                                  T.C. Memo. 2015-174



                            UNITED STATES TAX COURT



MANJIT ROCHLANI, DECEASED, AND BONY M. ROCHLANI, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 5383-11.                              Filed September 8, 2015.



      Bony M. Rochlani, pro se.

      Alicia A. Mazurek and Alexandra E. Nicholaides, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      BUCH, Judge: Respondent issued a notice of deficiency determining the

following deficiencies and penalties with respect to Manjit Rochlani, deceased,

and Bony Rochlani’s Federal income tax for years 2008 and 2009:1


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                         -2-

 [*2]                                                              Penalty
                Year                  Deficiency                 sec. 6662(a)
                2008                    $6,772                      $1,354
                2009                    5,828                       1,166

        After concessions by the parties, the issues remaining for consideration are

whether Mr. and Mrs. Rochlani operated their business, Ultimate Presales, as a C

corporation and whether they are liable for accuracy-related penalties. If they did

not operate Ultimate Presales as a C corporation, then the issue is whether they

engaged in that activity for profit. On the evidence presented at trial, we hold that

Ultimate Presales was a C corporation and that the Rochlanis, therefore, are not

entitled to deduct business losses on their personal returns. Further, respondent

met his burden of production as to the accuracy-related penalties, and the

Rochlanis did not establish any defense to those penalties.

                                FINDINGS OF FACT

        Mr. Rochlani started Ultimate Presales in 2006 and was the proprietor of the

business. Through Ultimate Presales, Mr. Rochlani bought and resold sporting,

concert, and other tickets. Without permission from his parents and while he was


        1
       (...continued)
Revenue Code in effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to
the nearest dollar.
                                        -3-

[*3] still a minor, the Rochlanis’ son Khushal incorporated Ultimate Presales in

Michigan in July 2006 using an online legal service. Khushal was unaware of the

tax differences between a sole proprietorship and a corporation when he registered

the business as a corporation. When the paperwork arrived, Mr. Rochlani asked

Khushal whether he had incorporated Ultimate Presales but did nothing to stop or

unwind the incorporation process. Thereafter, Mr. Rochlani filed corporate annual

reports for Ultimate Presales with the Michigan Department of Energy, Labor &

Economic Growth.

      During the years in issue Mr. and Mrs. Rochlani and their sons traveled to

various locations within the metropolitan Detroit area in addition to traveling

around the country to buy and resell sporting, concert, and other tickets. At the

same time, Mr. Rochlani worked full time as an engineer with Ford Motor Co.

      The Rochlanis used personal credit cards to make all purchases related to

the business because Ultimate Presales did not have a business credit card.

Further, all business expenses were paid from and business income was deposited

into the Rochlanis’ personal bank accounts. According to Mrs. Rochlani, Ultimate

Presales had its own bank account to use for business expenses, but she closed the

account because they never used it.
                                         -4-

[*4] Mr. Rochlani prepared and timely filed joint Forms 1040, U.S. Individual

Income Tax Return, for 2008 and 2009. The Rochlanis attached to each Form

1040 a Schedule C, Profit or Loss From Business, identifying the principal

business of Ultimate Presales as “Sell Goods” in 2008 and “Sell Goods and

Ticke[ts]” in 2009. The Rochlanis reported Schedule C losses of $41,610 for 2008

and $44,066 for 2009. The reported business expenses include: business use of

home, supplies expenses, office expenses, legal and professional expenses,

advertising expenses, travel expenses, car and truck expenses, other expenses,

contract labor expenses, depreciation and section 179 expenses, and commissions

and fees expenses. Mr. Rochlani did not keep any logs or calendars for travel-

related expenses or other expenses. He retained credit card statements that he

would later use to reconstruct Ultimate Presales’ expenses.

      Respondent examined the Rochlanis’ 2008 and 2009 returns and issued a

notice of deficiency on December 10, 2010. In the notice respondent adjusted the

Rochlanis’ tax liabilities to reflect removal of the Schedules C, asserting that

Ultimate Presales was a corporation. In addition, respondent made other

adjustments not in issue and determined accuracy-related penalties under section

6662(a) for both years. While residing in Michigan, the Rochlanis timely

petitioned.
                                         -5-

[*5] After the petition was filed, Mr. Rochlani passed away. Mrs. Rochlani,

assisted by Khushal, represented her interests at trial. After trial the Court

dismissed Mr. Rochlani after giving his heirs an opportunity to step into his place.

