T.C. Mem o. 2 01 3- 20 3

UNITED STAT ES TAX COURT

STANLEY L . ALEXANDER AND RUTHA. ALE XANDER, ET AL. , Pet it io ne rs v. COM MIS SIONER OF INTERNAL

1 REVENUE, Res po nd en t

Doc ke t No s. 79 07 -0 6, 7 90 8- 06 , Fil edAug us t 2 9, 2 01 3.

79 09 -0 6, 7 91 0- 06 , 14 04 7- 07
.

Dav idC. Greer a ndRo be rt H. His ho n, fo r pe ti ti on ers . Ri ch ardJ. Has se br oc k, Ti m othy S. Sin no tt , Davi d S . W ei ne r, Abi ga il Rai ne s, an d Arc ha naRav in dr an ath, fo r res po nd en t.

Cas es of t he fol lo win g p et it io ne rs are co ns ol id at edhe rewi th : Ru th A. 1 Alex an de r, do ck etNo. 7 90 8- 06 ; St an le y L. Alex an de r, do ck etNo. 7 90 9- 06 ; St an le y L. Alex an de r, do ck etNo. 7 91 0- 06 ; an d F ou nt ai n S ki n C are, Co sm et ic , Pl as ti c & Re co ns tru ct iv e Su rg ery, Inc ., do ck etNo. 1 40 47 -0 7.- 2 -

[* 2] CONTENTS FINDINGS OF FACT.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1. Dr. an d M rs . Stanl ey

Alex an de r. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2. Fo un ta in Sk in Care , Cos m et ic , Pla st ic & Rec on st ru ct iv e Su rg ery, Inc
.. . . . . . 14 3. St an le y

L. Alex an de r, M.D., Inc
.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4. An th on y

Krit t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5. Th e Ci nc in na ti Vein Cli ni c & the Mi dwe stVein Cen te r. . . . . . . . . . . . . . . . . . 18 6. Ken ne th Rei se rer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7. Gal enCo ./Da Vi nc i Gro up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8. Offs ho re Em

pl oyee Leas in g Tra ns act io n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 9. Nat io nwi de Exec ut iv e St aff Lea si ng , Inc
.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 10 . Prof es si on al Leas in g S erv ic es , Inc
.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 11 . Mon tra in Serv ic es , Inc
.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 12 . Int ern at io na l Advi so ry Serv ic es , LLC.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 13 . Ros m ol
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 14 . Rur it an ia
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 15 . Lon do n & Cap it al
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 16 . Ass oc ia te d En te rp ris es , Ltd
.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 17 . Blen he im

Fiduc iary

Group Lt d./ Elfi n Tru stGroup. . . . . . . . . . . . . . . . . . . . . 30- 3 -

[* 3] 18 . Retu rn s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 OPINION.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 I. Burd enof P ro of

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 II. Defi ci en ci es of Dr. an d M rs . Alex an de r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 A. Statut e o f Lim it at io ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 B. Und erp aym en t o f W ag e In co m e to Dr. Alex an de r. . . . . . . . . . . . . . . . . 35 1. Co ns tru ct iv e Rec ei ptof M on ey Tran sf erre d In to th e Deferred Co m pe ns at io n P la n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2. Se ct io ns 40 2( b) (1 ) an d 8 3( a).
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3. Eco no mic Subs ta nc e Doc tri ne . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 C. Whe th er Dr. an d M rs . Alex an de r Are En ti tl edto Sch edul e F Farmin g Los s Deduc ti on s fo r 20 01 an d 2 00 2.
. . . . . . . . . . . . . . . . . . . . . . . . . 39 1. Subs ta nt ia ti on of De du ct io ns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2. Act iv it y

Eng ag edIn f

orPro fit
. . . . . . . . . . . . . . . . . . . . . . . . . . . 40 D. Whe th er Dr. an d M rs . Alex an de r Are En ti tl edto Uns ub st an ti at ed Sch edul e A Mo rtg ag e In te res t Deduc ti on s fo r 20 01 an d 2 00 2.
. . . . 40 III. Pen al ti es an d Ad di ti on s t o Tax forDr. andMrs . Alex an de r. . . . . . . . . . . . . . 41 A. Sect io n 6 66 3 F rau d P en al ti es forth e Und erp aym en ts of Tax Ass oc ia te d W it h t he OEL T ran sa ct io n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 1. Un de rp aym en t o f Tax
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2. Fraudul en t In te nt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 a. Anal y si s o f Frau du le ntInt en t. . . . . . . . . . . . . . . . . . . . . . . 43 b. Ba dg es of F rau d.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 i. Co ns is te ntPat te rnof Un de rrep orti ng . . . . . . . . . . . . 46 ii . Lack o f Cre di bi li ty of th e Tax pay er’s Tes ti m on y . . 46 ii i. Co nc eal m en t o f In co m e o r Ass et s . . . . . . . . . . . . . 47 iv . Dr. andMrs . Alex an de r’s Fai lu re t o M ai nt ai n Ade qu at e Rec or ds Pert ai ni ng to Thei r Part ic ip at io n i n th e OEL Trans act io n a ndTo Fu ll y Co op erat e in th e Exam in at io n o f The ir R eturns or i n t he Lit ig at io n.. . . . 48 v. Fa il ur e To Fi le a Return fo r 20 03
. . . . . . . . . . . . . . . 48- 4 -

[* 4] vi . Dr. andMrs . Alex an de r’s Att em pt s atDis tanc in g T he m se lv es Fro m

th e OEL Trans act io n. . . . . . . . . 49 3. Co nc lu si on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 B. Sect io n 6 66 2( a) Pe na lt y forUnd erp aym en t o f Tax
. . . . . . . . . . . . . . . . 50 1. Subs ta nt ia l Un de rs ta te m en t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 2. Re as on ab le Cau se Und er Se ct io n 6 66 4.
. . . . . . . . . . . . . . . . . . . . 51 C. Sect io n 6 65 1( f) Fraudul en t Fa il ur e To Fi le Add it io n t o Tax for20 03
.. 54 D. Sect io n 6 65 1( a)(2 ) an d 6 65 4 Ad di ti on s t o Tax for20 03
. . . . . . . . . . . 55 1. Se ct io n 6 65 1( a)(2 ).
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 2. Se ct io n 6 65 4.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 E. Secti on 66 51 (a)( 1) Fai lu re To Fil e Add it io n t o Tax for 20 02 an d 2 00 3.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 IV. Whe th er Mr s. Al ex an de r Is Ent it le d t o In no cen t Sp ou se Rel ie f Und er Sect io n 6 01 5.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 V. Fou nt ai n’s Def

ic ie nc ie s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 A. Dr. Alex an de r W as anEm pl oyee of Fo un ta in Duri ng th e OEL Tran sa ct io n.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 1. Em pl oym en t St atus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 2. Re li ef Un de r Sec ti on 53 0 .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 B. Fo un ta in Is Li ab le for Em pl oym en t Tax es W it h R es pe ctto Dr. Alex an de r’s Serv ic es Duri ng th e Tax ab le Quarte rs End ed Mar ch31 , 19 99 , Thro ug h Dec em be r 31 , 20 03
. . . . . . . . . . . . . . . . . 69 VI. Fou nt ai n’s Pe na lt ie s an d Ad di ti on s t o Tax
. . . . . . . . . . . . . . . . . . . . . . . . . . . 69 A. Frau d P en al ty Und er Se ct io n 6 66 3.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 B. Pen al ty Und er Se ct io n 6 66 2.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 C. Sect io n 6 65 6 P en al ty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70- 5 -

[* 5] MEMORANDUM FINDINGS OF FACT AND OPINION GOEKE, Ju dg e: Dr. Stan le y Alex an de r, a p la st ic su rg eo n, en ga ge d i n a tra ns act io n u nd er wh ic h h e u se d a n o ffs ho re en ti ty to p ur po rte dl y lea se ba ckhi s
se rv ic es to hi s m ed ic al pra ct ic e co m pa ny in Oh io , os te ns ib ly to fa ci li ta te a de ferr edret ire m en t p ro gr am inwhi cha la rg e p artof h is in co m e res te d u nt ax ed
. His pa rti ci pa ti on inth is pl anis th e p rin ci pa l re as on for res po nd en t’s de te rm in at io ns of i nc om e ta x d efi ci en ci es ag ai ns t Dr. Ale xa nd er an d h is wife , Ru th A. Alex an de r, de te rm in at io ns of d efi ci en ci es ag ai ns t h is m ed ic al pra ct ic e
co m pa ny for em

pl oym en t t ax , andde te rm in at io ns ag ai ns t al l co ns ol id at ed pe ti ti on ers forvario us ad di ti on s t o t ax an d p en al ti es , in cl ud in g s om e fo r frau d. Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al Rev enue Co de ineffe ctforth e y ears inis su e, an d a ll Ru le refe ren ces are t o t he Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e Res po nd en t d et erm in edde fic ie nc ie s i n a ndad di ti on s t o t ax with re sp ectto pe ti ti on ers ’ Fed eral in co m e ta x a s fo ll ows :- 6 -

[* 6] Doc ke t No . 79 07 -0 6- -St an le y L. Alex an de r & Ru th A. Alex an de r

Additions to t ax/penalties Yea r Def

iciency Sec. 6651(a)(1) Sec. 6662(a) Sec. 6663 1999 $152,835 $30,469.60 $30,587.00 $114,626.25 2000 157,746 23,507.60 54,425.00 118,309.50 2001 221,104 54,425.00 44,220.80 165,828.00 Doc ke t No . 79 08 -0 6- -Ru thA. Alex an de r Additions to t ax/penalties Yea r Def

iciency Sec. 6651(a)(1) Sec. 6662(a) Sec. 6663 2002 $241,182 $60,485.28 $48,176.20 $180,660.75 Doc ke t No . 79 09 -0 6- -St an le y L. Alex an de r Additions to t ax/penalties Yea r Def

iciency Sec. 6651(a)(1) Sec. 6662(a) Sec. 6663 2002 $241,182 $60,485.28 $48,176.20 $180,660.75 Doc ke t No . 79 10 -0 6- -St an le y L. Alex an de r Additions to t ax/penalties Yea r Def

iciency Sec. 6651(f ) Sec. 6651(a)(2) Sec. 6664 2003 $175,291 $113,202.33 ( ) $4,030.55 1 The a ddition to t ax under sec. 6651( a)( 2) re mains to be computed on 1 0.5% of the unde rpay

ment, per month, for

a maximumof 50 months, not to exceed 50% in the ag greg ate.- 7 -

[* 7] Doc ke t No . 14 04 7- 07 --Fo un ta in Sk in Care , Cos m et ic , Pla st ic & Reco ns tru ct iv e Su rg ery, Inc
.
Q u a r t e r e n d e d O A S D I H o s p i t a l i n s u r a n c e I n c o m e t a x

w i t h h o l d i n g P e n a l t y

s e c . 6 6 6 3 ( a ) P e n a l t y

s e c . 6 6 5 6 P e n a l t y

s e c . 6 6 6 2 ( a ) 3 / 3 1 / 9 9 $ 9 , 0 0 2
. 4 0 $ 5 , 4 1 2
. 5 6 $ 5 2 , 2 5 9
. 2 0 $ 5 0 , 0 0 5
. 6 2 $ 7 2 0
. 7 5
- 0
- 6 / 3 0 / 9 9 2 , 2 5 0
. 6 6 2 , 5 1 2
. 8 5 2 4 , 2 6 2
. 0 0 2 1 , 7 6 9
. 0 9 2 3 8
. 1 7
- 0
- 9 / 3 0 / 9 9 2 , 2 5 0
. 6 6 2 , 6 1 0
. 0 0 2 5 , 2 0 0
. 0 0 2 1 , 7 6 9
. 0 9 2 3 8
. 1 7
- 0
- 1 2 / 3 1 / 9 9 2 , 2 5 0
. 6 6 3 , 5 3 8
. 0 0 3 4 , 1 6 0
. 0 0 2 8 , 2 7 3
. 5 0 2 3 8
. 1 7
- 0
- 3 / 3 1 / 0 0 9 , 4 4 8
. 8 0 4 , 5 3 0
. 2 6 4 3 , 7 4 0
. 4 8 4 3 , 2 8 9
. 6 6 6 9 8
. 9 5 $ 1 1 , 5 4 3
. 9 1 6 / 3 0 / 0 0 2 , 3 6 2
. 2 0 2 , 9 9 3
. 7 9 2 8 , 9 0 5
. 5 9 2 5 , 6 9 6
. 1 9 2 6 7
. 8 0 8 , 5 6 5
. 4 0 9 / 3 0 / 0 0 2 , 3 6 2
. 2 0 3 , 7 7 0
. 0 0 3 6 , 4 0 0
. 0 0 1 0 , 1 2 7
. 5 0 2 6 7
. 8 0 8 , 5 6 5
. 4 0 1 2 / 3 1 / 0 0 2 , 3 6 2
. 2 0 2 , 9 9 3
. 7 9 2 8 , 9 0 5
. 5 9 2 5 , 6 9 6
. 1 2 2 6 7
. 8 0 8 , 5 6 5
. 4 0 3 / 3 1 / 0 1 9 , 9 2 0
. 0 0 3 , 3 3 4
. 8 0 3 2 , 1 9 8
. 0 4 2 8 , 5 1 8
. 9 3 6 1 2
. 0 0
- 0
- 6 / 3 0 / 0 1 2 , 4 9 2
. 4 0 3 , 3 3 4
. 8 0 3 2 , 1 9 8
. 0 4 2 8 , 5 1 8
. 9 3 2 9 1
. 3 6
- 0
- 9 / 3 0 / 0 1 2 , 4 9 2
. 4 0 4 , 4 9 5
. 0 0 4 2 , 6 2 5
. 0 0 3 5 , 3 4 0
. 0 0 2 9 1
. 3 6
- 0
- 1 2 / 3 1 / 0 1 2 , 4 9 2
. 4 0 6 , 0 9 0
. 0 0 5 7 , 7 5 0
. 0 0 4 7 , 8 8 0
. 0 0 2 9 1
. 3 6
- 0
- 3 / 3 1 / 0 2 1 0 , 5 2 7
. 6 0 4 , 6 4 0
. 0 0 4 3 , 2 0 0
. 0 0 4 3 , 7 7 5
. 7 0 7 5 8
. 3 8
- 0
- 6 / 3 0 / 0 2 2 , 6 3 1
. 9 0 5 , 3 6 5
. 0 0 4 9 , 9 5 0
. 0 0 4 1 , 4 8 6
. 2 5 3 5 8
. 1 6
- 0
- 9 / 3 0 / 0 2 2 , 6 3 1
. 9 0 3 , 4 8 0
. 0 0 3 2 , 4 0 0
. 0 0 3 7 , 0 1 2
. 9 9 3 5 8
. 1 6
- 0
- 1 2 / 3 1 / 0 2 2 , 6 3 1
. 9 0 4 , 6 4 0
. 0 0 4 3 , 2 0 0
. 0 0 3 5 , 8 8 0
. 0 0 3 5 8
. 1 6
- 0
- 3 / 3 1 / 0 3 1 0 , 7 8 8
. 0 0 3 , 1 9 7
. 2 5 2 9 , 7 6 7
. 5 0 3 2 , 7 5 8
. 5 0 6 9 8
. 9 0 8 , 7 3 5
. 6 0 6 / 3 0 / 0 3 2 , 6 9 7
. 0 0 3 , 1 9 7
. 2 5 2 9 , 7 6 7
. 5 0 2 5 , 0 9 2
. 5 6 2 9 4
. 7 1 8 , 3 6 4
. 1 9 0 9 / 3 0 / 0 3 2 , 6 9 7
. 0 0 3 , 9 2 9
. 5 0 3 3 , 8 7 5
. 0 0 2 8 , 3 5 3
. 3 8 2 9 4
. 7 1 8 , 3 6 4
. 1 9 1 2 / 3 1 / 0 3 2 , 6 9 7
. 0 0 3 , 9 2 9
. 5 0 3 3 , 8 7 5
. 0 0 2 8 , 3 5 3
. 3 8 2 9 4
. 7 1 8 , 3 6 4
. 1 9 Afte r co nc es si on s, th e is su es forde ci si on are: 2
Pet it io ne rs ha ve co nc ed edth e fo ll owi ng is su es : (1 ) a ch ari tabl e 2 co nt rib ut io n d educ ti on of $ 13 ,29 8 c la im edby D r. an d M rs . Alex an de r on (co nt in ue d...)- 8 -

[* 8] (1 ) whe th er the st atut ory pe rio d fo r as se ss m en t o f in co m e ta x h as expi red with re sp ectto th e ta xabl e y ears 19 99 , 20 00 , and20 01 forDr. andMrs
. Alex an de r. W e h ol d t ha t i t h as no t; (...co nt inue d) 2 Sch edul e A, Ite m iz edDedu ct io ns , forth e ta xabl e y ear 2 00 2 i s d is al lo wed ; (2 ) a $5 7 l os s re po rte d o n l in e 1 4 o f th e Ale xa nd ers ’ 20 02 Fo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return, i s d is al lo wed ; (3 ) a cap it al lo ss de du ct io n o f $3 ,00 0 o n t he Alex an de rs ’ 20 00 an d 2 00 1 S ch edul es D, Capi ta l Gai n a ndLos se s, i s d is al lo wed ; (4 ) Dr. Alex an de r is li ab le forren ta l i nc om e o f $5 2,0 80 rep orte d o n S ch edul e E, Supp le m en ta l In co m e an d Lo ss , andall owe d S ch edul e E ex pe ns es of $ 19 ,34 0 fo r th e ta xabl e y ear 2 00 2; (5) Dr. Alex an de r is li ab le fora $5 6 p en al ty for anearl y withd rawal of s av in gs forth e ta xabl e y ear 2 00 2; (6) th e Ale xa nd ers are al lo weda Sch edul e E partn ers hi p l os s re la te d t o M ia m i Val le y Surg ic al of $ 41 ,12 0 a ndth e in cl us io n o f $5 9,3 33 inSch edul e E pa rtn ers hi p i nc om e fo r Mrs . Alex an de r rel at ed to th e sa m e p artne rs hi p; (7) th e d et erm in at io n t o d ecre as e $ 2,1 25 of i nc om e rep orte d o n S ch edul e C, Pro fitan d Lo ss Fro m Bu si ne ss , forth e ta xabl e y ear 2 00 2; (8 ) th e Ale xa nd ers are l iabl e fo r in co m e ta x o n $ 20 ,73 0 o f un rep orte d c ap it al ga in in co m e th ey

rece iv eddu rin g t he tax ab le y ear 2 00 0, an d re sp on de ntpro pe rly di sa ll owe d a$7 32 cap it al lo ss de du ct io n t he y cla im edon th ei r 20 01 Fed eral in co m e ta x re tu rn ; (9 ) th e Ale xa nd ers are l iabl e fo r in co m e ta x o n $ 19 ,43 0 i n ad di ti on al wage s p ai d b y Fo un ta in Sk in Care , Cos m et ic , Pla st ic & Rec on st ru ct iv e Su rg ery, Inc . (Fo un ta in ), to Ruth Alex an de r fo r th e ta xabl e y ear 2 00 2; (10 ) Dr. an d Mrs . Alex an de r are li ab le forad di ti on al sel f-em pl oym en t t ax of $ 67 an d e nt it le d t o a co rres po nd in g s el f-em

pl oym en t t ax de du ct io n o f $3 4 fo r th e ta xabl e y ear 2 00 2; (1 1) th e Ale xa nd ers are l iabl e fo r ad di ti on s t o t ax pu rs ua ntto sec . 66 51 (a)( 1) for th e y ears 19 99 -2 00 1; (12 ) th e Ale xa nd ers are l iabl e fo r ta x o n t he fol lo win g ad di ti on s t o i nc om e: (a) $ 30 7 S ta te in co m e ta x re fundin19 99 ; (b ) di vi de nd in co m e inth e ta xabl e y ears 20 00 , 20 01 , and20 02 of $ 15 , $5 5, an d $ 20 res pe ct iv el y ; (c ) in te res t i nc om e fo r th e ta xabl e y ears 20 00 an d 2 00 1 o f $3 36 an d $4 9, re sp ect iv el y ; (d ) cap it al ga in of $ 22 ,89 3 fo r th e ta xabl e y ear 2 00 0; (e) $ 2,6 00 in farm in co m e fo r th e ta xabl e y ear 2 00 2; an d (f ) $1 00 ,00 0 i n wag e in co m e rece iv edfro m

