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T.C. Memo. 2026-53

ALBERT S.N. HEE AND WENDY R. HEE,

Petitioners

COMMISSIONER OF INTERNAL REVENUE,

Respondent

WAIMANA ENTERPRISES, INC.,

Petitioner

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket Nos. 24068-22, 24077-22.

Filed June 23, 2026.

__________

Albert S.N. Hee and Wendy R. Hee, pro se in Docket No. 24068-22.

Howard T. Chang and Kurt K. Kawafuchi, for petitioner in Docket

No. 24077-22.

Scott W. Forbord, Erika R. Sams, D. Anthony Abernathy, Yvonne M.

Walker, Erik M. Martes, and Erick J. Quezada, for respondent in Docket

No. 24068-22.

Adam R. Becker, Scott W. Forbord, Erika R. Sams, D. Anthony

Abernathy, Yvonne M. Walker, and Erik M. Martes, for respondent in

Docket No. 24077-22.

Served 06/23/26

[*2]

MEMORANDUM FINDINGS OF FACT AND OPINION

WEILER, Judge: These cases were consolidated for trial, briefing,

and opinion. In Docket No. 24068-22 the Internal Revenue Service (IRS

or respondent) determined deficiencies and section 6663 1 civil fraud

penalties 2 for tax years 2004 through 2012 for petitioners Albert S.N.

Hee and Wendy R. Hee (collectively, Hees) as follows:

Year

Deficiency

I.R.C. § 6663

2004

$4,664

$3,498

2005

9,064

6,798

2006

28,900

21,675

2007

33,361

25,021

2008

64,389

48,292

2009

46,503

34,877

2010

87,636

65,727

2011

43,866

32,899

2012

22,800

17,100

In Docket No. 24077-22 respondent determined deficiencies and

section 6663 civil fraud penalties for tax years 2003, 2004, and 2006

through 2008 and an addition to tax under section 6651(a)(1) for tax year

2003 for petitioner Waimana Enterprises, Inc. (Waimana), as follows:

Year

Deficiency

Additions to Tax/Penalties

I.R.C. § 6663

I.R.C. § 6651(a)(1)

2003

$20,746

$68,360

$941

2004

58,208

43,656

—

2006

7,328

5,496

—

2007

54,343

40,757

—

2008

2,062

2,706

—

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all

relevant times, and Rule references are to the Tax Court Rules of Practice and

Procedure. All monetary amounts are rounded to the nearest dollar.

2 Respondent has determined that Mrs. Hee is not liable for section 6663 civil

fraud penalties for any of the tax years at issue.

[*3] The issues for decision are whether (1) the Hees failed to report

constructive dividend income received by Mr. Hee for tax years 2004

through 2012 from Waimana; (2) Mr. Hee and Waimana fraudulently,

and with the intent to evade tax, omitted income and/or overstated

deductions from their respective tax returns for each tax year at issue;

and (3) the statute of limitations bars assessment and collection of

respondent’s determined deficiencies.

FINDINGS OF FACT

These cases were tried during a special trial session of this Court

in Honolulu, Hawaii. Some of the facts are stipulated and are so found.

The Stipulations of Facts and the attached Exhibits are incorporated

herein by this reference. The Hees resided in Hawaii and Waimana’s

principal place of business was also in Hawaii when the Petitions in

these cases were filed.

Background on Petitioners and Expenses Questioned by the IRS

Mr. Hee, a native of Hawaii, attended Kamehameha Schools and

graduated from the U.S. Naval Academy. Mr. Hee is married to Mrs.

Hee, and they have three children: Adrianne, Breanne, and Charlton

(collectively, Children).

Mr. Hee incorporated Waimana in 1988 and was its sole

shareholder and president during tax years 2003 through 2012 (tax

years at issue). Waimana was a C corporation, and its primary business

was as a holding company for its affiliates. Waimana pursued new

business opportunities, provided management services, and supported

each of its affiliates’ businesses.

Sandwich Isles Communications, Inc. (Sandwich Isles), was a

C corporation and a wholly owned subsidiary of Waimana during the tax

years at issue. The chief executive officer of Sandwich Isles for the tax

years at issue was Robert Kihune. Sandwich Isles’ primary business was

to develop and provide telecommunication services on Hawaiian home

lands for the State of Hawaii, Department of Hawaiian Home Lands.

Clearcom, Inc. (Clearcom), was a C corporation and a wholly

owned subsidiary of Waimana during the tax years at issue. Clearcom’s

primary business was as a contractor to build and repair

telecommunication networks and to provide data services. Clearcom was

the general contractor for the Paniolo Cable, which is a Hawaiian

[*4] interisland cable. The Paniolo Cable is owned by Blue Ivory, LLC,

which is owned by Mr. Hee’s Children’s three irrevocable trusts.

Ho’opa’a Insurance Co. (Ho’opa’a) was a C corporation and a

wholly owned subsidiary of Waimana during the tax years at issue.

Ho’opa’a’s primary business was as a captive insurance company. Mr.

Hee was president of Sandwich Isles, Clearcom, and Ho’opa’a

(collectively, Subsidiaries).

To pay expenses Mr. Hee routinely used his personal credit cards:

an American Express Centurion card, a Navy Federal Credit Union

card, and an American Express Optima Platinum card (collectively,

Credit Cards). Mr. Hee personally paid the balances of the Credit Cards

each month, then sought reimbursement of certain expenses related to

the appropriate business, namely Waimana, Sandwich Isles, or

Clearcom.

On the Credit Cards’ itemized monthly statements Mr. Hee would

direct his assistant, Nancy Henderson, to categorize charges as personal

or business related, record the general category of the charges (e.g.,

travel, meals/entertainment, or office expense), and allocate the charges

to the Subsidiaries. Ms. Henderson would then prepare a “request for

reimbursement” form and a reimbursement check. Mr. Hee would then

approve the request for reimbursement by initialing the form and later

signing his reimbursement check as Waimana’s president.

Waimana and the Subsidiaries routinely reimbursed employees

for company travel. The travel reservations for items such as rental cars,

hotels, and other travel expenses would have to go through the travel

coordinator, Joycelynn Costa. The travel reimbursement process

required filling out a form, providing a receipt, stating the purpose of

the travel, and identifying what parts of the travel were personal versus

business. The form was then sent through a two-step approval process:

(1) the travel coordinator would review the purpose of the travel and

identify who was traveling and (2) management would approve the

request. Trips taken by Mr. Hee and his family, however, were not

reviewed by Ms. Costa through the ordinary process.

In addition to a travel reimbursement process there was a general

reimbursement policy for Waimana and the Subsidiaries. Most of the

expenses were funded and deducted by Sandwich Isles and Clearcom.

The expenses were initially paid by Mr. Hee’s Credit Cards, and then

Sandwich Isles or Clearcom would deduct the expenses and repay the

[*5] amounts to Waimana. Waimana would then reimburse Mr. Hee for

the total amount of business expenses.

The accounting firm of Chinaka & Siu and its certified public

accountant (CPA) partners—Carlton Siu and David Chinaka—prepared

Forms 1120, U.S. Corporation Income Tax Return, for Waimana for tax

years 2003 through 2008. For tax years 2003 through 2008 Waimana

did not file consolidated returns with the Subsidiaries. Therefore, for tax

years 2003 through 2008 the expenses at issue which were funded and

reimbursed by Sandwich Isles and Clearcom were not deducted on a

consolidated basis with Waimana.

Waimana provided Chinaka & Siu’s accountant Lynn Tamanaha

with check registers containing the dates of the checks, the check

numbers, the amounts of the checks, the payees, and the expense

classifications. It would also provide the Credit Card statements to

Chinaka & Siu at the end of the year. Chinaka & Siu relied upon the

check registers’ account classifications for preparing the tax returns. In

the later years Waimana used QuickBooks to categorize checks and

expense classifications which were furnished to Chinaka & Siu to

prepare Waimana’s tax returns.

Waimana requested an extension for tax year 2003 on October 15,

2004, but the return was not filed until April 23, 2007. The Form 1120

for tax year 2007 was also untimely filed on May 12, 2009. Waimana

timely filed its Forms 1120 for tax years 2004 through 2006 and 2008.

In addition to preparing returns Chinaka & Siu provided other

accounting services, including payroll, bookkeeping, and preparing

calculations and trial balances. In preparation of Waimana’s

employment tax returns Chinaka & Siu received the hours worked for

hourly employees, and for salaried employees Waimana would provide

annual salaries as well as start and termination dates of employment.

The payroll information received from Waimana was then entered into

Chinaka & Siu’s payroll tax software and used to prepare the necessary

employment returns. Chinaka & Siu prepared Waimana’s general

ledger for tax year 2004.

Chinaka & Siu was also responsible for certified audits of

Waimana’s financial statements for tax years 2005 through 2007. Each

certified audit was on a test basis which required review of supporting

documentation, including invoices, canceled checks, receipts, deposits,

loan documents, and leases. Since Chinaka & Siu both conducted the

[*6] certified audits and prepared the tax returns, the accountants

would communicate with each other if something came up in the audits.

At the end of each certified audit, Chinaka & Siu would prepare an

independent auditor’s report which would certify that the financial

statements of that year conformed with U.S. generally accepted

accounting principles. Since Sandwich Isles dealt with federal funding,

it was heavily regulated by government regulators and likewise audited

by a CPA firm in Portland, Oregon, specializing in these types of audits.

KMH, LLP (KMH), was engaged to prepare Forms 1120 for tax

years 2009 through 2012. These tax returns were filed for Waimana on

a consolidated basis with those of its Subsidiaries.

In preparing tax returns KMH used Prepared by Client requests

to obtain information from Waimana. KMH prepared workpapers based

on the information provided by Waimana and then input the approved

workpapers into the tax software. In addition to preparing returns

Waimana engaged KMH to assist in the IRS audit, which included

receiving documents from Waimana and forwarding the documents to

the IRS.

Chinaka & Siu—specifically Staff Accountant Lynn Yasaka—

prepared the individual tax returns for the Hees and the Children for

tax years 2004 through 2012. The Hees were responsible for furnishing

all information required to complete the individual returns. When

Chinaka & Siu received information from the Hees, it was placed in an

organizer and then entered into the tax software where the Hees were

responsible for reviewing the returns.

Mr. Hee reported receiving $150,009 in compensation from

Waimana for 2004, $250,000 for 2005, $150,000 for each of the years

2006 through 2008, $606,250 for 2009, $450,000 for 2010, and $300,000

for each of 2011 and 2012.

Massages

Mr. Hee suffers from chronic asthma, and upon graduation from

the U.S. Naval Academy he was designated as not physically qualified

for sea duty on the basis of his medical condition. Mr. Hee was under

the care of Lindsey Kimura, a licensed chiropractor. As part of the

treatment of his chronic asthma, Dr. Kimura prescribed massage

therapy for Mr. Hee.

[*7] Diane Doll was a massage therapist who provided massage

therapy to Mr. Hee approximately twice a week beginning in 2002. The

sessions took place at Ms. Doll’s office at Kaka Professional Center and

were approximately two hours long. Waimana paid Ms. Doll for Mr.

Hee’s therapy sessions by check, with annual fees ranging from $6,000

to $10,000. At the direction of Mr. Hee, Ms. Henderson first classified

payments made by Waimana to Ms. Doll on the check memo lines as

“professional services” and “services rendered.” Beginning in 2006

Waimana recorded these payments to Ms. Doll on the general ledger as

“consulting fees.” The annual amounts paid to Ms. Doll for tax years

2003 through 2012 are approximately $6,000, $10,000, $8,000, $10,000,

$10,000, $10,000, $8,000, $10,000, $8,000, and $8,000.

Tuition

The Hees’ eldest daughter, Adrianne, attended Massachusetts

Institute of Technology (MIT) from 2004 to 2009. On July 27, 2004,

Waimana issued a $15,400 check payable to MIT for Adrianne’s tuition.

This check was recorded on Waimana’s general ledger as an

“educational expense.” Later Waimana issued another check payable to

MIT for $2,492 relating to Adrianne’s dormitory at MIT. This check was

recorded on Waimana’s general ledger as a “travel expense.” On

September 20, 2004, Waimana issued another check payable to MIT for

$225 relating to Adrianne’s dining plan. This check was recorded on

Waimana’s general ledger as an “educational expense.” On December

20, 2004, Waimana issued another check payable to MIT for $15,406 for

Adrianne’s tuition. This check was recorded on Waimana’s general

ledger as an “educational expense.” Chinaka & Siu advised Waimana to

reclassify the MIT expenses as loans to shareholders, and starting in

2005 the payments to MIT were recorded as loans to shareholders.

Mr. Hee’s Children’s Salaries

Beginning in 2003 Mr. Hee’s Children were part-time employees

of Waimana, but by 2006 many of the Children were receiving salaries.

Mr. Hee’s Children performed work over the summers and during

holiday breaks, including photocopying documents, attending executive

meetings, and working outside cutting grass or maintaining property

owned by Waimana. When Mr. Hee’s Children were full-time students,

they did not have permanent office space in Waimana’s buildings. The

total amounts paid to Adrianne, Breanne, and Charlton for tax years

2006 through 2012 are approximately as follows:

[*8]

Adrianne

Breanne

2006

$23,000

—

$46,000

2007

26,664

26,665

—

53,329

2008

28,267

28,842

$25,910

83,019

2009

52,109

52,163

31,834

136,106

2010

57,502

57,238

36,698

151,438

2011

50,565

49,829

29,633

130,027

2012

49,384

—

32,855

82,239

Charlton

Total

Year

Mrs. Hee’s Salary

Mrs. Hee has an undergraduate degree from Wesleyan University

and a graduate degree in regional planning from Harvard University.

Waimana paid Mrs. Hee a salary starting in 2000. Her role at Waimana

included reviewing and editing documents, conducting research,

gathering documents, attending social events, occasional recruiting

activities, and acting as a sounding board to Mr. Hee. She did not have

an office at Waimana during the tax years at issue. The total amounts

paid to Mrs. Hee for tax years 2003 through 2012 are approximately

$33,589, $42,670, $64,643, $53,749, $58,757, $60,815, $67,061, $78,906,

$65,750, and $64,261.

