Pascal Nsame & Lamiaa Msalka v. Commissioner , 2019 T.C. Summary Opinion 26 ( 2019 )

T.C. Summary Opinion 2019-26
UNITED STATES TAX COURT
PASCAL NSAME AND LAMIAA MSALKA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11462-15S. Filed September 23, 2019.
Pascal Nsame and Lamiaa Msalka, pro sese.
Timothy B. Heavner and Mary Ann Waters, for respondent.
SUMMARY OPINION
COLVIN, Judge: This case was heard pursuant to the provisions of section
7463 of the Internal Revenue Code in effect when the petition was filed.1
1
Section references are to the Internal Revenue Code in effect for the year in
issue. Rule references are to the Tax Court Rules of Practice and Procedure.
Dollar amounts are rounded to the nearest dollar and are in U.S. dollars unless
(continued...)
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Pursuant to section 7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent for any other case.
Respondent determined a deficiency of $45,654 in petitioners’ Federal
income tax for 2012. After concessions,2 the issues for decision are:
1. Whether petitioners bear the burden of proof. We hold that they do.
2. Whether petitioners had a loss from the sale of their home in Montreal,
Canada (the Canadian property), as they claimed at trial, a gain of $72,525 as
respondent contends, or a gain or loss in some other amount. We hold that
petitioners’ gain from the sale of the Canadian property was $72,525.3
3. Whether petitioners are entitled to a deduction for a foreign currency
transaction loss under section 988. We hold that they are not.
1
(...continued)
otherwise indicated. Petitioners resided in Vermont when they timely filed the
petition.
2
The parties agree that petitioners may deduct a partial homeowners
exclusion of $82,192; $22,434 in selling expenses; and $44,955 in expenses for
additions/improvements on the home. Respondent’s computations use $44,955 as
the amount of the additions/improvements. However, respondent’s opening brief
states that the additions/improvements to the Canadian property totaled $44,935.
We will treat $44,955 as the correct amount.
3
During the Rule 155 computation the parties shall adjust the amount of
gain to take into account our finding that the Canadian property was not held for
the production of income after March 31, 2012.
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4. Whether or to what extent petitioners may deduct business expenses. We
hold that they are to the extent stated below.
5. Whether petitioners are liable for the 10% additional tax under section
72(t) for a distribution from a retirement account. We hold that they are.
Background
Petitioners, Pascal Nsame (petitioner husband) and Lamiaa Msalka
(petitioner wife), were both employed by International Business Machines Corp.
(IBM) in 2012.
A. The Canadian Property
Petitioners purchased the Canadian property in July 2003. Petitioner wife
lived there from July 2003 until October 2006 when she moved to Vermont for
work. Petitioners held the Canadian property out for rent beginning on October 7,
2006. Petitioner husband resumed living at the Canadian property in August
2012. Petitioners sold the Canadian property on November 29, 2012.
B. Distribution From Petitioner Husband’s Retirement Account
Petitioner husband withdrew $17,500 from his retirement account in 2012,
as reported to him on Form 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., provided by
Fidelity Investments.
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C. Tax Returns
Petitioners reported no expenses on their Schedule C, Profit or Loss From
Business, filed with their joint Federal income tax return for 2012. After receiving
the notice of deficiency and filing their petition, petitioners provided respondent
three amended tax returns for 2012. Petitioners reported Schedule C business
expenses of $42,532 on their first amended return and $47,283 on their two
subsequent amended returns. At trial petitioners submitted a spreadsheet4 that
stated they had $43,277 in business expenses.
D. Document Requests
Respondent requested documents from petitioners to evaluate their various
contentions. Petitioners responded by stating that the requests were unreasonable,
that some of the documents were confidential, and that they would provide only
nonconfidential business information. Petitioners eventually provided a small
amount of documentation, but except for one business expense item none of the
documentation was sufficient to substantiate their claims.
4
The record does not indicate when the spreadsheet was prepared.
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Discussion
Our discussion is organized as follows: (A) burden of proof, (B) gain or
loss on the sale of the Canadian property, (C) foreign currency transaction loss,
(D) business expenses, (E) the 10% additional tax under section 72(t) for an early
distribution from a retirement account, and (F) petitioners’ claim for damages.
A. Burden of Proof
Taxpayers generally bear the burden of proving that the Commissioner’s
determination is incorrect. Rule 142(a); see Welch v. Helvering, 290 U.S. 111,
115 (1933). However, under section 7491(a), the burden of proof may shift to the
Commissioner if the taxpayers comply with all substantiation requirements in the
Internal Revenue Code, introduce credible evidence with respect to factual issues
relevant to ascertaining their liability, and cooperate with reasonable requests by
the Commissioner for information, documents, and meetings. Sec. 7491(a)(1) and
(2)(A) and (B).