Fo un ta in bu t p ai d t hr ou gh Pro fes si on al Leas in g S erv ic es , Inc
. (PLS), fo r th e ta xabl e y ear 2 00 3. Pe ti ti on ers als o c on ced e d et erm in at io ns res po nd en t h as m ad e in th ei r fav or .- 9 -

[* 9] (2 ) whe th er Dr. an d M rs . Alex an de r are li ab le for in co m e ta x fo r Dr. Alex an de r’s un rep orte d wag e in co m e o f $3 42 ,25 4.2 3, $ 35 4, 2 16 , $4 33 ,50 0, $5 48 ,10 0, an d $ 49 0,0 00 forth e ta xabl e y ears 19 99 , 20 00 , 20 01 , 20 02 , and20 03 , res pe ct iv el y . W e h ol d t ha t the y are l iabl e; (3 ) whe th er Dr. an d M rs . Alex an de r are en ti tl edto de du ct io ns cla im edfor al le ge d fa rm -rel at edex pe ns es to ta li ng $2 3,8 57 an d $ 21 ,37 6 fo r th e ta xabl e y ears 20 01 an d 2 00 2, re sp ect iv el y . W e h ol d t ha t the y are n ot ; (4 ) whe th er Dr. an d M rs . Alex an de r are en ti tl edto va rio us de du ct io ns cl ai m edon Sch edul e A, in cl ud in g m ortg ag e in te res t fo r th e y ears 20 01 an d 2 00 2. W e h ol d t ha t the y

are n ot ; (5 ) whe th er Dr. an d M rs . Alex an de r are li ab le for frau d p en al ti es pu rs ua nt to sec ti on 66 63 forth e ta xabl e y ears 19 99 th ro ug h 2 00 2. We ho ldth atth ey are
no t; (6 ) whe th er Dr. an d M rs . Alex an de r are li ab le for accu racy-rela te d p en al ti es pu rs ua ntto sec ti on 66 62 (a) fo r th e ta xabl e y ears 19 99 , 20 00 , 20 01 , and20 02 , and whe th er Fo un ta inis li ab le foraccu racy-rela te d p en al ti es pu rs ua ntto sec ti on 66 62 (a) fo r th e ta xabl e qua rte rs at i ss ue du rin g 2 00 0 a nd20 03 . W e h ol d t ha t the y are l iabl e;- 10 -

[* 10 ] (7 ) whe th er An th on y I. Krit t an d Ken ne th Rei se rer are p ro m ot ers , andif s o, whe th er p et it io ne rs canrel y ingo odfai th onan y

tax advi ce p ro vi de d b y

Mes sr s. Krit t an d/ orRei se rer i n fu rth eran ce o f a rea so nabl e cau se an d g oo d- fai th de fen se to th e p en al ti es un de r se ct io ns 66 63 an d/ or66 62 (a). We ho ldth atth ey were pr om ot ers an d c an no t b e rel ie d upo n i n g oo d fa it h; (8 ) whe th er Dr. Ale xand er i s l iabl e fo r a fraudul en t fa il ur e to fil e ad di ti on to tax pu rs ua ntto sec ti on 66 51 (f) fo r th e ta xabl e y ear 2 00 3. We ho ldth athe is
no t; (9 ) whe th er Dr. Ale xand er i s l iabl e fo r anad di ti on to tax pu rs ua ntto
se ct io n 6 65 1( a)(2 ) fo r ta xabl e y ear 2 00 3. We ho ldth athe is ; (1 0) whethe r Dr. Alex an de r is li ab le for anad di ti on to tax pu rs uantto
se ct io n 6 65 4 fo r th e ta xabl e y ear 2 00 3. We ho ldth athe is ; (1 1) whethe r Dr. an d M rs . Alex an de r are li ab le forad di ti on s t o t ax pu rs ua nt to sec ti on 66 51 (a)( 1) forth e ta xabl e y ears 20 02 an d 2 00 3. We ho ldth atth ey are; (1 2) whethe r Mrs . Alex an de r is en ti tl edto rel ie f fro m joi ntan d s ev eral li ab il it y for th e ta xabl e y ears 19 99 th ro ug h 2 00 3 p ur su an t t o s ect io n 6 01 5( b) , (c),
an d/ or(f). We ho ldth atsh e is no t;- 11 -

[* 11 ] (13 ) whe th er Dr. Ale xa nd er was anem pl oyee of Fo un ta in du rin g the qu art ers en de d M arch 31 , 19 99 , th ro ug h a ndin cl ud in g Dec em be r 31 , 20 03 . W e ho ldth athe was a n e m

pl oyee of Fo un ta in ; (1 4) whethe r Fo un ta in is en ti tl edto rel ie f un de r th e Rev enue Act o f 19 78 , Pub. L. No. 9 5- 60 0, s ec. 5 30 , 92 Sta t. at28 85 , as a m en de d (s ect io n 5 30 ), with
res pe ctto Dr. Alex an de r fo r th e quarte rs en de d M arch 31 , 19 99 , th ro ug h a nd in cl ud in g Dec em

be r 31 , 20 03 . W e h ol d t ha t Fo un ta in is no t en ti tl edto rel ie f
un de r se ct io n 5 30 ; (1 5) whethe r Fo un ta in is li ab le forem pl oym en t t ax es on th e co m pe ns at io n itpa idfor Dr. Alex an de r’s se rv ic es durin g t he tax ab le qu art ers en de d M arch 31 , 19 99 , th ro ug h a ndin cl ud in g Dec em be r 31 , 20 03 . W e h ol d t ha t Fo un ta in is li ab le ; (1 6) whethe r Fo un ta in is li ab le forfrau d p en al ti es pu rs ua ntto sec ti on 66 63 fo r th e qua rte rs en de d M arch 31 , 19 99 , th ro ug h a ndin cl ud in g Dec em be r 31 , 20 03
. W e h ol d t ha t Fo un ta in is no t l iabl e; (1 7) whethe r Fo un ta in is li ab le forpe na lt ie s p ur su an t t o s ect io n 6 66 2 fo r th e qua rte rs en de d M arch 31 , 19 99 , th ro ug h Dec em be r 31 , 20 03 . W e h ol d t ha t Fo un ta in is li ab le ; an d (1 8) whethe r Fo un ta in is li ab le forpe na lt ie s p ur su an t t o s ect io n 6 65 6. We ho ldth atFo un ta in is
.- 12 -

[* 12 ] 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. Dr. an d M rs . Alex an de r res id edinOhi o wh enth ey fil edth ei r res pe ct iv e pe ti ti on s. Fo un ta inop erat edpri nc ip al ly outof C en te rv il le , Ohi o, wh enit s p et it io n
was fil ed
. 1. Dr. an d M rs . Stanl ey

Alex an de r Dr. Alex an de r was bo rnin19 48 an d m arri edMrs . Alex an de r in 19 91 , and th ey ha ve a daug ht er wh o was bo rnin19 96 . Dr. Alex an de r gr adua te d fr om Ott erb ei n C ol le ge inOhi o i n 1 97 1 wi tha ba ch el or ’s deg ree wi th di st in ct io n i n ch em is try andbi ol og y

an d amin orinm athe m at ic s. Dr. Ale xa nd er at te nd edth e Ohi o S ta te Uni ve rs it y

Co ll eg e o f Med ic in e an d g radua te d i n 1 97 5. Up on gr adua ti ng fro m

m ed ic al sch oo l, Dr. Ale xa nd er: (1) d ida res id en cy at Un iv ers it y Hos pi ta l atDuk e Uni ve rs it y , Nort h C aro li na ; (2 ) di d afel lo wsh ip at t he Nati on al Heart , Lun g, an d B lo odIns ti tu te inBethe sd a, Mary la nd ; (3 ) di d re se arch in card io va sc ul ar s ur ge ry

at t he Ohi o S ta te Uni ve rs it y , andin19 81 co m pl et edhi s ge ne ral su rg ery res id en cy ; an d (4 ) di d atwo -y ear f el lo wsh ip inpl as ti c an d
reco ns tru ct iv e su rg ery atth e Uni ve rs it y of M is so ur i i n C ol um

bi a. Dr. Alex an de r se rv edas a n o ffi cer a ndph y si ci aninth e U.S. Air Fo rce. At th e ti m e Dr. Alex an de r was onact iv e dut y inSanAnt on io , Texa s, h e was a- 13 -

[* 13 ] pr of

es so r of pl as ti c su rg ery atth e AirFo rce m ed ic al tra in in g c en te r. Dr. Alex an de r was ho no rab ly dis ch arg edfro m th e AirFo rce i n 1 98 7 wi th th e ran k o f li eu te na ntco lo ne l. Mrs . Alex an de r rec ei ve d aba ch el or ’s deg ree i n fi ne art s fr om Wrig htSta te Uni ve rs ity

inDayto n, Oh io . In ad di ti on , Mrs . Alex an de r to okacco un ti ng an d
co m pu te r pr og ramm in g c ou rs es at S in cl ai r Co m m un it y Co ll eg e dur in g t he lat e 19 70 s. Fo ll owi ng hi s re ti rem en t fr om th e m il it ary, Dr. Alex an de r pu rch as edan80
- acre farm . Duri ng th e y ears inis su e, fi ve ho rs es were o n t he farm . The h or se s
were n ev er s ho wn o r so ldby eith er Dr. o r Mrs . Alex an de r. Over40 acre s o f th e farm co ns is te d o f ei th er co rnor b ean s p la nt edan d h arv es te d b y th irdpa rti es . Mrs
. Alex an de r sp en t s ub st an ti al ti m e d ai ly w orki ng with t he ho rs es on th e farm , and sh e an d Dr. Al ex an de r al so rai se d h ay on th e farm . Mrs . Alex an de r di d n otke ep reg ul ar re co rd s o f th e farm act iv it y . Fo r 19 99 th ro ug h 2 00 2, Dr. an d M rs . Alex an de r at ta ch edSch edul es F, Pro fitor Lo ss Fro m

Farm in g, t o t he ir F orm s 1 04 0 re po rti ng farm in g a ct iv it y as fo ll ows :- 14 -

[* 14 ] 1999 2000 2001 2002 Gross re ceipts $2,671 $1,495 $2,600 $2,600 Ex penses -0- - 0- -0- -0- Depr eciation -0- 6,000 3,146 5,301 Other e x penses 2,557 2,794 20,711 21,376 Net prof it/los s 114 (7,299) ( 21,267) (18,776) Fo r th e farm in g a ct iv it y

ex pe ns es cla im ed , th e Ale xa nd ers di d n otpro vi de an y
subs ta nt ia ti on . Mrs . Alex an de r pr ov id edDr. Alex an de r th e in fo rm at io n re ga rd in g th e farm an d re nt al act iv it ie s fo r pu rp os es of p rep ari ng th ei r joi ntFed eral in co m e ta x re turn s. 2. Fo un ta in Sk in Care , Cos m et ic , Pla st ic & Rec on st ru ct iv e Su rg ery, Inc
. Fo un ta in , an S co rp or at io n, was in co rp or at edinth e St at e o f Ohi o o n Feb ru ary 14 , 19 97 . Dr. Alex an de r is an d h as alwa y s b eenth e so le sh areh ol de r an d of fic er o f Fo un ta in . Fou nt ai n’s p rimary pl ace o f bu si ne ss was i n C en te rv il le , Ohi o. WhenFo un ta inwas e st ab li sh ed , all em pl oyees o f St an le y

L. Alex an de r, M.D., Inc . (SLAMD), au to m at ic al ly became em pl oyees o f Fo un ta in witho utan y ch an ge inth ei r job de sc rip ti on s o r du ti es . Dr. Alex an de r co nt in ue d t o p erfo rm th e
sa m e supe rv is ory

du ti es ov er the st aff atFo un ta in as h e h adat S LAMD. Dr. Alex an de r ha d t he rig htto “ hi re an d fi re” F ou nt ai n’s em pl oyees. Fo un ta in ha d fo urem pl oyees: Dr. Alex an de r, Eli zab eth S el m (a reg is te rednu rs e, fro m 19 87 th ro ug h 2 00 9) , Mary Jo Lam be th (cl as si fie d a s a “bi ll er”, wh ic h p os it io n s he- 15 -

[* 15 ] co nt in ue s t o h ol d) , andMrs . Alex an de r. Dr. Alex an de r was th e so le ph y si ci anwork in g a t Fo un ta in
. Dr. Alex an de r pe rs on al ly kep t trackof h is ba si s i n F ou nt ai n. Durin g t he y ears 19 99 th ro ug h 2 00 3 M rs . Alex an de r worke d p artti m e atFo un ta in , andsh e
co nt in ue d t o wo rk

th ere a t the ti m e o f tr ia l. The wage s s he rece iv edfro m Fo un ta in fro m 19 99 th ro ug h 2 00 2 wer e rep orte d o n h er Fo rm s W-2, Wage an d Tax St at em en t, an d o n h er re tu rn s. Mr s. Al ex an de r al so ha d s ig na to ry au th or it y on Fo un ta in ’s ban k a cco un t an d h as si gn edch eck s drawnon th atacco un t. Mr s. Alex an de r reg ul arl y

si gn edch eck s fr om

Fo un ta in ’s ban k a cco un ts pa y ab le to Pro fes si on al Leas in g S erv ic es , Inc . (PLS), a Nev ad a co rp or at io n. PLS was own ed 10 0% b y Antho ny Kritt , an a tt orne y an d c ert ifi edpubl ic acco un ta nt . Fo un ta in ha d c he ck in g a cco un ts with Leb an on Cit iz en s Nat io na l Ba nkan d Lib erty Mu tu al Sav in gs Ban k. Dr. Ale xand er d idno t h av e a b an k a cco un t i n h is
na m e dur in g t he y ears inis su e an d up t o t he pre se nt . Mrs . Alex an de r ha d aba nk
acco un t wi th Leba no n C it iz en s Nat io na l Ba nk . Bot h M rs . Alex an de r an d S arah Marte ns , Mrs . Alex an de r’s si st er, h adsi gn at ory au th or it y ov er the Ruth Ann e Alex an de r Rev oc ab le Trus t’s (RAART) ba nkacco un t. RAART was crea te d i n Octo be r 19 93 as agra nt ortru stby Mrs. Ale xa nd er.- 16 -

[* 16 ] In20 01 Ms . Mart en s re si gn ed , andMrs . Alex an de r be cam e so le ly
res po ns ib le form ai nt ai ni ng th e b oo ks an d re co rd s fo r RAART. 3. St an le y

L. Alex an de r, M.D., Inc
. Afte r le av in g t he m il it ary in 19 87 , Dr. Alex an de r op en eda bu si ne ss as a
so le pro pr ie to rs hi p p ro vi di ng pl as ti c an d re co ns tru ct iv e su rg ery se rv ic es . By 19 89 Dr. Alex an de r in co rp or at edSLAMD, hi s p la st ic an d re co ns tru ct iv e su rg ery bu si ne ss . Dr. Alex an de r was th e so le sh areh ol de r, of fic er, an d d oc to r of

SLAMD. At al l t im es , SLAMD tre at edDr. Alex an de r as anem pl oyee. Dr. Alex an de r
earn eda sa la ry

of $ 96 ,00 0 fr om

SLAMD in 19 96 . Mrs . Alex an de r te st ifi edth at he r m on th ly inc om e o f $4 ,04 0 was pa idby D r. Alex an de r. Don al d Ho ke , a cert ifi edpubl ic acco un ta nt , pre pa redso m e o f SLAMD’s
co rp or at e ta x re tu rn s. Mr s. Al ex an de r di d s om e rec or dk eep in g fo r SLAMD an d
oc cas io na ll y

pro vi de d M r. Hok e wit h t he in fo rm at io n n eces sa ry to pre pa re SLAMD’s ta x re tu rn s. Mr s. Al ex an de r was th e p rimary co nt actforMr. Ho ke at SLAMD. Mr. Ho ke pre pa redSLAMD’s 19 96 Fo rm 11 20 S, U.S. Inc om e Tax Return fo r anS Co rp or at io n. Dr. Ale xa nd er s ig ne d a ll Fed eral tax returns fil edon be ha lf o f SLAMD. Dr. Alex an de r ha d o ve ral l s up erv is io n o f em pl oyees wh o
worke d a t SLAM D.- 17 -

[* 17 ] The off

ic e sp ace i n C en te rv il le , Ohi o, wh ere S LAMD was ru n was own ed by RAART beg in ni ng in19 93 . Dr. andMrs . Alex an de r were n am edas t he
or ig in al tru st ees inth e trus t ag reem en t draft edby W il li am Mo nt ag ue , an e st at e pl an ni ng att orne y

who ass is te d t he Alex an de rs inth e fo rm at io n o f th ei r trus ts . In Apr il 19 96 Dr. andMrs . Alex an de r rem ov edth em se lv es as t ru st ees fro m RAART
an d app oi nt edMs . Mart en s (the y ou ng er s is te r of Mrs . Alex an de r) as tru st ee th ro ug h am em or an du m

of t ru stpre pa redby Mr. Mon ta gu e. SLAMD o wedde li nque ntem pl oym en t t ax es forApri l, Au gu st , Octo be r,
an d No ve m

be r 19 96 , andas ares ul t re sp on de ntsei zedfun ds fro m SLAMD’s ba nk
acco un ts The co rp or at io n was di ss ol ve d b y th e St at e o f Ohi o i n 1 99 9. 4. An th on y

