UNITED STATES TAX COURT

T.C. Memo. 2003-219

UNITED STATES TAX COURT

DAVID D. LE, a.k.a. DAVID DUNG LE, a.k.a. DUNG V. LE &

KIM HUONG LE, a.k.a. KIM LE, ET AL.,1 Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 13703-99, 10851-01,

10852-01.

Filed July 22, 2003.

P-H is a physician in California who during 1990

and 1991 performed his medical services through a

business known as David Dung Le, M.D., Inc. (DDL). R

determined for those years that (1) DDL was a

corporation that realized unreported income from third

party payments made to it but diverted to the use of

P-H and P-W (collectively, Ps) and (2) Ps received

unreported constructive distributions on account of the

diversions. R determined as to the payments that Ps

owed 1990 and 1991 Federal individual income taxes and

1

Cases of the following petitioners are consolidated

herewith: David D. Le, a.k.a. David Dung Le, a.k.a. David Le,

a.k.a. Dung V. Le, a.k.a. Dung Le, Transferee, docket No.

10851-01; Kim Huong Le, a.k.a. Kim H. Le, a.k.a. Kim Le, a.k.a.

Nguy Le, Transferee, docket No. 10852-01.

-2fraud penalties under sec. 6663(a), I.R.C. R also

determined as to the payments that Ps were transferees

of DDL’s assets, and, in that capacity, owed the unpaid

1990 and 1991 Federal corporate income taxes and fraud

penalties of DDL. Ps argue that R’s determinations are

erroneous because, Ps state, P-H’s medical practice was

not incorporated during 1990 and 1991. Ps note that a

corporation has never been formally registered with

California to do business as DDL.

1. Held: In 1990 and 1991, P-H operated his

medical practice in California as a corporation known

as DDL.

2. Held, further, Ps’ 1990 and 1991 gross income

includes the amounts diverted from DDL, and Ps are

liable for the individual income taxes and related

fraud penalties determined by R.

3. Held, further, Ps, as transferees of DDL’s

assets, are liable for DDL’s 1990 and 1991 Federal

corporate income tax liabilities (inclusive of the

fraud penalties).

4. Held, further, the period of limitations under

sec. 6501, I.R.C., has not run as to Ps’ 1990 or 1991

taxable year.

Wayne Hagendorf and Richard J. Radcliffe, for petitioners.

Igor S. Drabkin and David R. Jojola, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge:

These cases concern (1) the 1990 and 1991

Federal individual income taxes of David D. Le, a.k.a. David Dung

Le, a.k.a. David Le, a.k.a. Dung V. Le, a.k.a. Dung Le

(petitioner), and Kim Huong Le, a.k.a. Kim H. Le, a.k.a. Kim Le,

a.k.a. Nguy Le (Ms. Le) (collectively with petitioner, the Les,

-3or petitioners), and (2) the Les’ liability for the unpaid 1990

and 1991 Federal corporate income taxes (inclusive of penalties)

of a California corporation known as David Dung Le, M.D., Inc.

(DDL).

Respondent determined deficiencies in the Les’ 1990 and

1991 Federal income taxes and fraud penalties under section

6663(a) and reflected those determinations in a notice of

deficiency issued to the Les on July 7, 1999.2

Respondent

determined that the Les, as transferees of DDL’s assets, are also

liable for DDL’s unpaid 1990 and 1991 Federal corporate income

tax liabilities (inclusive of penalties) and reflected this

determination in separate notices of determination of transferee

liability issued to petitioner and Ms. Le on June 5, 2001.3

As

determined by respondent, the amounts of the Les’ deficiencies

and fraud penalties and the amounts of DDL’s unpaid liabilities

are as follows:

2

Unless otherwise indicated, section references are to the

applicable versions of the Internal Revenue Code. Rule

references are to the Tax Court Rules of Practice and Procedure.

Dollar amounts are rounded to the nearest dollar.

3

On July 1, 1999, respondent had issued DDL a notice of

deficiency as to Federal corporate income taxes and fraud

penalties under sec. 6663(a). DDL, through its current counsel,

Wayne Hagendorf (Mr. Hagendorf), petitioned the Court with

respect thereto. Following our dismissal of that case for lack

of jurisdiction, see David Dung Le, M.D., Inc. v. Commissioner,

114 T.C. 268 (2000), affd. 22 Fed. Appx. 837 (9th Cir. 2001),

respondent, on July 31, 2000, assessed the deficiencies and

penalties listed in the notice of deficiency. These deficiencies

and penalties are the corporate liabilities at issue.

