TAX COURT OPINION

Case: Michael H. Boulware and Estate of Mal Sun Boulware, Karen Min Erwin, Personal Representative
Docket Number: 5514-16
Judge: Goeke
Opinion Type: bench
Filed: 04/09/2019
Pages: 29

149 UNITED STATES TAX COURT WASHINGTON, DC 20217 MICHAEL H. BOULWARE AND ESTATE OF ) MAL SUN BOULWARE, KAREN MIN ) ERWIN, PERSONAL REPRESENTATIVE, ET ) AL., ) ) ) Petitioner(s), v. ) Docket No. 5514-16, 5885-16. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above cases before Judge Joseph Robert Goeke at Honolulu, Hawaii containing his oral findings of fact and opinion rendered at the trial session at which these cases were heard. In accordance with the oral findings of fact and opinion, decisions will be entered under Rule 155 as to the above-docketed cases. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. April 9, 2019 SERVED APR 1 1 2019 1 2 Bench Opinion by Judge Joseph Robert Goeke March 14, 2019 3 Michael H. Boulware and Estate of Mal Sun Boulware, Karen 3 4 5 6 7 8 9 10 11 12 13 Min Erwin, Personal Representative, Et Al. v. Commissioner of Internal Revenue Docket Nos.: 5514-16 & 5885-16 THE COURT: The Court has decided to render oral Findings of Fact and Opinion in this case, and the following represents the Court's oral findings of fact and op1nlon. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This opinion is rendered pursuant to the authority 14 Provided by Internal Revenue Code section 7459(b) and Rule 15 152 of the Tax Court Rules of Practice and Procedure. 16 Section references here and after in this opinion are to 17 18 the Internal Revenue Code in effect for the years before the Court, and Rule references are to the Tax Court Rules 19 of Practice and Procedure. 20 21 22 This case is before us based upon our jurisidcition to review IRS determinations of income tax liability as reflected in notices of deficiency which are then timely 23 Petitioned, see sections 6211, 6212, and 6213. 24 Petitioner filed two timely petitions regarding two 25 notices of deficiency issued to him personally and one [973) a6-22Š0|operations@escribers.net|www.escribers.net issued to him and his wife. He was a resident of Hawaii when these petitions were filed. The petitions led to the 4 two dockets before us. Petitioner, estate of Mal Sun Boulware, Karen Min Erwin, personal representative, has been granted full relief under section 6015 for the deficiencies, penalties, and additions to tax asserted in docket number 5514-16. Hereinafter, references to petitioner are solely to 1 2 3 4 5 6 7 8 9 Michael H. Boulware. 10 The first notice of deficiency made the following 11 determinations. These determination are in dispute in 12 13 14 15 16 17 docket number 5514-16. For the year 1989, the deficiency in income tax in the amount of $380,051, an addition to tax under section 6651(a) (1) in the amount of $75,229.75, a penalty under section 6663 in the amount of $229,331.25. For 1990, a deficiency in the amount of $258,139, an 18 addition to tax under section 6651(a)(1) in the amount of 19 20 21 22 23 24 25 $65,807.50, a penalty under section 6663 in the amount of $192,578.25. For 1991, a deficiency in income tax in the amount of $619,000, an addition to tax under section 6651(a)(1) in the amount of $153,008, and a penalty under section 6663 in the amount of $461,638.50. For 1992, a deficiency in the amount of $498,534, an 973)4064250|operations@ërribers;net|www.escribersnet addition to tax pursuant to section 6651(a)(1) in the amount of $44,393, a penalty under section 6663 in the 5 amount of $373,309.50. For 1993, a deficiency in the amount of $431,942, an addition to tax under section 6651(a)(1) in the amount of $107,985.75, a penalty under section 6663 in the amount of $323,956.50. Regarding docket number 5885-16, the notice of deficiency determined the following amounts. A deficiency in income tax for the year 1994, in the amount of $520,353, an addition to tax under section 6651(a) (1) in the amount of $74,966.10, a penalty under section 6663 in the amount of $390,264.75. For 1995, a deficiency in the amount of $417,818, a 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Penalty under section 6663 in the amount of $313,363.50. 16 For 1996, a deficiency in the amount of $356,467, an 17 addition to tax pursuant to section 6651(a)(1) in the 18 19 20 21 amount of $267,350.25. For 1997, a deficiency in the amount of $30,591, and a penalty under section 6663 in the amount of $22,943.25. The following facts are not in dispute. Petitioner 22 Michael Boulware is the same person who was a defendant in 23 the criminal case of United States v. Michael H. Boulware, 24 CR99-00239 in the United States District Court for the 25 District of Hawaii, and ts-relevant herein, petitioner was Qfr 45 cribers (973)4069150)operations@escribers.net|www.escribers.nét 6 1 2 3 4 5 6 7 indicted for five counts of filing false tax returns in violation of section 7206(1) for 1989, 1990, 1991, 1992, and 1993, and four counts of tax evasion in violation of section 7201 for 1994, 1995, 1996, and 1997. On November 29th, 2001, petitioner was convicted of the nine stated tax counts in addition to a separate conspiracy account. The court of appeals for the Ninth 8 Circuit reversed the conviction and remanded to the trial 9 court in the United States v. Boulware, 384 F.3d 794 (9th 10 Cir. 2004). 