The opinion
T.C. Memo. 2009-130
UNITED STATES TAX COURT
HIE HOLDINGS, INC., HAWAIIAN ISLES KONA COFFEE CO., LTD., AND
ROYAL HAWAIIAN WATER CO., LTD., ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 5045-05, 5046-05, Filed June 8, 2009.
5047-05.
William C. McCorriston, Jonathan H. Steiner, Lisa W.
Cataldo, R. John Seibert, Paul B. K. Wong, Christopher J. Cole,
Brian R. Lynn, Christopher S. Rizek, Lawrence Inouye, Richard W.
Craigo, and John Gaims, for petitioners.2
1
Cases of the following petitioners are consolidated
herewith: Hawaiian Isles Enterprises, Inc., docket No. 5046-05;
and Michael H. Boulware, docket No. 5047-05.
2
On Mar. 15, 2005, Sidney E. Boulware, Jr. (an officer),
filed the petitions with the Court in docket Nos. 5045-05 and
(continued...)
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Kenneth C. Peterson, Paul K. Webb, Gordon L. Gidlund, and
L. Katrine Shelton, for respondent.
CONTENTS
FINDINGS OF FACT............................................. 21
I. Preliminaries................................... 21
II. NODs............................................ 22
A. NOD Issued to HIE.............................. 22
1. General Information....................... 22
2. First Adjustment--Disallowance of Portion
of Deductions for NOLs.................... 22
a. Overview............................. 22
b. Primary Determination................ 22
c. Alternate Determination.............. 23
i. Overview..................... 23
ii. Adjustments Related to
Criminal Indictment.......... 24
iii. Adjustments Unrelated to
Criminal Indictment.......... 25
iv. Some Specifics of
Adjustments.................. 26
3. Second Adjustment--Disallowance of Portion
of Deductions for Professional Fees....... 27
a. Overview............................ 27
2
(...continued)
5046-05, and Michael H. Boulware filed the petition with the
Court in docket No. 5047-05. Richard W. Craigo and John Gaims
entered their appearances in each of the three resulting cases on
Dec. 9 and 21, 2005, respectively, and were allowed to withdraw
from those cases on Nov. 15 and Sept. 22, 2006, respectively.
Lawrence Inouye, Jonathan H. Steiner, William C. McCorriston,
Lisa W. Cataldo, R. John Seibert, Paul B. K. Wong, Brian R. Lynn,
Christopher S. Rizek, and Christopher J. Cole entered their
appearances in each of the cases on Jan. 19, 2006, July 10, 2006,
July 14, 2006, Sept. 8, 2006, Nov. 27, 2006, Dec. 1, 2006, Dec.
7, 2006, Dec. 7, 2006, and July 9, 2007, respectively.
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b. Personal Expenses of Michael
Boulware............................ 28
c. Unsubstantiated Expenses............ 29
d. Capital Expenditures................ 29
e. Summary............................. 30
4. Third Adjustment--Disallowance of
Deduction for Bad Debt.................... 31
B. NOD Issued to Holdings......................... 31
1. General Information....................... 31
2. Sole Relevant Adjustment--Disallowance of
Portion of Deductions for Professional
Fees...................................... 31
C. NOD Issued to Michael Boulware................. 32
1. General Information....................... 32
2. Sole Relevant Adjustment--Constructive
Dividends................................. 33
III. Background of Michael Boulware.................. 33
IV. Relevant Corporations........................... 34
A. HIE............................................ 34
1. Formation of Business..................... 34
2. Officers and Directors.................... 36
a. Initially........................... 36
b. August 31, 1982, to July 10, 1991,
or Thereabouts ..................... 37
c. On or About July 10, 1991, Through
an Effective Date of April 15, 2000. 38
d. Effective April 15, 2000............ 39
e. Board Meetings...................... 40
3. Shareholders.............................. 40
4. Michael Boulware’s Control................ 42
B. Holdings....................................... 42
C. Other Corporations Organized in 1994........... 43
D. Restructuring of HIE........................... 43
E. Royal Hawaiian Water........................... 44
F. Holdings After the Restructuring............... 44
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G. Payment of Common Costs........................ 45
H. Various Names Used by HIE To Conduct Its
Business During the Subject Years.............. 45
I. No Payment of Formal Dividends by HIE.......... 46
J. E&P of HIE and Its Predecessor for 198206
Through 198806................................. 46
1. 198206.................................... 46
2. 198306.................................... 46
3. 198406.................................... 46
4. 198506.................................... 47
5. 198606.................................... 47
6. 198706.................................... 48
7. 198806.................................... 49
K. E&P of Holdings for 199706 and 199806.......... 50
1. 199706.................................... 50
a. Accumulated E&P...................... 50
b. Current E&P.......................... 50
2. 199806.................................... 50
L. Number of Holdings and HIE Employees........... 50
V. Officer Loan Account............................ 50
A. Overview....................................... 50
B. Mechanics of Account........................... 50
C. Repayment of Officer Loans..................... 52
D. Michael Boulware’s Claimed Coffee
Transactions................................... 52
E. Promissory Notes............................... 54
F. Lack of Collection on Promissory Notes......... 55
VI. Personal Bank Accounts........................... 55
A. Michael Boulware Individually.................. 55
B. Michael Boulware and Mal Sun Boulware Jointly.. 56
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C. Jin Sook Lee................................... 56
VII. Mal Sun Boulware................................ 56
VIII. Jin Sook Lee.................................... 57
A. Background..................................... 57
B. Jin Sook Lee Meets Michael Boulware............ 58
C. Paradise Roasting.............................. 60
D. Video Consultant............................... 62
1. Overview.................................. 62
2. Formation................................. 62
3. Payments From HIE for False Invoices...... 63
E. Michael Boulware’s Divorce From Mal Sun
Boulware....................................... 64
1. Discussions Concerning Divorce............ 64
2. Glenn Lee Boulware Trust.................. 65
3. Divorce Proceeding........................ 66
F. Transfers of HIE Assets to Jin Sook Lee........ 68
1. Overview.................................. 68
2. Atkinson Condominium...................... 69
3. Makaiwa House............................. 70
4. Koloa House............................... 71
5. Punahou Condominium....................... 73
6. Understanding as to the Transferred
Assets.................................... 74
7. Jin Sook Lee’s Use of the Transferred
Funds..................................... 75
8. Michael Boulware Takes Some of the
Transferred Funds From Jin Sook Lee
Without Her Knowledge..................... 76
IX. Off-Book Bank Accounts.......................... 77
X. Off-Book Activities............................. 78
A. Overview....................................... 78
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B. OTC Sales of Tobacco Products.................. 79
C. Michael Boulware’s Personal Sales of HIE Coffee
Unknown at the Time to HIE..................... 81
1. Overview.................................. 81
2. Sales to Hawaii Misuzu.................... 82
3. Sales to Pele Trading..................... 83
4. Referenced Coffee Sold by Michael Boulware
Included in HIE’s COGS.................... 85
D. Bonded Construction............................ 85
1. Background................................ 85
2. Michael Boulware Causes HIE To Pay to
Remodel Jin Sook Lee’s Residence.......... 85
3. Paving of the Back Lot at HIE............. 86
a. Overview............................ 86
b. Automated Equipment................. 87
E. Michael Boulware’s Fictitious Leasing
Transactions................................... 88
1. Overview.................................. 88
2. Michael Boulware’s First Scheme........... 89
3. Michael Boulware’s Second Scheme.......... 90
a. Need for the Second Scheme.......... 90
b. HIE’s Relationship With GECC........ 91
c. Seven False Invoices................ 92
i. Overview..................... 92
ii. Four False Invoices Totaling
$271,382.80.................. 92
iii. Three False Invoices
Totaling $224,432............ 93
d. First Four Referenced False Invoices. 94
e. Last Three Referenced False Invoices. 95
4. Funds Transferred to Lorin Kushiyama...... 96
F. Michael Boulware’s International Circular Flow
of Funds....................................... 96
1. Overview.................................. 96
2. Relevant Foreign Entities................. 97
a. Forest Trading...................... 97
b. Pacific Vendors..................... 98
c. Harvest International............... 99
i. Roxca Limited................ 99
ii. Reinvoicing Operation........ 99
iii. Bank Accounts................100
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iv. Rationale Underlying
Formation....................101
v. Actual Operation.............101
vi. False Invoices From Harvest
International................101
1. Overview...................101
2. Payments of Invoices.......102
3. Transfers From Harvest
International..............103
a. Overview..............103
b. Transfers to Personal
Account of Michael
Boulware..............103
c. Transfers on Behalf of
Michael Boulware to
Paragon Coffee, Gloria
Oh Young, and
Antoinette Hirai......103
d. Transfer on Behalf of
Michael Boulware to
Briggs Cockerham......104
vii. Coffee Rebagging.............105
3. Role of Nathan Suzuki.....................105
4. Harold Okimoto............................106
a. Overview............................106
b. Harold Okimoto’s Employment.........106
c. Administration of Harold Okimoto’s
Estate..............................107
d. U.S. Attorney Contacts Okimoto
Family..............................109
e. Claim of an Approximately $1.7
Million Debt........................110
f. After-the-Fact Creation of
Promissory Notes....................110
XI. Michael Boulware’s Removal of Funds From the
Off-Book Bank Accounts..........................111
A. Overview.......................................111
B. Michael Boulware Causes Checks To Be Cashed for
Him by Employees and Friends...................112
1. Stanley Hirai and Antoinette Hirai........112
2. Morris Miyasota...........................113
3. Thomas Okimoto............................114
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4. Milton Ikeda..............................115
5. Sydney Murayama...........................116
6. Neal Taira................................116
7. Paul Takekawa.............................116
8. John Torres...............................117
9. Other Check Cashers.......................118
XII. Criminal Investigation of Michael Boulware......118
A. Jerry Yamachika Contacts and Meets With
Michael Boulware...............................118
B. Michael Boulware Obtains Professional
Representation.................................120
C. Focus of Criminal Investigation................122
D. Applicability of HIE’s Indemnification
Provision Relating to Certain Personal Legal
Fees Incurred by Its Directors and Officers....124
XIII. Civil Litigation Initiated by Jin Sook Lee......126
A. Background.....................................126
B. JSL Litigation.................................127
1. Complaint.................................127
2. Counterclaim..............................129
C. Trust Case.....................................131
D. Shareholder Derivative Case....................132
E. HIE’s Perception of Civil Litigation...........133
F. Actions Taken by HIE Board of Directors........133
1. Resolution................................133
2. Payment of Legal Expenses.................134
XIV. Referral of Michael Boulware for Prosecution
and Michael Boulware’s Grand Jury Indictment....134
A. Referral to DOJ for Prosecution................134
B. Referral to Grand Jury.........................137
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C. Grand Jury Indictment..........................138
XV. Resolution of JSL Litigation....................139
A. Overview.......................................139
B. Jury Verdict...................................140
C. Equitable Issues Decided by State Court........140
D. Final Judgment Entered.........................142
E. HIE Records Receivable From Jin Sook Lee.......142
XVI. Bankruptcy Case of Jin Sook Lee.................142
A. Overview.......................................142
B. Property Transfers and Claims..................143
C. Adversary Proceedings Commenced in 1998........145
D. Settlement of 1997 Adversary Proceeding........146
E. May 1998 Settlement Agreement..................147
1. Overview..................................147
2. Property Distributions....................147
a. Cash and Cash Equivalents...........147
b. Automobiles.........................147
c. Real Properties.....................147
d. Jewelry and Furs....................148
e. Judgment Against Michael Boulware...148
f. Summary.............................148
3. Disbursements by HIE......................149
F. Settlement of 1998 Adversary Proceedings.......149
G. Claimed Bad Debt Deductions Related to Amounts
Considered Due From Jin Sook Lee, Trustee......151
XVII. NOL Adjustments.................................151
A. HIE’s Filing of Its Federal Income Tax Returns
for 198906 Through 199906......................151
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B. Pre-199806 Reported NOLs and Applications......152
C. HIE Claims on Its Federal Income Tax Return for
199806 That Its NOL Carryover From Earlier
Years Is Larger Than That Previously Reported..153
D. Source of Larger NOL Carryover Reported For
199806.........................................154
E. HIE’s 199906 Federal Income Tax Return.........155
1. Overview..................................155
2. Exhibit 18-J..............................156
3. Claim to Additional COGS..................158
F. HIE’s Position as to Its NOL Carryovers
Reported for 199806 and Later Years............159
1. Overview..................................159
2. HIE’s Liability for Hawaii Tobacco Tax....160
3. HIE’s Purported Overpayment of Hawaii
Tobacco Tax...............................160
4. Tobacco Tax Liability Adjustment..........162
5. HIE’s Monthly Book Adjustments............164
6. HIE’s AJEs................................165
7. Tobacco Tax Refund Income Claimed Reported
and Reportable by HIE.....................166
a. Income Claimed Reportable............166
b. Income Claimed Reported Through
Monthly Adjustments..................167
c. Income Claimed Reported Through AJEs.168
d. Summary..............................168
8. HIE’s Purported Income Shift..............169
XVIII. Michael Boulware’s Criminal Trials..............169
A. First Trial....................................169
1. General Information.......................169
2. Relevant Evidence and Arguments...........169
3. Jury Verdict..............................170
B. Sentencing Phase and First Appeal..............171
1. Positions as to Sentencing................171
2. Sentence Imposed..........................171
3. Appeal of Conviction......................172
C. Michael Boulware’s Retrial.....................172
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D. Criminal Case Heard by U.S. Supreme Court......173
E. Remand From U.S. Supreme Court.................174
XIX. Civil Examinations and Requests for
Information.....................................175
A. Start of Civil Examinations....................175
B. Requests for Information.......................175
1. HIE.......................................175
2. Holdings..................................177
3. Actions During This Proceeding............180
XX. Professional Fees...............................180
A. Overview.......................................180
B. Source of Professional Fees....................181
1. HIE.......................................181
2. Holdings..................................182
C. Categories of Disputed Professional Fees.......182
1. Overview..................................182
2. Specifics of Expenses in Each Category....183
a. Criminal Investigation..............183
b. Grand Jury Proceedings..............183
c. Michael Boulware’s Criminal Trial...184
d. Fees Involving Jin Sook Lee.........184
e. Fees Accepted as Ordinary and
Necessary...........................185
f. Other Fees..........................185
3. Amounts of Fees Attributable to Each
Category..................................185
D. Providers of the Professional Services
Underlying the Legal Costs.....................186
1. Criminal Investigation....................186
a. Representation of HIE Employees.....186
i. Overview.....................186
ii. Peter Wolff..................186
iii. Benjamin Cassidy.............186
b. Damon Key...........................187
c. Irell Manella.......................188
d. Shiotani Inouye.....................188
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e. Wachi Watanabe......................189
2. Grand Jury Proceedings....................190
a. Birney Bervar.......................190
b. Brook Hart..........................190
c. Chee Markham........................191
d. Damon Key...........................191
e. Graham James........................192
f. Hochman Salkin......................194
g. Howard Chang........................194
h. Irell Manella.......................195
i. Lopeti Foliaki......................195
j. Perkin Hosoda.......................195
k. Reinwald O’Connor...................196
l. Shiotani Inouye.....................198
m. Stephen Pingree.....................198
n. Wachi Watanabe......................198
3. Criminal Trial............................199
a. Accucopy............................199
b. Ayabe Chong.........................199
c. Bird Marella........................200
d. Bowen Hunsaker......................200
e. Brook Hart..........................201
f. Candon Consulting/John Candon.......201
g. Chicoine Hallett....................203
h. Corniel.............................203
i. Overview......................203
ii. Specifics.....................204
i. Damon Key...........................204
j. Gaims Weil..........................204
k. Goodenow............................205
l. Graham James........................205
m. Hawaii National Bank................205
n. Leonard Sharenow....................206
o. Lyle Hosoda Associates..............206
p. McCorriston Miller..................206