-4Les’ Deficiencies

Years

Deficiencies

Penalties

1990

1991

$89,826

59,246

$67,370

44,435

DDL’s Unpaid Liabilities

Years

Income taxes

Penalties

1990

1991

$98,540

65,897

$73,905

49,423

We decide as to the subject years:

1.

Whether petitioner operated his medical practice through

a C corporation known as DDL.

2.

We hold he did.

Whether the Les’ gross income includes constructive

distributions in the amounts determined by respondent.

We hold

it does.

3.

Whether the Les, in their individual capacities, are

liable for the fraud penalties determined by respondent under

section 6663(a).

4.

We hold they are.

Whether the Les, as transferees of DDL’s assets, are

liable for DDL’s unpaid Federal corporate income taxes (inclusive

of penalties).

5.

We hold they are.

Whether the period of limitations under section 6501 has

run as to the Les’ personal income taxes.

We hold it has not.4

FINDINGS OF FACT

4

On the basis of our holdings, we also sustain without

further comment certain computational adjustments made by

respondent and disputed by petitioners.

-5A.

Overview

Many facts were stipulated.

The stipulated facts and the

exhibits submitted therewith are incorporated herein by this

reference.

We find the stipulated facts accordingly.

The Les

are husband and wife, and they resided in Houston, Texas, when

they petitioned the Court.

They have been married to each other

since 1973.

Petitioner is a physician who was born in Hanoi, Vietnam, on

January 13, 1943, and immigrated to the United States in 1975.

He has been known in the United States by the following names:

Dung Van Le, Dung V. Le, Dung Le, David Van Le, David Dung Le,

David D. Le, and David Le.

Kim Le was born in Hanoi, Vietnam, on

August 11, 1951, and also immigrated to the United States in

1975.

She has been known in the United States by the following

names:

Kim Huong Le, Kim H. Le, Kim Le, and Nguy Le.

B.

Petitioner’s Medical Practice

Petitioner became licensed to practice medicine in

California in 1981.

On December 22, 1982, when he called himself

Dung Van Le, petitioner incorporated his medical practice

(medical practice) in California under the name Dung Van Le,

A Medical Corporation.

The articles of incorporation for the

corporation stated in relevant part:

I

The name of this Corporation is DUNG VAN LE, A

MEDICAL CORPORATION.

-6II

The purpose of this corporation is to engage in

the profession of Medicine and any other lawful

activities (other than the banking or trust company

business) not prohibited to a Corporation engaging in

such profession by applicable laws and regulations.

III

This Corporation is a Professional Corporation

within the meaning of Part 4 of Division 3 of Title 1

of the California Corporations Code.

IV

The name in the State of California of this

Corporation’s initial agent for service of process is

DUNG VAN LE, 4614 EL CAJON BOULEVARD, SUITE 7, SAN

DIEGO, CALIFORNIA 92115.

At or about that time, California assigned to the corporation a

corporate number.

Five months later, in May 1983, the

corporation applied for and received a Federal employer

identification number.

Petitioner incorporated his medical practice in order to

save taxes.

He was the corporation’s sole shareholder, sole

director, sole officer, and sole physician.

His corporate

business began in San Diego, California, and it moved to Orange

County, California (Orange County), in or about 1989.

During the subject years, petitioner called himself David

Dung Le, he operated his corporation under the name DDL, and he

personally performed all of DDL’s medical services.

During those

years, DDL had an active business checking account that had been

opened at a bank in Orange County contemporaneously with

-7petitioner’s move there.5

In 1991, petitioner used the corporate

and Federal employer identification numbers assigned to Dung Van

Le, A Medical Corporation, to report and pay to California

corporate estimated tax in the name of DDL.

C.

Attorney Checks

During the subject years, Ms. Le worked as DDL’s office

manager.

Her general duties included performing receptionist

functions, maintaining DDL’s books and records, processing

incoming mail, and making bank deposits.

Her specific

responsibilities included entering DDL’s receipts into DDL’s

records.

DDL’s receipts were primarily in the form of cash from

patients or checks from Medi-Cal, Medicare, insurance companies,

or various law offices.

The checks from the law offices

(attorney checks) were a significant source of DDL’s income and

stemmed from medical services rendered by petitioner, in his

capacity as DDL’s employee, to clients of the payor/attorneys.

Ms. Le recorded in DDL’s records all of DDL’s receipts but for

many of the receipts which DDL received in the form of attorney

checks.

The Les diverted many of the attorney checks to their

personal use and did not report the amounts of the diverted

checks to the Internal Revenue Service (either on DDL’s corporate

5

The bank statements list the owner of the account as DDL

“DBA ASIAN GARDEN MED’CL CLINIC”. The record does not elaborate

on this pseudonym.

