T.C. Mem o. 2 01 5- 67

UNITED STAT ES TAX COURT
STEVEN F. JACOBY AND SARAH E. JACOBY, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 17 63 6- 12 . Fi le d Ap ril 6, 2 01 5.

W il li am Bern ardMcC arthy andJef frey A. Neim an , forpe ti ti on ers . Dan ie l A. Ro se n a ndGail Cam pb el l, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION VASQUEZ, Ju dg e: Res po nd en t d et erm in edde fic ie nc ie s o f $8 56 ,24 3 a nd $3 70 ,34 8 i n a ndsec ti on 66 63 civ il frau d p en al ti es of $ 64 2,1 82 an d $ 27 7,7 61 with- 2 -

[* 2] res pe ctto pe ti ti on ers ’ Fed eral in co m e ta x fo r 19 99 an d 2 00 0, re sp ect iv el y . 1 The is su es forde ci si on are: (1) whet he r th e st atut e o f li m it at io ns ba rs th e as se ss m en t an d c ol le ct io n o f de fic ie nc ie s i n i nc om e ta x a ndad di ti on s t o t ax for 19 99 an d 2 00 0; (2) whet he r Sara h J aco by is en ti tl edto rel ie f fro m joi ntan d se ve ral li ab il ity

un de r se ct io n 6 01 5 fo r 19 99 an d 2 00 0; an d (3 ) whe th er St ev en Ja co by is l iabl e fo r se ct io n 6 66 3 c iv il frau d p en al ti es for19 99 an d 2 00 0. FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io ns of fact s an d the att ach edex hi bi ts are i nc or po rat edhe rei n b y

th is refe ren ce. Pet it io ne rs res id edinFlo rid a atth e ti m e th ey fil edth ei r pe ti ti on . I. Bac kg ro un d A. Edu cat io n a ndEarly W ork Hi st ory In19 82 Ste ve n J aco by gradua te d fr om co ll eg e wit h ade gr ee i n a cco un ti ng . Afte r co ll eg e h e worke d fo r th e acc ou nt in g fi rm of To uc he Ro ss & Co . (no w kn own as De lo it te ) in anen try-lev el po si ti on withi n t he firm ’s aud it in g d ep art m en t whe re h e worke d o n aud it s o f sm al l, p riv at e co m pa ni es . After s ix m on th s dur in g
Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de ineffe ctat a ll rel ev an t t im es , andall Ru le refe ren ces are t o t he Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. All m on et ary am ou nt s h av e b eenrou nd ed to th e n eare stdo ll ar.- 3 -

[* 3] whi chhe di d n otha ve an y co nt actwith t he tax si de of t he firm , he l eftto at te ndFo rdha m

Law Sch oo l. Whil e atlaw s ch oo l h e to okso m e b as ic in co m e ta x co ur se s. He g radua te d i n 1 98 5 a ndwas a dm it te d t o t he New Yorkba r in 19 86 . Afte r gr adua ti ng Mr. J aco by bri efl y work edas a n a ss oc ia te forth e adm ira lty law firm Burli ng ha m , Und erwo od& Lor d, wh ere h e worke d o n s om e ta x and co rp or at e la w m at te rs . Mr. Ja co by was as ke d t o l eav e th e fi rm aft er ap pr ox im at el y si x m on th s. B. Marke ti ng Tax andInv es tm en t Strat eg ie s In19 87 Mr. J aco by’ s ca reersh ift edto ward s fi na nc e an d m ark et in g. He joi ne d C arn eg ie Hil l, a New Yo rk -b as edweal th m an ag em en t fi rm , wher e h is pr im ary job was t o a ttractne w cli en ts . Later t ha t year he m ov edto Twenty -Fi rs t Secu rit ie s C or

p. (Twen ty-Firs t), wh ere h e worke d a s a l ic en se d s ecu rit ie s b ro ke r an d a n a cco un t ex ecu ti ve . As an acco un t ex ecu ti ve at Twen ty-Firs t, Mr . Jac ob y m ai nl y m ark et edtax an d i nv es tm en t s tra te gi es to hi gh ne t wo rth in di vi du al s an d l arg e co m pa ni es . He was pa id50 % of t he ne t p ro fit s fr om fees , comm is si on s, an d a ny reve nu e st ream s fro m hi s cl ie nt s’ trans act io ns , earn in g b etween$5 an d $ 6 m il li on du rin g the ap pr ox im at el y

ni ne y ears he work edex cl us iv el y with Twen ty-Firs t.- 4 -

[* 4] Mr. J aco by m ark et edstrat eg ie s d ev el op edby T wen ty-Firs t’s i n- ho us e co un se l an d the vario us acco un ti ng firm s an d l aw fi rm s wh ic h s erv edas Twen tyFi rs t’s o ut si de co un se l. Ro be rt Go rd on was Twen ty-Firs t’s p res id en t, an d M ark Fi ch te nb au m

was i ts in -h ou se tax di rect or . Bot h h adbe enpa rtn ers at p ro m in en t firm s b efo re joi ni ng Twenty -Fi rs t an d p lay edim po rta ntrol es inde ve lo pi ng st rat eg ie s. Inad di ti on to de ve lo pi ng ne w strat eg ie s, Twen ty-Firs t’s v ari ou s t ax ex pe rts work edto en su re tha t the strat eg ie s b ei ng de ve lo pe d wer e le ga l. Eve ry week Mr. J aco by andot he r sa le s s ta ff at te nd eda sa le s m eet in g i n whi chMr. Go rd onan d M r. Fic ht enbaum wou lddi sc us s Twen ty-Firs t’s s tra te gi es . The y wou ldals o d is cu ss th e la w andacco un ti ng firm s tha t the y were wo rk in g wi th to de ve lo p a ndve t the se strat eg ie s. Th e sa le s s ta ff wo ul d a ls o re cei ve m ark et in g m at eri al s t o p as s o n t o p ro sp ect iv e cl ie nt s. With th is in fo rm at io n M r. Ja co by was ab le to un de rs tandth e st rat eg ie s wel l en ou gh to expl ai n t o p ro sp ect iv e cl ie nt s the ba si cs of h ow the y

work ed . Howev er, i f a p ro sp ect iv e cl ie ntask edform or e de ta il edin fo rm at io n, M r. Ja co by woul d p uthi m or h er i n t ou chwith M r. Gord on orMr. Fi ch te nb au m . C. W orki ng W ith J am es Habe r In19 96 Mr. J aco by m etJames Hab er. Mr. Hab er was th e p res id en t o f th e Div ers ifi edGroup, In c. (DGI), whi chat the ti m e was co ns id ereda le ad er i n- 5 -

