                         T.C. Memo. 1999-353




                       UNITED STATES TAX COURT



DAVE GRAF DAIMLER, f.k.a. DIETER G. MONDRAGON, a.k.a. HANS DIETER
   GARCIA MONDRAGON, a.k.a. HANS DIETER MONDRAGON, a.k.a. HANS
 DIETER MODZANOWSKI, AND THELMA MONDRAGON, a.k.a. TAMI MONDRAGON,
   Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

    DIETER ELECTRONICS CO., INC., d.b.a. AUDIO VIDEO MASTERS,
    a.k.a. PERRY & BOB TV, a.k.a. ACE SEWING MACHINE, a.k.a.
        DAIMLER, INC., a.k.a. DAIMLER GROUP, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14606-94, 14608-94.   Filed October 25, 1999.



     John W. Duncan, for respondent.



                         MEMORANDUM OPINION


     CHIECHI, Judge:    These cases, which we have consolidated for

purposes of opinion only, are before us on respondent’s motions
                                - 2 -

for summary judgment (collectively, respondent’s motions).1     We

shall grant those motions.

     At the time the petition was filed in docket No. 14606-94,

the legal address of petitioner Dave Graf Daimler, f.k.a. Dieter

G. Mondragon, a.k.a. Hans Dieter Garcia Mondragon, a.k.a. Hans

Dieter Mondragon, a.k.a. Hans Dieter Modzanowski (Mr. Daimler)

was Wichita Falls, Texas.    At the time the petition was filed in

docket No. 14608-94, the legal address of petitioner Dieter

Electronics Co., Inc., d.b.a. Audio Video Masters, a.k.a. Perry &

Bob TV, a.k.a. Ace Sewing Machine, a.k.a. Daimler, Inc., a.k.a.

Daimler Group (Dieter Electronics or the Company) was in Wichita

Falls, Texas.

     Mr. Daimler and Dieter Electronics failed to reply in any

manner to respondent’s respective requests for admissions in

docket Nos. 14606-94 and 14608-94.      Consequently, each matter set

forth in each of those requests is deemed admitted.     See Rule

90(c);2 Marshall v. Commissioner, 85 T.C. 267, 272 (1985).     The

deemed admissions in these cases demonstrate that there are no


     1
      In docket No. 14606-94, respondent filed a motion for
summary judgment only as to petitioner Dave Graf Daimler. That
is because on Sept. 23, 1998, petitioner Thelma Mondragon, a.k.a.
Tami Mondragon (Ms. Mondragon), and respondent filed a stipula-
tion of settlement which reflects their agreement as to all
issues in that case.
     2
      All Rule references are to the Tax Court Rules of Practice
and Procedure. All section references are to the Internal
Revenue Code in effect for the years at issue.
                               - 3 -

genuine issues of material fact herein.

     Mr. Daimler and Ms. Mondragon were the sole stockholders of

Dieter Electronics, an electronics repair business that had been

operating in Wichita Falls, Texas, since 1982.

     Mr. Daimler and Ms. Mondragon filed a joint U.S. Individual

Income Tax Return (joint return), Form 1040, for each of the

years 1989 through 1992.   The Company filed a U.S. Corporation

Short-Form Income Tax Return, Form 1120-A, for each of its

taxable years ended January 31, 1990, January 31, 1991, and

January 31, 1992.   It filed a U.S. Corporation Income Tax Return,

Form 1120, for its taxable year ended January 31, 1993.   (We

shall refer collectively to the Forms 1120-A and Form 1120 filed

by the Company as corporate returns.)

     During 1989 through 1992, petitioners diverted substantial

funds from Dieter Electronics, deposited those funds into their

personal accounts, and used them personally (income diversion

scheme).   Throughout those years, as part of the income diversion

scheme, Mr. Daimler diverted all the checks submitted to Dieter

Electronics as corporate income on which the “payee” section of

the check was left blank (diverted corporate checks) and stamped

his own name (D.G. Mondragon) in that section of those checks.

Throughout those same years, and also as part of the income

diversion scheme, Mr. Daimler removed all the cash that Dieter

Electronics received as corporate income (diverted corporate
                              - 4 -

cash) and placed that cash into a lockbox located in his house

(lockbox).