Employee Benefits Provided to Mrs. Hee and to the Children

From 2005 through 2011, excluding 2009, Waimana made annual

retirement plan contributions of $7,500 to its profit-sharing plan on

behalf of Mrs. Hee and the Children. Beginning in 2007 and through

2012, excluding 2009, Waimana made employer match contributions of

varying amounts to its section 401(k) plan on behalf of Mrs. Hee and the

Children. Waimana provided varying insurance coverage options from

2009 through 2012 on behalf of Mrs. Hee and the Children: long term

care, DSIN-HDS, DSPS-HDS, HSIN-HMAA, HSPS-HMAA, and critical

illness coverage. In addition to the employee benefits referenced above,

Waimana paid and allocated through Sandwich Isles long-term

disability and life insurance premiums from 2009 through 2012 on

behalf of Mrs. Hee and the Children. In sum, the total amounts of

employee benefits provided for tax years 2005 through 2012 are

approximately:

[*9]

Year

Retirement

Plan

Discretionary

Contribution

2005

$7,500

—

$7,500

2006

22,500

—

22,500

2007

22,500

$13,256

—

35,756

2008

30,000

16,559

—

46,559

2009

—

$34,706

$1,289

35,995

2010

30,000

26,875

42,911

1,285

101,070

2011

30,000

25,000

50,358

1,120

106,479

2012

—

19,245

28,398

897

48,539

Section

401(k)

Employer

Match

Waimana

Insurance

Coverage

Sandwich

Isles

Benefits

Total

Miscellaneous Expenses

Travel

Airfare

Starting in 2007 Waimana deducted costs of multiple flights for

Mr. Hee’s Children. 3 The costs in dispute were deducted as travel

expenses by Waimana, 4 but the individual charges were classified under

variety

labels,

including

Air

Travel,

Management/Ownership Training, Advisory Board Meeting, and

generally WEI. There was no supporting documentation regarding the

purpose of the flights for Mr. Hee’s Children. The total amounts reported

by Waimana for tax years 2007 through 2012 and the amounts

respondent disputed are as follows:

Year

Total Travel Expenses

Reported

2007

2008

2009

2010

2011

2012

$2,809

19,905

19,612

33,027

25,996

13,403

Amount Disputed by

Respondent

$2,007

9,751

7,156

5,054

6,416

1,554

3 The airfare discussed here was primarily for Mr. Hee’s Children, but the

flight destinations are unclear from the Credit Card statements.

4 A flight in March 2008 for Adrianne was charged to Clearcom.

[*10]

2008 Trip to France and Switzerland

In March 2008 Mrs. Hee, Breanne, and her then boyfriend,

Jonathan Kahalewai (Jonathan), 5 who was not an employee of Waimana

at the time, traveled to France and visited the Alcatel factory for one

day. The purpose of the factory visit was to inspect an undersea fiber

optic communications cable to ensure the cable was being manufactured

to the correct specifications. This trip to France coincided with

Breanne’s spring break from college.

Later Mrs. Hee, Breanne, and Jonathan traveled to Switzerland

for a ski trip where they stayed in a bed and breakfast, went skiing, and

partook in recreational activities. Clearcom deducted the France trip

costs for Mrs. Hee, Breanne, and Jonathan. Clearcom also deducted the

travel costs for Mrs. Hee, Breanne, and Jonathan to travel to

Switzerland. In total Clearcom deducted $21,872 for the Switzerland

and France trip.

2009 Presidential Inauguration Trip

In January 2009 Mrs. Hee, Breanne, Jonathan, and Adrianne

traveled to Washington, D.C., to attend President Obama’s Presidential

Inauguration ceremonies, including the Hawaii Society’s Inauguration

Ball which Waimana sponsored. In Washington, D.C., Mrs. Hee met

with Senator Daniel Ken Inouye, a then member of the Senate’s

Committee on Appropriations. Waimana deducted the total travel costs

of $2,878 associated with the trip to Washington, D.C.

2010 Trip to Tahiti

In July 2010 Mrs. Hee and the Children traveled to the Island of

Tahiti, French Polynesia, for about a week. In Tahiti Mrs. Hee and the

Children spent a day looking for an undersea cable landing zone and a

day trying to get in contact with Honotua, the company that owned the

undersea cable. Waimana did not get in contact or make arrangements

with anyone from Honotua before the trip to Tahiti. The rest of the trip

was spent on personal activities, including attending Heiva, a dance

competition. Clearcom deducted $7,280 in total for Mrs. Hee and the

Children for the Tahiti trip.

5 Jonathan and Breanne were married on July 4, 2010.

[*11]

2010 Trip to Disney World

Later in July 2010 Breanne, Jonathan, Adrianne, and a family

friend, Amy, traveled to Orlando, Florida, to visit Walt Disney World for

a week. At the time neither Jonathan nor Amy was an employee of

Waimana. Mr. Hee purchased the tickets to attend Walt Disney World,

which were reimbursed by Waimana. The claimed purpose of the trip

was to build rapport with the chairman of Raytheon by riding a ride that

was sponsored by Raytheon. The attendees rode the ride once, visited

other parks, and stayed in Animal Kingdom Lodge for a week.

Originally, the charges regarding the Walt Disney World trip were

classified as personal, but Mr. Hee had the charges reclassified as

business. Waimana deducted $10,919 in total for the trip to Walt Disney

World.

2011 Stay at Mauna Lani

In June 2011 the Hees and the Children (collectively, Hee family)

stayed at Mauna Lani—a resort in Kona, Hawaii. On the general ledger

the trip was classified as “Travel” and “Stockholder’s Meeting.” At the

time of the trip, Mr. Hee was the only shareholder of Waimana. The

stated purpose of the trip was for Waimana’s succession planning. The

Hee family met with Janeen Olds at Mauna Lani to assist with the

succession planning for Waimana. Ms. Olds was not a shareholder but

the general counsel and the trustee of the Children’s irrevocable trusts.

Waimana deducted $16,515 in total for the trip to Mauna Lani.

Sport Coat

Mr. Hee was invited to dinner with executives from Raytheon by

his longtime college friend and business colleague, Torkel Patterson.

Shortly before dinner Mr. Hee purchased a sport coat from Saks Fifth

Avenue for $1,246 which he wore to the dinner. The cost of the sport coat

was deducted by Waimana as an office expense at the direction of Mr.

Hee.

Meals and Entertainment

Waimana deducted costs of various meals for the Hee family from

2009 through 2012. The costs were deducted as business meals and

entertainment expenses by Waimana and Sandwich Isles, and the

charges were further classified under a variety of business purposes

including Abandoned Water Mains, Ownership/Management Training,

Public Safety, Telecom, NOC Projects, Advisory Board, Landscaping,

[*12] Nursery and Abandoned Water Mines, and Stockholder’s Meeting.

These business charges, however, do not include documentation such as

meeting agendas or notes, and many do not provide a receipt. The

attendees at the meals ranged from the entire Hee family to one or two

members. The total amounts reported by Waimana for tax years 2009

through 2012 and the amounts respondent disputed are as follows:

Year

Total Meals and

Entertainment

Reported

Amount

Disputed

2009

$8,696

$2,401

2010

6,181

1,313

2011

4,990

1,964

2012

6,340

Bookstore

Waimana deducted a total of $1,106 from the Santa Clara

University Bookstore in 2008 as an educational expense. There are no

receipts for the charge.

Office Expenses

From 2007 through 2011 Waimana classified as office expenses

various charges from Costco, Target, Santa Clara University Bookstore,

Apple Store, a variety of clothing stores, and other household stores.

There are no receipts provided for the purchases at these stores. For

2011 Waimana deducted $73 for airport parking and classified it as an

auto expense for Stockholders Meeting. The total amounts reported by

Waimana for tax years 2007 through 2011 and the amounts respondent

disputed are as follows:

Year

Total Office

Expenses Reported

2007

$119,612

$3,936

2008

164,409

7,400

2009

96,686

4,691

2010

57,780

3,343

2011

43,064

1,023

Amount Disputed

[*13] G.

Santa Clara House

Waimana purchased a residence at 386 Monroe Street, Santa

Clara, California (Santa Clara Property), for $1,249,608 on May 28,

2008. Waimana owned the Santa Clara Property from 2008 to 2022. The

property had five bedrooms and an accessory dwelling unit with one

bedroom.

Mr. Hee had a business interest in a biotech company named

Siometrix, headquartered in Menlo Park, California. Mr. Hee stated

that the reason for purchasing the Santa Clara Property was to provide

a place to stay when visiting Siometrix to check on his investment.

However, in 2008 two of Mr. Hee’s Children, Breanne and

Charlton, attended Santa Clara University, which was within walking

distance of the Santa Clara Property. Between 2008 and 2012 Breanne

and Charlton resided in the Santa Clara Property and did not pay rent.

They also rented the remaining open rooms to other tenants and

collected rent. Rent collected was not remitted to Waimana; however,

Breanne used the collected rent to pay maintenance expenses of the

Santa Clara Property. Waimana did not report any rental income for tax

years 2008 through 2010, but it did report rental income for tax years

2011 and 2012 of approximately $39,550 and $29,750.

Respondent offered former IRS employee Paul Walker as an

expert witness to determine the average monthly fair market rent for

the Santa Clara Property. Mr. Walker holds bachelor’s and master’s

degrees from the University of Wisconsin, Madison. He is a California

Certified General Real Estate Appraiser and a California Broker, and

he holds an AI-GRS from the Appraisal Institute. Mr. Walker was

accepted by the Court as an expert in the field of residential rental real

estate appraisal.

Mr. Walker opined at trial that the average monthly fair market

rent for the Santa Clara Property was $4,900 for 2008 through 2010

($3,600 for the main structure and $1,300 for the accessory dwelling

unit). He further opined that the average monthly fair market rent was

$5,400 for 2011 ($3,900 for the main structure and $1,500 for the

accessory dwelling unit) and $5,800 for 2012 ($4,200 for the main

structure and $1,600 for the accessory dwelling unit).

[*14] H.

Cash Withdrawals

Mr. Hee withdrew cash from ATMs using his Amex Optima card

and submitted reimbursement requests to Waimana for the

withdrawals. The reimbursement forms never specified what was

purchased with the cash or whether the entire cash withdrawal was

spent. The total annual amounts of cash withdrawals for 2007 through

2012, excluding 2008, that Mr. Hee was reimbursed for and Waimana

deducted, were $8,733, $9,336, $5,423, $2,512, and $706, respectively.

Shareholder Loans

Waimana classified certain payments on behalf of Mr. Hee as

shareholder loans. On the basis of advice received from Chinaka & Siu

Waimana adjusted educational expenses relating to tuition for MIT as

loans to shareholders. Other educational expenses regarding tuition for

Mr. Hee’s Children included payments to Santa Clara University,

Arizona State University, and Rhode Island School of Design, which

were all classified as loans to shareholders. Expenses related to housing

for Mr. Hee’s Children incurred from 2005 through 2012 were classified

as loans to shareholders to Mr. Hee. Other expenses classified as loans

to shareholders included VISA credit card reimbursements, personal

legal fees, costs for the Santa Clara Property, Life Insurance Premium,

and the Buick Enclave. 6 Waimana’s shareholder loans to Mr. Hee

disputed by respondent are as follows:

Year

Loan to Shareholder

Account

2005

$63,898

2006

83,419

2007

72,471

2008

158,143 7

2009

101,904

2010

299,142

2012

37,125

6 Waimana purchased the Buick Enclave on August 4, 2008, in Santa Clara for

Mr. Hee’s use when he was in California. Breanne and Charlton had keys to the Buick

Enclave and used it while attending Santa Clara University.

7 Adjustments were made to the Loan to Shareholder account’s total for tax

year 2008 on the basis of an Adjusting Journal Entry for $38,893.

[*15] Waimana did not create promissory notes for the shareholder

loans to Mr. Hee, nor did Mr. Hee furnish security for the shareholder

loans. Mr. Siu advised Mr. Hee that it was good practice to have a

promissory note that showed what was owed, how the loan would be

repaid, and the interest rates. Waimana’s general ledger recorded

imputed interest income for the first time on December 31, 2012, and

again on August 1, 2013. 8 Waimana made no steps to enforce repayment

of the shareholder loans from 2005 through 2012, but Mr. Hee did make

two separate repayments. The first was in 2011 for $298,856 and the

second was in 2012 for $736,000.

This was not the first instance in which an employee had a loan

from Waimana: Harold Johnston was an employee at Sandwich Isles,

and part of his employment agreement provided that he would receive a

$450,000 loan from Sandwich Isles. Both Mr. Hee and Mr. Johnston

signed the employment agreement, and the loan was secured by a

promissory note.

II.

IRS Examination and Criminal Prosecution

Beginning in 2008 the IRS selected petitioners’ joint personal and

corporate returns for examination. Initially, Chinaka & Siu represented

Mr. Hee and Waimana in the audit. However, in 2009, because of a

criminal referral by the IRS, Waimana retained KMH.

Mr. Hee testified in his criminal trial, United States v. Hee,

No. 14CR00826-001, 2016 WL 337519 (D. Haw. Jan. 7, 2016), before

Judge Susan Oki Mollway. Mr. Hee was found guilty by a jury of his

peers on seven counts: One count of corrupt interference with the

administration of Internal Revenue Laws under section 7212(a) and six

counts of filing false tax returns for tax years 2007–12 under section

7206(1). Hee, 2016 WL 337519. Judge Mollway found that Mr. Hee’s

testimony was false, material, and willful, and she imposed a 46-month

prison sentence and criminal monetary penalties, including a restitution

order of $431,793 and a fine of $10,000. Id.

III.

Notices of Deficiency

Respondent issued a Notice of Deficiency dated August 5, 2022,

to the Hees that was based on their Forms 1040, U.S. Individual Income

Tax Return, with respect to deficiencies in income tax and penalties

8 The imputed interest recorded on August 1, 2013, was for interest recorded

on the loan for 2004 through 2011.

[*16] under section 6663 for tax years 2004 through 2012. Respondent

determined that Mrs. Hee is not liable for the section 6663 penalties

under section 6663(c).

