Court Opinion

ID: 4237543
Source: CourtListenerOpinion
Date Created: 2018-01-18 19:00:20.093673+00
Date Added: 2024-06-11T13:26:31.062875
License: Public Domain

Case: 16-60270     Document: 00514312072    Page: 1   Date Filed: 01/18/2018

          IN THE UNITED STATES COURT OF APPEALS
                  FOR THE FIFTH CIRCUIT

                                                                United States Court of Appeals
                                  No. 16-60270                           Fifth Circuit

                                                                       FILED
                                                                 January 18, 2018
JERRY J. SUN; SUN NAM SUN,                                        Lyle W. Cayce
                                                                       Clerk
               Petitioners - Appellants

v.

COMMISSIONER OF INTERNAL REVENUE,

               Respondent - Appellee

                         Appeal from the Decision of the
                            United States Tax Court

Before DAVIS, CLEMENT, and COSTA, Circuit Judges.
GREGG COSTA, Circuit Judge:
      A friend from overseas sent Jerry Sun and a company Sun controlled
about $19 million to invest. Sun used almost $6 million for personal expenses.
Another $4 million was kept in the accounts of Sun’s company. The remaining
$9 million or so was invested, but it was held in brokerage accounts in Sun’s
name, mingled with his other funds, and the gains or losses were reported on
Sun’s taxes.    The tax court held a trial to determine the appropriate tax
treatment of the $19 million. It considered various theories. Sun argued the
money was a loan, which would mean he did not owe taxes on it. The IRS
argued he did owe taxes upon receipt of the money as income from a foreign
company or, for the money that passed through Sun’s company, as qualified
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dividends. The court also considered whether the transfer was a gift. In the
end, it did not agree with any of these theories. The tax court concluded that
the money was not a tax-free loan. It also found that it was not income to Sun
when he received it because it was being entrusted to Sun to invest on his
friend’s behalf. But the court concluded that Sun diverted the funds for his
personal benefit, at which time the money became taxable. Whether this
misappropriation finding was a correct characterization is the primary issue
we consider.
                                      I.
      Sun, an American citizen, is the sole shareholder and chief executive
officer of Minchem International, Inc., a Texas corporation that imports
minerals from China. Sometime before 2008, he and his good friend Bill
Cheung, a Chinese citizen, agreed that Cheung would entrust funds to Sun to
invest in the United States.
      The arrangement was oral. Both Sun and Cheung testified that Sun had
broad discretion regarding how to invest the funds and that the funds were for
investment purposes. But they differed on many details. Sun testified that he
was to invest the money for at least five years, whereas Cheung maintained it
was for seven or ten years. As to Cheung’s return on investment, Sun said he
and Cheung agreed to split any profits beyond a ten percent return. Cheung,
on the other hand, asserted that Sun was obligated to pay him a ten to fifteen
percent annual return.
      Of the $19 million Cheung sent between 2008 and 2009, almost $15
million was sent to Minchem’s officer loan account. This account was listed on
the company’s general ledger but was solely for Sun’s benefit. The remaining
$4 million was sent to Sun’s personal brokerage accounts or Sun Investment,
LLC, a partnership in which Sun owns a 99-percent interest.