-8returns or on their individual returns).6

During the subject

years, the Les diverted to their personal use attorney checks

totaling $295,940 and $197,072, respectively.

Of the $295,940,

the Les deposited $150,213 into their personal accounts, cashed

$116,848, and converted $28,878 into cashier’s checks (the $1

discrepancy is due to rounding).

Of the $197,072, the Les

deposited $66,663 into their personal accounts, cashed $93,260,

and converted $37,148 into cashier’s checks (the $1 discrepancy

is due to rounding).

D.

DDL’s and the Les’ Accountant

During the relevant years, Tuan Anthony Nguyen (Mr. Nguyen)

performed accounting and tax return preparation services for DDL

and the Les.

Among other things, he prepared for them profit and

loss statements, quarterly payroll returns, the Les’ individual

income tax returns, and DDL’s corporate income tax returns.

Ms.

Le, who provided Mr. Nguyen with all of DDL’s information that he

relied upon to prepare DDL’s 1990 and 1991 corporate income tax

returns, informed Mr. Nguyen that all of DDL’s income was

reflected in its business bank account.

Mr. Nguyen also prepared

for DDL 1990 and 1991 Forms W-2, Wage and Tax Statements, as to

petitioner.

These forms, which were attached to the Les’ 1990

and 1991 Federal individual income tax returns, respectively,

6

DDL did report on its corporate income tax returns the

amounts of the attorney checks which were deposited into DDL’s

bank account.

-9reported that DDL had paid wages to petitioner in his capacity as

DDL’s employee.

E.

1990 and 1991 Tax Returns

The Les filed joint 1990 and 1991 Federal individual income

tax returns.

These returns were signed by both of the Les.

The

Les reported on these returns that they had realized gross income

in amounts which did not include the amount of any of the

attorney checks.

Petitioner filed on behalf of DDL 1990 and 1991 Federal

corporate income tax returns.

Those returns, which petitioner

signed in his capacity as an officer of DDL, reported that DDL

was incorporated on January 3, 1983,7 and that DDL owned as of

the end of each respective year a significant dollar amount of

assets.8

The corporate returns also reported for each respective

year that DDL had realized a significant dollar amount of gross

receipts and had paid a significant dollar amount of varied

expenses, including an expense for petitioner’s officer

compensation.

7

Whereas petitioner actually incorporated his medical

practice on Dec. 22, 1982, we consider DDL’s tax returns to state

erroneously that it was incorporated on Jan 3, 1983.

8

The respective returns report that DDL’s assets and

liabilities at the end of 1990 were $23,358 and $6,918,

respectively, and at the end of 1991 were $23,891 and $3,588,

respectively. The respective returns also reported that DDL had

retained earnings of $3,940 and $7,803.

-10The Commissioner commenced an audit of the individual and

corporate 1990 and 1991 returns after discovering during the

audit of a personal injury attorney that the attorney had written

checks to various physicians and that those checks had been

cashed.

The revenue agent interviewed both of the Les as part of

their and DDL’s audit.

During those interviews, both of the Les

provided false, misleading, and inconsistent statements on DDL’s

check cashing activities, their involvement in those activities,

and the completeness of DDL’s books and records.

On April 3,

1998, the Les agreed to extend to December 31, 1998, the time to

assess their personal income tax liability for 1991.

They later

agreed on July 1, 1998, to extend that term until July 31, 1999.

Respondent determined that the amounts of the attorney

checks which were diverted by the Les were includable in their

gross income as constructive distributions received from DDL.

As

to 1990, respondent determined (and included in the notice of

deficiency) that the Les failed to report constructive dividends

of $201,341 and constructive long-term capital gains of $82,100.

As to 1991, respondent determined (and included in the notice of

deficiency) that the Les failed to report constructive dividends

of $137,801 and constructive long-term capital gains of $62,034.

Following the issuance of the notice of deficiency, respondent’s

national office analyzed DDL’s earnings and profits to verify the

portions of the distribution that under section 301(c) were

-11dividends, return of basis, and long-term capital gain.

On the

basis of that analysis, respondent has since conceded that the

1990 distributions resulted in dividend income of $124,744 and

long-term capital gains of $154,017 and that the 1991

distributions resulted in dividend income of $78,494 and longterm capital gains of $118,579.

F.

The Les’ Indictment

Also during the audit, the Commissioner referred the Les’

case to his criminal investigation division (CID).

