T.C. Memo. 2003-219
UNITED STATES TAX COURT
DAVID D. LE, a.k.a. DAVID DUNG LE, a.k.a. DUNG V. LE &
KIM HUONG LE, a.k.a. KIM LE, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 13703-99, 10851-01, Filed July 22, 2003.
10852-01.
P-H is a physician in California who during 1990
and 1991 performed his medical services through a
business known as David Dung Le, M.D., Inc. (DDL). R
determined for those years that (1) DDL was a
corporation that realized unreported income from third
party payments made to it but diverted to the use of
P-H and P-W (collectively, Ps) and (2) Ps received
unreported constructive distributions on account of the
diversions. R determined as to the payments that Ps
owed 1990 and 1991 Federal individual income taxes and
1
Cases of the following petitioners are consolidated
herewith: David D. Le, a.k.a. David Dung Le, a.k.a. David Le,
a.k.a. Dung V. Le, a.k.a. Dung Le, Transferee, docket No.
10851-01; Kim Huong Le, a.k.a. Kim H. Le, a.k.a. Kim Le, a.k.a.
Nguy Le, Transferee, docket No. 10852-01.
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fraud penalties under sec. 6663(a), I.R.C. R also
determined as to the payments that Ps were transferees
of DDL’s assets, and, in that capacity, owed the unpaid
1990 and 1991 Federal corporate income taxes and fraud
penalties of DDL. Ps argue that R’s determinations are
erroneous because, Ps state, P-H’s medical practice was
not incorporated during 1990 and 1991. Ps note that a
corporation has never been formally registered with
California to do business as DDL.
1. Held: In 1990 and 1991, P-H operated his
medical practice in California as a corporation known
as DDL.
2. Held, further, Ps’ 1990 and 1991 gross income
includes the amounts diverted from DDL, and Ps are
liable for the individual income taxes and related
fraud penalties determined by R.
3. Held, further, Ps, as transferees of DDL’s
assets, are liable for DDL’s 1990 and 1991 Federal
corporate income tax liabilities (inclusive of the
fraud penalties).
4. Held, further, the period of limitations under
sec. 6501, I.R.C., has not run as to Ps’ 1990 or 1991
taxable year.
Wayne Hagendorf and Richard J. Radcliffe, for petitioners.
Igor S. Drabkin and David R. Jojola, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: These cases concern (1) the 1990 and 1991
Federal individual income taxes of David D. Le, a.k.a. David Dung
Le, a.k.a. David Le, a.k.a. Dung V. Le, a.k.a. Dung Le
(petitioner), and Kim Huong Le, a.k.a. Kim H. Le, a.k.a. Kim Le,
a.k.a. Nguy Le (Ms. Le) (collectively with petitioner, the Les,
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or petitioners), and (2) the Les’ liability for the unpaid 1990
and 1991 Federal corporate income taxes (inclusive of penalties)
of a California corporation known as David Dung Le, M.D., Inc.
(DDL). Respondent determined deficiencies in the Les’ 1990 and
1991 Federal income taxes and fraud penalties under section
6663(a) and reflected those determinations in a notice of
deficiency issued to the Les on July 7, 1999.2 Respondent
determined that the Les, as transferees of DDL’s assets, are also
liable for DDL’s unpaid 1990 and 1991 Federal corporate income
tax liabilities (inclusive of penalties) and reflected this
determination in separate notices of determination of transferee
liability issued to petitioner and Ms. Le on June 5, 2001.3 As
determined by respondent, the amounts of the Les’ deficiencies
and fraud penalties and the amounts of DDL’s unpaid liabilities
are as follows:
2
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code. Rule
references are to the Tax Court Rules of Practice and Procedure.
Dollar amounts are rounded to the nearest dollar.
3
On July 1, 1999, respondent had issued DDL a notice of
deficiency as to Federal corporate income taxes and fraud
penalties under sec. 6663(a). DDL, through its current counsel,
Wayne Hagendorf (Mr. Hagendorf), petitioned the Court with
respect thereto. Following our dismissal of that case for lack
of jurisdiction, see David Dung Le, M.D., Inc. v. Commissioner,
114 T.C. 268 (2000), affd. 22 Fed. Appx. 837 (9th Cir. 2001),
respondent, on July 31, 2000, assessed the deficiencies and
penalties listed in the notice of deficiency. These deficiencies
and penalties are the corporate liabilities at issue.