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      As noted, Sun ended up using millions of Cheung’s money for personal
expenses. This included the purchase of a luxury car, payment of the mortgage
and real estate taxes on his home, and—the biggest category—over $5 million
for gambling which resulted in losses of about $2.1 million. The $4 million that
remained in Minchem’s officer loan account increased Minchem’s working
capital, which bolstered its creditworthiness when the company sought a line
of credit. The remaining $9 million of Cheung’s money was invested through
either Sun’s brokerage accounts or Sun Investment. This money was mixed
with Sun’s personal fund, there was no separate accounting of Cheung’s
performance, and Sun reported the gains, losses, and dividends from the
accounts on his own taxes.
      Cheung testified, somewhat cryptically, that he may have been aware
Sun was using some of his money for personal purposes. When first asked
whether he knew this was the case, Cheung replied, “I do know.” He then said,
“Well, whether he used this amount of money – let me put it this way. I know
he was gambling. Is that what your question is?” Unsatisfied with Cheung’s
response, counsel repeated the question. Cheung replied, “How did I put this
way? That when he lost money in Vegas he had telephoned me and told me
that. That whether he lost my money or used my money and then he lost it or
used his money, well, let me say that I did not know. I did not know how he
divided or how he distribute his money to be put in.”
      After examining Sun’s and Minchem’s 2008 and 2009 returns, the IRS
issued a notice of deficiency. The notice set out alternative theories for the tax
treatment of Cheung’s transfers. According to the first, funds sent to Sun
through Minchem were gross receipts to Minchem and then dividend
distributions to Sun (meaning both Minchem and Sun owed taxes on this
money); funds sent directly to Sun were taxable upon receipt as income from a
foreign company. The second theory asserted that Minchem was merely a
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conduit and thus all funds should be included in Sun’s gross income. The notice
also assessed fraud penalties or, in the alternative, the less onerous accuracy-
related penalties for Sun’s failure to report Cheung’s transfers as income.
       In addition to claiming that the money from Cheung was taxable, the
notice also alleged that Sun underpaid taxes by (1) failing to report as income
travel and entertainment expenses paid by Minchem, and (2) incorrectly
claiming an investment interest deduction. The basis for the deduction was
interest paid on a home equity loan obtained by Sun; the loan proceeds were
deposited into Minchem’s bank account. Minchem’s ledger lists the transaction
as a personal loan from Sun to Minchem. The IRS contended this did not
constitute a legitimate investment.        These other two tax issues are only
relevant to this appeal because of the negligence penalties the court imposed
that Sun challenges. He does not challenge the tax court’s agreement with the
IRS about the underlying tax treatment of these transactions.
       As it is in this appeal, the primary dispute in the tax court concerned the
biggest dollar item: the $19 million Cheung sent Sun. Sun argued that the
money was a loan because Sun was obligated to repay it. The tax court rejected
this contention, noting there was not a loan agreement, a security interest, a
fixed term for repayment, or agreed rate of interest. But the tax court also
disagreed with the IRS’s position that Cheung’s transfer of funds to Sun was
taxable upon receipt. This was because the tax court determined that Sun held
the funds in trust to invest for Cheung’s benefit. But the money later became
taxable because Sun “misappropriated the funds for personal use, abandoned
the intended purpose for which the money was entrusted, and he did not invest
the    money   in      accordance   with   the   agreed-upon     strategy.”     Such
misappropriated funds are income. Although the court did not impose fraud
penalties, it did find that negligence penalties were warranted for Sun’s failure
to report Cheung’s funds as income and for the other alleged deficiencies.
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      The tax court’s misappropriation theory required a recalculation of the
tax and penalties listed in the deficiency notice. Recall that the IRS’s primary
theory was that money sent directly to Sun was taxable as income but the
money sent through Minchem was taxable only as dividends.                 Because
dividends are subject to lower rate than income, the finding that all of the
Cheung transfer was income would increase Sun’s tax liability from $3.9 to
$6.7 million (though Sun and Minchem combined would face less overall tax
liability as the funds that passed through Minchem would not be subject to
double taxation at both the corporate and individual level). As a result of the
tax court’s finding that all of the Cheung transfer was income to Sun, the IRS
moved for leave to amend its answer to conform to the proof at trial and assert
a greater deficiency amount for Sun’s personal liability. Sun opposed the
motion as both untimely and prejudicial. The tax court granted the motion
and allowed the amendment. The parties thereafter agreed that the new
computations were correct.
      Sun appeals.    With respect to the Cheung funds, he challenges the
conclusion that they are income as well as the negligence penalties assessed.
Those penalties are the only aspects he challenges of the other deficiencies the
tax court found. Finally, he challenges the tax court’s decision allowing the
IRS to file an amended complaint that recalculated the amounts owed.
                                        II.
      Gross income is broadly defined to include “all income from whatever
source derived.” I.R.C. § 61(a). Although at one time the Supreme Court took
a different position, see Commissioner v. Wilcox, 327 U.S. 404, 408 (1946), it
has long been the case that income includes funds acquired through
embezzlement or misappropriation. James v. United States, 366 U.S. 213, 219
(1961). So if a stockbroker does not invest his client’s money but instead takes
it to Vegas and loses it at the blackjack table, then the broker is not only liable
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for theft but also owes taxes on the money used for personal gain. See, e.g.,
Sproul v. Commissioner, T.C. Memo 1995-207, 1995 WL 292386, at *5-6 (May
15, 1995). Sun argues this does not describe his relationship with Cheung
because he was obligated to repay the money whether the investments
succeeded or failed. He also argues that his independent wealth gave him the
means to repay the money despite his spending much of it (though there is no
evidence that he did give any money back to Cheung). A bona fide mutual
obligation to repay would prevent treating the Cheung funds as being
misappropriated because the first requirement of such a finding is that there
be no “consensual recognition, express or implied, of an obligation to repay.”
James, 366 U.S. at 219. The second requirement is that there be no restriction
on how the money is used. Id.
      Sun contends the tax court failed to make the first required finding: that
there was no consensual recognition of an obligation to repay. More than that,
he says, it made the following finding that supports the opposite conclusion:
            While the specific terms of the agreement between Mr.
            Cheung and Mr. Sun were not defined, both credibly
            testified that Mr. Sun was obligated to return some
            money to Mr. Cheung at some point. Thus, the
            transfers were not from detached and disinterested
            generosity because Mr. Cheung expected some return
            of money from Mr. Sun.
This discussion was part of the tax court’s explanation of why the funds were
not a gift from Cheung to Sun; he expected to get some money back.
      An obligation to “return some money at some point” is not, however,
inconsistent with misappropriation. Cheung’s expectation of some return is
typical for the type of varied investments Sun was supposed to make. For all
but the riskiest of investments, an investor with a diversified portfolio expects
to get some money back even if the investments do not turn out well. But that
does not mean the recipient of the funds is allowed to make personal use of the