q. Michael McCarthy....................207
r. Nathan Suzuki.......................207
s. Perkin Hosoda.......................207
t. PWC.................................207
u. Professional Image..................208
v. Reinwald O’Connor...................208
w. Robert Waters.......................209
x. Saranow Pagani......................210
y. Sherman Sherman.....................210
z. Sheila Balkan.......................211
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aa. Shiotani Inouye.....................211
i. 200006.......................211
ii. 200106.......................211
iii. 200206.......................212
bb. Squire Sanders......................212
cc. Stephen Platt.......................213
dd. Wachi Watanabe......................213
ee. Wilmington Institute ...............213
4. Fees Concerning Jin Sook Lee..............214
a. Chee Markham........................214
b. Damon Key...........................214
c. Gaims Weil..........................215
d. Glenn Lee Boulware Trust............216
e. Reinwald O’Connor...................216
5. Fees Accepted as Ordinary and Necessary...217
a. Carlsmith Ball......................217
b. Damon Key...........................217
c. Marr Hipp...........................218
d. Seyfarth Shaw.......................218
e. Other Legal.........................219
6. Other Fees................................219
a. Accucopy............................219
b. Case Bigelow........................219
c. Damon Key...........................220
d. Foley Jones.........................221
e. GMK Consulting......................221
f. King King...........................222
g. Laird Christianson..................222
h. Louis Wai...........................222
i. Michael McCarthy....................223
j. Nathan Suzuki.......................223
k. Robert Holland......................223
l. Yoshida, Inc........................223
m. Other Legal.........................224
E. Other Professional Fees........................224
1. Fees Related to Criminal Trial............224
2. Fees Accepted as Ordinary and Necessary...224
a. Antoneita DeWang-Seo................224
b. Applied Computer....................224
c. ASI Food Safety.....................225
d. Back to Basics Plus.................225
e. Brewer Environmental................225
f. Business Consulting.................225
g. Ceridian Employer...................225
h. Charles Abraham.....................226
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i. COLIFORM............................226
j. Commercial Plumbing.................226
k. Communications Pacific..............226
l. Datahouse...........................227
m. Dataprofit Corp.....................227
n. Dunn Bradstreet.....................227
o. Electra Form........................227
p. EMS Solutions.......................227
q. Fidelity Investments................228
r. Foley Jones.........................228
s. Food Products.......................228
t. GEM Communications..................229
u. GT Service..........................229
v. Hawaiian Hardware...................229
w. Intrastate..........................229
x. IW..................................229
y. John Ching..........................230
z. Kimura International................230
aa. KPMG................................230
bb. L.C. Financial .....................230
cc. Leung Pang..........................231
dd. Melvin Kam..........................231
ee. Michael Toigo.......................231
ff. Pension Services....................231
gg. Procomm.............................232
hh. Professional Image..................232
ii. Profit Concepts.....................232
jj. Quadrel Labeling....................232
kk. Rhanda Kim..........................232
ll. Richard Kitagawa....................233
mm. RJR Packaging.......................233
nn. Servend of Hawaii...................233
oo. Stewart Engineering.................233
pp. Tricia Young........................233
qq. Wayne Arakaki.......................234
3. Other Fees................................234
a. Henry Yokogawa......................234
b. Kobayashi Doi.......................234
i. Overview......................234
ii. 199806........................235
iii. 199906........................235
iv. 200006........................236
v. 200106........................236
vi. 200206........................236
c. Lorin Kushiyama.....................236
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d. Richard Kitagawa....................236
e. TRI Pac.............................237
f. Vending Consulting..................237
g. Watson Wyatt........................237
h. Amortization........................237
XXI. Kona Coffee.....................................238
A. Background.....................................238
B. Season for Kona Coffee.........................239
C. Shelia David...................................239
OPINION......................................................241
I. Perception of Witnesses..........................241
II. Burden of Proof..................................244
A. Overview.......................................244
B. Applicability of Section 7491..................245
C. Claim That NODs Are Arbitrary..................249
III. NOL Deduction....................................251
IV. Bad Debt Deduction...............................263
V. Professional Fees................................269
A. Overview of Dispute............................269
B. Applicable Law in General......................270
1. Deduction of Ordinary and Necessary
Business Expenses.........................270
2. Corporate Taxpayer’s Burdens Underlying
Deduction.................................271
3. Payment of Another Taxpayer’s Expense.....272
a. First Prong of Two-Prong Test........273
b. Second Prong of Two-Prong Test.......275
C. Whether HIE Incurred Any of the Disputed
Expenses.......................................278
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D. Whether All Expenses Were Substantiated........280
E. “Fees Accepted as Ordinary and Necessary” and
“Other Fees”...................................281
F. Expenses of Michael Boulware’s Criminal
Defense........................................282
1. Background................................282
2. Expenses Stemmed From Personal Pursuits...284
G. Professional Fees Related to Civil Litigation
Initiated by Jin Sook Lee......................288
1. Overview..................................288
2. Analysis..................................289
a. Fees Determined To Be Capital
Expenditures.........................289
b. Fees Determined To Be Michael
Boulware’s Personal Expenses.........290
H. Applicability of Indemnification Agreement.....292
1. Overview..................................292
2. Arrangements Under Section 62(a)(2)(A)....293
3. Mandatory Indemnity.......................295
a. Overview.............................295
b. Analysis.............................296
4. Permissive Indemnity......................298
5. Repayment Obligation......................299
VI. Constructive Dividends...........................300
A. Overview.......................................300
B. Rules Applicable to Distributions..............301
C. E&P............................................302
1. Background................................302
2. Lack of Comprehensive Definition..........302
3. Calculation...............................303
a. Overview.............................303
i. ATI.............................303
ii. Increases and Decreases to ATI..304
b. Current E&P..........................306
c. Accumulated E&P......................307
d. Summary of Calculation...............307
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D. Adjustments Applicable to These Cases..........309
1. Overview..................................309
2. First Adjustment..........................309
3. Second Adjustment.........................309
4. Third Adjustment..........................310
5. Fourth Adjustment.........................310
6. Fifth Adjustment..........................311
E. Conclusion.....................................311
VII. Additions to Tax.................................312
VIII. Epilog...........................................313
Appendix A...................................................314
Appendix B...................................................321
Appendix C...................................................322
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: These cases are before the Court consolidated
for purposes of trial, briefing, and opinion.3 In docket No.
5045-05, HIE Holdings, Inc. (Holdings), and two of its
subsidiaries, Hawaiian Isles Kona Coffee Co., Ltd. (Hawaiian
Isles Kona Coffee), and Royal Hawaiian Water Co., Ltd. (Royal
Hawaiian Water), petitioned the Court to redetermine respondent’s
determination of deficiencies of $242,546, $77,602, $470,461,
$280,489, and $519,760 in the affiliated group’s Federal income
taxes for its taxable years ended June 30, 1997, 1999, 2000,
3
The cases were consolidated on Feb. 27, 2006, pursuant to
the joint motion of the parties.
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2001, and 2002, respectively.4 In docket No. 5046-05, Hawaiian
Isles Enterprises, Inc. (HIE), petitioned the Court to
redetermine respondent’s determination of deficiencies of
$1,057,181, $125,317, $175,524, and $799,433 in HIE’s Federal
income taxes for 199806, 200006, 200106, and 200206,
respectively, and a $264,295 addition to HIE’s 199806 tax under
section 6651(a)(1).5 In docket No. 5047-05, Michael Boulware
petitioned the Court to redetermine respondent’s determination of
deficiencies of $497,926, $603,406, $935,124, $1,339,019, and
$874,551 in Michael Boulware’s 1998 through 2002 Federal income
taxes, respectively.
4
We hereinafter refer to each relevant fiscal year by using
a six-digit number. The first four digits refer to the year in
which the fiscal year ended. The last two digits refer to the
month in which the fiscal year ended.
5
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, and dollar
amounts are rounded to the dollar. References to sections and
chapters of the Bankruptcy Code are to tit. 11 of the United
States Code after the effective date of amendments made thereto
by the Bankruptcy Reform Act of 1994, Pub. L. 103-394, 108 Stat.
4106, that were effective for bankruptcies filed on and after
Oct. 22, 1994. Id. sec. 702, 108 Stat. 4150. Throughout this
Memorandum Opinion, we reference various law, accounting, and
other professional firms, many of which changed their names
during the relevant period. We refer to each firm by one of its
names and include within that name each of the firm’s relevant
predecessors and successors.
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Following a trial of these cases held primarily in Honolulu,
Hawaii, we decide five issues.6 First, we decide whether to
sustain respondent’s disallowances of HIE’s deductions of net
operating losses (NOLs), reported as arising from NOL carryovers
from 198906 through 199606, to the extent of $1,636,322 for
199806 and of $1,184,192, $324,767, and $145,145 for 200006,
6
These cases were originally scheduled to be tried in Los
Angeles, California, but the Court granted the parties’ joint
motion to change the situs of trial to Honolulu, Hawaii, where
most of the witnesses resided. Because Michael Boulware would
otherwise have been detained at a U.S. penitentiary in California
during the trial, the Court, pursuant to sec. 7456 and joint
motions of the parties, issued writs of habeas corpus ad
testificandum causing the U.S. Marshal for the District of Hawaii
to move Michael Boulware to a prison in the vicinity of Honolulu
and then to transport Michael Boulware (under the escort of
Deputy U.S. Marshals) to and from the courtroom in Honolulu on
each day that Michael Boulware wanted to attend his trial. For
purposes of the trial, the parties generally made electronic
copies of each document that was introduced into evidence, and
petitioners caused five large electronic screens (including a
42-inch screen) to be present in the courtroom. The parties
generally used those screens to display to themselves, to the
Court, and to each witness any exhibit that was the subject of
the witness’s testimony. The Court imposed a time limit on each
side’s presentation of evidence. On Aug. 28, 2007, these cases
were initially submitted to the Court for decision. On Mar. 3,
2008, the U.S. Supreme Court decided Boulware v. United States,
552 U.S. , 128 S. Ct. 1168 (2008), a case involving Michael
Boulware and much of the same evidence that is in the record
here. In the light of that case, this Court granted petitioners’
request to reopen the record in these cases so that they could
solicit additional testimony and present additional documents
during a further trial in Honolulu. The issues tried at the
further trial were limited to determinations of the earnings and
profit (E&P) of HIE and Holdings and a determination of Michael
Boulware’s adjusted basis in each of those corporations.
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200106, and 200206, respectively.7 We shall sustain those
disallowances in full. Second, we decide whether to sustain
respondent’s disallowance of a $905,340 bad debt deduction HIE
claimed for 199806. We shall sustain none of that disallowance.
Third, we decide whether to sustain respondent’s disallowances of
professional fees deducted by HIE to the extent of $1,241,995,
$1,159,635, $1,156,364, and $2,208,588 for 199806, 200006,
200106, and 200206, respectively, and of professional fees
deducted by Holdings to the extent of $228,240, $1,383,710,
$794,404, and $2,253,652 for 199906 through 200206, respectively.
We shall sustain those disallowances to the extent stated herein.
Fourth, we decide whether to sustain respondent’s determinations
that Michael Boulware received constructive dividends of
$1,406,343, $1,513,055, $2,332,643, $3,380,947, and $2,231,120
for 1998 through 2002, respectively, primarily because the
just-referenced professional fees were paid by his constructive
withdrawals of funds from HIE and Holdings (collectively, subject
corporations). We shall sustain those determinations to the
extent stated herein. Fifth, we decide whether to sustain
respondent’s determination that HIE is liable for the addition to
7
For 199806, HIE claimed an NOL deduction of $2,086,891.
Respondent determined that the NOL deduction was $450,569; i.e.,
$1,636,322 less than claimed.
- 21 -
tax under section 6651(a). We shall sustain that determination
in full.8
FINDINGS OF FACT
I. Preliminaries
Many facts were stipulated, and those facts are found
accordingly. The approximately 2,000 stipulated facts and the
thousands of exhibits submitted therewith are incorporated herein
by this reference. The trial transcripts total 5,255 pages, and
the number of pages in the exhibits total approximately 50,000.
The Court has recorded on the docket sheets of these cases over
900 index entries.
The subject corporations are C corporations that during the
relevant years used accrual methods to report their income and
expenses for Federal income tax purposes on the basis of fiscal
years ended on June 30.9 When the petitions commencing these
8
In their posttrial briefs, petitioners attempt to raise
certain issues that were not pleaded in their petitions. We
decline to decide those issues as they are not properly before
us. See Rules 34(b)(4), 41(a) and (b); see also Bob Wondries
Motors, Inc. v. Commissioner, 268 F.3d 1156, 1161 (9th Cir.
2001), affg. Toyota Town, Inc. v. Commissioner, T.C. Memo.
2000-40; Foil v. Commissioner, 92 T.C. 376, 418 (1989), affd. 920
F.2d 1196 (5th Cir. 1990).
9
The Federal income tax return of a corporate taxpayer such
as HIE or Holdings that uses a fiscal year ending on June 30 is
generally due on Sept. 15 of the year in which its fiscal year
ends, unless the corporation receives an extension to file its
return 6 months later; i.e., by Mar. 15 of the following year.
- 22 -
cases were filed, the principal place of business of each subject
corporation was in Hawaii.10 Also at that time, the “legal
residence” of Michael Boulware as stipulated by the parties was
in Hawaii; we understand him then to have been imprisoned at a
U.S. penitentiary in California, specifically, the Lompoc
Correctional Facility in Lompoc, California.
II. NODs
A. NOD Issued to HIE
1. General Information
On December 15, 2004, respondent issued a notice of
deficiency (NOD) to HIE for 199806 and 200006 through 200206.
The NOD contained three adjustments which are relevant herein.
2. First Adjustment--Disallowance of Portion of
Deductions for NOLs
a. Overview
Respondent disallowed HIE’s claim of NOL deductions for each
year, except for $450,569 that was allowed for 199806.
b. Primary Determination
Respondent determined primarily that HIE failed to establish
that it was entitled to an NOL deduction for 199806 of more than
$450,569 or that it had an NOL carryover to apply to any of the
10
Unless otherwise noted, all references to Hawaii are to
the State of Hawaii.
- 23 -
other subject years. As part of this primary determination,
respondent also determined that HIE was entitled to reduce its
“miscellaneous income related to HIE’s tobacco tax ‘self-
correction’” (discussed infra) by $1,927,648 for 200006 and
$962,426 for 200106.11
c. Alternate Determination
i. Overview
Respondent determined alternatively that adjustments to
HIE’s income and deductions for 198906 through 199706, the years
in which HIE claims its NOL carryover to 199806 originated,
limited HIE’s NOL carryover to 199806 (and hence HIE’s NOL
deduction for that year) to $450,569 and resulted in no NOL
carryover to any of the other subject years. Many of those
adjustments, as discussed infra, related to the criminal
indictment of Michael Boulware in part with respect to his 1989
through 1997 Federal income taxes.12
11
During respondent’s civil examination of HIE, respondent
also verified that HIE had reported as taxable income for 199906
“miscellaneous income related to HIE’s tobacco tax ‘self-
correction’”. Respondent did not determine a deficiency for that
year.
12
As discussed infra, Michael Boulware’s indictment also
related in part to certain false invoicing schemes.
- 24 -
ii. Adjustments Related to Criminal
Indictment
The adjustments for 198906 through 199706 that were related
to the criminal indictment reflected the following determinations
by respondent: (1) For 199006 through 199306, HIE failed to
report $3,583,725 of income that was diverted to Michael Boulware
from HIE’s over-the-counter (OTC) sales of tobacco; (2) for
198906 through 199206, HIE failed to report $1,335,132 of income
that was diverted to Michael Boulware and/or his mistress, Jin
Sook Lee, from HIE’s sales of coffee beans to Pele Trading, Inc.