Krit t Mr. Kri ttha d ade gr ee i n a cco un ti ng an d b ecame a cert ifi edpubl ic
acco un ta ntin19 78 , bu t h e st op pe d p ract ic in g a cco un ti ng in19 87 . He wentto law
sc ho ol , andhe be cam e anatt orne y in19 85 . Mr. Krit t was no t a f in an ci al in ve st m en t p ro fes si on al an d n ev er h el d ali cen se to sel l s ecu rit ie s o r of fer in ve st m en t ad vi ce. Inad di ti on , Mr. Kri ttdo es no t h ol d am ed ic al li cen se or a ny ki ndof f orm al tra in in g o r educ at io n i n m ed ic in e o r he al th care . Mr. Krit t d idno t pr ep are t he Alex an de rs ’ ta x re tu rn s.- 18 -

[* 18 ] Befo re the y ears inis su e, Dr. Ro na ldBu sh , a co ll eag ue an d fu ture b us in es s pa rtn er o f Dr. Alex an de r, in tro du cedMr. Kri ttto Davi d Ted de r, an at to rn ey with afirm

inFlo rid a. Whi le vi si ti ng Mr. Ted de r inFlo rid a, Mr. Kri tt
m etKenn eth R ei se rer, an att orne y at M r. Tedd er’s l aw fi rm . 5. Th e Ci nc in na ti Vein Cli ni c & the Mi dwe stVein Cen te r Dr. Alex an de r an d Dr. Ro na ldBu sh , an Oh io va sc ul ar s ur ge onwho m Dr. Alex an de r fi rs t m etinth e m id -1 99 0s , bec am e b us in es s p artne rs inJan ua ry 19 97 at th e Ci nc in na ti VeinCli ni c & the Mi dwe stVein Cen te r (CVC) . Dr. Alex an de r, NESL, and/o r PLS al le ge dl y he ldth e ex cl us iv e ri gh t t o l eas e Dr. Alex an de r’s
se rv ic es durin g the pe rio d t ha t h e worke d a t CVC . Howev er, the re were no si gn ed ag reem en ts be twee n C VC an d/ orMi dwe stVein Cen te r an d e it he r NESL or PLS t o le as e Dr. Alex an de r’s se rv ic es . 6. Ken ne th Rei se rer Ken ne th Rei se rer i s an att orne y who ha d h is ownlaw fi rm inSeat tl e, W as hi ng to n, dur in g t he mid -1 99 0s . His c li en ts pa rti ci pa te d i n o ffs ho re
em pl oym en t l eas in g (OEL) tran sa ct io ns . The fi rs t t im e Dr. Alex an de r m etMr. Rei se rer was at a n Oct ob er 1 99 6 Gal enCo . (Gale n) seminarinth e Bah am as . Befo re the Gale n s em in ar, Mr . Rei se rer n ev er d idan y leg al workforDr.- 19 -

[* 19 ] Alex an de r. Howev er, Mr . Rei se rer p ro vi de d Dr. Al ex an de r with do cu m en ta ti on ab ou t the OEL tran sa ct io n a t the Octo be r 19 96 Gale n s em in ar i n th e Bah am as . 7. Gal enCo ./Da Vi nc i Gro up Gale n was a si de bu si ne ss of Dr. B us h t ha t p uton seminar s i n t he Bah am as in th e m id -1 99 0s pri m ari ly int en de d fo r m ed ic al pro fes si on al s. Th e se min ars featur edpre se nt at io ns on to pi cs in cl ud in g c ap ti ve in su ran ce, i nc om e d eferral pr og ram s, an d OEL tr an sa ct io ns . Dr. Bu sh was i n c ha rg e o f th e o ve ral l o rg an iz at io n o f Gal en ’s sem in ars . Gale n l at er b ecame kn own as DaVin ci Group, b utno subs ta nt iv e ch an ge s ca m e as pa rt o f th e n am e ch an ge . Dr. Bu sh ask edMr. Kri ttto att en d aGale n s em in ar. At the in it ia l s em in ar Mr. Kri ttlea rn edab ou t the OEL tran sa ct io n fr om Mr. Rei se rer. Dr. Bu sh ask ed Mr. Kri ttto m ak e p res en ta ti on s atfutur e se min ars , whi chhe di d o n s ev eral
oc cas io ns . Mr. Krit t al so m ad e p res en ta ti on s o n OEL tr an sa ct io ns at s em in ars in th e Uni te d S ta te s. Th ro ug h h is pre se nt at io ns at t he Gale n s em in ars , Mr. Kri tt ob ta in edne w cli en ts , in cl ud in g fo urin di vi du al s wh o s etup th e OEL tran sa ct io ns . Mr. Kri tt ’s pro m ot io na l m at eri al s d es cri be d the tax be ne fit s as so ci at edwith t he OEL tran sa ct io ns . In ad di ti on to Mr. Kri tt , Mr. Rei se rer andKen Whee le r, a ta x- 20 -

[* 20 ] att orne y

who pra ct ic edinFlo rid a fo r ap pr ox im at el y 40 y ears , in cl ud in g 4 y ears with t he Int ern al Rev enue Serv ic e (IR S), m ad e p res en ta ti on s atGale n
se m in ars . Mr. Wheel er’s rel at io ns hi p wi th Gale n c on si st edso le ly of sp eak in g a t
se ve ral seminar s re ga rd in g t ax pl an ni ng an d the leg al requi rem en ts ass oc iate d wi th of fs ho re fi na nc ia l ac ti vi ty. Mr. Wheel er n ev er m ad e p res en tati on s o r en te redin to
an y ag reem en ts to pa rti ci pa te inth e OEL pro gr am . It was Mr. Wheel er’s
un de rs ta nd in g t ha t M r. Rei se rer was th e arc hi te ctof the OEL tran sa ct io n. 8. Offs ho re Em

pl oyee Leas in g Tra ns act io n Dr. Alex an de r an d Dr. Bu sh di sc us se d t he co nc ep t o f anOEL tran sa ct io n i n th e ear ly 199 0s . Dr. Bus h was a cl ie ntof M r. Krit t. Dr. Bu sh was kno wled ge ab le ab ou t h ow the OEL tran sa ct io n o pe rat edan d h adals o p art ic ip at edinanOEL tra ns act io n. Subs eque nt ly, Dr. Bu sh in vi te d Dr. Al ex an de r to a se m in ar i n t he Bah am as th atin cl ud edanOEL pres en ta ti on . Mrs . Alex an de r at te nd edth e Bah am as seminarwith Dr. Al ex an de r in Octo be r 19 96 , andbo th att en de d a pr es en ta ti on m ad e b y

Mr. Rei se rer o n OEL tr an sa ct io ns . After l eav in g the Bah am as inOcto be r 19 96 , Dr. Alex an de r ha d e xt en si ve di sc us si on s wi th Mr. Krit t, Dr. Bu sh , andMr. Rei se rer abo utth e OEL tran sa ct io ns be fo re ag reei ng to go fo rwardwith s uc h atra ns act io n. Be fo re p art ic ip at in g i n t he OEL tran sa ct io n, Dr.- 21 -

[* 21 ] Alex an de r ha d n ev er co nduc te d a ny bu si ne ss with o r worke d fo r anoff sh or e
en ti ty. Afte r th e se min ar, Dr. Ale xa nd er p ai d $ 99 ,00 0 t hr ou gh SLAMD to Mes sr s. Krit t an d R ei se rer thr ou gha do m es ti c le as in g c om pa ny call edNati on wid e Exe cu ti ve Sta ff Leas in g, In c. (NESL), to st artth e OEL tran sa ct io n. Mes sr s. Kri ttan d R ei se rer s tru ctur ed , im pl em en te d, an d m an ag edth e Alex an de rs ’ OEL tran sa ct io n. Mr . Kritt m an ag edan d m ad e al l co nt act s wi th th e of fs ho re en ti ti es in vo lv edwith Dr. Al ex an de r’s OEL tran sa ct io n o n h is be ha lf. Mr. Kri ttex pl ai ne d i n d et ai l t o Dr. Al ex an de r ho w th e OEL tran sa ct io n wo rk ed
. Dr. an d M rs . Alex an de r ag reedto ret ai n M r. Krit t’s s erv ic es to im pl em en t an OEL tra ns act io n i n Dec em

be r 19 96 . Dr. Alex an de r be ga n p art ic ip at io n i n t he OEL tra ns act io n i n Dec em

be r 19 96
. The fol lo win g s te ps were i nv ol ve d i n Dr. Al ex an de r’s OEL tran sa ct io n: (1 ) Dr. Alex an de r si gn eda co nt ractwith a n OEL co m pa ny gr an ti ng th atco m

pany excl us iv e ri gh t t o o fferhi s s erv ic es to an
em pl oyer inex ch an ge for

wage s an d a dd it io na l co m pe ns at io n upo n ret ire m en t; (2 ) Dr. Alex an de r’s se rv ic es were as si gn edto a U.S. em pl oyee le as in g c om

pa ny by th e OEL com

pa ny;- 22 -

[* 22 ] (3 ) Dr. Alex an de r’s co rp or at io n s ig ne d aco nt ractwith ado m es ti c (U.S.) le as in g c om

pany for the rig htto us e Dr. Alex an de r’s se rv ic es in
ex ch an ge for

anag reed -upo n fe e; (4 ) th e d om es ti c le as in g c om pa ny pai d apo rti on of the fun ds
rece iv edfro m

Dr. Alex an de r’s co rp or at io n a s wag es ; (5 ) th e d om es ti c le as in g c om pa ny pai d t he rem ai nd er o f th e fund s re cei ve d fr om

Dr. Alex an de r’s co rp or at io n t o t he off sh or e le as in g c om

pa ny (afte r withh ol di ng a 4% fe e); an d (6 ) th e o ffs ho re l eas in g c om pany with he ldit s fe e an d t he n tra ns ferr edth e fu nd s t o o th er o ffs ho re en ti ti es whi ch , aft er t ak in g th ei r fee s, wo ul d e ve ntua ll y pl ace t he fun ds in to anoff sh or e acc ou nt fo r Dr. Alex an de r. Dr. Alex an de r co nt in ue d t o p art ic ip at e in th e OEL pro gr am th ro ug h 2 00 3. InApri l 2 00 3 M r. Krit t b ecame aware o f Not ic e 2 00 3- 22 , 20 03 -1 C.B. 8 51 , and ha d adi sc us si on with Dr. Al ex an de r ex pl ai ni ng th atth e n ot ic e in di cat edth atth e IRS c on si de redth e OEL pro gr am ab us iv e. Mr. Kri ttin di cat edpo te nt ia l p en al ti es th atDr. Alex an de r co ul d fa ce i f he co nt in ue d wi th th e OEL tran sa ct io n. Al th ou gh Mr. Kri ttm ad e Dr. Alex an de r aware of No ti ce 2 00 3- 22 , supr a, Dr. Alex an de r
ne ve r rea d i t. Ho wev er, Mr . Krit t as su redDr. Alex an de r th atinhi s o pi ni on th e- 23 -

[* 23 ] pr og ram

was l eg it im at e an d d idno t i nv ol ve any asp ect s tha t s ho ul d in va li da te it . Dr. Alex an de r rel ie d upo n t he op in io n o f Mr. Kri tt . Bl en he im /El fin , th e co m

pa ny tha t h el pe d fa ci li ta te lo an s i n Dr. Al ex an de r’s OEL tran sa ct io n, i nf

orm edMr. Kri ttinanem ai l d at edSep te m be r 6, 2 00 2, tha t the IRS was li ke ly to ch al le ng e th e le gi ti m acy of th e lo an s o bt ai ne d t hr ou gh anOEL tra ns act io n a ndth atth e IRS wou ldfin d t ha t “ an y su chch al le ng e wou ldm os t li ke ly be anin su rm ou nt ab le up hi ll ba tt le .” The re co rdis un cl ear a s t o wh ethe r Dr. Alex an de r sa w th is co rres po nd en ce. In20 03 th e IRS in it ia te d acri m in al in ve st ig at io n o f Mr. Kri ttrel at edto hi s in vo lv em en t wi th OEL tran sa ct io ns an d s ei zeda nu m be r of reco rd s, i nc lu di ng
so m e rel at edto Dr. Alex an de r’s OEL tran sa ct io n. Mr . Krit t was ch arg edwith cri m in al tax ev as io n a ndco ns pi racy as a re su ltof h is in vo lv em en t wi th OEL tra ns act io ns . Howev er, aft er a tria l wh ic h t oo k p la ce af te r th e y ears inis su e in th es e cas es , Mr. Krit t was fou ndno t g ui lty of any crim in al m is co nduc t i n
co nn ect io n wi th hi s i nv ol ve m en t i n OEL tr an sa ct io ns . 9. Nat io nwi de Exec ut iv e St aff Lea si ng , Inc
. Nati on wid e Exe cu ti ve Sta ff Leas in g, In c. (NESL), a Nev ad a co rp or at io n,
was own ed1% b y

Mr. Kri ttan d 9 9% b y

Mr. Rei se rer. Mr . Krit t was anoff ic er
an d h el d t he ti tl e o f vi ce p res id en t. NESL was s etup so le ly to fa ci li ta te Mes sr s.- 24 -

[* 24 ] Rei se rer andKrit t’s cl ie nt s’ parti ci pa ti on inOEL tran sa ct io ns . NESL acqui redrig ht s t o the servi ces of o th er OEL cli en ts an d l eas edth os e ri gh ts to cl ie nt s’ bu si ne ss es fora fee a s p artof OEL tr an sa ct io ns . The 4 % fee was sp li t
ev en ly betweenMes sr s. Kri ttan d R ei se rer, wh o s ub tra ct edth e fu nd s p ai d t o NESL by Fo un ta in . Mr. Krit t h adacce ss to all fin an ci al reco rd s m ai nt ai ne d b y NESL onbe ha lf o f Dr. Alex an de r. Des pi te th e co nt ractua l t erm s wh ic h re qu ire d t ha t Dr. Ale xa nd er b e p ai d a
m in im um wage of $ 67 ,00 0 i n b ot h 1 99 7 a nd19 98 , NESL pai d Dr. Al ex an de r on ly $5 0,2 50 an d $ 16 ,75 0, re sp ect iv el y . Whe n M r. Rei se rer b ecame aware th atNESL ha d fa ll enbe hi ndon it s o bl ig at io ns to pa y Dr. Alex an de r’s wag es , Mr. Rei se rer
su gg es te d t ha t M r. Krit t co ul d h av e $ 35 ,00 0 re cen tl y sen t o ffs ho re re tu rn edto NESL. A di sa gr eem en t ar os e b etweenMr. Kri ttan d M r. Rei se rer. As a res ul t, Dr. Alex an de r is su eda le tt er (draft edby Mr. Krit t) t o M r. Rei se rer, d at edNov em be r 28 , 19 98 , term in at in g F ou nt ai n’s ag reem en t wi thNESL. A s a r es ul t, Mr . Rei se rer fax eda se tt le m en t ag reem en t t erm in at in g the rel at io ns hi p, d at edMarc h 2 4, 1 99 9, to Dr. Alex an de r an d M r. Krit t.- 25 -

[* 25 ] 10 . Prof

es si on al Leas in g S erv ic es , Inc
. PLS was in co rp or at edon Sep te m be r 3, 1 99 9, i n Nev ad a. PLS was own ed 10 0% b y Mr. Kri tt , who was a ls o i ts so le off ic er. Fo ll owi ng th e en d o f Mr. Kri tt
an d M r. Rei se rer’s p ro fes si on al rel at io ns hi p, M r. Krit t fo rm edPLS to rep la ce NESL as the do m es ti c em pl oyee lea si ng co m

pa ny com po ne ntinOEL tran sa ct io ns with h is cli en ts . Mr. Krit t m ai nt ai ne d a ll bo ok s an d re co rd s fo r PLS, in cl ud in g le dg ers an d s pr ead sh eet s re fle ct in g OEL tr an sa ct io ns . On th es e le dg ers an d sp read sh eet s the re was a co lu m n t it le d “ sa lary ” whi chrep res en te d t he fun ds tra ns ferr edto Dr. Alex an de r as “ wag es ” o utof t he am ou ntof f un ds ori gi na ll y tra ns ferr edfro m

Fo un ta in to PLS. PLS ke pt4% o f th e fee s p ai d b y Fo un ta in aft er PLS rep la cedNESL as the do m es ti c le as in g c om pa ny in Dr. Al ex an de r’s OEL tra ns act io n. 11 . Mon tra in Serv ic es , Inc
. Mo nt rai n S erv ic es , Inc . (Mo nt rai n) , was an en ti ty form edinIrel an d wh ic h ob ta in edth e ri gh ts to servi ces pro vi de d b y U.S. cit iz en s an d t he n l eas edth em ba ck to bu si ne ss es inth e Uni te d S ta te s. Nei th er Dr. Ale xa nd er n orMr. Kri ttco ns id ered
an y off sh or e le as in g c om

pa ny oth er tha n M on tra in whenDr. Alex an de r in it ia ll y ag reedto pa rti ci pa te inth e OEL tran sa ct io n. Th e co nt ractbe twee n Dr. Al ex an de r
an d M on tra in was apro form a d oc um en t u se d b y Mes sr s. Kri ttan d R ei se rer fo r al l- 26 -

[* 26 ] of th ei r OEL cli en ts . At th e ti m e Dr. Alex an de r ag reedto pa rti ci pa te inth e OEL tran sa ct io n, h e was aware t ha t h e wou ldco nt in ue to workfor Fo un ta in as h e ha d p rev io us ly. The term s o f hi s co nt ractwith M on tra in purp orte dl y res tri ct edacce ss to hi s of fs ho re ac co un t u nt il hi s re ti rem en t. Dr. Ale xa nd er re pa tri at edhi s tran sf erre d fund s t o RAART th ro ug h ali ne of c red itwith a n o ffs ho re en ti ty; th e rem ai nd er
was to be pu t as id e fo r Dr. Alex an de r’s be ne fitalt ho ug h h e kne w he c ou ldacce ss th e fu nd s b efo re h is ret ire m en t i f ne ces sa ry . Alth ou gh th e co nt ractsi gn edwith Mo nt rai n p ro hi bi te d t he bo rro win g o f fu nd s fr om Dr. Alex an de r’s of

fs ho re
acco un t, Dr. Ale xa nd er was aware a t the ti m e h e ag reedto parti ci pa te inth e OEL tra ns act io n t ha t M on tra in was g oi ng to ass ig n t he rig ht s t o h is servi ces to NESL. The co nt ractbe twee n M on tra in an d NESL was an ot he r pr o fo rm a d oc um en t u se d by Mess rs . Krit t an d R ei se rer fo r al l o f th ei r OEL cli en ts . Dr. Alex an de r di d n ot
rece iv e a co py of th is co nt ract . Fees were s ub tra ct edfro m th e fu nd s p ai d fr om Fo un ta in to eit he r NESL or PLS a ndth entra ns ferr edoff sh or e. Dr. Alex an de r an d M r. Krit t t erm in at edth ei r ag reem en t wi th Mo nt rai n i n Decem be r 19 98 . Dr. Alex an de r un de rs to odth atterm in at in g h is ag reem en t was a
m ere f orm al it y be cau se th e fu nd s wo ul d re m ai n i n p la ce, an d t he OEL tran sa ct io n ret ai ne d the same term s b utwith adi ffer en t o ffs ho re co m pa ny.- 27 -