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money. And when the holder of the funds uses the money to enrich himself, he
has received “economic value,” which is the defining characteristic of income.
James, 366 U.S. at 219 (citation omitted); see also Rutkin v. United States, 343
U.S. 130, 137 (1952) (“An unlawful gain, as well as a lawful one, constitutes
taxable income when its recipient has such control over it that, as a practical
matter, he derives readily realizable economic value from it.”).
       A vague understanding that some money will be returned at some
undefined time is not the mutual recognition of an agreement to repay in full
that James contemplates. James explains the work the requirement of no
“consensual recognition . . . of an obligation to repay” is doing: the “standard
brings wrongful appropriations within the broad sweep of ‘gross income’; it
excludes loans.” James, 366 U.S. at 219 (emphasis added). It was necessary
to draw this line because loan proceeds are not taxable. The reason is that
although a loan provides money to the borrower that can be used for temporary
economic gain, it is offset by a future obligation to repay. United States v.
Rochelle, 384 F.2d 748, 751 (5th Cir. 1967) (Wisdom, J.). As there is no overall
improvement in the borrower’s economic situation, there is no gain to be taxed.
Id. This contrasts with the taxable treatment of embezzled or misappropriated
funds. James, 366 U.S. at 219. A leading tax treatise calls this the “theft-loan
dichotomy” that James’s “no consensual recognition of an obligation to repay”
requirement seeks to enforce. B. Bittker & L. Lokken, FEDERAL TAXATION OF
INCOME, ESTATES AND GIFTS ¶ 6.4, p. 4 (3d ed. 2017). Our court and others
have also recognized that the James language is ensuring that loans are not
treated as taxable income. 1 Moore v. United States, 412 F.2d 974, 979–80 (5th