[* 5] de ve lo pi ng tax -m ot iv at edtra ns act io ns forco rp or at io ns an d h ig h n etwort h in di vi du al s. Th e two m endi sc us se d t he po ss ib il ity of wo rk in g t og ethe r, an d i n 19 96 Mr. J aco by leftTwenty -Fi rs t t o fo rm hi s o wn co m

pa ny, SMD Cap it al Co rp . (SM D), a who ll y

own edNew Yorksubc hapt er S co rp or at io n. Mr . Jac ob y ’s pl an was to m ark etfin an ci al strat eg ie s an d p ro du ct s o ffer edby D GI inad di ti on to th os e of fere d b y Twenty -Fi rs t. Effect iv e Nov em

be r 1, 1 99 6, SM D andDGI ent eredin to a joi ntve ntur e ag reem en t (J VA). Und er the JVA, SMD an d DGI ag reedto workon “ joi nt tra ns act io ns ” ai m edat m ark et in g i nc om e ta x p lann in g a ndtax strat eg ie s t o cl ie nt s. Pur su an t t o the JVA Mr . Jac ob y so li ci te d c li en ts on be ha lf o f DGI an d 2
worke d wi th th em

fro m in tro du ct io ns th ro ug h c lo si ng s as a go -b etween . SMD rece iv ed50 % of t he ne t p ro fit s fr om an y cli en ts Mr. J aco by bro ug htto DGI. Mu chas h e h adwith Twen ty-Firs t, Mr . Jac ob y rel ie d o n DGI t o d ev el op an d v etth e st rat eg ie s h e m ark et ed . Mr. Hab er an d DGI’s i n- ho us e co un se l, Orri n Til lo wiz, d ev el op edm any of t he tax strat eg ie s wh il e Mr. J aco by reach edou t t o pr os pe ct iv e cl ie nt s. As far as Mr. J aco by kn ew atth e ti m e, al l the tra ns act io ns
Und er the JVA joi nttra ns act io ns are d efi ne d a s “ [t]ho se tra ns act io ns 2 in vo lv in g i nt ro du ct io ns of * * * [SMD] cli en ts to * * * [DGI] as s el li ng pri nc ip al s, an d * * * [DGI] as pri nc ip al fordo cu m en ta ti on pu rp os es ; s uc h c li en ts in ve st in g i n tra ns act io ns in vo lv in g * * * [co nf id en ti al in ve st m en t v eh ic le s an d s tra te gi es ]”.- 6 -

[* 6] en te redin to by his cli en ts were carefu ll y ve tt edan d app ro ve d b y

DGI, DGI’ s ou ts id e co un se l, an d the cli en t’s co un se l. He b el ie ve d t ha t M r. Hab er an d DGI wou ldno t ag ree t o b e in vo lv edinan y tra ns act io ns th atlac ke d s ub st an ti al au th or ity . One of t he strat eg ie s emplo y edby D GI’s cli en ts was c omm on ly kno wn as a

“ Mi dc o tran sa ct io n” . Mid co tra ns act io ns were d es ig ne d a s a way to effe ctth e sa le of a co m pa ny usi ng a ta x- in di ffer en t thi rdpa rty as an i nt erm ed iary inord er t o 3 ach ie ve cap it al ga in s treat m en t. Duri ng th e la te 19 90 s M id co tra ns act io ns 4
oc cu rredwith s om e fre qu en cy . DGI’ s M id co tra ns act io ns va rie d g reat ly in t erm s of th e types of a ss et s h el d b y th e co m pa ni es th atwere b ei ng so ldas we ll as t he fo rm of t he co m

pa ny. Fo r ex am

pl e, Mr. J aco by witn es se d d eal s i nv ol vi ng sal es of co m pa ni es ho ld in g o nl y

ord in ary as se ts an d a t l eas t o ne de al th atin vo lv edth e sa le of anS co rp or at io n. He d idno t wi tn es s an y de al s i nv ol vi ng th e sa le of aco m pa ny who se on ly ass etwas a cco un ts rece iv ab le
.

Mr. Hab er an d DGI ty

pi cal ly use d e nt it ie s o wne d b y Ind ian trib es as t he 3 th irdparti es . See Cu ll ife r v. C omm is si on er, T.C. Mem o. 2 01 4- 20 8, at*3 8- *4 0, fo r a 4 m or e in -d ep th de sc rip ti on of M id co tra ns act io ns .- 7 -

[* 7] II. 19 99 Tran sa ct io ns A. SMD St oc k S al e By Jan ua ry 19 99 SMD h adacco un ts rece iv ab le of $ 3,4 22 ,26 7 a ttrib ut ab le to fees th atMr. J aco by earn edfro m hi s wo rkwith DGI. In sp ire d b y th e ap pa ren t su cces s o f hi s cl ie nt s i n o bt ai ni ng si gn ifi can t t ax sav in gs inpri orde al s, M r. Ja co by as ke d M r. Hab er wh ethe r a Mi dc o t ran sa ct io n c ou ldbe us edto pa y th e b al an ce o n SMD’s ac co un ts rece iv ab le . Mr. Hab er s ai d i t co ul d. Tog ethe r, th ey

setup a sa le th atMr. J aco by bel ie ve d wo ul d g iv e DGI a di sc ou nton it s o bl ig at io ns to SMD wh il e g iv in g h im cap it al ga in s treat m en t o n wha t wo ul d o th erwi se be ord in ary in co m e. Mr. J aco by retai ne d M ic ha el Sal be rg , fro m th e fi rm Grauba rdMi ll er, to rep res en t h im inco nn ect io n wi thth e SMD s al e. 5 On J anua ry

26 , 19 99 , Mr. Ja co by tran sf erre d 1 8 s ha res of S MD s to ckto th e Je wis h C omm

un al Fund(JC F). Thi s was th e o nl y ti m e th atpe ti ti on ers ha d 6 tra ns ferr edno t-r ead il y -m ark et ab le sec ur it ie s t o t he JC F. On the same day Mr. Ja co by ent eredin to a st oc k p ur ch as e ag reem en t wi th JC Acqu is it io n, LLC, to sel l

Grauba rdMi ll er i s al so th e fi rm Mr. J aco by use d t o i nc or po rat e SMD. 5 The J CF i s a p ub li c ch ari ty. Don or s ar e ab le to setup fun ds with t he JC F 6 an d re co m

m en d g ran ts fro m

th ei r fu nd s t o qua li fie d c ha rit ie s o f th ei r ch oi ce.- 8 -

[* 8] hi s re m ai ni ng 18 2 s ha res of S MD s to ckfor$2 ,95 2,9 71 . Und er the term s o f 7 th e ag reem en t, $ 2,2 32 ,97 1 o f th e p ur ch as e p ric e wou ldbe imm ed ia te ly pai d t o M r. Ja co by andhe wou ldrece iv e a p ro m is so ry no te for$7 20 ,00 0. Ad di ti on al ly, DGI wou ldpa y

th e JC F $ 29 2,0 29 for

th e 1 8 s hares Mr. J aco by do na te d. Aro un d thi s t im e b utbe fo re the sal e Mr. J aco by tran sf erre d t o h im se lf SMD’s m on ey

m ark etacco un t an d l ap to p. He al so ex ecu te d a n a ss ig nm en t an d as su m pt io n a gr eem en t tran sf

erri ng to hi m se lf a ll of S MD’s ri gh ts inth e joi nt ve ntur e ag reem en t wi thDGI. At th e ti m e o f th e sa le SMD’s o nl y ass etwas the acco un ts rece iv ab le . Mr. Sal be rg , Mr. Ja co by’ s at to rn ey forth e tr an sa ct io n, was aware of t he se tra ns fers , andMr. J aco by bel ie ve d t he se trans fers were l eg al
. On J anua ry

28 , 19 99 , andMarc h 3 , 20 00 , Mr. Ja co by recei ve d wi re tra ns fers of $ 2,2 32 ,97 1 and$5 00 ,00 0, re sp ect iv el y . He als o s tru ctur edor a ss is te d 8 in stru ctur in g the pa ym en t o f $2 92 ,02 9 t o t he JC F. He rece iv edth e rem ai ni ng $7 20 ,00 0 i n 2 00 0.