(Pele Trading); (3) for 199006 through 199306, HIE failed to
report $1,265,458 of income that was diverted to Michael Boulware
and/or Jin Sook Lee from HIE’s sales of coffee beans to Hawaiian
Kona Coffee Co., d.b.a. Hawaii Misuzu Coffee Co., Ltd. (Hawaii
Misuzu);13 (4) for 199006, HIE improperly deducted $50,785 that
HIE paid to Bonded Construction Co., Ltd. (Bonded Construction),
for work that HIE reported was performed at HIE’s coffee plant
but which actually was performed to renovate Jin Sook Lee’s
residence in Honolulu at 1017 Makaiwa Street (Makaiwa house);
(5) for 199306, HIE improperly deducted $638,427 that was
diverted from HIE to Michael Boulware through certain fictitious
13
Hawaii Misuzu and Hawaiian Isles Kona Coffee are different
entities and are unrelated.
- 25 -
leasing arrangements; (6) for 199506 through 199706, HIE
improperly deducted $1,731,000 that HIE paid to a foreign entity,
Harvest International King Coffee, Ltd. (Harvest International),
which was then transferred to Michael Boulware through a second
foreign entity, Forest Trading Corp. (Forest Trading); (7) for
199506, HIE improperly deducted $29,984 that HIE paid to Harvest
International, which was then transferred on behalf of Michael
Boulware to a domestic entity, Briggs Cockerham, L.L.C. (Briggs
Cockerham); and (8) for 199506 and 199606, HIE improperly
deducted $89,936 that HIE paid to Harvest International, which
was then transferred on behalf of Michael Boulware to Anthony Oh
Young and Gloria Oh Young through a foreign entity, Pacific
Vendors Equipment, Ltd. (Pacific Vendors).
iii. Adjustments Unrelated to Criminal
Indictment
The adjustments for 198906 through 199706 that were
unrelated to the criminal indictment of Michael Boulware
reflected respondent’s determinations that HIE was not entitled
to deduct: (1) Salaries totaling $1,040,000 reportedly paid
during 198906 through 199406 to Michael Boulware’s then wife, Mal
Sun Boulware; (2) payments totaling $385,000 that HIE made during
198906 and 199006 to Paradise Roasting, Inc. (Paradise Roasting),
a nonoperating entity that was the alter ego of Jin Sook Lee and
- 26 -
was established to hide the transfer of HIE funds to Jin Sook
Lee; (3) professional fees totaling $175,000 reportedly paid to
Jin Sook Lee’s sole proprietorship, Video Consultant, during
199006 and 199106;14 (4) bad debts totaling $1,800,000 that were
written off during 199306, 199406, 199506, and 199706 as
uncollectible but otherwise due HIE from Jin Sook Lee in her
capacity as the sole trustee of the Glenn Lee Boulware Trust, a
trust established for the primary benefit of the oldest son of
Jin Sook Lee and Michael Boulware; and (5) certain other
professional fees totaling $4,269,980 for 199406 through 199706.
iv. Some Specifics of Adjustments
Some specifics of the adjustments for 198906 through 199706
are as follows:
14
The record sometimes lists this entity as “Video
Consultant” and other times as “Video Consultants”. We
consistently refer to this entity in the singular.
- 27 -
198906 199006 199106 199206 199306 199404 199506 199606 199706 Total
OTC sales -0- $506,464 $1,337,213 $719,755 $1,020,293 -0- -0- -0- -0- $3,583,725
Pele Trading $264,790 1,029,963 21,175 19,204 -0- -0- -0- -0- -0- 1,335,132
Hawaii
Misuzu -0- 116,832 382,403 347,866 418,357 -0- -0- -0- -0- 1,265,458
Bonded
Construction -0- 50,785 -0- -0- -0- -0- -0- -0- -0- 50,785
Leasing
arrangement -0- -0- -0- -0- 638,427 -0- -0- -0- -0- 638,427
Forest Trading -0- -0- -0- -0- -0- -0- $837,000 $819,000 $75,000 1,731,000
Briggs
Cockerham -0- -0- -0- -0- -0- -0- 29,984 -0- -0- 29,984
Anthony Oh
Young and
Gloria Oh
Young -0- -0- -0- -0- -0- -0- 34,986 54,950 -0- 89,936
Salaries 30,000 95,000 190,000 275,000 300,000 $150,000 -0- -0- -0- 1,040,000
Paradise
Roasting 185,000 200,000 -0- -0- -0- -0- -0- -0- -0- 385,000
Video
Consultant -0- 84,000 91,000 -0- -0- -0- -0- -0- -0- 175,000
Bad debts -0- -0- -0- -0- 300,000 100,000 700,000 -0- 700,000 1,800,000
Other
professional
fees -0- -0- -0- -0- -0- 521,690 903,695 1,296,308 1,548,287 4,269,980
Total 479,790 2,083,044 2,021,791 1,361,825 2,677,077 771,690 2,505,665 2,170,258 2,323,287 16,394,427
3. Second Adjustment--Disallowance of Portion of
Deductions for Professional Fees
a. Overview
For each subject year, respondent disallowed a portion of
HIE’s deduction for professional fees. The disallowed fees
totaled $1,241,995, $1,159,635, $1,156,364, and $2,208,588 for
199806, 200006, 200106, and 200206, respectively. Respondent
determined that some disallowed fees were the personal expenses
of HIE’s controlling shareholder, Michael Boulware. Respondent
determined that other disallowed fees were unsubstantiated.
Respondent determined that the remaining disallowed fees were
capital expenditures incurred in connection with HIE’s
acquisition of property from the bankruptcy estate of Jin Sook
Lee.
- 28 -
b. Personal Expenses of Michael Boulware
The disallowed fees determined to be personal expenses of
Michael Boulware stemmed from professional representation that he
received in his individual capacity. He received some of that
representation while respondent’s Criminal Investigation Division
(CID) was conducting a criminal investigation of Michael Boulware
and Jin Sook Lee as to their personal Federal income taxes
(criminal investigation); while a grand jury was conducting its
investigation of Michael Boulware, proceeding to his indictment
(grand jury proceedings); and during Michael Boulware’s first
criminal trial and his appeal of his conviction resulting from
that trial.15 Michael Boulware received the remainder of that
representation while he and HIE were involved in civil litigation
initiated by Jin Sook Lee. Respondent determined that 50 percent
of the expenses related to that civil litigation were the
personal expenses of Michael Boulware and that the other 50
percent were the business expenses of HIE.
15
As discussed infra, the criminal investigation began on or
about June 16, 1993; the grand jury proceedings began at or about
the beginning of August 1997; Michael Boulware was indicted on
May 19, 1999 (a superseding indictment and second superseding
indictment occurred on Apr. 6, 2000, and Feb. 14, 2001,
respectively); the jury in Michael Boulware’s first criminal
trial convicted him on Nov. 29, 2001; and Michael Boulware
appealed that conviction in May 2002.
- 29 -
In sum, the amounts of Michael Boulware’s personal expenses
determined to be attributable to the criminal and civil cases are
as follows:16
199806 199906 200006 200106 200206 Total
Criminal investigation,
grand jury proceedings,
first criminal trial,
and appeal $598,602 $810,688 $1,016,103 $1,156,364 -0- $3,581,757
50 percent of expenses
related to civil
litigation initiated
by Jin Sook Lee 411,678 36,245 58,588 -0- -0- 506,511
Total 1,010,280 846,933 1,074,691 1,156,364 -0- 4,088,268
c. Unsubstantiated Expenses
The disallowed fees determined to be unsubstantiated totaled
$103,313 for 199806, $10,000 for 199906, $66,671 for 200006, and
$2,208,588 for 200206.
d. Capital Expenditures
Respondent determined that $157,979 of the total disallowed
fees was capital expenditures attributable to various assets that
HIE acquired from the bankruptcy estate of Jin Sook Lee. The
specific amounts underlying the $157,979 were $128,402 for
199806, $11,304 for 199906, and $18,273 for 200006 ($128,402 +
$11,304 + $18,273 = $157,979). The acquired assets were the
Makaiwa house, a condominium in Honolulu at 1117 Punahou Street
(Punahou condominium), a condominium in Honolulu at 475 Atkinson
16
Although 199906 is not a year that was the subject of the
NOD issued to HIE, we include that year in our findings because
it relates to the constructive dividends determined in the NOD
issued to Michael Boulware.
- 30 -
Drive (Atkinson condominium), a 1992 Rolls Royce, and jewelry and
furs. Of the $157,979, respondent determined that $16,391,
$60,134, $22,308, $19,398, and $39,747 were allocable to those
respective assets. Respondent determined the allocable amounts
as follows:
Applicable Percent of Capitalized
Value Whole Fees
Makaiwa house $845,000
Less: A life estate
retained by Jin Sook
Lee in the house 760,500
Acquired interest 84,500 10.38 $16,391
Punahou condominium 310,000 38.06 60,134
Atkinson condominium 115,000 14.12 22,308
1992 Rolls Royce 100,000 12.28 19,398
Jewelry and furs 204,900 25.16 39,747
Total 814,400 100.00 157,979
For each of the taxable years 200006, 200106, and 200206,
respondent determined that HIE was entitled to deduct $2,459 of
depreciation as to the capital expenditures. Respondent
determined that depreciation as follows:
Capitalized Allocation Depreciable
Fees to Building Basis 200006 200106 200206
Punahou condominium $60,134 85% $51,114 $1,859 $1,859 $1,859
Atkinson condominium 22,308 74 16,508 600 600 600
Total 2,459 2,459 2,459
e. Summary
In sum, the disallowed professional fees are as follows:
199806 199906 200006 200106 200206 Total
Personal expenses $1,010,280 $846,933 $1,074,691 $1,156,364 -0- $4,088,268
Unsubstantiated expenses 103,313 10,000 66,671 -0- $2,208,588 2,388,572
Capital expenditures 128,402 11,304 18,273 -0- -0- 157,979
Total 1,241,995 868,237 1,159,635 1,156,364 2,208,588 6,634,819
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4. Third Adjustment--Disallowance of Deduction
for Bad Debt
For 199806, respondent disallowed HIE’s claimed bad debt
deduction of $905,340. That deduction was attributable to HIE’s
writeoff of a further portion of the debt reportedly due to HIE
from Jin Sook Lee in her capacity as trustee of the Glenn Lee
Boulware Trust. Respondent determined that the deduction was not
allowed primarily because HIE had failed to establish a
debtor/creditor relationship with Jin Sook Lee. Respondent
determined alternatively that the deduction was not allowed
because HIE had failed to establish the accuracy of the amount
claimed as the deduction or its worthlessness.
B. NOD Issued to Holdings
1. General Information
On December 15, 2004, respondent issued an NOD to Holdings
for 199706 and 199906 through 200206. The NOD related to
Holdings and to its wholly owned subsidiaries, Hawaiian Isles
Kona Coffee and Royal Hawaiian Water.
2. Sole Relevant Adjustment--Disallowance of Portion
of Deductions for Professional Fees
The NOD contained one adjustment which is relevant herein;
i.e., respondent disallowed a portion of Holdings’ deduction of
- 32 -
professional fees for 199906 through 200206.17 The disallowed
fees totaled $228,240, $1,383,710, $794,404, and $2,253,652 for
199906 through 200206, respectively. Respondent determined that
some of the disallowed fees were the personal expenses of Michael
Boulware. Those personal expenses were determined to stem mainly
from the professional representation Michael Boulware received
during the criminal investigation; during the grand jury
proceedings; and during Michael Boulware’s first criminal trial
and his appeal of his conviction resulting from that trial.
Respondent determined that the remaining disallowed fees were
unsubstantiated. Respondent determined the specific amounts
attributable to the two reasons for disallowance as follows:
199906 200006 200106 200206
Personal expenses -0- $1,110,435 $575,114 $1,678,579
Unsubstantiated expenses $228,240 273,275 219,290 575,073
Total 228,240 1,383,710 794,404 2,253,652
C. NOD Issued to Michael Boulware
1. General Information
On December 15, 2004, respondent issued an NOD to Michael
Boulware for 1998 through 2002.
17
For 199706, Holdings had carried back and claimed a
deduction for a $713,370 NOL from 200206. Because respondent’s
disallowance of the amount of professional fees Holdings deducted
for 200206 was greater than $713,370, respondent determined that
Holdings did not have an NOL for 200206 and thus was not entitled
to its claimed NOL deduction for 199706.
- 33 -
2. Sole Relevant Adjustment--Constructive Dividends
The NOD contained one adjustment which is relevant herein;
i.e., respondent determined that most of the above-mentioned
unsubstantiated expenses and personal expenses were personal
withdrawals of funds by Michael Boulware from the subject
corporations and that the amounts of these funds were includable
in Michael Boulware’s taxable income as constructive dividends.
Respondent determined that the constructive dividends totaled
$1,406,343, $1,513,055, $2,332,643, $3,380,947, and $2,231,120
for 1998 through 2002, respectively, Respondent determined these
amounts as follows:
Distribution 1998 1999 2000 2001 2002 Total
HIE 199806 $891,242 -0- -0- -0- -0- $891,242
HIE 199906 400,981 $472,235 -0- -0- -0- 873,216
HIE 200006 -0- 477,969 $596,722 -0- -0- 1,074,691
HIE 200106 -0- -0- 485,610 $670,754 -0- 1,156,364
HIE 200206 -0- -0- -0- 1,104,294 $1,104,294 2,208,588
Subtotal 1,292,223 950,204 1,082,332 1,775,048 1,104,294 6,204,101
Holdings 199906
Unsubstantiated 114,120 114,120 -0- -0- -0- 228,240
Holdings 200006
Personal expenses -0- 312,094 798,341 -0- -0- 1,110,435
Unsubstantiated -0- 136,637 136,638 -0- -0- 273,275
Holdings 200106
Personal expenses -0- -0- 205,687 369,428 -0- 575,115
Unsubstantiated -0- -0- 109,645 109,645 -0- 219,290
Holdings 200206
Personal expenses -0- -0- -0- 839,290 839,290 1,678,580
Unsubstantiated -0- -0- -0- 287,536 287,536 575,072
Subtotal 114,120 562,851 1,250,311 1,605,899 1,126,826 4,660,007
Total 1,406,343 1,513,055 2,332,643 3,380,947 2,231,120 10,864,108
III. Background of Michael Boulware
Michael Boulware was born on the Island of Maui on March 14,
1948, and he was raised on the Island of Oahu in a lower-middle-
income neighborhood. He attended college for approximately 2
- 34 -
years and then served in the National Guard through 1970. He
later attended college for one more semester and then quit school
to work for a telephone company. He subsequently stopped working
for the telephone company and performed a variety of jobs
including driving a cab and working at a restaurant bar.
IV. Relevant Corporations
A. HIE
1. Formation of Business
In the late 1970s, Michael Boulware started his own
business, the operation of a pool hall, and he began working for
that business. On the premises of the business were pool tables,
video games, and vending machines. In or about 1980, Michael
Boulware changed his business to one of video games. Shortly
thereafter, on July 10, 1981, Michael Boulware transferred most
if not all of the assets and liabilities of his video game
business to a newly formed corporation, M&S Vending, Inc. (M&S
Vending), in exchange for all of its stock.
M&S Vending was initially a cash business that involved
owning and maintaining coin-operated video games and jukebox,
pinball, karaoke, and vending machines (including vending
machines that sold cigarettes) and leasing those games and
machines to hotels, bars, restaurants, and other establishments
for use on their premises. M&S Vending generally shared the cash
- 35 -
receipts of each of its games and machines with the establishment
in which the game or machine was located. The establishment
generally received 50 percent of the cash receipts in each game
or machine (other than a cigarette machine) located on its
premises; sometimes, the establishment received the first 10
percent of the cash receipts plus 50 percent of the remaining
cash receipts (in other words, the establishment received 55
percent of the cash receipts). As to the cigarette machines, M&S
Vending paid an establishment 10 percent of the receipts from
those machines on the premises of that establishment. In
addition to the remaining 90 percent of the cigarette machine
receipts that it kept as income, M&S Vending also earned income
from cigarette manufacturers that paid M&S Vending to place their
brands in the cigarette machines.
In or about the mid-1980s’, M&S Vending expanded its
business to include the purchase of cigarettes and the sale of
those cigarettes through its leased cigarette machines.