                                      OPINION

I.    Burden of Proof

      The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and taxpayers bear the burden of proving otherwise.2 The

burden may shift to the Commissioner under section 7491(a) if the taxpayer has

complied with the necessary substantiation requirements, maintained adequate

records, and cooperated with reasonable requests by the Commissioner for

witnesses, information, documents, meetings, and interviews. The Rochlanis have

not adequately substantiated all the expenses in issue. Additionally, the Rochlanis

do not assert that the burden should shift to respondent. As a result, the burden

remains on the Rochlanis.




      2
          Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
                                        -6-

[*6] II.     Recognition as a C Corporation

       The corporate form allows businesses “to gain an advantage under the law

of the state of incorporation.”3 Where a taxpayer adopts the corporate form, and

“so long as that purpose is the equivalent of business activity or is followed by the

carrying on of business by the corporation, the corporation remains a separate

taxable entity.”4

       To determine whether a corporation is organized for a business purpose, we

have stated that “[t]he degree of corporate purpose and activity requiring

recognition of the corporation as a separate entity is extremely low” and the

determination that a corporation is doing business is “‘not necessarily dependent

upon the quantum of business.’”5 To be recognized as a separate taxable entity, a

corporation does not need to keep account books or records, maintain separate




       3
       Moline Props., Inc. v. Commissioner, 319 U.S. 436, 438 (1943) (citing
Texas-Empire Pipe Line Co. v. Commissioner, 127 F.2d 220 (10th Cir. 1942),
rev’g 42 B.T.A. 368 (1940)).
       4
       Moline Props., Inc. v. Commissioner, 319 U.S. at 439 (citing New Colonial
Ice Co. v. Helvering, 292 U.S. 435, 442 (1934), and Deputy v. du Pont, 308 U.S.
488, 494 (1940)).
       5
        Strong v. Commissioner, 66 T.C. 12, 24 (1976) (quoting Britt v. United
States, 431 F.2d 227, 235, 237 (5th Cir. 1970)), aff’d without published opinion,
553 F.2d 94 (2d Cir. 1977).
                                         -7-

[*7] bank accounts or credit cards, or own any assets.6 And when the corporate

form is adopted, taxpayers are not permitted to claim individual deductions for the

payment of corporate expenses.7 A taxpayer’s choice to adopt the corporate form

requires the acceptance of its tax disadvantages.8

      Courts have held that “the corporate form may be disregarded where it is a

sham or unreal.”9 When a taxpayer tries to avoid the tax disadvantages of the

corporate form, however, the “claim that his controlled corporation should be

disregarded will be closely scrutinized.”10

      The Rochlanis reported the following business expenses on their 2008 and

2009 Forms Schedule C: business use of home, supplies expenses, office

expenses, legal and professional services expenses, advertising expenses, travel

expenses, car and truck expenses, other expenses, contract labor expenses,

depreciation and section 179 expenses, and commission and fees expenses.

However, Khushal incorporated Ultimate Presales in Michigan in July 2006. An


      6
          Moline Props., Inc. v. Commissioner, 319 U.S. at 438.
      7
          Deputy v. du Pont, 308 U.S. at 494.
      8
          Burnet v. Commonwealth Improvement Co., 287 U.S. 415, 419-420 (1932).
      9
          Moline Props., Inc. v. Commissioner, 319 U.S. at 439.
      10
           Strong v. Commissioner, 66 T.C. at 24.
                                         -8-

[*8] entity formed as a State-law corporation is treated as a corporation for Federal

tax purposes. See sec. 301.7701-2(b)(3), Proced. & Admin. Regs. Nonetheless,

the Rochlanis argue that the Court should disregard the corporate form.

       There is no issue with Ultimate Presales’ bona fide business purpose.