Respondent issued a Notice of Deficiency dated August 5, 2022,

to Waimana that was based on its Forms 1120 with respect to

deficiencies in income tax and penalties under section 6663 for tax years

2003, 2004, and 2006 through 2008 and an addition to tax under section

6651(a)(1) for tax year 2003. Respondent determined the Hees received

constructive dividends from Waimana for each year at issue on the basis

of the disallowance of certain business deductions. In the alternative,

respondent determined that the Hees received additional wages for

services equal to the disallowance of certain business deductions

claimed. In the Notice of Deficiency respondent disallowed a portion of

the net operating loss (NOL) Waimana claimed for the tax years 2003

and 2004. Waimana’s reported NOL deduction for year 2003 consisted

of an NOL incurred in tax year 2005, and Waimana’s reported NOL

deduction for year 2004 consisted of NOLs incurred in tax years 2005

and 2006. Respondent’s disallowed NOLs are attributable to Waimana’s

disallowed business deductions incurred in tax years 2005 and 2006.

IV.

Trial Evidence

Trial of these consolidated cases spanned some ten days with the

parties presenting substantial testimony, deposition testimony, and

documents as evidence. The Court heard from current and former

employees and officers of Waimana and the Subsidiaries, the Hees, the

Hee Children, and accountants and tax preparers from both Chinaka &

Siu and KMH, among other witnesses. Petitioners called 9 witnesses

and respondent called 16. At trial Mr. Hee represented himself and

presented the Hees’ portions of their case, 9 which allowed the Court to

observe Mr. Hee for a substantial length of time.

Respondent primarily relies on a table produced by the

Government in Mr. Hee’s criminal trial, see Hee, 2016 WL 337519, which

was introduced at trial in these cases as Exhibit 421-J. Respondent

refers to Exhibit 421-J throughout his briefing to support nearly all of

his calculations. This table was prepared by an IRS special agent and

used to calculate the “tax loss” alleged by the Government against

9 Petitioner Waimana was separately represented at trial by counsel.

[*17] Mr. Hee. The table breaks down the questioned expenses between

Waimana and the Subsidiaries. 10

OPINION

Petitioners argue that the periods of limitation have expired, and

they dispute the applicability of the section 6663 fraud penalties.

Section 6501(a) provides, generally, that the amount of any tax

must be assessed within three years of the filing of a return. The Notices

of Deficiency in these cases were issued more than three years after the

relevant returns were filed. Therefore, the periods of limitation for the

tax years at issue have expired and assessment is barred unless an

exception to the general period applies.

Section 6501(c)(1) provides that, where a taxpayer has filed “a

false or fraudulent return with the intent to evade tax,” there is no

period of limitations, and the tax “may be assessed . . . at any time.”

“Fraud for this purpose is defined as intentional wrongdoing by the

taxpayer with the specific purpose of avoiding tax believed to be owed.”

Fabian v. Commissioner, T.C. Memo. 2022-94, at *25. In the case of a

joint return, fraud by either taxpayer suspends indefinitely the period

of limitations for both taxpayers. Vannaman v. Commissioner, 54 T.C.

1011, 1018 (1970); see Richardson v. Commissioner, 509 F.3d 736, 745

(6th Cir. 2007) (holding that fraud by one spouse “lifts the statute of

limitations” for both), aff’g T.C. Memo. 2006-69; Ballard v.

Commissioner, 740 F.2d 659, 663 (8th Cir. 1984), aff’g in part, rev’g in

part T.C. Memo. 1982-466. Accordingly, if we determine fraud as to Mr.

Hee, the periods of limitation are suspended as to the Hees’ joint

returns. See Vannaman, 54 T.C. at 1018.

Burden of Proof

The Commissioner’s determinations in a Notice of Deficiency are

generally presumed correct, and the taxpayer bears the burden of

proving them erroneous. Rule 142(a); see Welch v. Helvering, 290 U.S.

111, 115 (1933). When, as here, the case involves unreported income, the

Commissioner must produce evidence linking the taxpayer to an

income-producing activity; and once the Commissioner has met his

10 Here, however, respondent attributes all the questioned expenses from

Exhibit 421-J, including those of the Subsidiaries’ expenses, to Waimana even though

for tax years 2003 through 2008 Waimana did not file on a consolidated basis with its

Subsidiaries. This discrepancy will be addressed under Rule 155.

[*18] threshold burden, the burden shifts to the taxpayer to prove the

determinations are arbitrary or erroneous. Walquist v. Commissioner,

152 T.C. 61, 67–68 (2019); Estate of Clemons v. Commissioner, T.C.

Memo. 2022-95, at *16.

In cases of section 6663 civil fraud penalties and proving fraud as

an exception to the general period of limitation, the Commissioner bears

the burden of proof by clear and convincing evidence. I.R.C. § 7454(a);

Rule 142(b); see Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989);

Browning v. Commissioner, T.C. Memo. 2011-261, 102 T.C.M. (CCH)

460, 467.

The Commissioner must show by clear and convincing evidence

that (1) an underpayment exists for each year and (2) the taxpayer

intended to evade taxes known to be owing by conduct intended to

conceal, mislead, or otherwise prevent the collection of taxes. I.R.C.

§ 7454(a); Rule 142(b); Parks v. Commissioner, 94 T.C. 654, 660–61

(1990). Determining fraud as an exception to the general period of

limitation is the same as his burden under section 6663 to prove

applicability of the civil fraud penalty. See Matthews v. Commissioner,

T.C. Memo. 2018-212, at *21; Browning, 102 T.C.M. (CCH) at 467.

To determine whether respondent satisfies his burden, we must

first determine whether an underpayment exists for each year.

II.

Underpayments

Before trial we granted respondent’s Motion for Partial Summary

Judgment and held, on the basis of Mr. Hee’s prior criminal conviction,

that the Hees had underpayments of tax and filed false tax returns for

tax years 2007 through 2012. In addition, we are convinced that

respondent has established by clear and convincing evidence that

underpayments of tax as to Waimana existed for the tax years at issue

and as to the Hees for 2004–06. The amounts of the deficiencies for the

tax years at issue are further described below.

III.

Amounts of the Deficiencies

Petitioners contest the amounts of the deficiencies regarding the

underpayments. Respondent contends that Mr. Hee received unreported

income during tax years 2004 through 2012 in the form of constructive

dividends from Waimana and that Waimana incorrectly deducted

payments during tax years 2003, 2004, and 2006 through 2008, as

follows:

[*19]

Year

2003

2004

Massages

$6,000

$10,000

MIT Tuition

—

Salaries to

Children

2006

2007

2008

$8,000

$10,000

33,523

—

46,000

Salary to Mrs.

Hee

33,589

42,670

64,643

Employee

Benefits to

Children and

Mrs. Hee

—

7,500

Miscellaneous

Expenses 11

—

Santa Clara

Property 12

—

Cash

Withdrawals

Loans to

Shareholders

Total

2005

2010

2011

2012

$8,000

$10,000

$8,000

—

53,329

83,019

136,106

151,438

130,027

82,239

53,749

58,757

60,815

67,061

78,906

65,750

64,261

22,500

35,756

46,559

35,995

101,070

106,479

48,539

—

5,942

40,130

18,271

27,944

25,990

1,632

—

29,400

58,600

57,600

17,350

29,450

—

8,733

—

9,336

5,423

2,512

706

—

63,898

83,419

72,471

158,143

101,904

299,142

—

37,125

$39,589

$86,193

$144,041

$215,668

$244,988

$428,066

$435,273

$731,523

$356,108

$271,952

—

2009

11 Miscellaneous expenses include the personal expenses reimbursed to Mr. Hee: travel, the sport coat, meals and entertainment, the

Santa Clara University Bookstore purchases, and office expenses.

12 The Santa Clara Property rent applies only to the Hees. Respondent’s expert provided higher values regarding the fair market

value of the Santa Clara Property than found in respondent’s Notice of Deficiency for tax years 2009 through 2012; respondent, however, did

not seek an increase to the deficiencies determined.

[*20] Except as otherwise provided in the Code, “gross income means

all income from whatever source derived.” I.R.C. § 61(a). Dividends may

be formally declared or constructive. A constructive dividend is an

economic benefit—without expectation of repayment—conferred upon a

shareholder by a corporation. Truesdell v. Commissioner, 89 T.C. 1280,

1295 (1987) (citing Noble v. Commissioner, 368 F.2d 439, 443 (9th Cir.

1966), aff’g T.C. Memo. 1965-84). “The determination of constructive

dividend income received by [the taxpayers] is a determination of

unreported income.” Luczaj & Assocs. v. Commissioner, T.C. Memo.

2017-42, at *20. The amount of the constructive dividend is equal to the

fair market value of the benefit received. See Challenge Mfg. Co. v.

Commissioner, 37 T.C. 650, 663 (1962).

Sections 301 and 316 determine the classification of corporate

distributions of property to a shareholder. Benavides & Co., P.C. v.

Commissioner, T.C. Memo. 2019-115, at *18–19. If the distributing

corporation has sufficient earnings and profits (E&P), the distribution

is a dividend that the shareholder must include in gross income. I.R.C.

§§ 301(c)(1), 316; Benavides & Co., T.C. Memo. 2019-115, at *18–19. If

the distribution exceeds the corporation’s E&P, the excess represents a

nontaxable return of capital or capital gain. I.R.C. § 301(c); Benavides &

Co., T.C. Memo. 2019-115, at *18–19. The taxpayer bears the burden of

proving that the corporation lacks sufficient E&P to support dividend

treatment at the shareholder level. Truesdell, 89 T.C. at 1295–96;

Zalewski v. Commissioner, T.C. Memo. 1988-340, 55 T.C.M. (CCH) 1430,

1435. If neither party presents evidence as to the distributing

corporation’s E&P, the taxpayer has not met his burden of proof.

Truesdell, 89 T.C. at 1295–96; Vlach v. Commissioner, T.C. Memo. 2013116, at *33 n.38.

Petitioners do not present evidence as to Waimana’s and the

Subsidiaries’ accumulated E&P for the tax years at issue. See Luczaj &

Assocs., T.C. Memo. 2017-42, at *22–23. Respondent does present

evidence as to Waimana’s E&P after adjusting for the constructive

dividend distributions, concluding that it had E&P of approximately

$565,753, $576,959, $342,646, $494,746, $121,400, $110,025,

$31,325,183, $34,687,701, $34,447,918, and $28,062,802 for the tax

years at issue. Waimana made one cash distribution of $1 million to Mr.

Hee as a shareholder in 2012, but Waimana did not report any

distribution of cash, stock, or property from 2005 through 2011.

[*21] Accordingly, both Waimana and the Subsidiaries had sufficient

E&P in the tax years at issue to justify dividend treatment. 13

“Corporate expenditures constitute constructive dividends only if

1) the expenditures do not give rise to a deduction on behalf of the

corporation, and 2) the expenditures create ‘economic gain, benefit, or

income to the owner-taxpayer.’” P.R. Farms, Inc. v. Commissioner, 820

F.2d 1084, 1088 (9th Cir. 1987) (quoting Meridian Wood Prods. Co. v.

United States, 725 F.2d 1183, 1191 (9th Cir. 1984)), aff’g T.C. Memo.

1984-549, 48 T.C.M. (CCH) 1379.

The Code allows deductions for all ordinary and necessary

business expenses paid or incurred in carrying on a trade or business.

I.R.C. § 162(a); Boyd v. Commissioner, 122 T.C. 305, 313 (2004). An

“ordinary” expense is one that is common and acceptable in the

particular business. Welch v. Helvering, 290 U.S. at 113–14. A

“necessary” expense under section 162(a) is an expense that is

appropriate and helpful in carrying on the trade or business. Heineman

v. Commissioner, 82 T.C. 538, 543 (1984). No deduction is allowed for

“personal, living, or family expenses.” I.R.C. § 262(a).

“A taxpayer’s general statement that expenses were paid in

pursuit of a trade or business is insufficient to establish that the

expenses had a reasonably direct relationship to any such trade or

business.” Sham v. Commissioner, T.C. Memo. 2020-119, at *58.

Taxpayers are required to keep adequate records to substantiate these

deductions. See I.R.C. § 6001; Hradesky v. Commissioner, 65 T.C. 87,

89–90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Treas. Reg.

§ 1.6001-1(a). As a general rule, if a taxpayer provides sufficient

evidence of having incurred a trade or business expense contemplated

by section 162(a) but is unable to adequately substantiate the amount,

the Court may estimate the amount and allow a deduction to that

extent. Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). In

order for the Court to estimate the amount of an expense there must be

some basis upon which an estimate may be made. Vanicek v.

Commissioner, 85 T.C. 731, 742–43 (1985).

13 Petitioners did not address whether the corporations had sufficient E&P for

the Court to categorize the payments as dividends under section 316. See, e.g.,

Truesdell, 89 T.C. at 1295–96 (holding that because neither party introduced evidence

regarding E&P, taxpayer failed to meet his burden of proving that there were not

sufficient E&P to support the deficiency determined in the Notice of Deficiency); see

also Luczaj & Assocs., T.C. Memo. 2017-42, at *22–23.

[*22] The remaining questions for finding constructive dividend

treatment are whether the claimed expense deductions disallowed by

the IRS are in fact deductible and whether Waimana’s expenditures

“represent[ed] some economic gain, benefit or income to the ownertaxpayer.” See Meridian Wood Prods., 725 F.2d at 1191.

Massages

Petitioners argue that the costs of Mr. Hee’s massages are

deductible. Petitioners contend that deductibility is not based on

whether the massages are needed for Mr. Hee to perform his job, but on

whether the massages are cheaper than finding a replacement worker.

We do not agree with petitioners.

In Hutchison v. Commissioner, 13 B.T.A. 1187, 1190 (1928), the

Court held that massages were ordinary and necessary business

expenses since the taxpayer was in the business of “stunt” acting and

needed massages to be in excellent physical condition. Here, Mr. Hee is

in the business of telecommunications. Although the massages were

part of a holistic approach that was successful in treating his asthma,

they were not an ordinary and necessary business expense. The

deduction is inherently personal and not ordinary and necessary in the

telecommunications industry or appropriate for carrying on the

business. See Kelly v. Commissioner, T.C. Memo. 1991-605, 62 T.C.M.

(CCH) 1406, 1407 (“Because the cost of maintaining good health is one

of those expenses which is so ‘inherently personal’ that it simply cannot

qualify as a business expense within section 162, such cost is not

deductible.” (quoting Fred W. Amend. Co. v. Commissioner, 55 T.C. 320,

326 (1970), aff’d, 454 F.2d 399 (7th Cir. 1971))).

Therefore, under the first element of constructive dividends, the

massage payments are not deductible under section 162 for the tax years

at issue. See supra Table p. 19.