     During the years 1989, 1990, 1991, and 1992, Mr. Daimler and

Ms. Mondragon personally maintained account No. 001-06112247 at

Texas Commerce Bank in Houston, Texas (TCB account), and Mr.

Daimler personally maintained account No. 5495449-05 at Deutsche

Bank in Bremen, Germany (German account).   During those years,

the diverted corporate checks were deposited into the TCB ac-

count, and, whenever Mr. Daimler accumulated diverted corporate

cash in excess of $2,000 to $3,000 in the lockbox, he converted

such cash into cashier’s checks and deposited those checks into

the German account.

     Mr. Daimler and Ms. Mondragon knowingly diverted the follow-

ing amounts of corporate funds from Dieter Electronics for the

years indicated by depositing diverted corporate checks into the

TCB account:

                                     Amount of
                 Year         Diverted Corporate Checks

                 1989                 $33,138
                 1990                  31,3823
                 1991                  40,187
                 1992                  27,775



     3
      There is a $300 inconsistency in the deemed admissions
between the amount of diverted corporate checks that Mr. Daimler
and Ms. Mondragon deposited into the TCB account during 1990 and
the amount of dividend income consisting of such checks that they
failed to report in their joint return for that year. We have
used the lower amount for purposes of this Opinion.
                              - 5 -

Mr. Daimler and Ms. Mondragon personally used the foregoing funds

that were deposited into the TCB account, even though such funds

constituted income of Dieter Electronics.   They did not report

the diverted corporate checks as dividend income from the Company

in their joint returns for the years at issue.

     Mr. Daimler knowingly diverted the following amounts of

corporate funds from Dieter Electronics for the years indicated

by depositing diverted corporate cash into the German account:

                                   Amount of
               Year          Diverted Corporate Cash

               1989                   $31,050
               1990                    94,615
               1991                    52,500
               1992                    46,500

Mr. Daimler and Ms. Mondragon personally used the foregoing funds

that were deposited into the German account, even though such

funds constituted income of Dieter Electronics.    They did not

report the diverted corporate cash as dividend income from the

Company in their joint returns for the years at issue.

     Dieter Electronics failed to report taxable income in the

amounts of $35,020, $31,382, $47,446, and $51,775 for the taxable

years ended January 31, 1990, January 31, 1991, January 31, 1992,

and January 31, 1993, respectively, because those funds were

diverted from it to the TCB account, the personal account of its

stockholders Mr. Daimler and Ms. Mondragon.     Dieter Electronics

failed to report taxable income in the amounts of $38,050,
                               - 6 -

$91,615, $53,500, and $45,375 for the taxable years ended January

31, 1990, January 31, 1991, January 31, 1992, and January 31,

1993, respectively, because those funds were diverted from it to

the German account, the personal account of its stockholder Mr.

Daimler.   Dieter Electronics also failed to report taxable income

in the amount of $9,521 for the taxable year ended January 31,

1992.

     Throughout the years 1990 through 1992, Mr. Daimler and Ms.

Mondragon caused Dieter Electronics to pay their personal ex-

penses in the amounts of $18,598, $32,629, and $14,194, respec-

tively, which they failed to report as dividend income from the

Company in their respective joint returns for those years.

Dieter Electronics improperly deducted $14,194 of its stockhold-

ers’ personal expenses as a “Miscellaneous” expense in its return

for the taxable year ended January 31, 1993.

     During 1992, Dieter Electronics also paid Mr. Daimler and

Ms. Mondragon (1) $6,000 which they used to pay their automobile

lease, (2) an additional $7,760 of Mr. Daimler’s personal ex-

penses, and (3) Mr. Daimler’s personal model airplane expenses in

the amount of $561, all of which they failed to report as divi-

dend income from the Company in their joint return for that year.

Mr. Daimler and Ms. Mondragon knowingly caused Dieter Electronics

to deduct improperly the $7,760 of Mr. Daimler’s personal ex-

penses and the $561 of Mr. Daimler’s personal model airplane
                                - 7 -

expenses that Dieter Electronics paid during 1992 as “parts” and

“cost of goods sold-contract labor” in its corporate return for

the taxable year ended January 31, 1993.

     The accumulated earnings and profits of Dieter Electronics

for the years at issue were sufficient to cover the total divi-

dends, including constructive dividends, that Mr. Daimler and Ms.

Mondragon received during those years.