       1 History explains this concern. Prior to James, embezzled funds were not treated as
income because there was a legal obligation to repay (the thief would owe restitution to the
victim). See Wilcox, 327 U.S. at 408–09. Relying on the same principle of an offsetting
obligation that prevents loans from being treated as income to this day, Wilcox generally
treated any obligation to repay—whatever the source of that obligation—as preventing an
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Cir. 1969); see also Buff v. Commissioner, 496 F.2d 847, 848 (2d Cir. 1974)
(explaining that “the lack of consensual recognition of an obligation to repay”
element of James “distinguish[es] embezzlement from a loan”); Webb v.
Commissioner, 823 F. Supp. 29, 32 (D. Mass. 1993) (recognizing that “James’s
‘consensual recognition’ standard” serves to “distinguish bona fide loans from
other transactions”). And the Supreme Court held that refundable security
deposits paid to a utility were not income to the company because they are
more akin to loans than to advance payments. Commissioner v. Indianapolis
Power & Light Co., 493 U.S. 203, 207–12 (1990) (analogizing refundable
deposits to the proceeds of a commercial loan because there is a “guarantee” of
repayment).
       This understanding that the “consensual recognition” language from
James is about loans defeats Sun’s reliance on it. That is because the tax court
made a detailed and definitive finding that Cheung did not loan the money to
Sun. Or, in the words of Indianapolis Power, there was no “guarantee” of full
repayment. 493 U.S. at 210. The court noted that there was no written loan
agreement, Sun did not provide any collateral, and the parties did not agree on
the timing or amount of repayment. These things are expected of most loans,

income classification. Id.; see also Bittker & Lokken, ¶ 6.4. James overruled Wilcox in
holding that embezzled or misappropriated funds are income. James, 366 U.S. at 219, 221.
But it wanted to continue excluding loan proceeds—that is, money transferred with a
consensual obligation to repay as opposed to an obligation imposed by law—from income. Id.
at 219–20; Collins v. Commissioner, 3 F.3d 625, 632 (2d Cir. 1993) (explaining that “the
Supreme Court has clearly abandoned the pre-James view and ruled instead that only a loan,
with its attendant ‘consensual recognition’ of the obligation to repay, is not taxable”
(emphasis in original)). In contrast to this treatment of loans, courts have consistently held
in other situations that money is income when a taxpayer makes personal use of it despite a
legal obligation repay. A lawyer who misuses funds held in trust for clients is an example.
See Bailey v. Commissioner, 103 T.C.M. 1499 (2012), aff'd sub nom, Bailey v. I.R.S., 2014 WL
1422580 (1st Cir. Mar. 14, 2014); In re Carmel, 134 B.R. 890, 896–97 (Bankr. N.D. Ill. 1991).
Although there is an obligation to repay and personal use of the funds in both a loan and
embezzlement situation, eventual repayment is much more likely in the loan scenario as they
are often collateralized and usually issued only to those who are creditworthy.
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let alone one for close to $20 million. The tax court’s express finding that
Cheung did not loan the money to Sun thus satisfies the first James
requirement. That the tax court later credited Sun’s and Cheung’s testimony
that there was an obligation to return some unspecified amount of money on
some unspecified occasion is not inconsistent with its refusal to treat the
transfers as a loan. 2 We have recognized this distinction between a bona fide
loan that remains nontaxable under James and vague promises to repay that
do not prevent a finding of misappropriation. Moore, 412 F.2d at 978 (“As
opposed to unlawful economic gains which must be reported as income, the
proceeds from a bona fide loan do not constitute income because whatever
temporary economic benefit the borrower derives from the use of the funds is
offset by a corresponding obligation to repay them.” (emphasis added)); Collins
v. Commissioner, 3 F.3d 625, 631 (2d Cir. 1993) (“Loans are identified by the
mutual understanding between the borrower and lender of the obligation to
repay and a bona fide intent on the borrower’s part to repay the acquired
funds.”); see also Illinois Power Co. v. Commissioner, 792 F.2d 683, 689 (7th
Cir. 1986) (“The underlying principle is that the taxpayer is allowed to exclude
from his income money received under an unequivocal contractual . . . duty to
repay it, so that he really is just the custodian of the money.” (emphasis
added)). A legitimate loan should have “exact conditions of repayment” as part
of a “hard-and-fast agreement.”             Moore, 412 F.2d at 980.             Even with
documented agreements to repay, courts have found they are not bona fide
examples of loans within the meaning of James when the chances of full