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Les’ Deficiencies
Years Deficiencies Penalties
1990 $89,826 $67,370
1991 59,246 44,435
DDL’s Unpaid Liabilities
Years Income taxes Penalties
1990 $98,540 $73,905
1991 65,897 49,423
We decide as to the subject years:
1. Whether petitioner operated his medical practice through
a C corporation known as DDL. We hold he did.
2. Whether the Les’ gross income includes constructive
distributions in the amounts determined by respondent. We hold
it does.
3. Whether the Les, in their individual capacities, are
liable for the fraud penalties determined by respondent under
section 6663(a). We hold they are.
4. Whether the Les, as transferees of DDL’s assets, are
liable for DDL’s unpaid Federal corporate income taxes (inclusive
of penalties). We hold they are.
5. Whether the period of limitations under section 6501 has
run as to the Les’ personal income taxes. We hold it has not.4
FINDINGS OF FACT
4
On the basis of our holdings, we also sustain without
further comment certain computational adjustments made by
respondent and disputed by petitioners.
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A. Overview
Many facts were stipulated. The stipulated facts and the
exhibits submitted therewith are incorporated herein by this
reference. We find the stipulated facts accordingly. The Les
are husband and wife, and they resided in Houston, Texas, when
they petitioned the Court. They have been married to each other
since 1973.
Petitioner is a physician who was born in Hanoi, Vietnam, on
January 13, 1943, and immigrated to the United States in 1975.
He has been known in the United States by the following names:
Dung Van Le, Dung V. Le, Dung Le, David Van Le, David Dung Le,
David D. Le, and David Le. Kim Le was born in Hanoi, Vietnam, on
August 11, 1951, and also immigrated to the United States in
1975. She has been known in the United States by the following
names: Kim Huong Le, Kim H. Le, Kim Le, and Nguy Le.
B. Petitioner’s Medical Practice
Petitioner became licensed to practice medicine in
California in 1981. On December 22, 1982, when he called himself
Dung Van Le, petitioner incorporated his medical practice
(medical practice) in California under the name Dung Van Le,
A Medical Corporation. The articles of incorporation for the
corporation stated in relevant part:
I
The name of this Corporation is DUNG VAN LE, A
MEDICAL CORPORATION.
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II
The purpose of this corporation is to engage in
the profession of Medicine and any other lawful
activities (other than the banking or trust company
business) not prohibited to a Corporation engaging in
such profession by applicable laws and regulations.
III
This Corporation is a Professional Corporation
within the meaning of Part 4 of Division 3 of Title 1
of the California Corporations Code.
IV
The name in the State of California of this
Corporation’s initial agent for service of process is
DUNG VAN LE, 4614 EL CAJON BOULEVARD, SUITE 7, SAN
DIEGO, CALIFORNIA 92115.
At or about that time, California assigned to the corporation a
corporate number. Five months later, in May 1983, the
corporation applied for and received a Federal employer
identification number.
Petitioner incorporated his medical practice in order to
save taxes. He was the corporation’s sole shareholder, sole
director, sole officer, and sole physician. His corporate
business began in San Diego, California, and it moved to Orange
County, California (Orange County), in or about 1989.
During the subject years, petitioner called himself David
Dung Le, he operated his corporation under the name DDL, and he
personally performed all of DDL’s medical services. During those
years, DDL had an active business checking account that had been
opened at a bank in Orange County contemporaneously with
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petitioner’s move there.5 In 1991, petitioner used the corporate
and Federal employer identification numbers assigned to Dung Van
Le, A Medical Corporation, to report and pay to California
corporate estimated tax in the name of DDL.
C. Attorney Checks
During the subject years, Ms. Le worked as DDL’s office
manager. Her general duties included performing receptionist
functions, maintaining DDL’s books and records, processing
incoming mail, and making bank deposits. Her specific
responsibilities included entering DDL’s receipts into DDL’s
records.
DDL’s receipts were primarily in the form of cash from
patients or checks from Medi-Cal, Medicare, insurance companies,
or various law offices. The checks from the law offices
(attorney checks) were a significant source of DDL’s income and
stemmed from medical services rendered by petitioner, in his
capacity as DDL’s employee, to clients of the payor/attorneys.
Ms. Le recorded in DDL’s records all of DDL’s receipts but for
many of the receipts which DDL received in the form of attorney
checks. The Les diverted many of the attorney checks to their
personal use and did not report the amounts of the diverted
checks to the Internal Revenue Service (either on DDL’s corporate
5
The bank statements list the owner of the account as DDL
“DBA ASIAN GARDEN MED’CL CLINIC”. The record does not elaborate
on this pseudonym.