Initially, M&S Vending purchased its cigarette inventory from
Island Tobacco, a local wholesaler owned by Harold Okimoto and
run by his brother Thomas Okimoto. Because M&S Vending had a lot
of cigarette machines, it was eventually able to (and did)
purchase cigarettes directly from the manufacturers (e.g., Philip
Morris), rather than from the wholesalers.
- 36 -
M&S Vending eventually changed its name to Hawaiian Isles
Vending and later, on or about June 30, 1987, to HIE. Shortly
thereafter, HIE expanded its business further to include the sale
of coffee and candy through its vending machines. HIE’s coffee
business involved selling coffee to business offices through
machines that HIE lent to the businesses. In 1988 or 1989, HIE
expanded its business even further to include the processing and
distribution of a blend of Kona coffee. Kona coffee is grown and
sold at approximately 600 small farms in a central region of
Kona, a section of the Island of Hawaii, and Kona coffee is one
of the most expensive coffees in the world.18 In order to be
labeled and sold as “Kona coffee”, a blend of coffee must contain
at least 10 percent Kona coffee. HIE’s blend of Kona coffee was
a mix of 10 percent Kona coffee beans and 90 percent coffee beans
grown in places such as Brazil, Costa Rica, or Sumatra.
2. Officers and Directors
a. Initially
Initially, Michael Boulware was the president, treasurer,
and secretary of M&S Vending, and he was one of two directors on
its board. Through August 31, 1982, M&S Vending’s vice president
and only other director was Matthew S.K. Pyun, Jr.
18
The average size of each of the approximately 600 farms is
less than 5 acres, and the owners of those farms are natives.
- 37 -
b. August 31, 1982, to July 10, 1991, or
Thereabouts
From August 31, 1982, through July 10, 1991, or thereabouts,
Michael Boulware was the only officer of HIE (inclusive of its
predecessor), serving simultaneously as president, vice
president, secretary, and treasurer. During that time, Michael
Boulware also was either the sole director on the corporation’s
board or one of its two directors. Stanley Hirai was the other
director of HIE (and its predecessor) during some of that time.
Stanley Hirai helped Michael Boulware form the business that
became the business of M&S Vending and was one of M&S Vending’s
original employees. Stanley Hirai’s role as a director of HIE
(and its predecessor) was limited and scripted by Michael
Boulware; among other things, Stanley Hirai signed corporate
documents as directed by Michael Boulware, without fully reading
the documents or understanding them. In or about 1991, Stanley
Hirai contracted diabetes and was instructed by Michael Boulware
not to come into the office but to remain at home on full salary.
Afterwards, Stanley Hirai was paid approximately $50,000 per year
through at least 1997, and he performed few services for HIE in
return for that salary.
- 38 -
c. On or About July 10, 1991, Through an
Effective Date of April 15, 2000
From July 10, 1991, or thereabouts, through an effective
date of April 15, 2000, HIE had two directors in addition to
Michael Boulware. One was Michael Boulware’s brother, Sidney E.
Boulware, Jr. (Sidney Boulware). The other was Merwyn Manago, a
friend of a friend of Michael Boulware.
Sidney Boulware began working for HIE in or about 1983.
Before that time, Sidney Boulware had worked for the Department
of Education as a counselor at a high school. Sidney Boulware
worked part time for HIE through June 1987, at which time he
began (and has continued) to work full time for HIE as a chief
operations officer. As of July 10, 1991, Sidney Boulware also
took over Michael Boulware’s role as vice president of HIE.
Merwyn Manago began working for HIE in or about November
1988. His position at that time was chief financial officer
under the title of controller. Merwyn Manago has continued to
date to work for HIE (and later also Holdings) as chief financial
officer. Merwyn Manago also served as a board member of HIE (and
Holdings) through 2006. In 2006, Michael Boulware removed Merwyn
Manago from the board and replaced him with Michael Boulware’s
daughter.
- 39 -
When Merwyn Manago began working for HIE, HIE’s accounting
department was weak to inadequate, and its accounting records
were not current. Merwyn Manago aimed to make that department
stronger. Initially, Merwyn Manago caused HIE to hire a vending
accountant and an assistant controller. Later, in 1995 or 1996,
Merwyn Manago caused HIE to hire another assistant controller.
Scott Yoshida, an employee of HIE and then Holdings from December
1991 to date, was employed as assistant controller through
December 1995. In December 1995, Scott Yoshida was promoted to
controller of Hawaiian Isles Kona Coffee.
d. Effective April 15, 2000
Effective April 15, 2000, Michael Boulware resigned his
position as president, secretary, and treasurer of HIE. HIE’s
board (Michael Boulware, Sidney Boulware, and Merwyn Manago)
accepted that resignation and appointed Sidney Boulware and
Florence Boulware as HIE’s sole officers for the next corporate
year.19 Sidney Boulware was appointed president, vice president,
and treasurer. Florence Boulware was appointed secretary.
Sidney Boulware has continued to date to work for HIE as its
president.
19
While we find in the record that Florence Boulware is
related to Michael Boulware, we are unable to find the specific
relationship between the two.
- 40 -
e. Board Meetings
HIE’s board of directors met frequently (either formally or
informally) and memorialized those meetings in minutes. The
minutes were typically typed into form by an administrative
secretary of HIE, who was not at the meeting but who would
receive from either Michael Boulware or Sidney Boulware the
statements that she would type. The typed document would then be
circulated to the officers who were present at the meeting for
their signature.
3. Shareholders
Initially, Michael Boulware was the sole shareholder of M&S
Vending. Through September 8, 1987, Michael Boulware also was
the sole shareholder of HIE. On September 8, 1987, Michael
Boulware transferred 50 percent of his stock in HIE to Jin Sook
Lee as trustee of the Glenn Lee Boulware Trust.20 Jin Sook Lee
was Michael Boulware’s mistress from 1982 through 1994, and she
is the mother of their two children. Their oldest child is Glenn
Lee Boulware.
At the time of the transfer, HIE did not issue a stock
certificate to Jin Sook Lee, as trustee, or otherwise record the
20
Immediately before this transfer, Michael Boulware’s
adjusted basis in his HIE stock was $1,000. Immediately after
the transfer, Michael Boulware’s adjusted basis in his HIE stock
was $500.
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transfer in its books. In 1995, Jin Sook Lee, as trustee,
commenced a lawsuit in the Circuit Court of the First Circuit of
Hawaii by filing with the court a “Petition of Jin Sook Lee to
Enforce Trust and For An Accounting in Favor of Glenn Lee
Boulware, A Minor, Beneficiary” (trust case). The court docketed
the trust case as No. 95-0029. On June 14, 1996, while the
lawsuit was pending, HIE issued a stock certificate to Jin Sook
Lee, as trustee, reflecting the ownership of 47.5 percent of the
outstanding shares of HIE. Contemporaneously, HIE also issued
stock to Sidney Boulware so that thereafter Sidney Boulware
reportedly owned a 5-percent interest in HIE and Michael Boulware
and Jin Sook Lee, as trustee, each reportedly owned a 47.5-
percent interest in HIE.
On or about March 15, 1998, Sidney Boulware rescinded his
reported 5-percent interest in HIE so that thereafter Michael
Boulware and Jin Sook Lee, as trustee, each owned 50 percent of
HIE’s stock. Sidney Boulware’s action of rescission was in
response to a ruling made by the court in the trust case.
Specifically, on July 31, 1997, the court ruled that the Glenn
Lee Boulware Trust was entitled to own 50 percent of the stock of
HIE as of September 8, 1987.
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4. Michael Boulware’s Control
Michael Boulware was viewed by the directors, officers, and
employees of HIE as the “boss”. When he was a director on HIE’s
board, Michael Boulware always had the final say at board
meetings, and he always had the final say with respect to the
operation and the business of HIE. Michael Boulware controlled
HIE during the relevant years, and its employees routinely
followed his directions and instructions without questioning the
propriety of his actions.
B. Holdings
On April 4, 1994, Holdings was formed by Michael Boulware as
a corporation with 1,000 outstanding shares all owned by HIE.
Holdings began its operations in and filed its initial Federal
corporate income tax return for 199706. As of the first day of
that taxable year, i.e., July 1, 1996, Michael Boulware caused
HIE to effect a tax-free reorganization (spinoff) through which
it transferred its shares in Holdings as follows: 475 shares to
Michael Boulware, 475 shares to Jin Sook Lee, as trustee of the
Glenn Lee Boulware Trust, and 50 shares to Sidney Boulware. As
of the first day of the following taxable year, i.e., July 1,
1997, Holdings reverse-split its stock tenfold so that thereafter
Holdings had 100 outstanding shares and the numbers of shares
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owned by the three just-mentioned individuals were 47.5, 47.5,
and 5, respectively.
For each of the taxable years 199906 through 200206, Michael
Boulware was Holdings’ principal officer, principal employee, and
controlling shareholder. At some point, Sidney Boulware also
served as a director of Holdings. From 199706 to date, Sidney
Boulware worked for Holdings as an officer, including as its
president from April 15, 2000, or thereabouts, to date.
C. Other Corporations Organized in 1994
Three other relevant corporations also were organized in
1994: Hawaiian Isles Vending, Inc.; Hawaiian Isles Distributors,
Ltd.; and Hawaiian Isles Kona Coffee. HIE owned all of the
shares of each of these corporations.
D. Restructuring of HIE
Effective June 30, 1995, Michael Boulware and HIE entered
into an Agreement and Plan of Reorganization and Corporate
Separation (restructuring). Pursuant to the restructuring,
Hawaiian Isles Vending, Inc., changed its name to Holdings, and
all shares of Hawaiian Isles Kona Coffee owned by HIE were
transferred to Holdings. Also pursuant to the restructuring, HIE
reorganized its businesses so that thereafter HIE generally sold
cigarettes and Holdings generally sold and leased vending
machines and processed and sold coffee.
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E. Royal Hawaiian Water
Royal Hawaiian Water bottles purified drinking water and
sells that bottled water to retailers in Hawaii. Royal Hawaiian
Water conducts its business under the name “Hawaiian Isles Water
Company”. Royal Hawaiian Water is presently a subsidiary of
Holdings.
In September 1995, Michael Boulware formed Royal Hawaiian
Water as his wholly owned corporation and elected to have that
corporation taxed as an S corporation. As of July 1, 1997 (but
after the reverse split mentioned supra), Michael Boulware
contributed the net assets of Royal Hawaiian Water to Holdings in
exchange for 162.5 newly issued shares of Holdings. This
transaction increased Michael Boulware’s ownership interest in
Holdings to 210 shares (47.5 + 162.5 = 210) or in other words to
80 percent of its stock (210/(100 + 162.5) = 80%).
F. Holdings After the Restructuring
As now relevant, the primary business of Holdings and its
subsidiaries is the wholesaling, distribution, leasing, and
maintenance of vending machines (it was the largest vending
company in Hawaii before its vending operation was sold on
December 29, 2006); the bottling, wholesaling, and distribution
of purified drinking water (it has approximately 40 percent of
the market in Hawaii); and the processing, wholesaling, and
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distribution of coffee (it has approximately 60 percent of the
“gourmet end coffee” market in Hawaii). Holdings conducts most
of its business in Hawaii but also exports coffee to the
continental United States and to some foreign countries.
For 199706, 199906, 200006, 200106, and 200206, Holdings had
the following compensated officers, each of whom received the
indicated compensation:
Taxable Year Officer Compensation
199706 Michael Boulware $1,372,008
Sidney Boulware 126,322
199906 Michael Boulware 375,700
Sidney Boulware 177,769
200006 Michael Boulware 1,496,006
Sidney Boulware 192,200
200106 Michael Boulware 396,006
Sidney Boulware 142,000
200206 Michael Boulware 396,006
Sidney Boulware 142,000
G. Payment of Common Costs
At all relevant times, Holdings shared certain common costs
with HIE, d.b.a. Hawaiian Isles Distributors. At one point,
Holdings began paying HIE’s overhead and other expenses.
H. Various Names Used by HIE To Conduct Its Business
During the Subject Years
During the subject years, HIE sometimes did business as
Hawaiian Isles Distributors, sometimes as Hawaiian Isles Vending,
or sometimes as Kona Coffee Service.
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I. No Payment of Formal Dividends by HIE
From in or about November 1988 until the end of 2005, HIE
paid no formal dividends.
J. E&P of HIE and Its Predecessor for 198206 Through 198806
1. 198206
As of June 30, 1982, the accumulated E&P of HIE’s
predecessor, M&S Vending, was $189,252.
2. 198306
For 198306, the current E&P of M&S Vending was $234,989.
The current E&P reflected M&S Vending’s taxable income as
reported on its Federal income tax return for 198306 ($339,960),
less negative adjustments totaling $104,971 for Federal income
taxes ($103,324) and political contributions and penalties
($1,647). As of June 30, 1983, the accumulated E&P of M&S
Vending was $424,241 ($189,252 + $234,989).
3. 198406
For 198406, the current E&P of M&S Vending was $341,224.
The current E&P reflected M&S Vending’s taxable income as
reported on its Federal income tax return for 198406 ($424,392),
less negative adjustments totaling $83,168 for Federal income
taxes ($77,319) and political contributions and penalties
($5,849). As of June 30, 1984, the accumulated E&P of M&S
Vending was $765,465 ($424,241 + $341,224).
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4. 198506
For 198506, the current E&P of M&S Vending was $126,955.
The current E&P reflected M&S Vending’s taxable income as
reported on its Federal income tax return for 198506 ($151,550),
plus a $34,779 positive adjustment to reflect an error on that
return, less negative adjustments totaling $59,374 for Federal
income taxes ($45,589), political contributions and penalties
($8,649), prior period income included in the return ($136), and
a bad debt ($5,000). In addition to that year’s current E&P, the
calculation of the accumulated E&P of M&S Vending as of June 30,
1985, included a $10,110 positive adjustment to reflect an
overaccrual of prior years’ taxes. As of June 30, 1985, the
accumulated E&P of M&S Vending was $902,530 ($765,465 + $126,955
+ $10,110).
5. 198606
For 198606, the current E&P of M&S Vending was $252,942.
The current E&P reflected M&S Vending’s taxable income as
reported on its Federal income tax return for 198606 ($271,420),
less the sum of various positive and negative adjustments
totaling negative $18,478. The positive adjustments totaled
$133,981 and were attributable to a prior year adjustment for
“FA” ($120,000), bad debt reversals ($4,000), depreciation
($3,733), an NOL carryover ($5,798), and a recording of the
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correct book value of “FA” ($450). The negative adjustments
totaled $152,459 and were attributable to Federal income taxes
($70,001), depreciation adjustments ($11,094), an overaccrual of
tax ($60,871), and penalties ($10,493). In addition to that
year’s current E&P, the calculation of the accumulated E&P of M&S
Vending as of June 30, 1986, included two positive adjustments.
The first positive adjustment, $17,132, was made to reflect an
adjustment to HIE’s net income for 198506 as reported in its
books. The second positive adjustment, $16,283, was made to
reflect an adjustment to HIE’s net income as reported in its
books for years before 198506. As of June 30, 1986, the
accumulated E&P of M&S Vending was $1,188,887 ($902,530 +
$252,942 + $17,132 + $16,283).
6. 198706
For 198706, the current E&P of M&S Vending was negative
$329,574. The current E&P reflected M&S Vending’s taxable loss
as reported on its Federal income tax return for 198706
($367,487), less the sum of various positive and negative
adjustments totaling negative $37,913. The positive adjustments
totaled $68,912 and were attributable to a Federal income tax
refund ($39,377) and depreciation ($29,535). The negative
adjustments totaled $30,999 and were attributable to Federal
income taxes ($1,193), goodwill ($4,065), depreciation on capital
- 49 -
leases ($10,815), contribution carryovers ($2,473), bad debt
expenses ($5,955), and book depreciation greater than tax
depreciation ($6,498). As of June 30, 1987, the accumulated E&P
of M&S Vending was $859,313 ($1,188,887 + (-$329,574)).