Ultimate Presales was organized for the bona fide business purpose of buying and

reselling sporting, concert, and other event tickets. The issue is whether Ultimate

Presales is a corporation for Federal income tax purposes.

       To decide whether Ultimate Presales should be respected as a corporation,

an initial question arises regarding whether the Rochlanis are bound by Khushal’s

unauthorized act of registering Ultimate Presales as a corporation. The evidence is

clear that Khushal was not authorized or instructed by Mr. Rochlani to register

Ultimate Presales as a corporation. But upon learning that it had been registered,

Mr. Rochlani did nothing to undo what his son had done. In fact, Mr. Rochlani

ratified his son’s act.

       Under Michigan law, unauthorized acts may be ratified explicitly or

implicitly.11 And the unauthorized acts of an agent are ratified if the principal


       11
         David Stott Flour Mills, Inc. v. Saginaw Cnty. Farm Bureau, 213 N.W.
147, 149 (Mich. 1927) (stating that a principal “may impliedly ratify the act of one
assuming to act as his agent by conduct, which on his part, constitutes an assent to
the acts in question”).
                                          -9-

[*9] accepts those acts with knowledge of the material facts.12 While Khushal’s

act of incorporating Ultimate Presales was unauthorized, Mr. Rochlani thereafter

respected, at least in part, the corporate form by filing annual reports with the

Michigan Department of Energy, Labor & Economic Growth. In doing so, he

recognized and ratified the corporate form.

       The Rochlanis point us to the failure to maintain corporate books or

accounts. The Supreme Court addressed the significance of such facts in Moline

Props. Inc., where the Court determined that the corporate existence could not be

ignored as merely fictitious even though the corporation “kept no books and

maintained no bank account during its existence and owned no other [significant]

assets”.13

       Because Ultimate Presales was a corporation, the Rochlanis are not entitled

to deduct losses from Ultimate Presales on their personal 2008 and 2009 returns.

The Rochlanis’ ratification and adoption of the corporate form requires the

acceptance of its tax disadvantages.




       12
            Bruno v. Zwirkoski, 335 N.W.2d 120, 122 (Mich. Ct. App. 1983).
       13
            Moline Props., Inc. v. Commissioner, 319 U.S. at 438.
                                         - 10 -

[*10] III.      Section 6662(a) Accuracy-Related Penalties

      Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty

on any portion of an underpayment of tax required to be shown on a return if the

underpayment is due to, among other reasons, negligence, disregard of rules or

regulations, or any substantial understatement of income tax. Respondent bears

the burden of production with respect to any penalty or addition to tax.14 The

Rochlanis then bear the burden of proving any defenses.15

      An understatement of income tax is “substantial” if the understatement

exceeds the greater of 10% of the tax required to be shown on the return or

$5,000.16 Respondent made no showing as to negligence.

      In accordance with this opinion, the Rochlanis’ exact underpayment for

each year depends on the Rule 155 computations. If these computations establish

a substantial understatement of income tax for either year, respondent has met his




      14
            Sec. 7491(c).
      15
            Sec. 6664(c)(1); see also Higbee v. Commissioner, 116 T.C. 438, 447
(2001).
       16
            Sec. 6662(d)(1)(A).
                                       - 11 -

[*11] burden with respect to that year.17 Further, the Rochlanis failed to provide

any evidence of defenses against the penalties.

      Accordingly, we sustain the penalties under section 6662(a) for 2008 and

2009 only if the Rule 155 computations establish substantial understatements.

IV.   Conclusion

      On the basis of our examination of the record before us and the parties’

arguments at trial, we find that the Rochlanis have failed to show that the

corporate form of Ultimate Presales should be disregarded. Further, respondent

has met his burden of production with respect to the penalties only if the Rule 155

computations establish substantial understatements, and the Rochlanis have failed

to meet their burden to show that the penalties should not apply.

      To reflect the foregoing and the concessions of the parties,


                                                Decision will be entered

                                       under Rule 155.




      17
     See Olagunju v. Commissioner, T.C. Memo. 2012-119; Jarman v.
Commissioner, T.C. Memo. 2010-285.