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returns or on their individual returns).6 During the subject
years, the Les diverted to their personal use attorney checks
totaling $295,940 and $197,072, respectively. Of the $295,940,
the Les deposited $150,213 into their personal accounts, cashed
$116,848, and converted $28,878 into cashier’s checks (the $1
discrepancy is due to rounding). Of the $197,072, the Les
deposited $66,663 into their personal accounts, cashed $93,260,
and converted $37,148 into cashier’s checks (the $1 discrepancy
is due to rounding).
D. DDL’s and the Les’ Accountant
During the relevant years, Tuan Anthony Nguyen (Mr. Nguyen)
performed accounting and tax return preparation services for DDL
and the Les. Among other things, he prepared for them profit and
loss statements, quarterly payroll returns, the Les’ individual
income tax returns, and DDL’s corporate income tax returns. Ms.
Le, who provided Mr. Nguyen with all of DDL’s information that he
relied upon to prepare DDL’s 1990 and 1991 corporate income tax
returns, informed Mr. Nguyen that all of DDL’s income was
reflected in its business bank account. Mr. Nguyen also prepared
for DDL 1990 and 1991 Forms W-2, Wage and Tax Statements, as to
petitioner. These forms, which were attached to the Les’ 1990
and 1991 Federal individual income tax returns, respectively,
6
DDL did report on its corporate income tax returns the
amounts of the attorney checks which were deposited into DDL’s
bank account.
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reported that DDL had paid wages to petitioner in his capacity as
DDL’s employee.
E. 1990 and 1991 Tax Returns
The Les filed joint 1990 and 1991 Federal individual income
tax returns. These returns were signed by both of the Les. The
Les reported on these returns that they had realized gross income
in amounts which did not include the amount of any of the
attorney checks.
Petitioner filed on behalf of DDL 1990 and 1991 Federal
corporate income tax returns. Those returns, which petitioner
signed in his capacity as an officer of DDL, reported that DDL
was incorporated on January 3, 1983,7 and that DDL owned as of
the end of each respective year a significant dollar amount of
assets.8 The corporate returns also reported for each respective
year that DDL had realized a significant dollar amount of gross
receipts and had paid a significant dollar amount of varied
expenses, including an expense for petitioner’s officer
compensation.
7
Whereas petitioner actually incorporated his medical
practice on Dec. 22, 1982, we consider DDL’s tax returns to state
erroneously that it was incorporated on Jan 3, 1983.
8
The respective returns report that DDL’s assets and
liabilities at the end of 1990 were $23,358 and $6,918,
respectively, and at the end of 1991 were $23,891 and $3,588,
respectively. The respective returns also reported that DDL had
retained earnings of $3,940 and $7,803.
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The Commissioner commenced an audit of the individual and
corporate 1990 and 1991 returns after discovering during the
audit of a personal injury attorney that the attorney had written
checks to various physicians and that those checks had been
cashed. The revenue agent interviewed both of the Les as part of
their and DDL’s audit. During those interviews, both of the Les
provided false, misleading, and inconsistent statements on DDL’s
check cashing activities, their involvement in those activities,
and the completeness of DDL’s books and records. On April 3,
1998, the Les agreed to extend to December 31, 1998, the time to
assess their personal income tax liability for 1991. They later
agreed on July 1, 1998, to extend that term until July 31, 1999.
Respondent determined that the amounts of the attorney
checks which were diverted by the Les were includable in their
gross income as constructive distributions received from DDL. As
to 1990, respondent determined (and included in the notice of
deficiency) that the Les failed to report constructive dividends
of $201,341 and constructive long-term capital gains of $82,100.
As to 1991, respondent determined (and included in the notice of
deficiency) that the Les failed to report constructive dividends
of $137,801 and constructive long-term capital gains of $62,034.
Following the issuance of the notice of deficiency, respondent’s
national office analyzed DDL’s earnings and profits to verify the
portions of the distribution that under section 301(c) were
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dividends, return of basis, and long-term capital gain. On the
basis of that analysis, respondent has since conceded that the
1990 distributions resulted in dividend income of $124,744 and
long-term capital gains of $154,017 and that the 1991
distributions resulted in dividend income of $78,494 and long-
term capital gains of $118,579.