7. 198806
For 198806, the current E&P of HIE was negative $859,431.
The current E&P reflected HIE’s taxable loss as reported on its
Federal income tax return for 198806 ($813,106), less the sum of
various positive and negative adjustments totaling negative
$46,325. The positive adjustments totaled $930,937 and were
attributable to an income tax benefit ($273,200), depreciation
($21,393), and a lease rental expense ($636,343). The negative
adjustments totaled $977,262 and were attributable to Federal
income taxes ($107), an adjustment to a bad debt reserve
($2,250), gain on investment property ($132,978), inventory
capitalization ($18,000), pension contribution adjustments
($96,858), goodwill ($6,093), interest on leases ($103,942),
further depreciation ($5,500), contribution carryover ($1,425),
depreciation on leases ($436,761), penalties ($172,877), and
meals ($471). As of June 30, 1988, the accumulated E&P of HIE
was negative $118 ($859,313 + (-$859,431)).
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K. E&P of Holdings for 199706 and 199806
1. 199706
a. Accumulated E&P
As a result of HIE’s spinoff of Holdings on July 1, 1996,
45.9206 percent of HIE’s accumulated E&P is allocated to Holdings
as of that date.
b. Current E&P
For 199706, the current E&P of Holdings was $722,937.
2. 199806
For 199806, the current E&P of Holdings was $346,579.
L. Number of Holdings and HIE Employees
At all relevant times, HIE and Holdings each had fewer than
500 employees.
V. Officer Loan Account
A. Overview
Before the restructuring, an officer loan account was kept
on the books of HIE. After the restructuring, that account was
kept on the books of Holdings.
B. Mechanics of Account
Michael Boulware routinely requested that checks be written
to him from HIE’s checking accounts. Those checks were written
as requested. HIE did not always know how Michael Boulware would
use the funds reflected in those checks. Merwyn Manago
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anticipated that the dollar amounts of the checks written to
Michael Boulware would be charged to Michael Boulware’s officer
loan account (officer loan account) as borrowings by him and that
the officer loan account would be reduced by any amount repaid by
or on behalf of Michael Boulware.
Merwyn Manago kept a running balance of the amounts that he
knew that Michael Boulware borrowed (including by way of checks
written to him) and that Michael Boulware repaid. Merwyn Manago
generally caused those transactions to be recorded in the officer
loan account contemporaneously with the transactions. As
discussed infra, Michael Boulware participated in certain
transactions that were not reported on the books of either
subject corporation (off-book activities), and he caused deposits
and withdrawals to be made to and from two bank accounts (off-
book bank accounts) that were neither reported on the books of
either subject corporation nor known about by Merwyn Manago or
the other independent (of Michael Boulware) managers of the
subject corporations (collectively, independent managers).
Merwyn Manago did not know about the funds that were deposited
into or withdrawn from the off-book bank accounts, and he did not
reflect those funds in the officer loan account. Merwyn Manago
did not know about or cause HIE to record contemporaneously in
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the officer loan account transactions related to the off-book
activities.
C. Repayment of Officer Loans
Bonuses were declared to Michael Boulware at the end of each
year to repay some of the balance in the officer loan account.
Merwyn Manago caused to be recorded as reductions of the officer
loan account any portion of a loan to Michael Boulware that was
repaid. Michael Boulware’s repayments were not always made in
cash.
D. Michael Boulware’s Claimed Coffee Transactions
Michael Boulware told Merwyn Manago that Michael Boulware
was using HIE funds in his individual capacity to purchase coffee
for resale to HIE. Merwyn Manago caused the balance of the
officer loan account to be increased by the amount of HIE funds
that Merwyn Manago believed that Michael Boulware was using for
that purpose. Michael Boulware told Merwyn Manago when Michael
Boulware purportedly sold and delivered coffee to HIE, and Merwyn
Manago recorded those sales and alleged deliveries as reductions
to the balance in the officer loan account.
Merwyn Manago told Michael Boulware that HIE needed invoices
to document any coffee transaction between him and HIE.
Afterwards, Michael Boulware gave Merwyn Manago invoices stating
that Michael Boulware had sold Kona coffee to Hawaiian Isles Kona
- 53 -
Coffee or to HIE and that he had delivered that coffee to the
purchasing corporation. Michael Boulware did not always give
those invoices to HIE contemporaneously with the dates that
Michael Boulware said he had delivered coffee to HIE. Other than
through Merwyn Manago’s receipt of the invoices from Michael
Boulware and Merwyn Manago’s related discussions with Michael
Boulware, Merwyn Manago did not attempt to verify that HIE
received the coffee Michael Boulware said he sold to HIE; Merwyn
Manago relied primarily upon the representations and actions of
Michael Boulware.
From November 1988 through June 1994, Michael Boulware gave
HIE various invoices for coffee that he purportedly sold to HIE
or one of its subsidiaries. These invoices for the most part are
consecutively numbered. One invoice stated that Michael Boulware
sold and delivered to Hawaiian Isles Kona Coffee 80,000 pounds of
Kona coffee. Merwyn Manago did not see this coffee but credited
Michael Boulware’s loan account for the $500,000 sales price
listed on the invoice. Nor did Merwyn Manago verify that
Hawaiian Isles Kona Coffee had received 40,000 pounds of Kona
coffee that a second invoice stated that Michael Boulware had
sold and delivered to Hawaiian Isles Kona Coffee for $250,000.
Merwyn Manago also did not verify that Hawaiian Isles Kona Coffee
received 200,000 pounds of Kona coffee that a third invoice
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stated that Michael Boulware had sold and delivered to Hawaiian
Isles Kona Coffee for $800,000. Michael Boulware did not
actually deliver this 320,000 pounds of coffee (200,000 + 40,000
+ 80,000 = 320,000) but through the officer loan account was
credited with doing so.21
E. Promissory Notes
Before 1993, the year in which the CID investigation began,
Michael Boulware was not required to sign promissory notes for
checks written to him from an HIE account. Afterwards, at the
end of each year, Merwyn Manago generally took the total amount
of checks written to Michael Boulware in each month of that year
and drafted promissory notes for each of those months. None of
the funds that were deposited into the off-book bank accounts
were reflected in the promissory notes.
Payment of the promissory notes was not secured. The
promissory notes set forth a repayment date within 24 months
after their making and stated that a holder of a note in default
could declare that the entire unpaid balance was immediately due
and payable.
21
In addition to these amounts credited to the officer loan
account as coffee repayments, we are unable to verify other items
for which Merwyn Manago credited the officer loan account.
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F. Lack of Collection on Promissory Notes
Some of the loans recorded as made to Michael Boulware were
not repaid, and defaults occurred on the related and some of the
other promissory notes. Merwyn Manago never declared that any
amount due under a promissory note related to Michael Boulware
was immediately due and payable. Nor did Merwyn Manago ever
attempt to collect repayment of an obligation of Michael Boulware
that was in default; Merwyn Manago viewed Michael Boulware as the
owner of the subject corporations and, hence, as the boss of
Merwyn Manago and every other employee of one or both of the
subject corporations. When the period of limitations expired on
the enforcement of a promissory note related to Michael Boulware,
Merwyn Manago never recorded on the books of either subject
corporation that those amounts were uncollectible. The board of
directors never took any action with respect to collection on the
promissory notes.
VI. Personal Bank Accounts
A. Michael Boulware Individually
As relevant herein, Michael Boulware had three personal bank
accounts listed in his name. These accounts were checking
account No. 05-389054 at First Interstate Bank of Hawaii,
checking account No. 49-507151 at First Hawaiian Bank, and
checking account No. 09-365508 at First Hawaiian Bank. Michael
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Boulware also maintained a checking account at the Bank of Hawaii
in his reported capacity as president, treasurer, and secretary
of his wholly owned corporation, Automated Equipment, Ltd.
(Automated Equipment). That account number was 17-134698.
B. Michael Boulware and Mal Sun Boulware Jointly
Michael Boulware and Mal Sun Boulware had a joint savings
account, account No. 17-009762 at Liberty Bank. They also had a
joint checking account, account No. 37-251410 at First Hawaiian
Bank.
C. Jin Sook Lee
Jin Sook Lee had a personal checking account, account No.
65-565579 at First Hawaiian Bank. Jin Sook Lee also maintained a
savings account at First National Bank in her capacity as trustee
of the Glenn Lee Boulware Trust. That account number was
65-570109.
VII. Mal Sun Boulware
Mal Sun Boulware was born in Korea in 1944, and she moved to
the United States in 1963. She was married to Michael Boulware
from 1975 through May 5, 1994. She and Michael Boulware have one
child, Karen Min Boulware, a Korean girl whom they adopted.
Karen Min Boulware was born on May 2, 1979.
M&S Vending reportedly paid Mal Sun Boulware wages of
$16,560 and $21,210 during 1981 and 1982, respectively, and
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$24,000 during each of the years 1983 through 1986. HIE
reportedly paid Mal Sun Boulware wages of $47,000, $59,000,
$60,000, $130,000, $250,000, $300,000, $300,000, and $75,000
during 1987 through 1994, respectively. Mal Sun Boulware
generally received her reported wages in equal installments
throughout the corresponding year. For 198906 through 199406,
HIE deducted wages paid to Mal Sun Boulware of $30,000, $95,000,
$190,000, $275,000, $300,000, and $150,000, respectively.
Respondent disallowed the deductions for 198906 through 199406 in
the total amount of $1,040,000.
Mal Sun Boulware has just a few years of education, all in
Korea, and she reads little English. She did not have either an
office or a desk at HIE (or at any related entity). Mal Sun
Boulware performed no meaningful work for HIE (or M&S Vending)
that would support characterizing the disputed payments to her as
compensation.
VIII. Jin Sook Lee
A. Background
Jin Sook Lee was born in Seoul, Korea, in 1955, and she
moved to the United States in 1980. When she moved, Jin Sook Lee
had a high school education and had been married for
approximately 2 years to a man who lived in Hawaii. Shortly
after her move, Jin Sook Lee divorced her husband because he was
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jobless and, she believed, incapable of supporting her desired
lifestyle.
After her divorce, Jin Sook Lee started working at a Korean
hostess bar in Hawaii as a hostess retained by the bar owners to
socialize with their patrons and to allure the patrons to buy a
lot of drinks from the bar. Such bars usually involve
prostitution and are generally staffed with young women from
Korea who speak little English, have few job skills, and are
looking for someone to take care of them. Jin Sook Lee and the
other hostesses were paid for their services at the Korean
hostess bar through commissions earned on the drinks they caused
to be sold and through their receipt of tips left for them by the
patrons.
B. Jin Sook Lee Meets Michael Boulware
In or about 1981, Jin Sook Lee met Michael Boulware at the
Korean hostess bar where and while she was working. Shortly
thereafter, Michael Boulware and Jin Sook Lee began an intimate
relationship which Michael Boulware endeavored to keep hidden
from Mal Sun Boulware and others.22 Throughout their
relationship, Michael Boulware provided Jin Sook Lee with housing
and supported her financially.
22
Merwyn Manago, for example, did not know of Jin Sook Lee
until June 1993 or thereafter.
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Jin Sook Lee stopped working at the Korean hostess bar soon
after she met Michael Boulware, and she moved from her studio
apartment to what she considered to be Michael Boulware’s
Atkinson condominium. Jin Sook Lee lived at the Atkinson
condominium rent free. Later, Jin Sook Lee moved from the
Atkinson condominium to what she considered to be Michael
Boulware’s house in Honolulu at Hawaii Kai, 3 Lumahai Street.
She lived at that house rent free. Later, after Mal Sun Boulware
learned that Jin Sook Lee was living at the house at 3 Lumahai
Street, Jin Sook Lee moved from that house to the Punahou
condominium, which Jin Sook Lee bought with money given to her by
Michael Boulware. Jin Sook Lee has not worked since she stopped
working at the Korean hostess bar. During her relationship with
Michael Boulware, Jin Sook Lee attended business college, and she
received a diploma and certificate in 1994. Jin Sook Lee
currently receives $10,000 a year from HIE as a “settlement”.
Jin Sook Lee began her relationship with Michael Boulware
because she thought she would be better off financially, and she
almost daily told him during their relationship that they should
get married to each other. Michael Boulware eventually told Jin
Sook Lee that they would marry but that he first had to divorce
Mal Sun Boulware. Jin Sook Lee repeatedly fought with Michael
Boulware about his not getting a divorce, and Jin Sook Lee
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repeatedly told Michael Boulware that she would leave him unless
he got a divorce. Michael Boulware informed Jin Sook Lee that he
would divorce Mal Sun Boulware in due time. Jin Sook Lee did not
believe that Michael Boulware actually wanted to or would divorce
Mal Sun Boulware.
During their relationship, Jin Sook Lee and Michael Boulware
had two children together. Both of those children were planned.
The older child, Glenn Lee Boulware, was born on September 15,
1985. The younger child, Steven Boulware, was born on October
13, 1988. Currently, Michael Boulware’s relationship with each
of his sons is good.
C. Paradise Roasting
Beginning at least in 1986, Michael Boulware caused M&S
Vending to pay Jin Sook Lee wages although she did not perform
any work for M&S Vending in return for the wages. After M&S
Vending was renamed HIE, HIE continued to pay Jin Sook Lee wages
although she performed no work for HIE in return for the wages.
In or about 1987, Mal Sun Boulware learned that Michael
Boulware was having an affair with Jin Sook Lee and that Michael
Boulware and Jin Sook Lee had a son, Glenn Boulware. Because
Michael Boulware believed he could no longer cause HIE to pay
wages to Jin Sook Lee, he sought an indirect, surreptitious way
to give her money. Michael Boulware helped Jin Sook Lee form
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Paradise Roasting as her wholly owned corporation and instructed
her to open a bank account for Paradise Roasting in part so that
he could give her money in the form of checks. Jin Sook Lee was
named president of Paradise Roasting, and her sister, Hong Sun
Hirai, was named vice president. During 198906 and 199006,
Paradise Roasting had no employees.
Paradise Roasting sent invoices to HIE indicating it had
sold coffee to HIE, and Michael Boulware caused HIE to pay those
invoices. During 198906, HIE generally sent Paradise Roasting
one check every month. The first four checks were each in the
amount of $10,000. The next three checks were each in the amount
of $15,000. The last five checks were each in the amount of
$20,000. During 199006, HIE generally sent to Paradise Roasting
one check in the amount of $20,000 for each of the first 10
months. In total, HIE paid Paradise Roasting $185,000 and
$200,000 during 198906 and 199006, respectively. HIE deducted
those payments for Federal income tax purposes.
Paradise Roasting never sold or delivered any coffee to HIE.
Nor did Paradise Roasting ever have a business, ever have any
customers, or ever sell any goods (e.g., coffee) or perform any
services. Jin Sook Lee used the money that HIE transferred to
Paradise Roasting as she pleased, including to pay her living
expenses, to travel, and to purchase expensive jewelry for
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herself. When HIE wrote the above-referenced checks to Paradise
Roasting, HIE did not reflect those checks as loans on its books.
Except by means of the adjusting journal entries (AJEs) discussed
infra, HIE did not ever record those payments as loans on its
books.
D. Video Consultant
1. Overview
HIE also paid Jin Sook Lee at least $175,000 during the
2-year period beginning in July 1988 purportedly for work as a
video consultant. Jin Sook Lee received those funds through
Video Consultant, an entity that was formed as her sole
proprietorship. Jin Sook Lee was not a video consultant, and she
has never worked as such. Nor did Video Consultant ever have any
employees or any customers. Michael Boulware caused that money
to be paid to Jin Sook Lee for her living expenses and for her
other desires.
2. Formation
Michael Boulware helped Jin Sook Lee form Video Consultant
as another way to get money to her indirectly and surreptiously.
Michael Boulware filled in a form application for a general
excise license for Video Consultant, and he had Jin Sook Lee sign
the application. Michael Boulware caused Jin Sook Lee to open an
account at First Interstate Bank of Hawaii in the name of Jin
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Sook Lee d.b.a. Video Consultant. That account, No. 24-100804,
was a market interest investment account, with check writing
privileges.