[* 27 ] On Dec em

be r 29 , 19 98 , Mr. Rei se rer s en t a l et te r to Jo e Ken ne y at M on tra in tra ns mit ti ng a co py of a l et te r by Dr. Alexa nd er t erm in at in g the ag reem en t be twee n Dr. Al ex an de r an d M on tra in , effec ti ve Decem be r 31 , 19 98 . After h e te rm in at edhi s co nt ractwith M on tra in , Dr. Alex an de r’s da y -to -d ay du ti es at Fo un ta in di d n otch an ge . 12 . Int ern at io na l Advi so ry Serv ic es , LLC In te rn at io na l Advi so ry

Serv ic es Lim it edLiab il it y Co . (IALB), a Hung ari an
co m pa ny, w as setup to be anem pl oyee lea si ng co m

pa ny des ig ne d t o o bt ai n t he rig ht s t o t he servi ces of U.S. ci ti zen s an d l eas e th os e se rv ic es ba ckto co m pa ni es
an d c or po rat io ns inth e Uni te d S ta te s. Dr. Ale xa nd er n ev er v is it edHun gary or IALB’s of

fic es . Mr. Kri ttwas a ware tha t IALB re pl acedMo ntrai n i n h is OEL tran sa ct io n. As o f th e eff

ect iv e d at e o f th e em

pl oym en t co nt ractDr. Alex an de r si gn edwith IALB, he kn ew th atIALB wou ldbe ass ig ni ng th e ri gh ts to hi s s erv ic es to PLS. Pu rs uantto th e te rm s o f th e co nt ractbe twee n IALB a ndDr. Alex an de r, IALB wou ldha ve so le di sc ret io n t o d eci de whet he r to pa y an y m on ey to Dr. Alex an de r as pa rt o f a p os tre ti rem en t i nc om e p ro gr am . Howev er, IALB ce de d
co nt ro l o ve r Dr. Alex an de r’s ret ire m en t b en efi ts init s ag reem en t wi th Ro sm ol Co m m erci al Co . Ltd . (Ro sm ol ). Dr. Alex an de r’s co nt ractals o re qu ire d IALB t o- 28 -

[* 28 ] pro vi de Dr. Alex an de r with a n a nnua l re po rt o n t he fun d b al an ce i n h is of fs ho re ac co un t; IALB fai le d t o d o s o. In ad di ti onth e co nt ractpro vi de d tha t Dr. Alex an de r was no t al lo wedto bo rro w m on ey s fr om hi s o ffs ho re ac co un t. 13 . Ros m ol Ro sm ol was aCy

prus co rp or at io n s etup as aco ndui t t o a ss is t i nd iv idua ls pa rti ci pa ti ng inOEL tran sa ct io ns fro m off sh or e em pl oyee co m

pa ni es to Rurit an ia
. The purp os e o f Ro sm ol inth e OEL tran sa ct io n was to all ow M on tra in to av oi d Iri sh tax es on th e fu nd s tha t i t re cei ve d i n t he OEL tran sa ct io n. Al th ou gh Dr. Alex an de r ag reedforRo sm ol to be a pa rty to t he OEL tran sa ct io n, h e n ev er v is it ed Cy prus no r ha d any comm

un ic at io ns with a nyon e fro m Ro sm ol
. 14 . Rur it an ia Ru rit an iawas a n e nt it y

form edinth e Is le of J ers ey to aidin di vi du al s
wan ti ng to pa rti ci pa te inOEL tran sa ct io ns . Dr. Alex an de r ne ve r vi si te d t he Isl e o f Je rs ey or c omm un ic at edwith R

ur it an ia . Dr. Alex an de r kn ew th atRurit an ia ’s rol e in th e OEL tran sa ct io n was to be th e rep os it ory of h is off sh or e fund s. Ru rit an ia70
was th e n am e o f Dr. Alex an de r’s of fs ho re b an k a cco un t. Dr. Ale xa nd er h ad
co nt ro l o ve r hi s fu nd s an d i nv es tm en ts m ad e wit h the fun ds he ldinRurit an ia70
. Befo re Dr. Ale xa nd er’s p art ic ip at io n i n t he OEL tran sa ct io n, h e und ers to odth athe
co ul d h av e acc es s t o h is off sh or e fu nd s thr ou gh lo an s. Th e tr an sa ct io n wi th- 29 -

[* 29 ] Ass oc iate d En te rp ris es , Ltd ., di sc us se d i nf ra s ect io n 1 6 i s anex am

pl e o f th e
us e o f a cre di t l in e to fin an ce ac ces s t o t he off sh or e fu nd s. Dr. Alex an de r co ul d a ls o c au se in ve st m en ts to be m ad e. In19 98 Mr. Kri tt , atth e reque stof Dr. Al ex an de r, di rect edth at$9 0,0 00 inhi s o ffs ho re ac co un t, Ru rit an ia70 , be i nv es te d i n Eco tyre Techn ol og ie s, In c. (Eco tyre). 15 . Lon do n & Cap it al Lon do n & Cap it al was a n i nv es tm en t fi rm inLon do n, En gl an d. Lo nd on & Cap it al m etwith c li en ts who pa rti ci pa te d i n OEL tr an sa ct io ns to di sc us s the ir in ve st m en t s tra te gi es an d t he di sp os it io n o f th ei r po rtf ol io s. Lo nd on& Cap it al pr ov id edin ve st m en t ad vi ce t o Dr. Al ex an de r reg ard in g t he fun ds he he ldinhi s of fs ho re ac co un t an d a ct iv el y m an ag edhi s ac co un t. Lon do n & Cap it al pro vi de d Mr. Kri ttwith c op ie s o f Dr. Alex an de r’s of fs ho re ac co un t i nv es tm en t s ta te m en ts . 16 . Ass oc ia te d En te rp ris es , Ltd
. Ass oc ia te d En te rp ris es , Ltd . (AEL), was anoff sh or e sh el l co m

pa ny
or ga ni zedun de r th e laws o f th e Is le of M an . It ex is te d t o c reat e lo an s fo r cl ie nt s in vo lv edwith OEL tr an sa ct io ns . Dr. andMrs . Alex an de r di d n otha ve an y di rect
co nt actwith a nyon e atAEL. All co m m un ic at io n re la te d t o AEL was th ro ug h M r. Krit t. Mr . Krit t m ad e arr an ge m en ts to do cu m en t the all eg edli ne of c red itto RAART fro m

AEL for Dr. an d M rs . Alex an de r, al th ou gh Mrs . Alex an de r al so- 30 -

[* 30 ] fil le d o utso m e o f th e d oc um en ta ti on to fin al iz e sp eci fic trans act io ns . The in it ia l re qu es t t o o bt ai n ali ne of c red itwith AEL was fro m Dr. andMrs
. Alex an de r; s ub se qu en tl y

th e li ne of c red itwas t ak enou t i n the na m e o f RAART. Howev er, AEL’ s i nt ern al do cu m en ta ti on , in cl ud in g re fere nc es to Dr. Alex an de r’s pa ss po rt, re fle ct s tha t Dr. Ale xa nd er was th e so le pa rty to t he ag reem en t. Mr. Kri ttdra fte d t he sec ur edrev ol vi ng li ne of c red itag reem en t an d pr om is so ry

no te be twee n RAART andAEL, bo th of wh ic h wer e d at edJu ne 9, 20 00 , andsi gn edby PeterHowe, m an ag in g d ire ct or of AEL, onbe ha lf o f AEL
an d M s. M art en s, M rs . Alex an de r’s y ou ng er s is te r an d atru st ee o f RAART. Ms
. Marte ns ha d n o dut ie s as a trus te e o f RAART, bu t s he was n am edas t ru st ee b y Dr.
an d M rs . Alex an de r. Mrs . Alex an de r was res po ns ib le forob ta in in g M s. M art en s’ si gn atur e o n d oc um en ts rel at edto RAART. Ms. M art en s s uf fere d fr om

ser io us he al th pro bl em s an d d ie d i n 2 00 2. 17 . Blen he im

Fiduc iary

Group Lt d./ Elfi n Tru stGroup Elfi n Tru stGroup (El fin ) was anen ti ty head qu art eredon th e Is le of Gue rn se y an d wh ol ly owne d b y

th e Bl en he im

Fiduc ia ry

Group (B le nh ei m). Bl en he im is anen ti ty also he ad qu art eredon th e Is le of Gu ern se y . The two
en ti ti es sh are t he same addres s. Elf in is th e fo rm er n am e o f Bl en he im , whi ch ch an ge d i ts na m e so m et im e in th e la te 19 90 s o r ear ly 200 0s . Elfi n’s p ro m ot io na l- 31 -

[* 31 ] m at eri al s s ta te d t ha t i t wo ul d n otacce ptne w cli en ts witho utrece iv in g “ a due di li ge nc e d ecl arat io n” . Howev er, Dr. Ale xa nd er b ecame a cli en t o f Elfi n m or e th ansi x m on th s b efo re p ro vi di ng a “ du e d il ig en ce d ecl arat io n”
. Bl en he im off eredservi ces to pre pa re p ap erwo rkan d fi le reg is tra ti on do cu m en ta ti on to est ab li sh bu si ne ss es or o th er en ti ti es inva rio us for ei gn
co un tri es , alt ho ug h B le nh ei m di d n otha ve an y

of i ts ownem

pl oyees i n a ny fo rei gnco un tri es . Blen he im act edas t he reg is te redoff ic er fo r do zen s o f
co m pa ni es ba se d o n t he Isl e o f Gue rn se y . Blen he im ’s pro m ot io na l m at eri al s
co nt ai ne d asec ti on on “ lo an s t o b en efi ci ari es ” whi chm ad e b ot h M r. Krit t an d Dr. Alex an de r aware of t he po ss ib il it y of o bt ai ni ng fun ds fro m

th e o ffs ho re ac co un t
se t up a s p artof t he OEL tran sa ct io n b efo re Dr. Ale xa nd er’s b eco min g a pa rti ci pa ntinth e tr an sa ct io n. Dur in g t he IRS au di t o f Dr. an d M rs . Alex an de r’s returns , th e IRS ob ta in ed do cu m en ts th ro ug h t he Tax In fo rm at io n Ex ch an ge Agre em en t, U.S.-Gu ern se y , Sep t. 1 9, 2 00 2, Tax Treat ie s (C CH) p ara. 3 61 3 (U.S.- Gue rn se y Agre em en t) pu rs ua ntto th e Co nv en ti on forth e Avo id an ce o f Doubl e Tax at io n a ndth e Prev en ti on of F is cal Evas io n With R es pe ctto Taxe s o n In co m e an d o n C ap it al Gain s, U.S.-U.K., art . 27 , Ju ly 24, 2 00 1, Tax Treat ie s (C CH) p ara. 1 0,9 01 .00 1 (U.S.-U.K. Con ve nt io n)
.- 32 -

[* 32 ] 18 . Retu rn s Dr. Alex an de r pr ep aredth e joi nt19 99 , 20 00 , 20 01 , and20 02 Fo rm s 1 04 0 fo r hi m se lf a ndMrs . Alex an de r. Neit he r Dr. Alex an de r no r Mrs . Alex an de r fi le d a ta x re turnfor20 03 . Dr. Alex an de r rep orte d wag e in co m e o n t he ir F orm s 1 04 0 fo r 19 99 -2 00 2 o f $7 3,3 00 , $5 1,0 00 , $9 4,5 54 , and$7 6,9 00 , res pe ct iv el y , fro m NESL. Des pi te ha vi ng anoff

sh or e acc ou nt , Dr. Alex an de r di d n otatt ach a Sch edul e B, In te res t an d Ord in ary Div id en ds , to hi s 1 99 9, 2 00 0, o r 20 02 tax return. Onhi s 20 01 tax return, d es pi te ha vi ng anoff sh or e acc ou nt , Dr. Alex an de r ch eck edbo th bo xe s o n t he return i nd ic at in g t ha t h e d idno t h av e anin te res t i n an o ffs ho re
acco un t. Ho wev er, Dr. Ale xand er at ta ch eda Fo rm 88 86 , Rep ortabl e Tran sa ct io n Dis cl os ur e St at em en t, p rep aredby Mr. Krit t, t o h is Fo rm 10 40 for20 02 , de sc rib in g t he OEL tran sa ct io n. Dr. an d M rs . Alex an de r at ta ch edSch edul es F to th ei r Fo rm s 1 04 0 fo r 19 99
- 20 02 refl ect in g i nc om e an d e xp en se s fr om a farm in g a ct iv it y

by Mrs. Ale xa nd er. Mr. Kri ttadvi se d Dr. Al ex an de r th athe ha d a n i nc om e ta x re tu rnfil in g requi rem en t fo r 20 03 . For 1 99 9, 2 00 0, 2 00 1, an d 2 00 2 Dr. Al ex an de r reque st ed
ex te ns io ns of t im e to fil e, bu t h e d idno t fi le th e returns un ti l s ev eral m on th s af te r th e ex te nd edda te . In the cas e o f th e 2 00 2 re tu rn , th e return was no t fi le d u nt il
ov er a year aft er the ex te nd edda te s. Mrs . Alex an de r di d n otrev ie w th e 1 99 9,- 33 -

[* 33 ] 20 00 , 20 01 , and20 02 tax returns an d s im pl y rel ie d upo n h er h us ba ndan d hi s ad vi se rs . Mr. Krit t al so di d n otrev ie w th e returns be fo re the y were fi le d. A Form 87 2, Co ns en t t o Ex te ndth e Tim e to Ass es s Tax , fory ears en de d Decem be r 31 , 19 99 an d 2 00 0, was ex ecu te d b y Dr. andMrs . Alex an de r on Decem be r 23 , 20 04 , ext en di ng th e as se ss m en t p eri odth ro ug h J un e 3 0, 2 00 6. A Fo rm SS-1 0, Co ns en t t o Ex te ndth e Tim e to Ass es s Em pl oym en t Tax es , forth e pe rio ds en de d J anua ry

1 thr ou gh Decem

be r 31 , 20 00 , was ex ecu te d b y Mr. Kri tt
on be ha lf o f Fo un ta in on Ju ne 30 , 20 06 , ext en di ng th e as se ss m en t p eri odth ro ug h Ju ne 30 , 20 07
. Mrs . Alex an de r rep orte d o n h er Fo rm 88 57 , Reque stforInn oc en t Sp ou se Rel ie f, fil edMarc h 1 , 20 12 , th atsh e co nt in ue d t o o pe rat e h er farm in g a ct iv it y . On he r Fo rm 88 57 , Mrs . Alex an de r st at edth athe r m on th ly inc om e was $4 ,04 0 a nd th athe r m on th ly inc om e was rece iv edfro m Dr. Alex an de r. She cla im edm on th ly
ex pe ns es of $ 1,5 00 bu t n o g ro ss rece ip ts fro m th e farm in g a ct iv it y . OPINION I. Burd enof P ro of The Co m m is si on er’s d et erm in at io ns inth e n ot ic e o f de fic ie nc y are pr es um edco rrec t, an d t he tax pa y er b ears th e b ur de n o f pr ov in g, b y a pr ep on de ran ce o f th e ev id en ce, tha t the de te rm in at io ns of t he Co m m is si on er ar e- 34 -

[* 34 ] in co rrec t. Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Howev er, s ect io n 7 49 1( a)(1 ) pr ov id es th atsubjec t t o c ert ai n l im it at io ns , wher e a ta xp ay er i nt ro du ces cred ib le ev id en ce wi th res pe ctto an y factua l i ss ue rel ev an t t o
as cert ai ni ng th e ta xp ay er’s l iabi li ty for t ax , th e b ur de n o f pr oo f sh ift s fr om th e ta xp ay er t o t he Co m

mis si on er as to th e fac tu al is su e. Sect io n 7 49 1( a)(2 ) se ts forth requi rem en ts th e ta xp ay er m us t m eetbe fo re the bu rd enof p ro of wil l s hi ft. Pet it io ne rs ha ve no t m etth es e requi rem en ts inth es e cas es . II. Defi ci en ci es of Dr. an d M rs . Alex an de r A. Statut e o f Lim it at io ns Tax ge ne ral ly m

us t b e as se ss edwithi n t hr ee years af te r th e return was fil ed
. Sec. 6 50 1( a). The Alex an de rs ass ertth e li m it at io ns pe rio d fo r as se ss m en t o f in co m e ta xe s h as ex pi redwith re sp ectto Dr. andMrs . Alex an de r’s ta xabl e y ears 19 99 , 20 00 , and20 01
. Fo r 19 99 an d 2 00 0 Dr. an d M rs Alex an de r ex ecu te d aFo rm 87 2 e xt en di ng th e as se ss m en t p eri odth ro ug h J un e 3 0, 2 00 6. Dr. an d M rs . Alex an de r di d n otfil e th ei r 20 01 return unt il Feb ru ary 13 , 20 03 . Res po nd en t m ai le d ano ti ce o f de fic ie nc y

on Jan uary

10 , 20 06 , les s tha n thr ee years af te r Dr. an d M rs . Alex an de r fil edth ei r 20 01 return a ndbe fo re the ex te nd edass es sm en t p eri odforth e 1 99 9 a nd- 35 -

[* 35 ] 20 00 returns ex pi red . There fo re, the li m it at io n p eri od s h av e n otrunfor
as se ss in g t ax for19 99 , 20 00 , and20 01 . See s ec. 6 50 3( a)(1 ). B. Und erp aym en t o f W ag e In co m e to Dr. Alex an de r Res po nd en t d et erm in edDr. Alex an de r ha d u nr ep orte d wag e in co m e o f $3 42 ,25 4, $ 35 4,2 16 , $4 33 ,50 0, $ 54 8,1 00 , and$4 90 ,00 0 fo r 19 99 , 20 00 , 20 01 , 20 02 , and20 03 , res pe ct iv el y . Dr. Alex an de r co nt en ds th atth e unr ep orte d wag es were p artof ano nqua li fie d d eferredco m pe ns at io n p la n d es ig ne d t o d eferth e
rece ip t an d t ax at io n o f th e wag es rece iv edby D r. Alex an de r. Res po nd en t
co nt en ds th atDr. andMrs . Alex an de r co ns tru ct iv el y rece iv edth e m on ey

pl acedin th e o ffs ho re ac co un t wh enitwas t ran sf erre d i nt o t he acco un t. Res po nd en t ad di ti on al ly con te nd s tha t the OEL arran ge m en t i s a s ha m an d s ho ul d b e di sr eg ard edun de r th e eco no m ic subs tanc e d oc tri ne as atrans act io n t o a vo id Fed eral tax at io n.

