T.C. Mem o. 2 01 6- 49

UNITED STAT ES TAX COURT

JAM ES T. O’ NEAL, JR ., AND SALLY L. O’ NEAL, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 36 48 -1 0. Fi le d M arch 14 , 20 16
.
Ja m es T. O’ Neal , Jr., an d S al ly L . O’ Neal , pro ses e. Laura A. Pri ce, Ma rkJ. To be r, an d Lau renB. Eps te in , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION NEGA, Jud ge : By not ic e o f de fic ie nc y date d No ve m

be r 6, 2 00 9,
res po nd en t d et erm in edde fic ie nc ie s an d p en al ti es with re sp ectto pe ti ti on ers ’ Fed eral in co m e ta x a s fo ll ows : 1
All sec ti on refe ren ces are t o the Int ern al Rev enue Co de (Co de ) in effe ctat 1 (co nt in ue d...)- 2 -

[* 2] Year Defi ci en cy Pen al ty se c. 66 63 (a) Add it io n t o t ax

se c. 66 51 (a)( 1) 19 94 $9 2,2 60 $6 9,1 95
-- 19 95 34 1,4 97 25 6,1 23
-- 19 96 35 7,3 57 26 8,0 18
-- 19 97 1,1 68 ,41 1 87 6,3 08
-- 19 98 51 6,5 79 38 7,4 34 $1 28 ,94 2 The is su es forde ci si on are: (1 ) whe th er the pe rio ds of l im it at io ns forass es sm en t o f pe ti ti on er’s i nc om e ta x l iabi li ti es rem ai n o pe n fo r ta x years 1 99 4- 98 ; (2 ) whe th er p et it io ne rs fai le d t o re po rt t ax ab le in co m e o f $2 86 ,09 1, $9 24 ,60 3, $ 96 4,3 26 , $3 ,01 9,2 08 , and$1 ,37 6,6 97 onth ei r 19 94 -9 8 F ed eral in co m e ta x re turn s, re sp ect iv el y ; (3 ) whe th er p et it io ne rs are en ti tl edto ne t o pe rat in g l os s (NOL) ca rry fo rward de du ct io ns of $ 6,1 01 ,50 9, $ 6,0 91 ,82 2, $ 6,0 87 ,37 0, $ 6,0 86 ,17 0, an d $ 6,0 84 ,16 5 fo r ta x years 1 99 4, 1 99 5, 1 99 6, 1 99 7, an d 1 99 8, re sp ect iv el y ; (4 ) whe th er p et it io ne rs are l iabl e fo r frau d p en al ti es pu rs ua ntto sec ti on 66 63 fortax y ears 19 94 -9 8; an d (...co nt inue d) 1 al l re le va ntti m es . All R

ul e ref eren ces are t o the Tax C ou rt Rul es of P ract ic e an d Pro cedur e. All m on et ary am ou nt s ar e ro un de d t o the ne ares t d ol lar.- 3 -

[* 3] (5 ) whe th er p et it io ne rs are l iabl e fo r th e ad di ti on to tax pu rs ua ntto sec ti on 66 51 (a)( 1) for

tax y ear 1 99 8. 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. Pe ti ti on ers were
m arri edan d re si de d i n F lo rid a atth e ti m e th ey fil edth ei r pe ti ti on . Pet it io ne rs James T. O’ Neal , Jr. (p et it io ne r), an d S al ly L . O’ Neal were
m arri edin19 67 an d h av e fo urch il dr ento ge th er: Jam es T. O’ Neal III (J .T.), Kell y O’ Neal , Kath le enO’ Neal (Kat ie ), an d P atric k O’Neal. I. Pet it io ne rs ’ In co m e an d Lo ss es Befo re Tax Years at I ss ue A. Pet it io ne r’s Bu si ne ss Deal in gs an d Th eft Inth e m id -1 97 0s pe ti ti on ers joi ne d the Bay Hil l Cl ub an d Lo dg e (Ba y Hil l Cl ub ), a p riv at e g ol f res ort l oc at edinBay Hil l, Fl or id a. In19 75 pe ti ti on ers be cam e acqua in te d wi th Arno ldPal m er, a p ro fes si on al go lfe r. Pet it io ne r an d M r. Pal m er b ecame frien ds an d g ol fin g p artne rs . In 1 97 7 M r. Pal m er i nt ro du ced pe ti ti on er t o M arkMcC orm ack , Mr. Pal m er’s b us in es s p artne r an d a ge nt . Mr. McC orm ackwas the fou nd er an d c ha irman of Int ern at io na l M an ag em en t Gro up (IM G), anin te rn at io na l m an ag em en t co m pa ny tha t re pr es en ts pro fes si on al ath le te s an d o th er ce le br it ie s.- 4 -

[* 4] Pet it io ne r’s fri en ds hi p wi th Mes sr s. Pa lm er an d M cCo rm ackde ve lo pe d i nt o a b us in es s re lati on sh ip ov er the y ears . Beg in ni ng in19 79 , pet it io ne r was in vo lv ed with Arn ol d P al m er’s au to m ob il e d eal ers hi ps . In 1 98 8, 1 98 9, an d 1 99 0 p et it io ne r an d M es sr s. Pa lm er an d M cCo rm ackwere ea chon e-thi rdsh areh ol de rs infiv e subc hapt er S co rp or at io ns th atwere i n the bu si ne ss of s el li ng au to m ob il es : Arn ol d P al m er Mo to rs , Inc ., Arno ldPal m er Fo rdLin co ln Merc ury , Inc ., Fairway Fo rd , Inc ., PMO Mo to rs of Ke ntuc ky, Inc., an d Nu gg etMo to rs of C al ifo rn ia , Inc
. (co ll ect iv el y , Arno ldPal m er d eal ers hi ps ). Pet it io ne r m an ag edth e d ai ly ope rat io ns of th es e d eal ers hi ps . Mes sr s. Pa lm er an d M cCo rm ackwere n otin vo lv edinda y to -d ay op erat io ns . Pet it io ne r be ga n s ip ho ni ng m on ey fro m Arno ldPal m er Mo to rs , Inc ., as earl y as Oc to be r 19 85 . W

he n o ne de al ers hi p ra n s ho rt o n c as h, p et it io ne r tra ns ferr edm on ey

fro m an ot he r de al ers hi p t o c ov er the sh ortfa ll . Rath er tha n tra ns ferr in g fu nd s d ire ct ly betweende al ers hi p a cco un ts , pet it io ne r ro ut edtra ns fers th ro ug h h is pe rs on al ba nkacco un t. Pet it io ne r ro ut in el y ke ptso m e o f th e tra ns ferr edfun ds inhi s o wn ac co un t i ns te adof t ran sf erri ng th em

to th e ap pr op ria te de al ers hi p. Me ss rs . Pal m er an d M cCo rm ackdi d n otauth or iz e pe ti ti on er t o t ak e m on ey

fro m th e d eal ers hi ps . On Oct ob er 1 5, 1 98 5, p et it io ne r si gn eda de m an d p ro m is so ry no te (Oct ob er 1 98 5 p ro m is so ry no te ) in fav orof- 5 -

[* 5] Arno ldPal m er Mo to rs , Inc ., refl ect in g the am ou nt s h e h adtak enfro m th e de al ers hi p. Pe ti ti on er upd at edth e p ro m is so ry no te fro m

ti m e to ti m e. An at ta ch m en t t o the Octo be r 19 85 pro m is so ry no te refl ect s tha t as of De cem be r 31 , 19 86 , pet it io ne r ha d t ak enat l eas t $ 28 7,0 00 fro m th e d eal ers hi p. Inth e sp rin g o f 19 89 anArno ldPal m er d eal ers hi p i n S ou th Caro li nalo stit s fin an ci ng so ur ce, Fo rdMo to r Cre di t Co . (Fo rdMo to r Cre di t). Pe ti ti on er ac cep te d
res po ns ib il ity

forth e fi na nc ia l tro ub le s o f th e d eal ers hi p a ndpro m is edMes sr s. Pal m er an d M cCo rm ackth athe wou ldrei m bu rs e th em

foran y m on ey th atha d be enlo st . Peti ti on er al so in fo rm edMes sr s. Pa lm er an d M cCo rm ackth athe ha d bo rro wedap pr ox im at el y

$2 m il li on fro m

th e d eal ers hi ps . Upo n l earn in g o f pe ti ti on er’s m is ap pr op ria ti on s, IM G aud it edth e d eal ers hi ps ’ reco rd s t o d et erm in e th e ex te ntof p et it io ne r’s th eft . The IM G aud itdi sc ov eredth atpe ti ti on er h adin facttak enm or e th an$6 mil li on fro m th e d eal ers hi ps . On Apr il 30 , 19 89 , pe ti ti on er ex ecu te d an i nd em ni ty andsec ur ity

ag reem en t i n fa vo r of

Mes sr s. Pal m er an d M cCo rm ackwhi chgra nt eda se cu rit y in te res t i n a ll of h is ass et s t o Mes sr s. Pa lm er an d M cCo rm ack . On May 31 , 19 89 , pet it io ne r ex ecu te d ade m an d pr om is so ry

no te infav or

of F ai rway

Fo rd , Inc . (Fai rway

Fo rdno te ), inth e am ou nt of $6 ,05 6,8 62 inrep aym en t o f th e am ou nthe ha d t ak enfro m th e d eal ers hi ps .- 6 -

[* 6] Glen Bla ckbu rn , a fo rm er ce rti fie d p ub li c acc ou nt an t (C .P.A.) forth e Arn ol d P al m er d eal ers hi ps , tes ti fie d a t tria l. Ho wev er, the re i s n o e vi de nc e as to th e sp eci fic y ears inwhi chan y pa ym en ts were m ad e o n the Fai rway Fo rdno te or an y sp eci fic am ou nt s o f su chpa ym en ts , on ly that the y oc cu rredinth e “ earl y

90 ’s”. Mr. Bl ackbu rn ’s tes ti m on y was n otsubs tant ia te d b y an y do cu m en ta ti on reg ard in g th e d at es or a m ou nt s o f tr an sf ers of f un ds fro m

pe ti ti on ers to Mes sr s. Pa lm er an d McC orm ack . W

hi le pe ti ti on ers tra ns ferr edth ei r Is le worth ho m e, di sc us se d i n furth er d et ai l b el ow, t o M es sr s. Pa lm er an d M cCo rm ackfora pu rch as e p ric e o f $4
m il li on , th e rec or d i s u nc le ar as to whet he r an y m on ey actua ll y ch an ge d h an ds as pa rt o f th e tr an sf

er o f th e Is le worth ho m e, an d the ex ch an ge was n otsubs tant ia te d by any do cu m en ta ti on . Peti ti on er was rem ov edfro m an y own ers hi p i nt eres ts in th e Arn ol d P al m er d eal ers hi ps in19 90 . Mrs . O’ Neal subs eque nt ly retu rn edto
work t o s up po rt t he fam il y in19 92
. B. Loan t o Dea le rs hi ps Afte r th e So ut h C aro li nade al ers hi p l os t fi na nc in g, p et it io ne r an d M es sr s. Pal m er an d M cCo rm ackex ecu te d apro m is so ry no te on Ju ly 2, 19 90 , infav orof 2 Fo rdMo to r Cre di t i n the am ountof $ 10 .4 m il li on (Ju ly 199 0 p ro m is so ry no te ) in It i s u nc le ar fro m

th e rec or d wh ethe r pe ti ti on er s ti ll ha d a n o wne rs hi p 2 in te res t i n the Arno ldPal m er d eal ers hi ps when he si gn edth e Ju ly 199 0 p ro m is so ry no te .- 7 -

[* 7] ord er t o p ers on al ly gua ran te e fu rth er cr ed itfro m Fo rdMo to r Cre di t. The pr oc eed s o f th e p ro m is so ry no te were d ire ct ly inv es te d i n Arn ol d P al m er Fo rd Lin co ln Merc ury , Inc ., andtre at edas aco nt rib ut io n t o c ap it al . Peti ti on er an d Mes sr s. Pa lm er an d M cCo rm ackwere ea chall ot te d o ne -th irdof t he to ta l
co nt rib ut io n. Pe ti ti on er n ev er m ad e an y pa y m en ts to wardth e $ 10 .4 m il li onlo an fro m Fo rdMo to r Cre di t, an d M es sr s. Pa lm er an d M cCo rm acken de d up m ak in g equa l p aym en ts to wardth e lo an . FordMo to r Cre di t l oo ke d t o M es sr s. Pa lm er an d McC orm ackfor

gu aran ti es fir stan d wo ul d n otha ve en te redin to th e ag reem en t t o pr ov id e cre di t i f Mes sr s. Pa lm er an d M cCo rm ackha d n otsi gn edth e Ju ly 199 0 pr om is so ry

no te . On Au gu st1, 1 99 2, p et it io ne r an d M es sr s. Pa lm er an d M cCo rm ack
ex ecu te d a n a m en de d a ndres ta te d n ot e in fav orof P it ts bu rg h Nat io na l Ba nkinth e am ountof $ 10 ,23 0,3 62 (Aug us t 1 99 2 p ro mis so ry no te ). The n ot e was an am en dm en t an d re st at em en t o f fo urlo an s p rev io us ly m ad e to pe ti ti on er an d Mes sr s. Pa lm er an d M cCo rm ackin19 89 . Thes e fo urlo an s wer e u se d t o c ap it al iz e Arn ol d P al m er Mo to rs , Inc ., andFai rway Fo rd , Inc ., andtre at edas ash areh ol de rs ’
co nt rib ut io n t o c ap it al . Each s ha reh ol de r was all ot te d o ne -th irdof t he to ta l
co nt rib ut io n. Pe ti ti on er n ev er m ad e an y pa y m en ts to wardth e lo an s fr om Pi tt sb ur ghNati on al Ban k, an d M es sr s. Pa lm er an d M cCo rm ackpa idoff th e lo an s.- 8 -

[* 8] C. Pet it io ne rs ’ Pro pe rti es In19 89 pe ti ti on ers own edpro pe rty kn ownas t he Bay Hil l Farm th atwas lo cat edacro ss th e st reetfro m th e Bay Hill Club s ub di vi si on inBay Hil l, Fl or id a. Pet it io ne rs ke ptva rio us farm an im al s atth e Bay Hill Farm , in cl ud in g aho rs e rid de n b y on e o f th ei r daug ht ers , go at s, a m in ia tu re h or se na m edSm ur f, an d two ll am as na m edLero y

an d Lo ll ip op . Peti ti on er’s p ers on al ass is tantwork edinan of fic e lo cat edat t he Bay Hil l Fa rm . On Aug us t 2 1, 1 98 9, p et it io ne rs so ldth e Bay Hil l Fa rm to Mr. Pal m er fo r $1 m il li on . Con si de rat io n fo r th e p ro pe rty con si st ed of $5 00 ,00 0 t o b e ren de redat c lo si ng an d fo rg iv en es s o f $5 00 ,00 0 o wedby pe ti ti on er t o M r. Pal m er “ on a cert ai n J ud gm en t No te ”. Pet it io ne rs co nt inue d t o ke ep th ei r an im al s atth e Bay Hill Farm aft er the sal e to Mr. Pal m er i n 1 98 9. Add it io na ll y , two in di vi du al s wh o wo rk edforpe ti ti on er re si de d a t the farm for
so m e ti m e. Mr. Pal m er fi le d s ui t ag ai ns t p et it io ne rs in19 94 to ev ic t the two in di vi du al s an d the farm

an im al s fr om

th e Bay Hill Farm
. Fro m 19 87 to 19 89 pe ti ti on ers co ns tru ct eda 28 ,00 0- square-f oo t h om e at 97 66 GreenIsl an d C ov e in th e Is le worth subd iv is io n i n Win de rm ere, Fl or id a. Pet it io ne rs pa idTho m as Co ud rie t $ 1.4 m il li on to bu il d the ho us e, whi chwas
m od el edon th e cl ub ho us e atth e Aug us taNati on al Gol f Cl ub . Som e o f th e ch eck s pe ti ti on ers us edto pa y