F. The Les’ Indictment
Also during the audit, the Commissioner referred the Les’
case to his criminal investigation division (CID). During the
course of the investigation by the CID, neither the Les nor their
attorneys challenged petitioner’s reporting position that he
operated his medical practice through a corporation named “David
Dung Le, M.D., Inc.”.9 Subsequent to this referral, an
indictment was filed against the Les on April 3, 1997, generally
charging each of them with: (1) Two counts (counts 1 and 2) of
violating section 7206(1) as to their 1990 and 1991 Federal
individual income tax returns and (2) two counts (counts 3 and 4)
of violating section 7206(1) as to DDL’s 1990 and 1991 Federal
corporate income tax returns. See United States v. David Dung Le
and Kim Huong Le, Central District of California, Case No. SA CR
97-33. The gist of the indictment was that the Les had willfully
9
In fact, we understand petitioners’ counsel, Mr.
Hagendorf, to have first challenged this reporting position in
petitioners’ motion for summary judgment filed with the Court on
Apr. 25, 2002.
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failed to include the amount of the attorney checks in DDL’s 1990
and 1991 corporate gross income, that they had diverted those
funds to their personal use, and that they had willfully failed
to include the diverted amounts in their 1990 and 1991 individual
gross income.
On September 17, 1997, petitioner pleaded guilty to counts 1
and 3 of the indictment. Count 1 charged him with willfully
making and subscribing to a false 1990 Federal individual income
tax return. Count 3 charged him similarly as to DDL’s 1990
Federal corporate income tax return. As a factual basis of his
plea, petitioner agreed:
During calendar year 1990, as payment for medical
services rendered by your medical practice, David Dung
Le, M.D., Inc., you and your medical practice received
checks from various law offices. Notwithstanding the
fact that all of these checks constituted reportable
business income to you and your corporation, you caused
$295,940.90 in such checks to be deposited to your
personal accounts, cashed and/or converted to cashier’s
checks so as to avoid having these checks reported as
income to the Internal Revenue Service. You further
failed to advise your tax preparer that these business
checks had been so diverted.
Thereafter, on or about April 11, 1991, you willfully
signed a U.S. Joint Individual Tax Return, Form 1040,
for calendar year 1990 which was verified by a written
declaration that it was made under the penalties of
perjury, and which you did [not] believe to be true and
correct as to every material matter, in that said
return reported adjusted gross income of $113,847,
whereas as you knew, that adjusted gross income figure
failed to reflect an additional $295,940.90 in
reportable income.
In addition, on or about September 28, 1991, you
willfully made and subscribed a U.S. Corporation Income
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Tax Return, Form 1120, on behalf of David Dung Le,
M.D., Inc., for calendar year 1990 which was verified
by a written declaration that it was made under the
penalties of perjury, and you did not believe to be
true and correct as to every material matter, in that
said return reported gross receipts of $248,359,
whereas as you well knew, that figure failed to include
$295,940.90 in additional gross receipts.
Petitioner acknowledged as to his plea agreement that he had
“carefully reviewed every part of it with my attorney” before
signing it.
Also on September 17, 1997, Ms. Le pleaded guilty to counts
1 and 3 of the indictment. Count 1 charged her with willfully
subscribing to a false 1990 Federal individual income tax return
in violation of section 7206(1). Count 3 charged her with aiding
and abetting the willful subscription of a false 1990 Federal
corporate income tax return in violation of section 7206(1). As
a factual basis of her plea, Ms. Le agreed:
During calendar years 1990 and 1991, you served as
bookkeeper for your husband’s medical practice, David
Dung Le, M.D., Inc. During that calendar year, David
Dung Le, M.D., Inc. received checks from various law
offices in payment for medical services rendered.
Notwithstanding the fact that all of these checks
constituted taxable business income to David Dung Le,
M.D. and to your husband, you caused, and aided and
abetted the causing of, $295,940.90 in such checks to
be deposited to your personal accounts, cashed and/or
converted to cashier’s checks so as to avoid having
these checks reported as income to the Internal Revenue
Service. You further failed to advise your tax
preparer that these business checks had been so
diverted.
Thereafter, on or about April 11, 1991, you willfully
signed a U.S. Joint Individual Tax Return, Form 1040,
for calendar year 1990 which was verified by a written
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declaration that it was made under the penalties of
perjury, and which you did [not] believe to be true and
correct as to every material matter, in that said
return reported adjusted gross income of $113,847,
whereas as you knew, that adjusted gross income figure
failed to reflect an additional $295,940.90 in
reportable income.
In addition, on or about September 28, 1991, your
husband willfully made and subscribed a U.S.