During the

course of the investigation by the CID, neither the Les nor their

attorneys challenged petitioner’s reporting position that he

operated his medical practice through a corporation named “David

Dung Le, M.D., Inc.”.9

Subsequent to this referral, an

indictment was filed against the Les on April 3, 1997, generally

charging each of them with:

(1) Two counts (counts 1 and 2) of

violating section 7206(1) as to their 1990 and 1991 Federal

individual income tax returns and (2) two counts (counts 3 and 4)

of violating section 7206(1) as to DDL’s 1990 and 1991 Federal

corporate income tax returns.

See United States v. David Dung Le

and Kim Huong Le, Central District of California, Case No. SA CR

97-33.

9

The gist of the indictment was that the Les had willfully

In fact, we understand petitioners’ counsel, Mr.

Hagendorf, to have first challenged this reporting position in

petitioners’ motion for summary judgment filed with the Court on

Apr. 25, 2002.

-12failed to include the amount of the attorney checks in DDL’s 1990

and 1991 corporate gross income, that they had diverted those

funds to their personal use, and that they had willfully failed

to include the diverted amounts in their 1990 and 1991 individual

gross income.

On September 17, 1997, petitioner pleaded guilty to counts 1

and 3 of the indictment.

Count 1 charged him with willfully

making and subscribing to a false 1990 Federal individual income

tax return.

Count 3 charged him similarly as to DDL’s 1990

Federal corporate income tax return.

As a factual basis of his

plea, petitioner agreed:

During calendar year 1990, as payment for medical

services rendered by your medical practice, David Dung

Le, M.D., Inc., you and your medical practice received

checks from various law offices. Notwithstanding the

fact that all of these checks constituted reportable

business income to you and your corporation, you caused

$295,940.90 in such checks to be deposited to your

personal accounts, cashed and/or converted to cashier’s

checks so as to avoid having these checks reported as

income to the Internal Revenue Service. You further

failed to advise your tax preparer that these business

checks had been so diverted.

Thereafter, on or about April 11, 1991, you willfully

signed a U.S. Joint Individual Tax Return, Form 1040,

for calendar year 1990 which was verified by a written

declaration that it was made under the penalties of

perjury, and which you did [not] believe to be true and

correct as to every material matter, in that said

return reported adjusted gross income of $113,847,

whereas as you knew, that adjusted gross income figure

failed to reflect an additional $295,940.90 in

reportable income.

In addition, on or about September 28, 1991, you

willfully made and subscribed a U.S. Corporation Income

-13Tax Return, Form 1120, on behalf of David Dung Le,

M.D., Inc., for calendar year 1990 which was verified

by a written declaration that it was made under the

penalties of perjury, and you did not believe to be

true and correct as to every material matter, in that

said return reported gross receipts of $248,359,

whereas as you well knew, that figure failed to include

$295,940.90 in additional gross receipts.

Petitioner acknowledged as to his plea agreement that he had

“carefully reviewed every part of it with my attorney” before

signing it.

Also on September 17, 1997, Ms. Le pleaded guilty to counts

1 and 3 of the indictment.

Count 1 charged her with willfully

subscribing to a false 1990 Federal individual income tax return

in violation of section 7206(1).

Count 3 charged her with aiding

and abetting the willful subscription of a false 1990 Federal

corporate income tax return in violation of section 7206(1).

a factual basis of her plea, Ms. Le agreed:

During calendar years 1990 and 1991, you served as

bookkeeper for your husband’s medical practice, David

Dung Le, M.D., Inc. During that calendar year, David

Dung Le, M.D., Inc. received checks from various law

offices in payment for medical services rendered.

Notwithstanding the fact that all of these checks

constituted taxable business income to David Dung Le,

M.D. and to your husband, you caused, and aided and

abetted the causing of, $295,940.90 in such checks to

be deposited to your personal accounts, cashed and/or

converted to cashier’s checks so as to avoid having

these checks reported as income to the Internal Revenue

Service. You further failed to advise your tax

preparer that these business checks had been so

diverted.

Thereafter, on or about April 11, 1991, you willfully

signed a U.S. Joint Individual Tax Return, Form 1040,

for calendar year 1990 which was verified by a written

As

-14declaration that it was made under the penalties of

perjury, and which you did [not] believe to be true and

correct as to every material matter, in that said

return reported adjusted gross income of $113,847,

whereas as you knew, that adjusted gross income figure

failed to reflect an additional $295,940.90 in

reportable income.

In addition, on or about September 28, 1991, your

husband willfully made and subscribed a U.S.