3. Payments From HIE for False Invoices
During 198906 and 199006, Video Consultant invoiced HIE for
goods or services totaling $84,000 and $91,000, respectively, and
Michael Boulware caused HIE to pay Video Consultant the amount of
the invoices and to deduct those payments on HIE’s Federal income
tax returns. HIE paid those amounts to Video Consultant through
22 checks. During 198906, 12 of those checks were written
monthly in the amount of $7,000. During 199006, the first three
monthly payments were in the amount of $7,000 and the next seven
monthly payments were in the amount of $10,000. All 22 payments
were received by Video Consultant and deposited into First
Interstate bank account No. 24-100804.
Neither Jin Sook Lee nor Video Consultant performed any
service for or provided any good to HIE in exchange for any of
the 22 payments. Jin Sook Lee spent the money that HIE
transferred to Video Consultant as she pleased. When HIE wrote
the above-referenced checks to Video Consultant, HIE did not
reflect those checks as loans on its books. Except by means of
the AJEs discussed infra, HIE did not ever record those payments
as loans on its books. Although Michael Boulware knew Jin Sook
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Lee was not performing any service for HIE as Video Consultant,
he never told that to Merwyn Manago during the period she was
being paid by HIE. It was not until later that Merwyn Manago
learned that Video Consultant was related to Jin Sook Lee.
E. Michael Boulware’s Divorce From Mal Sun Boulware
1. Discussions Concerning Divorce
In 1987, Michael Boulware informed his attorney, Michael
McCarthy, a general practitioner who is now deceased, that he
wanted to divorce Mal Sun Boulware and to marry Jin Sook Lee.23
Mal Sun Boulware had recently informed Michael Boulware that she
knew he was having an affair with Jin Sook Lee and that Jin Sook
Lee and Michael Boulware had a child from that relationship. Mal
Sun Boulware also informed Michael Boulware that they should
divorce and that she desired as a condition of their divorce one-
half of the value of HIE, which she estimated had a total value
of at least $10 million, plus their house in Honolulu at 382 Puu
Ikena Drive, which she believed was worth $1 million. Michael
Boulware contemplated that HIE would be the source of any cash
that he needed to effect his divorce from Mal Sun Boulware, and
23
Shortly thereafter, Michael Boulware informed Jin Sook Lee
that their relationship was over because of actions she had taken
against Glenn Lee Boulware. At or about that time, Michael
Boulware also agreed with Mal Sun Boulware that he would end his
relationship with Jin Sook Lee. Michael Boulware later made up
with Jin Sook Lee.
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Mal Sun Boulware was content to postpone their divorce until
Michael Boulware had the necessary funds to pay her. Michael
Boulware understood from his conversations with Michael McCarthy
that Mal Sun Boulware might be entitled to receive less than $5
million as to HIE (i.e., one-half of the $10 million that Mal Sun
Boulware believed HIE was then worth) if the value of HIE as
shown on its books decreased from the current date to the
applicable valuation date for his divorce.
2. Glenn Lee Boulware Trust
In 1987, while Michael Boulware and Mal Sun Boulware were
discussing the terms of their divorce, Jin Sook Lee became
concerned about the welfare and future of herself and Glenn Lee
Boulware should Michael Boulware die before that divorce. Jin
Sook Lee asked Michael Boulware to transfer one-half of his
shares in HIE to her for the future benefit of Glenn Lee
Boulware. Michael McCarthy advised Michael Boulware not to put
the shares in the name of Jin Sook Lee personally but to transfer
the shares to Jin Sook Lee as trustee of a trust that Michael
Boulware could establish for the benefit of Glenn Lee Boulware.
Michael Boulware understood from his conversations with Michael
McCarthy that it was not permissible for him (as an employee,
officer, or director of HIE) to give HIE property to Jin Sook Lee
to hold for his divorce from Mal Sun Boulware.
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On September 8, 1987, Michael Boulware established the Glenn
Lee Boulware Trust as an irrevocable trust with Jin Sook Lee as
the sole trustee. Michael Boulware funded the trust with $500
plus 50 percent of his stock in HIE. The principal beneficiary
of the trust was Glenn Lee Boulware, who at the sole discretion
of Jin Sook Lee, as trustee, could receive distributions of
income and/or principal until he was 35 years old; alternatively,
until that time, Jin Sook Lee, as trustee, had sole discretion to
expend any or all of the principal or income of the trust for the
benefit of Glenn Lee Boulware. The trust was stated to terminate
when Glenn Lee Boulware became 35 years old, at which time he
would receive all of the trust estate. If Glenn Lee Boulware
died beforehand, the trust was stated to terminate upon his death
at which time all of the trust estate would be distributed to Jin
Sook Lee. Under the terms of the trust, Jin Sook Lee, as
trustee, was entitled to receive compensation for ordinary
services, and Jin Sook Lee, as trustee, was entitled to receive
additional compensation for extraordinary services.
3. Divorce Proceeding
On May 5, 1994, the Family Court of the First Circuit of
Hawaii decreed in the uncontested divorce proceeding of Boulware
v. Boulware, FC-D No. 94-1225, that Michael Boulware and Mal Sun
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Boulware were thereafter divorced.24 The court ordered as part
of the property settlement that Michael Boulware pay Mal Sun
Boulware $3.65 million and transfer to her full ownership of
their property in Honolulu at 382 Puu Ikena Drive. The court
also ordered Michael Boulware to pay Mal Sun Boulware child
support of $1,500 per month, starting April 5, 1994, to maintain
sufficient health coverage for his daughter, and to pay for his
daughter’s education. The court also ordered Michael Boulware to
pay off the approximately $1,350,000 mortgage debt on the
property at 382 Puu Ikena Drive, by February 20, 1999. As to the
division of property, the court order states:
The parties assume and intend that the division of
property incident to their divorce shall not itself
result in any tax consequences. Each party will take
each property interest awarded to him or her at its
pre-divorce basis, and that any tax which must be paid
upon the subsequent sale or exchange of such interest
shall be paid by the party who received and
subsequently sold or exchanged such interest.
Immediately after his divorce, Michael Boulware informed Jin
Sook Lee about the divorce, and he asked Jin Sook Lee to marry
him. Jin Sook Lee declined, and she ended their relationship.
Michael Boulware and Jin Sook Lee presently speak to each other
very little, and they have difficulty dealing with each other.
24
Following their divorce, Michael Boulware and Mal Sun
Boulware continue to have a good relationship, and his
relationship with their daughter is excellent.
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When Jin Sook Lee testified at the trial of these cases, it was
the first time that Michael Boulware had seen her in
approximately 18 months.
Mal Sun Boulware has yet to receive all of the payments that
Michael Boulware owes her incident to their divorce. Mal Sun
Boulware lost through gambling most of the money she received
from Michael Boulware incident to their divorce.
F. Transfers of HIE Assets to Jin Sook Lee
1. Overview
From 1987 through 1994, Michael Boulware delivered to Jin
Sook Lee a total of at least $6.7 million of assets diverted from
HIE. During that time, Michael Boulware also regularly gave Jin
Sook Lee at least another $2 million in cash and other assets
(e.g., jewelry). Michael Boulware did not contemporaneously
record or otherwise keep track of the funds and other assets that
he gave to Jin Sook Lee.25
The diverted assets included primarily cash obtained by
Michael Boulware mainly by way of checks drawn against HIE’s bank
25
Michael Boulware testified at trial that he kept accurate
records of the funds of HIE that he transferred to Jin Sook Lee.
We consider that testimony incredible. Michael Boulware at
various times has stated the total amount of funds as drastically
different amounts. Moreover, at trial, he failed to produce any
accurate documentation and admitted that no such documentation
existed as of the time he testified at trial.
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accounts and against the off-book bank accounts, and from funds
sourced in the off-book activities. The diverted assets also
reflected at least four real properties in Honolulu that were
purchased with HIE funds and that were put in the name of Jin
Sook Lee without any offsetting debt. The four real properties
were the Atkinson condominium, a house at 1050 Koloa Street
(Koloa house), the Makaiwa house, and the Punahou condominium.
Michael Boulware diverted HIE’s assets from HIE to hide the
assets from Mal Sun Boulware in connection with their divorce and
to accumulate personal wealth for what he hoped to be the benefit
of himself, Jin Sook Lee, and their children. Michael Boulware
diverted those assets from HIE for his personal use in that he
then gave the underlying assets to Jin Sook Lee to use, hold, or
spend as she desired, but with his expectation and belief
(neither told to her) that she would chose on her own to hold,
use, or spend the assets for the common benefit of himself, her,
and their children.
2. Atkinson Condominium
On September 9, 1987, Jin Sook Lee purchased the Atkinson
condominium for $115,000. Jin Sook Lee paid for that purchase
with funds that came from Michael Boulware which in turn came
from HIE without the knowledge of the independent managers.
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Jin Sook Lee rented the Atkinson condominium out to tenants,
she freely spent the money received as rent, and she reported
that rent as her taxable income. Michael Boulware never told Jin
Sook Lee to save the rent money from the Atkinson condominium for
his divorce or that the rent money was his or HIE’s. Michael
Boulware never told Jin Sook Lee that she would someday have to
transfer the Atkinson condominium to him or to HIE. Michael
Boulware never told Jin Sook Lee that the Atkinson condominium
would be used (or was otherwise needed) to effect his divorce
from Mal Sun Boulware.
After the start of the criminal investigation discussed
infra, the Atkinson condominium was added to the books of HIE by
recording it as an asset of HIE.
3. Makaiwa House
On or about March 21, 1989, Jin Sook Lee purchased the
Makaiwa house from an unrelated party for $560,000. Jin Sook Lee
paid for that purchase with money that came from Michael Boulware
which in turn came from HIE without the knowledge of the
independent managers. Michael Boulware never told Jin Sook Lee
that she would someday have to transfer the Makaiwa house to him
or to HIE. Michael Boulware never told Jin Sook Lee that the
Makaiwa house would be used (or was otherwise needed) to effect
his divorce from Mal Sun Boulware.
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Jin Sook Lee lived (and continues to live) in the Makaiwa
house. Jin Sook Lee has never paid any rent to live in the
Makaiwa house. After the start of the criminal investigation
discussed infra, the Makaiwa house was added to the books of HIE
by recording it as an asset of HIE.
4. Koloa House
On February 7, 1991, Jin Sook Lee purchased the Koloa house
from an unrelated party for $1,150,000, and the property was
placed in the name of Jin Sook Lee. Jin Sook Lee paid for that
purchase with funds that came from Michael Boulware which in turn
came from HIE without the knowledge of the independent managers.
Michael Boulware never told Jin Sook Lee that she would someday
have to transfer the Koloa house back to him or to HIE. Michael
Boulware never told Jin Sook Lee that the Koloa house would be
used (or was otherwise needed) to effect his divorce from Mal Sun
Boulware.
On or about November 24, 1992, in connection with a rift
between Michael Boulware and Jin Sook Lee, Michael Boulware
forged Jin Sook Lee’s name without her permission to the deed for
the Koloa house, caused a notary who was an employee of HIE to
attest in writing that Jin Sook had signed the deed personally,
and caused that property to be transferred into the name of
Michael Boulware. Contemporaneously, Michael Boulware deeded the
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Koloa house to HIE in return for a credit against the amount
reflected in his officer loan account.
Afterwards, when Jin Sook Lee did not receive the tax bill
for the Koloa house as she usually did, Jin Sook Lee learned that
Michael Boulware had transferred the Koloa house from her name.
Jin Sook Lee was upset and confronted Michael Boulware about the
transfer. Michael Boulware promised Jin Sook Lee that he would
pay her back for inappropriately taking the Koloa house from her.
On July 25, 1993, Michael Boulware agreed in a writing bearing
his signature to pay Jin Sook Lee $1.2 million, the amount they
agreed was the value of the Koloa house, and to secure his
payment of the $1.2 million with a security interest in HIE’s
vending machines. The writing states:26
I, Michael H. Boulware, president of Hawaiian
Isles Enterpr. Inc. do hereby acknowledge that I owe
Jin Sook Lee of 1017 Makaiwa St. the sum of One
Million, Two Hundred Thousand Dollars, $1,200,000. For
which I agree to pay the sum of Twenty Thousand
Dollars, $20,000, for each and every month starting
September 1, 1993 up until August 1, 1993 [sic]. On
September 1, 1994 a balloon payment of the balance is
on demand + payable on this day.
The loan will be secured by way of vending
machines equal to the balance of Loan even by ways of
Auction or any other means.
26
Michael Boulware stated in the writing that he was the
president of HIE as a way to further identify himself in his
individual capacity.
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Michael Boulware later signed and executed a more formal,
but undated, promissory note promising to pay $1.2 million to Jin
Sook Lee as follows: $25,000 on September 1, 1993, and on the
first day of each of the 12 months thereafter; and on September
1, 1994, any amount remaining due on the note. The note stated
that interest accrued on any unpaid amount at the rate of 12
percent per year. The note stated that it was secured by a
“Security Agreement and Financing Statement of even date
herewith”.
5. Punahou Condominium
Jin Sook Lee purchased and initially lived in the Punahou
condominium with money that came from Michael Boulware which in
turn came from HIE without the knowledge of the independent
managers. Subsequently, Jin Sook Lee rented the Punahou
condominium out to a tenant, she freely spent the money received
as rent, and she reported that rent as her taxable income.
Michael Boulware never told Jin Sook Lee to save the rent money
from the Punahou condominium for his divorce or that the rent
money was his or HIE’s. Michael Boulware never told Jin Sook Lee
that she would someday have to transfer the Punahou condominium
to him or to HIE. Michael Boulware never told Jin Sook Lee that
the Punahou condominium would be used (or was otherwise needed)
to effect his divorce from Mal Sun Boulware.
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After the start of the criminal investigation discussed
infra, the Punahou condominium was added to the books of HIE by
recording it as an asset of HIE.
6. Understanding as to the Transferred Assets
Jin Sook Lee understood that the funds that Michael Boulware
gave her during their relationship came from Michael Boulware,
and not from HIE, and that the funds were hers to spend as she
desired. Michael Boulware never told Jin Sook Lee she had to
save the money he gave her so that he could use the money for his
divorce. Nor did HIE’s board of directors sign any resolution
that specifically approved of Michael Boulware’s taking HIE money
for him to save for his divorce from Mal Sun Boulware.
Jin Sook Lee believed that Michael Boulware was giving her
money because she was his girlfriend and the mother of one (and
later two) of his children. Jin Sook Lee sometimes demanded
money from Michael Boulware; other times, he just gave money to
her. On one occasion, in or about December 1992, Michael
Boulware asked Jin Sook Lee to lend him $200,000 to use for his
divorce from Mal Sun Boulware.
Michael Boulware claims that he transferred HIE’s assets to
Jin Sook Lee between 1987 and 1994 for her to hold and to save
for him so he could accumulate funds to satisfy his property
settlement incident to his divorce from Mal Sun Boulware.
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Michael Boulware claims that Jin Sook Lee wanted to hold the
money that he was saving for his divorce, that Jin Sook Lee knew
the money he was giving her was to be saved for his divorce, and
that Jin Sook Lee agreed to give the money back to him upon his
request. We find these claims incredible. Michael Boulware
never told Jin Sook Lee any reason for giving her money or what
she had to do with the money. Jin Sook Lee understood that
Michael Boulware gave her the money to use as her own for
whatever she desired.
7. Jin Sook Lee’s Use of the Transferred Funds
Jin Sook Lee spent the transferred funds as she desired, and
Michael Boulware knew that Jin Sook Lee was spending a lot of the
funds that he gave her. During their relationship, Michael
Boulware provided Jin Sook Lee with an extravagant lifestyle that
included her driving a Mercedes, z Porsche, a Rolls Royce, and a
BMW (some of which she owned), her owning and wearing expensive
designer clothes and jewelry (e.g., a $70,000 diamond), her
traveling to foreign countries and to New York City, and her
regularly receiving cash from Michael Boulware. Jin Sook Lee
charged freely and extravagantly on her credit cards (e.g.,
charging more than $240,000 from August 24, 1991, through
December 15, 1994), and she paid her credit card bills with money
that Michael Boulware gave to her.