At al l re le va ntti m es , JC Acqui si ti on , LLC, was a t ax -in di ffer en t en ti ty 7 own edby the Skul l Val le y Ban d o f Gos hu te Ind ians an d m an ag edby D GI. Mr. Hab er was th e co m

pa ny’ s p res id en t. The co m pa ny was rep res en te d b y

co un se l fro m Pry orCas hm anfor

th is trans act io n. It i s u nc le ar fro m

th e rec or d wh y

Mr. J aco by recei ve d t he $5 00 ,00 0 wi re 8 tra ns fer.- 9 -

[* 9] Fo ll owi ng th e sa le of S MD Mr. J aco by inc or po rat edSMD Capi ta l Co rp . (SM D-Del aware ), a n ew who ll y own edsubc hapt er S co rp or at io n i n Del aware . Mr. Sa lb erg ha nd le d the in co rp or at io n. Un de r SMD-De laware M r. Ja co by co nt in ue d d oi ng bu si ne ss with DGI, m ark et in g t ax strat eg ie s u nd er the joi nt ve ntur e ag reem en t. B. Fo rei gn Curren cy

Tran sa ct io n Ano th er s tra te gy DG I of

te n u se d was th e fo rei gn curren cy tra ns act io n. Th e fo rei gncurren cy

tra ns act io n i nv ol ve d t rad in g i n c urren cy op ti on s wi th th e po te nt ia l t o m ak e a p ro fitinord er t o s ecu re t ax de du ct io ns be y on d the eco no m ic va lu e o f th e o pt io ns . Mr. Ja co by witn es se d DGI em pl oyin g t he strat eg y

in tra ns act io ns with s ev eral lar ge co m pa ni es in19 97 an d 1 99 8. Th es e tr an sa ct io ns were al so rev ie wedan d app ro ve d b y a nu m be r of law an d a cco un ti ng firm s. Inth e la tt er p artof 1 99 9 Dav idGreenbe rg , th ena pa rtn er atKPMG, al on g with s ev eral othe r KPMG p artne rs , bro ug htfou r fo rei gn curren cy tra ns act io ns to DGI. After t ho se trans act io ns su cces sf ul ly clo se d, M r. Greenbe rg ask edMr. Ja co by whethe r he wou ldbe in te res te d i n jo in in g agro up of KPM G partn ers who were p lann in g t o u se th e sa m e strat eg y forth ei r own pe rs on al be ne fit
. Mr. J aco by was in te res te d a ndso be cam e in vo lv edina fo rei gn curren cy tra ns act io n b etweentwo li m it edli ab il ity co m pa ni es (JP F III tran sa ct io n) : J PF III ,- 10 -

[* 10 ] LLC (JPF III), an d AD Glo ba l Fu nd , LLC (AD Glob al ). JPF III h adtwo m em be rs : Mr . Greenbe rg an d Wil li am A. God da rdIV, of the law fi rm Lee, God da rd& Duf

fy . AD G lo ba l, wh ic h was form edonOcto be r 31 , 19 99 --a fe w week s b efo re the JPF III tran sa ct io n t oo k p la ce-- al so ha d t wo m em be rs : Al ph a Co ns ul tant s, In c., an d DGI. As p artof t he JPF III tran sa ct io n, J PF III co ntrib ut ed two op ti on tra de s i nv ol vi ng Jap an es e y ento AD Glob al inex ch an ge fora 32 .6% in te res t i n AD Glo ba l. Lee, God da rd& Duf

fy were the att orne y s fo r th e tr an sa ct io n. OnNov em be r 16 , 19 99 , Mr. Ja co by tran sf erre d $ 40 ,00 0 fr om

a Bear St earn s ac co un t t o a n acco un t atSo ut he rnCal ifo rn iaBan k. A g en eral led ge r fro m Lee, God dard& Duf fy li st in g a m ou nt s as of De cem be r 31 , 19 99 , als o s ho wedth atth e fi rm ha d rece iv ed$4 0,0 00 fro m

Mr. J aco by onNov em

be r 16 , 19 99 . The tran sa ct io n i ts el f to okpl ace o n No ve m

be r 24 , 19 99 . InDecem be r 19 99 Mr. Gree nb erg , as the pre si de ntof J PF III , andMr. Ja co by sig ne d an a ge nc y

ag reem en t wi th aneffe ct iv e d at e o f Nov em be r 15 , 19 99 . Inth e ag en cy

ag reem en t M r. Ja co by app oi nt edJPF III as hi s ag en t wi th res pe ctto th e JP F III tran sa ct io n. Ho wev er, am on g t he clo si ng do cu m en ts pre pa redforth e tra ns act io n was a co nt rib ut io n a gr eem en t en te redin to by JPF III an d AD Glo ba l da te d No ve m

be r 24 , 19 99 . In thi s co nt rib ut io n a gr eem en t J PF III warran te d t ha t i t- 11 -

[* 11 ] was a ct in g o n i ts ownacco un t an d n otforth e acc ou ntof a no th er p ers on an d th atno ag en cy

or s im il ar re la ti on sh ip was i nt en de d t o b e cre at ed . Mr. Ja co by was ne ve r a p artne r of

JPF III, an d h e d idno t s ig n t he co nt rib ut io n a gr eem en t. III. Arb itrat io n a ndCiv il Lit ig at io n Aro un d 2 00 1 adi sp ut e aro se be twee n M r. Ja co by andMr. Hab er re ga rd in g co m pe ns at io n fo r th e m ark et in g wo rk Mr. J aco by hadpe rfo rm edaft er the SMD tra ns act io n. InMay 200 1 M r. Ja co by andSMD-Del aware in it ia te d a rb itrat io n pr oc eed in gs ag ai ns t DGI. The arb itrat io n d is pu te was d is mis se d o n M arch 14 , 20 02 . On May

30 , 20 02 , Mr. Ja co by andSMD-Del aware fil eda su itag ai ns t DGI an d J am es Habe r in th e Supr em e Co urt o f th e St at e o f New York, Co un ty of New York. Durin g the arb itrat io n p ro ceed in gs an d the civ il li ti ga ti on Mr. J aco by subm it te d a ffi da vi ts an d t es ti fie d a t a d ep os it io n a ndat t ria l re gard in g t he SMD st oc k s al e. IV. Tax Return P rep arat io n Pet it io ne rs ’ Fo rm s 1 04 0, U.S. In di vi du al Inc om e Tax Return, fo r 19 99 an d 20 00 were fi le d o n Oct ob er 1 8, 2 00 0, an d J ul y 12 , 20 01 , res pe ct iv el y . The returns were p rep aredby the ir a cco un tant s, Go ld st ei n Lewi n & Co . (Gol ds te in Lewin ). Mr. J aco by pro vi de d Go ld st ei n Lewi n wi th m an y do cu m en ts rel at edto bo th th e- 12 -

