Han v. Commissioner
| Decision Date | 24 August 1993 |
| Docket Number | Docket No. 9135-90. |
| Citation | 66 T.C.M. 499 |
| Parties | Vince S. Han and Kathy K. Han v. Commissioner. |
| Court | U.S. Tax Court |
Mark A. Oates, 130 E. Randolph, Chicago, Ill., James M. O'Brien, and Fred D'Amato, for the petitioners. James F. Kidd and Jonathan DeCator, for the respondent.
Memorandum Findings of Fact and Opinion
Petitioners filed a motion with this Court for award of reasonable litigation and administrative costs (Motion), and subsequently filed a supplemental motion for award of reasonable litigation costs (Supplemental Motion), under section 7430 and Rule 231. Hereinafter, Vince S. Han and Kathy K. Han are collectively referred to as petitioners and are separately referred to as Han and Mrs. Han, respectively. Petitioners seek an award totaling $51,152.60. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent previously determined that petitioners were liable for deficiencies in, and additions to, their Federal income taxes as follows:
Additions to Tax
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Year Deficiency Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6661
1986 ............................... $83,587 $62,690 1 $20,896.75
1987 ............................... 22,898 17,174 1 5,724.50
1 Amount is 50 percent of the interest of the portion of the underpayment attributable to fraud
Additions to Tax
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Year Deficiency Sec. 6653(b) Sec. 6661
1988 ............................... $187,399 $140,549 $46,849.75
These amounts were set forth in respondent's notice of deficiency issued to petitioners on February 14, 1990.
On May 9, 1990, petitioners filed a petition in this Court for a redetermination of respondent's determinations set forth in her notice of deficiency. Prior to trial, on July 2, 1992, petitioners and respondent filed with the Court a stipulation of settlement in which they agreed there were no deficiencies or additions to tax for petitioners' 1986, 1987, and 1988 taxable years. Petitioners filed their Motion contemporaneously with our filing of this stipulation.
On March 5 and 6, 1993, the Court held a hearing on petitioners' Motion. Subsequently, petitioners filed their Supplemental Motion requesting litigation costs incurred by petitioners in connection with the hearing. With respect to petitioners' Motion and Supplemental Motion, we must decide:
(1) Whether the Court should grant petitioners' two motions for sanctions against respondent for noncompliance with petitioners' discovery requests in preparation for the hearing. We will grant one of these motions and deny the other.
(2) Whether petitioners exhausted the administrative remedies available to them within the Internal Revenue Service (Service). We conclude they did.
(3) Whether respondent's position contained in her notice of deficiency, answer, and amended answer was substantially justified in both fact and law.1 We conclude it was not.
(4) Whether the litigation and administrative costs claimed in petitioners' Motion and Supplemental Motion were reasonable. We conclude they were, with slight modifications; we award petitioners administrative costs of $1,997.04 and litigation costs of $44,372.31.
In making our decisions, we take into account the hearing record, petitioners' Motion and Supplemental Motion, respondent's objections to petitioners' Motion and Supplemental Motion, petitioners' response to respondent's objection to petitioners' Motion, respondent's reply to petitioners response to respondent's objection to petitioners' Motion, and the briefs, affidavits, and memoranda of law provided by both parties.
Some of the facts have been stipulated and are so found. The stipulations and accompanying exhibits are incorporated herein by this reference. Han and Mrs. Han are husband and wife. At the time they filed their petition, they resided in Glenview, Illinois.
In or about 1980, Han and Charles Lee (Lee) started a partnership to sell in the United States antique reproduction clocks made in Korea. The clocks primarily were made by two manufacturers, Daijin Enterprises Co., Ltd. (Daijin) and Dong Bang Enterprise Co., Ltd. (Dong Bang). Initially, customers included small retail stores. Han and Lee expanded their business by selling clocks at trade shows; at these shows, Han met representatives from large corporations such as American Express.
In 1984, the partnership was incorporated under the name Clocks, Ltd. (Clocks) and Clocks elected to be treated as an S corporation effective with the 1984 taxable year. In 1985, Han bought Lee's interest in Clocks. During 1986 through 1988, the taxable years at issue, Han was the sole shareholder of Clocks; Clocks imported antique reproduction clocks for sale in the United States.
Clocks initially sold these clocks to its retail customers in small lots (e.g., five clocks at a time), and Han was able to finance purchases from Korea on an open credit basis. American Express later became a customer of Clocks, and Clocks' sales substantially grew; this changed the way Han conducted the business.2 Due to the growth of Clocks, Han obtained financing abroad and at least a $½ million line of credit to accommodate the American Express orders. Han's brothers Chang Soo Han (Chang Soo), assisted Han in raising cash for Clocks by collateralizing his property for an overseas loan.
Han's clock business ultimately failed. Daijin and Dong Bang sold Clocks a large number of defective clocks. In turn, Clocks sold these clocks to its customers, including American Express, who sold these clocks to their customers. Many of these clocks eventually were returned to Clocks and Clocks was required to credit American Express approximately $100,000. Clocks filed claims against Daijin and Dong Bang, but Daijin and Dong Bang generally did not pay the claims; the representative of each company told Han to "give us more orders; I will give you a discount."
In the latter part of 1986, American Express ceased buying clocks from Clocks. Clocks continued selling clocks to its smaller customers, and Clocks continued incurring business debts and borrowing against its line of credit. When Clocks was unable to pay its debts, the creditors threatened to foreclose on the collateralized property of Chang Soo. The creditors never forgave these debts; they took action against Chang Soo. Chang Soo borrowed about $200,000 to pay the collateralized debt, and petitioners later mortgaged their home to raise more funds to pay Clocks' creditors. Chang Soo never forgave any debt owed to him by Clocks.
Han kept the books and payment stubs for Clocks. Han's certified public accountant, Yong S. Kim (Accountant), checked the books and payment stubs monthly. Han kept Clocks' records separate from his personal records and was careful to keep his business expenses apart from his personal expenses.
Accountant established for Clocks an accounting system for recording expenses paid by check; these records were inspected by Accountant during his monthly reviews. At "tax time", Han prepared and delivered to Accountant a workpaper that included: (1) Financial information for Clocks (e.g., gross receipts, expenses, purchases, inventory, accounts payable) and (2) financial information for petitioners' personal return. Accountant prepared Clocks' corporate income tax return and petitioners' personal income tax return for each year at issue, and mailed these returns to Han and Mrs. Han for signatures.3 Han signed his personal returns, as did Mrs. Han, and signed Clocks' 1987 and 1988 corporate returns in his capacity as its president.
In 1989, respondent commenced examinations (audits) of the Federal income tax returns of petitioners and Clocks. In connection therewith, on ...
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