“Corporate payments to third parties may constitute constructive

dividends if they are made on behalf of a shareholder or for his economic

benefit.” Luczaj & Assocs., T.C. Memo. 2017-42, at *22; see United States

v. Mews, 923 F.2d 67, 68 (7th Cir. 1991). Here, Waimana paid Ms. Doll

on behalf of Mr. Hee who was personally receiving the benefit of the

massages. Accordingly, the massage payments from 2004 to 2012 are

constructive dividends to the Hees. 14

14 Respondent has not asserted that the Hees have a deficiency for 2003.

[*23] B.

MIT Tuition

Educational expenses are ordinary and necessary expenses if the

education “[m]aintains or improves skills required by the individual in

his employment” or “[m]eets the express requirements of the

individual’s employer.” Treas. Reg. § 1.162-5(a); see Love Box Co. v.

Commissioner, 842 F.2d 1213, 1216–17 (10th Cir. 1988), aff’g T.C.

Memo. 1985-13. “The taxpayer must show that the educational expense

is directly and proximately related to the skills required in his trade or

business.” O’Connor v. Commissioner, T.C. Memo. 2015-155, at *5–6,

aff’d, 653 F. App’x 633 (10th Cir. 2016). However, an educational

expense is not deductible if it will lead to qualifying the taxpayer for a

new trade or business. Treas. Reg. § 1.162-5(b)(3)(i).

At MIT Adrianne majored in architecture, which bears no

relationship to the telecommunication work that Waimana performed.

Waimana did not have a program for paying an employee’s educational

expenses as Judith Ushio, an employee of Waimana, testified that she

does not know of anyone else who had educational expenses paid by

Waimana or Sandwich Isles. After 2004, the MIT tuition payments were

reclassified as shareholder loans to Mr. Hee. Accordingly, the MIT

payments for tuition and living expenses of $33,523 are not deductible

under section 162. The MIT tuition payments are an economic benefit to

the Hees. See Meridian Wood Prods., 725 F.2d at 1191. Thus, the

payments are constructive dividends to the Hees.

Salaries and Employee Benefits to Children and Mrs. Hee

Deductible business expenses include “a reasonable allowance for

salaries or other compensation for personal services actually rendered.”

I.R.C. § 162(a)(1). Certain benefit plans, pension plans, profit-sharing

plans, or other contribution plans may be included in compensation. See

I.R.C. §§ 162(a)(1), 404(a); Treas. Reg. §§ 1.162-10(a), 1.404(a)-1(b). The

test for determining the deductibility of compensation payments is

whether (1) they are reasonable in amount and (2) they are in fact

payments purely for services. Treas. Reg. § 1.162-7(a). “Moreover, where

a family relationship is involved, the facts require close scrutiny to

determine whether a bona fide employer-employee relationship existed

and whether the payments received were made on account of the

employer-employee relationship or the family relationship.” Haeder v.

Commissioner, T.C. Memo. 2001-7, 81 T.C.M. (CCH) 987, 995; see Archer

v. Commissioner, T.C. Memo. 2018-111, at *9–10, aff’d, 821 F. App’x 865

(9th Cir. 2020); Wycoff v. Commissioner, T.C. Memo. 2017-203, at *44

[*24] (“Special scrutiny is given in situations where a corporation is

controlled by the employees to whom the compensation is paid because

there is a lack of arm’s-length bargaining.”).

The Children

The Children received payments from Waimana beginning in

2005, but Adrianne and Breanne began receiving salaries in 2006 and

Charlton in 2008. Petitioners argue that Mr. Siu advised Mr. Hee that

he could pay his Children as long as they were working and that the

payments to the Children were the lowest in Waimana. Petitioners

offered testimony of Waimana employees that the Children would work

during the summer and holiday breaks.

The Court has previously disallowed expenses for children’s

compensation when it was not persuaded the compensation was

reasonable because the taxpayer “did not keep track of the hours her

children worked or the services they performed.” Wax v. Commissioner,

T.C. Memo. 2018-63, at *7. Waimana did not accurately document the

type of work or hours performed per week by Adrianne in 2006, 2007,

and 2009 through 2012. It seems unlikely that Adrianne worked a

sufficient number of hours for Waimana to receive a reasonable salary

since she was a full-time student from 2004 to 2009 at MIT, studied

abroad for two summers, worked part-time jobs while attending MIT,

and worked 40 hours a week at various other jobs after graduating in

2009.

Adrianne began courses at Rhode Island School of Design starting

in August 2010, but from July 2010 through the end of June 2011

records indicate she worked 2,008 hours. Adrianne testified that she did

not devote 2,008 hours of time to the company business during the

calendar year. Gayle Honda from Waimana testified that the 2,008

hours are automatically input into the system for salaried employees to

generate the pay. The evidence presented indicates Adrianne did not

work the hours recorded. Thus, the salary payments and employee

benefits Adrianne received are not reasonable compensation and are not

deductible by Waimana.

Waimana compensated Breanne as a salaried employee starting

in 2006. From 2006 to 2007 Waimana recorded Breanne’s hours, but as

with Adrianne, Waimana did not document the type of work Breanne

performed; and from 2008 through 2011 Waimana did not document the

hours Breanne worked. See Francis v. Commissioner, T.C. Memo.

[*25] 2007-33, 93 T.C.M. (CCH) 904, 906 (holding that a taxpayer is not

entitled to a business expense deduction for an employee benefit plan

when there was no documentation of hours or time the employee

worked). We are not persuaded that Breanne’s salary from Waimana

starting in 2006 was reasonable since she attended Santa Clara

University from 2005 to 2009 as a full-time student, worked part-time

jobs throughout college, and after college worked various full-time jobs.

Accordingly, the salary and employee benefits Breanne received cannot

be determined to be reasonable compensation; therefore, Waimana

cannot deduct the payments.

Charlton was a full-time student at Santa Clara University from

2008 to 2012. Charlton was paid a salary during his time at Santa Clara

University. He testified that he was responsible for managing the Santa

Clara Property, and he performed tasks including plumbing, roofing,

fencing, lawn work, and general house maintenance. Charlton’s

testimony regarding his work was uncorroborated as Waimana recorded

that Charlton worked 34–88 hours per pay period in 2008. But it is

unclear whether these hours are entirely attributable to the housing

maintenance given that Waimana does not document the type of work

he performed. After graduation in 2012, Charlton returned to Hawaii

and worked in the arts department at Kamehameha Schools, and he

testified that he worked for Waimana only on the weekends and on the

weekdays when he was not teaching at the school. We hold that

petitioners have failed to prove that the payments to Charlton were

reasonable. Thus, Waimana may not deduct the salary and employee

benefits Charlton received.

Considering the foregoing, the salaries and employee benefits

paid to the Children from 2006 to 2012 are not deductible. See supra

Table p. 19.

“Transfer of income within the family presumably benefits both

transferor and transferee.” P.R. Farms, Inc. v. Commissioner, 820 F.2d

at 1088. “The rule that a shareholder has received a constructive

dividend by virtue of a corporation’s expenditures for the benefit of a

member of the shareholder’s family results from the application of the

assignment of income doctrine.” P.R. Farms, 48 T.C.M. (CCH) at 1395;

see Green v. United States, 460 F.2d 412, 419–21 (5th Cir. 1972); Benson

v. Commissioner, T.C. Memo. 2004-272, 88 T.C.M. (CCH) 520, 540,

supplemented by T.C. Memo. 2006-55, aff’d, 560 F.3d 1133 (9th Cir.

2009). The Court held in P.R. Farms, 48 T.C.M. (CCH) at 1395:

[*26] We believe that [the father] initiated the arrangement in

order to benefit his children, the owners of Palomate. . . .

[W]e need not find that an actual distribution was made to

[the father] in order to hold that he received a constructive

dividend from the transaction. . . . Moreover, for the

purpose of determining whether a constructive dividend

occurred, we find that a significant benefit was conferred

upon [the] children through Palomate’s retention of the net

proceeds. We therefore hold that the net proceeds retained

by Palomate are taxable to [the father] as a constructive

dividend.

A result similar to that in P.R. Farms is appropriate here. Waimana’s

transfers of employee benefits and salaries to Mr. Hee’s Children are

benefits to Mr. Hee as its sole shareholder and president. We do not need

to find that an actual distribution was made to Mr. Hee to find that he

received a benefit by transferring money to his Children. Accordingly,

the salary and employee benefit payments to the Children from 2006 to

2012 are constructive dividends to the Hees.

Mrs. Hee

As with the payments to the Children, Waimana’s salary and

employee benefit payments to Mrs. Hee are not deductible. Mrs. Hee’s

role at Waimana is unclear as she testified that she occasionally

reviewed and edited documents, acted as a sounding board to Mr. Hee,

and attended business functions. However, she never had an office at

Waimana, and her testimony was uncorroborated. Mrs. Hee also

testified that she worked in recruiting because she assisted a new

employee in finding a home in Hawaii. Yet petitioners do not provide

any other examples or testimony to support their claim that Mrs. Hee

worked in recruiting roles beyond this single event. And contrary to her

testimony, Charlton testified that his mother stayed at home and took

care of the family from 2001 to 2008.

Other than the foregoing self-serving testimony, petitioners did

not provide evidence of the type of work Mrs. Hee performed for

Waimana on a regular basis. As a result, the salary and employee

benefit payments to Mrs. Hee are not deductible by Waimana. See supra

Table p. 19. The salary payments are likewise an economic benefit to the

Hees. See Meridian Wood Prods., 725 F.2d at 1191. Thus, the payments

for tax years 2004 through 2012 should be reclassified as constructive

dividends to the Hees.

[*27] D.

Miscellaneous Expenses

A taxpayer may deduct reasonable and necessary travel expenses

such as meals and lodging incurred while away from home in the pursuit

of a trade or business. I.R.C. § 162(a)(2); see Commissioner v. Flowers,

326 U.S. 465, 470 (1946); Langlois v. Commissioner, T.C. Memo. 202512, at *10. Certain expenses otherwise deductible under section 162(a)

are subject to heightened substantiation requirements under section

274(d); these include expenses for traveling, auto expenses, and meals

and entertainment. See I.R.C. § 274(d)(1) and (2); Jaha v. Commissioner,

T.C. Memo. 2025-26, at *13–14; Temp. Treas. Reg. § 1.274-5T(a). “A

taxpayer generally must substantiate such expenses with adequate

records, or by sufficient evidence corroborating the taxpayer’s own

statement, establishing (1) the amount of the expense; (2) the time and

place it was incurred; and (3) its business purpose.” Jaha, T.C. Memo.

2025-26, at *14; accord Balyan v. Commissioner, T.C. Memo. 2017-140,

at *7; Temp. Treas. Reg. § 1.274-5T(b).

“Substantiation by adequate records requires the taxpayer to

maintain (1) an account book, diary, log, statement of expense, trip

sheets, or similar record prepared contemporaneously with the

expenditure and (2) documentary evidence, such as receipts or paid bills,

which together prove each element of an expenditure.” Balyan, T.C.

Memo. 2017-140, at *8; Temp. Treas. Reg. § 1.274-5T(c)(2). The Court

may not estimate expenses under Cohan in situations where section 274

requires specific substantiation. See I.R.C. § 274(d); Sanford v.

Commissioner, 50 T.C. 823, 827–28 (1968), aff’d per curiam, 412 F.2d

201 (2d Cir. 1969); Temp. Treas. Reg. § 1.274-5T(a).

Travel

Airfare

In addition to satisfying section 162 the heightened

substantiation requirements of section 274 must be met for airfare

expenses. See Edwards v. Commissioner, T.C. Memo. 2014-57, at *20.

Here, Waimana deducted costs of multiple flights for the Children from

their colleges back home to Hawaii at various times each year including

around the holidays. 15 The individual flights were classified under a

variety of titles including Air Travel, Travel, Management/Ownership

15 In 2009 there was a round-trip flight for Adrianne around Thanksgiving,

from Boston, Massachusetts, to Honolulu and back to Boston, where Adrianne was

attending MIT.

[*28] Training, Advisory Board Meeting, and generally WEI, but there

is no supporting documentation regarding the business purposes of the

flights.

Waimana’s only documentation is the Credit Card statements,

which occasionally provide passenger information, date, price, or the

origin and destination cities, but not all charge statements provide this

information. See id. at *20–21 (holding that the taxpayers did not

comply with section 274 when handwritten notes were not prepared

contemporaneously with travel and “do not include pertinent

information such as the date, the origin and destination cities, or the

business purpose of the travel”). The lack of substantiation for the

deducted airfare does not satisfy the heightened standard of section 274.

See Ismail v. Commissioner, T.C. Memo. 2022-113, at *13–14. Therefore,

the airfare expenses from 2007 to 2012 are not deductible by Waimana.

The airfare payments by Waimana for the Children are also an economic

benefit to the Hees. See Meridian Wood Prods., 725 F.2d at 1191.

Accordingly, the airfare payments made from 2007 to 2012 are

constructive dividends to the Hees. See supra Tables pp. 9, 19.

2008 Trip to France and Switzerland

Clearcom deducted the costs for the 2008 trip to France and

Switzerland. 16 Mr. Hee acknowledged that the deduction of the

Switzerland portion of the trip was a mistake. Therefore, expenses of the

Switzerland portion of the trip are not deductible under section 162.

Petitioners fail to present evidence of a business purpose for the

trip to France. Petitioners argue that the purpose was to visit the Alcatel

factory to observe the undersea cable being manufactured. Mr. Hee and

other Waimana employees testified that they were too busy to visit the

location, which is why Mrs. Hee, Breanne, and Jonathan went on the

trip. We are unpersuaded because the trip to France aligned with

Breanne’s college spring break, Jonathan was not an employee of

Clearcom or Waimana at the time, and throughout the entire trip the

visit to the factory lasted only one day. See Ismail, T.C. Memo. 2022-113,

at *14 (holding that the taxpayer is not entitled to a deduction for airfare

when there were “strong personal reasons for traveling” and there was

a lack of business purpose); Treas. Reg. § 1.162-2(b)(1).

16 In 2008 Clearcom reported on a separate basis from Waimana.

[*29] Even if we were to assume that the section 162 business purpose

requirement is met, the trip costs fail the heightened substantiation

standard under section 274. The only documentation provided was the

Credit Card statements that list the dates, amounts, occasionally the

locations of the charges, and handwritten labels categorizing the

expenses to the Subsidiaries. The statements do not provide the

business purpose or state what items were purchased at the locations.