Petitioners contend that the burden of proof has shifted to respondent under
section 7491(a). Respondent requested information relating to petitioners’ claims,
but petitioners’ responses were insufficient to substantiate them. Nothing in the
record supports petitioners’ claims that respondent’s requests were unreasonable
or that they were justified in not producing some of the documents on the grounds
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that they were confidential. Thus, petitioners have not satisfied the requirements
of section 7491(a).
B. Gain or Loss on the Sale of the Canadian Property
In their petition, petitioners contend they had taxable gain of $70,264 on the
sale of the Canadian property. At trial petitioners contended they sustained a loss
when they sold the property. Respondent contends petitioners had gain of
$72,525. The parties dispute the amounts of the Canadian property’s cost basis,
adjusted basis, and sale price and the dates that the property was held for the
production of income.
1. Purchase Price
At trial petitioner husband testified that the cost basis of the Canadian
property was $189,946 instead of the $137,493 used by respondent. Petitioners
offered into evidence five documents written in French, which they argue
substantiate their claim that the cost basis was $189,946.
Documents written in a language other than English are generally not
admissible unless the offering party provides an English translation. United States
v. Rivera-Rosario, 300 F.3d 1, 6 n.4 (1st Cir. 2002); see also United States v. Diaz,
519 F.3d 56, 64-65 (1st Circ. 2008); United States v. Contreras Palacios, 492 F.3d
39, 43 n.7 (1st Cir. 2007). Petitioner husband testified that the French language
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documents, Exhibit 16-P, established the cost basis but later said that they
provided information about the refinancing of the Canadian property in 2006. The
French language documents include no translation5 and thus are not admissible.
We decide whether a witness’ testimony is credible by relying on objective
facts, the reasonableness of the testimony, the consistency of statements made by
the witness, and the demeanor of the witness. See Quock Ting v. United States,
140 U.S. 417, 420-421 (1891); Wood v. Commissioner, 338 F.2d 602, 605 (9th
Cir. 1964), aff’g 41 T.C. 593 (1964); Pinder v. United States, 330 F.2d 119, 124-
125 (5th Cir. 1964); Concord Consumers Hous. Coop. v. Commissioner, 89 T.C.
105, 124 n.21 (1987). Witness testimony could almost always be said to be “self-
serving”, but that factor alone is not a reason to automatically reject the evidence
as unreliable. Lupyan v. Corinthian Colls. Inc., 761 F.3d 314, 320-321, 321 n.2
(3d Cir. 2014). We may discount testimony which we find to be unworthy of
belief, see Tokarski v. Commissioner, 87 T.C. 74, 77 (1986), but we may not
arbitrarily disregard testimony that is competent, relevant, and uncontradicted, see
5
Petitioners submitted one translated document with their answering brief.
We generally do not consider documents submitted by one party after trial because
the other party has not had an opportunity to seek additional testimony relating to
the document. In addition, according to the translation, the document is a credit
application and does not show the amount of petitioners’ cost basis in the
Canadian property. Thus, we do not consider that document in deciding this case.
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Conti v. Commissioner, 39 F.3d 658, 664 (6th Cir. 1994), aff’g and remanding 99
T.C. 370 (1992), and T.C. Memo. 1992-616.
Petitioner husband testified that their cost basis was $189,946. However, in
two letters to respondent petitioners said the cost basis was CAD186,000, which,
according to the conversion rate (0.73921) used by both parties, equaled $137,493
at the time of purchase. Because of this inconsistency, petitioner husband’s
testimony on this point was not credible. Without documentary evidence or
credible testimony supporting their claim, petitioners have not shown that the cost
basis of the property was an amount other than $137,493 as determined by
respondent. Thus, we find that petitioners’ cost basis in the Canadian property
was $137,493.
2. Adjusted Basis
Petitioners contend that their adjusted basis includes $73,459 in “other”
expenses (comprising Montreal business losses from 2003 to 2012, utilities,
business travel in 2012, and vehicle expenses) and $95,730 from “loss of income”.
Petitioners do not adequately explain how the “other” expenses relate to their basis
in the Canadian property. Therefore, the $73,459 is not included in their adjusted
basis.
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Petitioner husband testified that the $95,730 “loss of income” comprises a
foreign currency transaction loss of $52,453 and business expenses totaling
$43,277. As discussed below petitioners may not deduct any amount for a foreign
currency transaction loss. Thus, petitioners’ basis does not include any of the
$95,730.
3. Depreciation
Respondent contends that petitioners placed the property in service as a
rental on October 7, 2006, in part because petitioners so stated in two letters they
sent to respondent. In contrast petitioner husband testified that after petitioner
wife moved to Vermont, they held the Canadian property for sale from October
2006 to October 2007 and then held it for rent.
Petitioner husband’s testimony that petitioners first held the Canadian
property for rent in October 2007 is contrary to the letters he sent to respondent.