     Dieter Electronics paid Mr. Daimler and Ms. Mondragon net

salary of $28,100, $28,160, and $31,399 for tax years 1990, 1991,

and 1992, respectively.   Mr. Daimler and Ms. Mondragon reported

net wages (i.e., gross wages on line 10 of Forms W-2 less Federal

income tax and Social Security tax withheld) in the amounts of

$22,836, $22,840, and $28,639 in their joint returns for 1990,

1991, and 1992, respectively.   As a result, petitioners failed to

report taxable wages that they received from the Company in the

amounts of $5,264, $5,320, and $2,760 for 1990, 1991, and 1992,

respectively, in their respective joint returns for those years.

     On September 6, 1984, Mr. Daimler and Ms. Mondragon person-

ally purchased a building located at the corner of Kemp and

Avenue K in Wichita Falls, Texas (the Building), for $145,000,

$5,000 of which was allocated to land.   The Building was used as

the principal place of business of Dieter Electronics.   On

November 1, 1989, Mr. Daimler and Ms. Mondragon sold a portion

(i.e., 66 percent) of the Building (November 1, 1989 sale) to an
                                 - 8 -

unrelated third party for $75,500.       At the time of that sale, the

basis of Mr. Daimler and Ms. Mondragon in that portion of the

Building and land was $69,178.    They failed to include the gain

(i.e., $75,500 minus $69,178, or $6,322) that they realized on

the November 1, 1989 sale in their joint return for 1989.      During

1991, Mr. Daimler and Ms. Mondragon sold the remainder (i.e., 34

percent) of the Building (1991 sale) for $39,000.      At the time of

that sale, their basis in that portion of the Building and land

was $32,551.   They failed to include the gain ($39,000 minus

$32,551, or $6,449) that they realized on the 1991 sale in their

joint return for 1991.

     Mr. Daimler and Ms. Mondragon personally financed the

November 1, 1989 sale of the Building.      They financed a $12,500

downpayment for 12 months at 10 percent interest ($12,500 note)

and the remainder of the $75,500 sales price (i.e., $63,000) for

15 years at 10 percent interest ($63,000 note).      The payments on

both of those notes began in November 1989.      The $12,500 note was

paid off during 1990.    In December 1990, Mr. Daimler and Ms.

Mondragon sold the $63,000 note.    Mr. Daimler and Ms. Mondragon

failed to include interest income associated with the foregoing

two notes in the amounts of $1,248.77 for 1989 and $6,669.41 for

1990 in their respective joint returns for those years.

     In 1991, Mr. Daimler and Ms. Mondragon personally purchased

a new building to house the place of business of Dieter Electron-
                               - 9 -

ics (new Building).   They did not claim depreciation either on

the Building that they purchased on September 6, 1984, or on the

new Building that they purchased in 1991.   In its corporate

returns for the taxable years ended January 31, 1990, January 31,

1991, January 31, 1992, and January 31, 1993, Dieter Electronics,

with the full knowledge and consent of Mr. Daimler and Ms.

Mondragon, improperly deducted depreciation in the amounts of

$15,789, $15,789, $25,659, and $25,659, respectively, on the two

buildings personally owned by Mr. Daimler and Ms. Mondragon.

     During the years 1989 through 1992, Mr. Daimler and Ms.

Mondragon had a lease agreement (office lease) with the Company

with respect to either the Building or the new Building (collec-

tively, office buildings) that they owned and that housed Dieter

Electronics’ place of business.   The office lease required Dieter

Electronics to pay them rent in the amount of $2,500 per month

(i.e., $30,000 per year).   During 1990, 1991, and 1992, the

Company paid Mr. Daimler and Ms. Mondragon $27,500, $28,450, and

$36,500, respectively, as rent on the office buildings.   Mr.

Daimler and Ms. Mondragon did not include rental income under the

office lease in the amount of $30,000 per year in their joint

returns for 1989, 1990, 1991, and 1992.   Dieter Electronics did

not deduct rental expense in that annual amount in its corporate

returns for the taxable years ended January 31, 1990, January 31,

1991, January 31, 1992, and January 31, 1993.
                              - 10 -

     In 1990, Mr. Daimler and Ms. Mondragon maintained a personal

bank account No. 854-646952 at NCNB of Texas in Wichita Falls,

Texas (NCNB personal bank account).    During 1990, they deposited

$13,160.27 as “cash” or “misc.” into the NCNB personal bank

account.   Mr. Daimler and Ms. Mondragon did not include the

amount of those deposits in their joint return for 1990 and have

failed to show that such deposits were derived from a nontaxable

source.