Mr. Co udrie t wer e fro m

th e ch eck in g a cco un t b el on gi ng to- 9 -

[* 9] Arno ldPal m er Mo to rs , Inc . In the su m m er o f 19 89 pe ti ti on ers owedMr. Co ud rie t b etween$3 00 ,00 0 a nd$4 00 ,00 0 t o c om pl et e co ns tru ct io n o f th e Is le worth ho us e. Pet it io ne r as ke d M r. Pal m er fo r a l oa n t o fi ni sh co ns tru ct io n o n th e h ou se , andMr. Pal m er l en t p et it io ne rs $1 mil li on inAug us t 1 98 9 t o fi na nc e th e rem ai ni ng co ns tru ct io n c os ts . It i s u nc le ar t o the Co urt wh ethe r Mr. Pa lm er’s Aug us t 1 98 9 $ 1 m il li on lo anto pe ti ti on ers was re late d t o h is pu rch as e o f th e Bay Hil l Fa rm fro m pe ti ti on ers for$1 m il li oninAug us t 1 98 9. D. Pet it io ne rs ’ 19 88 , 19 89 , and19 90 Tax R eturns Pet it io ne rs rep orte d NOLs on th ei r 19 88 , 19 89 , and19 90 Fed eral in co m e ta x re turn s. Fortax y ear 1 98 8 p et it io ne rs rep orte d an NOL o f $8 13 ,47 5 a ndan

3 NOL carryforwardof $ 56 8,3 52 . For t ax y ear 1 98 9 p et it io ne rs rep orte d a n NOL o f $4 ,53 8,2 94 , andanNOL carry ov er fro m pri ory ears of $ 89 9,2 06 , andanNOL
carry fo rwardof $ 5,2 94 ,09 8. Fo r ta x year 19 90 pe ti ti on ers rep orte d a n NOL o f $7 59 ,58 6, an NOL carry ov er fro m pri ory ears of $ 5,4 40 ,31 7, an d a n NOL
carry fo rwardof $ 6,1 61 ,44 7. Th e NOLs cl ai m edby pet it io ne rs for19 88 -9 0 t ot al ed $6 ,11 1,3 55 . An ad de ndum to pe ti ti on er’s 1 98 9 t ax return t it le d “NOL” reci te s am ount s o f $3 4,8 96 for19 85 , $2 5,5 39 for19 86 , $1 22 ,02 8 fo r 19 87 , and$7 16 ,74 3
The reco rddo es no t co nt ai n c op ie s o f pe ti ti on ers ’ ta x re tu rn s fo r y ears pri or 3 to tax y ear 1 98 8.- 10 -

[* 10 ] for19 88 , to ta li ng $8 99 ,20 6, d es pi te th e 1 98 8 t ax return’s re po rti ng anNOL
carry fo rwardof o nl y

$5 68 ,35 2 a ndno NOL carry ov ers fro m pri ory ears . Pet it io ne rs ha ve no t o ffer edanex pl an at io n fo r why the ir 1 98 9 t ax return re po rts a carry ov er am ou ntfro m

pri ory ears th atis lar ge r th anth e am ou ntcla im edas a carry fo rwardin19 88 , no r ha ve th ey ex pl ai ne d wh y

th ei r 19 90 tax return re po rts a larg er ca rry ov er am ou ntfro m pri ory ears th anwhatwas re po rte d o n the ir 1 98 9 t ax return. Pe ti ti on ers di d n otrep ort o n the ir 1 98 8 o r 19 89 in co m e ta x re tu rnan y of th e $ 6,0 56 ,86 2 p et it io ne r ha d m is ap pr op ria te d fr om th e Arn ol d P al m er de al ers hi ps . E. Ju dg m en ts Agai ns t Pe ti ti on ers On Ap ril 9, 1 99 1, a f

in al su m m ary jud gm en t i n the am ountof $ 5,5 50 ,33 6
was en te redag ai ns t p et it io ne rs inth e act io n e nt it le d S un Ban k, N.A. v. APAG Hol di ng s, In c., Oran ge Co un ty, Fl or id a, No. CI -9 0- 96 76
. On Ap ril 25 , 19 91 , a fin al jud gm en t i n the am ou ntof $ 30 0,7 31 was e nt ered ag ai ns t p et it io ne r in th e act io n e nt it le d M il le r v. O’Neal, Orang e Co un ty, Fl or id a, No. CI -1 22 8. On Dec em

be r 2, 1 99 1, a d efau ltjud gm en t i n the am ou ntof $ 47 8,2 24 was en te redag ai ns t p et it io ne r in th e act io n e nt it le d B an k On e, In di an ap ol is , N.A. v. O’ Neal , Ham il to n C ou nt y Supe rio r Co urt, In di an a, No. 2 9D0 3- 91 07 -CP- 31 8.- 11 -

[* 11 ] On Fe brua ry

27 , 19 92 , a de fau ltjud gm en t i n the am ou ntof $ 11 ,31 3,3 77 pl us an y rel at edco st s was en te redag ai ns t p et it io ne rs inth e act io n e nt it le d B an k One , Ind ianapo li s, N.A. v. O’Neal, Ham il to n C ou nt y Supe rio r Co urt, In di an a, No. 29 D03 -9 10 7- CP-3 18 . The jud gm en t was en te redinfav orof M es sr s. Pa lm er an d McC orm ackan d re late d t o p et it io ne r’s no np aym en t t owa rdth e Ju ly 199 0 pr om is so ry

no te . InFeb ru ary 19 94 pe ti ti on er was co nv ic te d b y a jury in the Sta te of F lo rid a of two co un ts of S ta te sal es tax ev as io n. OnMay 17, 1 99 4, p et it io ne r was ord ered to pa y res ti tu ti on an d i nv es ti ga ti on co st s o f $3 89 ,52 6 t o the Sta te of F lo rid a pu rs ua ntto th is co nv ic ti on . The ab ov e-d es cri be d ju dg m en ts ag ai ns t p et it io ne r in di vi du al ly and pe ti ti on ers joi nt ly tot al inex ces s o f $1 8 m il li on . Peti ti on ers ha ve ne ve r m ad e an y pa ym en ts to wardth e $ 11 ,31 3,3 77 jud gm en t en te redag ai ns t the m infav orof Mes sr s. Pa lm er an d M cCo rm ack . As a res ul t o f th es e jud gm en ts , pet it io ne rs were in so lv en t fr om

19 94 th ro ug h 1 99 8, the tax y ears at i ss ue . II. Bu si ne ss Deal in gs Duri ng Tax Yea rs at I ss ue A. Fee Ag reem en t With Patric k B ak er In19 90 pe ti ti on er was th e so le sh areh ol de r of Arno ldPal m er Au to m ot iv e Gro up Hol di ng s, In c. (APAG Hol di ng s) . APAG Hold in gs who ll y own edArno ld- 12 -

[* 12 ] Pal m er Au to m ot iv e Gro up of Orl an do , Inc . (APAG Orlan do ). In t he earl y 19 90 s p et it io ne r, APAG Hol di ng s, an d APAG Orl an do were p la in ti ffs ina la wsu it ag ai ns t Gen eral Mo to rs , Inc . (GMC), an d Gen eral Mo to rs Accep tanc e Co rp . (GMAC)
. Pet it io ne r m etPatric k B ak er i n e ithe r 19 92 or 1 99 3. OnMay 19, 1 99 4, M r. Bak er ag reedto fun d p et it io ne r’s lawsu itag ai ns t GMC an d GM AC by paying for le ga l fe es an d p et it io ne r’s li vi ng ex pe ns es inex ch an ge forrece ip t o f an y pro ceed s res ul ti ng fro m

th e li ti ga ti on (19 94 fee ag reem en t). Th e la wsu iten de d i n 1 99 4 i n fav orof GM C an d GM AC. Pet it io ne r di d n otin fo rm Mr. Bak er o f th e st atus of th e la wsu it , andhe ne ve r as ke d M r. Bak er t o p ay an y of h is li vi ng ex pe ns es . B. Bak er O’Neal Ho ld in gs , Inc ., andAm eri canPubl ic Aut om ot iv e Gro up , Inc
. 1. Ove rv ie w of C om

pa ni es ’ Purp os e Sh ortl y aft er m eet in g M r. Bak er, p et it io ne r pi tc he d h im th e id ea o f cre at in g a p ub li cl y tra de d c or

po rat io n tha t wo ul d o pe rat e au to m ob il e m al ls . A witn es s co m pa redth e co nc ep t t o C arm ax , with l oc at io ns off eri ng nu m ero us au to m ob il e br an ds to cu st om ers . Peti ti on er an d M r. Bak er fo rm edBak er O’Neal Ho ld in gs , In c. (BOH), o n Dec em

be r 6, 1 99 3. Atth e ti m e Mr. Ba ke r ha d s om e p ers on al weal th fro m

th e rec en t s al e o f a fam il y bu si ne ss , andhe in ve st edap pr ox im at el y- 13 -

[* 13 ] $4 00 ,00 0 i nt o B OH. Mr. Bak er was th e so le sh areh ol de r of BOH, and pe ti ti on er s erv edas t he pre si de ntof B OH from it s i nc or po rat io n u nt il Sep te m

be r 2, 1 99 8. Am eri canPubl ic Aut om ot iv e Gro up , Inc . (APAG), was i nc or po rat edon Decem be r 27 , 19 95 . BOH was the so le sh areh ol de r of APAG, andas wi th BOH, pe ti ti on er s erv edas t he pre si de ntof APAG fr om it s i nc ep ti on un ti l Se pt em be r 2, 19 98 . Mr. Bak er was aware o f pe ti ti on er’s p rio r bu si ne ss in vo lv em en t wi th Mes sr s. Pa lm er an d M cCo rm ack , bu t p et it io ne r ne ve r ap pr is edMr. Bak er o f th e jud gm en ts en te redag ai ns t h im an d h is wife th atex ceed ed$1 8 m il li on . BOH an d APAG were org an iz edforth e p ur po se of d ev el op in g a nd op erat in g aut om ob il e d eal ers hi ps to be lo cat edinan d a ro un d s ho pp in g m al ls (au to
m al ls ). To ach ie ve th is pu rp os e, APAG end eav or edto purch as e se ve ral
au to m ob il e d eal ers hi ps fro m Don al d M as se y , a Detr oi t-area aut om ob il e d eal er, an d ra is edcap it al by sol ic it in g p riv at e in ve st or s. Ra th er tha n i ss ui ng st oc k t o in ve st or s, APAG m em or ia li zedeach in ve st m en t wi tha pr om is so ry no te . The pr om is so ry

no te s b or e in te res t ata rat e o f 8% l es s tran sa ct io n e xp en se s n otto
ex ceed10 % of t he ou ts tand in g a m ou ntof e ach no te . Peti ti on er an d M r. Bak er ga ve eachin ve st ora pe rs on al gu aran ty in wh ic h the y ag reedto gu aran te e th e pa ym en t o f al l i nd eb te dn es s o f APAG. APAG pro m is edin ve st or s tha t the ir
m on ey wou ldbe co nv ert edto sh ares of APAG s to ckup on th e ear li er o f th e d at e- 14 -

[* 14 ] APAG ent eredin to a de fin it iv e ag reem en t wi th Mr. Ma ss ey to acqui re h is de al ers hi ps or ada te cert ai n s etforth ineach fin an ci ng let te r. Even tu al ly, APAG pl an ne d t o e xe cu te anin it ia l p ub li c o ffer in g. APAG so ug htin ve st m en ts on ly from in di vi du al s wh o wer e acc red it ed in ve st or s as th atterm

is de fin edby the Secu rit ie s an d Ex ch an ge Co m m is si on . In ve st or s wer e to ldth ei r fund s wer e b ei ng he ldinanesc ro w acco un t. A to ta l o f $1 6,7 97 ,00 0 i n i nv es to r m on ey was d ep os it edin to APAG’ s b an k a cco un t fr om 19 95 to 19 98 . At anin ve st orm eet in g i n M arch 19 98 , an i nv es to r as ke d abo utth e st atus of m on ey

th atha d b eenrai se d up t o tha t p oi nt . Peti ti on er t ol d i nv es to rs th at ap pr ox im at el y

$1 m il li on ha d b eensp en t o n e xp en se s, $ 2.5 m il li on ha d b een de po si te d wi th Mr. Ma ss ey , andth e res t o f th e fu nd s wer e in APAG’ s b an k
acco un t. At the ti m e th e m eet in g was he ld , APAG hadrece iv edin ve st orde po si ts to ta li ng $1 6,5 97 ,00 0. Sub tra ct in g the am ou nt s p et it io ne r rep res en te d h adbe en 4 sp en t o n e xp en se s an d d ep os it edwith M r. Mas se y , APAG sh ou ldha ve ha d ap pr ox im at el y

$1 3,0 97 ,00 0 i n i ts ba nkacco un t. Ho wev er, as of Ap ril 1, 1 99 8, BOH an d APAG b an k a cco un ts he lda to ta l o f on ly $1,6 88 ,23 2. Into ta l, $1 1,4 08 ,76 8 was m is si ng fro m th e acc ou nt s.
APAG recei ve d o ne ad di ti on al in ve st m en t o f $2 00 ,00 0 a fte r th is m eet in g 4 was he ld
.- 15 -

[* 15 ] 2. Pet it io ne rs ’ The ft F ro m BOH an d APAG Pet it io ne r ne ve r dr ew a s al ary as pre si de ntof B OH or APAG. Pet it io ne r’s fam il y m em be rs , in cl ud in g h is fathe r, wife , andfou r ch il dr en , als o d idno t re cei ve sa larie s fr om

BOH or APAG s in ce the y ne ve r worke d fo r ei th er co m pa ny. Beg in ni ng in19 94 an d c on ti nu in g thr ou gh hi s d is m is sa l as pre si de ntof B OH and APAG onSep te m

be r 2, 1 99 8, p et it io ne rs us edBOH an d APAG fu nd s fo r al l o f th ei r pe rs on al ex pe ns es . Bot h p et it io ne rs were awar e th atth is was d on e, in pa rt, t o de featth ei r cre di to rs by notpl aci ng ass et s i n the ir o wn n am es . As h e h adpre vi ou sl y

do ne du rin g h is ten ur e with Arn ol d P al m er Mo to rs , In c., pe ti ti on er ex ecu te d ade m an d p ro mis so ry no te infav orof B OH onOcto be r 6, 19 95 (Oct ob er 1 99 5 p ro mis so ry no te ). The Oct ob er 1 99 5 p ro m is so ry no te si gn ed in fav orof B OH is ne arl y id en ti cal to th e Oct ob er 1 98 5 p ro m is so ry no te si gn edin fav orof Arn ol d P al m er Mo to rs , Inc ., with th e o nl y di ffer en ces be in g the da te s, the ho ld ers of t he no te s, an d the witne ss es . The Oct ob er 1 99 5 p ro m is so ry no te
co nt ai ns anatt ach m en t tha t i s s im il ar t o the att ach m en t u se d fo r th e Oct ob er 1 98 5 pr om is so ry

no te . The atta ch m en t re fle ct s tha t p et it io ne r ha d t ak enm or e th an$3
m il li on fro m