See I.R.C. § 274; Rogers v. Commissioner, T.C. Memo. 2018-53, at *93

(disallowing deduction for travel and meals when the taxpayer “failed to

maintain contemporaneous logs or other adequate records that satisfy

the section 274(d) requirements”). The 2008 France and Switzerland

trip cost of $21,872 is not deductible by Clearcom since it fails to satisfy

section 274 and is an economic benefit to the Hees. See Meridian Wood

Prods., 725 F.2d at 1191. Therefore, the payments should be classified

as a constructive dividend to the Hees.

2009 Presidential Inauguration Trip

Waimana deducted the total cost of the 2009 Presidential

Inauguration Trip for Mrs. Hee, Breanne, Jonathan, and Adrianne.

Waimana was a sponsor of the Hawaii Society’s Inauguration Ball, and

the trip allowed Mrs. Hee to meet with Senator Inouye, a then member

of the Senate Committee on Appropriations. Although section 162

requirements may be met in this instance, the heightened

substantiation requirements under section 274 are not. Waimana

provides no documentation regarding receipts or descriptions of the

expenses. The only documentation petitioners provide is the Credit Card

statements. There are typed labels on the statements categorizing the

expenses as Waimana’s or the Subsidiaries’, but the statements do not

report what was purchased at the locations and for what business

purposes. See Jaha, T.C. Memo. 2025-26, at *14; Ward v. Commissioner,

T.C. Memo. 2021-32, at *10–11.

Accordingly, Waimana cannot deduct the 2009 Presidential

Inauguration Trip expense of $2,878 for failure to satisfy the heightened

substantiation requirements under section 274.

2010 Trip to Tahiti

Clearcom deducted the entire weeklong trip that Mrs. Hee,

Breanne, Adrianne, and Charlton took to Tahiti in 2010. Mr. Hee

testified that the purpose of the trip was to see the undersea cable in

Tahiti and that the Children came back from the trip and shared their

[*30] observations. Petitioners assert that the trip took a week given

that there is only one flight per week from Hawaii to Tahiti. Petitioners’

briefs further argued that Mr. Hee “organized a trip so that his family

could work together to assess whether expanding to Tahiti would be

feasible.”

The Hee family spent a day looking for the undersea cable and a

day trying to get in contact with Honotua, the company that owned the

undersea cable, but the effort was unsuccessful. There were no

preparations made before the trip to meet with Honotua representatives

to coordinate seeing the undersea cable. Other than possibly two days

related to business, the remaining trip was spent on personal activities,

including attending Heiva, a dance competition.

“If the trip is primarily personal in nature, the traveling expenses

to and from the destination are not deductible even though the taxpayer

engages in business activities while at such destination.” Treas. Reg.

§ 1.162-2(b)(1). Determining the primary purpose of a trip requires

consideration of all the facts and circumstances, including the ratio of

time spent on business to time spent on personal activities. Crawford v.

Commissioner, T.C. Memo. 2014-156, at *12; Treas. Reg. § 1.162-2(b)(2).

Given that the travelers on the Tahiti trip spent a maximum of two days

on business and the remaining time on personal activities, the primary

purpose of the trip was not business. This defect provides a basis upon

which to disallow these travel deductions. See Treas. Reg. § 1.162-2(b).

Petitioners argue that they substantiated the business purpose of

the trip by citing a single page document created for the Tahiti trip,

which included the dates of travel, the destination, the travelers, and

the purpose. The documentation reported the total trip expenses,

including a statement that “[i]ndividual charges appear on the credit

card statement.” However, the individual Credit Card statement

charges do not document what was purchased, as many of the purchases

on the statement were of groceries, jewelry/watch, and women’s

accessories. It is not clear that these individual charges have any

business purpose since there is no explanation for them, yet they appear

personal. See I.R.C. § 274.

Moreover, Clearcom paid the trip expenses for the Hee family;

therefore, the payment of those expenses would be of personal benefit to

the Hees. Thus, the 2010 Tahiti trip cost of $7,280 should be classified

as a constructive dividend to the Hees.

[*31]

2010 Trip to Walt Disney World

Breanne, Jonathan, Adrianne, and her friend Amy traveled to

Orlando to visit Walt Disney World for a week. Waimana deducted the

entire cost. At the time, neither Jonathan nor Amy was an employee of

Waimana.

We find that there is no section 162 business purpose to this trip.

Mr. Hee testified that the business purpose was to build rapport with

Raytheon’s chairman by riding a ride sponsored by Raytheon. However,

the ride was open to the public and did not require a special invitation.

Furthermore, documentation that purportedly substantiated this trip

stated the purpose was for Adrianne and Breanne to see “how Federal

Infrastructure development funds have been used to benefit society.”

The entire trip was spent by Mr. Hee’s Children and two other

nonemployees enjoying the various parks of Walt Disney World.

Petitioners provided no evidence to prove that the attendees met or

spoke with anyone from Raytheon while at Walt Disney World, and for

the weeklong trip, they rode the ride sponsored by Raytheon once,

attended other parks, and stayed in Animal Kingdom Lodge. Petitioners

presented no evidence to support the prior claim that the attendees

observed how federal infrastructure worked. Accordingly, the Walt

Disney World trip cost of $10,919 is not deductible by Waimana and was

an economic benefit to the Hees. Therefore, the payments should be

classified as a constructive dividend to the Hees.

2011 Stay at Mauna Lani

Waimana deducted a trip by Mr. Hee and his entire family to

Mauna Lani, which was classified as “Travel” and “Stockholder’s

Meeting.” At the time of the trip Mr. Hee was the only shareholder of

Waimana. Mr. Hee testified that the purpose of the trip was succession

planning. Adrianne testified that she did not recall any business

succession planning meetings in Mauna Lani.

Even if there was a business purpose for the trip, petitioners

provided no documentation, such as meeting minutes or agendas, to

substantiate the claim that the trip was for succession planning. In fact

there was no documentation regarding any of the charges for the trip

other than the Credit Card statements, which documented the dates,

prices, and general locations of the charges. See Holden v.

Commissioner, T.C. Memo. 2015-83, at *41–43. Thus, the lack of

documentation regarding the trip supports our conclusion that

[*32] Waimana cannot deduct the 2011 Mauna Lani trip costs. See

I.R.C. § 274. The Hees also personally benefited from the family trip to

Mauna Lani, and the cost of $16,515 should be classified as a

constructive dividend.

Sport Coat

Mr. Hee purchased the sport coat in 2009 for a meeting with

Raytheon, and he told Ms. Henderson to classify it as an office expense.

The Court has “established three criteria for the cost of clothing

to be deductible as an ordinary and necessary business expense: (1) the

clothing is required or essential in the taxpayer’s employment; (2) the

clothing is not suitable for general or personal wear; and (3) the clothing

is not so worn.” Barnes v. Commissioner, T.C. Memo. 2016-79, at *7.

Although the sport coat was purchased specifically for the meeting with

Raytheon, petitioners have not demonstrated that it was unsuitable for

general or personal wear. See Ayria v. Commissioner, T.C. Memo. 2022123, at *9 (“[I]t is well established that the costs of purchasing and

maintaining ordinary street attire are not deductible merely because

those clothes are worn to the office.”). Accordingly, the sport coat

purchased for $1,246 is not deductible as a section 162 expense to

Waimana. The purchase of the sport coat is a personal benefit to Mr.

Hee and should be classified as a constructive dividend to the Hees in

2009.

Meals and Entertainment

Waimana and Sandwich Isles deducted various meal expenses

from 2009 to 2012 for Mr. Hee and members of his family. Neither

Waimana nor Sandwich Isles recorded meeting agenda, notes, or any

documentation regarding the purpose of the meal expenses deducted.

The only documentation regarding the purpose of the meals was the

classifications on the Credit Card statements under a variety of titles

including Abandoned Water Mains, Ownership/Management Training,

Public Safety, Telecom, NOC Projects, Advisory Board, Landscaping,

Nursery and Abandoned Water Mines, and Stockholder’s Meeting. For

example, a family meal on July 27, 2009, was classified as “management

and ownership training.” Mrs. Hee testified that Mr. Hee “would often

discuss business. It was never short.” Occasional commentary by Mr.

Hee regarding business at a family dinner does not classify the dinner

as an ordinary and necessary business expense. See I.R.C. § 162.

[*33] In addition to the meals’ lack of business purpose, there is a lack

of substantiation—such as receipts—to satisfy the heightened

requirement under section 274. See Zajac v. Commissioner, T.C. Memo.

2025-33, at *17 (disallowing deduction for meals for failing to introduce

any documentation to substantiate the expenses under section 274(d));

Jaha, T.C. Memo. 2025-26, at *15–16; Ismail, T.C. Memo. 2022-113,

at *15 (holding failure to substantiate the cost of meals disallowed the

taxpayer from claiming a deduction). Accordingly, petitioners have not

carried their burden of proving the deductibility of the meals from 2009

to 2012, and the food expenses are an economic benefit to the Hees. See

Meridian Wood Prods., 725 F.2d at 1191. Therefore, such meals should

be classified as constructive dividends. See supra Tables pp. 12, 19.

Bookstore

Waimana deducted payments to the Santa Clara University

Bookstore in 2008 as an educational expense. No receipts are provided

to substantiate the purpose of the payments. Since there is a lack of

evidence to support a business purpose, Waimana is not entitled to

deduct the $1,106 charge under section 162, and it was an economic

benefit to the Hees. Thus, it should be classified as a constructive

dividend to the Hees.

Office Expenses

Waimana deducted purchases from various locations and

classified them as office expenses. These include purchases from a

Costco in Santa Clara. The only business purpose in California that

petitioners presented was an investment at Siometrix. However, two of

Mr. Hee’s Children—Breanne and Charlton—lived in California while

attending Santa Clara University, and Breanne testified that when Mr.

Hee came to visit them in California, he would take her to Costco and

pay for groceries.

Other reported office expenses were purchases from clothing

stores (e.g., Nordstrom), furniture and supply stores (e.g., Home Depot),

and various other department stores (e.g., Target). In 2011 Waimana

deducted $73 for airport parking and classified it as an auto expense for

Stockholders Meeting.

Mr. Hee classified these charges as office expenses through

handwritten or typed notations on the Credit Card statements.

Petitioners did not provide receipts or documentation regarding what

was purchased at the locations. Many of the charges appear to be for

[*34] purchases that are personal, yet petitioners failed to present

evidence that the purchases had an ordinary and necessary business

purpose. See Johnson v. Commissioner, T.C. Memo. 2025-87, at *9–10

(holding that the taxpayer failed to substantiate his expenses when “[h]e

offered no supporting documentation that might establish the dates,

amounts, or business purposes of the expenditures”); Aulisio v.

Commissioner, T.C. Memo. 2024-29, at *24–25.

Because of the lack of substantiation, Waimana cannot deduct the

charges classified as office expenses under section 162. The charges are

for purchases that are personal and render a personal economic benefit

to the Hees. Accordingly, the payments should be classified as

constructive dividends for 2007 through 2011 to the Hees. See supra

Tables pp. 12, 19.

Santa Clara Property

Petitioners fail to provide evidence, other than self-serving

testimony, that the Santa Clara Property was purchased for an ordinary

and necessary business purpose. Petitioners argue that the Santa Clara

Property served many purposes, including providing a place for Mr. Hee

and Waimana employees to stay when checking on Siometrix and for

other business, a good investment upon sale, and an opportunity for his

Children to learn property management while living in the house.

Petitioners, however, provide no evidence that employees other

than Mr. Hee and the Children stayed at the Santa Clara Property. Mr.

Hee’s Children lived in the house throughout their time at Santa Clara

University, which was a five-to-ten-minute walk from the house. The

Children never paid rent, but they rented the spare rooms to other

tenants and collected rent. These payments collected were not

transferred to Waimana, but Breanne used the money to pay

maintenance expenses, including items such as toilet paper and paper

towels. Further, Waimana’s purchase of the Santa Clara Property for

Mr. Hee’s Children to practice management skills is not an ordinary and

necessary business expense for a telecommunications company.

Accordingly, we find that there was no ordinary and necessary business

purpose for the Santa Clara Property, and it was an economic benefit to

the Hee family since the Children lived in the house rent free while

attending college.

Respondent’s expert, Mr. Walker, testified that the monthly fair

market rental value for the Santa Clara Property was $4,900 for 2008

[*35] through 2010, $5,400 for 2011, and $5,800 for 2012. The total

unreported amounts were $29,400 for 2008 (as the amount is for the sixmonth period the house was owned), $58,800 for 2009 and 2010, $25,250

for 2011, and $39,850 for 2012. 17 Mr. Walker’s analysis for tax years

2009 through 2012 determines a fair market rental value that exceeded

the amounts determined in the Hees’ Notice of Deficiency.

Respondent on brief concedes Mr. Walker’s analysis for tax year

2008, which determined the fair market rental value of the Santa Clara

Property was $600 less than originally determined in the Notice of

Deficiency. Respondent on brief does not seek to increase the deficiencies

determined for tax years 2009 through 2012 for the Santa Clara

Property on the basis of Mr. Walker’s analysis. Thus, the fair market

rents for the Santa Clara Property established by Mr. Walker of $29,400

for 2008 and the amounts determined in the Notice of Deficiency of

$58,600, $57,600, $17,350, and $29,450 for 2009 through 2012 should be

classified as constructive dividends to the Hees. 18

Cash Withdrawals

Mr. Hee made multiple cash withdrawals on his Amex Optima

card from 2007 to 2012, excluding 2008, that were reimbursed by

Waimana. The reimbursement requests did not specify what the cash

was used for on the trips or whether Mr. Hee used the entire amount

withdrawn. Petitioners provide no additional documentation to

substantiate that the cash was used for ordinary and necessary business

purchases.

Petitioners argue that since the cash withdrawals were made

around the same dates as Mr. Hee’s business trips, Waimana should be

able to estimate and deduct such expenses under Cohan. If we were to

accept that the cash was used for travel expenses—such as meals and

lodging—the increased substantiation requirements of section 274(d)

would apply. The only documentation petitioners provide is the vague

bank and Credit Card statements, which would not satisfy the

heightened requirements. See Ward, T.C. Memo. 2021-32, at *11

(holding that the bank statements alone do not satisfy section 274 as

they do not tell the business purpose of each expense or the dates of

travel). Therefore, the cash withdrawals, including $8,733, $9,336,

17 For tax years 2011 and 2012 Waimana reported rental income from the

Santa Clara House of $39,550 and $29,750.