Corporation Income Tax Return, Form 1120, on behalf of
David Dung Le, M.D., Inc., for calendar year 1990 which
was verified by a written declaration that it was made
under the penalties of perjury, and which your husband
did not believe to be true and correct as to every
material matter, in that said return reported gross
receipts of $248,359, whereas as you and your husband
well knew, that figure failed to include an additional
$295,940.90 in gross receipts. By having failed to
deposit business checks into the David Dung Le, Md.,
Inc. business bank account and having failed to advise
your tax preparer that the business checks had been so
diverted, you knowingly aided, abetted and caused the
above described subscribing to a false corporate
return.
Ms. Le acknowledged as to her plea agreement that she had
“carefully reviewed every part of it with my attorney” before
signing it. In connection with her plea, Ms. Le served jail
time.
G. Previous Case Involving DDL
DDL previously petitioned this Court to redetermine
deficiencies in and other amounts related to its 1990 and 1991
Federal income taxes. We dismissed the case for lack of
jurisdiction. See David Dung Le, M.D., Inc. v. Commissioner,
114 T.C. 268 (2000). We held that DDL was a California
corporation that lacked the capacity to engage in litigation
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because California had suspended DDL’s powers, rights, and
privileges. We noted that California’s action resulted from
DDL’s failure to pay its California income taxes. Upon appeal,
our decision in David Dung Le, M.D., Inc. v. Commissioner, supra,
was affirmed by the Court of Appeals for the Ninth Circuit.
OPINION
The parties assert, and we agree, that petitioners have the
burden of proof as to all issues in this case except the issues
of transferee liability and fraud penalties. Respondent bears
the burden of proof as to these latter two issues. Secs.
6901(a), 7454(a); Rule 142(b), (d).
A. Status of DDL
Petitioners argue that petitioner did not operate his
medical practice in a corporate form in 1990 and 1991. We
disagree. Petitioners agree that petitioner initially conducted
his medical practice as a corporation but argue that petitioner
abandoned practicing medicine through his corporation when he
moved to Orange County. On the basis of the record as a whole,
including our observation and perception of petitioner when he
testified at trial about this issue, we find petitioner’s
testimony incredible and decline to rely upon it to support
petitioners’ positions herein.10 Neonatology Associates, P.A. v.
10
For similar reasons, we also find Ms. Le’s testimony
incredible and decline to rely upon it to support petitioners’
(continued...)
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Commissioner, 115 T.C. 43, 84 (2000), affd. 299 F.3d 221 (3d Cir.
2002).
Petitioner’s testimony is clearly and convincingly
contradicted by the credible evidence in the record. First,
petitioner had during the relevant years a business checking
account in the name of DDL. That account was actively used by
DDL to cash all of the nondiverted checks that DDL received for
services performed by petitioner in his capacity as DDL’s
employee. Second, petitioner filed 1990 and 1991 Federal
corporate income tax returns reporting DDL’s income and expenses
for those years as corporate items. Those returns, which were
signed personally by petitioner in his capacity as a DDL officer,
reveal that petitioner considered himself an officer of a
corporation named DDL and that DDL was realizing income and
incurring expenses as if it were an active and ongoing corporate
business. The returns also reveal that DDL owned assets as of
the end of both 1990 and 1991. Given the additional fact that
DDL during the subject years also reported and paid corporate
estimated income tax to the State of California, we do not accept
petitioners’ claim that the corporate form of the medical
practice was abandoned by petitioner before the subject years.
10
(...continued)
positions herein.
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Such is especially so, considering that the Les acknowledged
as part of their separate plea agreements that petitioner’s
medical practice was known during 1990 as “David Dung Le, M.D.,
Inc.”11, that DDL was active during that year, and that DDL
during that year received the same attorney checks that are at
issue herein in payment of medical services which were rendered
on behalf of it. In light of these plea agreements, we reject
petitioners’ attempt to disavow their acknowledgments as set
forth clearly in the agreements. We consider it unimportant that
the corporate and Federal employer identification numbers used on
the corporate returns and estimated payment vouchers were
initially assigned to a corporation named “Dung Van Le, A Medical
Corporation”. Similarly, we place no importance with respect to
petitioner’s corporation’s never having been registered with the
State of California to do business as DDL. In both cases,
petitioner called himself Dung Van Le when he incorporated his
medical practice as Dung Van Le, A Medical Corporation. During
the subject years, however, when he called himself David Dung Le,
he simply used a different name for his corporation to reflect
the change in his personal name. The fact that petitioner did
not notify the State of California that he had changed the name
of his medical practice to reflect his change in name does not
11
Ms. Le also acknowledged in her plea agreement that
petitioner’s medical practice was known as DDL in 1991.