     During the taxable years ended January 31, 1990, January 31,

1991, January 31, 1992, and January 31, 1993, Dieter Electronics

maintained a bank account No. 858-214645-8 at NCNB of Texas in

Wichita Falls, Texas (NCNB corporate bank account).   The bank

statements and canceled checks from the NCNB corporate bank

account were used to prepare the corporate returns of Dieter

Electronics for those taxable years.

     Dieter Electronics overstated its “purchases” expense by

$49,924, $42,796, $36,646, and $40 for the taxable years ended

January 31, 1990, January 31, 1991, January 31, 1992, and January

31, 1993, respectively.   Dieter Electronics overstated its cost

of goods sold by $8,361 for the taxable year ended January 31,

1993.

     During the years 1989, 1990, 1991, and 1992, the German

account earned interest in the amounts of $5,553, $3,936, $2,960,

and $4,150, respectively.   Mr. Daimler and Ms. Mondragon failed
                               - 11 -

to include the respective amounts of that interest income in

their joint returns for the years 1989 through 1992.

     Mr. Daimler and Ms. Mondragon did not disclose the existence

of the TCB account or the German account to the individuals who

prepared their joint returns and Dieter Electronics’ corporate

returns for the taxable years at issue.   During the examination

of the joint returns of Mr. Daimler and Ms. Mondragon and the

corporate returns of Dieter Electronics for the taxable years at

issue, Mr. Daimler presented false loan documents to respondent’s

agent.   On various occasions, Mr. Daimler has bragged about

diverting cash and checks from Dieter Electronics and using those

funds personally.   In addition, on various occasions, Mr. Daimler

has bragged about underreporting both his personal income and the

taxable income of Dieter Electronics by using the income diver-

sion scheme described above.

     Respondent issued a notice of deficiency (notice) to Mr.

Daimler and Ms. Mondragon for their taxable years 1989, 1990, and

1991 and a separate notice for their taxable year 1992.   In those

notices, respondent determined the following deficiencies in, and

fraud penalties under section 6663 on, their Federal income tax

(tax):
                                   - 12 -

                                              Fraud Penalty Under
     Taxable Year Ended          Deficiency      Section 6663

            1989                  $30,397           $22,798
            1990                   59,085            44,314
            1991                   44,645            33,484
            1992                   39,040            29,280

     Respondent issued to Dieter Electronics a notice with

respect to the taxable years ended January 31, 1990, January 31,

1991, and January 31, 1992, and a separate notice with respect to

the taxable year ended January 31, 1993.        In those notices,

respondent determined the following deficiencies in, and fraud

penalties under section 6663, on the Company’s tax:

                                              Fraud Penalty Under
     Taxable Year Ended          Deficiency      Section 6663

      January   31,   1990        $25,945           $19,459
      January   31,   1991         43,016            32,262
      January   31,   1992         39,038            29,279
      January   31,   1993         29,147            21,860

     Mr. Daimler and Dieter Electronics did not file responses to

respondent’s motions.        The undenied admissions in these cases

establish facts requiring a decision against Mr. Daimler in

docket No. 14606-94 and against Dieter Electronics in docket No.

14608-94 with respect to both the deficiency determinations in

the notices on which they have the burden of proof and the fraud

penalty determinations in those notices on which respondent has

the burden of proof by clear and convincing evidence.         Accord-

ingly, respondent’s motion for summary judgment as to Mr. Daimler

in docket No. 14606-94 and as to Dieter Electronics in docket No.
                             - 13 -

14608-94 will be granted.

     To reflect the foregoing and the stipulation of settlement

between respondent and Ms. Mondragon that was filed on September

23, 1998,



                                   An order granting respondent’s

                              motion for summary judgment as to

                              petitioner Mr. Daimler will be

                              issued, and decision will be en-

                              tered for petitioner Ms. Mondragon

                              and for respondent as to petitioner

                              Mr. Daimler in docket No. 14606-94.

                                   An order will be issued grant-

                              ing respondent’s motion for summary

                              judgment, and decision will be

                              entered for respondent in docket

                              No. 14608-94.