Corporation Income Tax Return, Form 1120, on behalf of

David Dung Le, M.D., Inc., for calendar year 1990 which

was verified by a written declaration that it was made

under the penalties of perjury, and which your husband

did not believe to be true and correct as to every

material matter, in that said return reported gross

receipts of $248,359, whereas as you and your husband

well knew, that figure failed to include an additional

$295,940.90 in gross receipts. By having failed to

deposit business checks into the David Dung Le, Md.,

Inc. business bank account and having failed to advise

your tax preparer that the business checks had been so

diverted, you knowingly aided, abetted and caused the

above described subscribing to a false corporate

return.

Ms. Le acknowledged as to her plea agreement that she had

“carefully reviewed every part of it with my attorney” before

signing it.

In connection with her plea, Ms. Le served jail

time.

G.

Previous Case Involving DDL

DDL previously petitioned this Court to redetermine

deficiencies in and other amounts related to its 1990 and 1991

Federal income taxes.

jurisdiction.

We dismissed the case for lack of

See David Dung Le, M.D., Inc. v. Commissioner,

114 T.C. 268 (2000).

We held that DDL was a California

corporation that lacked the capacity to engage in litigation

-15because California had suspended DDL’s powers, rights, and

privileges.

We noted that California’s action resulted from

DDL’s failure to pay its California income taxes.

Upon appeal,

our decision in David Dung Le, M.D., Inc. v. Commissioner, supra,

was affirmed by the Court of Appeals for the Ninth Circuit.

OPINION

The parties assert, and we agree, that petitioners have the

burden of proof as to all issues in this case except the issues

of transferee liability and fraud penalties.

Respondent bears

the burden of proof as to these latter two issues.

Secs.

6901(a), 7454(a); Rule 142(b), (d).

A.

Status of DDL

Petitioners argue that petitioner did not operate his

medical practice in a corporate form in 1990 and 1991.

disagree.

We

Petitioners agree that petitioner initially conducted

his medical practice as a corporation but argue that petitioner

abandoned practicing medicine through his corporation when he

moved to Orange County.

On the basis of the record as a whole,

including our observation and perception of petitioner when he

testified at trial about this issue, we find petitioner’s

testimony incredible and decline to rely upon it to support

petitioners’ positions herein.10

10

Neonatology Associates, P.A. v.

For similar reasons, we also find Ms. Le’s testimony

incredible and decline to rely upon it to support petitioners’

(continued...)

-16Commissioner, 115 T.C. 43, 84 (2000), affd. 299 F.3d 221 (3d Cir.

2002).

Petitioner’s testimony is clearly and convincingly

contradicted by the credible evidence in the record.

First,

petitioner had during the relevant years a business checking

account in the name of DDL.

That account was actively used by

DDL to cash all of the nondiverted checks that DDL received for

services performed by petitioner in his capacity as DDL’s

employee.

Second, petitioner filed 1990 and 1991 Federal

corporate income tax returns reporting DDL’s income and expenses

for those years as corporate items.

Those returns, which were

signed personally by petitioner in his capacity as a DDL officer,

reveal that petitioner considered himself an officer of a

corporation named DDL and that DDL was realizing income and

incurring expenses as if it were an active and ongoing corporate

business.

The returns also reveal that DDL owned assets as of

the end of both 1990 and 1991.

Given the additional fact that

DDL during the subject years also reported and paid corporate

estimated income tax to the State of California, we do not accept

petitioners’ claim that the corporate form of the medical

practice was abandoned by petitioner before the subject years.

10

(...continued)

positions herein.

-17Such is especially so, considering that the Les acknowledged

as part of their separate plea agreements that petitioner’s

medical practice was known during 1990 as “David Dung Le, M.D.,

Inc.”11, that DDL was active during that year, and that DDL

during that year received the same attorney checks that are at

issue herein in payment of medical services which were rendered

on behalf of it.

In light of these plea agreements, we reject

petitioners’ attempt to disavow their acknowledgments as set

forth clearly in the agreements.

We consider it unimportant that

the corporate and Federal employer identification numbers used on

the corporate returns and estimated payment vouchers were

initially assigned to a corporation named “Dung Van Le, A Medical

Corporation”.

Similarly, we place no importance with respect to

petitioner’s corporation’s never having been registered with the

State of California to do business as DDL.

In both cases,

petitioner called himself Dung Van Le when he incorporated his

medical practice as Dung Van Le, A Medical Corporation.

During

the subject years, however, when he called himself David Dung Le,

he simply used a different name for his corporation to reflect

the change in his personal name.

The fact that petitioner did

not notify the State of California that he had changed the name

of his medical practice to reflect his change in name does not

11

Ms. Le also acknowledged in her plea agreement that

petitioner’s medical practice was known as DDL in 1991.