18 The expenses for managing the Santa Clara Property are not at issue.

[*36] $5,423, $2,512, and $706 for tax years 2007 through 2012,

excluding tax year 2008, are not deductible by Waimana and are a

personal economic benefit to the Hees. Accordingly, the payments

should be classified as constructive dividends to the Hees. See Holden,

T.C. Memo. 2015-83, at *41–42 (holding that the taxpayer “failed to

show that the payments were for deductible business expenses”).

Shareholder Loans

Mr. Hee claims that the distributions from Waimana were

shareholder loans. We carefully scrutinize this claim and give greater

weight to the objective indicators of debt rather than to Mr. Hee’s selfserving statements. See Turner v. Commissioner, 812 F.2d 650, 654

(11th Cir. 1987), aff’g T.C. Memo. 1985-159. The question is whether Mr.

Hee and Waimana intended to create a bona fide debtor/creditor

relationship at the time of the distributions. See Estate of Chism v.

Commissioner, 322 F.2d 956, 960 (9th Cir. 1963), aff’g T.C. Memo.

1962-6. In determining whether a transaction is a bona fide loan, the

courts look to a variety of factors:

(1) whether the promise to repay is evidenced by a note or

other instrument; (2) whether interest was charged;

(3) whether a fixed schedule for repayments was

established; (4) whether collateral was given to secure

payment; (5) whether repayments were made; (6) whether

the borrower had a reasonable prospect of repaying the

loan and whether the lender had sufficient funds to

advance the loan; and (7) whether the parties conducted

themselves as if the transaction were a loan.

Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000), aff’g T.C.

Memo. 1998-121; see also Commissioner v. Valley Morris Plan, 305 F.2d

610, 618 (9th Cir. 1962) (defining a loan for federal tax purposes as “an

agreement, either expressed or implied, whereby one person advances

money to the other and the other agrees to repay it upon such terms as

to time and rate of interest, or without interest, as the parties may

agree” (quoting Nat’l Bank of Paulding v. Fidelity & Cas. Co., 131

F. Supp. 121, 123–24 (S.D. Ohio 1954))), rev’g in part 33 T.C. 572 (1959).

The factors are nonexclusive, and no single factor is dispositive. Welch

v. Commissioner, 204 F.3d at 1230. The Court is mindful that formalities

may not be followed between shareholders and closely held corporations.

Knutsen-Rowell, Inc. v. Commissioner, T.C. Memo. 2011-65, 101 T.C.M.

(CCH) 1293, 1302. On the basis of these factors we conclude that the

[*37] distributions classified as shareholder loans to Mr. Hee were not

bona fide loans.

First, petitioners did not execute formal loan documents with

respect to the distributions to Mr. Hee throughout 2005 to 2012. “The

absence of a note or other loan documentation is indicative of a

constructive dividend.” Teymourian v. Commissioner, T.C. Memo. 2005232, 90 T.C.M. (CCH) 352, 355; see Roschuni v. Commissioner, 29 T.C.

1193, 1201–02 (1958) (holding that the failure to provide a note or other

documentation was a factor in determining there was a constructive

dividend and not a shareholder loan), aff’d per curiam, 271 F.2d 267 (5th

Cir. 1959); Jones v. Commissioner, T.C. Memo. 1997-400, 74 T.C.M.

(CCH) 473, 480, aff’d, 177 F.3d 983 (11th Cir. 1999) (unpublished table

decision). Loans without documentation are not uncommon between a

shareholder and a closely held corporation. Miele v. Commissioner, 56

T.C. 556, 568–69 (1971) (“The fact that [the corporation] loaned money

to shareholders without security, notes or interest does not compel an

opposite conclusion for such occurrences are not uncommon in dealings

between shareholders of a closely held corporation and the

corporation.”), aff’d, 474 F.2d 1338 (3d Cir. 1973) (unpublished table

decision).

In failing to create formal loan documents petitioners argue that

Mr. Hee always knew he had to repay the distributions and had the

intent to repay. Although Waimana is a closely held corporation, Mr.

Hee failed to execute any formal loan documents even though Mr. Siu

advised him that it was good practice to have a promissory note that

showed what was owed, how it was to be repaid, and the interest rate.

This factor alone is not determinative, but it weighs in favor of finding

that the distributions were constructive dividends.

Second, Waimana did not accrue interest on an annual basis.

Waimana did not begin accruing interest on the distributions until after

KMH inquired whether Waimana had accrued interest income on the

distributions. Waimana’s general ledger recorded interest for the first

time on December 31, 2012, for $2,800 and again on August 1, 2013, for

$68,476. The interest on August 1, 2013, was recorded for years 2004

through 2011. Mr. Hee paid $71,276 of interest in total.

Although no annual interest was accrued on the distributions,

Mr. Hee paid interest in 2012 and recorded imputed interest for tax

years 2004 through 2011. This factor does weigh in favor of finding that

[*38] the distributions were shareholder loans. See Teymourian, 90

T.C.M. (CCH) at 356.

Third, the record is devoid of any evidence that Waimana

established a repayment schedule or required any specific repayments.

Evidence that a creditor did not intend to enforce repayment or was

indifferent to the exact time an advance was repaid indicates that a bona

fide loan did not exist. Gooding Amusement Co. v. Commissioner, 23 T.C.

408, 418–19 (1954), aff’d, 236 F.2d 159 (6th Cir. 1956). Waimana’s

failure to establish a fixed repayment schedule weighs in favor of finding

that the distributions were constructive dividends.

Fourth, Mr. Hee offered no collateral to secure repayment to

Waimana. The distributions were treated as unsecured personal loans.

This factor indicates the parties did not intend to establish a debtorcreditor relationship at the time the distributions were made.

Fifth, Mr. Hee made two repayments on the distributions. 19 The

first repayment was in 2011 for $298,856 when Mr. Hee converted a life

insurance policy to cash and contributed it to Waimana. The second

payment was on December 31, 2012, when Mr. Hee wrote a check to

Waimana for $736,000. As of December 31, 2012, the resulting balance

of the Loan to Shareholder account was $25,118.

The second payment came from a dividend payment made to Mr.

Hee. On July 31, 2012, Mr. Hee’s captive insurance company Ho’opa’a

requested that the Hawaii Department of Commerce allow a declared

dividend to Waimana for $1 million. The dividend request was granted,

and Ho’opa’a paid a $1 million dividend to Waimana in 2012. Waimana

then distributed a $1 million cash dividend to Mr. Hee in 2012.

Respondent argues that Mr. Hee used the money from Waimana

through issuance of a dividend to repay his debt to Waimana. We

disagree with respondent since Mr. Hee reported the dividend from

Waimana on his Form 1040 for the 2012 tax year. Thus, the repayment

of the distribution would be a factor to weigh in favor of finding a

shareholder loan. See Teymourian, 90 T.C.M. (CCH) at 356.

19 Petitioners mention a third $325,000 repayment for the first time in their

Answering Brief. The information was not mentioned at trial or in petitioners’ Opening

Brief. The charge mentioned is not labeled as a Repayment of Loan to Stockholder the

same way the other two payments are labeled on the general ledger. We find that it is

unclear whether this truly was a repayment specifically for the distributions.

[*39] Sixth, there is little evidence to show that Mr. Hee had a

reasonable prospect of repaying the distributions at the time they were

made. A taxpayer’s insolvency or financial difficulty casts doubt on the

ability to repay and thus on the characterization of a disbursement as a

loan. See Welch v. Commissioner, 204 F.3d at 1231. We acknowledge

that Mr. Hee testified that he always intended to pay off the Loan to

Shareholder account. However, we construe Mr. Hee’s failure to make

annual payments as an indication that he was unable to repay the

distributions; if he could have repaid the distributions, it would be

reasonable to believe he would have begun making such payments. See

Jones v. Commissioner, T.C. Memo. 2025-25, at *49. Waimana had

sufficient retained earnings from 2005 to 2012 to advance the amounts

recorded on the Loan to Shareholder account to Mr. Hee. However, there

is nothing in the record that indicates Mr. Hee had the reasonable

prospect of repaying the distributions at the time. Accordingly, this

factor is neutral.

Seventh, petitioners produced no evidence showing that

Waimana and Mr. Hee conducted themselves in a manner that indicated

the distributions were shareholder loans. Mr. Johnston, who was

employed by Sandwich Isles, received a $450,000 loan from Sandwich

Isles as part of his employment agreement; both Mr. Hee and Mr.

Johnston signed the employment agreement, and the loan was secured

by a promissory note. These steps were not followed for the distributions

to Mr. Hee, who was receiving distributions in much larger amounts.

There were no terms that Waimana and Mr. Hee agreed to, nor were

there any formalities or steps taken for the distributions other than

recording them on the general ledger. Mr. Hee testified that he intended

to repay the distributions; although he was the president of Waimana,

he took no responsibility to make payments to Waimana. See id. Thus,

the failure to conduct themselves as if the distributions were loans

weighs in favor of finding constructive dividends.

In short, although the parties adhered to certain formalities (i.e.,

paying interest and making repayments), in the light of the failure to

create formal documentation, provide collateral, make a repayment

schedule, have a reasonable prospect of repayment, and conduct

themselves in a manner that indicates a loan, we cannot say that Mr.

Hee and Waimana intended to create a bona fide debtor-creditor

relationship. See Estate of Chism v. Commissioner, 322 F.2d at 960

(explaining that the existence of a legal obligation to repay is not

controlling; rather, the taxpayer’s intent to honor, and the corporation’s

intent to enforce, the obligation is determinative). Accordingly, we

[*40] conclude that the distributions classified as shareholder loans

were a personal benefit to the Hees and should be reclassified as

constructive dividends from Waimana. See Jones, T.C. Memo. 2025-25,

at *50; Smiley v. Commissioner, T.C. Memo. 2024-66, at *34; Todd v.

Commissioner, T.C. Memo. 2011-123, 101 T.C.M. (CCH) 1603, 1607,

aff’d, 486 F. App’x 423 (5th Cir. 2012); Knutsen-Rowell, Inc., 101 T.C.M.

(CCH) at 1303; Talmage v. Commissioner, T.C. Memo. 2008-34, 95

T.C.M. (CCH) 1122, 1140, aff’d, 391 F. App’x 660 (9th Cir. 2010).

Thus, we find there are underpayments for the tax years at issue

as to the Hees and to Waimana. Further, our analysis above determines

the amounts of the deficiencies for the tax years at issue. Accordingly,

the remaining issue is whether some parts of the underpayments were

attributable to fraud. See DiLeo v. Commissioner, 96 T.C. 858, 873

(1991), aff’d, 959 F.2d 16 (2d Cir. 1992).

IV.

Fraud Penalties

“If any part of any underpayment of tax required to be shown on

a return is due to fraud, there shall be added to the tax an amount equal

to 75 percent of the portion of the underpayment which is attributable

to fraud.” I.R.C. § 6663(a). If any portion of the underpayment is

attributable to fraud, then the entire underpayment shall be

attributable to fraud, except for any portion of the underpayment the

taxpayer establishes is not attributable to fraud. I.R.C. § 6663(b). A

spouse is not liable for a fraud penalty on a joint return unless some part

of the underpayment is due to the fraud of such spouse. I.R.C. § 6663(c).

Respondent has not pursued civil fraud penalties against Mrs. Hee, but

he has pursued civil fraud penalties against Mr. Hee for tax years 2004

through 2012 and against Waimana for tax years 2003, 2004, and 2006

through 2008.

“[T]he determination of fraud for purposes of the period of

limitations on assessment under section 6501(c)(1) is the same as the

determination of fraud for purposes of the penalty under section 6663

. . . .” Neely v. Commissioner, 116 T.C. 79, 85 (2001). Whether the

underpayments at issue were due to fraud determines both whether Mr.

Hee and Waimana are liable for civil fraud penalties and whether

respondent can assess the deficiencies. 20

20 Mr. Hee contends that respondent’s determination of civil fraud penalties is

barred by his right to a jury trial under the Seventh Amendment to the U.S.

[*41] Section 6751(b)(1) provides that “[n]o penalty under this title

shall be assessed unless the initial determination of such assessment is

personally approved (in writing) by the immediate supervisor of the

individual making such determination.” Respondent must show IRS

compliance with section 6751(b)(1). See Laidlaw’s Harley Davidson

Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir. 2022)

(“[Section] 6751(b)(1) requires written supervisory approval before the

assessment of the penalty or, if earlier, before the relevant supervisor

loses discretion whether to approve the penalty assessment.”), rev’g and

remanding 154 T.C. 68 (2020). The record demonstrates, and petitioners

do not dispute, that respondent complied with the requirements of

section 6751(b).

Existence of Fraud

The existence of fraud is a question of fact to be resolved upon

consideration of the entire record. Estate of Pittard v. Commissioner, 69

T.C. 391, 400 (1977); Gajewski v. Commissioner, 67 T.C. 181, 199 (1976),

aff’d, 578 F.2d 1383 (8th Cir. 1978) (unpublished table decision). The

Commissioner bears the burden of proving fraud and must establish

fraud by clear and convincing evidence. See I.R.C. § 7454(a); Rule 142(b);

Castillo v. Commissioner, 84 T.C. 405, 408 (1985). If the Commissioner

proves that any portion of an underpayment was due to fraud, then “the

entire underpayment shall be treated as attributable to fraud” unless

the taxpayer shows, by a preponderance of the evidence, that any

portion was not so attributable. I.R.C. § 6663(b).

Fraud is not to be imputed or presumed but rather must be

established by some independent evidence of fraudulent intent. Beaver

v. Commissioner, 55 T.C. 85, 92 (1970); Otsuki v. Commissioner, 53 T.C.

96, 105 (1969). Fraud may not be found under “circumstances which at

the most create only suspicion.” Davis v. Commissioner, 184 F.2d 86, 87

(10th Cir. 1950). It may be proved by circumstantial evidence and

reasonable inferences drawn from the facts since direct proof of the

taxpayer’s intent is rarely available. Stephenson v. Commissioner, 79

T.C. 995, 1006 (1982), aff’d per curiam, 748 F.2d 331 (6th Cir. 1984).