BOH fro m

19 94 to 19 97 . Add it io na ll y , pet it io ne r di sg ui se d the ta ki ng of B OH andAPAG fun ds by categ or iz in g the m as l oa ns inBOH’ s g en eral le dg er.- 16 -

[* 16 ] a. Cred itCard s an d B an k Acc ou nt s Fro m 19 94 to 19 98 , pet it io ne rs an d the ir c hi ldrenfree ly spe ntBOH an d APAG m on ey . Peti ti on ers , J.T., Kell y , andKati e eac h h adBOH co rp or at e Am eri canExp res s cr ed itcard s i n the ir n am es whi chth ey us edforpe rs on al
ex pe ns es . Add it io na ll y , pet it io ne r di rect edBOH to pa y th e p ers on al cred itcard bi ll s o f Mrs . O’ Neal , J.T., Kell y , andKati e. Pet it io ne r cre at edba nkacco un ts in th e n am es of t hr ee o f hi s ch il dr en , J.T., Kell y , andKati e, in to whi chhe de po si te d BOH an d APAG fu nd s. Pet it io ne rs each to okst ep s t o h id e BOH an d APAG
m on ey inth ei r ch il dr en ’s nam es . For e xam pl e, in th e su m

m er o f 19 97 , Mrs
. O’ Neal to okKati e to Nati on al Cit y Ban k a ndde po si te d app ro xi m at el y $3 0,0 00 of BOH an d APAG fu nd s i nt o a n a cco un t t it le d i n Kat ie ’s nam e. Mrs . O’ Neal returne d wi th Kati e in May 199 8 a ndwithd rew the fun ds . Peti ti on er al so to ok Kati e to two ba nk s t o d ep os itBOH an d APAG fu nd s i n a cco un ts crea te d i n h er na m e an d l at er re turn edto withd raw the fun ds
. Mrs . O’ Neal di rect edth e BOH acc ou nt an t, Paul Mo habi r, to pa y he r pe rs on al ex pe ns es us in g B OH fun ds . In 1 99 4 a nd19 95 pe ti ti on er wro te ch eck s pa y ab le to Mrs . O’ Neal on BOH’ s ch eck in g a cco un t t o p ay th ei r da il y

li vi ng ex pe ns es . In 1 99 4, 1 99 5, an d 1 99 6 M rs . O’ Neal als o wro te ch eck s o n B OH’ s ch eck in g a cco un t t o p ay

pe rs on al ex pe ns es .- 17 -

[* 17 ] b. Gift s, Au to m ob il es , andVacat io ns Pet it io ne rs an d the ir c hi ldrendro ve va rio us au to m ob il es th atwere pu rch as edor l eas edwith B OH fun ds . Mrs . O’ Neal pl an ne d thr ee crui se s, al l p ai d fo r with B OH m on ey , forva rio us in di vi du al s, i nc lu di ng he r pa ren ts , pet it io ne rs ’ ch il dr en , andth e ch il dr en ’s si gn ifi can t o th ers an d fr ie nd s. Fo r Ch ris tm as in19 97 pe ti ti on er g av e Mrs . O’ Neal a ch eckfor$5 0,0 00 an d e ach of h is ch il dr enan d h is fathe r ch eck s fo r $1 0,0 00 , all of wh ic h wer e drawnon BOH’ s b an k a cco un t. Mr s. O’ Neal returne d the $5 0,0 00 ch eckto pe ti ti on er as sh e sa idsh e fel t i t was an in ap pr op ria te gi ft.
c. Ch il dr en ’s Edu cat io n Pet it io ne r us edBOH fun ds to pa y forhi s ch il dr en ’s edu cat io ns an d l iv in g ex pe ns es . On Ja nu ary 12 , 19 98 , pet it io ne r pa idoff J.T.’s stud en t l oa ns in cu rred fo r un de rg radua te an d juris do ct orde gr ees by tran sf erri ng $5 3,0 05 fro m

BOH’ s ba nkacco un t t o the Depa rtment o f Edu cat io n. Pe ti ti on er al so us edBOH fun ds to pa y forJ.T.’s ba r ex am

pre pa rat io n c ou rs e. Whe n J .T. was acc ep te d t o New Yo rk Uni ve rs ity

Sch oo l o f Law to co m

pl et e anLL.M. intax at io n, p et it io ne r tr an sf erre d $1 42 ,00 0 t o J .T. os te ns ib ly to co ve r th e co stof tui ti on an d h ou si ng inNew York Ci ty. Mr. Bak er s pe ci fic al ly den ie d p et it io ne r’s reque stth atBOH co ve r th e co st s as so ci at edwith J .T.’ s s ch oo li ng . Peti ti on er al so wrot e ch eck s fo r Kel ly’ s tui ti on- 18 -

[* 18 ] an d re ntwhi le sh e was at c ol le ge an d wro te ch eck s t o c ov er the co stof tu to rin g fo r Patric k. Mrs . O’ Neal als o u se d B OH fun ds forth e ch il dr en ’s sch oo li ng . Mrs
. O’ Neal wrot e ch eck s o n B OH’ s ch eck in g a cco un t fo r bo th J.T.’s an d Kel ly’ s tu it io n. Sh e al so wrot e ch eck s fo r Kel ly’ s re ntan d wro te a ch eckto Kati e’s hi gh
sc ho ol for$2 75 for

Kati e’s y earb oo k. d. Rea l Es ta te Purch as es Pet it io ne rs als o u se d B OH andAPAG m on ey to pu rch as e v ari ou s re al pr op ert ie s, n on e o f whi chha d a ny relat io ns hi p t o the co m pani es ’ m is si on of
crea ti ng a publ ic ly trad edau to m al l co rp or at io n. OnJu ly 29, 1 99 4, p et it io ne r cau se d B OH to pu rch as e 1 23 21 Cree kwo odLane inCarm el , Ind iana , for$2 39 ,88 6 fro m fri en ds , Tho m as an d B arb ara Harris . Peti ti on ers ha d p rev io us ly owne d 12 32 1 C reekwoo d Lan e an d h adde fau lt edonth ei r m ortg ag e; th e Harri se s h ad pu rch as edth e p ro pe rty at a s he rif f’s sa le . In co njunc ti onwith B OH’ s p ur ch as e o f 12 32 1 C reekwoo d Lan e, pe ti ti on er i ss ue d c he ck s t ot al in g $ 75 ,00 0 o n B OH’ s ch eck in g a cco un t t o M r. Harri s t o re pa y hi m forpe rs on al lo an s i n the same am ount . In19 94 pe ti ti on ers pu rch as edth e Sm ur f Farm inJ.T.’s an d Kel ly’ s n am es , na m edaft er the m in ia tu re h or se th atpe ti ti on ers ha d p rev io us ly hou se d a t the Bay- 19 -

[* 19 ] Hil l Fa rm . After M r. Pal m er ev ic te d p et it io ne rs fro m th e Bay Hill Farm , th ey m ov edth ei r pe rs on al bu il di ng s an d ani m al s t o the Sm ur f Farm . Peti ti on ers hi redEric R ei d t o l iv e o n the Sm ur f Farm an d l oo k a fte r th ei r an im al s. Ch eck s t o Mr. Re idwere wri tt enon BOH’ s ch eck in g a cco un t. Pet it io ne rs vi si te d the Sm ur f Farm with the ir c hi ldrenon Sund ay s; ex cep t fo r on e v is itby Mr. Bak er, BOH
em pl oyees n ev er v is it edth e farm . On May 23 , 19 94 , pet it io ne r ex ecu te d a qu it cl ai m de edon be ha lf o f J.T. an d Kel ly tran sf erri ng th e Sm

ur f Farm to Mr. Bak er. On Dec em

be r 22 , 19 97 , pet it io ne r us eda ch eckfor$1 46 ,44 6 fr om BOH’ s ch eck in g a cco un t t o m ak e fi na l p aym en t fo r th e Sm ur f Farm . Peti ti on ers als o hi redRic ha rdHend ers on to pe rfo rm m ai nt en an ce an d i m

pr ov em en ts to th e v ari ou s farm s as well as t he ir p ers on al res id en ce, p et it io ne r’s fathe r’s res id en ce, an d 9 09 0 Bay H il l Bo ul ev ard(di sc us se d i n fu rth er d et ai l b el ow) . Mr. Hen de rs on was p ai d with c he ck s fr om

BOH’ s ch eck in g a cco un t, d es pi te in vo ic es ’ be in g a dd res se d t o pe ti ti on er p ers on al ly. Pet it io ne rs pu rch as edfiv e o th er farm s wi th BOH fun ds . On Dece m be r 27 , 19 95 , pet it io ne r pu rch as edth e Alb a Farm for $2 06 ,32 6 u si ng BOH’ s ch eck in g acco un t an d t it le d i t i n B OH’ s n am e. On J un e 2 0, 1 99 5, p et it io ne r m ad e a do wnp aym en t o n the Dees e Farm by execu ti ng a ch eckfor$2 5,0 04 fro m BOH’ s ch eck in g a cco un t. OnFeb ru ary 8, 1 99 6, p et it io ne r m ad e a s eco ndpa ym en t o n the- 20 -

[* 20 ] Dees e Farm

by execu ti ng a $2 5,0 00 ch eckon BOH’ s ch eck in g a cco un t. On Ja nu ary 23 , 19 97 , pet it io ne r us eda ch eckfor$9 9,9 41 fro m BOH’ s ch eck in g acco un t t o m ak e fi na l p aym en t fo r th e Dees e Farm . The o wne rs of t he Dees e Farm tra ns ferr editto BOH onFeb ru ary 7, 1 99 7. Othe r farm s p ur ch as edwith B OH
m on ey in cl ud e: (1) th e Bra nn anFarm in19 97 for

$4 4,6 36 , (2) th e Po ire t Fa rm in 19 97 for$3 0,6 42 , and(3) th e Walse r Farm in19 98 for$2 9,9 57
. Afte r Mr. Pa lm er ev ic te d p et it io ne rs fro m th e Bay Hill Farm

in19 94 , pe ti ti on er m ov edhi s p ers on al off ic e to 84 84 Bay Hil l Bo ul ev ard , Orlan do , Flo rid a, a h ou se own edby pet it io ne r’s go odfri en d J ul ian Lau gh in gh ou se . Peti ti on er co nduc te d h is pe rs on al affa irs as we ll as B OH/APAG b us in es s fr om 84 84 Bay Hil l Bo ul ev ardfro m

19 94 to 19 98 . In 1 99 5 M r. Laug hi ng ho us e fi le d two s ep arat e lawsu it s ag ai ns t p et it io ne r to ev ic t h im fro m 84 84 Bay Hil l Bo ul ev ardforfai lu re to pa y ren t an d fo r fai lu re t o re pa y a $1 00 ,00 0 l oa n. Mr . Laug hi ng ho us e wit hd rew th e la wsu it s o n J ul y

27 , 19 95 . In Se pt em

be r, Nov em

be r, an d Dec em

be r 19 95 pe ti ti on er ex ecu te d c he ck s t ot al in g $ 75 ,01 2 o n B OH’ s ch eck in g a cco un t m ad e pa y ab le to Mr. Lau gh in gh ou se . Mr. Lau gh in gh ou se als o o wne d 9 09 0 B ay Hil l Bo ul ev ard , Orlan do , Flo rid a, whi chhe us edas h is pe rs on al res id en ce. On J ul y 30 , 19 97 , pet it io ne r en te redin to
anag reem en t wi th Mr. Lau gh in gh ou se to have BOH pu rch as e th e res id en ces at- 21 -

[* 21 ] 84 84 Bay Hil l Bo ul ev ardan d 9 09 0 B ay Hil l Bo ul ev ard . Mr. Lau gh in gh ou se tra ns ferr ed90 90 Bay Hil l Bo ul ev ardto BOH, subjec t t o ali fe i nt eres t fo r hi m se lf, vi a warra nt y

de edon Ju ly 30, 1 99 7. Th e warra nt y de edrefl ect s tha t M r. Lau gh in gh ou se was p ai d $ 90 0,0 00 for90 90 Bay Hil l Bo ul ev ard . On Feb ru ary 25 , 19 98 , pet it io ne r pu rch as eda va can t l otad jacen t t o 8 48 4 B ay

Hil l Bo ul ev ardus in g $1 44 ,93 4 i n B OH fun ds . The l otwas z on edforres id en ti al us e an d h adno bu si ne ss pu rp os e. On J un e 1 5, 1 99 7, p et it io ne rs lea se d aco nd om in iu m with B OH fun ds at 13 56 5 Ken si ng to n P la ce i n C arm el , Ind iana , for pe rs on al us e. Pet it io ne rs ha d
co ns id eredpe rs on al ly leas in g 1 35 65 Kens in gt on Pla ce as earl y as S ep te m

be r 26 , 19 95 . In 1 99 7 a nd19 98 pe ti ti on ers sp en t $ 23 5,8 20 an d $ 39 ,86 0 o f BOH fund s, res pe ct iv el y , onde co rat io ns an d re ntfor13 56 5 Ken si ng to n P la ce. Pet it io ne r cat eg or iz edth e ex pe ns es ass oc ia te d wi th 13 56 5 Ken si ng to n P la ce as “ co rp or at e co nd o e xp en se s” inBOH’ s g en eral led ge r. No BOH em pl oyees e ve r vi si te d 13 56 5 Ken si ng to n P la ce, b utMrs . O’ Neal an d the O’ Neal ch il dr enst ay edth ere du rin g s umm ers an d C hr is tm as va cat io ns .