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mean that his medical practice, which petitioner represented to
the public and to the Commissioner as a corporation named “David
Dung Le, M.D., Inc.”, may escape Federal taxation as a
corporation.12
B. Constructive Distributions
Absent a provision to the contrary, funds which a
shareholder diverts from a corporation are generally includable
in the shareholder’s gross income under section 61(a) to the
extent that the shareholder has dominion and control over them.
See also Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431
(1955). One example of a contrary provision is section 301 where
Congress has provided that funds (or any other property)
distributed by a corporation to a shareholder with respect to his
or her stock are to be taxed under the provisions of section
301(c). Under section 301(c), a constructive distribution is
12
Petitioners’ argument that DDL never existed is even more
audacious given that DDL attempted to litigate in this case the
merits of DDL’s liabilities and thereafter appealed to the Court
of Appeals for the Ninth Circuit our decision that DDL lacked
capacity to litigate by virtue of the fact that it was a
corporation with suspended powers. In light of the record as a
whole, including especially the Les’ plea agreements and DDL’s
filing of corporate income tax returns, we consider petitioners’
argument herein that petitioner did not operate his medical
practice through a corporation known as “David Dung Le, M.D.,
Inc.” to be frivolous. We also consider that it appears to have
been unreasonable for Mr. Hagendorf to have refused to stipulate
on behalf of his client to certain undisputed facts as to the
incorporation of petitioner’s medical practice, facts, we note,
which petitioner later testified at trial without contradiction
to be true.
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taxable to the shareholder as a dividend only to the extent of
the corporation’s earnings and profits. Any excess is a
nontaxable return of capital to the extent of the shareholder’s
basis in the corporation. Any remaining amount is taxable to the
shareholder as capital gain. Sec. 301(c)(2) and (3); Truesdell
v. Commissioner, 89 T.C. 1280, 1295-1298 (1987).
On the basis of the record before us, we are convinced:
(1) The Les had full dominion and control of DDL’s funds; i.e.,
the diverted attorney checks, and (2) they diverted those funds
for their personal use. In fact, as to 1990, they admitted as
much in their plea agreements.13 Petitioners do not challenge
respondent’s analysis as to the tax treatment of the constructive
distributions from DDL. We have reviewed those calculations, and
finding no error therein, we sustain respondent’s calculation of
the amounts of the constructive distributions that are dividends
and long-term capital gains.
C. Fraud Penalties
Respondent determined that the Les are liable for fraud
penalties under section 6663(a). Section 6663(a) imposes a
13
Whereas petitioners stress that all of the attorney
checks were made out to petitioner personally, given the plea
agreements, we find this to be but one more step in the Les’ goal
to hide this income from the IRS. We also reject petitioners’
assertion that the Les were naive, unsophisticated, and
incompetent as to tax matters. In fact, the Les willfully
concealed the receipt of the attorney checks by petitioner and
DDL. They were caught because the Commissioner was auditing the
personal injury attorney.
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penalty of 75 percent of the portion of an underpayment that is
attributable to fraud. In order for the Court to sustain
respondent’s determination as to the applicability of these
penalties to the Les, respondent must prove by clear and
convincing evidence: (1) The Les underpaid their taxes for 1990
and 1991, and (2) some part of each underpayment was due to
fraud. Once respondent has met this burden, we consider all of
the underpayment to be attributable to fraud unless petitioners
establish otherwise. Sec. 6663(b).
On the basis of our review of the record, we conclude that
respondent has proven the first prong of the two-part test. The
record establishes clearly and convincingly that petitioners
failed to include the distributions in their 1990 and 1991 gross
income. We conclude that respondent has proven that petitioners
underpaid their Federal income taxes for both 1990 and 1991.
As to the second prong of the test; i.e., the presence of
fraud, the existence of fraud is a question of fact. Gajewski v.
Commissioner, 67 T.C. 181, 199 (1976), affd. without published
opinion 578 F.2d 1383 (8th Cir. 1978). Fraud is never presumed
or imputed; it must be established by independent evidence that
establishes a fraudulent intent on the taxpayer’s part. Otsuki
v. Commissioner, 53 T.C. 96 (1969). Because direct proof of a
taxpayer’s intent is rarely available, fraud may be proven by
circumstantial evidence and reasonable inferences may be drawn
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from the relevant facts. Spies v. United States, 317 U.S. 492
(1943); Stephenson v. Commissioner, 79 T.C. 995 (1982), affd.