1. Co ns tru ct iv e Rec ei ptof M on ey Tran sf erre d In to th e Deferred Com pe ns at io n P la n The Alex an de rs ’ arg um en t tha t the OEL tran sa ct io ns were p artof ade ferr ed
co m pe ns at io n p la n fa il s b ecau se th e al le ge d p la n v io la te s the do ctrin e o f
co ns tru ct iv e rec ei pt . Inc om e wil l b e d eem edto be co ns tru ct iv el y rece iv edby a ta xp ay er i n t he tax ab le y ear i n wh ic h “ itis cred it edto hi s ac co un t, s etap artfor- 36 -

[* 36 ] hi m , or o th erwi se m ad e av ai labl e so th athe m ay dra w up on itat a ny tim e, or
so th athe co ul d h av e drawnup on itdu rin g t he tax ab le y ear i f no ti ce o f in te nt io n t o withd raw h adbe engi ve n.” Sec. 1 .45 1- 2( a), In co m e Tax Reg s. On ly whe n a ta xp ay er’s co nt ro l o f th e rec ei ptof i nc om e is subjec t t o s ub st an ti al li m it at io ns wil l itno t b e d eem edto ha ve be enco ns tru ct iv el y rece iv ed . See i d. The co ns tru ct iv e rec ei ptdo ctrin e requi res a ta xp ay er wh o i s o n t he cas h
m etho d o f acc ou nt in g t o re co gn iz e in co m e whe n the tax pa y er h as anun qu al ifi ed , ve st edrig htto rece iv e imm ed ia te pa ym en t o f in co m e. See Pa lm er v . Co m m is si on er, T.C. Mem o. 2 00 0- 22 8. Un de r th e co ns tru ct iv e rec ei ptdo ctrin e, a ta xp ay er m ay

no t d el ib erat el y

tu rnhi s b ackonin co m e o th erwi se av ai labl e. See Marti n v . Comm is si on er, 9 6 T.C. 8 14 , 82 3 (1 99 1)
. Pet it io ne rs arg ue th e co ntract s re st ric t Dr. Ale xa nd er’s acc es s t o t he fun ds
un ti l h e rea ch es th e ag e o f 70 or r et ire s. Ho wev er, the ev id en ce s ho ws tha t h e h ad
acce ss to an d c on tro l o ve r th e fu nd s atth e ti m e th e m on ey was p la cedin to th e Ru rit an ia70 acco un t. He was ab le to gi ve in ve st m en t d ire ct iv es , as e vi de nc edby th e 1 99 8 i nv es tm en t i n Eco tyre. Dr. Alexa nd er al so acce ss edth e fu nd s thr ou gh a li ne of c red itbe twee n AEL an d RAART. Thou gh th e ev id en ce d oe s n otest ab li sh th atDr. Alex an de r un de rs to odth atth e li ne of c red itwas ash am , th e rec or d refl ect s tha t the m on ey

rece iv edinth e fo rm

of ali ne of c red itfro m

AEL actu al ly- 37 -

[* 37 ] cam e fro m

th e Ru rit an ia70 acco un t an d was no t a c omm erci al lo anas t he Alex an de rs co nt en d. Co ns eque nt ly, we co nc lu de th atth e m on ey Fo un ta in tra ns ferr edas p artof th e OEL tran sa ct io ns was c on st ru ct iv el y rece iv edby D r. an d M rs . Alex an de r in th e y ears itwas t ran sf

erre d a ndth eref

or e is in cl ud ab le inDr. andMrs . Alex an de r’s in co m e fo r th os e y ears un de r se ct io n 4 51 (a).

2. Se ct io ns 40 2( b) (1 ) an d 8 3( a) Und er s ect io n 4 02 (b )(1 ) orsec ti on 83 (a), fu nd s s etasi de by an em pl oyer for
se rv ic es pe rfo rm edby an em pl oyee are i nc om e to th e em pl oyee. Onl y

when th e fund s ar e n ottra ns ferabl e o r th ere i s a s ub st an ti al ris k o f fo rfei tu re wi ll th ere b e n o in co m e to th e em

pl oyee. Dr. Alex an de r co ul d t ran sf er the se fun ds th ro ug h the us e of a li ne of c red it . There fo re, the fun ds pa idby Fou nt ai n fo r th e se rv ic es of Dr. Alex an de r fo r th e y ears 19 99 -2 00 3 wer e in co m e to Dr. Alex an de r inth e y ear t he y were p ai d. 3. Eco no mic Subs ta nc e Doc tri ne

“ Inde te rm in in g wh ethe r to att rib ut e in co m e to a ta xp ay er, the Co de
ev al ua te s s ub st an ce o ve r fo rm , ask in g n otwhatth e su rfac e o f a tran sa ct io n
su gg es ts bu t wh atth e eco no m ic real it ie s o f th e tr an sa ct io n s ho w.” Ric ha rd so n v . Co m m is si on er, 5 09 F.3d73 6, 7 40 (6t h C ir. 2 00 7) , aff’g T.C. Mem o. 2 00 6- 69 ; s ee- 38 -

[* 38 ] Co m

m is si on er v . Cou rt Ho ld in g C o., 3 24 U.S. 33 1, 3 34 (19 45 ). Inc om e is ta xe d t o t he pe rs on who earn s i t an d e njo y s the be ne fitof i t wh enpa id . See Helv eri ng v. Ho rs t, 3 11 U.S. 11 2, 1 19 (19 40 ); C or li ss v. Bo wers , 28 1 U.S. 3 76 , 37 8 (1 93 0) ; cf

. Commis si on er v . P. G. Lake, In c., 35 6 U.S. 2 60 , 26 7 (1 95 8) ; Ol d Co lo ny TrustCo . v. Co m mis si on er, 2 79 U.S. 71 6, 7 29 (19 29 ). Mo reo ve r, th e ta xp ay er wh o e arn s i nc om e m ay no t av oi d t ax at io n t hr ou gh an ti ci pa to ry
arra ng em en ts no m atte r ho w cle ve r orsubt le . Lucas v. Earl , 28 1 U.S. 1 11 , 11 5 (1 93 0)
. Inth es e cas es th ere i s n o e co no m ic subs ta nc e o ut si de th e av oi da nc e o f ta x. No s ub st an ti al ch an ge s wer e m ad e to th e b us in es s p ract ic es of F ou nt ai n, an d Dr. Alex an de r st il l m ai nt ai ne d c on tro l o ve r th e fu nd s Fo un ta in pa idth e le as in g a ge nc y fo r hi s s erv ic es . The ec on om ic real it y of t hi s s itua ti on is th atDr. Alex an de r
rece iv edan d c on tro ll edth e fu nd s p ai d t o t he lea si ng ag en ci es forhi s s erv ic es . The Alex an de rs co nt en d t he tra ns act io n was m ot iv at edby a des ire to crea te a ret ire m en t fu ndfor

Dr. Alex an de r. Howev er, the ev id en ce s ho ws tha t the
m ot iv at io n b eh in d t he trans act io n was th e av oi da nc e o f ta x, an d o ut si de of t he tax
co ns eque nc es th ere was no m ean in gf ul eco no m ic subs tanc e to th e tr an sa ct io n. Mr. Kri tttes ti fie d t ha t b utforth e ta x b en efi ts ass oc iate d wi thth e OEL tran sa ct io n,- 39 -

[* 39 ] itwou ldno t b e co steffe ct iv e fo r Dr. an d M rs . Alex an de r, oran y on e el se , to pa rti ci pa te inth e tr an sa ct io n. Add it io na ll y , th ere was no ch an ge inth e way Fo un ta in or Dr. Al ex an de r
co nduc te d b us in es s as id e fro m th e p aym en t t o t he lea si ng ag en cy . The o nl y
subs ta nt iv e ch an ge s tha t re su lt edfro m th is act iv it y

were the tax ab le in co m e Dr.
an d M rs . Alex an de r rep orte d a ndth e am ou ntof e m pl oym en t t ax Fo un ta in pa id
. As ev id en cedby the co ns tru ct iv e rec ei ptof t he m on ey inth e o ffs ho re ac co un t, Dr.
an d M rs . Alex an de r ha d c on tro l o f th e fu nd s p ai d t o t he lea si ng ag en ci es . The
subs ta nc e o f th is tra ns act io n was m erel y av oi da nc e o f ta xa ti on . C. Whe th er Dr. an d M rs . Alex an de r Are En ti tl edto Sch edul e F Farmin g L os s Deduc ti on s fo r 20 01 an d 2 00 2 1. Subs ta nt ia ti on of De du ct io ns Dr. an d M rs . Alex an de r ha ve no t s ub st an ti at edan y of t he de du ct io ns on th ei r Sch edul es F. In ju st ifyin g ade du ct io n t he burd enof p ro of is on th e ta xp ay er. Ru le 14 2( a). Tax pa y ers ha ve no in he ren t ri gh t t o d educ ti on s; th ey are m at te rs of le gi sl at iv e g race . Int ers ta te Tran si t Li ne s v . Commis si on er, 3 19 U.S. 59 0, 5 93 (1 94 3) ; New Co lo ni al Ice Co . v. Hel ve rin g, 2 92 U.S. 43 5, 4 40 (19 34 ). The ta xp ay er m

us t b e ab le to po in t t o s om e sp eci fic st atut e to jus ti fy hi s d educ ti on an d
es tabl is h t ha t h e co m es withi n i ts term s. Dep ut y v. du P on t, 3 08 U.S. 48 8, 4 93- 40 -

[* 40 ] (1 94 0) ; Whi te v. Un it edSta te s, 3 05 U.S. 28 1 (1 93 8) ; Ro be rts v. Co m m is si on er, 6 2 T.C. 8 34 , 83 6- 83 7 (1 97 4) . Add it io na ll y , sec ti on 60 01 requi res al l t ax pay ers to ke ep reco rd s o f th ei r act iv it ie s i n am an ne r th atwil l en ab le th e de te rm in at io n o f th e co rrec t am ou ntof i nc om e subjec t t o t ax . Dr. andMrs
. Alex an de r ha ve no t s ub st an ti at edan y of t he de du ct io ns res ul ti ng fro m th e lo ss es
su st ai ne d fr om

th ei r farm in g a ct iv it ie s an d t hu s ar e n oten ti tl edto an y of t he cl ai m edde du ct io ns forth e y ears 20 01 an d 2 00 2.

2. Act iv it y

Eng ag edIn f

orPro fit Dr. an d M rs . Alex an de r rep orte d agra in farm in g a ct iv it y on Sch edul es F of th ei r 20 01 an d 2 00 2 i nc om e ta x re tu rn s. Fo r th es e y ears th ey rep orte d a nn ua l gr os s i nc om e o f $2 ,60 0. Th ey als o re po rte d e xp en se s o f $2 3,8 57 an d $ 21 ,37 6,
res pe ct iv el y , res ul ti ng inlo ss es of $ 21 ,25 7 a nd$1 8,7 76 , res pe ct iv el y , forth os e y ears . For t he m

to cla im th es e as bu si ne ss de du ct io ns un de r se ct io n 1 62 , th e farm in g a ct iv it y

m us t b e anact iv it y

en ga ge d i n fo r pr of

it . Howev er, b ecau se th ey ha ve fai le d t o s ub st an ti at e th e ex pe ns es , th ere i s n o n eedto reac h t hi s i ss ue . D. Whe th er Dr. an d M rs . Alex an de r Are En ti tl edto Uns ub st an ti at ed Schedul e A Mo rtg ag e In te res t Deduc ti on s fo r 20 01 an d 2 00 2 Dr. an d M rs . Alex an de r ha ve fai le d t o s ub st an ti at e m ortg ag e in te res t de du ct io ns for20 01 an d 2 00 2 o f $2 1,8 67 an d $ 41 ,32 9, re sp ect iv el y . For t he same
reas on s tha t we d idno t al lo w th e Sch edul e F d educ ti on s (l ackof s ub st an ti at io n) ,- 41 -

[* 41 ] we do no t al lo w th e uns ub st an ti at edam ou nt s o f Sch edul e A m ortg ag e in te res t d educ ti on s. III. Pen al ti es an d Ad di ti on s t o Tax forDr. andMrs . Alex an de r A. Sect io n 6 66 3 F rau d P en al ti es forth e Und erp aym en ts of Tax Ass oc ia te d W it h t he OEL T ran sa ct io n Fo r 19 99 -2 00 2 Dr. an d M rs . Alex an de r un de rp ai d asubs tant ia l am ou ntof ta x fo r eac h year be cau se of Dr. Al ex an de r’s pa rti ci pa ti on inth e OEL tran sa ct io n. Sect io n 6 66 3 i m

po se s a p en al ty of 75 % of a ny po rti on of a n u nd erp aym en t tha t i s at tri bu tabl e to frau d. Th e Co m m is si on er h as th e b ur de n o f pr ov in g fr au d b y cle ar
an d c on vi nc in g e vi de nc e. Sec. 7 45 4( a); Ru le 14 2( b) . To sa ti sf y hi s b ur de n o f pr oo f, th e Co m

m is si on er m

us t s ho w: (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 ownto be owi ng by con du ctin te nd edto
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. Sad le r v. 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. 6 54 , 66 0- 66 1 (1 99 0)
.

1. Un de rp aym en t o f Tax The cle ar an d c on vi nc in g s ta nd ardap pl ie s n otm erel y to whet he r an
un de rp aym en t i s at tri bu tabl e to frau d, b utals o t o wh ethe r anun de rp aym en t ex is ts . Park s v . Comm is si on er, 9 4 T.C. at66 0- 66 1; Di Ri cco v. Co m m is si on er, T.C. Mem o. 2 00 9- 30 0. Where frau d i s d et erm in edfor each of s ev eral y ears , th e- 42 -

[* 42 ] Co m

m is si on er’s b ur de n app li es sep arat el y foreach . Rot h v . Comm is si on er, T.C. Mem o. 1 99 8- 28 . W e h av e al ready est ab li sh edth atanun de rp aym en t o f ta x
ex is ts foreach of t he y ears 19 99 -2 00 3 b ecau se of t he un rep orte d i nc om e at tri bu tabl e to th e se rv ic es Dr. Alex an de r pr ov id edto Fo un ta in
.

2. Fraudul en t In te nt The Co m m is si on er m

us t p ro ve by clearan d c on vi nc in g e vi de nc e th ata po rti onof t he un de rp aym en t fo r eac h t ax ab le y ear i n i ss ue was due to frau d. Pro f’l Serv s. v . Commis si on er, 7 9 T.C. 8 88 , 93 0 (1 98 2) . Once t he Co m m is si on er
es tabl is he s tha t an y

po rti on of a n u nd erp aym en t i s at tri bu tabl e to frau d, the en ti re
un de rp aym en t i s s ub

ject t o the 75 % pe na lty , exc ep t wi th res pe ctto an y po rti on of th e und erp aym en t tha t the tax pa y er es tabl is he s i s n otattrib ut ab le to frau d. Se c. 66 63 (a) and(b) . 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 upo n
co ns id erat io n o f th e en ti re re co rd . Kin g’s Co urt M ob il e Hom e Park, In c. v. Co m m is si on er, 9 8 T.C. 5 11 , 51 6 (1 99 2) . The t ax pa y er’s en ti re co ur se of c on du ct
m ay est ab li sh th e requi si te frau du le ntin te nt . Sto ne v. Co m m is si on er, 5 6 T.C. 2 13 , 22 3- 22 4 (1 97 1) . Becau se di rectpro of of atax pay er’s i nt en t i s ra rel y av ai labl e, frau d m ay

be pro ve n b y

cir cum st an ti al ev id en ce an d re as on ab ly infe rredfro m th e fact s. Sp ie s v . Uni te d S ta te s, 3 17 U.S. 49 2, 4 99 (19 43 ); Ni edrin gh au s v . Co m m is si on er, 9 9 T.C. 2 02 , 21 0 (1 99 2) ; Ro wlee v. Co m m is si on er, 8 0 T.C. 1 11 1,- 43 -

[* 43 ] 11 23 (19 83 ). Cert ai n i nd ic ia , comm on ly kno wn as ba dg es of f rau d,
co ns ti tu te cir cu m st an ti al ev id en ce wh ic h m ay gi ve ris e to a fi nd in g o f frau du le nt in te nt . Brad fo rdv. Co m

m is si on er, 7 96 F.2d30 3, 3 07 (9t h C ir. 1 98 6) , aff’g T.C. Mem o. 1 98 4- 60 1. “ Altho ug h n o s in gl e fac to r is ne ces saril y su ffi ci en t t o e st ab li sh frau d, the ex is te nc e o f se ve ral in di ci a is pe rs ua si ve cir cu m st an ti al ev id en ce o f frau d.” Pet zo ld t v . Comm is si on er, 9 2 T.C. 6 61 , 70 0 (1 98 9)
.

a. Anal y si s o f Frau du le ntInt en t Inde te rm in in g t ha t Dr. an d M rs . Alex an de r ha d fr au du le ntin te ntto ev ad e ta xe s, re sp on de ntpl aces a gr eatde al of e m ph as is on th ei r educ at io n a nd
un de rs ta nd in g o f th e OEL tran sa ct io n a ndus es th is to sh ow the ir a waren es s o f th e ba dg es of f

rau d. Re sp on de ntco nt en ds th atDr. andMrs . Alex an de r are hi gh ly educ at edpe op le who kn ew th atth e OEL tran sa ct io n was a ta x- av oi da nc e sc he m e. To m ak e th is po in t re sp on de ntrel ie s o n t he fol lo win g fa ct s an d a ss ert io ns : (1 ) th e educ at io n o f Dr. an d M rs . Alex an de r al lo wedth em to un de rs ta ndth e ta x im pl ic at io ns of t he tra ns act io n; (2) th e fac t tha t Dr. Ale xand er p rep aredbo th hi s pe rs on al an d F ou nt ai n’s co rp or at e ta x re tu rn s d em on st rat es anun de rs ta nd in g o f in co m e ta x; (3) Mrs . Alex an de r di d b oo kk eep in g wo rkforFo un ta in an d S LAMD;
an d (4 ) th e kno wled ge of M es sr s. Kri ttan d R ei se rer s ho ul d b e im pu te d t o Dr. an d Mrs . Alex an de r.- 44 -

[* 44 ] Whi le Dr. Alex an de r is hi gh ly edu cat edan d ave ry acco m pl is he d m ed ic al do ct or , res po nd en t d idno t es tabl is h t ha t h e und ers to odco m pl ex tax law i ss ue s. To b e su re, Dr. Ale xand er h as a ba si c und ers ta nd in g o f co rp or at e stru ctur es an d fil edhi s o wn t ax returns , bu t n othi ng inth e rec or ds est ab li sh es th athe un de rs to od th e co m pl ex tax laws in vo lv edwith t he OEL tran sa ct io n, n orth athe po ss es se d t he kn owl ed ge to de te rm in e th atth e OEL tran sa ct io n d idno t co m pl y with app li cab le ta x l aws . Sim il arl y , Mrs . Alex an de r do es ha ve so m e acc ou nt in g e du cat io n, b ut sh e d oe s n otpo ss es s the educ at io n o r ex pe rie nc e fo r th e Co urt t o h ol d h er t o a hi gh er l ev el of und ers ta nd in g wh enitco m es to th e OEL tran sa ct io n. The ev id en ce s ho ws tha t M es sr s. Kri ttan d R ei se rer e xp la in edth e OEL tra ns act io n i n d et ai l t o Dr. Al ex an de r an d a ss ur edhi m th e p la n c om

pl ie d wi th th e ta x l aws . There is no th in g i n h is educ at io n o r ex pe rie nc e th atwou ldin di cat e th at he sh ou ldha ve kn own di ffer en tl y . Mes sr s. Re is erer an d Kri ttstru ctur edan d im pl em en te d e ve ry

asp ectof t he OEL tran sa ct io n. Dr. an d M rs . Alex an de r rel ie d up on th e as su ran ce o f Mes sr s. Re is ereran d Kri ttth atth e OEL pl anco nf orm edto th e ta x l aws . Dr. andMrs . Alex an de r do no t p os se ss th e educ at io n a ndex pe rie nc e to un de rs ta ndth atth e p la n d idno t co nf orm to th e ap pl ic ab le tax laws
.- 45 -