3. Pet it io ne r’s Dis m is sa l Fr om BOH an d APAG Inlat e Aug us t 1 99 8 Kev in Ran ke l, a fi na nc ia l ad vi se r em pl oyed b y BOH
an d APAG, d is co ve redpe ti ti on ers ’ ex te ns iv e p ers on al us e o f BOH an d APAG- 22 -

[* 22 ] fun ds . Mr. Ran ke l re si gn edup ondi sc ov ery of pe ti ti on ers ’ us e o f BOH an d APAG fun ds bu t n otbe fo re s ho win g apo rti on of t he BOH ge ne ral led ge r to
an ot he r BOH em

pl oyee, Mi ch ael Qui nn . Mr. Qui nn imm ed ia te ly call edMr. Bak er to th e o ffi ce. Me ss rs . Qui nn an d B ak er d is co ve redth atpe ti ti on ers ha d s pe ntin
ex ces s o f $1 0 m il li on of B OH andAPAG fun ds on no nb us in es s ex pe ns es . Mr. Bak er t erm in at edpe ti ti on er’s em pl oym en t atBOH an d APAG o n S ep te m be r 2, 19 98
. III. Afte rm ath o f Pet it io ne rs ’ Man ag em en t o f BOH an d APAG Fu nd s A. BOH an d APAG Ba nkrupt ci es On Oct ob er 9 , 19 98 , BOH andAPAG fil edvo lu nt ary pe ti ti on s fo r rel ie f pu rs ua ntto ch ap te r 11 of t it le 11 of t he Uni te d S tate s C od e. As p artof t he ba nkrupt cy

pro ceed in gs , BOH andAPAG fil edanadve rs ary pr oc eed in g a ga in st pe ti ti on ers an d the ir f

ou r adul t ch il dr en , all eg in g tha t the y ha d fr au du le nt ly tra ns ferr edass et s fr om

BOH an d APAG t o the m se lv es forpe rs on al us e. On Aug us t 9 , 20 00 , th e b an krup tc y co urt fo un d i n fa vo r of

BOH an d APAG i n the adve rs ary pr oc eed in g a ndis su eda fi na l ju dg m en t ag ai ns t p et it io ne r an d fi nd in gs of factan d c on cl us io ns of l aw an d fi na l ju dg m en t ag ai ns t M rs . O’ Neal , J.T., Kell y , an d Kat ie . The b an krup tc y co urt fo un d tha t p et it io ne rs an d J .T., Kelly, andKati e were fr au du le nttra ns fere es of B OH andAPAG. Furthe r, th e b an krup tc y co urt- 23 -

[* 23 ] fou ndth atMrs . O’ Neal kn owi ng ly andact iv el y parti ci pa te d i n the sch em e to frau du le nt ly dep le te BOH an d APAG as se ts . B. Pet it io ne r’s Co nv ic ti on Sp eci al Agen t An ne tt e Waldo n (S A W al do n) was a ss ig ne d t o i nv es ti ga te
an y tax -rel at edcri m es pe ti ti on er m ay ha ve co m

mitte d i n re la ti on to hi s s pe nd in g of BOH’ s an d APAG’s m on ey be twee n 1 99 4 a nd19 98 . SA W al do n d et erm in ed th atth ere wer e two co m

po ne nt s t o p et it io ne r’s un rep orte d i nc om e: (1) in co m e di sg ui se d a s l oa ns an d (2 ) in co m e cl as si fie d a s b us in es s ex pe ns es rel at edto pu rch as es of p ers on al ass et s an d e xp en se s fo r th os e as se ts . SA W al do n e xc lu de d fro m th e se co ndcat eg ory

cert ai n aut om ob il es th atpe ti ti on er was ab le to pro ve were u se d fo r bu si ne ss pu rp os es . Peti ti on er co op erat edwith h er i nv es ti ga ti on on ly aft er an ot he r ta rg etof the in ve st ig at io n b eg anco op erat in g wi th th e Gov ern m en t. As a re su ltof S A W al do n’s i nv es ti ga ti on , pet it io ne r was in di ct edby a gran d jury on 4 9 c ou nt s o f m ai l fr au d, 3 0 c ou nt s o f m on ey lau nd eri ng , and3 co un ts of fil in g fa ls e in co m e ta x re tu rn s u nd er s ect io n 7 20 6( 1) fortax y ears 19 96 , 19 97 , and 19 98 . The g ran d jury

de te rm in edth atfortax y ears 19 96 th ro ug h 1 99 8 p et it io ne r wil lfu ll y m ad e an d s ub sc rib edFo rm s 1 04 0, U.S. In di vi du al Inc om e Tax Return, whi chhe kn ew to be fal se , invi ol at io n o f se ct io n 7 20 6( 1) . Furt he r, th e g ran d jury- 24 -

[* 24 ] de te rm in edth atfortax y ear 1 99 8, p et it io ne r act edwith i nt en t t o e ng ag e in
co nduc t co ns ti tu ti ng a vi ol at io n o f se ct io ns 72 01 an d 7 20 6. On Dec em

be r 23 , 20 05 , pet it io ne r pl ead edgu il ty to two co un ts of f il in g fal se in co m e ta x re tu rn s p ur su an t t o s ect io n 7 20 6( 1) fortax y ears 19 97 an d 1 99 8. Inth e p le a ag reem en t p et it io ne r ag reedth atm on ey cat eg or iz edas l oa ns an d
m on ey di sg ui se d a s b us in es s ex pe ns es were i ns te adin co m e to hi m . Peti ti on er ag reedth athe ha d re cei ve d u nr ep orte d i nc om e fo r th e ta x years a t i ss ue inth e fo ll owi ng am ou nt s:
Tax y ear In co m e d is gu is edas

lo an s In co m e d is gu is edas

bu si ne ss ex pe ns es Tot al 19 94 $2 11 ,09 1 $7 5,0 00 $2 86 ,09 1 19 95 56 8,2 32 35 6,3 71 92 4,6 03 19 96 74 6,8 86 21 7,4 40 96 4,3 26 19 97 1,4 61 ,90 8 1,5 57 ,30 0 3,0 19 ,20 8 19 98 50 7,5 13 86 9,1 84 1,3 76 ,69 7 Tota l 3,4 95 ,63 0 3,0 75 ,29 3 6,5 70 ,92 3 1 All fig ur es inth is tab le were t ak enfro m pe ti ti on er’s p le a ag reem en t. Itis 1 un cl ear wh y

th e p le a ag reem en t’s ca lc ul at io n o f th e to ta l am ountof i nc om e di sg ui se d a s b us in es s ex pe ns es an d the to ta l am ou ntof u nr ep orte d i nc om e is $2 le ss th anth e su m

of t he se same am ou nt s fo r 19 94 -9 8.- 25 -

[* 25 ] IV. Pet it io ne rs ’ Tax Returns Fo r 19 94 -9 8 Pet it io ne rs ti m el y

fil edth ei r 19 94 tax return, i n wh ic h the y rep orte d wag es of $9 ,68 7 a ttrib ut ab le to in co m e earne d b y Mrs . O’ Neal as areg is te rednu rs e an d ta xabl e in te res t i nc om e o f $4 . Peti ti on ers cla im eda $3 ,00 0 c ap it al lo ss an d a $6 ,10 1,5 09 NOL carry ov er, reduc in g the ir i nc om e to -$6 ,09 4,8 18
. Pet it io ne rs ti m el y

fil edth ei r 19 95 tax return, i n wh ic h the y rep orte d wag es of $4 ,45 2 a ttrib ut ab le to in co m e earne d b y Mrs . O’ Neal as areg is te rednu rs e an d ta xabl e in te res t i nc om e o f $1 86 . Peti ti on ers cla im eda $3 ,00 0 c ap it al lo ss an d a $6 ,09 1,8 22 NOL carry ov er, reduc in g the ir i nc om e to -$6 ,09 0,1 84
. Pet it io ne rs ti m el y

fil edth ei r 19 96 tax return, i n wh ic h the y rep orte d wag es of $1 ,20 0 a ttrib ut ab le to in co m e earne d b y Mrs . O’ Neal as areg is te rednu rs e, $9 ,47 2 i n t ax ab le di st rib ut io ns fro m ret ire m en t p lans , andtax ab le in te res t i nc om e of $2 49 . Peti ti on ers cla im eda $3 ,00 0 c ap it al lo ss an d a$6 ,08 7,3 70 NOL
carry ov er, reduc in g the ir i nc om e to -$6 ,07 9,4 49
. Pet it io ne rs ti m el y

fil edth ei r 19 97 tax return, i n wh ic h the y rep orte d wag es of $2 ,86 8 a ttrib ut ab le to in co m e earne d b y Mrs . O’ Neal as areg is te rednu rs e an d ta xabl e in te res t i nc om e o f $3 25 . Peti ti on ers cla im eda $3 ,00 0 c ap it al lo ss an d a $6 ,08 6,1 70 NOL carry ov er, reduc in g the ir i nc om e to -$6 ,08 5,9 77
.- 26 -

[* 26 ] Pet it io ne rs fil edth ei r 19 98 tax return l at e o n Au gu st1, 2 00 1, i n wh ic h the y rep orte d wag es of $ 2,0 05 attrib ut ab le to in co m e earne d b y Mrs . O’ Neal as a reg is te rednu rs e an d t ax ab le in te res t i nc om e o f $5 03 . Peti ti on ers cla im eda $3 ,00 0 cap it al lo ss an d a$6 ,08 4,1 65 NOL carry ov er, reduc in g the ir i nc om e to -$ 6,0 84 ,65 7. Pet it io ne rs fai le d t o m ak e an y est im at edtax pa y

m en ts forth e 1 99 4, 1 99 5, 19 96 , 19 97 , and19 98 tax y ears . V. Not ic e o f Defi ci en cy Res po nd en t i ss ue d ano ti ce o f de fic ie nc y to pe ti ti on ers on Nov em be r 6, 20 09 , fortax y ears 19 94 to 19 98 . The ad jus tm en ts to in co m e in th e n ot ic e o f de fic ie nc y

are b as edonth e am ou nt s p et it io ne r adm it te d t o re cei vi ng as i nc om e in hi s p le a ag reem en t. Ad di ti on al ly, th e n ot ic e o f de fic ie nc y di sa ll owe d i n fu ll pe ti ti on ers ’ NOL deduc ti on s ca rri edforwardfro m pri or y ears . OPINION I. St atut e o f Lim it at io ns A def ic ie nc y intax ge ne ral ly m

us t b e as se ss edwithi n thr ee years fr om th e da te on whi chth e return was fil ed . See s ec. 6 50 1( a). Howe ve r, if atax pa y er fi le s a fal se or f

rau du le ntreturn wi th th e in te ntto ev ad e ta x, the tax m ay be ass es se d a t
an y ti m e. Sec. 6 50 1( c)(1 ). Unl es s p et it io ne rs ’ returns for19 94 -9 8 wer e m ad e- 27 -

[* 27 ] fal se ly or frau du le nt ly w ith the in te ntto ev ad e ta x, the pe rio ds of l im it at io ns on ass es sm en t an d c ol le ct io n o f pe ti ti on ers ’ in co m e ta x fo r th os e y ears ha ve ex pi red
. Res po nd en t b ears th e b ur de n o f pr ov in g a n e xc ep ti on to th e g en eral li mit at io ns pe rio d. Se e Gou ldv. Co m m is si on er, 1 39 T.C. 41 8, 4 31 (20 12 ), aff’d, 55 2 F . App ’x 25 0 (4 th Cir . 20 14 ); Harla n v . Comm is si on er, 1 16 T.C. 31 , 39 (2 00 1) . Peti ti on er’s g ui lty pl ea u nd er s ect io n 7 20 6( 1) forin te nt io na ll y fil in g fa ls e returns fortax y ears 19 97 an d 1 99 8 d oe s n otinan d o f it se lf p ro ve th atsec ti on 65 01 (c) app li es be cau se th e in te ntto ev ad e ta x i s n otanele m en t o f th e cri m e ch arg edun de r se ct io n 7 20 6( 1) ; h owe ve r, a g ui lty pl ea u nd er s ect io n 7 20 6( 1) m ay be co ns id eredinco nn ect io n wi th othe r fact s i n d et erm in in g wh ethe r an un de rp aym en t o f ta x was du e to frau d. Wrig htv. Co m m is si on er, 8 4 T.C. 6 36 , 64 3- 64 4 (1 98 5) . Res po nd en t’s b ur de n o f pr oo f un de r se ct io n 6 50 1( c)(1 ) is th e sa m e as hi s b ur de n t o p ro ve ap pl ic ab il ity of t he sec ti on 66 63 civ il frau d p en al ty, whi chis als o a t i ss ue he re. Gou ldv. Co m m is si on er, 1 39 T.C. at 4 31 ; Br own in g v . Co m m is si on er, T.C. Mem o. 2 01 1- 26 1. To sat is fy th atbu rd en , res po nd en t m us t sh ow b y cle ar an d c on vi nc in g e vi de nc e th at(1) anun de rp aym en t o f ta x e xi st s, an d (2 ) th e ta xp ay er i nt en de d t o e va de tax es kn own to be owi ng by con du ctin te nd ed to co nc eal , m is le ad , or o th erwi se pre ve ntth e co ll ect io n o f ta xe s. See Sad le r v.- 28 -

[* 28 ] Co m

m is si on er, 1 13 T.C. 99 , 10 2 (1 99 9) ; Pa rk s v . Comm is si on er, 9 4 T.C. 65 4, 6 60 -6 61 (19 90 ). Bec au se we fin d tha t the re ar e und erp aym en ts fortax y ears 19 94 -9 8, an d furth er, tha t tho se un de rp aym en ts are at tri bu tabl e to pe ti ti on ers ’ frau du le ntin te nt , th e p eri odof l im it at io ns for ass es sm en t o f de fic ie nc ie s i n p et it io ne rs ’ in co m e ta x fo r th e y ears at i ss ue rem ai ns op en . II. Defi ci en ci es inTax fo r Tax Years 19 94 -9 8 A fin di ng of f

rau d u nd er s ect io n 6 66 3 re qu ire s u s t o fi rs t fi ndth atth ere was anun de rp aym en t o f ta x fo r eac h o f th e ta x years i n i ss ue . This cas e al so ask s u s t o ex am in e d efi ci en ci es inpe ti ti on ers ’ in co m e ta x fo r th e ta x years a t i ss ue . For pu rp os es of s ect io n 6 66 3 a ndas r el ev an t h ere, s ect io n 6 66 4( a) d efi ne s the term

“un de rp aym en t” iness en ti al ly the same term s as th e te rm “ de fic ie nc y ” is de fin ed by sect io n 6 21 1. Se e Fel le r v. C omm is si on er, 1 35 T.C. 49 7, 5 07 (20 10 ) (“ Ina cas e in vo lv in g ade fic ie nc y an d fr au d i n wh ic h n o e xc es s wi th ho ld in g c red it s ar e cl ai m ed , * * * the term s ‘def ic ie nc y ’ an d ‘un de rp aym en t’ canbe us ed in te rch an ge ab ly.”); s ee al so Ran d v . Comm is si on er 1 41 T.C. 37 6, 3 86 -3 87 (20 13 ) (“ Co ng res s ex pr es sl y

in di cat edth atun co up li ng th es e te rm s was no t i nt en de d t o rem ov e th ei r de fin it io na l n ex us .”). As tho se term s ar e u se d h ere, anun de rp aym en t
orde fic ie nc y

is equa l t o the am ou ntby whi chth e ta x i m po se d b y th e Co de- 29 -

[* 29 ] ex ceed s the am ou ntsh own as t he tax by pet it io ne rs on th ei r return fo r eac h of th e ta x years a t i ss ue . See s ecs . 62 11 (a), 6 66 4( a). To p ro ve anun de rp aym en t, the Co m m is si on er i s n otrequi redto est ab li sh th e p reci se am ountof t he de fic ie nc y de te rm in edby him . DiLeo v. Co m m is si on er, 96 T.C. 85 8, 8 73 (19 91 ), aff’d, 9 59 F.2d16 (2dCir . 19 92 ). Howev er, h e can no t
m eethi s b ur de n o f pr oo f by m erel y rel y in g o n the tax pa y er’s fai lure t o p ro ve erro r in th e d et erm in at io n o f th e d efi ci en cy . Id. (ci ti ng Ots uk i v . Commis si on er, 5 3 T.C. 96 , 10 6 (1 96 9) , andPig m anv. Co m m is si on er, 3 1 T.C. 3 56 , 37 0 (1 95 8) ). The de fic ie nc y

de te rm in at io n d oe s n oten joy it s u su al pre su m

pt io n o f co rrec tn es s un le ss th e Co m

m is si on er es tabl is he s an un de rp aym en t b y cle ar an d c on vi nc in g ev id en ce. Id .; s ee al so Park s v . Comm is si on er, 9 4 T.C. at66 0- 66 1 (“ W e m us t b e care fu l i n s uc h c as es no t t o b oo ts trap afin di ng of f rau d upo n atax pa y er’s fai lu re to pro ve res po nd en t’s d efi ci en cy de te rm in at io n e rro ne ou s.”)
. The Co m m is si on er m ay

pro ve anun de rp aym en t b y pro vi ng a li ke ly sou rce of th e unr ep orte d i nc om e. DiLeo v. Co m m is si on er, 9 6 T.C. at87 3. Al te rn at iv el y , whe re the tax pa y er al le ge s a n on ta xabl e so ur ce o f in co m e, th e Co m m is si on er m ay sa ti sf y hi s b ur de n b y

di sp ro vi ng th e n on ta xabl e so ur ce s o a ll eg ed . Id. at87 3- 87 4. Res po nd en t ar gu es th atpe ti ti on ers fai le d t o re po rt i nc om e fro m th ei r m is us e o f BOH an d APAG fu nd s fr om 19 94 to 19 98 , andacco rd in gl y , a de fic ie nc y ex is ts for- 30 -