11 On October 24th, 2005, following a trial by jury, 12 Petitioner was found guilty of tax favasion for tax years 13 14 15 1994, 1995, 1996, and 1997, in violation of section 7201 in the criminal case at United States v. Boulware, CR 99- 00239(D. Hawaii). The criminal conviction was affirmed by 16 the United States Court of Appeals for the Ninth Circuit 17 18 19 in the United States v. Boulware, 470 F.3d 931 (9th Cir. 2006). The United States Supreme Court then reversed and 20 remanded the case back to the Ninth Circuit in Boulware v. 21 United States, 522 U.S. 421 (2008). On remand, the Ninth 22 Circuit again affirmed petitioner's criminal conviction in 23 24 25 ehe United States V. Boulware, 558 F.3d 971 (9th Cir. 2009), cert. denied, 558 U.S. 1048 (2009). The criminal conviction is now final. ¢;173)406-2250loperations@escribers.net|www.escriberinet The issue of receiving and failing to report income 7 in excess of amounts reported on his tax return was Presented and adjudicated adversely to petitioner in the district court criminal case. Prior civil tax litigation between petitioner and companies under his control is reported in HIE Holdings Inc. et al v. Commissioner, T.C. Memo, 2009-130, affirmed 521 F. APPX. 602 (9th Cir. 2013). "(HIE Holdings)" The years involving the petitiondin the case of Fi 1 2 3 4 5 6 7 8 9 10 Holdings are years subsequent to those presently before 11 the Court and involve a separate notice of deficiency 12 which was issued to the petitioner for years after 1997. 13 14 15 Many of the issues raised in these two dockets have been settled or previously resolved. In docket number 5514-16, the IRS notice of deficiency is for the years 16 1989 through 1993. There are numerous adjustments in this 17 notice, and some of those adjustments are no longer at 18 1ssue. 19 20 21 22 23 In the years 1989 and through 1992, the IRS has asserted income for diverted income for the years 1989 through 1991, adjustment A in notice of deficiency explanation relates to diverted income pa4++i-ke trading transactions. Those adjustments are. still at issue in 24 this case, but they are the subject of an agreement 25 between the parties. bribe (973)406-2250}operations@escribers.netlwww.escribers.net 1 2 3 4 5 6 7 8 9 Petitioner's primary objection to those adjustments 8 relates to an argument of res judicata. The agreement between the parties which I refer to isqa lengthy stipulation of facts relative to the transactions. There was no specific evidence admitted at trial challenging that amounts were diverted, but rather the issues before the Court were whether those diversions should have been resolved in the earlier HIE Holdings case bovod upe RS 3d2rk For 1989, there are two adjustments which relate to CPL- 10 matters which are not involved in the criminal fraud case. . 11 12 They are IRjk distributions in th-e-ame,mt-4RA-4-i-stribuLiuus in the amount of $4,295 and taxable interest in the amount 13 of $1,301. These adjustments are sustained as petitioner 14 offered no evidence to rebut these adjustments, but these 15 16 17 18 19 20 21 22 23 24 25 adjustments may not be used to compute the penalty under section 6663. There's also an adjustment in 1989 for capital gain in the amount of $35,888. This adjustment is related to the distributions computed based upon diverted income and is based upon the computation of earnings and profits im the determination that part of the distribution was a capital distribution. The petitioner does not challenge the amount of this adjustment and does not challenge the earnings and profits computations entered into the record in support of this adjustment and c'ihsequont years- Écii rs . 73)406.-2250 operationšgiescribérs.net www.escfibeisaiet 9 1 2 3 4 5 6 7 8 9 EIE. In 1990, in addition to the diverted income adjustments from Pele Trading, there's an adjustment from A bonded construction transaction in the amount of $50,785. This adjustment remains at issue. There's & diverted alM) income adjustments in the amount of $116,832 from Hawaii Misuzu Coffee. These adjustments have been resolved in Part in that the parties have agreed on offsets to this 10 adjustments,6nt-5 wliluli might Le 11 12 13 appmpri-a.te-. However, petitioner still maintains a^ res judicata argument that would relate to these adjustments and the addition to tax or penalty under section 6663. 