Zamzam v. Commissioner

T.C. Memo. 2000-371

UNITED STATES TAX COURT

SALIH M. ZAMZAM AND MARIAM ZAMZAM, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

SALIH M. ZAMZAM M.D., INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 2984-97, 3004-97. Filed December 7, 2000.

Salih M. Zamzam and Mariam Zamzam, pro sese in docket No.
2984-97.

Salih M. Zamzam (an officer), for petitioner in docket No.
3004-97.

Mary Ann Waters and John C. McDougal, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

FOLEY, Judge: By notice dated November 15, 1996, respondent

determined the following deficiencies and penalties relating to

petitioners’ Federal income taxes:
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Salih M. Zamzam and Mariam Zamzam, docket No. 2984-97

Penalties
Year Deficiency Sec. 6663 Sec. 6662

1990 $74,453 $36,252 $4,496
1991 $74,390 $44,674 $2,475
1992 $49,635 $37,226 --
1993 $30,703 $23,027 --
1994 $26,707 $16,586 $1,278

Salih M. Zamzam, Inc. (ZMDI), docket No. 3004-97

Penalty
Year Deficiency Sec. 6663

1990 $58,210 $43,657
1991 $72,892 $48,230
1992 $57,117 $38,906
1993 $34,335 $25,379
1994 $24,788 $17,632

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. After concessions,

the issues for decision are whether: (1) Petitioners failed to

report income relating to 1990 through 1994; (2) Salih M. Zamzam

M.D., Inc. (ZMDI) paid constructive dividends to the Zamzams from

1990 through 1994; (3) ZMDI was entitled to certain deductions

relating to 1991 through 1994; and (4) petitioners are liable for

fraud penalties.

FINDINGS OF FACT

When their respective petitions were filed, Salih M. Zamzam

and Mariam Zamzam resided, and ZMDI had its principal place of

business, in Grundy, Virginia.
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During 1990 through 1994, the Zamzams maintained personal

accounts, and ZMDI maintained its corporate account, at Grundy

National Bank. The Zamzams also maintained brokerage accounts

with Robert Thomas Securities and J.C. Bradford and Company.

During 1990 and 1991, the Zamzams transferred $1,900,000 from

their personal checking account to foreign banks, and, during

1995, $2,228,968 from their U.S. brokerage accounts to accounts

in Switzerland.

Dr. Zamzam was a licensed physician, and an employee,

president, sole director, and sole shareholder of ZMDI. Mrs.

Zamzam was ZMDI’s office manager. ZMDI paid salaries to Dr. and

Mrs. Zamzam. In 1990 through 1994, ZMDI did not authorize

payments in excess of Dr. Zamzam’s salary, and the Zamzams’ Forms

W-2, personal tax returns, and ZMDI’s corporate tax returns, did

not reflect any payments made by ZMDI in excess of the Zamzams’

salaries.

Mrs. Zamzam was primarily responsible for ZMDI’s daily

receipts journals and bank deposits. The accountant who prepared

ZMDI’s corporate tax returns advised the Zamzams to deposit all

corporate receipts into the corporate account to ensure that all

corporate income was properly reported. The Zamzams diverted to

their personal account, corporate receipts totaling $181,783,

$187,914, $148,260, $90,295, and $60,317 during 1990 through

1994, respectively. ZMDI did not report as income corporate
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receipts that were not deposited into the corporate account, nor

did the Zamzams report as income the amounts diverted to their

personal use.

During the years in issue, ZMDI subleased to Tri-City

Opticians (Tri-City) part of the building it occupied for $6,600

per year. Tri-City paid both the rent and its portion of the

utility bill directly to ZMDI. ZMDI deducted all of the lease

and utility payments but did not report Tri-City’s payments as

income. In addition, ZMDI claimed deductions for a variety of

expenses in 1991 through 1994 that exceeded ZMDI’s payments.

In 1992, respondent began an examination of ZMDI’s returns.

In 1993, during an examination of the Zamzams’ personal returns,

respondent discovered the unreported personal income and

corporate receipts. The Zamzams’ failure to explain the deposits

to their personal account led to a criminal investigation.

During the course of respondent’s examinations and the

criminal investigation, the Zamzams made numerous false

statements to respondent’s agents, including statements that all

money in their personal account had been taxed; all corporate

receipts were deposited into the corporate account; and they did

not have foreign investments or bank accounts.

The Zamzams were indicted and convicted, pursuant to section

7201, of tax evasion relating to their 1990 through 1994 personal

returns. In addition, Mrs. Zamzam was indicted and convicted,
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pursuant to section 7206(2), of aiding and assisting in the

preparation of false 1990 through 1994 corporate returns, and Dr.

Zamzam was indicted and convicted, pursuant to section 7206(1),

of signing the false 1991, 1992, and 1994 corporate returns.

Petitioners appealed their convictions. Dr. Zamzam’s convictions

were upheld by the Court of Appeals for the Fourth Circuit on

June 4, 1999, and Mrs. Zamzam’s appeal was dismissed by the

Fourth Circuit Court of Appeals on July 29, 1999.

OPINION

I. Unreported Income

Respondent determined that the Zamzams and ZMDI had

unreported income attributable to the Zamzams’ diversion, during

the years in issue, of corporate receipts to their personal use.

Respondent also determined that the Zamzams had not reported all

of their wage income in 1991.