[* 12 ] SMD s to cksal e an d the JPF III tran sa ct io n, i nc lu di ng a ta x o pi ni on . 9 Cert ifi edpubl ic acco un tant s (C .P.A.s) atGol ds te inLewinwork edonpe ti ti on ers ’ returns us in g the in fo rm at io n a nddo cu m en ts th ey pro vi de d. Mr . Jac ob y

an swe red C.P.A.s’ qu es ti on s re ga rd in g the tra ns act io ns . The C.P.A.s als o c on ta ct edKPMG with que st io ns reg ard in g the JPF III tran sa ct io n. Gera ldLewin , a nam edpartn er of th e fi rm , si gn edpe ti ti on ers ’ 19 99 return, an d Do n Go ld st ei n, an ot he r na m ed pa rtn er, s ig ne d the ir 2 00 0 re tu rn . V. In te rn al Rev enue Serv ic e (IR S) Au di t an d In ve st ig at io n Aro un d 2 00 3 the IRS b eg anin ve st ig at in g DGI. The civ il in ve st ig at io n l ed to a se pa rat e cri m in al in ve st ig at io n b y th e IRS Cri m in al Inv es ti ga ti on s Di vi si on (CID) a ndth e U.S. Att orne y ’s Offic e fo r th e So ut he rnDis tri ctof Ne w York . As pa rt o f th e cri m in al in ve st ig at io n M r. Ja co by was in te rv ie wedby Feder al pr os ecu to rs an d p ro vi de d the m with d oc um en ts . He als o e nt eredin to an Mr. Ja co by ob ta in edth e ta x o pi ni on reg ard in g t he JPF III tran sa ct io n a t 9 th e rec omm en da ti on of M r. Greenbe rg so m et im e aft er the tra ns act io n h adclo se d. Mr. J aco by pai d $ 10 ,00 0 t o Lee , God da rd& Duf fy forth e o pi ni on , whi chhe be li ev edSte ve Acos ta --a l awy er atth e fi rm --wo ul d p rep are. On Ap ril 10 , 20 00 , Mr. Greenbe rg sen t M r. Ja co by a vers io n o f th e ta x op in io n, wh ic h l is te d S te ve Acos taas t he au th or . The fi rs t p ag e o f th atve rs io n st at es th atitwas p rep aredby Stev e Aco st a fo r Mr. Go dd ard . Howev er, a l at er se ct io n o f th atve rs io n o f th e ta x o pi ni on st at es th atth e d oc um en t b el on gs to KPMG. A sec on d v ers io n o f th e ta x o pi ni on , whi chdo es no t co nt ai n a ny refe ren ces to KPMG, was pro vi de d t o M r. Ja co by at a t im e n otsp eci fie d i n t he reco rd
.- 13 -

[* 13 ] ag reem en t t o e xt en d the pe rio d o f li m it at io ns forcri min al ch arg es , bu t n o ch arg es were ev er b ro ug htag ai ns t h im
. Aro un d 2 01 1 re sp on de ntbe ga n a n a dm in is tra ti ve ex am in at io n o f pe ti ti on ers ’ 19 99 an d 2 00 0 re tu rn s. Mr . Jac ob y pro vi de d re sp on de ntwith re co rd s in hi s p os se ss io n. Re sp on de ntsen t a n ot ic e o f de fic ie nc y for19 99 an d 2 00 0 t o pe ti ti on ers on Apri l 1 2, 2 01 2, d et erm in in g d efi ci en ci es of $ 85 6,2 43 for19 99 an d $3 70 ,34 8 fo r 20 00 , res pe ct iv el y . Res po nd en t d et erm in edfrau d p en al ti es of $6 42 ,18 2 fo r 19 99 an d $ 27 7,7 61 for 20 00 un de r se ct io n 6 66 3. Pe ti ti on ers ti m el y pe ti ti on edinres po ns e to th e n ot ic e o f de fic ie nc y . VI. Reque stforInn oc en t Sp ou se Rel ie f On Oct ob er 2 3, 2 01 3, p et it io ne rs fil edanun op po se d m ot io n fo r le av e to fil e anam en de d p et it io n. OnOcto be r 28 , 20 13 , we grant edpe ti ti on ers ’ m ot io n. Th e am en de d p et it io n c larif

ie s tha t M rs . Jac ob y , as p artof t he se pro ceed in gs , is se ek in g i nn oc en t s po us e rel ie f un de r se ct io n 6 01 5 a ndall eg es rel ev an t fa ct s. OPINION I. St atut e o f Lim it at io ns A. In tro du ct io n Sect io n 6 50 1( a) p ro vi de s, g en eral ly, th atth e am ountof a ny tax m us t b e as se ss edwithi n thr ee years o f th e fi li ng of areturn. Th e n ot ic e o f de fic ie nc y in- 14 -

[* 14 ] th is cas e was is su edm or e th ana de cad e aft er the rel ev an t re tu rn s wer e fi le d. The refo re, the pe rio ds of l im it at io ns forth e y ears inis su e h av e ex pi redan d as se ss m en t i s b arre d u nl es s an ex cep ti on to th e g en eral li m it at io ns pe rio d app li es . Res po nd en t ar gu es th atth e se ct io n 6 50 1( c)(1 ) frau d e xc ep ti on ap pl ie s. Un de r se ct io n 6 50 1( c)(1 ), if atax pa y er fi le s “ a fal se or f rau du le ntreturn wi th th e in te nt to ev ad e ta x, the tax m ay be ass es se d * * * at a ny tim e.” The Co m m is si on er h as th e b ur de n o f pr ov in g e xc ep ti on s t o t he ge ne ral li mit at io ns pe rio d. Se e, e.g ., Harlan v . Comm is si on er, 1 16 T.C. 31 , 39 (20 01 ). To sa ti sf y hi s b ur de n i n thi s ca se , res po nd en t m us t s ho w by cl ear a ndco nv in ci ng ev id en ce tha t: (1) anun de rp aym en t ex is ts ; an d (2 ) Mr. J aco by int en de d t o e va de ta xe s kno wn t o b e o win g b y co nduc t i nt en de d t o c on ceal , m is le ad , or o th erwi se pr ev en t the co ll ect io n o f ta xe s. Sec . 74 54 (a); Ru le 14 2( b) ; Pa rk s v . Co m m is si on er, 9 4 T.C. 6 54 , 66 0- 66 1 (1 99 0) . This is th e sa m e as hi s b ur de n u nd er se ct io n 6 66 3 t o p ro ve ap pl ic ab il ity of t he civ il frau d p en al ty (whic h i s al so at is su e). See , e.g., Bro wni ng v. Co m m is si on er, T.C. Mem o. 2 01 1- 26 1, s li p o p. at 25 . B. Und erp aym en t The SMD s to cksal e was pri m ari ly des ig ne d t o c on ve rt o rd in ary in co m e (the acco un ts rece iv ab le ) in to cap it al ga in s. See sec . 12 21 (a)( 4) . As we h av e- 15 -

