Han v. Commissioner
| Decision Date | 12 June 2002 |
| Docket Number | Docket No. 14649-94. |
| Citation | 83 T.C.M. 1824 |
| Parties | Steven K. Han v. Commissioner. |
| Court | U.S. Tax Court |
Richard L. Manning and Ira M. Burman, for the petitioner.
Marjory A. Gilbert and Catherine M. Thayer, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency in, and additions to, petitioner's Federal income tax for 1988 as follows:
Additions to tax
Deficiency Sec. 6651(a) Sec. 6653(a)(1) Sec. 6661
$31,101 ................... $7,697 $1,766 $7,775
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
In an amendment to petition, petitioner alleged that the income reported on his 1988 return should be reduced by $27,992 because he erroneously reported interest income that was earned on funds that belonged to his wholly owned corporation, N.A. Tours, Inc. In an amendment to answer to amendment to petition, respondent asserted that an increased deficiency for 1988 arose from (1) unreported income from theft of $986,856, dividend income of $20,641, capital gains from real estate sales of $107,021, and ordinary income from those sales of $2,638; and (2) a change in petitioner's filing status from single to married filing separately. Respondent further asserted that the additions to tax determined in the notice of deficiency under sections 6651(a), 6653(a)(1), and 6661 for 1988 should apply to the increased deficiency.
After concessions,1 the issues remaining for decision are:
(1) Whether petitioner had unreported income of $986,856 from funds diverted from his wholly owned corporations;
(2) whether petitioner had unreported income of $12,913 from dividends earned from brokerage accounts held in his name;
(3) whether petitioner had unreported income of $20,641 from dividends earned from brokerage accounts held in the names of petitioner's nominees;
(4) whether petitioner had income of $27,992 from interest earned on funds diverted from his wholly owned corporations;
(5) whether petitioner is entitled to depreciation deductions of $9,963 claimed on his return;
(6) whether petitioner had unreported rental income of $43,123 from two corporations owned by him;
(7) whether petitioner is subject to an addition to tax under section 6653(a)(1) for negligence; and
(8) whether petitioner is subject to an addition to tax under section 6661 for substantially understating his income tax.
Some facts have been stipulated and are so found. The stipulation of facts, first supplemental stipulation of facts, second supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference. Petitioner resided in Lincolnwood, Illinois, when he filed the petition in this case.
In 1981, petitioner, who also is known as Kee Soo Han, incorporated Air America Travel Services, Inc. (Air America), an Illinois corporation, the principal place of business of which was in Chicago, Illinois. At all times, petitioner was Air America's sole shareholder. Air America sold airline tickets to the general public as a retail travel agent. During 1984, Air America also started doing business as a consolidator2 for Northwest Airlines, Inc. (Northwest).3 Air America's consolidator activities primarily involved selling airline tickets in Korean ethnic communities in the United States for flights between the United States and Korea.
Beginning in 1984, petitioner incorporated six wholly owned corporations, operating in different localities under the "NA Tours" name, to conduct his consolidator business (hereinafter in the aggregate referred to as the NA Tours companies). In August 1984, petitioner incorporated K-P Travel, Inc. (K-P Travel), an Illinois corporation. In June 1986, petitioner changed K-P Travel's name to N.A. Tours, Inc. (IL NA Tours). Its principal place of business was Chicago, Illinois. In March 1986, petitioner incorporated NA Tours of California, Inc. (CA NA Tours), a California corporation, whose principal place of business was Los Angeles, California. In June 1986, petitioner incorporated NA Tour of New York, Inc. (NY NA Tours), a New York corporation, whose principal place of business was New York, New York. In September 1986, petitioner incorporated NA Tours of San Francisco, Inc. (SF NA Tours), a California corporation, whose principal place of business was San Francisco, California. At some time, petitioner also incorporated NA Tours of Washington, D.C., whose principal place of business was Washington, D.C., and NA Tours of Seattle, Washington, whose principal place of business was Seattle, Washington. From 1986 until the end of 1988, Air America did not operate as a consolidator, but during that period it continued to operate as a retail travel agent. Air America returned to doing consolidator business at the end of 1988. Hereinafter, we will refer to Air America and the NA Tours companies collectively as petitioner's or his corporations.