14 Petitioner concedes a bank deposit diverted income 15 16 adjustment in 1989, 1991, and 1992, as well as 1993. These adjustments are reflected in the notice of 17 deficiency in the following amounts -- $506,464 for 1990, 18 19 20 21 $1,337,213 for 1991, $719,755 for 1992, $1,020,293 for 1993. Once again, the addition to tax for fraud and the amounts of these adjustments has been conceded in full by 22 the petitioner, with the possible exception of 23 Petitioner's argument relative to res judicata as it might 24 25 relate to td adjustments. There's an adjustment in 1992 for diverted income (973)406-2250loperations@escribers.net|www.escribers.net associated with leasing arrangements in the amount of $638, 427. This adjustment 1 has been conceded by the petitioner, 4-t-he petitioner ' s res 10 judicata argument. There are diverted income adjustments associated with Coffee transactions in 1992, 1993, which remain in dispute, but are subject to an agreement of the parties which offsets the amounts of the diverted income. Petitioner does not challenge the amounts of diverted income, nor the offset for cost of goods sold, which was allowed for 1993 in the amount of $359,150. While conceding the application of the fraud penalty, 1 2 3 4 5 6 7 8 9 10 11 12 danem- 13 Aaddition to tax, and certain diversions from the HIE 14 computed based upon the bank deposits analysis, petitioner 15 maintains that the diversions associated with Coffee sales 16 should be offset by amounts petitioner paid in cash for 17 Coffee beans purchased by petitioner on behalf of HIE. 18 These purchases were made by the petitioner and others at 19 his direction from coffee growers in the Kona region of 20 21 22 23 the island of Hawaii. He testified how certain checks to cash were used for such purchases. After the record was closed, in post-trial arguments, the parties reached an agreement about the amount of such purchases which 24 Petitioner should be allowed as offsets to the diverted 25 income adjustments. The parties agreed that $950,000 (973)406d250|operátions@escribers.net|wwwescribersmet should be allowed to petitioner as cost of goods sold he incurred but which was not incurred by the corporation in 11 the year 1989. $150,000 of such offset is allowed pursuant to the parties' agreement for 1990, and zero amount of offset is allowed for 1991. And as previously stated, the cost of goods sold allowed in the notice of deficiency for 1993 has been accepted by the petitioner. Petitioner introduced expert testimony to support 1 2 3 4 5 6 7 8 9 10 higher offset based upon the estimated cost of coffee sold 11 12 13 14 15 16 17 by HIE using coffee beans purchased by petitioner. These estimates appear to include costs which were not incurred by the petitioner and they also include estimates which seem to be inconsistent with the record and petitioner's own testimony as to the amounts actually spent for purchases of beans. We have rejected these estimates as unreliable and 18 will adopt the agreed amounts offered by the parties in 19 the post-trial argument referred to earlier. 20 21 22 23 24 One final adjustment remaining in dispute includes the $21,200 diverted income adjustment from automated equipment transactions in 1993. The petitioner challenges this adjustment as inaccurate. There are itemized deductions adjustments in the 25 notices of deficiency, but these are purely computational $73)406-225e j operationseescribers.net l www.escribers.net based upon the other adjustments to petitioner's income. 12 In docket number 5585-16, we previously granted, in part, respondent's motion for summary judgement, upholding petitioner's concession of respondent's determinations of the fraud penalty and unchallenged adjustments to petitioner's income for the years 1994 through 1997. We did, based upon the arguments related to that summary judgement, allow petitioner's time to present evidence to offset the adjustments to income based primarily upon the 1 2 3 4 5 6 7 8 9 10 argument that amounts alleged to be diverted were actually 11 12 13 14 15 1 6 loans and that petitioner had reasonable cause to avoid the addition to tax^under section 6651(a) (1), beca-u-cc of .h-i-s-late fi--l-i-ftg. Petitioner, at the trial of this case, ddhs not pursue either of these potential arguments and ue is ru rráboneble d^e has con ceded t TnTrg- --e-s--l-een-s,-- 17 However, the petitioner offered no evidence to support the 18 19 20 21 loan offsets as it related to the years in docket number 5585-16. Petitioner does, however, continue to pursue the res judicata argument, and for the reasons stated, even if the 22 petitioner pursued the loan offset argument in docket 23 24 25 number 5585-16, we will not permit those offsets as will be explained in further detail. Regarding petitioner's and respondent's stipulations (977):406-2250 opeÑt ons@escribers.net w we ïlbeïs.net 13 of facts, various portions of the stipulations of facts are very critical to some of the arguments remaining relative to fraud, and we will include a discussion of those stipulations directly in the record. With respect to the other stipulations of facts and exhibits associated with those stipulations -- all th they're included in this opinion by this reference. By way of background, the parties have stipulated that in the late 1970s the petitioner started his own 1 2 3 4 5 6 7 8 9 10 business, the operation of a pool hall, and he began 11 working for that business. On the premises of the 12 business were pool tables, video games, and vending 13 machines. 