T.C. Memo. 2006-23
UNITED STATES TAX COURT
168 GARMENT, INC., ET AL.,1 Petitioners v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket Nos. 9243-04, 17152-04, Filed February 14, 2006.
17153-04.
Lang Thi Ngo, pro se.
Michael W. Berwind, for respondent.
MEMORANDUM OPINION
FOLEY, Judge: The issues for decision are whether 168
Garment, Inc. (168 Garment), and Lang Thi Ngo (Ms. Ngo) failed to
1
Cases of the following petitioners are consolidated
herewith: Lang Thi Ngo, docket No. 17152-04; and 168 Garment,
Inc., docket No. 17153-04.
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report income and are liable for the section 66632 fraud or the
section 6662 accuracy-related penalty.
Background
In 1997, pursuant to California law, Ms. Ngo incorporated
168 Garment, which performed sewing services for various garment
manufacturers. Ms. Ngo was the company’s sole shareholder, and
Tho Cong Huynh (Mr. Huynh), her son, was the office assistant.
In 2000 and 2001, 168 Garment maintained a business checking
account at Citizens Business Bank (Citizens account). Ms. Ngo
and Mr. Huynh were the only individuals with signature authority
over the Citizens account. During 2000 and 2001, respectively,
petitioners deposited $511,376, and $417,761 into the Citizens
account, and 168 Garment reported these amounts on its Federal
income tax returns related to those years. During this period,
Ms. Ngo and Mr. Huynh visited Matt’s Liquor at least 60 times to
cash checks payable to 168 Garment (i.e., totaling $120,610 in
2000 and $219,394 in 2001). The proceeds from these checks were
not reported on Ms. Ngo’s or 168 Garment’s Federal income tax
returns. In 2001, Ms. Ngo endorsed 45 of the 60 checks (i.e.,
totaling $173,022) cashed at Matt’s Liquor, and Mr. Huynh
endorsed the remaining 15 checks (i.e., totaling $46,372).
2
Unless otherwise indicated, 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.
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Revenue Agent Vivek Gupta (Agent Gupta) was in charge of the
Internal Revenue Service (IRS) audit of 168 Garment’s and Ms.
Ngo’s tax returns. Agent Gupta repeatedly attempted to contact
Ms. Ngo, but she did not respond. Agent Gupta was subsequently
contacted, however, by petitioners’ tax attorney, Bob Appert, who
provided Agent Gupta with bank statements, canceled checks, and a
disbursement journal relating to 168 Garment. Upon review of
this information, Agent Gupta concluded that 168 Garment’s
records did not account for the checks cashed at Matt’s Liquor
and petitioners failed to report as income the proceeds of these
checks.
On March 5, 2004, respondent issued 168 Garment a notice of
deficiency relating to its 2000 taxes. In the notice, respondent
determined that 168 Garment failed to report income, failed to
substantiate various expenses, and was liable for the section
6662 accuracy-related penalty. On June 4, 2004, 168 Garment
filed its petition, and on July 13, 2004, respondent filed his
answer.
On June 14, 2004, respondent issued 168 Garment a notice of
deficiency determining that 168 Garment understated its 2001
gross receipts and was liable for the section 6663 fraud penalty.
Respondent also issued Ms. Ngo a notice of deficiency determining
that in 2001 she failed to report constructive dividends and was
liable for the section 6663 fraud penalty. Respondent further
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determined that if no portion of the underpayment of each
petitioner’s tax for 2001 was due to fraud, petitioners were
each, pursuant to section 6662, liable for an accuracy-related
penalty.
On September 15, 2004, Ms. Ngo, while residing in Temple
City, California, and 168 Garment, whose principal place of
business was in South El Monte, California, filed their
respective petitions. On March 10, 2005, respondent filed
separate answers with respect to Ms. Ngo’s and 168 Garment’s
petitions. On August 9, 2005, this Court, pursuant to Rule
91(f), granted respondent’s motion to show cause why proposed
facts should not be accepted as established and made that order
absolute after petitioners failed to file a response as ordered.
On September 8, 2005, the Court granted respondent’s motion to
consolidate docket Nos. 9243-04, 17152-04, and 17153-04 for
purposes of trial, briefing, and opinion.
Discussion
At calendar call on September 19, 2005, respondent filed
three motions to dismiss for lack of prosecution relating to
docket Nos. 9243-04, 17152-04, and 17153-04, yet petitioners did
not appear at trial or submit a response. Thus, we will grant
all three motions. See Rules 53, 123(b). Accordingly, we
sustain respondent’s determinations that 168 Garment, for 2000
and 2001, understated its income; in 2000 and 2001, failed to
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substantiate various expenses; and, in 2000, was liable for the
section 6662 accuracy-related penalty.3 Similarly, we sustain
respondent’s determination that Ms. Ngo understated her 2001
income.
At trial and by facts deemed stipulated, pursuant to Rule
91(f), respondent established by clear and convincing evidence
that 168 Garment and Ms. Ngo understated their respective 2001
taxes with the intent to commit fraud. See secs. 6663(a),
7454(a); Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989).
Petitioners failed to maintain adequate records, cooperate with
respondent, and report a substantial amount of income on their
respective tax returns. See Bradford v. Commissioner, 796 F.2d
303, 307 (9th Cir. 1986) (stating that the failure to report
income, maintain adequate records, and cooperate with the
Commissioner are “badges of fraud” from which fraudulent intent
may be inferred), affg. T.C. Memo. 1984-601. In 2001, Ms. Ngo
repeatedly and consistently cashed 168 Garment’s checks but
failed to report the proceeds as income to either 168 Garment or
herself. This scheme was designed to conceal income, mislead
3
The penalty applies to the portion of 168 Garment’s
underpayment that is attributable to a substantial understatement
of income tax. Sec. 6662(b)(2). 168 Garment, on its 2000
return, reported a tax due of $1,961, yet 168 Garment owed
$66,900 (i.e. a difference of $64,939). Respondent has met his
burden of production pursuant to sec. 7491(c) and established
that 168 Garment understated its income tax liability. Sec.
6662(d)(1)(A)(i) and (ii).
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respondent, and prevent the collection of tax. Akland v.
Commissioner, 767 F.2d 618, 621 (9th Cir. 1985), affg. T.C. Memo.
1983-249; DiLeo v. Commissioner, 96 T.C. 858, 875 (1991) (holding
that a corporation may be liable for fraud if its officer has the
fraudulent intent to evade its taxes), affd. 959 F.2d 16 (2d Cir.
1992). In addition, Ms. Ngo did not cooperate with respondent
(i.e., she did not return phone calls, answer letters, or attend
scheduled meetings). Accordingly, petitioners are each liable
for the section 6663 penalty.
To reflect the foregoing,
Appropriate orders of
dismissal and decisions will be
entered for respondent.