[* 30 ] each of t he y ears at i ss ue . Peti ti on ers arg ue th atth e am ou nt s re cei ve d fr om BOH an d APAG were lo an s t o p et it io ne r an d the refo re were pro pe rly excl ud ed fro m in co m e. Pet it io ne rs alt ern at iv el y arg ue th atif we fi ndth atth e am ou nt s rece iv edfro m

BOH an d APAG were in co m e, th ey ha d s uf fic ie ntNOL carry ov er de du ct io ns to off

se t an y in co m e an d the refo re n o d efi ci en cy ex is ts foran y

of t he y ears at i ss ue . W e ag ree wi th res po nd en t tha t the fun ds pe ti ti on ers to okfro m BOH an d APAG were in co m e dur in g the y ears at i ss ue an d fu rth er tha t p et it io ne rs are n oten ti tl edto th e cl ai m edNOL carry ov er d educ ti on s. A. Whe th er Am ou nt s R ecei ve d Were In co m e, Loans , or B us in es s Exp en se s The re ar e two co m

po ne nt s t o p et it io ne rs ’ un rep orte d i nc om e: (1) in co m e di sg ui se d a s l oa ns , and(2) in co m e cl as si fie d a s b us in es s ex pe ns es rel at edto pu rch as es of p ers on al ass et s an d e xp en se s fo r th os e as se ts . W e ad dr es s ea ch
co m po ne ntof t he am ou nt s t ak enfro m BOH an d APAG. 1. Am ou nt s Di sg ui se d a s Lo an s Res po nd en t h as est ab li sh edby clearan d c on vi nc in g e vi de nc e th atth e am ount s t ak enby pet it io ne rs fro m BOH an d APAG were in co m e rathe r th anlo an s. Pet it io ne rs ne ve r dr ew sa larie s fr om BOH or APAG an d wer e h eav il y in de bt edto cred it or s dur in g the y ears at i ss ue . Howev er, the y m ai nt ai ne d alav is h l ife sty le- 31 -

[* 31 ] th ro ug h l ib eral us e o f BOH an d APAG fu nd s. Th ei r ex pl an at io n tha t the
am ount s t ak enfro m

BOH an d APAG were lo an s an d n otin co m e is no t cr ed ib le in li gh t o f th e ev id en ce re sp on de ntha s p res en te d t o the co nt rary. Fi rs t, p et it io ne r’s 19 94 fee ag reem en t was ex ecu te d wi th Mr. Bak er pe rs on al ly, rathe r th anwith B OH or APAG. It i s u nr eas on ab le to be li ev e th at pe ti ti on er, a l on gt im e b us in es sm an , wou ldth in k tha t h is pe rs on al ag reem en t wi th Mr. Ba ke r co ul d s erv e as anex cu se to dra in m on ey fro m BOH an d APAG. Add it io na ll y , th e lawsu itth atun de rp in ne d the 19 94 fee ag reem en t en de d i n 1 99 4 in fav orof GM C an d GM AC. Thu s, the 19 94 fee ag reem en t i s n ota pl au si bl e ex pl an at io n fo r pe ti ti on ers ’ si ph on in g o f m on ey fro m BOH an d APAG fro m

19 94 to 19 98
. Seco nd , pet it io ne rs can no t tran sm ut e th e n atur e o f th e am ount s t ak enfro m in co m e to lo an s m erel y

by call in g the m

so vi a n ot at io ns inBOH’ s g en eral led ge r an d the si gn in g o f a p ro mis so ry no te . Whe th er a b on a fi de de bt or -cre di to r rel at io ns hi p e xi st s i s a que st io n o f fac t t o b e d et erm in edup on a co ns id erat io n o f al l the pe rti ne ntfact s. See Habe r v. C omm is si on er, 5 2 T.C. 2 55 , 26 6 (1 96 9) , aff’d, 4 22 F.2d19 8 (5 th Cir .19 70 ). The m os t i m po rtantele m en ts of t hi s de te rm in at io n a re a g oo d- fai th in te nton th e p artof the de bt orto rep ay th e lo anan d a g oo d- fai th in te ntof t he cred it orto en fo rce r ep aym en t. Fi sh er v . Comm is si on er,- 32 -

[* 32 ] 54 T.C. 90 5, 9 09 -9 10 (19 70 ). Co urts ex am in e v ari ou s fa ct or s t o d et erm in e whe th er the pa rti es ha d the requi si te go od -fai thin te nt , in cl ud in g wh ethe r th e fo ll owi ng ele m en ts ex is te d: (1) a writ te n l oa n a gr eem en t, (2 ) a fi xe d s ch edul e fo r rep aym en t, (3 ) an y

reque stforsec ur ity

or c ol la te ral , (4) in te res t ch arg edon th e lo an , (5) a de m an d fo r rep aym en t, (6 ) a m em or ia li zat io n o f th e lo aninth e p art ie s’ bo ok s, (7 ) an y

rep aym en ts actua ll y

m ad e, an d (8 ) th e b orro wer’s so lv en cy at t he ti m e o f th e lo an . See, e.g ., Rick ardv. Co m m is si on er, T.C. Mem o. 2 01 0- 15 9. The se fact or s wei gh he av il y ag ai ns t p et it io ne rs ’ arg um en t tha t the re were bo nafid e lo an s b etweenth em an d B OH andAPAG. In co nt ras t, the y bo ls te r res po nd en t’s ev id en ce tha t the fun ds tak enfro m BOH an d APAG were in co m e to pe ti ti on ers . There was n o wri tt enlo anag reem en t, o nl y a pr om is so ry

no te si gn ed by pet it io ne r th atwas n ev er s ho wn t o M r. Bak er o r an y othe r co rp or at e o ffi cers at BOH. There was n o fi xe d s ch edul e fo r rep aym en t, n or were the re d em an ds for rep aym en t o r an y

rep aym en ts actua ll y

m ad e, in lar ge pa rt b ecau se pe ti ti on er ex ecu te d the pro m is so ry

no te insec recy. Pet it io ne rs di d n otoff er an y sec ur ity or co ll at eral an d d idno t p ay any in te res t o n the lo an . Furt he r, pe ti ti on ers were in so lv en t b ecau se of t he jud gm en ts ag ai ns t the m rel at in g t o the ir e arl ie r th eftfro m Mes sr s. Pa lm er an d M cCo rm ack . Mor eo ve r, ne ithe r Mr. Bake r no r an y othe r rep res en ta ti ve of B OH or APAG au th or iz edpe ti ti on ers to “ le nd ” th em se lv es va st- 33 -

[* 33 ] su m s o f co m

pa ny m on ey . W e fi ndth atpe ti ti on ers di d n otha ve a go od -fai th in te ntto rep ay

th e am ou nt s t ak enan d the re was no ge nu in e d eb to r-cr ed it or rel at io ns hi p. Thi rd , pet it io ne rs arg ue th atpe ti ti on er d is cu ss edwith h is C.P.A., Cha rle s Ro ach , whet he r to tre atth e fu nd s re cei ve d fr om BOH an d APAG as in co m e o r lo an s. Pet it io ne rs co nt en d tha t the y co nc lu de d tha t ev enif the “ lo an s” were in co m e, th ey

wou ldno t b e li ab le foran y in co m e ta x b ecau se th ey ha d NOL
carry ov er d educ ti on s s uf

fic ie ntto off

se t an y su chin co m e. Mr. Ro ach di d n ot te st ify, andwe are l eftwith o nl y pe ti ti on er’s uns ub st an ti at edtes ti m on y reg ard in g di sc us si on s h e m ay

ha ve ha d abo utth e ta x treatm en t o f th e am ou nt s re cei ve d fr om BOH an d APAG. Pet it io ne r’s de sc rip ti on of h is di sc us si on s wi th Mr. Ro ach bo ls te rs our co nc lu si on th atth e am ou nt s re cei ve d wer e n ev er b on a fi de lo an s. Fo r th e fo reg oi ng reas on s, we fi ndth atth e am ou nt s re cei ve d wer e n otlo an s b ecau se th ey were n otrece iv edun de r th e 1 99 4 fe e ag reem en t an d p et it io ne rs ne ve r ha d a go od -fai th in te ntto rep ay an y am ou nt s re cei ve d fr om

BOH an d APAG. 2. Am ou nt s Di sg ui se d a s B us in es s Ex pe ns es Res po nd en t h as als o p ro ve n b y cle ar an d c on vi nc in g e vi de nc e th atth e am ount s d is gu is edas b us in es s ex pe ns es were i n fa ctin co m e to pe ti ti on ers . Mos t of th e so -cal le d b us in es s ex pe ns es ha d n o re la ti on sh ip to BOH’ s an d APAG’s- 34 -

[* 34 ] in te nd edpurp os e o f cre at in g apubl ic ly trad edau to m al l. In st ead , th ey in ur edso le ly to the be ne fitof p et it io ne rs an d the ir c hi ldren . Peti ti on ers ’ arg um en ts th atth e ex pe ns es ass oc ia te d wi thva rio us au to m ob il es an d re al est at e were i n fa ctbu si ne ss ex pe ns es of B OH andAPAG are n otcred ib le . For e xa m pl e, pe ti ti on ers arg ue th at“ cert ai n p arce ls of r eal est at e” were purch as edfor

“ in ve st m en t” or “ co rp or at e u se ”. Howev er, al l o f th e farm s p ur ch as edan d t it le d i n BOH’s an d APAG’s n am es were u se d e xc lu si ve ly by pe ti ti on ers an d the ir c hi ldren an d h adno fun ct io n o th er than e nt ert ai nm en t fo r th e O’N eal fam il y . Furt he rm or e, th e p ers on al res id en ces inFlo rid a an d the co nd om in iu m inInd ianainur ed
ex cl us iv el y

to th e b en efi t o f pe ti ti on ers ; ex cep t fo r so m e BOH an d APAG b us in es s pe ti ti on er p erfo rm edat 8 48 4 B ay Hil l Bo ul ev ard , BOH andAPAG em pl oyees ne ve r us edth es e p rem is es forBOH or APAG b us in es s. Ad di ti on al ly, SA W al do n reduc edth e am ount s at tri bu tabl e to au to m ob il e p ur ch as es be cau se so m e au to m ob il es ha d aleg it im at e b us in es s p ur po se ; the rem ai ni ng auto m ob il es were us edex cl us iv el y

forth e b en efi t o f pe ti ti on ers an d the ir c hi ldren . Pet it io ne rs att em

ptto si de st ep th e ch arac te riz at io n o f th e am ou nt s d is gu is ed
as bu si ne ss ex pe ns es by poi nt in g o utth atth e rea l es ta te an d aut om ob il es were ti tl edinBOH’ s an d APAG’s n am es . It i s wel l es tabl is he d tha t t ax co ns eque nc es are d et erm in edby sub st an ce an d n otm ere f orm . See, e.g ., Fran k Lyon C o. v .- 35 -

[* 35 ] Uni te d S ta te s, 4 35 U.S. 56 1, 5 73 (19 78 ) (“ The [Supr em e] Cou rt h as ne ve r reg ard ed‘ th e si m

pl e ex pe di en t o f dr awin g up p ap ers []’ * * * as co nt ro ll in g fo r ta x pu rp os es when th e o bjec ti ve eco no m ic real it ie s ar e to th e co nt rary.” (qu ot in g Co m m is si on er v . Tower, 3 27 U.S. 28 0, 2 91 (19 46 ))). Co m m an d o ve r pr op erty

or en joym en t o f it s ec on om ic be ne fit s i de nt ifi es th e rea l o wne r fo r Fed eral in co m e ta x p ur po se s. An de rs on v. Co m m is si on er, 1 64 F.2d87 0, 8 73 (7t h C ir. 1 94 7) , aff’g 5 T.C. 44 3 (1 94 5) . Peti ti on ers were the be ne fic ia l o wne rs of v ari ou s pr op ert ie s t it le d i n B OH’ s an d APAG’s n am es . Add it io na ll y , th ey be ne fit te d b y pa y in g e xp en se s re la te d t o tho se pro pe rti es fro m BOH’ s an d APAG’s acc ou nt s an d d is gu is in g the co st s as bu si ne ss expe ns es . Accor di ng ly, res po nd en t h as pr ov enby clearan d c on vi nc in g e vi de nc e th atth es e am ou nt s ar e in co m e to pe ti ti on ers rathe r th anbu si ne ss ex pe ns es of B OH andAPAG.