14 15 16 17 18 On or about 1980, the petitioner changed his business to one of video games, and shortly thereafter, on July 10th, 1981, he transferred most, if not all, the assets and liabilities of his video game business to a newly- formed corporation designated as M&S Vending, Inc. The 19 petitioner received all the stock of that entity. M&S Vending, anò Inc. was initially e cash business t-bet Oak involved owning and maintaining coin-operated video games and jukebox, pinball, and karaoke, and other machines, and leasing those machines and games to hotels, bars, and restaurants. M&S Vending, Inc. generally shared the cash 20 21 22 23 24 25 receipts of each of its games and machines with the ClibËh 973)406-2250loperàtions@escribeineth,ww.escribersnet 14 1 2 3 4 5 6 7 8 9 establishment in which the game or machine was located. The establishment generally received 50 percent of the cash receipts, but sometimes the arrangements were negotiated in a different fashion. M&S Vending, Inc. also operated cigarette machines and the distribution of receipts from those machines was on a different percentage basis. On or about the mid-1980s, M&S Vending expanded its business to include the purchase of cigarettes and the 10 sale of those cigarettes through its leased cigarette 11 machines. M&S Vending, Inc. eventually changed its name 12 13 14 15 16 17 18 19 20 21 22 to Hawaii Isles Vending, and later, on or about June 30th, 1987, to HIE. Shortly thereafter, HIE expanded its business further to include the sale of coffee and candy through its vending machines. HIE's coffee business involved selling coffee to business offices through machines that HIE lent to the businesses. In the late 1980s, HIE expanded its business even further to include the processing and distribution of a blend of Kona coffee. Kona coffee is grown and sold at approximately 600 small farms in the central region of 23 Kona, a section of the island of Hawaii. Kona coffee is 24 one of the most expensive coffees in the world. In order 25 to be labeled and sold as Kona coffee, a blended coffee 973)406-2250|bperations@escribers.net jwww.escriberspet must contain at 15 least 10 percent Kona coffee. HIE's blend of Kona coffee was a mix of 10 percent Kona coffee beans and 90 percent coffee beans grown in places such as Brazil, Cost Rica, or Sumatra. Initially, Mr. Boulware, the petitioner, was the president, treasurer, and secretary of M&S Vending, and he was one of two directors on the board of M&S Vending. Through August 31st, 1982, M&S Vending, Inc.'s vice president and other director was Matthew S.K. Pyun, Jr. 1 2 3 4 5 6 7 8 9 10 From August 31st, 1982 through July 30th, 1941 FGG-1 [sic] 11 Petitioner was the only officer of HIE, including its 12 Predecessor. He served simultaneously as the president, 13 14 15 vice president, secretary, and treasurer. l%I From August 31st 1982 to July 10th, b90t [sic] or thereabouts, petitioner was also either the sole director 16 of the corporations board or one of its two directors. 17 Stanley Hirae was the other director of HIE and its 18 predecessor during some of that time. Mr. Hirae helped 19 petitioner form the business that became M&S Vending, 20 21 22 Inc., and he was one of M&S Vending, Inc.'s original employees. In 1981, Mr. Hirae contracted diabetes and was 23 instructed by petitioner not to come into the office but 24 to remain at home on full salary. Afterwards, he was paid 25 approximately $50,000 per year to at least 1997, although 73)406d250}operati ns@escribers.net|www.escribers Àt he performed few services for HIE during that period. From July 10, 1991 through the years at issue in this case, HIE had two directors in addition to the petitioner. One was the petitioner's brother, Sidney E. Boulware, Jr., 16 and the other was Mirwin Manago, a friend of the petitioner. As of July 10th, 1991, petitioner's brother took over the petitioner's role as the vice president of HIE. Mr. Manago began working for HIE on or about November 1988. 1 2 3 4 5 6 7 8 9 10 His position at that time was chief financial officer 11 12 13 14 15 under the title of controller. He has continued to work for HIE, and worked there through the years in question, as chief financial officer. HIE's board of directors met frequently during the years in question and memorialized these meetings in 16 minutes. The minutes were typically typed into a form by 17 the administrative assistant of HIE, who was not at the 18 meetings, but who would receive from either Mr. Boulware 19 or his brother the statements that she would type. Typed 20 documents would then be circulated to the officers who 21 were present at the meeting and they would sign the 22 minutes. 