       2 The only way to reconcile the express finding of “no loan” with the tax court’s later
brief mention of an obligation that some money would be repaid is that the latter was not a
formal agreement to repay the full amount. Any remaining doubt about this is resolved when
the tax court later (in assessing a negligence penalty) describes the arrangement as an “un-
agreed-upon obligation to repay the money.”
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repayment are unrealistic, 3 Buff, 496 F.2d at 849 (finding it “wholly
unrealistic” to believe an employee could pay back $22,000 embezzled from his
employer in $25 weekly payments), or when a violation of the terms of the loan
undermines the credibility of an intention to repay, Webb, 823 F. Supp. at 33
(treating as income funds falsely obtained from a Small Business
Administration disaster relief loan). A mutual understanding that Sun would
“return some money to Mr. Cheung at some point” is thus not enough to
constitute the bona fide loan that would allow Sun to avoid reporting as income
the millions he used to gamble, to bolster the financial condition of his
company, and to produce investment returns that he retained and commingled
with his other funds.
       An understanding that some, but not necessarily all, of Cheung’s money
would be returned is thus not typical of either a gift or a loan, as the tax court
found. The former would not have an expectation of a return; the latter would
require it in full. Sun’s obligation to someday return some money instead
characterizes the investment relationship that we previously described.
Indeed, this is how Sun described his role: he “was entrusted with funds
belonging to another for investment purposes – much like a custodian.”
Another word the law sometimes uses to describe custodians is trustee. See,
e.g., 11 U.S.C. § 101(11) (defining custodian in the bankruptcy code to include,
among other things, trustees holding property of the debtor). Yet Sun also
challenges the tax court’s ruling on the ground that there was no formal trust

       3 That full repayment is the standard reinforces the distinction between a loan and an
understanding that Sun would “return some money to Mr. Cheung at some point.” Partial
repayment is not a bona fide loan. As discussed above, it instead characterizes the typical
investment relationship in which the funds are held in trust on the investor’s behalf who is
entitled to a return of the funds with the resulting gains or losses. Sun emphasizes some of
the testimony that Cheung was guaranteed a full return of his money plus a positive return,
but the tax court did not credit that testimony given the lack of documentation and
inconsistent testimony about any guarantee.
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relationship between him and Cheung, so there could be no misappropriation.
We see no support in the caselaw requiring the existence of a formal trust
relationship before funds diverted to personal use can be classified as income.
Neither James nor our cases applying it mention such a requirement. James,
366 U.S. at 219–20; Moore, 412 F.2d at 978–80. Judge Posner rejected a trust
requirement, explaining that it should not make a “difference . . . whether the
money is placed in a formal trust or is merely ordered held for the benefit of
others.” Illinois Power, 792 F.2d at 688. The key is whether the money is no
longer being used to benefit the other person but rather in a way that results
in “economic value” to the taxpayer. James, 366 U.S. at 219. That is why the
“law is settled that funds diverted to one’s own use constitute taxable income.”
Potito v. Commissioner, 534 F.2d 49, 51 (5th Cir. 1976). The uses to which Sun
was putting Cheung’s millions that we have already recounted amply support
the tax court’s finding that Sun was realizing an economic benefit from the
money. 4 We affirm the finding that the money became income to Sun when he
diverted it for his personal use.
                                         III.
      Sun next challenges the penalties the tax court imposed not just for the
failure to include Cheung’s money as income but also for failing to include
Minchem’s payment of personal expenses as income and for improperly
claiming an investment interest deduction. The tax court rejected the IRS’s
attempt to impose fraud penalties, but did impose the 20% penalties that
results from “[n]egligence or disregard of rules or regulations.” I.R.C. § 6662(a),
(b). The standard of review largely dictates the outcome of this challenge as