[* 15 ] pr ev io us ly stat ed , acco un ts rece iv ab le “ can no t b e tu rn edin to cap it al ga in it em s b y m ean s o f a s al e.” Sewardv. Co m m is si on er, T.C. Mem o. 1 96 1- 11 4, 1 96 1 Tax Ct. M em o LEXIS 2 36 , at * 5 (c it in g Tu nn el l v . Uni te d S ta te s, 2 59 F.2d91 6 (3 d C ir. 1 95 8) ). Res po nd en t h as sh own by clearan d c on vi nc in g e vi de nc e th at , as a res ul t o f th e SMD s to cksal e, pe ti ti on ers un de rp ai d t he ir t ax for th e two y ears in is su e. Acco rd in gl y , an u nd erp aym en t ex is ts forbo th y ears . C. Frau du le ntInt en t To p ro ve frau du le ntin te ntth e Co m mis si on er m

us t s ho w by cl ear a nd co nv in ci ng ev id en ce tha t a p orti on of t he un de rp aym en t fo r eac h t ax ab le y ear i n is su e was du e to frau d. Pro f’l Serv s. v . Comm is si on er, 7 9 T.C. 8 88 , 93 0 (1 98 2)
. The ex is te nc e o f frau d i s a que st io n o f factto be res ol ve d fr om th e en ti re re co rd
. Gajewsk i v . Commis si on er, 6 7 T.C. 1 81 , 19 9 (1 97 6) , aff’d wit ho utpubl is he d op in io n, 5 78 F.2d13 83 (8th C ir. 1 97 8) . Becau se di rectpro of of atax pa y er’s in te ntis rare ly avai labl e, frau d m ay be pro ve n b y

cir cu m st an ti al ev id en ce, an d reas on ab le in fere nc es m ay be dra wn fr om

th e rel ev an t fa ct s. Sp ie s v . Uni te d St at es , 31 7 U.S. 4 92 , 49 9 (1 94 3) ; St ep he ns on v. Co m m is si on er, 7 9 T.C. 9 95 , 10 06 (1 98 2) , aff’d, 7 48 F.2d33 1 (6 th Cir . 19 84 ). Mere su sp ic io n, h owe ve r, do es no t su ffi ce t o p ro ve frau d. Kat z v . Comm is si on er, 9 0 T.C. 1 13 0, 1 14 4 (1 98 8) ; Sh aw- 16 -

[* 16 ] v. Co m

m is si on er, 2 7 T.C. 5 61 , 56 9- 57 0 (1 95 6) , aff’d, 2 52 F.2d68 1 (6 th Cir
. 19 58 ). Ove r th e y ears , cou rts ha ve de ve lo pe d ano ne xc lu si ve li stof f act or s tha t de m on st rat e fraudul en t i nt en t. The se ba dg es of f rau d i nc lu de : (1 ) un de rs ta ti ng in co m e, (2 ) m ai nt ai ni ng in ad equa te reco rd s, (3 ) im pl au si bl e o r in co ns is te nt ex pl an at io ns of b eh av io r, (4 ) co nc eal m en t o f in co m e o r as se ts , (5) fai li ng to co op erat e wit h t ax au th or it ie s, (6 ) en ga gi ng inil le ga l ac ti vi ti es , (7) anin te ntto m is le adwhi chm ay

be in ferr edfro m

a pa tt ernof c on du ct , (8) lac k o f cre di bi li ty of th e ta xp ay er’s t es ti m on y , (9) fil in g fa ls e d oc um en ts , (10 ) fai li ng to fil e ta x re tu rn s, an d (1 1) de al in g i n c as h. Sp ie s, 3 17 U.S. at 4 99 ; Do ug e v . Comm is si on er, 8 99 F.2 d 1 64 , 16 8 (2 d C ir. 1 99 0) ; Br ad fo rdv. Co m m is si on er, 7 96 F.2d30 3, 3 07 -3 08 (9 th Cir . 19 86 ), aff’g T.C. Me m o. 1 98 4- 60 1; Reck li ti s v . Comm is si on er, 9 1 T.C. 87 4, 9 10 (19 88 ). Altho ug h n o s in gl e fac to r is ne ces sa ril y su ffi ci en t t o e st ab li sh frau d, the co m

bi na ti on of anu m

be r of fact or s m ay

co ns ti tu te pe rs ua si ve ev id en ce. So lo m on v. Co m

m is si on er, 7 32 F.2d14 59 , 14 61 (6t h C ir. 1 98 4) , aff’g p er cu ria m T.C. Mem o. 1 98 2- 60 3. Res po nd en t as se rts th atsi x b ad ge s o f frau d a re p res en t i n t hi s ca se , whi le pe ti ti on ers arg ue th atno ne are p res en t. We addres s ea chof t he ass ert edba dg es of frau d b el ow.- 17 -

[* 17 ] 1. Und ers ta te m en t o f In co m e Res po nd en t ar gu es th at(1) pe ti ti on ers un de rs ta te d t he ir i nc om e o n t he ir 19 99 an d 2 00 0 t ax returns an d (2 ) th atfactis su ffi ci en t t o p ro ve th atth is ba dg e o f frau d i s p res en t i n thi s ca se . Peti ti on ers arg ue th atres po nd en t “ m is se s the po in t” , be cau se th e k ey

is su e is whet he r Mr. J aco by int en de d t o e va de tax es by un de rs ta ti ng th ei r in co m e. They furthe r arg ue th atth e rec or d s ho ws tha t M r. Ja co by lack edth atin te ntan d tha t h e b el ie ve d t he SMD s to cksal e an d t he JPF III tra ns act io n wer e le gi ti m at e st rat eg ie s, an d the de ta il s o f th e tr an sa ct io ns were fu ll y di sc lo se d t o h is C.P.A.s atGol ds te in Lewin , who he tru st edto pro pe rly repo rt t he tra ns act io ns . The Co urt o f App eal s fo r th e Ele ve nth C irc ui t h as he ldth ata “ m ere un de rs ta te m en t o f in co m e d oe s n otco ns ti tu te pro of of f rau d” whi le a

“ ‘[c] on si st en t an d s ub st an ti al un de rs ta te m en t o f in co m e is by its el f st ro ng ev id en ce o f frau d.’” Kore cky v. Co m mis si on er, 7 81 F.2d15 66 , 15 68 (11 th Cir
. 1 0 19 86 ) (quo ti ng Merr it t v . Comm is si on er, 3 01 F.2d48 4, 4 87 (5t h C ir. 1 96 2) , aff’g T.C. Mem o. 1 95 9- 17 2) , aff’g T.C. Mem o. 1 98 5- 63 . As we d is cu ss edsupr a, res po nd en t h as pro ve n tha t, as a res ul t o f th e SMD s to ck sal e, pe ti ti on ers
Abs en t a s ti pu la ti onto th e co nt rary, thi s ca se is ap pe al ab le to th e Co urt 1 0 of App eal s fo r th e Ele ve nt h C irc ui t. See sec . 74 82 (b ).- 18 -

[* 18 ] im pr op erl y rep orte d o rd in ary in co m e as cap it al ga in s fo r 19 99 an d 2 00 0. Thi s l edto un de rs ta te m en ts on th ei r returns forbo th y ears . Howev er, res po nd en t ha s n otpro ve n, n orev ensu gg es te d, tha t p et it io ne rs un de rs ta te d t he ir i nc om e fo r an y othe r y ear. We fin d tha t re sp on de ntha s fa il edto pro ve th e ex is te nc e o f co ns is te ntan d s ub st an ti al un de rs ta te m en ts of i nc om e. Furth erm or e, th e rec or d- -in cl ud in g the tes ti m on y of s ev eral C.P.A.s fr om Gol ds te inLewin --co nv in ces us th atpe ti ti on ers ful ly dis cl os edth e d et ai ls of b ot h th e SMD s to cksal e an d the JPF III tran sa ct io n t o t he C.P.A.s p rep ari ng th ei r returns . Peti ti on ers ha ve de m on st rat edth atth ey rel ie d o n Go ld st ei n Lewi n t o rep ort the tra ns act io ns accurat el y on th ei r returns . There fo re, wh il e un de rs ta te m en ts ex is t fo r 19 99 an d 2 00 0, re sp on de ntha s fa il edto pro ve th at pe ti ti on ers in te nd edto un de rs ta te th ei r ta x fo r ei th er y ear.