3. Co nc lu si on as t o Am ou nt s In cl ud ib le inInc om e Altho ug h n otco nc lu si ve as t o the pre ci se un de rs ta te m en t am ou nt , a ta xp ay er’s ad m is si on ina pl ea ag reem en t fr om a pr io r cri m in al pro ceed in g a s t o th e p reci se am ountby whi chhe un de rs tate d n etin co m e co ns ti tu te s s tro ng ev id en ce o f th e und ers ta te m en t am ou nt . See Ep hr em v. Co m m is si on er, T.C. Mem o. 2 01 4- 12 . Furt he r, pe ti ti on er’s co nv ic ti onpu rs ua ntto sec ti on 72 06 (1 ) fo r ta x years 1 99 7 a nd19 98 est op s h im fro m co nt es ti ng th atanun de rp aym en t ex is ts- 36 -

[* 36 ] forth os e ta x years. Se e, e.g ., Con si di ne v. Un it edSta te s, 6 83 F.2d12 85 , 12 87 (9t h C ir. 1 98 2) ; Wrig htv. Co m m is si on er, 8 4 T.C. at64 3- 64 4; Rei nh ardv. Co m m is si on er, T.C. Mem o. 2 01 5- 11 6. Pe ti ti on er ad m it te d i n h is pl ea ag reem en t to rece iv in g i nc om e in th e am ou nt s i de nt ifi edas h av in g b eendi sg ui se d a s l oa ns or bu si ne ss ex pe ns es . Peti ti on ers off er n o c red ib le ba si s fo r reduc in g the se am ou nt s. Co ns eque nt ly, pe ti ti on ers rece iv edun rep orte d t ax ab le in co m e o f $2 86 ,09 1, $9 24 ,60 3, $ 96 4,3 26 , $3 ,01 9,2 08 , and$1 ,37 6,6 97 in19 94 , 19 95 , 19 96 , 19 97 , and 19 98 , res pe ct iv el y . B. Ent it le m en t t o NOL Carry fo rwardDedu ct io ns Res po nd en t h as pro ve n b y cle ar an d c on vi nc in g e vi de nc e th atpe ti ti on ers rece iv edun rep orte d i nc om e dur in g e ach of the y ears at i ss ue . Howev er, pe ti ti on ers arg ue th atinth e ev en t we fi ndth e am ou nt s re cei ve d fr om BOH an d APAG were i nc om e, th ey ne ve rth el es s d o n otowe any add it io na l Fe de ral in co m e ta x b ecau se th ey

ha ve su ffi ci en t NOL carry ov er d educ ti on s t o o ffs etth e rec ei ptof
an y in co m e. 1. Gen eral ly A pp li cab le S Co rp or at io n B as is Ru le s Gen eral ly, th e te rm

“ ne t o pe rat in g l os s” is de fin edinsec ti on 17 2( c) t o m ean th e ex ces s o f al lo wab le de du ct io ns ov er g ro ss in co m e. Taxp ay ers are en ti tl edto
anNOL deduc ti on forth e ag gr eg at e o f NOL carryback s an d c arryov ers to th e- 37 -

[* 37 ] tax ab le y ear. Se c. 17 2( a). Fo r ta xabl e y ears be gi nn in g a fte r Aug us t 5 , 19 97 , th e p eri odforanNOL carry ba ckis 2 years an d the pe rio d fo r anNOL carry ov er i s 20 y ears . Sec. 1 72 (b )(1 )(A). Fo r ta xabl e y ears be gi nn in g o n o r be fo re Au gu st5, 19 97 , th e p eri odforanNOL carry ba ckis 3 years andth e p eri odfor anNOL
carry ov er i s 1 5 years. Tax pa y er Re li ef Actof 1 99 7, Pub. L. No. 1 05 -3 4, s ec. 10 82 (a), 1 11 Sta t. at95 0. A sh areh ol de r of

anS co rp or at io n c andi rect ly deduc t h is or h er s ha re o f
en ti ty-lev el lo ss es inacco rd an ce wi th th e fl owt hr ou gh rul es of s ub ch ap te r S. See
se c. 13 66 (a). Th e lo ss es can no t ex ceedth e su m of t he sh areh ol de r’s ad

jus te d b as is in hi s o r he r st oc k a ndth e sh areh ol de r’s ad jus te d b as is inan y

in de bt edne ss of t he S co rp or at io n t o the sh areh ol de r. Sec. 1 36 6( d) (1 )(A) an d (B ). The d is al lo wed lo ss es m ay

be carr ie d fo rwardin de fin it el y an d c la im edwhen an d t o the ex te ntth at th e sh areh ol de r in crea se s h is or h er b as is inth e S co rp or at io n. Se e se c. 13 66 (d )(2 ). Add it io na ll y , th e b as is of ash areh ol de r’s st oc k i n a n S co rp or at io n i s reduc edby non ta xabl e d is tri bu ti on s b y th e co rp or at io n. Se c. 13 67 (a)( 2) (A). Thu s, p et it io ne r co ul d h av e cl ai m edlo ss es fro m th e Arn ol d P al m er d eal ers hi ps on ly to the ex te nthe ha d s uf fic ie ntst oc k b as is inth e co rp or at io ns or b as is inan y in de bt edne ss of t he co rp or at io ns .- 38 -

[* 38 ] Wha t co ns ti tu te s “ ad jus te d b as is of a ny ind eb te dn es s o f th e S co rp or at io n t o th e sh areh ol de r” und er s ect io n 1 36 6( d) (1 )(B) is a qu es ti on th atha s b een co ns id erednu m ero us ti m es by thi s an d o th er co urts . Gener al ly, m ere s ha reh ol de r gu aran ti es of S co rp or at io n i nd eb te dn es s fa il to sat is fy th e requi rem en ts of s ect io n 13 66 (d )(1 )(B) . Spe nc er v . Comm is si on er, 1 10 T.C. 62 , 83 (19 98 ); Es ta te of Leav it t v . Comm is si on er, 9 0 T.C. 2 06 , 21 1 (1 98 8) , aff’d, 8 75 F.2d42 0, 4 22 (4t h Ci r. 19 89 ); R ayno r v. C omm is si on er, 5 0 T.C. 7 62 , 77 0- 77 1 (1 96 8) . In Ra yno r v. Co m m is si on er, 5 0 T.C. at77 0- 77 1, we h el d tha t i nd ire ctbo rro win g d oe s n otgi ve ris e to in de bt edne ss fro m th e co rp or at io n t o the sh areh ol de r un ti l an d u nl es s the sh areh ol de r pa y s p artor a ll of the ob li ga ti on . Unt il th e sh areh ol de r actua ll y pa y s th e o bl ig at io n, “ ‘liab il ity ’ m ay ex is t, b utno t d eb t t o the sh areh ol de rs .” Id . at 7 71 ; se e al so Bro wn v . Comm is si on er, T.C. Mem o. 1 98 1- 60 8, 4 2 T.C.M . (CCH) 1 46 0, 14 64 (19 81 ) (“Notun ti l the gu aran to r pa y s o n the ob li ga ti on do es th e g ua ran to r
m ak e anactua l i nv es tm en t.”) , aff’d, 7 06 F.2d75 5 (6 th Cir .19 83 ). Furth er, fo r a lo anto crea te ba si s, the tax pa y er m us t m ak e aneco no m ic ou tl ay , whi chis
acco m pl is he d wh enth e ta xp ay er i nc ur s a c os t o n ath ird -p arty lo anor i s l eftpo or er in a m at eri al sen se aft er the tra ns act io n. Ma lo of v. Co m m is si on er, T.C. Mem o. 20 05 -7 5, af

f’d, 45 6 F .3d64 5 (6 th Cir . 20 06 ).- 39 -

[* 39 ] Howev er, the Co urt o f App eal s fo r th e Ele ve nt h C irc ui t, t o wh ic h a n app eal in th is cas e wou ldli e, ha s h el d tha t a s hareh ol de r who ha s g ua ran te eda lo anto an S co rp or at io n m ay

in crea se hi s b as is wher e, in subs tanc e, th e sh areh ol de r ha s bo rro wedfun ds an d s ub se qu en tl y adva nc edth em

to th e co rp or at io n. Se lfe v. Uni te d S tate s, 7 78 F.2d76 9, 7 73 (11 th Cir . 19 85 ). The C ou rt o f App eal s p art ia ll y ag reedwith the reas on in g o f th e Co urt o f App eal s fo r th e Si xt h C irc ui t i n B ro wn v. Co m m is si on er, 7 06 F.2d75 5 (6 th Cir . 19 83 ), th ataneco no m ic ou tl ay is requi redbe fo re a s hareh ol de r m ay in crea se hi s b as is inanS co rp or at io n; ho wev er, th e Co urt o f App eal s i n S el fe d is ag reedth ata sh areh ol de r m us t, i n a ll cas es , m ak e pa ym en ts on a lo anbe fo re i nc reas in g h is ba si s as a res ul t o f gu aran te ei ng th e lo an to th e co rp or at io n. Re lying on Pla nt at io n P at te rn s, In c. v. Co m m is si on er, 4 62 F.2d 71 2 (5 thCir . 19 72 ), th e co urt i n S el fe h el d tha t a s ha reh ol de r gu aran ty of a lo an 5
m ay be tre at ed , fortax pu rp os es , as an e qu ity in ve st m en t i n the co rp or at io n wh ere th e le nd er l oo ks to th e sh areh ol de r as th e p rimary ob li go r. Sel fe, 7 78 F.2dat 7 74
. The co urt i n S el fe al so no te d tha t the an al y si s i n P lant at io n P at te rn s fo cu se d o n
The U.S. Cou rt o f App eal s fo r th e Ele ve nt h C irc ui t was est ab li sh edon 5 Octo be r 1, 1 98 1, p ur su an t t o the Fif th Cir cu itCo urt o f App eal s R eo rg an iz at io n Act o f 19 80 , Pub . L. No. 96 -4 52 , 94 Sta t. 1 99 4. InBo nn er v . Cit y of P ric ha rd , 66 1 F .2d12 06 , 12 07 (11 th Cir . 19 81 ), th atco urt ad op te d the de ci si on s o f th e U.S. Co urt o f App eal s fo r th e Fi fth Cir cu itha nd eddo wn b efo re cl os e o f bu si ne ss on Sep te m be r 30 , 19 81 , as g ov ern in g l aw in th e Ele ve nth C irc ui t.- 40 -

[* 40 ] “ hi gh ly com

pl ex is su es of f

act ” an d tha t co ns id erat io n o f si m il ar i nqui rie s
m us t b e “ care fu ll y

ev al ua te d o n the ir o wn fa ct s” . Id. 2. Pet it io ne r’s Bas es inth e Arn ol d P al m er Deal ers hi ps Pet it io ne rs ’ br ie f do es no t i de nt ify the ex actam ou ntof NOLs cla im ed , bu t th e Co urt as su m es th at , pu rs uantto pe ti ti on ers ’ 19 94 -9 8 t ax returns , th e cl ai m ed NOLs ex ceed$6 m il li on . The cl ai m edNOL carry ov er d educ ti on s re la te to lo ss es 6
or ig in al ly repo rte d o n p et it io ne rs ’ 19 88 , 19 89 , and19 90 Fed eral in co m e ta x returns . The cl ai m edNOLs are p ur po rte dl y att rib ut ab le to flo wth ro ug h l os se s fro m th e Arn ol d P al m er d eal ers hi ps an d t ot al ed$6 ,11 1,3 55 fortax y ears 19 88 , 19 89 , and19 90
. The reco rdco nt ai ns no ev id en ce re li ab ly establ is hi ng pe ti ti on ers ’ ba se s, i f
an y , inth e Arn ol d P al m er d eal ers hi ps or t he ir e nt it le m en t t o NOLs ari si ng
Pet it io ne rs co nt en d tha t equi tabl e es to pp el pre cl ud es res po nd en t fr om 6 ch al le ng in g the ir c la im

to NOLs ari si ng in19 88 , 19 89 , and19 90 si nc e th os e lo ss es were n otqu es ti on edby the Int ern al Rev enue Serv ic e b efo re thi s ca se . Pet it io ne rs ’ arg um en t i gn or es th at“ [i]t i s wel l s et tl edth atwe m ay de te rm in e th e co rrec t am ountof t ax ab le in co m e o r ne t o pe rat in g l os s fo r a y ear n otinis su e (wh ethe r orno t the ass es sm en t o f a d efi ci en cy forth aty ear i s b arre d) as a pr el im in ary st ep inde te rm in in g the co rrec t am ou ntof ane t o pe rat in g l os s carry ov er t o atax ab le y ear i n i ss ue .” Lon e Mano r Farm s, In c. v. Co m m is si on er, 61 T.C. 43 6, 4 40 (19 74 ), aff’d wi th ou t p ub li sh edop in io n, 5 10 F.2d97 0 (3 d C ir. 19 75 ). Add it io na ll y , each tax y ear s tand s o n i ts own , andth e Co m m is si on er m ay ch al le ng e in a su ccee di ng y ear wh atwas c on do ne d o r ag reedto fora pr io r y ear. See R os e v . Comm is si on er, 5 5 T.C. 2 8, 3 1- 32 (19 72 ).- 41 -

[* 41 ] th eref

ro m . Peti ti on ers ha ve no t p ro vi de d a ny Form s 1 12 0S , U.S. Inco m e Tax Return fo r anS Co rp or at io n, o r Fo rm s 1 06 5, Sc he du le K-1, Pa rtn er’s Sh are o f In co m e, Deduc ti on s, Cr ed it s, et c., fo r an y of t he Arno ldPal m er d eal ers hi ps in whi chpe ti ti on er was a on e-thi rdsh areh ol de r. They con te ndth athe
co nt rib ut ed“ si gn ifi can t fu nd s” to th e d eal ers hi ps bu t d o n otid en ti fy an y sp eci fic do ll ar am ou nt s co nt rib ut ed . In co ntras t, the reco rdrefl ect s tha t p et it io ne rs
m is ap pr op ria te d a m ou nt s i n e xc es s o f $6 m il li on fro m th e Arn ol d P al m er de al ers hi ps du rin g the lat e 1 98 0s whi chth ey di d n otrep ort o n the ir 1 98 8 o r 19 89 in co m e ta x re tu rn . Furt he rm or e, th e NOLs rep orte d o n the 19 88 , 19 89 , and19 90 ta x re turn s ar e fac tu al ly inc on si st en t wi th eachothe r an d d o n otsupp ort a f in di ng th atpe ti ti on ers are en ti tl edto th e cl ai m edam ou nt s. Th e 1 98 9 a nd19 90 tax returns rep ort l arg er ca rry ov er am ou nt s than wh atwas re po rte d o n the 19 88 an d 19 89 returns , res pe ct iv el y , andpe ti ti on ers ha ve no t o ffer edan y expl an at io n t o ad dr es s the se in co ns is te nc ie s. Inad di ti on to th e fac t tha t p et it io ne rs si ph on edm on ey fro m th e d eal ers hi ps rathe r th anco nt rib ut in g c ap it al , pet it io ne r’s si gn in g o f th e Ju ly 199 0 p ro m is so ry no te do es no t co ns ti tu te in de bt edne ss fro m th e co rp or at io ns to hi m

withi n the
m ean in g o f se ct io n 1 36 6( d) (1 )(B) . Peti ti on ers ha ve pre se nt edno in fo rm at io n tha t Fo rdMo to r Cre di t l oo ke d t o p et it io ne r as th e p rimary ob li go r on th e n ot e, as- 42 -

