Hie Holdings, Inc. v. Commissioner of Internal Revenue, 060809 FEDTAX, 5045-05

Docket Nº:5045-05, 5046-05, 5047-05
Opinion Judge:LARO, Judge
Party Name:HIE HOLDINGS, INC., HAWAIIAN ISLES KONA COFFEE CO., LTD., AND ROYAL HAWAIIAN WATER CO., LTD., ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:William C. McCorriston, Jonathan H. Steiner, Lisa W. Cataldo, R. John Seibert, Paul B. K. Wong, Christopher J. Cole, Brian R. Lynn, Christopher S. Rizek, Lawrence Inouye, Richard W. Craigo, and John Gaims, for petitioners. Kenneth C. Peterson, Paul K. Webb, Gordon L. Gidlund, and L. Katrine Shelt...
Case Date:June 08, 2009
Court:United States Tax Court
 
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T.C. Memo. 2009-130

HIE HOLDINGS, INC., HAWAIIAN ISLES KONA COFFEE CO., LTD., AND ROYAL HAWAIIAN WATER CO., LTD., ET AL., Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 5045-05, 5046-05, 5047-05

United States Tax Court

June 8, 2009

William C. McCorriston,1 Jonathan H. Steiner, Lisa W. Cataldo, R. John Seibert, Paul B. K. Wong, Christopher J. Cole, Brian R. Lynn, Christopher S. Rizek, Lawrence Inouye, Richard W. Craigo, and John Gaims, for petitioners.2

Kenneth C. Peterson, Paul K. Webb, Gordon L. Gidlund, and L. Katrine Shelton, for respondent.

CONTENTS

FINDINGS OF FACT ............................................. 21

I. Preliminaries ................................... 21

II. NODs ............................................ 22

A. NOD Issued to HIE .............................. 22

1. General Information ....................... 22

2. First Adjustment--Disallowance of Portion of Deductions for NOLs .................... 22

a. Overview ............................. 22 b. Primary Determination ................ 22 c. Alternate Determination .............. 23 i. Overview ..................... 23 ii. Adjustments Related to Criminal Indictment .......... 24 iii. Adjustments Unrelated to Criminal Indictment .......... 25 iv. Some Specifics of Adjustments .................. 26

3. Second Adjustment--Disallowance of Portion of Deductions for Professional Fees ....... 27

a. Overview ............................ 27 b. Personal Expenses of Michael Boulware ............................ 28 c. Unsubstantiated Expenses ............ 29 d. Capital Expenditures ................ 29 e. Summary ............................. 30

4. Third Adjustment--Disallowance of Deduction for Bad Debt .................... 31

B. NOD Issued to Holdings ......................... 31

1. General Information ....................... 31

2. Sole Relevant Adjustment--Disallowance of Portion of Deductions for Professional Fees ...................................... 31C. NOD Issued to Michael Boulware ................. 32

1. General Information ....................... 32 2. Sole Relevant Adjustment--Constructive Dividends ................................. 33

III. Background of Michael Boulware .................. 33

IV. Relevant Corporations ........................... 34

A. HIE ............................................ 34

1. Formation of Business ..................... 34

2. Officers and Directors .................... 36 a. Initially ........................... 36 b. August 31, 1982, to July 10, 1991, or Thereabouts ..................... 37 c. On or About July 10, 1991, Through an Effective Date of April 15, 2000. 38 d. Effective April 15, 2000 ............ 39 e. Board Meetings ...................... 40 3. Shareholders .............................. 40 4. Michael Boulware's Control ................ 42

B. Holdings ....................................... 42

C. Other Corporations Organized in 1994 ........... 43

D. Restructuring of HIE ........................... 43

E. Royal Hawaiian Water ........................... 44

F. Holdings After the Restructuring ............... 44

G. Payment of Common Costs ........................ 45

H. Various Names Used by HIE To Conduct Its Business During the Subject Years .............. 45

I. No Payment of Formal Dividends by HIE .......... 46

J. E&P of HIE and Its Predecessor for 198206 Through 198806 ................................. 46

1. 198206 .................................... 46

2. 198306 .................................... 46 3. 198406 .................................... 46 4. 198506 .................................... 47 5. 198606 .................................... 47 6. 198706 .................................... 48 7. 198806 .................................... 49

K. E&P of Holdings for 199706 and 199806 .......... 50

1. 199706 .................................... 50 a. Accumulated E&P ...................... 50 b. Current E&P .......................... 50 2. 199806 .................................... 50