-18mean that his medical practice, which petitioner represented to

the public and to the Commissioner as a corporation named “David

Dung Le, M.D., Inc.”, may escape Federal taxation as a

corporation.12

B.

Constructive Distributions

Absent a provision to the contrary, funds which a

shareholder diverts from a corporation are generally includable

in the shareholder’s gross income under section 61(a) to the

extent that the shareholder has dominion and control over them.

See also Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431

(1955).

One example of a contrary provision is section 301 where

Congress has provided that funds (or any other property)

distributed by a corporation to a shareholder with respect to his

or her stock are to be taxed under the provisions of section

301(c).

12

Under section 301(c), a constructive distribution is

Petitioners’ argument that DDL never existed is even more

audacious given that DDL attempted to litigate in this case the

merits of DDL’s liabilities and thereafter appealed to the Court

of Appeals for the Ninth Circuit our decision that DDL lacked

capacity to litigate by virtue of the fact that it was a

corporation with suspended powers. In light of the record as a

whole, including especially the Les’ plea agreements and DDL’s

filing of corporate income tax returns, we consider petitioners’

argument herein that petitioner did not operate his medical

practice through a corporation known as “David Dung Le, M.D.,

Inc.” to be frivolous. We also consider that it appears to have

been unreasonable for Mr. Hagendorf to have refused to stipulate

on behalf of his client to certain undisputed facts as to the

incorporation of petitioner’s medical practice, facts, we note,

which petitioner later testified at trial without contradiction

to be true.

-19taxable to the shareholder as a dividend only to the extent of

the corporation’s earnings and profits.

Any excess is a

nontaxable return of capital to the extent of the shareholder’s

basis in the corporation.

Any remaining amount is taxable to the

shareholder as capital gain.

Sec. 301(c)(2) and (3); Truesdell

v. Commissioner, 89 T.C. 1280, 1295-1298 (1987).

On the basis of the record before us, we are convinced:

(1) The Les had full dominion and control of DDL’s funds; i.e.,

the diverted attorney checks, and (2) they diverted those funds

for their personal use.

In fact, as to 1990, they admitted as

much in their plea agreements.13

Petitioners do not challenge

respondent’s analysis as to the tax treatment of the constructive

distributions from DDL.

We have reviewed those calculations, and

finding no error therein, we sustain respondent’s calculation of

the amounts of the constructive distributions that are dividends

and long-term capital gains.

C.

Fraud Penalties

Respondent determined that the Les are liable for fraud

penalties under section 6663(a).

13

Section 6663(a) imposes a

Whereas petitioners stress that all of the attorney

checks were made out to petitioner personally, given the plea

agreements, we find this to be but one more step in the Les’ goal

to hide this income from the IRS. We also reject petitioners’

assertion that the Les were naive, unsophisticated, and

incompetent as to tax matters. In fact, the Les willfully

concealed the receipt of the attorney checks by petitioner and

DDL. They were caught because the Commissioner was auditing the

personal injury attorney.

-20penalty of 75 percent of the portion of an underpayment that is

attributable to fraud.

In order for the Court to sustain

respondent’s determination as to the applicability of these

penalties to the Les, respondent must prove by clear and

convincing evidence:

(1) The Les underpaid their taxes for 1990

and 1991, and (2) some part of each underpayment was due to

fraud.

Once respondent has met this burden, we consider all of

the underpayment to be attributable to fraud unless petitioners

establish otherwise.

Sec. 6663(b).

On the basis of our review of the record, we conclude that

respondent has proven the first prong of the two-part test.

The

record establishes clearly and convincingly that petitioners

failed to include the distributions in their 1990 and 1991 gross

income.

We conclude that respondent has proven that petitioners

underpaid their Federal income taxes for both 1990 and 1991.

As to the second prong of the test; i.e., the presence of

fraud, the existence of fraud is a question of fact.

Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978).

Fraud is never presumed

or imputed; it must be established by independent evidence that

establishes a fraudulent intent on the taxpayer’s part.

v. Commissioner, 53 T.C. 96 (1969).

Otsuki

Because direct proof of a

taxpayer’s intent is rarely available, fraud may be proven by

circumstantial evidence and reasonable inferences may be drawn

-21from the relevant facts.

Spies v. United States, 317 U.S. 492

(1943); Stephenson v. Commissioner, 79 T.C. 995 (1982), affd.

748 F.2d 331 (6th Cir. 1984).

Where fraud is determined for

multiple years, as is the case here, respondent must establish

the requisite fraudulent intent for each of the years in order to

prevail as to all of the years.