By 1987, petitioner's corporations were generating approximately $50 million in annual gross receipts from their operations as consolidators for Northwest and had between 70 and 80 employees. During 1987, petitioner hired David Chung (Chung) to serve as accountant for his corporations. Sometime later, petitioner promoted Chung to controller and vice president of IL NA Tours. Among other things, Chung was responsible for preparing financial statements for the NA Tours companies.
Petitioner continued to be the sole shareholder and president of Air America and each of the NA Tours companies throughout 1988. When he incorporated each NA Tours company, petitioner did not contribute any money or property to the capital of the corporation. None of the NA Tours companies ever declared a dividend. IL NA Tours used the other NA Tours companies, Air America, and unaffiliated subagents as its subagents to distribute airline tickets.
The NA Tours companies continued to operate as consolidators for Northwest into 1988. In 1988 IL NA Tours also operated as a consolidator for Korean Airlines, and the NA Tours companies sold retail airline tickets.
Northwest did not require its consolidators to pay for ticket stock at the time of transfer to the consolidator or upon the transfer of that ticket stock to the consolidator's subagents. Rather, payment was not due, and a consolidator could retain the proceeds of a sale of Northwest ticket stock, until the submission of an "auditor's coupon" to Northwest. (An auditor's coupon was one copy of the multiple-copy ticket that served as a permanent record of a ticket sold.) Before 1987, auditor's coupons did not have to be submitted to Northwest until 45 days after each 2-week sales period, when coupons for all tickets sold during the sales period were due, together with payment for the tickets less the consolidator's commission. Sometime in 1987, Northwest modified its procedures to reduce the period during which proceeds from the sale of ticket stock could be retained by a consolidator. Under the new procedures, consolidators were required to submit auditor's coupons for tickets sold on a weekly basis; Northwest then prepared a sales report based on the submitted coupons and invoiced the consolidator, with payment due within 7 days of receipt of the invoice.
As a consequence of Northwest's procedures for collecting payment for ticket stock from its consolidators, petitioner's corporations were able to postpone payment for ticket stock for significant periods. In addition, before 1987, IL NA Tours was frequently late in remitting payment to Northwest; after the initiation of the more expedited procedures in 1987, IL NA Tours' payment delays intensified.
During the periods that petitioner's corporations held ticket sales proceeds, petitioner would invest them in the stock market. Petitioner enjoyed speculating in the stock market, frequently purchasing heavily margined4 stock. Petitioner used various brokerage accounts for purposes of investing his corporations' funds, including ticket sales proceeds, in the stock market.
During 1987, petitioner opened the following three brokerage accounts, among others: (1) Account No. 682-07658 at Merrill Lynch Pierce Fenner & Smith, Inc. (Merrill Lynch5) (Merrill Lynch No. 1), which was opened in the name of Air America and under Air America's taxpayer identification number (TIN) but considered to be IL NA Tours' account; (2) account No. 879 07787 at Merrill Lynch (Merrill Lynch No. 2), which was opened in the name of NY NA Tours and under NY NA Tours' TIN but considered to be IL NA Tours' account; and (3) account No. A19 52547 at E.F. Hutton & Co., Inc. (Merrill Lynch No. 3), which was opened in the name of IL NA Tours and under Air America's TIN and considered to be IL NA Tours' account. Hereinafter, we refer to those three accounts collectively as the corporate accounts.
In June 1987 petitioner opened a brokerage account, account No. 78-36391001 (Allied account), at Allied Capital Group under his name and Social Security number, but with the designation "d/b/a Tours of Illinois". Notwithstanding this designation, the account was petitioner's personal account, the securities transactions from which were reported on his individual tax returns. On August 7 and October 7, 1987, petitioner transferred $59,582 and $18,257, respectively, from IL NA Tours to the Allied account.
In August 1987, petitioner transferred $109,777 of IL NA Tours' funds to account No. 879 62934 (Chung No. 2) at Merrill Lynch, an account which petitioner had opened at some time in Chung's name and under Chung's Social Security number. Chung, however, was a nominee only as he had no ownership interest in Chung No. 2 and...
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...552 F.2d 478, 481 (2d Cir.1977) (“if [an embezzler] repays the money during the same taxable year, he will not be taxed”); Han v. Comm'r, 83 T.C.M. 1824, 2002 WL 1298745, at *23 (2002) (“Funds over which a taxpayer has obtained dominion and control, lawfully or unlawfully, are not taxable t......