23 Through September 8th, 1987, the petitioner was the 24 sole shareholder of HIE. On September 8th, 1987, the 25 Petitioner transferred 50 percent of stock in HIE to Gin (973)406-2 250 l operátions@escribersnet j www.escril»ts.n et Sook Lee, as trustee of 17 the Glenn Lee Boulware Trust. Gin Sook Lee was the petitioner's mistress from 1982 through 1994 and she is the mother of two children by the petitioner. The oldest of these is Glenn Lee Boulware. At the time of the transfer, HIE did not issue a stock certificate to Gin Lee Sook or otherwise record the transfer. In 1995, Gin Sook Lee, as trustee, commenced a lawsuit in the circuit court of the First Circuit of Hawaii. 1 2 3 4 5 6 7 8 9 10 On June 14th, 1996, while this lawsuit was pending, 11 HIE issued a stock certificate to Gin Sook Lee as trustee, 12 reflecting the ownership of 47.5 percent of the 13 outstanding shares of HIE. 14 Contemporaneously, HIE also issued stock to Mr. 15 Boulware's brother Sidney, who was listed as a five 16 17 percent holder of stock at HIE. On or about March 15th, 1998, petitioner's brother 18 Sidney rescinded his five percent interest in HIE. This 19 rescission was the result of a holding by the state court 20 21 22 23 in the trust case that ruled that Glen Lee Boulware Trust was entitled to own 50 percent of the stock of HIE as of September 8th, 1987. Despite these stock holdings, petitioner was viewed 24 as the boss and maintained control over the operations of 25 HIE. He was viewed as the boss by all the employees and cribws ts73)406-2250{operations@escribers.netlwwwàscríbers.net . 18 1 2 3 4 5 6 7 8 9 10 11 12 the officers of the company. He had the final say at board meetings, and he had the final say with respect to the operation of the business. The parties have stipulated that the petitioner diverted HIE's assets from HIE to hide the assets from Mal Sun Boulware in connection with their divorce and to accumulate personal wealth for what he hoped to be the benefit of himself, Gin Sook Lee, and their children. Petitioner diverted those assets from HIE for his personal use in that he gave the underlying assets to Gin Sook Lee to use, hold, or spend as she desired. He had hoped that she would marry him, but subsequently she declined his 13 offer of matrimony. 14 The parties have also stipulated that the petitioner 15 surreptitiously caused the opening of two off-book bank 16 accounts. In October, 1990, the first account was opened 17 at Hawaii National Bank in the name of Hawaiian Isles 18 Distributors, Inc. On or about October 1991, a second 19 account was opened at Central Pacific Bank in the name of 20 Hawaiian Isles Enterprises, Inc., d/b/a Hawaiian Isles 21 Distributors. 22 23 The off-book account income diversions were not reported on the books of any of the relevant corporations, 24 and those accounts were kept secret during the subject 25 years from the independent managers and directors of HIE. C D h)406 2250|operationseescribersnet|www.escribers.net Petitioner did tell his brother about 19 the off-book banking accounts in order that his brother could assist him in 1 2 3 maintaining the secrecy of these accounts from the 4 5 6 7 8 9 independent managers of HIE. These diversions were deposited into the off-book bank accounts or into the personal account of petitioner or Gin Sook Lee. Petitioner has conceded that these diversions are subject to the fraud addition to tax. However, petitioner maintains the argument i-evol"ed a res 10 judicata discussed previously. 11 12 13 14 15 16 17 Petitioner caused Gin Sook Lee to receive at least $3,147,923 of the funds deposited into the off-book bank accounts. HIE did not record these receipts as loans on its books and records through June of 1993. The parties have also stipulated certain facts with respect to Bonded Construction. In 1989, Gin Sook Lee purchased a house at 1017 Makawa Street, with funds 18 petitioner had obtained from HIE. Bonded Construction, a 19 general construction company, performed work for HIE and 20 petitioner. Bonded Construction also rented a warehouse 21 22 from HIE. In 1990, Bonded Construction renovated the 1017 23 Makawa Street house at a cost of $156,647. Petitioner 24 directed Bonded Construction to issue two invoices 25 totaling $50,785 to HIE for part of the work on the 1017 (973)406-2250loperatiönspeschbets.net|www.escrib.brséet·. Makawa Street construction home. At petitioner's direction, HIE paid the $50,785 in 1990. 