Gross income includes all income from whatever source

derived. See sec. 61(a). Every taxpayer is required to maintain

adequate records of taxable income. See sec. 6001. If a

taxpayer fails to maintain such records, respondent may

reconstruct income in accordance with a method that clearly

reflects the full amount of income received. See sec. 446(b);

Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965). Respondent

used the bank deposits method to reconstruct petitioners’ income

for the years in issue. Petitioners have the burden of proving
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that respondent’s bank deposits analysis is erroneous. See Parks

v. Commissioner, 94 T.C. 654, 658 (1990). Petitioners, however,

failed to present any credible evidence establishing that

respondent’s computation of unreported income is incorrect. See

Welch v. Helvering, 290 U.S. 111, 115 (1933). Therefore, we

sustain respondent’s determination of the amount of unreported

income for both the Zamzams and ZMDI.

II. Constructive Dividends

Respondent determined that the corporate receipts diverted

to the Zamzams’ personal use were constructive dividends from

ZMDI. A shareholder receives a constructive dividend when

payment from a corporation to or for the benefit of such

shareholder confers an economic benefit on the shareholder. See

Nobel v. Commissioner, 368 F.2d 439, 442-443 (9th Cir. 1966);

Truesdell v. Commissioner, 89 T.C. 1280, 1292 (1987).

Petitioners contend that the diverted funds were

compensation to Dr. Zamzam and deductible by ZMDI pursuant to

section 162(a)(1). Payments are deductible, however, only when

they are intended as compensation. See King’s Court Mobile Home

Park, Inc. v. Commissioner, 98 T.C. 511, 514 (1992). The

testimony and documentary evidence establish that ZMDI did not

intend that these payments be compensation and that the Zamzams

received an economic benefit from the funds they diverted from
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ZMDI. Thus, we conclude the Zamzams received constructive

dividends, not compensation.

Petitioners further contend that respondent is collaterally

estopped from contending that the payments to the Zamzams were

not compensation. We disagree. On February 28, 1997, the U.S.

District Court for the Western District of Virginia at Abingdon,

Virginia, held, pursuant to section 7429 (i.e., relating to a

jeopardy assessment), that these payments could have been

deducted by the corporation as compensation. Collateral estoppel

precludes the relitigation of any issue of fact or law that is

actually litigated and necessarily determined by a valid and

final judgment. See Montana v. United States, 440 U.S. 147, 153

(1979); Wright v. Commissioner, 84 T.C. 636, 639 (1985). The

issue before us, however, is the ultimate tax liability, whereas

in the section 7429 jeopardy proceeding the issue was the

reasonableness of the provisional jeopardy assessment. Because

the issues in the deficiency case are not identical to those

litigated in the section 7429 proceeding, collateral estoppel is

not applicable. See Peck v. Commissioner, 90 T.C. 162, 166-167

(1988), affd. 904 F.2d 525 (9th Cir. 1990). Further, the

legislative history of section 7429 states that a trial court’s

decision in a section 7429 proceeding “will have no effect upon

the determination of the correct tax liability in a subsequent
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proceeding.” S. Rept. 94-938, at 365 (1976), 1976-3 C.B. (Vol.

3) 57, 403.

III. Deductions

Respondent determined that ZMDI claimed deductions for

expenses in 1991 through 1994 that exceeded its payments.

Petitioners failed to present evidence establishing its

entitlement to these deductions. See Welch v. Helvering, supra

at 115. Accordingly, respondent’s determination is sustained.

IV. Fraud Penalty

Respondent determined that petitioners were liable, pursuant

to section 6663(a), for fraud penalties. Respondent must

establish by clear and convincing evidence that for each year in

issue an underpayment of tax exists and some portion of the

underpayment is due to fraud. See Petzoldt v. Commissioner, 92

T.C. 661, 699 (1989). After respondent has established that any

portion of the underpayment is due to fraud, the entire

underpayment is treated as attributable to fraud, unless

petitioner establishes that any portion is not attributable to

fraud. See sec. 6663(b).

Fraud is established by proof of intent to evade tax

believed to be owing. See Clayton v. Commissioner, 102 T.C. 632

(1994). Respondent may prove intent to evade tax by

circumstantial evidence, see Davis v. Commissioner, T.C. Memo.

1991-603, which may include substantial understatement of income,
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inadequate books and records, failure to file returns,

concealment of assets, failure to cooperate with tax authorities,

and participation in or concealment of illegal activities. See

Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).

A. Fraud Penalty Relating to the Zamzams

A taxpayer convicted under section 7201 is collaterally

estopped from denying liability for the civil fraud penalty

because the elements of criminal tax evasion and civil fraud are

identical. See Moore v. United States, 360 F.2d 353, 356 (4th

Cir. 1965). Thus, having been convicted of criminal tax evasion

pursuant to section 7201, the Zamzams are liable for the section

6663(a) fraud penalty. In addition, the Zamzams failed to

establish, pursuant to section 6663(b), that any portion of their

underpayment was not attributable to fraud. Accordingly, the

penalty applies to the entire underpayment of tax for 1990

through 1994.

B. Fraud Penalty Relating to ZMDI

Dr. Zamzam was the president and sole shareholder of ZMDI,

and the Zamzams fraudulently diverted corporate receipts into

personal accounts. As a result, his actions are imputed to ZMDI.

See Loftin & Woodward, Inc. v. United States, 577 F.2d 1206, 1244

(5th Cir. 1978)(holding that the court may impute the fraud of a

controlling shareholder or officer to the corporation). The

failure to report significant corporate income, false statements
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to revenue agents, and transfer of funds to undisclosed foreign

accounts establish the corporation’s fraudulent intent.

Petitioners failed to establish, pursuant to section 6663(b),

that any portion of the underpayment was not due to fraud.

Accordingly, ZMDI is liable for the section 6663(a) fraud penalty

relating to the entire underpayment of tax in 1990 through 1994.

Contentions we have not addressed are moot, irrelevant, or

meritless.

To reflect the foregoing,

Decisions will be entered

under Rule 155.