2. Im pl au si bl e o r In co ns is te ntExp lana ti on s o f Beh av io r Pet it io ne rs arg ue th atMr. J aco by bel ie ve d t ha t the SMD s to cksal e an d the JP F III tran sa ct io n wer e le gi ti m at e an d t ha t h e la ck edfrau du le ntin te nt . Res po nd en t ar gu es th atpe ti ti on ers ’ ex pl an at io n o f Mr. J aco by’ s b eh av io r is im pl au si bl e an d u ns up po rte d b y th e rec or d a ndth atMr. J aco by actu al ly dev is ed th e SMD s to cksal e in de pe nd en tl y .- 19 -

[* 19 ] Res po nd en t’s ar gu m en t i s b ui lton th ree p rem is es : (1 ) th e tr an sa ct io ns are di ffer en t fr om

an y of t he strat eg ie s m ark et edto Mr. J aco by’ s cl ie nt s wh il e h e worke d a t Twen ty-Firs t Se curit ie s an d wi th DGI; (2 ) Mr. J aco by didno t s eektax advi ce fr om

an y on e el se with re ga rdto th e SMD s to cksal e o r th e JP F III tra ns act io n; an d (3 ) Mr. J aco by was actua ll y well ve rs edintax . Peti ti on ers arg ue th atth e rec or d, an d M r. Ja co by’ s t es ti m on y inpa rti cu lar, co nt rad ic ts each of res po nd en t’s p rem is es . Res po nd en t que st io ns Mr. J aco by’ s cr ed ib il ity an d arg ue s th athi s t es ti m on y

was s el f-s erv in g a ndsh ou ldbe di sr eg ard ed . As to Mr. J aco by’ s cred ib il ity , we di sa gr ee wi th res po nd en t. At tria l we fo un d M r. Ja co by to b e a cred ib le witne ss , andres po nd en t h as no t o ffer eda pe rs ua si ve reas on to di sb el ie ve hi s t es ti m on y . a. In vo lv em en t i n S im il ar Tran sa ct io ns Res po nd en t cl ai m s tha t the SMD s to cksal e was di ffer en t fr om any of the st rat eg ie s tha t M r. Ja co by hadpre vi ou sl y m ark et edto th e ex te ntitin vo lv edth e sa le of a n S co rp or at io n wh os e o nl y ass etwas a cco un ts rece iv ab le . The rec or d sh ows , ho wev er, tha t M r. Ja co by hadpre vi ou sl y witne ss edcli en ts en ga gi ng in tra ns act io ns in vo lv in g S co rp or at io ns as we ll as t ran sa ct io ns in vo lv in g e nt it ie s tha t he ldon ly ord in ary in co m e as se ts --tran sa ct io ns th atha d b eenap pr ov edby vari ou s firm s an d s eem edleg it im at e atth e ti m e. Whi le th ere wer e n o t ran sa ct io ns- 20 -

[* 20 ] in vo lv in g e nt it ie s wh os e o nl y ass etwas a cco un ts rece iv ab le , we fin d i t pl au si bl e th atMr. J aco by bel ie ve d t he SMD tran sa ct io n was su ffi ci en tl y si m il ar t o pr io r tr an sa ct io ns to no t ra is e an y co nc ern s. b. Help Fro m

Tax Ex pe rts Acco rd in g t o re sp on de nt , “ Mr. J aco by, on h is ownan d wi th ou t an y ou ts id e advi ce, d es ig ne d the no m in al ‘ sa le ’ of SMD-NY s to ck ”. Howev er, i t i s cl ear f ro m hi s t es ti m on y

th atMr. J aco by cam e up wi thth e id ea fo r th e SMD s to cksal e aft er witne ss in g e arl ie r DGI tra ns act io ns an d s po ke with M r. Hab er re ga rd in g the le gi ti m acy of th e sa le be fo re i ni ti at in g t he tra ns act io n. Mo reo ve r, he ful ly di sc lo se d the de ta il s o f th e tr an sa ct io n a ndpro vi de d a ll th e d oc um en ts he ha d rel at in g t o the two tra ns act io ns to hi s ac co un tant s atGol ds te in Lewinwith t he ex pe ct at io n tha t the y

wou ldrep ort i t ap pr op ria te ly on p et it io ne rs ’ returns . c. Lackof Tax Exp ert is e Inm an y pri orcas es we ha ve fou ndtax pa y ers lac ke d fr au du le ntin te nt be cau se of the ir l ackof f in an ci al an d t ax ex pe rti se . See, e.g ., Aven el l v
. Co m m is si on er, T.C. Mem o. 2 01 2- 32 . Com pa redto th os e ta xp ay ers , Mr. Ja co by can no t b e sa idto lac k s op hi st ic at io n. He h ol ds bo th anacco un ti ng an d alaw de gr ee an d h as work edat a n a cco un ti ng firm , a law fi rm (whe re h e h an dl edso m e ta x m at te rs ), an d s ev eral fin an ci al servi ces firm s. Onclo se r ex am in at io n,- 21 -

[* 21 ] ho wev er, Mr . Jac ob y ’s tax cred en ti al s ar e n otas s tro ng as t he y fir stap pe ar. Whi le he was h ire d b y

a pr es ti gi ou s ac co un ti ng firm , Tou ch e Ro ss & Co ., Mr. Ja co by work edth ere f

oron ly a sho rt t im e an d o nl y init s au di ti ng de pa rtment. He ha d n o i nv ol ve m en t wi th th e ta x s id e o f th e fi rm . In l aw sc ho ol he di d n ot sp eci al iz e in tax law, an d h e d oe s n otha ve anLL.M. intax at io n. Mo reo ve r, whi le he di d s om e ta x- rel at edworkat t he law fi rm Burli ng ha m , Und erwo od& Lor d, tha t work d oe s n otap pe ar t o h av e b eenex te ns iv e, an d h e was ask edto lea ve th e fi rm aft er o nl y si x m on th s o n the job
. Whe n h e wen t o n t o m ark etstrat eg ie s fo r Twent y -Fi rs t an d DGI, the reco rd sh ows th atitwas the lawyers an d a cco un tant s, s uc h a s M r. Hab er, wh o h an dl ed th e d ev el op m en t o f th e strat eg ie s. Re sp on de ntha s n otsh own , by cl ear a nd co nv in ci ng ev id en ce, tha t M r. Ja co by was an yth in g m or e th ana m ark et er wh o rel ie d o n t ax sp eci al is ts to de vi se an d v etth e st rat eg ie s.

d. Co nc lu si on Res po nd en t h as fai le d t o p ro ve by clearan d c on vi nc in g e vi de nc e th at(1) th e tr an sa ct io ns were s ub st an ti al ly diff eren t fr om

an y of t he strat eg ie s m ark et edto Mr. J aco by’ s cl ie nt s wh il e h e worke d a t Twen ty-Firs t Se cu rit ie s an d wi th DGI; (2 ) Mr. J aco by didno t s eektax advi ce fr om an y on e wit h re gardto th e 1 99 9 a nd20 00 tra ns act io ns ; an d (3 ) Mr. J aco by was actua ll y well ve rs edintax . Accor di ng ly, Mr.- 22 -