L. Number of Holdings and HIE Employees ........... 50

V. Officer Loan Account ............................ 50

A. Overview ....................................... 50

B. Mechanics of Account ........................... 50

C. Repayment of Officer Loans ..................... 52

D. Michael Boulware's Claimed Coffee Transactions ................................... 52

E. Promissory Notes ............................... 54

F. Lack of Collection on Promissory Notes ......... 55

VI. Personal Bank Accounts ........................... 55

A. Michael Boulware Individually .................. 55

B. Michael Boulware and Mal Sun Boulware Jointly.. 56

C. Jin Sook Lee ................................... 56

VII. Mal Sun Boulware ................................ 56

VIII. Jin Sook Lee .................................... 57

A. Background ..................................... 57

B. Jin Sook Lee Meets Michael Boulware ............ 58

C. Paradise Roasting .............................. 60

D. Video Consultant ............................... 62

1. Overview .................................. 62

2. Formation ................................. 62 3. Payments From HIE for False Invoices ...... 63

E. Michael Boulware's Divorce From Mal Sun Boulware ....................................... 64

1. Discussions Concerning Divorce ............ 64

2. Glenn Lee Boulware Trust .................. 65 3. Divorce Proceeding ........................ 66

F. Transfers of HIE Assets to Jin Sook Lee ........ 68

1. Overview .................................. 68

2. Atkinson Condominium ...................... 69 3. Makaiwa House ............................. 70 4. Koloa House ............................... 71 5. Punahou Condominium ....................... 73 6. Understanding as to the Transferred Assets .................................... 74 7. Jin Sook Lee's Use of the Transferred Funds ..................................... 75 8. Michael Boulware Takes Some of the Transferred Funds From Jin Sook Lee Without Her Knowledge ..................... 76

IX. Off-Book Bank Accounts .......................... 77

X. Off-Book Activities ............................. 78

A. Overview ....................................... 78

B. OTC Sales of Tobacco Products .................. 79

C. Michael Boulware's Personal Sales of HIE Coffee Unknown at the Time to HIE ..................... 81

1. Overview .................................. 81

2. Sales to Hawaii Misuzu .................... 82 3. Sales to Pele Trading ..................... 83 4. Referenced Coffee Sold by Michael Boulware Included in HIE's COGS .................... 85

D. Bonded Construction ............................ 85

1. Background ................................ 85

2. Michael Boulware Causes HIE To Pay to Remodel Jin Sook Lee's Residence .......... 85 3. Paving of the Back Lot at HIE ............. 86 a. Overview ............................ 86 b. Automated Equipment ................. 87

E. Michael Boulware's Fictitious Leasing Transactions ................................... 88

1. Overview .................................. 88

2. Michael Boulware's First Scheme ........... 89 3. Michael Boulware's Second Scheme .......... 90 a. Need for the Second Scheme .......... 90 b. HIE's Relationship With GECC ........ 91 c. Seven False Invoices ................ 92 i. Overview ..................... 92 ii. Four False Invoices Totaling $271,382.80 .................. 92 iii. Three False Invoices Totaling $224,432 ............ 93 d. First Four Referenced False Invoices. 94 e. Last Three Referenced False Invoices. 95

4. Funds Transferred to Lorin Kushiyama ...... 96

F. Michael Boulware's International Circular Flow of Funds ....................................... 96

1. Overview .................................. 96

2. Relevant Foreign Entities ................. 97 a. Forest Trading ...................... 97 b. Pacific Vendors ..................... 98 c. Harvest International ............... 99 i. Roxca Limited ................ 99 ii. Reinvoicing Operation ........ 99 iii. Bank Accounts ................ 100 iv. Rationale Underlying Formation .................... 101 v. Actual Operation ............. 101 vi. False Invoices From Harvest International ................ 101 1. Overview ................... 101 2. Payments of Invoices ....... 102 3. Transfers From Harvest International .............. 103 a. Overview .............. 103 b. Transfers to Personal Account of Michael Boulware .............. 103 c. Transfers on Behalf of Michael Boulware to Paragon Coffee, Gloria Oh Young, and Antoinette Hirai ...... 103 d. Transfer on Behalf of Michael Boulware to Briggs Cockerham ...... 104

vii. Coffee Rebagging ............. 105

3. Role of Nathan Suzuki ..................... 105

4. Harold Okimoto ............................ 106 a. Overview ............................ 106 b. Harold Okimoto's Employment ......... 106 c. Administration of Harold Okimoto's Estate .............................. 107 d. U.S. Attorney Contacts Okimoto Family .............................. 109 e. Claim of an Approximately $1.7 Million Debt ........................ 110 f. After-the-Fact Creation of Promissory Notes .................... 110

XI. Michael Boulware's Removal of Funds From the Off-Book Bank Accounts .......................... 111

A. Overview ....................................... 111

B. Michael Boulware Causes Checks To Be Cashed for Him by Employees and Friends ................... 112

1. Stanley Hirai and Antoinette Hirai ........ 112

2. Morris Miyasota ........................... 113 3. Thomas Okimoto ............................ 114 4. Milton Ikeda .............................. 115 5. Sydney Murayama...

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