their 1988 return? We hold that they are.
(4) Are the Gundotras entitled to deduct for 1989 expenses paid during that year with respect to their travel to Europe and India? We hold that they are not.
(5) Are the Gundotras entitled to depreciation deductions for 1989 with respect to a model house and an addition to an office building? We hold that they are not.
(6) Are the Gundotras entitled to tax credit carryforwards to 1989? We hold that they are not.
(7) Are the Gundotras liable for 1989 for the accuracy-related penalty under section 6662(a)? We hold that they are.
(8) a. Is petitioner PKG Foundation Corp. (PKG) entitled for 1990 to reduce its gross receipts by amounts it claimed as cost of goods sold or to deduct those amounts as business expenses under section 162(a)? We hold that it is not.
b. Is PKG entitled for 1990 to a charitable contribution deduction under section 170(a)? We hold that it is in an amount determined pursuant to section 170(b)(2).
(9) Is PKG entitled to depreciation deductions for 1990? We hold that it is not.
(10) Is PKG liable for 1990 for the accuracy-related penalty under section 6662(a)? We hold that it is.
(11) Is petitioner Trading Int'l Markets Corp. (Trading) entitled for 1990 to reduce its gross receipts by amounts it claimed as cost of goods sold or to deduct those amounts as business expenses under section 162(a)? We hold that it is not.
(12) Is Trading liable for 1990 for the accuracy-related penalty under section 6662(a)? We hold that it is.
Some of the facts have been stipulated and are so found. The Gundotras' mailing address was in Maryland at the time their petition was filed. The mailing addresses of PKG and Trading were in Maryland at the time their respective petitions were filed.
Mr. Gundotra, who is originally from India, holds a degree in physics, chemistry, and mathematics. After moving to the United States, Mr. Gundotra opened Thickfilm Int'l Microelectronics (Thickfilm) during 1973 as a sole proprietorship. Thickfilm manufactured circuits "made on ceramic by printing repressed metal inks and then firing them to the furnace * * * for commercial and industrial and defense use."
The Gundotras reported in Schedule C (Profit or Loss from Business) of their 1989 return the income, gains, losses, and expenses attributable to their investment activity for that year.
On or about September 6, 1988, Mr. and Mrs. Gundotra purchased for $2,092,899 (or an average price per share of $15.9994) a total of 130,843.8 shares of the Fidelity Select Technology mutual fund (Fidelity Select Technology fund). On or about March 27, 1989, they sold those shares for $2,256,507 (or an average price per share of $17.2458). Margin interest totaling $34,094 that was attributable to 1988 and that was related to the purchase of those shares was retained by Fidelity Select Technology fund from the sale proceeds Mr. and Mrs. Gundotra received in 1989. The Gundotras deducted that margin interest as a business expense in Schedule C of their 1988 return. They did not deduct that margin interest in their 1989 return.
During 1989, Mr. and Mrs. Gundotra traveled to Europe and India. They deducted amounts expended on that trip as business expenses in Schedule C of their 1989 return. Most of the persons whom Mr. and Mrs. Gundotra visited on that trip were friends. The trip to India was not for the purpose of selling the parts manufactured by Thickfilm.
In October 1986, the Gundotras became a distributor of homes for Tri-Steel Structures, Inc. (Tri-Steel).4 Prior to signing the distributorship agreement, the Gundotras spent approximately one year researching Tri-Steel's business and the unique ground loop heating system that can be incorporated in a Tri-Steel house.
Prior to the years at issue, the Gundotras lived in a house located at 3210 Lumar Drive (Lumar Drive house) and built a model house of the Tri-Steel design (model house). The Gundotras moved into the model house sometime in 1988 and lived in it throughout 1989. During 1989, when the Gundotras were living in the model house, they rented the Lumar Drive house in order to generate income.
During 1984, an addition was added to the office building used by Thickfilm.
Sometime around the end of 1989 or the beginning of 1990, all of the assets of Thickfilm were transferred to PKG,5 which is a U.S. corporation. PKG's only employee during 1990 was Mr. Gundotra.
PKG reduced its gross receipts by the following amounts that it claimed as cost of goods sold in its 1990 return:
$17,312 Contract labor/professional service
950 Real estate taxes
2,380 Utilities/telephone
5,453 Dues and subscriptions
1,650 Charitable donations
4,783 Car expenses
5,780 Office expenses
6,521 Employee benefits (principally health
insurance)
10,362 Travel
1,728 Repair/maintenance
5,258 Miscellaneous
_______
62,177
=======
The $17,312 of contract labor was paid to an individual who maintained manufacturing and computer equipment and provided accounting services to PKG. The $950 in real estate taxes was paid with respect to the building used by both PKG and Trading. The $2,380 of utilities was paid with respect to the building shared by PKG and Trading. The $5,453 for dues and subscriptions was primarily paid for data obtained from Wall Street. The $1,650 of charitable donations was paid to a congregation of Jehovah's Witnesses. The $4,783 of car expenses was primarily attributable to lease payments on an automobile shared by PKG and Trading. The $5,780 of office expenses was for purchases of miscellaneous office expenses to operate an office for both PKG and Trading. The $6,521 of employee benefits was paid primarily for the purchase of health insurance on behalf of Mr. Gundotra. The $10,362 of travel expenses was paid for trips taken by the Gundotras and some or all of their children to Brazil, India, and Ft. Lauderdale. The $1,728 of repair/maintenance was paid for typical maintenance of an unidentified building and unidentified equipment. The $5,258 of miscellaneous expenses was paid for the purchase of small, unidentified items.
PKG had the following items of income for 1990:
$ 8,272 Gross receipts
83,206 Dividends
260 Interest
PKG is entitled for 1990 to a section 243 dividends-received deduction in the amount of $61,059.
Trading reduced its gross receipts by the following amounts that it claimed as cost of goods sold in its 1990 tax return:
$12,000 Rent
5,526 Regulatory fees
8,662 Outside labor
5,000 Payments to Pershing
22,500 Management fee paid to PKG
_______
53,688
=======
The $12,000 of rent was paid to the Gundotras for use of the office building shared by PKG and Trading. The $5,526 of regulatory fees was for licenses from the National Association of Securities Dealers (NASD), the Securities and Exchange Commission, and other regulatory agencies that are necessary to operate a brokerage firm. The $8,662 of outside labor was paid to an individual for computer maintenance and research. The $5,000 paid to Pershing was in return for its services as a clearing corporation for securities transactions.6
Trading had the following items of income for 1990:
$ -0- Gross receipts
29,316 Dividends
-0- Interest
Trading is entitled for 1990 to a section 243 dividends-received deduction in the amount of $20,521.
During 1990, only one client of Trading, i.e., TADAA Corp. (TADAA), made an actual trade, which consisted of the short sale of certain stock on or about November 9, 1990, and the repurchase of that stock about three days later. Trading reported no income for 1990 from that transaction. Mr. D. Gundotra, a relative of petitioner Paul K. Gundotra, was the trustee of TADAA.
OPINIONPetitioners7 in these respective cases bear the burden of proving that respondent's determinations in the respective notices of deficiency are erroneous. Rule 142(a); Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111, 115 (1933).
The only witness to appear at trial was Mr. Gundotra. His testimony was for the most part general, vague, conclusory, and uncorroborated. Under those circumstances, we are not...
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