Paul Bi-Yang Chen and Chiu-Mei Chen - Page 5

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          the fraud in their reported income.  He also determined a fraud             
          penalty under section 6663.1                                                
               The Chens contest both the deficiency and the penalty.  Mrs.           
          Chen also asserts as a defense that she is an innocent spouse, on           
          the grounds that she could not communicate in English; had                  
          nothing to do with the 1998 tax return other than signing the               
          return; wrote checks only at Mr. Chen’s direction; and did not              
          benefit from the additional income.  The Commissioner denied her            
          request as inconsistent with her signed plea agreement, in which            
          she had admitted participating in her husband’s fraudulent                  
          scheme.  Mrs. Chen believes the Commissioner abused his                     
          discretion in denying her request for innocent spouse relief.               
               Both Chens also assert a statute-of-limitations defense.               
          The Commissioner admits that he sent the notice of deficiency               
          more than three years after they filed their 1998 tax return, but           
          argues that the Chens’ fraud makes the notice of deficiency                 
          valid.                                                                      
               The Chens also argue that even if they did commit fraud, the           
          amount of their understatement is exaggerated by the IRS.  They             
          argue that PCTI was already taxed on a portion of the proceeds,             
          and argue as well that if the fraudulently obtained proceeds are            
          no longer applied to the Citirom account receivable, that account           


               1 Section references are to the Internal Revenue Code; Rule            
          references are to the Tax Court Rules of Practice and Procedure.            




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