20 . on or about December 22nd, 1993, petitioner asked his attorney to form a corporation petitioner wholly owned as Automated Equipment Limited ½##.9. The attorney did so, and petitioner became the sole officer of Automated Equipment Limited. Petitioner did not inform HIE accountants about the Automated Equipment Limited account or formation. HIE did not lease equipment from Automated 1 2 3 4 5 6 7 8 9 10 Equipment Limited, but petitioner caused HIE to issue a 11 check for $21,020 to Automated Equipment Limited on 12 December 28th, 1993. He then endorsed and signed over the • 13 14 15 16 17 check to Harold Okimoto. Petitioner disputes these adjustments. However, the stipulations they clearly suggest were diversions of A income, and we hold that these adjustments were subject to the penalty under section 6663, and this should be 18 Properly included in petitioner's income. 19 20 21 22 23 24 Evidence supporting that petitioner's additions to tax and the penalty for fraud were approved by supervisors for the IRS have been admitted into the record of this case, and the conformity of respondent's actions with section 6751 is not at issue as it has been conceded by the petitioner that the appropriate forms were signed by 25 the supervisory personnel of the Internal Revenue Service. Chr$ (973)406-2250|operations@escribers.net|www.escribers.net Petitioner argues that the doctrine of res judicata bars respondent from litigating or assessing deficiencies, 21 additions to tax, and penalties with respect to petitioner's 1989 through 1997 tax years. Res judicata applies to prevent subsequent litigation of a claim previously tried and decided where three conditions are met. There is privity between the parties and the actions. There is an identity of claims between the actions, and there was a final judgement on the merits in the previous action. The United States v Wanland, 830 F.3d 947,956 (9th 1 2 3 4 5 6 7 8 9 10 11 12 Cir. 2016), citing Taho-Sierra Pres. Council, Inc. v. Taho 13 Reg'l Planning Agency, 322 F.3d 1064, 1077 (9th Cir.2003). 14 Petitioner specifically argues that the doctrine of res 15 judicata applies in this case based upon this Court's 16 Prior decision in HIE Holdings, Inc. v. Commissioner (HIE 17 Holdings), TC Memo 2009-130, aff'd 521 F. App'x 602 (9th 18 Cir. 2003). Respondent HMdF] also argues that the 19 doctrine applies to the previous convictions for criminal 20 21 22 failure to file on tax evasion. A previous criminal determination regarding tax liability does not limit further civil proceedings under 23 the doctrine of res judicata. The Supreme Court has long 24 held, and the 9th Circuit has adopted that "the difference 25 in the burdens of proof in criminal and civil proceedings (973)406-2250|aperations©escribers.net|www.escribers.net 22 1 2 3 4 5 6 7 8 9 usually precludes application of collateral estoppal." Standlee v. Rhay, 557 F.2d, 1303, 1305 (9th Cir. 1977) citing Helvering v. Mitchell, 303 U.S. 391, 397 (1938), Explaining further the 9th Circuit has said "because of this difference in burdens of proof, an adjudication of the issues in a criminal case 'does not constitute an adjudication on the preponderance of the evidence burden applicable in civil proceedings.'" Standlee, 557 F.2d at 1305, quoting One Lot Emerald Cut 10 Stones V. United States, 409 U.S. 232,235 (1971). "In 11 addition, the nature of the sanction imposed by a 12 proceeding also is determinative of whether collateral 13 estoppel applies." Standlee, 557 F.2d at 1305, "Action on 14 a criminal charge does not bar, under res judicata, a 15 civil action by the government which is remedial in 16 nature, even if it arises from the same facts that the 17 criminal proceeding was based upon. See Helvering V. 18 Mitchell, 303 U.S. at 397. For the doctrine of res 19 judicata to apply to the same cause of action involving 20 civil matters, the same cause of action must be litigated 21 2 2 23 24 in both cases. HIE holdings concerned petitioner's 4-euc r e t u r n s 1998 to 2002. paW-re1ir fif This present case involves petitioner's joint returns 25 with his then-spouse for the years 1989 through 1993 and shun 23 1 2 3 4 5 6 7 8 9 petitioner's returns individually from 1994 through 1997. The 9th Circuit has explained that in determining whether an identity of claims exists, they consider four factors: whether the rights or interests established in the prior judgement would be destroyed or impaired by prosecution of the second action; whether substantially, the same evidence is present in the two actions; whether the two suits involve infringement of the same right; and whether the two suits arise out of the same transaction in locus 10 of facts. Turtle Island Restoration Network V. U.S. 11 Department of State, 673 F.3d 914, 917-918 (9th Cir. 12 2012). The final factor, the same transactional in locus 13 of facts, is the most important pursuant to 9th Circuit 14 Precedent. 15 The relevant question is not whether the claims were 16 actually brought'in a previous action, but whether they 17 could have been brought. Here we note that the Internal 18 Revenue procedures which precede Tax Court cases 19 specifically make petitioner's argument untenable. 