748 F.2d 331 (6th Cir. 1984). Where fraud is determined for
multiple years, as is the case here, respondent must establish
the requisite fraudulent intent for each of the years in order to
prevail as to all of the years. The Court may sustain
respondent’s determination of fraud only as to those years for
which the fraudulent intent is established clearly and
convincingly. Fraud requires a showing that the taxpayer
intended to evade a tax known or believed to be owing by conduct
intended to conceal, mislead, or otherwise prevent the collection
of tax. Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d.
Cir. 1968).
We often rely on certain indicia of fraud in deciding the
existence of fraud. The presence of several indicia is
persuasive circumstantial evidence of fraud. Beaver v.
Commissioner, 55 T.C. 85, 93 (1970). The “badges of fraud”
include: (1) Understatement of income; (2) maintenance of
inadequate records; (3) failure to file tax returns;
(4) implausible or inconsistent explanations of behavior;
(5) concealment of income or assets; (6) failure to cooperate
with tax authorities; (7) engaging in illegal activities;
(8) dealing in cash; (9) failure to make estimated tax payments;
and (10) filing false documents. Spies v. United States, supra;
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Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Bradford
v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg.
T.C. Memo. 1984-601; Recklitis v. Commissioner, 91 T.C. 874, 910
(1988).
Following our consideration of the relevant badges of fraud,
we conclude that respondent has clearly and convincingly proven
the requisite fraudulent intent on the part of the Les for each
year in issue. The Les understated their income on their 1990
and 1991 individual tax returns by not recognizing income from
the attorney checks which they diverted from DDL in the amounts
totaling $295,941 and $197,673, respectively. They attempted to
conceal this income by not recording those checks in DDL’s
records (i.e., by not maintaining proper records for DDL), by not
depositing those checks into DDL’s bank account, by not advising
their tax preparer of the checks’ existence, and by not reporting
the diverted funds on DDL’s corporate income tax returns or on
their individual income tax returns. They engaged in illegal
activities in that they filed fraudulent tax returns. They
provided implausible or inconsistent explanations of their
behavior. They failed to cooperate with tax authorities. They
pleaded guilty to certain charges as to their and DDL’s 1990
income tax returns. Although a conviction under section 7206(1)
does not by itself establish intent to evade tax, since the
existence of such intent is not an element of the crime, the
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indictment and petitioners’ plea agreements in this case are
probative of petitioners’ fraudulent intent. Wright v.
Commissioner, 84 T.C. 636, 643-344 (1985). We also note as to
1990 that the Les both acknowledged in their separate plea
agreements that the attorney checks were taxable income to
petitioner, that they failed to advise their tax preparer about
the diverted funds, and that they knew that their taxable income
was underreported.
We hold that petitioners are liable for the fraud penalties
for 1990 and 1991 determined by respondent under section 6663(a).
D. Transferee Liability
DDL has unpaid income tax liabilities which respondent seeks
to collect from the Les in their capacity as transferees of DDL’s
assets. Section 6901 allows the Commissioner in certain cases to
collect from a transferee of assets unpaid taxes owed by the
assets’ transferor if a basis exists under State law or equity
for holding the transferee liable. Bresson v. Commissioner,
111 T.C. 172 (1998), affd. 213 F.3d 1173 (9th Cir. 2000); Gumm v.
Commissioner, 93 T.C. 475, 479 (1989). Section 6901 does not
create the liability of a transferee, but is merely a secondary
method for enforcing a transferor’s existing liability. Mysse v.
Commissioner, 57 T.C. 680, 700-701 (1972). Here, in order to
prevail on this issue, respondent must prove that he has
satisfied the procedural requirements of section 6901(a) and that
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petitioner and Ms. Le are liable as transferees under State law
or equity. Sec. 6902(a); Gumm v. Commissioner, supra at 479-480.
We begin with the procedural requirements. They are:
(1) That the alleged transferee received property of the
transferor; (2) that the transfer was made without adequate
consideration; (3) that the transfer was made during or after the
period for which the transferor’s tax liability accrued; (4) that
either the transferor was insolvent before or because of the
transfer of property, or the transfer of property was one of a
series of distributions of property that resulted in the
insolvency of the transferor; (5) that all reasonable efforts to
collect from the transferor were made, and further collection
efforts would be futile; and (6) the value of the transferred
property (which determines the limit of the transferee’s
liability). Gumm v. Commissioner, supra at 480.
On the basis of the record, we conclude that respondent has
met each of these procedural requirements. First, the Les
received corporate funds from DDL in each subject year as
indicated by the diverted checks. Second, corporate funds were
diverted from the corporation to the Les without adequate
consideration. Third, the Les diverted these funds while DDL’s
tax liabilities for the subject years accrued. Fourth, taking
into account DDL’s unpaid tax liabilities, DDL did not have
sufficient assets to pay all of its debts. Fifth, respondent has
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previously issued a notice of deficiency to DDL and assessed the
Federal corporate income taxes (inclusive of penalties) listed
therein. Given DDL’s financial position, it would be futile for
respondent to attempt to collect the delinquent debt from DDL.