His testimony relating to the attempted sale of the property was vague, murky, and
unaccompanied by any related documentary evidence. The complete absence of
relevant documents undermines his credibility. Therefore, we find that the
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Canadian property was not held for sale from October 2006 to October 2007 and
was placed into service as a rental on October 7, 2006.6
Under section 1.168(i)-4(c), Income Tax Regs., when a property held for the
production of income is converted to personal use, it is depreciable only for the
“months * * * the property is deemed to be placed in service during the year”.
(Emphasis added.) Petitioners contend that the property ceased being held for the
production of income in March 2012. Respondent states that the property was
“placed in service until April 2012.” Respondent’s calculations treated the
property as depreciable until August 2012 when petitioner husband resumed living
in the home. Because both parties state that the property was held for rent through
but not after March 2012, we treat the rental period as ending March 31, 2012.
Thus, we find that the Canadian property was held for rent from October 7, 2006,
to March 31, 2012.
4. Sale Price
At trial the parties agreed that the sale price of the home was $301,990.
After trial petitioners contended they are allowed a 50% reduction in the sale price
of the home (to $150,995) because of a “50% business use” rule. Petitioners did
6
Respondent states, and petitioners do not dispute, that the date is October 7,
2006, and we accept that date.
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not provide any authority for this 50% reduction. In addition their contention is
untimely. We find that the sale price of the Canadian property was $301,990.
C. Foreign Currency Transaction Loss
Petitioners contend that they are entitled to deduct a foreign currency
transaction loss under section 988 of $52,453 for mortgage payments they made
on the Canadian property. We disagree.
A foreign currency transaction loss can occur when there are changes in the
exchange rate between the taxpayer’s primary currency and the currency in which
the debt was denominated. Sec. 988(b)(2), (c)(2) and (3). Petitioners did not
provide testimony or admissible documents7 to substantiate the amounts of
payments they made on the mortgage during the rental period. Thus, petitioners
have not shown they may deduct a foreign currency transaction loss.
D. Business Expenses
Section 162(a) allows deductions for ordinary and necessary business
expenses paid or incurred in conducting a trade or business. Taxpayers must
maintain records that sufficiently substantiate the amounts of their claimed
deductions. Sec. 6001; see Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975),
7
Petitioners provided only the French language documents, which are not
admissible. See supra pp. 6-7.
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aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax
Regs.
Petitioners deducted $500 for professional membership fees paid to the
Institute of Electrical and Electronics Engineers. Petitioners adequately
substantiated that this expense is related to petitioner husband’s employment at
IBM; thus they may deduct it as an unreimbursed employee expense.
Petitioners also contend they are eligible for business deductions for
expenses for travel, office supplies, professional certifications, bookkeeping
services, telephones, interest on a business loan, and a timeshare in Florida.
Except as discussed above, the documentation they provided did not sufficiently
substantiate the amounts claimed or show that the expenses were business related.
Petitioner husband’s testimony concerning the legitimacy and amount of the
business expenses was evasive and lacked credibility. For example, when asked
whether he had brought documents to substantiate his business expenses, he
responded that his documents were too numerous for him to find those respondent
had requested and that respondent had had the chance to ask for the documents for
years and had not. We note that respondent had asked petitioners for, but
petitioners did not provide, these documents at least three times before trial. Thus,
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except for $500 for the professional membership, petitioners may not deduct
business expenses for 2012.
E. 10% Additional Tax Under Section 72(t)
Petitioners withdrew $17,500 from petitioner-husband’s retirement account
in 2012. Section 72(t) provides that, unless an exception applies, any distributions
from a retirement account are subject to a 10% additional tax. One of the
exceptions is payment of a tax levy. Sec. 72(t)(2)(A)(vii). Petitioners contend that
they used a portion of the $17,500 to pay a tax levy.8 However, they provided no
evidence describing the tax levy. In his testimony petitioner husband referred to
the tax levy only vaguely. He did not specify the date, the amount, or the taxing
authority that imposed the levy. Petitioners have not shown that they are eligible
for the exception for tax levies under section 72(t).
Petitioners also contend that the remaining portion of the $17,500 was a
loan which they used to purchase a home in Vermont in 2013. Petitioners
provided only Form 1099-R as evidence of the loan, but that form does not
provide any information about a loan. Because of the lack of sufficient evidence
8
After trial petitioners stated that additional exclusions under sec.
72(t)(2)(A) applied to the disbursement. Their claim of additional grounds is
untimely, and we will not consider it.
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relating to petitioners’ use of the funds distributed from his retirement account, the
entire $17,500 is subject to the 10% additional tax under section 72(t).
F. Petitioners’ Claim for Damages
Petitioners seek monetary damages from respondent on the grounds that
respondent knowingly misrepresented the facts, made intentional false statements,
and concealed the truth. There is no credible evidence in the record supporting
petitioners’ claims on these points.
To reflect the foregoing,
Decision will be entered under
Rule 155.