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Jin Sook Lee used some of the funds that she received from
Michael Boulware to purchase certificates of deposit earning over
$220,000 in interest in 1992 and 1993. Michael Boulware did not
tell Jin Sook Lee that the interest was not hers, and Jin Sook
Lee spent that interest on herself and otherwise as she desired.
Jin Sook Lee transferred out of the country some of the funds she
received from Michael Boulware, including at least $100,000 that
she sent to her mother in Korea. After commencing the civil
litigation against Michael Boulware and HIE, Jin Sook Lee paid to
her attorneys approximately $1 million using some of the funds
given to her by Michael Boulware.
8. Michael Boulware Takes Some of the Transferred
Funds From Jin Sook Lee Without Her Knowledge
Jin Sook Lee kept in a safe at her house (the Punahou
condominium) some of the funds given to her by Michael Boulware.
The combination to the safe was known by both Jin Sook Lee and
Michael Boulware. On one occasion, in or about the fall of 1990,
Michael Boulware removed from the safe $840,000 of the
approximately $1.5 million that was then there. Jin Sook Lee was
upset by that action, and she demanded that Michael Boulware give
the money back to her because it was hers. Michael Boulware gave
Jin Sook Lee a check drawn on HIE’s corporate bank account in
return for the money he removed from the safe. Michael Boulware
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promised Jin Sook Lee that he would not borrow or steal any money
from her again.
IX. Off-Book Bank Accounts
Michael Boulware surreptiously caused the opening of the two
off-book bank accounts. In or about October 1990, the first
account, No. 03-038866, was opened at Hawaii National Bank in the
name of “Hawaiian Isles Distributors, Inc.” In or about October
1991, the second account, checking account No. 01-06586-6, was
opened at Central Pacific Bank in the name of “Hawaiian Isles
Enterprises, Inc. DBA Hawaiian Isles Distributors”. Activity in
the earlier off-book bank account stopped shortly after the later
off-book bank account was opened. Activity in the later off-book
bank account stopped 2 days after Michael Boulware learned he was
under criminal investigation by the CID. The deposits into the
off-book bank accounts totaled at least $6,139,567 during 199006
through 199306.
The off-book bank accounts were not reported on the books of
any of the relevant corporations (including the subject
corporations), and those accounts (and the deposits therein and
the withdrawals therefrom) were kept secret during the subject
years from the independent managers. Michael Boulware told
Sidney Boulware about the off-book bank accounts so that Sidney
Boulware could oversee those accounts personally and could keep
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the accounts secret from the independent managers. Sidney
Boulware kept the deposit slips for the off-book bank accounts in
his office. The deposit slips for the subject corporations’ bank
accounts which the independent managers knew about were kept
outside Sidney Boulware’s office by others.
X. Off-Book Activities
A. Overview
During the relevant years, Michael Boulware engaged in a
number of off-book activities and other improper transactions
(collectively, off-book activities). The off-book activities
were OTC sales of HIE tobacco products, Michael Boulware’s
personal sales of HIE coffee to Pele Trading and Hawaii Misuzu,
Michael Boulware’s fabrication of work performed for HIE by
Bonded Construction, Michael Boulware’s fictitious equipment
leasing transactions by HIE, and Michael Boulware’s fictitious
international transactions by HIE. Michael Boulware kept the
off-book activities secret from the independent managers. Much
of the money that Michael Boulware diverted from HIE through the
off-book activities was deposited into the off-book bank accounts
or into a personal account of Michael Boulware or Jin Sook Lee.
Michael Boulware caused Jin Sook Lee to receive at least
$3,147,923 of the funds deposited into the off-book bank
accounts. When Jin Sook Lee received those funds, and during
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198906 through 199306, HIE did not record those receipts as loans
on its books and records. The $3,147,923 received by Jin Sook
Lee was in addition to the payments that Jin Sook Lee received
through Paradise Roasting and Video Consultant (i.e., at least
$385,000 and $175,000, respectively). Jin Sook Lee also received
other amounts from Michael Boulware that he diverted from HIE.
Jin Sook Lee used some of the funds referenced in this paragraph
to purchase the Punahou condominium, the Atkinson condominium,
the Makaiwa house, and the Koloa house.
B. OTC Sales of Tobacco Products
HIE had a “cash and carry business” where small wholesalers
and retailers (mostly mom-and-pop type stores and employees of
the subject corporations) came to HIE’s warehouse and bought
HIE’s tobacco products over the counter by paying cash or by
using checks. The warehouse was separate from the building that
housed HIE’s accounting department. The warehouse had a
register, an order desk, and a computer to use with respect to
HIE’s OTC sales. The register in the warehouse related to the
cash and carry business, and the computer in the warehouse was
neither connected to HIE’s main computer nor part of HIE’s
regular accounting system.
Each day, the receipts from the OTC sales were given to
Irene Takamiya, a cashier at HIE. Irene Takamiya forwarded those
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receipts to Sidney Boulware, either directly or through Thomas
Okimoto, the general manager of Hawaiian Isles Distributors.
Sidney Boulware, or sometimes Thomas Okimoto, deposited those
receipts into the off-book bank accounts. Sidney Boulware never
told the independent managers about the receipts from the OTC
sales or that those receipts were deposited into the off-book
bank accounts. HIE’s accounting department also did not know
that OTC proceeds were deposited into the off-book bank accounts.
Unbeknownst to the independent managers, Michael Boulware caused
HIE’s OTC sales not to be recorded on HIE’s invoice register, not
to be reported in HIE’s books, and not to be reported as income
by HIE.
The funds deposited into the off-book bank accounts came
primarily from the receipts of HIE’s OTC sales. Of the total
deposits into those accounts, the funds that Michael Boulware
diverted from OTC sales totaled $506,464, $1,337,213, $719,755,
and $1,020,293 for 199006 to 199306, respectively, or $3,583,725
in total. When those OTC proceeds were deposited into the off-
book bank accounts, the transactions were not recorded as loans
on HIE’s books. Nor were the proceeds reflected in the
promissory notes related to the officer loans.
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C. Michael Boulware’s Personal Sales of HIE Coffee Unknown
at the Time to HIE
1. Overview
HIE sold blended coffee to consumers. HIE purchased coffee
beans from third parties, and the beans were delivered directly
to HIE’s warehouse, where they were stored. When coffee beans
were delivered to HIE, an HIE employee checked the shipping
document to see that the coffee purchased was in fact delivered.
HIE’s accounting department relied on the shipping document and
the signature of a designated employee to verify that the coffee
beans were delivered.
As relevant herein, Robert Kong was the employee designated
by HIE to sign the shipping documents verifying that the coffee
beans purchased by HIE were delivered. Upon the request of
Sidney Boulware, Robert Kong sometimes signed such shipping
documents after the coffee was supposedly delivered. The
shipping documents did not always list the date on which the
coffee was purportedly received, and Robert Kong did not always
read the invoices that he signed. When Robert Kong signed
shipping documents upon the request of Sidney Boulware, Robert
Kong neither read those documents nor checked them for accuracy.
Merwyn Manago knew that Michael Boulware was selling coffee
beans to companies other than the subject corporations, and
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Michael Boulware led Merwyn Manago to believe that the coffee
beans sold by Michael Boulware were not from HIE’s inventory.
Unbeknownst to the independent managers, Michael Boulware sold
coffee beans that were inventoried by HIE to at least two
purchasers and diverted from HIE the proceeds from those sales.
The first purchaser, Hawaii Misuzu, was a coffee roasting company
that during the relevant years was buying Kona coffee from HIE
regularly. The second purchaser, Pele Trading, was an
independent company that also bought coffee from HIE.
2. Sales to Hawaii Misuzu
Hawaii Misuzu purchased and roasted coffee beans and then
sold the roasted coffee to its customers. From 199006 through
199306, Michael Boulware sold HIE’s coffee beans to Hawaii Misuzu
and caused HIE to invoice Hawaii Misuzu for those sales. Michael
Boulware caused HIE to specify on the invoices that payment be
made directly to Michael Boulware, or in some cases directly to
Jin Sook Lee, or in still other cases directly to HIE. Hawaii
Misuzu paid the invoices by check made payable to the payee
specified on the invoice; i.e., Michael Boulware, Jin Sook Lee,
or HIE. Of the amount that Hawaii Misuzu paid for HIE’s coffee,
at least $1,265,458 was deposited into bank accounts controlled
by either Michael Boulware or Jin Sook Lee; the deposits totaled
$116,832 for 199006, $382,403 for 199106, $347,866 for 199206,
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and $418,357 for 199306. These payments were not reflected as
officer loans at the time of the transactions. Merwyn Manago did
not know that Michael Boulware was selling coffee to Hawaii
Misuzu and causing Hawaii Misuzu to pay Michael Boulware or Jin
Sook Lee directly. Neither HIE nor Michael Boulware reported
these payments as income.
3. Sales to Pele Trading
In 1989, Pele Trading was an exporter of coffee that was
seeking a new supplier of coffee beans. Timothy Inoue was Pele
Trading’s vice president who was responsible for purchasing
coffee beans for Pele Trading. From 1989 through 1993, Timothy
Inoue purchased coffee from Michael Boulware and from Marvin
Fukumitsu, an HIE employee, believing that HIE was the seller of
the coffee. Timothy Inoue received his purchased coffee in HIE
burlap bags, and he received invoices from HIE for the purchases.
At the direction of Michael Boulware, Timothy Inoue paid for
his coffee purchases with checks that he made payable to Michael
Boulware. Those checks totaled at least $1,335,132; by taxable
year, the deposits underlying this total aggregated $264,790 for
198906, $1,029,963 for 199006, $21,175 for 199106, and $19,204
for 199206. All but seven of such checks received from Timothy
Inoue were deposited into a personal checking account of Michael
Boulware, specifically, account No. 05-389054 or account No.
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49-507151. In one instance, a check in the amount of $73,500 was
deposited in 199006 into Jin Sook Lee’s trustee account No.
65-570109. In a second instance, a check in the amount of
$65,000 was deposited in 199006 into Jin Sook Lee’s personal
account No. 65-570109. On five other instances, a check was
cashed in 199006, rather than deposited; those five checks
totaled $196,532. Some of the checks were written payable to
HIE, but at the direction of Michael Boulware, “HIE” was crossed
out by Timothy Inoue and the name of Michael Boulware (or in one
case Jin Sook Lee) was written in. The proceeds from the checks
rewritten to Michael Boulware ended up in the accounts he
controlled. The proceeds from the check rewritten to Jin Sook
Lee ended up in her account.
At the time of the transactions, Merwyn Manago did not know
that Michael Boulware was selling coffee to Pele Trading or that
HIE was supplying coffee sold to Pele Trading. The $1,335,132
that Pele Trading paid Michael Boulware was not directly recorded
as income on HIE’s books. From 1989 through 1993, the coffee
sales to Pele Trading were not booked as loans to Michael
Boulware. Michael Boulware did not report these payments as
income.
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4. Referenced Coffee Sold by Michael Boulware Included in
HIE’s COGS
As to its coffee sales, HIE computes its cost of goods sold
(COGS) using a system that takes into account the difference in
weight (i.e., shrinkage) between actual coffee bean inventory at
the beginning and end of the accounting period. That “shrinkage”
is a plug number that reflects the loss in weight from roasting
coffee beans and from any other unexplained loss in weight of
inventory between the inventory dates. The coffee that Michael
Boulware sold to third parties was included in HIE’s COGS as
shrinkage.
D. Bonded Construction
1. Background
Bonded Construction is a general construction company owned
and operated by John Yamada. Bonded Construction performed work
for both HIE and Michael Boulware. Bonded Construction rented
and occupied a warehouse from HIE.
2. Michael Boulware Causes HIE To Pay to Remodel
Jin Sook Lee’s Residence
In 199006, Bonded Construction completely renovated the
Makaiwa house where Jin Sook Lee lived (and continues to live
today) and which was then titled in her name. The renovation
cost $156,647. Bonded Construction invoiced HIE for part of the
work and at the direction of Michael Boulware stated on two of
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the invoices that a total of $50,785 of the work was done on
HIE’s coffee roasting plant.27 At the direction of Michael
Boulware, Merwyn Manago caused HIE to pay both of those invoices
upon receipt.
3. Paving of the Back Lot at HIE
a. Overview
HIE paid Bonded Construction to “fill” (i.e., raise the
elevation of) and pave a 70,000-square-foot lot owned by HIE and
located at the back of its property behind the warehouse leased
by Bonded Construction. Bonded Construction was the general
contractor of the project, and Automated Equipment was the sole
subcontractor. Michael Boulware had asked John Yamada to act as
general contractor and to use Automated Equipment as the
subcontractor. HEI paid Bonded Construction for the job, and
Bonded Construction then paid Automated Equipment with some of
the money that Bonded Construction had just received from HIE.
Merwyn Manago authorized the payments to Bonded Construction not
27
The first invoice, dated Mar. 15, 1990, stated that
$23,580 was due for “Materials and Labor needed to make necessary
improvements to the Coffee Roasting Plant according per
instructions”. The second invoice, dated Apr. 11, 1990, stated
that $27,205 was due for “Materials and Labor to fabricate and
modify certain areas in the coffee plant to accept the new mill
assembly as per instructed”.
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knowing that part of the payments would then be transferred to
Automated Equipment.
James Kunihiro and Rodney Nohara owned a construction
company named Jayar Construction (Jayar). In 1994, Jayar was
working on a large excavation project in downtown Honolulu at the
site of the Bank of Hawaii. The project required that Jayar haul
away from the site approximately 100,000 cubic yards of soil in
the form of coral material. James Kunihiro and Michael Boulware
discussed Michael Boulware’s need for approximately 4,000 cubic
yards of that type of soil to fill HIE’s back lot. Jayar sold
Michael Boulware approximately 4,000 cubic yards of the soil
excavated from the downtown project. Jayar also trucked, dumped,
and spread that soil at HIE’s back lot.
Jayar received at least $31,000 for the job. James Kunihiro
and Rodney Nohara were each paid separately for the job through
checks that were payable to them personally from the bank account
of Automated Equipment. James Kunihiro received $17,000 through
three checks in the amounts of $9,000, $5,000, and $3,000.
Rodney Nohara received at least $14,000 through two checks in the
amounts of $9,000 and $5,000.
b. Automated Equipment
On or about December 22, 1993, Michael Boulware asked his
attorney, Michael McCarthy, to form quickly for Michael Boulware
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a wholly owned corporation known as Automated Equipment. Michael
McCarthy did so on December 22, 1993, using form documents that
he had previously used to set up other corporations and listing
himself as the only initial officer. Approximately 3 weeks
later, Michael Boulware replaced Michael McCarthy as the sole
officer of Automated Equipment. Michael Boulware did not tell
his and the subject corporations’ accountants, Kobayashi, Doi &
Lum CPAs LLC (Kobayashi Doi), about the formation or existence of
Automated Equipment.
In 1993, HIE started making monthly payments of
approximately $35,000 to Automated Equipment for a lease of
equipment. HIE did not actually lease any equipment from
Automated Equipment. When HIE was making these payments, Merwyn
Manago did not know that Michael Boulware owned Automated
Equipment.