Sixth, the amount of the attorney checks diverted by the Les in
each year ($295,940 and $197,072, respectively) totaled greater
than DDL’s corresponding Federal income tax liabilities
(inclusive of penalties).
We now turn to whether the Les are liable as transferees
under applicable State law or equity. Given that the diversion
of funds occurred in California, the applicable State law is that
of California. In 1986, California adopted the Uniform
Fraudulent Transfer Act (UFTA), effective with transfers made or
obligations incurred after January 1, 1987. Cal. Civ. Code, sec.
3439.12 (West 1997). In that the diversions of funds at issue
all occurred after January 1, 1987, we conclude that California’s
version of the UFTA applies. That version, which is codified at
Cal. Civ. Code secs. 3439-3439.12, allows transfers to be set
aside by present or future creditors for either actual fraud
(sec. 3439.04(a)) or constructive fraud (sec. 3439.04(b)).
In order to establish transferee liability under an actual
fraud theory, respondent must show that the transferor acted with
actual intent to defraud a creditor. In determining such an
intent, courts have considered certain “badges of fraud”. Lyons
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v. Sec. Pac. Natl. Bank, 48 Cal. Rptr. 2d 174, 185 (1995).
Although California has not expressly codified these “badges of
fraud”, the legislative history of its version of the UFTA
demonstrates that indicia of intent should be given consideration
in determining whether a taxpayer has acted with intent to
hinder, delay, or defraud a creditor. Annod Corp. v. Hamilton &
Samuels, 123 Cal. Rptr. 2d 924 (Cal. App. 2002). The record
before us establishes an actual intent to defraud creditors by
DDL through the actions of its sole officer, petitioner, and by
its office manager, Ms. Le. See Benes v. Commissioner, 42 T.C.
358, 383 (1964) (fraud of a sole or dominant shareholder can be
attributed to the corporation), affd. 355 F.2d 929 (6th Cir.
1966); Auerbach Shoe Co. v. Commissioner, 21 T.C. 191, 194 (1953)
(same), affd. 216 F.2d 693, 697-98 (1st Cir. 1954). DDL, through
the actions of these individuals, caused a substantial amount of
its corporate funds to be diverted to the Les in 1990 and 1991.
The Les attempted to conceal this diversion either by cashing the
corporate checks, by depositing them into their personal bank
accounts, or by converting them into cashier’s checks. As a
result of this diversion, DDL was left without sufficient assets
to pay its tax liabilities on the income connected to the
diverted funds.
We conclude that an actual intent to defraud the
Commissioner existed when the corporate receipts were diverted by
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the Les. Accordingly, we sustain respondent’s determination that
the Les, as transferees, are liable for DDL’s unpaid 1990 and
1991 income tax liabilities (inclusive of penalties).14
E. Period of Limitations
Respondent generally must assess tax against individual
taxpayers such as the Les within 3 years of the later of the due
date or filing date of their return. Sec. 6501(a) and (b)(1);
Mecom v. Commissioner, 101 T.C. 374, 382 (1993), affd. without
published opinion 40 F.3d 385 (5th Cir. 1994). One exception to
this general rule is that in the case of a “false or fraudulent
return” with the intent to evade tax, the tax may be assessed at
any time. Sec. 6501(c)(1). Respondent bears the burden of
proving fraud in this context. Sec. 7454(a); Rule 142(b). In
that we have already concluded above that respondent has met his
burden of proof as to fraud in each year, we conclude that
assessment of petitioners’ 1990 and 1991 tax liabilities is not
barred by the statute of limitations.15
14
Because we find that petitioners had the actual intent to
defraud the Government, we do not need to address whether there
was constructive fraud under Cal. Civ. Code sec. 3439.04(b) (West
1997).
15
Respondent alternatively argued that the period of
limitations has not run because the Les’ omission of income was
“substantial” under sec. 6501(e)(1)(A). We need not and do not
consider this argument. We also need not and do not consider
respondent’s other alternative argument that the period of
limitations for 1991 remains open given the timely extension for
that year. See sec. 6501(c)(4).
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All of the parties’ arguments not discussed herein have been
considered and rejected as irrelevant and/or without merit.
Decisions will be entered
under Rule 155.