The Court may sustain

respondent’s determination of fraud only as to those years for

which the fraudulent intent is established clearly and

convincingly.

Fraud requires a showing that the taxpayer

intended to evade a tax known or believed to be owing by conduct

intended to conceal, mislead, or otherwise prevent the collection

of tax.

Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d.

Cir. 1968).

We often rely on certain indicia of fraud in deciding the

existence of fraud.

The presence of several indicia is

persuasive circumstantial evidence of fraud.

Commissioner, 55 T.C. 85, 93 (1970).

include:

Beaver v.

The “badges of fraud”

(1) Understatement of income; (2) maintenance of

inadequate records; (3) failure to file tax returns;

(4) implausible or inconsistent explanations of behavior;

(5) concealment of income or assets; (6) failure to cooperate

with tax authorities; (7) engaging in illegal activities;

(8) dealing in cash; (9) failure to make estimated tax payments;

and (10) filing false documents.

Spies v. United States, supra;

-22Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Bradford

v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg.

T.C. Memo. 1984-601; Recklitis v. Commissioner, 91 T.C. 874, 910

(1988).

Following our consideration of the relevant badges of fraud,

we conclude that respondent has clearly and convincingly proven

the requisite fraudulent intent on the part of the Les for each

year in issue.

The Les understated their income on their 1990

and 1991 individual tax returns by not recognizing income from

the attorney checks which they diverted from DDL in the amounts

totaling $295,941 and $197,673, respectively.

They attempted to

conceal this income by not recording those checks in DDL’s

records (i.e., by not maintaining proper records for DDL), by not

depositing those checks into DDL’s bank account, by not advising

their tax preparer of the checks’ existence, and by not reporting

the diverted funds on DDL’s corporate income tax returns or on

their individual income tax returns.

They engaged in illegal

activities in that they filed fraudulent tax returns.

They

provided implausible or inconsistent explanations of their

behavior.

They failed to cooperate with tax authorities.

They

pleaded guilty to certain charges as to their and DDL’s 1990

income tax returns.

Although a conviction under section 7206(1)

does not by itself establish intent to evade tax, since the

existence of such intent is not an element of the crime, the

-23indictment and petitioners’ plea agreements in this case are

probative of petitioners’ fraudulent intent.

Commissioner, 84 T.C. 636, 643-344 (1985).

Wright v.

We also note as to

1990 that the Les both acknowledged in their separate plea

agreements that the attorney checks were taxable income to

petitioner, that they failed to advise their tax preparer about

the diverted funds, and that they knew that their taxable income

was underreported.

We hold that petitioners are liable for the fraud penalties

for 1990 and 1991 determined by respondent under section 6663(a).

D.

Transferee Liability

DDL has unpaid income tax liabilities which respondent seeks

to collect from the Les in their capacity as transferees of DDL’s

assets.

Section 6901 allows the Commissioner in certain cases to

collect from a transferee of assets unpaid taxes owed by the

assets’ transferor if a basis exists under State law or equity

for holding the transferee liable.

Bresson v. Commissioner,

111 T.C. 172 (1998), affd. 213 F.3d 1173 (9th Cir. 2000); Gumm v.

Commissioner, 93 T.C. 475, 479 (1989).

Section 6901 does not

create the liability of a transferee, but is merely a secondary

method for enforcing a transferor’s existing liability.

Commissioner, 57 T.C. 680, 700-701 (1972).

Mysse v.

Here, in order to

prevail on this issue, respondent must prove that he has

satisfied the procedural requirements of section 6901(a) and that

-24petitioner and Ms. Le are liable as transferees under State law

or equity.

Sec. 6902(a); Gumm v. Commissioner, supra at 479-480.

We begin with the procedural requirements.

They are:

(1) That the alleged transferee received property of the

transferor; (2) that the transfer was made without adequate

consideration; (3) that the transfer was made during or after the

period for which the transferor’s tax liability accrued; (4) that

either the transferor was insolvent before or because of the

transfer of property, or the transfer of property was one of a

series of distributions of property that resulted in the

insolvency of the transferor; (5) that all reasonable efforts to

collect from the transferor were made, and further collection

efforts would be futile; and (6) the value of the transferred

property (which determines the limit of the transferee’s

liability).

Gumm v. Commissioner, supra at 480.

On the basis of the record, we conclude that respondent has

met each of these procedural requirements.

First, the Les

received corporate funds from DDL in each subject year as

indicated by the diverted checks.

Second, corporate funds were

diverted from the corporation to the Les without adequate

consideration.

Third, the Les diverted these funds while DDL’s

tax liabilities for the subject years accrued.