20 21 22 23 Tax Court cases are the result of the issuance of notice of deficiencies in cases involving deficiency determinations of income tax liabilities. There was no notice of deficiency issued to the 24 Petitioner or to the petitioner and his former wife for 25 the years that are currently before the Court at the time (973)4Ò6-2250|operaticáseescribersnetIwww.escribersitet of the litigation of the HIE Holdings case. 24 HIE Holdings did not involve a petition of the years that are presently before the Court. There could not have been a judgment upholding deficiencies, penalties, or additions to tax for the years presently before this Court in the HIE Holdings case as they related to petitioner Michael Boulware because there was no notice of deficiency issued to him for those years. The judgment entered by the court did not involve the years in question as they relate to Michael 1 2 3 4 5 6 7 8 9 10 Boulware, nor did they involve him personally for any 11 12 13 14 years other than those after the years of question in this case. In addition, the 9th Circuit has taken a narrow approach to the question of whether a latter action 15 involves the same transactional locus of facts. They have 16 held that "when considering whether a prior action 17 18 involved the same 'locus of facts' for preclusion purposes, we must narrowly construe the scope of that 19 earlier action." 20 Central Delta Water Agency v. United States, 306 F.3d, 21 22 23 24 938,953 (2002). The issues before the Court in HIE Holdings did not, nor could they, have considered petitioner's individual tax returns for 1989 through 1997 N-et-e ashas bn 25 explained previously. Although the harm may be the same (973)406-2250|operations@escribertnet|wwtmescribers.net by the recognition of 25 tax deficiencies as they related to HIE Holdings, that is not enough to establish an identity of claims if the harm arises from different facts or if the judgment that could have been rendered in HIE Holdings did not involve the petitioner himself. While the cases have facts in common, they do not involve the same tax determinations. Petitioners rely upon Commissioner v. Sunnen, 333 U.S. 591 (1948). Their reliance on this case is odd because it appears to 1 2 3 4 5 6 7 8 9 10 directly contradict the ·holding,^ In Sunnen, the Supreme 11 Court held each year is the origin of a new tax liability 12 13 14 15 16 and of a separate cause of action. Thus, if a claim of liability or non-liability related to a particular tax year is litigated, a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim in the same tax year, but if the later 17 Proceeding is concerned with a similar or unlike claim 18 19 20 21 22 related to a different tax year, the prior judgment acts as a collateral estoppel only as to those matters in the second proceeding which were actually presented and determined in the first suit. Sunnen at 598. In a final attempt to salvage their argument about 23 collateral estoppel, the petitioner suggests that 24 respondent could have assessed the 1989 through 1997 tax 25 deficiencies as a result of the HIE Holdings litigation. (973)406-2250{operations@escribers.net|vruvtescribershet 1 2 3 4 5 6 7 8 9 10 11 12 13 Ete effect w.asr-t-he petitioner would argue, was that respondent should have issued a notice of deficiency against the petitioner for the same years that were litigated in HIE Holdings relative to the corporation. There's no authority for the proposition that the Petitioner can cause respondent to issue a notice of deficiency except for the statute of limitations, and the statute of limitations is not an issue in this case. Petitioner cites Zackim v. Commissioner, 91 T.C. 1001 (1988), rev'd 887 F.2d 455 (3.d Cir. 1989). In Zackim, we held that res judicata precluded respondent from retrying a fraud claim in a subsequent proceeding where respondent knew of the fraud prior to the final judgment in a 14 Preceding law suit. However, that case involved the same 15 Petitioner in the same year that was subsequently 16 litigated, and the court held that to the extent they were 17 different arguments in the later years, they could be 18 pursued. 19 20 The distinguishing feature in Zackim is obviously that there was a different taxpayer involved in HIE 21 Holdings, and that the years involving the petitioner were 22 different years than the years we presently have. Even 23 more damning for the petitioner, the 3rd Circuit reversed 24 our decision as it related to the issue of res judicata, 25 applying to the 1979 tax year in Zackim because "Congress . 1eriber $73j406-2250|operations@escribers.net|wwwascribérs.net 27 dealt exclusively with what we now commonly refer to as claim preclusion within an act of section 6212 (c) which consciously excludes from claim preclusion government claims for tax fraud." 887 F.2d, 445, 459. In any event, Zackim is not applicable to the present facts even if it remained good authority, which is a serious question in itself. The notice of deficiency from 1989 determines an additional capital gain of $35,888, as stated previously. 