Courts have developed a nonexclusive list of factors, so-called

badges of fraud, that demonstrate fraudulent intent. See, e.g.,

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

Constitution. However, this Court has previously ruled to the contrary on the matter.

See Silver Moss Props., LLC v. Commissioner, 165 T.C. 37 (2025).

[*42] fraud include (1) understating income, (2) keeping inadequate

records, (3) giving implausible or inconsistent explanations of behavior,

(4) concealing income or assets, (5) failing to cooperate with tax

authorities, (6) engaging in illegal activities, (7) supplying incomplete or

misleading information to a tax return preparer, (8) providing testimony

that lacks credibility, (9) filing false documents (including false tax

returns), (10) failing to file tax returns, and (11) dealing in cash.

Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), aff’g T.C.

Memo. 1984-601; see Fumo v. Commissioner, T.C. Memo. 2025-97,

at *83.

“[A] corporation can act only through its officers and . . . it does

not escape responsibility for the acts of its officers performed in that

capacity. Corporate fraud necessarily depends upon the fraudulent

intent of the corporate officer.” Federbush v. Commissioner, 34 T.C. 740,

749 (1960), aff’d per curiam, 325 F.2d 1 (2d Cir. 1963); see Benes v.

Commissioner, 42 T.C. 358, 382 (1964) (“Where fraud is alleged against

a corporate taxpayer, the requisite proof of fraudulent intent is to be

found in the acts of its officers, inasmuch as the corporation, being an

artificial person created by law, can have no separate intent of its own

apart from those who direct its affairs.”), aff’d, 355 F.2d 929 (6th Cir.

1966), abrogated by, Truesdell, 89 T.C. 1280.

The existence of any one badge is not dispositive, but the

existence of several badges may be persuasive circumstantial evidence

of fraud. Niedringhaus, 99 T.C. at 211. On brief respondent has raised

a number of badges of fraud against Mr. Hee and Waimana, which we

address below, with the remaining factors having no application. 21

Understating Income

A pattern of substantially underreporting income over several

successive years can be strong evidence of fraudulent intent. See

Vanover v. Commissioner, T.C. Memo. 2012-79, 103 T.C.M. (CCH) 1418,

1421; Zhadanov v. Commissioner, T.C. Memo. 2002-104, 83 T.C.M.

(CCH) 1553, 1560. Such a pattern is evidence of fraudulent intent “even

where the record is ‘devoid of the usual indicia of fraud.’” Isaacson v.

Commissioner, T.C. Memo. 2020-17, at *48–49 (quoting Otsuki, 53 T.C.

at 107–08), aff’d, No. 20-71121, 2022 WL 541617 (9th Cir. Feb. 23, 2022).

We have said that consistent failure to report substantial income over

21 Several of these factors have no application here, including concealing

income or assets, engaging in illegal activities, or failing to cooperate with tax

authorities. See Fumo, T.C. Memo. 2025-97, at *83.

[*43] several years is highly persuasive evidence of fraudulent intent.

See Temple v. Commissioner, T.C. Memo. 2000-337, aff’d, 62 F. App’x

605 (6th Cir. 2003). Consistent and substantial understatement of

income is “strong evidence of fraud.” Korecky v. Commissioner, 781 F.2d

1566, 1568 (11th Cir. 1986) (quoting Merritt v. Commissioner, 301 F.2d

484, 487 (5th Cir. 1962), aff’g T.C. Memo. 1959-172), aff’g per curiam

T.C. Memo. 1985-63. 22

We have previously held that Mr. Hee and Waimana are

precluded from disputing that Mr. Hee underpaid tax for tax years 2007

through 2012. Further, we have determined that Mr. Hee has

understated his income from constructive dividends received from

Waimana by over $2 million in the aggregate during tax years 2004

through 2012. The unreported income stems from disallowed deductions

of personal expenses that Waimana paid on behalf of Mr. Hee and his

family. The volume of unreported income for each year was large

relative to the income that Mr. Hee actually reported, which ranged

from $150,009 to $606,250.

Waimana argues that it is separate from Mr. Hee and that it was

never charged with or convicted of filing any false income tax returns or

any other criminal charges. Mr. Hee did have separate personal filings.

But we also find that Waimana underpaid tax by improperly claiming

personal expenses for Mr. Hee and his family as business expense

deductions, which reduced its taxable income and the amount of tax due

for tax years 2003, 2004, and 2006 through 2008. However, for two of

the five years, 2006 and 2008, the deficiencies are only $7,328 and

$2,062, respectively.

Mr. Hee’s pattern and substantial amount of underreporting are

persuasive evidence of fraudulent intent. See Musa v. Commissioner,

T.C. Memo. 2015-58, at *27, aff’d, 854 F.3d 934 (7th Cir. 2017). However,

as to Waimana we acknowledge that there is less of a clear pattern of

substantially underreporting income over several successive years.

After considering all the above, we determine this badge is less favorable

to respondent than he contends; but we acknowledge (at a minimum)

22 Some of the deductions being challenged by respondent were not paid or

deducted by Waimana. Rather, they were deducted by the Subsidiaries. For instance,

respondent contends that the 2008 Switzerland trip is evidence of fraud on the part of

the Waimana; however, their own evidence (i.e., Exhibit 421-J) reflects that this

expense was deducted by Clearcom. These discrepancies will need to be resolved under

Rule 155.

[*44] that this factor is somewhat favorable to respondent as evidence

of fraudulent intent on the part of Waimana.

Maintaining Adequate Records

Taxpayers must maintain records sufficient for the Commissioner

to determine their tax liability. I.R.C. § 6001. Failing “to keep or produce

adequate records to support . . . tax return positions” is an indicator of

fraud. Scott v. Commissioner, T.C. Memo. 2012-65, 103 T.C.M. (CCH)

1310, 1317. Petitioners argue that the failure to document the

shareholder loans is not adequate to support this badge of fraud.

Respondent contends that petitioners consistently failed to maintain

adequate records as follows: (1) Waimana did not accurately record the

Children’s hours worked for many of the tax years at issue; (2) Waimana

failed to substantiate the airfare expenses for the Children’s flights;

(3) Waimana did not substantiate with receipts or documentation any of

the expenses reimbursed for the trips in question; (4) Mr. Hee did not

provide receipts for the meals reimbursed; (5) Mr. Hee failed to provide

receipts for any purchases made with the cash he withdrew; (6) Mr. Hee

failed to provide receipts or a business purpose for the office expenses;

and (7) Waimana did not document the shareholder loans with any

formal loan documentation.

As to Mr. Hee we find respondent’s assertions to be compelling

since Mr. Hee failed to furnish receipts (aside from Credit Card

statements) reflecting his Children’s airfare, trips, meal

reimbursements, or office expenses.

Mr. Hee would categorize travel charges on his Credit Cards by

written notations on the statements, but the notations would not

indicate the purpose or reason for the charges’ being expensed, nor

would receipts be furnished. For instance, Mr. Hee created a document

for substantiating the Walt Disney World trip by detailing the dates

traveled and the destination; however, no receipts for the trip were

furnished. Moreover, the trip did not accurately document the travelers

as it listed only Adrianne and Breanne, excluding the additional friends

Amy and Jonathan.

Waimana presented records and evidence rebutting respondent’s

claim and reflecting a reimbursement process which did include detailed

receipts. Waimana was subject to annual financial audits, and

employees at Waimana testified that all information requested by

Chinaka & Siu was furnished—the same was confirmed through prior

[*45] testimony of Mr. Chinaka offered at Mr. Hee’s criminal trial.

However, Mr. Hee, as a corporate officer, processed and approved his

own claims outside of Waimana’s process. Waimana failed not only to

maintain records for Mr. Hee’s personal expenses but also to maintain

adequate records as to the Children’s or Mrs. Hee’s hours worked for

Waimana.

Thus, the failure to keep adequate records and the inaccuracy of

the records that were kept for trips supports fraudulent intent as to Mr.

Hee. Moreover, Waimana had a system in place to record expenses, but

it did not follow the process for Mr. Hee and his family. Accordingly, we

find this factor supports a finding of fraudulent intent.

Giving Implausible or Inconsistent Explanations

“We may consider a taxpayer’s filings and testimony as evidence

of implausible or inconsistent explanations.” Di Giorgio v.

Commissioner, T.C. Memo. 2023-44, at *25. Petitioners argue that any

inconsistencies are due to the passage of time since such activities

occurred in 2003 through 2012 and are not evidence of fraudulent intent.

Although there has been a passage of time regarding the activities in

issue and minor inconsistences may have resulted, we find that Mr. Hee

offered the Court several significant implausible and inconsistent

explanations about Waimana’s business expenses that are not due solely

to the passage of time.

Mr. Hee testified that the purpose of the trip to Walt Disney

World was to establish rapport with the chairman of Raytheon.

However, documentation that substantiated this trip stated that the

purpose was for Adrianne and Breanne to see “how Federal

Infrastructure development funds have been used to benefit society.”

Not only has the stated purpose been inconsistent, but it is implausible

that the purpose was either of these, given that the attendees rode on

the ride sponsored by Raytheon once and there was no testimony that

there was any discussion regarding federal infrastructure development.

We find that the testimony as to the purpose of the Tahiti trip

was also implausible. Mr. Hee testified that the purpose of sending his

family to Tahiti for a week was to conduct a site investigation of an

undersea communications cable system. Even if we were to consider

these self-serving statements to be true, we find it implausible that the

trip was for a business purpose when evidence and testimony from his

family indicate they spent no more than two days related to business

[*46] and absolutely no preparations were made before the trip to

actually conduct business activities. Further, testimony indicates that

the remaining time was spent on personal activities including attending

Heiva, a dance competition, and individual Credit Card charges list

purchases such as jewelry/watch and women’s accessories.

Next, there are inconsistent and implausible explanations as to

the purpose of the Santa Clara Property. Mr. Hee testified that the

purpose of the house was to provide both a place to stay when visiting

Siometrix to check on his investment and a good learning opportunity

for Charlton and Breanne. However, Ms. Tamanaha testified that

Waimana (without clarifying which employee) told her that the Santa

Clara house “was to be used by the employees when they went up to

California as a working environment.” They did not tell her which

employees were using the residence, and she was not aware that the

Children were living at the property. Not only was there inconsistent

testimony given as to the purpose of the Santa Clara Property, but it is

implausible that it was truly used for any of the asserted business

reasons. Both Charlton and Breanne lived in the house while attending

Santa Clara University, and they rented the remaining rooms out to

other tenants. The purpose of the Santa Clara home is rather apparent:

It was the residence of Mr. Hee’s Children while they attended college.

Mr. Hee’s statements as the sole shareholder and president of

Waimana during the tax years at issue are inextricably bound up with

his statements as an individual, private taxpayer. See Benes, 42 T.C.

at 384. In sum we find that Mr. Hee’s explanations were inconsistent

and implausible and are persuasive evidence of fraudulent intent as to

both Mr. Hee and Waimana. See Fumo, T.C. Memo. 2025-97, at *84;

Beleiu v. Commissioner, T.C. Memo. 2025-70, at *10; Podlucky v.

Commissioner, T.C. Memo. 2022-45, at *21, aff’d, No. 22-70169, 2024

WL 4234510 (9th Cir. Sep. 19, 2024).

Supplying Incomplete or Misleading Information to a Tax

Return Preparer

A taxpayer’s failure to provide her tax return preparer complete

and accurate records may reflect the taxpayer’s intent to conceal and

deceive. See Dubose v. Commissioner, T.C. Memo. 1996-99, 71 T.C.M.

(CCH) 2299, 2301; Scallen v. Commissioner, T.C. Memo. 1987-412, 54

T.C.M. (CCH) 177, 208, aff’d, 877 F.2d 1364 (8th Cir. 1989). Petitioners

argue that there is no evidence that Mr. Hee and Waimana deceived

Waimana’s internal CPAs or tax preparers as both Chinaka & Siu and

[*47] KMH had all essential records at their disposal. Petitioners

further argue that if there was an irregularity the accountants would

contact Ms. Henderson and straighten it out.

First, we note that Chinaka & Siu conducted audits of Waimana,

rendering favorable audit findings. Chinaka & Siu was responsible for

certified audits of the financial statements of Waimana for tax years

2005 through 2007, and Chinaka & Siu prepared the general ledger for

Waimana for tax year 2004. We also heard from Waimana’s employees,

including those within the internal accounting department, confirming

that they always complied with any requests from outside accountants.

Likewise, Mr. Chinaka testified at Mr. Hee’s criminal trial that

employees of Waimana were always cooperative and forthcoming with

requests for information.

However, we find that Mr. Hee, as an officer of Waimana,

provided inaccurate, incomplete, and misleading information to the

accountants, Chinaka & Siu and KMH. First, Mr. Hee circumvented the

reimbursement policies regarding reporting his personal expenses.

Specifically, the trips taken by Mr. Hee and his family were not reviewed

by Ms. Costa through Waimana’s ordinary process of reporting travel.

Thus, the books that were provided to Chinaka & Siu and KMH were

misleading and incomplete. Next, Chinaka & Siu did not know when

preparing Waimana’s tax returns that Waimana was paying for the

services of a massage therapist. Mr. Hee did not communicate this to his

accountants. Ms. Tamanaha testified that no one working at Waimana

communicated Ms. Doll’s occupation to her while she worked on the

Waimana returns, and when she was preparing the tax returns, she

believed Ms. Doll was a consultant. Chinaka & Siu first learned that Ms.

Doll was a masseuse during the IRS examination in 2011.

KMH struggled to gather enough information in time from

Waimana for the 2009 and 2010 tax returns. KMH did not know about

the Children’s receiving salaries from Waimana in 2010 and 2011 when

preparing the 2009 and 2010 tax returns. KMH learned about the

Children’s receiving salaries in 2012. Nor did Waimana and Mr. Hee

disclose that the Santa Clara Property was being rented, and KMH was

not made aware until 2012 when it was preparing the 2011 tax return.

Further, Mr. Hee directed Ms. Henderson to reclassify personal

expenses as business expenses on Waimana’s books, which were

provided to the KMH accountants to rely upon. For example, the charges

regarding the Walt Disney World trip were classified as personal, but

Mr. Hee had the charges reclassified as business.