[* 42 ] wou ldbe requi redun de r Sel fe. In st ead , tes ti m on y fro m Mr. Bl ackbu rn in di cat es th atMes sr s. Pa lm er an d M cCo rm ackwere the pri m ary ob li go rs on th e no te . In s um , pet it io ne r di d n otm ak e an y eco no m ic ou tl ay

on th e Ju ly 199 0 pr om is so ry

no te , no r was he lef

t p oo rer i n am at eri al sen se , as M es sr s. Pa lm er an d McC orm ackul ti m at el y

rep ai d the lo an . Like wis e, th ere i s n o e vi de nc e to in di cat e th atpe ti ti on er m ad e an y

eco no m ic ou tl ay

whenhe si gn edth e Aug us t 1 99 2 pr om is so ry

no te . Eve n i n c riminal cas es , wher e th e Gov ern m en t b ears th e b ur de n o f pr oo f be y on d areas on ab le do ub t, p ro of of u nr ep orte d i nc om e is su ffi ci en t t o e st ab li sh an un de rp aym en t o f ta x abs en t p ro of by the tax pa y er o f of

fs et ti ng expe ns es . Mon ro y v. Co m m is si on er, T.C. Mem o. 1 99 6- 54 0 (c it in g Un it edSta te s v . Hiet t, 5 81 F.2d 11 99 , 12 02 (5t h C ir. 1 97 8) , Elwertv. Un it edSta te s, 2 31 F.2d92 8, 9 33 -9 36 (9t h Ci r. 19 56 ), an d Un it edSta te s v . Ben de r, 21 8 F .2d86 9, 8 71 (7t h C ir. 1 95 5) ). Pet it io ne rs ha ve in tro du cedno ev id en ce, o th er tha n the ir u nc orro bo rat ed te st im on y , th atwou ldbo ls te r th ei r un subs tant ia te d c la im th atth ey ha d any bas es in th e d eal ers hi ps , andwe fin d tha t p et it io ne rs (1) lac ke d b as es inth e d eal ers hi ps , (2 ) were n oten ti tl edto NOLs fo r 19 88 -9 0, an d the refo re (3 ) do no t h av e NOL
carry ov ers th atwou ldoff se t the un rep orte d i nc om e fro m th e y ears inis su e. See, e.g ., Gou ldv. Co m

m is si on er, 1 39 T.C. 41 8 (f in di ng th atth e Co m

m is si on er’s- 43 -

[* 43 ] bu rd enas t o fr au d was m etwher e th e ta xp ay ers fai le d t o i nt ro du ce ev id en ce es tabl is hi ng th e ex is te nc e o r am ou ntof c la im edNOLs); Bro ok s v . Comm is si on er, 82 T.C. 41 3, 4 33 -4 34 (19 84 ) (“ Not withs tand in g re sp on de nt ’s bu rd enof p ro of as to frau d, the re co m es a ti m e whe n p et it io ne r m us t co m e fo rwardwith e vi de nc e in
supp ort o f hi s cl ai m edde fen se s[ .] * * * Pe ti ti on er’s fai lu re * * * to ex pl ai n the in cri min at in g e vi de nc e b y co min g fo rwardwith o th er ev id en ce i n s up po rt o f hi s co nt en ti on s ju st ifi es th e in fere nc e th atsu chev id en ce d oe s n otex is t o r wou ldbe
un fav or ab le to hi m .” (ci ta ti on s o m it te d) ), aff’d wi th ou t p ub li sh edop in io n, 7 72 F.2 d 9 10 (9t h C ir. 1 98 5) ; Gre env. Co m m is si on er, T.C. Mem o. 2 01 0- 10 9, 9 9 T.C.M. (CC H) 14 44 , 14 49 (20 10 ) (“ Res po nd en t h as als o s ho wn tha t p et it io ne rs cl ai m edde du ct io ns for* * * NOL carry fo rward s * * * to whi chth ey were n ot
en ti tl edan d wh ic h re su lt edinun de rp aym en ts of t ax .”). Res po nd en t h as de m on st rat edth ro ug h c le ar an d c on vi nc in g e vi de nc e th at pe ti ti on ers were n oten ti tl edto th e NOL deduc ti on s the y cla im edon th ei r 19 88 -9 0 ta x re turn s, an d p et it io ne rs do no t the refo re h av e NOL carryove rs fro m th os e y ears to off se t the un rep orte d i nc om e dur in g the y ears at i ss ue . Accor di ng ly, res po nd en t ha s m ethi s b ur de n o f pr oo f to sh ow tha t the re i s an un de rp aym en t fo r eac h o f th e ta x years a t i ss ue .- 44 -

[* 44 ] Res po nd en t m ak es two arg um en ts as t o wh y pe ti ti on ers are n oten ti tl edto th e cl ai m edNOL deduc ti on s. Fi rs t, re sp on de ntarg ue s tha t p et it io ne rs lac ke d ba se s i n the Arno ldPal m er d eal ers hi ps su ffi ci en t t o a ll ow the m to us e an y

lo ss es flo win g the refr om , as d is cu ss edab ov e. Seco nd , res po nd en t ar gu es th atpe ti ti on ers ha d u nr ep orte d i nc om e fo r 19 88 an d 1 98 9 tha t re du ces th ei r cl ai m edNOL de du ct io ns acco rd in gl y . W e n eedno t an d d o n otde ci de res po nd en t’s al te rn at iv e arg um en t re ga rd in g p et it io ne rs ’ un rep orte d i nc om e fo r ta x years 1 98 8 a nd19 89
. C. Co nc lu si on as t o Def ic ie nc ie s fo r 19 94 -9 8 Bec au se we fin d tha t p et it io ne rs rece iv edin co m e fro m BOH an d APAG du rin g the y ears at i ss ue inth e fo rm of a m ou nt s d is gu is edas l oa ns an d b us in es s ex pe ns es an d the y

are n oten ti tl edto NOL carry ov er d educ ti on s fr om tax y ears 19 88 -9 0, we fu rth er fi ndth atth ere was a de fic ie nc y inpe ti ti on ers ’ in co m e ta x fo r each y ear a t i ss ue . Con se qu en tl y , res po nd en t h as als o s at is fie d the fir stpro ng of
se ct io n 6 66 3 b y

pro vi ng th atanun de rp aym en t ex is ts foreach y ear at i ss ue . III. Frau du le ntInt en t If an y pa rt o f an y

un de rp aym en t o f ta x re qu ire d t o b e sh own on a return i s at tri bu tabl e to frau d, s ect io n 6 66 3( a) i m po se s a p en al ty equ al to 75 % of the po rti onof t he un de rp aym en t wh ic h i s at tri bu tabl e to frau d. Se ct io n 6 66 3( b) pr ov id es th aton ce the Co m m is si on er es tabl is he s tha t an y po rti on of t he- 45 -

[* 45 ] un de rp aym en t i s due to frau d, the en ti re u nd erp aym en t i s t o b e tr eat edas at tri bu tabl e to frau d e xc ep t wi th res pe ctto an y po rti on th atth e ta xp ay er est ab li sh es , by a p rep on de ran ce o f th e ev id en ce, i s n otattrib ut ab le to frau d. Th e en ti re t ax ab le y ear r em ai ns op enun de r se ct io n 6 50 1( c)(1 ) ev enif o nl y a pa rt o f th e un de rp aym en t fo r a y ear i s at tri bu tabl e to frau d. Lo wy v. Co m m is si on er, 2 88 F.2d 51 7, 5 20 (2dCir . 19 61 ), aff’g T.C. Me m o. 1 96 0- 32 . “ Thu s, wh ere f rau d i s al le ge d
an d p ro ve n, re sp on de ntis free to de te rm in e a d efi ci en cy with re sp ectto all it em s fo r th e p art ic ul ar t ax ab le y ear wi th ou t re ga rdto th e p eri odof l im it at io ns .” Co le st oc k v . Comm is si on er, 1 02 T.C. 38 0, 3 85 (19 94 ). Onc e anun de rp aym en t h as be enpro ve n, the sec on d p ro ng of t he frau d t es t requi res th e Co m

mis si on er t o p ro ve th at , foreach y ear a t i ss ue , at l eas t s om e po rti onof t he un de rp aym en t i s due to frau d, d efi ne d a s an in te nt io na l wro ng do in g de si gn edto ev ad e ta x b el ie ve d t o b e o win g. Di Leo v. Co m m is si on er, 9 6 T.C. at 87 4. Th e Co urt m ay

ex am in e th e ta xp ay er’s wh ol e co ur se of c on du ctto de te rm in e whe th er fraudex is ts . Sto ne v. Co m m is si on er, 5 6 T.C. 2 13 , 22 4 (1 97 1) . The
ex is te nc e o f frau d i s a que st io n o f fac t t o b e 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) . Frau d i s n ev er i m pu te d o r pr es um ed , and th eref or e th e Co m

m is si on er m

us t m eethi s b ur de n thr ou gh affi rm at iv e ev id en ce.- 46 -

[* 46 ] See Ni edrin gh au s v . Comm is si on er, 9 9 T.C. 2 02 , 21 0 (1 99 2) ; Pe tz ol dtv. Co m m is si on er, 9 2 T.C. 6 61 , 69 9 (1 98 9) ; Be av er v . Comm is si on er, 5 5 T.C. 8 5, 9 2 (1 97 0) . Frau d m ay

be pro ve d b y

cir cu m st an ti al ev id en ce an d re as on ab le in fere nc es dra wn fr om

th e fac ts be cau se di rectpro of of atax pa y er’s i nt en t i s ra rel y av ai labl e. Tou sh in v. Co m m is si on er, 2 23 F.3d64 2, 6 47 (7t h C ir. 2 00 0) , aff’g T.C. Mem o. 1 99 9- 17 1; Pet zo ld t v . Comm is si on er, 9 2 T.C. at69 9. Fraudis no t i m pu te d fro m on e sp ou se to an ot he r. Sto ne v. Co m m is si on er, 5 6 T.C. at22 7- 22 8. Inth e cas e o f a joi ntreturn, the sec ti on 66 63 pe na lty do es no t ap pl y

with re sp ectto a sp ou se un le ss so m e p artof t he un de rp aym en t i s due to th e fraudof s uc h s po us e. Sec. 6 66 3( c). A. Dete rm in at io n o f Frau du le ntInt en t fo r 19 94 -9 8 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 te m en t of in co m e, (2 ) in ad equa te m ai nt en an ce o f rec or ds , (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 as se ts or i nc om e, (5 ) fai lu re t o 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) fai lu re t o fi le tax returns , (10 ) fi li ng fal se do cu m en ts , (1 1) fai lu re t o m ak e es ti m at edtax pa ym en ts , and(12 ) de al in g i n c as h. Se e Sp ie s- 47 -

[* 47 ] v. Un it edSta te s, 3 17 U.S. 49 2, 4 99 (19 43 ); B rad fo rdv. Co m m is si on er, 7 96 F.2 d 3 03 , 30 7- 30 8 (9 th Cir . 19 86 ), aff’g T.C. Me m o. 1 98 4- 60 1; Niedrin gh au s v . Co m m is si on er, 9 9 T.C. at21 1. A ta xp ay er’s i nt el li ge nc e, educ at io n, an d t ax ex pe rti se are re le vantforpu rp os es of d et erm in in g fr au du le ntin te nt . See St ep he ns on v. Co m

mis si on er, 7 9 T.C. 9 95 , 10 06 (19 82 ), aff’d, 7 48 F.2d33 1 (6 th Ci r. 19 84 ); I le y

v. Co m m is si on er, 1 9 T.C. 6 31 , 63 5 (1 95 2) . W e co ns id er s ev eral of th es e fac to rs intu rn .

1. Und ers ta te m en t o f In co m e Pet it io ne rs co ns is te nt ly und ers ta te d the ir i nc om e b y lar ge am ou nt s fo r th e y ears at i ss ue . Duri ng th e y ears at i ss ue , pet it io ne rs ne ve r rep orte d any inc om e fro m eit he r BOH or

APAG, des pi te rece iv in g m il li on s fr om co m pa ny coffe rs . Pet it io ne rs ’ om it te d i nc om e dwarfs th e in co m e th ey di d re po rt f

ro m Mrs . O’ Neal ’s
nu rs in g jo b. Fo r ex am

pl e, fo r 19 97 th ey

rep orte d i nc om e fro m

Mrs . O’ Neal ’s
nu rs in g jo b o f $2 ,86 8, wh ic h i s l es s tha n 0 .1% o f th e $ 3,0 19 ,20 8 the y rece iv edth at y ear. Co ns is te ntan d s ub st an ti al un de rrep orti ng of i nc om e is stro ng ev id en ce o f frau d, p art ic ul arl y

if the re ar e o th er ci rcu m st an ces sh owi ng anin te ntto co nc eal in co m e. See Park s v . Comm is si on er, 9 4 T.C. at66 4 (“ A pat te rnof c on si st en t
un de rrep orti ng of i nc om e, es pe ci al ly whe n a cco m pa ni edby oth er ci rcu m st an ces sh owi ng anin te ntto co nc eal , just ifi es th e in fere nc e o f frau d.” ); Ab da ll ahv.- 48 -

[* 48 ] Co m

m is si on er, T.C. Mem o. 2 01 3- 27 9 (f in di ng frau d wh ere t ax pa y ers rep orte d b etween6% an d 1 9% o f th ei r actua l i nc om e o ve r th e co ur se of f iv e y ears of rep orti ng ); B ran so n v . Comm is si on er, T.C. Mem o. 2 01 2- 12 4, 1 03 T.C.M. (CCH) 16 80 , 16 86 (20 12 ) (“ A pat te rnof s ub st an ti al ly und erre po rti ng in co m e fo r se ve ral y ears is stro ng ev id en ce o f frau d, p art ic ul arl y if the reas on forth e un de rs ta te m en ts is no t s at is fact or il y ex pl ai ne d o r du e to in no cen t m is ta ke .”). Acco rd in gl y , th is fact orfav or s a f in di ng of f

rau d b y bo th pe ti ti on ers fro m

19 94 th ro ug h 1 99 8.

2. In ad equa te Mai nt en an ce o f Rec or ds Pet it io ne r m ai nt ai ne d s om e rec or ds pe rta in in g t o h is mis us e o f BOH an d APAG m on ey . Spe ci fic al ly, he do cu m en te d i n B OH’ s g en eral led ge r th e “ lo an s” whi chwere ac tu al ly dis gu is edin co m e an d s ig ne d the Octo be r 19 95 pro m is so ry no te to refl ectam ou nt s t ak enfro m BOH. Howev er, g iv enth atth es e rec or ds were th em se lv es frau du le ntinth atpe ti ti on er cre at edth em inord er t o m as k h is th eft fro m BOH an d APAG, we are di si nc li ne d t o c red itpe ti ti on ers forth is fact or . Acco rd in gl y , th is fact oris ne ut ral with re sp ectto bo th pe ti ti on ers forall tax y ears atis su e.- 49 -

[* 49 ] 3. 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 r of

fere d v ari ou s i m

pl au si bl e an d i nc on si st en t ex pl an at io ns forth e un de rs ta te d i nc om e. Fir st , he c la im edth athe to okm on ey fro m BOH an d APAG
un de r th e 1 99 4 fe e ag reem en t wi th Mr. Bak er ev enth ou gh th e 1 99 4 fe e ag reem en t di d n otex te ndto BOH an d APAG an d the laws ui t u nd erp in ni ng th e 1 99 4 fe e ag reem en t co nc lu de d i n 1 99 4. Des pi te th es e fac ts , pet it io ne r ha s at te m pt edto us e th e 1 99 4 fe e ag reem en t as anex cu se fortak in g m on ey fro m BOH an d APAG fro m 19 94 th ro ug h 1 99 8. Se co nd , pet it io ne r cl ai m edth atth e m is ap pr op ria te d fu nd s were l oa ns fro m

th e co m pa ni es to hi m , a cla im

whi ch , as we d is cu ss edearl ie r, is si m pl y no t cr ed ib le . Sep arat el y , pet it io ne r ha s cl ai m edth athe an d h is acco un tant di sc us se d wh ethe r to tre atth e tr an sf ers fro m BOH an d APAG as lo an s o r as in co m e o n p et it io ne rs ’ ta x re tu rn s. Th es e ex pl an at io ns are i nc on si st en t wi th on e an ot he r an d i m

pl au si bl e. Thi s fa ct orfav or s a f in di ng of f

rau d a ga in stpe ti ti on er fo r al l t ax y ears at i ss ue . Mrs . O’ Neal ’s po si ti on th ro ug ho utth is cas e h as be enth atsh e n ev er qu es ti on edwhy sh e an d h er ch il dr enwere al lo wedacce ss to BOH an d APAG fund s, s he ne ve r qu es ti on edhe r hu sb an d’s fi na nc es , andsh e d idno t g iv e m or e th ana cu rs ory

gl an ce t o the ir t ax returns du rin g the y ears at i ss ue . She als o te st ifi edth atitwas h er h ab itto pro vi de rece ip ts forva rio us ex pe ns es , andsh e- 50 -