[* 45 ] Res po nd en t al so st at es th atth e kno wled ge an d e xp ert is e o f Mes sr s. Kri tt
an d R ei se rer s ho ul d b e im pu te d t o Dr. an d M rs . Alex an de r, ci ti ng th e g en eral rul e th ata pr in ci pa l i s ch arg edwith t he kn owl ed ge of a n a ge ntinth e co ur se of t he pr in ci pa l’s b us in es s. See Fo rdMo to r Cre di t Co . v. Weave r, 68 0 F .2d45 1, 4 57 (6 th Cir . 19 82 ) (ci ti ng Curti s, Co ll in s & Hol lb ro okCo . v. Un it edSta te s, 2 62 U.S. 21 5, 2 22 (19 23 )). Inth is si tu at io n, Dr. an d M rs . Alex an de r were c li en ts of M es sr s. Krit t an d R ei se rer andwere p artof t he OEL tran sa ct io n o wne d a ndop erat edby Mes sr s. Kri ttan d R ei se rer. Me ss rs . Krit t an d R ei se rer wer e n otem pl oyees o r ag en ts pa rti ci pa ti ng inth e b us in es s o f Dr. Alex an de r orFo un ta in , andthus th e ge ne ral pri nc ip le do es no t ap pl y inth is si tu at io n. Th e li m it edab il it y to un de rs ta nd th e ta x l aws ass oc ia te d wi th th e OEL tran sa ct io n a ndth e rel ia nc e upo n t he ir t ax advi se rs to ha ve th e p la n c om pl y with t he tax laws sh ow the Alex an de rs di d n ot ha ve frau du le ntin te nt .

b. Ba dg es of F rau d Res po nd en t ci te s n um ero us ba dg es of f rau d t o s ho w cir cum st an ti al ev id en ce of frau d i n h is co nc lu si on th atDr. andMrs . Alex an de r ha d fr au du le ntin te nt . Howev er, the reco rdsh ows th atth e frau du le ntin te ntele m en t i s m is si ng .- 46 -

[* 46 ] i. Co ns is te ntPat te rnof Un de rrep orti ng Dr. an d M rs . Alex an de r un de rrep orte d t he ir i nc om e fo r fo ur co ns ecu ti ve y ears . “ A con si st en t p atte rnof u nd erre po rti ng lar ge am ou nt s o f in co m e is ev id en ce of frau d.” Garci a v . Comm is si on er, T.C. Mem o. 2 01 2- 15 5 (c it in g Ho ll an d v
. Uni te d S tate s, 3 48 U.S. 12 1 (1 95 4) ). Howev er, the reas on for th e und erre po rti ng
was th ei r rel ia nc e o n t he leg it im acy of th e OEL pl an . This do es no t s up po rt a fin di ng of i nt en t t o e va de tax es kn own to be owedbe cau se Dr. andMrs . Alex an de r di d n otkn ow tha t the y

owedad di ti on al tax at t he ti m e. Afte r Not ic e 2 00 3- 22 , supr a, was rel eas ed , des cri bi ng OEL tran sa ct io ns as abu si ve , Dr. andMrs
. Alex an de r were a ga in ass ur edby bot h M r. Krit t an d agro up of l awy ers th atMr. Krit t’s OEL trans act io n c on fo rm edto th e ap pl ic ab le tax laws an d t reat ie s. Whil e th e rel ianc e b y

th e Ale xa nd ers m ay

no t h av e b eenreas on ab le , th ei r rel ia nc e was
no t fr au du le nt . ii . Lack o f Cre di bi li ty of th e Tax pay er’s Tes ti m on y W e fo un d Dr. an d M rs . Alex an de r to be cred ib le inth ei r te st im on y . Mr. Krit t i m pl em en te d the OEL plan, an d Dr. an d M rs . Alex an de r rel ie d upo n h im to
m ak e th e p la n c on fo rm

to th e ap pl ic ab le tax laws . The rec or d a ndth ei r te st im on y refl ectth is rel ia nc e.- 47 -

[* 47 ] ii i. Co nc eal m en t o f In co m e o r Ass et s Res po nd en t cl ai m s Dr. an d M rs . Alex an de r to okaffi rm at iv e st ep s t o c on ceal th ei r in co m e an d a ss et s an d m is le d re sp on de ntas t o t he ir a ctua l t ax ab le in co m e. Dr. an d M rs . Alex an de r us edth e OEL tran sa ct io n t o l owe r th ei r ta xabl e in co m e,
an d t he y de ni edth e ex is te nc e o f anoff sh or e acc ou nton th e 2 00 1 t ax return. Whi le th es e fac ts are p ot en ti al ba dg es of f rau d, the reco rddo es no t es tabl is h t he se act s wer e in te nt io na ll y

de si gn edto de cei ve or c on ceal
. On the ir 2 00 2 i nc om e ta x re tu rnno t fi le d u nt il May of 20 05 bu t b efo re the
no ti ce o f de fic ie nc y

in20 06 , Dr. andMrs . Alex an de r di sc lo se d t he OEL tra ns act io n i n aFo rm

88 86 att ach edto th ei r ta x re tu rn . The RAART Tru stwas
crea te d i n 1 99 3, s ev eral y ears be fo re Dr. an d M rs . Alex an de r’s in tro du ct io n t o t he OEL tran sa ct io n. Fi na ll y , we fin d t ha t wh il e h e h adacce ss to fin an ci al st at em en ts of th e Ru rit an ia70 acco un t, Dr. Ale xa nd er d idno t ac tu al ly und ers ta ndth athe ha d
anown ers hi p i nt eres t o r an y si gn at ory

au th or it y ov er the acco un t. His
m is un de rs ta nd in g a ll ev ia te s fr au d i n t he se cas es .- 48 -

[* 48 ] iv . Dr. andMrs . Alex an de r’s Fai lu re t o M ai nt ai n Ad equa te

Reco rd s Pe rta in in g t o Th ei r Part ic ip at io n i n t he OEL T ran sa ct io n a ndTo Fu ll y Co op erat e in th e E xa m in at io n o f The ir R eturns or i n t he Lit ig at io n Bec au se he was u nabl e to ob ta in in fo rm at io n fr om Dr. andMrs . Alex an de r,
res po nd en t was for cedto ob ta in m an y do cu m en ts th ro ug h t he U.S.- Guerns ey ag reem en t an d a rti cl e 2 7 o f th e U.S.-U.K. Con ve nt io n. Fa il in g t o c oo pe rat e wit h th e au th or it ie s i s a b ad ge of f rau d. In th es e cas es , itap pe ars th atDr. Alex an de r
m ay ha ve ha d a cces s t o s om e in fo rm at io n re ga rd in g t he ir o ffs ho re ac co un ts , bu t Dr. an d M rs . Alex an de r di d n otpo ss es s m an y of t he do cu m en ts res po nd en t reque st ed
. v. Fa il ur e To Fi le a Return fo r 20 03 Fai li ng to fil e a return i s a b ad ge of f rau d, an d Dr. an d M rs . Alex an de r di d
no t fi le an y

return fo r 20 03 . Dr. Alex an de r te st ifi edth athe ha d c on cern s tha t fil in g a ny po st ch al le ng e return wo ul d b e co ns tru edas e it he r anadm is si on or a
co nt in ua ti on of t he im

pr op er tran sa ct io n. Th ou gh th is co nc ernis no ex cu se forno t fil in g atax return, Dr. Al ex an de r’s te st im on y ex pl ai ns th atth e rea so n fo r no t fi li ng di d n otin cl ud e th e in te ntto co m m itfrau d a ndev ad e ta xe s.- 49 -

[* 49 ] vi . Dr. andMrs . Alex an de r’s Att em pt s atDis tanc in g T he m se lv es Fro m

th e OEL Trans act io n Frau du le ntin te ntcanbe in ferr edfro m th e wil lfu l b li nd ne ss of t he tax pa y er. See F ie ld s v . Comm is si on er, T.C. Mem o. 1 99 6- 42 5. Re sp on de ntba se s h is arg um en t tha t Dr. an d M rs . Alex an de r were wi ll fu ll y bl in d o n s ev eral fact s. Dr.
an d M rs . Alex an de r di d n otdi rect ly com m un ic at e wit h a nyon e o ffs ho re. Dr. Alex an de r di d n otreque stoff sh or e acc ou ntst at em en ts fro m Mo ntrai n a ndIALB. Mrs . Alex an de r di d n otrev ie w herjoi nttax return b efo re i t was fil ed . Fin al ly, aft er l earn in g o f th e IRS ’ co nc ernov er OEL trans act io ns an d the cri m in al in ve st ig at io n o f Mr. Kri tt , Dr. Alex an de r di d n otsee k i nd ep en de ntadvi ce. W e b el ie ve Dr. andMrs . Alex an de r di st an cedth em se lv es fro m th e tra ns act io n b ecau se Mes sr s. Kri ttan d R ei se rer p la nn ed , stru ctur ed , and im pl em en te d t he en ti re OEL trans act io n. Dr. an d M rs . Alex an de r rel ie d o n t he se in di vi du al s t o i m

pl em en t the tra ns act io n; itis reas on ab le th atth ey wou ldha ve lef

t th e co m m un ic at io n wi th th e o ffs ho re p ers on s t o M es sr s. Kri ttan d R ei se rer. Dr. Alex an de r’s la ckof c on cern ov er the cri m in al in ve st ig at io n o f Mr. Kri ttan d t he factth atth e IRS di sf

av or edth e OEL tran sa ct io ns is tro ub li ng bu t n otev id en ce o f frau du le ntin te nt .- 50 -

[* 50 ] 3. Co nc lu si on W e fi ndth atDr. andMrs . Alex an de r di d n otin te ndto ev ad e ta xe s tha t the y be li ev edto be owed . Dr. andMrs . Alex an de r pl aceda gr eatde al of r el ia nc e o n Mr. Kri ttan d b el ie ve d t he OEL tran sa ct io n c om pl ie d wi th th e ta x l aws . They do
no t p os se ss th e educ at io n o r ex pe rie nc e th atwou ldall ow the m to kn ow tha t the y sh ou ldha ve rep orte d t he ad di ti on al in co m e. Even th ou gh th ei r rel ia nc e in Mr. Krit t was m is pl acedan d m an y ba dg es of f

rau d d o e xi stinth is si tu at io n,
res po nd en t h as no t p ro ve n fr au d b y cle ar an d c on vi nc in g e vi de nc e. 3 B. Sect io n 6 66 2( a) Pe na lt y forUnd erp aym en t o f Tax As we h av e fo un d n o fr au d fo r whi chth e p en al ty und er s ect io n 6 66 3 c ou ld ap pl y , Dr. andMrs . Alex an de r m ay be li ab le for

a 20 % accu racy-rela te d p en al ty
un de r se ct io n 6 66 2( a) an d (b )(2 ) fo r anun de rp aym en t o f ta x a ttrib ut ab le to a
subs ta nt ia l u nd ers ta te m en t o f in co m e ta x. Un de r se ct io n 7 49 1( c), the Co m m is si on er b ears th e b ur de n o f pr oduc ti on with re ga rdto pe na lt ie s an d m us t
co m e fo rwardwith s uf

fic ie ntev id en ce i nd ic at in g t ha t i t i s ap pr op ria te to im po se
Inat l eas t two o th er ca se s i nv ol vi ng si m il ar s ch em es to all eg ed ly leas e 3 se rv ic es to off

sh or e en ti ti es , we hav e su st ai ne d a dd it io ns to tax forfrau d. Se e, Bro wni ng v. Co m

m is si on er, T.C. Mem o. 2 01 1- 26 1; Fo xwo rth y , Inc . v. Co m m is si on er, T.C. Mem o. 2 00 9- 20 3. Ho wev er, we m us t an al yze the fact s o f th e cas e b efo re u s, an d we f

in d t ha t Dr. Ale xa nd er’s d eci si on to en ga ge inth e tra ns act io ns at i ss ue is ba se d o n m is gu id edrel ia nc e o n h is advi se rs an d n otth e in te ntto frau du le nt ly evad e ta x.- 51 -

[* 51 ] pe na lt ie s. See Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). 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 b ur de n o f pr oo f sh ift s t o t he tax pa y er, i nc lu di ng th e b ur de n o f pr ov in g tha t the pe na lt ie s ar e in ap pr op ria te be cau se of r eas on ab le cau se un de r se ct io n 6 66 4. Se e Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 -4 47
.

1. Subs ta nt ia l Un de rs ta te m en t A subs ta nt ia l u nd ers ta te m en t o f in co m e ta x e xi st s wh ere t he un de rs tate m en t
ex ceed s the gre at er o f $5 ,00 0 o r 10 % of t he tax requi redto be sh own on th e return. Se c. 66 62 (d )(1 )(A)(i ) an d (i i). Fo r al l years b etween19 99 -2 00 2, Dr. an d Mrs . Alex an de r’s un de rs ta te m en ts ex ceed10 % of t he tax requi redto be sh own on th e returns , whi chis gre at er tha n $ 5,0 00 . There fo re, res po nd en t h as m etth e bu rd enof p ro du ct io n i n t he se cas es .

2. Re as on ab le Cau se Und er Se ct io n 6 66 4 The Alex an de rs ass ertgo od -fai th rel ia nc e upo n t he ir t ax advi se rs , Mes sr s. Krit t an d R ei se rer, fo r th ei r rea so nabl e cau se de fen se to a se ct io n 6 66 2( a) p en al ty.

“No p en al ty sha ll be im

po se d u nd er thi s p artwith re sp ectto an y po rti onof a n
un de rp aym en t i f itis sh ownth atth ere was a reas on ab le cau se for su chpo rti on an d th atth e ta xp ay er ac te d i n g oo d fa it h wi th res pe ctto su chpo rti on .” Sec. 6 66 4( c).- 52 -

[* 52 ] Goo d- fai th rel ia nc e o n p ro fes si on al advi ce m ay pro vi de a ba si s fo r a
reas on ab le cau se de fen se . Howev er, certa in op in io ns m ay no t b e rel ie d upo n. A tax advi se r who “ is a m at eri al advi so r (wit hi n t he m ean in g o f se ct io n 61 11 (b )(1 )), an d p art ic ip at es inth e o rg an iz at io n, m an ag em en t, p ro m ot io n, o r sa le of th e tr an sa ct io n” m ay

be a so ur ce o f advi ce tha t m ay be rel ie d upo n t o a vo idth e pe na lty for ne gl ig en ce. Sec . 66 64 (d )(4 )(B) (i) an d (i i). “ The advi ce m us t b e fro m
co m pe te ntan d i nd ep en de ntpa rti es , no t fr om pro m ot ers of the in ve st m en t” or advi se rs who ha ve a co nf li ctof i nt eres t. Swan so n v . Comm is si on er, T.C. Mem o. 20 09 -3 1 (c it in g LaVe rn e v . Comm is si on er, 9 4 T.C. 6 37 , 65 2- 65 3 (1 99 0) , aff’d witho utpubl is he d o pi ni on , 95 6 F .2d27 4 (9 th Cir . 19 92 )); see Hans env. Co m m is si on er, 4 71 F.3d10 21 , 10 31 (9t h C ir. 2 00 6) , aff’g T.C. Mem o. 2 00 4- 26 9.

“ Co urts ha ve rep eat ed ly hel d t ha t i t i s u nr eas on ab le fora ta xp ay er t o re ly on atax advi se r act iv el y

in vo lv edinpl an ni ng th e tr an sa ct io n andtai nt edby an in he ren t
co nf li ctof i nt eres t” . Can al Co rp . v. Co m m is si on er, 1 35 T.C. 19 9, 2 18 (20 10 ); s ee al so Pas te rn ak

v. Co m m is si on er, 9 90 F.2d89 3, 9 02 -9 03 (6t h C ir. 1 99 3) , aff’g Don ah ue v. Co m

m is si on er, T.C. Mem o. 1 99 1- 18 1; LaVern e v . Commis si on er, 9 4 T.C. at 6 52 -6 53
.- 53 -

[* 53 ] A pro m ot er i s “ ‘an advi se r who pa rti ci pa te d i n s tru ctur in g t he tra ns act io n o r is othe rwis e rel at edto , has anin te res t i n, o r pr of it s fr om th e tr an sa ct io n’.” 10 6 Ltd . v. Co m

m is si on er, 1 36 T.C. 67 , 79 (20 11 ) (quo ti ng Tig ers Ey e Trad in g, LLC v. Co m m is si on er, T.C. Mem o. 2 00 9- 12 1) , aff’d, 6 84 F.3d84 (D.C. Cir . 20 12 ). “ A pr om ot er’s s el f in te res t m ak es ‘ advi ce’ in he ren tl y un rel iabl e.” Tig ers Ey e Trad in g, LLC v . Comm is si on er, T.C. Mem o. 2 00 9- 12 1. Inth es e cas es , Mes sr s. Kri ttan d R ei se rer c anno t b e rel ie d upo n fo r a g oo dfai th rel ia nc e d efen se un de r se ct io n 6 66 4( c). Mes sr s. Kri ttan d R ei se rer p la nn ed , st ru ctur ed , andim

pl em en te d e ve ry

pa rt o f th e OEL tran sa ct io n. Th ey were the
own ers of NESL an d P LS, th e d om es ti c le as in g a ge nc ie s tha t em pl oyed Dr. Alex an de r du rin g t he tra ns act io n. Mo stim po rtant ly, th ey

were p ai d o nl y

for im pl em en ti ng th e p la n a ndth e co nt in ue d p art ic ip at io n i n t he pl an . Mes sr s. Kri tt
an d R ei se rer re cei ve d 4 % of t he m on ey pl acedin to a de ferr edco m pe ns at io n p la n,
an d Dr. Al ex an de r was aware t ha t the m or e m on ey he pl acedin to th e p lan, the
m or e m on ey

Mes sr s. Kri ttan d R ei se rer wo ul d re cei ve . Dr. Alex an de r al so
un de rs to odth atth e d om es ti c le as in g a ge nc ie s u se d i n t he tra ns act io n wer e o wne d by Mess rs . Krit t an d R ei se rer. Th e rec or d s ho ws tha t the tax advi se rs , Mes sr s. Krit t an d R ei se rer, were pro m ot ers of t he OEL tran sa ct io n. Th ey im pl em en te d t hi s type o f tr an sa ct io n fo r nu m ero us ot he r m ed ic al pro fes si on al s wh o wer e in tro du ced- 54 -