      4  It does not matter that, as Sun emphasizes, Cheung did not object when he
apparently realized Sun was using money for unintended purposes like gambling. The money
was entrusted to Sun for investing on Cheung’s behalf. Once he spent it on his own behalf
instead, he realized the economic gain that constitutes income.
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we can vacate the tax court’s finding of negligence, and its related finding that
Sun did not establish a defense of good faith, only if clear error is shown.
Streber v. Commissioner, 138 F.3d 216, 219 (5th Cir. 1998); see Todd v.
Commissioner, 486 F. App’x. 423, 427 (5th Cir. 2012).
         Negligence is strongly indicated when a taxpayer fails to ascertain the
correctness of an exclusion or deduction that would seem to a reasonable
person to be “too good to be true.” 26 C.F.R. § 1.6662-3(b)(1). The tax court
was entitled to find that was the case for the $19 million Cheung sent from
China. Sun did not inquire into the implications of using this enormous sum
of money for personal expenses without reporting it to the IRS. The same is
true for Sun’s attempt to deduct interest he owed on a home equity loan as
investment interest or not to report the travel and entertainment expenses
Minchem covered. Because a reasonable person could see the beneficial tax
treatment of these transactions as “too good to be true” and Sun did not inquire
about the tax consequences, we are not left with a firm conviction the tax court
made a mistake in finding Sun was negligent. See Pasternak v. Commissioner,
990 F.2d 893, 903 (6th Cir. 1993) (holding that a prudent person would
investigate claims when they are likely “too good to be true”).
         Although Sun did not seek any specific advice about treatment of the
contested tax issues, he nonetheless contends that he is entitled to the defense
of good faith reliance because accountants prepared his returns. Cf. United
States v. Boyle, 469 U.S. 241, 251 (1985) (explaining that taxpayer may avoid
negligence penalty if he reasonably relied on expert’s advice). But merely
turning over financial documents to an accountant is not enough to establish
a good faith defense. Todd, 486 F. App’x. at 427. It is also again a problem for
Sun that he did not inquire about the unusual and high-dollar transactions at
issue.    See Westbrook v. Commissioner, 68 F.3d 868, 881 (5th Cir. 1995);
Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 100 (2000), aff'd, 299
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F.3d 221 (3d Cir. 2002). Sun directed his accountant to ask Minchem’s CFO
any questions, but that employee testified that he was not fully aware of the
Cheung-Sun arrangement. And there was no documentation of the terms for
the accountants or CFO to consult because the agreement was oral. Sun has
not shown the complete disclosure of relevant facts to his accountants that
would compel a good faith defense. Contrast Streber, 138 F.3d at 219–22
(reversing a finding of negligence when taxpayer provided tax lawyer with all
relevant information, sought advice on how to classify funds, elected to report
the income consistent with option lawyer approved). We will not disturb the
tax court’s conclusion that Sun did not establish the defense.
                                    IV.
      The final question is whether the tax court erred in allowing the IRS to
recompute the amount of the deficiency after the tax court ruled that all the
Cheung money was income to Sun (as opposed to part of it being income to Sun
and the funds that were sent to Minchem being taxed first at the corporate
level and then treated as dividends on Sun’s return).       The tax court has
“jurisdiction to redetermine the correct amount of the deficiency even if the
amount so redetermined is greater than the amount of the deficiency . . . if
claim therefor is asserted by the Secretary at or before the hearing or a
rehearing.” I.R.C. § 6214(a). Courts have construed this provision broadly,
concluding that “there is no reason why the word ‘hearing’ should not be given
a significance broad enough to include the whole proceeding down to the final
decision.”   Hennigsen v. Commissioner, 243 F.2d 954, 959 (4th Cir. 1957)
(allowing amendment after testimony concluded when taxpayer testified he