[* 22 ] Jac ob y ’s agr eem en t ex pl an at io n o f hi s b eh av io r was ne ithe r in co ns is te ntno r im pl au si bl e. 3. Co nc eal m en t o f In co m e o r Ass et s Res po nd en t ar gu es th atMr. J aco by nev er i nv es te d m on ey inth e JP F III tra ns act io n a ndwas n ev er a p artne r in JPF III an d t ha t J PF III ne ve r act edas h is ag en t. Res po nd en t al so arg ue s tha t ev enif J PF III ha d b eenact in g a s M r. Ja co by’ s ag en t i n the JPF III tran sa ct io n, p et it io ne rs ’ 19 99 an d 2 00 0 t ax returns co nc eal ed in co m e b y

hi di ng th e ex is te nc e o f th e p rin ci pa l-a ge ntrel at io ns hi p. Pe ti ti on ers arg ue th atth ere i s n o re qu ire m en t t o d is cl os e th e ex is te nc e o f su chpri nc ip al -ag en t rel at io ns hi ps an d tha t, re ga rd le ss , Mr. Ja co by didno t i nt en ti on al ly con ceal an y in co m e o r as se ts be cau se he ful ly dis cl os edth e d et ai ls of t he for ei gn curren cy tra ns act io n t o the acco un tant s wh o p rep aredpe ti ti on ers ’ returns . As we d is cu ss in fra, i t i s unc le ar fro m th e rec or d wh ethe r a p rin ci pa l-a ge nt rel at io ns hi p i n fa ctex is te d b etweenMr. J aco by andJPF III. Howe ve r, co ntrary to res po nd en t’s p os it io n, the ev id en ce d oe s s ho w th atpe ti ti on ers tra ns ferr ed$4 0,0 00 to anacco un t co nt ro ll edby L ee, Go dd ard& Duf fy , th e JP F III tran sa ct io n c ou ns el , aro un d the da te of t he tra ns act io n. Th is lea ds us to be li ev e th atpe ti ti on ers di d in ve stso m e am ountof m on ey inth e JP F III tran sa ct io n. Re ga rd le ss , onth e b as is of th e te st im on y

an d d oc um en tary

ev id en ce p res en te d, i t ap pe ars th atMr. J aco by- 23 -

[* 23 ] be li ev eda pr in ci pa l-a ge ntrel at io ns hi p e xi st edan d p ro vi de d h is acco un tant s an d Go ld st ei n Lewi n wi th all th e d oc um en ts rel ev an t t o t he tra ns act io n, wi th th e ex pe ct at io n tha t the firm

wou ldrep ort the tra ns act io n app ro pr ia te ly on p et it io ne rs ’ returns . Mo reo ve r, res po nd en t h as no t ci te d a ny autho rit y insupp ort o f hi s ar gu m en t th atpe ti ti on ers were re qu ire d t o d is cl os e an y pri nc ip al -ag en t re la ti on sh ip s o n the ir returns . On th e b as is of t he reco rditcan no t b e sa idth atpe ti ti on ers co nc eal edth at in fo rm at io n. 4. Fai lu re To Co op erat e Res po nd en t ar gu es th atMr. J aco by fail edto co op erat e with t he tax au th or it ie s b ecau se , du rin g the adm in is tra ti ve ex am in at io n o f pe ti ti on ers ’ 19 99 an d 2 00 0 t ax returns , th e IRS reque st edanop po rtu ni ty to i nt erv ie w Mr. Ja co by bu t h e “ de cl in edto m ak e h im se lf a va il ab le forsu chanin te rv ie w.” Pet it io ne rs arg ue th atth e ev id en ce s ho ws tha t, i n re ga rdto th e SMD s to ck sal e an d t he JPF III tra ns act io n, “ Mr. J aco by was fo rth co m in g wi th th e au th or it ie s” an d “ co op erat ed fu ll y ”. The on ly evi de nc e res po nd en t ci te s t o s ho w th atMr. J aco by fail edto co op erat e is th e fo ll owi ng tes ti m on y eli ci te d dur in g d ire ctex am in at io n:- 24 -

[* 24 ] Q Dur in g the au di t p ha se of t hi s ca se , y ouwere re pr es en te d b y Mel Lefk owi tz . Is tha t co rrec t? A Yes . Q Andwere y ouaware t ha t the Int ern al Rev enue Serv ic e as ke d fo r th e op po rtu ni ty to m eetwith you , to Mr. Lefk owi tz ? A Yes . Q Thanky ou . W e ag ree wi th pe ti ti on ers th atth e ev id en ce d oe s n otsh ow tha t M r. Ja co by fai le d t o c oo pe rat e wit h t ax au th or it ie s. Pet it io ne rs ha ve de m on strat edth atMr. Ja co by coo pe rat edwith F ed eral pro se cu to rs du rin g t he 20 03 cri m in al in ve st ig at io n of DGI by m eet in g wi th pro se cuto rs an d C ID ag en ts . He ans weredth e in ve st ig at or s’ qu es ti on s re ga rd in g t he SMD s to ck sal e an d t he JPF III tran sa ct io n an d e ve n e nt eredin to a st ip ul at io n e xt en di ng th e p eri odof l im it at io ns forcri m in al ch arg es . Peti ti on ers als o p ro vi de d re sp on de ntwith c op io us do cu m en ts an d in fo rm at io n i n re sp on se to res po nd en t’s i nf orm at io n d oc um en t re qu es ts du rin g the IRS’ admini st rat iv e ex am in at io n m an y y ears lat er. Inco m

paris on to th e am bi gu ou s t es ti m on y

hi gh li gh te d b y

res po nd en t, the ev id en ce s ho ws tha t M r. Ja co by didpro vi de th e ta x aut ho rit ie s wi th subs tant ia l co op erat io n.- 25 -

[* 25 ] 5. Fi li ng Fal se Docu m en ts Res po nd en t ar gu es th atpe ti ti on ers fil edsev eral fal se do cum en ts with t he IRS. Inparti cu lar, res po nd en t draws att en ti onto pe ti ti on ers ’ 19 99 an d 2 00 0 Fed eral in co m e ta x re tu rn s, anun si gn edan d b ack da te d a ge nc y ag reem en t wi th JP F III, an d the di ffer en t v ers io ns of t he tax op in io n. Pe ti ti on ers arg ue th atth e ag en cy ag reem en t was no t i m

pr op er as itwas p rep aredat t he su gg es ti on of M r. Ja co by’ s co un se l an d was date d “ effe ct iv e as of” a cert ai n d at e. As t o t he tax op in io n, p et it io ne rs arg ue th atMr. J aco by was una ware tha t the tax op in io n h ad be enpre paredby som eo ne othe r th anMr. Aco st a unt il m an y y ears aft er pe ti ti on ers ’ returns ha d b eenpre pa red . Peti ti on ers als o c ha ll en ge res po nd en t’s po si ti onth atth e au th or sh ip is su e ren de rs th e ta x o pi ni on frau du le nt . Fi li ng a do cu m en t i nt en di ng to co nc eal , m is le ad , or p rev en t the co ll ect io n o f ta x i s an in di ci um

of c iv il frau d. Se e Sp ie s, 3 17 U.S. at 4 99 . Spe ci fic al ly, fil in g a fal se do cu m en t wi th th e IRS is anaffi rm at iv e actof m is rep res en ta ti on th atm ay in di cat e fraud . See Zel l v . Comm is si on er, 7 63 F.2d11 39 , 11 46 (10 th Cir . 19 85 ) (h ol di ng fal se withh ol di ng cert ifi cat es were ev id en ce o f frau d) , aff’g T.C. Mem o. 19 84 -1 52 . Reg ard in g the ag en cy

ag reem en t, the re i s a d is ti nc ti on be twee n a n e ffec ti ve da te pro vi si on see ki ng to m em or ia li ze a p rio r or al ag reem en t an d a n a tt em ptto- 26 -