[* 54 ] to itat m ed ic al co nf eren ces . There was aser io us co nf li ctof i nt eres t be twee n the tax advi se rs an d t he Alex an de rs as the tax advi se rs ’ pr of itin crea se d fo r ev ery ad di ti on al do ll ar p la cedin to th e tr an sa ct io n. W e co nc lu de th atMes sr s. Kri ttan d R ei se rer m ay no t b e rel ie d upo n fo r pu rp os es of areas on ab le cau se de fen se un de r se ct io n 6 66 4. Thus , th e Ale xa nd ers ha ve no t m etth ei r bu rd enof p ro vi ng th e se ct io n 6 66 2( a) p en al ty is i napp ro pr ia te . C. Sect io n 6 65 1( f) Fraudul en t Fa il ur e To Fi le Add it io n t o Tax for20 03 Sect io n 6 65 1( f) i m

po se s anad di ti on to tax of up t o 7 5% o f th e am ou ntof ta x re qu ire d t o b e sh own on th e return wh enth e fai lu re t o fi le a Fed eral in co m e ta x return t im el y

is du e to frau d. In co ns id eri ng whet he r Dr. Alex an de r is subjec t t o th e ad di ti on to tax forfrau du le ntfai lu re t o fi le un de r se ct io n 6 65 1( f) fo r 20 03 , we
no te th atwe ha ve alr eady de te rm in edth e ad di ti on to tax forfrau d u nd er s ect io n 66 63 is no t ap pl ic ab le inth e p rio r y ears . The Co m mis si on er b ears th e b ur de n o f
es tabl is hi ng frau d b y

“ cl ear a ndco nv in ci ng ev id en ce.” Se c. 74 54 (a); Ru le 14 2( b) ; Kor ecky v. Co m m is si on er, 7 81 F.2d15 66 , 15 68 (11 th Cir . 19 86 ), aff’g T.C. Mem o. 1 98 5- 63 ; Cl ayto n v . Comm is si on er, 1 02 T.C. 63 2, 6 53 (19 94 ); P et zo ld t v . Co m m is si on er, 9 2 T.C. 6 61 , 69 9 (1 98 9)
. W e fi ndno frau du le ntin te ntinDr. Alex an de r’s fai lu re t o fi le a return fo r 20 03 an d t he ad di ti on to tax un de r se ct io n 6 65 1( f) i s n otsu st ai ne d.- 55 -

[* 55 ] D. Sect io n 6 65 1( a)(2 ) an d 6 65 4 Ad di ti on s t o Tax for20 03

1. Se ct io n 6 65 1( a)(2 ) Res po nd en t d et erm in edth atDr. andMrs . Alex an de r are li ab le fora se ct io n 66 51 (a)( 2) ad di ti on to tax forth e 2 00 3 t ax ab le y ear. Se ct io n 6 65 1( a)(2 ) im po se s
anad di ti on to tax for

fai lure t o p ay

th e am ou ntsh own as t ax on a return o n o r be fo re the du e d at e p res cri be d u nl es s the tax pa y er ca n e st ab li sh su chfai lure was du e to reas on ab le cau se an d n otwil lfu l n eg le ct . The ad di ti on is equa l t o 0 .5% o f th e am ou ntsh own as t ax on th e ta x re tu rnbu t n otpa id , with an a dd it io na l 0 .5% each m on th or f

ract io n t he reo f du rin g wh ic h t he fai lure t o p ay co nt in ue s (up t o a
m ax im um of 2 5%) . See Cabi rac v . Comm is si on er, 1 20 T.C. 16 3, 1 70 n.1 2 (2 00 3)
. Sect io n 7 49 1( c) p la ces th e b ur de n o f pr oduc ti on on th e Co m mis si on er t o pr es en t s uf

fic ie ntev id en ce s ho win g t ha t the ad di ti on to tax is ap pr op ria te . Hig be e v. Co m m is si on er, 1 16 T.C. 43 8 (2 00 1) . Once t he Co m m is si on er m eet s thi s bu rd en , th e ta xp ay er h as th e b ur de n o f pr oo f with re sp ectto ex cu lp at ory fact or s,
su chas r eas on ab le cau se . Id. at44 6. Inth es e cas es , res po nd en t h as m ethi s b ur de n. Dr. Ale xa nd er d idno t fi le a ta x re turnfor20 03 . His r eas on in g fo r no t fi li ng was aco nc ernth atfil in g a ny po st ch al le ng e return wo ul d b e co ns tru edas e ithe r anadm is si on or aco nt in ua ti on of th e im pr op er tran sa ct io n. Whil e th is m ay ha ve ne ga te d a ny fraudul en t i nt en t, i t- 56 -

[* 56 ] is no t a r eas on ab le cau se to no t fi le a ta x re tu rn . Dr. Alex an de r un de rs to od he ha d t ax ab le in co m e fo r 20 03 an d was in fo rm edby Mr. Krit t, the tax advi se r he rel ie d upo n, tha t a t ax return n eed edto be fil edfor20 03 . There fo re, Dr. Alex an de r is li ab le forth e se ct io n 6 65 1( a)(2 ) ad di ti on to tax .

2. Se ct io n 6 65 4 Res po nd en t al so de te rm in edth atDr. andMrs . Alex an de r are li ab le foran ad di ti on to tax un de r se ct io n 6 65 4 fo r fai lu re t o p ay est im at edtax for

20 03
. Sect io n 6 65 4( a) i m

po se s an ad di ti on to tax forfai lure t o m ak e ti m el y an d
su ffi ci en t p aym en ts of e st im at edtax . A tax pa y er h as anob li ga ti on to pa y
es ti m at edtax fora pa rti cu la r y ear o nl y if h e h as a “requi redan nu al pa ym en t” for th aty ear. Se c. 66 54 (d ). A requ ire d a nn ua l p aym en t i s equa l t o t he les se r of : (1 ) 90 % of t he tax sh own on th e ta xp ay er’s return due forth e y ear i n i ss ue (or , if n o return i s fi le d, 9 0% o f th e ta x fo r su chy ear) ; o r (2 ) if th e ta xp ay er fi le d areturn fo r th e imm ed ia te ly prece di ng tax ab le y ear, 1 00 % of t he tax sh own on th atreturn. Sec. 6 65 4( d) (1 )(B) . Gener al ly, se ct io n 6 65 4 p ro vi de s n o e xc ep ti on forreas on ab le
cau se . Sec. 1 .66 54 -1 (a)( 1) , Inc om e Tax Reg s.; see als o B ray v. Co m m is si on er, T.C. Mem o. 2 00 8- 11 3. The Alex an de rs m ad e n o e st im at edtax pa ym en ts for20 03 , andth eref or e
su chpaym en ts were l es s tha n 9 0% o f th e am ou ntof t ax forth aty ear Ad di ti on al ly,- 57 -

[* 57 ] th ey

do no t m eetan y

ex cep ti on s p ro vi de d i n s ect io n 6 65 4( e). The refo re, the Alex an de rs are l iabl e fo r th e se ct io n 6 65 4( a) ad di ti on to tax . E. Secti on 66 51 (a)( 1) Fai lu re To Fil e Add it io n t o Tax for 20 02 and20 03 As an alt ern at iv e to sec ti on 66 51 (f), re sp on de ntco nt en ds th atDr. andMrs
. Alex an de r are li ab le for

ad di ti on s t o t ax pu rs uantto sec ti on 66 51 (a)( 1) for20 02
an d 2 00 3. Se ct io n 6 65 1( a)(1 ) pr ov id es foranad di ti on to tax forfai lu re t o t im el y fil e a Fed eral in co m e ta x re tu rn(de te rm in edwith re ga rdto an y ex te ns io n o f ti m e fo r pa ym en t) u nl es s the tax pay er s ho ws tha t s uc h fa il ur e was du e to reas on ab le
cau se an d n otwil lfu l n eg le ct . Men de s v . Comm is si on er, 1 21 T.C. 30 8, 3 20 (2 00 3)
. The Alex an de rs di d n otpro vi de an y reas on ab le cau se for

th ei r ta rd in es s fo r 20 02 . There fo re, we fi ndth ey are l iabl e fo r th e se ct io n 6 65 1( a)(1 ) ad di ti on to tax . Fo r th e sa m e rea so ns we di d n otfin d a ny reaso nabl e cau se inth e se ct io n 66 51 (a)( 2) an al y si s, we d o n otfin d a ny reaso nabl e cau se un de r se ct io n 6 65 1( a)(1 ). The refo re, Dr. an d M rs . Alex an de r are li ab le forth e ad di ti on to tax pu rs uantto
se ct io n 6 65 1( a)(1 ) fo r 20 03
.- 58 -

[* 58 ] IV. Whe th er Mr s. Al ex an de r Is Ent it le d t o In no cen t Sp ou se Rel ie f Und er

Sect io n 6 01 5 Und er s ect io n 6 01 5( b) , a reque st in g s po us e m ay be rel ie ve d o f joi ntan d
se ve ral li ab il it y

fro m anun de rs ta te m en t o f ta x t o t he ex te ntth atth e
un de rs ta te m en t was att rib ut ab le to th e n on reque st in g s po us e. To qua li fy forrel ie f,
se ct io n 6 01 5( b) (1 ) pr ov id es th atth e ta xp ay er m us t es tabl is h t ha t (A) a joi ntreturn h as be enm ad e fo r a t ax ab le y ear; (B) o n s uc h re tu rnth ere i s an un de rs ta te m en t o f ta x at tri bu tabl e to erro ne ou s i te m s o f 1 i nd iv idua l fi li ng th e joi ntreturn; (C) the ot he r in di vi du al fil in g t he joi ntreturn e st ab li sh es th at in si gn in g t he return h e o r sh e d idno t kno w, andha d n o re as on to kn ow, tha t the re was su chun de rs ta te m en t; (D) ta ki ng in to acco un t al l the fact s an d c irc um st an ces , itis in equi tabl e to ho ldth e o th er i nd iv idua l l iabl e fo r th e d efi ci en cy intax fo r su chtax ab le y ear a tt rib ut ab le to su chun de rs tate m en t; an d (E) th e o th er i nd iv idua l el ect s (i n s uc h fo rm as t he Secr et ary m ay pre sc rib e) the be ne fit s o f th is subs ect io n n otlat er tha n t he da te whi chis 2 years a fte r th e d at e th e Sec ret ary ha s b eg un co ll ect io n act iv it ie s wi th res pe ctto th e in di vi du al m ak in g t he ele ct io n. The requi rem en ts of s ect io n 6 01 5( b) (1 ) are co nju nc ti ve , andth eref or e th e fai lu re o f a t axpa y er t o s at is fy an y on e o f th e el em en ts pre cl ud es rel ie f. Halt om v. Co m m is si on er, T.C. Mem o. 2 00 5- 20 9. Re sp on de ntco nc ed es th atMrs . Alex an de r
sa ti sf ie s the requi rem en ts of s ect io n 6 01 5( b) (1 )(A) an d (E) ; h owe ve r, res po nd en t- 59 -

[* 59 ] m ai nt ai ns sh e fai le d t o e st ab li shth atsh e sa ti sf ie s the requi rem en ts of s ect io n 60 15 (b )(1 )(B) , (C), an d (D) . Accor di ng ly, th e b ur de n i s o n M rs . Alex an de r to
es tabl is h t ha t s he is en ti tl edto rel ie f. Und er s ect io n 6 01 5( b) (1 )(B) , Mrs . Alex an de r is eli gi bl e fo r rel ie f on ly if th e
un de rs ta te m en t o f ta x i s at tri bu tabl e to erro ne ou s i te m s o f Dr. Alex an de r. W e ha ve alr eady

de te rm in edth atth e Sch edul e F farm lo ss es are n otde du ct ib le for 20 01 an d 2 00 2. Th e d is al lo wedlo ss es an d t he res ul ti ng po rti on of e ach
un de rs ta te m en t ar e at tri bu tabl e to Mrs . Alex an de r. Mrs . Alex an de r was inch arg e of th e farm bu si ne ss an d re po rte d t he pro fit s an d l os se s t o h er h us bandforth e pu rp os e o f fi li ng th e ta x re tu rn s. We fin d t ha t M rs . Alex an de r is no t en ti tl edto rel ie f fo r th e p orti on s o f th e 2 00 1 a nd20 02 un de rs ta te m en ts att rib ut ab le to th e di sa ll owe d S ch edul e F l os se s b ecau se th ey are at tri bu tabl e to he r. See s ec. 60 15 (b )(1 )(B)
. Und er s ect io n 6 01 5( b) (1 )(C) , Mrs . Alex an de r is eli gi bl e fo r rel ie f on ly if sh e d idno t kno w or h av e rea so n t o kno w at the ti m e sh e si gn edth e joi ntreturn th atth ere was anun de rs ta te m en t o f ta x o n t he return. Th e Co urt o f App eal s fo r th e Si xt h C irc ui t i s the li ke ly venue foran y ap pe al of the se cas es . ThatCo urt o f App eal s h as he ldth atkn owl ed ge of t he tra ns act io n g iv in g ri se to th e
un de rs ta te m en t wi ll est ab li sh kn owl ed ge inanom itte d i nc om e si tu at io n. In- 60 -

[* 60 ] Purcel l v . Comm is si on er, 8 26 F.2d47 0, 4 73 -4 74 (6t h C ir. 1 98 7) , aff’g 8 6 T.C. 22 8 (1 98 6) , th e Co urt o f App eal s h el d t ha t kno wled ge of t he tra ns act io n gi vi ng ris e to om it te d i nc om e was su ffi ci en t t o b ar re li ef u nd er fo rm er s ect io n 60 13 (e). InRic ha rd so n v . Comm is si on er, 5 09 F.3d73 6 (6 thCir . 20 07 ), aff’g T.C. Mem o. 2 00 6- 69 , th e Co urt o f App eal s fo ll owe d P ur cel l i n acas e whe re the ta xp ay er s ou gh t re li ef u nd er s ect io n 6 01 5( b) fro m a ta x d efi ci en cy

ari si ng fro m

th e
us e o f al le ge d t ru st s t o s hi el d i nc om e. The t ru st s i n que st io n wer e h el d t o b e a sh am . InGreer v . Commis si on er, 5 95 F.3d33 8, 3 45 (6t h C ir. 2 01 0) , aff’g T.C. Mem o. 2 00 9- 20 , th e Co urt o f App eal s ad op te d t he an al y si s o f Pri ce v . Co m m is si on er, 8 87 F.2d95 9, 9 65 (9t h C ir. 1 98 9) , to an al yze the reas on to kn ow requi rem en t. InPri ce, the Co urt o f App eal s fo r th e Nin th Cir cu itexpl ai ne d t ha t a te stsh ou ldbe ap pl ie d i n “ de du ct io n” cas es di ffer en t fr om th e te stin“ om is si on sfro m -in co m e” ca se s. Be cau se th e p res en t ca se s i nv ol ve d o m it te d i nc om e, th e kn owl ed ge of t he tra ns act io n s ta nd ardis ap pr op ria te . Mrs . Alex an de r cl earl y ha d kn owl ed ge of t hi s tran sa ct io n; bu t ev enif we app li edth e d educ ti on st an dardof Pri ce, Mr s. Al ex an de r wou ldno t b e el ig ib le forin no cen t s po us e rel ie f. In P ric e
an d Gre er, the Co urts of Ap pe al s h el d t ha t “ ‘[a] sp ou se ha s ‘reas on to kn ow’ of the
subs ta nt ia l u nd ers ta te m en t i f a rea so nabl y pru de nttax pa y er i n h er p os it io n a t the- 61 -

[* 61 ] ti m e sh e si gn edth e return c ou ldbe expe ct edto kn ow tha t the return
co nt ai ne d t he subs ta nt ia l u nd ers ta te m en t’.” Greer v . Comm is si on er, 5 95 F.3dat 34 6 (quo ti ng Pri ce v . Comm is si on er, 8 87 F.2dat 9 65 ). Mrs . Alex an de r is a ve ry in te ll ig en t p ers on who well kn ew th e im pl ic at io ns of t he OEL tran sa ct io n. Sh e al so kn ew ab ou t the m etho ds to ob ta in cas h fo r th e fam il y fro m th e fu nd s pu rp orte dl y

tra ns ferr edto th e co nt ro l o f th e o ve rs eas en ti ti es . W e fo ll ow the law i n t he Six th Cir cu itinap pl y in g t he kn owl ed ge of t he tra ns act io n t es t t o o m it te d i nc om e si tu at io ns . See Go ls env. Co m mis si on er, 5 4 T.C. 74 2 (1 97 0) , aff’d, 4 45 F.2d98 5 (1 0t h C ir. 1 97 1)
. Mrs . Alex an de r at te nd edth e OEL sem in ar i n t he Bah am as wher e sh e an d Dr. Alex an de r le arn edof t he OEL tran sa ct io n. Sh e und ers to odhe r hu sb an d wo ul d be work in g fo r a fo rei gn en ti ty as a res ul t o f th e tr an sa ct io n andm uc h o f hi s
m on ey wou ldbe sen t o ffs ho re. Mrs . Alex an de r al so pa rti ci pa te d i n t he tra ns act io n th ro ug h h er ro le as tru st ee o f th e RAART Tru st . W e fi ndth atMrs . Alex an de r ha d kn owl ed ge of t he OEL tran sa ct io n, an d t hu s s he is no t en ti tl edto rel ie f fro m joi nt
an d s ev eral li ab il it y

un de r se ct io n 6 01 5( b) for de fic ie nc ie s tha t ar os e fro m th at tra ns act io n fo r 19 99 -2 00 3. The Alex an de rs als o a ss ertth atitwou ldbe in equi tabl e to de ny Mrs. Alex an de r in no cen t s po us e rel ie f. Sect io n 6 01 5( f) p ro vi de s an alt ern at iv e m ean s- 62 -

[* 62 ] of rel ie f fo r a reque st in g s po us e who do es no t o th erwi se qu al ify for re li ef
un de r subs ect io n (b ) of

sec ti on 60 15 . Sec. 6 01 5( f)(2 ). Sect io n 6 01 5( f) p erm it s rel ie f fro m

joi ntan d s ev eral li ab il it y wher e “ itis in equi tabl e to ho ldth e in di vi du al li ab le foran y

unpa idtax or a ny defi ci en cy (or an y po rti on of e ithe r)”. Sec
. 60 15 (f)(1 ). Und er s ect io n 6 01 5( f), th e Sec ret ary m ay gra ntequi tabl e rel ie f to a reque st in g s po us e o n t he ba si s o f th e fac ts an d c irc um st an ces of t he reque st in g sp ou se ’s cas e. Exce ptas o th erwi se pro vi de d i n s ect io n 6 01 5, the tax pa y er b ears th e b ur de n o f pr oo f. See Ru le 14 2( a); Altv. Co m m is si on er, 1 19 T.C. 30 6, 3 11 (2 00 2) , aff’d, 1 01 Fed . App x. 3 4 (6 th Cir . 20 04 ). Pu rs uantto sec ti on 60 15 (f), the Co m m is si on er h as pre sc rib edrev enue pr oc edur e g ui de li ne s t o h el p IR S em pl oyees d et erm in e whe th er a re qu es ti ng sp ou se is en ti tl edto rel ie f fro m joi ntan d s ev eral li ab il it y . See Re v. Pr oc . 20 03 -6 1, 20 03 -2 C.B. 2 96 , m od ifyin g andsupe rs ed in g R ev . Pro c. 20 00 -1 5, 2 00 0- 1 C .B. 44 7. Re v. Pr oc . 20 03 -6 1, s up ra, l is ts th e fac to rs th atIRS em pl oyees s ho ul d
co ns id er, an d t he Co urt co ns id ers th os e sa m e fac to rs when rev ie win g the IRS’ de ni al of r el ie f. See Wash in gt on v. Co m mis si on er, 1 20 T.C. 13 7, 1 47 -1 52 4
On J anuary