received a bonus in a different year than the one the IRS listed in its notice);
cf. H.F. Campbell Co. v. Commissioner, 443 F.2d 965, 970 (6th Cir. 1971)
(rejecting argument that “course of the trial” in a tax court rule is limited to
the “period in which testimony is taken” and concluding that it “include[s] all
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proceedings down to final judgment”). This ensures that the tax imposed by
the tax court is consistent with its liability ruling. Commissioner v. Ray, 88
F.2d 891, 893 (7th Cir. 1937) (explaining that it is sometimes the case that
“[u]ntil the liability is determined neither taxpayer nor Commissioner is in a
position to make a computation”). Just as a civil proceeding in district court is
not complete until damages have been determined and final judgment entered,
a tax “hearing is not completed until these computations are made.”           Id.
Further support for this broad reading of “hearing” is found in the statute’s
allowing an amended notice to be filed at or before rehearing. Rehearing would
necessarily follow the hearing. Helvering v. Edison Secs. Corp., 78 F.2d 85,
90–91 (4th Cir. 1935) (recognizing that the statue allows amended notices even
after entry of judgment because of the rehearing language). We therefore
conclude that the tax court had jurisdiction to consider the amended notice
that was filed during the computation phase before entry of final judgment.
      The existence of jurisdiction under section 6214(a) means only that the
tax court could allow the amended notice, not that it was required to do so. See
Commissioner v. Erie Forge Co., 167 F.2d 71, 76–78 (3d Cir. 1948) (recognizing
this difference in concluding that tax court did not abuse its discretion in
declining to allow IRS to seek new penalties after conclusion of testimony). So
Sun also challenges the district court’s decision to allow the amendment under
Tax Court Rule 41(a).     Similar to the civil rule governing amendment of
complaints, Rule 41(a) says that “leave shall be freely given when justice so
requires.” TAX CT. R. 41(a).
      The tax court did not abuse its discretion in allowing the IRS to amend
its notice. Without the new computation there would have been an untenable
situation in which the amount owed was not consistent with the proper tax
treatment of the transactions. There is no dispute about the accuracy of the
recalculation. And the “new” amount due based on all the Cheung money being
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treated as income to Sun was the same amount that would have been due
under the IRS’s alternative theory that was listed in the original notice. That
theory treated Minchem as solely a conduit so that the entire $19 million was
income to Sun. Sun thus had notice from the beginning of the proceeding that
the liability ultimately imposed was his potential exposure. 5
         Given that the recomputed amount could not have been a surprise to
him, Sun seeks to identify a lack of notice based on the misappropriation
theory’s being raised sua sponte by the tax court. But that liability finding did
not flow from the court’s allowing the amended notice; the timing was the other
way around as the liability finding prompted the request for a new
computation. If Sun thought he lacked notice of the misappropriation theory,
he could have attacked the underlying liability ruling on that basis either in a
request for rehearing or in this appeal. But lack of notice is not one of the
challenges he raises to the misappropriation finding. And in at least two ways
the misappropriation theory was better for Sun than the IRS’s primary theory.
For one thing, it resulted in less overall taxation for Sun and his company
because it avoided the double taxation of the money going through Minchem.
For another, to the extent he ever repays any of the money as he says was the
plan, Sun can deduct that amount for the tax years in which those transfers
occur.
                                          ***
         The judgment of the tax court is AFFIRMED.

         To the extent some courts have also considered the jurisdictional question under
         5

section 6214(a) as turning in part on notice concerns, see Helvering, 78 F.2d at 91, the IRS’s
alternative theory in the original notice satisfies these concerns.
                                             15