1 2 3 4 5 6 7 8 9 10 This capital gain for diverted corporate funds in excess 11 of earnings and profits for 1989 as reported on the 12 petitioner's return,, 1 3 14 15 oer da n t c f a n add+t-i-ena4--ames-t--e f The notice of deficiency characterized this 16 additional asw as a distribution in excess of earnings and 17 Profits. Through a Revenue agent witness, respondent 18 introduced a schedule a trial which was admitted with no 19 objection regarding an earnings and profits computation 20 21 22 that would be applicable for all the years before us. We hold that the diverted income adjustments in this case from HIE must be subject to the same earnings and profits 23 analysis which respondent applied in 1989, and that to the 24 extent the diversions exceed earnings and profits, capital 25 gains treatment would apply. Therefore, in the Rule 155 (973)406-2250}cperations@escribers.net|www.escribernet. computations of this case, earnings and profits will be calculated based upon the schedule admitted at trial, 28 which is Exhibit 3163-R. We now turn to petitioner's argument involving loan advances. Respondent asserts we should reject the idea that a debtor/ creditor relationship existed between petitioner and HIE regarding the unreported income diversions from HIE. To determine whether a transaction created bona fide debt and a true debtor/creditor relationship, we must examine the intent of each party in the transactions, such as that intent existed at the time of the transfer. In other words, did the parties intend to establish an enforceable obligation of repayment. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Ruckriegel v. Commissioner, T.C. Memo 2006-78, citing 16 Delta Plastics Corp v. Commissioner, 54 T.C. 1287 (1970). 17 Self-serving statements by the petitioner should be viewed 18 with skepticism regarding after-the-fact claims that 19 advances were loans. See Bhatia V. Commissioner, T.C. 20 Memo 1996-429, and Hubert Enters, Inc. and Subs V. 21 Commissioner, 125 T.C. 82 (2005). 22 23 24 25 The question of whether the petitioner intended to repay the loans in question in this case is made clear by the parties' stipulations of facts. The facts that are stipulated undermine the argument that the petitioner took (973)40(s-2250}ope,ations@erribers.net |wwwæscriber5Aet · 29 off-book funds as a loan or that he repaid them. Through 1993, the petitioner was not required to sign promissory notes for checks written to him from the HIE account. After 1993, HIE CFO Mirwin Manago took the total amount of checks written to petitioner and drafted promissory notes for a portion of the diverted funds. Mr. Manago and HIE never declared a default on any amount under promissory note or attempted to collect the defaulted obligation from the petitioner. The parties likewise have stipulated that numerous income items diverted to the petitioner were not booked as loans by HIE at the times of the transactions, including coffee sales by petitioner to Pele Trading during the years 1989 through 1993, or to Hawaii Misuzu during 1990 through 1993. In conclusion, the record as stipulated by the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Parties, undermines the petitioner's argument that there 18 19 was an intent to repay at the time the advances were made to the petitioner or the diversions were made from HIE to 20 petitioner. We therefore conclude that the diverted sums 21 22 23 should not be considered loans. Likewise, we conclude that res judicata is inapplicable as a defense to the adjustments in question in this case and the application 24 of the addition to tax for fraud. 25 As stated previously, we also uphold respondent's 73)46ëä250loperationséescdbers,net wwwäscribers.net 30 1 2 3 4 5 6 7 8 9 adjustment of $50,785 in 1990 and $21,200 in 1993 as diversions subject to the fraud addition to tax. We note, with respect to these diversions, petitioner offered no witnesses at trial to explain the stipulated diversion or cause us to revisit the specific language of the stipulation of facts. The stipulation of facts made clear, as we stated previously, that these amounts represent diverted corporate funds, which petitioner diverted to be used for the personal purposes he had in 10 mind with respect to his then-mistress, and he did attempt 11 12 13 14 15 16 17 18 19 20 21 to conceal these payments, evidencing fraud. With respect to the addition to tax under section 6651(a)(1), petitioner has conceded that he does not have any evidence of reasonable cause for a late filing returns for any of the years that are subject to this addition to tax, and we uphold this addition to tax. In conclusion, a decision for respondent will be entered in docket number 5885-16 and a decision under Rule 155 will be required for docket number 5514-16. This concludes the Court's oral findings of fact and opinion in this case. 22 . (whereupon, at 10:57 a.m., the above-entitled matter 23 was concluded.) 24 25 (973)406-2250|operations@escdbersnet|www.escribersaet •