[*48] In 2012 KMH sent a Prepared by Client request to Sang Son

Sumida—an accountant working for Waimana or one of its

Subsidiaries—which

stated:

“Are

personal

expenses

shareholders/employees included as business expenses on the

financials? If yes, attach a detailed schedule, including account

numbers.” KMH employees followed up on this request multiple times

before Mr. Sumida from Waimana responded by stating: “To our

[Waimana’s]

best

knowledge,

personal

expenses

shareholders/employees were not included as business expenses on the

financials.” Petitioners argue that KMH was aware of the IRS’s concerns

regarding personal expenses when preparing the consolidated returns

for tax years 2009 through 2012. Deanna Awa from KMH testified she

was aware of the concern; but when KMH requested information from

Waimana on the subject, she expected that the client would answer

truthfully.

In sum, Mr. Hee supplied false, incomplete, and misleading

information to Chinaka & Siu and to KMH. Thus, such information

furnished is persuasive evidence of fraudulent intent, and we determine

this badge is evidence of fraudulent intent as to both Mr. Hee and

Waimana.

Lack of Credibility of Taxpayer’s Testimony

Overall, we find that portions of Mr. Hee’s testimony at trial were

not credible. For example, petitioners argue that Mr. Hee relied on his

CPAs to make tax decisions, and he may have also been confused or

misunderstood tax law. However, it was Mr. Hee, as president of

Waimana and its Subsidiaries, who would commonly approve employee

trips and expenses as business related since he reviewed these requests

and approved reimbursements. Mr. Hee confirmed that he knew how to

distinguish between personal and business charges, and he would

instruct Ms. Henderson how to categorize items on the statement before

issuing him a check. Likewise, Mr. Hee’s inconsistent statements as to

the purpose of trips and whether they were personal reflect his lack of

credibility.

Respondent equally relies on Mr. Hee’s criminal conviction and

Judge Mollway’s determination: “I do think [Mr. Hee] gave testimony

when he was on the stand that was false, that was material, and that

was willful . . . .” Although Judge Mollway found that Mr. Hee’s

testimony lacked credibility, that determination alone is not sufficient

for respondent to independently establish fraud. See I.R.C. § 7454(a);

[*49] McGowan v. Commissioner, T.C. Memo. 2004-146, 87 T.C.M.

(CCH) 1421, 1422 (“[The Commissioner] cannot rely on [the taxpayer’s]

conviction to sustain his burden of establishing fraud but must clearly

and convincingly prove that [the taxpayer] intended to evade tax.”),

aff’d, 187 F. App’x 915 (11th Cir. 2006).

In sum, we determine that Mr. Hee’s failure to provide credible

testimony at trial and in previous proceedings supports the finding of

fraud as to Mr. Hee and to Waimana.

Filing False Documents

Before trial we ruled that Mr. Hee is precluded from disputing

that he filed false tax returns for tax years 2007 through 2012. See Order

(Nov. 27, 2024). Thus, Mr. Hee’s pattern of filing false tax returns

weighs in favor of finding fraud. See Podlucky, T.C. Memo. 2022-45,

at *22.

Waimana contends that respondent has failed to identify “one

major document that was false” and that “simply no proof was offered”

showing fraudulent intent through the filing of false documents by

Waimana as to all tax years in question.

“Filing false documents includes filing false income tax returns.”

Musa, T.C. Memo. 2015-58, at *38; see Isaacson, T.C. Memo. 2020-17,

at *54 (“Filing false documents with the Internal Revenue Service or

with third parties supports an inference of fraudulent intent.”).

However, “[a] taxpayer’s filing an income tax return that omits income

constitutes filing a false document. But such a filing alone is not

sufficient to satisfy this badge.” Hoyal v. Commissioner, T.C. Memo.

2024-84, at *23 (some citations omitted) (citing Norris v. Commissioner,

T.C. Memo. 2011-161, 102 T.C.M. (CCH) 26, 31).

We recognize that Waimana did file tax returns for tax years

2003, 2004, and 2006 through 2008 and underreported material

amounts of its taxable income on its tax returns by improperly claiming

Mr. Hee’s personal expenses as business expense deductions for the tax

years at issue. However, improperly claiming business expense

deductions on tax returns without providing any additional false

documentation without intent is not sufficient for us to conclude that

[*50] Waimana filed the returns for the purpose of evading income tax. 23

See Norris, 102 T.C.M. at 31; see also Hoyal, T.C. Memo. 2024-84, at *23

(“Even if we assumed that they understated income on their tax returns

for the years in issue, that alone is not sufficient to conclude that they

filed the returns with the intent to evade income tax.”). Respondent,

however, makes the compelling rebuttal that through the actions of Mr.

Hee, as sole shareholder and president, Waimana knowingly

understated its corporate income.

We heard significant testimony as to how the corporate returns

were prepared in the ordinary course of business, which included relying

upon financial data either prepared by or furnished from Waimana and

involved several different accountants and CPAs over the years.

Regarding the preparation of Waimana’s tax returns, the Court also

heard from accountants from Chinaka & Siu and KMH.

Chinaka & Siu was engaged to prepare both financial audits and

tax returns. They received copies of Mr. Hee’s personal Credit Card

statements and thus were intimately involved in the tax reporting

process. In Allen v. Commissioner, 128 T.C. 37, 42 (2007), we held that

the filing of a fraudulent return extended indefinitely the period during

which the IRS could assess additional tax, even though the taxpayer’s

preparer alone had acted with fraudulent intent, while the taxpayer had

not. See also Murrin v. Commissioner, T.C. Memo. 2024-10. Here,

however, respondent has presented no evidence reflecting alleged fraud

by Waimana’s tax preparers either alone or in concert with Mr. Hee. See

Allen, 128 T.C. at 42.

After considering all of the above, we determine this badge is less

favorable than respondent contends; however, we acknowledge (at a

minimum) that this factor is somewhat favorable to respondent as

evidence of fraudulent intent on the part of Waimana.

Failing to File Tax Returns

“While such failure to file, standing alone, does not establish

fraud, it is persuasive circumstantial evidence of fraud.” Fedechko v.

Commissioner, T.C. Memo. 1990-390, 60 T.C.M. (CCH) 272, 276; see

United States v. Magnus, 365 F.2d 1007, 1011–12 (2d Cir. 1966). We do

recognize that Waimana did file tax returns for tax years 2003, 2004,

23 We decline to take into consideration the Federal Communications

Commissioner Forfeiture Order against Sandwich Isles, Waimana, and Mr. Hee for

this analysis.

[*51] and 2006 through 2008; however, Waimana did not timely file for

tax years 2003 and 2007.

Waimana requested an extension for tax year 2003 on October 15,

2004, but the return was not filed until April 23, 2007. Petitioners argue

that the entire two-year delay was due to the death of Waimana’s

accountant’s mother. Although that situation could account for a delay

of a few months, Waimana cannot cast blame on its accountant when it

did not otherwise take any steps to ensure the timely filing of its return.

See Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987) (“As a

general rule, the duty of filing accurate returns cannot be avoided by

placing responsibility on a tax return preparer.”). The Form 1120 for tax

year 2007 was also untimely filed, on May 12, 2009; however, on the

basis of the testimony received, some of the delay is attributable to

Waimana’s newly retained CPA firm. We have said the failure to file

timely returns for four tax years is circumstantial evidence of fraudulent

intent. See Fedechko, 60 T.C.M. (CCH) at 276 (holding that the

taxpayer’s “fail[ure] to file timely their returns for the years in issue”

was circumstantial evidence of fraud). After considering the evidence

before us, we find that Waimana’s two failures appear to be isolated,

nonconsecutive, and not entirely due to its delay. There is no evidence

that Waimana was late with its tax filings for tax years 2004, 2006, and

2008. We therefore determine that this badge, as to Waimana, does not

weigh in favor of finding of fraudulent intent.

We do acknowledge, however, that Mr. Hee did timely file tax

returns for tax years 2004 through 2012. Thus, this factor does not

weigh in favor of finding fraudulent intent as to Mr. Hee.

Dealing in Cash

Extensive dealing in cash to avoid scrutiny of a taxpayer’s

finances is evidence of fraud. See Bradford v. Commissioner, 796 F.2d

at 308. Fraudulent intent may be inferred when a taxpayer handles her

affairs in a manner designed “to avoid making the records usual in

transactions of the kind.” Spies v. United States, 317 U.S. 492, 499

(1943); see Valbrun v. Commissioner, T.C. Memo. 2004-242, 88 T.C.M.

(CCH) 385, 387.

Mr. Hee did not receive extensive reimbursement for cash

withdrawals from Waimana. The annual amounts are relatively low.

Petitioners mentioned in their briefs that many of the withdrawals

occurred during business trips for Waimana, and Mr. Hee could not

[*52] recall the reasons for the cash withdrawals. Respondent did not

provide sufficient evidence that Mr. Hee dealt primarily in cash to avoid

making records or hide his cash dealings. See Chernomordikov v.

Commissioner, T.C. Memo. 2025-129, at *20.

As to Waimana respondent has made no allegation nor has he

presented evidence that the company was dealing in cash. Thus, this

factor does not weigh in favor of finding fraudulent intent as to Mr. Hee

or to Waimana.

Intelligence and Sophistication

Respondent asserts that Mr. Hee’s sophistication is a factor in

indicating fraud. Petitioners argue that respondent has made no

attempt to show that Mr. Hee’s purported business sophistication has

any relationship to an alleged intent to defraud the IRS from 2003

through 2012.

The sophistication, education, and intelligence of the taxpayer are

relevant to determining fraudulent intent. See Niedringhaus, 99 T.C.

at 211; Stephenson, 79 T.C. at 1006; Iley v. Commissioner, 19 T.C. 631,

635 (1952); Beleiu, T.C. Memo. 2025-70, at *8; Clark v. Commissioner,

T.C. Memo. 2021-114, at *37. A taxpayer’s education and sophistication

are not themselves badges of fraud but are relevant factors in

determining “whether a taxpayer could have formed the intent

necessary to be found liable for the fraud penalty.” Holmes v.

Commissioner, T.C. Memo. 2012-251, at *31 n.16 (quoting Wickersham

v. Commissioner, T.C. Memo. 1999-276, 78 T.C.M. (CCH) 315, 319),

aff’d, 593 F. App’x 693 (9th Cir. 2015).

Mr. Hee was a sophisticated businessman. He is a graduate of the

U.S. Naval Academy, ran a successful telecommunications company,

had employees, and dealt with federal regulations. See Di Giorgio, T.C.

Memo. 2023-44, at *24. His testimony provides evidence that he had an

above-average understanding of accounting and tax knowledge as he

knew how to distinguish between personal and business expenses and

would tell Ms. Henderson how to categorize items on Credit Card

statements. Mr. Hee’s sophistication is not dispositive of fraudulent

intent but is a relevant factor in determining his and Waimana’s fraud.

Summary as to Fraud

Considering the record in toto, some six factors support the

finding of fraud as to Mr. Hee: understating income; maintaining

[*53] inadequate records; giving implausible or inconsistent

explanations; supplying incomplete or misleading information to a tax

return preparer; lack of credibility of the taxpayer’s testimony; and filing

false documents. Only two factors, failing to file tax returns and dealing

in cash, do not weigh in favor of finding fraud as to Mr. Hee. Accordingly,

we hold that respondent has established by clear and convincing

evidence that the underpayments of tax for years 2004 through 2012 are

attributable to fraud as to Mr. Hee, and Mr. Hee has not established, by

a preponderance of the evidence, that any portions of the

underpayments for these same years were not attributable to fraud. See

I.R.C. § 6663(b).

Respondent’s case for civil fraud against Waimana principally

relates to how Mr. Hee’s sophistication and actions as a corporate officer

are attributed to Waimana. “[A] corporation can act only through its

officers and . . . it does not escape responsibility for the acts of its officers

performed in that capacity. Corporate fraud necessarily depends upon

the fraudulent intent of the corporate officer.” Federbush, 34 T.C. at 749.

When the badges of fraud are examined as to Waimana, several factors

support the finding of fraud: maintaining inadequate records, giving

implausible or inconsistent explanations, and supplying incomplete or

misleading information to a tax return preparer, as well as Mr. Hee’s

lack of credible testimony. Two additional factors, understating income

and filing false documents, are somewhat favorable to respondent.

Inversely, there are only two factors that do not weigh in favor of finding

fraud: failing to file tax returns and dealing in cash. After considering

these badges of fraud in toto, along with Mr. Hee’s intelligence and

sophistication, we determine that respondent’s case for fraud as to

Waimana is equally clear and convincing. See I.R.C. § 6663(b). Thus, we

will sustain respondent’s determinations that Mr. Hee is liable for civil

fraud penalties for tax years 2004 through 2012 and Waimana is liable

for civil fraud penalties for tax years 2003, 2004, and 2006 through 2008.

VI.

Conclusion

We conclude that respondent has established by clear and

convincing evidence that the underpayments of tax for years 2004

through 2012 as to Mr. Hee were attributable to fraud; therefore, tax

years 2004 through 2012 remain open. See I.R.C. § 6501(c)(1).

Accordingly, respondent is not barred from assessing deficiencies for the

Hees’ tax years 2004 through 2012 and civil fraud penalties against Mr.

Hee. Therefore, we will sustain respondent’s determined deficiencies for

[*54] the reasons stated supra Part III for tax years 2004 through 2012

in Docket No. 24068-22.

We equally conclude that respondent has established that

Waimana’s underpayments for tax years 2003, 2004, and 2006 through

2008 were attributable to fraud; therefore, tax years 2003, 2004, 2006,

2007, and 2008 remain open. See I.R.C. § 6501(c)(1). Accordingly, we will

sustain respondent’s determined deficiencies consistent with this

Opinion as well as the section 6663 civil fraud penalties for tax years

2003, 2004, and 2006 through 2008, the addition to tax under section

6651(a)(1) for tax year 2003, and the disallowed NOLs attributable to

Waimana’s disallowed business deductions incurred in tax years 2005

and 2006 in Docket No. 24077-22. 24

In reaching our decisions we have considered all arguments made

by the parties, and to the extent not mentioned or addressed, they are

irrelevant, moot, or without merit.

To reflect the foregoing,

Decisions will be entered under Rule 155.

24 In briefing Waimana did not challenge respondent’s NOL adjustments or

does not raise a defense to the addition to tax; we accordingly deem the issues to be

conceded. See, e.g., Mendes v. Commissioner, 121 T.C. 308, 312–13 (2003) (“If an

argument is not pursued on brief, we may conclude that it has been abandoned.”).

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