[* 26 ] ba ck da te anag reem en t i n o rd er t o re tro act iv el y ob ta in anun warrant edtax be ne fit . See Mo or e v . Comm is si on er, T.C. Mem o. 2 00 7- 13 4, s li p o p. at37 . The ag en cy ag reem en t s ta te s tha t i t i s “ m ad e eff ect iv e” as of No ve m

be r 15 , 19 99 . Reg ard le ss of wh enth e ag en cy ag reem en t was m ad e eff ect iv e, ho wev er, the fact th atth e co ntrib ut io n a gr eem en t b etweenJPF III an d AD Glo ba l s tate s tha t J PF III was no t ac ti ng as a n a ge ntrai se s s eri ou s co nc ern s as to th e le gi ti m acy of th e ag en cy ag reem en t. Nev erthe le ss , th ere i s n o i nd ic at io n t ha t M r. Ja co by was aware of th e co nt rib ut io n a gr eem en t o r th e d is crep an cy be twee n i t an d t he ag en cy ag reem en t-- bo thof wh ic h wer e p rep aredby the JPF III tran sa ct io n c ou ns el , Lee, God da rd& Duf

fy . Con se qu en tl y , res po nd en t h as fai le d t o s ho w, by cle ar an d co nv in ci ng ev id en ce, tha t M r. Ja co by kn ew th atth e ag en cy ag reem en t was fal se or th athe subm it te d i t wi th anin te ntto m is le ad
. As t o the tax op in io n, the factth atMr. Aco st a d idno t draftitis a co nc ern ; ho wev er, the re i s n o i nd ic at io n tha t M r. Ja co by was aware of t he di sc rep an cy in au th or sh ip , andwe ag ree wi th pe ti ti on ers th atth es e que st io ns reg ard in g t he au th or sh ip of t he tax op in io n d o n otren de r th e ta x o pi ni on frau du le nt .

6. Pat te rnof B eh av io r In di cat in g a n In te ntTo Mi sl ead Res po nd en t ar gu es th at“ Mr. J aco by’ s en ti re p at te rnof b eh av io r * * * was co ns is te ntwith ape rs on att em pt in g t o c on ceal tra ns act io ns fro m th e Servi ce tha t- 27 -

[* 27 ] wou ldres ul t i n u nd erp aym en ts ”. Pet it io ne rs arg ue th atMr. J aco by’ s p at te rn of be ha vi oris co ns is te ntwith the ir p os it io n t ha t h e was jus t a m ark et er an d be li ev edth e SMD s to cksal e an d t he JPF III tran sa ct io n wer e le gi ti m at e. Thro ug ho utth es e p ro ceed in gs --as well as t he pri orarb itrat io n p ro ceed in gs , ci vi l l it ig at io n, an d a dm in is tra ti ve ex am in at io n- -Mr . Jac ob y ha s ca nd id ly adm it te d th atth e p rimary

m ot iv e fo r th e SMD s to cksal e was to ach ie ve tax sav in gs . Suc h anadmis si on m ay

cas t the tra ns act io n i n ane ga ti ve li gh t. Bu t we ar e lo ok in g h ere to whet he r pe ti ti on ers , andpa rti cu larly Mr. Jac ob y , hel d a n i nt en t t o m is le ad . W e fin d tha t the y

di d n ot . Mr. J aco by’ s ac ti on s an d b eh av io r as ev id en cedinth e rec or d a re co ns is te nt with p et it io ne rs ’ na rrat iv e th atMr. J aco by was p rimaril y a su cces sf

ul sal es m an who be li ev edth athe co ul d a ch ie ve leg it im at e ta x s av in gs by eng ag in g i n tra ns act io ns th at(1) were s im il ar t o t ho se he was s uc ces sf ul ly m ark et in g t o h is cl ie nt s, (2 ) ha d b eenap pr ov edby lawy ers an d a cco un tant s wh o wer e co ns id eredto be ex pe rts inth e fi el d, (3 ) were e xe cu te d b y co un se l, an d (4 ) were re po rte d o n returns pre pa redby a repu tabl e C.P.A. fi rm . Whi le he an d t he vario us tax expe rts he work edwith t oo k m is ta ke n p os it io ns , res po nd en t h as fai le d t o s ho w th atMr. Ja co by was act in g wi th anin te ntto m is le ad
.- 28 -

[* 28 ] 7. Su m

m ary of Bad ge s o f Frau d As n ot edab ov e, res po nd en t al le ge s tha t s ix fact or s ar e p res en t i n t hi s ca se . W e co nc lu de th atno ne of t he se ba dg es of f rau d a re p res en t i n t hi s ca se . W hi le Mr. J aco by hadso m e educ at io n andex pe rie nc e in tax law, an d t he un de rlyin g tra ns act io ns m ay

have be enim

pr op er, res po nd en t h as no t ca rri edhi s s ub st an ti al bu rd enof p ro vi ng by clearan d c on vi nc in g e vi de nc e th atMr. J aco by int en de d t o co m m itfrau d. II. Co nc lu si on Afte r rev ie win g a ll of t he fact s an d c irc um st an ces , we con cl ud e th at res po nd en t h as fai le d t o s us ta in hi s h eav y bu rd enof p ro vi ng by clearan d co nv in ci ng ev id en ce tha t, s om e 1 5 years a go , pet it io ne rs in te nd edto ev ad e ta x kn own to be owi ng by con du ctin te nd edto co nc eal , m is le ad , or o th erwi se pre ve nt th e co ll ect io n o f ta x fo r th e y ears inis su e. As we n ot edsupr a, ab se nta fi nd in g o f frau d the pe rio ds of l im it at io ns forbo th of t he y ears inis su e ex pi red , andwe fin d th atth e p eri od s o f li m it at io ns forbo th y ears ha ve in de edex pi red . Accor di ng ly, pe ti ti on ers are n otli ab le forth e d efi ci en ci es , add it io ns to tax , or p en al ti es forth e y ears inis su e. Thi s fi nd in g a ls o re nd ers m oo t M rs . Jac ob y ’s reque stforin no cen t sp ou se rel ie f un de r se ct io n 6 01 5, an d we wi ll di sm is s i t as su ch
.- 29 -

[* 29 ] Inreac hi ng ou r ho ld in g h erei n, we h av e co ns id eredall arg um en ts m ad e, an d, t o the ex te ntno t m en ti on edab ov e, we co nc lu de th ey are m oo t, i rrel ev an t, o r witho utm eri t. To re fle ctth e fo reg oi ng , An ap pr op ria te ord er an d de ci si on wil l b e en te red
.