E. Michael Boulware’s Fictitious Leasing Transactions
1. Overview
Lorin Kushiyama owned three businesses named Aloha Games,
Automatic Coin Equipment, Inc. (Automatic Coin Equipment), and
NA, Inc. Lorin Kushiyama has known Michael Boulware since the
1960s. In the early 1990s, Lorin Kushiyama asked Michael
Boulware to lend him approximately $25,000. Michael Boulware
refused to do so. Later, in 1992, Michael Boulware asked Lorin
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Kushiyama in exchange for money to assist him in two false
invoicing schemes that would eventually underlie one or more of
the counts for which Michael Boulware was indicted. Lorin
Kushiyama agreed to do so. Eventually, as a result of Lorin
Kushiyama’s participation in Michael Boulware’s false invoicing
schemes, Lorin Kushiyama was named an unindicted coconspirator
with Michael Boulware regarding a count of his indictment that,
as discussed infra, alleged a conspiracy knowingly to make a
false statement and report for purposes of influencing the action
of an institution insured by the Federal Deposit Insurance
Corporation.
2. Michael Boulware’s First Scheme
On or about January 8, 1992, Michael Boulware asked Lorin
Kushiyama to cause Aloha Games to prepare and deliver to HIE an
invoice purporting to show that HIE paid $157,612 to purchase
video games identified in the invoice. Lorin Kushiyama agreed to
do so and caused Aloha Games to issue HIE an invoice stating that
Aloha Games had sold 48 games to HIE on January 8, 1992, at a
total cost of $157,612 (inclusive of 4-percent Hawaii tax of
$6,062). On January 8, 1992, HIE issued a $75,000 check to Aloha
Games to pay part of the invoice. On the same day, Lorin
Kushiyama wrote a $70,000 check from Aloha Games to Michael
Boulware, which Michael Boulware deposited on that day into his
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First Hawaiian Bank account No. 49-507151. On January 10, 1992,
HIE issued a $82,612 check to Aloha Games to pay the remainder of
the invoice. The $82,612 check was endorsed by Lorin Kushiyama
and deposited into one of the off-book bank accounts, Central
Pacific Bank account No. 01-06586-6. HIE deducted the $157,612
in payments on its 199206 Federal income tax return. Neither
Lorin Kushiyama nor Aloha Games sold or otherwise transferred to
HIE any of the games listed on the invoice; HIE already owned
those games.
3. Michael Boulware’s Second Scheme
a. Need for the Second Scheme
Michael Boulware asked Merwyn Manago to make additional
payments to Aloha Games for the purchase of video games but did
not submit to Merwyn Manago any additional invoices to support
those additional payments. Merwyn Manago made the additional
payments to Aloha Games and recorded those payments as personal
loans to Michael Boulware. Michael Boulware devised a second
scheme to obtain invoices in response to the actions of Merwyn
Manago.
Under the second scheme, Lorin Kushiyama prepared false
invoices for Michael Boulware showing a sale of equipment to HIE
from one of Lorin Kushiyama’s businesses, and Michael Boulware
received financing on those invoices from General Electric Credit
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Corporation Financial Corporation (GECC). GECC financed
purchases of equipment secured by a security interest in the
equipment, and transactions with GECC were structured as if the
borrower was leasing the equipment from GECC. The typical
transaction facilitated by GECC involved GECC as the lessor and a
commercial customer as the lessee seeking to lease equipment from
a particular vendor that the customer had selected. Because HIE
was a regular and well-rated customer of GECC with respect to
HIE’s prior purchases of video games, GECC generally required
from HIE just an invoice to finance any purchase price shown on
the invoice.
b. HIE’s Relationship With GECC
HIE and GECC had had a financial relationship since October
8, 1985, and HIE had had an account with GECC since at or about
the same time. On April 10, 1989, HIE and GECC entered into a
“Master Lease Agreement” (MLA) under which GECC agreed to lease
to HIE and HIE agreed to lease from GECC equipment as described
in subsequent schedules to the MLA. The MLA appointed HIE as
GECC’s agent for inspection and acceptance of equipment from a
supplier, and HIE upon receipt of equipment was required to
execute a certificate of acceptance and a delivery receipt
acknowledging receipt of the equipment in good condition. Under
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the MLA, the equipment remained the property of GECC while HIE
made payments under the lease schedule.
c. Seven False Invoices
i. Overview
In early 1992, Michael Boulware asked Lorin Kushiyama to
cause Aloha Games and Automatic Coin Equipment to prepare and
deliver to HIE seven invoices purporting to show the purchase of
video games at a total cost of $495,814.80. Lorin Kushiyama
agreed to do so. Lorin Kushiyama prepared in the names of his
businesses four false invoices totaling $271,382.80 and three
false invoices totaling $224,432.
ii. Four False Invoices Totaling $271,382.80
Lorin Kushiyama caused his businesses to issue four false
invoices in the total amount of $271,382.80. First, Lorin
Kushiyama caused Automatic Coin Equipment to prepare and deliver
to HIE an invoice dated February 3, 1992, listing that Automatic
Coin Equipment had sold 17 games to GECC (on behalf of HIE) at a
total cost of $54,563.60 (inclusive of 4-percent Hawaii tax of
$2,098.60). Second, Lorin Kushiyama caused Aloha Games to
prepare and deliver to HIE an invoice dated February 5, 1992,
listing that Aloha Games had sold 15 games to GECC (on behalf of
HIE) at a total cost of $42,900 (inclusive of 4-percent Hawaii
tax of $1,650). Third, Lorin Kushiyama caused Automatic Coin
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Equipment to prepare and deliver to HIE an invoice dated February
10, 1992, listing that Automatic Coin Equipment had sold 15 games
to GECC (on behalf of HIE) at a total cost of $53,851.20
(inclusive of 4-percent Hawaii tax of $2,071.20). Fourth, Lorin
Kushiyama caused Automatic Coin Equipment to prepare and deliver
to HIE an invoice dated March 6, 1992, listing that Automatic
Coin Equipment had sold 35 games to GECC (on behalf of HIE) at a
total cost of $120,068 (inclusive of 4-percent Hawaii tax of
$4,618). As noted above, the amounts of these 4 invoices total
$271,382.80 ($54,563.60 + $42,900 + $53,851.20 + $120,068 =
$271,382.80).
iii. Three False Invoices Totaling $224,432
Lorin Kushiyama caused his businesses to issue three other
false invoices in the total amount of $224,432. First, Lorin
Kushiyama caused Aloha Games to prepare and deliver to HIE an
invoice dated March 3, 1992, listing that Aloha Games had sold 22
games to GECC (on behalf of HIE) at a total cost of $66,705.60
(inclusive of 4-percent Hawaii tax of $2,565.60). Second, Lorin
Kushiyama caused Automatic Coin Equipment to prepare and deliver
to HIE an invoice dated March 11, 1992, listing that Automatic
Coin Equipment had sold 22 games to GECC (on behalf of HIE) at a
total cost of $65,442 (inclusive of 4-percent Hawaii tax of
$2,517). Third, Lorin Kushiyama caused Aloha Games to prepare
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and deliver to HIE an invoice dated March 17, 1992, listing that
Aloha Games had sold 28 games to GECC (on behalf of HIE) at a
total cost of $92,284.40 (inclusive of 4-percent Hawaii tax of
$3,549.40). As noted above, the amounts of these three invoices
total $224,432 ($66,705.60 + $65,442 + $92,284.40 = $224,432).
d. First Four Referenced False Invoices
On March 3, 1992, HIE submitted the February 3, 5, 10 and
March 6, 1992, invoices to GECC as if the invoices reflected
typical leasing arrangements. GECC processed the invoices as
such and on March 10, 1992, joined with HIE in executing a
document with respect thereto stating that HIE had to make
monthly payments to GECC of $8,833.51. One day later, on March
11, 1992, GECC issued a $42,900 check payable to Aloha Games and
a $228,482.80 check payable to Automatic Coin Equipment. Neither
Lorin Kushiyama nor either of his businesses, Aloha Games and
Automatic Coin Equipment, sold or otherwise transferred to HIE or
GECC any of the games listed on the four just mentioned invoices;
HIE already owned those games.
On March 12, 1992, Lorin Kushiyama caused Aloha Games to
transfer $32,900 to the Bank of Hawaii and caused the Bank of
Hawaii to issue a $32,900 cashier’s check to Michael Boulware in
return for the transfer. Also on that day, Lorin Kushiyama
caused NA, Inc., to issue a $228,482.80 check payable to Michael
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Boulware; on the same day, Michael Boulware deposited that check
into his First Hawaiian Bank account No. 49-507151. On March 13,
1992, Michael Boulware deposited the $32,900 cashier’s check into
his First Hawaiian Bank account No. 49-507151.
HIE paid GECC each of the $8,833.51 monthly payments and
deducted those payments on its 199206 through 199506 Federal
income tax returns.
e. Last Three Referenced False Invoices
On March 23, 1992, HIE submitted the March 3, 11, and 17,
1992, invoices to GECC as if the invoices reflected typical
leasing arrangements. GECC processed the invoices as such and on
March 27, 1992, joined with HIE in executing a document with
respect thereto stating that HIE had to make monthly payments to
GECC of $7,206.51. On April 1, 1992, GECC issued a $66,705.60
check payable to Aloha Games, a $92,284.40 check payable to Aloha
Games, and a $65,442 check payable to Automatic Coin Equipment.
Neither Lorin Kushiyama nor either of his businesses, Aloha Games
and Automatic Coin Equipment, sold or otherwise transferred to
HIE or GECC any of the games listed on the three just mentioned
invoices; HIE already owned those games. On April 1, 1992, the
$66,705.60, $92,284.40, and $65,442 checks were all deposited
into one of the off-book bank accounts, Central Pacific Bank
account No. 01-06586-6.
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HIE paid GECC each of the $7,206.51 monthly payments and
deducted those payments on its 199206 through 199506 Federal
income tax returns.
4. Funds Transferred to Lorin Kushiyama
After Lorin Kushiyama prepared and delivered the false
invoices for Michael Boulware, Michael Boulware lent Lorin
Kushiyama the money he had previously requested. Later, in 1999
and 2000, HIE paid Lorin Kushiyama as a full-time consultant
although he performed no meaningful substantive activity for HIE.
F. Michael Boulware’s International Circular Flow of Funds
1. Overview
Respondent determined in the NOD issued to HIE that HIE
improperly deducted $1,731,000 for 199506 through 199706 as to
funds transferred from HIE to various foreign entities and then
to Michael Boulware; that HIE improperly deducted $29,984 for
199506 as to funds transferred from HIE to various foreign
entities and then to Briggs Cockerham, an entity in Amarillo,
Texas, as a potential personal investment by Michael Boulware;
and that HIE improperly deducted $89,936 for 199506 and 199606 as
to funds transferred from HIE to various foreign entities and
then to Anthony Oh Young and Gloria Oh Young to pay off a
personal gambling debt of Michael Boulware.
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Nathan Suzuki was a tax adviser to Michael Boulware and to
the subject corporations and a former certified public accountant
elected in 1992 (and continuing to serve through 1996) as a
member of the Hawaii House of Representatives. On or about March
25, 2004, Nathan Suzuki pleaded guilty to conspiring with Michael
Boulware from June 16, 1993 or thereabouts, to February 10, 2000,
to defraud the United States by impeding, impairing, obstructing,
and defeating the lawful functions of the Internal Revenue
Service in the ascertainment, computation, assessment, and
collection of Michael Boulware’s Federal income taxes. That plea
related in part to the formation and operation of Forest Trading,
Pacific Vendors, and Harvest International, the relevant foreign
entities referred to in the prior paragraph.
2. Relevant Foreign Entities
a. Forest Trading
On April 7, 1992, Forest Trading was established in Hong
Kong as a corporate type entity. Its original shareholders were
Sek Nga Kwan and Raymond Lam Man Shing (Raymond Lam), each
holding 50 percent of its shares. The office of Forest Trading
in an office building in Hong Kong. The office was staffed by
Raymond Lam, his wife, and a third individual.
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b. Pacific Vendors
Harold Okimoto was a close personal friend of Michael
Boulware. Harold Okimoto referred either Nathan Suzuki or a
Tongan national named V. Hemaloto Alatini (Hemaloto Alatini) to
Barney Shiotani for assistance in forming for Michael Boulware a
corporate type entity in the Kingdom of Tonga.28 On or about
December 9, 1994, Nathan Suzuki and Hemiloto Alatini incorporated
that entity, Pacific Vendors, as a private company in and under
the laws of the Kingdom of Tonga (in other words, an entity that
was similar to a corporation in the United States). Subsequently
in December 1994, Barney Shiotani contacted the officials of the
Kingdom of Tonga inquiring as to why the corporate charter had
not as of then been issued for Pacific Vendors. Barney Shiotani
was informed that the charter was “well on its way”. The charter
was later issued.
Pacific Vendors was owned nominally for Michael Boulware.
Originally, its nominal shareholders were Nathan Suzuki, owning
80 percent of the shares of the company, and Hemaloto Alatini,
owning the rest. Hemaloto Alatini was nominally given shares in
28
As discussed infra, Barney Shiotani is an attorney who
became a close confidant of Michael Boulware after Michael
Boulware learned that he was under criminal investigation.
Barney Shiotani advised Michael Boulware on ways to defeat that
investigation.
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Pacific Vendors to facilitate its creation and the opening of its
bank accounts in the Kingdom of Tonga. Nathan Suzuki was
appointed secretary and director of Pacific Vendors.
Pacific Vendors and its bank accounts were established by
Nathan Suzuki and Michael Boulware to help Michael Boulware avoid
the consequences of the criminal investigation of Michael
Boulware and to impede, impair, obstruct, and defeat that
investigation. Merwyn Manago was not aware of Pacific Vendors.
c. Harvest International
i. Roxca Limited
In or before 1994, Harold Okimoto contacted Barney Shiotani
because Harold Okimoto wanted to form a corporate type entity in
and under the laws of Hong Kong. Barney Shiotani referred Harold
Okimoto to a Hong Kong law firm named King & Co. (King Co.). The
desired entity, Roxca Limited, was incorporated in Hong Kong on
October 14, 1994.
ii. Reinvoicing Operation
James Chan was a friend of Nathan Suzuki and of Raymond Lam.
Sometime during 1993 through 1995, Nathan Suzuki asked James Chan
to help him establish an offshore reinvoicing operation in Hong
Kong. James Chan asked Raymond Lam, who was then in Hong Kong,
if he would assist Nathan Suzuki in that matter. Raymond Lam
agreed to do so.
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James Chan referred Nathan Suzuki to Raymond Lam, and Nathan
Suzuki and Raymond Lam formed Harvest International on or about
January 12, 1995, by changing the name of Roxca Limited to
Harvest International. Harvest International had no personnel,
and its office in Hong Kong was the same office as that of Forest
Trading. The office had a separate phone and fax line for
Harvest International. Harvest International reported that its
initial directors were Harold Okimoto and Pacific Vendors and
that its initial shareholders also were Harold Okimoto and
Pacific Vendors. Harold Okimoto owned 1 percent of the shares in
Harvest International as a nominee of Pacific Vendors and of
Michael Boulware, and Pacific Venders owned the other 99 percent
of the shares. Harold Okimoto’s shares were formally transferred
to Pacific Vendors after Harold Okimoto died of colon cancer on
October 12, 1996.
iii. Bank Accounts
From March 24, 1995, until his death, Harold Okimoto was the
sole signatory on Harvest International’s bank accounts. Those
accounts were a “HK Dollar Current Account” and a “US Dollar
Savings Account” opened on or about March 24, 1995, at the
Hongkong & Shanghai Banking Corporation Limited.
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iv. Rationale Underlying Formation
Nathan Suzuki had explained to James Chan that he wanted to
form a reinvoicing company in Hong Kong to buy coffee from HIE on
credit and then to sell the coffee to overseas customers, the end
users, who would receive their purchased coffee as drop shipments
from HIE. Further, Nathan Suzuki explained, the reinvoicing
company would collect payments on its sales long before the time
that it would have to pay its credit owed HIE and could lend the
excess cashflow to Forest Trading which in turn could lend the
money to Michael Boulware net of certain fees. James Chan often
acted as a messenger and translator for Nathan Suzuki and Raymond
Lam regarding Harvest International, and James Chan later learned
that the excess cash was wired directly to Michael Boulware
rather than lent to him.
v. Actual Operation
This text is long and has been trimmed here. Open the source document for the complete record.