[* 50 ] “ ne ve r go t i nv ol ve d wi th * * * [p et it io ne r’s] bus in es s” . Howev er, s he kn ew th atth e am ou nt s s he was re cei vi ng fro m BOH an d APAG were forpe rs on al
ex pe ns es , andsh e was aware t ha t s he an d p et it io ne r di d n otti tl e as se ts inth ei r na m es to av oi d c red it or s wh o h adjud gm en ts inex ces s o f $1 8 m il li onag ai ns t th em . It wo ul d d efy co m

m on sen se to be li ev e th atMrs . O’ Neal ne ve r qu es ti on ed th e so ur ce o f fu nd s fo r th e fam il y ’s per so na l ex pe ns es du rin g the y ears at i ss ue , pa rti cu larly in l ig htof the fal lo utfro m pe ti ti on er’s b us in es s d eal in gs with M es sr s. Pal m er an d M cCo rm ack . Mrs . O’ Neal was aware o f th e jud gm en ts ag ai ns t the m fro m va rio us cred it or s; th os e jud gm en ts aro se ou t o f th e sa m e p at te rnof c or po rat e th eftth atpe ti ti on ers pe rp etrat eddu rin g the y ears at i ss ue . Furt he r, Mrs . O’ Neal
was aware o f th e si gn ifi can t d ol lar am ou nt s at ta ch edto th os e jud gm en ts an d yet
supp os ed ly didno t que st io n the lav is h l ife st y le sh e an d p et it io ne r co nt in ue d t o en joy du rin g the y ears at i ss ue , eve n tho ug h s he ha d t o re tu rnto workin19 92 to
supp ort the fam il y

aft er p et it io ne r was fir edfro m th e Arn ol d P al m er d eal ers hi ps . Sh e al so cle arl y

ha d s om e m is gi vi ng s o ve r rec ei vi ng lar ge am ou nt s o f co rp or at e fund s fr om

BOH, su chas wh ensh e returne d a$5 0,0 00 ch eckwritte n o n B OH’ s ba nkacco un t t o h er hus ba nd . Evenif we wer e to tak e Mrs . O’ Neal at h er wo rd ,

“ wil lfu l b li nd ne ss ” is anin di cat orof f rau d i f th e ta xp ay er i s awa re o f a h ig h- 51 -

[* 51 ] pro babi li ty of un rep orte d i nc om e an d d el ib erat el y av oi ds st ep s t o c on firm th is awaren es s. Fi or e v . Comm is si on er, T.C. Mem o. 2 01 3- 21 . On b al an ce, thi s fact or fav or s a f

in di ng of f

rau d a ga in stMrs . O’ Neal forall tax y ears at i ss ue . 4. Co nc eal m en t o f Ass et s o r In co m e Pet it io ne rs co ns is te nt ly con ceal edass et s o r in co m e o ve r th e co ur se of t he y ears at i ss ue . Noton ly didth ey free ly spe ndBOH an d APAG m on ey onpe rs on al
ex pe ns es ; the y

ti tl edva rio us pro pe rti es --i nc lu di ng si x fa rm s, thr ee p ro pe rti es or pa rcel s o n B ay

Hil l Bo ul ev ardinOrland o, Fl or id a, two pro pe rti es inCarm el , In di an a, an d s ev eral au to m ob il es --i n o th ers ’ na m es . Thes e p ro pe rti es were u se d
so le ly for p et it io ne rs ’ pe rs on al be ne fitan d d idno t s erv e an y bu si ne ss pu rp os e fo r BOH orAPAG. Peti ti on ers als o o pe ne d b an k a cco un ts inth ei r ch il dr en ’s nam es in to whi chth ey

de po si te d B OH andAPAG fun ds
. Pet it io ne r al so pl ead edgu il ty to two co un ts of f il in g afal se tax return i n vi ol at io n o f se ct io n 7 20 6( 1) fortax y ears 19 97 an d 1 99 8. Al th ou gh hi s g ui lty pl ea do es no t co ll at eral ly esto p p et it io ne r fro m de nyin g tha t h e fraudul en tl y un de rs ta te d pe ti ti on ers ’ in co m e, itis a pr ob at iv e fac t wh ic h m ay be co ns id eredpe rs ua si ve ev id en ce o f frau du le ntin te nt . See Wrig htv. Co m m is si on er, 8 4 T.C. at64 3- 64 4. Upo n e nt eri ng hi s g ui lty

pl ea, p et it io ne r ackno wled ge d tha t h e was gu il ty of si gn in g m at eri al ly fals e ta x re tu rn s fo r ta x years 1 99 7 a nd19 98 an d tha t h e- 52 -

[* 52 ] un de rrep orte d i nc om e in each tax y ear a t i ss ue . This fact or fav or s a f

in di ng of frau d a ga in stbo th pe ti ti on ers forall tax y ears at i ss ue .

5. Fai lu re To Co op erat e With Tax Au th or it ie s Pet it io ne r co op erat edwith S A W al do n’s i nv es ti ga ti on on ly after a no th er targ etof t he in ve st ig at io n b eg anco op erat in g. Th is fact or is th eref or e n eu tra l wi th
res pe ctto pe ti ti on er. The re i s n o i nf orm at io n i n the reco rdpe rta in in g t o M rs . O’ Neal ’s coo pe rat io n, o r la ckth ereo f, with the Gov ern m en t, an d thi s fa ct or is th eref or e ab se ntwith re sp ectto Mrs . O’ Neal
. 6. Pat te rnof C on du ctSh owi ng anInt en t To Mi sl ead Pet it io ne rs en ga ge d i n apa tt ernof c on du ctth atin di cat es anin te ntto
m is le ad . They co ns is te nt ly dis gu is edpe rs on al ex pe ns es as b us in es s ex pe ns es an d ti tl edass et s i n the na m es of t he ir c hi ldrenan d B OH andAPAG. Peti ti on er s ig ne d th e Oct ob er 1 99 5 p ro m is so ry no te , refl ect in g t ot al s t ak enfro m BOH fro m

19 94 to 19 97 bu t n ev er s ho weditto Mr. Bak er o r an y othe r of fic ers withi n the co m

pa ny. Thi s fa ct or

fav or s a f

in di ng of f

rau d a ga in stbo th pe ti ti on ers forall tax y ears at is su e. 7. Lackof C red ib il ity of P et it io ne rs ’ Test im on y A tax pa y er’s l ackof c red ib il ity , “ th e in co ns is te nc ie s i n h is tes ti m on y an d hi s ev as iv en es s o n the st an d[ ,] are h eav il y weig ht edfact or s i n c on si de rin g the- 53 -

[* 53 ] frau d i ss ue .” Tou ss ai ntv. Co m m is si on er, 7 43 F.2d30 9, 3 12 (5t h C ir. 1 98 4) , aff’g T.C. Me m o. 1 98 4- 25 ; DeVri es v. Co m m is si on er, T.C. Mem o. 2 01 1- 18 5. We fin d tha t p et it io ne rs ’ res pe ct iv e te st im on ie s ar e n otcred ib le . Peti ti on ers ha ve a hi st ory of the ft f ro m th e co m pa ni es with wh ic h p et it io ne r ha s b eenaffi li at ed
. The y kn ew th irdpa rti es ha d ju dg m en ts ag ai ns t the m inex ces s o f $1 8 m il li on as a res ul t o f pe ti ti on er’s ear li er the ft f ro m th e Arn ol d P al m er d eal ers hi ps . It s tra in s cred ib il ity

th atMrs . O’ Neal “ ne ve r qu es ti on ed ” p et it io ne r reg ard in g the so ur ce o f th e fu nd in g fo r th ei r li fes tyle dur in g the y ears at i ss ue when sh e was aware o f th e jud gm en ts ag ai ns t the m

an d kne w th atth ey

were av oi di ng ti tl in g a ss et s i n the ir
na m es inord er t o avo idth ei r cre di to rs . Pet it io ne r’s ex pl an at io ns form an y of h is act io ns are n otcred ib le . Firs t, h e kn ew th e la wsu itag ai ns t GMC an d GM AC en de d i n 1 99 4 b utcla im s tha t the 19 94 fee a gr eem en t ra ti on al iz edhi s t ak in g o f fu nd s fr om BOH an d APAG fro m

19 94
un ti l h is di sm is sa l fr om

th e co m pa ni es in19 98 . Seco nd , he c la im s tha t the si x farm s h e p ur ch as edwith B OH andAPAG m on ey were i nt en de d t o b e co rp or at e retreat s d es pi te hi s n ev er t el li ng an y on e aff il ia te d wi th eithe r co m

pa ny abo utth ei r ex is te nc e. Sim il arl y , he d is gu is edth e Carm el , Ind iana , con do m in iu m as a

“ co rp or at e co nd o” ev enth ou ghhe an d h is fam il y ha d e xc lu si ve us e o f itan d
no bo dy at BOH orAPAG was awar e o f it s ex is te nc e. Thi rd , pet it io ne r’s- 54 -

[* 54 ] st at em en ts th atth e am ou nt s h e to okfro m th e co m pa ni es were l oa ns is no t cred ib le be cau se (1) no bo nafid e lo anag reem en ts ex is te d b etweenpe ti ti on er an d BOH orAPAG, (2) h e la ck edth e ab il ity to rep ay any lo an s b ecau se of t he $1 8
m il li on jud gm en ts ag ai ns t h im an d h is wife , and(3) an y ch arac te riz at io n o f th e in co m e as “ lo an s” run s co un te r to hi s o th er cl ai m th atth e fu nd s wer e ta ke n u nd er th e 1 99 4 fe e ag reem en t. Thi s fa ct orfav or s a f in di ng of f

rau d a ga in stbo th pe ti ti on ers forall tax y ears at i ss ue .

8. Fi li ng Fal se Docu m en ts Fi li ng fal se do cu m en ts in cl ud es fil in g fa ls e in co m e ta x re tu rn s. Worth v
. Co m m is si on er, T.C. Mem o. 2 01 4- 23 2; Po tt er v . Commis si on er, T.C. Mem o. 2 01 4- 18 ; M or se v. Co m

m is si on er, T.C. Mem o. 2 00 3- 33 2, af f’d, 41 9 F .3d82 9 (8 th Cir
. 20 05 ). Pet it io ne rs fil edfal se do cu m en ts foreach y ear a t i ss ue inwhi chth ey si gn ifi can tl y

un de rrep orte d the ir i nc om e b y no t re po rti ng an y

of t he am ou nt s t ak en fro m BOH an d APAG. Mrs . O’ Neal cla im s tha t s he ne ve r rev ie wedth e ta x re tu rn s bu t s im pl y “ sh owe d up” to si gn th em . Reg ard le ss of h er l ev el of r ev ie w, sh e si gn edth e returns un de r pe na lty of p erjury ; s he can no t ab di cat e th e res po ns ib il ity to fil e a co rrec t t ax return b y fai li ng to rev ie w itinit s en ti rety . Mor eo ve r, a reas on ab le pe rs on rev ie win g p et it io ne rs ’ joi ntreturns forth e y ears at i ss ue wou ld ha ve qu es ti on edth e la ckof r ep orte d i nc om e in co m pa ris on to pe ti ti on ers ’ lavi sh- 55 -

[* 55 ] li fes tyle. Thi s fa ct orfav or s a f in di ng of f

rau d fo r bo th pe ti ti on ers forall tax y ears at i ss ue .

9. Fai lu re To Mak e Est im at edTax Pa y m en ts Pet it io ne rs fai le d t o m ak e an y est im at edtax pa y

m en ts du rin g the y ears at is su e. Sect io n 6 65 4( d) (1 )(A) re qu ire s qua rte rly ins ta ll m en t p aym en ts of 2 5% o f th e requi redannu al paym en t. The requi redan nu al pa ym en t i s the les se r of 90 % of th e ta x due forth e y ear o r 10 0% o f th e ta x s ho wn o n the pre ced in g year’s return. Sec. 6 65 4( d) (1 )(B) . This fact orfav or s a f in di ng of f

rau d a ga in stbo thpe ti ti on ers fo r al l t ax y ears at i ss ue . B. Co nc lu si on as To Pet it io ne rs ’ Frau d Sev enba dg es of f

rau d a re p res en t i n thi s ca se forbo thpe ti ti on ers forall tax y ears at i ss ue . After c on si de rin g the en ti re re co rdan d the fact or s d is cu ss edsupr a, we fi ndth atfor19 94 -9 8 re sp on de ntha s p ro vi de d c le ar an d c on vi nc in g e vi de nc e th atpe ti ti on ers in te nd edto ev ad e ta xe s kno wn t o b e o win g b y co nduc t i nt en de d t o co nc eal , m is le ad , or o th erwi se pre ve ntth e co ll ect io n o f ta xe s. See Sad le r v. Co m m is si on er, 1 13 T.C. at 1 02 ; Pa rk s v . Comm is si on er, 9 4 T.C. at66 0- 66 1. Acco rd in gl y , res po nd en t h as m ethi s b ur de n o f pr oo f, an d p et it io ne rs are l iabl e fo r th e se ct io n 6 66 3 c iv il frau d p en al ty for eac h year atis su e. Co ns eque nt ly, th e en ti re am ou ntof t he un de rp aym en t fo r eac h t ax ab le y ear a t i ss ue is att rib ut ab le to- 56 -

[* 56 ] frau d. Pe ti ti on ers ha ve no t s ho wn tha t an y po rti on of t he un de rp aym en t fo r each y ear a t i ss ue is no t due to frau d. Se e se c. 66 63 (b ). IV. Sect io n 6 65 1( a)(1 ) Add it io n t o Tax Norm al ly, th e Co m

mis si on er b ears th e b ur de n o f pr oduc ti on with re sp ectto
an y pe na lty or a dd it io n t o t ax . Sec. 7 49 1( c); Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). In t hi s ca se , itis un cl ear wh ethe r res po nd en t b ears an y burd enof pr oduc ti on un de r se ct io n 7 49 1( c) b ecau se itis no t cl ear wh ethe r th e ex am in at io n co m m en cedaft er J ul y

22 , 19 98 , th e effe ct iv e d at e o f se ct io n 7 49 1. Ho wev er, res po nd en t h as m etan y

bu rd enof p ro du ct io n tha t h e m ay ha ve . To m eetth at bu rd en , th e Co m

m is si on er m

us t co m e fo rwardwith s uf fic ie ntev id en ce i nd ic at in g th atitis ap pr op ria te to im po se th e rel ev an t p en al ty. Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 . Howev er, o nc e th e Co m m is si on er h as m etth e b ur de n o f pr oduc ti on , th e ta xp ay er b ears th e b ur de n o f pr ov in g tha t the pe na lty is in ap pr op ria te . See Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 -4 49
. Sect io n 6 65 1( a)(1 ) pr ov id es foranad di ti on to tax forfai lure t o t im el y fil e a return unl es s i t i s s ho wn tha t s uc h fa il ur e is du e to reas on ab le cau se an d n otdu e to wil lfu l n eg le ct . See Un it edSta te s v . Boyle, 4 69 U.S. 24 1, 2 45 (19 85 ). Pet it io ne rs fil edth ei r 19 98 tax return l at e o n Au gu st1, 2 00 1, an d re sp on de ntha s the refo re
m ethi s b ur de n o f pr oduc ti on . Peti ti on ers di d n otad dr es s the sec ti on 66 51 (a)( 1)- 57 -

[* 57 ] ad di ti on to tax inth ei r br ie f an d h av e o ffer edno reas on ab le cau se forth ei r fai lu re t o t im el y

fil e th ei r 19 98 tax return. Acco rd in gl y , pet it io ne rs are l iabl e fo r th e se ct io n 6 65 1( a)(1 ) ad di ti on to tax fortax y ear 1 99 8. Inreac hi ng ou r ho ld in gs , we hav e co ns id eredall arg um en ts m ad e. To 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 ut
m eri t. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red fo r res po nd en t.