5, 2 01 2, the Co m

m is si on er i ss ue d No ti ce 2 01 2- 8, 2 01 2- 4 I.R .B. 4 3- 9, an no un ci ng a pr op os edrev enue pro cedur e upd at in g R ev . Pro c. 20 03 -6 1, 20 03 -2 C.B. 2 96 . Thatpro po se d rev enue pro cedur e, if fin al iz ed , wil l re vi se th e fact or s tha t the IRS wi ll us e to ev al ua te reque st s fo r equi tabl e rel ie f un de r se c. (co nt in ue d...)- 63 -

[* 63 ] (20 03 ). Acco rd in g t o R ev . Pro c. 20 03 -6 1, s ec. 4 .01 , 20 03 -2 C.B. at 29 7- 29 8, M rs . Alex an de r, as a reque st in g s po us e, m us t s at is fy

th res ho ld
co nd it io ns inord er t o b e el ig ib le to subm ita reque stfor equi tabl e rel ie f un de r
se ct io n 6 01 5( f). Mrs . Alex an de r do es no t s at is fy all of t he th res ho ldrequi rem en ts for equi tabl e rel ie f un de r se ct io n 6 01 5( f). Rev . Pro c. 20 03 -6 1, s ec. 4 .01 (5 ), requi res th atno di squa li fie d a ss et s h av e b eentra ns ferr edfro m Dr. Alex an de r to Mrs
. Alex an de r. A “ di squa li fie d a ss et ” m ean s an y pro pe rty tran sf

erre d t o an i nd iv idua l
m ak in g the ele ct io n u nd er s ect io n 6 01 5( c) i f th e p rin ci pa l p ur po se of the trans fer
was th e av oi da nc e o f ta x o r pa y m en t o f ta x. Se c. 60 15 (c)( 4) (B)( i). Dr. Alex an de r’s wag es th atwere re pa tri at edth ro ug h t he us e o f th e OEL lo an s wer e tra ns ferr edin to RAART, Mrs . Alex an de r’s tru st . The as se ts were tran sf erre d i n
or de r to m ak e cap it al im

pr ov em en ts on th e Ale xa nd ers ’ ho m e an d fa rm , andsh e well kn ew ab ou t the off

sh or e tr an sa ct io ns whi chge ne rat edth e fu nd s. Mr s.
(...co nt inue d) 4 60 15 (f). InSri ram

v. Co m m is si on er, T.C. Mem o. 2 01 2- 91 , sl ip op . at 9 n.7 , we st at edth atwe wou ld“ co nt in ue to ap pl y th e fac to rs inRev . Pro c. 20 03 -6 1, 2 00 3- 2 C.B. 2 96 , invi ew of

th e fac t tha t the pro po se d re ve nu e p ro cedur e is no t fi na l an d be cau se th e co m

m en t p eri odun de r th e n ot ic e o nl y rece nt ly clo se d.” See al so Cu tl er v . Comm is si on er, T.C. Mem o. 2 01 3- 11 9 (c on ti nu in g t o app ly Rev. Pro c. 20 03 -6 1, s up ra); W il li am so n v . Comm is si on er, T.C. Mem o. 2 01 3- 78
.- 64 -

[* 64 ] Alex an de r fai ls th is pro ng of t he an al y si s an d t hu s i s n oteli gi bl e fo r rel ie f
un de r se ct io n 6 01 5( f). V. Fou nt ai n’s Def

ic ie nc ie s Res po nd en t co nt en ds th atFo un ta in ha s d efi ci en ci es forem pl oym en t t ax es fo r th e y ears at i ss ue . The d efi ci en ci es st em fro m th e OEL tran sa ct io n a ndth e fac t th atFo un ta in di d n ottre atDr. Alex an de r as anem pl oyee fo r th e y ears at i ss ue . A. Dr. Alex an de r W as anEm pl oyee of Fo un ta in Duri ng th e OEL T ran sa ct io n. 1. Em pl oym en t St atus Res po nd en t h adde te rm in edth atDr. Alex an de r was anem pl oyee of Fo un ta in du rin g t he OEL tran sa ct io n a ndFo un ta in is li ab le forem pl oym en t t ax es fo r th e wag es pa idforDr. Alex an de r’s se rv ic es . Parag rap hs (1) , (3) , and(4) of
se ct io n 3 12 1( d) de sc rib e o th er i nd iv idua ls who are co ns id eredem pl oyees reg ard le ss of t he ir s ta tu s u nd er the co m m on law. In di vi du al s d es cri be d i n t ho se pa rag rap hs are co m

m on ly referre d t o a s “ st atut ory ” em pl oyees. Jo se ph M. Grey

5 Pub. Acc ou nt an t, P.C. v . Commis si on er, 1 19 T.C. 12 1, 1 26 (20 02 ), aff’d, 9 3 F ed
. App x. 4 73 (3dCir . 20 04 ). One s uc h c at eg ory of s tatu to ry

em pl oyees c on si st s o f
Und er s ec. 3 12 1( d) (2 ), th e te rm “ em pl oyee” in cl ud es an y

in di vi du al who 5 ha s the st atus of a n e m

pl oyee un de r th e co m

m on law. Be cau se Dr. Alex an de r is a st atut ory em pl oyee, we do no t fi nditne ces sa ry to di sc us s h is st atus as aco m m on la w em pl oyee.- 65 -

[* 65 ] off ic ers of c or

po rat io ns . Sec. 3 12 1( d) (1 ). Sect io n 3 1.3 12 1( d) -1 (b ), Em pl oym en t Tax Reg s., l im it s tha t ca te go ry as f ol lo ws: (b ) Co rp or at e o ffi cers .--Gen eral ly, anoff ic er o f a co rp or at io n is anem pl oyee of th e co rp or at io n. Ho wev er, anoff ic er o f a co rp or at io n wh o a s s uc h d oe s n otpe rfo rm an y servi ces or p erfo rm s on ly min orservi ces an d wh o n ei th er re cei ve s n oris en ti tl edto rece iv e, di rect ly or in di rect ly, an y rem un erat io n i s co ns id eredno t t o be anem pl oyee of th e co rp or at io n. A d ire ct orof aco rp or at io n i n h is cap aci ty as su chis no t an em pl oyee of th e co rp or at io n. Dur in g t he en ti re t im e th e OEL tran sa ct io n was inpl ace Dr. Al ex an de r was th e so le off

ic er atFo un ta in . Dr. Alex an de r do es no t m eetth e ex cep ti on pro vi de d in sec ti on 31 .31 21 (d )-1 (b ), Em pl oym en t Tax Reg s., fo r of fic ers who pro vi de li mit edor n o s erv ic es to th e co rp or at io n a ndrece iv e n o re m un erat io n. Dr. Alex an de r rec ei ve d re m

un erat io n fo r hi s s erv ic es in di rect ly thro ug h NESL an d PLS. He ex erci se d autho rit y ov er the workpl ace, e vi de nc edby his po wer t o h ire
an d fi re em

pl oyees. He was als o t he so le pra ct it io ne r worki ng at F ou nt ai n a nd pe rfo rm edth e es se nt ia l s erv ic e o f th e b us in es s. Durin g t he pe rio ds inis su e, Dr. Alex an de r was a st atut ory em pl oyee of Fo un ta in be cau se of h is po si ti on as a n of fic er wh o p erfo rm edsubs ta nt ia l s erv ic es forth e co rp or at io n. Pet it io ne rs arg ue th atDr. Alex an de r an d F ou nt ai n s ig ne d a way Dr. Alex an de r’s em

pl oyee st atus by agree m en t an d h e h adno em pl oym en t co nt ract with F ou nt ai n. In Fo xwo rth y v. Co m m is si on er, T.C. Mem o. 2 00 9- 20 3, af f’d pe r- 66 -

[* 66 ] curiam , 49 4 F ed . App x. 9 64 (11 th Cir . 20 12 ), we fo un d t ha t the lea se d
em pl oyee inanOEL tran sa ct io n was anem pl oyee of hi s o wn b us in es s ra th er tha n th e le as in g c om

pa ny andth atth e le as e p aym en ts were h is wage in co m e. Dr. Alex an de r is a st atut ory em pl oyee of Fo un ta in ; thu s Fo un ta in is li ab le fo r em pl oym en t t ax es forth e wag es th atitpa idforDr. Alex an de r’s se rv ic es . For th e sa m e rea so ns th atth e le as e p aym en ts were i nc om e to Dr. Alex an de r, th e le as e pa ym en ts are wag es subjec t t o e m pl oym en t t ax es . 2. Re li ef Un de r Sec ti on 53 0 Pet it io ne rs arg ue th atFo un ta in is en ti tl edto tre atm en t u nd er s ect io n 5 30 , whi chpro vi de s re li ef fro m em pl oym en t t ax li ab il it y . Taxp ay ers are en ti tl edto rel ie f un de r se ct io n 5 30 if the y de m on st rat e th at : (1 ) th ey di d n ottre atan in di vi du al as a n e m

pl oyee fo r em

pl oym en t t ax pu rp os es foran y pe rio d, s ec. 53 0( a)(1 ); ( 2) th ey

fil edall requi redFed eral tax returns co ns is te ntwith t he ir tre atm en t o f th e in di vi du al , id .; an d (3 ) th ey ha d “ a rea so nabl e b as is forno t tre at in g a n i nd iv idua l as anem pl oyee”, se c. 53 0( a)(2 ). A taxpa y er i s d eem edto ha ve a reas on ab le ba si s i f th e ta xp ay er es tabl is he d i ts “ tre atm en t o f su ch in di vi du al was i n re as on ab le rel ia nc e o n” : (1 ) jud ic ia l p rece de nt , publ is he d
ru li ng s, t ech ni cal advi ce wi th res pe ctto th e ta xp ay er, o r a l et te r ru li ng to th e- 67 -

[* 67 ] tax pa y er; (2) a pa stIRS au di t o f th e ta xp ay er i n wh ic h t he re was no
as se ss m en t at tri bu tabl e to th e tr eat m en t (f orem pl oym en t t ax pu rp os es ) of th e in di vi du al s h ol di ng po si ti on s s ub st an ti al ly sim il ar t o t he po si ti on he ldby thi s in di vi du al ; o r (3 ) a l on gs ta nd in g re co gn iz edpra ct ic e o f a s ig ni fic an t s eg m en t o f th e in du st ry

inwhi chsu chin di vi du al was e ng ag ed . Id. Inad di ti on to th e sa fe h arb or s o f se ct io n 5 30 (a)( 2) , a tax pay er m ay de m on st rat e an y

ot he r rea so nabl e b as is forth e tr eat m en t o f anem pl oyee fo r ta x pu rp os es . See, e.g ., Spri ng fie ldv. Un it edSta te s, 8 8 F .3d75 0, 7 53 (9t h C ir. 1 99 6) ; Bo le s Tru ck in g, In c. v. Un it edSta te s, 7 7 F .3d23 6, 2 39 (8t h C ir. 1 99 6) . The le gi sl at iv e h is to ry

rev eal s tha t the reas on ab le ba si s i nqui ry is to be li be ral ly
co ns tru edinfav or

of t he tax pa y er. See H. R. Rep t. No . 95 -1 74 8, at5 (1 97 8) , 19 78 -3 C.B. (Vo l. 1 ) 62 9, 6 33 . Sect io n 5 30 (e)( 4) , add edby the Sm al l Bu si ne ss Jo b P ro te ct io n Actof 1 99 6, Pub. L. No. 1 04 -1 88 , sec . 11 22 (a), 1 10 Sta t. at17 66 , pl aces th e b ur de n o f pr oo f on th e Sec ret ary if t he tax pa y er es tabl is he s a p rima faci e cas e th atitwas re as on ab le no t t o t reatanin di vi du al as a n e m pl oyee an d t he ta xp ay er h as co m

pl ie d wi th th e Sec ret ary’ s re as on ab le reque st s fo r ta x p eri od s at is su e. W e h av e al ready

est ab li sh edth atan y

rel ia nc e o n a dv ic e fro m

Mes sr s. Kri tt
an d R ei se rer was no t re as on ab le . In ad di ti on , Dr. Alex an de r was tre at edas a n- 68 -

[* 68 ] em pl oyee inall cir cu m st an ces be fo re the OEL tran sa ct io n. Th e tr an sa ct io n
crea te d n o c ha ng es inth e b us in es s p ract ic es of S LAMD; an d o ut si de of Dr. an d Mrs . Alex an de r, no ot he r em pl oyee ha d any kn owl ed ge th atSLAMD no lo ng er
co ns id eredDr. Alex an de r anem pl oyee fo r em

pl oym en t t ax purp os es . Becau se th ere was no ch an ge inth e way SLAMD an d Dr. Al ex an de r wen t ab ou t the ir d ay to -d ay bu si ne ss , th ere i s n o re as on ab le ba si s fo r SLAMD to tre atDr. Alex an de r as
an yth in g b utanem

pl oyee fo r em

pl oym en t t ax purp os es . The tran si ti on fro m SLAMD to Fo un ta in crea te d n o c ha ng e inth e way th e b us in es s o pe rat edan d pr ov id es no reas on ab le ba si s fo r Dr. Alex an de r to be tre at edas a nyth in g o th er tha n
anem pl oyee. Add it io na ll y , th e co nt ract s b etweenDr. Alex an de r an d the lea si ng ag en ci es were n otfol lo wedby the parti es . Dr. Alex an de r worke d a t CVC witho ut
an y ag reem en t fr om

an y of t he lea si ng ag en ci es th atha d c on tra ct edforex cl us iv e rig ht s t o h is servi ces . The d is reg ardof t he term s o f th e em pl oym en t co nt ract s sh ow p et it io ne rs do no t h av e a rea so nabl e b as is forbe li ev in g Dr. Al ex an de r was
no t an em pl oyee be cau se of t he co nt ract s. As th ere i s n o re as on ab le ba si s fo r Dr. Alex an de r no t t o b e tr eat edas a n e m pl oyee, Fou nt ai n i s n oten ti tl edto sec ti on 53 0 tre atm en t.- 69 -

[* 69 ] B. Fo un ta in Is Li ab le forEm pl oym en t Tax es W it h R es pe ctto Dr. Alex an de r’s Serv ic es Duri ng th e Tax ab le Quarte rs End ed March 31 , 19 99 , Thro ug h Dec em be r 31 , 20 03
. W e h av e d et erm in edth atDr. Alex an de r was anem pl oyee of Fo un ta inforall qu art ers fro m

Marc h 3 1, 1 99 9, thr ou gh Decem be r 31 , 20 03 . Sect io n 3 10 1 im po se s a t ax on em

pl oyees u nd er the Fed eral Ins ur an ce Co nt rib ut io ns Act (F ICA) ba se d o n t he ir wa ge s p ai d, wh ic h t he em pl oyer is requi redto co ll ectun de r se ct io n 31 02 . The t erm

“ wag es ” as us edinth es e st atut es ge ne ral ly enco m pa ss es “ al l
rem un erat io n fo r em

pl oym en t” . Secs . 31 21 (a), 3 30 6( b) . Fou nt ai n p ai d NESL an d PLS as rem

un erat io n fo r Dr. Alex an de r’s se rv ic es . W e h av e fo un d t ha t Dr. Alex an de r was inco ns tru ct iv e rec ei ptof a ll th e fu nd s p ai d fo r hi s s erv ic es to NESL andPLS by Fount ai n. Be cau se Dr. Alex an de r was anem pl oyee of Fo un ta in
an d was inrece ip t o f th e fu nd s p ai d a s re m un erat io n fo r hi s s erv ic es , Fou nt ai n i s li ab le forall em

pl oym en t t ax es on th e am ou nt s p ai d fo r Dr. Alex an de r’s se rv ic es fro m Marc h 1 99 9 t hr ou gh Decem be r 31 , 20 03
. VI. Fou nt ai n’s Pe na lt ie s an d Ad di ti on s t o Tax A. Frau d P en al ty Und er Se ct io n 6 66 3 Res po nd en t d et erm in edth ata frau d p en al ty w as ap pl ic ab le to Fo un ta in on th e b as is of t he act iv it y

of Dr. Al ex an de r, th e so le sh areh ol de r, of fic er, an d pr in ci pa l o f Fo un ta in . For t he same reaso ns we di d n otfin d Dr. an d M rs .- 70 -

[* 70 ] Alex an de r li ab le forth e fraudpe na lt y un de r se ct io n 6 66 3, we d o n otfin d Fo un ta in li ab le forth e fraudpe na lt y . B. Pen al ty Und er Se ct io n 6 66 2 Fo un ta in ha s n otpa idem pl oym en t t ax es forDr. Alex an de r’s se rv ic es for
an y of t he qu art ers fro m

Marc h 3 1, 1 99 9, thr ou ghDecem be r 31 , 20 03 . There fo re du rin g t he se pe rio ds th ere h av e b eensubs ta nt ia l u nd ers ta te m en ts of m or e th an 10 % of t he em

pl oym en t t ax requi redto be pa id . For t he same reaso ns di sc us se d reg ard in g Dr. an d M rs . Alex an de r, Fo un ta in do es no t h av e a g oo d- fai th -rel ia nc e de fen se an d i s l iabl e fo r pe na lt ie s u nd er s ect io n 6 66 2. C. Sect io n 6 65 6 P en al ty If a t ax pa y er i s m or e th an15 da y s l at e in de po si ti ng em pl oym en t t ax es , se ct io n 6 65 6 i m

po se s a 1 0% p en al ty. Sec. 6 65 6; see als o Ewen s & Mi ll er, In c. v. Co m m is si on er, 1 17 T.C. 26 3, 2 68 (20 01 ). The t ax pa y er i s n otli ab le for th e
se ct io n 6 65 6 p en al ty if th e la te de po si t was du e to reas on ab le cau se an d n otdu e to wil lfu l n eg le ct . Sec. 6 65 6( a). Fo un ta in fai le d t o m ak e em pl oym en t t ax de po si ts foram ou nt s p ai d fo r Dr. Alex an de r’s se rv ic es . Whi le rel ia nc e upo n t he advi ce o f a p ro fes si on al can
co ns ti tu te reas on ab le cau se , rel ia nc e o n t he pro fes si on al ’s adv ic e in go odfai th is- 71 -

[* 71 ] requi redfor

th e d efen se . Fou nt ai n i s n oten ti tl edto th is de fen se forth e sa m e
reas on s Dr. an d M rs . Alex an de r were n oten ti tl edto th e se ct io n 6 66 4 d efen se . To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te red
un de r Ru le 15 5.