Charles Y. Choi Jin Yi Choi v. Commissioner of Internal Revenue

Taxpayers, Charles Y. Choi and his wife Jin Yi Choi, appeal the Tax Court’s determination that they underreported the income from their Arizona grocery store on their 1991 and 1992 federal tax returns and the imposition of a civil fraud penalty under 26 U.S.C. § 6663 . It is undisputed that the Chois did not maintain adequate records for the store and that the Commissioner therefore was entitled to use an indirect method of reconstructing income to determine the amount of any deficiency. 26 U.S.C. § 446 (b). The Commissioner used the “bank deposits plus cash expenditures” method of reconstructing income and assessed a deficiency of $59,106 for 1991 and $49,624 for 1992. The Commissioner found fraudulent intent and imposed a penalty. Indeed Mr. Choi, in 1996, pled guilty to criminal tax evasion for the 1992 tax year.

In challenging the deficiency and civil penalty determinations in the Tax Court, the Chois argued that the Commissioner was not allowed to use the “bank deposits plus cash expenditures” method to reconstruct their income. The Chois then provided expert testimony to establish that using a different method of reconstructing income, the Commissioner would not have found…