Fourth, taking

into account DDL’s unpaid tax liabilities, DDL did not have

sufficient assets to pay all of its debts.

Fifth, respondent has

-25previously issued a notice of deficiency to DDL and assessed the

Federal corporate income taxes (inclusive of penalties) listed

therein.

Given DDL’s financial position, it would be futile for

respondent to attempt to collect the delinquent debt from DDL.

Sixth, the amount of the attorney checks diverted by the Les in

each year ($295,940 and $197,072, respectively) totaled greater

than DDL’s corresponding Federal income tax liabilities

(inclusive of penalties).

We now turn to whether the Les are liable as transferees

under applicable State law or equity.

Given that the diversion

of funds occurred in California, the applicable State law is that

of California.

In 1986, California adopted the Uniform

Fraudulent Transfer Act (UFTA), effective with transfers made or

obligations incurred after January 1, 1987.

3439.12 (West 1997).

Cal. Civ. Code, sec.

In that the diversions of funds at issue

all occurred after January 1, 1987, we conclude that California’s

version of the UFTA applies.

That version, which is codified at

Cal. Civ. Code secs. 3439-3439.12, allows transfers to be set

aside by present or future creditors for either actual fraud

(sec. 3439.04(a)) or constructive fraud (sec. 3439.04(b)).

In order to establish transferee liability under an actual

fraud theory, respondent must show that the transferor acted with

actual intent to defraud a creditor.

In determining such an

intent, courts have considered certain “badges of fraud”.

Lyons

-26v. Sec. Pac. Natl. Bank, 48 Cal. Rptr. 2d 174, 185 (1995).

Although California has not expressly codified these “badges of

fraud”, the legislative history of its version of the UFTA

demonstrates that indicia of intent should be given consideration

in determining whether a taxpayer has acted with intent to

hinder, delay, or defraud a creditor.

Annod Corp. v. Hamilton &

Samuels, 123 Cal. Rptr. 2d 924 (Cal. App. 2002).

The record

before us establishes an actual intent to defraud creditors by

DDL through the actions of its sole officer, petitioner, and by

its office manager, Ms. Le.

See Benes v. Commissioner, 42 T.C.

358, 383 (1964) (fraud of a sole or dominant shareholder can be

attributed to the corporation), affd. 355 F.2d 929 (6th Cir.

1966); Auerbach Shoe Co. v. Commissioner, 21 T.C. 191, 194 (1953)

(same), affd. 216 F.2d 693, 697-98 (1st Cir. 1954).

DDL, through

the actions of these individuals, caused a substantial amount of

its corporate funds to be diverted to the Les in 1990 and 1991.

The Les attempted to conceal this diversion either by cashing the

corporate checks, by depositing them into their personal bank

accounts, or by converting them into cashier’s checks.

As a

result of this diversion, DDL was left without sufficient assets

to pay its tax liabilities on the income connected to the

diverted funds.

We conclude that an actual intent to defraud the

Commissioner existed when the corporate receipts were diverted by

-27the Les.

Accordingly, we sustain respondent’s determination that

the Les, as transferees, are liable for DDL’s unpaid 1990 and

1991 income tax liabilities (inclusive of penalties).14

E.

Period of Limitations

Respondent generally must assess tax against individual

taxpayers such as the Les within 3 years of the later of the due

date or filing date of their return.

Sec. 6501(a) and (b)(1);

Mecom v. Commissioner, 101 T.C. 374, 382 (1993), affd. without

published opinion 40 F.3d 385 (5th Cir. 1994).

One exception to

this general rule is that in the case of a “false or fraudulent

return” with the intent to evade tax, the tax may be assessed at

any time.

Sec. 6501(c)(1).

Respondent bears the burden of

proving fraud in this context.

Sec. 7454(a); Rule 142(b).

In

that we have already concluded above that respondent has met his

burden of proof as to fraud in each year, we conclude that

assessment of petitioners’ 1990 and 1991 tax liabilities is not

barred by the statute of limitations.15

14

Because we find that petitioners had the actual intent to

defraud the Government, we do not need to address whether there

was constructive fraud under Cal. Civ. Code sec. 3439.04(b) (West

1997).

15

Respondent alternatively argued that the period of

limitations has not run because the Les’ omission of income was

“substantial” under sec. 6501(e)(1)(A). We need not and do not

consider this argument. We also need not and do not consider

respondent’s other alternative argument that the period of

limitations for 1991 remains open given the timely extension for

that year. See sec. 6501(c)(4).

-28All of the parties’ arguments not discussed herein have been

considered and rejected as irrelevant and/or without merit.

Decisions will be entered

under Rule 155.